Bassett Furniture Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended August 27, 2011. Dollar amounts are in millions unless otherwise stated. The company designs, sources, manufactures, and sells home furnishings through wholesale channels and company-owned and licensed stores.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $59.4 | $58.5 | $189.9 | $169.3 |
| Gross profit margin | 49.2% | 45.5% | 49.6% | 47.7% |
| Operating income (loss) | ($0.2) | ($2.3) | ($21.7) | ($5.5) |
| Net income (loss) | $0.4 | ($2.4) | $54.7 | ($3.9) |
| Diluted earnings (loss) per share | $0.04 | ($0.21) | $4.72 | ($0.34) |
Q3 sales rose 1.5%; nine-month sales increased 12.2%. Q3 gross margin improved 3.7 percentage points, while operating loss narrowed. Nine-month net income primarily reflects an $85.5 million gain on the sale of the company’s IHFC investment; excluding that gain, reported earnings do not represent recurring operating profitability. Nine-month operating loss widened, including substantial receivable charges and special items.
For Q3, wholesale sales declined 4.3% to $41.9 million, while company-owned retail sales increased 12.4% to $33.6 million. Comparable-store sales rose 4.3%. Wholesale operating income improved to $1.5 million before specified debt-cancellation, restructuring, and impairment charges; retail continued to post an operating loss of $1.8 million.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $68.9 million at August 27, up from $11.1 million at November 27, 2010; current marketable securities were $3.1 million.
- Cash used in operations was $12.3 million for the first nine months, versus $1.7 million provided in the prior-year period. Investing activities provided $81.0 million, largely reflecting IHFC sale proceeds; financing activities used $10.9 million.
- Total assets were $223.7 million and stockholders’ equity was $158.6 million. Current assets were $139.6 million versus current liabilities of $45.8 million.
- Real estate notes payable totaled $6.1 million; there were no revolver borrowings at quarter-end. A $1.8 million mortgage was paid off on August 30, after quarter-end. The temporary $10 million credit line matured September 5; on September 28 the bank offered a new $3 million facility, subject to financial-ratio covenants and without an asset pledge. Standby letters of credit totaled $3.3 million at quarter-end.
Material changes and unusual items
- On May 2, Bassett sold its 46.9% IHFC interest. The filing reports a $85.5 million gain and $69.2 million in cash consideration received, with $6.1 million of additional consideration in tax and indemnification escrows. The proceeds supported debt and obligation payments, dividends, and share repurchases.
- Nine-month bad-debt and notes-receivable valuation charges rose to $13.1 million from $5.2 million. Q3 charges fell to $0.1 million from $1.3 million. Net accounts receivable declined to $16.5 million from $31.6 million; net notes receivable fell to $2.0 million from $8.2 million. Management said it stopped converting past-due receivables into notes.
- Nine-month operating charges included $6.4 million for cancellation of selected licensee debts, $2.1 million of restructuring and asset impairments, and $3.7 million of lease-exit costs. Other income also included $4.8 million of retail-real-estate impairment and lease-termination charges. Management said debt forgiveness was intended to help key licensees reinvest and strengthen the Bassett brand.
- The nine-month effective tax rate was approximately 6.2%, versus a 38.0% blended statutory rate, primarily due to anticipated use of tax-loss carryforwards and reversal of valuation allowance associated with the IHFC gain. Management estimated approximately $18 million of deferred tax assets could be realized in fiscal 2011; this depended on income projections.
Outlook, risks, and contingencies
No quantified revenue or earnings guidance is provided. Management said available cash and marketable securities should fund operations for the foreseeable future and may be used for working capital, store investments, dividends, or repurchases. The company announced an HGTV partnership to introduce a branded custom-upholstery and accent-furniture line in 2012. Management also noted that further store closures remain possible.
Key exposures include weak housing and consumer demand, licensee credit and collection risk, store profitability and closures, raw-material and sourced-product costs, import-supply-chain execution, and potential declines in retail-real-estate values. The company had $69.0 million of future minimum operating-lease payments and $2.9 million of guaranteed licensee lease obligations. Management stated that known legal and environmental matters were not expected to materially harm financial position or future results. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the nine-month $54.7 million net income is attributable to the nonrecurring IHFC sale gain, and what are sustainable operating earnings?
- Whether licensee collections and credit quality continue to improve after $13.1 million of nine-month receivable valuation charges.
- The status and terms of the post-quarter $3 million credit facility, including its covenants and relationship to $3.3 million of outstanding letters of credit.
- Whether the $6.1 million IHFC escrow consideration is released as expected and whether further special charges or store closures arise.
- Whether retail comparable-store growth, margins, and loss reduction continue, given persistent retail operating losses and real-estate exposure.