Form 10-Q HOOKER FURNITURE CORP For: Jul 30

September 8, 2017 1:49 PM

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


 
FORM 10-Q
 

 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 30, 2017

Commission file number 000-25349

HOOKER FURNITURE CORPORATION
(Exact name of registrant as specified in its charter)

Virginia 
54-0251350
(State or other jurisdiction of incorporation or organization)
(IRS employer identification no.)

440 East Commonwealth Boulevard, Martinsville, VA  24112
(Address of principal executive offices, zip code)

(276) 632-2133
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer  
Accelerated filer 
Non-accelerated Filer  (Do not check if a smaller reporting company) 
Smaller reporting company
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 1, 2017:
 
Common stock, no par value 
11,586,391
(Class of common stock) 
(Number of shares)


 
TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
3
 
 
 
Item 2.
16
 
 
 
Item 3.
31
 
 
 
Item 4.
32
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 6.
33
 
 
 
35
 
 
 
 
 
 
PART I.  FINANCIAL INFORMATION

Item 1.      Financial Statements

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

As of
 
July 30,
   
January 29,
 
   
2017
   
2017
 
   
(unaudited)
       
Assets
           
Current assets
           
    Cash and cash equivalents
 
$
45,818
   
$
39,792
 
    Trade accounts receivable, net
   
75,371
     
92,578
 
    Inventories
   
82,036
     
75,303
 
    Prepaid expenses and other current assets
   
4,246
     
4,244
 
         Total current assets
   
207,471
     
211,917
 
Property, plant and equipment, net
   
25,507
     
25,803
 
Cash surrender value of life insurance policies
   
23,178
     
22,366
 
Deferred taxes
   
6,019
     
7,264
 
Intangible assets
   
25,256
     
25,923
 
Goodwill
   
23,187
     
23,187
 
Other assets
   
2,241
     
2,236
 
         Total non-current assets
   
105,388
     
106,779
 
               Total assets
 
$
312,859
   
$
318,696
 
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
    Current portion of term loan
 
$
5,822
   
$
5,817
 
    Trade accounts payable
   
27,712
     
36,552
 
    Accrued salaries, wages and benefits
   
7,049
     
8,394
 
    Income tax accrual
   
953
     
4,323
 
    Customer deposits
   
5,993
     
5,605
 
    Other accrued expenses
   
3,288
     
3,369
 
         Total current liabilities
   
50,817
     
64,060
 
Long term debt
   
38,858
     
41,772
 
Deferred compensation
   
11,041
     
10,849
 
Pension plan
   
3,008
     
3,499
 
Other long-term liabilities
   
793
     
589
 
Total long-term liabilities
   
53,700
     
56,709
 
              Total liabilities
   
104,517
     
120,769
 
                 
Shareholders’ equity
               
    Common stock, no par value, 20,000 shares authorized,
      11,590 and 11,563 shares issued and outstanding on each date
   
40,403
     
39,753
 
    Retained earnings
   
167,434
     
157,688
 
    Accumulated other comprehensive income
   
505
     
486
 
              Total shareholders’ equity
   
208,342
     
197,927
 
                   Total liabilities and shareholders’ equity
 
$
312,859
   
$
318,696
 
 

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


HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
   
July 31,
   
July 30,
   
July 31,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net sales
 
$
156,308
   
$
136,163
   
$
287,180
   
$
257,994
 
                                 
   Cost of sales
   
123,191
     
107,685
     
225,920
     
202,917
 
                                 
      Gross profit
   
33,117
     
28,478
     
61,260
     
55,077
 
                                 
Selling and administrative expenses
   
20,989
     
19,441
     
41,690
     
40,385
 
Intangible asset amortization
   
333
     
813
     
667
     
2,467
 
                                 
        Operating income
   
11,795
     
8,224
     
18,903
     
12,225
 
                                 
Other income, net
   
499
     
259
     
722
     
418
 
Interest expense, net
   
282
     
247
     
533
     
511
 
                                 
      Income before income taxes
   
12,012
     
8,236
     
19,092
     
12,132
 
                                 
Income tax expense
   
4,234
     
2,887
     
6,568
     
4,284
 
                                 
       Net income
 
$
7,778
   
$
5,349
   
$
12,524
   
$
7,848
 
                                 
Earnings per share
                               
       Basic
 
$
0.67
   
$
0.46
   
$
1.08
   
$
0.68
 
       Diluted
 
$
0.67
   
$
0.46
   
$
1.08
   
$
0.68
 
                                 
Weighted average shares outstanding:
                               
       Basic
   
11,565
     
11,533
     
11,554
     
11,524
 
       Diluted
   
11,593
     
11,554
     
11,587
     
11,548
 
                                 
Cash dividends declared per share
 
$
0.12
   
$
0.10
   
$
0.24
   
$
0.20
 



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

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
   
July 31,
   
July 30,
   
July 31,
 
 
 
2017
   
2016
   
2017
   
2016
 
                         
Net Income
 
$
7,778
   
$
5,349
   
$
12,524
   
$
7,848
 
       Other comprehensive income (loss):
                               
                 Amortization of actuarial loss (gain)
   
15
     
(18
)
   
31
     
(35
)
                 Income tax effect on amortization
   
(6
)
   
6
     
(11
)
   
12
 
        Adjustments to net periodic benefit cost
   
9
     
(12
)
   
20
     
(23
)
                                 
Total comprehensive Income
 
$
7,787
   
$
5,337
   
$
12,544
   
$
7,825
 


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

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Twenty-Six Weeks Ended
 
   
July 30,
   
July 31,
 
   
2017
   
2016
 
Operating Activities:
           
Net income
 
$
12,524
   
$
7,848
 
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
   
2,697
     
4,748
 
Gain on disposal of assets
   
(43
)
   
(36
)
Deferred income tax expense (benefit)
   
1,234
     
(1,875
)
Noncash restricted stock and performance awards
   
951
     
832
 
Provision for doubtful accounts
   
173
     
(506
)
Changes in assets and liabilities:
               
Trade accounts receivable
   
17,034
     
10,078
 
Inventories
   
(6,732
)
   
4,458
 
Gain on life insurance policies
   
(478
)
   
(541
)
Prepaid expenses and other current assets
   
185
     
109
 
Trade accounts payable
   
(9,283
)
   
(2,474
)
Accrued salaries, wages, and benefits
   
(1,559
)
   
(1,451
)
Accrued income taxes
   
(3,371
)
   
2,032
 
Customer deposits
   
388
     
2,304
 
Other accrued  expenses
   
313
     
(1,380
)
Deferred compensation
   
(355
)
   
(51
)
Other long-term liabilities
   
207
     
6
 
              Net cash provided by operating activities
 
$
13,885
   
$
24,101
 
                 
Investing Activities:
               
Acquisition of Home Meridian
 
$
-
   
$
(86,062
)
Purchases of property and equipment
   
(1,665
)
   
(1,160
)
Proceeds received on notes from sale of assets
   
63
     
96
 
Proceeds from life insurance premiums
   
-
     
644
 
Premiums paid on life insurance policies
   
(550
)
   
(594
)
              Net cash used in investing activities
   
(2,152
)
   
(87,076
)
                 
Financing Activities:
               
Proceeds from long-term debt
 
$
-
   
$
60,000
 
Payments for long-term debt
   
(2,929
)
   
(9,361
)
Debt issuance cost
   
-
     
(165
)
Cash dividends paid
   
(2,778
)
   
(2,310
)
              Net cash (used in) provided by financing activities
   
(5,707
)
   
48,164
 
                 
Net increase (decrease) in cash and cash equivalents
   
6,026
     
(14,811
)
Cash and cash equivalents - beginning of year
   
39,792
     
53,922
 
Cash and cash equivalents - end of quarter
 
$
45,818
   
$
39,111
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid for income taxes
 
$
8,705
   
$
4,120
 
Cash paid for interest, net
   
489
     
391
 
Non-cash transactions:
               
Acquisition cost paid in common stock
 
$
-
   
$
20,267
 
Increase in property and equipment through accrued purchases
   
50
     
54
 


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

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Twenty-Six Weeks Ended July 30, 2017


1.                
Preparation of Interim Financial Statements

The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations.  However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position.  These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 29, 2017 (“2017 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 1, 2017, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began January 30, 2017, which both ended July 30, 2017,  compared to the  thirteen-week period that began May
2, 2016 and the twenty-six week period that began February 1, 2016, which both ended July 31, 2016.

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

§
the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and will end January 28, 2018; and

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and ended January 29, 2017.

We adopted Accounting Standard’s Update (“ASU”) No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” in the first quarter of fiscal 2018. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this ASU, we recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than as a change to paid-in capital. The ASU was effective for annual reporting periods after December 15, 2016, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.

We adopted ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” in the first quarter of fiscal 2018. ASU 2015-11 requires that inventory within the scope of this update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method; consequently, since our inventories are measured under the LIFO method, the adoption of this guidance did not have an impact upon our financial condition or results of operations.

2. Accounts Receivable


   
July 30,
   
January 29,
 
   
2017
   
2017
 
             
Trade accounts receivable
 
$
82,221
   
$
99,378
 
Receivable from factor
   
-
     
6
 
Other accounts receivable allowances
   
(6,073
)
   
(6,298
)
Allowance for doubtful accounts
   
(777
)
   
(508
)
   Accounts receivable
 
$
75,371
   
$
92,578
 



3.               
Inventories

   
July 30,
   
January 29,
 
   
2017
   
2017
 
Finished furniture
 
$
91,342
   
$
85,520
 
Furniture in process
   
722
     
735
 
Materials and supplies
   
8,723
     
7,536
 
   Inventories at FIFO
   
100,787
     
93,791
 
Reduction to LIFO basis
   
(18,751
)
   
(18,488
)
   Inventories
 
$
82,036
   
$
75,303
 



4. Property, Plant and Equipment


   
Depreciable Lives
   
July 30,
   
January 29,
 
   
(In years)
   
2017
   
2017
 
                   
Buildings and land improvements
 
15 - 30
   
$
24,015
   
$
23,392
 
Computer software and hardware
 
3 - 10
     
17,661
     
17,308
 
Machinery and equipment
 
10
     
5,660
     
5,031
 
Leasehold improvements
 
Term of lease
     
7,246
     
7,104
 
Furniture and fixtures
 
3 - 8
     
1,946
     
1,903
 
Other
 
5
     
561
     
562
 
   Total depreciable property at cost
         
57,089
     
55,300
 
Less accumulated depreciation
         
33,154
     
31,167
 
   Total depreciable property, net
         
23,935
     
24,133
 
Land
         
1,067
     
1,067
 
Construction-in-progress
         
505
     
603
 
   Property, plant and equipment, net
       
$
25,507
   
$
25,803
 


5. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an “exit price”) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of July 30, 2017 and January 29, 2017, 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.

As of January 29, 2017, the assets of the Home Meridian segment’s legacy Pension Plan (the “Plan”) were measured at fair value on a recurring basis based on Level 1 inputs. Pension plan assets, held in a trust account by the Plan’s trustee, primarily consist of a wide-range of mutual fund asset classes, including domestic and international equities, fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries. As of January 31, 2017, the date of the latest actuarial valuation, Plan assets were netted against the Plan’s Projected Benefit Obligation (“PBO”) on that date to determine the Plan’s funded status. Since the PBO exceeded the market value of the Plan’s assets, the funded status is recorded in our condensed consolidated balance sheets as a net liability. As of January 31, 2017, the net liability for this plan was $3.5 million shown on the “Pension Plan” line of our condensed consolidated balance sheets.  The market value of pension plan assets shown below are as of January 31, 2017, the actuarial valuation date of the Pension Plan.  See Note 8. Employee Benefit Plans for additional information about the Plan.

Our assets measured at fair value on a recurring basis at July 30, 2017 and January 29, 2017, were as follows:

   
Fair value at July 30, 2017
   
Fair value at January 29, 2017
 
Description
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
    (In thousands)                       
Assets measured at fair value
                                               
Company-owned life insurance
 
$
-
   
$
23,178
   
$
-
   
$
23,178
   
$
-
   
$
22,366
   
$
-
   
$
22,366
 
Pension plan assets*
   
13,881
     
-
     
-
     
13,881
     
13,881
     
-
     
-
     
13,881
 
                                                                 
* as of January 29, 2017 for Pension Plan assets.

6. Intangible Assets

     
July 30,
   
January 29,
 
 
Segment
 
2017
   
2017
 
Non-amortizable Intangible Assets
             
Goodwill
Home Meridian
 
$
23,187
   
$
23,187
 
Trademarks and trade names - Home Meridian
Home Meridian
   
11,400
     
11,400
 
Trademarks and trade names - Bradington-Young
Upholstery
   
861
     
861
 
Trademarks and trade names - Sam Moore
Upholstery
   
396
     
396
 
   Total non-amortizable assets
   
$
35,844
   
$
35,844
 


All of our amortizable intangible assets are recorded in our Home Meridian segment. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

   
Amortizable Intangible Assets
 
   
Customer
             
   
Relationships
   
Trademarks
   
Totals
 
                   
Balance at January 29, 2017
 
$
13,091
   
$
175
   
$
13,266
 
Amortization
   
(655
)
   
(12
)
   
(667
)
Balance at July 30, 2017
 
$
12,436
   
$
163
   
$
12,599
 

The estimated amortization expense associated with our amortizable intangible assets is expected to be as follows:

Fiscal Year
 
Amount
 
       
Remainder of 2018
 
$
667
 
2019
   
1,334
 
2020
   
1,334
 
2021
   
1,334
 
2022
   
1,334
 
Thereafter
   
6,596
 
   
$
12,599
 

For the remainder of fiscal 2018, expected amortization expense will be approximately $334,000 per quarter.

7. Long-Term Debt

On February 1, 2016, we entered into an amended and restated loan agreement with Bank of America, N.A. and borrowed $60 million, the full amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the HMI Acquisition. We may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty.
Additionally, we incurred $165,000 in debt issuance costs in connection with our term loans in the fiscal 2017 first quarter. These costs are amortized over the life of the loan using the interest method and are included in the “interest expense” line of our condensed consolidated income statements. Unamortized debt issuance costs are netted against the carrying value of our term loans on our condensed consolidated balance sheets. As of July 30, 2017, unamortized loan costs of $102,000 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

8. Employee Benefit Plans

We maintain three retirement plans for the benefit of certain former and current employees, including a supplemental retirement income plan (“SRIP”) for certain former and current employees of Hooker Furniture Corporation, as well as two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, one of two entities combined to form Home Meridian International. These legacy pension plan obligations include:

§
the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. The SERP is an unfunded plan and all benefits are paid solely out of our general assets; and
§
the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.

The SRIP, SERP and Pension Plan are all “frozen” and we do not expect to add additional employees to any of these plans in the future. Pension plan assets include a range of mutual fund asset classes and are measured at fair value using Level 1 inputs, which are quoted prices in active markets.

The consolidated liability for our retirement plan obligations at July 30, 2017 and January 29, 2017 are shown below and are shown in our condensed consolidated balance sheets as follows:

   
July 30,
   
January 29,
 
   
2017
   
2017
 
Accrued salaries, wages and benefits (current portions)
           
   SRIP
 
$
473
   
$
473
 
   SERP
   
221
     
221
 
   Pension
   
-
     
-
 
      Total current portion
 
$
694
   
$
694
 
                 
Long-term portions
               
   SRIP
 
$
8,548
   
$
8,372
 
   SERP
   
2,006
     
2,081
 
      Total deferred compensation*
   
10,554
     
10,453
 
   Pension
   
3,008
     
3,499
 
      Total deferred compensation and pension plans
 
$
13,562
   
$
13,952
 
                 
   Consolidated pension liabilities
 
$
14,256
   
$
14,646
 


*Total Deferred Compensation shown in the Long-Term Liabilities section of our Condensed Consolidated Balance Sheets is $11.0 million and $10.8 million at July 30, 2017 and January 29, 2017. These totals include the SRIP and SERP amounts shown in the table above, as well as miscellaneous additional long-term compensation-related items unrelated to these plans.

Components of net periodic benefit cost for the SRIP, SERP and Pension Plans are included in our condensed consolidated statements of income under selling and administrative expenses.
 
 
 
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
 
 
July 30,
   
July 31,
   
July 30,
   
July 31,
 
 
 
2017
   
2016
   
2017
   
2016
 
Net periodic benefit costs
                       
   SRIP:
                       
      Service cost
 
$
76
   
$
94
   
$
152
   
$
187
 
      Interest cost
   
86
     
85
     
172
     
170
 
      Actuarial loss (gain)
   
15
     
(18
)
   
31
     
(35
)
         Total SRIP
   
177
     
161
     
355
     
322
 
 
                               
   SERP:
                               
      Interest cost
   
21
     
22
     
41
     
44
 
         Total SERP
   
21
     
22
     
41
     
44
 
 
                               
   Pension Plan:
                               
      Interest cost
   
173
     
187
     
346
     
376
 
      Expected return on pension plan assets
   
(234
)
   
(197
)
   
(467
)
   
(395
)
      Expected administrative expenses
   
70
     
70
     
140
     
140
 
         Total Pension Plan
   
9
     
60
     
19
     
121
 
 
                               
Consolidated net periodic benefit costs
 
$
207
   
$
243
   
$
415
   
$
487
 
 
The expected long-term rate of return on Pension Plan assets is 7.0% as of the Pension Plan’s most recent valuation date of January 29, 2017.


We contributed $511,000 in required contributions to the Pension Plan in the first half of fiscal 2018. We expect to contribute an additional $265,000 in required contributions to the Pension Plan in the second half of fiscal 2018. The SRIP and SERP plans are unfunded plans. Consequently, we expect to pay a total of approximately $315,000 in benefit payments from our general assets during the remainder of fiscal 2018 to fund SRIP and SERP payments.

9. Earnings Per Share

We refer you to the discussion of Earnings Per Share in Note 1-Summary of Significant Accounting Policies, in the financial statements included in our 2017 Annual Report, for additional information concerning the calculation of earnings per share.

We have issued restricted stock awards to non-employee members of the board of directors since 2006 and restricted stock units (“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

   
July 30,
   
January 29,
 
   
2017
   
2017
 
             
Restricted shares
   
19
     
26
 
Restricted stock units
   
19
     
20
 
     
38
     
46
 
 
All restricted shares and RSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
   
July 31,
   
July 30,
   
July 31,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net income
 
$
7,778
   
$
5,349
   
$
12,524
   
$
7,848
 
   Less: Unvested participating restricted stock dividends
   
3
     
3
     
6
     
5
 
            Net earnings allocated to unvested participating restricted stock
   
16
     
12
     
27
     
18
 
Earnings available for common shareholders
   
7,759
     
5,334
     
12,491
     
7,825
 
                                 
Weighted average shares outstanding for basic earnings per share
   
11,565
     
11,533
     
11,554
     
11,524
 
Dilutive effect of unvested restricted stock and RSU awards
   
28
     
21
     
33
     
24
 
   Weighted average shares outstanding for diluted earnings per share
   
11,593
     
11,554
     
11,587
     
11,548
 
                                 
Basic earnings per share
 
$
0.67
   
$
0.46
   
$
1.08
   
$
0.68
 
                                 
Diluted earnings per share
 
$
0.67
   
$
0.46
   
$
1.08
   
$
0.68
 

10. Income Taxes

We recorded income tax expense of $4.2 million for the fiscal 2018 second quarter compared to $2.9 million for the comparable prior year period. The effective tax rates for the fiscal 2018 and 2017 second quarter were 35.2% and 35.1%, respectively. Our effective tax rate was higher in the fiscal 2018 second quarter primarily due to the life insurance proceeds received in the prior year second quarter. The effective tax rates for the first half of fiscal 2018 and 2017 were 34.4% and 35.3%, respectively. The effective tax rate was lower in the 2018 first half as a result of the excess tax benefits from share-based compensation and a state tax credit received during FY2018 first quarter.

The net unrecognized tax benefits as of July 30, 2017 and January 29, 2017, which, if recognized, would affect our effective tax rate are $205,000 and $201,000, respectively.
Tax years ending February 2, 2014 through January 29, 2017 remain subject to examination by federal and state taxing authorities.

11. Segment Information

As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in Accounting Standards Codification Topic 280, “Segment Reporting” (“ASC 280”), which are to allow the users of our financial statements to:

§
better understand our performance;
§
better assess our prospects for future net cash flows; and
§
make more informed judgments about us as a whole.

We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.

For financial reporting purposes, we are organized into four operating segments:

§
Hooker Casegoods, an imported casegoods business; 
§
Upholstery, which includes the domestic upholstery manufacturing operations Bradington-Young and Sam Moore and the imported upholstery operations of Hooker Upholstery;
§
All other, which includes H Contract and Homeware, two businesses started in 2013. Neither of these segments met the ASC 280 aggregation criteria nor were individually reportable; therefore, we combined them in an “All other” segment in accordance with ASC 280. We note that Homeware failed to reach critical mass and its operations were wound down during the fiscal 2018 second quarter; and
§
Home Meridian, a business acquired at the beginning of fiscal 2017, is stand-alone, mostly autonomous business that serves a different type or class of customer than do the legacy Hooker businesses and at much lower margins.

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

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
         
July 31,
         
July 30,
         
July 31,
       
   
2017
         
2016
         
2017
         
2016
       
         
% Net
         
% Net
         
% Net
         
% Net
 
Net Sales
       
Sales
         
Sales
         
Sales
         
Sales
 
   Hooker Casegoods
 
$
34,880
     
22.3
%
 
$
33,582
     
24.7
%
 
$
67,695
     
23.6
%
 
$
66,510
     
25.8
%
   Upholstery
   
22,364
     
14.3
%
   
19,847
     
14.6
%
   
44,546
     
15.5
%
   
41,740
     
16.2
%
   Home Meridian
   
96,403
     
61.7
%
   
80,362
     
59.0
%
   
170,105
     
59.2
%
   
145,338
     
56.3
%
   All other
   
2,661
     
1.7
%
   
2,372
     
1.7
%
   
4,834
     
1.7
%
   
4,406
     
1.7
%
   Intercompany eliminations
   
-
             
-
              -              
-
         
Consolidated
 
$
156,308
     
100.0
%
 
$
136,163
     
100
%
 
$
287,180
     
100.0
%
 
$
257,994
     
100
%
                                                                 
Gross Profit
                                                               
   Hooker Casegoods
 
$
10,766
     
30.9
%
 
$
10,662
     
31.7
%
 
$
21,638
     
32.0
%
 
$
20,816
     
31.3
%
   Upholstery
   
5,442
     
24.3
%
   
4,642
     
23.4
%
   
11,065
     
24.8
%
   
9,718
     
23.3
%
   Home Meridian
   
16,061
     
16.7
%
   
12,413
     
15.4
%
   
27,067
     
15.9
%
   
23,123
     
15.9
%
   All other
   
847
     
31.8
%
   
757
     
31.9
%
   
1,487
     
30.8
%
   
1,413
     
32.1
%
   Intercompany eliminations
   
1
             
4
             
3
             
7
         
Consolidated
 
$
33,117
     
21.2
%
 
$
28,478
     
20.9
%
 
$
61,260
     
21.3
%
 
$
55,077
     
21.3
%
                                                                 
Operating Income
                                                               
   Hooker Casegoods
 
$
3,999
     
11.5
%
 
$
4,341
     
12.9
%
 
$
7,928
     
11.7
%
 
$
6,422
     
9.7
%
   Upholstery
   
2,314
     
10.3
%
   
1,316
     
6.6
%
   
4,608
     
10.3
%
   
3,078
     
7.4
%
   Home Meridian
   
5,235
     
5.4
%
   
2,365
     
2.9
%
   
6,051
     
3.6
%
   
2,453
     
1.7
%
   All other
   
246
     
9.2
%
   
198
     
8.4
%
   
313
     
6.5
%
   
265
     
6.0
%
   Intercompany eliminations
   
1
             
4
             
3
             
7
         
Consolidated
 
$
11,795
     
7.5
%
 
$
8,224
     
6.0
%
 
$
18,903
     
6.6
%
 
$
12,225
     
4.7
%
                                                                 
Capital Expenditures
                                                               
   Hooker Casegoods
 
$
464
           
$
342
           
$
966
           
$
722
         
   Upholstery
   
144
             
174
             
207
             
208
         
   Home Meridian
   
190
             
(59
)
           
492
             
230
         
   All other
   
-
             
-
             
-
             
-
         
Consolidated
 
$
798
           
$
457
           
$
1,665
           
$
1,160
         
                                                                 
Depreciation
                                                               
   & Amortization
                                                               
   Hooker Casegoods
 
$
479
           
$
548
           
$
983
           
$
1,084
         
   Upholstery
   
193
             
236
             
391
             
465
         
   Home Meridian
   
663
             
1,176
             
1,318
             
3,194
         
   All other
   
3
             
3
             
5
             
5
         
Consolidated
 
$
1,338
           
$
1,963
           
$
2,697
           
$
4,748
         
 
   
As of
July 30,
                   
As of
January 29,
                 
   
2017
   
%Total
       
 
   
2017
   
%Total
         
Identifiable Assets
       
Assets
         
 
         
Assets
           
   Hooker Casegoods
 
$
133,721
     
42.7
%
 
 
 
     
 
 
$
130,917
     
41.1
%
 
 
     
 
   Upholstery
   
34,493
     
11.0
%
   
 
     
 
   
32,275
     
10.1
%
         
 
   Home Meridian
   
144,111
     
46.1
%
   
 
     
 
   
154,954
     
48.6
%
         
 
   All other
   
534
     
0.2
%
   
 
     
 
   
554
     
0.2
%
         
 
   Intercompany eliminations
   
-
             
 
 
   
 
   
(4
)
   
0.0
%
       
 
Consolidated
 
$
312,859
     
100.0
%
 
 
     
 
 
$
318,696
     
100
%
       
 
 


Sales by product type are as follows:

   
Net Sales (in thousands)
 
   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
         
July 31,
         
July 30,
         
July 31,
       
   
2017
   
%Total
   
2016
   
%Total
   
2017
   
%Total
   
2016
   
%Total
 
Casegoods
 
$
106,851
     
68
%
 
$
88,848
     
65
%
 
$
201,534
     
70
%
 
$
178,045
     
69
%
Upholstery
   
49,457
     
32
%
   
47,315
     
35
%
   
85,646
     
30
%
   
79,949
     
31
%
   
$
156,308
     
100
%
 
$
136,163
     
100
%
 
$
287,180
     
100
%
 
$
257,994
     
100
%

12. Subsequent Events
Dividends
On August 29, 2017, our board of directors declared a quarterly cash dividend of $0.12 per share, payable on September 29, 2017 to shareholders of record at September 15, 2017.
Proposed Acquisition
On September 6, 2017, we reached a definitive agreement to acquire Shenandoah Furniture, Inc. (the “Shenandoah” Acquisition), a North Carolina-based domestic upholstery manufacturer, for $40 million. The acquisition agreement includes substantially all of the assets and certain liabilities of Shenandoah, which is headquartered in Valdese, N.C. and operates leased plants in Valdese and Mt. Airy, N.C. and Martinsville, VA. The $40 million purchase price consists of $32 million in cash, of which approximately $12 million is expected to be in the form of additional bank debt, and $8 million in newly issued common shares. The cash portion of the purchase price is subject to customary working capital adjustments.  We expect the acquisition to be accretive to earnings in our 2019 fiscal year, which begins on January 29, 2018. In the short-term, we expect a nominal reduction in earnings for the remainder of fiscal 2018 due to the timing of the acquisition and some short-term additional expenses related to the acquisition. We expect the acquisition to close during our third fiscal quarter which ends October 29, 2017, subject to among other things, third party consents and other customary closing conditions. The transaction does not require approval by our shareholders.


Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

All references to the “Company,” “we,” “us” and “our” refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to operating segment information. All references to “legacy Hooker” or “legacy Hooker business” divisions, or companies refer to the current components of our Hooker Casegoods and Upholstery operating segments. All references to specific quarterly periods are referring to our fiscal quarters. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. All references to the years 2018, 2017 and other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks.

Forward-Looking Statements

Certain statements made in this report, including statements included under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements.  These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Those risks and uncertainties include but are not limited to:

§
general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;
§
the risks specifically related to the concentrations of a material part of our of sales and accounts receivable in only a few customers;
§
achieving and managing growth and change, and the risks associated with new business lines, acquisitions (including the proposed Shenandoah Acquisition), restructurings, strategic alliances and international operations;
§
risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;
§
adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, including the implementation of a possible border-adjustment tax;
§
our ability to successfully implement our business plan to increase sales and improve financial performance;
§
changes in actuarial assumptions, the interest rate environment, the return on plan assets and future funding obligations related to the Pension Plan, which can affect future funding obligations, costs and plan liabilities;
§
the possible impairment of our long-lived assets, which can result in reduced earnings and net worth;
§
the cost and difficulty of marketing and selling our products in foreign markets;
§
disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;
§
the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet;
§
disruptions affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices in Vietnam and China;
§
when or whether our new business initiatives, meet growth and profitability targets;
§
price competition in the furniture industry;
 
§
changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials;
§
the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;
§
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 and environmental compliance and remediation costs;
§
risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;
§
capital requirements and costs, including the servicing of our floating-rate term loans;
§
competition from non-traditional outlets, such as catalog and internet retailers and home improvement centers;
§
changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, declines in consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit;
§
higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products; and
§
higher than expected employee medical and workers’ compensation costs that may increase the cost of our self-insured healthcare and workers’ compensation plans.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

Our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward Looking Statements detailed above and Item 1A, “Risk Factors” in our 2017 annual report on Form 10-K (the “2017 Annual Report”), and Item 1A of Part II of this quarterly report on Form 10-Q.

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “first quarter” or “quarterly period”) that began May 1, 2017, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began January 30, 2017, which both ended July 30, 2017. This report discusses our results of operations for this period compared to the 2017 fiscal year thirteen-week period that began May 2, 2016 and the twenty-six week period that began February 1, 2016, which both ended July 31, 2016; and our financial condition as of July 30, 2017 compared to January 29, 2017.

References in this report to:

§
the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and will end January 28, 2018; and

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and ended January 29, 2017.

Dollar amounts presented in the tables below are in thousands except for per share data.

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 2017 Annual Report filed with the SEC on April 14, 2017. Our 2017 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.

Our 2017 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.

Nature of Operations

Hooker Furniture Corporation (referred to as “we,” “us”, “our” “Hooker” or the “Company”), incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2016 shipments to U.S. retailers, according to a 2017 survey by a leading trade publication.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable legacy businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our legacy businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and is currently in the process of acquiring Shenandoah Furniture, Inc., (the “Shenandoah Acquisition”- see the discussion under “Proposed Acquisition” below) a North Carolina-based domestic upholsterer.
Hooker’s acquisition of Home Meridian has better positioned us in some of the fastest growing and emerging channels of distribution, including e-commerce, warehouse membership clubs, and contract channels of distribution, although at lower margins. The HMI Acquisition has provided the Home Meridian division’s current leadership team with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus. Hooker’s proposed acquisition of Shenandoah should better position us in the “lifestyle specialty” retail distribution channel, which we believe is gaining market share and doing well with multiple demographic groups.

Overview

Our net sales are derived from the sale of home furnishings, as well as hospitality and contract furniture. We believe that consumer home furnishings purchases are impacted by an array of factors, including general economic conditions (such as consumer confidence, availability of consumer credit, energy and other commodity prices), and housing and mortgage markets. These purchases are also impacted by lifestyle-driven factors such as changes in fashion trends, disposable income, household formation and turnover, as well as competition with other discretionary purchases. Hospitality furniture sales are driven primarily by new hotel construction and hotel remodeling activity, which is linked to the strength of the overall economy, including business and personal spending levels. Contract furniture sales are driven largely by senior living facility construction and remodeling activity, which is linked to the number of consumers entering retirement, which is partially related to the strength of the overall economy, including stock market performance.

Approximately 90% of our fiscal 2017 sales were of imported furniture products, primarily from Asia. Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers (such as duties and tariffs) diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. Our domestic upholstery operations have both significantly higher overhead and fixed costs than our import operations, and their profitability can be and has been adversely affected by economic downturns.

Executive Summary-Results of Operations

Consolidated net sales for the fiscal 2018 second quarter grew 15% to $156.3 million and grew 11% to $287.2 million in fiscal 2018 first half due primarily to net sales increases in our Home Meridian segment.  Home Meridian’s net sales increased $16.0 million or 20% as compared to the prior year quarter and increased for the fiscal 2018 first half by $24.8 million or 17.0% compared to the prior year first half. For the fiscal 2018 second quarter, the Hooker Casegoods, Upholstery and All other segments had net sales increases of 3.9%, 12.7% and 12.2%, respectively.

For the fiscal 2018 first half, the Hooker Casegoods, Upholstery and All other segments had net sales increases of 1.8%, 6.7% and 9.7%, respectively. Net income for the fiscal 2018 second quarter increased $2.4 million or 45% as compared to the prior year second quarter and increased $4.7 million or 60% compared to the prior year first half.

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2018 second quarter and first half results of operations:

§
Gross profit. Consolidated gross profit increased in absolute terms and as a percentage of net sales for the fiscal 2018 second quarter due primarily to gross profit improvements in our Home Meridian segment due to higher net sales and customer mix. Upholstery segment gross profit increased due to increased net sales at both Hooker Upholstery and Bradington-Young. Consolidated gross profit increased in absolute terms for the fiscal 2018 first half due primarily to increased sales in our Home Meridian and Upholstery segments, but remained flat as a percentage of net sales for the fiscal 2018 first half.

§
Selling and administrative expenses. During the fiscal 2018 second quarter, consolidated selling and administrative (S&A) expenses increased in absolute terms primarily due to higher selling, bonus and professional expenses. During the 2018 first half, consolidated S&A expenses increased in absolute terms primarily due to higher selling, bonus and bad debt expense. Consolidated S&A expenses as a percentage of net sales decreased due to increased net sales.

§
Intangible asset amortization expense. The Home Meridian segment recorded amortization expense of $334,000 in the fiscal 2018 second quarter and $667,000 in the fiscal 2018 first half for HMI Acquisition-related intangibles, compared to $813,000 and $2.5 million in the comparable prior year periods.

§
Operating income. Consolidated operating income increased $3.6 million or 43.4% in the fiscal 2018 second quarter and increased $6.7 million or 54.6% in the fiscal 2018 first half, due to the factors discussed above and in greater detail below.


Review

We were pleased to have achieved an approximate 15% consolidated sales increase during the fiscal 2018 second quarter, with sales up across all operating segments and in eight of our ten business units. The Home Meridian segment led the consolidated net sales increase with a 20% increase in net sales for the fiscal 2018 second quarter and 17% net sales increase for the fiscal 2018 first half, primarily due to increased sales to mega, e-commerce and alternate channel accounts. The Home Meridian segment ended the first half with a 24% year-to-date increase in sales orders and a 23% increase in order backlog as of the end of the fiscal 2018 second quarter, both as measured against the comparable prior year periods. Additionally, the customer mix and related sales allowance issues that strained Home Meridian’s margins in the fiscal 2018 first quarter, were muted in the second quarter. Consequently, that segment’s gross margins were flat for the six-month period, but increased in the fiscal second quarter. The Upholstery segment net sales increased in the double digits for the quarter and in the upper single digits for the six-month period, on the strength of double-digit sales increases in both the Hooker Upholstery and Bradington-Young divisions of that segment. Hooker Upholstery’s sales increased primarily due to a better in-stock position, now that the division has fully recovered from inventory shortages that resulted from a vendor-quality issue in the prior year. Bradington-Young’s net sales increased primarily due to increased sales of higher priced luxury motion products. The Upholstery segment’s net sales and operating profit performance was partially offset by net sales decreases at Sam Moore in both the quarter and six month periods, as that division continues to struggle with labor efficiency issues that have led to longer delivery times, which has resulted in lower orders and net sales. The Upholstery segment’s year-to-date sales orders were up 5.3% and its order backlog was up 14.3% as of the end of the second quarter, both as compared to the comparable prior year periods. Hooker Casegoods segment net sales increased 3.9% and 1.8%, respectively, for the quarter and six-month period and operating profit for both periods remained strong. Hooker Casegoods sales orders increased 8.9% year-to-date July and backlog was up 25.8% at quarter-end. Although a small part of our consolidated results, the All Other segment reported a 12% and 10% net sales increase for the second quarter and six-months, respectively, due to sales growth in H Contract segment. Its sales orders were up 20% in the first half and its backlog was up over 7% at quarter-end, all compared to the prior-year period. The wind-down of Homeware’s operations concluded during the quarter, with essentially no net sales recorded in the quarter and only a small amount recorded in the first half.

In addition to increased net sales, consolidated operating profitability improved both due to the absence of approximately $1 million in HMI Acquisition-related costs that were incurred in the prior year and a $1.8 million decrease in amortization expense on HMI acquisition-related intangibles. We were gratified to post a double-digit operating profit margin for the fifth quarter in a row, with Hooker Casegoods achieving an 11.5% operating income margin for the fiscal 2018 second quarter.

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 30,
   
July 31,
   
July 30,
   
July 31,
 
   
2017
   
2016
   
2017
   
2016
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
78.8
     
79.1
     
78.7
     
78.7
 
Gross profit
   
21.2
     
20.9
     
21.3
     
21.3
 
Selling and administrative expenses
   
13.4
     
14.3
     
14.5
     
15.7
 
Intangible asset amortization
   
0.2
     
0.6
     
0.2
     
1.0
 
Operating income
   
7.5
     
6.0
     
6.6
     
4.7
 
Other income, net
   
0.3
     
0.2
     
0.3
     
0.2
 
Interest expense, net
   
0.2
     
0.2
     
0.2
     
0.2
 
Income before income taxes
   
7.7
     
6.0
     
6.6
     
4.7
 
Income tax expense
   
2.7
     
2.1
     
2.3
     
1.7
 
Net income
   
5.0
     
3.9
     
4.4
     
3.0
 


Fiscal 2018 Second Quarter Compared to Fiscal 2017 Second Quarter


   
Net Sales
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
           
% Net Sales
               
Hooker Casegoods
 
$
34,880
     
22.3
%
 
$
33,582
     
24.7
%
 
$
1,298
     
3.9
%
Upholstery
   
22,364
     
14.3
%
   
19,847
     
14.6
%
   
2,517
     
12.7
%
Home Meridian
   
96,403
     
61.7
%
   
80,362
     
59.0
%
   
16,041
     
20.0
%
All Other
   
2,661
     
1.7
%
   
2,372
     
1.7
%
   
289
     
12.2
%
Intercompany Eliminations
   
-
         
-
             
-
         
  Consolidated
   
156,308
     
100
%
   
136,163
     
100
%
   
20,145
     
14.8
%
 

Unit Volume
 
FY18 Q2 %
Increase
vs. FY17 Q2
   
Average Selling Price
(ASP)
 
FY18 Q2 %
Increase
vs. FY17 Q2
 
                 
Hooker Casegoods
   
0.9
%
 
Hooker Casegoods
   
3.4
%
Upholstery
   
13.5
%
 
Upholstery
   
-0.9
%
Home Meridian
   
31.7
%
 
Home Meridian
   
-11.0
%
All Other
   
-11.2
%
 
All Other
   
27.0
%
Consolidated
   
26.0
%
 
Consolidated
   
-9.9
%

Consolidated net sales increased primarily as a result of higher incoming order rates at Home Meridian and to a lesser extent in the Upholstery and Casegoods segments, offset by a decline in average selling prices in Home Meridian and Upholstery segments. The Home Meridian segment’s unit volume increased primarily due to increased sales to mega, e-commerce and alternate channels accounts. The decrease in Home Meridian segment average selling price was attributable to customer mix. We believe the Hooker Casegoods segment unit volume was flat primarily due to sluggish retail furniture sales in the traditional furniture channels in which that segment competes, a trend that seems generally consistent with that of the overall home furnishings industry. Average selling price in the Hooker Casegoods segment increased 3.4% due to the greater volume of non-container direct shipments in the second quarter. Upholstery segment unit volume increased primarily due to robust sales in the Hooker Upholstery division and to a lesser extent at Bradington Young. Hooker Upholstery’s prior-year sales were adversely affected by a quality issue that delayed shipments to retailers. Upholstery segment average selling prices decreased due to lower average selling prices at Sam Moore. Although a small part of our consolidated results, unit volume decreased and ASP increased in our All Other segment due to the lack of Homeware net sales during the quarter, as that business completed its wind-down during the quarter.

   
Gross Income and Margin
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
               
Hooker Casegoods
 
$
10,766
     
30.9
%
 
$
10,662
     
31.7
%
 
$
104
     
1.0
%
Upholstery
   
5,442
     
24.3
%
   
4,642
     
23.4
%
   
800
     
17.2
%
Home Meridian
   
16,061
     
16.7
%
   
12,413
     
15.4
%
   
3,648
     
29.4
%
All Other
   
847
     
31.8
%
   
757
     
31.9
%
   
90
     
11.9
%
Intercompany Eliminations
   
1
             
4
             
(3
)
   
-75.0
%
  Consolidated
 
$
33,117
     
21.2
%
 
$
28,478
     
20.9
%
 
$
4,639
     
16.3
%

Consolidated gross profit increased in the fiscal 2018 second quarter, primarily due to improved profit margin in Home Meridian and Upholstery segments due primarily to increased net sales in those segments. The Upholstery segment’s Hooker Upholstery division was the primary driver of increased gross profit in the second quarter due to increased sales. Gross profit in Hooker Casegoods segment increased slightly in absolute terms, but decreased as a percentage of net sales due to increased cost of goods sold and adjustments in discounts and other sales accruals.

   
Selling and Administrative Expenses
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
           
% Net Sales
               
Hooker Casegoods
 
$
6,766
     
19.4
%
 
$
6,321
     
18.8
%
 
$
445
     
7.0
%
Upholstery
   
3,128
     
14.0
%
   
3,326
     
16.8
%
   
(198
)
   
-6.0
%
Home Meridian
   
10,494
     
10.9
%
   
9,235
     
11.5
%
   
1,259
     
13.6
%
All Other
   
601
     
22.6
%
   
559
     
23.6
%
   
42
     
7.5
%
  Consolidated
 
$
20,989
     
13.4
%
 
$
19,441
     
14.3
%
 
$
1,548
     
8.0
%


Consolidated S&A expenses decreased as a percentage of net sales primarily due to higher net sales, but increased in absolute terms due to higher employee incentive accruals on increased earnings, increased selling costs due to higher sales, increased benefits expense due primarily to a $500,000 gain on Company-owned life insurance recognized in the prior-year second quarter, not repeated in the current period.

   
Intangible Asset Amortization
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
Home Meridian
       
% Net Sales
           
% Net Sales
               
Intangible asset amortization
 
$
333
     
0.2
%
 
$
813
     
0.6
%
 
$
(480
)
   
-59.0
%

Intangible asset amortization expense was higher in the prior year quarter due to the short amortization period of some of the intangible assets recorded as a result of the HMI Acquisition.

   
Operating Profit and Margin
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
           
% Net Sales
               
Hooker Casegoods
 
$
3,999
     
11.5
%
 
$
4,341
     
12.9
%
 
$
(342
)
   
-7.9
%
Upholstery
   
2,314
     
10.3
%
   
1,316
     
6.6
%
   
998
     
75.8
%
Home Meridian
   
5,235
     
5.4
%
   
2,365
     
2.9
%
   
2,870
     
121.4
%
All Other
   
246
     
9.2
%
   
198
     
8.4
%
   
48
     
24.2
%
Intercompany Eliminations
   
1
             
4
             
(3
)
   
-75.0
%
  Consolidated
 
$
11,795
     
7.5
%
 
$
8,224
     
6.0
%
 
$
3,571
     
43.4
%

Operating profitability increased for the fiscal 2018 second quarter compared to the prior year quarter, both as a percentage of net sales and in absolute terms, due to the factors discussed above.
 
   
Interest Expense, net
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Consolidated interest expense, net
 
$
282
     
0.2
%
 
$
247
     
0.2
%
 
$
35
     
14.2
%
 
Consolidated interest expense was recognized on our HMI Acquisition-related term loans.

   
Income taxes
 
   
Thirteen Weeks Ended
 
   
July 30, 2017
         
July 31, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Consolidated income tax expense
 
$
4,234