- -------------------------------------------------------------------------------- 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 SEPTEMBER 30, 1999 ------------------ 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.) 866 WEST PEACHTREE STREET, N.W., ATLANTA, GEORGIA 30308 - ------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 881-1911 -------------- - -------------------------------------------------------------------------------- (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 November 10, 1999 were: Common Stock - 17,297,927; Class A Common Stock - 4,786,214.
HAVERTY FURNITURE COMPANIES, INC. INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> <C> Part I. Financial Information: Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income - Quarter and nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Quantitative and Qualitative Disclosure of Market Risk 9 Part II. Other Information 10 </TABLE>
PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> September 30 December 31 1999 1998 --------------- --------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 737 $ 1,874 Accounts receivable 178,771 194,472 Less allowance for doubtful accounts ( 7,900) ( 8,300) --------------- --------------- 170,871 186,172 Inventories, at LIFO 84,442 82,084 Other current assets 9,096 8,047 --------------- --------------- Total Current Assets 265,146 278,177 Property and equipment 215,154 196,814 Less accumulated depreciation and amortization ( 92,510) ( 85,481) -------------- --------------- 122,644 111,333 Other assets 3,235 3,391 --------------- --------------- $ 391,025 $ 392,901 =============== =============== </TABLE>
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) <TABLE> <CAPTION> September 30 December 31 1999 1998 ------------ ----------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ -- $ 6,400 Accounts payable and accrued expenses 75,033 54,356 Current portion of long-term debt and capital lease obligations 12,773 9,711 --------------- --------------- Total Current Liabilities 87,806 70,467 Long-term debt and capital lease obligations, less current portion 134,131 161,778 Other liabilities 2,709 2,598 Stockholders' Equity Capital stock, par value $1 per share: Preferred Stock, Authorized: 1,000 shares; Issued: None Common Stock, Authorized: 50,000 shares; Issued: 1999 - - 21,555 shares; 1998 - - 20,786 shares (including shares in treasury: 1999 - - 4,271; 1998 - - 3,478) 21,555 20,786 Convertible Class A Common Stock, Authorized: 15,000 shares; Issued: 1999 - - 5,334 shares; 1998 - -5,544 shares (including shares in treasury: 1999 and 1998 - -522) 5,334 5,544 Additional paid-in capital 30,715 27,173 Retained earnings 148,572 133,207 --------------- --------------- 206,176 186,710 Less cost of Common Stock and Convertible Class A Common Stock in treasury ( 39,797) ( 28,652) --------------- -------------- 166,379 158,058 --------------- --------------- $ 391,025 $ 392,901 =============== =============== </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> Quarter Ended Nine Months Ended September 30 September 30 ----------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Net Sales $ 157,875 $ 139,004 $ 449,895 $ 390,368 Cost of goods sold 82,769 73,527 236,979 206,805 ----------- ----------- ----------- ---------- Gross profit 75,106 65,477 212,916 183,563 Credit service charges 3,643 4,300 11,457 12,899 ----------- ----------- ----------- ----------- 78,749 69,777 224,373 196,462 Cost and expenses: Selling, general and administrative 63,697 57,964 183,589 165,411 Interest 2,797 3,215 8,820 10,063 Provision for doubtful accounts 1,008 1,345 3,208 5,428 Other expense (income), net 10 ( 44) ( 75) ( 158) ----------- ---------- ---------- ---------- 67,512 62,480 195,542 180,744 ----------- ----------- ----------- ----------- Income Before Income Taxes 11,237 7,297 28,831 15,718 Income taxes 4,045 2,591 10,379 5,623 ----------- ----------- ----------- ----------- Net Income $ 7,192 $ 4,706 $ 18,452 $ 10,095 =========== =========== =========== =========== Diluted earnings per share $0.31 $0.20 $0.80 $0.43 Basic earnings per share $0.32 $0.21 $0.83 $0.44 Weighted average diluted shares 23,182 23,208 23,098 23,593 Weighted average basic shares 22,258 22,686 22,313 23,119 Cash dividends per common share: Common Stock $0.050 $0.0425 $0.1400 $0.1225 Class A Common Stock $0.047 $0.0400 $0.1325 $0.1150 </TABLE> See notes to condensed consolidated financial statements. 3
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Nine Months Ended September 30 1999 1998 --------------- --------------- <S> <C> <C> Operating Activities Net income $ 18,452 $ 10,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,011 10,605 Provision for doubtful accounts 3,208 5,428 Deferred income taxes ( 206) 903 Gain on sale of property and equipment ( 14) ( 21) -------------- -------------- Subtotal 32,451 27,010 Changes in operating assets and liabilities: Accounts receivable 12,093 18,213 Inventories ( 2,358) 2,966 Other current assets ( 832) ( 733) Accounts payable and accrued expenses 20,555 13,161 Income taxes 122 3,996) -------------- -------------- Net cash provided by operating activities 62,031 56,621 --------------- --------------- Investing Activities Purchases of property and equipment ( 22,524) ( 9,173) Proceeds from sale of property and equipment 215 168 Other investing activities 156 266 --------------- --------------- Net cash used in investing activities ( 22,153) ( 8,739) -------------- -------------- Financing Activities Net (decrease) increase in short-term borrowings ( 17,500) ( 82,500) Proceeds from issuance of long-term debt -- 59,200 Payment of long-term debt and capital lease obligations ( 13,485) ( 5,477) Purchase of treasury stock ( 11,145) ( 19,465) Exercise of stock options 4,101 3,686 Dividends paid ( 3,087) ( 2,807) Other financing activities 101 69 --------------- --------------- Net cash used in financing activities ( 41,015) ( 47,294) -------------- --------------- (Decrease)increase in cash and cash equivalents ( 1,137) 588 Cash and cash equivalents at beginning of period 1,874 390 --------------- --------------- Cash and cash equivalents at end of period $ 737 $ 978 =============== =============== </TABLE> See notes to condensed consolidated financial statements. 4
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. Earnings per share and all shares outstanding have been restated to record the effect of the 2-for-1 stock split on August 25, 1999. NOTE B - 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. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Certain information included in this Quarterly Report on Form 10-Q contains, and other reports or materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and pursuant to the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. Such forward looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, general economic conditions, changes in consumer spending for large ticket items such as furniture, economic conditions affecting the housing market, the mortgage interest rate environment, competition in the retail furniture industry, and other uncertainties detailed in this report and detailed from time to time in other filings by the Company with the Securities and Exchange Commission. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. RESULTS OF OPERATIONS Net sales for the third quarter and nine months ended September 30, 1999 increased 13.6% and 15.2% over the same periods for 1998, respectively. Comparable-store sales increased 12.6% and 13.1% over the year-earlier third quarter and nine month periods, respectively. The Company's largest markets, Dallas and Atlanta, experienced the strongest comparable-store sales for the quarter and nine-month period. Comparable-store sales increases were broad based as four of the six regions had double-digit percent increases and the other two regions had high single digit increases, through September 30, 1999. A store's results are included in the comparable-store sales computation beginning with the anniversary of its opening. Overall, continued steady economic growth and high employment stimulated housing markets and consumer spending on home furnishings. Gross margin as a percent of net sales improved for the third quarter to 47.6% for 1999 compared to 47.1% for the 1998 period, and was up to 47.3% from 47.0% for the nine months ended September 30, 1999 and 1998, respectively. These improved margins are the result of continued emphasis of brand name products such as Thomasville, Broyhill, Lane and La-Z-Boy, and the continued themes in the Company's advertising programs on quality, value and service. The ability to increase sales without the use of heavy discounting or extended deferred- payment credit promotions has contributed to the increased margins as has higher levels of associated delivery charges and product care and protection revenues. Additionally, merchandise close out sales activity had been higher than normal in the 1998 periods due to the liquidation of inventory prior to the closing of three clearance centers. Third quarter credit service charge revenues decreased to 2.3% of net sales from 3.1% for the prior year while the nine-month period decreased to 2.5% from 3.3%. This reduction was due to a lower average outstanding accounts receivable portfolio and to a shift toward more consumer usage of free interest promotions rather than deferred-payment promotions. Selling, general and administrative expenses as a percent of net sales decreased to 40.4% as compared to 41.7% and to 40.8% from 42.4% for the quarter and nine months ended September 30, 1999 and 1998, respectively. The continued leveraging of fixed costs in occupancy and administrative expenses and effective cost controls in advertising contributed to these improvements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 6
AND RESULTS OF OPERATIONS (Continued) The provision for doubtful accounts as a percentage of net sales decreased to 0.6% from 1.0% and 0.7% from 1.4% for the quarter and nine months ended September 30, 1999 and 1998, respectively. This continued reduction reflects the trend of decreased delinquencies, bankruptcies and write offs and a general reduction in overall receivables. These combined factors led to a $400,000 reduction in the second quarter provision for doubtful accounts as prescribed by the Company's methodology for calculating the required allowance. The Company also continues to evaluate and improve its credit and collection operations. Management does not expect any significant changes in the current consumer credit environment for the remainder of 1999. Interest expense decreased $0.4 million and $1.2 million, and as a percent of net sales, to 1.8% from 2.3% and to 2.0% from 2.6% for the quarter and nine-month period ended September 30, 1999 and 1998, respectively, from the year-earlier periods. This reduction was mostly due to lower debt levels which decreased 15.0% and 11.5% for the quarter and nine-month periods, as the Company's effective interest rate was slightly higher at 7.4% for the quarter and lower at 7.2% for the nine-month period, respectively, from the year-earlier periods. 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 $62.0 million during the first nine months of 1999. The Company carries its own customer accounts receivable which provided positive cash flows as receivables decreased $12.1 million due to less customer usage of credit promotions offered (more purchases were made using national credit cards) as well as from faster payoffs. Such faster turnover arose from shortened free interest periods and more customer usage of the 12 equal monthly payments with no interest plan. Investing activities used $22.2 million of cash during the nine months ended September 30, 1999. Capital expenditures during the period were $22.5 million, mostly for additional store locations, which open primarily in the latter half of 1999. Financing activities used $41.0 million of cash during the nine months ended September 30, 1999, primarily to reduce debt in the amount of $31.0 million and for the purchase of $11.1 million of treasury stock. In addition to cash flows 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 (99.3% of total debt was interest rate protected at September 30, 1999). The Company's average effective interest rate on all borrowings (excluding capital leases) was 7.3% at September 30, 1999. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company opened two stores and closed a clearance center in the third quarter. Three stores are scheduled for opening in the fourth quarter, one of which is a relocation, and two existing stores will be physically expanded. Capital expenditures for the remainder of 1999 to support these projects, and additional ones which will be completed in 2000, are estimated to be $7.5 million. Funds available from operations, bank lines of credit and other possible financing transactions are expected to be adequate to finance the Company's current 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, particularly in the fourth quarter. YEAR 2000 As is more fully described in the Company's annual report on Form 10-K for the year ended December 31, 1998, the Company is modifying or replacing portions of its software and certain hardware for Year 2000 compliance. The review, remediation and testing of the Company's store systems software was completed in May 1998 except for third party credit scoring software which is being completed in the fourth quarter of 1999. The review, remediation and testing of the corporate office systems was completed in March 1999. The Company brought substantially all of its software and IT systems into compliance with Year 2000 issues in June 1999. Certain additional, less critical, Y2K issues have been identified and will be remediated during the fourth quarter. These items relate to personal computing, telephone voice communication and office document imaging. Management's assessment of the estimated costs and risks associated with the Year 2000 project and the status of the Company's contingency plans are unchanged from that described in the 1998 annual report. The Company also has identified its suppliers, vendors and financial institutions (external agents) and is coordinating with them to address potential Year 2000 issues. Year 2000 questionnaires were sent to these entities to monitor their progress and to minimize any adverse consequences that might result if an entity is not Year 2000 compliant. Responses have been received from approximately 95% of these external agents with no major potential problems identified. The non-responding external agents are primarily merchandise suppliers for which the Company has identified substitute products from compliant suppliers. With respect to Year 2000 risks, the Company believes it has identified all critical areas and is in the process of developing contingency plans for those critical areas identified. Critical is defined as any business process or application failure that would result in a material operational or financial impact. If the Company's remediation efforts and the remediation efforts of external agents fail (which the Company believes is the most reasonably likely worst case scenario), the Company's contingency plans include performing certain processes manually while working to assess and correct any errors in the current systems and possibly changing suppliers. These plans are intended to enable the Company to continue operating even if a degree of business interruption occurs at Year 2000. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The complexity of the potential Year 2000 issues and the proposed solutions are dependent on the technical skills of the Company's employees and on the representations and preparedness of third parties and are among the factors that could cause the Company's Year 2000 compliance efforts to be less than fully effective. Additionally, there are a number of risks that are beyond the Company's reasonable control, such as the failure of utility companies to deliver electricity, the failure of telecommunications companies to provide voice and data services, the failure of financial institutions to process transactions and transfer funds, the failure of vendors to deliver merchandise or perform services required by the Company and the collateral effects on the Company of the effects of Year 2000 issues on the economy in general. Although the Company believes that its Year 2000 compliance program is designed to appropriately identify and address those Year 2000 issues that are subject to the Company's reasonable control, there can be no assurance that the Company's efforts in this regard will be fully effective or that Year 2000 issues will not have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF 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 on Form 10-K. 9
PART II. OTHER INFORMATION Item 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this report. 10.10.1 - Amendment No. One to the Supplemental Executive Retirement Plan 10.10.2 - Amendment No. Two to the Supplemental Executive Retirement Plan 27 - Financial Data Schedule. (b) Reports on Form 8-K. None 10
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 NOVEMBER 15, 1999 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 11