bset20180825b_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 August 25, 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. 000-00209

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

 

 

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 September 20, 2018, 10,638,409 shares of common stock of the Registrant were outstanding.

 

Page 1 of 42

 

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM

 

PAGE

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

1.

Condensed Consolidated Financial Statements as of  August 25, 2018 (unaudited) and November 25, 2017 and for the three and nine months ended August 25, 2018 (unaudited) and August 26, 2017 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

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

25

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

4.

Controls and Procedures

38

 

 

 

PART II - OTHER INFORMATION

 

 

 

1.

Legal Proceedings

40

 

 

 

2.

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

40

 

 

 

3.

Defaults Upon Senior Securities

40

 

 

 

6.

Exhibits

40

 

Page 2 of 42

 

 

PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE PERIODS ENDED AUGUST 25, 2018 AND AUGUST 26, 2017 – UNAUDITED

(In thousands except per share data)

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 

Sales revenue:

                               

Furniture and accessories

  $ 99,807     $ 100,152     $ 298,605     $ 294,144  

Logistics

    13,149       14,109       41,603       40,134  

Total sales revenue

    112,956       114,261       340,208       334,278  
                                 

Cost of furniture and accessories sold

    44,821       45,320       133,750       132,199  
                                 

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

    63,279       61,373       192,986       180,972  

New store pre-opening costs

    532       308       1,435       1,583  

Income from operations

    4,324       7,260       12,037       19,524  
                                 

Gain on sale of investment

    -       -       -       3,267  

Impairment of investment in real estate

    -       -       -       (1,084 )

Other loss, net

    (492 )     (583 )     (1,352 )     (1,994 )

Income before income taxes

    3,832       6,677       10,685       19,713  
                                 

Income tax expense

    887       2,098       4,364       6,431  
                                 

Net income

  $ 2,945     $ 4,579     $ 6,321     $ 13,282  
                                 

Retained earnings-beginning of period

    140,934       135,947       139,378       129,388  

Reclassification of certain tax effects from accumulated other comprehensive loss

    -       -       545       -  

Purchase and retirement of common stock

    (1,036 )     -       (1,036 )        

Cash dividends

    (1,338 )     (1,181 )     (3,703 )     (3,325 )

Retained earnings-end of period

  $ 141,505     $ 139,345     $ 141,505     $ 139,345  
                                 

Basic earnings per share

  $ 0.28     $ 0.43     $ 0.59     $ 1.25  
                                 

Diluted earnings per share

  $ 0.28     $ 0.43     $ 0.59     $ 1.24  
                                 

Dividends per share

  $ 0.125     $ 0.11     $ 0.345     $ 0.31  

 

 

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

 

Page 3 of 42

 

 

 

PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIODS ENDED AUGUST 25, 2018 AND AUGUST 26, 2017 – UNAUDITED

(In thousands)

 

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 
                                 

Net income

  $ 2,945     $ 4,579     $ 6,321     $ 13,282  

Other comprehensive income:

                               

Recognize prior service cost associated with Long Term Cash Awards (LTCA)

    -       -       -       (932 )

Amortization associated with Long Term Cash Awards (LTCA)

    31       24       93       49  

Income taxes related to LTCA

    (8 )     (9 )     (24 )     341  

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

    76       94       228       281  

Income taxes related to SERP

    (19 )     (36 )     (57 )     (107 )
                                 

Other comprehensive income, net of tax

    80       73       240       (368 )
                                 

Total comprehensive income

  $ 3,025     $ 4,652     $ 6,561     $ 12,914  

 

 

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

 

Page 4 of 42

 

 

 

PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AUGUST 25, 2018 AND NOVEMBER 25, 2017

(In thousands)

 

 

   

(Unaudited)

         

 

 

August 25,

2018

   

November 25,

2017

 
Assets                

Current assets

               

Cash and cash equivalents

  $ 25,763     $ 53,949  

Short-term investments

    22,643       23,125  

Accounts receivable, net

    19,485       19,640  

Inventories

    63,726       54,476  

Other current assets

    8,724       8,192  

Total current assets

    140,341       159,382  
                 

Property and equipment, net

    103,205       103,244  
                 

Deferred income taxes

    5,773       8,393  

Goodwill and other intangible assets

    28,541       17,351  

Other

    6,624       5,378  

Total long-term assets

    40,938       31,122  

Total assets

  $ 284,484     $ 293,748  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 24,219     $ 21,760  

Accrued compensation and benefits

    13,434       14,670  

Customer deposits

    21,168       27,107  

Dividends payable

    -       3,759  

Current portion of long-term debt

    436       3,405  

Other accrued liabilities

    13,031       12,655  

Total current liabilities

    72,288       83,356  
                 

Long-term liabilities

               

Post employment benefit obligations

    13,677       13,326  

Notes payable

    -       329  

Other long-term liabilities

    6,564       5,277  

Total long-term liabilities

    20,241       18,932  
                 

Stockholders’ equity

               

Common stock

    53,326       53,690  

Retained earnings

    141,505       139,378  

Additional paid-in capital

    -       962  

Accumulated other comprehensive loss

    (2,876 )     (2,570 )

Total stockholders' equity

    191,955       191,460  

Total liabilities and stockholders’ equity

  $ 284,484     $ 293,748  

 

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

 

Page 5 of 42

 

 

 

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 AUGUST 25, 2018 AND AUGUST 26, 2017 – UNAUDITED

(In thousands)

 

   

Nine Months Ended

 
   

August 25, 2018

   

August 26, 2017

 

Operating activities:

               

Net income

  $ 6,321     $ 13,282  

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

               

Depreciation and amortization

    9,920       10,060  

Provision for asset impairment charge

    -       1,084  

Gain on sale of property and equipment

    (130 )     (1,278 )

Gain on sale of investment

    -       (3,267 )

Tenant improvement allowance received from lessors

    2,220       1,165  

Deferred income taxes

    2,620       195  

Other, net

    490       516  

Changes in operating assets and liabilities:

               

Accounts receivable

    1,183       (1,018 )

Inventories

    (5,349 )     (4,190 )

Other current assets

    (496 )     1,919  

Customer deposits

    (5,939 )     (4,424 )

Accounts payable and accrued liabilities

    196       654  

Net cash provided by operating activities

    11,036       14,698  
                 

Investing activities:

               

Purchases of property and equipment

    (12,632 )     (10,817 )

Proceeds from sales of property and equipment

    2,488       4,474  

Cash paid for business acquisition

    (15,556 )     -  

Proceeds from maturities and sales of investments

    482       3,592  

Acquisition of retail licensee store

    -       (655 )

Other

    -       223  

Net cash used in investing activities

    (25,218 )     (3,183 )
                 

Financing activities:

               

Cash dividends

    (7,462 )     (6,544 )

Proceeds from the exercise of stock options

    27       310  

Other issuance of common stock

    264       83  

Repurchases of common stock

    (2,848 )     (83 )

Taxes paid related to net share settlement of equity awards

    (674 )     (641 )

Repayments of notes payable

    (3,311 )     (3,287 )

Net cash used in financing activities

    (14,004 )     (10,162 )

Change in cash and cash equivalents

    (28,186 )     1,353  

Cash and cash equivalents - beginning of period

    53,949       35,144  
              .  

Cash and cash equivalents - end of period

  $ 25,763     $ 36,497  

 

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

 

Page 6 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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 income 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 income.

 

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 statements of income 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 three and nine months ended August 25, 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 three and nine months ended August 25, 2018. Our effective tax rates for the three and nine months ended August 25, 2018 were 23.1% and 40.8%, respectively. Our effective tax rate for the nine months ended August 25, 2018 differs from the fiscal 2018 blended federal statutory rate of 22.2% primarily due to a discrete charge of $2,032 arising from the re-measurement of our deferred tax assets. Other items impacting our effective tax rates for the three and nine months ended August 25, 2018 include the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $26 and $223, respectively, non-taxable life insurance proceeds of $266 during the nine months ended August 25, 2018, and the Section 199: Domestic Production Activities Deduction.

 

Page 7 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

Given the significance of the Act, 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 August 25, 2018, we were still assessing the overall impact that the Act will have on our financial statements and related disclosures. Therefore, the net 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 rates for the three and nine months ended August 26, 2017 of 31.4% and 32.6%, respectively, 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 $227 and $554 during the three and nine months ended August 26, 2017, respectively, 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 14, 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 nine months ended August 25, 2018 we reclassified $545 of tax benefits associated with pension costs from accumulated other comprehensive loss to retained earnings.

 

Page 8 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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. During the nine months ended August 25, 2018, we recorded measurement period adjustments to increase (decrease) the opening value of net accounts receivable, inventory and accrued liabilities by $150, ($2) and $38, respectively, resulting in a reduction of recognized goodwill of $110. The preliminary allocation of the $15,556 all-cash purchase price to the acquired assets and liabilities of the Lane Venture business, including measurement period adjustments, is as follows:

 

Allocation of the fair value of consideration transferred:

 

Identifiable assets acquired:

       

Accounts receivable, net of reserve (Note 5)

  $ 1,507  

Inventory, net of reserve (Note 6)

    3,752  

Prepaid expenses and other current assets

    37  

Intangible assets

    7,360  

Total identifiable assets acquired

    12,656  

Liabilities assumed:

       

Accounts payable

    (357 )

Other accrued liabilities

    (852 )

Total liabilities assumed

    (1,209 )

Net identifiable assets acquired

    11,447  

Goodwill

    4,109  

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  

 

Page 9 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

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.

 

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 $256 during the nine months ended August 25, 2018, and are included in selling, general and administrative expenses in the condensed consolidated statements of income. Additional acquisition costs related to Lane Venture are not expected to be significant during the remainder of fiscal 2018. The acquisition costs are primarily related to legal, accounting and valuation services.

 

The pro forma impact of the acquisition and the results of operations attributable to Lane Venture since the acquisition have not been presented because they are not material to our consolidated results of operations for the three and nine month periods ended August 25, 2018 and August 26, 2017.

 

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 were not material to our consolidated results of operations for the three and nine months ended August 26, 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. 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 $22,643 at August 25, 2018 and $23,125 at November 25, 2017 consisted of certificates of deposit (CDs). At August 25, 2018, the CDs had original terms averaging nine months, bearing interest at rates ranging from 0.10% to 2.45%. At August 25, 2018, the weighted average remaining time to maturity of the CDs was approximately six months and the weighted average yield of the CDs was approximately 2.11%. 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 August 25, 2018 and November 25, 2017 approximates their fair value.

 

Page 10 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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:

 

   

August 25,

2018

   

November 25,

2017

 

Gross accounts receivable

  $ 20,466     $ 20,257  

Allowance for doubtful accounts

    (981 )     (617 )

Accounts receivable, net

  $ 19,485     $ 19,640  

 

Activity in the allowance for doubtful accounts for the nine months ended August 25, 2018 was as follows:

 

   

2018

 
         

Balance at November 25, 2017

  $ 617  

Acquired allowance on accounts receivable (Note 3)

    50  

Additions charged to expense

    329  

Write-offs and other reductions

    (15 )

Balance at August 25, 2018

  $ 981  

 

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.

 

Page 11 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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:

 

   

August 25,

2018

   

November 25,

2017

 

Wholesale finished goods

  $ 29,907     $ 26,145  

Work in process

    504       388  

Raw materials and supplies

    15,432       11,808  

Retail merchandise

    28,159       26,173  

Total inventories on first-in, first-out method

    74,002       64,514  

LIFO adjustment

    (8,560 )     (8,143 )

Reserve for excess and obsolete inventory

    (1,716 )     (1,895 )
    $ 63,726     $ 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)

    50       -       50  

Additions charged to expense

    1,026       304       1,330  

Write-offs

    (1,237 )     (322 )     (1,559 )

Balance at August 25, 2018

  $ 1,457     $ 259     $ 1,716  

 

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.

 

Page 12 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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:

 

   

August 25, 2018

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,550     $ (764 )   $ 2,786  

Technology - customized applications

    834       (426 )     408  
                         

Total intangible assets subject to amortization

    4,384       (1,190 )     3,194  
                         

Intangibles not subject to amortization:

                       

Trade names

    9,338       -       9,338  

Goodwill

    16,009       -       16,009  
                         

Total goodwill and other intangible assets

  $ 29,731     $ (1,190 )   $ 28,541  

 

   

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 nine months ended August 25, 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)

    4,109       -       -       4,109  
                                 

Balance as of August 25, 2018

  $ 9,154     $ 1,926     $ 4,929     $ 16,009  

 

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 August 25, 2018 or November 25, 2017.

 

Page 13 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

Amortization expense associated with intangible assets during the three and nine months ended August 25, 2018 and August 26, 2017 was as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 
                                 

Intangible asset amortization expense

  $ 95     $ 80     $ 280     $ 241  

 

Estimated future amortization expense for intangible assets that exist at August 25, 2018 is as follows:

 

Remainder of fiscal 2018

  $ 95  

Fiscal 2019

    379  

Fiscal 2020

    379  

Fiscal 2021

    379  

Fiscal 2022

    279  

Fiscal 2023

    259  

Thereafter

    1,424  
         

Total

  $ 3,194  

 

 

 

8. Notes Payable and Bank Credit Facility

 

Our notes payable consist of the following:

 

   

August 25, 2018

 
         

Real estate notes payable

  $ 436  

Less current portion

    (436 )
         

Total long-term notes payable

  $ -  

 

   

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

  $ 107  

Fiscal 2019

    329  
    $ 436  

 

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 for the nine months ended August 25, 2018 and $19 and $76 for the three and nine months ended August 26, 2017, respectively.

 

Page 14 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 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 $436 and $747 at August 25, 2018 and November 25, 2017, respectively. The mortgages each bear interest at a fixed rate of 6.73%. They are collateralized by the respective properties with net book values totaling approximately $5,631 and $5,727 at August 25, 2018 and November 25, 2017, respectively. The current portion of these mortgages due within one year was $436 and $418 as of August 25, 2018 and November 25, 2017, respectively.

 

Fair Value

 

We believe that the carrying amount of our notes payable approximates fair value at both August 25, 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 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. The credit facility will mature in December 2018, at which time we expect to obtain a new facility under substantially similar terms.

 

At August 25, 2018, we had $1,382 outstanding under standby letters of credit against our line, leaving availability under our credit line of $13,618. In addition, we have outstanding standby letters of credit with another bank totaling $381.

 

 

 

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 $11,188 and $11,337 as of August 25, 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 $1,055 and $985 as of August 25, 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:

 

   

August 25,

2018

   

November 25,

2017

 

Accrued compensation and benefits

  $ 778     $ 778  

Post employment benefit obligations

    11,465       11,544  
                 

Total pension liability

  $ 12,243     $ 12,322  

 

Page 15 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

Components of net periodic pension costs for our defined benefit plans for the three and nine months ended August 25, 2018 and August 26, 2017 are as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 

Service cost

  $ 49     $ 49     $ 147     $ 136  

Interest cost

    105       114       315       336  

Amortization of prior service costs

    31       24       93       49  

Amortization of transition obligation

    11       11       33       32  

Amortization of loss

    65       83       195       249  
                                 

Net periodic pension cost

  $ 261     $ 281     $ 783     $ 802  

 

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 income.

 

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 $1,857 and $1,916 as of August 25, 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 $629 and $139 as of August 25, 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:

 

   

August 25,

2018

   

November 25,

2017

 

Accrued compensation and benefits

  $ 274     $ 274  

Post employment benefit obligations

    2,212       1,782  
                 

Total deferred compensation liability

  $ 2,486     $ 2,056  

 

We recognized expense under our deferred compensation arrangements during the three and nine months ended August 25, 2018 and August 26, 2017 as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26, 2

017

 

Deferred compensation expense

  $ 161     $ 68     $ 320     $ 203  

 

Page 16 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

 

10. Other Gains and Losses

 

Fiscal 2018

 

Gain on Sale of Retail Store Location

 

In May 2018 we sold the land and building occupied by our Spring, Texas retail store in connection with the eventual relocation of the store to another site in the Houston market. We received net cash proceeds of $2,463 from the sale, resulting in a gain of $165 recognized during the nine months ended August 25, 2018 which is included in income from operations in our accompanying condensed consolidated statements of income.

 

Fiscal 2017

 

Gain on Sale of Investment

 

In 1985, we acquired a minority interest in a privately-held, start-up provider of property and casualty insurance for $325. We have accounted for this investment on the cost method and included it in other long-term assets in our condensed consolidated balance sheet. In April 2017 we sold our interest for $3,592 in cash, resulting in a gain of $3,267 recognized for the nine months ended August 26, 2017.

 

Gain on Sale of Retail Store Location

 

Selling, general and administrative expenses for the three and nine months ended August 26, 2017 includes a gain of $1,220 resulting from the sale of our retail store location in Las Vegas, Nevada for $4,335 in cash. The store was closed in August of 2017 in preparation for its repositioning to a new location in the Las Vegas market.

 

Impairment of Investment in Real Estate

 

We own a building in Chesterfield County, Virginia that was formerly leased to a licensee for the operation of a BHF store. The building is subject to a ground lease that expires in 2020, with additional renewal options. Since 2012, we have leased the building to another party who is, as of recently, paying less than the full amount of the lease obligation, resulting in rental income insufficient to cover our ground lease obligation. Efforts to sell our interest in the building have been unsuccessful to date. We have also concluded that, absent a significant cash investment in the building, the likelihood of locating another tenant at a rent that would provide positive cash flow in excess of the ground lease expense is remote. In addition, we obtained an appraisal during the quarter ended May 27, 2017 which indicated that the value of the building had significantly decreased and was now minimal. Given these circumstances, we concluded that we were unlikely to renew the ground lease in 2020 and were therefore likely vacate the property at that time. Consequently, we recorded a non-cash impairment charge of $1,084 for the nine months ended August 26, 2017 to write off the value of the building.

 

Page 17 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

 

 11. 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 August 25, 2018:

 

   

Retail Stores

   

Distribution

Centers

   

Transportation

Equipment

   

Total

 
                                 

Remainder of fiscal 2018

  $ 6,243     $ 1,300     $ 828     $ 8,371  

Fiscal 2019

    25,697       4,237       3,398       33,332  

Fiscal 2020

    24,332       3,495       3,193       31,020  

Fiscal 2021

    21,206       2,771       2,153       26,130  

Fiscal 2022

    18,299       2,583       1,432       22,314  

Fiscal 2023

    15,448       1,517       637       17,602  

Thereafter

    46,000       437       558       46,995  

Total future minimum lease payments

  $ 157,225     $ 16,340     $ 12,199     $ 185,764  

 

In connection with our long-term real estate leases, our liability for accrued straight-line rent expense was $5,578 and $4,821 at August 25, 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 $2,168 and $2,743 at August 25, 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 August 25, 2018 and November 25, 2017 was not material.

 

Page 18 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

 

12. Earnings Per Share

 

The following reconciles basic and diluted earnings per share:

 

   

Net Income

   

Weighted Average

Shares

   

Net Income

Per Share

 

For the quarter ended August 25, 2018:

                       
                         

Basic earnings per share

  $ 2,945       10,666,529     $ 0.28  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       33,188       -  

Diluted earnings per share

  $ 2,945       10,699,717     $ 0.28  
                         

For the quarter ended August 26, 2017:

                       
                         

Basic earnings per share

  $ 4,579       10,661,433     $ 0.43  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       69,772       -  

Diluted earnings per share

  $ 4,579       10,731,205     $ 0.43  
                         

For the nine months ended August 25, 2018:

                       
                         

Basic earnings per share

  $ 6,321       10,684,720     $ 0.59  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       46,632       -  

Diluted earnings per share

  $ 6,321       10,731,352     $ 0.59  
                         

For the nine months ended August 26, 2017:

                       
                         

Basic earnings per share

  $ 13,282       10,641,035     $ 1.25  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       81,558       (0.01 )

Diluted earnings per share

  $ 13,282       10,722,593     $ 1.24  

 

 

For the three and nine months ended August 25, 2018 and August 26, 2017, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 
                                 

Unvested shares

    -       -       5,292       6,538  

 

Page 19 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

 

13. 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 income.

 

 

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 segment reflects the operations of Zenith. In addition to providing shipping 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 statements 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 $23,396 and $72,955 for the three and nine months ended August 25, 2018, and $23,761 and $70,149 for the three and nine months ended August 26, 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.

 

Page 20 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 25,

2018

   

August 26,

2017

   

August 25,

2018

   

August 26,

2017

 

Sales Revenue

                               

Wholesale

  $ 63,847     $ 61,757     $ 190,735     $ 186,025  

Retail - Company-owned stores

    65,430       67,402       198,773       196,139  

Logistical services

    23,536       24,925       73,714       71,885  

Inter-company eliminations:

                               

Furniture and accessories

    (29,470 )     (29,007 )     (90,903 )     (88,020 )

Logistical services

    (10,387 )     (10,816 )     (32,111 )     (31,751 )

Consolidated

  $ 112,956     $ 114,261     $ 340,208     $ 334,278  
                                 

Income from Operations

                               

Wholesale

  $ 3,298     $ 4,466     $ 9,401     $ 15,142  

Retail - Company-owned stores

    858       1,353       971       1,377  

Logistical services

    139       1,164       758       1,736  

Inter-company elimination

    29       277       907       1,269  

Consolidated

  $ 4,324     $ 7,260     $ 12,037     $ 19,524  
                                 

Depreciation and Amortization

                               

Wholesale

  $ 793     $ 668     $ 2,253     $ 1,976  

Retail - Company-owned stores

    1,333       1,530       4,397       4,498  

Logistical services

    1,106       1,156       3,270       3,586  

Consolidated

  $ 3,232     $ 3,354     $ 9,920     $ 10,060  
                                 

Capital Expenditures

                               

Wholesale

  $ 1,154     $ 304     $ 3,484     $ 4,149  

Retail - Company-owned stores

    3,519       1,155       7,974       6,069  

Logistical services

    297       186       1,174       599  

Consolidated

  $ 4,970     $ 1,645     $ 12,632     $ 10,817  

 

   

As of

   

As of

 

Identifiable Assets

 

August 25,

2018

   

November 25,

2017

 

Wholesale

  $ 140,100     $ 152,181  

Retail - Company-owned stores

    93,557       89,271  

Logistical services

    50,827       52,296  

Consolidated

  $ 284,484     $ 293,748  

 

Page 21 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

 

14. 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 conducted a comprehensive review of the significant revenue streams across our wholesale, retail and logistical services reportable segments. The focus of this review included, 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. Our findings from the review were then analyzed based on the five-step model described in the new standard. We are currently finalizing our assessment of the impact that adoption will have on our consolidated financial statements. While we have not yet made a final determination as to the impact on our financial position or results of operations, we do anticipate incorporating additional disclosures, primarily related to disaggregation of revenue. We are also in the process of implementing the necessary changes to our accounting policies, procedures and controls with respect to these contracts and arrangements as required by the adoption of ASU 2014-09. We currently anticipate adopting this standard as of the beginning of our 2019 fiscal year using the modified retrospective method of adoption. We do not believe that the adoption of this standard will have a material impact on our financial position or results of operations.

 

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.

 

Page 22 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 (as subsequently amended by ASU 2018-01, ASU 2018-10 and ASU 2018-11) 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. In addition, ASU 2018-11 provides for an additional (and optional) transition method by which entities may elect to initially apply the transition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and without retrospective application to any comparative prior periods presented. 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 as to the method of adoption or with respect to the optional practical expedients.

 

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.

 

Page 23 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

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.

 

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).

 

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Accounting Standards Update No. 2018-15Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU 2018-15. The amendments in ASU 2018-15 will become effective for us as of the beginning of our 2021 fiscal year. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact that this guidance will have upon our financial position and results of operations, if any.

 

Page 24 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 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 116-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 96 BHF stores at August 25, 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 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 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. Approximately 57% 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 August 25, 2018, our BHF store network included 64 Company-owned stores and 32 licensee-owned stores. During the third quarter of fiscal 2018, a new licensee store was opened in Daly City, California. We also opened a new 16,000 square foot clearance center in Middletown, New York in the third quarter of 2018. Because the nature of this store will differ significantly from the other stores in the BHF network, offering only clearance merchandise at reduced price points and without design consulting services, we will not include this location in our reporting of comparable store results in the future.

 

Page 25 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 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:

           

Coral Gables, FL

Corporate

    10,000  

Q4 2018

Frisco, TX

Corporate

    15,000  

Q4 2018

Boise, ID

Licensed

    11,000  

Q4 2018/Q1 2019

Columbus, OH

Corporate

    11,000  

Q1 2019

Tucson, AZ

Corporate

    9,000  

Q1 2019

Estero, FL

Corporate

    15,000  

Q1 2019

Sarasota, FL

Corporate

    8,000  

Q2 2019

Princeton, NJ

Corporate

    13,000  

Q3 2019

             

Repositionings:

           

Spring, TX to The Woodlands, TX

Corporate

    12,000  

Q1 2019

Friendswood, TX to Baybrook Mall area in Friendswood, TX

Corporate

    16,000  

Q1 2019

 

In addition, lease negotiations are underway for new store locations that could result in additional openings during 2019 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.

 

During 2018, we are focusing on our 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.  We are laying the foundation to becoming more connected to our customers and to use the data and insights collected during the customer journey to create a more compelling customized customer experience. In 2018 and 2019, we plan 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.

 

Recent Developments

 

Effective September 24, 2018, a new 10% tariff was imposed on goods imported into the United States from China, including all furniture and furniture components manufactured in China, with the potential for the tariffs to increase to 25% on January 1, 2019. While these tariffs will impact a portion of our product offerings, over 70% of the products we sell are manufactured in the United States with components that are primarily either made domestically or sourced from countries not subject to the new tariffs, with certain fabrics and leathers being exceptions. In addition, we have transformed much of our supply chain for internationally-sourced finished goods over the last few years such that most of those goods are not subject to the new tariffs.  We have developed a plan to mitigate the cost increases resulting from the tariffs which will include placing a price increase on certain products, which we hope will be temporary.

 

Page 26 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

Results of Operations – Periods ended August 25, 2018 compared with periods ended August 26, 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 three and nine months ended August 25, 2018 and August 26, 2017:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 25, 2018

   

August 26, 2017

   

Dollars

 

Percent

   

August 25, 2018

   

August 26, 2017

   

Dollars

 

Percent

 
                                                                                     

Sales revenue:

                                                                                   

Furniture and accessories

  $ 99,807     88.4 %   $ 100,152     87.7 %   $ (345 )   -0.3 %   $ 298,605     87.8 %   $ 294,144     88.0 %   $ 4,461     1.5 %

Logistics revenue

    13,149     11.6 %     14,109     12.3 %     (960 )   -6.8 %     41,603     12.2 %     40,134     12.0 %     1,469     3.7 %

Total sales revenue

    112,956     100.0 %     114,261     100.0 %     (1,305 )   -1.1 %     340,208     100.0 %     334,278     100.0 %     5,930     1.8 %

Cost of furniture and accessories sold

    44,821     39.7 %     45,320     39.7 %     (499 )   -1.1 %     133,750     39.3 %     132,199     39.5 %     1,551     1.2 %

SG&A expenses

    63,279     56.0 %     61,373     53.7 %     1,906     3.1 %     192,986     56.7 %     180,972     54.1 %     12,014     6.6 %

New store pre-opening costs

    532     0.5 %     308     0.3 %     224     72.7 %     1,435     0.3 %     1,583     0.5 %     (148 )   -9.3 %
                                                                                     

Income from operations

  $ 4,324     3.8 %   $ 7,260     6.4 %   $ (2,936 )   -40.4 %   $ 12,037     3.6 %   $ 19,524     5.8 %   $ (7,487 )   -38.3 %

 

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and nine months ended August 25, 2018 as compared with the prior year periods.

 

Page 27 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 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 income.

 

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 segment reflects the operations of Zenith. In addition to providing shipping 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 statements of income. Zenith’s operating costs are included in selling, general and administrative expenses.

 

Page 28 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 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 August 25, 2018

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue:

                                       

Furniture & accessories

  $ 63,847     $ 65,430     $ -     $ (29,470 ) (1)   $ 99,807  

Logistics

    -       -       23,536       (10,387 ) (2)     13,149  

Total sales revenue

    63,847       65,430       23,536       (39,857 )     112,956  

Cost of furniture and accessories sold

    42,604       31,350       -       (29,133 ) (3)     44,821  

SG&A expense

    17,945       32,690       23,397       (10,753 ) (4)     63,279  

New store pre-opening costs

    -       532       -       -       532  

Income from operations

  $ 3,298     $ 858     $ 139     $ 29     $ 4,324  

 

   

Quarter Ended August 26, 2017

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue:

                                       

Furniture & accessories

  $ 61,757     $ 67,402     $ -     $ (29,007 ) (1)   $ 100,152  

Logistics

    -       -       24,925       (10,816 ) (2)     14,109  

Total sales revenue

    61,757       67,402       24,925       (39,823 )     114,261  

Cost of furniture and accessories sold

    41,016       33,097       -       (28,793 ) (3)     45,320  

SG&A expense

    16,275       32,644       23,761       (11,307 ) (4)     61,373  

New store pre-opening costs

    -       308       -       -       308  

Income from operations

  $ 4,466     $ 1,353     $ 1,164     $ 277     $ 7,260  

 

Page 29 of 42

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 25, 2018

(Dollars in thousands except share and per share data)

 

   

Nine Months Ended August 25, 2018

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue:

                                       

Furniture & accessories

  $ 190,735     $ 198,773     $ -