HOOKER FURNISHINGS Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery Segment including Bradington-Young, Sam Moore, and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands. References to the “Shenandoah acquisition” refer to the acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017. References to the “HMI acquisition” refer to the acquisition of substantially all of the assets of Home Meridian International, Inc. on February 1, 2016. Forward-Looking Statements Certain statements made in this report, including statements under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negatives thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to: ■ The effect and consequences of the coronavirus (COVID-19) pandemic or future pandemics on a wide range of matters including but not limited to U.S. and local economies; our business operations and continuity; the health and productivity of our employees; and the impact on our global supply chain, the retail environment and our customer base; ■ general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; ■ adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, such as the current U.S. administration’s imposing a 25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for additional or increased tariffs in the future; ■ sourcing transitions away from China, including the lack of adequate manufacturing capacity and skilled labor and longer lead times, due to competition and increased demand for resources in those countries; ■ risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, ocean freight costs and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders; ■ changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products; ■ disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships; ■ difficulties in forecasting demand for our imported products; 18 Table of Contents ■ risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products; ■ disruptions and damage (including those due to weather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in Vietnam and China; ■ risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs; ■ the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers; ■ our inability to collect amounts owed to us or significant delays in collecting such amounts; ■ the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance or risks not covered by cyber insurance; ■ achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations; ■ the impairment of our long-lived assets, which can result in reduced earnings and net worth; ■ capital requirements and costs, including the servicing of our floating-rate term loans; ■ risks associated with distribution through third-party retailers, such as non-binding dealership arrangements; ■ the cost and difficulty of marketing and selling our products in foreign markets; ■ changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials; ■ the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; ■ price competition in the furniture industry; ■ competition from non-traditional outlets, such as internet and catalog retailers; and ■ changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit. Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so. 19 Table of Contents Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 2020 annual report on Form 10-K (the “2020 Annual Report”). Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. 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,” “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: ■ the 2021 fiscal year and comparable terminology mean the fiscal year that began February 3, 2020 and will end January 31, 2021; and ■ the 2020 fiscal year and comparable terminology mean the fiscal year that began February 4, 2019 and ended February 2, 2020. Dollar amounts presented in the tables below are in thousands except for per share data. 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. 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. If the items ordered are in stock and the customer has requested immediate delivery, we generally ship products in about 7 days or less from receipt of order; 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. 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. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 2020 Annual Report. Our 2020 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives. Our 2020 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com. 20 Table of Contents Overview Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of case goods (wooden and metal furniture), leather-and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2019 shipments to U.S. retailers, according to a 2020 survey by a leading trade publication. We believe that consumer tastes and buying habits are evolving at a rapid pace and we continue to change to meet these demands. Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired the business of Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017. We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and hospitality furniture. While growing faster than industry average, these channels tend to operate at lower margins. We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer, has better positioned us in the “lifestyle specialty” retail distribution channel. In that channel, domestically- produced, customizable upholstery is viable product preferred by the end consumers who shop at retailers in that channel. COVID-19 During the fiscal 2021 first quarter, COVID-19 was recognized as a global pandemic. Federal, state and local governments in the U.S and elsewhere have imposed restrictions on travel and business operations and have advised or required individuals to limit or eliminate time outside of their homes. Temporary closures of certain businesses were also ordered in certain jurisdictions and other businesses temporarily closed voluntarily. Consequently, the COVID-19 outbreak severely restricted the level of economic activity in the U.S. 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. 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. 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. 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. 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. We are in the process of re-building inventory to meet increased customer demand. 21 Table of Contents We monitor information on COVID-19 from the Centers for Disease Control and Prevention (“CDC”) and believe we are adhering to their recommendations regarding the health and safety of our personnel. To address the potential human impact of the virus, most of our administrative staff are still telecommuting. For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have implemented social distancing and mask policies, instituted daily temperature checks and have stepped-up facility cleaning at each location. Non-essential domestic travel for our employees has ceased and international travel has been prohibited outright. Testing and treatment for COVID-19 is covered 100% under our medical plan and counseling is available through our employee assistance plan to assist employees with financial, mental and emotional stress related to the virus and other issues. 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 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.” Review 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. 22 Table of Contents 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. 23 Table of Contents 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. 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. Results of Operations The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report. Thirteen Weeks Ended Thirty-Nine Weeks Ended November 1, November 3, November 1, November 3, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 77.6 82.0 79.4 81.4 Gross profit 22.4 18.0 20.6 18.6 Selling and administrative expenses 13.3 14.4 15.1 15.1 Goodwill impairment charges - - 10.3 - Trade name impairment charges - - 1.2 - Intangible asset amortization 0.4 0.4 0.5 0.4 Operating income/(loss) 8.7 3.2 (6.5 ) 3.1 Other income, net 0.1 0.2 - - Interest expense, net 0.1 0.2 0.1 0.2 Income/(loss) before income taxes 8.7 3.2 (6.6 ) 2.9 Income tax expense/(benefit) 2.0 0.7 (1.6 ) 0.6 Net income/(loss) 6.7 2.5 (4.9 ) 2.3 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 Third Quarter Compared to Fiscal 2020 Third Quarter Net Sales Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 47,287 31.6 % $ 43,703 27.6 % $ 3,584 8.2 % Home Meridian 73,727 49.3 % 85,776 54.2 % (12,049 ) -14.0 % Domestic Upholstery 25,350 16.9 % 25,029 15.9 % 321 1.3 % All Other 3,323 2.2 % 3,668 2.3 % (345 ) -9.4 % Consolidated $ 149,687 100 % $ 158,176 100 % $ (8,489 ) -5.4 % Unit Volume FY21 Q3 % Increase vs. FY20 Q3 Average Selling Price (ASP) FY21 Q3 % Increase vs. FY20 Q3 Hooker Branded 6.2 % Hooker Branded 0.9 % Home Meridian -20.7 % Home Meridian 7.9 % Domestic Upholstery -3.0 % Domestic Upholstery 4.7 % All Other -10.2 % All Other 3.4 % Consolidated -16.3 % Consolidated 12.3 % 24 Table of Contents 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 Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 15,446 32.7 % $ 13,947 31.9 % $ 1,499 10.7 % Home Meridian 11,169 15.1 % 7,286 8.5 % 3,883 53.3 % Domestic Upholstery 5,751 22.7 % 5,847 23.4 % (96 ) -1.6 % All Other 1,117 33.6 % 1,319 36.0 % (202 ) -15.3 % Consolidated $ 33,483 22.4 % $ 28,399 18.0 % $ 5,084 17.9 % 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. 25 Table of Contents ■ 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) Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 7,762 16.4 % $ 7,760 17.8 % $ 2 0.0 % Home Meridian 8,325 11.3 % 10,907 12.7 % (2,582 ) -23.7 % Domestic Upholstery 3,067 12.1 % 3,307 13.2 % (240 ) -7.3 % All Other 696 21.0 % 836 22.8 % (140 ) -16.7 % Consolidated $ 19,850 13.3 % $ 22,810 14.4 % $ (2,960 ) -13.0 % 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 Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Intangible asset amortization $ 596 0.4 % $ 596 0.4 % $ - 0.0 % Intangible asset amortization expense stayed the same compared to the prior year third quarter. Operating Profit/(Loss) and Margin Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 7,686 16.3 % $ 6,188 14.2 % $ 1,498 24.2 % Home Meridian 2,510 3.4 % (3,955 ) -4.6 % 6,465 163.5 % Domestic Upholstery 2,421 9.6 % 2,278 9.1 % 143 6.3 % All Other 420 12.6 % 482 13.2 % (62 ) -12.9 % Consolidated $ 13,037 8.7 % $ 4,993 3.2 % $ 8,044 161.1 % Operating profit increased in absolute terms and as a percentage of net sales, due to the factors discussed above. 26 Table of Contents Interest Expense, net Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Consolidated interest expense, net $ 106 0.1 % $ 316 0.2 % $ (210 ) -66.5 % 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. Income taxes Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Consolidated income tax expense $ 2,996 2.0 % $ 1,066 0.7 % $ 1,930 181.1 % Effective Tax Rate 22.9 % 21.4 % 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. Net Income Thirteen Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change Net income % Net Sales % Net Sales Consolidated $ 10,093 6.7 % $ 3,920 2.5 % $ 6,173 157.5 % Diluted earnings per share $ 0.84 $ 0.33 Fiscal 2021 First Nine Months Compared to Fiscal 2020 First Nine Months Net Sales Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 113,268 29.4 % $ 122,707 27.5 % $ (9,439 ) -7.7 % Home Meridian 202,560 52.6 % 240,594 54.0 % (38,034 ) -15.8 % Domestic Upholstery 59,640 15.6 % 73,016 16.3 % (13,376 ) -18.3 % All Other 9,353 2.4 % 9,625 2.2 % (272 ) -2.8 % Consolidated $ 384,821 100 % $ 445,942 100 % $ (61,121 ) -13.7 % Unit Volume FY21 YTD % Increase vs. FY20 YTD Average Selling Price (ASP) FY21 YTD % Increase vs. FY20 YTD Hooker Branded -9.6 % Hooker Branded 1.4 % Home Meridian -17.7 % Home Meridian 4.1 % Domestic Upholstery -17.3 % Domestic Upholstery -1.2 % All Other -4.5 % All Other 1.2 % Consolidated -16.5 % Consolidated 4.1 % 27 Table of Contents 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 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. 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 sales and unfavorable product mix. ■ 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 Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 35,894 31.7 % $ 38,323 31.2 % $ (2,429 ) -6.3 % Home Meridian 28,489 14.1 % 24,139 10.0 % 4,350 18.0 % Domestic Upholstery 11,555 19.4 % 16,766 23.0 % (5,211 ) -31.1 % All Other 3,199 34.2 % 3,513 36.5 % (314 ) -8.9 % Consolidated $ 79,137 20.6 % $ 82,741 18.6 % $ (3,604 ) -4.4 % 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. 28 Table of Contents ■ 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) Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 20,788 18.4 % $ 22,870 18.6 % $ (2,082 ) -9.1 % Home Meridian 26,305 13.0 % 32,152 13.4 % (5,847 ) -18.2 % Domestic Upholstery 8,785 14.7 % 10,149 13.9 % (1,364 ) -13.4 % All Other 2,042 21.8 % 2,115 22.0 % (73 ) -3.5 % Consolidated $ 57,920 15.1 % $ 67,286 15.1 % $ (9,366 ) -13.9 % 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 Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Home Meridian $ 23,187 11.4 % $ - 0.0 % $ 23,187 Domestic Upholstery 16,381 27.5 % - 0.0 % 16,381 Consolidated 39,568 10.3 % - 39,568 Trade name impairment charges Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Home Meridian $ 4,750 2.3 % $ - $ 4,750 Consolidated $ 4,750 1.2 % $ - 4,750 29 Table of Contents 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 of the 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 Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Intangible asset amortization $ 1,788 0.5 % $ 1,788 0.4 % $ - 0.0 % Intangible asset amortization expense stayed the same compared to the prior year first nine months. Operating (Loss)/Profit and Margin Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 15,108 13.3 % $ 15,453 12.6 % $ (345 ) -2.2 % Home Meridian (26,754 ) -13.2 % (9,013 ) -3.7 % (17,741 ) -196.8 % Domestic Upholstery (14,399 ) -24.1 % 5,830 8.0 % (20,229 ) 347.0 % All Other 1,156 12.4 % 1,397 14.5 % (241 ) -17.3 % Consolidated $ (24,889 ) -6.5 % $ 13,667 3.1 % $ (38,556 ) -282.1 % Operating profitability decreased in absolute terms and as a percentage of net sales, due to the factors discussed above. Interest Expense, net Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Consolidated interest expense, net $ 433 0.1 % $ 986 0.2 % $ (553 ) -56.1 % 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. Income taxes Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change % Net Sales % Net Sales Consolidated income tax (benefit)/expense $ (6,263 ) -1.6 % $ 2,829 0.6 % $ (9,092 ) -321.4 % Effective Tax Rate 24.8 % 21.9 % 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 Thirty-Nine Weeks Ended November 1, 2020 November 3, 2019 $ Change % Change Net (loss) / income % Net Sales % Net Sales Consolidated $ (18,952 ) -4.9 % $ 10,067 2.3 % $ (29,019 ) -288.3 % Diluted (loss) / earnings per share $ (1.61 ) $ 0.85 30 Table of Contents Outlook 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 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 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 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 Thirty-Nine Weeks Ended November 1, November 3, 2020 2019 Net cash provided by operating activities $ 67,607 $ 26,610 Net cash provided by / (used in) investing activities 328 (3,838 ) Cash used in financing activities (10,092 ) (9,709 ) Net increase in cash and cash equivalents $ 57,843 $ 13,063 31 Table of Contents 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 Our financial resources include: ■ available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance; ■ expected cash flow from operations; ■ available lines of credit; and ■ cash surrender value of Company-owned life insurance. We believe these resources are sufficient to meet our business requirements through fiscal 2021 and for the foreseeable future, including: ■ capital expenditures; ■ working capital; and ■ the servicing of our acquisition-related debt. Loan Agreements and Revolving Credit Facility 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 HMI acquisition. Details of our loan agreements and revolving credit facility are outlined below. Original Loan Agreement On February 1, 2016, we entered into an amended and restated loan agreement (the “Original Loan Agreement”) with Bank of America, N.A. (“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 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 (subsequently revised to $10 million in the 2021 fiscal fourth quarter). Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; ■ Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan bears interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and 32 Table of Contents ■ Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amount borrowed under the Secured Term Loan bears interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement. New Loan Agreement On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement: ■ amends and restates the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility (the “Existing Revolver”), Unsecured Term Loan, and Secured Term Loan all remain outstanding under the New Loan Agreement; and ■ provided us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”), which we subsequently paid off in full. The New Loan Agreement also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants: Maintain a ratio of funded debt to EBITDA not exceeding: o 2.50:1.0 through August 31, 2018; o 2.25:1.0 through August 31, 2019; and o 2.00:1.00 thereafter. o A basic fixed charge coverage ratio of at least 1.25:1.00; and o Limit capital expenditures to no more than $15.0 million during any fiscal year beginning in fiscal 2020. The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement. We paid off the New Unsecured Term Loan in fiscal 2019. 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 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 November 1, 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 November 1, 2020. There were no additional borrowings outstanding under the revolving credit facility as of November 1, 2020. 33 Table of Contents 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 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 concluding. We expect to enter into a new credit facility on or before the expiration of the current agreement. 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. Capital Expenditures Prior to the COVID-19 crisis, we expected to spend between $2.5 million to $4.5 million for capital projects in fiscal 2021 to maintain and enhance our operating systems and facilities. 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 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 During the fiscal 2021 first quarter, we initiated certain measures to reduce operating expenses and preserve cash which include temporary fee reductions for our Board of Directors, temporary salary reductions for officers and certain other managers, strategic staff reductions, the temporary closure of our domestic manufacturing plants and the furlough of manufacturing, warehouse and administrative associates. We also delayed all non-critical capital spending, rationalized our import purchase orders and accepted certain accommodations from 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. 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 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. Dividends 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. Our cash position has remained strong and has continued to improve since our fiscal year-end in early February, with additional availability under our revolving credit facility if needed. Consequently, while we are confident in our future and are proud of our fifty-plus year history of consistently paying dividends, we have limited visibility into future economic conditions. The Board will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters. 34 Table of Contents Critical Accounting Policies Except as discussed below, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2020 Annual Report. On the first day of the current fiscal year, we adopted the accounting standards outlined in Part 1, Notes to Condensed Consolidated Financial Statements, “Note 2. Recently Adopted Accounting Policies” (“Note 2”). See Note 2 for additional information related to the impact of adopting these accounting standards.