Hooker Furnishings Corporation

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference call, reporting its operating results for the first quarter 2021. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question during the session, you will need to press star 1 on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to introduce your Paul Huxbelt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Joelle. Good morning and welcome to our quarterly conference call to review our preliminary financial results for the fiscal 2021 first quarter, which ended May 3, 2020. We certainly appreciate your participation this morning. Paul Thoms, our Chairman and CEO, Jeremy Hoff, President of our Hooker Legacy Brand, and Doug Townsend, Co-President of our meridian division, are joining me today. For the question and answer portion of the call, our other executive officers will also be available to take questions, including Ann Smith, our Chief Administration Officer, and Lee Boone, Co-President of Homeria. During our call, we may make forward-looking statements which are subject to risks and uncertainties. Discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our preliminary fiscal 2021 first quarter results. Any forward-looking statement speaks only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call. COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on market valuations, discount rates, and other inputs used in our intangibles valuation analysis. Consequently, and despite having completed a similar intangible asset valuation during our fiscal 2020 fourth quarter, we determined that another intangible asset valuation was appropriate given our performance and these changing market dynamics. Given the effort and complexity involved in this project, we need additional time to complete this analysis. Therefore, the results reported this morning and that we'll discuss on this call are preliminary and do not include any non-cash impairment charges on our intangible assets, which could result from the impairment analysis that's currently underway. Actual results may differ materially from these preliminary unaudited results that are provided this morning and discussed on this call. We expect to complete the intangibles valuation and finalize the amount of impairment if any in connection with the filing of our FOM 10Q for the fiscal first quarter ended May 3rd, 2020, which we expect to file on or before the extended due date of July 27th, 2020. Impairment charges, if any, will not affect our cash position but would adversely affect operating loss, net loss, loss per share, total comprehensive loss, deferred income taxes, intangible assets, and retained earnings. This morning, we reported consolidated net sales of $104.6 million for our 2021 fiscal first quarter, a .8% or a $30.9 million decrease compared to last year. For the first time since 2009, we reported a preliminary net quarterly loss in the amount of $1.1 million, a $3.1 million decrease compared to the $2 million net income in the prior year first quarter due to the severely negative impact of the COVID-19 pandemic across all three of our reportable segments, such as branded, home meridian, and domestic upholstery. We reported a preliminary loss of $0.09 per share compared to $0.17 earnings per share in the prior year. Now, Paul Thomas will comment on our fiscal 21 first quarter results.

Thank you, Paul, and good morning, everyone. The COVID-19 crisis drove the most significant downturn in our business in over 50 years. The pandemic, -at-home restrictions, and an economic shutdown from mid-March to mid-May throughout the U.S. resulted in the double-digit sales decline and the company's first quarterly operating and net income losses in over a decade. After beginning the fiscal year on an upturn with an .3% -over-year increase in consolidated incoming orders in February, orders plummeted in March and April as many of our retail customers temporarily closed. Large customers canceled stock orders and others deferred orders. Also contributing to the quarterly income loss and operating margin reduction was a temporary shutdown of production at five of our six domestic upholstery plants in Virginia and North Carolina, which resulted in unabsorbed fixed costs and operating inefficiencies. However, the business disruption has not been as severe as we initially feared. While consolidated orders declined steeply by over 70% and 65%, respectively, in March and April, we had a significant -over-month improvement in consolidated order rates in May. Orders in fiscal May were down about 7% for the period, and since mid-May, consolidated orders have generally comped above the same period last year. Retailers in some regions of the country have glowing reports about their business the last few weeks, including strong Memorial Day, holiday weekend sales. We believe there are several positive factors in play, including pent-up demand, more focus on home environments from people spending so much time in their homes the last few months, and less competition for discretionary consumer spending from travel, eating out, and other activities. In addition, Hooker's domestic upholstery manufacturing facilities for Braddington Young, Sam Moore, and Shenandoah began ramping up production in early May and are currently operating at approximately 75% capacity on a consolidated basis, increasing efficiencies and cost absorption. Reflecting on the company's response to the international health and economic crisis, we're proud of how our team weathered the storm during this unparalleled time challenge. First and foremost, we're grateful that none of our 1,000 employees in the U.S. at any locations have tested positive for the virus to date. That's quite an accomplishment and a testament to the diligence with which human resources implemented best practice safety protocols at all locations. Our employees also followed best practices at home and work and adapted to working remotely while staying productive, positive, and engaged. We believe we responded with appropriate mitigation measures to reduce operating expenses and preserve cash with difficult but necessary decisions, such as furloughing 600 manufacturing warehouse and administrative employees, closing five of six domestic upholstery manufacturing facilities during the month of April, temporarily reducing officer and manager salaries and board of directors fees, delaying and delaying all non-critical capital spending. Unfortunately, we had to reduce our workforce by 35 employees, but we're able to keep 97% of our employees on board during this time. We're also pleased to declare a quarterly cash dividend of 16 cents per share to shareholders of record on June 16, 2020. We're confident in our long-term strategies and gratified to have been able, even in these extreme circumstances, to maintain our 50-plus year history of consistently paying dividends. With the steady improvement in orders and shipments since the end of the first quarter on May 3, we expect that our low fixed cost business model, which served us well during the recession, will continue to serve us in this current disruption. Additionally, our ongoing strategy to sell through multiple distribution channels proved itself again during this crisis. While most traditional bricks and mortar furniture retailers were closed for two months, other channels such as e-commerce, hospitality, and clubs flourished and provided a source of revenue. Importantly, our cash position remains strong and has continued to improve since our fiscal year end in early February. We generated $18.9 million in cash from operations this quarter, which contributed to a $15.2 million increase in our cash balance since the end of fiscal 2020. At this point, I'd like to turn the call over to Jeremy Hoff, president of Hooker Brands,

to

comment on that

division. Thanks, Paul. In the Hooker Branded segment, net sales declined 12.4 million or 31%. In the domestic upholstery segment, net sales declined 8.5 million or .7% during the first quarter. Turning to a more detailed look at each of our segments, I'll begin with the Hooker Branded segment. Because traditional furniture stores and small and regional change, which comprise the lion's share of Hooker Brands distribution base, were closed during the economic shutdown, incoming order rates dropped dramatically during the quarter. Despite the sales decline, the segment's low fixed cost and high variable cost model enabled it to maintain a .5% gross margin and .9% operating income margin during the quarter. Also, the quarter, the spring high point furniture market originally scheduled for late April, was canceled and high point showrooms were closed. Despite that, Hooker Case Goods has been able to sell new collections originally set for spring introductions through a virtual showroom presentation on a password protected area of the company's website. Before the showroom closed, we prioritized upscale environmental and detailed photography of four new collections that are already in production. We have done very well selling through the first outings via this online presentation to our retail customers, which is very encouraging. Our next step is to produce a 360 degree style video tour of the collections in our showroom this month. In the domestic upholstery segment, incoming orders fell 40% during the quarter. During the month of April, manufacturing plants at Bradenton Young and Shenandoah were temporarily closed, while Sam Moore operated at about 50% capacity. Employees returned to the factories and production restarted the week of May 4th and currently the segment is operating at approximately 75% capacity. Sales declined and operating inefficiencies from the temporary shutdown resulted in significantly decreased gross margins and an operating loss. For all other, which includes H Contract and the newly formed Lifestyle Brands, net sales stayed essentially flat and we reported an operating income of $387,000 due to continued solid performance at H Contract, which achieved a 16% increase in incoming orders and 68% higher backlog compared to the prior year first quarter. Now I'd like to call on Doug Townsend to give more detail on the HMI segment this quarter.

Thank you, Jeremy. Good morning, everyone. HMI's first quarter sales were $57.7 million, down .7% from the prior year. Preliminary Q1 operating loss was $2.4 million, an improvement of 52% over the prior year results. While the global economic slowdown from COVID-19 significantly impacted Q1 orders, sales, and profits, the HMI bottom line improvement over prior year results is attributable to the company's fundamental turnaround strategy. Some of these improvement indicators are first quarter allowances were 21% below prior year, contribution margin as a percent of net sales improved 360 basis points over the prior year, and the fixed expenses were $1.5 million below prior year. These are all areas of concentrated management focus among many others. The COVID-19 pandemic significantly interrupted our Asian supply chain during the first half of Q1. Our factories were unable to operate normally due to the massive quarantines in Asia, and many production facilities were forced to close temporarily. All of our factories in China and Malaysia were closed for a month, as those countries had countrywide shutdowns. The nationwide retail shutdowns in the US that started in mid-March severely impacted our shipments for the balance of Q1. Only recently are we beginning to see conventional furniture business. Nonetheless, there were some bright spots that outperformed expectations during the quarter. Specifically, our e-commerce business increased significantly, outperformed all expectations, and accounted for 35% of our total sales in the quarter. Businesses several of our mega and mass accounts held up much better than originally projected. Fortunately, some of our customers such as wholesale clubs, big box stores, and mass merchants were able to remain open, while dedicated furniture retailers in many locales were forced to close temporarily. These bright spots, combined with major spending reductions and other cost control measures, enabled HMI to significantly outperform prior year results. While only two of our business units reported an operating profit in Q1, four of six units beat the prior year results. Eccentrics Home benefited from exploding e-commerce demand, and Samuel Lawrence Hospitality benefited from a healthy backlog of hotel projects that were already in process. Thanks to significant new business with a major mass channel account, and having completed our resourcing of the entire product line, or its entire product line out of China, PRI's upholstery sales were 83% of prior year, despite the COVID-19 crisis, and gross margin improved by 610 basis points over the prior year. PRI also significantly outperformed last year's dismal bottom line results. Samuel Lawrence Furniture improved prior year bottom line results by virtue of margin improvements and spending controls as well. The coronavirus economic slowdown provided us the impetus to implement numerous new cost control measures, some temporary and others permanent. Staff and compensation reductions, employee furloughs, lease cost reductions, product cost reductions, and curtailment of all non-essential operations spending are but a few of the many measures in place. These measures have partially mitigated the losses from the sudden significant revenue drop. Inventory reduction is another area where we have made much progress. As of the end of May, our inventories have decreased approximately $19 million, or 29% from the beginning of the fiscal year. While the decrease was intentional, we're now in a position of needing to replenish stocks to maintain an acceptable service position. Our manufacturing partners have suffered during this difficult time as well. They have experienced erratic flow of materials and components, labor shortages, government mandated shutdowns, as well as other cancellations and delays. Nonetheless, we are very pleased with the way our factory partners have weathered this storm and supported our business in every manner possible. We are very fortunate to have an exceptionally strong stable of suppliers, many of whom have been our partners for 10 to 20 years. Looking forward, we have several business growth initiatives during pre-sales. First, we're hosting several mega-account retailers at our showroom this summer for private product presentations, which will help mitigate the impact of the cancellation of the High Point Spring Furniture Market and hopefully generate new product placements. We have several other initiatives intended to grow sales, including a new branded license collection in the works, a new mass channel customer partnership, our HM IDEA RTA product launch, our club business regrowth efforts, our PRI upholstery business reboot, and perhaps most importantly, given the current circumstances, a major effort to maximize sales through our e-commerce channel. While we feel we are weathering the storm, it is important for us to keep our teams and collective thinking in alignment on the most important issues we face, especially since most of our staff is working remotely. For now, our focus is on these issues, the health and welfare of our people, a thoughtful and careful return of employees to the workplace when conditions permit, regular open and candid communications with all stakeholders, cost control and profitability, and the adaptation of our organization and strategies to be well positioned for the post-pandemic future. While the economic impact of the coronavirus will continue to impact Q2 and likely the balance of the year to some degree, we are encouraged that April and May results were much better than we had forecasted at the beginning of the crisis. We are cautiously optimistic that the worst of us is yet to come, and we are starting to see stronger demand for shipments as we enter the summer and the majority of our customers reopen their retail stores. At this time, I would like to turn the call over to Paul Hupfield who will elaborate further on our quarterly results.

Thanks Doug. Average selling prices were up in the low to mid single digits in both the Hooker branded and home radiant segments. However, consolidated average selling prices decreased .1% due to a change in the mix between divisions. Unit volumes in the higher priced Hooker branded and domestic upholstery segments were down in the low to mid 30% range, much more than the 18% decline in the home radiant segment. Increased average selling prices in the Hooker branded and home radiant segments were attributable to favorable product mix and helped offset a small decrease in average selling price in the domestic upholstery segment. However, these factors were not sufficient to offset the nearly .6% unit volume decrease which resulted from lower orders across all three segments. Consolidated gross profits decreased $6.9 million from $25.5 to $18.7 and from .8% to .8% as a percent of net sales. Hooker branded gross profit decreased in absolute terms and as a percentage of net sales due principally to the net sales decrease. In the home radiant segment, despite a net sales decline, gross profit increased in absolute terms and as a percentage of net sales reflecting some of the turnarounds Doug referred to earlier. In the prior year period, home radians gross margin was negatively impacted by unexpected quality-related charge racks as well as unrecovered tariff and freight costs. These issues did not occur in fiscal 2021 which we believe is the result of the resourcing transition to Vietnam which has helped to reduce product costs and the exit of temporary warehouses which has reduced warehousing and handling costs. Domestic upholstery segments gross profit decreased significantly in absolute terms and as a percentage of net sales due to the net sales decline and the inefficiencies resulting from operating at significantly reduced production volumes. As mentioned before, we temporarily closed five of Hooker's six domestic upholstery plants in April. Brandon and Young and Shenandoah essentially did not report sales in April while Sam Moore's April net sales were only 37% of the prior year amount. Preliminary consolidated selling and administrative expenses decreased in absolute terms due to decreased selling expenses on the lower net sales and cost reductions that we made in response to the COVID-19 pandemic such as decreased employee compensation, reduced temporary salary reductions, furloughs and the elimination of positions as well as decreased travel and furniture market related expenses. These decreases were partially offset by higher bad debt expense including the recognition of current expected credit losses under the newly adopted ASC 326 accounting standard. For these reasons, preliminary operating profit for the fiscal 2021 first quarter decreased $4 million to a preliminary $1.1 million loss compared to $2.9 million operating income in the prior year first quarter. Operating margin decreased from .1% to a minus .1% this quarter. Despite these operating losses for the quarter, our cash balance increased about $15 million from the fiscal 2020 year end to just over $51 million. We've generated $18.9 million in cash from operating activities, much of it from the significant reduction in inventory levels since year end and the collection of accounts receivable as well as the benefits of spending reductions and rationalizing purchase orders with our suppliers. In addition to our cash on hand, we have access to almost $26 million on our revolving credit facility and just under $26 million of cash surrender value of company-owned life insurance. This gives us additional financial flexibility to navigate these difficult times. Despite the lower profitability, we're confident our financial condition and we believe we have the financial resources to weather the expected short-term impacts of COVID-19. So in June, our board of directors approved a $0.16 per share dividend, which in current share prices gives us a dividend yield of 3.2%. However, an extended impact of a crisis could materially affect and adversely impact sales, earnings, and liquidity going forward. Now I'll turn the discussion back to Paul Thoms for an outlook.

Thanks, Paul. While we have limited visibility of how the economic and health crisis may fluctuate in coming months and still face the significant headwinds of the high level of unemployment, our business is improving and we are in better position than we expected to be at this time. The company remains in exceptional financial condition. In times like these, we believe a strong balance sheet is even more important than the income statement. We're grateful for the stability and resilience of our employees and look forward to bringing back our administrative and management team members into the offices when the states say we can and more importantly, when we feel it's safe based on the status of the virus in the communities around our corporate locations. We expect the second quarter to be significantly better than the first. Barring a second wave of infection, we expect business each quarter to improve as we go through the year. We're confident we will emerge from this crisis as a stronger company. This ends the formal part of our discussion and at this time I'll turn the call back over to Joelle for questions.

Thank you. Thank you. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Anthony Lebedinsky with Sadodi & Company. Your line is now open.

Thank you and good morning everyone. Thank you for taking the questions. First, I just wanted to get a better sense about your sales channel mix. Obviously, you called out that within HMI, 35% of the sales came from e-commerce which is much higher than typically. So, I just wanted to get a sense as to what that was for the entire company and also if you could comment about warehouse clubs. Also, just overall broadly speaking, as far as your sales penetration to non-traditional sellers of furniture that were not closed during the pandemic.

All right. That's a lot of questions within that company but I'll take a stab at it. I don't think Hooker's legacy brand sales in the e-comm channel were to the same degree that we were in the past. I don't have a number for overall but I would guess that it's somewhere in a 15 to 20 percent range. Our domestic upholstery has very little penetration in the e-comm channel. So, that would kind of bring the overall down. We are fortunate to sell through e-comm and in addition, we're fortunate to be in clubs like Costco or Sam's or other warehouse type clubs that were able to operate. We're in other retailers that were open during this period because they sell some groceries and they were considered essential. So, we had some big box retailers for customers that also were able to operate in this. I'm not sure what other parts of your question have I not answered. I'll take a stab at

it. I think that that pretty much covers that. So, thank you for that, Paul. Anthony,

this is Doug. I'll just chime in a little. HMI sales to those other emerging channels, mass merchants that were open, clubs, and then hospitality hotels that we were still developing is another 20 percent plus of HMI business on top of the e-commerce.

That's very helpful. Okay, so Doug, you also talked about cost control measures that you implemented. I was just wondering if you could expand on that and maybe quantify some of these permanent cost control measures.

Oh, okay. Well, color on it is everything from the things that Paul had talked about earlier, Paul Huxfeldt about travel, reducing, basically cutting spending everywhere we could in addition we've cut salaries 10 to 15 percent. We had laid off about 10 percent of our workforce. We had furloughed about half the people in our corporate offices on rotating furloughs. The combination of all of that as well as just managing spending in a fairly draconian way just to be as safe as possible. If we look at it for the first quarter, we reduced our spending and our overall fixed cost is $2 million relative to what we budgeted to spend.

Got it. Okay, that's very helpful. Thanks for that, Doug. As far as your exposure to China, obviously because of the tariffs you've been reducing your product sourcing there. So where did you guys wind up at the end of Q1?

Q1, 12 percent of our shipments came from China. Obviously a little deflated by the fact that China was closed for a whole month. If you looked at it over the six-month period, it's 18 percent.

So going forward,

probably something in between those two numbers.

Got it. I think if you look at total company, that number that we gave of being around 22 percent of sales at the end of last year, probably not significantly different. It might be in the high teens.

Got it. Yeah, thanks for that, Paul. So okay, and then a couple of other questions if I may. You talked about obviously seeing better results so far in your second quarter. Can you just remind us as to when you look at the different regions within the country, where do you have the most exposure to? I assume that probably the northeast is going to be lagging the rest of the country, but if you could just kind of expand on that, that'd be great.

You're right. I think the northeast and maybe the upper midwest, even the northwest, may be slower reopening than parts of the south or the west. But it's really hard to, I mean, we can look at our traditional customers and kind of know where the sales are, but when you get into e-comm and catalogs, clubs, it's really harder to know exactly where the furniture ends up in each region. But I think you could probably be safe to say certainly on the booker branded as well as the domestic upholstery segments that we're more concentrated in the southern parts of the country, the south. I'd say we're in the Texas and Oklahoma, the Sunbelt, than we are in the northeast. But we have a very good presence in the northeast, I think, through some of the other channels of distribution and probably more through home meridian than we do through the other two segments.

Got it. Okay. And then operationally, so obviously you have your domestic upholstery plants. You talked about now operating at a 75% capacity. Just wondering operationally, what are you guys doing differently as far as from a safety protocol perspective? And can you be as, I assume that you probably can't be as efficient as pre-COVID, but I mean, just wanted to get a sense as to how we should think about additional costs related to just dealing with COVID.

Good morning, Anthony. This is Jeremy.

Good morning, Jeremy.

You know, we've obviously followed all the CDC guidelines and we're being as careful as possible. I mean, our number one priority throughout this entire crisis has been the safety of our employees and that will remain our focus. We're doing, we're obviously doing social distancing within our factories. We're utilizing the mask. I don't know what the additional cost, that part of your question, I don't see substantial additional cost to practicing the safety measures that we put in place.

I would agree. It's not like a meat packing plant where you have people right on top of each other. I think they're naturally spread out a little more in a manufacturing facility, but we are, I don't know that we can really quantify the impact financially on taking a more safe position.

That would suggest that it's not inferior. Okay.

And we,

you know, the big

part of this is communication, Anthony. You know, every week we have calls to make sure we understand the dynamics that are today and we do that on almost probably more of a daily basis than a weekly basis. So as this thing changes, we change with it and we want to make sure we stay on top of that.

Got it. Okay. And then my last question is, I've read about the, obviously you have sold home office type of furniture for a while. Just wondering as, you know, in the new post COVID world, how are you guys thinking about the new product categories or collections and if you could expand on your exposure to home office, that'd be great.

On the, on the Hooker legacy side of the business, specifically case goods, fortunately we were planning a major home office launch of a new program for this fall. So that's that's obviously timely. I would call it a little bit luck handedly, but we are going to be in great position for what trends we see coming up. And also we have a, the other part of our major introduction is a new casual dining program as well. And both of those categories are seeing positive trends in the marketplace. I'd like to let, pass it to Doug as well for his side of the

business. Sure. Yeah. Home, home office products, unfortunately for home meridian in a fairly small category for us. But obviously once we saw this trend two months ago, we started additional product development in the category. So we're racing to add products in the category.

Got it. Okay. Thank you and best of luck. Thanks. Thank you.

Thank you. Our next question comes from JP Gagan with Global Value Investments.

Your line is now existing issues, namely product quality issues and tariffs. And I know you addressed each of those to some degree, but can you add any color around those two, particularly the success of your efforts to rebuild your club relationships?

Sure.

Hi JP, this is Doug. Yeah, our relationships with our clubs are strong our sales are growing slightly with them after the fallback that we took last year. We've got no quality issues, no problems. We're both growing with them in their retail stores, as well as on their online, on their dot com sites. And yeah, so really no issues. Those issues are us. We don't have any inequality chargebacks or anything like that. In terms of tariffs, we mentioned before we've moved a substantial portion of the business out of China and into Vietnam and Malaysia. And the few products that we still have in China, we're paying the 25% tariff on our products that inside the marketplace can withstand those cost increases. And so we've got

a lot of great, thank you. Looking ahead, can you talk generally about the outlook of your customers, especially considering that the COVID-19 pandemic might have brought about an acceleration and changes of consumer behaviors and the way consumers shop?

Anybody's welcome to chime in. But I would say, I mean, you obviously have seen e-commerce strengthening this. I think some of that will be sustained. I don't think it'll be at the level it was when bricks and mortar would close. But I think people probably that weren't shopping online before have gotten somewhat comfortable doing that. So I expect that channel of distribution to remain advantaged. You know, other channels, clubs, it's been pretty steady. We had a little hiccup last year, obviously, but I think we've gotten past that. Catalogs seem to have done equally well in the downturn. Bricks and mortar, I think it really varies by the individual retailer. We've had some small, bomb and pop independent retailers that have actually gone out of business during the last few months. That's not totally unexpected. That may have happened even absent. The crisis of the pandemic. But you also have strong regional players that I think are going to bear very well going forward. And some of them didn't close all their stores. Some of them didn't close any of their stores. I would say a lot of our bricks and mortar customers significantly increased their e-comm business here in the last few months, which wasn't a big part of their business before, but maybe it goes from 2 to 10%. So I think they've learned that they can sell online and maybe found ways to take advantage of that as the stores reopen as well. So that would be my response, but certainly, Dior, Jeremy, welcome to chime in or leave.

Yeah, I have one comment or two comments on that. One is in terms of channels, I think hospitality channel is going to be challenged, at least in the near term with all the disruption that hotels have gone through and just the reduction of travel and how many empty hotels we have. So I think that's one channel that's going to be challenged, but the near term at least. And then in terms of the brick and mortar and traditional channel, there is going to be disruption. Some people going out of business, some of the weaker ones having issues, but it's going to create huge opportunities for the stronger ones. And a lot of the bigger players that we deal with are actively looking for those opportunities, waiting for those opportunities and are looking to do some expansion and things like that. So while there will be some disruption, I think there's also going to be growth for some of the stronger ones.

Great, that's good detail. Thank you. Finally, as manufacturing ramps up, both internationally and domestically, can you elaborate on any supply chain constraints that you might see?

I think generally when the pandemic hit and stores specifically had to close in mid-March, the reaction by most everybody was slow things down, cancel orders, we're not going to need the inventory. We certainly saw that from our large customers, which we passed on to our suppliers in Asia. We canceled some stock orders ourselves, probably more at Home Meridian where we went into this a bit over inventory, less at Hooper where we were chasing inventory went into this. But I think that for the Asian suppliers, first of all, they came back from Chinese New Year, a lot of their plants, they couldn't run because of people having to shelter at home and government mandates to close. There was disruption from their suppliers on components and subparts that they needed. About the time they got back ramped up and producing at a regular schedule, then the pandemic hit over here and you saw those order cancellations. They laid off some of their workforce, they slowed things down. And then I know for us, and I suspect for many other people in this industry like us, by mid-May you realize, hey, maybe this isn't going to be as bad as we originally thought. Let's start getting orders back in place. That kind of for a manufacturer. So I think we're going to see, we are seeing already some lengthening of lead times from suppliers in Asia. But I think for most of the people that we source with, we are a significant customer. If not their largest customer, one of their top two or three customers. So I think we enjoy a pretty good position and would get preference in manufacturing time. And I think they're working extremely hard to try to supply us with what we need. Doug, anything to add to that?

No, I would just reiterate, with as big of a disruption as this was, that the massive cancellations of orders in retail that flowed all the way to Asia and with many of our factories shutting down for two to four weeks at a time just to preserve cash on their end, it's amazing the bounce back and the lack of disruption we're having. And we do have longer lead times here or there, a couple weeks, but nothing material, nothing that's affecting the business in a big way. And I'm actually very impressed with how that's happened in the supply chain.

Great. Appreciate your time this morning. Thank you.

Thank you. As a reminder to ask a question, you will need to press star one on your telephone. Our next question comes from John Dasher with Pinnacle. Your line is now open.

Good morning, everyone. Thanks for taking my questions. I was just curious on the product that's coming in from China, subject to the tariffs, where you can bring that in and raise prices. What type of product is that from China that you feel you can bring it in and pass through the price increases?

It really runs across several businesses in home meridian. I think some of their hospitality business, there are things that are sourced in cuttings of upholstery for some of our customers that can buy thousands at a time. And that's probably better done in China. And the customer is the import of record and pays the tariffs associated with it. Our contract hospitality customers, I believe, all are paying the tariffs. That's something that's produced in China. In our line of curios, which is we're a dominant player in that category, it's a niche business, but there are parts of that that are better produced in China. And we're able to get paid for it. On the hooker side of the business, we have a vendor that we've done business with for 20 years in China. They also have a newer plant that was opened a couple of years ago in Vietnam. But their China plant is able to produce product that nobody else we've found is able to produce a similar product. It's very a lot of hands-on, great finishing, a lot of detail that it's hard to do in mass production. And we historically have been paid for higher prices that come out of that plant. And even with the tariffs, we raised prices early. Once tariffs went to 10% and then went up the additional 15 to 25%,

we were able

to pass most of that along. And the part that was not mitigated by the vendor helping us too. So I think the parts of the business that are still in China, as we said earlier, the customers are willing to pay us a tariff. So it's not like last year where we had unrecovered tariff costs. I think now the things that we source are very intentional. It is becoming smaller month by month and quarter by quarter. But I think we're in a much better position related to tariffs on China production than we were a year ago.

Okay. Thanks. That's helpful. I'm a little fuzzy on the headcount right now. At your end, you had approximately 1,250 full-time employees. Where are you with full-time employees approximately today? And where do you see that number going as you get to the point where you think you'll be operating over the next few months or so?

Okay. And I can understand you being confused because we throw numbers around 1,000 employees and 1,250. At the end of last year, we had 1,250 employees. About 250 of those were in Asia, in Vietnam and China, primarily with a few in Malaysia. Of the U.S. employees, the 1,000, I would say that we reduced headcount by about 35. So we're at 965. Some of those are furloughed. I expect most of those employees to remain employees. I don't see our business being impacted long-term where we need to shrink our workforce beyond what we already did. In Asia, we were probably somewhat inflated and that 250 employees because we were in the process of moving production out of China to Vietnam. So last year, you had employees both in China and in Vietnam trying to move the production. And I think we're at a point now where we don't need all of those and actually reduce headcount there. I'm guessing, Doug, you can help me here, but maybe 50, 75 people out of that 250. And that's probably- Yeah.

Yes, that's a good number.

Okay. So the headcount is going to come down a little bit, but overall, you'll be slightly below where you ended last year.

Maybe 100 employees, so 8%, something like that.

Okay.

And the majority of that would be in Asia.

Okay. Is the CatBix budget still targeted for $3 million this fiscal year?

That's probably a reasonable number, although I think we're monitoring that and we evaluate every project as we go. Obviously, in a crisis like this, cash conservation is a priority. So we'll continue to evaluate that. But typically, our capital spending is low even in a good year.

Yeah. No. That's one of the benefits of owning your company is the low CatBix. Okay. Where are we with the refinancing? I know both the term and the revolver come to February 1st, about 7 or 8 months away. Where are we with refinancing and does the write-down, if it happens, impact any of the covenants for the existing debt facilities?

The covenants are on EBITDA. So we don't expect that to be a problem. To be honest, the refinancing has kind of been on hold because the weight will be a little more stability in the market. We have the luxury of having sufficient financial resources that we don't really, by the end of the year, we won't need to refinance the term loan if the terms aren't appropriate. I think we'd like to. But we have other resources like the cash-surrender value of life insurance that if we don't refinance, I think it doesn't affect our operating cash, our operating position. So it's been on hold temporarily. I think we'll restart that process shortly. And now that we're starting to see a little more clarity in both our results and, well, until yesterday, we thought there was more clarity in the financial market too.

Okay. So even in a worst-case scenario with the write-down of the intangibles, you don't expect that to impact the refinancing process? Okay. Great. Thanks and good luck. Thank you.

Thank you. I'm not showing any further questions at this time. And I'd like to turn the call back over to Paul Thomas for closing remarks.

Thanks, Joelle. I really have no additional remarks. We appreciate everybody joining us today, although we'd never like to have a loss. We haven't had one in 10 years. I think given what we've just gone through, it's not bad performance. And we certainly are very encouraged by what we've seen since about the third week or middle of May. And we hope that that's sustainable. We think that furniture is advantaged right now. We're in a good position to take advantage of any uptick in business, including what we've seen over the last three or four weeks. So we look forward to being back with you in early September, hopefully having better results to talk about then. And again, thank you for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.