HOOKER FURNISHINGS Corp annual report, FY2018

Business context and reporting period

Hooker Furniture Corporation’s Form 10-K covers fiscal 2018, the 52 weeks ended January 28, 2018; it is an annual report, not a standalone fourth-quarter filing. The company designs, imports and manufactures residential, hospitality and contract furniture. Its reporting segments are Hooker Branded, Home Meridian and All Other.

Fiscal 2018 includes Shenandoah Furniture from its September 29, 2017 acquisition date. The company paid $32.8 million in cash and issued shares valued at approximately $8.4 million. Prior-year results do not include Shenandoah. Segment reporting was also reorganized in the fourth quarter, with prior periods recast.

Financial performance and position

Year-end cash was $30.9 million, working capital $153.2 million and total debt $53.4 million. The company had $28.5 million available under its $30 million revolver, with no revolver borrowings other than $1.5 million in letters of credit. Current assets were $213.1 million and current liabilities $60.0 million. After year-end, the company made an unscheduled $10 million term-loan payment.

Capital expenditures were $3.2 million. Cash dividends paid were $5.8 million, or $0.50 per share for the year; the quarterly dividend was raised to $0.14 per share. Total assets were $349.7 million and shareholders’ equity $229.5 million.

Material changes versus prior year

• Sales rose 7.5%; unit volume increased 13.8%, partly offset by a 5.4% decline in average selling price. Home Meridian sales grew 6.0%, Hooker Branded 5.1% and All Other 19.6%.
• Operating income rose 16.0% and net income 11.7%. Gross margin was essentially flat, while operating margin improved.
• Home Meridian’s growth was driven by mega-account, e-commerce and alternate-channel sales, which tend to carry lower prices and margins. Its operating margin improved to 5.0% from 4.2%.
• All Other’s sales growth largely reflected Shenandoah’s post-acquisition contribution. Sam Moore continued to face labor-efficiency and delivery-time challenges; Homeware was wound down after failing to achieve critical mass.
• Interest expense increased 30.8% to $1.25 million, reflecting higher variable rates and the Shenandoah loan. Income-tax expense included a $1.8 million charge to remeasure deferred taxes following the Tax Cuts and Jobs Act; the effective tax rate was 38.3%, versus 35.5%.
• Fiscal fourth-quarter sales were $175.5 million, compared with $173.9 million a year earlier; net income was $8.5 million versus $11.0 million. The tax-related charge weighed on the current-year result.

Outlook, risks and unusual items

Management said incoming orders and backlogs had improved in many segments and believed the company began fiscal 2019 on track with its growth plans. It expected Shenandoah to be accretive to earnings in fiscal 2019, while noting late-year softness and customer concentration as risks. No specific consolidated sales or EPS guidance was provided. Planned fiscal 2019 capital expenditures were $6–8 million; management said available resources were adequate for foreseeable needs, including debt service and dividends.

• Shenandoah contributed $11.3 million in post-acquisition sales and $604,000 of operating income, including $750,000 of intangible amortization. The company incurred about $800,000 of acquisition-related costs. Integration benefits and accretion remain uncertain.
• Debt carries variable LIBOR-based rates; a 1 percentage-point increase in LIBOR was estimated to raise annual interest expense by approximately $411,000. The company reported covenant compliance at year-end.
• About 87% of fiscal 2018 sales were imported. Nearly all import purchases came from China and Vietnam, and the five largest suppliers there represented about half of imports. Freight, tariffs, supply disruption, currency movements and sourcing transitions could pressure costs, sales or margins.
• The top five customers generated nearly one-third of sales and held nearly half of receivables. Shenandoah’s sales and receivables are especially concentrated among a small number of customers.
• A $6.4 million pension-plan lift-out transaction settled benefits for about half of plan participants; the company recognized a $560,000 gain. Pension obligations remain sensitive to actuarial assumptions and investment performance.
• Management and the auditor reported effective internal control over financial reporting, but Shenandoah’s operations were excluded from the control assessment while integration work continued.

Most important facts for investors to verify

• Whether Shenandoah retains key customer relationships and achieves the expected fiscal 2019 earnings contribution.
• Whether sales growth in lower-priced channels can sustain margins, particularly at Home Meridian.
• Progress on Sam Moore’s labor and delivery issues and the performance of other All Other businesses.
• Debt repayment, variable-rate exposure, covenant headroom and the effect of the post-year-end $10 million payment.
• Customer receivable concentration, offshore sourcing continuity, and any changes in freight costs, tariffs or supplier pricing.
• The ongoing effects of tax reform, pension funding and Shenandoah-related amortization or integration charges.