- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR |_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission file number: 1-14445 HAVERTY FURNITURE COMPANIES, INC. (Exact name of registrant as specified in its charter) MARYLAND 58-0281900 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 780 Johnson Ferry Road, Suite 800, Atlanta, Georgia 30342 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 443-2900 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [__] The number of shares outstanding of the registrant's two classes of $1 par value common stock as of April 30, 2001 were: Common Stock - 16,180,136; Class A Common Stock - 4,742,614.
HAVERTY FURNITURE COMPANIES, INC. INDEX Page No. -------- Part I. Financial Information: Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 3 Condensed Consolidated Statements of Stockholders' Equity - Three months ended March 31, 2001 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Quantitative and Qualitative Disclosure about Market Risk 11 Part II. Other Information 12
PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> March 31 December 31 2001 2000 ------------ ------------ <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 1,397 $ 3,256 Accounts receivable 172,035 182,466 Less allowance for doubtful accounts (6,750) (6,750) ------------ ------------ 165,285 175,716 Inventories, at LIFO 110,079 109,068 Other current assets 9,983 7,952 ------------ ------------ Total Current Assets 286,744 295,992 Property and equipment 256,709 249,868 Less accumulated depreciation and amortization (109,118) (105,343) ------------ ------------ 147,590 144,525 Other assets 8,004 7,646 ------------ ------------ $ 442,338 $ 448,163 ============ ============ </TABLE> 1
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) <TABLE> <CAPTION> March 31 December 31 2001 2000 ------------ ------------ <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 29,400 $ 3,600 Accounts payable and accrued expenses 64,684 80,791 Current portion of long-term debt and capital lease obligations 10,664 11,129 ------------ ------------ Total Current Liabilities 104,748 95,520 Long-term debt and capital lease obligations, less current portion 151,091 170,369 Other liabilities 3,422 2,899 Stockholders' Equity Capital stock, par value $1 per share: Preferred Stock, Authorized: 1,000 shares; Issued: None Common Stock, Authorized: 50,000 shares; Issued: 2001 -- 22,076 Shares; 2000 -- 21,958 shares (including shares in treasury: 2001 and 2000 -- 5,939 22,076 21,958 Convertible Class A Common Stock, Authorized: 15,000 shares; Issued: 2001 -- 5,267 shares; 2000 -- 5,276 shares (including shares in treasury: 2001 and 2000 -- 522) 5,267 5,276 Additional paid-in capital 34,283 33,594 Retained earnings 180,002 176,774 Accumulated other comprehensive (loss) (324) -- ------------ ------------ 241,304 237,602 Less cost of Common Stock and Convertible Class A Common Stock in treasury (58,227) (58,227) ------------ ------------ 183,077 179,375 ------------ ------------ $ 442,338 $ 448,163 ============ ============ </TABLE> See notes to condensed consolidated financial statements. 2
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) <TABLE> <CAPTION> Three Months Ended March 31 --------------------- 2001 2000 --------- --------- <S> <C> <C> Net sales $ 167,599 $ 163,741 Cost of goods sold 88,108 85,113 --------- --------- Gross profit 79,491 78,628 Credit service charges 3,053 3,370 --------- --------- Gross profit and other revenue 82,544 81,998 Expenses: Selling, general and administrative 71,495 68,016 Interest 3,164 2,865 Provision for doubtful accounts 1,011 933 Other expense (income), net 62 (66) --------- --------- 75,732 71,748 --------- --------- Income before income taxes and cumulative effect of a change in accounting principle 6,812 10,250 Income taxes 2,505 3,741 --------- --------- Income before cumulative effect of a change in accounting principle 4,307 6,509 Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method -- (3,356) --------- --------- Net income $ 4,307 $ 3,153 ========= ========= Weighted average shares - basic 20,807 21,097 Weighted average shares - assuming dilution 21,344 21,529 Basic earnings per share: Income before cumulative effect of a change in accounting principle $ 0.21 $ 0.31 Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method -- (0.15) --------- --------- Net income $ 0.21 $ 0.16 ========= ========= Diluted earnings per share: Income before cumulative effect of a change in accounting principle $ 0.20 $ 0.30 Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method -- (0.15) --------- --------- Net income $ 0.20 $ 0.15 ========= ========= Cash dividends per common share: Common Stock $ 0.0525 $ 0.0500 Class A Common Stock $ 0.0500 $ 0.0475 </TABLE> See notes to condensed consolidated financial statements. 3
HAVERTY FURNITURE COMPANIES, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Class A Common Common Accumulated Stock Stock Additional Other ($1 Par ($1 Par Paid-in Retained Comprehensive Treasury (In thousands, except per share data) Value) Value) Capital Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 $ 21,958 $ 5,276 $ 33,594 $ 176,774 $ -- $ (58,227) $ 179,375 Net income -- -- -- 4,307 -- -- 4,307 Cumulative effect of a change in accounting for derivative financial instruments, net of applicable income tax liability of $30 -- -- -- -- 53 -- 53 Change in fair value of derivative, net of applicable income tax asset of $218 -- -- -- -- (377) -- (377) Cash dividends on Common Stock -- -- -- (1,079) -- -- (1,079) Conversion of Class A Common Stock 9 (9) -- -- -- -- -- Stock option transactions, net 109 -- 689 -- -- -- 798 - ------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ 22,076 $ 5,267 $ 34,283 $ 180,002 $ (324) $ (58,227) $ 183,077 =============================================================================================================================== </TABLE> 4
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 ---------------------------- 2001 2000 -------- -------- Operating Activities <S> <C> <C> Net income $ 4,307 $ 3,153 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Cumulative effect of a change in accounting principle -- 3,356 Depreciation and amortization 4,095 3,921 Provision for doubtful accounts 1,011 933 Deferred income taxes (512) -- Loss (gain) on sale of property and equipment 26 40 -------- -------- Subtotal 8,927 11,403 Changes in operating assets and liabilities: Accounts receivable 9,420 6,435 Inventories (1,011) (12,682) Other current assets (2,031) (2,255) Accounts payable and accrued expenses (16,107) 266 -------- -------- Net cash (used in) provided by operating activities (802) 3,167 -------- -------- Investing Activities Purchases of property and equipment (7,202) (7,513) Proceeds from sale of property and equipment 17 1,549 Other investing activities (170) 719 -------- -------- Net cash used in investing activities (7,355) (5,245) -------- -------- Financing Activities Net increase in revolving credit agreement 8,100 14,400 Payments on long-term debt and capital lease obligations (2,043) (2,237) Dividends paid (1,079) (1,033) Other financing activities 523 26 Exercise of stock options 798 609 Purchase of treasury stock -- (9,663) -------- -------- Net cash provided by financing activities 6,299 2,102 -------- -------- (Decrease) increase in cash and cash equivalents (1,859) 24 Cash and cash equivalents at beginning of period 3,256 1,762 -------- -------- Cash and cash equivalents at end of period $ 1,397 $ 1,786 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 5
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all such adjustments are of a normal recurring nature. NOTE B - Changes in Accounting Principles Effective on January 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FASB Statement No. 138. The new standards require that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. As of January 1, 2001, the only derivative financial instrument held by the Company was a cash flow hedge interest rate swap agreement. Upon adoption of the new standards, the Company recognized an after-tax transition adjustment of $53,000, reflected in the accumulated other comprehensive (loss) income component of shareholders' equity as of that date. Changes in fair value of the derivative are recognized periodically in other comprehensive income. The effects of the adoption of the new standards did not significantly affect the Company's results of operations, its financial position, or its cash flows. The interest-rate swap agreement effectively converts a portion of the Company's floating rate debt to a fixed-rate basis over the next two years, thus reducing the impact of interest rate changes on future interest expense. Approximately $30 million of the Company's outstanding short-term debt was designated as the hedged item to the interest-rate swap agreement at March 31, 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This bulletin provides guidance on revenue recognition matters and, in accordance therewith, the Company changed its method of recognizing sales effective January 1, 2000. Under the new method, revenue from merchandise sales is recognized upon delivery to the customer. Previously, the Company recognized revenue for sales of merchandise when certain criteria were met, such as receipt of full payment, credit approval for charge sales and merchandise in stock. These conditions were typically met at the point of sale. The Company changed its method of revenue recognition on January 1, 2000. Accordingly, it is impractical to determine income utilizing the billed method for the first quarter of 2000. Revenues recognized in the first quarter of 2000 that were included in undelivered sales at December 31, 1999, aggregated approximately $19,000,000. The cumulative effect of the accounting change decreased net income by $3,356,000 and was recorded in the three-month period ended March 31, 2000. NOTE C - Interim LIFO Calculations An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) management's estimates of expected year-end inventory levels and costs. Since these are affected by factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Certain statements we make in this report, and other written or oral statements made by or on behalf of the Company, may constitute "forward-looking statements" within the meaning of the federal securities laws. Examples of such statements in this report include descriptions of our plans with respect to new store openings and relocations, our plans to enter new markets and expectations relating to our continuing growth. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections. Management believes that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. Such statements speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. The following are some of the factors that could cause the Company's actual results to differ materially from the expected results described in the Company's forward-looking statements: the ability to maintain favorable arrangements and relationships with key suppliers (including domestic and international sourcing); conditions affecting the availability and affordability of retail real estate sites; the ability to attract, train and retain highly qualified associates to staff corporate positions, existing and new stores and distribution facilities; general economic and financial market conditions, which affect consumer confidence and the spending environment for big ticket items; competition in the retail furniture industry; and changes in laws and regulations, including changes in accounting standards, tax statutes or regulations. CHANGES IN ACCOUNTING PRINCIPLES In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities which was amended by FASB Statement No. 138. The Statements require the Company to recognize all derivatives on the balance sheet at fair value and to establish criteria for designation and effectiveness of hedging relationships. The Company's only derivative instrument is an interest rate swap agreement and the changes in its fair value are recognized in other comprehensive income. The adoption of Statement Nos. 133 and 138 on January 1, 2001, resulted in an after-tax adjustment of $53,000 in other comprehensive income. The Company changed its accounting method for recognizing revenues on January 1, 2000, and is now recording merchandise sales upon delivery to the customer. Historically, sales were recognized and "billed" prior to delivery when certain criteria were met, such as receipt of full payment, credit approval for charge sales and merchandise in stock. The change is consistent with new guidance on revenue recognition provided by the Securities and Exchange Commission Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements. The implementation of this change was accounted for as a change in accounting principle and applied cumulatively as if the change occurred at January 1, 2000. RESULTS OF OPERATIONS Net sales for the first quarter of 2001 increased 2.4% to $167.6 million compared to sales of $163.7 million for the first quarter of 2000. Comparable-store sales, which were negatively impacted by the general economic slowing and the opening of new locations in existing markets, decreased 3% for the quarter. A store's results are included in the comparable-store sales computation beginning with the one-year anniversary of its opening, expansion, or the date when it was otherwise non-comparable. Management believes that the slowdown in the sales pace has 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) been caused by a general softness in the economy coupled with greater reluctance by consumers to spend discretionary sums as their stock market wealth declined and as concerns arise over the sharp increase in corporate layoff announcements. The Federal Reserve interest rate reductions thus far in the year and additional anticipated cuts are expected to help contain the recessionary performance to a limited number of industries. In the opinion of Management, the residential furniture industry entered a recession in early 2001 which is continuing into the second quarter. Although the duration of the industry downturn cannot be accurately predicted, the strong housing sales thus far in 2001 and the brisk level of home mortgage refinancings are typically positive influences on a recovery in the spending on residential furniture. This is, however, dependent on the return of a greater degree of overall consumer confidence. Gross profit, as a percent of sales, was 47.4% for the first three months of 2001 compared to 48.0% for the comparable period of 2000. Although lower than the prior year period, gross margins were comparable to more recent periods and the overall gross margin for 2000. First quarter credit service charge revenues decreased to 1.8% of net sales from 2.1% in the prior year period. This reduction is due to lower average outstanding accounts receivable and to a shift toward more customer usage of the "12 month no interest with 12 equal payments" promotion rather than deferred-payment promotions. Selling, general and administrative expenses, as a percent of net sales, increased to 42.7% for the three months ended March 31, 2001 from 41.5% in the prior year period. Additional occupancy expenses accounted for the majority of the increase. Operating costs of five new stores opened in late 2000 and one in early 2001 were only partially offset by reduced expenses from the closure of two small stores. Additionally, utility costs were higher in general for most Company locations. Advertising expenses were modestly higher as a percent of sales due to the lower than expected sales volume. Management is attempting to contain or reduce overhead costs where possible. The provision for doubtful accounts, as a percent of net sales, was 0.6% for the first quarter of 2001 which was unchanged from the first quarter of 2000. Management expects that the slowing economic environment is likely to require that the provision be higher for the remainder of 2001 than for the same period in 2000. Interest expense increased $0.3 million and, as a percent of net sales, to 1.9% for the first quarter from 1.8% in the prior year period. This increase, as compared to the year-ago period, is due to a 15.9% increase in the Company's average debt level, but was partially offset by a reduction in the effective interest rate by 16 basis points. Income before the cumulative effect of an accounting change, as a percent of sales, was 2.6% for the first quarter of 2001 and 4.0% for the first quarter of 2000. Diluted earnings per share before the cumulative effect of an accounting change were $0.20 and $0.30, for the three months ended March 31, 2001, and 2000, respectively. LIQUIDITY AND SOURCES OF CAPITAL The Company has historically used internally generated funds, bank borrowings and private placements with institutions to finance its continuing operations and growth. Net cash used in operating activities was $0.8 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) million during the first three months of 2001. Inventory during the first quarter increased only .9%, a lower rate than sales. Accounts receivable during the first quarter decreased on a slightly faster pace than in the prior year. Accounts payable decreased during the first quarter since purchases were reduced in reaction to slower sales. Investing activities used $7.4 million of cash during the three months ended March 31, 2001. Capital expenditures during the period were $7.2 million for new store construction and renovations, some of which will be completed later in the year. Financing activities provided $6.3 million of cash during the first quarter of 2001, including $8.1 million in increased borrowings under the Company's revolving credit facilities. Financing activities also included the use of $2.0 million for the repayment of long-term debt. The Company has two five-year revolving credit facilities totaling $105 million. These facilities, which expire in 2003, were syndicated with five commercial banks and provide a multi-year commitment for the Company's capital requirements. At March 31, 2001, borrowings under the revolving credit facilities were $79.4 million ($25.6 million unused) of which $75 million was classified as long-term debt. Borrowings under these agreements are unsecured and accrue interest at competitive money-market rates. The Company also has a $25 million short-term loan due January 2002 which is secured by accounts receivable and accrues interest at competitive rates. In addition to cash flow from operations, the Company uses bank lines of credit on an interim basis to finance capital expenditures and repay long-term debt. Longer-term transactions such as private placements of senior notes, sale/leasebacks and mortgage financings are used periodically to reduce short-term borrowings and manage interest-rate risk. The Company pursues a diversified approach to its financing requirements and balances its overall capital structure as determined by the interest rate environment with fixed-rate debt and interest rate swap agreements to reduce the impact of changes in interest rates on its variable rate debt (46.0% of total debt was fixed or interest rate protected as of March 31, 2001). The Company's average effective interest rate on all borrowings (excluding capital leases) was 6.2% at March 31, 2001. Capital expenditures for 2001 are presently expected to include the construction of a new store in an existing market; the purchase and remodeling of one replacement store; improvements to a leased replacement store; the remodeling and expansion of one store location; purchase of land for the expansion of regional warehouse facilities; and the purchase of various information systems equipment and software. The preliminary estimate of capital expenditures in 2001 is approximately $23 million. Funds available from operations, bank lines of credit and other possible financing transactions such as asset securitizations are expected to be adequate to finance the Company's planned expenditures. SEASONALITY Although the Company does not consider its business to be seasonal, sales are somewhat higher in the second half of the year. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes with respect to the Company's derivative financial instruments and other financial instruments and its related market risk since the date of the most recent annual report. 11
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The exhibit listed below is incorporated by reference into this report. Exhibit Number -- Description of Exhibit 10.12 -- Form of Agreement regarding Change in Control with the following Executive Officer: Clarence H. Ridley (executed February 23, 2001) (incorporated by reference from the Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit No. 10.12) (b) Report on Form 8-K. None 12
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the Undersigned thereunto duly authorized. HAVERTY FURNITURE COMPANIES, INC. (Registrant) Date May 14, 2001 By: /s/ Dennis L. Fink ---------------- --------------------------------- Dennis L. Fink, Executive Vice President and Chief Financial Officer (principal financial officer) By: /s/ Dan C. Bryant --------------------------------- Dan C. Bryant, Vice President and Controller (principal accounting officer) By: /s/ Jenny H. Parker --------------------------------- Jenny H. Parker, Vice President, Secretary and Treasurer 13