HOOKER FURNISHINGS Corp 10-Q

Item 1. Financial Statements HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS As of October 31, January 31, 2021 2021 (unaudited) Assets Current assets Cash and cash equivalents $ 57,219 $ 65,841 Trade accounts receivable, net 73,585 83,290 Inventories 77,864 70,159 Income tax recoverable 3,098 - Prepaid expenses and other current assets 6,523 4,432 Total current assets 218,289 223,722 Property, plant and equipment, net 29,590 26,780 Cash surrender value of life insurance policies 26,133 25,365 Deferred taxes 11,835 14,173 Operating leases right-of-use assets 53,225 34,613 Intangible assets, net 24,449 26,237 Goodwill 490 490 Other assets 3,374 893 Total non-current assets 149,096 128,551 Total assets $ 367,385 $ 352,273 Liabilities and Shareholders ’ Equity Current liabilities Trade accounts payable $ 16,599 $ 32,213 Accrued salaries, wages and benefits 5,928 7,136 Income tax accrual - 501 Customer deposits 6,550 4,256 Current portion of lease liabilities 7,293 6,650 Other accrued expenses 5,456 3,354 Total current liabilities 41,826 54,110 Deferred compensation 10,676 11,219 Lease liabilities 47,530 29,441 Total long-term liabilities 58,206 40,660 Total liabilities 100,032 94,770 Shareholders’ equity Common stock, no par value, 20,000 shares authorized, 11,922 and 11,888 shares issued and outstanding on each date 53,690 53,323 Retained earnings 214,242 204,988 Accumulated other comprehensive loss ( 579 ) ( 808 ) Total shareholders’ equity 267,353 257,503 Total liabilities and shareholders’ equity $ 367,385 $ 352,273 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 Table of Contents HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) For the Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 1, October 31, November 1, 2021 2020 2021 2020 Net sales $ 133,428 $ 149,687 $ 458,807 $ 384,821 Cost of sales (See note 3) 113,421 116,204 373,501 305,684 Gross profit 20,007 33,483 85,306 79,137 Selling and administrative expenses 21,139 19,850 63,343 57,920 Goodwill impairment charges - - - 39,568 Trade name impairment charges - - - 4,750 Intangible asset amortization 596 596 1,788 1,788 Operating (loss)/income ( 1,728 ) 13,037 20,175 ( 24,889 ) Other income, net 133 158 160 107 Interest expense, net 27 106 81 433 (Loss)/income before income taxes ( 1,622 ) 13,089 20,254 ( 25,215 ) Income tax (benefit)/expense ( 403 ) 2,996 4,563 ( 6,263 ) Net (loss)/income $ ( 1,219 ) $ 10,093 $ 15,691 $ ( 18,952 ) (Loss)/earnings per share Basic $ ( 0.10 ) $ 0.85 $ 1.32 $ ( 1.61 ) Diluted $ ( 0.10 ) $ 0.84 $ 1.30 $ ( 1.61 ) Weighted average shares outstanding: Basic 11,863 11,833 11,849 11,818 Diluted 11,863 11,939 12,017 11,818 Cash dividends declared per share $ 0.18 $ 0.16 $ 0.54 $ 0.48 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 Table of Contents HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME (In thousands) (Unaudited) For the Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 1, October 31, November 1, 2021 2020 2021 2020 Net (loss)/income $ ( 1,219 ) $ 10,093 $ 15,691 $ ( 18,952 ) Other comprehensive income (loss): Amortization of actuarial loss 100 84 301 253 Income tax effect on amortization ( 24 ) ( 20 ) ( 72 ) ( 60 ) Adjustments to net periodic benefit cost 76 64 229 193 Total comprehensive (loss)/income $ ( 1,143 ) $ 10,157 $ 15,920 $ ( 18,759 ) The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 Table of Contents HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the Thirty-Nine Weeks Ended October 31, November 1, 2021 2020 Operating Activities: Net income/(loss) $ 15,691 $ ( 18,952 ) Adjustments to reconcile net income to net cash provided by operating activities: Goodwill and intangible asset impairment charges - 44,318 Depreciation and amortization 5,623 5,052 Deferred income tax expense/(benefit) 2,266 ( 10,143 ) Noncash restricted stock and performance awards 367 1,473 Provision for doubtful accounts and sales allowances 474 4,527 Gain on life insurance policies ( 802 ) ( 1,750 ) Changes in assets and liabilities: Trade accounts receivable 9,230 7,829 Inventories ( 7,705 ) 28,730 Income tax recoverable ( 3,098 ) 751 Prepaid expenses and other current assets ( 4,074 ) 620 Trade accounts payable ( 15,632 ) 2,947 Accrued salaries, wages, and benefits ( 1,140 ) ( 441 ) Accrued income taxes ( 501 ) 2,015 Customer deposits 2,294 967 Operating lease liabilities 120 797 Other accrued expenses 2,104 ( 1,165 ) Deferred compensation ( 243 ) 32 Net cash provided by operating activities $ 4,974 $ 67,607 Investing Activities: Purchases of property and equipment ( 6,626 ) ( 642 ) Premiums paid on life insurance policies ( 533 ) ( 519 ) Proceeds received on life insurance policies 1,489 Net cash (used in)/provided by investing activities ( 7,159 ) 328 Financing Activities: Cash dividends paid ( 6,437 ) ( 5,699 ) Payments for long-term debt - ( 4,393 ) Cash used in financing activities ( 6,437 ) ( 10,092 ) Net (decrease)/increase in cash and cash equivalents ( 8,622 ) 57,843 Cash and cash equivalents - beginning of year 65,841 36,031 Cash and cash equivalents - end of quarter $ 57,219 $ 93,874 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 5,858 $ 2,301 Cash paid for interest, net 1 365 Non-cash transactions: increase in lease liabilities arising from changes in right-of-use assets $ 23,736 $ 2,103 Increase in property and equipment through accrued purchases 17 12 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 Table of Contents HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except per share data) (Unaudited) Accumulated Other Total Common Stock Retained Comprehensive Shareholders' Shares Amount Earnings Income (loss) Equity Balance at February 2, 2020 11,838 $ 51,582 $ 223,252 $ ( 713 ) $ 274,121 Net loss ( 18,952 ) ( 18,952 ) Unrealized loss on defined benefit plan, net of tax of $ 60 193 193 Cash dividends paid and accrued ($ 0.48 per share) ( 5,699 ) ( 5,699 ) Restricted stock grants, net of forfeitures 49 169 169 Restricted stock compensation cost 651 651 Performance-based restricted stock units costs 653 653 Balance at November 1, 2020 11,887 $ 53,055 $ 198,601 $ ( 520 ) $ 251,136 Balance at January 31, 2021 11,888 $ 53,323 $ 204,988 $ ( 808 ) $ 257,503 Net income 15,691 15,691 Unrealized loss on defined benefit plan, net of tax of $ 72 229 229 Cash dividends paid and accrued ($ 0.54 per share) ( 6,437 ) ( 6,437 ) Restricted stock grants, net of forfeitures 34 ( 125 ) ( 125 ) Restricted stock compensation cost 813 813 Performance-based restricted stock units costs 419 419 PSU awards ( 740 ) ( 740 ) Balance at October 31, 2021 11,922 $ 53,690 $ 214,242 $ ( 579 ) $ 267,353 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 7 Table of Contents HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated) (Unaudited) For the Thirty-Nine Weeks Ended October 31, 2021 1. Preparation of Interim Financial Statements The condensed consolidated financial statements of Hooker Furnishings Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 31, 2021 (“2021 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year. The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2022 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 2, 2021, and the thirty-nine week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began February 1, 2021, which both ended October 31, 2021. This report discusses our results of operations for these periods compared to the 2021 fiscal year thirteen-week period that began August 3, 2020, and the thirty-nine week period that began February 3, 2020, which both ended November 1, 2020; and our financial condition as of October 31,2021 compared to January 31, 2021. References in these notes to the condensed consolidated financial statements of the Company to: ■ the 2022 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 1, 2021 and will end January 30, 2022; and ■ the 2021 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 3, 2020 and ended January 31, 2021. 2. Recently Adopted Accounting Policies In August 2018, the Financial Accounting Standards Board (“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. We adopted this guidance in the fiscal 2022 first quarter. The adoption of ASU 2018-14 did not have a material impact on our consolidated financial statements or disclosures. 3. Cancellation Costs The Home Meridian segment incurred cancellation costs of $ 2.6 million for raw materials related to its exit of the ready-to-assemble furniture category. The amount was recorded in cost of sales in the fiscal 2022 third quarter. Due to the increases in freight costs since these items were ordered, we determined that the additional cost needed to move these products stateside would have resulted in a substantially greater loss than the cost to cancel the orders at the factories. 8 Table of Contents 4. Accounts Receivable October 31, January 31, 2021 2021 Trade accounts receivable $ 83,363 $ 92,621 Other accounts receivable allowances ( 7,621 ) ( 6,993 ) Allowance for doubtful accounts ( 2,157 ) ( 2,338 ) Accounts receivable $ 73,585 $ 83,290 5. Inventories October 31, January 31, 2021 2021 Finished furniture $ 88,815 $ 81,290 Furniture in process 2,152 1,397 Materials and supplies 13,176 9,639 Inventories at FIFO 104,143 92,326 Reduction to LIFO basis ( 26,279 ) ( 22,167 ) Inventories $ 77,864 $ 70,159 6. Property, Plant and Equipment Depreciable Lives October 31, January 31, (In years) 2021 2021 Buildings and land improvements 15 - 30 $ 31,998 $ 31,316 Computer software and hardware 3 - 10 15,592 15,012 Machinery and equipment 10 10,570 9,314 Leasehold improvements Term of lease 11,322 10,005 Furniture and fixtures 3 - 10 5,748 2,614 Other 5 674 651 Total depreciable property at cost 75,904 68,912 Less accumulated depreciation ( 47,851 ) ( 44,098 ) Total depreciable property, net 28,053 24,814 Land 1,077 1,077 Construction-in-progress 460 889 Property, plant and equipment, net $ 29,590 $ 26,780 7. Fair Value Measurements Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: ■ Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; ■ Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and ■ Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of October 31, 2021 and January 31, 2021, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period. 9 Table of Contents Our assets measured at fair value on a recurring basis at October 31, 2021 and January 31, 2021, were as follows: Fair value at October 31, 2021 Fair value at January 31, 2021 Description Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (In thousands) Assets measured at fair value Company-owned life insurance $ - $ 26,133 $ - $ 26,133 $ - $ 25,365 $ - $ 25,365 8. Intangible Assets January 31, 2021 October 31, 2021 Non-amortizable Intangible Assets Segment Beginning Balance Impairment Charges Net Book Value Goodwill Domestic Upholstery $ 490 $ - $ 490 Trademarks and trade names - Home Meridian Home Meridian 6,650 - 6,650 Trademarks and trade names - Bradington-Young Domestic Upholstery 861 - 861 Trademarks and trade names - Sam Moore Domestic Upholstery 396 - 396 Total Trademarks and trade names $ 7,907 $ - $ 7,907 Total non-amortizable assets $ 8,397 $ - $ 8,397 Our amortizable intangible assets are recorded in our Home Meridian and Domestic Upholstery segments. The carrying amounts and changes therein of those amortizable intangible assets were as follows: Amortizable Intangible Assets Customer Relationships Trademarks Totals Balance at January 31, 2021 $ 17,672 $ 658 $ 18,330 Amortization ( 1,743 ) ( 45 ) ( 1,788 ) Balance at October 31, 2021 $ 15,929 $ 613 $ 16,542 For the remainder of fiscal 2022, amortization expense is expected to be approximately $ 596 ,000. 9. Leases We recognized sub-lease income of $ 266,000 for the three-month period and $ 561,000 for the nine-month period, both ended October 31, 2021. We recognized sub-lease income of $ 144,000 for the three-month period and $ 432,000 for the nine-month period, both ended November 1, 2020. The components of lease cost and supplemental cash flow information for leases for the three-months and nine-months ended October 31, 2021 and November 1, 2020 were: Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 Operating lease cost $ 1,794 $ 2,061 $ 5,712 $ 6,319 Variable lease cost 53 37 162 105 Short-term lease cost 27 70 94 272 Total operating lease cost $ 1,874 $ 2,168 $ 5,968 $ 6,696 Operating cash outflows $ 1,843 $ 2,056 $ 5,818 $ 5,908 10 Table of Contents The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of October 31, 2021 and January 31, 2021 were as follows: October 31, 2021 January 31, 2021 Real estate $ 52,010 $ 33,651 Property and equipment 1,215 962 Total operating leases right-of-use assets $ 53,225 $ 34,613 Current portion of operating lease liabilities $ 7,293 $ 6,650 Long term operating lease liabilities 47,530 29,441 Total operating lease liabilities $ 54,823 $ 36,091 The increase in right-of-use assets and lease liabilities is primarily due to the commencement of the operating lease at our new warehouse facility in Georgia during the fiscal 2022 third quarter. The weighted-average remaining lease term is 8.5 years. We used our incremental borrowing rate which is LIBOR plus 1.5 % at the adoption date. The weighted-average discount rate is 1.93 %. The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheets on October 31, 2021: Undiscounted Future Operating Lease Payments Remainder of 2022 $ 1,796 2023 8,213 2024 6,980 2025 6,960 2026 7,032 2027 and thereafter 28,519 Total lease payments $ 59,500 Less: impact of discounting ( 4,677 ) Present value of lease payments $ 54,823 As of October 31, 2021, the Company had an additional lease for a showroom in High Point, North Carolina. This lease is expected to commence in Fall of calendar 2022 with an initial lease term of 10 years and estimated future minimum rental commitments of approximately $ 23.7 million. Since the lease has not yet commenced, the undiscounted amounts are not included in the table above. 10. Long-Term Debt As of October 31, 2021, we had an aggregate $ 27.9 million available under our $ 35 million revolving credit facility (the “Existing Revolver”) to fund working capital needs. Standby letters of credit in the aggregate amount of $ 7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 31, 2021. There were no additional borrowings outstanding under the Existing Revolver as of October 31, 2021. 11 Table of Contents 11. Employee Benefit Plans We maintain two “frozen” retirement plans, which are paying benefits and may include active employees among the participants. We do not expect to add participants to these plans in the future. The two plans include: ■ a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furnishings Corporation; and ■ the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 1, October 31, November 1, 2021 2020 2021 2020 Net periodic benefit costs Service cost 33 32 100 96 Interest cost 53 74 159 222 Actuarial loss 100 84 301 253 Consolidated net periodic benefit costs $ 186 $ 190 $ 560 $ 571 The SRIP and SERP plans are unfunded plans. In fiscal 2022, we paid $ 259,000 in the third quarter and $ 803,000 in the nine-month period and expect to pay a total of approximately $ 230,000 in benefit payments from our general assets during the remainder of fiscal 2022 to fund SRIP and SERP payments. 12. Earnings Per Share We refer you to the discussion of Earnings Per Share in Note 2. Summary of Significant Accounting Policies, in the financial statements included in our 2021 Annual Report, for additional information concerning the calculation of earnings per share. All stock awards are designed to encourage retention and to provide an incentive for increasing shareholder value. We have issued restricted stock awards to non-employee members of the board of directors since 2006 and to certain non-executive employees since 2014. We have issued restricted stock units (“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. One target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. The payout or settlement of the PSUs will be made in shares of our common stock. We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs and PSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated: October 31, January 31, 2021 2021 Restricted shares 60 55 RSUs and PSUs 132 141 192 196 12 Table of Contents All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share: Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 1, October 31, November 1, 2021 2020 2021 2020 Net income/(loss) $ ( 1,219 ) $ 10,093 $ 15,691 $ ( 18,952 ) Less: Unvested participating restricted stock dividends 11 9 34 26 Net earnings allocated to unvested participating restricted stock - 47 84 - Earnings/(loss) available for common shareholders ( 1,230 ) 10,037 15,573 ( 18,978 ) Weighted average shares outstanding for basic earnings per share 11,863 11,833 11,849 11,818 Dilutive effect of unvested restricted stock, RSU and PSU awards* - 106 168 - Weighted average shares outstanding for diluted earnings per share 11,863 11,939 12,017 11,818 Basic (loss)/earnings per share $ ( 0.10 ) $ 0.85 $ 1.32 $ ( 1.61 ) Diluted (loss)/earnings per share $ ( 0.10 ) $ 0.84 $ 1.30 $ ( 1.61 ) * Due to the net loss recorded in the fiscal 2022 third quarter, approximately 164,000 potentially dilutive shares would have been antidilutive and are therefore excluded from the calculation above. Due to the fiscal 2021 year-to-date net loss, approximately 92,000 shares would have been antidilutive and are therefore excluded from the calculation of earnings per share for the thirty-nine weeks ended November 1, 2020. 13. Income Taxes We recorded income tax benefit of $ 403 ,000 for the fiscal 2022 third quarter compared to $ 3.0 million income tax expense for the comparable prior year quarter. The effective tax rates for the fiscal 2022 and 2021 third quarters were 24.8 % and 22.9 %, respectively. For the fiscal 2022 nine-month period, we recorded income tax expense of $ 4.6 million, compared to income tax benefit of $ 6.3 million for the comparable prior year period, of which $ 10.7 million was recorded related to goodwill and trade name impairment charges. The effective tax rates for the fiscal 2022 and 2021 nine-month periods were 22.5 % and 24.8 %, respectively. No material and non-routine positions have been identified that are uncertain tax positions. Tax years ending January 28, 2018 through January 31, 2021 remain subject to examination by federal and state taxing authorities. 14. Segment Information As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to: ■ better understand our performance; ■ better assess our prospects for future net cash flows; and ■ make more informed judgments about us as a whole. 13 Table of Contents We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM. 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. For financial reporting purposes, we are organized into three reportable segments and “All Other”, which includes the remainder of our businesses: ■ Hooker Branded , consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; ■ Home Meridian , a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; ■ Domestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore and Shenandoah Furniture; and ■ All Other , consisting of H Contract and Lifestyle Brands, a new business started in late fiscal 2019. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280. The following table presents segment information for the periods, and as of the dates, indicated. Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net % Net % Net % Net Net Sales Sales Sales Sales Sales Hooker Branded $ 56,037 42.0 % $ 47,287 31.6 % $ 157,304 34.3 % $ 113,268 29.4 % Home Meridian 46,230 34.6 % 73,727 49.3 % 217,964 47.5 % 202,560 52.6 % Domestic Upholstery 27,972 21.0 % 25,350 16.9 % 74,996 16.3 % 59,640 15.6 % All Other 3,189 2.4 % 3,323 2.2 % 8,543 1.9 % 9,353 2.4 % Consolidated $ 133,428 100 % $ 149,687 100.0 % $ 458,807 100.0 % $ 384,821 100.0 % Gross Profit/(Loss) Hooker Branded $ 15,366 27.4 % $ 15,446 32.7 % $ 49,639 31.6 % $ 35,894 31.7 % Home Meridian ( 1,807 ) - 3.9 % 11,169 15.1 % 17,935 8.2 % 28,489 14.1 % Domestic Upholstery 5,353 19.1 % 5,751 22.7 % 14,879 19.8 % 11,555 19.4 % All Other 1,095 34.3 % 1,117 33.6 % 2,853 33.4 % 3,199 34.2 % Consolidated $ 20,007 15.0 % $ 33,483 22.4 % $ 85,306 18.6 % $ 79,137 20.6 % Operating (Loss)/Income Hooker Branded $ 6,669 11.9 % $ 7,686 16.3 % $ 25,040 15.9 % $ 15,108 13.3 % Home Meridian ( 10,181 ) - 22.0 % 2,510 3.4 % ( 9,274 ) - 4.3 % ( 26,754 ) - 13.2 % Domestic Upholstery 1,443 5.2 % 2,421 9.6 % 3,589 4.8 % ( 14,399 ) - 24.1 % All Other 341 10.7 % 420 12.6 % 820 9.6 % 1,156 12.4 % Consolidated $ ( 1,728 ) - 1.3 % $ 13,037 8.7 % $ 20,175 4.4 % $ ( 24,889 ) - 6.5 % Capital Expenditures Hooker Branded $ 306 $ 60 $ 427 $ 173 Home Meridian 2,501 27 4,956 137 Domestic Upholstery 344 82 1,233 332 All Other 10 - 10 - Consolidated $ 3,161 $ 169 $ 6,626 $ 642 Depreciation & Amortization Hooker Branded $ 645 $ 444 $ 1,844 $ 1,338 Home Meridian 710 540 1,779 1,608 Domestic Upholstery 682 700 1,991 2,097 All Other 3 3 9 9 Consolidated $ 2,040 $ 1,687 $ 5,623 $ 5,052 14 Table of Contents As of October 31, As of January 31, 2021 %Total 2021 %Total Identifiable Assets Assets Assets Hooker Branded $ 164,358 48.0 % $ 174,475 53.5 % Home Meridian 123,991 36.2 % 100,497 30.9 % Domestic Upholstery 53,431 15.6 % 49,370 15.2 % All Other 666 0.2 % 1,204 0.4 % Consolidated $ 342,446 100 % $ 325,546 100 % Consolidated Goodwill and Intangibles 24,939 26,727 Total Consolidated Assets $ 367,385 $ 352,273 Sales by product type are as follows: Net Sales (in thousands) Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, 2021 %Total November 1, 2020 %Total October 31, 2021 %Total November 1, 2020 %Total Casegoods $ 75,982 57 % $ 91,457 61 % $ 271,421 59 % $ 234,905 61 % Upholstery 57,446 43 % 58,230 39 % 187,386 41 % 149,916 39 % $ 133,428 100 % $ 149,687 100 % $ 458,807 100 % $ 384,821 100 % 15. Subsequent Events Dividends On December 7, 2021 , our board of directors declared a quarterly cash dividend of $ 0.20 per share, an increase of $ 0.02 per share or 11 % over the most recent dividend, which will be paid on December 31, 2021 to shareholders of record at December 17, 2021 . 15 Table of Contents 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 Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. 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: ■ disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam, China, and Malaysia, including customs issues, labor stoppages, strikes or slowdowns and the availability and cost of shipping containers and cargo ships; ■ 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, inflation, 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 prior U.S. administration’s imposition of a 25% tariff on certain goods imported into the United States from China including almost all furniture and furniture components manufactured in China, which is still in effect, with the potential for additional or increased tariffs in the future; ■ 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, including the price and availability of shipping containers, vessels and domestic trucking, and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders; ■ 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; ■ 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; ■ difficulties in forecasting demand for our imported products; ■ 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 and the adverse effects of negative media coverage; ■ disruptions and damage (including those due to weather) affecting our Virginia, Georgia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities, our North Carolina showrooms or our representative offices or warehouses in Vietnam and China; 16 Table of Contents ■ risks associated with our newly leased warehouse space in Georgia, including risks associated with our move to and occupation of the facility, including information systems, access to warehouse labor and the inability to realize anticipated cost savings; ■ the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers, including the loss of several large customers through business consolidations, failures or other reasons, or the loss of significant sales programs with major 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; ■ the direct and indirect costs and time spent by our associates associated with the implementation of our Enterprise Resource Planning system (“ERP”), including costs resulting from unanticipated disruptions to our business; ■ achieving and managing growth and change, and the risks associated with new business lines, acquisitions, including the selection of suitable acquisition targets, 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; ■ 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. 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. 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 2021 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 2022 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 2, 2021, and the thirty-nine week period (also referred to as “nine-months”, “nine-month period” or “year-to-date period”) that began February 1, 2021, which both ended October 31, 2021. This report discusses our results of operations for these periods compared to the 2021 fiscal year thirteen-week period that began August 3, 2020 and the thirty-nine week period that began February 3, 2020, which both ended November 1, 2020; and our financial condition as of October 31, 2021 compared to January 31, 2021. 17 Table of Contents References in this report to: ■ the 2022 fiscal year and comparable terminology mean the fiscal year that began February 1, 2021 and will end January 30, 2022; and ■ the 2021 fiscal year and comparable terminology mean the fiscal year that began February 3, 2020 and ended January 31, 2021. Dollar amounts presented in the tables below are in thousands except for per share data. In the discussion below and herein we reference changes in sales orders, or “orders,” and sales order backlog (unshipped orders at a point in time), or “backlog,” over and compared to certain periods of time and changes discussed are in sales dollars and not units of inventory, unless stated otherwise. We believe orders are generally good current indicators of sales momentum and business conditions. 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 seven 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. For the Hooker Branded and Domestic Upholstery segments 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. 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. At October 31, 2021, our backlog of unshipped orders was as follows: Order Backlog (Dollars in 000s) Reporting Segment October 31, 2021 January 31, 2021 November 1, 2020 Hooker Branded $ 55,599 $ 34,776 $ 28,627 Home Meridian 208,364 180,188 186,487 Domestic Upholstery 61,516 30,271 24,582 All Other 5,432 2,845 2,210 Consolidated $ 330,911 $ 248,080 $ 241,906 At the end of the fiscal 2022 third quarter, order backlog increased $82.8 million, or 33.3%, as compared to the end of fiscal 2021 and increased $89 million, or 36.8%, as compared to the prior-year nine months end, due to increased incoming orders in all three reportable segments as well as longer delivery times resulting from the supply chain disruptions in the Home Meridian and, to a lesser degree, Hooker Branded segments and production delays in the Domestic Upholstery segment. We are very encouraged by the current historic levels of orders and backlogs; however, due to the current supply chain issues including the lack and cost of shipping containers and vessel space and limited overseas vendor capacity, orders are not converting to shipments as quickly as could be expected compared to the pre-pandemic environment and we expect that to continue at some level through the fiscal 2023 second quarter. The current logistics challenges are slowing order fulfillment, particularly for Home Meridian whose average order sizes tend to be larger and more project-based 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. 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 SEC, especially our 2021 Annual Report. Our 2021 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. 18 Table of Contents Our 2021 Annual Report and other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com. Overview Hooker Furnishings 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 2020 shipments to U.S. retailers, according to a 2021 survey by a leading trade publication. 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. Executive Summary-Results of Operations ● Consolidated net sales for the fiscal 2022 third quarter decreased as compared to the prior year period due to significantly reduced shipments in the Home Meridian segment as the result of temporary COVID-related factory closures in Vietnam and Malaysia. Consolidated gross profit and margin decreased in the fiscal 2022 third quarter as compared to the prior year period due primarily to the sales volume decline and to a lesser extent higher freight costs, inventory cancellation costs and higher than expected customer chargebacks in the Home Meridian segment. Consolidated operating loss for the fiscal 2022 third quarter was $1.7 million, compared to a $13.0 million operating income in the prior year period. Consolidated net loss for the quarter was $1.2 million or ($0.10) per diluted share, as compared to net income of $10.1 million or $0.84 per diluted share in the prior year quarter. ■ For the fiscal 2022 nine-month period, consolidated net sales increased by $74.0 million, or 19.2%, compared to the prior year period, as all three reportable segments had sales increases. Consolidated gross profit increased due to increases in the Hooker Branded and Domestic Upholstery segments, partially offset by decreased gross profit and margin in the Home Meridian segment. Consolidated operating income was $20.2 million for the fiscal 2022 nine-month period compared to a $24.9 million operating loss in the prior year period. Consolidated net income was $15.7 million or $1.30 per diluted share for the fiscal 2022 nine-month period, as compared to net loss of $19.0 million or ($1.61) per diluted share in the prior year period. Our fiscal 2022 third quarter and nine months performance are discussed in greater detail below under “Review” and “Results of Operations.” Review Despite favorable demand for home furnishings and our strong order backlog, we were challenged by ongoing supply chain disruptions, the COVID lockdown and slower than expected reopenings in Vietnam and Malaysia, and industry-wide inflationary pressures. Fiscal 2022 third quarter consolidated net sales decreased by 10.9% compared to prior year period. Sales volume decline and increased product costs led to an operating loss of $1.7 million. The Hooker Branded segment’s net sales increased by $8.7 million, or 18.5%, as compared to the prior year quarter, which was attributable to increased sales volume and lower discounting driven by higher demand, as well as inventory availability. All the net sales increases were in our Casegoods non-container business, which comprised 80% of revenue in this segment. Because we source product on a consistent weekly basis and ship product to our U.S. warehouses, Hooker Branded is better able to mitigate supply chain constraints and keep its best sellers in stock. However, higher ocean freight and product cost inflation significantly impacted this segment’s gross margin and offset the gains from sales increases in the third quarter. Despite these adverse factors, this segment reported $6.7 million operating income or an 11.9% operating margin. Incoming orders decreased slightly by 1.9% as compared to prior year period when business dramatically rebounded. Backlog remained historically high and nearly doubled as compared to the prior year third quarter end when backlog was already at a high level. 19 Table of Contents Home Meridian segment’s net sales decreased by $27.5 million, or 37.3%, as compared to the prior year third quarter and this segment reported a $10.2 million operating loss. Despite the disappointing financial results, we believe the challenges are short-term as discussed below: ● During the quarter, container direct sales, which typically comprise the majority of revenue in this segment, decreased by over 50% compared to the prior year third quarter, driven by sales volume loss due to the temporary COVID lockdowns in Vietnam and Malaysia. As a result, sales with major furniture chains and large independent accounts decreased by over 50% compared to the prior year quarter, which counted for two thirds of total sales decrease in this segment. Additionally, e-commerce sales decreased by 25% due to inventory unavailability and price increases due primarily to increased freight costs. Clubs sales decreased due to lower volume and higher than expected chargebacks which negatively impacted net sales and operating income by $1.9 million in that channel. Hospitality sales also decreased during the quarter as this business has not yet recovered from the COVID crisis. ● Higher freight costs adversely impacted gross margin by 800 bps in the quarter and were the primary driver of increased product costs. We imposed freight surcharges and price increases during the second and third quarters to mitigate these excess costs; however significant volume was shipped at pre-surcharge selling prices. ● To help drive improved future profitability, eliminate low-margin categories and avoid unnecessary costs, we exited the Ready-To-Assemble (“RTA) furniture category and incurred cancellation costs of $2.6 million for raw materials related to this exit. Although these costs increased segment cost of goods sold by 580 bps and resulted in a gross loss in the quarter, we estimate we avoided roughly $10 million in additional product and freight costs related to these orders by taking this action. Furthermore, this action allows us to focus resources on more profitable business opportunities to drive long-term growth. The Home Meridian segment finished the quarter with a backlog 12% higher than the prior year third quarter end, and more than doubled as compared to pre-pandemic levels. The Domestic Upholstery segment’s net sales increased by $2.6 million, or 10.3%, in the fiscal 2022 third quarter compared to the prior year period as all three divisions of the segment reported over or close to 10% sales increases. However, material cost inflation for nearly all the raw materials and higher freight surcharges on the materials increased product costs by 340 bps and offset the gains from increased sales. Other manufacturing constraints adversely impacted our profitability, including wage inflation and the domestic driver and truck shortage which adversely impacted the delivery of finished products. Despite increased material costs, this segment reported operating income of $1.4 million, or 5.2% operating margin for the third quarter. Although we are encouraged by historically high backlog at the end of the fiscal 2022 third quarter at all three divisions, production levels were adversely impacted by manufacturing capacities, inconsistent deliveries of materials due to supply disruption with our suppliers, and labor inefficiencies at the Sam Moore division. We have implemented price increases and surcharges with major accounts to improve margin and filled key positions to improve labor productivity. Since this segment has current order backlog levels of 5-6 months and prices were not increased on backlog orders, we anticipate seeing the benefits of the price increases beginning in the second quarter of fiscal 2023. All Other’s net sales decreased by $134,000, or 4.0%, in the fiscal 2022 third quarter as compared to the prior year period, due to a 5.6% sales decrease at H Contract. The senior living industry, which comprises the majority of H Contract’s business, has been severely impacted by the pandemic and has reduced capital spending due to increased costs and uncertain revenues. However, as vaccination rates have increased, especially among the senior population, H Contract’s incoming orders have increased for three consecutive quarters in fiscal 2022 and finished the quarter with backlog 150% higher than prior year third quarter end. Despite the sales decrease, All Other still reported a 10.7% operating margin for the quarter. Cash and cash equivalents stood at $57.2 million at fiscal 2022 third quarter-end, down $8.6 million compared to the balance at the fiscal 2021 year-end due primarily to $7.7 million increase in inventory. During the first nine months of fiscal 2022, we used cash on hand and $5 million generated from operations to pay $6.6 million of capital expenditures including $4.4 million in our newly opened Georgia distribution center, $6.4 million in cash dividends to our shareholders, and $2.6 million on our new common, cloud-based ERP platform. In addition to our cash balance, we have an aggregate of $27.9 million available under our existing revolver to fund working capital needs. We believe we have the financial resources to fund our business operations for the foreseeable future, including weathering an extended impact of COVID-19 pandemic as well as the logistics issues, cost increases and production capacity constraints which are currently impacting our industry. 20 Table of Contents 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 Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 Net sales 100 % 100 % 100 % 100 % Cost of sales 85.0 77.6 81.4 79.4 Gross profit 15.0 22.4 18.6 20.6 Selling and administrative expenses 15.8 13.3 13.8 15.1 Goodwill impairment charges - - - 10.3 Trade name impairment charges - - - 1.2 Intangible asset amortization 0.4 0.4 0.4 0.5 Operating income/(loss) (1.3 ) 8.7 4.4 (6.5 ) Interest expense, net - 0.1 - 0.1 Income/(Loss) before income taxes (1.2 ) 8.7 4.4 (6.6 ) Income tax expense (0.3 ) 2.0 1.0 (1.6 ) Net income/(loss) (0.9 ) 6.7 3.4 (4.9 ) Fiscal 2022 Third Quarter and Nine Months Compared to Fiscal 2021 Third Quarter and Nine Months Net Sales Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Hooker Branded $ 56,037 42.0 % $ 47,287 31.6 % $ 8,750 18.5 % $ 157,304 34.3 % $ 113,268 29.4 % $ 44,036 38.9 % Home Meridian 46,230 34.6 % 73,727 49.3 % (27,497 ) -37.3 % 217,964 47.5 % 202,560 52.6 % 15,404 7.6 % Domestic Upholstery 27,972 21.0 % 25,350 16.9 % 2,622 10.3 % 74,996 16.3 % 59,640 15.6 % 15,356 25.7 % All Other 3,189 2.4 % 3,323 2.2 % (134 ) -4.0 % 8,543 1.9 % 9,353 2.4 % (810 ) -8.7 % Consolidated $ 133,428 100 % $ 149,687 100 % $ (16,259 ) -10.9 % $ 458,807 100 % $ 384,821 100 % $ 73,986 19.2 % Unit Volume FY22 Q3 % Increase vs. FY21 Q3 FY22 YTD % Increase vs. FY21 YTD Average Selling Price ("ASP") FY22 Q3 % Increase vs. FY21 Q3 FY22 YTD % Increase vs. FY21 YTD Hooker Branded 0.9 % 20.6 % Hooker Branded 17.1 % 14.5 % Home Meridian -46.1 % -1.8 % Home Meridian 4.9 % 1.6 % Domestic Upholstery 0.3 % 17.1 % Domestic Upholstery 8.7 % 6.4 % All Other -19.4 % -17.2 % All Other 14.6 % 7.4 % Consolidated -35.6 % 2.2 % Consolidated 31.7 % 11.5 % 21 Table of Contents Consolidated net sales decreased in the fiscal 2022 third quarter due to the sales decline in Home Meridian segment but increased in the first nine months as compared to the prior year periods. ■ The Hooker Branded segment’s net sales increased significantly in the fiscal 2022 third quarter and nine months, as compared to the respective prior year periods, due to both increased unit volume and ASP, driven by increased demand. Hooker Upholstery unit volume decreased during the third quarter due to inventory unavailability issues. ■ The Home Meridian segment’s net sales decreased in the fiscal 2022 third quarter driven by a 46% decrease in unit volume as the result of COVID lockdown in Vietnam which led to much lower shipments. For the nine-month period, net sales increased with major furniture chains and retail stores as the result of strong demand, partially offset by decreased net sales in hospitality business, e-commerce and the club businesses, and higher than expected chargebacks from a clubs channel customer. The ASP increase was attributable to price increases to mitigate higher freight costs; however, the increases were not sufficient to cover the excess freight costs. ■ The Domestic Upholstery segment’s net sales increased in the fiscal 2022 third quarter and nine months as all three divisions of the segment reported increased net sales for both periods. ASP increased at all three divisions in response to the inflation of material costs, with Sam Moore ASP increasing the most in order to improve profitability in this division. However, Sam Moore unit volume decreased during the third quarter due to labor inefficiencies. ■ All Other’s net sales decreased in the fiscal 2022 third quarter and nine-month period due to reduced unit volume at H Contract, as this division has not yet recovered from the impact of reduced capital spending by the senior living industry as a result of COVID crisis. ASP increased in response to increased product costs; however, it was not sufficient to offset the volume loss. Gross Profit/(Loss) and Margin Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Hooker Branded $ 15,366 27.4 % $ 15,446 32.7 % $ (80 ) -0.5 % $ 49,639 31.6 % $ 35,894 31.7 % $ 13,745 38.3 % Home Meridian (1,807 ) -3.9 % 11,169 15.1 % (12,976 ) -116.2 % 17,935 8.2 % 28,489 14.1 % (10,554 ) -37.0 % Domestic Upholstery 5,353 19.1 % 5,751 22.7 % (398 ) -6.9 % 14,879 19.8 % 11,555 19.4 % 3,324 28.8 % All Other 1,095 34.3 % 1,117 33.6 % (22 ) -2.0 % 2,853 33.4 % 3,199 34.2 % (346 ) -10.8 % Consolidated $ 20,007 15.0 % $ 33,483 22.4 % $ (13,476 ) -40.2 % $ 85,306 18.6 % $ 79,137 20.6 % $ 6,169 7.8 % For the fiscal 2022 third quarter, consolidated gross profit and margin both decreased as compared to the prior year quarter. For the fiscal 2022 nine-month period, consolidated gross profit increased due to the sales increase while margin decreased. ■ The Hooker Branded segment’s gross profit and margin both decreased in the fiscal 2022 third quarter driven by higher freight costs, product cost inflation, and higher demurrage and drayage expenses due to supply chain interruptions. For the nine-month period, gross profit increased due primarily to the net sales increase while gross margin decreased slightly. ■ The Home Meridian segment’s gross profit and margin decreased significantly in the fiscal 2022 third quarter and nine-month period, due to sales volume loss, excess ocean freight costs, higher than expected customer chargebacks and order cancellation costs. ■ The Domestic Upholstery segment’s gross profit and margin decreased in the fiscal 2022 third quarter due primarily to raw material cost inflation, which offset the effect of increased sales. Gross profit and margin increased in the nine-month period due to net sales increases and production efficiencies from operating near full capacity due to historic levels of backlog. ■ All Other’s gross profit decreased in the fiscal 2022 third quarter and nine-month period due principally to H Contract net sales declines, while gross margin still maintained a high level. 22 Table of Contents Selling and Administrative Expenses (S&A) Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Hooker Branded $ 8,697 15.5 % $ 7,762 16.4 % $ 935 12.0 % $ 24,599 15.6 % $ 20,788 18.4 % $ 3,811 18.3 % Home Meridian 8,042 17.4 % 8,325 11.3 % (283 ) -3.4 % 26,208 12.0 % 26,305 13.0 % (97 ) -0.4 % Domestic Upholstery 3,647 13.0 % 3,067 12.1 % 580 18.9 % 10,503 14.0 % 8,785 14.7 % 1,718 19.6 % All Other 753 23.6 % 696 21.0 % 57 8.2 % 2,033 23.8 % 2,042 21.8 % (9 ) -0.4 % Consolidated $ 21,139 15.8 % $ 19,850 13.3 % $ 1,289 6.5 % $ 63,343 13.8 % $ 57,920 15.1 % $ 5,423 9.4 % Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2022 third quarter. For fiscal 2022 nine-month period, S&A expenses increased in absolute terms but decreased as a percentage of net sales. ■ The Hooker Branded segment’s S&A expenses increased in absolute terms in the fiscal 2022 third quarter driven by increased selling costs as the result of higher net sales, increased expenses incurred as part of our ERP project, and increased salaries and wages, partially offset by decreased bonus accruals on lower profits. For the fiscal 2022 nine-month period, S&A expenses increased in absolute terms due to the factors discussed above, offset by lower bad debt expenses due to the absence of a customer write-off in the current year. S&A expenses decreased as a percentage of net sales in the fiscal 2022 third quarter and nine-month period in the segment due to increased net sales. ■ The Home Meridian segment’s S&A expenses decreased in absolute terms in the fiscal 2022 third quarter due to lower selling costs on decreased sales, partially offset by increased severance expenses due to personnel changes and increased professional service expenses. S&A expense increased as a percentage of net sales in the fiscal 2022 third quarter due to decreased sales. For the fiscal 2022 nine-month period, S&A expenses decreased slightly in absolute terms, with lower selling costs, professional service expenses and advertising supply expenses, nearly offset by increased severance expenses, the absence of employee furloughs in the current year period, and increased market expenses and other spending as business returned to more normal levels. S&A expenses decreased as a percentage of net sales in the nine-month period in the segment due to higher net sales. ■ The Domestic Upholstery segment’s S&A expenses increased in absolute terms in the fiscal 2022 third quarter and nine-month period due to increased selling expenses on higher net sales, increased salaries and wages due to the absence of a number of employees furloughed when factories were temporarily shut down in the prior year period, and increased depreciation expenses due to the accelerated depreciation of our existing ERP system due to the expected implementation of an upgraded cloud-based ERP solution in fiscal 2023. ■ All Other S&A expenses increased in absolute terms in the fiscal 2022 third quarter and stayed essentially flat in the nine-month period due to increased market expenses, advertising supply expenses and other spending, offset by decreased selling expenses. S&A expenses increased as a percentage of net sales due to lower net sales in the segment. In the prior year first quarter, we recorded $23.2 million and $16.4 million in non-cash impairment charges to write down goodwill in Home Meridian segment and the Shenandoah division under Domestic Upholstery segment, respectively. We also recorded $4.8 million non-cash impairment charges to write down tradenames in the Home Meridian segment. Intangible Asset Amortization Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Intangible asset amortization $ 596 0.4 % $ 596 0.4 % $ - 0.0 % $ 1,788 0.4 % $ 1,788 0.5 % $ - 0.0 % Intangible asset amortization expense stayed the same compared to the prior year periods. 23 Table of Contents Operating (Loss)/Profit and Margin Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Hooker Branded $ 6,669 11.9 % $ 7,686 16.3 % $ (1,017 ) -13.2 % $ 25,040 15.9 % $ 15,108 13.3 % $ 9,932 65.7 % Home Meridian (10,181 ) -22.0 % 2,510 3.4 % (12,691 ) -505.6 % (9,274 ) -4.3 % (26,754 ) -13.2 % 17,480 65.3 % Domestic Upholstery 1,443 5.2 % 2,421 9.6 % (978 ) -40.4 % 3,589 4.8 % (14,399 ) -24.1 % 17,988 124.9 % All Other 341 10.7 % 420 12.6 % (79 ) -18.8 % 820 9.6 % 1,156 12.4 % (336 ) -29.1 % Consolidated $ (1,728 ) -1.3 % $ 13,037 8.7 % $ (14,765 ) -113.3 % $ 20,175 4.4 % $ (24,889 ) -6.5 % $ 45,064 181.1 % We recognized an operating loss in the fiscal 2022 third quarter due to the factors discussed above. Interest Expense, net Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Consolidated interest expense, net $ 27 0.0 % $ 106 0.1 % $ (79 ) -74.5 % $ 81 0.0 % $ 433 0.1 % $ (352 ) -81.3 % Consolidated interest expense decreased in both the third quarter and nine months of fiscal 2022 due to the payoff of our term loans in fiscal 2021 fourth quarter. Income taxes Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Consolidated income tax (benefit)/expense $ (403 ) -0.3 % $ 2,996 2.0 % $ (3,399 ) -113.5 % $ 4,563 1.0 % $ (6,263 ) -1.6 % $ 10,826 172.9 % Effective Tax Rate 24.8 % 22.9 % 22.5 % 24.8 % We recorded income tax benefit of $403,000 for the fiscal 2022 third quarter compared to $3.0 million income tax expense for the comparable prior year quarter. The effective tax rates for the fiscal 2022 and 2021 third quarters were 24.8% and 22.9%, respectively. For the fiscal 2022 nine-month period, we recorded income tax expense of $4.6 million, compared to income tax benefit of $6.3 million for the comparable prior year period, of which $10.7 million was recorded related to goodwill and trade name impairment charges. The effective tax rates for the fiscal 2022 and 2021 nine-month periods were 22.5% and 24.8%, respectively. Net (Loss)/Income Thirteen Weeks Ended Thirty-Nine Weeks Ended Oct 31, Nov 1, Oct 31, Nov 1, 2021 2020 2021 2020 % Net Sales % Net Sales $ Change % Change % Net Sales % Net Sales $ Change % Change Net (loss)/income Consolidated $ (1,219 ) -0.9 % $ 10,093 6.7 % $ (11,312 ) -112.1 % $ 15,691 3.4 % $ (18,952 ) -4.9 % $ 34,643 182.8 % Diluted earnings/(loss) per share $ (0.10 ) $ 0.84 $ 1.30 $ (1.61 ) 24 Table of Contents COVID-19 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, many of our administrative staff are telecommuting for at least part of their work-week. 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. Domestic travel for our employees has been limited and international travel is mostly non-existent. 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. We are encouraging vaccinations and requiring the wearing of masks for unvaccinated employees. 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. We continue to cautiously make decisions regarding our financial resources to weather and adapt to changes in market conditions, including any further impacts of COVID-19, including certain COVID variants and possible future pandemics. Outlook Consumer and retail demand remain historically strong, with the Company experiencing consolidated backlogs nearly triple compared to pre-pandemic level. However, we expect varying degrees of continued supply chain turbulence and product and raw materials cost inflation to impact our net sales and income in the short term, at least through the second quarter of fiscal 2023. We expect that our Hooker Branded and Domestic Upholstery segments will continue to be less challenged than Home Meridian primarily due to more than 70% of Home Meridian’s business historically being direct container versus domestic warehouse distribution. In addition, higher freight costs have a greater impact as a percentage on the Home Meridian’s lower price points. We continue to manage our logistics issues, with the goal of minimizing costs and maximizing delivery; however, there is no indication that ocean freight container rates will return to pre-COVID-19 levels in the near term. We believe we have mitigated these dynamics as much as possible through surcharges and price increases, but these increases can trail price increases received from logistics partners and suppliers for up to ninety days and up to one hundred eighty days for some backlog orders. Additionally, in the current environment, these supply-side factors are unpredictable and often involve frequent, unexpected changes with little or no notice. We believe we are utilizing all available levers to help mitigate these headwinds, and we remain optimistic about our long-term position as we work our way through these transitory disruptions. Our strong balance sheet and variable cost business model give us confidence that we can weather this current industry-wide challenge and will allow us to take advantage of the healthy consumer demand environment and long-term positive economic indicators and demographic trends for home-related industries. However, we continue to see increased competition for consumer discretionary income from industries such as travel, apparel, dining out and in-person events as vaccination rates increase. Additionally, potential adverse effects of new COVID-19 variants on the US and global economies remain uncertain. Longer-term, we believe that several macroeconomic factors provide a path for growth such as the strong housing market and favorable demographics with the large Millennial generation becoming highly engaged in household formation and home furnishings purchases. While we expect the extraordinary levels of demand for home furnishings to diminish somewhat, we also expect that demand for home furnishings will settle into a higher level of demand than pre-pandemic. We believe we are well positioned to help consumers enhance their homes with comfortable, stylish and quality home furnishings and will continue to focus on items under our control such as developing relevant new products to meet consumer needs, operational improvements, managing overhead and costs, and executing our strategic growth initiatives. We remain optimistic as we manage through the current challenging environment. Financial Condition, Liquidity and Capital Resources Cash Flows – Operating, Investing and Financing Activities Thirty-Nine Weeks Ended October 31, November 1, 2021 2020 Net cash provided by operating activities $ 4,974 $ 67,607 Net cash (used in)/provided by investing activities (7,159 ) 328 Cash used in financing activities (6,437 ) (10,092 ) Net (decrease)/increase in cash and cash equivalents $ (8,622 ) $ 57,843 25 Table of Contents During the nine months ended October 31, 2021, we used a portion of the existing cash and cash equivalents on hand and $5 million generated from operations to pay $6.6 million of capital expenditures to enhance our business systems and facilities, including $4.4 million in our newly opened Georgia distribution center, $6.4 million in cash dividends, $2.6 million on our new common, cloud-based ERP platform and $533,000 in life insurance premiums on Company-owned life insurance policies. In comparison, 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. 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 currently have one $35 million revolving credit facility (the “Existing Revolver”) with Bank of America, N. A. (“BofA”), which we entered into on January 27, 2021. The credit facility is based on successive past amendments to previous BofA banking agreements which are collectively referred to as the “Previous Agreements.” Details of our Existing Revolver 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. The loan covenants agreed to under the Previous Agreements continue to apply to us. They include customary representations and warranties and require 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. 26 Table of Contents 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 October 31, 2021 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have the financial resources to fund our business operations, including weathering the logistics issues, cost increases and production capacity constraints which are currently impacting our industry. As of October 31, 2021, we had $27.9 million available under our Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 31, 2021. There were no additional borrowings outstanding under the revolving credit facility as of October 31, 2021. Capital Expenditures We expect to spend approximately $500,000 in capital expenditures over the remainder of fiscal 2022 to maintain and enhance our operating systems and facilities. Enterprise Resource Planning In early fiscal 2022, 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 Hooker Branded segment and certain divisions under Domestic Upholstery segment by mid calendar 2022, with Home Meridian and Shenandoah divisions 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. We spent approximately $2.6 million on this project in the first nine months of fiscal 2022 and expect to spend approximately $1 million in the last quarter of fiscal 2022. Dividends On December 7, 2021, our board of directors declared a quarterly cash dividend of $0.20 per share, an increase of $0.02 per share or 11% over the most recent dividend, which will be paid on December 31, 2021 to shareholders of record at December 17, 2021. The Board will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters. 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 2021 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 this accounting standard.