What changed in this filing

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Item 1A. Risk Factors

2022-04-15 compared with 2021-04-16 · 67 added, 46 removed, 189 unchanged (37% of the section changed)

10 unchanged sentences

COVID-19 also impacted our Asian supply chain, particularly as a result of mandatory shutdowns in locations where our products are manufactured, and we experienced out-of-stocks and lost sales as a result.

Additionally, the demand surge that occurred after the initial height of the pandemic has caused supplier capacity restraints, shipping container and steamship space shortages.

Additionally, the demand surge that occurred after the initial height of the pandemic continues to cause supplier capacity restraints, shipping container and steamship space shortages.

These logistics issues have increased costs, led to out-of-stocks and adversely affected our sales and earnings.

Additionally, our sales order backlog is at historic levels due to these factors, and we cannot assure that we will be able to convert this backlog into sales at a normal pace or at all.

Our sales order backlog is at historic levels due to these factors, and we cannot assure that we will be able to convert this backlog into sales at a normal pace or at all.

We face the risk that current consumer demand could soften, or our customers could go elsewhere for products if our competitors are able to solve the current issues and we cannot.

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The sweeping nature of pandemics makes it extremely difficult to predict how our business and operations could be affected in the longer run.

However, the likely overall economic impact of pandemics is viewed as highly negative to the general economy.

Any of the foregoing factors, or other cascading effects of this or other pandemics, could materially increase our costs, negatively impact our sales and damage the company’s results of operations and its liquidity, possibly to a significant degree.

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Risks related to our business and industry

We rely on offshore sourcing from Vietnam and China for most of our sales.

We rely on offshore sourcing from Vietnam, China and Malaysia for most of our sales.

Consequently:

A disruption in supply from Vietnam or China or from our most significant Vietnamese or Chinese suppliers could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.

A disruption in supply from Vietnam, China or Malaysia or from our most significant suppliers in Asia could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.

In fiscal 2022, imported products sourced from Vietnam and China accounted for 88% of our import purchases and our top five suppliers in Vietnam and China accounted for 42% of our fiscal 2022 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.

Our supply chain could be adversely impacted by the uncertainties of health concerns and governmental restrictions.

For example, in early calendar 2020, the COVID-19 outbreak in China resulted in the temporary shutdown or reduced capacity of our vendors’ factories and significantly slowed the post-Chinese New Year production recovery.

Consequently, we experienced some out-of-stocks, but in some cases were able to provide substitutions out of inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales.

Although many of our vendors’ factories are now back online, limitations on supply include scarcity of some raw materials and components, limited availability of shipping containers and ocean vessel space, and production delays from some import suppliers.

Consequently, we have been faced with shortages of certain products.

If such disruptions were to occur again, 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, assuming an adequate number of shipping containers and vessels were available.

We believe we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries, again assuming an adequate number of shipping containers and vessels were available, and could produce certain upholstered products domestically at our own factories.

However, supply disruptions and delays on selected items could occur for six months or longer 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.

Increased freight costs on imported products could decrease earnings and liquidity.

Ocean freight costs on imported products currently represent a significant portion of the cost of our imported products.

Ocean freight rates on our imported products are affected by a myriad of factors including the global economy, petroleum prices and ocean freight carrier capacity.

We have seen a significant spike in ocean freight costs over the past year and have been able to partially offset these increases through price increases and temporary freight surcharges.

However, there can be no assurance that we will be successful in increasing prices or receiving freight surcharges in the future.

Also, increased ocean freight rates in the future would likely adversely affect earnings, financial condition and liquidity.

A disruption in our supply chain, or from Vietnam, China or Malaysia in general, could significantly impact our ability to fill customer orders for products manufactured in those countries.

For example, in the summer of calendar 2021, our suppliers in Vietnam and Malaysia were temporarily closed or operated at substantially reduced levels due to a COVID-related lockdown.

We faced supply chain constraints including but not limited to slower-than-expected re-openings, capacity limitations and production delays at some of our suppliers, along with the reduced shipping container and ocean vessel space availability.

Home Meridian segment shipping and sales were immediately impacted as the majority of its business is container direct customers.

In the fourth quarter of fiscal 2022, Hooker Branded segment sales were also impacted due to low inventory receipts in the second half of fiscal 2022 which consequently resulted in out-of-stocks.

In some cases, we were able to provide substitutions using inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales.

Supply disruptions and delays on selected items could occur for six months or longer before the impact of remedial measures would be reflected in our results.

If we are 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, China or Malaysia in general, could adversely affect our sales, earnings, financial condition and liquidity.

Increased transportation costs, including freight costs on imported products could decrease earnings and liquidity.

Transportation costs, including ocean freight costs and domestic trucking costs, on imported products currently represent a significant portion of the cost of those products.

Transportation costs on our imported products are affected by a myriad of factors including the global economy, petroleum prices and ocean freight carrier capacity.

We have seen a significant spike in these costs over the past year and our profitability has been materially impacted.

We have implemented price increases and surcharges;

however, there can be no assurance that we will be successful in increasing prices or receiving freight surcharges in the future or that we can do it quickly enough to offset increased costs.

Increased transportation costs, both domestically and internationally, in the future would likely adversely affect earnings, financial condition and liquidity.

Our dependence on suppliers could, over time, adversely affect our ability to service customers.

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A disruption affecting our domestic facilities could disrupt our business.

The warehouses in which we store our inventory in Virginia, North Carolina and California are critical to our success.

Our corporate and divisional headquarters, which house our administration, sourcing, sales, finance, merchandising, customer service and logistics functions for our imported and domestic products are located in Virginia and North Carolina.

Additionally, we are in the process of consolidating our Home Meridian segment’s East Coast warehousing operations into an 800,000 square foot distribution center in Liberty County, Georgia.

We believe that this strategically located facility near the Port of Savannah and major interstate highways will allow us to more efficiently service our customers, reduce transportation costs and better position us for future growth.

This leased facility is currently under construction and we expect to occupy it in the Fall of 2021.

Risks associated with our newly leased warehouse space in Georgia, include delays in construction and occupancy and risks associated with our move to the facility, including information systems, access to warehouse labor and the inability to realize anticipated cost savings.

The warehouses in which we store our inventory in Virginia, North Carolina, Georgia and California are critical to our success.

Our domestic upholstery manufacturing facilities are located in Virginia and North Carolina.

Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subject to the risk of losses arising from explosions and fires.

Additionally, our domestic operations have been negatively affected by COVID-19 and experienced some COVID-related employee absences.

It has become increasingly difficult to recruit skilled labor into our domestic upholstery plants and training and turnover costs have increased.

We activated business continuity plans in early calendar 2020 and many administrative employees have been telecommuting given recommendations for social distancing.

We also instituted increased cleaning regimens and have instituted social distancing and masking protocols for office, manufacturing and warehousing associates.

Additionally, our domestic operations have been negatively affected by COVID-19 and we experienced some COVID-related employee absences.

During the initial height of the COVID-19 crisis in early calendar 2020, we activated business continuity plans and many administrative employees telecommuted given recommendations for social distancing and most of our domestic manufacturing facilities temporarily closed or operated at reduced levels.

We also instituted increased cleaning regimens and social distancing and masking protocols for office, manufacturing and warehousing associates.

As COVID-infection rates have decreased, more administrative employees have returned to our offices and social distancing and masking protocols have adjusted to current public health guidelines.

Any disruption affecting our domestic facilities, for even a relatively short period of time, could adversely affect our ability to ship our furniture products and disrupt our business, which could adversely affect our sales, earnings, financial condition and liquidity.

Labor shortages could disrupt operations at our domestic warehousing and manufacturing facilities

Demand for home furnishings rose after the COVID-19 pandemic and lead to higher-than-normal order rates and historic levels of order backlogs.

We hired an increased number of employees in all three segments during fiscal 2022 in response to business growth.

It has become increasingly difficult to recruit skilled labor into our domestic upholstery plants and training and turnover costs have increased.

In fiscal 2022, lack of qualified workers and high turnover in a variety of positions caused increased training costs, adversely affected our production schedules and the ability to ship our furniture products, which adversely affected our sales, earnings and liquidity.

Should these issues persist or increase due to the COVID-19 pandemic or similar pandemics in the future, our sales, earnings, financial condition and liquidity could again be adversely affected.

Fluctuations in the price, availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase our costs.

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Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers.

For example, our domestic upholstery segment is currently facing foam allocations of between 60-75% of requested amounts.

We may not always be able to pass price increases in raw materials through to our customers due to competition and other market pressures.

For example, our domestic upholstery segment experienced foam allocations of between 60-75% of requested amounts in early fiscal 2022 which negatively impacted production efficiencies for several months.

Later we experienced raw material cost inflation for nearly all of our raw materials and higher freight surcharges to bring in these materials.

We may not always be able to pass price increases on raw materials through to our customers due to competition and other market pressures.

In addition, the price increases are frequently implemented on future orders instead of existing order backlogs.

Considering our lead times of five to six months, the benefits of new pricing could be offset by continued price increases from our suppliers that could impact us before we realize the benefit from our price increases.

The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings, financial condition and liquidity.

In 2021, Russia was the third largest source of US hardwood plywood imports.

Due to the current Ukraine-Russia conflict, the U.S.

House of Representatives voted to raise tariffs on some Russian imports, which could impose tariffs of 40% to 50% on Russian Birch.

Currently, 50% - 60% of the plywood used at our Shenandoah (SFI) division is Russian birch.

Based on current rates of sale, we believe we have an adequate supply to support SFI manufacturing operations through mid-to-late summer 2022.

SFI has begun the process of switching from the Russian Birch to another plywood species and are currently working with suppliers and testing those products.

If we are unable to find a suitable replacement for Russian Birch before we exhaust our supply, our sales, earnings and liquidity could be adversely affected.

If demand for our domestically manufactured upholstered furniture declines, we may respond by realigning manufacturing.

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One customer accounted for approximately 8% of our consolidated sales in fiscal 2022, our top five customers accounted for about 26% of our fiscal 2022 consolidated sales.

Approximately half of our consolidated accounts receivable is concentrated in our top five customers.

Approximately 25% of our consolidated accounts receivable is concentrated in our top five customers.

Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity.

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Sales and earnings in the Clubs channel of our Home Meridian segment are subject to higher volatility than other distribution channels subject to our success or failure in developing suitable products at acceptable prices for this channel.

Given the relatively liberal return policies in this channel, we are subject to higher-than-normal customer chargebacks.

The Clubs channel has proven to be a particularly difficult channel in which to do business.

We have taken steps to minimize our exposure in this channel however, given the relatively liberal return policies in this channel, we are subject to higher-than-normal customer chargebacks.

While we accrue estimated amounts for chargebacks based on sales and chargeback history, those accruals may not be adequate and given the relative size of customers in this channel, we may not be successful in negotiating resolutions to these extra costs.

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The implementation of our Enterprise Resource Planning system could disrupt our business.

We are in the beginning phases of implementing a common Enterprise Resource Planning (ERP) system across all divisions.

We are in the process of implementing a common Enterprise Resource Planning (ERP) system across all divisions and expect to go-live with this system in our Hooker Branded segment in the second half of our 2023 fiscal year, with other segments and divisions following thereafter.

Although we currently expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout all divisions and standardizing processes and reporting, our ERP system implementation may not result in improvements that outweigh its costs and may disrupt our operations.

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These activities could disrupt our business, divert management attention from our current business, pose integration concerns, dilute our earnings per share, decrease the value of our common stock and decrease our earnings and liquidity.

We have publicly stated our goal of reaching $1 billion in sales by our 100 th anniversary in 2024.

Achieving that goal is highly dependent upon finding attractive targets and there can be no assurance those targets will be found.

Our growth strategy includes growth by acquisition, which is highly dependent upon finding attractive targets and there can be no assurance those targets will be found.

We may acquire or invest in businesses such as those that offer complementary products or that we believe offer competitive advantages.

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New business initiatives may fail outright or fail to produce an adequate return, which could adversely affect our earnings, financial condition and liquidity.

We may fail to realize all of the anticipated benefits of the Sunset West acquisition.

We incurred significant acquisition and acquisition-related costs in fiscal 2022 in connection with the Sunset West acquisition and expect to incur additional integration-related costs in fiscal 2023, but we may fail to realize all the anticipated benefits of the acquisition or they may take longer to realize than expected.

While we believe the Sunset West acquisition will be accretive to our earnings per share beginning in fiscal 2023, this expectation is based on preliminary estimates which may materially change.

Although we do not expect to merge operations or change customer-facing services, the success of this acquisition will depend, in part, on our ability to improve each business by sharing best practices in order to lower costs, improve efficiencies and grow sales.

We have based our expectations in part on the historical results and trends in Sunset West’s business;

however there can be no assurance regarding when or the extent to which we will be able to realize these benefits.

Achieving the anticipated benefits is subject to a number of uncertainties, including whether the business acquired can be operated in the manner we intend.

Events outside of our control could also adversely affect our ability to realize the anticipated benefits from the acquisition.

Thus, the integration of Sunset West’s business may be unpredictable, subject to delays or changed circumstances, and we can give no assurance that the acquired business will perform in accordance with our expectations, or that our expectations with respect to integration or benefits as a result of the contemplated acquisition will materialize.

The integration process could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies.

If the integration is not completed as planned, our ongoing business and financial results may be adversely affected, which could adversely affect our sales, earnings, financial condition and liquidity.

We may experience impairment of our long-lived assets, which would decrease our earnings and net worth.

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Our goodwill, some trademarks and tradenames have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired.

COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on the market valuations, discount rates and other inputs used in our intangibles valuation analysis.

As an example, COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on the market valuations, discount rates and other inputs used in our intangibles valuation analysis.

We determined that an immediate intangible asset valuation was necessary given our performance and changing market dynamics.

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A write-down of our assets would, in turn, reduce our earnings and net worth.

See Notes 8 and 9 for additional information.

See Notes 7 and 8 to our Consolidated Financial Statements for additional information.

We may lose market share due to furniture retailers by-passing us and sourcing directly from non-U.S.

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Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.

Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions and changes in consumer order patterns.

From time to time, we have experienced, and may continue to experience, volatility with respect to demand for our home furnishing products.

Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions, availability of raw materials and finished inventory and changes in consumer order patterns.

From time to time, we have experienced, and may continue to experience, volatility with respect to availability of and demand for our home furnishing products.

Accordingly, our results of operations for any quarter are not necessarily indicative of the results of operations to be expected for a full year.

Other general risk factors applicable to us and our business

We may not be able to maintain, raise prices, or raise prices in a timely manner in response to inflation and increasing costs.

Competitive and market forces could prohibit future successful price increases for our products in order to offset increased costs of labor, finished goods, raw materials, freight and other product-related costs, which could adversely affect our sales, earnings, financial condition and liquidity.

The interruption, inadequacy or security failure of our information systems or information technology infrastructure or the internet or inadequate levels of cyber-insurance could adversely impact our business, sales, earnings, financial condition and liquidity.

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Economic downturns could result in decreased sales, earnings and liquidity.

The furniture industry is particularly sensitive to cyclical variations in the general economy and to uncertainty regarding future economic prospects, including the current and evolving negative economic effects of the COVID-19 pandemic.

The furniture industry is particularly sensitive to cyclical variations in the general economy and to uncertainty regarding future economic prospects, including those caused by pandemics such as COVID-19.

Home furnishings are generally considered a postponable purchase by most consumers.

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We have seen negative effects on all of these measures due to the COVID-19 pandemic.

A recovery in our sales could lag significantly behind a general recovery in the economy after an economic downturn, due to, among other things, the postponable nature and relatively significant cost of home furnishings purchases.

These events could also impact retailers, who are our primary customers, possibly adversely affecting our sales, earnings, financial condition and liquidity.

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A claim that is brought against us, successful or unsuccessful, that is uninsured or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings, financial condition and liquidity.

We may not be able to maintain or raise prices in response to inflation and increasing costs.

Competitive and market forces could prohibit future successful price increases for our products in order to offset increased costs of finished goods, raw materials, freight and other product-related costs, which could adversely affect our sales, earnings, financial condition and liquidity.

UNRESOLVED STAFF COMMENTS

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

What changed 10-K

Item 1A. Risk Factors