HOOKER FURNISHINGS Corp 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of January 31, 2021, we had approximately 7,600 beneficial shareholders. As we have done in the past, we currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors. Performance Graph The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index, and a published industry index, the Household Furniture Index, for the period from January 31, 2016 to January 31, 2021. (1) The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends. (2) The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization and includes the Company. (3) Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under Standard Industrial Classification (SIC) Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada. At January 31, 2021, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Nova Lifestyle, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furniture Corporation, Sleep Number Corp., Kimball International, Inc., Luvu Brands, Inc., Tempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Casper Sleep Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., Horrison Resources, Inc., The Rowe Companies, and Dorel Industries. 19 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations. Fiscal Year Ended (1) January 31, February 2, February 3, January 28, January 29, 2021 2020 2019 2018 2017 (In thousands, except per share data) Income Statement Data: Net sales $ 540,081 $ 610,824 $ 683,501 $ 620,632 $ 577,219 Cost of sales 427,333 496,866 536,014 485,815 451,098 Casualty loss (2) - - 500 - - Gross profit 112,748 113,958 146,987 134,817 126,121 Selling and administrative expenses (3) 80,410 88,867 91,928 87,279 83,186 Goodwill impairment (4) 39,568 - - - - Trade names impairment (4) 4,750 - - - - Intangible asset amortization (4) 2,384 2,384 2,384 2,084 3,134 Operating (loss)/income (3) (14,364 ) 22,707 52,675 45,454 39,801 Other income, net (3) 336 458 369 1,566 349 Interest Expense, net 540 1,238 1,454 1,248 954 (Loss)/Income before income taxes (14,568 ) 21,927 51,590 45,772 39,196 Income tax (benefit)/expense (4,142 ) 4,844 11,717 17,522 13,909 Net (loss)/income (10,426 ) 17,083 39,873 28,250 25,287 Per Share Data: Basic (loss)/earnings per share $ (0.88 ) $ 1.44 $ 3.38 $ 2.42 $ 2.19 Diluted (loss)/earnings per share (0.88 ) 1.44 3.38 2.42 2.18 Cash dividends per share 0.66 0.61 0.57 0.50 0.42 Net book value per share (5) 21.76 23.25 22.37 19.53 17.16 Weighted average shares outstanding (basic) 11,822 11,784 11,759 11,633 11,531 Balance Sheet Data: Cash and cash equivalents $ 65,841 $ 36,031 $ 11,435 $ 30,915 $ 39,792 Trade accounts receivable 83,290 87,653 112,557 92,803 92,578 Inventories 70,159 92,813 105,204 84,459 75,303 Working capital 169,612 171,838 170,516 153,162 147,856 Total assets 352,273 393,708 369,716 350,058 318,696 Long-term debt (including current maturities) (6) - 30,138 35,508 53,425 47,710 Shareholders' equity 257,503 274,121 263,176 229,460 197,927 (1) Our fiscal years end on the Sunday closest to January 31. The fiscal years presented above all had 52 weeks, except for the prior fiscal year ended February 3, 2019, which had 53 weeks. (2) Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019. (3) Amounts for fiscal 2018 and 2017 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000) and $581,000 for fiscal 2018 and 2017, respectively. 20 Table of Contents (4) Represents impairment charges and amortization expense on acquisition-related intangibles. The Home Meridian acquisition occurred on February 1, 2016 and the Shenandoah acquisition occurred on September 29, 2017. See note 9 for additional information on our intangible assets. (5) Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period. (6) Long-term debt (including current maturities) consisted of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions. We paid off the term loans in January 2021. ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As you read Management’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with: ■ All of our recent public filings made with the Securities and Exchange Commission (“SEC”) which are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com; ■ The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K; ■ The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and ■ Our commitments and contractual obligations and off-balance sheet arrangements described on page 31 and in Note 18 on page F-35 of this report. These sections describe commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements. In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2021 compared to fiscal 2020. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2020 compared to fiscal 2019 results are in our 2020 Form 10-K available through Hooker Furniture and Securities and Exchange Commission websites. Unless otherwise indicated, references to the “Company”, "we," "our" or "us" 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. Furniture sales account for all of our net sales. For financial reporting purposes, we are organized into three reportable segments- Hooker Branded, Home Meridian and Domestic Upholstery, with our other businesses included in All Other. We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2020, we updated our reportable segments as follows: Domestic upholstery producers Bradington-Young, Sam Moore and Shenandoah Furniture were moved from All Other and aggregated into a new reportable segment called “Domestic Upholstery.” All Other now consists of H Contract and Lifestyle Brands. Lifestyle Brands is a business in its start-up phase targeted at the interior designer channel. The Hooker Branded and Home Meridian segments were unchanged. Fiscal 2020 and 2019 results discussed below have been recast based on the re-composition of our operating segments during the 2020 fourth quarter. See Note 17 to our consolidated financial statements for additional financial information regarding our segments. Overview Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture 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. 21 Table of Contents We believe that consumer tastes and channels in which they shop for furniture 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 Home Meridian on February 1, 2016 (the “Home Meridian acquisition”) and Shenandoah Furniture on September 29, 2017(the “Shenandoah acquisition”). 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 contract 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. For that channel, domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel. Executive Summary- Fiscal 2021 Results of Operations As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2021 operations: ● The severe and pervasive effects of the economic crisis caused by the COVID-19 pandemic had a material, adverse effect on our fiscal 2021 sales and earnings. ● Demand for our products fell sharply at the outset of the crisis, then later surged, as did the demand for home furnishings in general. The surge in demand led to capacity constraints with our Asian suppliers as we and other importers reacted to increased demand. Consequently, the cost and availability of shipping containers and steamship bookings increased exponentially which negatively affected our sales and earnings. ● Consolidated net sales for fiscal 2021 decreased by $70.7 million or 11.6% as compared to fiscal 2020, from $610.8 million to $540.1 million, due primarily to: o a $58.2 million or 17.1% sales decrease in the Home Meridian segment and to a lesser extent a $12.0 million or 12.5% decrease in the Domestic Upholstery segment; o a $1.0 million or 7.9% decrease in All Other net sales; and o flat Hooker Branded segment net sales. ● Approximately 75% of the consolidated net sales decreases happened in the first half of fiscal 2021 when our orders and operations were adversely impacted by the initial severity of the COVID-19 crisis. ● We reported a $14.4 million operating loss in fiscal 2021 compared to $22.7 million operating income in the prior year period, due principally to $44.3 million non-cash impairment charges ($33.7 million net of tax) to write down goodwill and tradenames in our Home Meridian segment and goodwill in the Shenandoah division of our Domestic Upholstery segment. ● The adverse economic effects brought on by the COVID-19 pandemic triggered an intangible asset impairment analysis in the first quarter of fiscal 2021, which required us to perform a valuation of our intangible assets. Our stock price was near a six-year low at the impairment measurement date, which occurred at the depth of the COVID-19 crisis to that point and was one of the primary inputs in the valuation analysis that indicated these assets were impaired and it was appropriate to write them down. Consequently, consolidated net loss was $10.4 million or $0.88 per diluted share, as compared to $17.1 million net income or $1.44 diluted earnings per share in the prior year period. 22 Table of Contents Review Fiscal 2021 was one of the most challenging years in our nearly 97-year history as we experienced the ups and downs in our business under the COVID-19 global pandemic. We experienced steep declines in orders and sales early in fiscal 2021 when many of our customers’ stores were closed and the retail environment was severely impacted by the initial pandemic. When the economy reopened in the second quarter, we were encouraged by increased incoming orders which were attributable to increased demand of home furnishings due to renewed consumer focus on the home, higher levels of consumer confidence, the strong housing market and less competition from other discretionary spending categories, such as travel, dining out and sporting events and other forms of entertainment. However, our business continues to be impacted by supply chain disruptions, which include industry-wide scarcity of shipping containers and ocean vessel space, limited capacity of our overseas vendors, and production delays at our domestic manufacturing plants. On a more positive note, we are pleased to report that incoming orders increased by 5.8% and backlog more than doubled, both on consolidated basis, as compared to the prior fiscal year, showing solid improvements from the initial pandemic conditions encountered early in fiscal 2021. The Hooker Branded segment recovered at the fastest pace among all our reportable segments. Net sales rebounded in the third and fourth fiscal quarters and the segment finished fiscal 2021 with essentially flat net sales compared to the prior fiscal year. The majority of this segment’s customers are traditional furniture stores and small or regional chains, which were deemed non-essential businesses and were closed early in the fiscal year. Demand for our products increased as our customers’ stores reopened during the second quarter, leading to double-digit monthly increases in incoming orders starting in June 2020 and through fiscal year end. The Hooker Branded segment finished the year with backlog more than tripled compared to the prior year-end backlog. This segment reported $22.8 million operating income or 14.1% operating margin, an increase of $1.3 million or 6.1% as compared to prior year. Given the economic conditions in fiscal 2021, we are pleased to have maintained and improved Hooker Branded segment profitability as compared to the prior year. Home Meridian segment net sales decreased by $58.2 million or 17.1% in fiscal 2021 due primarily to sales declines in the hospitality business and major furniture chains, and to a lesser extent sales declines in the Accentrics Home (“ACH”) division which focuses on the e-commerce channel. The sales decline at Samuel Lawrence Hospitality (“SLH”) represented 45% of Home Meridian’s net sales decrease, as the hospitality division was severely impacted by COVID-19 pandemic’s negative effects on remodeling and new construction activity in the hospitality industry. The Pulaski Furniture (“PFC”) and Samuel Lawrence Furniture (“SLF”) divisions experienced a spike in order cancellations early in fiscal 2021 as their customers’ stores were closed or operated under restrictions. Incoming orders started to recover in mid-year; however, lack of container availability limited shipments and led to decreased sales as compared to the prior year period. Sales declines in ACH comprised the remaining sales decrease, which was attributable to Asian vendor production capacity challenges and container availability. HMidea net sales increased slightly due to steady sales in the Club business. Prime Resources International (“PRI”) net sales were essentially flat as compared to prior year despite the COVID-19 crisis, due to the additions of mass merchant customers. Home Meridian segment incoming orders increased by 3.8% and backlog doubled as compared to prior year. The segment’s $26.1 million operating loss was attributable to $27.9 million intangible asset impairment charge. Absent the impairment charge necessitated by our low stock price at the end of our first fiscal quarter at the initial height of the COVID-19 economic crisis, segment operating performance improved compared to a $7.2 million operating loss in the prior fiscal year. Domestic Upholstery segment net sales decreased by $12.0 million or 12.5% due to decreased sales volume in all three domestic manufacturing divisions attributable to factory shutdowns and production delays. In response to COVID-19 restrictions and significantly reduced orders, in April we temporarily closed our manufacturing plants at Bradington-Young and Shenandoah for a month, while Sam Moore operated at 50% capacity. All three divisions experienced labor shortages and staffing issues when they resumed operations. The segment’s $12.4 million operating loss was attributable to $16.4 million intangible asset impairment charge. Additionally, profitability in this segment was negatively impacted by operating inefficiencies, partially mitigated by cost reduction measures. At the end of the fiscal year, Domestic Upholstery incoming orders were at the same level as prior year-end and backlog had doubled. We are pleased with the current historic levels of orders and backlog and as of year-end we were operating at full capacity in all three domestic manufacturing plants. All Other net sales decreased by $1.0 million or 7.9% as compared to the prior fiscal year, due principally to sales decline at H Contract. The senior living industry, which comprises the majority of H Contract’s business, is struggling under the COVID-19 crisis. Factors such as postponed new constructions, low occupancy rates, and COVID-related expenses resulted in reduced spending on furnishings and reduced demand for our product. H Contract incoming orders decreased by 11.8% for fiscal 2021; however, we believe vaccine rollouts are beginning to help the senior living industry as the decline in order rates slowed somewhat in the fourth quarter. H Contract finished the year with backlog 4.9% higher than prior year end. Despite sales decline and unfavorable product mix, All Other contributed $1.3 million operating income to the consolidated results. 23 Table of Contents Despite the operating loss which was driven by $44.3 million in intangible assets impairment charges, we generated $68.3 million from operating activities and paid off the remaining $24.3 million in term loans near year-end. In addition, in the third quarter of fiscal 2021, our Board of Directors approved the increase of our quarterly dividend to $0.18 per share, an increase of 12.5% or $0.02 per share, for a total of $0.66 per share or $7.8 million paid in fiscal 2021, an increase of 8.2% or $0.05 per share, compared to the prior year. Cash and cash equivalents stood at $65.8 million at fiscal 2021 year-end, an increase of nearly $30 million compared to the balance at prior year end. Based on existing cash balances, no debt, and an aggregate $28.7 million available under our revolver, we are confident in our financial position. Results of Operations The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of operations: Fifty-two Fifty-two Fifty-three weeks ended weeks ended weeks ended January 31, February 2, February 3, 2021 2020 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 79.1 81.3 78.5 Gross profit 20.9 18.7 21.5 Selling and administrative expenses 14.9 14.5 13.4 Goodwill impairment charges 7.3 - - Trade name impairment charges 0.9 - - Intangible asset amortization 0.4 0.4 0.3 Operating (loss)/income (2.7 ) 3.7 7.7 Other income, net 0.1 0.1 0.1 Interest expense, net 0.1 0.2 0.2 (Loss)/income before income taxes (2.7 ) 3.6 7.5 Income tax (benefit)/expense (0.8 ) 0.8 1.7 Net (loss)/income (1.9 ) 2.8 5.8 Fiscal 2021 Compared to Fiscal 2020 Net Sales Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 162,442 30.1 % $ 161,990 26.4 % $ 452 0.3 % Home Meridian 282,423 52.3 % 340,630 55.8 % (58,207 ) -17.1 % Domestic Upholstery 83,678 15.5 % 95,670 15.7 % (11,992 ) -12.5 % All Other 11,538 2.1 % 12,534 2.1 % (996 ) -7.9 % Consolidated $ 540,081 100 % $ 610,824 100 % $ (70,743 ) -11.6 % 24 Table of Contents Unit Volume and Average Selling Price ( “ ASP ” ) Unit Volume FY21 % Increase/ -Decrease vs. FY20 Average Selling Price FY21 % Increase/ -Decrease vs. FY20 Hooker Branded -1.9% Hooker Branded 1.3% Home Meridian -17.4% Home Meridian 2.0% Domestic Upholstery -11.4% Domestic Upholstery -1.6% All Other -7.6% All Other -1.3% Consolidated -15.1% Consolidated 4.6% Consolidated net sales decreased due primarily to sales decline in the Home Meridian segment, and to a lesser extent the decreases in the Domestic Upholstery segment and All Other. ■ Hooker Branded segment net sales were essentially flat compared to the prior fiscal year. Despite significant volume loss in the first quarter, unit volume recovered in the second half of fiscal 2021 in this segment, which was attributable to increased incoming orders beginning in June which trended through year end. ■ Home Meridian segment net sales decreased due to decreased unit volume driven by volume loss with traditional furniture chains and in the hospitality business (severely impacted by COVID-19 pandemic’s negative effects on remodeling and new construction activity in the hospitality industry), inability to ship due to limited container availability, as well as sales declines in the e-commence (ACH) channel which were impacted by inventory availability challenges. E-commerce sales were strong early in the pandemic causing them to run out of bestsellers earlier than other divisions. These sales are highly dependent on warehouse inventory which the division was not able to replace due to logistics challenges mentioned. These decreases were partially offset by increased sales in the mass merchant and general retailer distribution channels. The ASP increase was attributable to product mix. ■ Domestic Upholstery net sales decreased due primarily to sales decreases at Bradington-Young and Shenandoah, and to a lesser extent at Sam Moore. In April 2020, in response to COVID-19 restrictions and reduced incoming orders, we temporarily shut down Bradington-Young’s and Shenandoah’s manufacturing facilities while keeping Sam Moore operating at 50% capacity. We resumed production in the second quarter. ASP decreased slightly due to a reduced proportion of higher priced Bradington-Young and Shenandoah products sold. ■ All Other net sales decreased by $1.0 million or 7.9% due primarily to decreased unit volume in H Contract as this division was adversely impacted by the pandemic, partially offset by increased Lifestyle Brands net sales. Gross Profit and Margin Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 51,832 31.9 % $ 51,462 31.8 % $ 370 0.7 % Home Meridian 39,832 14.1 % 36,936 10.8 % 2,896 7.8 % Domestic Upholstery 17,121 20.5 % 21,120 22.1 % (3,999 ) -18.9 % All Other 3,963 34.4 % 4,440 35.4 % (477 ) -10.7 % Consolidated $ 112,748 20.9 % $ 113,958 18.7 % $ (1,210 ) -1.1 % 25 Table of Contents Consolidated gross profit decreased slightly in absolute terms but increased as a percentage of net sales as compared to the prior fiscal year. ■ Hooker Branded segment gross profit increased slightly both in absolute terms and as a percentage of net sales. Product costs benefitted from the transition to non-tariff countries but were negatively impacted by higher container costs and freight surcharges incurred later in fiscal 2021. Warehousing and distribution expenses decreased due to cost reduction initiatives implemented during the pandemic, partially offset by increases due to the addition of leased warehouse space in Vietnam. ■ Home Meridian segment gross profit improved significantly both in absolute terms and as a percentage of net sales despite a net sales decline. In the prior fiscal year, this segment was heavily impacted by increased product costs due to excess tariffs and was exacerbated by higher quality-related expenses and increased warehousing and distribution costs to handle the inventory related to quality issues. These issues either did not re-occur in fiscal 2021 or re-occurred at much lower levels. Home Meridian segment gross margin was negatively impacted by reduced sales volume and some lower-margin programs due to customer mix. ■ Domestic Upholstery segment gross profit decreased in absolute terms and as a percentage of net sales due primarily to sales decline, and to a lesser extent to manufacturing inefficiencies from operating at a reduced production level early in fiscal 2021. Fixed costs adversely impacted gross margin in this segment. All three manufacturing divisions experienced labor and staffing issues due to COVID-related absenteeism, turnover and training costs. Gross profit was also adversely impacted by increased benefits expenses at Sam Moore and Shenandoah due mostly to increased medical claims. ■ All Other’s gross profit decreased in absolute terms and as a percentage of net sales due to sales decline in H Contract division and a heavier weighting of domestically manufactured product sold which carried higher costs, partially offset by the addition of increased Lifestyle Brands gross profit. Selling and Administrative Expenses (S&A) Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 29,005 17.9 % $ 29,949 18.5 % $ (944 ) -3.2 % Home Meridian 36,632 13.0 % 42,771 12.6 % (6,139 ) -14.4 % Domestic Upholstery 12,108 14.5 % 13,433 14.0 % (1,325 ) -9.9 % All Other 2,665 23.1 % 2,714 21.7 % (49 ) -1.8 % Consolidated $ 80,410 14.9 % $ 88,867 14.5 % $ (8,457 ) -9.5 % Consolidated selling and administrative expenses decreased in absolute terms but increased as a percentage of net sales in fiscal 2021. ■ Hooker Branded segment S&A expenses decreased in absolute terms and as a percentage of net sales due to cost-cutting measures implemented to address the COVID-19 crisis, decreased travel and showroom expenses due to pandemic-related restrictions, decreased advertising supplies and sample expenses, partially offset by increased selling expenses due to higher commission rates and higher bad debt expense due to a customer write-off 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. ■ Home Meridian segment S&A expenses decreased in absolute terms due to decreased selling expenses on lower net sales, cost reduction efforts in response to the COVID-19 crisis, decreased travel and showroom expenses due to pandemic-related restrictions, and the absence of the resourcing transition costs and start-up costs for HMidea division incurred in the prior year period. The decreases were partially offset by increased compliance costs and increased bad debt due to a customer bankruptcy not related to the COVID-19 crisis. Home Meridian segment S&A expenses increased slightly as a percentage of net sales due to lower net sales. ■ Domestic Upholstery segment expenses decreased in absolute terms as the result of cost reduction initiatives in response to the pandemic and decreased selling expenses due to lower net sales. S&A expenses increased as a percentage of net sales due to lower net sales. ■ All Other S&A expenses stayed flat in absolute terms and increased as a percentage of net sales due to lower net sales. 26 Table of Contents Goodwill impairment charges Fifty-Two Weeks Ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Home Meridian $ 23,187 8.2 % $ - 0.0 % $ 23,187 Domestic Upholstery 16,381 19.6 % - 0.0 % 16,381 Consolidated 39,568 7.3 % - 39,568 Trade name impairment charges Fifty-Two Weeks Ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Home Meridian $ 4,750 1.7 % $ - $ 4,750 Consolidated $ 4,750 0.9 % $ - 4,750 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. See Note 9 for additional details on these impairment charges. Intangible Asset Amortization Fifty-two Weeks Ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Intangible asset amortization $ 2,384 0.4 % $ 2,384 0.4 % $ - 0.0 % Intangible asset amortization expense was unchanged compared to the prior year period. See Note 9 Intangible Assets and Goodwill for additional information about our amortizable intangible assets. Operating (Loss)/Profit and Margin Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change %Segment Net Sales %Segment Net Sales Hooker Branded $ 22,827 14.1 % $ 21,512 13.3 % $ 1,315 6.1 % Home Meridian (26,071 ) -9.2 % (7,169 ) -2.1 % (18,902 ) 263.7 % Domestic Upholstery (12,418 ) -14.8 % 6,637 6.9 % (19,055 ) -287.1 % All Other 1,298 11.3 % 1,727 13.8 % (429 ) -24.8 % Consolidated $ (14,364 ) -2.7 % $ 22,707 3.7 % $ (37,071 ) -163.3 % Operating profitability decreased both in absolute terms and as a percentage of net sales in fiscal 2021 compared to the same prior-year period due to the factors discussed above. 27 Table of Contents Interest Expense, net Fifty-two Weeks Ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Interest expense, net $ 540 0.1 % $ 1,238 0.2 % $ (698 ) -56.4 % Consolidated interest expense in fiscal 2021 decreased due to lower balances on our term loans as well as lower interest rates. Income Taxes Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change % Net Sales % Net Sales Consolidated income tax (benefit)/expense $ (4,142 ) -0.8 % $ 4,844 0.8 % $ (8,986 ) -185.5 % Effective Tax Rate 28.4 % 22.1 % We recorded income tax benefit of $4.1 million for fiscal 2021, of which an income tax benefit of $10.6 was recorded related to goodwill and trade name impairment charges, compared to $4.8 million income tax expense for the same prior year period. The effective tax rates for the fiscal 2021 and 2020 were 28.4% and 22.1%, respectively. Our effective tax rate was higher in fiscal 2021 due primarily to the Employer Retention Credit for employers affected by qualified disasters under the Consolidated Appropriations Act of 2020 and increased state income taxes. See Note 16 “Income Taxes” for additional information about our income taxes. Net (Loss)/Income and (Loss)/Earnings Per Share Fifty-two weeks ended January 31, 2021 February 2, 2020 $ Change % Change Net (Loss)/Income % Net Sales % Net Sales Consolidated $ (10,426 ) -1.9 % $ 17,083 2.8 % $ (27,509 ) -161.0 % Diluted (loss)/earnings per share $ (0.88 ) $ 1.44 The analysis and discussion of fiscal 2020 compared to fiscal 2019 results is available in Item 7 of our 2020 Annual Report on Form 10-K available through Hooker Furniture and Securities and Exchange Commission websites. Financial Condition, Liquidity and Capital Resources Summary Cash Flow Information – Operating, Investing and Financing Activities Fifty-Two Weeks Ended Fifty-Two Weeks Ended Fifty-Three Weeks Ended January 31, February 2, February 3, 2021 2020 2019 Net cash provided by operating activities $ 68,263 $ 41,429 $ 9,662 Net cash used in investing activities (476 ) (4,254 ) (4,511 ) Net cash used in financing activities (37,977 ) (12,579 ) (24,631 ) Net increase (decrease) in cash and cash equivalents $ 29,810 $ 24,596 $ (19,480 ) 28 Table of Contents During fiscal 2021, we used existing cash, a portion of the $68.3 million generated from operations and $1.3 million in life insurance proceeds to retire our $30.1 million in outstanding term loans related to the Home Meridian acquisition, pay $7.8 million in cash dividends, $1.2 million in capital expenditures to enhance our systems and facilities and to pay $555,000 for insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees and to facilitate business continuity. During fiscal 2020, we used some of the $41.4 million generated from operations and $1.4 million proceeds received from a note receivable to pay $7.2 million cash dividends, $6.4 million principal payments and interest towards our term loans, $5.1 million in capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities and $590,000 for insurance premiums on Company-owned life insurance policies. During fiscal 2019, $9.7 million generated from operations, $1.2 million in life insurance proceeds and cash on hand helped make $17.9 million in principal payments on our term loans, $6.7 million in cash dividends, $5.2 million of capital expenditures, and $652,000 for insurance premiums on Company-owned life insurance policies. 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 and the payment of dividends through fiscal 2022 and for the foreseeable future, including expected capital expenditures and working capital needs. Loan Agreements and Revolving Credit Facility We paid off the term loans which were related to the Home Meridian acquisition at the end of fiscal 2021 and currently have one $35 million revolving credit facility (the “Existing Revolver”). The credit facility was provided for in the amended and restated loan agreement (the “Original Loan Agreement”), which we entered into on February 1, 2016 with Bank of America, N. A. (“BofA”) in connection with the Home Meridian acquisition. We entered a Second Amended and Restated Loan Agreement dated as of September 29, 2017 (the “Second Amended and Restated Loan Agreement”), a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to the Second Amended and Restated Loan Agreement dated as of January 27, 2021. Details of our revolving credit facility are outlined below: ■ The facility is available between January 27, 2021 and February 1, 2026 or such earlier date as the availability may terminate or such later date as BofA may from time to time in its sole discretion designate in any extension notice; ■ During the availability period, BofA will provide a line of credit to the maximum amount of the Existing Revolver; ■ The initial amount of the Existing Revolver is $35 million; ■ The sublimit of the facility available for the issuance of letters of credit was increased to $10 million; ■ The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%; ■ We may, on a one-time basis, request an increase in the Existing Revolver by an amount not to exceed $30 million at BofA’s discretion; and ■ Any amounts outstanding under the Existing Revolver bear interest at a rate, equal to the then current LIBOR monthly rate (adjusted periodically) plus 1.00%. We must also pay a quarterly unused commitment fee at a rate of 0.15% determined by the actual daily amount of credit outstanding during the applicable quarter. 29 Table of Contents The loan covenants agreed to under the Second Amended and Restated Loan Agreement continue to apply to us. They include 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 2.00:1.00. ● A basic fixed charge coverage ratio of at least 1.25:1.00; and ● Limit capital expenditures to no more than $15.0 million during any fiscal year. They also limit our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. They do 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 agreements. We were in compliance with each of these financial covenants at January 31, 2021 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have 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. Revolving Credit Facility Availability As of January 31, 2021, we had an aggregate $28.7 million available under the Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $6.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of January 31, 2021. There were no additional borrowings outstanding under the Existing Revolver as of January 31, 2021. Capital Expenditures We expect to spend approximately $7 million in capital expenditures in fiscal 2022 to maintain and enhance our operating systems and facilities. Of those amounts, we expect to spend approximately: ● $3.2 million outfitting a newly built leased warehouse space in Savannah, Georgia that we expect to occupy in the fall of 2021. The facility will consolidate several older, less flexible Home Meridian segment warehouses into a single strategically located distribution facility near the port of Savannah and major interstate highways. We believe this is critical to servicing customers and is expected to reduce transportation costs and increase operating efficiencies; and ● $1.4 million on implementation costs for a new common, cloud-based Enterprise Resource Planning (“ERP”) platform which we expect to be online in our legacy Hooker divisions by mid-2022, with other segments following thereafter. Enterprise Resource Planning In early calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts began shortly thereafter. We expect to implement the ERP upgrade in our legacy Hooker divisions by mid calendar 2022, with Home Meridian and Shenandoah following afterwards. To complete the ERP system implementation as anticipated, we will be required to expend significant financial and human resources. We anticipate spending approximately $5.5 million over the course of this project, with a significant amount of time invested by our associates. 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 included 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 have seen greatly increased demand for our products. Consequently, during the second quarter of fiscal 2021, 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. 30 Table of Contents Cash and cash equivalents stood at $65.8 million at fiscal 2021 year-end, an increase of nearly $30 million compared to the balance of prior year end. We expect these cash balances to decrease as we build inventories to meet increased customer demand. Dividends We declared and paid dividends of $0.66 per share or approximately $7.8 million in fiscal 2021, an increase of 8.2% or $0.05 per share compared to $0.61 per share in fiscal 2020. On March 1, 2021, our Board of Directors declared a quarterly cash dividend of $0.18 per share, payable on March 31, 2021 to shareholders of record at March 17, 2021. Our Board of Directors will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters. Commitments and Contractual Obligations As of January 31, 2021, our commitments and contractual obligations were as follows: Cash Payments Due by Period (In thousands) Less than More than 1 Year 1-3 Years 3-5 Years 5 years Total Deferred compensation payments (1) $ 1,033 $ 2,132 $ 2,192 $ 4,639 $ 9,996 Operating leases (2) 7,394 11,254 10,615 9,809 39,072 Total contractual cash obligations $ 8,427 $ 13,386 $ 12,807 $ 14,448 $ 49,068 (1) These amounts represent estimated cash payments to be paid to participants in our SRIP through fiscal year 2043, which is 15 years after the last current SRIP plan participant is assumed to have retired. SERP benefits are paid over the lifetimes of plan participants, so the year of final payment is unknown. The present value of these benefits (the actuarially derived projected benefit obligation for the SRIP and SERP) were approximately $10.6 million and $1.7 million, respectively, on January 31, 2021, and are shown on our consolidated balance sheets, with $1.0 million recorded in current liabilities and $11.3 million recorded in long-term liabilities. Under the SRIP, the monthly retirement benefit for each participant, regardless of age, would become fully vested and the present value of that benefit would be paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. See Note 13 to the consolidated financial statements beginning on page F-22 for additional information about the SRIP and SERP. (2) These amounts represent estimated cash payments due under operating leases for real estate utilized in our operations and warehouse and office equipment, as well as short term leases with remaining terms less than 12 months. See Note 11 for additional information and disclosures about our leases. Off-Balance Sheet Arrangements Standby letters of credit in the aggregate amount of $6.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of January 31, 2021. See the “Commitments and Contractual Obligations” table above and Note 18 to the consolidated financial statements included in this annual report on Form 10-K for additional information on our off-balance sheet arrangements. Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20) — Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in this update change the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the FASB considers pertinent. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect the adoption of ASU 2018-14 will have a material impact on our consolidated financial statements or disclosures. 31 Table of Contents In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this update align the accounting for implementation costs incurred in a hosting arrangement that does not include a license to internal-use software (i.e., a cloud computing arrangement) with one that does. It therefore requires companies to defer potentially significant implementation costs incurred in a cloud computing arrangement that were often expensed as incurred under legacy US GAAP and recognize them as expense over the term of the hosting arrangement. This guidance was effective for fiscal years and interim periods beginning after December 15, 2019. We plan to adopt this guidance in the fiscal 2022 first quarter. We do not expect the adoption of ASU 2018-15 will have a material impact on our consolidated financial statements and related disclosures. COVID-19 As discussed under "Item 1A. Risk Factors," an outbreak of COVID-19 has been recognized as a global pandemic by the World Health Organization. We monitor information on COVID-19 from the 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, much of our administrative staff are telecommuting. For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have implemented appropriate social distancing policies and have stepped-up facility cleaning at each location. Non-essential domestic travel for our employees has ceased and international travel has been prohibited out-right. Testing, treatment and vaccinations for COVID-19 are 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, we are offering temporary paid leave to employees diagnosed with the virus (and those associates with another diagnosed person or persons in their household) and are working to accommodate associates with child-care issues related to school or day-care closures. Outlook We enter fiscal 2022 with confidence and a positive outlook for our company and our industry. Demand is strong, and we are experiencing significantly increased order rates so far in fiscal 2022 compared to last year this time. Our operational priority is to maximize these high levels of demand by servicing our backlogs, as we work to continue the momentum of the improved profitability achieved during the second half of fiscal 2021. We are currently experiencing two significant headwinds which we believe to be temporary. The first is the ongoing impact of COVID-19 on global manufacturing capacities, raw materials and the cost and availability of shipping containers. The second is a shortage of upholstery foam created by the recent power grid outage in Texas from severe weather. That power grid outage negatively impacted the oil industry, which produces the by-products used in the fabrication of foam. This has led to allocations of foam to our domestic upholstery segment. We expect the later issue to be a short to mid-term problem. The duration of the global logistics constraints is uncertain, but we believe that ports and freight lines are working to overcome these bottlenecks and expect to see improvements later this year. Additionally, competition for consumers’ discretionary spending such as travel, dining out and entertainment will increase as COVID-19 vaccinations roll out; however, we see sustainable positive market conditions for home furnishings, driven by the robust housing market, favorable demographics and a bright economic outlook. We are confident in our team’s ability to execute our strategies to grow profitably and to adapt successfully to unexpected challenges. Critical Accounting Policies and Estimates Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” to the consolidated financial statements beginning at page F-11 in this report. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that actual results will deviate materially from our estimates related to our accounting policies described below. However, because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates. 32 Table of Contents Revenue Recognition. We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container. The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery. Leases. Our lease assets are composed of real estate and equipment. Real estate leases consist primarily of warehouses, showrooms and offices, while equipment leases consist of vehicles, office and warehouse equipment. At the inception of a contract, we assess whether the contract is, or contains, a lease. Our assessment is based on: (a) whether there is an identified asset in the contract that is land or a depreciable asset – i.e. property, plant or equipment; (b) whether we have the right to control the use of the identified asset throughout the period of use, which may be different from the overall contract term; and (c) whether we have the right to direct the use of an identified asset if it can direct (and change) how and for what purpose the asset will be used throughout the period of use. Leases are classified as either finance leases or operating leases based on criteria in Topic 842. All of our leases are classified as operating leases. We do not currently have finance leases but could in the future. Operating lease right-of-use ("ROU") assets and liabilities are recognized on the adoption date based on the present value of lease payments over the remaining lease term. As interest rates are not explicitly stated or implicit in any of our leases, we utilized our incremental borrowing rate at the adoption date of February 4, 2019, which was one-month LIBOR plus 1.5%. For leases without explicitly stated or implicit interest rates that commenced after the adoption date, we used our incremental borrowing rate which was one-month LIBOR at the lease commencement date plus 1.5%. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At the inception of a lease, we allocate the consideration in the contract to each lease and non-lease component based on the component's relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Some of our real estate leases contain variable lease payments, including payments based on the percentage increase in the Consumer Price Index for Urban Consumers (“CPI-U”). We used February 2019 CPI-U issued by the US Department of Labor’s Bureau of Labor Statistics to measure lease payments and calculate lease liabilities upon adoption of this standard. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred. We have a sub-lease at one of our warehouses. In accordance with the provisions of Topic 842, since we have not been relieved as the primary obligor of the warehouse lease, we cannot net the sublease income against our lease payment to calculate the lease liability and ROU asset. Our practice has been, and we will continue to, straight-line the sub-lease income over the term of the sublease. 33 Table of Contents Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend the leases for up to seven years. We have elected not to recognize ROU assets and lease liabilities that arise from short term leases for any class of underlying asset. Short term leases are leases with lease terms of 12 months or less with either (a) no renewal option or (b) a renewal option which we are not reasonably certain to exercise. Inventories Inventories, consisting of finished furniture for sale, raw materials, manufacturing supplies and furniture in process, are stated at the lower of cost, or market value, with cost determined using the last-in, first-out (LIFO) method. Under this method, inventory is valued at cost, which is determined by applying a cumulative index to current year inventory dollars. We review inventories on hand and record an allowance for slow-moving and obsolete inventory based on historical experience and expected sales. Impairment of Long-Lived Assets Tangible and Definite Lived Intangible Assets We regularly review our property, plant and equipment and definite lived intangible assets for indicators of impairment, as specified in the Accounting Standards Codification. Although not exhaustive, this accounting guidance lists potential indicators of impairment, which we use to facilitate our review. These potential indicators of impairment include: ■ A significant decrease in the market value of the long-lived asset; ■ A significant adverse change in the extent or manner in which a long-lived asset group is being used, or in its physical condition; ■ A significant adverse change in the legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; ■ An accumulation of costs significantly in excess of the amount originally expected to acquire or construct a long-lived asset; ■ A current period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with the long-lived asset’s use; and ■ A current expectation that more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of operations and consolidated balance sheets. When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less. Intangible Assets and Goodwill We own both definite-lived (amortizable) assets and indefinite-lived intangible assets. Our amortizable intangible assets are related to the Home Meridian and Shenandoah acquisitions and include customer relationships, backlog and trademarks. Our indefinite lived assets include goodwill, trademarks and tradenames related to the Home Meridian and Shenandoah acquisitions, as well as the Bradington-Young and Sam Moore tradenames. We may acquire additional amortizable assets and/or indefinite lived intangible assets in the future. Our indefinite-lived intangible assets are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. 34 Table of Contents The adverse economic effects brought on by the COVID-19 pandemic, including reductions in our sales, earnings and market value, as well as other changing market dynamics, required that we perform a valuation of our intangible assets during the interim period. The calculation methodology for the fair value of our Home Meridian segment and the Shenandoah division of our Domestic Upholstery segment included three approaches: the Discounted Cash Flow Method (DCF) which was given the largest weighting, the Guideline Public Company Method (GPCM) based on the consideration of the facts of the Company’s peer competitors and the Guideline Transaction Method (GTM) based on consideration of transactions with varying risk profiles, geographies and market conditions. The income approach, specifically the relief from royalty method, was used as the valuation methodology for our trade names and trademarks, based on cash flow projections and growth rates for each trade name for five years in the future, and a royalty rate benchmark for companies with similar activities. As a result of our intangible asset valuation analysis, in the first quarter of fiscal 2021, we recorded $44.3 million non-cash impairment charges including $23.2 million to Home Meridian goodwill, $16.4 million to Shenandoah goodwill and $4.8 million to certain of Home Meridian segment’s trade names. Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include, but are not limited to: ■ a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy; ■ significant changes in demand for our products; ■ loss of key personnel; and ■ the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal. The fair value of our trademarks and tradenames is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. At January 31, 2021, based on our internal valuation, the fair values of our Bradington-Young, Home Meridian, Sam Moore and Shenandoah non-amortizable trademarks and trade names exceeded their carrying values. Upon the adoption of ASU 2017-04, we perform our annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. Based on our internal goodwill impairment analysis as described above, we have concluded that Shenandoah goodwill in the Domestic Upholstery segment is not impaired as of January 31, 2021. The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition. Income Taxes At times, tax law and generally accepted accounting principles differ in the treatment of certain income and expense items. These items may be excluded or included in taxable income at different times than is required for GAAP or “book” reporting purposes. These differences may be permanent or temporary in nature. We determine our annual effective income tax rate based on pre-tax book income and permanent book and tax differences. To the extent any book and tax differences are temporary in nature, that is, the book realization will occur in a different period than the tax realization, a deferred tax asset or liability is established. To the extent a deferred tax asset is created, we evaluate our ability to realize this asset. If we determine that we will not be able to fully utilize deferred tax assets, we establish a valuation reserve. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences reverse. Currently, we have $14.2 million deferred tax assets that can be used to offset taxable income and reduce our income tax liabilities in the future periods. All deferred tax assets and liabilities are classified as non-current on our consolidated balance sheets. See Note 16 Income Taxes for additional details. 35 Table of Contents Concentrations of Sourcing Risk In fiscal 2021, imported products sourced from Vietnam and China accounted for nearly all of our import purchases and our top five suppliers in Vietnam and China account for approximately half of our fiscal 2021 import purchases. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. If such a disruption were to occur, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Virginia, North Carolina and California to adequately meet demand for several months or slightly longer with an additional month’s worth of demand available for immediate shipment from our warehouses in Asia. We believe that we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to six months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity.