Hooker Furniture Corporation — Form 10-Q
Business context and period. The filing covers the 13 weeks and 39 weeks ended October 30, 2016 (fiscal 2017 third quarter and year to date), compared with periods ended November 1, 2015. Hooker completed its acquisition of substantially all of Home Meridian International’s assets on February 1, 2016. Home Meridian results are included from that date, so reported year-over-year growth is not directly comparable with the prior-year periods.
Key financial results
| Metric | Q3 FY2017 | Q3 FY2016 | 39 weeks FY2017 | 39 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $145.3 million | $65.3 million | $403.3 million | $186.4 million |
| Gross profit / margin | $30.9 million / 21.3% | $18.2 million / 27.8% | $86.0 million / 21.3% | $50.6 million / 27.2% |
| Operating income / margin | $9.9 million / 6.8% | $6.6 million / 10.2% | $22.2 million / 5.5% | $17.7 million / 9.5% |
| Net income | $6.5 million | $4.6 million | $14.3 million | $12.0 million |
| Diluted EPS | $0.56 | $0.43 | $1.23 | $1.11 |
| Operating cash flow | $31.3 million | $16.9 million |
- Q3 sales rose 122.4% and net income rose 39.5%; nine-month sales rose 116.3% and net income rose 18.8%. The sales increase primarily reflects the acquired Home Meridian business.
- Home Meridian contributed Q3 sales of $86.1 million and operating income of $3.5 million; year-to-date sales were $231.4 million and operating income $6.0 million. Its year-to-date segment operating margin was 2.6%.
- Legacy Hooker sales declined 9.3% in Q3 and 7.8% year to date. Hooker Casegoods sales fell 10.5% and 11.6%, respectively; Upholstery sales fell 9.5% and 3.6%.
- Consolidated gross and operating margins declined year over year despite higher absolute profit, reflecting the acquired business’s lower margins and weaker legacy sales. Lower ocean freight costs supported margins in certain segments.
Financial position, cash flow and debt
- At October 30, 2016, cash was $43.1 million, total assets $304.7 million, current assets $196.3 million and current liabilities $57.8 million. Cash was down from $53.9 million at January 31, 2016.
- Term-loan debt was approximately $49.2 million outstanding before unamortized issuance costs; there were no revolving-credit borrowings. The $30 million revolving facility had $28.7 million available, with $1.3 million in letters of credit outstanding.
- The acquisition was funded with $86.1 million cash and 716,910 shares valued at $20.3 million. The company borrowed $60 million in term loans and made $10.8 million of debt payments during the nine-month period.
- Nine-month investing cash use was $87.6 million, including the acquisition; financing provided $45.5 million. Cash declined $10.8 million over the period. Capital expenditures were $1.9 million.
- Term loans mature February 1, 2021. Rates reset monthly at LIBOR plus 1.50% on the unsecured loan and LIBOR plus 0.50% on the secured loan; the latter is secured by certain company-owned life insurance policies. Management estimated a 1 percentage-point LIBOR increase would add about $460,000 to annual interest expense.
- The company reported compliance with its financial covenants at quarter-end and expected to remain compliant. It said available cash, operating cash flow and credit availability were sufficient for anticipated needs, including debt service and dividends.
Outlook, management commentary and risks
- Management expressed optimism about the fourth quarter and following year, citing Home Meridian’s record order backlog, favorable response to new products, improving order trends and retail conditions, and expected shipments of new products. These are expectations, not guaranteed results.
- Management cited sluggish furniture retail demand and reduced retailer inventory investment as pressures. A quality issue delayed Hooker Upholstery shipments in the second and third quarters; management said the division was generally back in stock and had an order backlog exceeding two months’ sales. Sam Moore faced labor-capacity issues.
- Management expected $334,000 of additional acquisition-related intangible amortization and nominal additional acquisition costs for the remainder of fiscal 2017. Total acquisition-related costs recorded in the first nine months were $1.1 million; acquired-asset valuations remained preliminary.
- Risks include integrating Home Meridian, maintaining its customer relationships, realizing expected benefits, acquisition debt and interest-rate exposure, legacy pension obligations, customer concentration in Home Meridian, offshore sourcing and shipping disruptions, foreign-exchange and input-cost changes, and cyclical consumer demand.
- A customs dispute concerns alleged antidumping duties and a proposed penalty on furniture imported from China. CBP’s revised proposed penalty was about $1.7 million plus approximately $500,000 of duties. The company disputes liability and intends to defend the matter; management said it did not expect a material adverse effect.
- Potential antidumping duties on certain Chinese accent chests remain uncertain; the company could not estimate potential exposure. A November 28, 2016 dividend declaration set a $0.12-per-share payment, up from $0.10 declared per share in the reported quarters.
Important facts for investors to verify
- How much reported growth and earnings contribution came from Home Meridian, and how its margins and backlog translate into future results.
- Whether legacy segment sales stabilize and the Hooker Upholstery quality and shipping issues remain resolved.
- Final purchase-price allocation, including acquired intangibles, goodwill and assumed pension liabilities, and any resulting adjustments or charges.
- Debt repayment, covenant headroom, sensitivity to floating interest rates, and the effect of cash needs on dividends and other investment.
- Developments in the customs matters, possible import duties, and customer concentration, sourcing and shipping risks.