BASSETT FURNITURE INDUSTRIES INC - Quarter Report: 2019 March (Form 10-Q)

 

 

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 March 2, 2019

 

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 March 28, 2019, 10,519,640 shares of common stock of the Registrant were outstanding.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

ITEM	PAGE
PART I - FINANCIAL INFORMATION
1.        Condensed Consolidated Financial Statements as of  March 2, 2019 (unaudited) and November 24, 2018 and for the three months ended March 2, 2019 (unaudited) and February 24, 2018 (unaudited)
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Balance Sheets	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
2.        Management's Discussion and Analysis of Financial Condition and Results of Operations	23
3.        Quantitative and Qualitative Disclosures About Market Risk	33
4.        Controls and Procedures	33
PART II - OTHER INFORMATION
1.        Legal Proceedings	35
2.        Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	35
3.        Defaults Upon Senior Securities	35
6.        Exhibits	35

 

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		Quarter Ended
		March 2, 2019				February 24, 2018
Sales revenue:
Furniture and accessories		$	107,357			$	96,123
Logistics			13,484				14,149
Total sales revenue			120,841				110,272
Cost of furniture and accessories sold			49,177				43,269
Selling, general and administrative expenses excluding new store pre-opening costs			69,386				64,251
New store pre-opening costs			494				702
Early retirement program			835				-
Income from operations			949				2,050
Other loss, net			(123	)			(627	)
Income before income taxes			826				1,423
Income tax expense			218				2,336
Net income (loss)		$	608			$	(913	)
Basic earnings (loss) per share		$	0.06			$	(0.09	)
Diluted earnings (loss) per share		$	0.06			$	(0.09	)
Dividends per share		$	0.125			$	0.11

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		Quarter Ended
		March 2, 2019				February 24, 2018
Net income (loss)		$	608			$	(913	)
Other comprehensive income:
Amortization associated with Long Term Cash Awards (LTCA)			31				31
Income taxes related to LTCA			(8	)			(8	)
Amortization associated with supplemental executive retirement defined benefit plan (SERP)			46				76
Income taxes related to SERP			(12	)			(19	)
Other comprehensive income, net of tax			57				80
Total comprehensive income (loss)		$	665			$	(833	)

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		(Unaudited)
		March 2, 2019				November 24, 2018
Assets
Current assets
Cash and cash equivalents		$	9,986			$	33,468
Short-term investments			22,643				22,643
Accounts receivable, net			23,222				19,055
Inventories			66,678				64,192
Other current assets			14,540				9,189
Total current assets			137,069				148,547
Property and equipment, net			106,880				104,863
Deferred income taxes			3,228				3,266
Goodwill and other intangible assets			28,386				28,480
Other			6,472				6,485
Total long-term assets			38,086				38,231
Total assets		$	282,035			$	291,641
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	21,439			$	27,407
Accrued compensation and benefits			10,876				12,994
Customer deposits			24,416				27,157
Other current liabilites and accrued expenses			16,546				14,261
Total current liabilities			73,277				81,819
Long-term liabilities
Post employment benefit obligations			12,853				13,173
Other long-term liabilities			6,900				6,340
Total long-term liabilities			19,753				19,513
Stockholders’ equity
Common stock			52,598				52,638
Retained earnings			138,687				140,009
Accumulated other comprehensive loss			(2,280	)			(2,338	)
Total stockholders' equity			189,005				190,309
Total liabilities and stockholders’ equity		$	282,035			$	291,641

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		Quarter Ended
		March, 2 2019				February 24, 2018
Operating activities:
Net income (loss)		$	608			$	(913	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			3,370				3,304
Loss (gain) on sale of property and equipment			(9	)			36
Deferred income taxes			45				2,210
Other, net			(209	)			891
Changes in operating assets and liabilities:
Accounts receivable			(4,084	)			(626	)
Inventories			(3,318	)			(5,440	)
Other current assets			(3,163	)			(1,382	)
Customer deposits			(2,741	)			(164	)
Accounts payable and other liabilities			(6,233	)			1,088
Net cash used in operating activities			(15,734	)			(996	)
Investing activities:
Purchases of property and equipment			(5,552	)			(3,958	)
Cash paid for business acquisition			-				(15,556	)
Other			117				(481	)
Net cash used in investing activities			(5,435	)			(19,995	)
Financing activities:
Cash dividends			(1,291	)			(4,942	)
Proceeds from the exercise of stock options			25				-
Other issuance of common stock			74				84
Repurchases of common stock			(1,012	)			(244	)
Taxes paid related to net share settlement of equity awards			-				(522	)
Repayments of notes payable			(109	)			(3,024	)
Net cash used in financing activities			(2,313	)			(8,648	)
Change in cash and cash equivalents			(23,482	)			(29,639	)
Cash and cash equivalents - beginning of period			33,468				53,949
Cash and cash equivalents - end of period		$	9,986			$	24,310

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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 operations.

 

Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks. The current fiscal year ending November 30, 2019 is a 53-week year, with the additional week being included in our first fiscal quarter. Accordingly, the information presented below includes 14 weeks of operations for the quarter ended March 2, 2019 as compared with 13 weeks included in the quarter ended February 24, 2018.

 

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 operations since the date of acquisition.

 

Recently Adopted Accounting Pronouncements

 

Effective as of the beginning of fiscal 2019, we have adopted 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 with comparative amounts in prior period cash flow statements reclassified to conform to the current period presentation. Accordingly, for the three months ended February 24, 2018 we have reclassified investments in Company-owned life insurance of $481 from cash flows from operating activities to cash flows from investing activities, and we have reclassified $78 representing the portion of a debt payment attributable to discount accretion from cash flows from financing activities to cash flows from operating activities.

 

During the first quarter of 2019, we also adopted Accounting Standards Update No. 2014-09, Revenue – Revenue from Contracts with Customers (Topic 606 or “ASC 606”). Refer to Note 14, Revenue Recognition, for more information regarding the impact of ASC 606 on our financial statements.

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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 months ended March 4, 2019 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 24, 2018.

 

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.  Our effective tax rate for the three months ended March 2, 2019 differs from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences. 

 

Because the Act specified the new 21% tax rate beginning on January 1, 2018, we were only subject to the reduced rate for 11 months of 2018.  Therefore, we computed our income tax expense for fiscal 2018 using a blended federal statutory rate of 22.2%.  However, our effective tax rate for the three months ended February 24, 2018 was 164.2% primarily due to a $2,157 discrete charge to re-measure our deferred tax assets at the lower statutory rate.  Other items impacting our effective tax rate for the three months ended February 24, 2018 included the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $181 and the Section 199: Domestic Production Activities Deduction, which was eliminated by the Act for our fiscal 2019 tax return.

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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 $15,556 all-cash purchase price to the acquired assets and liabilities of the Lane Venture business, was as follows:

 

 

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 was assigned to identifiable intangible assets as follows:

 

 

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 $228 during the three months ended February 24, 2018, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations. The acquisition costs are primarily related to legal, accounting and valuation services.

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

The revenue and operating results of Lane Venture that are included in our condensed consolidated statement of operations for the three months ended March 2, 2019 were not material. The revenue of Lane Venture from the date of acquisition through February 24, 2018 was also not material. The operating loss from the date of acquisition through February 24, 2018 was $426, or approximately $0.03 per share, net of income tax benefit, and includes the acquisition costs noted above. The pro forma results of operations for the acquisition of Lane Venture have not been presented because they are not material to our consolidated results of operations for the three months ended February 24, 2018.

 

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 March 2, 2019 and November 24, 2018 consisted of certificates of deposit (CDs). At March 2, 2019, the CDs had original terms averaging eleven months, bearing interest at rates ranging from 0.85% to 2.70%. At March 2, 2019, the weighted average remaining time to maturity of the CDs was approximately five months and the weighted average yield of the CDs was approximately 2.44%. 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 March 2, 2019 and November 24, 2018 approximates their fair value.

 

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.

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5. Accounts Receivable

 

Accounts receivable consists of the following:

 

 

 

Activity in the allowance for doubtful accounts for the three months ended March 2, 2019 was as follows:

 

 

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.

 

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:

 

 

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.

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

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

 

 

Additions charged to expense for our wholesale segment during the three months ended March 2, 2019 includes a $390 inventory valuation charge arising from our decision to exit the juvenile furniture line of business.

 

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 2019 and do not anticipate that our methodology is likely to change in the future.

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7. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets consisted of the following:

 

 

 

There were no accumulated impairment losses on goodwill as of March 2, 2019 or November 24, 2018.

 

The carrying amounts of goodwill by reportable segment at both March 2, 2019 and November 24, 2018 were as follows:

 

 

 

Amortization expense associated with intangible assets during the three months ended March 2, 2019 and February 24, 2018 was as follows:

 

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

Estimated future amortization expense for intangible assets that exist at March 2, 2019 is as follows:

 

 

 

 

8. Notes Payable and Bank Credit Facility

 

Real Estate Notes Payable

 

Certain of our retail real estate properties have been financed through commercial mortgages with outstanding principal totaling $183 and $292 at March 2, 2019 and November 24, 2018, 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 $5,568 and $5,599 at March 2, 2019 and November 24, 2018, respectively. The entire balance of these mortgages is due within one year and is included in other current liabilities and accrued expenses in the accompanying condensed consolidated balance sheets.

 

Fair Value

 

We believe that the carrying amount of our notes payable approximates fair value at both March 2, 2019 and November 24, 2018. 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 $25,000. 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 2021.

 

At March 2, 2019, we had $2,798 outstanding under standby letters of credit against our line, leaving availability under our credit line of $22,202. In addition, we have outstanding standby letters of credit with another bank totaling $325.

 

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 $10,364 and $10,574 as of March 2, 2019 and November 24, 2018, 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 $1,101 and $1,078 as of March 2, 2019 and November 24, 2018, respectively.

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

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

 

 

 

 

Components of net periodic pension costs for our defined benefit plans for the three months ended March 2, 2019 and February 24, 2018 are as follows:

 

 

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

 

Deferred Compensation Plans

 

We have an unfunded deferred compensation plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. Our liability under this plan was $1,792 and $1,837 as of March 2, 2019 and November 24, 2018, 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. Our liability under this plan, including both accrued Company contributions and participant salary deferrals, was $661 and $611 as of March 2, 2019 and November 24, 2018, 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:

 

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

We recognized expense under our deferred compensation arrangements during the three months ended March 2, 2019 and February 24, 2018 as follows:

 

 

 

10. Other Operating Losses

 

Early Retirement Program

 

During the first quarter of fiscal 2019, we offered a voluntary early retirement package to certain eligible employees of the Company. Twenty-three employees accepted the offer, which expired on February 28, 2019. These employees are to receive pay equal to one-half their current salary plus benefits over a period of one year from the final day of each individual’s active employment. Accordingly, we recognized a charge of $835 during the three months ended March 2, 2019. The unpaid obligation of $835 is included in other current liabilities and accrued expenses in our condensed consolidated balance sheet as of March 2, 2019.

 

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 retail and logistical services segments. We also lease tractors and trailers used in our logistical services segment, and local delivery trucks used in our retail 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 March 2, 2019:

 

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

In connection with our long-term real estate leases, our liability for accrued straight-line rent expense was $6,227 and $5,844 at March 2, 2019 and November 24, 2018, respectively, and is included in other current liabilities and accrued expenses in our condensed consolidated balance sheets. Improvement allowances received from lessors at the inception of a lease are deferred and amortized over the term of the lease. The unamortized balance of such amounts was $7,519 and $6,716 at March 2, 2019 and November 24, 2018, respectively, with the non-current portion of $6,410 and $5,715, respectively, included in other long term liabilities in our condensed consolidated balance sheets and the remaining current portion included in other current liabilities and accrued expenses. At March 2, 2019 and November 24, 2018 prepaid rent of $2,893 and $245, respectively, was included in other current assets 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 $1,953 and $2,021 at March 2, 2019 and November 24, 2018, 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 or liquidating the collateral (primarily inventory). 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 March 2, 2019 and November 24, 2018 was not material.

 

12. Earnings (Loss) Per Share

 

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

 

 

 

For the three months ended March 2, 2019 and February 24, 2018, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

 

 

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13. Segment Information

 

 

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

 

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

 

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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 and the Company-owned distribution network utilized to deliver products to our retail customers.

 

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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 operations. 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 $21,039 and $21,092 for the three months ended March 2, 2019 and February 24, 2018, respectively.

 

During the fourth quarter of fiscal 2018, we substantially completed transferring operational control of home delivery services for BHF stores from Zenith to our retail segment, including the transfer of the assets and many of the employees used in providing that service. Accordingly, the results for the retail and logistical services segments for all periods presented have been restated to present the depreciation and amortization, capital expenditures and identifiable assets associated with home delivery services formerly provided by Zenith to the Bassett retail segment as though they had been incurred within the retail segment, and intercompany revenues for those services are no longer included in the logistical services segment. The impact of the restatement upon the income (loss) from operations for both the logistical services and retail segments was not material. Concurrently with the transfer of home delivery operations to retail, Zenith also ceased providing such services to third party customers. Revenues from Zenith’s home delivery services formerly provided to third party customers and the associated costs thereof continue to be reported in the logistical services segment. Zenith continues to provide other intercompany shipping and warehousing services to Bassett which are eliminated in consolidation.

 

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.

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MARCH 2, 2019

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

 

 

 

 

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14. Revenue Recognition

 

We adopted ASU 2014-09, Revenue - Revenue from Contracts with Customers (ASC Topic 606 or "ASC 606") effective as of November 25, 2018, the beginning of our 2019 fiscal year. ASC 606 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. For our wholesale and retail segments, revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the buyer.

 

At wholesale, transfer occurs and revenue is recognized upon the shipment of goods to independent dealers and licensee-owned BHF stores. We offer payment terms varying from 30 to 60 days for wholesale customers. Estimates for returns and allowances have been recorded as a reduction of revenue based on our historical return patterns. The contracts with our licensee store owners do not provide for any royalty or license fee to be paid to us.

 

At retail, transfer occurs and revenue is recognized upon delivery of goods to the customer. We typically collect a significant portion of the purchase price as a customer deposit upon order, with the balance typically collected upon delivery. These deposits are carried on our balance sheet as a current liability until delivery is fulfilled and amounted to $24,416 and $27,157 as of March 2, 2019 and November 24, 2018, respectively. Substantially all of the customer deposits held at November 24, 2018 related to performance obligations satisfied during the current period and have therefore been recognized in revenue for the quarter ended March 2, 2019. Estimates for returns and allowances have been recorded as a reduction of revenue based on our historical return patterns. We also sell furniture protection plans to our retail customers on behalf of a third party which is responsible for the performance obligations under the plans. Revenue from the sale of these plans is recognized upon delivery of the goods net of amounts payable to the third party service provider.

 

For our logistical services segment, line-haul freight revenue is recognized as services are performed and are billed to the customer upon the completion of delivery to the destination. Because the customer receives the benefits of these services as the freight is in transit from point of origin to destination, we recognize revenue using a percentage of completion method based on our estimate the amount of time freight has been in transit as of the reporting date compared with our estimate total required time for the deliveries. We recognize an asset for the amount of line-haul revenue earned but not yet billed which is included in other current assets. The balance of this asset was $528 at March 2, 2019 and $512 at the beginning of the first quarter of fiscal 2019. Warehousing services revenue is based upon warehouse space occupied by a customer’s goods and inventory movements in and out of a warehouse and is recognized as such services are provided and billed to the customer concurrently in the same period. All invoices for logistical services are due 30 days from invoice date.

 

Sales commissions are expensed as part of selling, general and administrative expenses at the time revenue is recognized because the amortization period would have been one year or less. Sales commissions at wholesale are accrued upon the shipment of goods. Sales commissions at retail are accrued at the time a sale is written (e.i. – when the customer’s order is placed) and are carried as prepaid commissions in other current assets until the goods are delivered and revenue is recognized. At March 2, 2019 and November 24, 2018, our balance of prepaid commissions included in other current assets was $2,453 and $2,739, respectively. We do not incur sales commissions in our logistical services segment.

 

We adopted ASC 606 using the modified retrospective method and applied the standard only to contracts that were not completed as of initial application. Results for reporting periods beginning after November 24, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. Our adoption of ASC 606 did not have a material impact on our consolidated financial statements except for our enhanced presentation and disclosures. We also expect the impact of the adoption of ASC 606 to be immaterial to our net income and financial position on an ongoing basis.

 

Upon adoption of ASC 606, we have adopted the following policy elections and practical expedients:

 

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We exclude from revenue amounts collected from customers for sales tax, which is consistent with our policy prior to the adoption of ASC 606.

 

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We do not adjust the promised amount of consideration for the effects of a significant financing component since the period of time between transfer of our goods or services and the collection of consideration from the customer is less than one year.

 

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We do not disclose the value of unsatisfied performance obligations because the transfer or goods or services is made within one year of the placement of customer orders.

 

See Note 13, Segments, for disaggregated revenue information.

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15. Changes to Stockholders’ Equity

 

The following changes in our stockholders’ equity occurred during the three months ended March 2, 2019 and February 24, 2018:

 

 

 

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16. Recent Accounting Pronouncements

 

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, ASU 2018-11, ASU 2018-20 and ASU 2019-01) 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. Also, ASU 2018-20 provides certain narrow-scope improvements to Topic 842 as it relates to lessors. 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 (refer to Note 11 for information regarding our leases currently classified as operating leases under ASC Topic 840). We currently anticipate that we will adopt the guidance of ASU 2016-02 as of the beginning of our 2020 fiscal year using the optional transition method as provided by ASU 2018-11.

 

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

 

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Accounting Standards Update No. 2018-15 – Intangibles - 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.

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