Hooker Furniture Corporation — FY2019 Form 10-K
Business context and reporting period. The filing covers the 53-week fiscal year ended February 3, 2019, compared with 52 weeks ended January 28, 2018. Hooker designs, imports, markets and manufactures residential, hospitality and contract furniture. Its reportable segments are Hooker Branded and Home Meridian; domestic upholstery and related businesses are reported in All Other. Shenandoah Furniture is included in All Other for a full year in FY2019, versus approximately four months in FY2018.
Financial performance and position
Amounts below are in millions except per-share data and percentages.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $683.5 | $620.6 |
| Gross profit / gross margin | $147.0 / 21.5% | $134.8 / 21.7% |
| Operating income / margin | $52.7 / 7.7% | $45.5 / 7.3% |
| Net income / diluted EPS | $39.9 / $3.38 | $28.3 / $2.42 |
| Cash from operating activities | $9.7 | $27.7 |
| Cash and cash equivalents at year-end | $11.4 | $30.9 |
| Working capital at year-end | $170.5 | $153.2 |
| Term debt, including current maturities | $35.5 | $53.4 |
| Cash dividends per share | $0.57 | $0.50 |
- Sales rose 10.1%; management estimated underlying organic growth at about 6%, with the extra fiscal week contributing approximately $13.4 million of sales. FY2019 sales also benefited from including a full year of Shenandoah.
- Operating income increased 15.9%. Net income rose 41.1%, aided by the lower tax rate under the Tax Cuts and Jobs Act and the absence of a $1.8 million deferred-tax remeasurement charge recorded in FY2018.
- Gross margin edged down 0.2 percentage points, principally reflecting Home Meridian’s higher product and warehouse/distribution costs, tariff effects and unfavorable customer mix. Consolidated selling and administrative expense declined as a share of sales, to 13.4% from 14.1%.
- Operating cash flow fell to $9.7 million, with receivables and inventory absorbing cash. Receivables increased to $112.6 million from $92.8 million and inventory to $105.2 million from $84.5 million; the company said it built inventory ahead of tariffs and for sales growth.
- FY2019 investing cash use was $4.5 million, including $5.2 million of capital expenditures. Financing cash use was $24.6 million, including $17.9 million of debt repayments and $6.7 million of dividends.
- At year-end, $18.4 million was outstanding on the unsecured term loan and $17.1 million on the secured term loan. The $12 million Shenandoah-related term loan was repaid during FY2019. No revolving-credit borrowings were outstanding; $27.7 million was available, net of letters of credit. The company reported compliance with its loan covenants.
- FY2019 segment sales and operating income were: Hooker Branded $178.7 million and $25.3 million; Home Meridian $387.8 million and $18.8 million; All Other $117.0 million and $8.6 million. Home Meridian’s operating margin was 4.9%, compared with 14.1% for Hooker Branded and 7.3% for All Other.
Material changes versus FY2018
- Hooker Branded sales increased 7.2%, supported by casegoods and upholstery growth; segment operating income rose 14.1%.
- Home Meridian sales increased 6.1%, but margin pressure from tariffs, product costs and customer mix constrained gross profit growth. Vendor interruptions in Asia and quality issues affecting certain products were also cited.
- All Other sales increased 32.3%, mainly because FY2019 included a full year of Shenandoah. Bradington-Young and H Contract also grew; Sam Moore sales declined.
- Year-end cash declined by $19.5 million. Debt fell by $17.9 million, including an unscheduled $10 million payment on the Shenandoah-related loan. The dividend increased to $0.15 quarterly during FY2019.
Outlook, risks and unusual items
- Near-term demand: Management reported that consolidated incoming orders were essentially flat in FY2019’s fourth quarter, then down in the low double digits in fiscal February and March 2019 versus the comparable prior-year period; backlogs were also lower. Management characterized this as a short-term headwind but provided no quantified annual sales or earnings guidance.
- Tariffs and sourcing: A 10% U.S. tariff on covered Chinese imports, including furniture and components, took effect in September 2018. A potential increase to 25% was postponed while negotiations continued. China represented 44% of FY2019 imported purchases; management intends to mitigate exposure through pricing and sourcing shifts, while warning that higher costs, lower margins or weaker volumes could result.
- Liquidity and spending: Management said available cash, operating cash flow and credit access should meet needs through FY2020 and the foreseeable future. Expected FY2020 capital expenditures were $4 million–$6 million. Scheduled principal payments were $5.9 million in FY2020 and $29.7 million in FY2021; debt carries floating interest rates.
- Pension plan: The company contributed $3 million to the frozen Pulaski pension plan during FY2019 and approved its termination, a process expected to take 18–24 months and require regulatory approvals. Settlement charges, termination costs or renewed funding needs could affect earnings and liquidity.
- Unusual items: A $500,000 casualty loss was recorded after warehouse roof damage; $409,000 of additional repair costs was reimbursed by the insurer. A separate $4 million lawsuit settlement was fully reimbursed by insurance and the case was dismissed. A $1.0 million company-owned life-insurance gain benefited FY2019 results.
- Other key risks: Heavy reliance on suppliers in China and Vietnam, customer concentration (top five customers represented nearly one-third of sales and nearly half of receivables), furniture-industry cyclicality, freight and raw-material costs, interest rates, product quality and cybersecurity. The company reported no material impact from cyberattacks to date.
- Accounting and controls: Adoption of the new lease standard was expected to add approximately $45 million of right-of-use assets and lease liabilities. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No material legal proceedings were reported in Item 3.
Most important facts for investors to verify
- How much of sales growth and EPS improvement is repeatable after adjusting for the extra fiscal week, Shenandoah’s full-year inclusion and tax-rate effects.
- Whether the post-year-end order declines persist, and how they affect sales, margins and inventory.
- Whether tariff costs can be passed through or avoided through alternate sourcing without weakening demand or product quality.
- Cash conversion and working-capital trends, especially receivables and elevated inventory, alongside the scheduled FY2021 debt maturity.
- The costs and timing of pension-plan termination, and the final lease-accounting balance-sheet impact.