bset20130623_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 1, 2013

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________________ to _______________________

 

Commission File No. 0-209

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

Virginia

 

54-0135270

 

 

(State or other jurisdiction

 

(I.R.S. Employer

 

 

of incorporation or organization) 

 

Identification No.)

 

                                                                                                                                                                                                                                                                                                   

3525 Fairystone Park Highway

Bassett, Virginia 24055

(Address of principal executive offices)

(Zip Code)

 

(276) 629-6000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes          X            No                       

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes          X             No                       

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large Accelerated Filer                          Accelerated Filer           X            Non-accelerated Filer                          Smaller Reporting Company                      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes                         No           X          

 

At June 28, 2013, 10,855,014 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 June 1, 2013 (unaudited) and November 24, 2012 and for the three and six months ended June 1, 2013 (unaudited) and May 26, 2012 (unaudited)  

 

 

 

 

Condensed Consolidated Statements of Income and Retained Earnings

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

4

Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6

 

Notes to Condensed Consolidated Financial Statements

7

2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
3. Quantitative and Qualitative Disclosures About Market Risk 31
4. Controls and Procedures 32

PART II - OTHER INFORMATION

1. Legal Proceedings 34
2. Unregistered Sales of Equity Securities and Use of Proceeds 34
3. Defaults Upon Senior Securities 34
6. Exhibits 34

 

 
Page 2 of 36

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE PERIODS ENDED JUNE 1, 2013 AND MAY 26, 2012 – UNAUDITED

(In thousands except per share data)

 

 

Quarter Ended

Six Months Ended

 

June 1,

May 26,

June 1,

May 26,

 

2013

2012

2013

2012

Net sales

  $ 81,223   $ 67,454   $ 161,072   $ 128,422

Cost of sales

    39,397     31,793     77,886     61,090

Gross profit

    41,826     35,661     83,186     67,332
                                 

Selling, general and administrative expenses

    38,416     33,435     77,412     64,463

Restructuring and asset impairment charges

    -     475     -     711

Lease exit costs

    -     131     -     359

Income from operations

    3,410     1,620     5,774     1,799
                                 

Income from Continued Dumping & Subsidy Offset Act

    -     9,010     -     9,010

Other loss, net

    (129 )     (677 )     (797 )     (1,924 )

Income before income taxes

    3,281     9,953     4,977     8,885
                                 

Income tax expense

    1,328     1,911     2,044     1,439

Net income

  $ 1,953   $ 8,042   $ 2,933   $ 7,446
                                 

Retained earnings-beginning of period

    104,757     95,094     104,319     96,331

Purchase and retirement of common stock

    -     (156 )     -     (234 )

Cash dividends

    (543 )     (563 )     (1,085 )     (1,126 )

Retained earnings-end of period

  $ 106,167   $ 102,417   $ 106,167   $ 102,417
                                 

Basic earnings per share

  $ 0.18   $ 0.72   $ 0.27   $ 0.67
                                 

Diluted earnings per share

  $ 0.18   $ 0.71   $ 0.27   $ 0.66
                                 

Dividends per share

  $ 0.05   $ 0.05   $ 0.10   $ 0.10

 

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 JUNE 1, 2013 AND MAY 26, 2012 – UNAUDITED

 

 

Quarter Ended

Six Months Ended

 

June 1,

May 26,

June 1,

May 26,

 

2013

2012

2013

2012

                                 

Net income

  $ 1,953   $ 8,042   $ 2,933   $ 7,446

Other comprehensive income (loss):

                               

Net change in unrealized holding gains

    -     23     -     77

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

    19     8     38     16

Changes in related deferred tax effects

    -     -     -     (511 )
                                 

Other comprehensive income (loss), net of tax

    19     31     38     (418 )
                                 

Total comprehensive income

  $ 1,972   $ 8,073   $ 2,971   $ 7,028

 

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

JUNE 1, 2013 AND NOVEMBER 24, 2012

(In thousands)

 

 

(Unaudited)

       

Assets

June 1, 2013

November 24, 2012

Current assets

               

Cash and cash equivalents

  $ 43,571   $ 45,566

Short-term investments

    1,125     -

Accounts receivable, net

    15,444     15,755

Inventories, net

    55,994     57,916

Deferred income taxes

    7,116     6,832

Other current assets

    8,580     6,439

Total current assets

    131,830     132,508
                 

Property and equipment, net

    57,922     56,624
                 

Retail real estate

    12,485     12,736

Deferred income taxes

    9,974     10,485

Other

    13,392     14,827

Total long-term assets

    35,851     38,048

Total assets

  $ 225,603   $ 227,180
                 

Liabilities and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 18,883   $ 22,405

Accrued compensation and benefits

    6,497     6,926

Customer deposits

    14,341     12,253

Dividends payable

    -     542

Other accrued liabilities

    10,285     10,454

Total current liabilities

    50,006     52,580
                 

Long-term liabilities

               

Post employment benefit obligations

    11,183     11,577

Real estate notes payable

    2,927     3,053

Other long-term liabilities

    2,076     2,690

Total long-term liabilities

    16,186     17,320
                 
                 

Stockholders’ equity

               

Common stock

    54,275     54,184

Retained earnings

    106,167     104,319

Additional paid-in capital

    154     -

Accumulated other comprehensive loss

    (1,185 )     (1,223 )

Total stockholders' equity

    159,411     157,280

Total liabilities and stockholders’ equity

  $ 225,603   $ 227,180

 

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 JUNE 1, 2013 AND MAY 26, 2012 – UNAUDITED

(In thousands)

 

 

Six Months Ended

 

June 1, 2013

May 26, 2012

Operating activities:

               

Net income

  $ 2,933   $ 7,446

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

               

Depreciation and amortization

    2,890     2,615

Equity in undistributed income of investments and unconsolidated affiliated companies

    (282 )     (134 )

Provision for restructuring and asset impairment charges

    -     711

Non-cash portion of lease exit costs

    -     359

Other than temporary impairment on investments

    -     806

Deferred income taxes

    353     107

Other, net

    (491 )     330

Changes in operating assets and liabilities:

               

Accounts receivable

    243     337

Inventories

    1,922     (2,786 )

Other current assets

    (2,101 )     (64 )

Accounts payable and accrued liabilities

    (2,644 )     (1,465 )

Net cash provided by operating activities

    2,823     8,262
                 

Investing activities:

               

Purchases of property and equipment

    (5,184 )     (4,352 )

Proceeds from sales of property and equipment

    955     -

Proceeds from sale of interest in affiliate

    2,348     1,410

Proceeds from sales of investments

    -     875

Purchases of investments

    (1,125 )     (857 )

Other

    5     13

Net cash used in investing activities

    (3,001 )     (2,911 )
                 

Financing activities:

               

Repayments of real estate notes payable

    (126 )     (100 )

Issuance of common stock

    462     157

Repurchases of common stock

    (526 )     (1,250 )

Cash dividends

    (1,627 )     (6,626 )

Net cash used in financing activities

    (1,817 )     (7,819 )

Change in cash and cash equivalents

    (1,995 )     (2,468 )

Cash and cash equivalents - beginning of period

    45,566     69,601
             

Cash and cash equivalents - end of period

  $ 43,571   $ 67,133

 

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

JUNE 1, 2013

(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 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 operating control. The equity method of accounting is used for our investment in an affiliated company in which we exercise significant influence but do not maintain control. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

 

Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks. The current fiscal year ending November 30, 2013 is a 53-week year, with the additional week being included in our first fiscal quarter. Accordingly, the information presented below includes 27 weeks of operations for the six months ended June 1, 2013 as compared with 26 weeks included in the six months ended May 26, 2012.

 

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 six months ended June 1, 2013 are not necessarily indicative of results for the full fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 24, 2012.

 

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rate for the three and six months ended June, 2013 differs from the federal statutory rate primarily due to the effects of state income taxes and permanent differences resulting from non-deductible expenses.

 

Due to the losses incurred prior to fiscal 2011, we were in a cumulative loss position for the three years preceding fiscal 2011 which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While our long-term financial outlook remained positive, we concluded that our ability to rely on our long-term outlook and forecasts as to future taxable income was limited due to uncertainty created by the weight of the negative evidence. As a result, we previously recorded a valuation allowance on certain of the deferred tax assets. In fiscal 2011, due to the gain recognized on the sale of our interest in International Home Furnishings Center, Inc. (“IHFC”), we were able to utilize net operating loss carryforwards and credits to significantly offset the taxable gain, resulting in a significant reduction of the valuation allowance. However, as the gain on the sale of IHFC did not represent a source of recurring future taxable income, we continued to record a valuation allowance against substantially all of our deferred tax assets as of November 26, 2011. Due to our positive earnings during fiscal 2012, and the absence of any significant negative evidence to the contrary, we concluded that we could rely on our positive long-term outlook and forecasts as to future taxable income in evaluating our ability to realize our deferred tax assets. Accordingly, the reserve against the majority of our deferred tax assets was removed in fiscal 2012.

  

 
Page 7 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

The effective tax rate for the quarter ended May 26, 2012 differed from the blended statutory rate primarily due to the year-to-date impact of releasing a portion of the valuation allowance against our deferred tax assets. The reduction in the valuation allowance was primarily due to favorable provision-to-return adjustments related to our 2011 Federal income tax return. These adjustments were related to changes in estimates for temporary differences which created additional tax benefit due to the resulting decline in our deferred tax asset balance and a corresponding decline in the valuation allowance. The valuation allowance was also reduced in part due to the recognition of income from the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) (Note 7), which provided a source of taxable income that allowed for the realization of a portion of our net deferred tax assets. The favorable impact of reducing our valuation allowance was partially offset by the accrual of penalties and interest associated with certain unrecognized tax benefits. For the six months ended May 26, 2012, the effective rate differed from the blended statutory rate due to the release of a portion of the valuation allowance against our deferred taxes as noted above, as well as the recognition of a tax benefit for a reduction of tax effects on our other comprehensive income, partially offset by the accrual of penalties and interest associated with certain unrecognized tax benefits.

 

 

3. Accounts Receivable

 

Accounts receivable consists of the following:

 

 

 

June 1,

2013

November 24,

2012

Gross accounts receivable

  $ 16,840   $ 17,544

Allowance for doubtful accounts

    (1,396 )     (1,789 )

Accounts receivable, net

  $ 15,444   $ 15,755

 

 

At June 1, 2013 and November 24, 2012 approximately 65% and 52%, respectively, of gross accounts receivable, and approximately 73% and 84%, respectively, of the allowance for doubtful accounts were attributable to amounts owed to us by our licensees. Our remaining receivables are primarily due from national account customers and traditional distribution channel customers.

 

 

Activity in the allowance for doubtful accounts was as follows:

 

 

Balance at November 24, 2012

  $ 1,789

Additions charged to expense

    68

Write-offs and other deductions

    (461 )

Balance at June 1, 2013

  $ 1,396

 

 

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 10.

 

 
Page 8 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

4. Inventories

 

Inventories are valued at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories are determined using the first-in, first-out (FIFO) method.

 

Inventories were comprised of the following:

 

 

June 1,

2013

November 24,

2012

Wholesale finished goods

  $ 31,748   $ 33,110

Work in process

    343     273

Raw materials and supplies

    8,326     8,586

Retail merchandise

    24,243     23,938

Total inventories on first-in, first-out method

    64,660     65,907

LIFO adjustment

    (7,317 )     (6,902 )

Reserve for excess and obsolete inventory

    (1,349 )     (1,089 )
    $ 55,994   $ 57,916

 

 

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

 

 

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

 

 

Wholesale

Segment

Retail

Segment

Total

                         

Balance at November 24, 2012

  $ 715   $ 374   $ 1,089

Additions charged to expense

    1,036     269     1,305

Write-offs

    (777 )     (268 )     (1,045 )

Balance at June 1, 2013

  $ 974   $ 375   $ 1,349

 

 

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 2013 and do not anticipate that our methodology is likely to change in the future. A plus or minus 10% change in our inventory reserves would not have been material to our financial statements for the periods presented.

 

 
Page 9 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

5. Unconsolidated Affiliated Companies

 

We own 49% of Zenith Freight Lines, LLC, (“Zenith”) which provides domestic transportation and warehousing services primarily to furniture manufacturers and distributors and also provides home delivery services to furniture retailers. We have contracted with Zenith to provide for substantially all of our domestic freight, transportation and warehousing needs for the wholesale business. In addition, Zenith provides home delivery services for several of our Company-owned retail stores. Our investment in Zenith was $6,765 and $6,484 at June 1, 2013 and November 24, 2012, respectively. At June 1, 2013 and November 24, 2012, we owed Zenith $1,879 and $2,547, respectively, for services rendered to us. We believe the transactions with Zenith are at current market rates. We recorded the following income from Zenith in other loss, net, in our condensed consolidated statements of income and retained earnings:

 

 

Quarter Ended

Six Months Ended

 

June 1,

2013

May, 26,

2012

June 1,

2013

May, 26,

2012

Equity in income of Zenith

  $ 168   $ 119   $ 282   $ 134

 

In connection with the sale of our interest in IHFC on May 2, 2011, $2,348 and $4,696 remained held in escrow at June 1, 2013 and November 24, 2012, respectively, to indemnify the purchaser with respect to various contingencies. Half of this escrow was released to us during the six months ended June 1, 2013, with the remainder, provided it is not used for contingencies, being due for release to us during 2014 following the third anniversary of the sale. Previously, during the six months ended May 26, 2012, we received $1,410 from the release of a separate tax indemnification escrow in connection with the IHFC sale.

 

The escrow receivable from the sale of IHFC is included in our condensed consolidated balance sheets as follows:

 

 

June 1,

2013

November 24,

2012

                 

Other current assets

  $ 2,348   $ 2,348

Other assets

    -     2,348
                 

Total IHFC escrow receivable

  $ 2,348   $ 4,696

 

 

6. Real Estate Notes Payable and Bank Credit Facility

 

Real Estate Notes Payable

 

The real estate notes payable are summarized as follows:

 

 

June 1,

2013

November 24,

2012

Real estate notes payable

  $ 3,176   $ 3,294

Current portion of real estate notes payable

    (249 )     (241 )
    $ 2,927   $ 3,053

 

Certain of our retail real estate properties have been financed through commercial mortgages with interest rates of 6.73%. These mortgages are collateralized by the respective properties with net book values totaling approximately $6,329 and $6,397 at June 1, 2013 and November 24, 2012, respectively. The portion of these mortgages due within one year, $249 and $241 as of June 1, 2013 and November 24, 2012, respectively, is included in other current liabilities in the accompanying condensed consolidated balance sheets. The long-term portion, $2,927 and $3,053 as of June 1, 2013 and November 24, 2012, respectively, is presented as real estate notes payable in the condensed consolidated balance sheets.

 

 
Page 10 of 36

 

 

 PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

The fair value of these mortgages was $3,176 and $3,668 at June 1, 2013 and November 24, 2012, respectively. In determining the fair value, we utilized current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 10.

 

 

Bank Credit Facility

 

On December 18, 2012, we entered into a new credit facility with our bank extending us a line of credit of up to $15,000, replacing our previous $3,000 line of credit. This new line is secured by our accounts receivable and inventory. The new facility contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the new agreement and expect to remain in compliance for the foreseeable future.

 

At June 1, 2013, we had $1,966 outstanding under standby letters of credit, leaving availability under our credit line of $13,034.

 

 

7. Contingencies

 

 

Legal and Environmental 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.

 

In 2009, our former vendor, Colonial Trading, Inc. (“Colonial”), filed a lawsuit against us alleging, among other things, breach of contract by the Company after we cancelled orders for cribs following product recalls.  We filed counterclaims for breach of contract and warranty.  On August 1, 2012, a jury returned a verdict in favor of Colonial, and in October 2012 judgment was entered in the amount of $1,449. Both Bassett and Colonial appealed; with Bassett seeking a new trial for damages for breach of express warranty, among other things, and Colonial seeking, among other things, to treble its breach of contract damages.  On June 21, 2013, the Court of Appeals denied both appeals and affirmed the judgment. The Company is evaluating whether to seek a rehearing or pursue a further appeal. Colonial’s motion seeking attorney’s fees remains pending in the trial court. We currently have sufficient reserves to cover the existing judgment amount.

 

2012 CDSOA Income and Return Contingency

 

During the three months ended May 26, 2012, the U.S. Customs and Border Protection (“Customs”) made a distribution to us of $9,010 representing our share of the final distribution of duties that have been withheld by Customs under the CDSOA. We have received annual distributions in past years under the CDSOA as a result of our support of an antidumping petition on imports of wooden bedroom furniture from China. Certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the United States Court of International Trade challenging the CDSOA's “support requirement” and seeking to share in the distributions. As a result, Customs held back a portion of those distributions (“the Holdback”) pending resolution of the Non-Supporting Producers' claims. The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit (“the Court of Appeals”). While the Court of Appeals denied the Non-Supporting Producers request for an injunction to block the final distribution of the Holdback and allowed Customs to distribute the funds in April of 2012, the appeal is still pending before the court, which held oral arguments on March 8, 2013 concerning the appeal. Should the Court of Appeals reverse the decisions of the United States Court of International Trade which ordered the release of the final distribution, it is possible that Customs may seek to have us return all or a portion of our share of the distribution. However, we believe that the chance Customs will seek and be entitled to obtain a return is remote.

 

 
Page 11 of 36

 

 

 PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

Lease Commitments and Guarantees

 

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. We had obligations of $83,605 and $72,800 at June 1, 2013 and November 24, 2012, respectively, for future minimum lease payments under non-cancelable operating leases having initial terms in excess of one year.

 

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $1,783 and $2,007 at June 1, 2013 and November 24, 2012, respectively.

 

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory) and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at June 1, 2013 and November 24, 2012 was not material.

 

 

8. Post Employment Benefit Obligations

 

Supplemental Executive Retirement Defined Benefit Plan (SERP)

 

We have an unfunded Supplemental Retirement Income Plan that covers one current and certain former executives. The liability for this plan was $9,457 and $9,805 as of June 1, 2013 and November 24, 2012, respectively, and is recorded as follows in the condensed consolidated balance sheets:

 

 

June 1,

2013

November 24,

2012

Other accrued liabilities

  $ 858   $ 843

Post employment benefit obligations

    8,599     8,962
                 

Total pension liability

  $ 9,457   $ 9,805

 

Components of net periodic pension costs are as follows:

 

 

Quarter Ended

Six Months Ended

 

June 1,

2013

May 26,

2012

June 1,

2013

May 26,

2012

Service cost

  $ 17   $ 14   $ 35   $ 27

Interest cost

    88     94     175     188

Amortization of transition obligation

    10     11     21     21

Amortization of loss

    21     3     41     5
                                 

Net periodic pension cost

  $ 136   $ 122   $ 272   $ 241

 

 
Page 12 of 36

 

 

 PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

Deferred Compensation Plan

 

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. We recognized expense under this plan as follows:

 

 

Quarter Ended

Six Months Ended

 

June 1,

2013

May 26,

2012

June 1,

2013

May 26,

2012

Deferred compensation plan expense

  $ 72   $ 78   $ 144   $ 156

 

Our liability under this plan was $2,584 and $2,615 as of June 1, 2013 and November 24, 2012, respectively, and is reflected in post employment benefit obligations.

 

 

9. 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 June 1, 2013:

                       
                         

Basic earnings per share

  $ 1,953     10,712,718   $ 0.18

Add effect of dilutive securities:

                       

Options and restricted shares

    -     173,131     -

Diluted earnings per share

  $ 1,953     10,885,849   $ 0.18
                         

For the quarter ended May 26, 2012:

                       
                         

Basic earnings per share

  $ 8,042     11,117,399   $ 0.72

Add effect of dilutive securities:

                       

Options and restricted shares

    -     102,765     (0.01 )

Diluted earnings per share

  $ 8,042     11,220,164   $ 0.71
                         
                         

For the six months ended June 1, 2013:

                       
                         

Basic earnings per share

  $ 2,933     10,705,711   $ 0.27

Add effect of dilutive securities:

                       

Options and restricted shares

     -       165,820     -

Diluted earnings per share

  $ 2,933     10,871,531   $ 0.27
                         

For the six months ended May 26, 2012:

                       
                         

Basic earnings per share

  $ 7,446     11,138,505   $ 0.67

Add effect of dilutive securities:

                       

Options and restricted shares

     -       91,060     (0.01 )

Diluted earnings per share

  $ 7,446     11,229,565   $ 0.66

 

 
Page 13 of 36

 

 

 PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

For the three and six months ended June 1, 2013 and May 26, 2012, the following potentially dilutive shares were excluded from the computation as their effect was anti-dilutive:

 

 

Quarter Ended

Six Months Ended

 

June 1,

2013

May 26,

2012

June 1,

2013

May 26,

2012

Stock options

    472,500     724,500     472,500     724,500

Unvested restricted shares

    11,295     11,184     11,295     11,184
                                 

Total anti-dilutive shares

    483,795     735,684     483,795     735,684

 

 

10. Financial Instruments and Fair Value Measurements

 

Our financial instruments include cash and cash equivalents, accounts receivable, short-term investments, cost and equity method investments, accounts payable and long-term debt. Because of their short maturities, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair values. Our cost and equity method investments generally involve entities for which it is not practical to determine fair values.

 

Our short-term investments at June 1, 2013 consist of certificates of deposit (CDs) with one-year terms, bearing interest at rates ranging from 0.275% to 1.00%, and all maturing within twelve months following June 1, 2013. 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 June 1, 2013 approximates their fair value.

 

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

 

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

 

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

 

Level 3 Inputs– Instruments with primarily unobservable value drivers.

 

Our investment in the Fortress Value Recovery Fund I, LLC (“Fortress”) has been valued at fair value primarily based on the net asset values which are determined by the fund manager, less a discount for illiquidity. Due to significant declines in net asset values during the first quarter of 2012, the highly illiquid nature of the investment and the high degree of uncertainty regarding our ability to recover our investment in the foreseeable future, we have fully impaired the carrying amount of this investment resulting in a charge of $806 during the six months ended May 26, 2012, which is included in other loss, net, in the condensed consolidated statements of income and retained earnings. The inputs into our estimate of the fair value of our investment in Fortress reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy noted above.

 

 
Page 14 of 36

 

 

 PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

The carrying values and approximate fair values of certain financial instruments were as follows:

 

 

 

June 1, 2013

November 24, 2012

 

Carrying

Value

Fair

Value

Carrying

Value

Fair

Value

Assets:

                               

Cash and cash equivalents

  $ 43,571   $ 43,571   $ 45,566   $ 45,566

Accounts receivable, net

    15,444     15,444     15,755     15,755

Short-term investments

    1,125     1,125     -     -
                                 

Liabilities:

                               

Accounts payable

  $ 18,883   $ 18,883   $ 22,405   $ 22,405

Real estate notes payable

    3,176     3,176     3,294     3,668

 

11. Restructuring, Asset Impairment and Other Charges

 

During the three and six months ended May 26, 2012, our income from operations included restructuring and asset impairment charges totaling $475 and $711, respectively, and lease exit costs of $131 and $359, respectively, as more fully described below.

 

Restructuring and Asset Impairment Charges

 

During the three and six months ended May 26, 2012, we incurred costs of $89 and $203, respectively, associated with the demolition of a previously closed manufacturing facility in Bassett, Virginia; non-cash charges of $385 associated with the write-down of a previously closed manufacturing facility in Mt. Airy, North Carolina; and $-0- and $123, respectively, associated with the write off of abandoned leasehold improvements following the relocation of a retail store near Richmond, Virginia.

 

The determination of amount of asset impairments recognized involves making estimates of the fair value of the impaired assets. 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 10.

 

Lease Exit Costs

 

During the six months ended May 26, 2012, we incurred non-cash charges of $228 for lease exit costs associated with the relocation of a retail store near Richmond, Virginia. During the three and six months ended May 26, 2012 we incurred $131 of non-cash charges to reflect reduced estimates of recoverable lease costs at several previously closed retail locations.

 

 
Page 15 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

The following table summarizes the activity related to our accrued lease exit costs:

 

Balance at November 24, 2012

  $ 2,614
         

Payments on unexpired leases

    (913 )

Adjustments to previous estimates

    (42 )

Accretion of interest on obligations and other

    54
         

Balance at June 1, 2013

  $ 1,713
         

Current portion included in other accrued liabilities

  $ 1,176

Long-term portion included in other long-term liabilities

    537
    $ 1,713

 


12. Recent Accounting Pronouncements

 

In February 2013, the FASB issued Accounting Standards Update No. 2013-02 (ASU 2013-02), which updates the guidance in ASC Topic 220, Comprehensive Income. The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in ASU 2013-02 seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. This guidance became effective for us prospectively beginning with our second quarter for fiscal 2013. The adoption of this guidance did not have a material impact upon our financial position or results of operations.

 

In March 2013, the FASB issued Accounting Standards Update No. 2013-04 (ASU 2013-04), which updated the guidance in ASC Topic 405, Liabilities. The amendments in ASU 2013-04 generally provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This guidance will become effective for us as of the beginning of our 2015 fiscal year. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

 

 

13. Segment Information

 

We have strategically aligned our business into three reportable segments: Wholesale, Retail and Investments/Real Estate. 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 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.

 

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

 

 
Page 16 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

Our investments and real estate segment consists of our short-term investments, our holdings of retail real estate leased or previously leased as licensee stores and our equity investment in Zenith. We also hold an investment in Fortress, which we fully reserved during the first quarter of fiscal 2012. Although this segment does not have operating earnings, income from the segment is included in other loss, net, in our condensed consolidated statements of income and retained earnings.

 

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores. Inter-company income elimination represents 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 end retail consumer. The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate.

 

The following table presents our segment information:

 

 

Quarter Ended

Six Months Ended

 

June 1,

2013

May 26,

2012

June 1,

2013

May 26,

2012

Net Sales

                               

Wholesale

  $ 53,933   $ 45,940   $ 107,893   $ 88,550

Retail

    51,470     42,805     101,427     81,622

Inter-company elimination

    (24,180 )     (21,291 )     (48,248 )     (41,750 )

Consolidated

  $ 81,223   $ 67,454   $ 161,072   $ 128,422
                                 

Income (loss) from Operations

                               

Wholesale

  $ 2,849   $ 2,033   $ 5,850   $ 3,864

Retail

    277     66     (294 )     (933 )

Inter-company elimination

    284     127     218     (62 )

Restructuring and asset impairment charges

    -     (475 )     -     (711 )

Lease exit costs

    -     (131 )     -     (359 )

Consolidated

  $ 3,410   $ 1,620   $ 5,774   $ 1,799
                                 

Depreciation and Amortization

                               

Wholesale

  $ 332   $ 285   $ 673   $ 566

Retail

    999     875     1,966     1,771

Investments & real estate

    125     139     251     278

Consolidated

  $ 1,456   $ 1,299   $ 2,890   $ 2,615
                                 

Capital Expenditures

                               

Wholesale

  $ 1,474   $ 642   $ 2,122   $ 1,035

Retail

    1,089     1,792     3,062     3,307

Investments & real estate

    -     -     -     10

Consolidated

  $ 2,563   $ 2,434   $ 5,184   $ 4,352

 

Identifiable Assets

As of

June 1,

As of

November 24,

Wholesale

  $ 140,582   $ 145,861

Retail

    71,411     68,583

Investments & real estate

    13,610     12,736

Consolidated

  $ 225,603   $ 227,180

 

 
Page 17 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

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

 

Overview

 

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as the Company’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission, which provides a more thorough discussion of the Company’s products and services, industry outlook and business trends.

 

Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks. The current fiscal year ending November 30, 2013 is a 53-week year, with the additional week being included in our first fiscal quarter. Accordingly, the information presented below includes 27 weeks of operations for the six months ended June 1, 2013 as compared with 26 weeks included in the six months ended May 26, 2012.

 

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, specialty stores and mass merchants. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 111-year history has instilled the principles of quality, value and integrity in everything that we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and to meet the demands of a global economy.

 

With 89 BHF stores at June 1, 2013, we have leveraged our strong brand name in furniture into a network of corporate and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  We created our store program in 1997 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.  The store features custom order furniture ready for delivery in less than 30 days, more than 1,000 upholstery fabrics, free in-home design visits and coordinated decorating accessories.  We believe that our capabilities in custom furniture have become unmatched in recent years. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship and the speed of its delivery.  The selling philosophy in the stores is based on building strong long term relationships with each customer.  Sales people are referred to as Design Consultants and are each trained to evaluate customer needs and provide comprehensive solutions for their home decor. We continue to strengthen the sales and design talent within our Company-owned retail stores.  During 2011, our Design Consultants completed extensive Design Certification training coursework. This coursework has strengthened their skills related to our house call and design business, and is intended to increase business with our most valuable customers.

 

In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers, specialty stores and mass merchants. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.  

 

In September of 2011, we announced the formation of a strategic partnership with HGTV (Home and Garden Television), a division of Scripps Networks, LLC, which combines our 111 year heritage in the furniture industry with the penetration of 99 million households in the United States that the HGTV network enjoys today.  This alliance encompasses strategies for both the BHF store network and other open market sales channels. For the store network, the in-store design centers have been co-branded with HGTV to more forcefully market the concept of a “home makeover”, an important point of differentiation for our stores that also mirrors much of the programming content on the HGTV network. We believe the new co-branded design centers coupled with the targeted national advertising on HGTV have played a key role in our improved comparable store sales during the fourth quarter of 2012 and the first six months of 2013.

 

 
Page 18 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

In addition, we have developed, in conjunction with HGTV, a new line of furniture that contains only the HGTV® Home Collection brand and will be primarily marketed through select furniture retailers. The HGTV® Home Collection furniture line currently consists of several wood collections with complementary upholstered furniture offerings. We expect to expand the upholstery offerings while reducing some of our wood offerings. Currently, 25 retailers with over 80 floors have the new furniture line. During the six months ended June 1, 2013, approximately 2.9% of our wholesale shipments were HGTV® Home Collection branded furniture. We are currently in discussions with several other retailers to carry the line.

 

Our store network included 55 Company-owned and operated stores and 34 licensee-owned stores at June 1, 2013. During the six months ended June 1, 2013, we opened new stores in Dallas, Texas, and Raleigh, North Carolina. The Raleigh store is only 3,000 square feet and represents a custom furniture shop concept that will be tested in a few additional markets. We also completed the repositioning of our Hartford, Connecticut location. Also during the first six months of fiscal 2013 two new licensee-owned stores were opened, one store in San Jose, California, and another store in Columbus, Ohio, and a licensee-owned store in Lynwood, Washington closed due to the expiration of its lease. We have begun a multi-year relocation process of many of our first generation stores that should result in locations more suitable to the current Bassett retail strategy. As part of this process, we plan to reposition five existing Company-owned stores during the nine months following June 1, 2013. In addition, we plan to open six new Company-owned stores within that same period.

 

The following table summarizes the changes in store count during the six months ended June 1, 2013:

 

 

November 24,

2012

Openings

Closed

Transfers

June 1,

2013

Company-owned stores

    53     2     -     -     55

Licensese-owned stores

    33     2     (1 )     -     34
                                         

Total

    86     4     (1 )     -     89

 

Our wholesale operations include an upholstery complex in Newton, North Carolina that produces a wide range of upholstered furniture. We believe that we are an industry leader with our quick-ship custom upholstery offerings. We also operate a custom dining manufacturing facility in Martinsville, Virginia. Most of our wood furniture and certain upholstery offerings are sourced from several foreign plants, primarily in Vietnam and Indonesia. We define imported product as fully finished product that is sourced internationally. For the first six months of 2013, approximately 47% of our wholesale sales were of imported product compared to 51% for the first six months of 2012.

 

Results of Operations – Three and six months ended June 1, 2013 compared with three and six months ended May 26, 2012:

 

Net sales, gross profit, selling, general and administrative (SG&A) expense, and income from operations were as follows for the periods ended June 1, 2013 and May 26, 2012:

 

Quarter Ended

Six Months Ended*

 

June 1, 2013

May 26, 2012

June 1, 2013

May 26, 2012

                                                                 

Net sales

  $ 81,223     100.0 %   $ 67,454     100.0 %   $ 161,072     100.0 %   $ 128,422     100.0 %

Gross profit

    41,826     51.5 %     35,661     52.9 %     83,186     51.6 %     67,332     52.4 %

SG&A expenses

    38,416     47.3 %     33,435     49.6 %     77,412     48.1 %     64,463     50.2 %

Restructuring and asset impairment charges

    -     0.0 %     475     0.7 %     -     0.0 %     711     0.5 %

Lease exit costs

    -     0.0 %     131     0.2 %     -     0.0 %     359     0.3 %
                                                                 

Income from operations

  $ 3,410     4.2 %   $ 1,620     2.4 %   $ 5,774     3.5 %   $ 1,799     1.4 %

 

* 27 weeks for fiscal 2013 as compared with 26 weeks for fiscal 2012.

 

 
Page 19 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

On a consolidated basis, we reported net sales for the second quarter of 2013 of $81,223, an increase of $13,769, or 20%, over the second quarter of 2012. Net sales for the six months ended June 1, 2013 were $161,072, an increase of $32,650, or 25%, over the first half of fiscal 2012. As noted above, the first half of 2013 consisted of 27 weeks while the first half of 2012 consisted of 26 weeks. On an average weekly basis, consolidated net sales for the first half of fiscal 2013 increased 21% over the comparable prior year period. Operating income for the three and six months ended June 1, 2013 increased by $1,790 and $3,975, respectively, over the comparable prior year periods driven primarily by higher sales in both the wholesale and retail segments. This was partially offset by higher selling, general and administrative expenses due primarily to the increased number of Company-owned stores, planned higher marketing and advertising costs to drive continued sales growth, and increased health care costs due to higher claim experience.

 

Restructuring and Asset Impairment Charges

 

During the three and six months ended May 26, 2012, we incurred costs of $89 and $203, respectively, associated with the demolition of a previously closed manufacturing facility in Bassett, Virginia; non-cash charges of $385 associated with the write-down of a previously closed manufacturing facility in Mt. Airy, North Carolina; and $-0- and $123, respectively, associated with the write off of abandoned leasehold improvements following the relocation of a retail store near Richmond, Virginia.

.

When analyzing our properties for potential impairment, we consider such qualitative factors as our experience in leasing and/or selling real estate properties as well as specific site and local market characteristics. Upon the closure of a Bassett Home Furnishings store, we generally write off all tenant improvements which are only suitable for use in such a store.

 

Lease Exit Costs

 

During the six months ended May 26, 2012, we incurred non-cash charges of $228 for lease exit costs associated with the relocation of a retail store near Richmond, Virginia. During the three and six months ended May 26, 2012 we incurred $131 of non-cash charges to reflect reduced estimates of recoverable lease costs at several previously closed retail locations.

 

 

Segment Information

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

 

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (licensee-owned stores and Company-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations 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.

 

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.

 

Investments and Real Estate. Our investments and real estate segment consists of our short-term investments, our holdings of retail real estate leased or previously leased as licensee stores and our equity investment in Zenith Freight Lines, LLC, (“Zenith”). We also hold an investment in the Fortress Value Recover Fund I, LLC (“Fortress”), which was fully impaired during the first quarter of fiscal 2012. Although this segment does not have operating earnings, income from the segment is included in other loss, net, in our condensed consolidated statements of income and retained earnings.

 

 
Page 20 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

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

 

 

Quarter Ended June 1, 2013

 

Wholesale

Retail

Eliminations

Consolidated

                                 

Net sales

  $ 53,933   $ 51,470   $ (24,180 )(1)   $ 81,223

Gross profit

    17,593     24,413     (180 )(2)     41,826

SG&A expense

    14,744     24,136     (464 )(3)     38,416

Income from operations

  $ 2,849   $ 277   $ 284   $ 3,410

 

 

Quarter Ended May 26, 2012

 

Wholesale

Retail

Eliminations

Consolidated

                                 

Net sales

  $ 45,940   $ 42,805   $ (21,291 )(1)   $ 67,454

Gross profit

    15,103     20,776     (218 )(2)     35,661

SG&A expense

    13,070     20,710     (345 )(3)     33,435

Income from operations (4)

  $ 2,033   $ 66   $ 127   $ 2,226

 

 

Six Months Ended June 1, 2013*

 

Wholesale

Retail

Eliminations

Consolidated

                                 

Net sales

  $ 107,893   $ 101,427   $ (48,248 )(1)   $ 161,072

Gross profit

    35,601     48,287     (702 )(2)     83,186

SG&A expense

    29,751     48,581     (920 )(3)     77,412

Income (loss) from operations

  $ 5,850   $ (294 )   $ 218   $ 5,774

 

 

Six Months Ended May 26, 2012*

 

Wholesale

Retail

Eliminations

Consolidated

                                 

Net sales

  $ 88,550   $ 81,622   $ (41,750 )(1)   $ 128,422

Gross profit

    28,645     39,446     (759 )(2)     67,332

SG&A expense

    24,781     40,379     (697 )(3)     64,463

Income (loss) from operations (4)

  $ 3,864   $ (933 )   $ (62 )   $ 2,869

 

(1)

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

(2)

Represents 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.

(4)

Excludes the effects of restructuring and asset impairment charges and lease exit costs. These charges are not allocated to our segments.

 

* 27 weeks for fiscal 2013 as compared with 26 weeks for fiscal 2012.

 

 
Page 21 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

The following is a discussion of operating results for our wholesale and retail segments:

 

Wholesale Segment

 

Results for the wholesale segment for the three and six months ended June 1, 2013 and May 26, 2012 are as follows:

 

 

Quarter Ended

Six Months Ended*

 

June 1, 2013

May 26, 2012

June 1, 2013

May 26, 2012

                                                                 

Net sales

  $ 53,933     100.0 %   $ 45,940     100.0 %   $ 107,893     100.0 %   $ 88,550     100.0 %

Gross profit

    17,593     32.6 %     15,103     32.9 %     35,601     33.0 %     28,645     32.3 %

SG&A expenses

    14,744     27.3 %     13,070     28.5 %     29,751     27.6 %     24,781     28.0 %
                                                                 

Income from operations (1)

  $ 2,849     5.3 %   $ 2,033     4.4 %   $ 5,850     5.4 %   $ 3,864     4.3 %

 

(1) Excluding the effects of restructuring and asset impairment charges and lease exit costs. These charges are not allocated to our segments.

 

* 27 weeks for fiscal 2013 as compared with 26 weeks for fiscal 2012

 

Quarterly Analysis of Results - Wholesale

 

Net sales for the wholesale segment were $53,933 for the second quarter of 2013 as compared to $45,940 for the second quarter of 2012, an increase of $7,993, or 17%. Wholesale shipments to the open market (outside the Bassett Home Furnishings store network) increased 41% and shipments to the Bassett Home Furnishings store network increased by 8.2% compared to the prior year quarter. Gross margins for the wholesale segment were 32.6% for the second quarter of 2013 as compared to 32.9% for the second quarter of 2012. This decrease was primarily due to lower margins in the wood business from discounting discontinued product and increased health care costs due to higher claims experience. The decrease was partially offset by increased margins in upholstery operations as increased sales volumes provided greater leverage of fixed costs. Wholesale SG&A increased $1,674 to $14,744 for the second quarter of 2013 as compared to $13,070 for the second quarter of 2012. SG&A costs as a percentage of sales decreased to 27.3% as compared to 28.5% for the second quarter of 2012 as we effectively leveraged fixed SG&A costs through increased sales.

 

Year-to-Date Analysis of Results – Wholesale

 

Net sales for the wholesale segment were $107,893 for the first six months of 2013 as compared to $88,550 for the first six months of 2012, an increase of $19,343, or 22%. On an average weekly basis (normalizing for the extra week in the first six months of 2013), wholesale net sales increased 17%. Wholesale shipments to the open market (outside the Bassett Home Furnishings store network) increased 44% and shipments to the Bassett Home Furnishings store network increased by 12% compared to the first six months of 2012. Gross margins for the wholesale segment were 33.0% for the first six months of 2013 as compared to 32.3% for the first six months of 2012. This increase was primarily due to increased margins in upholstery operations as increased sales volumes provided greater leverage of fixed costs, partially offset by lower margins in the wood business from discounting discontinued product and increased health care costs due to higher claims experience. Wholesale SG&A increased $4,970 to $29,751 for the first six months of 2013 as compared to $24,781 for the first six months of 2012. SG&A costs as a percentage of sales decreased to 27.6% as compared to 28.0% for the first six months of 2012. Profit improvement from leveraging fixed SG&A costs through higher sales volumes was partially offset by planned increased marketing and advertising costs of $836 to drive continued sales growth.

 

 
Page 22 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

 

Wholesale shipments by type:

Quarter Ended

Six Months Ended*

 

June 1, 2013

May 26, 2012

June 1, 2013

May 26, 2012

                                                                 

Wood

  $ 22,243     41.2 %   $ 19,295     42.0 %   $ 44,466     41.2 %   $ 37,355     42.2 %

Upholstery

    31,233     57.9 %     26,160     56.9 %     62,434     57.9 %     50,274     56.8 %

Other

    457     0.9 %     485     1.1 %     993     0.9 %     921     1.0 %

Total

  $ 53,933     100.0 %   $ 45,940     100.0 %   $ 107,893     100.0 %   $ 88,550     100.0 %

 

* 27 weeks for fiscal 2013 as compared with 26 weeks for fiscal 2012

 

Wholesale Backlog

 

The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $15,246 at June 1, 2013 as compared with $9,387 at May 26, 2012. The increase over the prior year amount is primarily due to an overall increase in business and timing of the receipt of imported product needed to fill certain orders.

 

 
Page 23 of 36

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

JUNE 1, 2013

(Dollars in thousands except share and per share data)

  

Retail Segment – Company-Owned Retail Stores

 

Results for the retail segment for the three and six months ended June 1, 2013 and May 26, 2012 are as follows:

 

 

Quarter Ended

Six Months Ended*

 

June 1, 2013

May 26, 2012

June 1, 2013

May 26, 2012

                                                                 

Net sales

  $ 51,470     100.0 %   $ 42,805     100.0 %   $ 101,427     100.0 %   $ 81,622     100.0 %

Gross profit

    24,413     47.4 %     20,776     48.5 %     48,287     47.6 %     39,446     48.3 %

SG&A expenses

    24,136     46.9 %     20,710     48.4 %     48,581     47.9 %     40,379     49.5 %

Income (loss) from operations (1)

  $ 277     0.5 %   $ 66     0.1 %   $ (294 )     -0.3 %   $ (933 )     -1.2 %

 

Results for the comparable stores (49 stores for the quarters ended June 1, 2013 and May 26, 2012, 48 stores for the six months ended June 1, 2013 and May 26, 2012) are as follows:

 

 

Quarter Ended

Six Months Ended*

 

June 1, 2013

May 26, 2012

June 1, 2013

May 26, 2012

                                                                 

Net sales

  $ 46,361