Hooker Furniture Corporation — Q2 FY2017 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 31, 2016. The fiscal second quarter and first half are compared with periods ended August 2, 2015. Financial amounts below are in millions of dollars except per-share data.
Business context
Hooker designs, sources, markets and distributes residential furniture, with domestic upholstery manufacturing. On February 1, 2016, it acquired substantially all of Home Meridian International’s assets and assumed certain liabilities. Home Meridian is reported as a separate segment, and its results are included from the acquisition date; therefore, reported year-over-year revenue growth is not directly comparable.
Financial results and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $136.2 | $60.1 | $258.0 | $121.1 |
| Gross profit / margin | $28.5 / 20.9% | $16.1 / 26.8% | $55.1 / 21.3% | $32.5 / 26.8% |
| Operating income / margin | $8.2 / 6.0% | $5.9 / 9.7% | $12.2 / 4.7% | $11.1 / 9.2% |
| Net income | $5.3 | $3.9 | $7.8 | $7.4 |
| Diluted EPS | $0.46 | $0.36 | $0.68 | $0.69 |
| Operating cash flow | — | — | $24.1 | $9.0 |
Q2 net income increased 35.8%; first-half net income increased 5.9%. First-half diluted EPS fell from $0.69 to $0.68. Lower consolidated margins largely reflect Home Meridian’s lower-margin sales mix, along with acquisition-related amortization and expenses.
- Cash and liquidity: Cash was $39.1 at July 31, 2016, down from $53.9 at January 31. The company reported $28.9 available on its $30.0 revolving facility, with $1.1 of letters of credit and no revolver borrowings.
- Debt: Term-loan principal outstanding was approximately $52.0; the balance sheet reported $50.5 of current and long-term debt net of issuance costs. The loans have variable LIBOR-based rates and mature February 1, 2021. A 1 percentage-point LIBOR increase was estimated to add about $0.475 annually to interest expense.
- Cash flows and investment: First-half investing cash outflow was $87.1, primarily the $86.1 cash acquisition payment. Financing provided $48.2, including $60.0 in term-loan proceeds, offset by debt payments and dividends. Capital expenditures were $1.2.
- Acquisition and balance sheet: Total Home Meridian consideration was $106.3, comprising $86.1 cash and $20.3 of issued shares. Total assets rose to $296.7 from $181.7; goodwill was $23.4 and intangible assets were $26.7.
Material changes and segment trends
- Consolidated sales more than doubled with Home Meridian, which generated Q2 sales of $80.4 and operating income of $2.4. Legacy business sales declined 7.2% in Q2 and 7.0% in the first half.
- Hooker Casegoods sales fell 10.0% in Q2 and 12.3% in the first half; first-half operating income fell 25.0%. Management cited sluggish retail demand.
- Upholstery sales declined 4.1% in Q2 and 0.6% in the first half. A quality issue delayed Hooker Upholstery shipments; Sam Moore continued profitable performance and reported mid-single-digit Q2 sales growth.
- Home Meridian represented 59.0% of Q2 sales and 56.3% of first-half sales. Its reported operating margin was 2.9% for Q2 and 1.7% for the first half.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said Home Meridian entered the second half with its largest-ever order backlog and expects its second-half sales to improve versus the first half. It also described plans to stimulate Hooker Casegoods demand and expected Bradington-Young to return to mid-single-digit sales growth following an ERP implementation.
- Management said the Hooker Upholstery quality issue would continue to affect Q3 as unsalable inventory was returned and replaced. It warned that the Hanjin Shipping bankruptcy could raise ocean freight costs in the short to medium term.
- Management believed available cash, operating cash flow and credit lines were sufficient for fiscal 2017 and the foreseeable future, including debt service, dividends and working capital. Expected remaining-FY2017 capital expenditures were $1.5–$3.0.
- Acquisition-related expenses were about $1.1 in the first half, with approximately $0.2 more expected in the remainder of FY2017. Acquisition intangible amortization was $2.5 in the first half; a further $0.667 was expected for the remainder of the year. Purchase-price allocations remained preliminary.
- Risks include Home Meridian integration and customer concentration, variable-rate debt, import sourcing and freight costs, foreign exchange and raw-material exposure, and weak furniture demand. The company continued to contest a customs assessment of approximately $1.7 in penalties plus $0.5 in duties, stating management did not expect a material adverse effect. Potential duties on certain China-sourced accent chests remained uncertain and not quantifiable.
- The board declared a $0.10-per-share dividend payable September 30, 2016. The company reported compliance with its financial covenants at July 31.
Important facts for investors to verify
- Whether Home Meridian’s backlog converts to sales and sustainable operating margins, and how results compare on a like-for-like basis.
- Whether legacy Hooker sales recover and the upholstery quality and ERP-related disruptions are resolved.
- Debt amortization, variable-rate exposure, covenant headroom and ongoing cash available after acquisition-related working-capital needs.
- Final purchase-price allocation, including acquired intangible values, useful lives and any later measurement-period adjustments.
- Developments in the customs matters, import duties and freight costs, including any quantified financial exposure.