Bassett Furniture Industries, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended November 24, 2012; 52 weeks. Dollar amounts below are in millions unless stated otherwise. This is an annual filing, with fourth-quarter results noted separately.
Business context
Bassett designs, manufactures, sources, wholesales and retails branded home furnishings. Its 86 Bassett Home Furnishings stores comprised 53 company-owned and 33 licensee-operated locations. Wholesale sales represented 52% of net sales and company retail 48%. About half of wholesale sales were imported products. The company also owns a 49% interest in freight and logistics provider Zenith.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $269.7 | $253.2 |
| Gross profit / gross margin | $141.3 / 52.4% | $127.6 / 50.4% |
| Operating income (loss) | $5.1 / 1.9% | $(20.6) / (8.1)% |
| Income before taxes | $12.0 | $59.8 |
| Income tax benefit (provision) | $14.7 benefit | $4.4 provision |
| Net income | $26.7 | $55.3 |
| Diluted earnings per share | $2.41 | $4.79 |
| Cash from (used in) operations | $8.0 | $(5.4) |
- Sales grew 6.5%. Company-owned retail sales rose 16.0%, including 9.1% delivered comparable-store growth; wholesale sales rose 4.4%.
- Operating results improved substantially as bad debt and notes-receivable charges fell to $0.4 from $13.5, and restructuring, impairment and lease-exit charges declined to $1.1 from $12.7.
- FY2012 net income included an $18.7 tax benefit from releasing most of the deferred-tax-asset valuation allowance and $9.0 of final CDSOA duty distributions. The tax benefit was a major contributor to reported earnings; management estimated net deferred tax assets of $17.3, expected to reduce future cash taxes if realized.
- FY2011 results included an $85.5 gain on the IHFC sale. Accordingly, the year-over-year decrease in net income reflects the absence of that unusual gain and is not directly comparable with recurring operating performance.
- Cash and equivalents were $45.6 at year-end, down $24.0. Current assets were $132.5 and current liabilities $52.6; the reported current ratio was 2.52. Total assets were $227.2 and stockholders’ equity $157.3.
- Operating cash flow improved by $13.4, but included the $9.0 CDSOA receipt. Inventory increased to $57.9 from $45.1; consolidated inventory turns declined to 2.5 from 2.9.
- Long-term debt was $3.1; mortgage notes totaled $3.3. A new secured revolving credit line of up to $15.0 was entered into after year-end, on December 18, 2012. Standby letters of credit outstanding at year-end were $2.0.
Material changes and management outlook
- Retail segment operating loss narrowed to $2.1 from $4.5. The 40 stores comparable for both years were approximately break-even in FY2012, versus a $2.0 operating loss in FY2011. Management stated company-owned stores as a whole still operated at a loss.
- The HGTV Home Collection was being launched through selected retailers; sample shipments for the first phase were completed in January 2013. Management identified incremental marketing and infrastructure costs, and the risk that sales may not adequately offset them.
- Management expected to increase company-owned store count during 2013, primarily through selected new openings. Planned FY2013 capital expenditures were $9.0–$11.0, mainly for store openings and remodels and a new retail enterprise system. Management believed available cash and operating cash flow would fund foreseeable needs.
- The year-end wholesale backlog was $12.0, expected to ship during FY2013, mostly in the first quarter; retail backlog was $18.2. These order balances are not guarantees of future revenue.
- Management cited improving housing starts and retail conditions, while noting ongoing uncertainty in consumer demand. Key risks include economic weakness, store profitability and licensee credit, competition, changing consumer tastes, sourcing and shipping disruptions, and volatile raw-material costs.
Contingencies and unusual items
- A jury verdict in the Colonial Trading dispute resulted in a $1.4 judgment against Bassett; both parties appealed, and Colonial’s attorney-fee motion remained pending. The company said reserves covered the judgment amount; Colonial also sought, among other things, treble damages.
- Bassett had received the final $9.0 CDSOA distribution, but litigation remained pending that could potentially require repayment of some or all of it.
- Year-end future minimum operating lease payments were $72.8; contingent licensee lease guarantees were reported at $2.0. Environmental matters included a Superfund site for which Bassett had spent about $1.0 and estimated its share of total remediation liability at approximately $0.3, while seeking recovery from other responsible parties.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Separate recurring operating performance from the $18.7 deferred-tax valuation-allowance benefit and $9.0 CDSOA distribution; assess whether future taxable income supports realization of deferred tax assets.
- Track comparable-store sales, store-level profitability, and whether planned openings and HGTV-related spending generate adequate returns.
- Monitor inventory growth, turnover, product obsolescence reserves, and cash conversion as new products and imported inventory build.
- Review licensee credit exposure, lease and loan guarantees, the Colonial appeal and fee motion, and potential CDSOA repayment exposure.
- Confirm use and availability of the post-year-end $15.0 credit facility, covenant compliance, and the cash impact of dividends, repurchases, leases and planned capital spending.