HOOKER FURNISHINGS Corp 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of January 30, 2022, we had approximately 9,600 beneficial shareholders. As we have done in the past, we currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors. Performance Graph (1) The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index (2), and a published industry index, the Household Furniture Index (3), for the period from January 29, 2017 to January 30, 2022. Comparison of Cumulative Total Return Hooker Furnishings Corporation (1) The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends. (2) The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization and includes the Company. (3) Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under Standard Industrial Classification (SIC) Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada. At January 30, 2022, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Nova Lifestyle, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furnishings Corporation, Sleep Number Corp., Kimball International, Inc., Luvu Brands, Inc., Tempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Casper Sleep Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., Horrison Resources, Inc., The Rowe Companies, Dorel Industries, and Instadose Pharma Corp. 23 Table of Contents ITEM 6. SELECTED FINANCIAL DATA SEC disclosure rules no longer require the presentation of selected financial data; however, based on shareholder and internal feedback we continue to provide this information. The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations. Fiscal Year Ended (1) January 30, January 31, February 2, February 3, January 28, 2022 2021 2020 2019 2018 (In thousands, except per share data) Income Statement Data: Net sales $ 593,612 $ 540,081 $ 610,824 $ 683,501 $ 620,632 Cost of sales 491,910 427,333 496,866 536,014 485,815 Casualty loss (2) - - - 500 - Gross profit 101,702 112,748 113,958 146,987 134,817 Selling and administrative expenses (3) 84,475 80,410 88,867 91,928 87,279 Goodwill impairment (4) - 39,568 - - - Trade names impairment (4) - 4,750 - - - Intangible asset amortization (4) 2,384 2,384 2,384 2,384 2,084 Operating income / (loss)(3) 14,843 (14,364 ) 22,707 52,675 45,454 Other income, net (3) 373 336 458 369 1,566 Interest Expense, net 110 540 1,238 1,454 1,248 Income / (loss) before income taxes 15,106 (14,568 ) 21,927 51,590 45,772 Income tax expense / (benefit) 3,388 (4,142 ) 4,844 11,717 17,522 Net income / (loss) 11,718 (10,426 ) 17,083 39,873 28,250 Per Share Data: Basic earnings/(loss) per share $ 0.99 $ (0.88 ) $ 1.44 $ 3.38 $ 2.42 Diluted earnings/(loss) per share 0.97 (0.88 ) 1.44 3.38 2.42 Cash dividends per share 0.74 0.66 0.61 0.57 0.50 Net book value per share (5) 22.01 21.76 23.25 22.37 19.53 Weighted average shares outstanding (basic) 11,852 11,822 11,784 11,759 11,633 Balance Sheet Data: Cash and cash equivalents $ 69,366 $ 65,841 $ 36,031 $ 11,435 $ 30,915 Trade accounts receivable 73,727 83,290 87,653 112,557 92,803 Inventories 75,023 70,159 92,813 105,204 84,459 Working capital 170,777 169,612 171,838 170,516 153,162 Total assets 374,559 352,273 393,708 369,716 350,058 Long-term debt (including current maturities) (6) - - 30,138 35,508 53,425 Shareholders' equity 261,128 257,503 274,121 263,176 229,460 (1) Our fiscal years end on the Sunday closest to January 31. The fiscal years presented above all had 52 weeks, except for the prior fiscal year ended February 3, 2019, which had 53 weeks. (2) Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019. (3) Amounts for fiscal 2018 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000). 24 Table of Contents (4) Represents impairment charges and amortization expense on acquisition-related intangibles. See Note 8 to our Consolidated Financial Statements for additional information on our intangible assets. (5) Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period. (6) Long-term debt (including current maturities) consisted of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions. We paid off the term loans in January 2021. ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As you read Management’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with: ■ All of our recent public filings made with the Securities and Exchange Commission (“SEC”) which are available, without charge, at www.sec.gov and at http://investors.hookerfurnishings.com; ■ The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K; ■ The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and ■ Our commitments and contractual obligations and off-balance sheet arrangements described in Note 17 to our Consolidated Financial Statements on page F-30 of this report. This note describes commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements. In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2022 compared to fiscal 2021. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2021 compared to fiscal 2020 results are in our 2021 Form-10K available through Hooker Furnishings and SEC websites. Unless otherwise indicated, references to the “Company”, "we," "our" or "us" refer to Hooker Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery segment including Bradington-Young, Sam Moore and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands. Furniture sales account for all of our net sales. For financial reporting purposes, we are organized into three reportable segments- Hooker Branded, Home Meridian and Domestic Upholstery, with our other businesses included in All Other. We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2020, we updated our reportable segments as follows: Domestic upholstery producers Bradington-Young, Sam Moore and Shenandoah Furniture were moved from All Other and aggregated into a new reportable segment called “Domestic Upholstery.” All Other now consists of H Contract and Lifestyle Brands. Lifestyle Brands is a business in its start-up phase targeted at the interior designer channel. The Hooker Branded and Home Meridian segments were unchanged. See Note 16 to our consolidated financial statements for additional financial information regarding our segments. 25 Table of Contents 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, contract and outdoor 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. Executive Summary- Fiscal 2022 Results of Operations Consolidated net sales increased by $53.5 million, or 9.9%, compared to the prior year period, due to over 20% increases in sales in both Hooker Branded and Domestic Upholstery segments, partially offset by a 1.2% sales decrease in the Home Meridian segment. Despite the sales increases and slight sales decrease in the Home Meridian segment, consolidated gross profit and margin both decreased due to excess freight costs and product cost inflation in the Home Meridian segment and, to a lesser extent, in the Hooker Branded segment, as well as ready-to-assemble (“RTA”) product cancellation costs in the Home Meridian segment incurred as we exited that product category. Consolidated operating income was $14.8 million compared to a $14.4 million operating loss in the prior year period. The prior year loss was driven by $44.3 million ($33.7 million net of tax) non-cash intangible assets impairment charge. Consolidated net income was $11.7 million or $0.97 per diluted share, as compared to net loss of $10.4 million or ($0.88) per diluted share in the prior year period. Our fiscal 2022 performance is discussed in greater detail below under “Review” and “Results of Operations”. Review We started fiscal 2022 with strong order backlogs carried over from the prior year end and reported significantly increased sales and profits in the first two quarters. Although we were pleased that favorable demand for home furnishings continued through the year, ongoing global supply chain disruptions, the COVID lockdowns in Vietnam and Malaysia and the slower than expected re-openings of our suppliers in those two countries, coupled with freight and product inflationary pressures adversely affected our sales and profitability. We reported a 9.9% consolidated net sales increase and $14.8 million in operating income and finished fiscal 2022 with a consolidated order backlog 25% higher over the level at the end of our fiscal 2021 year-end. The Hooker Branded segment ’ s net sales increased by $38.3 million, or 23.5%, as compared to the prior fiscal year, which was attributable to increased sales volume and lower discounting driven by higher demand. About 80% of the net sales increases were in our casegoods non-container business as we were better able to manage our inventory availability and keep our best-selling products in stock during the first half of fiscal 2022. However, the unexpected COVID-related lockdown at our suppliers in Vietnam and Malaysia for nearly three months, beginning in August and their slow re-openings coupled with continued difficulty obtaining shipping containers and vessel space caused low inventory receipts in the second half of this year which resulted in out-of-stock issues and decreased net sales in the fourth quarter. On a more positive note, the majority of shipments in this segment carried the price increases we implemented in July 2021 to mitigate higher ocean freight and product cost inflation. Hooker Branded reported $30.7 million operating income or 15.3% operating margin, an increase of $7.8 million or 34.3% as compared to the prior year. Given the current economic conditions, we are pleased to have maintained Hooker Branded segment profitability. Incoming orders increased by 24.2% as compared to prior year period when business dramatically rebounded. Backlog remained historically high and nearly doubled as compared to the prior year end when backlog was already at a high level, with part of that increase being due to lower shipments in the fourth quarter. The Home Meridian segment had a difficult year with net sales decreasing by $3.5 million, or 1.2%, as compared to the prior year. This segment also reported a $21.3 million operating loss. Despite the disappointing financial results, we believe the challenges are short-term and the strategic decisions made by management will provide us with opportunities to significantly improve profitability in the coming year. ● Net sales decreased due to sales declines with e-commerce and Clubs channels, and the hospitality business, nearly offset by sales increases with mass merchants and major furniture chains driven by higher demand. E-commerce sales decreased by 30% due to lower demand (which was driven by higher product costs due to excess freight costs) and inventory availability issues. Clubs sales decreased due to lower volume (which was intentional as we began exiting this channel in fiscal 2022) and $2.9 million of higher than expected chargebacks which negatively impacted net sales. Hospitality sales also decreased during the year as capital spending in the hospitality industry is still recovering from the COVID crisis. On a more positive note, hospitality order backlog at fiscal 2022 year-end was higher than prior year end. In the summer of 2021, the temporary COVID lockdowns at our suppliers in Vietnam and Malaysia immediately impacted shipments and sales as the majority of revenue in this segment is container direct sales. The sales volume loss during the second half of this year largely offset the sales increases in the first and second quarters. 26 Table of Contents ● Higher freight costs adversely impacted gross margin by 530 bps in fiscal 2022 and were the primary driver of increased product costs. Home Meridian’s Accentrics Home division, was impacted the most by higher freight costs due to the lower sales value of its product. 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 improve future profitability, eliminate low-margin categories and avoid unnecessary costs, we took steps to optimize our product, sales channel and customer mix at Home Meridian. o Current freight costs made our RTA furniture products unprofitable. Consequently, we exited the RTA furniture category and incurred one-time order cancellation costs of $2.6 million. We estimate we avoided at least $10 million of additional costs by exiting this category. o Due to continued poor profitability and excess chargebacks of $2.9 million, we made the decision to exit the Clubs channel and incurred one-time order cancellation costs of $900,000. ● Although these actions adversely affected our sales and earnings and helped drive an operating loss at Home Meridian, we believe these actions allow us to focus resources on more profitable business and stable channels to drive long-term growth. We are also in the process of redefining our e-commerce business’ price points. The Domestic Upholstery segment net sales increased by $18.6 million, or 22.2%, in fiscal 2022 due to double-digit sales increases at all three divisions as well as the absence of factory shutdowns in the current year. However, gross margin decreased as compared to the prior year and pre-pandemic levels as this segment faced several manufacturing constraints which adversely impacted profitability. Raw material cost increases and higher freight surcharges increased product costs by 360 bps. The foam shortage we experienced early in fiscal 2022 and inconsistent deliveries of raw materials due to supply chain disruptions with our suppliers adversely impacted our production levels. Labor shortages and inefficiencies at the Sam Moore division also impacted manufacturing capacities and resulted in higher over-time at already inflated wage rates. We filled key positions at Sam Moore to improve labor productivity and reevaluated pay and benefits in order to attract and retain qualified employees. In addition, domestic driver and truck shortages adversely impacted the delivery of finished products. Despite increased material and labor costs, this segment reported operating income of $4.3 million, or a 4.2% operating margin as compared to a $12.4 million operating loss in the prior year, which was attributable to $16.4 million non-cash intangible assets impairment charge. Incoming orders increased by 38% and this segment finished the year with an order backlog 122% higher than prior year, when backlog levels were already at a historical high. We implemented price increases and surcharges in July and October of 2021 to mitigate increased material costs. Since this segment has current order backlog levels of 5-6 months from when the sale was made 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. However, these benefits could be offset by continuing price increases from our suppliers that impact us sooner than our price increases. All Other net sales increased by $197,000 or 1.7% as compared to the prior fiscal year, due principally to sales increase at Lifestyle Brands, a business started in fiscal 2019 targeted at the interior design channel. Although this business is still small, its net sales increased nearly 80% as compared to the prior fiscal year. H Contract’s net sales stayed essentially flat as compared to the prior year. 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, according to an industry survey, with new treatments and increased vaccination rates, especially among the senior population, occupancy level increased in the last two quarters of 2021 despite the later waves caused by delta and omicron variants. H Contract’s incoming orders increased by 27% in fiscal 2022 and turned into 44% increased net sales in the fourth quarter, which offset the sales decreases in the first three quarters. H Contract finished the year with backlog 126% higher than prior year end. H Contract’s gross profit and margin decreased due to an unfavorable product mix and much of the product sold did not carry the full price increases. All Other reported $1.1 million operating income or 9.6% operating margin for fiscal 2022. 27 Table of Contents Cash and cash equivalents stood at $69.4 million at fiscal 2022 year-end, an increase of $3.5 million compared to the balance at the fiscal 2021 year-end due primarily to collection of accounts receivable. During fiscal 2022, we used a portion of the $19.2 million generated from operations and $372,000 in life insurance proceeds to pay $8.8 million in cash dividends to our shareholders, $6.7 million in capital expenditures in our newly opened Georgia distribution center and enhancements of other facilities and systems. In the third quarter of fiscal 2022, our Board of Directors approved the increase of our quarterly dividend to $0.20 per share, an increase of 11.1% or $0.02 per share. In fiscal 2022, dividends totaled $0.74 per share or $8.8 million in the aggregate paid, an increase of 12.1% or $0.08 per share, compared to the prior year representing the sixth consecutive annual dividend increase. In addition to our cash balance, we have an aggregate of $27.9 million available under our $35 million revolving credit facility with BofA (the “Existing Revolver”) to fund working capital needs and have access to $26.5 million in cash surrender value of Company-owned life insurance policies. 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. Results of Operations The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income: Fifty-two weeks ended January 30, January 31, February 2, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 82.9 79.1 81.3 Gross profit 17.1 20.9 18.7 Selling and administrative expenses 14.2 14.9 14.5 Goodwill impairment charges - 7.3 - Trade name impairment charges - 0.9 - Intangible asset amortization 0.4 0.4 0.4 Operating income/(loss) 2.5 (2.7 ) 3.7 Other income (expense), net 0.1 0.1 0.1 Interest expense, net - 0.1 0.2 Income/(loss) before income taxes 2.6 (2.7 ) 3.6 Income tax expense/(benefit) 0.6 (0.8 ) 0.8 Net income/(loss) 2.0 (1.9 ) 2.8 Fiscal 2022 Compared to Fiscal 2021 Net Sales Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 200,692 33.8 % $ 162,442 30.1 % $ 38,250 23.5 % Home Meridian 278,902 47.0 % 282,423 52.3 % (3,521 ) -1.2 % Domestic Upholstery 102,283 17.2 % 83,678 15.5 % 18,605 22.2 % All Other 11,735 2.0 % 11,538 2.1 % 197 1.7 % Consolidated $ 593,612 100 % $ 540,081 100 % $ 53,531 9.9 % 28 Table of Contents Unit Volume and Average Selling Price ( “ ASP ” ) Unit Volume FY22 % Increase / (Decrease) vs. FY21 Average Selling Price FY22 % Increase / (Decrease) vs. FY21 Hooker Branded 6.0 % Hooker Branded 16.1 % Home Meridian -8.9 % Home Meridian 1.4 % Domestic Upholstery 9.6 % Domestic Upholstery 10.8 % All Other -7.0 % All Other 6.8 % Consolidated -5.7 % Consolidated 12.2 % Consolidated net sales increased due to sales increases at Hooker Branded and Domestic Upholstery segments, partially offset by a small sales decrease at Home Meridian segment. ■ Hooker Branded segment’s net sales increased significantly in fiscal 2022 driven by increased demand. ASP increased in response to higher freight costs and product cost inflation. However, Hooker Branded net sales decreased in the fourth quarter of fiscal 2022 due to inventory unavailability issues. The temporary factory shutdown in Vietnam and Malaysia during the summer resulted in low inventory receipts in the third and fourth quarters of fiscal 2022. ■ The Home Meridian segment’s net sales decreased by 1.2% as compared to the prior year period due to decreased unit volume as the result of COVID-19 lockdown in Vietnam and Malaysia, which led to lower shipments. The majority of Home Meridian’s business are container direct customers, which were immediately impacted by factory delays. Net sales and ASP decreased within the e-commence , hospitality and Clubs channels, partially offset by ASP increases with major furniture chains and retail stores as the result of strong demand. ■ Domestic Upholstery net sales increased in fiscal 2022 as all three divisions of this segment reported double digit net sales increases due to high demand and reduced prior-year sales due to temporary COVID-19 factory shutdowns. ASP increased at all three divisions in response to the inflation of raw material costs. Unit volume increased by double digits at Bradington-Young and Shenandoah, while increasing by lower single digits at Sam Moore due to labor inefficiencies. ■ All Other net sales increased slightly in fiscal 2022 due to sales increases in the Lifestyle Brands business. H Contract’s net sales were essentially flat as compared to prior year period even though sales rebounded in the fourth quarter when the orders started to improve. Gross Profit and Margin Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 63,146 31.5 % $ 51,832 31.9 % $ 11,314 21.8 % Home Meridian 15,213 5.5 % 39,832 14.1 % (24,619 ) -61.8 % Domestic Upholstery 19,471 19.0 % 17,121 20.5 % 2,350 13.7 % All Other 3,872 33.0 % 3,963 34.4 % (91 ) -2.3 % Consolidated $ 101,702 17.1 % $ 112,748 20.9 % $ (11,046 ) -9.8 % 29 Table of Contents Consolidated gross profit and margin both decreased as compared to the prior fiscal year due principally to significantly decreased gross profit and margin in the Home Meridian segment. ■ Hooker Branded segment gross profit increased while margin decreased slightly in fiscal 2022. Favorable sales variances were partially offset by product cost inflation, increased warehouse labor costs due to increased shipments, and higher demurrage and drayage expenses due to supply chain interruptions. In the third quarter of fiscal 2022, product sold started to carry the price increases we implemented in the second quarter of fiscal 2022, which helped offset excess ocean freight costs. ■ Home Meridian segment gross profit and margin decreased significantly in fiscal 2022 due to excess ocean freight costs, which impacted margin by 530 bps, as well as sales volume declines, increased product costs due to inflation, order cancellation costs related to the exit of the RTA furniture category, Clubs channel order cancellation costs, and excess moving costs and disposal of obsolete inventory related to the consolidation of segment warehouse operations to our new Georgia warehouse. ■ Domestic Upholstery segment gross profit increased in fiscal 2022 driven by increased net sales. Gross margin decreased in fiscal 2022 due primarily to increased raw material costs (including increased freight costs), which negatively impacted margin by 360 bps, partially offset by improved production efficiencies from operating near full capacity due to historic levels of backlog, as compared to the prior year when factories were temporarily closed or operating at a reduced production level during the initial wave of COVID-19 crisis, which resulted in unabsorbed fixed costs. ■ All Other gross profit and margin both decreased despite increased net sales because of higher costs due to inflation, partially offset by price increases on these products and increased Lifestyle Brands gross profit. Selling and Administrative Expenses (S&A) Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 32,479 16.2 % $ 29,005 17.9 % $ 3,474 12.0 % Home Meridian 35,139 12.6 % 36,632 13.0 % (1,493 ) -4.1 % Domestic Upholstery 14,117 13.8 % 12,108 14.5 % 2,009 16.6 % All Other 2,740 23.4 % 2,665 23.1 % 75 2.8 % Consolidated $ 84,475 14.2 % $ 80,410 14.9 % $ 4,065 5.1 % Consolidated selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales in fiscal 2022. ■ Hooker Branded segment S&A expenses increased in absolute terms in fiscal 2022 driven by increased selling costs as the result of higher net sales, increased salaries and wages due primarily to inflation, increased professional service expenses related to the recent Sunset West acquisition, increased ERP project expenses, and increased showroom, samples, travel and other general spendings as business returned to more normal levels. These increases were partially offset by reversal of executives’ bonus accrual on lower profits and 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 fiscal 2022 due to increased net sales. ■ Home Meridian segment S&A expenses decreased in absolute terms and as a percentage of net sales due to decreased selling expenses on lower net sales, absence of employee bonuses due to failure to achieve profitability goals, decreased compliance costs and the absence of a customer write-off in the current year period, partially offset by increased severance expenses due to personnel changes, increased depreciation expenses and increased marketing, showroom, travel and other expenses as business returned to more normal levels. ■ Domestic Upholstery segment S&A expenses increased in absolute terms in fiscal 2022 due to increased salaries and wages because of the absence of employee furloughs when factories were temporarily shut down in the prior year period (and to a lesser extent inflationary pressures), increased selling expenses on higher net sales, and increased depreciation expenses due to the accelerated depreciation of our existing ERP system because of the expected implementation of an upgraded cloud-based ERP solution in fiscal 2023. S&A decreased as a percentage of net sales due to increased net sales. ■ All Other S&A expenses increased slightly in absolute terms and as a percentage of net sales in fiscal 2022 due to increased selling and market expenses, partially offset by decreased advertising supply expenses. 30 Table of Contents Goodwill impairment charges Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Segment Net Sales % Segment Net Sales Home Meridian $ - $ 23,187 8.2 % $ (23,187 ) Domestic Upholstery - 16,381 19.6 % (16,381 ) Consolidated $ - $ 39,568 7.3 % (39,568 ) Trade name impairment charges Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Segment Net Sales % Segment Net Sales Home Meridian $ - $ 4,750 1.7 % $ (4,750 ) Consolidated $ - $ 4,750 0.9 % (4,750 ) In fiscal 2021, we recorded $23.2 million and $16.4 million in non-cash impairment charges to write down goodwill in the Home Meridian segment and the Shenandoah division of the Domestic Upholstery segment, respectively. We also recorded $4.8 million in non-cash impairment charges to write down tradenames in the Home Meridian segment. See Note 8 to our Consolidated Financial Statements for additional details on these impairment charges. Intangible Asset Amortization Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Net Sales % Net Sales Intangible asset amortization $ 2,384 0.4 % $ 2,384 0.4 % $ - 0.0 % Intangible asset amortization expense was unchanged compared to the prior year period. See Note 8 Intangible Assets and Goodwill to our Consolidated Financial Statements for additional information about our amortizable intangible assets. Operating Profit/(Loss) and Margin Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change %Segment Net Sales %Segment Net Sales Hooker Branded $ 30,667 15.3 % $ 22,827 14.1 % $ 7,840 34.3 % Home Meridian (21,260 ) -7.6 % (26,071 ) -9.2 % 4,811 18.5 % Domestic Upholstery 4,304 4.2 % (12,418 ) -14.8 % 16,722 134.7 % All Other 1,132 9.6 % 1,298 11.3 % (166 ) -12.8 % Consolidated $ 14,843 2.5 % $ (14,364 ) -2.7 % $ 29,207 203.3 % Consolidated operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2022 compared to the same prior-year period due to the factors discussed above. 31 Table of Contents Interest Expense, net Fifty-two Weeks Ended January 30, 2022 January 31, 2021 $ Change % Change % Net Sales % Net Sales Interest expense, net $ 110 0.0 % $ 540 0.1 % $ (430 ) -79.6 % Consolidated interest expense decreased in fiscal 2022 due to the payoff of our term loans in fiscal 2021 fourth quarter. Income Taxes Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change % Net Sales % Net Sales Consolidated income tax expense/(benefit) $ 3,388 0.6 % $ (4,142 ) -0.8 % $ 7,530 181.8 % Effective Tax Rate 22.4 % 28.4 % We recorded income tax expense of $3.4 million for fiscal 2022, as compared to income tax benefit of $4.1 million for fiscal 2021, of which an income tax benefit of $10.6 million was recorded related to goodwill and trade name impairment charges. The effective tax rates for fiscal 2022 and 2021 were 22.4% and 28.4%, respectively. Our effective tax rate was lower in fiscal 2022 due to change in cash surrender value and the absence of employee retention credit in the current year, which increased the effective tax rate in the prior fiscal year due to a loss before income tax benefits. See Note 15 Income Taxes to our Consolidated Financial Statements for additional information about our income taxes. Net Income/(Loss) and Earnings/(Loss) Per Share Fifty-two weeks ended January 30, 2022 January 31, 2021 $ Change % Change Net Income/(Loss) % Net Sales % Net Sales Consolidated $ 11,718 2.0 % $ (10,426 ) -1.9 % $ 22,144 212.4 % Diluted earnings/(loss) per share $ 0.97 $ (0.88 ) The analysis and discussion of fiscal 2021 compared to fiscal 2020 results is available in Item 7 of our 2021 Annual Report on Form-10K available through Hooker Furnishings and SEC websites. 32 Table of Contents Financial Condition, Liquidity and Capital Resources Summary Cash Flow Information – Operating, Investing and Financing Activities Fifty-Two Weeks Ended January 30, January 31, February 2, 2022 2021 2020 Net cash provided by operating activities $ 19,209 $ 68,263 $ 41,429 Net cash used in investing activities (6,862 ) (476 ) (4,254 ) Net cash used in financing activities (8,822 ) (37,977 ) (12,579 ) Net increase in cash and cash equivalents $ 3,525 $ 29,810 $ 24,596 During fiscal 2022, we used a portion of the $19.2 million generated from operations and $372,000 in life insurance proceeds to pay $8.8 million in cash dividends, $6.7 million in capital expenditures to enhance our systems and facilities and $560,000 for insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees and to facilitate business continuity. During fiscal 2021, we used existing cash, a portion of the $68.3 million generated from operations and $1.3 million in life insurance proceeds to retire our $30.1 million in outstanding term loans related to the Home Meridian acquisition, pay $7.8 million in cash dividends, $1.2 million in capital expenditures to enhance our systems and facilities and to pay $555,000 for insurance premiums on Company-owned life insurance policies. During fiscal 2020, we used some of the $41.4 million generated from operations and $1.4 million proceeds received from a note receivable to pay $7.2 million cash dividends, $6.4 million principal payments and interest towards our term loans, $5.1 million in capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities and $590,000 for insurance premiums on Company-owned life insurance policies. Liquidity, Financial Resources and Capital Expenditures Our sources of liquidity are: ■ 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. The most significant components of our working capital are inventory, accounts receivable and cash and cash equivalents reduced by accounts payable and accrued expenses. Our primary cash needs are for imported finished goods and raw materials for our domestic upholstery operations and lease payments on our distribution centers, administrative facilities and showrooms. Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for inventory, lease payments and labor), quarterly dividend payments and capital expenditures related primarily to our ERP project, showroom renovations and upgrading systems, buildings and equipment. The timing of our working capital needs can vary greatly depending on demand for and availability of raw materials and imported finished goods but is generally the greatest in the mid-summer as a result of inventory build-up for the traditional fall selling season. Long-term cash requirements relate primarily to funding lease payments. We generally fund short-term and long-term cash requirements with cash from operating activities. We believe our primary sources of liquidity will satisfy our cash requirements over both the short-term (the next twelve months) and long-term. 33 Table of Contents Loan Agreements and Revolving Credit Facility We paid off the term loans which were related to the Home Meridian acquisition at the end of fiscal 2021 and currently have the Existing Revolver. The Existing Revolver 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 Existing Revolver 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 Existing Revolver 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 Second Amended and Restated Loan Agreement 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. They also limit our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. They do not restrict our ability to pay cash dividends on, or repurchase shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the agreements. We were in compliance with each of these financial covenants at January 30, 2022 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have financial resources to weather the expected short-term impacts of COVID-19; however, an extended impact may materially and adversely affect our sales, earnings and liquidity. Revolving Credit Facility Availability As of January 30, 2022, we had an aggregate $27.9 million available under 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 January 30, 2022. There were no additional borrowings outstanding under the Existing Revolver as of January 30, 2022. 34 Table of Contents Capital Expenditures We expect to spend approximately $8 million in capital expenditures in fiscal 2023 to maintain and enhance our operating systems and facilities. Of those amounts, we expect to spend approximately: ● $3.5 million on showroom renovations for both the legacy Hooker divisions and the Home Meridian segment. The showroom for the Hooker legacy will be moved to a location to maximize interior design traffic and to showcase Sunset West products in an outdoor setting. The Home Meridian renovation will support new initiatives including the new ‘Portfolio’ sales program aimed at retailers who prefer to buy from our warehouse rather than container direct; and ● $3.5 million on implementation costs for a new common, cloud-based Enterprise Resource Planning platform which we expect to be online in our legacy Hooker divisions in the second half of our 2023 fiscal-year, with other segments following thereafter. Enterprise Resource Planning During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts began shortly thereafter. We expect to implement the ERP upgrade in our legacy Hooker divisions in the second half of fiscal 2023, with the Home Meridian segment and the Shenandoah division 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. Dividends We declared and paid dividends of $0.74 per share or approximately $8.8 million in fiscal 2022, an increase of 12.1% or $0.08 per share compared to $0.66 per share in fiscal 2021. On March 1, 2022, our Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on March 31, 2022 to shareholders of record at March 17, 2022. Our Board of Directors will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters. COVID-19 As discussed under "Item 1A. Risk Factors," COVID-19 was recognized as a global pandemic by the World Health Organization. We continue to 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 the 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. Testing, treatment and vaccinations for COVID-19 are covered 100% under our medical plan and counseling is available through our employee assistance plan to assist employees with financial, mental and emotional stress related to the virus and other issues. In addition, we are offering temporary paid leave to employees diagnosed with the virus (and those associates with another diagnosed person or persons in their household) and are working to accommodate associates with child-care issues related to school or day-care closures. As vaccination rates have increased and infection rates have stabilized and started to decline, more admin staff are returning to the office for at least partial workweeks. Domestic travel and limited international travel has resumed and we have adjusted social distancing and masking protocols to the current public health guidelines. 35 Table of Contents Outlook We are concerned about ongoing global logistics constraints and economic headwinds affecting the consumer that could impact short-term demand, such as inflation, high gas prices and the war in Ukraine. We expect production capacity of our Asian suppliers to improve significantly, reaching full capacity at some point during the fiscal 2023 first quarter; although we don’t believe the full financial impact of this improvement will be felt until sometime in the fiscal 2023 second quarter. We continue to be encouraged by long-term trends such as demand for housing, the renewed and sustainable focus on home interiors and exteriors, and the Millennial generation entering their prime earning and household formation years. We were also very encouraged by the recently concluded Spring High Point market. Attendance was up significantly compared to both the Fall 2021 and June 2021 markets and new products were very well received with major placements across all brands, including new placements of Home Meridian’s licensed products. While we have worked through a broad spectrum of challenges during the past year, our team has continued to focus on multiple strategic growth initiatives, many of which we expect will positively impact us in the next six to twelve months. One such initiative is the integration of Sunset West, a leading manufacturer of outdoor furniture, which we acquired on the first day of our 2023 fiscal year. The acquisition immediately positioned us in the growing outdoor furniture segment of the industry with one of the most respected brands in the category and gives Sunset West access to our East Coast distribution system, our High Point showroom and retail and interior design customer base. We were very encouraged by the strong reception Sunset West received at its recent High Point market debut. As we integrate Sunset West and move past the current headwinds, we expect faster growth from Sunset West than our existing businesses as it is able to leverage the full capabilities of our organization. We are confident in our team’s ability to execute our strategies to grow profitably and to adapt successfully to unexpected challenges. Critical Accounting Policies and Estimates The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. Specific areas requiring the application of management’s estimates and judgments include, among others, revenue recognition, assumptions pertaining to valuation of goodwill and intangible assets and useful lives of long-lived assets. Accordingly, a different financial presentation could result depending on the judgments, estimates or assumptions that are used. However, we do not believe that actual results will deviate materially from our estimates related to our accounting policies described below but because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results. Revenue Recognition We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container. The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. 36 Table of Contents Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery. Impairment of Long-Lived Assets Tangible and Definite Lived Intangible Assets We regularly review our property, plant and equipment and definite lived intangible assets for indicators of impairment, as specified in the Accounting Standards Codification. When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of operations and consolidated balance sheets. When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less. Intangible Assets and Goodwill The adverse economic effects brought on by the COVID-19 pandemic, including reductions in our sales, earnings and market value, as well as other changing market dynamics, required that we perform a valuation of our intangible assets during the interim period. The calculation methodology for the fair value of our Home Meridian segment and the Shenandoah division of our Domestic Upholstery segment included three approaches: the Discounted Cash Flow Method (DCF) which was given the largest weighting, the Guideline Public Company Method (GPCM) based on the consideration of the facts of the Company’s peer competitors and the Guideline Transaction Method (GTM) based on consideration of transactions with varying risk profiles, geographies and market conditions. The income approach, specifically the relief from royalty method, was used as the valuation methodology for our trade names and trademarks, based on cash flow projections and growth rates for each trade name for five years in the future, and a royalty rate benchmark for companies with similar activities. As a result of our intangible asset valuation analysis, in the first quarter of fiscal 2021, we recorded $44.3 million non-cash impairment charges including $23.2 million to Home Meridian goodwill, $16.4 million to Shenandoah goodwill and $4.8 million to certain of Home Meridian segment’s trade names. Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of our trademarks and tradenames is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. At January 30, 2022, based on our internal valuation, the fair values of our Bradington-Young, Home Meridian, Sam Moore and Shenandoah non-amortizable trademarks and trade names exceeded their carrying values. 37 Table of Contents Upon the adoption of ASU 2017-04, we perform our annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. Based on our internal goodwill impairment analysis as described above, we have concluded that Shenandoah goodwill in the Domestic Upholstery segment is not impaired as of January 30, 2022. The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition. Our other significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to our Consolidated Financial Statements beginning at page F-10 in this report. Concentrations of Sourcing Risk 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, China or Malaysia 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 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.