For the quarterly period ended September 30, 2001
OR
HAVERTY FURNITURE COMPANIES, INC. (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (404) 443-2900
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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 October 22, 2001 were: Common Stock – 16,460,396, Class A Common Stock – 4,737,714.
(In thousands, except per share data)
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(Continued)
See notes to condensed consolidated financial statements.
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(In thousands)
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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 September 30, 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.
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 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.
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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 anticipated 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 revenue 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.
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RESULTS OF OPERATIONS
Net sales for the third quarter and nine months ended September 30, 2001, decreased 3.8% and 3.0% over the same periods for 2000, respectively. Comparable-store sales, which were negatively impacted by the general economic slowing and the opening of new locations in existing markets, decreased 8.8% and 8.0% for the third quarter and nine-month period, respectively. 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 decrease in sales has been caused by a general weakness in the economy coupled with a drop in consumer confidence as concerns continue over the increase in corporate layoff announcements. The Federal Reserve interest rate reductions during the year and possible additional cuts are expected to help spur an economic recovery. In the opinion of Management, the residential furniture industry entered a recession in early 2001 which is continuing into the fourth quarter. The attacks on the United States on September 11 and the continued threat of further destabilizing events has created additional uncertainty as to the timing of the improvement in sales volume. Although the duration of the industry downturn cannot be predicted, strong housing sales thus far in 2001 and the brisk level of home mortgage refinancings are typically positive influences on a recovery in 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 47.8% for the third quarter of 2001 compared to 47.2% for the comparable period of 2000 and 47.6% compared to 47.4% for the nine months ended September 30, 2001 and 2000, respectively. Gross margins have increased in recent periods due to fewer markdowns, which is attributable to better management of inventory and product introductions and an increase in the sales mix of the Company’s Havertys branded product. The Company has worked with manufacturers to develop these proprietary products which bear the Havertys logo and name. These Havertys brand items currently represent approximately 19% of the Company’s core product line, up from 11% at the first of the year.
Third quarter credit service charge revenues were 1.6% of net sales, compared to 1.8% for the prior year period, with the dollar amount declining by $394,000. This drop was due to a shift toward more customer usage of the 12-months, no-interest financing promotions.
Selling, general and administrative expenses, as a percent of net sales, increased to 42.3% from 40.4% for the quarter and to 43.1% from 41.0% for the nine months ended September 30 as compared to the prior year periods. 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 older stores that were smaller and less expensive. Net retail square footage increased 5.0% on a weighted average basis for the first nine months of 2001 versus the same period in 2000. The Company also determined during the third quarter of 2001 the need to increase its reserves for insurance and its accrual for pension costs, and additional amounts were expensed as required. Reductions in costs were made in delivery and warehouse operations. Management continues to make efforts to contain or reduce overhead costs where possible.
The provision for doubtful accounts, as a percent of net sales, was 0.6% for the third quarter and first nine months of 2001, which is slightly higher than the 0.5% reported for the same periods 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.
In late October, the Company began using a third-party finance company to provide a one-year, no-interest, no-payment, same-as-cash credit promotion. Management expects that the out-sourcing of this one program will free up capital and reduce credit exposure over the next year as some customers choose this financing option in lieu of those offered directly by the Company.
Interest expense decreased as a percent of net sales, to 1.3% from 1.6% for the quarter and to 1.6% from 1.7% for the nine months ended September 30, 2001 and 2000, respectively. The impact of the 8.3% increase in the Company’s average debt level as compared to the year ago nine-month period was more than offset by a reduction in the effective interest rate of 109 basis points.
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Income before the cumulative effect of an accounting change, as a percent of sales, was 3.3% and 4.2% for the third quarter and 2.6% and 3.9% for the nine months ended September 30, 2001 and 2000, respectively. Diluted earnings per share before the cumulative effect of an accounting change were $0.26 and $0.35 for the third quarter and $0.58 and $0.93 for nine months ended September 30, 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 provided by operating activities was $34.2 million during the first nine months of 2001 versus $20.3 million for the same period in 2000. Accounts receivable during the first nine months decreased $10.5 million, mostly due to lower sales volume, as compared to an increase of $1.6 million in the prior year. Inventories increased modestly in 2001 due to the new merchandise displayed in the added retail showroom square footage.
Investing activities used $17.5 million of cash during the nine months ended September 30, 2001. Capital expenditures during the period were $18.2 million for new store construction and renovations, some of which will be completed next year.
Financing activities used $18.1 million of cash during the first nine months of 2001, including $17.2 million for reducing 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 September 30, 2001, borrowings under the revolving credit facilities were $61.4 million ($43.6 million unused), of which $57.9 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 certain 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 (50.8% of total debt was fixed or interest rate protected as of September 30, 2001). The Company’s average effective interest rate on all borrowings (excluding capital leases) was 5.3% at September 30, 2001.
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Capital expenditures for 2001 include the purchase and remodeling of two stores formerly operated by a competitor; the construction of one new store in an existing market; tenant improvements to one leased replacement store; other various store renovations; the purchase of land for the expansion of regional warehouse facilities; and the purchase of various information systems equipment and software. The present estimate of total capital expenditures for 2001 is $21.0 million. In addition, the Company is presently seeking to acquire up to eight stores from a former competitor who is liquidating in bankruptcy. Four of these stores are under operating leases and four would be outright purchases. If some or all of the Company’s bids are accepted, the purchases will likely be made by the end of 2001 and all of the remodeling expenditures will take place during 2002. The total capital expenditures for all of these stores, together with all related improvements, will be approximately $21 million. Management cannot presently predict whether any of its bids for these stores will be accepted. Funds available from operations, bank lines of credit and other possible financing transactions 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.
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There have been no material changes with respect to the Company’s derivative financial instruments and other financial instruments and their related market risk since the date of the Company’s most recent annual report.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report.
None.
(b) Reports on Form 8-K.
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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.
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