Hooker Furnishings - 10-Q quarterly report FY2013 Q3

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 October 28, 2012

 

Commission file number 000-25349

HOOKER FURNITURE CORPORATION

(Exact name of registrant as specified in its charter)

440 East Commonwealth Boulevard, Martinsville, VA  24112

(Address of principal executive offices, zip code)

(276) 632-0459

(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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of December 3, 2012:

 

Item 1.  Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

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

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

For the Thirty-Nine Weeks Ended October 28, 2012

 

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.  Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.  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, 2012.

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.

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,” “third quarter” or “quarterly period”) that began July 30, 2012 and the thirty-nine week period (also referred to as “nine months,” or “nine-month period”) that began January 30, 2012, and which both ended October 28, 2012.  These financial statements also include the thirteen-week period that began August 1, 2011 and the thirty-nine week period that began January 31, 2011, which both ended October 30, 2011 and our financial condition as of October 28, 2012 compared to January 29, 2012.

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

Certain amounts have been reclassified in the prior period financial statements to reflect the current period classification.

2.           Inventories

 

 

 

 

Leasehold improvements increased $1.9 million to $2.7 million at October 28, 2012, primarily due to the capitalization of improvements to our new High Point, NC showroom during the fiscal 2013 first quarter.

The buildings and land improvements, machinery and equipment and land fixed asset categories decreased at October 28, 2012, primarily due to the sale of our former Cherryville, NC upholstery manufacturing facility during the fiscal 2013 second quarter.

The $1.3 million in construction-in-process at October 28, 2012 is made up primarily of expenses to support our continued ERP conversion efforts and technological upgrades in our import and upholstery operations.

4.           Intangible Assets

 

 

5.           Accounts Receivable

 

“Receivable from factor” represents amounts due with respect to factored accounts receivable. We factor substantially all of the accounts receivable for our domestically produced upholstery without recourse to us.

 

 

A limited number of our accounts receivable for our domestically produced upholstery are factored with recourse to us. The amounts of these receivables at October 28, 2012 and January 29, 2012 were $118,000 and $135,000, respectively. If the factor is unable to collect the amounts due, invoices are returned to us for collection. We include an estimate of potentially uncollectible receivables in our calculation of our allowance for doubtful accounts.

6.          Earnings Per Share

Since 2006, we have issued restricted stock awards to non-employee members of the board of directors under our stock incentive plan and expect to continue to make these awards annually.  These awards vest if the director continuously serves on the board through a three-year service period and may vest earlier upon certain events specified in the plan. In both fiscal 2012 and the fiscal 2013 first quarter, we awarded time-based restricted stock units (RSUs) to certain executive employees.  Each RSU entitles the executive to receive one share of the Company’s common stock if he remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of the Company’s common stock, cash, or both, at the discretion of our compensation committee. Unlike the restricted stock awards made to our non-employee directors, the shares of our common stock that may be issued under these RSUs will not be issued until the vesting period has elapsed. The RSU grantee is not entitled to receive dividends on or vote these shares during the vesting period. Both our unvested restricted stock awards and shares issuable under unvested RSUs are considered when computing diluted earnings per share. As of October 28, 2012 and January 29, 2012 there were 31,894 and 32,005 dilutive shares, respectively, outstanding, or deemed outstanding, under restricted stock and RSU awards, net of forfeitures and vested shares on each date. During the fiscal 2013 third quarter and the fiscal 2013 first nine months, we purchased and retired 35,300 and 57,700 shares, respectively, of our common stock under a $12.5 million share repurchase authorization approved by our board of directors during the fiscal 2013 first quarter. These repurchases reduced our total outstanding shares for each respective period and, consequently,  reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2013 quarterly and year-to-date periods shown below.

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

 

As of October 28, 2012, we had an aggregate $13.2 million available under our $15.0 million revolving credit facility to fund working capital needs.  Standby letters of credit in the aggregate amount of $1.8 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of October 28, 2012.  There were no additional borrowings outstanding under the revolving credit facility on October 28, 2012.  Any principal outstanding under the revolving credit facility is due July 31, 2013.

8.           Employee Benefit Plans

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives. The liability for the SRIP at October 28, 2012 was $7.7 million and was $7.6 million at January 29, 2012 and is shown in our condensed consolidated balance sheets as follows:

 

Components of net periodic benefit cost for the SRIP are included in our condensed consolidated statements of operations under selling and administrative expenses:

 

9.           Income Taxes

We recorded income tax expense of $1.4 million for the fiscal 2013 third quarter compared to $563,000 for the prior year third quarter.  The effective tax rates for the fiscal 2013 and fiscal 2012 third quarters were 36.2% and 20.0%, respectively.  The fiscal 2013 effective tax rate is in the range of what we would expect from normal operations. The 20% effective tax rate from the fiscal 2012 third quarter was exceptionally low, primarily due to the tax benefits of the following items, which occurred in the fiscal 2012 third quarter:

We recorded income tax expense of $2.8 million in the first nine months of fiscal 2013 compared to $1.7 million in the comparable prior-year period.  The effective income tax rates for the first nine months of fiscal 2013 and fiscal 2012 were 36.2% and 27.9%, respectively.  The higher effective income tax rate for the fiscal 2013 period was primarily due to:

10.         Segment Information

The following table presents segment information for the following thirteen and thirty-nine week periods:

11.         Subsequent Events

 

 

At its December 4, 2012 meeting, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on December 28, 2012 to shareholders of record at December 17, 2012.

 

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

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,” “third quarter” or “quarterly period”) that began July 30, 2012 and the thirty-nine week period (also referred to as “nine months,” “nine-month period”) that began January 30, 2012, and which both ended October 28, 2012.  This report discusses our results of operations for these periods compared to the fiscal year 2012 thirteen-week period that began August 1, 2011 and the thirty-nine week period that began January 31, 2011, which both ended October 30, 2011, and our financial condition as of October 28, 2012 compared to January 29, 2012.

For financial reporting purposes, we are organized into two operating segments – casegoods furniture and upholstered furniture. References in this report to the Company refer to the Company and our consolidated subsidiaries, unless specifically referring to segment information.

References in this report to:

Dollar amounts presented in the tables below are in thousands.

Incorporated in Virginia in 1924, Hooker Furniture Corporation (the “Company,” “we,” “us,” and “our”) is a home furnishings marketing and logistics company offering imported residential casegoods and upholstery, as well as domestically produced custom leather and fabric upholstery. We are ranked among the nation’s top 10 largest publicly traded furniture sources, based on 2011 shipments to U.S. retailers, according to a survey released in May 2012 by Furniture/Today, a leading trade publication.  We are a key resource for residential wood and metal furniture, commonly referred to as casegoods, and upholstered furniture.  Our major casegoods product categories include home entertainment, home office, accent, dining and bedroom furniture under the Hooker Furniture brand, and youth furniture sold under the Opus Designs by Hooker brand.  Our residential upholstered seating companies include Bradington-Young, a specialist in upscale motion and stationary leather furniture, and Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on fabric cover-to-frame customization.  An extensive selection of designs and formats along with finish and cover options in each of these product categories makes us a comprehensive residential furniture resource for retailers, primarily targeting the upper-medium price range.  Our principal customers are retailers of residential home furnishings who are broadly dispersed throughout the United States and Canada, as well as an important, growing international customer base.  Customers include independent furniture stores, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.

Consumer home furnishings purchases are driven by an array of factors, including general economic conditions such as:

as well as lifestyle-driven factors such as changes in:

Our industry has been impacted by low levels of consumer confidence and a weak housing market since the fall of 2006.  By late 2008, this malaise, exacerbated by weak credit markets, had spread to the broader U.S. economy.  As a result, the residential home furnishings industry experienced a significant and persistent decline in demand for its products from 2008-2010.  Discretionary purchases of furniture have been highly affected by low consumer confidence.  Current economic factors, such as high unemployment and difficult housing and mortgage markets and changing consumer priorities have resulted in a relatively weak retail environment for home furnishings and related purchases. The extended weakness in housing and housing related industries is beginning to shows signs of recovery; however, any recovery in home furnishings is expected to be slow and cautious due to the relatively high cost and postponable nature of many home furnishing product purchases.

Our domestic upholstery operations, which have significantly higher overhead and fixed costs than our import operations, have been particularly affected by the decline in demand for home furnishings and, except for the first quarter and third quarter of the current fiscal year, have experienced operating losses since our fiscal 2009 second quarter.  Extensive cost reduction efforts over that time have mitigated the losses and have resulted in our upholstery segment returning to operating profitability for the first nine-months of fiscal 2013. Our lower overhead, variable-cost import operations have driven our profitability over the last few years and provide us with the flexibility to respond to changing demand by adjusting inventory purchases from suppliers. Our import model also requires that we transition sourcing among suppliers, often located in different countries or regions, when quality concerns or inflationary pressures diminish the value proposition offered by our current suppliers.

The following are the primary factors that affected our consolidated results of operations for the three and nine-month periods ended October 28, 2012 compared to the same prior-year periods:

 

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

 

 

Gross Profit

These improvements were partially offset by increases in

Upholstery selling and administrative expenses decreased both as a percentage of net sales and in absolute terms in the fiscal 2013 third quarter compared to the same prior-year period, primarily due to decreases in:

These decreases were partially offset by increases in:

 

Net Income and Earnings Per Share

 

 

 

The decrease in consolidated net sales for the fiscal 2013 first nine months, as compared to the fiscal 2012 first nine months, was principally due to lower unit volume, particularly in our casegoods segment, partially offset by higher average selling prices in both segments. The casegoods sales decrease was driven by out-of-stock positions on several key items, groups and collections in the first half of the fiscal 2013 fiscal year and decreased discounting. The out-of-stock positions were primarily due to overly-aggressive inventory reductions that began in fiscal 2012 and continued into the fiscal 2013 first six months. To a lesser extent and consistent with our fiscal 2012 fourth quarter, vendor shifts from China to other Asian countries resulted in the delay of several well-placed new casegoods collections and negatively impacted fiscal 2013 first six month sales. These vendor shifts contributed to the out-of-stock positions and increased the demand for our best-selling, in-stock products. This accelerated demand cycle hastened the out-of-stock position on best sellers. Sales of imported products in fiscal 2012 were driven by heavy discounting, intended to reduce inventory of slow selling and discontinued products. Upholstery net sales increased compared to the same prior-year period, primarily due to increased average selling prices, partially offset by  lower unit volume.

 

These expense improvements were partially offset by increases in:

Upholstery selling and administrative expenses decreased both as a percentage of net sales and in absolute terms in the fiscal 2013 first nine months compared to the same prior-year period, primarily due to decreases in:

These decreases were partially offset by an increase in the upholstery segment’s share of Company-wide administrative costs.

 

Operating profitability increased for the fiscal 2013 first nine months as compared to the same prior-year period, both as a percentage of net sales and in absolute terms, due to the factors discussed above.  Our upholstery segment returned to operating profitability during the 2013 fiscal first quarter and, despite a modest operating loss in the fiscal 2013 second quarter, remained profitable for the first three quarters of fiscal 2013. The upholstery segment has returned to operating profitability due to operational improvements.

We recorded income tax expense of $2.8 million in the first nine months of fiscal 2013 compared to $1.7 million in the comparable prior-year period.  The effective income tax rates for the first nine months of fiscal 2013 and fiscal 2012 were 36.2% and 27.9%, respectively.  The higher effective income tax rate for the fiscal 2013 period was primarily due to:

 

The improvement in net income and earnings per share in the fiscal year 2013 first three quarters, reflects the upholstery segment returning to operating profitability, which was primarily due to operational improvements partially offset by lower casegoods profitability due to lower sales volume.

Outlook

 

Our current sourcing transition from some vendors in China to other Asian locales neared completion during the fiscal 2013 third quarter. Transition-related out-of-stock positions, which negatively impacted sales during the first half of fiscal 2013, began to improve during the fiscal 2013 third quarter. Improvements in vendor performance and product quality continued to be realized during the fiscal 2013 third quarter.  In addition, significant improvement in in-stock inventory and a somewhat improved incoming order rate resulted in improved case goods shipments in the fiscal 2013 third quarter compared to the first two quarters of fiscal 2013.

 

 

We are generally pleased with our upholstery segment’s year-to-date fiscal 2013 performance, however manufacturing costs remain somewhat elevated at Sam Moore due to the startup of sofa production and the ramp up in production to meet the higher incoming order levels compared to the same period last year.  We intend to build on these positives by continuing to focus on labor efficiency, cost reduction projects, and volume increases driven by new and updated products and improved volume at key retailers.

Our upholstery segment continues to have higher fixed costs than our casegoods segment, which is due to the upholstery segment’s domestic manufacturing operations. In addition, one-time start-up costs for Sam Moore’s successful fully upholstered sofa line have added costs during the 2013 fiscal year.  To mitigate the impact of sales declines in recent years, we have continued to streamline our upholstery operations by improving efficiency, reducing overhead and evaluating our operating costs and capacity to better match costs to current sales volume levels. Further significant cost reductions in our upholstery segment will be challenging. While we are encouraged by recent increases in sales and incoming orders, if we are unable to continue to increase and maintain sales in our upholstery segment, particularly sales of domestically produced upholstery, additional capacity reductions may be necessary. If undertaken, these capacity reductions which would likely result in restructuring charges, would lower our consolidated net earnings in the short-term (for the quarterly and annual periods in which we recognize the charges) and adversely affect our consolidated balance sheets for the periods then ended. Further capacity reductions also would increase the ratio of fixed to variable costs in  our upholstery segment which would create pricing and cost absorption challenges.

 

Many economic indicators suggest that the United States is in an economic recovery. Evidence of this recovery includes continued increases in household wealth, consumer confidence, disposable income, retail sales and furniture store sales, as well as continued improvement in housing activity, which we believe to be a leading indicator for furniture sales. However, many consumers seem to be hesitant to commit to major purchases due to persistent high unemployment levels and concerns about the domestic economy, including the so called “fiscal cliff”, high U.S. debt levels and persistent U.S. federal and state budget deficits. Based on these positive and negative factors, as well as what we see in the home furnishings marketplace, we expect retail furniture demand to improve, but modestly, as we progress through the remainder of our fiscal year.

 

In light of current conditions, we continue to focus on:

Our new Enterprise Resource Planning (ERP) system became operational for our casegoods and imported upholstery units early in the third quarter of fiscal 2013, after nearly two years of design, planning, conversion and training efforts by our associates and consultants. We do not believe this system implementation negatively impacted our third quarter results nor do we expect it to impact our fiscal 2013 fourth quarter results of operations. We expect conversion efforts will begin for our domestic upholstery units late in the fiscal 2013 fourth quarter, with full implementation scheduled for late in the fiscal 2014 fourth quarter. Once all our business units are operational on the ERP platform, we expect to realize operational efficiencies and cost savings by presenting a single face to our customers and leveraging best practices across the organization. We refer you to Item “1A. Risk Factors” included in our annual report on Form 10-K for the fiscal year ended January 29, 2012 for a more complete discussion of the risks involved in our ERP system conversion and implementation.

Sales of imported finished goods comprised approximately 73.0% of our sales through the first nine months of fiscal 2013. We receive most of our imported finished goods through the East Coast port of Norfolk, VA. On August 22, 2012, contract negotiations for a new collective bargaining agreement between the United States Maritime Alliance, which represents the shipping industry, and the International Longshoremen’s Association (ILA), whose members work in deep sea ports around the East and Gulf Coasts of the United States, were suspended.   The current collective bargaining agreement expired on September 30, 2012, yet both parties agreed to extend negotiations for 90-days through December 29, 2012. If a new collective bargaining agreement is not reached before that date, a strike by the ILA could disrupt the flow of inventory to us and our customers. A prolonged strike would likely have an adverse effect on our results of operations and financial position.

 

The following chart shows changes in our total assets, current assets, current liabilities, net working capital and working capital ratio during the first nine months of fiscal 2013:

Total assets at October 28, 2012 increased as compared to January 29, 2012, primarily due to increases in:

These increases were partially offset by decreased cash and cash equivalents due to increased inventory and accounts receivable resulting from increased sales.

Factors that contributed to the decline in our net working capital (current assets less current liabilities) include the decreased  cash and cash equivalents mentioned above and increases in other accrued expenses, due to income tax accruals during the fiscal 2013 first nine months.

During the nine months ended October 28, 2012, cash on hand and cash generated from operations of $896,000 helped to fund capital expenditures of $3.9  million related to our business operating systems and facilities, cash dividends of $3.2 million, premiums on officers’ life insurance of $870,000  and repurchases of our common stock of $671,000. Company-owned life insurance policies are in place to offset costs associated with the loss of key employees and facilitate business continuity, as well as provide funding for benefits.

In comparison, during the nine months ended October 30, 2011, cash generated from operations of $22.2 million helped to fund an increase in cash and cash equivalents of $16.1 million, cash dividends of $3.2 million, capital expenditures of $2.4 million related to our business operating systems and facilities and premiums paid on Company-owned life insurance policies of $1.1 million.

During the fiscal 2013 second quarter we amended our loan agreement to reduce the minimum required tangible net worth from $108 million to $95 million, primarily to provide additional flexibility to purchase our common shares under the share repurchase authorization approved by our board in April 2012.

We were in compliance with our loan agreement covenants as of October 28, 2012 and expect to remain in compliance with existing covenants for the forseeable future.

During the fiscal 2013 first quarter, our board of directors authorized the repurchase of up to $12.5 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. We have entered into a trading plan under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934 for affecting some or all of the purchases under this repurchase authorization. The trading plan contains provisions that could restrict the amount and timing of purchases. We can terminate this plan at any time. Through the first nine months of fiscal 2013, we had used approximately $671,000 of the authorization to purchase 57,700 of our common shares (at an average price of $11.63 per share), with approximately $11.8 million remaining available for future purchases under the authorization as of the end of the fiscal 2013 nine months.

As of October 28, 2012, we had an aggregate $13.2 million available under our $15.0 million revolving credit facility to fund working capital needs.  Standby letters of credit in the aggregate amount of $1.8 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of October 28, 2012.  There were no additional borrowings outstanding under the revolving credit facility on October 28, 2012.  Any principal outstanding under the credit facility is due July 31, 2013.

We believe that we have the financial resources needed to meet our business requirements for the foreseeable future, including capital expenditures and working capital, as well as for share repurchases and regular quarterly dividends. Our primary sources of liquidity include cash flow from operations, our $15.0 million revolving credit facility, the accounts receivable factoring arrangement for our domestic upholstery operation and the ability to borrow against the cash surrender value of Company-owned life insurance policies. Cash flow from operations is highly dependent on incoming order rates and our operating performance.  We expect to spend between $1.0  million to $2.0  million in capital expenditures during the remainder of fiscal year 2013 to maintain and enhance our operating systems and facilities. Of this estimated amount, we expect to spend between $500,000 to $1.0 million on the implementation of our ERP system.

We have $11.8  million remaining on our share repurchase authorization. We expect to fund share repurchases using available cash and cash generated from operations. Repurchased shares will become authorized but unissued common shares. Additional share repurchases will depend on the factors and limitations discussed under “Share Repurchase Authorization” above.

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our annual report on Form 10-K for the fiscal year ended January 29, 2012.

Certain statements made in this report, including under Part 1, Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the notes to the condensed 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Any forward looking statement that 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.

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, which could impact our results of operations or financial condition.  We manage our exposure to this risk through our normal operating activities.

For imported products, we generally negotiate firm pricing denominated in U.S. Dollars with our foreign suppliers, typically for periods of at least six months.  We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk, but could choose to do so in the future.  Most of our imports are purchased from suppliers located in China.  The Chinese currency floats within a limited range in relation to the U.S. Dollar, resulting in exposure to foreign currency exchange rate fluctuations.

Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we pay for imported products beyond the negotiated periods.  We generally expect to reflect substantially all of the effect of any price increases from suppliers in the prices we charge for imported products.  However, these changes could adversely impact sales volume or profit margins during affected periods.

Amounts outstanding under our revolving credit facility would bear interest at variable rates. In the past, we have entered into swap agreements to hedge against the potential impact of increases in interest rates on our floating-rate debt instruments. There was no outstanding balance under our revolving credit facility as of October 28, 2012, other than standby letters of credit in the amount of $1.8 million.  Therefore, a fluctuation in market interest rates of one percentage point (or 100 basis points) would not have a material impact on our results of operations or financial condition.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended October 28, 2012.  Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

As discussed above, early in the fiscal 2013 third quarter we implemented a new Enterprise Resource Planning (ERP) system in our casegoods segment and the imported upholstery unit of our upholstery segment. This implementation did not result in material changes to our internal controls over financial reporting. However, where appropriate, we have modified the design and documentation of internal controls, processes and procedures relating to the new system in order to replace or supplement our existing set of internal controls over financial reporting. These system changes were not undertaken in response to any actual or perceived deficiencies in our internal control over financial reporting.

There were no other changes in our internal control over financial reporting during the fiscal quarter ended October 28, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Issuer and Affiliated Purchasers