(Mark One)
OR
HAVERTY FURNITURE COMPANIES, INC. (Exact name of registrant as specified in its charter)
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 July 24, 2001 were: Common Stock – 16,270,162, Class A Common Stock – 4,738,314.
H A V E R T Y F U R N I T U R E C O M P A N I E S, I N C.
(In thousands)
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CONDENSED CONSOLIDATED BALANCE SHEETS(Continued)
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
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5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
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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 June 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.
RESULTS OF OPERATIONS
Net sales for the second quarter and six months ended June 30, 2001, decreased 7.5% and 2.6% 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 12.2% and 7.6% for the second quarter and six month period, respectively. A store’s results are included in the comparable-store sales computation
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(Continued)
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 softness in the economy coupled with greater reluctance by consumers to spend discretionary sums as their stock market wealth has declined and as concerns arise over the sharp 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 third quarter. Although the duration of the industry downturn cannot be predicted with certainty, 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 47.5% for the second quarter of 2001 compared to 47.1% for the comparable period of 2000 and 47.5% compared to 47.6% for the six months ended June 30, 2001 and 2000, respectively. Gross margins have been relatively consistent in recent periods and comparable to the overall gross margin for the full year 2000.
Second quarter credit service charge revenues were 1.9% of net sales, unchanged from the prior year period, but the dollar amount declined by $360,000. This drop was due 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 44.3% from 41.1% for the quarter and to 43.4% from 41.3% for the six months ended June 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 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 second quarter and first six 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.
Interest expense decreased as a percent of net sales, to 1.8% from 1.9% for the quarter and was unchanged at 1.8% for the six months ended June 30, 2001 and 2000. The impact of the 8.5% increase in the Company’s average debt level as compared to the year ago quarter was offset by a reduction in the effective interest rate by 114 basis points.
Income before the cumulative effect of an accounting change, as a percent of sales, was 1.7% and 3.5% for the second quarter and 2.2% and 3.8% for the six months ended June 30, 2001 and 2000, respectively. Diluted earnings per share before the cumulative effect of an accounting change were $0.12 and $0.28, for the second quarter and $0.32 and $0.58 for six months ended June 30, 2001 and 2000, respectively.
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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 $14.4 million during the first six months of 2001. Accounts receivable during the first six months decreased on a faster pace than in the prior year. Accounts payable decreased during the first half of the year since purchases were reduced in reaction to slower sales.
Investing activities used $12.5 million of cash during the six months ended June 30, 2001. Capital expenditures during the period were $13.1 million for new store construction and renovations, some of which will be completed later in the year.
Financing activities used $4.0 million of cash during the first half of 2001, including $3.9 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 June 30, 2001, borrowings under the revolving credit facilities were $73.0 million ($32.0 million unused) of which $67.8 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 (47.4% of total debt was fixed or interest rate protected as of June 30, 2001). The Company’s average effective interest rate on all borrowings (excluding capital leases) was 5.8% at June 30, 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 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 $20.0 million. 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.
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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 4. Submission of Matters to a Vote of Security Holders.
The 2001 Annual Meeting of Stockholders of the Company was held on May 4, 2001.
At the meeting the following persons were elected by the holders of Common Stock to serve for a term of one year and until their successors are elected:
The number of votes cast “for” or “withheld” was as follows: Mr. Humann: For = 12,655,414, Withheld = 1,128,979; Mr. Glover: For = 12,744,103, Withheld = 1,040,290; Ms. Mangum: For = 12,742,873, Withheld = 1,041,520.
The holders of Class A Common Stock elected the following persons to serve for a term of one year and until their successors are elected:
The number of votes cast by the holders of Class A Common Stock was as follows: Mr. Haverty, Sr.: For = 4,173,513, Withheld = 14,844; for each of the remaining nominees: For = 4,173,557, Withheld = 14,800.
A proposal to amend the Company’s Employee Stock Purchase Plan to increase the number of shares available for purchase under the Plan was approved by a 98.9% affirmative vote of the 50,102,141 total votes cast at the meeting as follows:
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PART II. OTHER INFORMATION (Continued)
Item 5. Other Information
A proposal to amend the Company’s 1998 Stock Option Plan to increase the number of shares available for option grants under the Plan was approved by a 92.9% affirmative vote of the 50,102,141 total votes cast at the meeting, as follows:
Item 6. Exhibits and 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.