Bassett Furniture Industries, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended November 28, 2015 (52 weeks). Amounts are in thousands of dollars except per-share data, percentages, and where otherwise noted.
Business context and reporting period
Bassett designs, manufactures, sources, wholesales, and retails branded home furnishings. At year-end it operated 60 company-owned and 33 licensed Bassett Home Furnishings stores, alongside wholesale distribution through independent retailers and other channels.
On February 2, 2015, Bassett acquired the remaining 51% of Zenith Freight Lines, making it a wholly owned subsidiary and creating a logistical-services reporting segment. Fiscal 2015 includes Zenith’s results only from the acquisition date; fiscal 2014 did not include consolidated logistics revenue.
Key financial results
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net sales | $430,927 | $340,738 | Up 26.5%; includes $43,522 of consolidated external logistics revenue from Zenith after acquisition |
| Furniture and accessories sales | $387,405 | $340,738 | Up 13.7% |
| Operating income | $25,989 | $15,131 | Operating margin 6.0%, versus 4.4% |
| Income before taxes | $31,868 | $14,607 | Includes acquisition-related remeasurement gain and other income items |
| Income tax expense | $11,435 | $5,308 | Audited income statement amount; another MD&A passage reports $11,629, which the filing text does not clearly reconcile |
| Net income | $20,433 | $9,299 | More than doubled year over year |
| Diluted EPS | $1.88 | $0.87 | Includes approximately $0.41 per diluted share, net of tax, from remeasurement of the prior Zenith interest |
| Cash from operations | $32,398 | $29,961 | Up $2,437 |
The audited income statement implies net income of about 4.7% of sales in FY2015, versus about 2.7% in FY2014. Wholesale sales rose 13% to $252,180, with a 33.1% gross margin versus 33.2%; segment operating income was $15,618. Company-owned retail sales rose 15% to $249,379, and retail operations returned to $6,170 of operating income from a $528 loss. Zenith generated $77,250 of segment revenue and $3,528 of operating income from its acquisition date, before intercompany eliminations.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $36,268; short-term certificates of deposit were $23,125. Together, these totaled $59,393 at year-end.
- Current assets were $147,284 and current liabilities $79,850; the reported current ratio was 1.84:1. Total assets were $282,543 and stockholders’ equity $177,366.
- Net cash used in investing was $19,661, including $7,323 paid for the Zenith acquisition, a $1,345 capital contribution to Zenith, and property and equipment purchases of $13,974. Net cash used in financing was $3,142.
- Debt principal outstanding was $14,085 ($13,773 net carrying amount after discount); $5,477 of principal was due within one year. Debt rose primarily because of the Zenith acquisition. The company had $13,030 of availability on its $15,000 bank line after standby letters of credit, and reported covenant compliance.
- Future minimum operating lease payments were $124,897. Licensee lease guarantees were approximately $2,494 in the financial-statement note; the contractual-obligations table reports $2,537.
- FY2015 dividends declared totaled $0.54 per share, comprising $0.34 regular and $0.20 special. The company repurchased 76,350 shares for $2,071; $17,929 remained authorized under the repurchase plan.
Material changes versus the prior period
- Consolidated sales and operating income increased, but the sales comparison is affected by adding Zenith’s post-acquisition results. Furniture and accessories sales, which are more directly comparable, increased 13.7%.
- Comparable company-store delivered sales rose 13.3%; written sales rose 11%. Comparable-store operating income improved to $7,468 from $2,266.
- Wholesale backlog increased to $17,131 from $13,644; retail backlog increased to $31,871 from $30,206.
- Cash increased by $9,595 during the year. Property and equipment, goodwill, and intangible assets increased substantially in connection with the Zenith acquisition and related investment.
Outlook, management commentary, risks, and unusual items
- Management expected FY2016 capital expenditures of approximately $20 million, primarily for new and remodeled stores and logistics transportation equipment. It expected to open at least three stores and close three underperforming stores in FY2016.
- A new upholstery facility in Grand Prairie, Texas was expected to begin production in early March 2016. Management said sales of the new “Bench Made” American dining line were ahead of expectations. The HGTV partnership was extended through 2019, with the concept planned for select independent dealers.
- The filing identifies consumer demand, housing and retail conditions, competition, customer credit, raw-material costs and availability, overseas sourcing and shipping delays, and execution of store and logistics strategies as principal risks. Zenith also exposes Bassett to driver availability and costs, fuel prices, transportation regulation, and weather-related operating risks.
- FY2015 included a $7,212 non-cash gain from remeasuring Bassett’s previously held Zenith interest and $1,156 of CDSOA income. Operating charges included $419 of lease-exit costs, $106 of asset impairment charges, and $449 of management restructuring costs. The company also recorded a $182 impairment on investment real estate.
- Bassett remained involved in environmental matters and other claims. At the Ward Transformer Superfund site, it had spent approximately $1,000 on remediation, above its then-assessed share, and was negotiating its remaining share with other parties. Management did not expect known contingencies to materially affect financial position or future results.
- Management said the bank line, which matured in December 2015, had been temporarily extended while it negotiated a replacement expected in FY2016’s first quarter. Management believed available cash and operating cash flow would meet foreseeable needs.
- The financial-statement audit and the auditor’s internal-control opinion were unqualified. The FY2015 internal-control assessment excluded Zenith, which represented $30,836 of year-end assets and $43,522 of revenue.
Important facts for investors to verify
- Separate underlying furniture-and-retail growth from the partial-year contribution of the newly consolidated Zenith business, and assess Zenith’s ongoing margins and cash generation.
- Confirm FY2016 execution of the planned store openings and closures, Texas facility ramp-up, and approximately $20 million capital-spending plan.
- Review debt maturities, renewal terms and covenants for the bank line, and the company’s ability to fund its significant lease commitments.
- Monitor backlog conversion, inventory growth and reserves, licensee receivables and lease guarantees, and customer concentration.
- Check the resolution of the Ward Transformer remediation cost allocation and the filing’s differing income-tax expense figures and lease-guarantee disclosures.