Hooker Furniture Corporation — FY2016 Form 10-K
Business context and reporting period. Hooker designs, sources, manufactures and markets residential and contract furniture. This annual report covers the 52 weeks ended January 31, 2016; it is not a standalone quarterly filing. The Home Meridian International (HMI) acquisition closed February 1, 2016, so HMI is excluded from FY2016 reported results.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $247.0 million | $244.4 million |
| Gross profit / margin | $68.7 million / 27.8% | $62.8 million / 25.7% |
| Operating income / margin | $24.3 million / 9.8% | $19.0 million / 7.8% |
| Net income | $16.2 million | $12.6 million |
| Diluted EPS | $1.49 | $1.16 |
| Operating cash flow | $23.0 million | $22.8 million |
- Annual sales rose 1.1%; net income increased 28.7%. Gross margin improved by 2.1 percentage points.
- Cash and cash equivalents were $53.9 million at year-end, versus $38.7 million. Working capital was $111.5 million and the working-capital ratio was 7.7:1. Year-end inventories were $43.7 million and trade receivables were $28.2 million.
- FY2016 investing cash outflow was $3.5 million, including $2.8 million of capital expenditures; financing cash outflow was $4.3 million, principally dividends. Dividends were $0.40 per share.
- There was no term debt outstanding at January 31, 2016. After year-end, the company borrowed $41 million under an unsecured term loan and $19 million under a secured term loan to finance HMI; it also expanded its revolving facility to $30 million. The filing reports subsequent unscheduled term-loan payments of $6.8 million, in addition to scheduled payments, but does not provide a clear remaining debt balance.
Material changes versus the prior comparable period
- Casegoods sales increased 0.8% to $155.1 million; upholstery sales fell 2.6% to $84.1 million; All Other sales grew 59.9% to $8.0 million, largely from H Contract.
- Operating income improved across all segments. Casegoods operating margin rose to 11.9% from 11.2%; upholstery operating income more than doubled to $6.0 million, with margin rising to 7.2% from 3.3%. All Other remained loss-making, but its operating loss narrowed to $0.3 million from $1.1 million.
- Management attributed improved profitability to lower discounting, freight and quality costs in casegoods, and improved manufacturing efficiency and lower contract manufacturing in upholstery. Sales volumes fell 1.5% overall while average selling prices rose 2.0%.
- Fourth-quarter sales were $60.6 million versus $64.9 million a year earlier; net income was $4.1 million versus $4.3 million, and diluted EPS was $0.38 versus $0.40.
Outlook, risks and unusual items
- Management described the U.S. economy as generally healthy but volatile and reported lower demand early in FY2017 than in the comparable prior-year period. No specific consolidated FY2017 sales or earnings guidance was provided. Management expected HMI to more than double company net sales and stated the acquisition was expected to be accretive to EPS beginning in FY2017, based on preliminary estimates.
- HMI was acquired for $85 million cash and 716,910 shares; the preliminary purchase-price allocation was $106.3 million, including $21.0 million goodwill and $28.8 million intangible assets. The company anticipated approximately $1.5 million of additional deal and integration costs in FY2017, as well as higher depreciation and amortization, including approximately $3.4 million of FY2017 amortization on acquired intangibles.
- Acquisition debt carries variable LIBOR-based rates and is subject to financial covenants. Management expected covenant compliance, but debt service, integration execution, customer retention and assumed retirement-plan obligations are material considerations. HMI had significant sales concentration: 60% of its FY2015 sales came from ten customers, and two customers together represented over 27% of HMI sales.
- Supply risk is concentrated in Asia: imported goods represented about 70% of Hooker’s FY2016 sales, and China and Vietnam accounted for 68% and 26% of import purchases, respectively. One Chinese factory represented approximately 58% of imported purchases. Other risks include consumer and housing cyclicality, competition, foreign-exchange and freight costs, inventory forecasting, and ERP implementation; the Bradington-Young ERP rollout was expected in the first half of FY2017.
- Hooker is contesting a customs matter involving a proposed $1.7 million civil penalty and approximately $0.5 million in duties related to Chinese bedroom furniture imports. Management believes the matter will not materially affect the company and intends to defend it. Potential anti-dumping duties on certain imported accent chests remained uncertain; the latest court action was favorable to the company’s position, but an appeal remained possible.
- Homeware continued to report operating losses. The company revised its strategy, discontinued direct-to-consumer marketing and online sales, and shifted toward lower-cost sourcing and third-party online retailers. H Contract was profitable at the operating level, but management noted its early growth record was not assured.
Important facts for investors to verify
- HMI’s post-acquisition sales, margins, customer retention, integration costs and realized synergies against management’s preliminary expectations.
- Current term-loan balances, interest expense, covenant headroom and the effect of variable interest rates after subsequent repayments.
- Resolution and potential financial exposure from the customs penalty and any duties on accent chests.
- Progress on Bradington-Young’s ERP implementation and the planned transition away from receivables factoring.
- Whether weaker early-FY2017 demand, import concentration and HMI customer concentration affect sales, cash generation or liquidity.