Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended October 30, 2011. The filing compares the quarter and nine-month period with those ended October 31, 2010. Amounts below are in millions unless stated otherwise. The company markets residential casegoods and upholstered furniture, including domestically manufactured upholstery.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $54.2 | $55.7 | $168.1 | $160.5 |
| Gross profit | $12.7 | $12.3 | $35.9 | $36.0 |
| Gross margin | 23.5% | 22.0% | 21.4% | 22.4% |
| Operating income | $2.7 | $1.7 | $5.9 | $4.9 |
| Net income | $2.3 | $1.2 | $4.4 | $3.4 |
| Diluted EPS | $0.21 | $0.11 | $0.41 | $0.32 |
- Q3 sales declined 2.8%, despite average selling prices rising about 6%; consolidated unit volume fell about 11%. Nine-month sales rose 4.8%, with unit volume up 4.7%.
- Q3 gross margin improved mainly on lower freight costs, partly offset by higher discounting. Nine-month margin declined amid higher discounting, returns and allowances, and freight costs.
- Selling and administrative expense fell to $10.0 million in Q3 from $10.6 million and to $30.0 million for nine months from $31.1 million, reflecting lower personnel-related and other costs.
- For nine months, casegoods sales rose to $111.7 million from $103.8 million; upholstery sales were $56.4 million versus $56.7 million. Upholstery reported operating losses of $0.8 million in Q3 and $2.1 million for nine months; casegoods remained profitable.
Cash flow, balance sheet and liquidity
- Operating cash flow was $22.2 million for the first nine months, versus cash used of $13.4 million in the prior-year period. Inventory reduction contributed $14.5 million to current-period operating cash flow.
- Cash increased to $32.7 million at October 30, 2011, from $16.6 million at January 30, 2011. Capital expenditures were $2.4 million and dividends paid were $3.2 million during the nine months.
- Working capital was $90.3 million and the current ratio was 6.3:1, compared with $89.3 million and 6.1:1 at fiscal year-end. Total liabilities were $23.9 million and shareholders’ equity was $127.9 million.
- No revolving-credit borrowings were outstanding. Of the $15.0 million facility, $13.2 million was available after $1.8 million of standby letters of credit. The facility matures July 31, 2013; the company reported compliance with its covenants. It also said up to $15.8 million was available to borrow against life-insurance cash surrender value.
- The filing states there was no long-term debt other than deferred-compensation obligations. The revolving facility’s availability, not outstanding debt, supports working-capital liquidity.
Material changes, outlook and risks
- Management was cautiously optimistic about continued year-over-year sales growth through market-share gains and improving demand, but provided no quantified sales or earnings guidance.
- Management expected fiscal 2012 margins to face pressure from elevated discounting to clear excess inventory, higher Asian import costs (including China wage inflation and currency strength), and higher raw-material costs, including leather, cotton and steel.
- The domestic upholstery business has high fixed costs and remained unprofitable. Management said further capacity reductions may be necessary if sales do not rise sufficiently; any such action could cause restructuring charges and reduce near-term earnings.
- Key risks include weak consumer confidence and housing conditions, intense competition, exchange-rate and imported-product costs, supply and shipping disruptions, raw-material prices, product quality, and ERP implementation costs or disruption.
- Unusual items included a $181,000 Q3 warehouse sprinkler-malfunction casualty loss; the prior-year nine-month comparison included a $2.2 million casualty loss and $1.7 million insurance recovery. Current-period results also benefited from a $610,000 life-insurance gain in Q1 and a lower effective tax rate partly attributable to non-taxable life-insurance proceeds and a captive-insurance distribution.
- The board declared a $0.10-per-share dividend payable February 24, 2012. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and unit volumes recover, particularly in leather upholstery, and whether discounting and returns moderate.
- Whether the domestic upholstery division can reduce losses without capacity cuts or restructuring charges.
- Cash-flow sustainability: the strong current-period operating cash flow was helped substantially by inventory reductions.
- Availability under the credit facility, covenant compliance, and the impact of import, currency, freight and raw-material costs on margins.
- The extent and timing of ERP spending, remaining capital expenditures, and any further warehouse, quality or restructuring costs.
- The sustainability of the unusually low Q3 effective tax rate and the contribution of life-insurance-related items to earnings.