What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-10 compared with 2020-09-09 · 231 added, 173 removed, 255 unchanged (61% of the section changed)

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achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

higher than expected employee medical and workers’ compensation costs that may increase the cost of our high-deductible healthcare and workers compensation plans;

risks related to our other defined benefit plans;

the impairment of our long-lived assets, which can result in reduced earnings and net worth;

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Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2021 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 4, 2020, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began February 3, 2020, which both ended August 2, 2020.

This report discusses our results of operations for this period compared to the 2020 fiscal year thirteen-week period that began May 6, 2019 and the twenty-six week period that began February 4, 2019, which both ended August 4, 2019;

and our financial condition as of August 2, 2020 compared to February 2, 2020.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2021 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 3, 2020, and the thirty-nine week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began February 3, 2020, which both ended November 1, 2020.

This report discusses our results of operations for this period compared to the 2020 fiscal year thirteen-week period that began August 5, 2019 and the thirty-nine week period that began February 4, 2019, which both ended November 3, 2019;

and our financial condition as of November 1, 2020 compared to February 2, 2020.

References in this report to:

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In the discussion below we reference changes in sales orders or “orders” and sales order backlog (unshipped orders at a point in time) or “backlog” over and compared to certain periods of time and changes discussed are in sales dollars and not units of inventory, unless stated otherwise.

We believe orders are generally good current indicators of sales momentum and business conditions.

In a normal environment, we believe orders are generally good current indicators of sales momentum and business conditions.

However, except for custom or proprietary products, orders may be cancelled before shipment.

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however, orders may be shipped later if they are out of stock or there are production or shipping delays or the customer has requested the order to be shipped at a later date.

For the Hooker Branded segment, Domestic Upholstery segment and All Other, we consider unshipped order backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies, we do not consider order backlogs to be a reliable indicator of expected long-term sales.

We consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period.

In a normal environment, for the Hooker Branded segment, Domestic Upholstery segment and All Other, we generally consider unshipped order backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies, we do not consider order backlogs to be a reliable indicator of expected long-term sales.

In a normal environment, we generally consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period.

Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass, club and mega account channels of distribution, (iii) the proprietary nature of many of its products and (iv) the project nature of its hospitality business, for which average order sizes tend to be larger and consequently, its order backlog tends to be larger.

There are exceptions to the general predictive nature of our orders and backlogs noted in this paragraph due to current demand and supply chain challenges related to the COVID-19 Pandemic.

They are discussed in greater detail below and are essential to understanding our prospects.

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report.

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and around the world and demand for our products plummeted, and orders decreased 40.5% in the fiscal 2021 first quarter as compared to the same prior-year period.

To address the financial impact of the virus, we delayed non-essential capital spending and implemented other cost-cutting measures, including abbreviated shifts, furloughs, the temporary closure of our domestic manufacturing plants, staff reductions, temporary fee reductions for our Board of Directors, temporary salary reductions for officers and other managers, rationalizing current import purchase orders and collaborating with our vendors to cut costs and extend payment terms where possible.

While we continue to spend cautiously, business has improved steadily beginning in May 2020 and we’ve seen greatly increased demand for our products compared to the prior-year period and the first quarter of fiscal 2021.

Cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown partially drove the steep declines in the fiscal 2021 first quarter.

Fiscal 2021 second quarter orders increased nearly 24% compared to the same prior-year period and year-to-date orders as of the end of the fiscal 2021 second quarter were down only 6.5% as compared to the same prior-year period, despite abysmal first quarter orders.

(The favorable trend continued into fiscal August as orders increased over 50% which brought year-to-date orders up 3% as compared to the same prior-year period.) Consequently, during the 2021 second quarter, our domestic manufacturing plants reopened and are currently operating near capacity.

To address the financial impact of the virus felt in the first quarter, we delayed non-essential capital spending and implemented other cost-cutting measures, including abbreviated shifts, furloughs, the temporary closure of our domestic manufacturing plants, staff reductions, temporary fee reductions for our Board of Directors, temporary salary reductions for officers and other managers, rationalizing current import purchase orders and collaborating with our vendors to cut costs and extend payment terms where possible.

Fiscal 2021 third quarter consolidated orders increased 34% compared to the same prior-year period and year-to-date orders increased 8.3% as compared to the same prior-year period, despite abysmal first quarter orders.

All three domestic upholstery divisions were operating at current full capacity at the end of the third quarter.

Most furloughs of our associates have ended, and temporary salary and fee reductions have been rescinded.

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In addition, for employees diagnosed with the virus (and those associates with another diagnosed person or persons in their household) we are offering work-from-home arrangements where feasible and are working to accommodate associates with child-care issues related to school or day-care closures and anticipated re-openings.

The safety and health of our employees remains a top priority.

As of early December 2020, the average daily cases of COVID-19 and associated hospitalizations and deaths have been increasing since September.

Governments have been implementing a range of measures in response to the second round of the pandemic.

The extent to which these recent developments may adversely affect our sales, earnings and liquidity during the remainder of fiscal 2021 and into fiscal 2022 is unknown.

Executive Summary-Results of Operations

We began to recover from the depths of the initial COVID-19 crisis in the fiscal 2021 second quarter.

Our results were greatly improved as compared to the first quarter of fiscal 2021, which was our worst quarterly performance recorded in over a decade.

While second quarter net sales were lower than the prior year-quarter due to the lagging effects of the crisis, net income was up 39% and quarterly earnings per share was $0.48 as compared to $0.35 in the prior year second quarter.

Fiscal 2021 first half results clearly show the adverse economic effects brought on by the initial severity of COVID-19 crisis conditions, which caused demand for our products to plummet.

First half sales were down over 18% with nearly 60% of the consolidated net sales decrease occurring in the first quarter of fiscal 2021.

The net loss reported in the first half was due principally to $44.3 million non-cash impairment charges on our goodwill and trade names ($33.7 million net of tax), driven largely by our depressed stock price which occurred at the depth of the crisis and which was a primary input in the valuation analysis that necessitated the write-off.

First-half loss per share was $2.46 as compared to earnings per share of $0.52 in the comparable period.

Our fiscal 2021 second quarter and first-half performance is discussed in greater detail below under “Review” and “Results of Operations.”

Although the COVID-19 pandemic continued to impact current economic conditions and our business, we are pleased to report encouraging results for the second quarter of fiscal 2021.

Consolidated operating income increased by $1.7 million or 30.2% as compared to the prior year second quarter.

The Home Meridian segment reported $1.1 million in operating income compared to a small operating loss in the prior year second quarter.

Our Hooker Branded segment reported $6.1 million in operating income, with an increased operating margin of 15.7% of net sales compared to 10.4% net sales in the comparable prior-year period.

The Domestic Upholstery segment reported essentially break-even operating results for the second quarter despite decreased net sales and inefficiencies from operating at reduced production volumes and lower capacities, which is a much better performance than initially expected under crisis conditions.

The Hooker Branded segment’s net sales slightly decreased by $584,000 or 1.5% as compared to the prior year second quarter, while increasing nearly $12 million or 43% as compared to the fiscal 2021 first quarter.

Most of our customers’ stores reopened during the second quarter, leading to increased demand for our products.

Incoming orders increased by 11.8% as compared to the prior year second quarter and over 50% as compared to the first quarter.

The Hooker Branded segment finished the quarter with an order backlog 47% higher than the comparable prior year period and 45% higher than the fiscal 2021 first quarter.

The Home Meridian segment’s net sales decreased $16 million or 18.4% in the fiscal 2021 second quarter as compared to the prior year second quarter due primarily to decreases in the Samuel Lawrence Hospitality (“SLH”), Pulaski Furniture (“PFC”) and Samuel Lawrence Furniture (“SLF”) divisions, partially offset by increased sales in the Accentrics Home (“ACH”) and HMidea divisions.

The COVID-19 pandemic severely impacted the hospitality business beginning in the fiscal 2021 second quarter and, consequently, SLH’s sales decreased.

PFC’s and SLF’s sales decreases were mostly due to cancelled and delayed orders early in the pandemic that delayed the normal flow of product.

Most customers in this channel were closed or their operations severely limited in the fiscal 2021 first quarter and were slower to recover in the fiscal 2021 second quarter.

However, incoming orders in this channel increased in the fiscal 2021 second quarter as these customers responded to better than expected business following the initial shutdowns.

ACH’s and HMidea’s sales increased by about 20% and accounted for 34% of Home Meridian’s total sales in the quarter.

These divisions concentrate on the e-commerce and Clubs channels, which were less seriously impacted by the COVID-19 crisis.

Four out of six divisions in the Home Meridian segment reported operating income for the quarter and four out of six divisions reported improved operating margin compared to the prior year period, which we believe was attributable to the reduced occurrence of cost-related issues which negatively impacted Home Meridian’s sales and profitability in the prior year, such as excess tariffs, higher freight costs and warehousing and distribution expenses.

The Domestic Upholstery segment’s net sales decreased by $5.2 million or 22.8% in the fiscal 2021 second quarter as compared to the fiscal 2020 second quarter.

Second quarter incoming orders decreased by 5.9% as compared to the prior year period.

In response to the COVID-19 pandemic and reduced orders, we temporarily closed our manufacturing plants at Bradington-Young and Shenandoah in April and gradually resumed their operations in the second quarter.

At the end of July, all three divisions were operating near capacity as they continue to ramp up from reduced operating schedules.

Domestic Upholstery management implemented cost reduction measures to mitigate unabsorbed fixed costs resulting from the lower production volumes.

At the end of the second quarter, Domestic Upholstery’s backlog was about 45% higher than both the fiscal 2021 first quarter and prior year second quarter, due to the ramp up from reduced operating schedules in the second quarter and the receipt of programmed orders scheduled to ship later in the fall.

All Other’s net sales increased slightly compared to prior year second quarter.

Both H Contract and Lifestyle Brands reported small sales increases.

However, H Contract’s incoming orders decreased by 9% in the second quarter, as senior-living facilities, which comprise the majority of this division’s business, felt the impact of the COVID-19 pandemic.

Although orders were below the prior year, thanks to strong first quarter incoming orders, H Contract’s backlog was over 30% higher than the prior year second quarter.

All Other reported $350,000 in operating income in the fiscal 2021 second quarter which was attributable to H Contract’s performance, despite unfavorable product mix having a modest adverse impact on the gross margin.

To address the financial impact of the COVID-19 pandemic, during the fiscal 2021 first half we implemented certain measures to preserve cash and reduce operating expenses.

We strategically monitored our inventory levels by focusing on best-selling products.

Consolidated net sales for fiscal 2021 third quarter decreased by $8.5 million or 5.4%, partially recovering from 22.8% and 14.3% net sales decreases, respectively, in the first and second quarters of fiscal 2021, all compared to their respective prior year periods.

The net sales declines were principally driven by decreased sales at Home Meridian due to inventory availability challenges partially offset by increased Hooker Branded sales.

Consolidated operating income increased by $8.0 million or 161% versus the prior year period with our three reportable segments and All Other reporting operating profit for the third quarter of fiscal 2021.

Increased operating income was driven by the non-recurrence of certain expenses at Home Meridian in the current year, lower overall consolidated spending due to COVID-19 and increased sales in the Hooker Branded segment.

For the first nine months, consolidated net sales decreased $61.1 million or 13.7% from $445.9 million to $384.8 million as compared to the prior year period due to sales decreases in all three reportable segments as well as All Other driven by significantly reduced sales volume during the COVID-19 pandemic.

Consolidated net income during the current quarter increased by $6.2 million or 158% and quarterly earnings per share was $0.84 as compared to $0.33 in the prior year third quarter.

The net loss reported in the year-to-date period was due principally to $44.3 million non-cash impairment charges on our goodwill and trade names, $33.7 million net of tax, driven largely by our depressed stock price which occurred at the depth of the crisis and which was a primary input in the valuation analysis that necessitated the write-off.

First nine months of fiscal 2021 loss per share was $1.61 as compared to earnings per share of $0.85 in the comparable period.

Our fiscal 2021 third quarter and first nine months performance is discussed in greater detail below under “Review” and “Results of Operations.”

We are pleased to report encouraging results for the third quarter of fiscal 2021, which showed solid improvements from the initial pandemic conditions encountered earlier in the fiscal year.

We believe that higher levels of consumer confidence and home sales compared to earlier in the year and more time spent at home have led to increased spending on home furnishings.

The Hooker Branded segment’s net sales increased by $3.6 million or 8.2% compared to the prior year third quarter and diminished the year-to-date sales decrease to 7.7%, compared to 16.5% decrease for the six-month period.

Incoming orders have been trending upward for five consecutive months driven by increased demand for our products.

Hooker Casegoods incoming orders increased by over 30% and Hooker Upholstery incoming orders increased by over 50%, both compared to the prior year third quarter.

This segment reported $7.7 million operating income or 16.3% operating margin and finished the quarter with an order backlog 1.5 times the comparable prior year period.

The Home Meridian segment’s net sales decreased $12 million or 14% in the fiscal 2021 third quarter as compared to the prior year period due to decreases in Accentrics Home (“ACH”), Pulaski Furniture (“PFC”) and Samuel Lawrence Hospitality (“SLH”), partially offset by increased sales in the Prime Resources International (“PRI”) and HMidea divisions.

Samuel Lawrence Furniture (“SLF”) net sales stayed flat for the quarter.

ACH, the division focused on e-commerce channels with a shorter selling cycle, PFC and SLF all experienced inventory availability issues due to container availability and production capacity constraints with import suppliers.

These issues led to reduced net sales at ACH and PFC, especially with large furniture chains and e-commerce customers.

We are in the process of re-building our inventory and we have large orders in production to fulfill expected demand in the Winter selling season and beyond.

The COVID-19 pandemic severely impacted the hospitality business beginning in the fiscal 2021 second quarter and, consequently, SLH’s sales decreased significantly.

Division management is exploring new channels of distribution as the hospitality industry is expected to only partially recover in fiscal 2021.

On a more positive note, PRI and HMidea net sales saw double-digit increases as compared to prior year third quarter driven by increased sales in the mass merchant and clubs channels.

Despite decreased net sales, the segment reported $2.5 million in operating income compared to a $4.0 million operating loss in the prior year third quarter due principally to chargebacks with one major customer, excess inventory carrying costs due to customer returns and excess inventory, and inventory write-downs – all of which did not repeat in the current year.

Home Meridian incoming orders increased by 36% with four out of six divisions reporting increases compared to the prior year period and the segment finished the quarter with backlog 80% higher than prior year quarter end.

However, current order backlog may not be a helpful indicator of sales for the fourth quarter and the first half of fiscal 2022 due to supply chain challenges discussed above.

The Domestic Upholstery segment’s net sales increased $321,000 or 1.3% in the fiscal 2021 third quarter as compared to the prior year period, which represented solid recovery after two quarters with double-digit percentage net sales declines.

Third quarter incoming orders increased by over 30% as compared to the prior year period.

In response to the COVID-19 pandemic and reduced orders early this year, we temporarily closed our manufacturing plants at Bradington-Young and Shenandoah in April and significantly reduced production at Sam Moore.

We gradually resumed their operations in the second quarter.

By the end of the third quarter, all three divisions were operating at current full capacity and their order backlogs had fully recovered and increased substantially over the prior year.

Bradington-Young, Shenandoah, and Sam Moore order backlog was 251%, 74%, and 57% higher than the prior year third quarter end, respectively.

However, given the current circumstances, the unshipped order backlog may not be a helpful indicator of this segment’s sales for the fourth quarter and beyond due to production delays including labor shortages and scarcity of some raw materials and components.

This segment has incurred higher labor costs as division management has increased capacity by hiring new associates to ramp up production in order to reduce backlogs.

Domestic Upholstery reported $2.4 million in operating income or 9.6% operating margin in the third quarter of fiscal 2021, improvements compared to both prior year and operating losses experienced at the heights of the initial COVID crisis in the first and second quarters of the current fiscal year.

All Other net sales decreased by 9.4% compared to prior year third quarter due primarily to sales declines at H Contract.

Incoming orders decreased by over 30% in the third quarter, as senior-living facilities, which comprise the majority of H Contract’s business, have decreased project spending due to the COVID-19 pandemic.

Postponement of new facility construction, lower occupancy rates, and increased operating expenses related to COVID-19 resulted in reduced spending on furnishings.

H Contract’s backlog was 9.1% lower than the prior year third quarter.

All Other reported $420,000 in operating income in the fiscal 2021 third quarter which was attributable to H Contract’s performance, despite unfavorable product mix having a modest adverse impact on the gross margin.

We are very encouraged by the current historic levels of orders and backlogs;

however, due to the current supply chain issues orders are not converting to shipments as quickly as could be expected in the pre-Pandemic environment and we expect that to continue at least into the fiscal 2022 first quarter.

In a normal environment, we’d expect backlog to be one helpful indicator of sales for the Hooker Branded, Domestic Upholstery and All Other for the upcoming 30-day period and for the upcoming 90-day period for the Home Meridian segment.

However, the current logistics challenges are slowing order fulfillment, particularly for Home Meridian whose average order sizes tend to be larger and more episodic versus orders for the traditional Hooker businesses, which tend to be smaller and more predictable.

Additionally, Home Meridian orders are programmed out and scheduled for delivery to its larger accounts further into the future than usual, which is also contributing to the increased backlog.

We expect these challenges will continue to negatively impact us and our sales in the fiscal 2021 fourth quarter, with steady improvements beginning in mid-February 2021 after the new year holidays in China and Vietnam.

To address the financial impact of the COVID-19 pandemic, we implemented certain measures to preserve cash and reduce operating expenses.

Despite the operating loss for the nine-month period, which was driven by the non-cash impairment charges, we generated $67.6 million in cash from operating activities, distributed $5.7 million in cash dividends to our shareholders, and paid $4.8 million in principal and interest on our term loans.

Cash and cash equivalents stood at $93.9 million at fiscal 2021 third quarter-end, an increase of $57.8 million compared to the balance at fiscal 2020 year-end.

We are in the process of re-building our inventories to meet current demand and given current lead times with our Asian partners, we have and may continue to experience out-of-stocks with respect to certain imported products.

Despite the operating loss for the six-month period, we generated $53.2 million in cash from operating activities, distributed $3.8 million in cash dividends to our shareholders, and paid $3.2 million in principal and interest on our term loans.

Cash and cash equivalents stood at $82.2 million at fiscal 2021 second quarter-end, an increase of $46.2 million compared to the balance at fiscal 2020 year-end.

Along with an aggregate $25.7 million available under our existing revolver to fund working capital, we are confident that our strong financial condition can weather the expected short-term impacts of COVID-19;

We are confident that our strong financial condition can weather the expected short-term impacts of COVID-19;

however, an extended impact may continue to materially and adversely affect our sales, earnings and liquidity.

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Cost of sales

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Intangible asset amortization

Operating (loss)/income

Operating income/(loss)

Other income, net

Interest expense, net

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Income tax expense/(benefit)

Net (loss)/income

Net income/(loss)

Fiscal 2020 results have been recast based on the re-composition of our reportable segments during the fiscal 2020 fourth quarter.

See Note 13 Segment Information for additional details regarding the re-composition of our operating segments.

Fiscal 2021 Second Quarter Compared to Fiscal 2020 Second Quarter

Fiscal 2021 Third Quarter Compared to Fiscal 2020 Third Quarter

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Hooker Branded

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Domestic Upholstery

FY21 Q2 % Increase

FY21 Q3 % Increase vs.

Average Selling Price (ASP)

FY21 Q2 % Increase

FY21 Q3 % Increase vs.

Hooker Branded

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Domestic Upholstery

Consolidated net sales decreased due primarily to the sales decline in the Home Meridian and Domestic Upholstery segments as a result of significantly reduced sales volume at those two segments.

Hooker Branded segment net sales decreased slightly in the fiscal 2021 second quarter driven by a mid-single digit sales percentage decease in Hooker Casegoods as compared to the prior year period, partially offset by a 12% sales increase at Hooker Upholstery, due to increased unit volume in this division.

ASP decreased slightly in Hooker Casegoods division driven by higher discounting on e-commerce and discontinued product sales.

Hooker Upholstery ASP stayed essentially flat.

Net sales decreased in the Home Meridian segment due primarily to sales declines in the SLH, PFC and SLF divisions which were more adversely impacted by the pandemic, partially offset by increased sales in the ACH and HMIdea divisions which are focused on the e-commerce and Clubs sales channels.

The ASP increase was principally attributable to increased ASP in SLH due to the nature of its projects;

however, it was not sufficient to offset the severe volume loss in its hospitality business.

Domestic Upholstery segment net sales decreased due to net sales decline in Bradington-Young and Shenandoah divisions as their manufacturing plants were temporarily idled in April and reopened at a slower pace in the fiscal 2021 second quarter.

Net sales and unit volume decreased by over 20% in these two divisions.

The Sam Moore division restored operations to 80% capacity and reported a lower single digit net sales decrease as compared to the prior year period.

Domestic Upholstery segment ASP decreased due to a lower ratio of higher-priced Bradington-Young leather products.

All Other net sales increased 1.7% in the fiscal 2021 second quarter.

Both H Contract and Lifestyle Brands reported increased net sales, driven by increased unit volume in both divisions, partially offset by H Contract decreased ASP.

Consolidated net sales decreased due primarily to the sales decline in the Home Meridian segment, partially offset by increased net sales in the Hooker Branded segment.

Hooker Branded segment net sales increased in the fiscal 2021 third quarter as compared to the prior year period, due to increased unit volume and, to a lesser extent, increased ASP.

Net sales decreased in the Home Meridian segment due to inventory availability in the ACH and PFC divisions, as well as sales decline in the hospitality business which has been severely impacted by the pandemic.

The decreases were partially offset by increased sales in the mass merchants and Clubs sales channels.

ASP increased in four of six divisions;

however, it was not enough to offset the volume loss in these divisions.

Domestic Upholstery segment net sales increased due to net sales increases in the Bradington-Young and Sam Moore divisions, partially offset by lower sales in the Shenandoah division due to reduced unit volume.

During the fiscal 2021 third quarter, Bradington-Young and Sam Moore restored operations to full capacity.

Shenandoah ramped up production and shipping at a slower pace but was at current full capacity at quarter-end.

ASP increased due to increases in the Sam Moore and Shenandoah divisions as well as increased mix of higher-priced Bradington-Young leather products.

All Other net sales decreased by 9.4% in the fiscal 2021 third quarter as compared to the prior year period due principally to decreased unit volume in H Contract, which was adversely impacted by the pandemic.

Gross Income and Margin

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Hooker Branded

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Domestic Upholstery

Consolidated gross profit decreased in absolute terms and increased as a percentage of net sales in the fiscal 2021 second quarter as compared to the prior year period.

The Hooker Branded segment’s gross profit increased due to increased gross margin in the Hooker Casegoods division, which was attributable to favorable product costs and reduced warehousing and distribution expenses during the pandemic.

Gross profit was negatively impacted by increased product costs at Hooker Upholstery due to a higher mix of product sourced from China which carried higher costs due to tariffs imposed during a prior year.

Home Meridian segment gross profit decreased in absolute terms but improved as a percentage of net sales due to reduced tariff costs as the sourcing transition from China to non-tariff countries has progressed, as well as the absence of several negative issues which impacted the prior year, including higher freight costs and increased warehousing and distribution costs to handle excess inventory related to quality issues and inventory growth due to slower sales than forecast.

These improvements were partially offset by lower margins on the sale of some slow-moving inventory.

Domestic Upholstery segment’s gross profit decreased in absolute terms and as a percentage of net sales due primarily to the net sales decline and to a lesser extent unabsorbed indirect and fixed costs at Shenandoah due to operating inefficiencies resulting from lower production levels.

Cost reduction efforts at Bradington-Young helped this division maintain gross margins at similar levels as compared to the prior year period.

Sam Moore gross margin was negatively impacted by higher benefits expense.

All Other’s gross profit decreased in absolute terms and as a percentage of net sales due to unfavorable product mix at the H Contract division.

Consolidated gross profit increased in absolute terms and as a percentage of net sales due primarily to increased gross margin in the Home Meridian segment and to a lesser in the Hooker Branded segment in the fiscal 2021 third quarter as compared to the prior year period.

The Hooker Branded segment’s gross profit increase was attributable to increased sales but was partially offset by higher ocean freight costs and increased product costs at Hooker Upholstery due to a higher mix of product sourced from China which carried higher costs.

Home Meridian segment gross profit increased significantly in absolute terms and as a percentage of net sales despite a 14% net sales decline.

Gross margin benefitted from the absence of higher customer chargebacks, write-downs of quality-related returns, and warehousing and distribution costs to handle excess inventory in the prior year third quarter, as well as lower product costs due to the sourcing transition from China to non-tariff countries.

Domestic Upholstery segment’s gross profit decreased slightly in absolute terms and as a percentage of net sales due to decreased gross profit in the Shenandoah division as the result of net sales decline, partially offset by increased gross income and margin in the Bradington Young and Sam Moore divisions.

All three divisions experienced increased material costs due to inflation and increased direct labor costs to service excess backlog but benefited from lower indirect costs as three divisions were at full capacity by quarter-end and were better able to absorb the indirect and fixed costs.

All Other’s gross profit decreased in absolute terms and as a percentage of net sales due to net sales decline and unfavorable product mix at the H Contract division.

Selling and Administrative Expenses (S&A)

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Hooker Branded

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Domestic Upholstery

Consolidated selling and administrative (“S&A”) expenses decreased in absolute terms and as a percentage of net sales in the fiscal 2021 second quarter as compared to prior year period.

The Hooker Branded segment’s S&A expenses decreased in absolute terms and as a percentage of net sales, due to the cost reduction initiatives related to the COVID-19 pandemic, and decreased selling and travel expenses.

The Home Meridian segment’s S&A expenses decreased in absolute terms due to lower selling expenses on decreased net sales and spending reduction initiatives in response to the COVID-19 crisis, but increased as a percentage of net sales due to lower sales.

These decreases were partially offset by increased professional service expenses.

The Domestic Upholstery segment’s S&A expenses decreased in absolute terms due to the cost reduction efforts and to a lesser extent decreased selling expenses on lower net sales.

S&A increased as a percentage of net sales due to lower net sales.

All Other S&A expenses were essentially flat.

Consolidated selling and administrative (“S&A”) expenses decreased in absolute terms and as a percentage of net sales in the fiscal 2021 third quarter as compared to prior year period.

The Hooker Branded segment’s S&A expenses stayed essentially flat in absolute terms.

Increased selling expenses were offset by the cost reduction initiatives, lower October Market costs and spending concessions granted, all related to the COVID-19 pandemic.

S&A expenses decreased as a percentage of net sales due to increased net sales.

The Home Meridian segment’s S&A expenses decreased in absolute terms and as a percentage of net sales due to lower selling expenses on decreased net sales and overall spending reductions in response to the COVID-19 crisis, partially offset by increased allowances for doubtful accounts.

The Domestic Upholstery segment’s S&A expenses decreased in absolute terms and as a percentage of net sales due to the cost reduction efforts as well as decreased advertising supply and sample expenses due to fewer new product introductions, partially offset by increased selling expenses on increased net sales.

All Other S&A expenses decreased in absolute terms and as a percentage of net sales due to lower selling expenses on decreased net sales as well as cost reduction initiatives related to the pandemic.

Intangible Asset Amortization

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Intangible asset amortization

Intangible asset amortization expense stayed the same compared to the prior year second quarter.

Intangible asset amortization expense stayed the same compared to the prior year third quarter.

Operating Profit/(Loss) and Margin

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Hooker Branded

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Domestic Upholstery

Operating income increased in absolute terms and as a percentage of net sales, due to the factors discussed above.

Operating profit increased in absolute terms and as a percentage of net sales, due to the factors discussed above.

Interest Expense, net

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Consolidated interest expense, net

Consolidated interest expense decreased in fiscal 2021 second quarter primarily due to lower interest rates on our variable-rate term loans, as well as lower principal balances.

Consolidated interest expense decreased in fiscal 2021 third quarter primarily due to lower interest rates on our variable-rate term loans, as well as lower principal balances.

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Consolidated income tax expense

Effective Tax Rate

We recorded income tax expense of $1.6 million for the fiscal 2021 second quarter compared to $1.2 million for the comparable prior year period.

The effective tax rates for the fiscal 2021 and 2020 second quarters were 21.8% and 23.1%, respectively.

We recorded income tax expense of $3.0 million for the fiscal 2021 third quarter compared to $1.1 million for the comparable prior year period.

The effective tax rates for the fiscal 2021 and 2020 third quarters were 22.9% and 21.4%, respectively.

Thirteen Weeks Ended

November 1, 2020

November 3, 2019

Diluted earnings per share

Fiscal 2021 First Half Compared to Fiscal 2020 First Half

Twenty-Six Weeks Ended

Fiscal 2021 First Nine Months Compared to Fiscal 2020 First Nine Months

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Hooker Branded

1 unchanged sentence

Domestic Upholstery

FY21 YTD % Increase

FY21 YTD % Increase vs.

Average Selling Price (ASP)

FY21 YTD % Increase

FY21 YTD % Increase vs.

Hooker Branded

5 unchanged sentences

Consolidated net sales decreased due to significantly reduced sales volume in all three reportable segments as compared to the prior year period.

Much of the unit volume decline in all segments is attributable to order cancelations and reduced ordering by our customers in immediate response to the COVID-19 pandemic, which caused many of our customers, particularly traditional furniture retailers which were deemed non-essential, to face state-mandated temporary store closures to help reduce the spread of COVID-19.

The net sales decrease in the Hooker Branded segment was attributable to decreased unit volume primarily in the Hooker Casegoods division and to a lesser extent in the Hooker Upholstery division.

ASP increased in the Hooker Branded segment due to increased ASP in Hooker Casegoods, partially offset by decreased ASP in Hooker Upholstery driven by higher discounting on e-commerce and discontinued product sales.

Home Meridian segment net sales decreased due to decreased unit volume in all divisions except for HMidea, which saw higher sales due to increased sales in the e-commerce and Clubs channels.

The ASP increase was attributable to increased ASP in SLH due to the nature of its projects.

Domestic Upholstery segment net sales decreased due to volume loss in all three divisions and decreased ASP.

We temporarily shut down Bradington-Young’s and Shenandoah’s manufacturing plants in April in response to COVID-19 pandemic restrictions and a decline in orders.

Thus, Bradington-Young and Shenandoah essentially did not report sales in April and reported net sales at 40% and 60%, respectively, of the prior year amounts in May.

The Sam Moore division operated at 50% capacity in April and resumed to 80% in the second quarter.

Its sales decrease was driven by decreased unit volume.

The Domestic Upholstery segment’s ASP decreased due to reduced proportion of higher-priced Bradington-Young leather products.

All Other net sales increased slightly due to the addition of Lifestyle Brands sales, partially offset by decreased net sales at H Contract due to decreased unit volume and ASP.

Much of the unit volume decline in all segments is attributable to order cancelations and reduced ordering by our customers in immediate response to the COVID-19 pandemic, which caused many of our customers, particularly traditional furniture retailers which were deemed non-essential businesses, to face state-mandated temporary store closures to help reduce the spread of COVID-19.

The net sales decrease in the Hooker Branded segment was attributable to decreased net sales in the Hooker Casegoods division driven by reduced unit volume.

Hooker Upholstery division reported increased net sales in the second and third quarters, while nine-month net sales stayed essentially flat as compared to the prior year period.

Home Meridian segment net sales decreased due to decreased unit volume in five of six divisions as the result of reduced sales volume with large retailers and regional furniture chains, sales declines in its hospitality business, and inventory availability issues in the e-commence channel, while partially offset by increased sales in its clubs channel.

The ASP increase was attributable to increased ASP in SLH due to product mix.

Domestic Upholstery segment net sales decreased due to decreased unit volume in all three divisions.

Early this year, in response to COVID-19 pandemic restrictions and a decline in orders, we temporarily shut down Bradington-Young’s and Shenandoah’s manufacturing plants while we kept Sam Moore division operating at 50% capacity, which adversely impacted net sales in this segment.

We resumed operations in the second quarter and operated at current full capacity for all three divisions by the end of the third quarter.

The Domestic Upholstery segment’s ASP decreased due to a reduced proportion of higher-priced leather products sold.

All Other net sales decreased due to sales declines at H Contract, which was adversely impacted by the pandemic, partially offset by increased in sales at Lifestyle Brands.

Gross Income and Margin

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Hooker Branded

1 unchanged sentence

Domestic Upholstery

Consolidated gross profit decreased in absolute terms while increased as a percentage of net sales in the fiscal 2021 first half versus the prior year period.

The Hooker Branded segment’s gross profit decreased in absolute terms due to the decline in sales and stayed essentially flat as a percentage of net sales.

Home Meridian segment gross margin increased in absolute terms in spite of lower net sales, but consequently increased as a percentage of net sales.

In the prior year period, this segment was heavily impacted by increased product costs due to excess tariffs, higher freight costs, and increased warehousing and distribution costs to handle excess inventory.

These issues did not re-occur in fiscal 2021, which we believe is the result of the resourcing transition to Vietnam which has helped to reduce product costs, and the exit of temporary warehouses, which has reduced warehousing and handling costs.

Domestic Upholstery segment’s gross profit decreased significantly in absolute terms and as a percentage of net sales due to the net sales decline and inefficiencies of operating at reduced production volume.

Unabsorbed fixed costs adversely impacted gross margin by 5.6% in this segment.

All Other’s gross profit and margin decreased in absolute terms and as a percentage of net sales due to unfavorable product mix.

Consolidated gross profit decreased in absolute terms but increased as a percentage of net sales in the fiscal 2021 first nine months versus the prior year period.

The Hooker Branded segment’s gross profit decreased in absolute terms due to the net sales decline.

Gross margin increased as a percentage of net sales as compared to the prior year period due principally to a higher percentage of sales sourced from non-tariff countries and lower warehousing and distribution spending, partially offset by higher discounting.

Home Meridian segment gross margin increased in absolute terms and as a percentage of net sales despite net sales decline.

In the prior year period, this segment was heavily impacted by increased product costs due to excess tariffs, higher chargebacks of product with quality-related issues, increased warehousing and distribution costs to handle excess inventory, and some lower-margin programs due to customer mix.

These issues either did not re-occur in fiscal 2021 or re-occurred at much lower or near normal levels.

Domestic Upholstery segment’s gross profit decreased significantly in absolute terms and as a percentage of net sales due primarily to the net sales decline and inefficiencies of operating at reduced production volumes during the first and second quarters.

Indirect fixed costs adversely impacted gross margin by 310 basis points in this segment.

All Other’s gross profit and margin decreased in absolute terms and as a percentage of net sales due to sales decline and unfavorable product mix in H Contract division, partially offset by the addition of Lifestyle Brands.

Selling and Administrative Expenses (S&A)

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November 1, 2020

November 3, 2019

Hooker Branded

1 unchanged sentence

Domestic Upholstery

Consolidated S&A expenses decreased in absolute terms but increased as a percentage of net sales in the fiscal 2021 first half versus the prior year period.

The Hooker Branded segment’s S&A expenses decreased in absolute terms in the fiscal 2021 first half due primarily to decreased selling costs on lower net sales, as well as cost-cutting measures implemented to address the COVID-19 crisis.

The decreases were partially offset by higher bad debt expenses due to a customer write-off during the first quarter unrelated to COVID-19 and an increase in reserves to recognize expected future credit losses under ASC 326 requirements, which we adopted during the first quarter of fiscal 2021.

The Home Meridian segment’s S&A expenses decreased in absolute terms and increased slightly as a percentage of net sales.

The decrease was principally attributable to lower selling expenses due to lower net sales and cost reductions implemented in response to the COVID-19 crisis.

These decreases were partially offset by increased professional service expenses.

The Domestic Upholstery segment’s S&A expenses decreased in absolute terms due to decreased selling expenses on lower net sales, as well as cost reductions such as decreased compensation expenses and advertising supply expenses.

All Other S&A expenses increased both in absolute terms and as a percentage of net sales.

Consolidated S&A expenses decreased in absolute terms but stayed unchanged as a percentage of net sales in the fiscal 2021 first nine months versus the prior year period.

The Hooker Branded segment’s S&A expenses decreased in absolute terms and as a percentage of net sales in the fiscal 2021 first nine months due primarily to decreased selling expenses on lower net sales, cost-cutting measures implemented to address the COVID-19 crisis, lower advertising supplies and sample expenses due to fewer new product introductions, as well as lower travel expenses due to pandemic-related restrictions.

The decreases were partially offset by higher bad debt expense due to a customer write-off during the first quarter unrelated to COVID-19 and an increase in reserves to recognize expected future credit losses under ASC 326 requirements, which we adopted during the first quarter of fiscal 2021.

The Home Meridian segment’s S&A expenses decreased in absolute terms and as a percentage of net sales, attributable to lower selling expenses on lower net sales and overall spending reductions implemented in response to the COVID-19 crisis, as well as the absence of the resourcing transition costs in the prior year period.

The Domestic Upholstery segment’s S&A expenses decreased in absolute terms due to decreased selling expenses on lower net sales, decreased advertising supply expenses, as well as the overall cost reductions on operating expenses.

S&A expenses increased as a percentage of net sales due to lower net sales.

All Other S&A expenses decreased in absolute terms and as a percentage of net sales driven by lower selling expenses and advertising supply expenses.

Goodwill impairment charges

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Home Meridian

1 unchanged sentence

Trade name impairment charges

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Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Home Meridian

In the first quarter of fiscal 2021, we recorded $23.2 million and $16.4 million in non-cash impairment charges to write down goodwill in the Home Meridian segment and the Shenandoah division under Domestic Upholstery segment, respectively.

We also recorded $4.8 million in non-cash impairment charges to write down tradenames in the Home Meridian segment.

Intangible Asset Amortization

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November 1, 2020

November 3, 2019

Intangible asset amortization

Intangible asset amortization expense stayed the same compared to the prior year first half.

Intangible asset amortization expense stayed the same compared to the prior year first nine months.

Operating (Loss)/Profit and Margin

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Hooker Branded

3 unchanged sentences

Interest Expense, net

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Consolidated interest expense, net

Consolidated interest expense decreased in the fiscal 2021 first half primarily due to lower interest rates on our variable-rate term loans, as well as lower principal balances.

Twenty-Six Weeks Ended

Consolidated interest expense decreased in the fiscal 2021 first nine months primarily due to lower interest rates on our variable-rate term loans, as well as lower principal balances.

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Consolidated income tax (benefit)/expense

Effective Tax Rate

We recorded income tax benefit of $9.3 million for the fiscal 2021 first half, of which $10.7 million was recorded related to goodwill and trade name impairment charges, compared to $1.8 million income tax expense for the comparable prior year period.

The effective tax rates for the fiscal 2021 and 2020 first half periods were 24.2% and 22.3%, respectively.

We recorded income tax benefit of $6.3 million for the fiscal 2021 first nine months, of which $10.7 million was recorded related to goodwill and trade name impairment charges, compared to $2.8 million income tax expense for the comparable prior year period.

The effective tax rates for the fiscal 2021 and 2020 first nine months periods were 24.8% and 21.9%, respectively.

Net (Loss)/Income

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

November 1, 2020

November 3, 2019

Net (loss) / income

Diluted (loss) / earnings per share

Given the strong demand we have seen since mid-May and with backlogs up 35% as of the end of the second quarter, we are entering the fall selling season with momentum and optimism.

We believe there are several positive factors in play such as pent-up demand, more focus on home environments and less competition for discretionary consumer spending from travel, dining out and sporting events.

The factors noted above have currently positioned home furnishings as an advantaged category and we are well-positioned to capitalize on that.

We are concerned about the human and economic toll of COVID-19, both currently and prospectively, as the possibility of additional surges of the virus may delay re-openings and have adverse effects in certain regions or states and consequently on demand for our products.

Barring a second nationwide or large-scale lock-down, we expect business to improve in the second half of the fiscal year.

However, we have limited visibility of how the economic and health crises may fluctuate in the coming months and face headwinds of substantial unemployment, continuing social unrest and general uncertainty.

As we head into the fourth quarter and next fiscal year, we are encouraged by our significant backlog and robust demand from all residential channels.

We believe that furniture will be an advantaged sector of the economy, benefitting from a renewed consumer focus on the home, a strong housing market and less discretionary spending competition from travel, dining out and entertainment.

Currently, supply chain bottlenecks in an environment of surging demand are our greatest business challenge.

Limitations on supply include scarcity of some raw materials and components, limited availability of shipping containers and ocean vessel space and production delays from some import suppliers.

We are making progress with these challenges, as our overseas suppliers and own factories ramp up production to allow us to begin to meet the strong demand.

However, we expect short-term unfavorable impacts to our fiscal 2021 fourth quarter sales and earnings, especially in our Home Meridian segment.

We are concerned about the human and economic toll of COVID-19, both currently and prospectively, especially the recent surge in COVID infections and hospitalizations.

We continue to maintain rigorous safety protocols in all our workplaces and are encouraged that we have had essentially no workplace spread in any location thus far.

Despite these challenges, as we look forward to the next two to three quarters, we are optimistic and believe we have the backlog, order velocity and momentum to deliver strong results when our supply chain challenges subside.

However, we have limited visibility of how the economic and health crises may fluctuate in the coming months.

We remain in exceptional financial condition with a strong balance sheet.

As of the end of our fiscal 2021 second quarter, our cash position was $82.2 million, an increase of $46 million over the end of the 2020 fiscal year on February 2, 2020.

As of the end of our fiscal 2021 third quarter, our cash position was nearly $94 million, an increase of about $58 million over the end of the 2020 fiscal year on February 2, 2020.

Additionally, we have access to about $26 million under our existing revolver to fund working capital requirements and to an additional $25 million in cash surrender value of Company-owned life insurance policies.

While we expect our cash balances to decline somewhat over the remainder of the year as we rebuild inventories and as trade receivables increase, both to accommodate increased sales, we expect our liquidity to be sufficient.

Discussions with lenders to refinance our credit facility which expires in February 2021 have begun and we expect to be successful in refinancing our debt;

however, we believe we have sufficient financial resources to continue to operate effectively even without refinancing our debt.

Discussions with lenders to refinance our credit facility which expires in February 2021 are nearing completion and we expect to be successful in refinancing our debt;

however, we believe we have enough financial resources to continue to operate effectively even without refinancing our debt.

Due to our strong cash position and expected working capital needs, we expect to pay off the balance of our term loans on or before closing of the New Credit Facility.

If we were unable to enter into the new credit facility, we believe we have enough cash on hand to pay off our term loans and fund our operations in the near future.

We expect to continue managing cash and spending cautiously as we move through the coming months.

We face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors” in our 2020 Annual Report.

We face many significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors” in our 2020 Annual Report.

Financial Condition, Liquidity and Capital Resources

Cash Flows – Operating, Investing and Financing Activities

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by / (used in) investing activities

Cash used in financing activities

Net increase in cash and cash equivalents

During the six months ended August 2, 2020, we used a portion of the $53.2 million cash generated from operations and $673,000 life insurance proceeds to pay $3.8 million in cash dividends, $3.2 million in principal and interest payments on our term loans, and $453,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the six months ended August 4, 2019, we used some of the $11.0 million of cash generated from operations and $1.4 million of proceeds on a note receivable to pay for $3.7 million of capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities, $3.5 million in cash dividends, $2.9 million in long-term debt payments, and $489,000 in life insurance premiums.

During the nine months ended November 1, 2020, we used a portion of the $67.6 million cash generated from operations and $1.5 million life insurance proceeds to pay $5.7 million in cash dividends, $4.8 million in principal and interest payments on our term loans, $642,000 to enhance our business systems and facilities, and $519,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the nine months ended November 3, 2019, we used some of the $26.6 million of cash generated from operations and $1.4 million of proceeds on a note receivable to pay for $5.3 million in cash dividends, $4.7 million of capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities, $4.4 million in term loans payments, and $558,000 in life insurance premiums.

Liquidity, Financial Resources and Capital Expenditures

5 unchanged sentences

We believe these resources are sufficient to meet our business requirements through fiscal 2021 and for the foreseeable future, including:

limited capital expenditures;

capital expenditures;

working capital;

2 unchanged sentences

We currently have one unsecured term loan and one secured term loan outstanding and a revolving credit facility.

The term loans are related to the Home Meridian acquisition.

The term loans are related to the HMI acquisition.

Details of our loan agreements and revolving credit facility are outlined below.

2 unchanged sentences

(“BofA”) in connection with the closing of the Home Meridian acquisition.

Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the Home Meridian acquisition.

Also, on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the HMI acquisition.

Details of the individual credit facilities referenced in the Original Loan Agreement are as follows:

Unsecured revolving credit facility.

The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million.

Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%.

24 unchanged sentences

We paid off the New Unsecured Term Loan in fiscal 2019.

We were in compliance with each of these financial covenants at August 2, 2020 and expect to remain in compliance with existing covenants for the foreseeable future.

We were in compliance with each of these financial covenants at November 1, 2020 and expect to remain in compliance with existing covenants for the foreseeable future.

We believe we have the financial resources to weather the expected short-term impacts of COVID-19;

however, an extended impact may materially and adversely affect our sales, earnings and liquidity.

As of August 2, 2020, $10.1 million was outstanding under the Unsecured Term Loan, $17.1 million was outstanding under the Secured Term Loan.

As of November 1, 2020, $8.6 million was outstanding under the Unsecured Term Loan, and $17.1 million was outstanding under the Secured Term Loan.

Revolving Credit Facility Availability

As of August 2, 2020, we had an aggregate $25.7 million available under our revolving credit facility to fund working capital needs.

Standby letters of credit in the aggregate amount of $4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of August 2, 2020.

There were no additional borrowings outstanding under the revolving credit facility as of August 2, 2020.

Expected Refinancing in Fiscal 2021

All amounts outstanding on our term loans and revolving credit facility are due and payable on the first day of fiscal 2022, February 1, 2021 and discussions with lenders about refinancing are underway.

As of November 1, 2020, we had an aggregate $25.7 million available under our revolving credit facility to fund working capital needs.

There were no additional borrowings outstanding under the revolving credit facility as of November 1, 2020.

Loan agreement

On November 4, 2020, we entered the Second Amendment to the Second Amended and Restated Loan Agreement to amend certain provisions of the Existing Loan Agreement.

The following provisions of the Existing Loan Agreement are amended as:

the Bank may from time to time issue letters of credit for the Company;

the amount of any letters of credit outstanding at any one time (including the drawn and unreimbursed amounts of the letters of credit) may not exceed $10 million in the aggregate.

Expected New Credit Facility and Term Loan Payoff in Fiscal 2021

We expect to enter into a new credit facility on or before the expiration of the current agreement.

Given current market dynamics, we expect credit to be more costly than our current lending arrangements.

If the negative economic effects of COVID-19 persist, it would likely have a material adverse effect on our sales, earnings and liquidity.

Due to our strong cash position and expected working capital needs, we expect to pay off the balance of our term loans on or before closing of the New Credit Facility.

In the unlikely event that we are unable to enter into the new credit facility as expected, we believe we have enough cash on hand to pay off our term loans and fund our operations in the near future.

Given current market dynamics, credit could be more costly than our current lending arrangements.

If the negative economic effects of COVID-19 persist or further deteriorate, it would likely have a material adverse effect on our sales, earnings and liquidity.

Consequently, our credit rating may decrease, or the availability of loans may be limited and refinancing our debt may be more difficult and loans more costly.

Irrespective of our success in refinancing these loans, we believe we could pay them off and have sufficient liquidity for working capital needs thanks to our strong cash position and access to cash surrender value of Company-owned life insurance.

Capital Expenditures

1 unchanged sentence

However, due to the negative economic effects of COVID-19, we have delayed indefinitely about $3 million in non-critical capital spending.

We expect to spend between $500,000 to $1.0 million in the remainder of the 2021 fiscal year to maintain and enhance our operating systems and facilities.

We expect to spend about $500,000 during the remainder of the 2021 fiscal year to maintain and enhance our operating systems and facilities.

COVID-19 Cost Cutting and Cash Preservation Measures

2 unchanged sentences

While we continue to spend cautiously, business has improved steadily beginning in May 2020 and we’ve seen greatly increased demand for our products.

Consequently, during the 2021 second quarter, our domestic manufacturing plants reopened and are currently operating near capacity.

Most furloughs of our associates have ended and temporary salary and fee reductions have been rescinded.

Consequently, during the 2021 second quarter, our domestic manufacturing plants reopened and are currently operating at current capacity.

During the fiscal 2021 third quarter, temporary salary and fee reductions were rescinded and as of early December 2020 furloughs of our associates have ended.

We are in the process of re-building inventory to meet increased customer demand.

As of the end of our fiscal 2021 second quarter of August 2, 2020, our cash position had increased by $46.2 million over the end of the 2020 fiscal year on February 2, 2020.

We expect these cash balances to decrease as we build inventories to meet increased customer demand.

On September 2, 2020, our board of directors declared a quarterly cash dividend of $0.16 per share, payable on September 30, 2020 to shareholders of record at September 18, 2020.

As of the end of our fiscal 2021 third quarter of November 1, 2020, our cash position had increased by about $58 million over the end of the 2020 fiscal year on February 2, 2020.

We expect these cash balances to decrease as we build inventories to meet increased customer demand and pay off the balance of our term loans.

On December 2, 2020, our board of directors declared a quarterly cash dividend of $0.18 per share, payable on December 31, 2020 to shareholders of record at December 16, 2020.

This represents a 12.5% increase over the previous quarterly dividend and the fifth consecutive annual dividend increase.

We expect our low fixed cost business model, which served us well during the Great Recession, to help us navigate the current disruption.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis