NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
unaudited)
Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. The accompanying unaudited financial statements should be read in conjunction with the Company’s Form 10-K for the year ended March 3, 2018. All adjustments that are, in the opinion of management, necessary for a fair presentation of the Consolidated Financial Statements contained in this report have been made and consist only of normal recurring adjustments, except as otherwise described herein, if any. Certain items in these Consolidated Financial Statements have been reclassified to conform to the current period presentation. Fiscal 2019 consists of a 52-week year ending on March 2, 2019. Fiscal 2018 consisted of a 53-week year which ended on March 3, 2018. The results of operations for the 13 and 39 weeks ended December 1, 2018 and November 25, 2017, are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment under the name Pier 1 Imports. As of December 1, 2018, the Company had no financial instruments with fair market values that were materially different from their carrying values, unless otherwise disclosed.
NOTE 1 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share amounts were determined by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Stock-based awards totaling 2,442,000 and 2,127,000 were excluded from the computation for the 13 and 39 weeks ended December 1, 2018, respectively, as the effect would be antidilutive. Stock-based awards totaling 395,000 and 1,756,000 were excluded from the computation for the 13 and 39 weeks ended November 25, 2017, respectively, as the effect would be antidilutive. Earnings (loss) per share amounts were calculated as follows (in thousands except per share amounts):
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
December 1,
|
|
|
November 25,
|
|
|
December 1,
|
|
|
November 25,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income (loss)
|
|
$
|
(50,441
|
)
|
|
$
|
7,381
|
|
|
$
|
(130,032
|
)
|
|
$
|
(3,428
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,784
|
|
|
|
79,658
|
|
|
|
80,508
|
|
|
|
80,363
|
|
Effect of dilutive stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Effect of dilutive restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
|
80,784
|
|
|
|
79,658
|
|
|
|
80,508
|
|
|
|
80,363
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
0.09
|
|
|
$
|
(1.62
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
0.09
|
|
|
$
|
(1.62
|
)
|
|
$
|
(0.04
|
)
|
NOTE 2 – LONG-TERM DEBT AND AVAILABLE CREDIT
Revolving Credit Facility
—
At the end of the third quarter of fiscal 2019, the Company had a $350,000,000 secured revolving credit facility with a $150,000,000 accordion feature that matures on June 2, 2022 (“Revolving Credit Facility”). Credit extensions under the Revolving Credit Facility were limited to the lesser of $350,000,000 or the amount of the calculated borrowing base, as defined in the Revolving Credit Facility, which was $361,893,000 as of December 1, 2018. The Company had no cash borrowings and $40,641,000 in letters of credit and bankers’ acceptances outstanding under the Revolving Credit Facility, with $309,359,000 remaining available for cash borrowings, all as of December 1, 2018. At the Company’s option, borrowings will bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the adjusted LIBOR rate as defined in the Revolving Credit Facility plus a spread varying from 125 to 150 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility, or (b) the prime rate as defined in the Revolving Credit Facility plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility.
S
ubsequent to quarter end, the Company amended its secured revolving credit facility to include a new $50,000,000 first-in, last-out (“FILO”) tranche provided by Bank of America and Pathlight Capital. The new FILO tranche, which was completed and funded on December 14, 2018, expands the secured revolving credit facility from $350,000,000 to $400,000,000 and modifies the borrowing base. The amendment provides for a $15,000,000 FILO loan (“FILO Loan”), subject to a borrowing base, which bears interest at either the adjusted LIBOR rate plus 300 basis points per annum or the prime rate plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility. The amendment also provides for a $35,000,000 term
10
l
oan
(“ABL Term Loan”)
, subject to a borrowing base, which bears interest at the adjusted LIBOR rate plus 800 basis points per annum, and which w
ill amortize in equal quarterly installments of 1.25% of the original principal amount thereof commencing on June 30, 2020. The maturity date of each of the FILO
L
oan and the ABL
T
erm
L
oan is June 2, 2022.
The proceeds of the FILO
L
oan and the ABL
T
erm
L
oa
n will be used for working capital, capital expenditures and
general corporate purposes.
The amendment did not result in any other material changes to the Revolving Credit Facility.
Term Loan Facility
—
The Company has a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of December 1, 2018, March 3, 2018 and November 25, 2017, the Company had $191,500,000, $193,000,000 and $193,500,000 outstanding, respectively, under the Term Loan Facility with carrying values of $189,592,000, $190,495,000 and $190,780,000, respectively, net of unamortized discounts and debt issuance costs.
The fair value of the amount outstanding under the Term Loan Facility was approximately $141,352,000 as of December 1, 2018, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchy based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
NOTE 3 – MATTERS CONCERNING SHAREHOLDERS’ EQUITY
For the 13 and 39 weeks ended December 1, 2018, the Company recorded compensation expense related to restricted stock of $835,000 and $2,099,000, respectively. For the 13 and 39 weeks ended November 25, 2017, the Company recorded compensation expense related to restricted stock of $489,000 and $2,948,000, respectively.
Subsequent to quarter end, the Company granted 1,114,542 shares of restricted stock as employment inducement awards outside of a plan to certain executives. The total grant date fair value of the shares awarded was $1,600,000. The shares are time based and will be expensed over three-year periods.
NOTE 4 – INCOME TAX
The income tax provision for the third quarter of fiscal 2019 was $17,876,000, compared to $3,704,000 during the same period in the prior fiscal year. The effective tax rate for the third quarter of fiscal 2019 was (54.9%), compared to 33.4% in the same period during fiscal 2018. The increase in the income tax provision for the third quarter of fiscal 2019 was primarily related to the recognition of a $20,761,000 non-cash charge to increase the Company’s valuation allowance against its U.S. federal deferred tax assets and a portion of its state deferred tax assets. Of this amount, $19,038,000 was attributable to deferred tax assets recognized during the first half of fiscal 2019. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. When the need for a valuation allowance is assessed, the Company considers all available positive and negative evidence. Recent cumulative losses were a significant piece of negative evidence management considered in determining it was not more likely than not that certain of its deferred tax assets would be realized, resulting in the increase to the Company’s valuation allowance. The non-cash charge to increase the Company’s valuation allowance was partially offset by certain favorable discrete items occurring in the third quarter of fiscal 2019.
The income tax benefit for the year-to-date period of fiscal 2019 was $2,321,000, compared to $4,201,000 during the same period in the prior fiscal year. The effective tax rate for the year-to-date period of fiscal 2019 was 1.8%, compared to 55.1% in the same period during fiscal 2018. The decrease in the income tax benefit and the lower effective tax rate for the year-to-date period of fiscal 2019 primarily relates to the Company’s $20,761,000 non-cash charge to increase to its valuation allowance in the third quarter of fiscal 2019, which reduced tax benefits recognized for the period. The effective tax rate for the year-to-date period of fiscal 2018 was also impacted by certain non-deductible items recognized during the period, including the Consumer Product Safety Commission (“CPSC”) matter referenced in
Note 5 - Commitments and Contingencies
. The statutory federal rate was 21% for the third quarter and year-to-date period of fiscal 2019 compared to 35% for the same periods last year.
As of December 1, 2018, the Company had total unrecognized tax benefits of $4,885,000, the majority of which, if recognized, would affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to settlements with certain taxing jurisdictions.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Putative class action complaints were filed in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between April 10, 2014 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants' alleged violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
11
promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys' f
ees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. On June 25, 2018, the c
ourt granted the Company’s motion to dismiss the amended complaint, with prejudice.
T
he plaintiffs
subsequently
filed a notice of appeal
and a related appellate brief; the Company plans to file its reply brief in January 2019.
Although the ultimate outcome
of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against it vigorously.
The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the CPSC. In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The Company responded to the inquiry and cooperated with the CPSC. On September 20, 2017, the Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. On October 27, 2017, the Company submitted its response to the CPSC letter. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. The CPSC has responded to the Company’s letter and generally declined to accept the Company’s position. The Company entered into settlement discussions with the CPSC during the third quarter of fiscal 2019. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2,000,000 to $6,200,000. While the Company anticipates that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay.
The Company was a defendant in lawsuits in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits sought unspecified monetary damages, injunctive relief and attorneys’ fees. The Company settled these cases as expected on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company recognized expense of $6,600,000 in the second quarter of the prior fiscal year attributable to the legal and regulatory proceedings described in this paragraph and the preceding paragraph as a component of selling, general and administrative expenses.
There are various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operation of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Note and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity.
NOTE 6 – NEW ACCOUNTING STANDARDS
Accounting Standards
—
Recently Adopted:
ASU 2014-09
—
Revenue from Contracts with Customers (Topic 606)
Revenue Recognition
— The Company
adopted Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”,
in the first quarter of fiscal 2019, using the modified retrospective approach. As a result, the Company
recorded a cumulative adjustment to increase retained earnings and decrease gift cards and other deferred revenue by
$9,444,000 ($7,020,000, net of tax)
related to the acceleration in the timing of recognizing gift card breakage revenue. The Company now recognizes gift card breakage revenue over the expected redemption period rather than when the likelihood of redemption is remote.
Revenue is recognized upon customer receipt or delivery for retail sales. A reserve has been established for estimated merchandise returns based upon historical experience and other known factors. The new standard required a change in the presentation of the reserve on the consolidated balance sheet, which was previously recorded net of the value of returned merchandise, but is now presented on a gross basis. During the first quarter of fiscal 2019, the Company recorded an adjustment of $2,216,000 to present the reserve on a gross basis, with an offset recorded to other current assets. The gross reserve for estimated merchandise returns at December 1, 2018 was $7,809,000. The Company’s revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties. Amounts charged to customers for shipping and handling are included in net sales. For the 13 and 39 weeks ended December 1, 2018, the Company recognized revenue of $3,049,000 and $11,659,000 for gift card redemptions. These amounts were previously included in gift cards and other deferred revenue on the Company’s consolidated balance sheet as of March 3, 2018.
12
Disaggregated Revenues
—
Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during the 13 and 39 weeks ended December 1, 2018 and Nove
mber 25, 2017 were as follows (in thousands):
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
December 1,
|
|
|
November 25,
|
|
|
December 1,
|
|
|
November 25,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Retail sales
|
|
$
|
410,377
|
|
|
$
|
465,803
|
|
|
$
|
1,132,170
|
|
|
$
|
1,276,282
|
|
Other
(1)
|
|
|
2,855
|
|
|
|
3,358
|
|
|
|
8,262
|
|
|
|
10,011
|
|
Net sales
|
|
$
|
413,232
|
|
|
$
|
469,161
|
|
|
$
|
1,140,432
|
|
|
$
|
1,286,293
|
|
(1)
|
The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a "store within a store" format in Mexico and El Salvador and online in Mexico. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage.
|
ASU 2016-15
—
Statement of Cash Flows (Topic 230)
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15,
“Statement of Cash Flows (Topic 230).”
The standard is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2016-16
—
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”
This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with modified retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2016-18
—
Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash.”
The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2017-07
—
Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07,
“Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”
The new guidance requires the service cost component of the net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization. Other components will be presented separately from the line items that include the service cost and outside of any subtotal of operating income, if one is presented. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019. The guidance on the presentation of the components of net periodic benefit cost requires retrospective application. The guidance limiting the capitalization of net periodic benefit cost requires prospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2017-09
—
Compensation — Stock Compensation
(Topic 718):
Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, “
Scope of Modification Accounting.
” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 on a prospective basis. The
adoption
of this guidance did not have a material impact on the Company’s financial statements.
SEC Disclosure Update
In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted final rules under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending and expanding certain disclosure requirements. The rules require, among other things, that registrants include in their interim financial statements a reconciliation of changes in shareholders’ equity in the notes or as a separate statement that reconciles the beginning balance to the ending balance of each caption in shareholders’ equity for each period
13
for which an income statement is required to be filed.
The Company
applied the new SEC disclosure requirements to the Consolidated Statements of Shareholders’ Equity
in the third quarter of fiscal 2019 on a retrospective basis.
Accounting Standards
—
Pending Adoption:
ASU 2016-02
—
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842),”
which provides new guidance on accounting for leases and will require lessees to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The Company leases its corporate headquarters, retail stores and the majority of its distribution and fulfillment centers; therefore, this ASU is expected to have a material impact on the Company’s consolidated balance sheets, but is not expected to have a material impact on the consolidated statements of operations or consolidated statements of cash flows. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
The Company will adopt this ASU and related amendments beginning in the first quarter of fiscal 2020 using a modified retrospective transition method and expects to elect certain practical expedients permitted under the transition guidance, including the package of practical expedients and the transition option that allows entities to not apply the new standard to comparative periods in the year of adoption. The Company has a project team focused on identifying a complete population of leases, evaluating accounting policy elections, and establishing new processes and internal controls. The Company implemented a new lease system to assist with its compliance with ASU 2016-02 during fiscal 2019.
ASU 2018-02
—
Income Statement
—
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “
Income Statement
—
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
” ASU 2018-02 gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that have been stranded in accumulated OCI as a result of the remeasurement of deferred taxes to reflect the lower federal income tax rate enacted as part of the Tax Act. ASU 2018-02 requires entities to make new disclosures, regardless of whether they elect to reclassify tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. Early adoption in any period is permitted. ASU 2018-02 can be applied either retrospectively or in the period of adoption. ASU 2018-02 is effective for the Company beginning in fiscal 2020. The Company is evaluating the impact of the adoption of ASU 2018-02 on its financial statements, but does not expect it to have a material impact.
ASU 2018-14
—
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,”
which makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans.
The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU 2018-14 is effective for the Company beginning in fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2018-14 on its financial statements, but does not expect it to have a material impact.
ASU 2018-15
—
I
ntangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15,
“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,”
requiring a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 is effective for the Company beginning in fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2018-15 on its financial statements, but does not expect it to have a material impact.
14