10-Q 1 bset20160708_10q.htm FORM 10-Q bset20160708_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 27, 2016

 

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

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)

 

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 September 16, 2016, 10,801,148 shares of common stock of the Registrant were outstanding.

 

 
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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM

   

PAGE

       
 

PART I - FINANCIAL INFORMATION

   
       

1.

Condensed Consolidated Financial Statements as of August 27, 2016 (unaudited) and November 28, 2015 and for the three and nine months ended August 27, 2016 (unaudited) and August 29, 2015 (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

 

24

       

3.

Quantitative and Qualitative Disclosures About Market Risk

 

36

       

4.

Controls and Procedures

 

36

       
 

PART II - OTHER INFORMATION

   
       

1.

Legal Proceedings

 

38

       

2.

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

 

38

       

3.

Defaults Upon Senior Securities

 

38

       

6.

Exhibits

 

38

 

 
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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE PERIODS ENDED AUGUST 27, 2016 AND AUGUST 29, 2015 – UNAUDITED

(In thousands except per share data)

 

 

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 

Sales revenue:

                               

Furniture and accessories

  $ 91,465     $ 97,107     $ 276,857     $ 286,122  

Logistics

    13,247       13,904       41,395       29,250  

Total sales revenue

    104,712       111,011       318,252       315,372  
                                 

Cost of furniture and accessories sold

    40,091       44,824       124,496       133,676  
                                 

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

    56,800       58,303       173,845       163,203  

New store pre-opening costs

    281       192       727       236  

Lease exit costs

    -       -       -       419  

Asset impairment charges

    -       -       -       106  

Management restructuring costs

    -       -       -       449  

Income from operations

    7,540       7,692       19,184       17,283  
                                 

Remeasurement gain on acquisition of affiliate

    -       -       -       7,212  

Income from Continued Dumping & Subsidy Offset Act

    -       -       -       1,066  

Other loss, net

    (647 )     (472 )     (1,904 )     (1,692 )

Income before income taxes

    6,893       7,220       17,280       23,869  
                                 

Income tax expense

    2,728       2,954       6,496       9,118  

Net income

  $ 4,165     $ 4,266     $ 10,784     $ 14,751  
                                 

Retained earnings-beginning of period

    125,563       115,149       120,904       106,339  

Cash dividends

    (1,093 )     (1,029 )     (3,053 )     (2,704 )

Retained earnings-end of period

  $ 128,635     $ 118,386     $ 128,635     $ 118,386  
                                 

Basic earnings per share

  $ 0.39     $ 0.39     $ 1.00     $ 1.38  
                                 

Diluted earnings per share

  $ 0.38     $ 0.39     $ 0.99     $ 1.36  
                                 

Dividends per share

  $ 0.10     $ 0.09     $ 0.28     $ 0.25  

 

 

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

 

 
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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIODS ENDED AUGUST 27, 2016 AND AUGUST 29, 2015 – UNAUDITED

(In thousands)

 

 

   

Quarter Ended

   

Nine Months Ended

 
                                 
   

August 27, 2016

   

August 29, 2015

   

August 27, 2016

   

August 29, 2015

 
                                 

Net income

  $ 4,165     $ 4,266     $ 10,784     $ 14,751  

Other comprehensive income:

                               

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

    92       60       275       177  

Income taxes related to SERP

    (35 )     (23 )     (105 )     (67 )
                                 

Other comprehensive income, net of tax

    57       37       170       110  
                                 

Total comprehensive income

  $ 4,222     $ 4,303     $ 10,954     $ 14,861  

 

 

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

 

 
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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AUGUST 27, 2016 AND NOVEMBER 28, 2015

(In thousands)

 

   

(Unaudited)

         
   

August 27,

2016

   

November 28,

2015

 
Assets                

Current assets

               

Cash and cash equivalents

  $ 28,051     $ 36,268  

Short-term investments

    23,125       23,125  

Accounts receivable, net

    19,302       21,197  

Inventories

    53,413       59,896  

Other current assets

    11,519       6,798  

Total current assets

    135,410       147,284  
                 

Property and equipment, net

    105,595       96,104  
                 

Deferred income taxes

    9,006       13,471  

Goodwill and other intangible assets

    17,440       17,682  

Other

    8,048       8,002  

Total long-term assets

    34,494       39,155  

Total assets

  $ 275,499     $ 282,543  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 19,569     $ 20,916  

Accrued compensation and benefits

    11,927       14,345  

Customer deposits

    20,132       23,999  

Dividends payable

    -       2,184  

Current portion of long-term debt

    5,003       5,273  

Other accrued liabilities

    11,077       13,133  

Total current liabilities

    67,708       79,850  
                 

Long-term liabilities

               

Post employment benefit obligations

    12,634       12,694  

Notes payable

    9,077       8,500  

Other long-term liabilities

    3,915       4,133  

Total long-term liabilities

    25,626       25,327  
                 
                 

Stockholders’ equity

               

Common stock

    54,114       54,580  

Retained earnings

    128,635       120,904  

Additional paid-in capital

    1,924       4,560  

Accumulated other comprehensive loss

    (2,508 )     (2,678 )

Total stockholders' equity

    182,165       177,366  

Total liabilities and stockholders’ equity

  $ 275,499     $ 282,543  

 

 

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

 

 
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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED AUGUST 27, 2016 AND AUGUST 29, 2015 – UNAUDITED

(In thousands)

 

 

   

Nine Months Ended

 
   

August 27, 2016

   

August 29, 2015

 

Operating activities:

               

Net income

  $ 10,784     $ 14,751  

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

               

Depreciation and amortization

    8,866       7,302  

Equity in undistributed income of investments and unconsolidated affiliated companies

    -       (220 )

Provision for restructuring and asset impairment charges

    -       106  

Non-cash portion of lease exit costs

    -       419  

Remeasurement gain on acquisition of affiliate

    -       (7,212 )

Tenant improvement allowance received from lessors

    590       933  

Deferred income taxes

    4,360       3,778  

Excess tax benefits from stock-based compensation

    87       2,008  

Other, net

    256       1,445  

Changes in operating assets and liabilities:

               

Accounts receivable

    2,334       (751 )

Inventories

    6,483       (8,165 )

Other current assets

    (4,721 )     (21 )

Customer deposits

    (3,867 )     (3,196 )

Accounts payable and accrued liabilities

    (6,207 )     2,158  

Net cash provided by operating activities

    18,965       13,335  
                 

Investing activities:

               

Purchases of property and equipment

    (18,955 )     (11,283 )

Proceeds from sales of property and equipment

    632       2,952  

Cash paid for business acquisition, net of cash acquired

    -       (7,323 )

Capital contribution to affiliate

    -       (1,345 )

Net cash used in investing activities

    (18,323 )     (16,999 )
                 

Financing activities:

               

Cash dividends

    (5,238 )     (4,806 )

Proceeds from the exercise of stock options

    114       4,018  

Other issuance of common stock

    182       254  

Repurchases of common stock

    (3,989 )     (1,374 )

Taxes paid related to net share settlement of equity awards

    (77 )     (178 )

Repayments of notes payable

    (7,235 )     (1,630 )

Proceeds from equipment loans

    7,384       1,307  

Net cash used in financing activities

    (8,859 )     (2,409 )

Change in cash and cash equivalents

    (8,217 )     (6,073 )

Cash and cash equivalents - beginning of period

    36,268       26,673  

Cash and cash equivalents - end of period

  $ 28,051     $ 20,600  

 

 

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

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

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

 

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

 

Zenith Acquisition

 

Prior to February 2, 2015 we held a 49% interest in Zenith Freight Lines, LLC (“Zenith”) for which we used the equity method of accounting. On February 2, 2015 we acquired the remaining 51% ownership interest (see Note 3, Business Combinations). Accordingly, the results of Zenith have been consolidated with our results since the date of the acquisition. Sales of logistical services from Zenith to our wholesale and retail segments have been eliminated, and Zenith’s operating costs and expenses since the date of acquisition are included in selling, general and administrative expenses in our condensed consolidated statements of income. Our equity in the earnings of Zenith prior to the date of the acquisition is included in other loss, net, in the accompanying condensed consolidated statements of income.

 

Adoption of Accounting Standards Update 2016-09

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). While the effective date of ASU 2016-09 is for fiscal years beginning after December 15, 2016, earlier adoption is permitted and we adopted the amendments in ASU 2016-09 during the second quarter of fiscal 2016. This standard simplifies or clarifies several aspects of the accounting for equity-based payment awards, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Certain of these changes are required to be applied retrospectively, while other changes are required to be applied prospectively.

 

The impact of early adoption resulted in the following:

 

 

We recorded $46 and $87 of tax benefits within income tax expense for the three and nine months ended August 27, 2016 related to the excess tax benefit on stock based compensation. Prior to adoption this amount this amount would have been recorded as additional paid-in capital. This change could create future volatility in our effective tax rate depending upon the amount of exercise or vesting activity from our stock based awards.

 

 

We elected to recognized forfeitures as they occur. There was no cumulative effect adjustment as a result of the adoption of this amendment on a modified retrospective basis.

 

 

We elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. Accordingly, $2,008 of excess tax benefits previously reported as a cash flow provided by financing activities during the nine months ended August 29, 2015 has been reclassified to be included in cash flows provided by operating activities.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

 

We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended August 27, 2016. The effect of this change on our diluted earnings per share was not significant.

 

 

ASU 2016-09 also requires the presentation of employee taxes paid by the Company through the withholding of shares as a financing activity on the statement of cash flows, which is where we had previously reclassified these items.

 

The impact of the adoption of this standard retroactively as of November 29, 2015 (the first day of our fiscal year 2016), was not significant as there was no significant award vesting or settlement activity during the first quarter of fiscal 2016.

 

There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard.

 

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, 2016 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 28, 2015.

 

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 rates for the three and nine month periods ended August 27, 2016 and August 29, 2015 differ from the federal statutory rate primarily due to the effects of state income taxes and various permanent differences including the favorable impact of the Section 199 manufacturing deduction.

  

3. Business Combination – Acquisition of Zenith

 

Prior to February 2, 2015 we held a 49% interest in Zenith for which we used the equity method of accounting. Zenith provides domestic transportation and warehousing services primarily to furniture manufacturers and distributors and also provides home delivery services to furniture retailers. We historically have contracted with Zenith to provide substantially all of our domestic freight, transportation and warehousing needs for the wholesale business. In addition, Zenith provides home delivery services for many of our Company-owned retail stores. On February 2, 2015, we acquired the remaining 51% of Zenith in exchange for cash, Bassett common stock and a note payable with a total fair value of $19,111. The value of the Bassett common stock was based on the closing market price of our shares on the acquisition date, discounted for lack of marketability due to restrictions on the seller’s ability to transfer the shares. The restrictions on one half of the shares expired on the first anniversary of the acquisition, with the remainder expiring on the second anniversary. The note is payable in three annual installments of $3,000 each beginning February 2, 2016, and has been discounted to its fair value as of the date of the acquisition based on our estimated borrowing rate.

 

The carrying value of our 49% interest in Zenith prior to the acquisition was $9,480 (see Note 8, unconsolidated affiliated company). In connection with the acquisition, this investment was remeasured to a fair value of $16,692 resulting in the recognition of a gain of $7,212 during the nine months ended August 29, 2015. The impact of this gain upon our basic and diluted earnings per share was approximately $0.42 and $0.41, respectively, net of the related tax expense. The remeasured fair value of our prior interest in Zenith was estimated based on the fair value of the consideration transferred to acquire the remaining 51% of Zenith less an estimated control premium.

 

Under the acquisition method of accounting, the fair value of the consideration transferred along with the fair value of our previous 49% interest in Zenith was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date with the remaining unallocated amount recorded as goodwill.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

The total fair value of the acquired business was determined as follows:

 

Fair value of consideration transferred in exchange for 51% of Zenith:

       

Cash

  $ 9,000  

Bassett common stock, 89,485 shares, par value $5.00 per share, fair value at closing $18.72 per share

    1,675  

Note payable

    8,436  

Total fair value of consideration transferred to seller

    19,111  

Less effective settlement of previous amounts payable to Zenith at acquisition

    (3,622 )

Total fair value of consideration net of effective settlement

    15,489  

Fair value of Bassett's previous 49% interest in Zenith

    16,692  
         

Total fair value of acquired business

  $ 32,181  

 

The allocation of the fair value of the acquired business is as follows:

 

Allocation of the fair value of consideration transferred:

       

Identifiable assets acquired:

       

Acquired cash and cash equivalents

  $ 1,677  

Accounts receivable, net

    3,399  

Prepaid expenses and other current assets

    496  

Property and equipment

    18,110  

Other long-term assets

    646  

Intangible assets

    6,362  

Total identifiable assets acquired

    30,690  

Liabilities assumed:

       

Accounts payable and accrued liabilities

    (4,038 )

Notes payable

    (4,329 )

Total liabilities assumed

    (8,367 )

Net identifiable assets acquired

    22,323  

Goodwill

    9,858  

Total net assets acquired

  $ 32,181  

 

Goodwill was determined based on the residual difference between the fair value of the consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $6,982 of the acquired goodwill is deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill were Zenith’s reputation for best-in-class, fully integrated logistical services which are uniquely tailored to the needs of the furniture industry, as well as their ability to provide expedited delivery service which is increasingly in demand in the furniture industry.

 

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

 

Description:

 

Useful Life

In Years

   

Fair Value

 
                 

Customer relationships

    15     $ 3,038  

Trade names

    Indefinite       2,490  

Technology - customized applications

    7       834  
                 

Total acquired intangible assets

          $ 6,362  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

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

 

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

 

Acquisition costs related to the Zenith acquisition totaled $0 and $209 during the three and nine months ended August 29, 2015, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of income. The acquisition costs are primarily related to legal, accounting and valuation services.

 

The revenue and pre-tax profit of Zenith that is included in our condensed consolidated statements of income is as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015 (1)

 
                                 

Zenith revenue (2)

  $ 13,247     $ 13,904     $ 41,395     $ 29,250  
                                 

Zenith pre-tax income

  $ 608     $ 1,022     $ 1,917     $ 1,984  

 

(1) From date of acquisition, February 2, 2015.

 

(2) Net of eliminated inter-company transactions. See Note 14. 

 

The pro forma results of operations for the acquisition of Zenith have not been presented because they are not material to our consolidated results of operations.

 

4. Financial Instruments and Fair Value Measurements

 

Financial Instruments

 

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

 

Investments

 

Our short-term investments of $23,125 at both August 27, 2016 and November 28, 2015 consisted of certificates of deposit (CDs) with original terms of twelve months, bearing interest at rates ranging from 0.28% to 1.00%. At August 27, 2016, the weighted average remaining time to maturity of the CDs was approximately ten months and the weighted average yield of the CDs was approximately 0.65%. 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, 2016 and November 28, 2015 approximates their fair value.

 

Fair Value Measurement 

 

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

 

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

 

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

 

Level 3 Inputs– Instruments with primarily unobservable value drivers.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

We believe that the carrying amounts of our current assets and current liabilities approximate fair value due to the short-term nature of these items. The recurring estimate of the fair value of our notes payable for disclosure purposes (see Note 9) involves Level 3 inputs. Our primary non-recurring fair value estimates typically involve business acquisitions (Note 3) which involve a combination of Level 2 and Level 3 inputs, and asset impairments (Note 11) which utilize Level 3 inputs.

 

5. Accounts Receivable

 

Accounts receivable consists of the following:

  

   

August 27,

2016

   

November 28,

2015

 

Gross accounts receivable

  $ 20,146     $ 22,372  

Allowance for doubtful accounts

    (844 )     (1,175 )

Accounts receivable, net

  $ 19,302     $ 21,197  

 

 

Activity in the allowance for doubtful accounts for the nine months ended August 27, 2016 was as follows:

 

Balance at November 28, 2015

  $ 1,175          

Reductions to allowance

    (331 )        

Balance at August 27, 2016

  $ 844          

 

 

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

 

6. Inventories

 

Inventories are valued at the lower of cost or 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:

 

   

August 27,

2016

   

November 28,

2015

 

Wholesale finished goods

  $ 24,819     $ 31,253  

Work in process

    375       318  

Raw materials and supplies

    10,771       9,793  

Retail merchandise

    26,899       27,680  

Total inventories on first-in, first-out method

    62,864       69,044  

LIFO adjustment

    (8,015 )     (7,751 )

Reserve for excess and obsolete inventory

    (1,436 )     (1,397 )
    $ 53,413     $ 59,896  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

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

 

 

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

 

   

Wholesale

Segment

   

Retail Segment

   

Total

 
                         

Balance at November 28, 2015

  $ 1,087     $ 310     $ 1,397  

Additions charged to expense

    1,523       386       1,909  

Write-offs

    (1,485 )     (385 )     (1,870 )

Balance at August 27, 2016

  $ 1,125     $ 311     $ 1,436  

 

 

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 2016 and do not anticipate that our methodology is likely to change in the future.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

7. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets consisted of the following: 

 

   

August 27, 2016

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,038     $ (321 )   $ 2,717  

Technology - customized applications

    834       (189 )     645  
                         

Total intangible assets subject to amortization

    3,872       (510 )     3,362  
                         

Intangibles not subject to amortization:

                       

Trade names

    2,490       -       2,490  

Goodwill

    11,588       -       11,588  
                         

Total goodwill and other intangible assets

  $ 17,950     $ (510 )   $ 17,440  

 

   

November 28, 2015

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,038     $ (169 )   $ 2,869  

Technology - customized applications

    834       (99 )     735  
                         

Total intangible assets subject to amortization

    3,872       (268 )     3,604  
                         

Intangibles not subject to amortization:

                       

Trade names

    2,490       -       2,490  

Goodwill

    11,588       -       11,588  
                         

Total goodwill and other intangible assets

  $ 17,950     $ (268 )   $ 17,682  

 

The carrying amounts of goodwill by reportable segment at both August 27, 2016 and November 28, 2015 were as follows:

 

Wholesale

  $ 4,839  

Retail

    1,820  

Logistical services

    4,929  
         

Total goodwill

  $ 11,588  

 

There were no accumulated impairment losses on goodwill as of August 27, 2016 or November 28, 2015.

 

Amortization expense associated with intangible assets during the three and nine months ended August 27, 2016 and August 29, 2015 was as follows:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 
                                 

Intangible asset amortization expense

  $ 80     $ 80     $ 241     $ 188  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

 

8. Unconsolidated Affiliate

 

Prior to February 2, 2015 we owned 49% of Zenith and accounted for our investment under the equity method. The balance of our investment in Zenith was adjusted for our equity in the earnings of Zenith through February 2, 2015 of $220 (included in other loss, net in our condensed consolidated statement of income for the nine months ended August 29, 2015), and increased by $1,345 representing our 49% share of a $2,745 capital contribution made to Zenith, a portion of which was used for retirement of certain of Zenith’s debt prior to the acquisition. This activity resulted in a carrying value for our investment in Zenith of $9,480 on the date of acquisition. See Note 3 regarding the remeasurement of this carrying value to fair value in connection with the acquisition and the resulting remeasurement gain of $7,212.

  

9. Notes Payable and Bank Credit Facility

 

Our notes payable consist of the following:

 

   

August 27, 2016

 
   

Principal

Balance

   

Unamortized

Discount

   

Net Carrying

Amount

 
                         

Zenith acquisition note payable

  $ 6,000     $ (154 )   $ 5,846  

Transportation equipment notes payable

    6,787       -       6,787  

Real estate notes payable

    1,447       -       1,447  
                         

Total Debt

    14,234       (154 )     14,080  

Less current portion

    (5,125 )     122       (5,003 )
                         

Total long-term debt

  $ 9,109     $ (32 )   $ 9,077  

 

   

November 28, 2015

 
   

Principal

Balance

   

Unamortized

Discount

   

Net Carrying

Amount

 
                         

Zenith acquisition note payable

  $ 9,000     $ (312 )   $ 8,688  

Transportation equipment notes payable

    2,152       -       2,152  

Real estate notes payable

    2,933       -       2,933  
                         

Total Debt

    14,085       (312 )     13,773  

Less current portion

    (5,477 )     204       (5,273 )
                         

Total long-term debt

  $ 8,608     $ (108 )   $ 8,500  

 

 

The future maturities of our notes payable are as follows:

 

Remainder of fiscal 2016

  $ 503  

Fiscal 2017

    5,171  

Fiscal 2018

    5,246  

Fiscal 2019

    2,324  

Fiscal 2020

    990  

Fiscal 2021

    -  

Thereafter

    -  
    $ 14,234  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

 

Zenith Acquisition Note Payable

 

As part of the consideration given for our acquisition of Zenith on February 2, 2015, we issued an unsecured note payable to the former owner in the amount of $9,000, payable in three annual installments of $3,000 due on each anniversary of the note, the first installment having been paid on February 2, 2016. Interest is payable annually at the one year LIBOR rate, which was established at 0.62% on February 2, 2015 and resets on each anniversary of the note, having reset to the current rate of 1.14% on February 2, 2016. The note was recorded at its fair value in connection with the acquisition resulting in a debt discount that is amortized to the principal amount through the recognition of non-cash interest expense over the term of the note. Interest expense resulting from the amortization of the discount was $46 and $158 for the three and nine months ended August 27, 2016, respectively, and $76 and $177 for the three and nine months ended August 29, 2015, respectively. The current portion of the note due within one year, including unamortized discount, was $2,878 and $2,796 at August 27, 2016 and November 28, 2015, respectively.

 

Transportation Equipment Notes Payable

 

Certain of the transportation equipment operated in our logistical services segment is financed by notes payable in the amount of $6,787 and $2,152 at August 27, 2016 and November 28, 2015, respectively. These notes are payable in fixed monthly payments of principal and interest at variable rates of approximately 2.69% at August 27, 2016, with remaining terms of forty to fifty months. The current portion of these notes due within one year was $1,756 and $901 at August 27, 2016 and November 28, 2015, respectively. The notes are secured by tractors, trailers and local delivery trucks with a total net book value of $7,948 and $3,796 at August 27, 2016 and November 28, 2015, respectively.

 

Real Estate Notes Payable

 

Certain of our retail real estate properties have been financed through commercial mortgages with outstanding principal totaling $1,447 and $1,709 at August 27, 2016 and November 28, 2015, respectively. The mortgages bear interest at fixed rates of 6.73%. They are collateralized by the respective properties with net book values totaling approximately $5,892 and $5,993 at August 27, 2016 and November 28, 2015, respectively. The current portion of these mortgages due within one year was $369 and $351 as of August 27, 2016 and November 28, 2015, respectively.

 

Certain of the real estate located in Conover, North Carolina and operated in our logistical services segment was subject to a note payable in the amount of $1,224 at November 28, 2015, all of which was classified as current at that time. The remaining balance due on this note was paid in full during the third quarter of fiscal 2016.

 

Fair Value

 

We believe that the carrying amount of our notes payable approximates fair value at both August 27, 2016 and November 28, 2015. In estimating the fair value, we utilize current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 3.

 

Bank Credit Facility

 

Effective December 5, 2015, we entered into a new credit facility with our bank which provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future.

 

At August 27, 2016, we had $1,970 outstanding under standby letters of credit against our line, leaving availability under our credit line of $13,030. In addition, we have outstanding standby letters of credit with another bank totaling $381.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

10. Post Employment Benefit Obligations

 

We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for this plan was $11,693 and $11,678 as of August 27, 2016 and November 28, 2015, respectively, and is recorded as follows in the condensed consolidated balance sheets:

 

  

   

August 27,

2016

   

November 28,

2015

 

Accrued compensation and benefits

  $ 749     $ 749  

Post employment benefit obligations

    10,944       10,929  
                 

Total pension liability

  $ 11,693     $ 11,678  

 

Components of net periodic pension costs are as follows:

 

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 

Service cost

  $ 36     $ 26     $ 109     $ 78  

Interest cost

    106       94       317       281  

Amortization of transition obligation

    11       11       32       32  

Amortization of loss

    81       49       243       146  
                                 

Net periodic pension cost

  $ 234     $ 180     $ 701     $ 537  

 

 

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 $2,010 and $2,085 as of August 27, 2016 and November 28, 2015, respectively, and is recorded as follows in the condensed consolidated balance sheets:

 

 

   

August 27,

2016

   

November 28,

2015

 

Accrued compensation and benefits

  $ 320     $ 320  

Post employment benefit obligations

    1,690       1,765  
                 

Total deferred compensation liability

  $ 2,010     $ 2,085  

 

We recognized expense under this plan during the three and nine months ended August 27, 2016 and August 29, 2015 as follows:

 

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 

Deferred compensation expense

  $ 57     $ 54     $ 171     $ 162  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

11. Litigation Gain, Impairment Charges and Accrued Lease Exit Costs

 

Income from Antitrust Litigation Settlement

 

Cost of furniture and accessories sold for the three and nine months ended August 27, 2016 includes the benefit of $1,428 of income we received from the settlement of class action litigation. This benefit is included in our wholesale segment. We were a member of the certified class of consumers that were plaintiffs in the Polyurethane Foam Antitrust Litigation against various producers of flexible polyurethane foam. The litigation alleged a price-fixing conspiracy in the flexible polyurethane foam industry that caused indirect purchasers to pay higher prices for products that contain flexible polyurethane foam. In 2015 a settlement was reached with several of the producers, though other producers named in the suit filed appeals blocking distribution of the settlement. In June of 2016 the final producer appeal was dismissed and we received $1,428 in cash representing our share of the settlement, which is included in cash provided by operating activities in our statement of cash flows for the nine months ended August 28, 2016.

 

Impairment Charges and Lease Exit Costs

 

During the first quarter of fiscal 2015 we announced the closing of our Company-owned retail store location in Memphis, Tennessee. In connection with this closing, we recognized non-cash charges during the nine months ended August 29, 2015 of $419 for the accrual of lease exit costs and $106 for the write off of abandoned leasehold improvements and other store assets.

 

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

 

Balance at November 28, 2015

  $ 566  
         

Provisions made to adjust previous estimates

    93  

Payments and other

    (401 )

Accretion of interest on obligations

    7  
         

Balance at August 27, 2016

  $ 265  
         

Current portion included in other accrued liabilities

  $ 129  

Long-term portion included in other long-term liabilities

    136  

Total accrued lease exit costs at August 27, 2016

  $ 265  

 

Management Restructuring Costs

 

During the nine months ended August 29, 2015, we recognized $449 of expense related to severance payable to a former executive, who left the Company in April, 2015. As of November 28, 2015, all required payments of severance had been disbursed. These management restructuring costs were incurred within our wholesale segment.

 

Income from Continued Dumping & Subsidy Offset Act

 

During the nine months ended August 29, 2015, we recognized income of $1,066 arising from distributions received from U.S. Customs and Border Protection (“Customs”) under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”). These distributions primarily represent amounts previously withheld by Customs pending the resolution of claims filed by certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) challenging certain provisions of the CDSOA and seeking to share in the distributions. The Non-Supporting Producers’ claims were dismissed by the courts and all appeals were exhausted in 2014. While it is possible that we may receive additional distributions from Customs, we cannot estimate the likelihood or amount of any future distributions.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

12. Commitments and Contingencies

  

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

 

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services segment. Our real estate lease terms range from one to 15 years and generally have renewal options of between five and 15 years. Some store leases contain contingent rental provisions based upon sales volume. Our transportation equipment leases have terms ranging from two to seven years with fixed monthly rental payments plus variable charges based upon mileage. The following schedule shows future minimum lease payments under non-cancellable operating leases with terms in excess of one year as of August 27, 2016:

 

   

Retail Stores

   

Distribution

Centers

   

Transportation

Equipment

   

Total

 
                                 

Remainder of fiscal 2016

  $ 4,764     $ 1,067     $ 909     $ 6,740  

Fiscal 2017

    20,405       4,160       3,060       27,625  

Fiscal 2018

    18,349       2,857       1,835       23,041  

Fiscal 2019

    16,500       1,838       1,808       20,146  

Fiscal 2020

    15,205       1,230       1,743       18,178  

Fiscal 2021

    13,234       1,254       1,169       15,657  

Thereafter

    37,315       3,023       1,217       41,555  

Total future minimum lease payments

  $ 125,772     $ 15,429     $ 11,741     $ 152,942  

 

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $2,098 and $2,494 at August 27, 2016 and November 28, 2015, respectively.

 

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at August 27, 2016 and November 28, 2015 was not material.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

13. 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, 2016:

                       
                         

Basic earnings per share

  $ 4,165       10,739,006     $ 0.39  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       139,661       (0.01 )

Diluted earnings per share

  $ 4,165       10,878,667     $ 0.38  
                         

For the quarter ended August 29, 2015:

                       
                         

Basic earnings per share

  $ 4,266       10,816,293     $ 0.39  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       116,575       -  

Diluted earnings per share

  $ 4,266       10,932,868     $ 0.39  
                         

For the nine months ended August 27, 2016:

                       
                         

Basic earnings per share

  $ 10,784       10,762,106     $ 1.00  

Add effect of dilutive securities:

                       

Options and restricted shares

            139,834       (0.01 )

Diluted earnings per share

  $ 10,784       10,901,940     $ 0.99  
                         

For the nine months ended August 29, 2015:

                       
                         

Basic earnings per share

  $ 14,751       10,658,416     $ 1.38  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       153,787       (0.02 )

Diluted earnings per share

  $ 14,751       10,812,203     $ 1.36  

 

For the three and nine months ended August 27, 2016 and August 29, 2015, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 
                                 

Unvested shares

    2,000       2,000       7,814       8,354  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

14. Segment Information

  

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

 

 

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

 

 

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

 

 

Logistical services. With our acquisition of Zenith on February 2, 2015, we created the logistical services operating segment which reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s operating costs are included in selling, general and administrative expenses and were $22,317 and $69,400 for the three and nine months ended August 27, 2016, respectively; $22,850 for the three months ended August 29, 2015 and $49,517 from the date of acquisition through August 29, 2015. Amounts charged by Zenith to the Company for logistical services prior to the date of acquisition are included in selling, general and administrative expenses, and our equity in the earnings of Zenith prior to the date of acquisition is included in other loss, net, in the accompanying statements of income.

 

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

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27,

2016

   

August 29,

2015

   

August 27,

2016

   

August 29,

2015

 

Sales Revenue

                               

Wholesale

  $ 58,303     $ 62,165     $ 177,785     $ 187,675  

Retail - Company-owned stores

    61,216       62,009       184,754       183,113  

Logistical services

    22,991       23,650       71,480       51,607  

Inter-company eliminations:

                               

Furniture and accessories

    (28,054 )     (27,067 )     (85,682 )     (84,666 )

Logistical services

    (9,744 )     (9,746 )     (30,085 )     (22,357 )

Consolidated

  $ 104,712     $ 111,011     $ 318,252     $ 315,372  
                                 

Income from Operations

                               

Wholesale

  $ 5,648     $ 3,795     $ 14,380     $ 11,518  

Retail - Company-owned stores

    768       2,037       1,465       3,967  

Logistical services

    674       1,070       2,079       2,089  

Inter-company elimination

    450       790       1,260       683  

Management restructuring costs

    -       -       -       (449 )

Lease exit costs

    -       -       -       (419 )

Asset impairment charges

    -       -       -       (106 )

Consolidated

  $ 7,540     $ 7,692     $ 19,184     $ 17,283  
                                 

Depreciation and Amortization

                               

Wholesale

  $ 538     $ 501     $ 1,453     $ 1,539  

Retail - Company-owned stores

    1,455       1,326       4,515       4,024  

Logistical services

    1,262       745       2,898       1,739  

Consolidated

  $ 3,255     $ 2,572     $ 8,866     $ 7,302  
                                 

Capital Expenditures

                               

Wholesale

  $ 2,808     $ 1,793     $ 5,799     $ 4,138  

Retail - Company-owned stores

    1,080       1,448       4,060       5,326  

Logistical services

    951       100       9,096       1,819  

Consolidated

  $ 4,839     $ 3,341     $ 18,955     $ 11,283  

 

   

As of

   

As of

 

Identifiable Assets

 

August 27,

2016

   

November 28,

2015

 

Wholesale

  $ 135,045     $ 146,878  

Retail - Company-owned stores

    89,871       88,878  

Logistical services

    50,583       46,787  

Consolidated

  $ 275,499     $ 282,543  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

15. Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures. In addition, during 2016 the FASB has issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, all of which clarify certain implementation guidance within ASU 2014-09, and ASU 2016-11, which rescinds certain SEC guidance within the ASC effective upon an entity’s adoption of ASU 2014-09. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is not permitted. Therefore the amendments in ASU 2014-09 will become effective for us as of the beginning of our 2019 fiscal year. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and have not made any decision on the method of adoption.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory within the scope of this Update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Therefore the amendments in ASU 2015-11 will become effective for us as of the beginning of our 2018 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Any current period adjustments to provisional amounts that would have impacted a prior period’s earnings had they been recognized at the acquisition date are required to be presented separately on the face of the income statement or disclosed in the notes. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. Therefore the amendments in ASU 2015-16 will become effective for us as of the beginning of our 2017 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

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

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

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

 

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

 

See Note 1 regarding our adoption of ASU 2016-09, issued by the FASB in March 2016.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

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

 

Overview

 

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 114-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 91 BHF stores at August 27, 2016, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  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.  In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 25 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 ready for delivery in less than 30 days, free in-home design visits (“home makeovers”), and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are each trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.

 

We have factories in Newton, North Carolina and Grand Prairie, Texas that manufacture upholstered furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our recently introduced “Bench Made” line of furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores. Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees in a timeframe to meet the 30 day promise.  In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture and certain upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 65% of the products we currently sell are manufactured in the United States.

 

“Bench Made” is a selection of American dining furniture that first appeared in retail showrooms during the second quarter of 2015. Partnering with nearby hardwood component manufacturers, we are preparing, distressing, finishing, and assembling an assortment of solid maple tables and chairs in our newly renovated facility in Bassett, Virginia. Due to its strong reception, we have expanded “Bench Made” offerings to include bedroom and occasional furniture starting in May of 2016. Also in 2016 we began moving to a great room centric floor plan for our retail locations that will focus more on our domestic upholstery products that have lead our sales increases in recent years complemented by both imported and domestically produced entertainment and occasional furnishings. All of these new products have been carefully designed in coordination with our merchants, designers, engineers and finishing technicians to achieve the upscale casual decor that we believe speaks to today’s consumer.  

 

For many years we owned 49% of Zenith Freight Lines, LLC (“Zenith”). During that time the strategic significance of our partnership with Zenith had risen to include the over-the-road transportation of furniture, the operation of regional freight terminals, warehouse and distribution facilities in eleven states, and the management of various home delivery facilities that service BHF stores and other clients in local markets around the United States. On February 2, 2015, we acquired the remaining 51% of Zenith, which now operates as a wholly-owned subsidiary of Bassett. Our acquisition of Zenith brings to our Company the ability to deliver best-of-class shipping and logistical support services that are uniquely tailored to the needs of the furniture industry, as well as the ability to provide the expedited delivery service which is increasingly demanded by our industry. We believe that our ownership of Zenith will not only enhance our own wholesale and retail distribution capabilities, but will provide additional growth opportunities as Zenith continues to expand its service to other customers.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

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 heritage in the furniture industry with the penetration of 96 million households in the United States that HGTV enjoys today.  As part of this alliance, 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 since their introduction. In October of 2015, we announced the extension of our partnership with HGTV through 2019. While continuing to feature HGTV branded custom upholstery products in our HGTV Home Design Studios in BHF stores, we have now expanded the concept to select independent dealers. We believe this will provide additional growth outside our BHF store network.

 

At August 27, 2016, our BHF store network included 59 Company-owned stores and 32 licensee-owned stores. During the first nine months of 2016, we closed three underperforming stores in Tucson, Arizona; Egg Harbor, New Jersey and Fountain Valley, California. We opened a new store in Sterling, Virginia during the second quarter of 2016 and opened another new store in Hunt Valley, Maryland during the third quarter of 2016.

 

Due to the improved operating performance of our retail network over the last few years, we are expanding our retail presence in various parts of the country. We currently have signed leases for three new stores that we expect to open during fiscal 2017. In addition, we have a signed lease for the repositioning of one of our legacy stores to an improved location which we expect to occur in the first half of 2017. We are also in various stages of negotiation on several leases for both new store locations and relocations of existing stores. While there can be no assurance that any of these leases will be completed, we expect additional store openings and relocations during fiscal 2017.

 

As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $100 to $300 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $300 to $500 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

  

Results of Operations – Periods ended August 27, 2016 compared with periods ended August 29, 2015:

 

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the periods ended August 27, 2016 and August 29, 2015:

 

 

 

   

Quarter Ended

   

Nine Months Ended

 
   

August 27, 2016

   

August 29, 2015

   

August 27, 2016

   

August 29, 2015

 
                                                                 

Sales revenue:

                                                               

Furniture and accessories

  $ 91,465       87.3 %   $ 97,107       87.5 %   $ 276,857       87.0 %   $ 286,122       90.7 %

Logistics revenue

    13,247       12.7 %     13,904       12.5 %     41,395       13.0 %     29,250       9.3 %

Total sales revenue

    104,712       100.0 %     111,011       100.0 %     318,252       100.0 %     315,372       100.0 %

Cost of furniture and accessories sold

    40,091       38.3 %     44,824       40.4 %     124,496       39.1 %     133,676       42.4 %

SG&A expenses

    56,800       54.2 %     58,303       52.5 %     173,845       54.6 %     163,203       51.7 %

New store pre-opening costs

    281       0.3 %     192       0.2 %     727       0.2 %     236       0.1 %

Other charges

    -       0.0 %     -       0.0 %     -       0.0 %     974       0.3 %
                                                                 

Income from operations

  $ 7,540       7.2 %   $ 7,692       6.9 %   $ 19,184       6.1 %   $ 17,283       5.5 %

 

 

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and nine months ended August 27, 2016 as compared with the prior year periods.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2016

(Dollars in thousands except share and per share data)

 

Segment Information

 

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

 

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

 

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

 

Logistical services. With our acquisition of Zenith on February 2, 2015, we created the logistical services operating segment which reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s operating costs are included in selling, general and administrative expenses. Amounts charged by Zenith to the Company for transportation and logistical services prior to February 2, 2015 are included in selling, general and administrative expenses, and our equity in the earnings of Zenith prior to the date of acquisition is included in other loss, net, in the accompanying statements of income.

 

 

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

 

   

Quarter Ended August 27, 2016

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 
                                         

Sales revenue: