Business context and reporting period
Hooker Furniture Corporation’s Form 10-Q covers the 13 weeks ended May 1, 2016 (fiscal 2017 first quarter), compared with the 13 weeks ended May 3, 2015. Results include Home Meridian International (HMI) from its February 1, 2016 acquisition date; the prior-year reported results do not include HMI.
On February 1, the company acquired substantially all HMI assets and assumed certain liabilities for $86.1 million cash and 716,910 shares valued at $20.3 million, for total consideration of $106.3 million. HMI contributed a new, separately reported segment and broadened the company’s brands, customer base and distribution channels.
Financial results and liquidity
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net sales | $121.8 million | $61.0 million |
| Gross profit / margin | $26.6 million / 21.8% | $16.4 million / 26.9% |
| Operating income / margin | $4.0 million / 3.3% | $5.2 million / 8.6% |
| Net income | $2.5 million | $3.5 million |
| Diluted EPS | $0.22 | $0.32 |
| Operating cash flow | $14.5 million | $3.5 million |
Reported sales nearly doubled, primarily because of HMI; excluding HMI, sales were down 6.7%. Net income declined 28.0%, and consolidated gross and operating margins contracted. Results included $1.0 million of acquisition-related costs, $1.7 million of acquired-intangible amortization and $0.3 million of net interest expense.
Cash and cash equivalents were $32.4 million at May 1, down from $53.9 million at January 31. Investing cash use was $86.9 million, including $86.1 million for the acquisition; financing provided $50.9 million, including $60.0 million of term-loan proceeds and $7.8 million of debt repayments. The company paid $1.2 million in dividends. Current assets were $175.5 million and current liabilities $44.1 million.
Term-loan carrying amounts totaled approximately $52.1 million at quarter-end; there were no revolver borrowings and $28.2 million remained available, subject to $1.8 million of standby letters of credit. Term loans carry floating LIBOR-based rates and mature February 1, 2021. Management reported compliance with financial covenants and expected to remain compliant.
Segment highlights
- Home Meridian: sales of $65.0 million; operating income of $0.1 million, including acquisition-related amortization.
- Hooker Casegoods: sales fell 14.4% to $32.9 million; operating income fell 49.3% to $2.1 million. Management cited weaker retail demand and approximately $1.0 million of acquisition costs in segment expenses.
- Upholstery: sales rose 2.8% to $21.9 million; operating income rose 21.8% to $1.8 million.
- All Other: sales increased 52.6% to $2.0 million; operating income was $0.1 million versus a prior-year loss.
Outlook, management commentary and risks
Management reported that weaker retail demand, first noted in the second half of fiscal 2016, persisted, citing market volatility, slower housing activity, lower consumer confidence and effects of low energy prices in some customer markets. Traditional retailers were less willing to invest in inventory, while e-commerce and omni-channel customers had double-digit sales growth. Management saw encouraging order activity and positive economic indicators and expected the retail environment to improve, while noting summer is seasonally weak. No quantitative full-year earnings or sales guidance was provided.
Management’s priorities include integrating HMI, pursuing cost savings and operating efficiencies, controlling costs and inventory, expanding channels and improving newer businesses. The company expected another approximately $0.4 million of acquisition-related costs and approximately $1.5 million of intangible amortization for the remainder of fiscal 2017. Purchase-price allocations and acquired asset valuations remained preliminary. Planned capital expenditures for the rest of fiscal 2017 were $2–$4 million.
- Acquisition-related execution risks include integration, retention of key employees and customers, realization of synergies, added debt service, and HMI’s significant customer concentration in sales and receivables.
- Floating-rate debt creates interest exposure: a 1 percentage-point LIBOR increase was estimated to add approximately $0.5 million in annual interest expense.
- Import sourcing exposes the company to freight, supplier costs, currency movements, trade restrictions and supply-chain disruption. Management noted lower ocean freight costs but said their persistence was uncertain.
- The company continued to dispute a Customs assessment involving approximately $1.7 million in proposed penalties and $0.5 million in duties. Management intended to defend the matter and did not expect a material adverse effect. Potential duties on certain China-sourced accent chests remained uncertain; a related court decision was favorable to the company’s position.
- HMI brought legacy pension and retirement obligations; the company reported $16.8 million in consolidated pension liabilities and expected further pension contributions and benefit payments.
- Management said the company had sufficient resources for fiscal 2017 and the foreseeable future. The acquired HMI operations were being integrated into internal controls and were excluded from the company’s fiscal 2017 Section 404 control assessment as permitted by SEC guidance.
Most important facts for investors to verify
- Whether HMI integration delivers the anticipated efficiencies and growth, and whether its customer concentration or working-capital needs affect cash generation.
- Whether sales weakness in Hooker Casegoods and HMI persists, and whether consolidated margins recover as acquisition costs and amortization evolve.
- Debt balances, floating-rate exposure, covenant headroom and the capacity to fund operations, dividends and planned investment.
- Final purchase-price allocation, acquired intangible values and useful lives, and any resulting future charges or adjustments.
- Developments in the disputed Customs assessment and potential import duties, along with pension funding requirements.
- Reported pro forma information is not directly comparable to actual results: assuming HMI had been acquired at the start of the prior-year quarter, the filing estimates sales of $125.8 million, net income of $2.7 million and diluted EPS of $0.23.