What changed in this filing

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Item 1. Financial Statements

2022-09-08 compared with 2022-06-09 · 313 added, 206 removed, 505 unchanged (51% of the section changed)

12 unchanged sentences

Deferred taxes

Operating leases right-of-use assets

Operating lease right-of-use assets

Intangible assets, net

2 unchanged sentences

Current liabilities

Current portion of long-term debt

Trade accounts payable

1 unchanged sentence

Customer deposits

Current portion of lease liabilities

Current portion of operating lease liabilities

Other accrued expenses

Total current liabilities

Long term debt

Deferred compensation

Lease liabilities

Operating lease liabilities

Other long-term liabilities

13 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Cost of sales

2 unchanged sentences

Operating income

Other income, net

Other (expense)/income, net

Interest expense, net

9 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Other comprehensive income:

Amortization of actuarial (loss) / gain

Amortization of actuarial loss

Income tax effect on amortization

5 unchanged sentences

(In thousands)

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Operating Activities:

Adjustments to reconcile net income to net cash

(used in) / provided by operating activities:

used in operating activities:

Depreciation and amortization

14 unchanged sentences

Deferred compensation

Net cash (used in)/provided by operating activities

Net cash used in operating activities

Investing Activities:

3 unchanged sentences

Financing Activities:

Proceeds from long-term loans

Proceeds from revolving credit facility

Payments for revolving credit facility

Debt issuance cost

Purchase and retirement of common stock

Cash dividends paid

Cash used in financing activities

Cash provided by/(used in) financing activities

Net decrease in cash and cash equivalents

5 unchanged sentences

Non-cash transactions:

Increase in lease liabilities arising from changes in right-of-use assets

Increase/(Decrease) in lease liabilities arising from changes in right-of-use assets

Increase in property and equipment through accrued purchases

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

3 unchanged sentences

Income (loss)

Balance at January 31, 2021

Balance at May 2, 2021

Net income for the 13 weeks ended August 1, 2021

Unrealized loss on defined benefit plan, net of tax of $ 24

3 unchanged sentences

Performance-based restricted stock units costs

Balance at August 1, 2021

Balance at May 1, 2022

Net income for the 13 weeks ended July 31, 2022

Unrealized loss on defined benefit plan, net of tax of $ 14

Cash dividends paid and accrued ($ 0.20 per share)

Purchase and retirement of common stock

Restricted stock grants, net of forfeitures

Restricted stock compensation cost

Performance-based restricted stock units costs

Balance at July 31, 2022

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)

(In thousands, except per share data)

Comprehensive

Shareholders'

Income (loss)

Balance at January 31, 2021

Net income for the 26 weeks ended August 1, 2021

Unrealized loss on defined benefit plan, net of tax of $ 48

3 unchanged sentences

Performance-based restricted stock units costs

Balance at May 1, 2022

Balance at August 1, 2021

Balance at January 30, 2022

Net income for the 26 weeks ended July 31, 2022

Unrealized loss on defined benefit plan, net of tax of $ 10

Cash dividends paid and accrued ($ 0.40 per share)

Purchase and retirement of common stock

Restricted stock grants, net of forfeitures

Restricted stock compensation cost

Performance-based restricted stock units costs

Balance at July 31, 2022

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2 unchanged sentences

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

For the Thirteen Weeks Ended May 1, 2022

For the Twenty-Six Weeks Ended July 31, 2022

Preparation of Interim Financial Statements

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Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

This report discusses our results of operations for this period compared to the 2022 fiscal year thirteen-week period that began February 1, 2021 and ended May 2, 2021;

and our financial condition as of May 1, 2022 compared to January 30, 2022.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022.

This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began May 3, 2021, and the twenty-six-week period that began February 1, 2021, which both ended August 1, 2021;

and our financial condition as of July 31, 2022 compared to January 30, 2022.

References in these notes to the condensed consolidated financial statements of the Company to:

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The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of May 1, 2022.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of July 31, 2022.

The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revision, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized.

10 unchanged sentences

Prepaid expenses and other current assets

Property and equipment

Intangible assets

3 unchanged sentences

Total purchase price

Property and equipment were recorded at fair value and primarily consist of computer software and hardware and equipment.

Property was recorded at fair value and primarily consists of machinery and equipment.

Property and equipment will be amortized over their estimated useful lives.

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The total weighted average amortization period for these assets is 10.2 years.

We incurred approximately $ 414,000 in Acquisition-related costs in fiscal 2022.

These expenses were included in the “Selling and administrative expenses” line of our fiscal 2022 condensed consolidated statements of operations.

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $ 7.9 million in net sales and $ 861 ,000 of operating income, including $ 282 ,000 in intangible amortization expense.

We incurred Acquisition-related costs of $ 414,000 in fiscal 2022 and $ 63,000 in the first six months of fiscal 2023.

These expenses were included in the “Selling and administrative expenses” line of our fiscal 2022 and fiscal 2023 condensed consolidated statements of operations.

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $ 6.9 million in net sales and $ 150,000 of operating income, including $ 282,000 in intangible amortization expense for the fiscal 2023 second quarter and $ 14.8 million in net sales and $ 1.0 million of operating income, including $ 564,000 in intangible amortization expense for the fiscal 2023 first half.

Accounts Receivable

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Cloud Computing Hosting Arrangement

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 legacy Hooker divisions and Sunset West in the second half of fiscal 2023, with other segments and divisions following thereafter.

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 Sunset West in the second half of fiscal 2023 and in our legacy Hooker divisions in fiscal 2024, with other segments and divisions following thereafter.

Based on the provisions of ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software, we capitalize implementation costs incurred to develop internal-use software associated with hosting arrangements that are service contracts.

1 unchanged sentence

Amortization expense is expected to commence at system go-live in the second half of fiscal 2023.

The capitalized implementation costs at May 1, 2022 and January 30, 2022 were as follows:

Capitalized Implementation Costs

The capitalized implementation costs at July 31, 2022 and January 30, 2022 were as follows:

Implementation Costs

Balance at January 30, 2022

Costs capitalized during the period

Balance at May 1, 2022

Balance at July 31, 2022

Fair Value Measurements

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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 May 1, 2022 and January 30, 2022, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs.

As of July 31, 2022 and January 30, 2022, 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.

Our assets measured at fair value on a recurring basis at May 1, 2022 and January 30, 2022, were as follows:

Fair value at May 1, 2022

Our assets measured at fair value on a recurring basis at July 31, 2022 and January 30, 2022, were as follows:

Fair value at July 31, 2022

Fair value at January 30, 2022

3 unchanged sentences

Intangible Assets

During the fiscal 2023 first quarter, we recorded both non-amortizable and amortizable intangible assets as a result of the Acquisition.

During the fiscal 2023 first half, we recorded both non-amortizable and amortizable intangible assets as a result of the Acquisition.

Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Domestic Upholstery and Home Meridian segments, are shown in the following two tables:

January 30, 2022

July 31, 2022

Non-amortizable Intangible Assets

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Balance at January 30, 2022

Balance at May 1, 2022

Balance at July 31, 2022

For the remainder of fiscal 2023, amortization expense is expected to be approximately $ 1.8 million.

We recognized sublease income of $ 348,000 and $ 146,000 in the first quarters of fiscal 2023 and 2022, respectively.

The components of lease cost and supplemental cash flow information for leases in the first quarters of fiscal 2023 and 2022 were:

We have operating leases for warehouses, showrooms, manufacturing facilities, offices and equipment.

We recognized sub-lease income of $ 34,000 for the three-month period and $ 381,000 for the six-month period, both ended July 31, 2022.

We recognized sub-lease income of $ 150,000 for the three-month period and $ 296,000 for the six-month period, both ended August 1, 2021.

The components of lease cost and supplemental cash flow information for leases for the three-months and six-months ended July 31, 2022 and August 1, 2021 were:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Operating lease cost

1 unchanged sentence

Short-term lease cost

Total operating lease cost

Operating cash outflows

The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of May 1, 2022 and January 30, 2022 were as follows:

Total lease cost

Operating lease cash outflows

The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of July 31, 2022 and January 30, 2022 were as follows:

July 31, 2022

January 30, 2022

Property and equipment

Total operating leases right-of-use assets

Total leases right-of-use assets

Current portion of operating lease liabilities

Long term operating lease liabilities

Total operating lease liabilities

The weighted-average remaining lease term is 8.0 years.

We used our incremental borrowing rate which is LIBOR plus 1.5 % at the adoption date.

Total lease liabilities

For leases that commenced before July 2022, we used our incremental borrowing rate which was LIBOR plus 1.5 %.

When we entered into the new loan agreement our incremental borrowing rate for unsecured term loan became the current BSBY rate plus 1.40%.

We use this rate as discount rate for leases commenced in July 2022 and thereafter.

The weighted-average discount rate is 3.02 %.

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 May 1, 2022:

The weighted-average remaining lease term is 7.9 years.

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 July 31, 2022:

Undiscounted Future

5 unchanged sentences

Present value of lease payments

As of May 1, 2022, the Company had an additional lease for a showroom in High Point, North Carolina.

As of July 31, 2022, the Company had an additional lease for a showroom in High Point, North Carolina.

This lease is expected to commence in the 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.

Long-Term Debt

As of May 1, 2022, 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 May 1, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of May 1, 2022.

Since the lease has not yet commenced, the undiscounted amounts are not included in our financial statements or in the table above.

On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A.

(“BofA”) in order to replenish cash used to make the Acquisition.

The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”).

Details of the individual credit facilities provided for in the Amendment are as follows:

Unsecured Revolving Credit Facility.

Under this Amendment, the expiration date of the existing $ 35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027.

Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00 %.

The interest rate will be adjusted on a monthly basis.

The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1 %.

We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

2022 Secured Term Loan.

The Amendment provided us with a $ 18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022.

We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90 % on the outstanding balance until the principal is paid in full.

The interest rate will be adjusted on a monthly basis.

On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA;

2022 Unsecured Term Loan.

The Amendment provided us with a $ 7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022.

We are required to pay monthly principal payments of $ 116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40 % on the outstanding balance until paid in full.

The interest rate will be adjusted monthly.

On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed.

We incurred $ 37,500 in debt issuance costs in connection with our term loans.

As of July 31, 2022, unamortized loan costs of $ 37,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

Maintain a ratio of funded debt to EBITDA not exceeding:

2.50:1.0 through July 30, 2023;

2.25:1.0 through July 30, 2024;

2.00:1.00 thereafter.

The other financial covenants under the Existing Loan Agreement continue to apply to us, including 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.

The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions.

The Existing Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the Existing Loan Agreement.

We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

During the fiscal 2023 second quarter, we drew $ 30.3 million under our $35 million Existing Revolver to cover working capital needs driven by finished goods inventory purchases from our Asian suppliers but had repaid such amounts by the end of the quarter due in part to receiving the proceeds from the Secured Term Loan and Unsecured Term Loan.

As of July 31, 2022, we had $ 27.9 million available under our $ 35 million Existing Revolver to fund working capital needs.

There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

Earnings Per Share

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All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share.

During the fiscal 2023 second quarter, we purchased and retired 68,400 shares of our common stock (at an average price of $ 16.59 per share) under the $ 20 million share repurchase authorization approved by our board of directors earlier this quarter.

These repurchases reduced our total outstanding shares and, consequently, reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2023 second quarter and year-to-date periods shown below.

Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $ 5.9 million.

The following table sets forth the computation of basic and diluted earnings per share:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Unvested participating restricted stock dividends

6 unchanged sentences

Diluted earnings per share

We recorded income tax expense of $ 991 ,000 for the fiscal 2023 first quarter compared to $ 2.8 million for the comparable prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 first quarters were 23.7 % and 22.7 %, respectively.

We recorded income tax expense of $ 1.6 million for the fiscal 2023 second quarter compared to $ 2.2 million for the comparable prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6 % and 22.7 %, respectively.

For the fiscal 2023 first half, we recorded income tax expense of $ 2.6 million, compared to $ 5.0 million for the comparable prior year period.

The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0 % and 22.7 %, respectively.

No material and non-routine positions have been identified that are uncertain tax positions.

17 unchanged sentences

therefore, we combined them in “All Other” in accordance with ASC 280.

Changes to segment reporting for the fiscal 2023 first quarter

Changes to segment reporting for fiscal 2023

We regularly monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary.

5 unchanged sentences

Based on our analysis and the requirements of ASC 280:

Segment Reporting , Sunset West’s results are included in the Domestic Upholstery segment.

Segment Reporting , Sunset West’s results are included in the Domestic Upholstery segment on a prospective basis.

The following table presents segment information for the periods, and as of the dates, indicated.

1 unchanged sentence

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Hooker Branded

16 unchanged sentences

Domestic Upholstery

As of July 31,

As of January 30,

8 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Subsequent Events

On June 1, 2022 , our board of directors declared a quarterly cash dividend of $ 0.20 per share which will be paid on June 30, 2022 to shareholders of record at June 17, 2022 .

Share Repurchase Authorization

On June 6, 2022, our Board of Directors authorized the repurchase of up to $ 20 million of the Company’s common shares.

The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of our Board of Directors.

Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to our cash requirements for other purposes, compliance with the covenants under the loan agreement for our revolving credit facility and other factors we deem relevant.

On September 7, 2022 , our board of directors declared a quarterly cash dividend of $ 0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022 .

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

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risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs;

the risks related to the recent Sunset West Acquisition including integration costs, maintaining Sunset West’s existing customer relationships, the loss of key employees from Sunset West, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the business which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Acquisition;

the risks related to the recent Acquisition including integration costs, costs related to Acquisition debt, maintaining Sunset West’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, the loss of key employees from Sunset West, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the business which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Acquisition;

changes in U.S.

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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, or North Carolina warehouses, our Virginia or North Carolina administrative facilities, our North Carolina and Las Vegas showrooms or our representative offices or warehouses in Vietnam and China;

disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia or North Carolina administrative facilities, our North Carolina and Las Vegas showrooms or our representative offices or warehouses in Vietnam and China;

risks associated with our newly leased warehouse space in Georgia including information systems, access to warehouse labor and the inability to realize anticipated cost savings;

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Quarterly Reporting

This report discusses our results of operations for this period compared to the 2022 fiscal year thirteen-week period that began February 1, 2021 and ended May 2, 2021;

and our financial condition as of May 1, 2022 compared to January 30, 2022.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022.

and our financial condition as of July 31, 2022 compared to January 30, 2022.

References in this report to:

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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.

Changes to segment reporting for the fiscal 2023 first quarter

Changes to segment reporting for fiscal 2023

We regularly monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary.

5 unchanged sentences

Based on our analysis and the requirements of ASC 280:

Segment Reporting , Sunset West’s results are included in the Domestic Upholstery segment.

Segment Reporting , Sunset West’s results are included in the Domestic Upholstery segment on a prospective basis.

Orders and Backlog

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Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass 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.

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 and subsequent recovery.

They are discussed in greater detail below and are essential to understanding our prospects.

We are very encouraged by the current 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 would be expected compared to the pre-pandemic environment and we expect that to continue at some level through at least the fiscal 2023 second quarter.

The logistics challenges and production delays caused by Covid-related factory shutdowns in the second half of 2022 have slowed order fulfillment into the first quarter of fiscal 2023.

At May 1, 2022, our backlog of unshipped orders was as follows:

During fiscal 2022, orders were not converting to shipments as quickly as would be expected compared to the pre-pandemic environment due to the lack and cost of shipping containers and vessel space as well as limited overseas vendor capacity.

As a result, backlogs were elevated to historical high levels.

At July 31, 2022, our backlog of unshipped orders was as follows and a further discussion of our current backlog by segment is discussed below under “Review”:

Order Backlog

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Reporting Segment

July 31, 2022

January 30, 2022

August 1, 2021

Hooker Branded

1 unchanged sentence

Domestic Upholstery

At the end of fiscal 2023 first quarter, order backlog decreased by $27.5 million or 8.9% as compared to the fiscal 2022 year-end and increased by $2.1 million or 0.8% as compared to the prior year first quarter end.

Order backlog increases in the Hooker Branded and Domestic Upholstery segments were due to continued supply chain disruptions and production delays.

Order backlog decreased in the Home Meridian segment due to our exit from the Clubs channel and adjustments to programmed orders by large customers.

Executive Summary-Results of Operations

Consolidated net sales for the fiscal 2023 first quarter decreased by $15.5 million, or 9.5%, as compared to the prior year quarter due to decreased net sales in the Home Meridian and Hooker Branded segments, partially offset by strong sales in the Domestic Upholstery segment and the addition of Sunset West results therein.

Consolidated gross profit and margin decreased due to decreases in the Home Meridian and Hooker Branded segments, partially offset by increased gross profit and margin in the Domestic Upholstery segment.

Consolidated net sales for the fiscal 2023 second quarter decreased by $9.6 million, or 5.9%, as compared to the prior year quarter, driven by decreased net sales in the Home Meridian segment, partially offset by sales increases in the Domestic Upholstery (due in part to the addition of Sunset West results) and Hooker Branded segments, and the recovery in the H Contract business.

Consolidated gross profit decreased due to decreases in the Home Meridian and Hooker Branded segments, partially offset by increased gross profit in the Domestic Upholstery segment.

Consolidated gross margin increased due to improved margin at Home Meridian.

Consolidated operating income was $7.3 million or 4.8% of net sales as compared to a $9.7 million or 5.9% of net sales in the prior year period.

Consolidated net income was $3.2 million or $0.26 per diluted share for the fiscal 2023 first quarter, as compared to $9.4 million or $0.78 per diluted share in the prior year quarter.

Our fiscal 2023 first quarter performance is discussed in greater detail below under “Review” and “Results of Operations.”

Despite continued supply chain disruptions, inventory availability challenges, rising inflation and volatile interest rates, we are pleased to have started fiscal 2023 with very strong order backlogs, a leaner product portfolio as we began exiting the unprofitable Clubs channel and RTA category in the prior fiscal year, and the acquisition of Sunset West, which enables us to immediately gain market share in the growing outdoor furniture category.

Consolidated net sales and profitability decreased as compared to the prior year quarter but were better than management’s expectations given current economic conditions.

The Hooker Branded segment ’ s net sales decreased by $9.1 million, or 17.7%, as compared to the prior year period, due to inventory unavailability.

Consolidated net income was $5.5 million or $0.46 per diluted share for the fiscal 2023 second quarter, as compared to $7.5 million or $0.62 per diluted share in the prior year quarter.

For the fiscal 2023 first half, consolidated net sales decreased by $25.2 million, or 7.7%, compared to the prior year period due to decreased net sales in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment and the addition of Sunset West results therein.

Consolidated gross profit decreased while gross margin stayed about the same.

Consolidated operating income was $11.2 million or 3.7% of net sales as compared to $21.9 million or 6.7% of net sales in the prior year first half.

Consolidated net income was $8.7 million or $0.73 per diluted share for the fiscal 2023 first half, as compared to $16.9 million or $1.40 per diluted share in the prior year period.

Our fiscal 2023 second quarter and first-half performance are discussed in greater detail below under “Review” and “Results of Operations.”

In the second quarter and first half of fiscal 2023, consolidated net sales and profitability both decreased as compared to the corresponding periods in the prior year.

In the first half of the prior year, sales and profitability were favorably impacted by the demand surge that followed the initial Covid crisis and a return to more normal factory production, which benefitted home furnishings and other industries, before new Covid variants resulted in new lockdowns at many of our Asian suppliers in the second half of fiscal 2022.

Effects of these lockdowns continued into the fiscal 2023 first quarter, however factory production improved substantially during the second quarter of fiscal 2023 and helped us exceed our internal expectations for the quarter.

The Hooker Branded segment ’ s net sales increased by $2.9 million, or 5.8%, as compared to the prior year quarter when sales were already elevated, due to sales increases at both Hooker Casegoods and Hooker Upholstery.

The unexpected COVID-related lockdown at our suppliers in Vietnam last summer and their slow re-openings caused low inventory receipts in our U.S.

warehouses in the second half of fiscal 2022 and the fiscal 2023 first quarter.

At the end of the first quarter, inventory levels had more than doubled as compared to fiscal 2022 year-end and a record amount of inventory was in transit from Asia, the majority of which we have orders for and expect to ship in the second and third quarters of fiscal 2023.

Additionally, a large percentage of these shipments carry the price increases we implemented in July 2021 to mitigate excess freight costs and product inflation and a significant portion also carry the price increases implemented in January 2022 to address additional freight and product inflation.

This segment reported $4.1 million operating income and a 9.8% operating margin.

Incoming orders decreased by 12.9% as compared to prior year quarter when business dramatically rebounded and the demand for home furnishings was exceptionally strong.

However, quarter-end backlog was 11% higher than at fiscal 2022 year-end and 87% higher than the end of the fiscal 2021 first quarter end and has remained at historical highs.

The Home Meridian segment ’ s net sales decreased by $22.3 million, or 26.4%, as compared to the prior year period.

Sales with major furniture chains and mass merchants decreased due to continued lower direct container sales impacted by the temporary COVID lockdown and slow re-opening in Vietnam and Malaysia and the difficulties in securing shipping containers and vessel space.

About 30% of the sales decrease was due to our exit of the unprofitable Clubs channel.

E-commerce sales decreased substantially due largely to decreased demand because of price increases in response to excess freight costs and inventory unavailability.

These decreases were partially offset by the launch of the Pulaski Upholstery division which is targeted at medium price points not currently serviced by other divisions, sales under a 2020 licensing arrangement with Scott Brothers Global which had been delayed by pandemic-related disruptions in vendor factories in Asia and container and ocean vessel space shortages driven by the demand surge after the height of the initial Covid crisis, and a small sales increase in the hospitality business.

Most shipments carried price increases and freight surcharges, which helped offset the impact of higher freight costs, however, profitability was negatively impacted by higher than expected demurrage expense and transition and start-up costs at the new Georgia warehouse.

In addition, we are experiencing labor shortages and higher than expected training costs at the Georgia warehouse.

Due to these factors, this segment reported an operating loss, which while disappointing, was in line with our expectations for the quarter.

Backlog at quarter-end was about 50% higher as compared to pre-pandemic levels in early 2020.

The Domestic Upholstery segment ’ s net sales increased by $15.8 million, or 62.2%, as compared to the prior year quarter due to organic sales growth at Bradington Young, Sam Moore and Shenandoah, as well as the addition of Sunset West sales.

However, material cost inflation for nearly all raw materials and higher freight surcharges on these materials increased product costs for three divisions and partially offset the gains from increased sales.

A large portion of shipments carried the price increases we implemented in July of 2021 to offset inflation on raw material costs.

We began to recognize the benefits as the segment reported operating income higher than prior year quarter even without the current year addition of Sunset West’s income.

Other manufacturing constraints adversely impacted our profitability including the domestic driver and truck shortage which adversely impacted the delivery of raw materials for production and the delivery of our finished products, and varying degrees of raw material shortages.

Incoming orders decreased by 5.4% as compared to the prior year quarter due to current lead times and historically high backlogs.

At the end of fiscal 2023 first quarter, backlog was 18% higher than at fiscal 2022 year-end and 80% higher than the fiscal 2022 first quarter end.

Cash and cash equivalents stood at $10.1 million at fiscal 2023 first quarter-end, down $59.3 million as compared to the balance at the fiscal 2022 year-end due to $30.1 million increase in inventory and $26 million spent for the Acquisition.

At quarter-end, inventories stood at $107.7 million and included a record $40 million in transit to our domestic warehouses.

We also paid $2.4 million in cash dividends to our shareholders.

In addition to our cash balance, we had an aggregate of $27.9 million available under our existing revolver to fund working capital needs at quarter-end.

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.

warehouses and resulted in a sales decline in the second half of fiscal 2022 and the fiscal 2023 first quarter.

As these suppliers resumed production and shipments after the Lunar New Year, inventory receipts at our U.S.

warehouses have increased each month, allowing us to fulfill orders and reduce backlogs.

At the end of fiscal 2023 second quarter, inventory levels for this segment increased by $33 million as compared to fiscal 2022 year-end and $15 million as compared to fiscal 2023 first quarter end, including $24 million of in-transit inventory.

The majority of Hooker Branded sales are shipped out of U.S.

warehouses, so we believe our investment in inventory is essential to keep our best sellers in stock, support our inventory positioning, help reduce impacts of the ongoing supply chain disruptions, flow imports from Asia, and prepare for the fall and holiday selling seasons.

Additionally, a large percentage of this inventory is designated for sales orders in our backlog and carries the price increases we implemented last year and earlier this year to mitigate higher freight and product costs.

This segment reported $6.1 million operating income and a 11.5% operating margin for the fiscal 2023 second quarter.

Incoming orders decreased as compared to the prior year quarter and the quarter-end backlog was at a comparable level to the prior year second quarter end but was 21% lower than at fiscal 2022 year-end due to increased shipments during the quarter.

Hooker Branded backlog was still about four times higher than pre-pandemic levels in fiscal 2020.

The Home Meridian segment ’ s net sales decreased by $28.3 million, or 32.4%, as compared to the prior year quarter.

Sales with mass merchants and major furniture chains decreased due to retailers accelerating orders in the prior year and rationalizing their inventory levels in the current year.

In addition, our exit of the unprofitable Clubs channel, which accounted for about 40% of the sales decline.

E-commerce sales decreased as sales in this channel returned to pre-pandemic levels and growth rates.

These decreases were partially offset by the continued recovery of hospitality business and the launch of the Pulaski Upholstery division.

Despite significant sales declines, Home Meridian gross margin improved in fiscal 2023 second quarter due to the fact that most shipments carried price increases and freight surcharges to help mitigate higher freight costs and lower allowances as a result of our exit from the Clubs channel.

Profitability was negatively impacted by a large quality-related chargeback and transition and start-up costs at the new Georgia warehouse.

On a more positive note, during the quarter we completed the exit from all three older warehouses and leased additional space at our new Georgia warehouse to support HMI’s expansion into higher-margin channels of distribution.

This segment reported an operating loss of $991,000, as compared to breakeven in the prior year quarter;

however, it improved from $3.1 million operating loss in the first quarter of fiscal 2023.

Quarter-end backlog was lower than the prior year second quarter end and fiscal 2022 year-end due to decreased incoming orders with mass merchants, as these customers continue to rationalize their inventories to match current demand levels, and the absence of Clubs channel orders but was at about the same levels the segment experienced in fiscal 2020.

The Domestic Upholstery segment ’ s net sales increased by $14.7 million, or 62.0%, as compared to the prior year quarter due to organic sales growth at Bradington Young, Sam Moore and Shenandoah, as well as the addition of Sunset West results.

Despite strong sales, gross margins decreased in the fiscal 2023 second quarter due to significantly increased raw material costs, partially offset by overhead absorption on higher sales volume and higher gross margin at the Shenandoah division whose production was impacted by a foam shortage issue in the prior year period.

This segment reported an operating income of $1.7 million and a 4.5% operating margin for the fiscal 2023 second quarter.

Incoming orders decreased due to current lead times and high backlogs.

Quarter-end backlog was at the same level as prior year quarter, but was 7.8% lower than at fiscal 2022 year-end as higher shipments reduced backlog.

Domestic Upholstery backlog was almost five times pre-pandemic levels in fiscal 2020.

Cash and cash equivalents stood at $11.7 million at fiscal 2023 second quarter-end, down $57.7 million as compared to the balance at the fiscal 2022 year-end due principally to a $56.1 million increase in inventory.

At fiscal 2023 second quarter end, inventory stood at $131.1 million, $27.5 million higher than prior year second quarter end and $38.3 million higher than pre-pandemic level at fiscal 2020 year-end.

During the fiscal 2023 second quarter, we received $25 million in term loan proceeds to replenish cash used to make the Sunset West Acquisition.

We also paid $4.8 million in cash dividends to our shareholders and spent $3 million for development of our new cloud-based ERP system.

In addition to our cash balance, we had $27.9 million available under our existing revolver to fund working capital needs.

With strategic inventory management and cautious capital expenditures, we believe we have the financial resources to support our business operations for the foreseeable future.

Results of Operations

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Cost of sales

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Operating income

Other income, net

Other (expense)/income, net

Income before income taxes

Income tax expense

Fiscal 2023 First Quarter Compared to Fiscal 2022 First Quarter

Fiscal 2023 Second Quarter and First-Half Compared to Fiscal 2022 Second Quarter and First-Half

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Hooker Branded

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Domestic Upholstery

FY23 Q1 % Increase

Average Selling Price ("ASP")

FY23 Q1 % Increase

Hooker Branded

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Domestic Upholstery *

*Sunset West is excluded from Domestic Upholstery in the Unit Volume and ASP portions of the table above since it was not a part of our fiscal 2022 first quarter results.

Consequently, we believe including their fiscal 2023 first quarter results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table.

Consolidated net sales decreased in the fiscal 2023 first quarter due to sales declines in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment.

The Hooker Branded segment’s net sales decreased in the fiscal 2023 first quarter compared to the prior year quarter.

The prior year quarter’s sales were up nearly 90% as compared to the fiscal 2021 first quarter due to a demand surge after the initial COVID crisis.

Fiscal 2023 first quarter sales decreased due to inventory unavailability at the Hooker Casegoods division.

The temporary factory shutdown in Vietnam during the summer of last year resulted in low inventory receipts in the second half of fiscal 2022 and this quarter.

The decrease was partially offset by increased net sales at Hooker Upholstery due to quicker inventory turns at this division.

ASP increased due to a large percentage of shipments carrying price increases we implemented last year in response to higher freight costs and product cost inflation.

However, it was not sufficient to offset the sales decreases driven by significant volume loss.

The Home Meridian segment’s net sales decreased in the fiscal 2023 first quarter compared to the prior year quarter.

The prior year quarter’s sales were up nearly 50% as compared to the fiscal 2021 first quarter due to a demand surge after the initial COVID crisis.

Fiscal 2023 first quarter sales decreased primarily due to lower sales in the major furniture chains and mass merchant channels due to continued supply chain disruptions, the exit of the unprofitable Clubs channel, as well as lower sales in the e-commerce channel, partially offset by the addition of Pulaski Upholstery division.

ASP increased in all divisions partially mitigating higher freight costs;

however, the increases were not sufficient to cover the volume loss.

The Domestic Upholstery segment’s net sales increased significantly in the fiscal 2023 first quarter due to strong sales at Bradington Young, Sam Moore and Shenandoah as well as the addition of Sunset West’s sales.

Both Bradington Young and Sam Moore net sales increased by over 30% while Shenandoah sales increased by 25%.

ASP increased at three divisions as a large portion of products sold carried price increases we implemented last year in response to the inflation of raw material costs.

Additionally, prior-year sales were negatively affected by a foam shortage which is no longer a significant issue.

All Other’s net sales increased in the fiscal 2023 first quarter due to increased unit volume at H Contract, as this division is gradually recovering from the impact of reduced capital spending by the senior living industry during the COVID pandemic.

*Sunset West is excluded from the Domestic Upholstery segment in the Unit Volume and ASP portions of the table above since it was not a part of our fiscal 2022 results.

Consequently, we believe including their fiscal 2023 results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table.

Consolidated net sales decreased in the fiscal 2023 second quarter due to sales declines in the Home Meridian segment, partially offset by increased net sales in the Domestic Upholstery and Hooker Branded segments.

Consolidated net sales decreased in the fiscal 2023 first half due to sales declines in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment.

The Hooker Branded segment’s net sales increased in the fiscal 2023 second quarter compared to the prior year quarter as both Hooker Casegoods and Hooker Upholstery divisions reported higher net sales.

Unit volume was lower than prior year second quarter, but significantly improved from the fourth quarter of previous year and the first quarter of this year.

ASP increased due to price increases we implemented in response to higher freight costs and product cost inflation.

For the fiscal 2023 first half, net sales decreased driven by lower shipments at the Hooker Casegoods division in the first quarter due to inventory unavailability.

The decrease was partially offset by continued higher sales at Hooker Upholstery due to quicker inventory turns at this division.

However, it was not sufficient to offset the sales decreases driven by unit volume loss.

The Home Meridian segment’s net sales decreased in the fiscal 2023 second quarter and first half compared to the prior year periods due to lower sales in the mass merchants and furniture chains as customers rationalize their inventory levels, the absence of sales from the unprofitable Clubs channel, and lower sales in the e-commerce channel.

These declines were partially offset by the recovery of hospitality business and the addition of Pulaski Upholstery division.

In addition, the prior year quarter’s sales were up over 20% as compared to the fiscal 2021 second quarter due to a demand surge after the initial COVID crisis.

We implemented price increases to mitigate higher freight costs;

however, ASP was negatively impacted by deeply discounted Ready-To-Assemble category sales, the category we determined to exit last year.

The Domestic Upholstery segment reported strong net sales in the fiscal 2023 second quarter and first half due to double-digit sales growth at all three divisions as well as the addition of Sunset West’s sales.

Prior-year sales were negatively affected by a foam shortage which is no longer a significant issue.

Although we experienced some disruptions of the delivery of raw materials for production, all three divisions were operating near full capacity with shipments exceeding prior year periods and our internal goals.

Additionally, ASP increased at three divisions due to price increases we implemented in response to the inflation of raw material costs.

All Other’s net sales increased in the fiscal 2023 second quarter and first half due to increased unit volume at H Contract, as this division is gradually recovering from the impact of reduced capital spending by the senior living industry during the COVID pandemic.

Gross Profit and Margin

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Hooker Branded

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Domestic Upholstery

Consolidated gross profit and margin both decreased in the fiscal 2023 first quarter as compared to the prior year quarter.

The Hooker Branded segment’s gross profit and margin both decreased in the fiscal 2023 first quarter due to decreased net sales, higher warehousing labor costs due to increased headcounts and wage levels, and higher demurrage and drayage expenses due to continued supply chain interruptions.

The Home Meridian segment’s gross profit and margin decreased in the fiscal 2023 first quarter due to sales volume loss, transition and start-up costs at the new Georgia warehouse, higher warehousing labor costs, and higher demurrage expenses due to supply chain disruptions which have adversely impacted product flow to our warehouses.

Ocean freight costs still negatively impacted margin in this segment but improved as compared to prior year quarter.

The Domestic Upholstery segment’s gross profit and margin increased in the fiscal 2023 first quarter due to the addition of Sunset West and increased gross profit at the other three divisions driven by increased net sales.

The increases were partially offset by increased material costs which were higher at the three divisions.

Direct labor improved due to production efficiencies at Sam Moore.

Additionally, prior-year gross profit was negatively affected by production inefficiencies from a foam shortage which is no longer a significant issue.

Consolidated gross profit decreased while margin increased in the fiscal 2023 second quarter.

For the fiscal 2023 first half, consolidated gross profit decreased and margin stayed about the same as compared to prior year period.

The Hooker Branded segment’s gross profit and margin both decreased in the fiscal 2023 second quarter, despite increased net sales, due primarily to higher freight and product costs, and to a lesser extent higher warehousing labor costs due to increased shipping and receiving activity, higher wage levels, and higher demurrage and drayage expenses as more containers were delivered to the U.S and continued to experience supply chain interruptions.

Hooker Branded gross profit and margin decreased in the fiscal 2023 first half also due to sales declines in the first quarter and increased costs.

The Home Meridian segment’s gross profit decreased in the fiscal 2023 second quarter and first half driven by sales volume loss, higher product costs, higher warehousing labor costs, transition and start-up costs at the new Georgia warehouse, and margin loss on a quality-related issue.

Gross margin increased in the fiscal 2023 second quarter but decreased slightly in the first half.

Freight costs still negatively impacted margin in this segment but improved as compared to prior year periods due to price increases and surcharges to offset the increased freight and product costs.

The Domestic Upholstery segment’s gross profit increased in the fiscal 2023 second quarter and first half due to strong sales across all divisions and the addition of Sunset West gross profit.

Despite significant sales increases, gross margin decreased in the fiscal 2023 second quarter and stayed the same in the first half due to increased raw material costs, partially offset by overhead absorption which benefitted from higher sales volume and production efficiencies.

Prior-year gross profit was negatively affected by production inefficiencies from a foam shortage which is no longer a significant issue.

All Other’s gross profit and margin both increased in the fiscal 2023 second quarter and first half driven by stronger net sales.

Selling and Administrative Expenses (S&A)

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Hooker Branded

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Domestic Upholstery

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 first quarter.

The Hooker Branded segment’s S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 first quarter driven by increased salaries and wages due to increased head count and salary inflation, higher bonus accruals due to the reversal of unearned executive bonuses in the prior year period, and higher showroom, sample and travel expenses due to the postponement of High Point Furniture Market in the prior year period.

These increases were partially offset by lower selling costs on decreased net sales.

S&A expenses increased as a percentage of net sales in the fiscal 2023 first quarter also due to decreased net sales.

The Home Meridian segment’s S&A expenses increased slightly in absolute terms in the fiscal 2023 first quarter due to bonus accruals on better-than-expected performance, higher depreciation expenses on additions of property and equipment at the new Georgia warehouse, and higher showroom, travel and advertising supply expenses due to the postponement of High Point Furniture Market in the prior year period.

The increases were nearly offset by lower salaries and wages due to personnel changes and lower selling costs on decreased sales.

S&A expenses increased as a percentage of net sales due principally to decreased net sales.

The Domestic Upholstery segment’s S&A expenses increased in absolute terms and stayed essentially flat as a percentage of net sales in the fiscal 2023 first quarter.

The increases were attributable to the addition of Sunset West’s S&A expenses, as well as higher selling costs on increased net sales and higher salaries and wages at Bradington Young, Sam Moore and Shenandoah.

All Other S&A expenses increased slightly in absolute terms and as a percentage of net sales in the fiscal 2023 first quarter due to increased selling costs and higher travel expenses.

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half.

The Hooker Branded segment’s S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half driven by increased salaries and wages due to salary inflation, higher professional service fees, higher commissions on undiscounted sales, higher bonus accruals due to the reversal of unearned executive bonuses in the prior year first quarter, and higher travel expenses and other operating expenditures as business continued to resume to normal.

The Home Meridian segment’s S&A expenses decreased in absolute terms in the fiscal 2023 second quarter and first half due to decreased salaries and wages because of personnel changes and lower selling costs on decreased net sales, partially offset by higher depreciation expenses on additions of property and equipment at the new Georgia warehouse, higher designing fees on a new licensing arrangement, and higher international travel expenses as normal travel schedules resumed.

S&A expenses increased as a percentage of net sales in the fiscal 2023 second quarter and first half due to decreased net sales.

The Domestic Upholstery segment’s S&A expenses increased in absolute terms in the fiscal 2023 second quarter and first half driven by the addition of Sunset West’s S&A expenses, higher selling costs on increased net sales across all divisions, and higher salaries and wages.

Domestic Upholstery S&A expenses decreased as a percentage of net sales in the fiscal 2023 second quarter and first half due principally to higher net sales.

All Other S&A expenses increased in absolute terms while decreased as a percentage of net sales in the fiscal 2023 second quarter and first half.

Intangible Asset Amortization

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Intangible asset amortization

Intangible asset amortization expense was higher in fiscal 2023 first quarter due to Acquisition-related amortization expense.

Intangible asset amortization expense was higher in fiscal 2023 second quarter and first half due to Acquisition-related amortization expense.

Operating Profit/(Loss) and Margin

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Hooker Branded

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Operating profit and margin decreased as compared to the prior year quarter due to the factors discussed above.

Sunset West operating profit of $861,000, net of $282,000 in intangible asset amortization expense on Acquisition-related intangibles, is included in the Domestic Upholstery segment’s results.

Sunset West operating profit of $150,000 and $1.0 million for the fiscal 2023 second quarter and first half, respectively, net of $282,000 and $564,000 in intangible asset amortization expense on Acquisition-related intangibles, is included in the Domestic Upholstery segment’s results.

Interest Expense, net

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Consolidated interest expense, net

Consolidated interest expense consisted of fees on the revolving credit facility in both periods.

Consolidated interest expense was higher in fiscal 2023 second quarter and first half due to interest on the amounts drawn on the revolving credit facility in the second quarter.

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Consolidated income tax expense

Effective Tax Rate

We recorded income tax expense of $991,000 for the fiscal 2023 first quarter compared to $2.8 million for the comparable prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 first quarters were 23.7% and 22.7%, respectively.

Consolidated income tax expense was $1.6 million for the fiscal 2023 second quarter compared to $2.2 million for the prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6% and 22.7%, respectively.

For the fiscal 2023 first half, consolidated income tax expense was $2.6 million, compared to $5.0 million for the prior year period.

The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0% and 22.7%, respectively.

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Consolidated Net Income

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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 continue to telecommute for at least part of the work week.

For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have stepped-up facility cleaning at each location.

We have adjusted social distancing and masking protocols to recently updated CDC guidelines.

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.

As vaccination rates have increased and infection rates have stabilized and started to decline, more administrative staff are returning to the office for at least partial workweeks.

Domestic travel and limited international travel have resumed and we have adjusted social distancing and masking protocols to the current public health guidelines.

We are seeing a leveling off of demand, with order rates down from the dramatic but unsustainable levels we experienced in the last 18 months.

Upon receipt of the inventory currently in transit from Asia, we expect to be in a near-optimum shipping position throughout the fiscal second quarter and believe we will see the full benefit of Asian production levels being at 100% capacity.

With a record $40 million of inventory in transit to our warehouses, our cash levels have dropped temporarily which necessitated the draw on our revolving credit facility discussed below.

A very high percentage of the inventory in transit is sold, so we expect to quickly convert the inventory to shipments and expect our cash balances to begin to improve by the end of the fiscal 2023 second quarter.

We are monitoring inflationary pressures in the economy, including higher interest rates, and believe those are currently affecting consumers more at the lower price points than at the upper medium and upper price points.

On the import side of our business, we continue to experience near-record ocean freight rates and a strained global supply chain including scarcity of ocean vessel space, port congestion and a strained domestic transportation system.

On the domestic side, we continue to see inflation in and scarcity of many raw materials and a strained domestic transportation system.

We continue to manage these issues with surcharges, selective price increases where possible, and the resourcing of raw materials when and where possible.

These current headwinds, including the persistent supply chain issues that have plagued the post-COVID crisis recovery, belie many reasons for optimism, including the housing market, strong levels of employment and having multiple generational segments of the US population in prime household formation and furniture purchasing years.

We believe our variable cost business model will allow us to adjust to changing economic conditions, and we continue to focus on multiple strategic initiatives to spur organic growth and increase market share.

These initiatives include our recent entry into the outdoor furniture market with the purchase of Sunset West, expanding our reach into the interior design market, Home Meridian’s launch of the Pulaski Upholstery division (targeted at medium price points not currently serviced by other divisions), and HMI’s focus on growth in profitable channels of distribution.

We are closely monitoring economic disrupters like inflation, rising interest rates, and a slowing housing market.

At the same time, we see many reasons for optimism as the U.S.

enjoys strong levels of employment, rising household incomes, continuing strength in consumer spending and watching as yet another sizeable generation enters into their prime furniture purchasing years.

While incoming orders are down from pandemic highs, we have substantial backlogs to ship and we believe the reduction of incoming orders from retailers may be temporary, and more a result of right-sizing their inventories than a significant decline in normalized consumer demand.

We expect that the fall and holiday season sales activity will align more closely with the pre-pandemic ordering environment that we have become accustomed to.

We are preparing for a strong second half of the year, and based on our backlogs and solid inventory position, we are on track to increase sales in all three segments as compared to the prior fiscal year.

We believe organic growth will be buoyed by several new strategic initiatives including our recent entry into outdoor furniture, expansion of our presence in the interior design channel in all segments along with the post pandemic recovery within the hospitality and contract businesses.

HMI’s portfolio program launches at the upcoming October High Point market which we believe will accelerate the expansion of HMI’s customer base.

Financial Condition, Liquidity and Capital Resources

Cash Flows – Operating, Investing and Financing Activities

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Net cash (used in)/provided by operating activities

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Net cash used in operating activities

Net cash used in investing activities

Cash used in financing activities

Cash provided by/(used in) financing activities

Net decrease in cash and cash equivalents

During the three months ended May 1, 2022, we used a portion of the existing cash and cash equivalents on hand to build up inventory levels, fund the Acquisition, pay $2.4 million in cash dividends, $830,000 capital expenditures to enhance our business systems and facilities, and $118,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the three months ended May 2, 2021, we used a portion of the existing cash and cash equivalent on hand to pay $2.2 million of capital expenditures to enhance our business systems and facilities, $2.1 million in cash dividends, and $155,000 in life insurance premiums on Company-owned life insurance policies.

During the six months ended July 31, 2022, we used a portion of the $25 million term-loan proceeds and existing cash and cash equivalents on hand to build up inventory levels, fund the Acquisition, pay $4.8 million in cash dividends, $1.9 million capital expenditures to enhance our business systems and facilities, $1.1 million in purchases and retirement of common stock, and $404,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the six months ended August 1, 2021, we used a portion of the existing cash and cash equivalent on hand to pay $3.5 million of capital expenditures to enhance our business systems and facilities, $4.3 million in cash dividends, and $473,000 in life insurance premiums on Company-owned life insurance policies.

Liquidity, Financial Resources and Capital Expenditures

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Loan Agreements and Revolving Credit Facility

We currently have one $35 million revolving credit facility (the “Existing Revolver”) with Bank of America, N.

(“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;

On July 26, 2022, we entered into a Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A.

(“BofA”) in order to replenish cash for all or a portion of the purchase price and other costs associated with the acquisition of substantially all of the assets of Sunset West.

Details of the individual credit facilities provided for in the Amendment are as follows:

Unsecured Revolving Credit Facility.

Under this Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027.

Any amounts outstanding will bear interest at a rate per annum, equal to the then current BSBY (adjusted periodically) plus 1.00%.

The interest rate will be adjusted monthly.

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;

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:

We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

2022 Secured Term Loan.

The Amendment provided us with a $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022.

We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full.

The interest rate will be adjusted monthly.

On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

The Secured Term Loan is secured by life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA;

2022 Unsecured Term Loan.

The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022.

We are required to pay monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full.

The interest rate will be adjusted on a monthly basis.

On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

We incurred $37,500 in debt issuance costs in connection with our term loans.

As of July 31, 2022, unamortized loan costs of $37,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

Maintain a ratio of funded debt to EBITDA not exceeding:

A basic fixed charge coverage ratio of at least 1.25:1.00;

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 May 1, 2022 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 May 1, 2022, 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 May 1, 2022.

There were no additional borrowings outstanding under the revolving credit facility as of May 1, 2022.

Early in the fiscal 2023 second quarter, we drew $8 million from the Existing Revolver to cover working capital needs driven by finished goods inventory purchases from our Asian suppliers.

Currently, we have a record $40 million in transit to our domestic warehouses.

These purchases required payment when loaded onto ocean vessels in Asia and take approximately 8 weeks to reach our domestic warehouses.

We expect to ship most of these products during the fiscal 2023 second and third quarters and to receive payment within 60-days of shipment, on average.

We repaid $4 million of the $8 million draw in mid-May 2022 and expect to repay the $4 million balance in the fiscal 2023 second quarter.

2.50:1.0 through July 30, 2023;

2.25:1.0 through July 30, 2024;

2.00:1.00 thereafter.

The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions.

We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

As of July 31, 2022, we had $27.9 million available under our $35 million 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 July 31, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

Share Repurchase Authorization

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Expected Term Loan Proceeds

In order to replenish cash used to make the Sunset West acquisition, we are in the process of securing a $25 million term loan with our lender Bank of America, N.A.

which we expect to close in thirty to sixty days from the date of this report.

Although there can be no assurance that we will be able to close this term loan, if closed, proceeds will be used to replenish cash used to make the Sunset West acquisition.

Considering current and expected sources of liquidity and projected working capital needs, this loan is not needed to support current working capital requirements.

During the second quarter of fiscal 2023, we had used approximately $1.1 million of the authorization to purchase 68,400 of our common shares (at an average price of $16.59 per share), with approximately $18.9 million remaining available for future purchases under the authorization as of the end of the fiscal 2023 second quarter.

Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $5.9 million.

Capital Expenditures

We expect to spend approximately $4 million in capital expenditures over the remainder of fiscal 2023 to maintain and enhance our operating systems and facilities.

We expect about $2.5 million of this amount will be spent on showroom renovations for both the legacy Hooker divisions and the Home Meridian segment.

We expect about $2.5 million of this amount will be spent on the High Point showroom renovations for both 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.

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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 and Sunset West in the second half of fiscal 2023, with the Home Meridian segment following afterwards.

We expect to implement the ERP upgrade in our legacy Hooker divisions in the first quarter of fiscal 2024, with the Home Meridian segment following afterwards.

To complete the ERP system implementation as anticipated, we will be required to expend significant financial and human resources.

In addition to the capital expenditures discussed in the section immediately above, we anticipate spending approximately $3 million over the remainder of the year, with a significant amount of time invested by our associates.

On June 1, 2022, our board of directors declared a quarterly cash dividend of $0.20 per share which will be paid on June 30, 2022 to shareholders of record at June 17, 2022.

On September 7, 2022, our board of directors declared a quarterly cash dividend of $0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022.

Critical Accounting Policies

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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-Q

Item 1. Financial Statements