1 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, 1998 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: 0-8498 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 11, 1998 were: Common Stock - 8,633,651; Class A Common Stock - 2,536,211.
2 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 Page No. Part I. Financial Information: Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income - Quarter and nine months ended September 30, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II. Other Information 10
3 PART I. FINANCIAL INFORMATION HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> September 30 December 31 1998 1997 -------- -------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 978 $ 390 Accounts receivable 187,622 211,263 Less allowance for doubtful accounts 8,500 8,500 -------- -------- 179,122 202,763 Inventories, at LIFO 77,747 80,713 Other current assets 6,496 5,763 -------- -------- Total Current Assets 264,343 289,629 Property and equipment 195,309 187,113 Less accumulated depreciation and amortization 82,270 72,495 -------- -------- 113,039 114,618 Other assets 2,001 2,267 -------- -------- $379,383 $406,514 ======== ======== </TABLE> 1
4 HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) <TABLE> <CAPTION> September 30 December 31 1998 1997 ------------ ----------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ -- $ 82,500 Accounts payable and accrued expenses 50,787 41,463 Current portion of long-term debt and capital lease obligations 8,854 8,945 --------- --------- Total Current Liabilities 59,641 132,908 Long-term debt and capital lease obligations, less current portion 165,303 111,489 Deferred income taxes 943 199 Other liabilities 2,463 2,364 Stockholders' Equity Capital stock, par value $1 per share - - Preferred Stock, Authorized: 1,000,000 shares; Issued: None Common Stock, Authorized: 1998 and 1997 - - 50,000,000 shares; Issued: 1998 - -8,597,440 shares; 1997 - - 9,604,063 shares (including shares in treasury: 1998 - - 1,711,079; 1997 - - 756,133) 10,309 9,604 Convertible Class A Common Stock, Authorized: 1998 and 1997 - 15,000,000 shares; Issued: 1998 - - 2,802,266 shares; 1997 - - 3,096,267 shares (including shares in treasury: 1998 - - 261,055; 1997 - - 249,055) 2,802 3,096 Additional paid-in capital 38,638 35,363 Retained earnings 127,405 120,117 --------- --------- 179,154 168,180 Less cost of Common Stock and Convertible Class A Common Stock in treasury (28,121) (8,626) --------- --------- 151,033 159,554 --------- --------- $ 379,383 $ 406,514 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 2
5 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 ------------------------- ------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Sales $ 139,004 $ 128,160 $ 390,368 $ 355,915 Cost of goods sold 73,527 68,037 206,805 188,460 --------- --------- --------- --------- Gross profit 65,477 60,123 183,563 167,455 Credit service charges 4,300 4,098 12,899 11,934 --------- --------- --------- --------- 69,777 64,221 196,462 179,389 Cost and expenses: Selling, general and administrative 57,964 52,320 165,411 151,067 Interest 3,215 3,524 10,063 10,843 Provision for doubtful accounts 1,345 2,215 5,428 5,129 --------- --------- --------- --------- 62,524 58,059 180,902 167,039 --------- --------- --------- --------- 7,253 6,162 15,560 12,350 Other income (expense), net 44 (29) 158 90 --------- --------- --------- --------- Income Before Income Taxes 7,297 6,133 15,718 12,440 Income taxes 2,591 2,208 5,623 4,478 --------- --------- --------- --------- Net Income $ 4,706 $ 3,925 $ 10,095 $ 7,962 ========= ========= ========= ========= Diluted earnings per share $ 0.41 $ 0.33 $ 0.86 $ 0.68 Basic earnings per share $ 0.41 $ 0.34 $ 0.87 $ 0.68 Weighted average diluted shares 11,604 11,756 11,797 11,755 Weighted average basic shares 11,343 11,623 11,560 11,660 Cash dividends per common share: Common Stock $ 0.0850 $ 0.0800 $ 0.2450 $ 0.2400 Class A Common Stock $ 0.0800 $ 0.0750 $ 0.2300 $ 0.2250 </TABLE> See notes to condensed consolidated financial statements. 3
6 HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Nine Months Ended September 30 1998 1997 -------- -------- <S> <C> <C> Operating Activities Net income $ 10,095 $ 7,962 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,605 10,303 Provision for doubtful accounts 5,428 5,129 Deferred income taxes 903 -- (Gain) Loss on sale of property and equipment (21) 115 -------- -------- Subtotal 27,010 23,509 Changes in operating assets and liabilities: Accounts receivable 18,213 (1,363) Inventories 2,966 (3,020) Other current assets (733) (4,816) Accounts payable and accrued expenses 13,161 6,689 Income taxes (3,996) (1,622) -------- -------- Net cash provided by operating activities 56,621 19,377 -------- -------- Investing Activities Purchases of property and equipment (9,173) (13,112) Proceeds from sale of property and equipment 168 121 Other investing activities 266 342 -------- -------- Net cash used in investing activities (8,739) (12,649) -------- -------- Financing Activities Net increase in short-term borrowings (82,500) 1,900 Proceeds from issuance of long-term debt 59,200 -- Payment of long-term debt and capital lease obligations (5,477) (4,697) Purchase of treasury stock (19,465) (2,591) Exercise of stock options 3,686 1,667 Dividends paid (2,807) (2,755) Other financing activities 69 82 -------- -------- Net cash used in financing activities (47,294) (6,394) -------- -------- Increase (decrease) in cash and cash equivalents 588 334 Cash and cash equivalents at beginning of period 390 414 -------- -------- Cash and cash equivalents at end of period $ 978 $ 748 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 4
7 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 - 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
8 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, 1998 increased 8.5% and 9.7% over the same periods for 1997, respectively. Comparable-store sales increased 6.6% and 6.3% over the year-earlier third quarter and nine month periods respectively. The Company's largest markets, Dallas and Atlanta, experienced double-digit comparable-store sales for the nine months period and better than the Company market-wide average for the quarter. A store's results are included in the comparable-store sales computation beginning with the anniversary of its opening. Overall, continued lower long term interest rates and steady economic growth stimulated housing markets, mortgage refinancings and consumer spending on home furnishings, particularly in the Company's markets. Gross margin as a percent of net sales improved slightly for the third quarter, 47.1% for 1998 compared to 46.9% for the 1997 period, and was flat at 47.0% for the nine months ended September 30, 1998 and 1997. Merchandise close out sales activity has been higher than normal for the last two years due to store and warehouse relocations in 1997 and the liquidation of inventory from the closing of three clearance centers in 1998. Selling, general and administrative expenses as a percent of net sales increased to 41.7% as compared to 40.8% for the quarter ended September 30, 1998 and 1997, respectively, and was unchanged for the nine month period at 42.4%. The main categories of increased spending were in advertising and administrative expenses. An increase in the level of television advertising was the primary source of the increased advertising costs. Administrative expenses, although higher, were within budgeted levels as costs were directed for the improved management of receivables and inventory. 6
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The provision for doubtful accounts as a percentage of net sales decreased to 1.0% from 1.8% for the quarter ended September 30, 1998 as compared to 1997, and was flat at 1.4% for the nine months ended September 30, 1998 and 1997. This 1.0% provision was lower than the levels of the first half of 1998 and slightly better than expected. The Company's provision during the last half of 1997 and the first half of 1998 had been higher than historical levels, reflecting the increased delinquencies and bankruptcies experienced in the consumer lending industry over the last two years The Company slightly tightened its criteria for credit approval during the third quarter of 1997 and during the current year increased the number of credit professionals to better manage the Company's portfolio. Systems were also enhanced and additional credit bureau and collection services employed. During the past six months, the Company has experienced a moderating to improving trend in its rate of delinquencies and new consumer bankruptcies. Interest expense decreased 0.4% and 0.6% as a percent of net sales for the quarter and nine month period ended September 30, 1998, respectively, from the year-earlier periods. The Company's effective interest rate was slightly higher in 1998 at 7.3% for the quarter and 7.2% for the nine month period, but was offset by the decrease in average debt levels of 13.9% and 10.5% for the quarter and 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 $56.6 million during the first nine months of 1998. The Company carries its own customer accounts receivables which provided positive cash flows as receivables decreased $18.2 million due to less customer usage of credit promotions offered and more purchases with national credit cards. Also, a shortened free interest period allowed under one program accelerated payoffs and contributed to the reduction. Capital requirements for inventory have been reduced as improved systems and better management have resulted in decreased overall inventory levels. The Company's inventory at September 30, 1998 is $2.3 million lower than the September 30, 1997 level, in spite of approximately $3.2 million in additional display inventory for new retail square footage and sales growth of $42.9 million during the same period. Investing activities used $8.7 million of cash during the nine months ended September 30, 1998. Capital expenditures during the period were $9.2 million primarily for improvements to five additional leased store locations, one of which opened in the fourth quarter of 1998. During the nine months ended September 30, 1998, the positive cash flows generated allowed for $47.3 million to be used in financing activities, including $28.8 million to reduce debt and $19.5 million for the acquisition of treasury stock. In March 1998, the Company arranged a five year $105 million revolving credit facility syndicated with five commercial banks. This facility provides a multi-year commitment for the Company's capital requirements and replaced existing one year bank line-of-credit agreements. The Company also has uncommitted line-of-credit 7
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) agreements with two banks to borrow up to $13 million, which were unused at September 30, 1998. Borrowings under the revolving credit facility were $59.2 million ($45.8 million unused) and were classified as long term debt at September 30, 1998. Borrowings under all of these agreements are unsecured and accrue interest at competitive money-market rates. 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 with fixed-rate and capped-rate debt as determined by the interest rate environment (88% of total debt was interest-rate protected at September 30, 1998). The Company's average effective interest rate on all borrowings (excluding capital leases) was 7.2% at September 30, 1998. The Company opened four stores during the first nine months of 1998 and has an additional store scheduled to open during the fourth quarter of 1998. All of these new facilities will be leased under operating leases. Capital expenditures for the remainder of 1998 to support other improvements and additional projects which will be completed in 1999 are estimated to be $3 million to $5 million. The Company is considering other new stores for 1999, some of which may require ownership and which would increase the estimated 1998 capital expenditures well above the levels of 1997. 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, particularly in the fourth quarter. YEAR 2000 Many existing computer programs utilized globally use only two digits to identify a year in the date field. Such systems, if not changed, may interpret "00" as "1900" instead of the year "2000." This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. The Company relies on computer-based technology and utilizes a variety of third-party hardware and proprietary and third-party software. The Company's retail functions (store systems software), such as merchandise procurement and distribution, inventory control, point-of-sale information systems and credit approval and account servicing, generally use proprietary software. The Company's administrative functions, such as accounting, also use proprietary software and to a more limited extent, third-party software for areas such as human resource management. In addition to such information technology ("IT") systems, the Company's operations rely on various non-IT equipment and systems that contain embedded computer 8
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) technology, such as elevators and energy management systems. Third parties with whom the Company has relationships, including merchandise vendors and service providers used by the Company in its operations (such as banking and financial services, data processing services, telecommunications services and utilities), are also highly reliant on computer-based technology. In 1997, the Company's Management Information Services (MIS) department developed a plan to modify the Company's proprietary systems for compliance with Year 2000 issues. In 1998, a cross-departmental task force was formed to provide guidance to the Company's operating and support functions and to monitor the progress of Company wide efforts to address Year 2000 issues. The Company has also consulted with various third parties, including, but not limited to, outside consultants, outside service providers, merchandise suppliers, industry groups, and other retail companies. The task force has divided the compliance project into five broad categories: store systems software, corporate office systems software, hardware, facilities, and vendors. Beginning in January 1998, substantially all of the MIS development resources began programming modification efforts on the proprietary systems. The first phase focused on store systems. Each program and file has been reviewed, remediated if necessary and then tested. The store systems software phase was completed and testing was finished in May 1998. Thus far in the second half of 1998, the corporate office systems have been reviewed and all identified programming changes have been made by MIS development personnel with testing scheduled to be complete by December 1998. The Company presently anticipates that all of its software and IT systems (including third-party and proprietary hardware, software, network components and interfaces) will be compliant with all Year 2000 issues by March 1999. The Company has requested a report from all of its suppliers as to their Year 2000 preparedness. The Company has migrated all of its electronic data interchange (EDI) transactions with its trading partners to compliant software systems. Despite the significant efforts to address Year 2000 concerns, the Company could potentially experience disruptions to some of its operations, including those resulting from noncompliant systems used by third party business and governmental entities. The Company is developing contingency plans to address potential Year 2000 disruptions. These plans will address accessibility and functionality of Company facilities as well as interim steps to be taken if an event causes failure of a system critical to the Company's core business activities. The Company's contingency plans are expected to be complete by September 1999. Through September 30, 1998, the Company has incurred approximately $0.7 million of expenses to achieve Year 2000 compliance. The Company's projected remaining cost for Year 2000 remediation is currently estimated to be $0.2 million. These expenses are not incremental costs but represent the MIS and managerial time dedicated to this issue rather than being used for new projects which have been postponed. Upgrade or replacement expenditures for IT hardware, operating systems and third party software have not been included in these amounts as most of the items purchased met new Company requirements with respect to additional capacity, speed or functionality in addition to compliance with Year 2000 issues. 9
12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. 27 - Financial Data Schedule. (b) Reports on Form 8-K. None 10
13 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. HAVERTY FURNITURE COMPANIES, INC. Date November 12, 1998 By: /s/ Dennis L. Fink ------------------------ ------------------------------- Dennis L. Fink, Executive Vice President and Chief Financial Officer (principal accounting 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