bset20180224_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 24, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________________ to _______________________

 

Commission File No. 0-209

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

Virginia                                                              54-0135270

(State or other jurisdiction                            (I.R.S. Employer

of incorporation or organization)                    Identification No.)

 

3525 Fairystone Park Highway

Bassett, Virginia 24055

(Address of principal executive offices)

(Zip Code)

 

(276) 629-6000

(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, 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 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, 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

    X        

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 ___X____

 

At March 21, 2018, 10,755,292 shares of common stock of the Registrant were outstanding.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM   PAGE
   
 

PART I - FINANCIAL INFORMATION

 

 

 

1.

Condensed Consolidated Financial Statements as of  February 24, 2018 (unaudited) and November 25, 2017 and for the quarters ended February 24, 2018 (unaudited) and February 25, 2017 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations and Retained Earnings

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

 

 

 

Condensed Consolidated Balance Sheets

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

2.

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

24

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

4.

Controls and Procedures

35

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

1.

Legal Proceedings

37

 

 

 

2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

37

 

 

 

3.

Defaults Upon Senior Securities

37

 

 

 

6.

Exhibits

37

 

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PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE PERIODS ENDED FEBRUARY 24, 2018 AND FEBRUARY 25, 2017 – UNAUDITED

(In thousands except per share data)

 

   

Quarter Ended

 
                 
   

February 24,

2018

   

February 25,

2017

 

Sales revenue:

               

Furniture and accessories

  $ 96,123     $ 93,698  

Logistics

    14,149       12,194  

Total sales revenue

    110,272       105,892  
                 

Cost of furniture and accessories sold

    43,269       41,898  
                 

Selling, general and administrative expenses excluding new store pre-opening costs

    64,251       58,524  

New store pre-opening costs

    702       806  

Income from operations

    2,050       4,664  
                 

Other loss, net

    (627 )     (733 )

Income before income taxes

    1,423       3,931  
                 

Income tax expense

    2,336       1,070  
                 

Net income (loss)

  $ (913 )   $ 2,861  
                 

Retained earnings-beginning of period

    139,378       129,388  

Reclassification of certain tax effects from accumulated other comprehensive loss

    545       -  

Cash dividends

    (1,183 )     (1,071 )

Retained earnings-end of period

  $ 137,827     $ 131,178  
                 

Basic earnings (loss) per share

  $ (0.09 )   $ 0.27  
                 

Diluted earnings (loss) per share

  $ (0.09 )   $ 0.27  
                 

Dividends per share

  $ 0.11     $ 0.10  

 

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

 

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE PERIODS ENDED FEBRUARY 24, 2018 AND FEBRUARY 25, 2017 – UNAUDITED

(In thousands)

 

   

Quarter Ended

 
                 
   

February 24,

2018

   

February 25,

2017

 
                 

Net income (loss)

  $ (913 )   $ 2,861  

Other comprehensive income:

               

Amortization associated with Long Term Cash Awards (LTCA)

    31       -  

Income taxes related to LTCA

    (8 )     -  

Amortization associated with supplemental executive retirement defined benefit plan (SERP)

    76       94  

Income taxes related to SERP

    (19 )     (36 )
                 

Other comprehensive income, net of tax

    80       58  
                 

Total comprehensive income (loss)

  $ (833 )   $ 2,919  

 

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

 

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

FEBRUARY 24, 2018 AND NOVEMBER 25, 2017

(In thousands)

 

   

(Unaudited)

         

 

 

February 24,

2018

   

November 25,

2017

 
Assets                

Current assets

               

Cash and cash equivalents

  $ 24,310     $ 53,949  

Short-term investments

    23,125       23,125  

Accounts receivable, net

    21,543       19,640  

Inventories

    63,669       54,476  

Other current assets

    9,610       8,192  

Total current assets

    142,257       159,382  
                 

Property and equipment, net

    103,766       103,244  
                 

Deferred income taxes

    6,183       8,393  

Goodwill and other intangible assets

    28,840       17,351  

Other

    5,619       5,378  

Total long-term assets

    40,642       31,122  

Total assets

  $ 286,665     $ 293,748  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 25,551     $ 21,760  

Accrued compensation and benefits

    12,553       14,670  

Customer deposits

    26,943       27,107  

Dividends payable

    -       3,759  

Current portion of long-term debt

    425       3,405  

Other accrued liabilities

    12,773       12,655  

Total current liabilities

    78,245       83,356  
                 

Long-term liabilities

               

Post employment benefit obligations

    13,600       13,326  

Notes payable

    220       329  

Other long-term liabilities

    5,534       5,277  

Total long-term liabilities

    19,354       18,932  
                 
                 

Stockholders’ equity

               

Common stock

    53,776       53,690  

Retained earnings

    137,827       139,378  

Additional paid-in capital

    499       962  

Accumulated other comprehensive loss

    (3,036 )     (2,570 )

Total stockholders' equity

    189,066       191,460  

Total liabilities and stockholders’ equity

  $ 286,665     $ 293,748  

 

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

 

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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED FEBRUARY 24, 2018 AND FEBRUARY 25, 2017 – UNAUDITED

(In thousands)

 

   

Quarter Ended

 
   

February 24, 2018

   

February 25, 2017

 

Operating activities:

               

Net income (loss)

  $ (913 )   $ 2,861  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    3,304       3,351  

Loss on sale of property and equipment

    36       -  

Tenant improvement allowance received from lessors

    500       -  

Deferred income taxes

    2,210       103  

Other, net

    488       413  

Changes in operating assets and liabilities:

               

Accounts receivable

    (626 )     110  

Inventories

    (5,440 )     (1,915 )

Other current assets

    (1,382 )     1,155  

Customer deposits

    (164 )     977  

Accounts payable and accrued liabilities

    588       (4,978 )

Net cash provided by (used in) operating activities

    (1,399 )     2,077  
                 

Investing activities:

               

Purchases of property and equipment

    (3,958 )     (5,610 )

Proceeds from sales of property and equipment

    -       3  

Cash paid for business acquisition

    (15,556 )     -  

Acquisition of retail licensee store

    -       (655 )

Other

    -       223  

Net cash used in investing activities

    (19,514 )     (6,039 )
                 

Financing activities:

               

Cash dividends

    (4,942 )     (4,290 )

Proceeds from the exercise of stock options

    -       221  

Other issuance of common stock

    84       -  

Repurchases of common stock

    (244 )     (26 )

Taxes paid related to net share settlement of equity awards

    (522 )     (474 )

Repayments of notes payable

    (3,102 )     (3,095 )

Net cash used in financing activities

    (8,726 )     (7,664 )

Change in cash and cash equivalents

    (29,639 )     (11,626 )

Cash and cash equivalents - beginning of period

    53,949       35,144  

Cash and cash equivalents - end of period

  $ 24,310     $ 23,518  

 

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

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.

 

The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our wholly-owned subsidiaries of which we have a controlling interest. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

 

Revenue from the sale of furniture and accessories is reported in the accompanying condensed consolidated statements of operations net of estimates for returns and allowances.

 

Revenues from logistical services are generated by our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”). Sales of logistical services from Zenith to our wholesale and retail segments have been eliminated in consolidation, and Zenith’s operating costs and expenses are included in selling, general and administrative expenses in our condensed consolidated statements of operations.

 

Lane Venture Acquisition

 

On December 21, 2017, we purchased certain assets and assumed certain liabilities of Lane Venture from Heritage Home Group, LLC. Lane Venture is being operated as a component of our wholesale segment (see Note 3, Business Combinations). Results of operations for the Lane Venture business are included in our condensed consolidated statement of operations since the date of acquisition.

 

 

2. Interim Financial Presentation

 

All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the quarter ended February 24, 2018 are not necessarily indicative of results for the full fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 25, 2017.

 

Income Taxes and Impact of the Tax Cuts and Jobs Act

 

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter.

 

On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduced the Federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018 for all corporate taxpayers, while most other provisions of the Act take effect for fiscal years beginning on or after January 1, 2018. Therefore, we will compute our income tax expense for fiscal 2018 using a blended Federal statutory rate of 22.2%. The 21% Federal statutory rate, as well as certain other provisions of the Act including the elimination of the domestic manufacturing deduction and new limitations on certain business deductions, will apply to our 2019 fiscal year and thereafter.

 

The Federal rate reduction has had a significant impact on our provision for income taxes for the quarter ended February 24, 2018. Our effective tax rate for the quarter ended February 24, 2018 of 164.2% differs from the fiscal 2018 blended Federal statutory rate of 22.2% primarily due to a $2,157 discrete charge arising from the re-measurement of our deferred tax assets. Other items impacting our effective tax rate for the quarter include the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $181 and the Section 199: Domestic Production Activities Deduction.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. Per SAB 118, the measurement period is deemed to have an earlier end date when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the updated tax law are expected to be recorded at the time a reasonable estimate for all, or a portion, of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

 

SAB 118 states, that at each reporting period, companies must disclose the effects of the Act for areas where accounting is complete, disclose provisional amounts (or adjustments to provisional amounts) for the effects of the Act for areas where accounting is not complete but a reasonable estimate has been determined, and confirm areas where a reasonable estimate of the effects cannot yet be made, and therefore taxes are reflected in accordance with law prior to the enactment of the Act.

 

As of February 24, 2018, we were still assessing the overall impact that the Act will have on our financial statements and related disclosures. Therefore, the charge for the re-measurement of our deferred tax assets was based on reasonable estimates and has been recorded as a provisional amount in accordance with SAB 118. We may alter our estimates during the remainder of fiscal 2018 as we continue to process data to finalize the underlying calculations and also analyze other provisions of the Act to determine if they will impact our effective tax rate in fiscal 2018 or in the future. We will continue to refine our adjustments through the permissible measurement period as described above.

 

Our effective tax rate for the quarter ended February 25, 2017 of 27.2% differed from the federal statutory rate of 35% primarily due to the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $327 and the Section 199: Domestic Production Activities Deduction.

 

Adoption of Accounting Standards Update No. 2018-02

 

The Act has also had a significant impact on the income tax effect of pension costs included in our accumulated other comprehensive loss at November 25, 2017 due to the reduction in Federal statutory rates. Therefore we have adopted Accounting Standards Update 2018-02 (see Note 13, Recent Accounting Pronouncements) effective as of the beginning of fiscal 2018 and have elected to reclassify the income tax effects of the Act from accumulated other comprehensive loss to retained earnings. Accordingly, during the quarter ended February 24, 2018 we reclassified $545 of tax benefits associated with pension costs from accumulated other comprehensive loss to retained earnings.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

3. Business Combinations

 

Acquisition of Lane Venture

 

On December 21, 2017, we purchased certain assets and assumed certain liabilities of Lane Venture from Heritage Home Group, LLC for $15,556 in cash. Lane Venture is a manufacturer and distributor of premium outdoor furniture, and is now being operated as a component of our wholesale segment.

 

Under the acquisition method of accounting, the fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date with the remaining unallocated amount recorded as goodwill.

 

The allocation of the fair value of the acquired business was based on a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The primary areas of the preliminary allocation of the fair value of consideration transferred that are not yet finalized relate to the fair values of certain tangible and intangible assets acquired and the residual goodwill. The preliminary allocation of the $15,556 all-cash purchase price to the acquired assets and liabilities of the Lane Venture business is as follows:

 

Allocation of the fair value of consideration transferred:

 

Identifiable assets acquired:

       

Accounts receivable, net of reserve (Note 5)

  $ 1,357  

Inventory, net of reserve (Note 6)

    3,753  

Prepaid expenses and other current assets

    37  

Intangible assets

    7,360  

Total identifiable assets acquired

    12,507  

Liabilities assumed:

       

Accounts payable

    (357 )

Other accrued liabilities

    (813 )

Total liabilities assumed

    (1,170 )

Net identifiable assets acquired

    11,337  

Goodwill

    4,219  

Total net assets acquired

  $ 15,556  

 

Goodwill was determined based on the residual difference between the fair value of the consideration transferred and the value assigned to the tangible and intangible assets and liabilities recognized in connection with the acquisition and is deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill are the expected synergies arising from combining the Company’s manufacturing and distribution capabilities with Lane Venture’s position in the outdoor furnishings market, a segment of the market not previously served by Bassett.

 

A portion of the fair value of the consideration transferred has been provisionally assigned to identifiable intangible assets as follows:

 

   

Useful Life

         

Description:

 

In Years

   

Fair Value

 
                 

Trade name

 

 

Indefinite     $ 6,848  

Customer relationships

    9       512  
                 

Total acquired intangible assets

          $ 7,360  

 

The finite-lived intangible asset is being amortized on a straight-line basis over its estimated useful life. The indefinite-lived intangible asset and goodwill are not amortized but will be tested for impairment annually or between annual tests if an indicator of impairment exists.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 4.

 

Acquisition costs related to the Lane Venture acquisition totaled $228 during the quarter ended February 24, 2018 and are included in selling, general and administrative expenses in the condensed consolidated statements of operations. Approximately $60 of additional acquisition costs related to Lane Venture are expected to be incurred during the remainder of fiscal 2018. The acquisition costs are primarily related to legal, accounting and valuation services.

 

The revenue of Lane Venture since December 21, 2017 that is included in our condensed consolidated statement of operations for the quarter ended February 24, 2018 was not material. Loss from operations for Lane Venture from the date of acquisition through February 24, 2018 is $426, or approximately $0.03 per share net of income tax benefit, and includes the acquisition costs noted above. The pro forma results of operations for the acquisition of Lane Venture have not been presented because they are not material to our consolidated results of operations.

 

Retail Store Acquisition

 

During the quarter ended February 25, 2017, we acquired the operations of the Bassett Home Furnishings (“BHF”) store located in Columbus, Ohio for a purchase price of $655. The store had been owned and operated by a licensee that had determined that continued ownership of a BHF store was no longer consistent with its future business objectives. We believe that Columbus, Ohio represents a viable market for a BHF store.

 

The purchase price was allocated as follows:

 

Inventory

  $ 343  

Goodwill

    312  
         

Purchase price

  $ 655  

 

The inputs into our valuation of the acquired assets reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 inputs as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 4.

 

The pro forma impact of the acquisition and the results of operations for the Columbus store since acquisition are not material to our consolidated results of operations for the quarters ended February 24, 2018 and February 25, 2017.

 

 

4. Financial Instruments and Fair Value Measurements

 

Financial Instruments

 

Our financial instruments include cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, cost method investments, accounts payable and notes payable/long-term debt. Because of their short maturities, the carrying amounts of cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, and accounts payable approximate fair value. 

 

Investments

 

Our short-term investments of $23,125 at both February 24, 2018 and November 25, 2017 consisted of certificates of deposit (CDs) with original terms averaging ten months, bearing interest at rates ranging from 0.10% to 1.80%. At February 24, 2018, the weighted average remaining time to maturity of the CDs was approximately three months and the weighted average yield of the CDs was approximately 1.27%. Each CD is placed with a Federally insured financial institution and all deposits are within Federal deposit insurance limits. Due to the nature of these investments and their relatively short maturities, the carrying amount of the short-term investments at February 24, 2018 and November 25, 2017 approximates their fair value.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

  

Fair Value Measurement 

 

The Company accounts for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

 

Level 1 Inputs– Quoted prices for identical instruments in active markets.

 

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 Inputs– Instruments with primarily unobservable value drivers.

 

We believe that the carrying amounts of our current assets and current liabilities approximate fair value due to the short-term nature of these items. The recurring estimate of the fair value of our notes payable for disclosure purposes (see Note 8) involves Level 3 inputs. Our primary non-recurring fair value estimates typically involve business acquisitions (Note 3) which involve a combination of Level 2 and Level 3 inputs.

 

 

5. Accounts Receivable

 

Accounts receivable consists of the following:

 

   

February 24,

2018

   

November 25,

2017

 

Gross accounts receivable

  $ 22,421     $ 20,257  

Allowance for doubtful accounts

    (878 )     (617 )

Accounts receivable, net

  $ 21,543     $ 19,640  

 

Activity in the allowance for doubtful accounts for the nine months ended February 24, 2018 was as follows:

 

   

2018

 
         

Balance at November 25, 2017

  $ 617  

Acquired allowance on accounts receivable (Note 3)

    200  

Additions charged to expense

    80  

Write-offs and other reductions

    (19 )

Balance at February 24, 2018

  $ 878  

 

We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 4.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

6. Inventories

 

Inventories are valued at the lower of cost or net realizable value. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories and those applicable to Lane Venture are determined using the first-in, first-out (FIFO) method.

 

Inventories were comprised of the following:

 

   

February 24,

2018

   

November 25,

2017

 

Wholesale finished goods

  $ 29,378     $ 26,145  

Work in process

    443       388  

Raw materials and supplies

    15,782       11,808  

Retail merchandise

    28,203       26,173  

Total inventories on first-in, first-out method

    73,806       64,514  

LIFO adjustment

    (8,238 )     (8,143 )

Reserve for excess and obsolete inventory

    (1,899 )     (1,895 )
    $ 63,669     $ 54,476  

 

We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

 

Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:

 

   

Wholesale

Segment

   

Retail Segment

   

Total

 
                         

Balance at November 25, 2017

  $ 1,618     $ 277     $ 1,895  

Acquired reserve on inventory (Note 3)

    400       -       400  

Additions charged to expense

    355       142       497  

Write-offs

    (788 )     (105 )     (893 )

Balance at February 24, 2018

  $ 1,585     $ 314     $ 1,899  

 

Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2018 and do not anticipate that our methodology is likely to change in the future.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

7. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets consisted of the following:

 

   

February 24, 2018

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,550     $ (634 )   $ 2,916  

Technology - customized applications

    834       (367 )     467  
                         

Total intangible assets subject to amortization

    4,384       (1,001 )     3,383  
                         

Intangibles not subject to amortization:

                       

Trade names

    9,338       -       9,338  

Goodwill

    16,119       -       16,119  
                         

Total goodwill and other intangible assets

  $ 29,841     $ (1,001 )   $ 28,840  

 

   

November 25, 2017

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,038     $ (574 )   $ 2,464  

Technology - customized applications

    834       (337 )     497  
                         

Total intangible assets subject to amortization

    3,872       (911 )     2,961  
                         

Intangibles not subject to amortization:

                       

Trade names

    2,490       -       2,490  

Goodwill

    11,900       -       11,900  
                         

Total goodwill and other intangible assets

  $ 18,262     $ (911 )   $ 17,351  

 

Changes in the carrying amounts of goodwill by reportable segment during the quarters ended February 24, 2018 were as follows:

 

   

Wholesale

   

Retail

   

Logistics

   

Total

 
                                 

Balance as of November 25, 2017

  $ 5,045     $ 1,926     $ 4,929     $ 11,900  

Goodwill arising from acquisition of Lane Venture (Note 3)

    4,219       -       -       4,219  
                                 

Balance as of February 24, 2018

  $ 9,264     $ 1,926     $ 4,929     $ 16,119  

 

The goodwill recognized in connection with our acquisition of Lane Venture remains subject to future adjustments before the close of the measurement period in the first quarter of fiscal 2019. See Note 3, Business Combinations, for additional information regarding the acquisition of Lane Venture. There were no accumulated impairment losses on goodwill as of February 24, 2018 or November 25, 2017.

 

13 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Amortization expense associated with intangible assets during the quarters ended February 24, 2018 and February 25, 2017 was as follows:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 
                 

Intangible asset amortization expense

  $ 90     $ 80  

 

Estimated future amortization expense for intangible assets that exist at February 24, 2018 is as follows:

 

Remainder of fiscal 2018

  $ 284  

Fiscal 2019

    379  

Fiscal 2020

    379  

Fiscal 2021

    379  

Fiscal 2022

    279  

Fiscal 2023

    259  

Thereafter

    1,424  
         

Total

  $ 3,383  

 

 

8. Notes Payable and Bank Credit Facility

 

Our notes payable consist of the following:

 

   

February 24,

2018

 
         

Real estate notes payable

  $ 645  

Less current portion

    (425 )
         

Total long-term notes payable

  $ 220  

 

   

November 25, 2017

 
   

Principal

Balance

   

Unamortized

Discount

   

Net Carrying

Amount

 
                         

Zenith acquisition note payable

  $ 3,000     $ (13 )   $ 2,987  

Real estate notes payable

    747       -       747  
                         

Total notes payable

    3,747       (13 )     3,734  

Less current portion

    (3,418 )     13       (3,405 )
                         

Total long-term notes payable

  $ 329     $ -     $ 329  

 

The future maturities of our notes payable are as follows:

 

Remainder of fiscal 2018

  $ 316  

Fiscal 2019

    329  
    $ 645  

 

Zenith Acquisition Note Payable

 

The final installment of the Zenith acquisition note was paid in full on February 2, 2018. Interest expense resulting from the amortization of the discount was $13 and $37 for the quarters ended February 24, 2018 and February 25, 2017, respectively.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Real Estate Notes Payable

 

Certain of our retail real estate properties have been financed through commercial mortgages with outstanding principal totaling $645 and $747 at February 24, 2018 and November 25, 2017, respectively. The mortgages bear interest at fixed rates of 6.73%. They are collateralized by the respective properties with net book values totaling approximately $5,695 and $5,727 at February 24, 2018 and November 25, 2017, respectively. The current portion of these mortgages due within one year was $425 and $418 as of February 24, 2018 and November 25, 2017, respectively.

  

Fair Value

 

We believe that the carrying amount of our notes payable approximates fair value at both February 24, 2018 and November 25, 2017. In estimating the fair value, we utilize current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 3.

 

Bank Credit Facility

 

Our credit facility with our bank provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future.

 

At February 24, 2018, we had $2,249 outstanding under standby letters of credit against our line, leaving availability under our credit line of $12,751. In addition, we have outstanding standby letters of credit with another bank totaling $511. 

 

 

9. Post Employment Benefit Obligations

 

Defined Benefit Plans

 

We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for the Supplemental Plan was $11,333 and $11,337 as of February 24, 2018 and November 25, 2017, respectively.

 

We also have the Bassett Furniture Industries, Incorporated Management Savings Plan (the “Management Savings Plan”) which was established in the second quarter of fiscal 2017. The Management Savings Plan is an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees. As part of the Management Savings Plan, we have made Long Term Cash Awards (“LTC Awards”) totaling $2,000 to certain management employees in the amount of $400 each. The liability for the LTC Awards was $1,009 and $985 as of February 24, 2018 and November 25, 2017, respectively.

 

The combined pension liability for the Supplemental Plan and LTC Awards is recorded as follows in the condensed consolidated balance sheets:

 

   

February 24,

2018

   

November 25,

2017

 

Accrued compensation and benefits

  $ 778     $ 778  

Post employment benefit obligations

    11,564       11,544  
                 

Total pension liability

  $ 12,342     $ 12,322  

 

15 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Components of net periodic pension costs for our defined benefit plans for the quarters ended February 24, 2018 and February 25, 2017 are as follows:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 

Service cost

  $ 49     $ 38  

Interest cost

    105       107  

Amortization of prior service costs

    31       -  

Amortization of transition obligation

    11       11  

Amortization of loss

    65       83  
                 

Net periodic pension cost

  $ 261     $ 239  

 

The components of net periodic pension cost other than the service cost component are included in other loss, net in our condensed consolidated statements of operations.

 

Deferred Compensation Plans

 

We have an unfunded Deferred Compensation Plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. Our liability under this plan was $1,897 and $1,916 as of February 24, 2018 and November 25, 2017, respectively.

 

We also have an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees which was established under the Management Savings Plan in the second quarter of fiscal 2017. Our liability under this plan, including both accrued Company contributions and participant salary deferrals, was $413 and $139 as of February 24, 2018 and November 25, 2017, respectively.

 

Our combined liability for all deferred compensation arrangements, including Company contributions and participant deferrals under the Management Savings Plan, is recorded as follows in the condensed consolidated balance sheets:

 

   

February 24,

2018

   

November 25,

2017

 

Accrued compensation and benefits

  $ 274     $ 274  

Post employment benefit obligations

    2,036       1,782  
                 

Total deferred compensation liability

  $ 2,310     $ 2,056  

 

We recognized expense under our deferred compensation arrangements during the quarters ended February 24, 2018 and February 25, 2017 as follows:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 

Deferred compensation expense

  $ 79     $ 54  

 

16 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

  

 

10. Commitments and Contingencies 

 

We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

 

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services segment. Our real estate lease terms range from one to 15 years and generally have renewal options of between five and 15 years. Some store leases contain contingent rental provisions based upon sales volume. Our transportation equipment leases have terms ranging from two to seven years with fixed monthly rental payments plus variable charges based upon mileage. The following schedule shows future minimum lease payments under non-cancellable operating leases with terms in excess of one year as of February 24, 2018:

 

   

Retail Stores

   

Distribution

Centers

   

Transportation

Equipment

   

Total

 
                                 

Remainder of fiscal 2018

  $ 17,853     $ 3,859     $ 2,424     $ 24,136  

Fiscal 2019

    23,826       4,055       2,750       30,631  

Fiscal 2020

    22,281       3,309       2,486       28,076  

Fiscal 2021

    19,246       2,694       1,552       23,492  

Fiscal 2022

    16,382       2,584       1,346       20,312  

Fiscal 2023

    13,545       1,517       637       15,699  

Thereafter

    38,586       437       511       39,534  

Total future minimum lease payments

  $ 151,719     $ 18,455     $ 11,706     $ 181,880  

 

In connection with our long-term real estate leases, our liability for accrued straight-line rent expense was $4,991 and $4,821 at February 24, 2018 and November 25, 2017, respectively, and is included in other accrued liabilities in our condensed consolidated balance sheets.

 

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $2,552 and $2,743 at February 24, 2018 and November 25, 2017, respectively.

 

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at February 24, 2018 and November 25, 2017 was not material.

 

17 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

11. Earnings (Loss) Per Share 

 

The following reconciles basic and diluted earnings (loss) per share:

 

   

Net Income

(Loss)

   

Weighted Average

Shares

   

Net Income

(Loss) Per

Share

 

For the quarter ended February 24, 2018:

                       
                         

Basic loss per share

  $ (913 )     10,686,477     $ (0.09 )

Add effect of dilutive securities:

                       

Options and restricted shares*

    -       -       -  

Diluted loss per share

  $ (913 )     10,686,477     $ (0.09 )
                         

For the quarter ended February 25, 2017:

                       
                         

Basic earnings per share

  $ 2,861       10,613,639     $ 0.27  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       105,636       -  

Diluted earnings per share

  $ 2,861       10,719,275     $ 0.27  

 

*Due to the net loss, the potentially dilutive securities would have been anti-dilutive and are therefore excluded.

 

For the quarters ended February 24, 2018 and February 25, 2017, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 
                 

Stock options

    11,750       -  

Unvested shares

    59,138       -  
                 

Total anti-dilutive securities

    70,888       -  

 

18 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data) 

 

 

12. Segment Information

 

We have strategically aligned our business into three reportable segments as defined in ASC 280, Segment Reporting, and as described below:

 

 

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which now include Lane Venture (see Note 3, Business Combinations), as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. Our wholesale segment also includes our holdings of short-term investments and retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.

 

 

Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores.

 

 

Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s total operating costs, including those associated with providing logistical services to the Company as well as to third-party customers, are included in selling, general and administrative expenses and were $24,919 and $22,560 for the quarters ended February 24, 2018 and February 25, 2017, respectively.

 

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores and the elimination of Zenith logistics revenue from our wholesale and retail segments. Inter-company income elimination includes the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the retail consumer. The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate, and the elimination of shipping and handling charges from Zenith for services provided to our wholesale and retail operations.

 

19 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 

Sales Revenue

               

Wholesale

  $ 63,100     $ 61,975  

Retail - Company-owned stores

    64,661       61,593  

Logistical services

    25,249       22,334  

Inter-company eliminations:

               

Furniture and accessories

    (31,638 )     (29,870 )

Logistical services

    (11,100 )     (10,140 )

Consolidated

  $ 110,272     $ 105,892  
                 

Income (loss) from Operations

               

Wholesale

  $ 3,064     $ 5,893  

Retail - Company-owned stores

    (1,513 )     (1,343 )

Logistical services

    330       (226 )

Inter-company elimination

    169       340  

Consolidated

  $ 2,050     $ 4,664  
                 

Depreciation and Amortization

               

Wholesale

  $ 703     $ 644  

Retail - Company-owned stores

    1,528       1,472  

Logistical services

    1,073       1,235  

Consolidated

  $ 3,304     $ 3,351  
                 

Capital Expenditures

               

Wholesale

  $ 1,217     $ 1,627  

Retail - Company-owned stores

    2,601       3,703  

Logistical services

    140       280  

Consolidated

  $ 3,958     $ 5,610  

 

   

As of

   

As of

 

Identifiable Assets

 

February 24,

2018

   

November 25,

2017

 

Wholesale

  $ 140,701     $ 152,181  

Retail - Company-owned stores

    93,490       89,271  

Logistical services

    52,474       52,296  

Consolidated

  $ 286,665     $ 293,748  

 

20 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

13. Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures. In addition, during 2016 the FASB has issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, all of which clarify certain implementation guidance within ASU 2014-09, and ASU 2016-11, which rescinds certain SEC guidance within the ASC effective upon an entity’s adoption of ASU 2014-09. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is not permitted. Therefore the amendments in ASU 2014-09 will become effective for us as of the beginning of our 2019 fiscal year. In order to evaluate the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements, we have initiated a comprehensive review of the significant revenue streams across our wholesale, retail and logistical services reportable segments. The focus of this review includes, among other things, the identification of the significant contracts and other arrangements we have with our customers to identify significant performance obligations, factors affecting the determination of transaction price, such as variable consideration, and factors affecting the classification of receipts as revenue, such as principal versus agent considerations. We are also reviewing our current accounting policies, procedures and controls with respect to these contracts and arrangements to determine what changes, if any, may be required by the adoption of ASU 2014-09. We have not yet made a determination as to the impact that adoption will have on our consolidated financial statements, nor have we made any decision on the method of adoption.

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. The amendments in ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. The amendments in ASU 2016-01 will become effective for us as of the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a differentiation between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply. The guidance in ASU 2016-02 will become effective for us as of the beginning of our 2020 fiscal year. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements, which we expect will have a material effect on our statement of financial position, and have not made any decision on the method of adoption with respect to the optional practical expedients.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costs related to debt prepayments or extinguishments, payments representing accreted interest on discounted debt, payments of contingent consideration after a business combination, proceeds from insurance claims and company-owned life insurance, and distributions from equity method investees, among others. The amendments in ASU 2016-15 are to be adopted retrospectively and will become effective for as at the beginning of our 2019 fiscal year. Early adoption, including adoption in an interim period, is permitted. The adoption of this guidance is not expected to have a material impact upon our presentation of cash flows.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 shall apply prospectively and will become effective for us at the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in ASU 2017-04 will become effective for us as of the beginning of our 2021 fiscal year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The amendments in ASU 2017-09 will become effective for us as of the beginning of our 2019 fiscal year. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to provide narrow-scope guidance for entities that are required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and have items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. Because the Act has had a significant impact upon the tax effects of pension costs included in our accumulated other comprehensive loss, we have adopted the guidance in ASU 2018-02 effective as of the beginning of the first quarter of fiscal 2018, resulting in the reclassification of $545 of tax benefits from accumulated other comprehensive loss to retained earnings (see Note 2).

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview 

 

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 115-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.

 

With 93 BHF stores at February 24, 2018, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service.  In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 30 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.  

 

The BHF stores feature custom order furniture, free in-home design visits (“home makeovers”), and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are each trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.

 

We have factories in Newton, North Carolina and Grand Prairie, Texas that manufacture custom upholstered furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made” line of custom, solid hardwood furniture.  Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores.  Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees.  In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture (casegoods) and certain leather upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 70% of the products we currently sell are manufactured in the United States.

 

We also own Zenith Freight Lines, LLC (“Zenith”) which provides logistical services to both the wholesale and retail operations at Bassett along with other furniture manufacturers and retailers. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry, as well as the ability to provide the expedited delivery service which is increasingly demanded by our industry. Zenith operates seven regional freight hubs and 14 home delivery centers in 13 states. Approximately 55% of Zenith’s revenue is generated from services provided to non-Bassett customers.

 

On December 21, 2017, we purchased certain assets and assumed certain liabilities of Lane Venture from Heritage Home Group, LLC for $15,556 in cash. Lane Venture is a manufacturer and distributor of premium outdoor furniture, and is now being operated as a component of our wholesale segment. This acquisition marks our entry into the market for outdoor furniture and we believe that Lane Venture will provide a foundation for us to become a significant participant in this category. We plan to distribute this brand outside of our Bassett store network with plans to introduce a Bassett-branded line in the stores in the near future. See Note 3 to our condensed consolidated financial statements for additional details regarding this acquisition.

 

At February 24, 2018, our BHF store network included 63 Company-owned stores and 30 licensee-owned stores. During the first quarter of fiscal 2018, we opened new stores in Chandler, Arizona; Oklahoma City, Oklahoma; and Summerlin, Nevada.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

We continue to execute our strategy of growing the Company through opening new stores, repositioning stores to improved locations within a market and closing underperforming stores. The following table shows planned store openings where leases have been executed:

 

     

Size

 

Planned

Location

Type

 

Sq. Ft.

 

Opening

New Stores:

           

El Paso, TX

Corporate

    8,400  

Opened March 6, 2018

La Jolla, CA

Licensed

    10,000  

Q2 2018

Daly City, CA

Licensed

    9,000  

Q3 2018

Coral Gables, FL

Corporate

    10,000  

Q3 2018

Frisco, TX

Corporate

    15,000  

Q4 2018

 

In addition, lease negotiations are underway for new store locations that could result in additional openings during 2018 and beyond. With a track record of seven consecutive years of positive same store sales growth and our focus on store productivity, we believe that we can take our concept to new markets and consistently grow overall store count in the years to come.

 

As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $200 to $400 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $400 to $600 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business. Because of the increased store openings in 2018, we expect to incur approximately $1,000 more new store pre-opening costs and post-opening losses in 2018 than we incurred in 2017.

 

In 2018, Bassett will focus on its digital effort to improve the customers’ journey from the time they begin on our website to the final step of delivering the goods to their homes.  Today’s customers expect their digital experiences and communications to be personalized and highly-relevant, and catered to match their specific needs and preferences.  Bassett is laying the foundation to becoming more connected to its customers and to use the data and insights collected during the customer journey to create a more compelling customized customer experience. This year, the Company plans to invest in technology, including an order management system, and in digital talent who can direct the strategy, planning and daily business direction and critical decision making required for building a competitive omnichannel retail business.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

  

Results of Operations Periods ended February 24, 2018 compared with periods ended February 25, 2017:

 

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the quarters ended February 24, 2018 and February 25, 2017:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Sales revenue:

                                               

Furniture and accessories

  $ 96,123       87.2 %   $ 93,698       88.5 %   $ 2,425       2.6 %

Logistics revenue

    14,149       12.8 %     12,194       11.5 %     1,955       16.0 %

Total sales revenue

    110,272       100.0 %     105,892       100.0 %     4,380       4.1 %

Cost of furniture and accessories sold

    43,269       39.2 %     41,898       39.6 %     1,371       3.3 %

SG&A expenses

    64,251       58.3 %     58,524       55.3 %     5,727       9.8 %

New store pre-opening costs

    702       0.6 %     806       0.8 %     (104 )     -12.9 %
                                                 

Income from operations

  $ 2,050       1.9 %   $ 4,664       4.4 %   $ (2,614 )     -56.0 %

 

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the quarter ended February 24, 2018 as compared with the prior year period.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Segment Information

 

We have strategically aligned our business into three reportable segments as described below:

 

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which now include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.

 

Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

 

Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s operating costs are included in selling, general and administrative expenses.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

The following tables illustrate the effects of various intercompany eliminations on income from operations in the consolidation of our segment results:

 

   

Quarter Ended February 24, 2018

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue:

                                       

Furniture & accessories

  $ 63,100     $ 64,661     $ -     $ (31,638 ) (1)   $ 96,123  

Logistics

    -       -       25,249       (11,100 ) (2)     14,149  

Total sales revenue

    63,100       64,661       25,249       (42,738     110,272  

Cost of furniture and accessories sold

    42,644       31,994       -       (31,369 ) (3)     43,269  

SG&A expense

    17,392       33,478       24,919       (11,538 ) (4)     64,251  

New store pre-opening costs

    -       702       -       -       702  

Income (loss) from operations

  $ 3,064     $ (1,513 )   $ 330     $ 169     $ 2,050  

 

   

Quarter Ended February 25, 2017

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue:

                                       

Furniture & accessories

  $ 61,975     $ 61,593     $ -     $ (29,870 ) (1)   $ 93,698  

Logistics

    -       -       22,334       (10,140 ) (2)     12,194  

Total sales revenue

    61,975       61,593       22,334       (40,010 )     105,892  

Cost of furniture and accessories sold

    40,169       31,459       -       (29,730 ) (3)     41,898  

SG&A expense

    15,913       30,671       22,560       (10,620 ) (4)     58,524  

New store pre-opening costs

    -       806       -       -       806  

Income (loss) from operations

  $ 5,893     $ (1,343 )   $ (226 )   $ 340     $ 4,664  

 

(1)

Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.

(2)

Represents the elimination of logistical services billed to our wholesale and retail segments.

(3)

Represents the elimination of purchases by our Company-owned BHF stores from our wholesale segment, as well as the change for the period in the elimination of intercompany profit in ending retail inventory.

(4)

Represents the elimination of rent paid by our retail stores occupying Company-owned real estate, and the elimination of logisitcal services charged by Zenith to Bassett's retail and wholesale segments as follows:

 

   

Quarter Ended

 
   

February 24,

2018

   

February 25,

2017

 
                 

Intercompany logistical services

  $ (11,100 )   $ (10,140 )

Intercompany rents

    (438 )     (480 )
                 

Total SG&A expense elimination

  $ (11,538 )   $ (10,620 )

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Wholesale Segment

 

Results for the wholesale segment for the quarters ended February 24, 2018 and February 25, 2017 are as follows:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Net sales

  $ 63,100       100.0 %   $ 61,975       100.0 %   $ 1,125       1.8 %

Gross profit

    20,456       32.4 %     21,806       35.2 %     (1,350 )     -6.2 %

SG&A expenses

    17,392       27.6 %     15,913       25.7 %     1,479       9.3 %
                                                 

Income from operations

  $ 3,064       4.9 %   $ 5,893       9.5 %   $ (2,829 )     -48.0 %

 

Quarterly Analysis of Results - Wholesale

 

The increase in net sales was driven by an 8.2% increase in furniture shipments to the open market (outside the Bassett Home Furnishings network) as compared to the prior year period partially offset by a 2.9% decrease in furniture shipments to the Bassett Home Furnishings network.  A much smaller component of our wholesale revenues, shipments of wholesale accessories, increased 55% over the prior year period.  Gross margins for the wholesale segment were 32.4% for the first quarter of 2018 compared to 35.2% for the prior year quarter. This decrease was primarily driven by lower margins in the Bassett Custom Upholstery operation from continued higher materials costs coupled with lower absorption of fixed costs from lower volumes, excluding Lane Venture. Also, lower margins in the imported Bassett Casegoods were primarily due to a higher sales level of discontinued and discounted goods and higher container freight costs. Wholesale SG&A increased as a percentage of sales over the prior year period primarily due to one-time acquisition and startup costs associated with the Lane Venture operation and higher digital marketing and other brand development costs.

 

 

Wholesale shipments by type:

 

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Bassett Custom Upholstery

  $ 33,568       53.2 %   $ 33,455       54.0 %   $ 113       0.3 %

Bassett Leather

    6,524       10.3 %     5,582       9.0 %     942       16.9 %

Bassett Custom Wood

    10,987       17.4 %     9,868       15.9 %     1,119       11.3 %

Bassett Casegoods

    10,797       17.1 %     12,282       19.8 %     (1,485 )     -12.1 %

Accessories

    1,224       1.9 %     788       1.3 %     436       55.3 %

Total

  $ 63,100       100.0 %   $ 61,975       100.0 %   $ 1,125       1.8 %

 

Wholesale Backlog

 

The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $17,098 at February 24, 2018 as compared with $17,140 at February 25, 2017.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Retail – Company-owned Stores Segment

 

Results for the retail segment for the quarters ended February 24, 2018 and February 25, 2017 are as follows:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Net sales

  $ 64,661       100.0 %   $ 61,593       100.0 %   $ 3,068       5.0 %

Gross profit

    32,667       50.5 %     30,134       48.9 %     2,533       8.4 %

SG&A expenses

    33,478       51.8 %     30,671       49.8 %     2,807       9.2 %

New store pre-opening costs

    702       1.1 %     806       1.3 %     (104 )     -12.9 %

Loss from operations

  $ (1,513 )     -2.3 %   $ (1,343 )     -2.2 %   $ (170 )     12.7 %

 

Results for comparable stores (53 stores for the quarter) are as follows:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Net sales

  $ 58,852       100.0 %   $ 56,974       100.0 %   $ 1,878       3.3 %

Gross profit

    29,802       50.6 %     28,169       49.4 %     1,633       5.8 %

SG&A expenses

    29,027       49.3 %     28,255       49.6 %     772       2.7 %

Income (loss) from operations

  $ 775       1.3 %   $ (86 )     -0.2 %   $ 861    

N/M

 

 

“Comparable” stores include those locations that have been open and operated by the Company for all of each respective comparable period.

 

Results for all other stores are as follows:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Net sales

  $ 5,809       100.0 %   $ 4,619       100.0 %   $ 1,190       25.8 %

Gross profit

    2,865       49.3 %     1,965       42.5 %     900       45.8 %

SG&A expenses

    4,451       76.6 %     2,416       52.3 %     2,035       84.2 %

New store pre-opening costs

    702       12.1 %     806       17.4 %     (104 )     -12.9 %

Loss from operations

  $ (2,288 )     -39.4 %   $ (1,257 )     -27.2 %   $ (1,031 )     82.0 %

 

Quarterly Analysis of Results - Retail

 

The first quarter 2018 increase in net sales for the 63 Company-owned stores over the prior year was comprised of a 3.3% increase in comparable store sales along with a $1,190 increase in non-comparable store sales.

 

While we do not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores decreased by 2.5% for the first quarter of 2018 as compared to the first quarter of 2017.

 

The operating loss of $1,513 for the first quarter of 2018 was primarily due to non-comparable store results while comparable store performance improved. The 53 comparable stores generated operating income for the first quarter of 2018 compared with a slight loss in the prior year quarter. The increase in comparable store gross margins to 50.6% in the first quarter of 2018 from 49.4% in the prior year period is primarily due to improved pricing strategies and product mix. SG&A expenses as a percentage of sales for comparable stores showed marginal improvement over 2017 due to better leveraging of fixed costs.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

We incur losses in the first two to three months of operation following a store opening as sales are not recognized in the income statement until the furniture is delivered to its customers resulting in operating expenses without the normal sales volume. Because we do not maintain a stock of retail inventory that would result in quick delivery, and because of the custom nature of the furniture offerings, such deliveries are generally not made until after 30 days from when the furniture is ordered by the customer. Coupled with the pre-opening costs, total start-up losses typically amount to $400 to $600 per store. During the first quarter of 2018 we incurred $740 of post-opening losses associated with the three new stores opened during the quarter as well as the Wichita, Kansas store which opened late in the fourth quarter of 2017. There were no post-opening losses during the first quarter of 2017.

 

Each addition to our Company-owned store network results in incremental fixed overhead costs, primarily associated with local store personnel, occupancy costs and warehousing expenses. The incremental SG&A expenses associated with each new store will be ongoing.

 

Retail Backlog

 

The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was $34,353, or an average of $545 per open store at February 24, 2018 as compared with a retail backlog of $34,048, or an average of $567 per open store at February 25, 2017.

 

Logistical Services Segment

 

Results for our logistical services segment for the quarters ended February 24, 2018 and February 25, 2017 are as follows:

 

   

Quarter Ended

   

Change

 
   

February 24, 2018

   

February 25, 2017

   

Dollars

   

Percent

 
                                                 

Logistical services revenue

  $ 25,249       100.0 %   $ 22,334       100.0 %   $ 2,915       13.1 %

Operating expenses

    24,919       98.7 %     22,560       101.0 %     2,359       10.5 %
                                                 

Income from operations

  $ 330       1.3 %   $ (226 )     -1.0 %   $ 556    

 

N/M  

 

Quarterly Analysis of Operations – Logistical Services

 

Zenith’s 2018 increase in revenue over the first quarter of 2017 resulted from increases in both Bassett and non-Bassett customers. Zenith’s operating profit increased due primarily to improved load efficiency in the middle mile operation resulting in higher revenue per mile partially offset by increased fuel costs. Operating costs for the quarters ended February 24, 2018 and February 25, 2017 include non-cash depreciation and amortization charges of $1,073 and $1,235, respectively.

 

31 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Other Items Affecting Net Income (Loss)

 

Other Loss, Net

 

Other loss, net, for the quarter ended February 24, 2018 was $627 as compared to $733 for the quarter ended February 25, 2017. This decrease is primarily attributable to lower interest expense due to overall lower levels of debt and increased interest income due to rising yields on our short-term investments compared to the prior year period.

 

Income Taxes and Impact of Tax Cuts and Jobs Act

 

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter. 

 

On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduced the Federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018 for all corporate taxpayers, while most other provisions of the Act take effect for fiscal years beginning on or after January 1, 2018. Therefore, we will compute our income tax expense for fiscal 2018 using a blended Federal statutory rate of 22.2%. The 21% Federal statutory rate, as well as certain other provisions of the Act including the elimination of the domestic manufacturing deduction and new limitations on certain business deductions, will apply to our 2019 fiscal year and thereafter.

 

The Federal rate reduction has had a significant impact on our provision for income taxes for the quarter ended February 24, 2018. Our effective tax rate for the quarter ended February 24, 2018 of 164.2% differs from the fiscal 2018 blended Federal statutory rate of 22.2% primarily due to a $2,157 discrete charge arising from the re-measurement of our deferred tax assets. Other items impacting our effective tax rate for the quarter include the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $181 and the Section 199: Domestic Production Activities Deduction.

 

The charge for the re-measurement of our deferred tax assets was based on reasonable estimates and therefore has been recorded as a provisional amount. We may alter our estimates during the remainder of fiscal 2018 as we continue to process data to finalize the underlying calculations and also analyze other provisions of the Act to determine if they will impact our effective tax rate in fiscal 2018 or in the future. We will continue to refine our adjustments through the permissible measurement period, which is not to extend beyond one year from the enactment date.

 

Our effective tax rate for the quarter ended February 25, 2017 of 27.2% differed from the federal statutory rate of 35% primarily due to the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $327 and the Section 199: Domestic Production Activities Deduction.

 

32 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

Liquidity and Capital Resources

 

We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, to allow us to take advantage of opportunities as market conditions improve, and to execute our long-term retail strategies.

 

Cash Flows

 

Cash flow from operations for the first quarter of 2018 was a net use of $1,399 compared to cash provided by operations of $2,077 for the first quarter of 2017, representing a decrease of $3,476 in cash flows from operations. This decrease is primarily due to changes in working capital from increases in inventory.

 

Our overall cash position decreased by $29,639 during the first quarter of 2018. In addition to cash used in operations, we used $19,514 of cash in investing activities, primarily consisting of our $15,556 investment in Lane Venture and capital expenditures which included retail store relocations, retail store remodels, in-process spending on new stores, and expanding and upgrading our manufacturing capabilities. Net cash used in financing activities was $8,726, including dividend payments of $4,942 and the final $3,000 installment payment on our Zenith acquisition note payable. With cash and cash equivalents and short-term investments totaling $47,435 on hand at February 24, 2018, we believe we have sufficient liquidity to fund operations for the foreseeable future.

 

Debt and Other Obligations

 

Our credit facility with our bank provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future. At February 24, 2018, we had $2,249 outstanding under standby letters of credit against our line, leaving availability under our credit line of $12,751. In addition, we have outstanding standby letters of credit with another bank totaling $511.

 

At February 24, 2018 we have outstanding principal totaling $645 under notes payable of which $425 matures within one year of the balance sheet date. See Note 8 to our condensed consolidated financial statements for additional details regarding these notes, including collateral and future maturities. We expect to satisfy these obligations as they mature using cash flow from operations or our available cash on hand.

 

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services segment. We had obligations of $181,880 at February 24, 2018 for future minimum lease payments under non-cancelable operating leases having remaining terms in excess of one year. We also have guaranteed certain lease obligations of licensee operators. Remaining terms under these lease guarantees range from approximately one to five years. We were contingently liable under licensee lease obligation guarantees in the amount of $2,552 at February 24, 2018. See Note 10 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.

 

Investment in Retail Real Estate

 

We have a substantial investment in real estate acquired for use as retail locations. To the extent such real estate is occupied by Company-owned retail stores, it is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and is considered part of our retail segment. The net book value of such retail real estate occupied by Company-owned stores was $22,652 at February 24, 2018. All other retail real estate that we own, consisting of locations formerly leased to our licensees and now leased to others, is included in other assets in the accompanying condensed consolidated balance sheets. The net book value of such real estate, which is considered part of our wholesale segment, was $1,732 at February 24, 2018.

 

33 of 39

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 24, 2018

(Dollars in thousands except share and per share data)

 

The following table summarizes our total investment in retail real estate owned at February 24, 2018:

 

   

Number of

   

Aggregate

   

Net Book

 
   

Locations

   

Square Footage

   

Value

 
                         

Real estate occupied by Company-owned and operated stores, included in property and equipment, net (1)

    10       250,070     $ 22,652  
                         

Investment real estate leased to others, included in other assets

    2       41,021