SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
HAVERTY FURNITURE COMPANIES, INC.(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (404) 443-2900
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, 2002 were: Common Stock – 17,011,281; Class A Common Stock – 4,589,152.
TABLE OF CONTENTS
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.
I N D E X
PART I. FINANCIAL INFORMATION
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS(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)
See notes to condensed consolidated financial statements.
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HAVERTY FURNITURE COMPANIES, INC., AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIESNOTES 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 — 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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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.
RESULTS OF OPERATIONS
Net sales for the first quarter of 2002 increased 4.4% to $175.0 million compared to sales of $167.6 million for the first quarter of 2001. Comparable store sales increased 3.4%. 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 improved sales results, which began in the fourth quarter of 2001 and continued in the first quarter, are one of several indicators that the economy may be beginning to improve. Low interest rates and continued strong housing sales are a positive factor for the industry. The Company has continued to provide a consistent and effective message of the Company’s breadth of fashionable merchandise in its advertising rather than marketing a variety of promotional opportunities. Management believes that the merchandising and advertising of well-known brand name products and accessory items selected to appeal to its customer base have improved sales for all of the Company’s merchandise, including its own private-label products.
Gross profit, as a percent of sales, was 48.2% for the first three months of 2002 compared to 47.4% for the comparable period of 2001. This increase reflects continued improvements related to the products imported from Asia and pricing pressure on domestic suppliers. The Company also expanded its private-label merchandise line from 18% of items selected for inclusion in the Company’s core assortment to 30% at the end of the first quarter of 2001 and 2002, respectfully. These items generally carry a modestly higher gross margin which is useful in offsetting the somewhat lower gross margin typically associated with the higher-end or widely distributed merchandise sold under well-known manufacturer brands.
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(Continued)
First quarter credit service charge revenues decreased to 1.4% of net sales from 1.8% in the prior year period. This reduction is due to the continuing trend toward more customer usage of financing alternatives, which allows for longer periods of free interest.
Selling, general and administrative expenses, as a percent of net sales, decreased to 40.9% for the three months ended March 31, 2002 from 42.7% in the prior year period. This reduction is attributed to emphasis on containing costs along with the increased sales volume which allows for the normal leveraging of fixed costs. The Company also experienced lower advertising costs associated with the printing of its newspaper inserts.
The provision for doubtful accounts, as a percent of net sales, was 0.7% for the first quarter of 2002, up slightly from 0.6% in the first quarter of 2001. Management expects that the provision will remain at this slightly higher level for the remainder of 2002.
Interest expense decreased $1.1 million and, as a percent of net sales to 1.2% for this first quarter from 1.9% in the prior period. This decrease is due primarily to a 15.8% decrease in the Company’s average debt level, and a reduction in the effective interest rate by 113 basis points.
The Company is consolidating its Atlanta, Georgia and Charlotte, North Carolina regional warehouses into a new distribution center in Braselton, Georgia. The Company will be vacating certain leased local market warehouses in September through March of next year. Included in other expenses is approximately $1.0 million for estimated unrecoverable costs for exiting these facilities.
Net income, as a percent of sales, was 3.8% for the first quarter of 2002 and 2.6% for the first quarter of 2001. Diluted earnings per share were $0.30 and $0.20, for the three months ended March 31, 2002, and 2001, respectively.
LIQUIDITY AND SOURCES OF CAPITAL
The Company has historically used internally generated funds, bank borrowings and private placements with institutions to finance its operations and growth. Net cash provided by operating activities was $24.6 million during the first three months of 2002.
Investing activities used $5.3 million of cash during the three months ended March 31, 2002. Capital expenditures during the period were $4.7 million for new store construction and renovations, most of which will be completed later in the year.
Financing activities used $18.5 million of cash during the first quarter of 2002. The Company reduced its borrowings under its revolving and short-term borrowing facilities by $17.6 million, and made $2.2 million in long-term debt repayments.
The Company, during March 2002, replaced its $105 million revolving credit facilities and paid off a $25 million, short-term secured note. The new facilities, that were syndicated with six commercial banks, are unsecured and comprised of two revolving credit facilities totaling $80 million with a three and one-half year term and a $45 million, revolving note. The pricing for the replaced facilities was London Interbank Offering
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Rate (LIBOR) plus a varying amount based on a fixed charge coverage ratio. The pricing for the new facilities has higher spreads over LIBOR, reflecting the current general lending environment. The impact of these higher spreads is expected to increase the Company’s interest rate by approximately 125 basis points for its borrowings under these facilities. At March 31, 2002, borrowings under the revolving credit facilities were $72.4 million ($52.6 million unused) of which $65.6 million was classified as long-term debt.
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 (49.1% of total debt was fixed or interest rate protected as of March 31, 2002). The Company’s average effective interest rate on all borrowings (excluding capital leases) was 5.4% at March 31, 2002.
Capital expenditures in 2002 are presently expected to include the following: construction of a new replacement store in the Dallas/Ft. Worth market; remodeling of a purchased store in the Atlanta market; the remodeling of nine former Homelife stores; the exercise of purchase options on three leased locations; the purchase of equipment for new replacement distribution facilities; the purchase of trailers and equipment for shuttling prepped merchandise to local markets for home delivery; other real estate projects that will not be completed in 2002; and various information systems and software. The preliminary estimate of capital expenditures in 2002 is approximately $50 million. Funds available from operations, bank lines of credit and other financing transactions are expected to be adequate to finance the Company’s planned 2002 expenditures.
The Company’s capital expenditures for 2002 are expected to be funded in part by the proceeds from a sale-leaseback transaction that is expected to be completed during the second quarter of 2002. This transaction is expected to generate approximately $42 million in cash, resulting from the sale of 11 retail store locations. Management expects that the resulting increase in annual rent expense will be approximately $4 to $4.5 million for the initial lease term, largely offset by lower depreciation and interest expense.
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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In connection with the replacement of its revolving credit facilities, the Company modified its interest-rate swap agreements. The Company terminated $10 million in notional amounts of its $30 million swap agreement and incurred charges of approximately $272,000 which were recorded as interest expense. At March 31, 2002, the Company had two outstanding interest-rate swap agreements, each having a notional amount of $10 million and maturing September 30, 2005, at rates of 5.75% and 5.72%. Under the agreements, the Company makes payments at the fixed rate and receives payments at variable rates that are based on LIBOR, adjusted quarterly.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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S I G N A T U R E S
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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