Hooker Furniture Corporation — FY2017 Form 10-K
Business context and reporting period. The filing covers the 52 weeks ended January 29, 2017. Hooker designs, imports, markets and manufactures residential, hospitality and contract furniture. On February 1, 2016, it acquired substantially all of Home Meridian International’s assets; Home Meridian is included for the full fiscal year, so consolidated year-over-year comparisons reflect a major change in business scope.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $577.2 million | $247.0 million |
| Gross profit / margin | $126.1 million / 21.8% | $68.7 million / 27.8% |
| Operating income / margin | $39.2 million / 6.8% | $24.3 million / 9.8% |
| Net income / margin | $25.3 million / 4.4% | $16.2 million / 6.6% |
| Diluted EPS | $2.18 | $1.49 |
| Cash from operations | $31.2 million | $23.0 million |
- Consolidated sales increased 133.7%, primarily from the acquisition. Home Meridian contributed $344.6 million of sales and $14.4 million of operating income (4.2% margin).
- Legacy Hooker sales declined 5.8%: Casegoods fell 8.8% and Upholstery 2.5%. All Other sales rose 13.7%.
- Consolidated gross margin and operating margin declined largely because Home Meridian carries lower margins. Lower ocean freight costs supported margins in legacy businesses; management cautioned that low freight rates might not persist.
- FY2017 net cash used in investing was $88.1 million, including $86.1 million cash paid for Home Meridian. Financing provided $42.7 million, including $60 million of term-loan proceeds and $12.3 million of debt payments. Cash decreased $14.1 million to $39.8 million.
- At year-end, working capital was $147.9 million, total assets $318.7 million and shareholders’ equity $197.9 million. Term debt was $47.7 million principal ($47.6 million carrying value); no revolving-credit borrowings were outstanding, and $28.5 million remained available.
- Fiscal 2017 dividends were $0.42 per share. The board declared a $0.12-per-share quarterly dividend in March 2017.
Fourth-quarter results
In the 13-week fourth quarter, sales were $173.9 million versus $60.6 million a year earlier; net income was $11.0 million versus $4.1 million, and diluted EPS was $0.95 versus $0.38. The acquisition substantially limits the comparability of these figures.
Outlook, risks and unusual items
- Management reported improved demand early in FY2018 and was optimistic about the longer-term outlook, citing a generally healthy U.S. economy and growth opportunities in e-commerce, hospitality and contract channels. No numerical sales or earnings guidance was provided.
- Management planned FY2018 capital expenditures of $3.5–$5.0 million and expected scheduled FY2018 debt payments of about $5.9 million. It believed cash, operating cash flow and credit availability would meet expected needs.
- Key risks include sourcing concentration in Vietnam and China (nearly all import purchases; the five largest suppliers there represented over half of imports), customer concentration (Costco was about 10% of sales; the top five customers nearly one-third of sales and about 40% of receivables), freight and currency changes, competition, demand cyclicality and variable-rate debt. A 1-percentage-point LIBOR increase was estimated to raise annual term-loan interest expense by about $445,000.
- Home Meridian acquisition-related expense was $1.2 million; acquired-intangible amortization was $3.1 million. The company decided to wind down Homeware.com and recorded a $125,000 impairment charge.
- In March 2017, the company paid $357,000 in reduced customs duties and penalties and considered the matter closed. Potential duties on certain China-sourced accent chests remained uncertain; the filing does not provide a clear estimate of any possible exposure.
- Home Meridian’s legacy pension plan was underfunded by $3.5 million at year-end. The company made $2.0 million of FY2017 plan contributions and expected at least approximately $776,000 in FY2018 contributions; actuarial assumptions and asset performance could change future funding needs.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Home Meridian’s own internal controls were excluded from the year-end ICFR assessment under the acquisition-transition provisions described in the filing.
Investor verification priorities
- Separate acquired growth from legacy performance and assess whether Home Meridian’s 4.2% operating margin and FY2017 contribution are sustainable.
- Track legacy segment sales, order trends and margins, especially after the reported quality issue at Hooker Upholstery and capacity constraints at Sam Moore.
- Review debt reduction, floating-rate exposure, covenant headroom and the cash requirements of pension obligations and dividends.
- Monitor customer receivable concentration, Vietnam/China supplier dependence, freight costs and any developments in the unresolved accent-chest duty question.
- Confirm that the Homeware wind-down and integration costs are complete and assess future amortization of acquisition-related intangibles.