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BASSETT FURNITURE INDUSTRIES INC - Quarter Report: 2022 August (Form 10-Q)

bset20220827_10q.htm
 
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 27, 2022

 

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

of incorporation or organization)

(I.R.S. Employer

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

Common Stock ($5.00 par value)

 

BSET

 

NASDAQ

 

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 ☒  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 ☒ 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
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 ☒

 

At September 23, 2022, 9,155,740 shares of common stock of the Registrant were outstanding.

 

Page 1 of 36

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM   PAGE
     
PART I - FINANCIAL INFORMATION
     
1. Condensed Consolidated Financial Statements as of August 27, 2022 (unaudited) and November 27, 2021 and for the three and nine months ended August 27, 2022 (unaudited) and August 28, 2021 (unaudited)  
     
  Condensed Consolidated Statements of Income  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  23
     
3. Quantitative and Qualitative Disclosures About Market Risk  34
     
4. Controls and Procedures 34
     
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

           

Page 2 of 36

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE PERIODS ENDED AUGUST 27, 2022 AND AUGUST 28, 2021 UNAUDITED

(In thousands except per share data)

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 
                                 

Net sales of furniture and accessories

  $ 118,012     $ 104,870     $ 364,582     $ 316,522  

Cost of furniture and accessories sold

    57,240       52,263       180,479       153,426  

Gross profit

    60,772       52,607       184,103       163,096  
                                 

Selling, general and administrative expenses

    54,695       47,631       160,536       145,473  

Gain on sale of real estate

    4,595       -       4,595       -  

Income from operations

    10,672       4,976       28,162       17,623  
                                 

Other loss, net

    (594 )     (268 )     (1,850 )     (828 )

Income from continuing operations before income taxes

    10,078       4,708       26,312       16,795  
                                 

Income tax expense

    2,305       1,267       6,505       4,579  
                                 

Income from continuing operations

    7,773       3,441       19,807       12,216  
                                 

Discontinued operations:

                               

Income (loss) from operations of logistical services

    -       (565 )     1,712       1,079  

Gain on disposal (less adjustments)

    (193 )     -       53,061       -  

Income tax expense (benefit)

    (48 )     (140 )     14,261       294  
                                 

Income (loss) from discontinued operations

    (145 )     (425 )     40,512       785  
                                 

Net income

  $ 7,628     $ 3,016     $ 60,319     $ 13,001  
                                 

Basic earnings per share:

                               

Income from continuing operations

  $ 0.84     $ 0.35     $ 2.08     $ 1.24  

Income (loss) from discontinued operations

    (0.02 )     (0.04 )     4.26       0.08  

Basic and diluted earnings per share

  $ 0.82     $ 0.31     $ 6.34     $ 1.32  
                                 

Diluted earnings per share:

                               

Income from continuing operations

  $ 0.84     $ 0.35     $ 2.08     $ 1.24  

Income (loss) from discontinued operations

    (0.02 )     (0.04 )     4.26       0.08  

Diluted earnings per share

  $ 0.82     $ 0.31     $ 6.34     $ 1.32  
                                 

Regular dividends per share

  $ 0.16     $ 0.14     $ 0.44     $ 0.39  
                                 

Special dividend per share

  $ -     $ -     $ 1.50     $ 0.25  

 

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

 

Page 3 of 36

 

 

 

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 27, 2022 AND AUGUST 28, 2021 UNAUDITED

(In thousands)

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 
                                 

Net income

  $ 7,628     $ 3,016     $ 60,319     $ 13,001  
Other comprehensive income:                                

Amortization associated with Long Term Cash Awards (LTCA)

    33       36       99       108  

Income taxes related to LTCA

    (8 )     (9 )     (24 )     (28 )

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

    31       11       93       33  

Income taxes related to SERP

    (8 )     (3 )     (24 )     (9 )
                                 

Other comprehensive income, net of tax

    48       35       144       104  
                                 

Total comprehensive income

  $ 7,676     $ 3,051     $ 60,463     $ 13,105  

 

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

 

Page 4 of 36

 

 

PART I FINANCIAL INFORMATION CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AUGUST 27, 2022 AND NOVEMBER 27, 2021

(In thousands)

 

   

(Unaudited)

         

 

 

August 27, 2022

   

November 27, 2021

 
Assets                
Current assets                

Cash and cash equivalents

  $ 66,870     $ 34,374  

Short-term investments

    17,715       17,715  

Accounts receivable, net

    20,950       20,567  

Inventories

    91,681       78,004  

Recoverable income taxes

    5,427       8,379  

Current assets of discontinued operations held for sale

    -       11,064  

Other current assets

    11,104       10,181  

Total current assets

    213,747       180,284  
                 

Property and equipment, net

    75,513       69,168  
                 

Deferred income taxes

    6,045       3,189  

Goodwill and other intangible assets

    14,313       14,354  

Right of use assets under operating leases

    86,809       95,955  

Long-term assets of discontinued operations held for sale

    -       52,757  

Other

    6,260       5,953  

Total long-term assets

    113,427       172,208  

Total assets

  $ 402,687     $ 421,660  
                 

Liabilities and Stockholders Equity

               
Current liabilities                

Accounts payable

  $ 24,189     $ 23,988  

Accrued compensation and benefits

    12,809       12,639  

Customer deposits

    40,311       51,492  

Current portion operating lease obligations

    19,969       20,235  

Current liabilities of discontinued operations held for sale

    -       16,095  

Other current liabilites and accrued expenses

    12,746       9,770  

Total current liabilities

    110,024       134,219  
                 
Long-term liabilities                

Post employment benefit obligations

    13,016       12,968  

Long-term portion of operating lease obligations

    84,102       94,845  

Long-term liabilities of discontinued operations held for sale

    -       16,210  

Other long-term liabilities

    606       686  

Total long-term liabilities

    97,724       124,709  
                 
                 

Stockholders equity

               

Common stock

    46,064       48,811  

Retained earnings

    150,553       115,631  

Additional paid-in capital

    -       113  

Accumulated other comprehensive loss

    (1,678 )     (1,823 )

Total stockholders' equity

    194,939       162,732  

Total liabilities and stockholders equity

  $ 402,687     $ 421,660  

 

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

 

Page 5 of 36

 

 

 

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 27, 2022 AND AUGUST 28, 2021 UNAUDITED

(In thousands)

 

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

 
Operating activities:                

Net income

  $ 60,319     $ 13,001  

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

               

Depreciation and amortization

    8,732       10,458  

Gain on disposal of discontinued operations

    (53,061 )     -  

Gain on sale of property and equipment

    (4,603 )     (68 )

Deferred income taxes

    (2,856 )     1,053  

Other, net

    1,425       478  

Changes in operating assets and liabilities:

               

Accounts receivable

    57       (4,329 )

Inventories

    (13,677 )     (18,941 )

Other current assets

    2,961       (100 )

Right of use assets under operating leases

    15,881       18,857  

Customer deposits

    (11,181 )     11,341  

Accounts payable and other liabilities

    1,227       2,750  

Obligations under operating leases

    (17,519 )     (20,823 )

Net cash provided by (used in) operating activities

    (12,295 )     13,677  
                 
Investing activities:                

Purchases of property and equipment

    (17,266 )     (7,141 )

Proceeds from sales of property and equipment

    8,226       101  

Proceeds from the disposal of discontinued operations, net

    84,534       -  

Other

    (1,428 )     (1,173 )

Net cash provided by (used in) investing activities

    74,066       (8,213 )
                 
Financing activities:                

Cash dividends

    (18,734 )     (6,321 )

Proceeds from the exercise of stock options

    -       42  

Other issuance of common stock

    340       266  

Repurchases of common stock

    (10,263 )     (5,566 )

Taxes paid related to net share settlement of equity awards

    -       (219 )

Repayments of finance lease obligations

    (618 )     (854 )

Net cash used in financing activities

    (29,275 )     (12,652 )

Change in cash and cash equivalents

    32,496       (7,188 )

Cash and cash equivalents - beginning of period

    34,374       45,799  
              .  

Cash and cash equivalents - end of period

  $ 66,870     $ 38,611  

 

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

 

Page 6 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(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 represent VIEs. We were the primary beneficiary of one VIE by virtue of our control over the activities that most significantly impact the entity’s economic performance. This VIE was created to effect a Section 1031 like-kind exchange involving the purchase of real property in the state of Florida and the sale of real property in the state of Texas (see Note 13, Retail Real Estate Transactions). Subsequent to the completion of the exchange transactions during the third quarter of fiscal 2022, the sole equity interest in the VIE was transferred to Bassett and the entity is now consolidated as a wholly owned subsidiary.

 

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.

 

On January 31, 2022, we entered into a definitive agreement to sell substantially all of the assets of our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) to J.B. Hunt Transport Services, Inc. (“J.B. Hunt”). The sale was completed on February 28, 2022. Accordingly, the operations of our logistical services segment as well as the gain realized upon disposal are presented in the accompanying condensed consolidated statements of income as discontinued operations, and the assets sold to and liabilities assumed by J.B. Hunt are presented in the accompanying condensed consolidated balance sheet as of November 27, 2021 as assets and liabilities of discontinued operations held for sale. See Note 12, Discontinued Operations, for additional information. Costs incurred by Bassett for logistical services performed for Bassett by Zenith are included in selling, general and administrative expenses.

 

Recently Adopted Accounting Pronouncements

 

Effective as of the beginning of fiscal 2022, we have adopted Accounting Standards Update No. 2019-12 – Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 became effective for us as of the beginning of our 2022 fiscal year. We adopted ASU 2019-12 on a prospective basis and the adoption did not have a material impact upon our financial condition or results of operations.

 

Certain prior year amounts have been reclassified to conform with the current year presentation.

 

 

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 27, 2022 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 27, 2021.

 

Page 7 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Income Taxes

 

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.

 

Our effective tax rate was 22.8% and 25.6% for the three and nine months ended August 27, 2022, respectively, and 27.2% and 27.3% for the three and nine months ended August 28, 2021, respectively. These effective rates differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including those associated with Company-owned life insurance, and tax of $552 for the nine months ended August 27, 2022 associated with non-deductible goodwill written off in connection with our sale of Zenith and included in income tax on discontinued operations, and tax deficiencies of $117 during the nine months ended August 28, 2021 arising from stock-based compensation.

 

Cash paid for income taxes, net of refunds, during the nine months ended August 27, 2022 was $20,722, including the estimated tax payable on the taxable gain realized on our sale of Zenith. Cash paid for income taxes, net of refunds, during the nine months ended August 28, 2021 was $624. These cash payments for income taxes are included in cash flows from operating activities in the accompanying condensed consolidated statement of cash flows.

 

 

3. Financial Instruments and Investments

 

Financial Instruments

 

Our financial instruments include cash and cash equivalents, short-term investments in certificates of deposit (CDs), accounts receivable, and accounts payable. Because of their short maturities, the carrying amounts of cash and cash equivalents, short-term investments in CDs, accounts receivable, and accounts payable approximate fair value.

 

Investments

 

Our short-term investments of $17,715 at August 27, 2022 and November 27, 2021 consisted of CDs. At August 27, 2022, the CDs had original terms averaging eight months, bearing interest at rates ranging from 0.25% to 3.00%. At August 27, 2022, the weighted average remaining time to maturity of the CDs was approximately six months and the weighted average yield of the CDs was approximately 2.17%. 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 27, 2022 and November 27, 2021 approximates their fair value.

 

 

4. Accounts Receivable

 

Accounts receivable consists of the following:

 

   

August 27, 2022

   

November 27, 2021

 

Gross accounts receivable

  $ 21,902     $ 21,134  

Allowance for doubtful accounts

    (952 )     (567 )

Accounts receivable, net

  $ 20,950     $ 20,567  

 

We maintain an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments. The allowance for credit losses is based on a review of specifically identified accounts in addition to an overall aging analysis which is applied to accounts pooled on the basis of similar risk characteristics. Judgments are made with respect to the collectibility of accounts receivable within each pool based on historical experience, current payment practices and current economic trends based on our expectations over the expected life of the receivables, which is generally ninety days or less. Actual credit losses could differ from those estimates.

 

Page 8 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Activity in the allowance for credit losses for the nine months ended August 27, 2022 was as follows:

 

   

2022

 
         

Balance at November 27, 2021

  $ 567  

Additions charged to expense

    439  

Write-offs against allowance

    (54 )

Balance at August 27, 2022

  $ 952  

 

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 3.

 

 

5. Inventories

 

Domestic furniture inventories are valued at the lower of cost, which is determined using the last-in, first-out (LIFO) method, or market. Imported inventories and those applicable to our Lane Venture and Bassett Outdoor lines are valued at the lower of cost, which is determined using the first-in, first-out (FIFO) method, or net realizable value.

 

Inventories were comprised of the following:

 

   

August 27, 2022

   

November 27, 2021

 

Wholesale finished goods

  $ 50,617     $ 40,254  

Work in process

    695       482  

Raw materials and supplies

    23,527       21,653  

Retail merchandise

    35,169       30,914  

Total inventories on first-in, first-out method

    110,008       93,303  

LIFO adjustment

    (12,407 )     (10,483 )

Reserve for excess and obsolete inventory

    (5,920 )     (4,816 )
    $ 91,681     $ 78,004  

 

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.

 

Page 9 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

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

 

   

Wholesale
Segment

   

Retail Segment

   

Total

 
                         

Balance at November 27, 2021

  $ 3,683     $ 1,133     $ 4,816  

Additions charged to expense

    1,941       862       2,803  

Write-offs

    (982 )     (717 )     (1,699 )

Balance at August 27, 2022

  $ 4,642     $ 1,278     $ 5,920  

 

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 2022 and do not anticipate that our methodology is likely to change in the future.

 

 

6. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets consisted of the following:

 

   

August 27, 2022

 
   

Gross Carrying
Amount

   

Accumulated
Amortization

   

Intangible
Assets, Net

 
Intangibles subject to amortization                        

Customer relationships

  $ 512     $ (264 )   $ 248  
                         
Intangibles not subject to amortization:                        

Trade names

                    6,848  

Goodwill

                    7,217  
                         

Total goodwill and other intangible assets

                  $ 14,313  

 

   

November 27, 2021

 
   

Gross Carrying Amount

   

Accumulated Amortization

   

Intangible Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 512     $ (223 )   $ 289  
                         

Intangibles not subject to amortization:

                       

Trade names

                    6,848  

Goodwill

                    7,217  
                         

Total goodwill and other intangible assets

                  $ 14,354  

 

Page 10 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

The carrying amounts of goodwill by reportable segment at both August 27, 2022 and November 27, 2021 are as follows:

 

   

Original

   

Accumulated

         
   

Recorded

   

Impairment

   

Carrying

 
   

Value

   

Losses

   

Amount

 
                         

Wholesale

  $ 9,188     $ (1,971 )   $ 7,217  

Retail

    1,926       (1,926 )     -  
                         

Total goodwill

  $ 11,114     $ (3,897 )   $ 7,217  

 

Goodwill and other intangible assets associated with our logistical services segment totaling $9,094 at November 27, 2021 are included in assets of discontinued operations held for sale in the accompanying balance sheet (see Note 12).

 

Amortization expense associated with intangible assets during the three and nine months ended August 27, 2022 and August 28, 2021 was as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
                         
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 
                                 

Intangible asset amortization expense

  $ 14     $ 14     $ 42     $ 42  

 

Estimated future amortization expense for intangible assets that exist at August 27, 2022 is as follows:

 

Remainder of fiscal 2022

  $ 15  

Fiscal 2023

    57  

Fiscal 2024

    57  

Fiscal 2025

    57  

Fiscal 2026

    57  

Fiscal 2027

    5  
         

Total

  $ 248  

 

 

7. Bank Credit Facility

 

Our bank credit facility provides for a line of credit of up to $25,000. At August 27, 2022, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069. In addition, we had outstanding standby letters of credit with another bank totaling $325 at August 27, 2022. The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.5% and is unsecured. Our bank charges a fee of 0.25% on the daily unused balance of the line, payable quarterly. Under the terms of the facility, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis:

 

 

Consolidated fixed charge coverage ratio of not less than 1.4 times,

 

 

Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and

 

 

Minimum tangible net worth of $140,000.

 

We were in compliance with these covenants at August 27, 2022 and expect to remain in compliance for the foreseeable future. The credit facility will mature on January 27, 2025, at which time any amounts outstanding under the facility will be due.

 

Page 11 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

8. 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 $9,062 and $9,192 as of August 27, 2022 and November 27, 2021, 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 $1,560 and $1,548 as of August 27, 2022 and November 27, 2021, respectively.

 

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

 

   

August 27, 2022

   

November 27, 2021

 

Accrued compensation and benefits

  $ 913     $ 913  

Post employment benefit obligations

    9,709       9,827  
                 

Total pension liability

  $ 10,622     $ 10,740  

 

Components of net periodic pension costs for our defined benefit plans for the three and nine months ended August 27, 2022 and August 28, 2021 are as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 

Service cost

  $ 9     $ 31     $ 27     $ 91  

Interest cost

    58       48       173       146  

Amortization of prior service costs

    31       31       94       94  

Amortization of loss

    33       15       100       45  
                                 

Net periodic pension cost

  $ 131     $ 125     $ 394     $ 376  

 

The components of net periodic pension cost other than the service cost component, which is included in selling, general and administrative expenses, 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 $1,657 and $1,648 as of August 27, 2022 and November 27, 2021, 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 $1,946 and $1,789 as of August 27, 2022 and November 27, 2021, respectively.

 

Page 12 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

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 27, 2022

   

November 27, 2021

 

Accrued compensation and benefits

  $ 296     $ 296  

Post employment benefit obligations

    3,307       3,142  
                 

Total deferred compensation liability

  $ 3,603     $ 3,438  

 

We recognized expense under our deferred compensation arrangements during the three and nine months ended August 27, 2022 and August 28, 2021 as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 

Deferred compensation expense (benefit)

  $ (7 )   $ 96     $ 54     $ 451  

 

 

9. 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.

 

 

10. Lease Guarantees

 

We have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to three years. We were contingently liable under licensee lease obligation guarantees in the amounts of $1,871 and $1,845 at August 27, 2022 and November 27, 2021, 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 August 27, 2022 and November 27, 2021 was not material.

 

Page 13 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

11. 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 27, 2022:

                       
                         

Basic earnings per share - continuing operations

  $ 7,773       9,238,185     $ 0.84  
Add effect of dilutive securities:                        

Restricted shares

    -       28,927       -  

Diluted earnings per share - continuing operations

  $ 7,773       9,267,112     $ 0.84  
                         

Basic loss per share - discontinued operations

  $ (145 )     9,238,185     $ (0.02 )

Add effect of dilutive securities:

                       

Restricted shares

    -       28,927       -  

Diluted loss per share - discontinued operations

  $ (145 )     9,267,112     $ (0.02 )
                         

For the quarter ended August 28, 2021:

                       
                         

Basic earnings per share - continuing operations

  $ 3,441       9,779,928     $ 0.35  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       5,415       -  

Diluted earnings per share - continuing operations

  $ 3,441       9,785,343     $ 0.35  
                         

Basic loss per share - discontinued operations

  $ (425 )     9,779,928     $ (0.04 )

Add effect of dilutive securities:

                       

Options and restricted shares

    -       5,415       -  

Diluted loss per share - discontinued operations

  $ (425 )     9,785,343     $ (0.04 )
                         
                         

For the nine months ended August 27, 2022:

                       
                         

Basic earnings per share - continuing operations

  $ 19,807       9,503,937     $ 2.08  

Add effect of dilutive securities:

                       

Restricted shares

    -       5,688       -  

Diluted earnings per share - continuing operations

  $ 19,807       9,509,625     $ 2.08  
                         

Basic earnings per share - discontinued operations

  $ 40,512       9,503,937     $ 4.26  

Add effect of dilutive securities:

                       

Restricted shares

    -       5,688       -  

Diluted earnings per share - discontinued operations

  $ 40,512       9,509,625     $ 4.26  
                         

For the nine months ended August 28, 2021:

                       
                         

Basic earnings per share - continuing operations

  $ 12,216       9,864,691     $ 1.24  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       9,329       -  

Diluted earnings per share - continuing operations

  $ 12,216       9,874,020     $ 1.24  
                         

Basic earnings per share - discontinued operations

  $ 785       9,864,691     $ 0.08  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       9,329       -  

Diluted earnings per share - discontinued operations

  $ 785       9,874,020     $ 0.08  

 

Page 14 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

For the three and nine months ended August 27, 2022 and August 28, 2021, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 
                                 

Unvested shares

    15,799       -       67,099       7,105  

 

 

12. Discontinued Operations

 

On January 31, 2022, we entered into a definitive agreement to sell substantially all of the assets of Zenith to J.B. Hunt. The sale was completed on February 28, 2022, at which time we received the following net proceeds:

 

Sales price prior to post-closing working capital adjustment

  $ 86,939  
Less:        

Amount held in escrow for contingencies related to representations and warranties (1)

    1,000  

Seller expenses paid at closing

    418  

Working capital adjustment paid to buyer

    987  
         

Net proceeds from the sale (2)

  $ 84,534  

 

 

(1)

To be held in escrow until the first anniversary of the sale, at which time any amount not distributed or reserved for specified claims will be released to the Company. This amount is included in other current assets in the accompanying condensed consolidated balance sheet at August 27, 2022.

 

 

(2)

Included in cash flows from investing activities in the accompanying condensed consolidated statement of cash flows for the nine months ended August 27, 2022.

 

The sales price was subject to a customary post-closing working capital adjustment which was paid during the third quarter of fiscal 2022. Including the effect of the working capital adjustment, we recognized a pre-tax gain from the sale of Zenith of $53,061.

 

The operations of our logistical services segment, which consisted entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income as discontinued operations, and the assets sold to and liabilities assumed by J.B. Hunt are presented in the accompanying condensed consolidated balance sheet as assets and liabilities of discontinued operations held for sale as of November 27, 2021.

 

Page 15 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

The following table summarizes the major classes of assets and liabilities of the discontinued operations held for sale as reported in the condensed consolidated balance sheet as of November 27, 2021:

 

   

November 27, 2021

 
Carrying amounts of major classes of assets included as part of discontinued operations:        

Accounts receivable, net

  $ 7,601  

Other current assets

    3,463  

Property and equipment, net

    24,898  

Goodwill and other intangible assets

    9,094  

Right of use assets under operating leases

    18,193  

Other

    572  
         
    $ 63,821  
         
Balance sheet classification:        

Current assets of discontinued operations held for sale

  $ 11,064  

Long-term assets of discontinued operations held for sale

    52,757  
         

Total assets of discontinued operations held for sale

  $ 63,821  
         
Carrying amounts of major classes of liabilities included as part of discontinued operations:        

Accounts payable

  $ 4,336  

Accrued compensation and benefits

    3,295  

Current portion operating lease obligations

    7,458  

Other current liabilites and accrued expenses

    1,006  

Long-term portion of operating lease obligations

    10,996  

Other long-term liabilities

    5,214  
         
    $ 32,305  
         
Balance sheet classification:        

Current liabilities of discontinued operations held for sale

  $ 16,095  

Long-term liabilities of discontinued operations held for sale

    16,210  
         

Total liabilities of discontinued operations held for sale

  $ 32,305  

 

Following the sale of Zenith, certain of Zenith’s liabilities primarily representing reserves and accrued liabilities for pre-disposal workers’ compensation, health insurance and auto liability claims were retained by Bassett. The remaining balance of these reserves and accruals total $537 at August 27, 2022 and are included in other current liabilities and accrued expenses in the accompanying condensed consolidated balance sheet.

 

Page 16 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

The following table summarizes the major classes of line items constituting income of the discontinued operations, as reported in the condensed consolidated statements of income for the three and nine months ended August 27, 2022 and August 28, 2021:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 
Major line items constituting pretax income of discontinued operations:                                

Logistical services revenue

  $ -     $ 14,036     $ 16,776     $ 40,116  

Cost of logistical services

    -       14,522       15,001       38,849  

Other loss, net

    -       (79 )     (63 )     (188 )
                                 

Income (loss) from operations of logistical services

    -       (565 )     1,712       1,079  

Gain on disposal (less adjustments)

    (193 )     -       53,061       -  

Pretax income of discontinued operations

    (193 )     (565 )     54,773       1,079  

Income tax expense (benefit)

    (48 )     (140 )     14,261       294  
                                 

Income (loss) from discontinued operations, net of tax

  $ (145 )   $ (425 )   $ 40,512     $ 785  

 

The amounts for revenue and costs of logistical services shown above represent the results of Zenith’s business transactions with third parties. Zenith also charged Bassett for logistical services provided to our wholesale segment in the amount of $9,121 during the nine months ended August 27, 2022, and $7,164 and $23,409, respectively, for the three and nine months ended August 28, 2021. We have entered into a service agreement with J.B. Hunt for the continuation of these services for a period of seven years following the sale of Zenith. Subsequent to the sale, we incurred $10,307 and $19,852 of expense during the three and nine months ended August 27, 2022, respectively, for the performance of logistical services, of which $17,818 had been paid in cash as of August 27, 2022.

 

Included in other loss, net, is interest arising from finance leases assumed by J.B. Hunt as part of the transaction. Such interest amounted to $78 for the nine months ended August 27, 2022, and $86 and $207, respectively, for the three and nine months ended August 28, 2021.

 

The following table summarizes the cash flows generated by discontinued operations during the nine months ended August 27, 2022 and August 28, 2021:

 

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

 

Cash provided by operating activities

  $ 1,681     $ 3,231  

Cash used in investing activities

    (81 )     (2,706 )

Cash used in financing activities

    (371 )     (834 )
                 

Net cash provided by (used in) discontinued operations

  $ 1,229     $ (309 )

 

 

13. Retail Real Estate Transactions

 

During the third quarter of fiscal 2022, we sold one of our Company-owned store locations in Houston, Texas for $8,217 net of closing costs, resulting in a gain of $4,595 during the three and nine months ended August 27, 2022. The sale closed on June 24, 2022, and we expect to vacate the premises during the fourth quarter of fiscal 2022. This store will be relocated to a new leased store in the Houston market that we expect to open during the second quarter of fiscal 2023.

 

This sale, together with our recent purchase of real property in Tampa, Florida for $7,668 in cash during the second quarter of fiscal 2022 will be treated as an exchange of like-kind property under Section 1031 of the Internal Revenue Code of 1986, as amended, for the purpose of deferring approximately $4,300 of the taxable gain arising from the sale of the Houston property. A VIE was established during the second quarter of fiscal 2022 for purposes of acquiring the Tampa, Florida property, of which the Company was the primary beneficiary by virtue of our control over the activities that most significantly impact the entity's economic performance. Subsequent to the completion of the exchange transactions during the third quarter of fiscal 2022, the sole equity interest in the VIE was transferred to Bassett and the entity is now consolidated as a wholly owned subsidiary We plan to remodel the Tampa property and open as a Company-owned store in the second quarter of fiscal 2023.

 

Page 17 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

14. Segment Information

 

We have strategically aligned our business into two 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 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. Our wholesale segment also includes our holdings of short-term investments and retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.

 

 

Retail  Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.

 

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores. 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.

 

Our former logistical services segment which represented the operations of Zenith is now presented as a discontinued operation in the accompanying condensed consolidated balances sheets and statements of income (see Note 12).

 

Page 18 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 

Sales Revenue

                               

Wholesale sales of furniture and accessories

  $ 78,959     $ 73,073     $ 249,945     $ 219,371  

Less: Sales to retail segment

    (31,833 )     (26,779 )     (95,976 )     (84,303 )

Wholesale sales to external customers

    47,126       46,294       153,969       135,068  

Retail sales of furniture and accessories

    70,886       58,576       210,613       181,454  

Consolidated net sales of furniture and accessories

  $ 118,012     $ 104,870     $ 364,582     $ 316,522  
                                 

Income from Operations

                               

Wholesale

  $ 1,611     $ 4,466     $ 8,430     $ 14,622  

Retail - Company-owned stores

    4,529       917       15,754       3,663  

Inter-company elimination

    (63 )     (407 )     (617 )     (662 )

Gain on sale of real estate

    4,595       -       4,595       -  

Consolidated

  $ 10,672     $ 4,976     $ 28,162     $ 17,623  
                                 

Depreciation and Amortization

                               

Wholesale

  $ 1,213     $ 835     $ 3,038     $ 2,456  

Retail - Company-owned stores

    1,455       1,528       4,429       4,625  

Consolidated

  $ 2,668     $ 2,363     $ 7,467     $ 7,081  
                                 

Capital Expenditures

                               

Wholesale

  $ 3,160     $ 2,078     $ 15,065     $ 4,244  

Retail - Company-owned stores

    1,468       54       2,201       191  

Consolidated

  $ 4,628     $ 2,132     $ 17,266     $ 4,435  

 

   

As of

   

As of

 

 

 

August 27, 2022

   

November 27, 2021

 
Identifiable Assets                

Wholesale

  $ 243,046     $ 196,853  

Retail - Company-owned stores

    159,641       160,986  

Discontinued Operations

    -       63,821  

Consolidated

  $ 402,687     $ 421,660  

 

See Note 15, Revenue Recognition, for disaggregated revenue information regarding sales of furniture and accessories by product type for the wholesale and retail segments.

 

 

15. Revenue Recognition

 

We recognize revenue when we transfer promised goods or services to our customers in an amount that reflects the consideration we expect 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. At retail, transfer occurs and revenue is recognized upon delivery of goods to the customer. All wholesale and retail revenues are recorded net of estimated returns and allowances based on historical patterns. We typically collect a significant portion of the purchase price from our retail customers as a deposit upon order, with the balance typically collected upon delivery. These customer deposits are carried on our balance sheet as a current liability until delivery is fulfilled and amounted to $40,311 and $51,492 as of August 27, 2022 and November 27, 2021, respectively. Substantially all of the customer deposits held at November 27, 2021 related to performance obligations that were satisfied during the current year-to-date period and have therefore been recognized in revenue for the three and nine months ended August 27, 2022.

 

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 (i.e. – 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 August 27, 2022 and November 27, 2021, our balance of prepaid commissions included in other current assets was $4,357 and $6,221, respectively.

 

Page 19 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

We exclude from revenue all amounts collected from customers for sales tax. We do not disclose amounts allocated to remaining unsatisfied performance obligations as they are expected to be satisfied within one year or less.

 

Disaggregated revenue information for sales of furniture and accessories by product category for the three and nine months ended August 27, 2022 and August 28, 2021, excluding intercompany transactions between our segments, is a follows:

 

   

Quarter Ended

 
   

August 27, 2022

   

August 28, 2021

 
   

Wholesale

   

Retail

   

Total

   

Wholesale

   

Retail

   

Total

 

Bassett Custom Upholstery

  $ 30,885     $ 39,054     $ 69,939     $ 26,276     $ 32,362     $ 58,638  

Bassett Leather

    6,290       867       7,157       9,142       302       9,444  

Bassett Custom Wood

    5,564       11,357       16,921       5,745       7,674       13,419  

Bassett Casegoods

    4,387       10,404       14,791       5,131       10,394       15,525  

Accessories, mattresses and other (1)

    -       9,204       9,204       -       7,844       7,844  

Consolidated net sales of furniture and accessories

  $ 47,126     $ 70,886     $ 118,012     $ 46,294     $ 58,576     $ 104,870  

 

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

 
   

Wholesale

   

Retail

   

Total

   

Wholesale

   

Retail

   

Total

 

Bassett Custom Upholstery

  $ 96,636     $ 122,248     $ 218,884     $ 77,134     $ 102,201     $ 179,335  

Bassett Leather

    29,111       1,399       30,510       26,898       782       27,680  

Bassett Custom Wood

    17,207       32,001       49,208       17,921       20,756       38,677  

Bassett Casegoods

    11,015       27,884       38,899       13,115       32,175       45,290  

Accessories, mattresses and other (1)

    -       27,081       27,081       -       25,540       25,540  

Consolidated net sales of furniture and accessories

  $ 153,969     $ 210,613     $ 364,582     $ 135,068     $ 181,454     $ 316,522  

 

(1) 

Includes the sale of goods other than Bassett-branded products, such as accessories and bedding, and also includes the  sale of furniture protection plans.

 

Page 20 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

16. Changes to Stockholders Equity

 

The following changes in our stockholders’ equity occurred during the three and nine months ended August 27, 2022 and August 28, 2021:

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 27, 2022

   

August 28, 2021

   

August 27, 2022

   

August 28, 2021

 

Common Stock:

                               
                                 

Beginning of period

  $ 46,396     $ 49,262     $ 48,811     $ 49,714  

Issuance of common stock

    98       23       222       143  

Purchase and retirement of common stock

    (430 )     (506 )     (2,969 )     (1,078 )
                                 

End of period

  $ 46,064     $ 48,779     $ 46,064     $ 48,779  
                                 

Common Shares Issued and Outstanding:

                               
                                 

Beginning of period

    9,279,268       9,852,359       9,762,125       9,942,787  

Issuance of common stock

    19,568       4,587       44,544       28,623  

Purchase and retirement of common stock

    (86,096 )     (101,100 )     (593,929 )     (215,564 )
                                 

End of period

    9,212,740       9,755,846       9,212,740       9,755,846  
                                 

Additional Paid-in Capital:

                               
                                 

Beginning of period

  $ -     $ -     $ 113     $ -  

Issuance of common stock

    65       71       117       165  

Purchase and retirement of common stock

    (207 )     (119 )     (629 )     (275 )

Stock based compensation

    142       48       399       110  
                                 

End of period

  $ -     $ -     $ -     $ -  
                                 

Retained Earnings:

                               
                                 

Beginning of period

  $ 145,471     $ 112,325     $ 115,631     $ 109,710  

Net income for the period

    7,628       3,016       60,319       13,001  

Purchase and retirement of common stock

    (982 )     (2,017 )     (6,663 )     (4,432 )

Cash dividends declared

    (1,564 )     (1,366 )     (18,734 )     (6,321 )
                                 

End of period

  $ 150,553     $ 111,958     $ 150,553     $ 111,958  
                                 

Accumulated Other Comprehensive Loss:

                               
                                 

Beginning of period

  $ (1,726 )   $ (1,325 )   $ (1,823 )   $ (1,394 )

Amortization of pension costs, net of tax

    48       35       145       104  
                                 

End of period

  $ (1,678 )   $ (1,290 )   $ (1,678 )   $ (1,290 )

 

Page 21 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

17. Recent Accounting Pronouncements

 

In October 2021, the FASB issued Accounting Standards Update No. 2021-08– Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and to payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in ASU 2021-08 will become effective for us as of the beginning of our 2024 fiscal year. Early adoption is permitted, including adoption in any interim period. We do not expect that this guidance will have a material impact upon our financial position and results of operations.

 

In March 2022, the FASB issued Accounting Standards Update No. 2022-02 – Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to address certain concerns identified in the Post-Implementation Review process for ASU Topic 326. The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings by creditors in ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments in ASU 2022-02 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The amendments in ASU 2022-02 will become effective for us as of the beginning of our 2024 fiscal year. Early adoption is permitted. We expect that the adoption of this standard will primarily impact our disclosures but do not expect that this guidance will have a material impact upon our financial position and results of operations.

 

In June 2022, the FASB issued Accounting Standards Update No. 2022-03 – Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to clarify the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, the amendments in ASU 2022-03 require certain additional disclosures related to investments in equity securities subject to contractual sale restrictions. The amendments in ASU 2022-03 will become effective for us as of the beginning of our 2025 fiscal year. Early adoption is permitted. As of August 27, 2022 we do not hold any investments in equity securities, therefore we do not currently expect that this guidance will have a material impact upon our financial position and results of operations.

 

 

18. Subsequent Events

 

On September 2, 2022, we acquired the capital stock of Noa Home Inc. (“Noa”), a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa has operations in Canada, Australia, Singapore and the United Kingdom and had net revenues of approximately $15,300 (approximately C$19,100) for its most recent fiscal year ended February 28, 2022. The initial purchase price of approximately $5,900 (approximately C$7,700) included cash payments of approximately $1,500 (approximately C$2,000) paid to the co-founders of Noa and approximately $4,300 (approximately C$5,700) for the repayment of existing debt. The Noa co-founders will also have the opportunity to receive additional annual cash payments totaling approximately $1,000 per year (approximately C$1,330 per year) for the following three fiscal years based on established increases in net revenues and achieving certain internal EBITDA goals.

 

Page 22 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

 

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

 

Safe-harbor, forward-looking statements:

 

This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Bassett Furniture Industries, Incorporated and subsidiaries. Such forward-looking statements are identified by use of forward-looking words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, “aims” and “intends” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include:

 

fluctuations in the cost and availability of raw materials, fuel, labor, delivery costs and sourced products, including those which may result from general price inflation, supply chain disruptions and the imposition of new or increased duties, tariffs, retaliatory tariffs and trade limitations with respect to foreign-sourced products

 

competitive conditions in the home furnishings industry

 

overall retail traffic levels in stores and on the web and consumer demand for home furnishings

 

ability of our customers and consumers to obtain credit

 

the profitability of the Bassett stores (independent licensees and Company-owned retail stores) which may result in future store closings

 

ability to implement our Company-owned retail strategies and realize the benefits from such strategies, including our initiatives to expand and improve our digital marketing capabilities, as they are implemented

 

results of marketing and advertising campaigns

 

effectiveness and security of our information and technology systems and possible disruptions due to cybersecurity threats, including any impacts from a network security incident; and the sufficiency of our insurance coverage, including cybersecurity insurance

 

future tax legislation, or regulatory or judicial positions

 

ability to efficiently manage the import supply chain to minimize business interruption

 

concentration of domestic manufacturing, particularly of upholstery products, and the resulting exposure to business interruption from accidents, weather and other events and circumstances beyond our control

 

the impact of the COVID-19 pandemic and resulting supply chain disruptions upon our ability to maintain normal operations at our retail stores and manufacturing facilities, and the resulting effects any future interruption of those operations may have upon our financial condition, results of operations and liquidity, as well as the impact of the pandemic upon general economic conditions, including consumer spending and the strength of the housing market in the United States

 

Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 27, 2021.

 

You should keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which such forward-looking statement is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the events described in any forward-looking statement made in this report or elsewhere, might not occur.

 

Page 23 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

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 also sell our products through our website at www.bassettfurniture.com. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 120-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 95 BHF stores at August 27, 2022, 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 and casual 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 for the Bassett brand 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 or virtual 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 or virtual design services for our customers.

 

During the second quarter of fiscal 2022, we opened our first regional fulfillment center in Orlando, Florida where we are stocking our best sellers for much quicker delivery. This adds an element of immediacy to our proven platform of made to order custom furniture that has driven our strategy for the past two decades. We plan to roll this out nationwide over the near term and our next center recently opened near Baltimore, Maryland subsequent to the third quarter of fiscal 2022.

 

In 2018, we added outdoor furniture to our offerings with the acquisition of the Lane Venture brand. Our strategy is to distribute these products outside of our BHF store network through a network of over 15 independent sales representatives. Using Lane Venture as a platform, we developed the Bassett Outdoor brand that is only marketed through the BHF store network. This allows Bassett branded product to move from inside the home to outside the home to capitalize on the growing trend of outdoor living.

 

We have factories in Newton, North Carolina that manufacture both stationary and motion upholstered furniture for inside the home along with our outdoor furniture offerings. We also have factories in Martinsville and Bassett, Virginia that assemble and finish our custom bedroom and dining offerings. Late in the third quarter of fiscal 2022, we purchased a facility which we had formerly leased in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture. With the purchase, we also obtained two additional buildings which will allow us to expand our footprint at that facility. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its manufacturing process. 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, Thailand and China. Over 75% of the products we currently sell are manufactured in the United States.

 

We consider our website to be the front door to our brand experience where customers can research our furniture and accessory offerings and subsequently buy online or engage with an in-store design consultant. Customer acquisition resulting from our digital outreach strategies has significantly increased our traffic to the website since 2019. The migration to digital brand research has caused us to comprehensively evaluate all of our American made custom products. While our Bench Made line of custom upholstery and custom bedroom and dining products continue to be our most successful offerings, most of these items must be purchased in a store as they are not conducive to web transactions due to the number of options available. Consequently, we will continue to methodically re-design each one of these important lines to best serve our customers online, in the store or wherever our customer might be. Our intent is to continue to offer the consumer custom options that will help them personalize their home but to do so in an edited fashion that will provide a better web experience in the research phase and will also allow the final purchase to be made either on the web or in the store. While we work to make it easier to purchase either in store or on-line, we will not compromise our in-store experience or the quality of our in-home makeover capabilities.

 

Page 24 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

We are engaged in a multi-year cross-functional digital transformation initiative with the first phase consisting of the examination and improvement of our underlying data management processes. During the second quarter of 2022, we implemented a comprehensive Product Information Management system which will allow us to enhance and standardize our product development and data management and governance processes during the second half of 2022. This will result in more consistent data that our merchandizing and sales teams can use in analyzing various product and sales trends in order to make better informed decisions. We are also in the process of implementing a new eCommerce platform that we plan to introduce in 2023.  The new web platform will leverage world class features including enhanced customer research capabilities and streamlined navigation that we believe will result in increased web traffic and sales.  We expect to spend between $3,000 and $4,000 this fiscal year on these efforts.

 

Company-owned Retail Stores

 

As we continually monitor the performance of our Company-owned retail store locations, we may occasionally determine that it is necessary to close underperforming stores in certain markets. During the first quarter of fiscal 2022 we closed one retail store in Ontario, California, and we closed our store in Wichita, Kansas, during the third quarter of fiscal 2022. During the fourth quarter of fiscal 2022 we closed our store in Farmingdale, New York and consolidated its operations with our existing store in nearby Westbury, New York. All of the above-mentioned closures occurred at or near the lease expirations.

 

During the second quarter of 2022, we acquired a 25,000 square foot store property in Tampa, Florida for $7,668. We are currently in the process of developing plans for store buildout and upfit with a planned opening date in the second quarter of 2023.

 

We also may occasionally identify opportunities to enhance our presence in existing markets by relocating existing stores to better locations within the same market. During the third quarter of fiscal 2022 we sold the store property of one of our Houston, Texas locations for $8,217, net of closing costs, which resulted in a gain of $4,595. For tax purposes, the sale of the Houston store and the purchase of the Tampa store will be treated as a 1031 exchange where the majority of the tax on the gain will be deferred. The store closure sale was completed early in the fourth quarter of fiscal 2022 at which time the store was officially closed. We expect to open a new leased store in a more upscale shopping area in the vicinity of the closed store in the second quarter of 2023. During the fourth quarter of fiscal 2022 at the end of the lease term, we expect to close our Dallas, Texas store located at the intersection of McKinney and Knox streets. We plan to open a replacement store in the nearby iconic Inwood Village shopping center during the fourth quarter of 2022.

 

As of August 27, 2022, we had 61 Corporate-owned stores operating and expect to end fiscal 2022 with 59 stores.

 

Sale of the Assets of Zenith Freight Lines, LLC

 

During the first quarter of 2022, we entered into a definitive agreement to sell substantially all of the assets of our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) to J.B. Hunt Transport Services, Inc. (“J.B. Hunt”) for $86,939 in cash. On February 28, 2022 the transaction was completed with us receiving $85,521 after the payment of $418 in certain transaction costs and the funding of $1,000 held in escrow. The final purchase price was subject to a customary post-closing working capital adjustment, which was settled in the amount of $987 and paid back to J.B. Hunt during the third quarter of fiscal 2022. During the nine months ended August 27, 2022, we recognized a pre-tax gain of $53,061 on this transaction. As a result of the sale, the operations of our former logistical services segment, which consisted entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income and in the following discussion as discontinued operations.

 

Page 25 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Recent Development Acquisition of Noa Home, Inc.

 

On September 2, 2022, we acquired the capital stock of Noa Home Inc. (“Noa”), a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa has operations in Canada, Australia, Singapore and the United Kingdom and had net revenues of approximately $15,300 (approximately C$19,100) for its most recent fiscal year ended February 28, 2022. The initial purchase price of approximately $5,900 (approximately C$7,700) included cash payments of approximately $1,500 (approximately C$2,000) paid to the co-founders of Noa and approximately $4,300 (approximately C$5,700) for the repayment of existing debt. The Noa co-founders will also have the opportunity to receive additional annual cash payments totaling approximately $1,000 per year (approximately C$1,330 per year) for the following three fiscal years based on established increases in net revenues and achieving certain internal EBITDA goals.

 

Results of Continuing Operations Periods ended August 27, 2022 compared with the periods ended August 28, 2021:

 

Consolidated results of continuing operations for the three and nine months ended August 27, 2022 and August 28, 2021 are as follows:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

 
                                                                                                 

Net sales of furniture and accessories

  $ 118,012       100.0 %   $ 104,870       100.0 %   $ 13,142       12.5 %   $ 364,582       100.0 %   $ 316,522       100.0 %   $ 48,060       15.2 %

Cost of furniture and accessories sold

    57,240       48.5 %     52,263       49.8 %     4,977       9.5 %     180,479       49.5 %     153,426       48.5 %     27,053       17.6 %

Gross profit

    60,772       51.5 %     52,607       50.2 %     8,165       15.5 %     184,103       50.5 %     163,096       51.5 %     21,007       12.9 %

SG&A expenses

    54,695       46.3 %     47,631       45.4 %     7,064       14.8 %     160,536       44.0 %     145,473       46.0 %     15,063       10.4 %

Gain on sale of retail real estate

    4,595       3.9 %     -       0.0 %     4,595       100.0 %     4,595       1.3 %     -       0.0 %     4,595       100.0 %
                                                                                                 

Income from operations

  $ 10,672       9.0 %   $ 4,976       4.7 %   $ 5,696       114.5 %   $ 28,162       7.7 %   $ 17,623       5.5 %   $ 10,539       59.8 %

 

Analysis of Quarterly Results:

 

Total sales revenue for the three months ended August 27, 2022 increased $13,142 or 12.5% from the prior year period primarily due to a 21% increase in retail sales through the Company-owned stores and a 6% increase in wholesale shipments to the licensee store network.

 

Gross margins for the three months ended August 27, 2022 increased 130 basis points from 2021 primarily due to a greater portion of total sales coming from the Corporate retail segment, partially offset by lower margins in the retail segment due to increased clearance activity from four store closure sales during the quarter.

 

Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended August 27, 2022 increased 90 basis points from 2021 primarily due to increased sales and marketing expenses and increased logistics and warehouse costs, partially offset by greater leverage of fixed costs from increased sales volumes.

 

During the third quarter of fiscal 2022, we also recognized a gain of $4,595 from the sale of the real estate at a former retail location in Houston, Texas.

 

Analysis of Year-to-Date Results:

 

Total sales revenue for the nine months ended August 27, 2022 increased $48,060 or 15% from the prior year period primarily due to increases in wholesale shipments to both the open market and the BHF store network, along with a 16% increase in retail sales.

 

Gross margins for the nine months ended August 27, 2022 decreased 100 basis points from 2021 primarily due to rising raw material and inbound freight costs, including the impact of rising fuel prices, partially offset by greater fixed cost leverage from increased sales. While these rising costs have been somewhat mitigated by price increases implemented since the first quarter of 2021, the increase in order backlogs and order fulfillment times limited our ability to match revised pricing to manufacturing costs. Although no increases are currently being contemplated, we will continue to monitor our costs to determine if additional increases are warranted.

 

Page 26 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

SG&A expenses as a percentage of sales for the nine months ended August 27, 2022 decreased 200 basis points from 2021 primarily due to improved leverage of fixed costs through higher sales levels.

 

During the first nine months of fiscal 2022, we also recognized a gain of $4,595 from the sale of the real estate at a former retail location in Houston, Texas.

 

Segment Information

 

We have strategically aligned our business into two 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 include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.

 

Retail Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.

 

Our former logistical services segment which represented the operations of Zenith is now presented as discontinued operations.

 

Page 27 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Reconciliation of Segment Results to Consolidated Results of Operations

 

To supplement the financial measures prepared in accordance with GAAP, we present gross profit by segment inclusive of the effects of intercompany sales by our wholesale segment to our retail segment. Because these intercompany transactions are not eliminated from our segment presentations and because we do not present gross profit as a measure of segment profitability in the accompanying condensed consolidated financial statements, the presentation of gross profit by segment is considered to be a non-GAAP financial measure. In addition, certain special gains or charges are included in consolidated income from operations are not included in the measures of segment profitability. The reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is presented below along with the effects of various other intercompany eliminations on our consolidated results of operations.

 

   

Quarter Ended August 27, 2022

 
   

Non-GAAP Presentation

           

Special

     

GAAP Presentation

 
   

Wholesale

   

Retail

   

Eliminations

   

Items

     

Consolidated

 
                                           

Net sales of furniture and accessories

  $ 78,959     $ 70,886     $ (31,833 ) (1)   $ -       $ 118,012  

Cost of furniture and accessories sold

    54,501       34,166       (31,427 ) (2)     -         57,240  

Gross profit

    24,458       36,720       (406 )     -         60,772  

SG&A expense

    22,847       32,191       (343 ) (3)     -         54,695  

Gain on sale of real estate

    -       -       -       4,595   (4)       4,595  

Income from operations

  $ 1,611     $ 4,529     $ (63 )   $ 4,595       $ 10,672  

 

   

Quarter Ended August 28, 2021

 
   

Non-GAAP Presentation

           

Special

   

GAAP Presentation

 
   

Wholesale

   

Retail

   

Eliminations

   

Items

   

Consolidated

 
                                         

Net sales of furniture and accessories

  $ 73,073     $ 58,576     $ (26,779 ) (1)   $ -     $ 104,870  

Cost of furniture and accessories sold

    50,493       27,815       (26,045 ) (2)     -       52,263  

Gross profit

    22,580       30,761       (734 )     -       52,607  

SG&A expense

    18,114       29,844       (327 ) (3)     -       47,631  

Income from operations

  $ 4,466     $ 917     $ (407 )   $ -     $ 4,976  

 

   

Nine Months Ended August 27, 2022

 
   

Non-GAAP Presentation

           

Special

   

GAAP Presentation

 
   

Wholesale

   

Retail

   

Eliminations

   

Items

   

Consolidated

 
                                         

Net sales of furniture and accessories

  $ 249,945     $ 210,613     $ (95,976 ) (1)   $ -     $ 364,582  

Cost of furniture and accessories sold

    175,293       99,556       (94,370 ) (2)     -       180,479  

Gross profit

    74,652       111,057       (1,606 )     -       184,103  

SG&A expense

    66,222       95,303       (989 ) (3)     -       160,536  

Gain on sale of real estate

    -       -       -       4,595  (4)     4,595  

Income from operations

  $ 8,430     $ 15,754     $ (617 )   $ 4,595     $ 28,162  

 

   

Nine Months Ended August 28, 2021

 
   

Non-GAAP Presentation

             

Special

   

GAAP Presentation

 
   

Wholesale

   

Retail

   

Eliminations

     

Items

   

Consolidated

 
                                           

Net sales of furniture and accessories

  $ 219,371     $ 181,454     $ (84,303 ) (1)     $ -     $ 316,522  

Cost of furniture and accessories sold

    148,640       87,444       (82,658 ) (2)       -       153,426  

Gross profit

    70,731       94,010       (1,645 )       -       163,096  

SG&A expense

    56,109       90,347       (983 ) (3)       -       145,473  

Income from operations

  $ 14,622     $ 3,663     $ (662 )     $ -     $ 17,623  

 

Notes to segment consolidation table:

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Represents the gain on the sale of the real estate at a former retail location.

 

Page 28 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Wholesale Segment

Results for the wholesale segment for the periods ended August 27, 2022 and August 28, 2021 are as follows:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

 
                                                                                                 

Net sales

  $ 78,959       100.0 %   $ 73,073       100.0 %   $ 5,886       8.1 %   $ 249,945       100.0 %   $ 219,371       100.0 %   $ 30,574       13.9 %

Gross profit (1)

    24,458       31.0 %     22,580       30.9 %     1,878       8.3 %     74,652       29.9 %     70,731       32.2 %     3,921       5.5 %

SG&A expenses

    22,847       28.9 %     18,114       24.8 %     4,733       26.1 %     66,222       26.5 %     56,109       25.6 %     10,113       18.0 %
                                                                                                 

Income from operations

  $ 1,611       2.0 %   $ 4,466       6.1 %   $ (2,855 )     -63.9 %   $ 8,430       3.4 %   $ 14,622       6.7 %   $ (6,192 )     -42.3 %

 

 

(1)

Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions. Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.

 

Wholesale sales by major product category are as follows:

 

   

Quarter Ended

 
   

August 27, 2022

   

August 28, 2021

   

Total Change

 
   

External

   

Intercompany

   

Total

   

External

   

Intercompany

   

Total

   

Dollars

   

Percent

 

Bassett Custom Upholstery

  $ 30,885     $ 20,641     $ 51,526       65.3 %   $ 26,276     $ 16,572     $ 42,848       58.6 %   $ 8,678       20.3 %

Bassett Leather

    6,290       24       6,314       8.0 %     9,142       5       9,147       12.5 %     (2,833 )     -31.0 %

Bassett Custom Wood

    5,564       5,995       11,559       14.6 %     5,745       5,440       11,185       15.3 %     374       3.3 %

Bassett Casegoods

    4,387       5,173       9,560       12.1 %     5,131       4,762       9,893       13.5 %     (333 )     -3.4 %

Total

  $ 47,126     $ 31,833     $ 78,959       100.0 %   $ 46,294     $ 26,779     $ 73,073       100.0 %   $ 5,886       8.1 %

 

   

Nine Months Ended

 
   

August 27, 2022

   

August 28, 2021

   

Total Change

 
   

External

   

Intercompany

   

Total

   

External

   

Intercompany

   

Total

   

Dollars

   

Percent

 

Bassett Custom Upholstery

  $ 96,636     $ 64,075     $ 160,711       64.3 %   $ 77,134     $ 52,102     $ 129,236       58.9 %   $ 31,475       24.4 %

Bassett Leather

    29,111       48       29,159       11.7 %     26,898       47       26,945       12.3 %     2,214       8.2 %

Bassett Custom Wood

    17,207       18,927       36,134       14.5 %     17,921       18,117       36,038       16.4 %     96       0.3 %

Bassett Casegoods

    11,015       12,926       23,941       9.6 %     13,115       14,037       27,152       12.4 %     (3,211 )     -11.8 %

Total

  $ 153,969     $ 95,976     $ 249,945       100.0 %   $ 135,068     $ 84,303     $ 219,371       100.0 %   $ 30,574       13.9 %

 

Analysis of Quarterly Results Wholesale

 

Net sales for the three months ended August 27, 2022 increased $5,886 or 8.1% from the prior year period due primarily to a 17% increase in shipments to the BHF store network and a 16% increase in Lane Venture shipments. Shipments to the open market were flat. Gross margins for the three months ended August 27, 2022 were comparable to the prior year with a 10 basis point increase as we were able to recognize a greater portion of previously implemented price increases in current period sales. This was offset by lower margins in the Bassett Leather product line due to product discounting. As this product line is internationally sourced with extended lead times, we received significant amounts of inventory during the second and third quarters of 2022 just as product demand was weakening due to the market downturn in home furnishings. We expect reduced margins on this product line to continue over the next two quarters as we reduce the inventory to a more normal level. SG&A expenses as a percentage of sales increased 410 basis points primarily due to increased sales and marketing expenses, employee compensation costs and logistics and warehouse costs partially offset by greater leverage of fixed costs from increased sales volumes.

 

Page 29 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Analysis of Year-to-Date Results - Wholesale

 

Net sales for the nine months ended August 27, 2022 increased $30,574 or 14% from the prior year period due primarily to increases in shipments of 13% and 12% to both the BHF store network and to the open market, respectively. Gross margins for the nine months ended August 27, 2022 declined 230 basis points compared to the prior year period as we experienced significant increases in material and other production costs, partially offset by greater leverage of fixed costs due to higher sales volumes. SG&A expenses as a percentage of sales increased 90 basis points primarily due to increased sales and marketing expenses, employee compensation costs and logistics and warehouse costs partially offset by greater leverage of fixed costs from increased sales volumes.

 

Wholesale Backlog

 

Since the beginning of the COVID pandemic in early 2020, Bassett and most of the home furnishings industry have been faced with logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. Many of these issues have subsided due to the industry slowdown in demand for home furnishings that started during the second quarter of 2022. As a result of the slowdown, our incoming order rates have decreased resulting in decreases in our wholesale backlogs. While wholesale orders for the third quarter of 2022 decreased 22% against the prior year period, they were comparable to the pre-pandemic level of the third quarter of 2019. At August 27, 2022, the wholesale backlog totaled $41,693 as compared to $60,134 at May 28, 2022, $78,135 at February 26, 2022, $90,057 at November 27, 2021, and 92,839 at August 28, 2021. At February 29, 2020, the end of our last fiscal quarter prior to the impact of the COVID pandemic upon our operations and the overall economy, our wholesale backlog was $14,617.

 

Retail Company-owned Stores Segment

 

Results for the retail segment for the periods ended August 27, 2022 and August 28, 2021 are as follows:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

 
                                                                                                 

Net sales

  $ 70,886       100.0 %   $ 58,576       100.0 %   $ 12,310       21.0 %   $ 210,613       100.0 %   $ 181,454       100.0 %   $ 29,159       16.1 %

Gross profit (1)

    36,720       51.8 %     30,761       52.5 %     5,959       19.4 %     111,057       52.7 %     94,010       51.8 %     17,047       18.1 %

SG&A expenses

    32,191       45.4 %     29,844       50.9 %     2,347       7.9 %     95,303       45.3 %     90,347       49.8 %     4,956       5.5 %

Income (loss) from operations

  $ 4,529       6.4 %   $ 917       1.6 %   $ 3,612    

N/M

    $ 15,754       7.5 %   $ 3,663       2.0 %   $ 12,091       330.1 %

 

(1)

Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions. Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.

 

Retail sales by major product category are as follows:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

 
                                                                                                 

Bassett Custom Upholstery

  $ 39,054       55.1 %   $ 32,362       55.2 %   $ 6,692       20.7 %   $ 122,248       58.0 %   $ 102,201       56.3 %   $ 20,047       19.6 %

Bassett Leather

    867       1.2 %     302       0.5 %     565       187.1 %     1,399       0.7 %     782       0.4 %     617       78.9 %

Bassett Custom Wood

    11,357       16.0 %     7,674       13.1 %     3,683       48.0 %     32,001       15.2 %     20,756       11.4 %     11,245       54.2 %

Bassett Casegoods

    10,404       14.7 %     10,394       17.7 %     10       0.1 %     27,884       13.2 %     32,175       17.7 %     (4,291 )     -13.3 %

Accessories, mattresses and other (1)

    9,204       13.0 %     7,844       13.4 %     1,360       17.3 %     27,081       12.9 %     25,540       14.1 %     1,541       6.0 %

Total

  $ 70,886       100.0 %   $ 58,576       100.0 %   $ 12,310       21.0 %   $ 210,613       100.0 %   $ 181,454       100.0 %   $ 29,159       16.1 %

 

 

(1)

Includes the sale of goods other than Bassett-branded products, such as accessories and bedding, and also includes the sale of furniture protection plans.

 

Page 30 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Quarterly Analysis of Results - Retail

 

Net sales for the three months ended August 27, 2022 increased $12,310 or 21% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 9.4% from the third quarter of 2021. Gross margins for the three months ended August 27, 2022 decreased by 70 basis points as compared to the prior year period, primarily due to increased clearance activity from four store closure sales during the quarter. Selling, general and administrative expenses as a percentage of sales for the three months ended August 27, 2022 decreased 550 basis points primarily due to greater leverage on fixed costs from higher sales volumes.

 

Year-to-Date Analysis of Results - Retail

 

Net sales for the nine months ended August 27, 2022 increased $29,159 or 16% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 8.4% from the first nine months of 2021. Gross margins for the nine months ended August 27, 2022 increased by 90 basis points as compared to the prior year period, primarily driven by improved pricing strategies and lower levels of promotional activity, partially offset by increased clearance activity from five store closing events during the year. Selling, general and administrative expenses for the nine months ended August 27, 2022 as a percentage of sales decreased by 450 basis points as compared to the first nine months of 2021 primarily due to greater leverage on fixed costs from higher sales volumes.

 

Retail Backlog

 

As previously discussed, since the beginning of the COVID pandemic in early 2020, Bassett and most of the home furnishings industry have been faced with logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. Many of these issues have subsided due to the industry slowdown in demand for home furnishings that started during the second quarter of 2022. As a result of the slowdown, our written sales for the second and third quarters decreased by 13% and 8.4%, respectively, as compared to the corresponding periods of 2021. Written sales for the second and third quarters of 2022 are comparable to the corresponding periods in 2019. At August 27, 2022, retail backlog totaled $59,981 as compared to $71,073 at May 28, 2022, $84,685 at February 26, 2022, $82,894 at November 27, 2021, and $73,489 at August 28, 2021. At February 29, 2020, the end of our last fiscal quarter prior to the impact of the COVID pandemic upon our operations and the overall economy, our retail backlog was $29,775.

 

Discontinued Operations Logistical Services

 

Results for the operations of Zenith, which was sold to J.B. Hunt at the beginning of the second quarter, for the periods ended August 27, 2022 and August 28, 2021 are as follows:

 

   

Quarter Ended

   

Change

   

Nine Months Ended

   

Change

 
   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

   

August 27, 2022

   

August 28, 2021

   

Dollars

   

Percent

 
                                                                                                 

Logistical services revenue

  $ -       0.0 %   $ 14,036       100.0 %   $ (14,036 )     -100.0 %   $ 16,776       100.0 %   $ 40,116       100.0 %   $ (23,340 )     -58.2 %

Cost of logistical services

    -       0.0 %     14,522       103.5 %     (14,522 )     -100.0 %     15,001       89.4 %     38,849       96.8 %     (23,848 )     -61.4 %

Other loss, net

    -       0.0 %     (79 )     -0.6 %     79       -100.0 %     (63 )             (188 )                        
                                                                                                 

Income from discontinued operations before tax

  $ -       0.0 %   $ (565 )     -4.0 %   $ 565       -100.0 %   $ 1,712       10.2 %   $ 1,079       2.7 %   $ 633       58.7 %

 

The amounts shown above represent the results of Zenith’s business transactions with third parties. Because the sale of Zenith was closed on the first business day of the second fiscal quarter of 2022, operating results for that period are insignificant.

 

Zenith also charged Bassett $9,121 for logistical services provided to our wholesale segment during the nine months ended August 27, 2022, and $7,164 and $23,409 for the three and nine months ended August 28, 2021. These shipping and handling costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. We have entered into a service agreement with J.B. Hunt for the continuation of these services for a period of seven years following the sale of Zenith. Subsequent to the sale, we have incurred $10,307 and $19,852 of expense during the three and nine months ended August 27, 2022, respectively, for the performance of logistical services by J.B. Hunt.

 

Page 31 of 36

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Other Items Affecting Net Income

 

Other Loss, Net

 

Other loss, net, for the three and nine months ended August 27, 2022 was $594 and $1,850, respectively, compared to $268 and $828 for the three and nine months ended August 28, 2021, a net increase of $336 over the prior year quarter and $1,022 over the prior year to date. The net change was primarily due to higher net costs of Company-owned life insurance.

 

Income Taxes

 

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.

 

Our effective tax rate was 22.8% and 25.6% for the three and nine months ended August 27, 2022, respectively, and 27.2% and 27.3% for the three and nine months ended August 28, 2021, respectively. These effective rates differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including those associated with Company-owned life insurance, and tax of $550 for the nine months ended August 27, 2022 associated with non-deductible goodwill written off in connection with our sale of Zenith, and tax deficiencies of $117 during the nine months ended August 28, 2021 arising from stock-based compensation.

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash used in operations for the first nine months of fiscal 2022 was $12,295 compared to cash provided by operations of $13,677 for the first nine months of fiscal 2021, representing a decrease of $25,972 in cash flows from operations. Cash provided by the operating activities of our discontinued operations was $1,681 for the first nine months of fiscal 2022 compared to $3,231 for the prior year period, a decline of $1,550 as Zenith only operated during the first quarter of fiscal 2022. Excluding the decline in operating cash flow from discontinued operations, cash flows from continuing operations declined $24,422 from the prior year period. Cash flows from operating activities during the first nine months of fiscal 2022 included the payment of $20,722 in estimated taxes (net of refunds) compared with only $626 for the prior year period, the increase primarily related to the taxable gain on the sale of Zenith. In addition, cash flows from the collection of retail customer deposits declined $22,522 compared to the first nine months of 2021 as the pace of written orders has slowed compared to the prior year and we continue to reduce our retail order backlog. Changes in working capital for the first nine months of fiscal 2022 were favorably impacted by slower growth in our investment in inventory as compared to the prior year period.

 

Our overall cash position increased by $32,496 during the first nine months of fiscal 2022, compared to a decline of $7,188 during the first nine months of fiscal 2021, an increase of $39,684 from the prior year period. Excluding the overall cash flow from discontinued operations, overall cash flow from continuing operations increased $38,146 over the prior year period. Offsetting the decline in cash flows from operations, net cash flows from investing activities during the first nine months of fiscal 2022 increased $82,279 to $74,066 of cash provided by investing activities compared to net cash used in investing activities of $8,213 for the prior year period. This increase was primarily due to net proceeds of $84,534 received from the sale of Zenith and net proceeds of $8,217 received from the sale of retail real estate in Houston, Texas, partially offset by a $10,125 increase in capital expenditures over the prior year, including our purchase of our new retail store site in Tampa, Florida. Net cash used in financing activities during the first nine months of 2022 increased $16,623 to a net use of $29,275 as compared to a net use of $12,652 for the prior year period, primarily due to a special dividend of $14,494 declared and paid during the second quarter of 2022 and a $4,697 increase in share repurchases to $10,263 during the first nine months of fiscal 2022 as compared to $5,566 repurchased during the first nine months of fiscal 2021. On March 9, 2022, our Board of Directors increased the amount authorized under our existing share repurchase plan to $40,000, of which $30,857 remains available for future purchases as of August 27, 2022. With cash and cash equivalents and short-term investments totaling $84,585 on hand at August 27, 2022, expected future operating cash flows and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Debt and Other Obligations

 

Our bank credit facility provides for a line of credit of up to $25,000. At August 27, 2022, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069. In addition, we had outstanding standby letters of credit with another bank totaling $325 at August 27, 2022. The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.5% and is unsecured. Our bank charges a fee of 0.25% on the daily unused balance of the line, payable quarterly. Under the terms of the facility, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis:

 

 

Consolidated fixed charge coverage ratio of not less than 1.4 times,

 

 

Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and

 

 

Minimum tangible net worth of $140,000.

 

We were in compliance with these covenants at August 27, 2022 and expect to remain in compliance for the foreseeable future. The credit facility will mature on January 27, 2025, at which time any amounts outstanding under the facility will be due.

 

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 used in our wholesale manufacturing operations. We also lease local delivery trucks used in our retail segment. The present value of our obligations for leases with terms in excess of one year at August 27, 2022 is $104,899 and is included in our accompanying condensed consolidated balance sheet at August 27, 2022. We were contingently liable under licensee lease obligation guarantees in the amount of $1,871 at August 27, 2022. Remaining terms under these lease guarantees range from approximately one to three years. See Note 10 to our condensed consolidated financial statements for additional details regarding our lease guarantees.

 

Investment in Retail Real Estate

 

We have a substantial investment in real estate acquired for use as retail locations and occupied by Company-owned retail stores, including a site in Tampa, Florida recently purchased for $7,668 which is expected to open for business during the second quarter of fiscal 2023. Such real estate is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and consists of eight properties with an aggregate square footage of 203,465 and a net book value of $21,168 at August 27, 2022.

 

During the third quarter of fiscal 2022, sold one of our Company-owned store locations in Houston, Texas for $8,217 net of closing costs. The sale closed on June 24, 2022, and we expect to vacate the premises early in the fourth quarter of fiscal 2022. This sale, together with our recent purchase of real property in Tampa, Florida, will be treated as an exchange of like-kind property under Section 1031 of the Internal Revenue Code of 1986, as amended, for the purpose of deferring the taxable gain of approximately $4,300 arising from the sale of the Houston property.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended November 27, 2021.

 

Off-Balance Sheet Arrangements

 

We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. In addition, we have guaranteed certain lease obligations of licensee operators for some of their store locations. See Note 10 to our condensed consolidated financial statements for further discussion of lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.

 

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, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations. See Note 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of August 27, 2022.

 

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk:

 

We are exposed to market risk from changes in the value of foreign currencies. Substantially all of our imports purchased outside of North America are denominated in U.S. dollars. Therefore, we believe that gains or losses resulting from changes in the value of foreign currencies relating to foreign purchases not denominated in U.S. dollars would not be material to our results from operations in fiscal 2022.

 

We are exposed to market risk from changes in the cost and availability of raw materials used in our manufacturing processes, principally wood, woven fabric, and foam products.  The cost of foam products, which are petroleum-based, is sensitive to changes in the price of oil.

 

We have potential exposure to market risk related to conditions in the commercial real estate market. Our retail real estate holdings of $21,168 at August 27, 2022 for Company-owned stores could suffer significant impairment in value if we are forced to close additional stores and sell or lease the related properties during periods of weakness in certain markets. Additionally, if we are required to assume responsibility for payment under the lease obligations of $1,871 which we have guaranteed on behalf of licensees as of August 27, 2022 we may not be able to secure sufficient sub-lease income in the current market to offset the payments required under the guarantees. We are also exposed to risk related to conditions in the commercial real estate rental market with respect to the right-of-use assets we carry on our balance sheet for leased retail store locations, manufacturing and warehouse facilities. At August 27, 2022, the unamortized balance of such right-of-use assets used in continuing operations totaled $86,053. Should we have to close or otherwise abandon one of these leased locations, we could incur additional impairment charges if rental market conditions do not support a fair value for the right of use asset in excess of its carrying value.

 

Item 4. Controls and Procedures:

 

The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Page 34 of 36

 

PART II - OTHER INFORMATION

BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

 

Item 1. Legal Proceedings

 

None

 

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

The following table summarizes the stock repurchase activity by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act, for the three and nine months ended August 27, 2022 and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program:

 

   

Total
Shares
Purchased

   

Average
Price Paid

   

Total Number of Shares Purchased as Part of
Publicly Announced Plans
or Programs (1)

   

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)

 
                                 

May 29 - July 2, 2022

    32,096     $ 15.92       32,096     $ 31,967  

July 3 - July 30, 2022

    -     $ -       -     $ 31,967  

July 31 - August 27, 2022

    54,000     $ 20.54       54,000     $ 30,857  

 

(1)

The Company is authorized to repurchase Company stock under a plan which was originally announced in 1998. On March 9, 2022, the Board of Directors increased the remaining limit of the repurchase plan to $40,000. At August 27, 2022, $30,857 remained available for share repurchases under the plan.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 6. Exhibits

 

a.

Exhibits:

 

Exhibit 3a – Articles of Incorporation as amended to date are incorporated herein by reference to the Exhibit to Form 10-Q for the fiscal quarter ended February 28, 1994.

 

Exhibit 3b – By-laws as amended to date are incorporated herein by reference to Exhibit 3 to Form 8-K filed with the SEC on January 19, 2021.

 

Exhibit 4 – Registrant hereby agrees to furnish the SEC, upon request, other instruments defining the rights of holders of long-term debt of the Registrant.

 

Exhibit 31a – Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31b – Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32a – Chief Executive Officer’s certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32b – Chief Financial Officer’s certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101.INS Inline XBRL Instance

 

Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema

 

Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation

 

Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition

 

Exhibit 101.LAB Inline XBRL Taxonomy Extension Labels

 

Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation

 

Exhibit 104. Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

Page 35 of 36

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

 

 

 

/s/

Robert H. Spilman, Jr.

 

Robert H. Spilman, Jr., Chairman and Chief Executive Officer

September 29, 2022

 

 

 

/s/

J. Michael Daniel

 

J. Michael Daniel, Senior Vice President and Chief Financial Officer

September 29, 2022

 

 

 

Page 36 of 36