Bassett Furniture Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended August 29, 2020; year-to-date period covers 39 weeks. The comparable 2019 nine-month period covered 40 weeks. Financial amounts below are in millions unless otherwise noted.
Business context and results
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. Its Zenith subsidiary provides furniture-focused logistics services. COVID-19 temporarily closed stores, factories and warehouses, mainly in Q2; stores had reopened by mid-June and manufacturing resumed in May.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $91.6 | $109.4 | $267.5 | $338.5 |
| Operating income (loss) | $2.7 | $3.4 | $(26.3) | $5.1 |
| Net income (loss) | $2.2 | $2.2 | $(17.0) | $3.2 |
| Diluted EPS | $0.22 | $0.21 | $(1.70) | $0.31 |
| Operating cash flow | $23.2 | Not clearly stated for the quarter | $17.5 | $(2.1) |
Q3 revenue fell 16.3% year over year; furniture and accessories revenue declined 18.3%, while logistics revenue increased 1.5%. Q3 operating margin was 3.0%, versus 3.1%. Nine-month revenue declined 21.0%; the nine-month operating loss included substantial impairment and litigation charges. The company reported Q3 operating cash flow of $23.2 million in MD&A; nine-month cash flow was $17.5 million.
Financial position and liquidity
- At August 29, cash and cash equivalents were $31.0 million and short-term investments were $17.7 million, totaling $48.7 million. Current assets were $145.9 million and current liabilities were $110.5 million.
- The company reported no drawn bank borrowings. Its $50 million credit facility had $47.8 million available after standby letters of credit; maximum availability was scheduled to fall to $25 million after December 31, 2020. Financial-ratio covenants were waived through fiscal 2020; the facility matures January 31, 2022.
- Operating lease liabilities totaled $145.2 million, with an additional $1.3 million of finance lease obligations. Adoption of lease accounting in fiscal 2020 materially increased reported assets and liabilities.
- Customer deposits were $35.7 million, up from $25.3 million at fiscal 2019 year-end, largely reflecting unfilled customer orders. Cash increased $11.3 million over the first nine months.
Material changes and unusual items
- Q3 wholesale orders increased 26% year over year; wholesale backlog was $37.4 million, versus $11.6 million a year earlier. Retail written sales increased 10%; retail backlog was $47.9 million, versus $28.2 million.
- Nine-month special charges totaled $15.2 million: $12.2 million of asset and goodwill impairments and $1.1 million of additional wage-and-hour litigation expense. Asset impairments included charges for five underperforming retail stores and closure of the Grand Prairie, Texas upholstery facility. Inventory valuation charges were $3.8 million.
- Q3 other income included a $0.9 million gain from a Company-owned life insurance death benefit.
- Management cited COVID-related labor shortages and supply-chain disruptions as causes of delayed fulfillment and growing backlogs. Manufacturing lead times had risen to more than eight weeks.
Outlook, risks and contingencies
No numerical earnings or revenue guidance was provided. Management expected manufacturing and shipping capacity to improve and wholesale and retail backlogs to begin declining by the end of Q4 2020. It cautioned that prolonged fulfillment delays could prompt order cancellations and deposit refunds, while renewed restrictions or economic weakness could hurt demand and liquidity. Other identified risks include input costs, store performance and closures, supply-chain execution, and the value of retail real estate and leased locations.
The company had accrued $1.75 million for class-action wage-and-hour claims, but stated the ultimate resolution could cost substantially more. It also guaranteed $1.8 million of licensee lease obligations. Management stated that other ordinary-course legal and environmental matters were not expected to materially affect financial position or future results.
Important facts for investors to verify
- Whether strong incoming orders convert to shipments and revenue as production and logistics constraints ease, and whether customers cancel delayed orders.
- Whether the $35.7 million of customer deposits and available credit remain adequate if fulfillment delays or COVID-related restrictions worsen.
- Whether further store or asset impairments, inventory write-downs, or additional litigation costs arise.
- How lease obligations, store closures and the scheduled reduction in credit-line availability affect liquidity.
- The filing reports $17.5 million of operating cash flow for the nine months and separately cites $23.2 million for Q3; verify the quarterly cash-flow presentation against the underlying statements.