- -------------------------------------------------------------------------------- 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 JUNE 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 August 9, 1999 were: Common Stock - 8,744,748; Class A Common Stock - 2,405,777.
HAVERTY FURNITURE COMPANIES, INC. INDEX <TABLE> <CAPTION> PAGE NO. <S> <C> Part I. Financial Information: Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income - Quarter and six months ended June 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows - Six months ended June 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 1. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) <TABLE> <CAPTION> June 30 December 31 1999 1998 <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 1,761 $ 1,874 Accounts receivable 175,512 194,472 Less allowance for doubtful accounts (7,900) (8,300) ------------ ----------- 167,612 186,172 Inventories, at LIFO 81,922 82,084 Other current assets 9,119 8,047 ------------ ----------- Total Current Assets 260,414 278,177 Property and equipment 209,459 196,814 Less accumulated depreciation and amortization (90,039) (85,481) ------------ ----------- 119,420 111,333 Other assets 3,032 3,391 ------------ ----------- $ 382,866 $ 392,901 ------------ ----------- ------------ ----------- </TABLE> 1
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) <TABLE> <CAPTION> June 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 56,990 54,356 Current portion of long-term debt and capital lease obligations 11,606 9,711 ----------- ---------- Total Current Liabilities 68,596 70,467 Long-term debt and capital lease obligations, less current portion 144,299 161,778 Other liabilities 2,669 2,598 Stockholders' Equity Capital stock, par value $1 per share - - Preferred Stock, Authorized: 1,000 shares; Issued: Common Stock, Authorized: 50,000 shares; Issued: 1999 - - 21,332 shares; 1998 - - 20,786 shares (including shares in treasury: 1999 - - 3,684; 1998 - - 3,478) 21,332 20,786 Convertible Class A Common Stock, Authorized: 15,000 shares; Issued: 1999 - - 5,360 shares; 1998 - - 5,544 shares (including shares in treasury: 1999 - 522; 1998 - - 498) 5,360 5,544 Additional paid-in capital 29,090 27,173 Retained earnings 142,483 133,207 ----------- ---------- 198,265 186,710 Less cost of Common Stock and Convertible Class A Common Stock in treasury (30,963) (28,652) ----------- ---------- 167,302 158,058 ----------- ---------- $ 382,866 $ 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 Six Months Ended June 30 June 30 ----------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Net Sales $ 142,239 $ 121,996 $ 292,020 $ 251,364 Cost of goods sold 75,237 64,841 154,210 133,278 ----------- ----------- ----------- ----------- Gross profit 67,002 57,155 137,810 118,086 Credit service charges 3,834 4,301 7,814 8,599 ----------- ----------- ----------- ----------- 70,836 61,456 145,624 126,685 Cost and expenses: Selling, general and administrative 59,292 53,237 119,892 107,447 Interest 2.963 3,353 6 023 6,848 Provision for doubtful accounts 830 1,951 2,200 4,083 Other (income) expense, net (14) (265) (85) (114) ----------- ----------- ----------- ----------- 63,071 58,276 128,030 118,264 ---------- ---------- ---------- ---------- Income Before Income Taxes 7,765 3,180 17,594 8,421 Income taxes 2,795 1,145 6,334 3,032 ----------- ----------- ----------- ----------- Net Income $ 4,970 $ 2,035 $ 11,260 $ 5,389 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted earnings per share $0.21 $0.09 $0.49 $0.23 Basic earnings per share $0.22 $0.09 $0.50 $0.23 Weighted average diluted shares 23,184 23,896 23,056 23,790 Weighted average basic shares 22,388 23,296 22,340 23,340 Cash dividends per common share Common Stock $0.0475 $0.0400 $0.090 $0.080 Class A Common Stock $0.0450 $0.0375 $0.085 $0.075 </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> Six Months Ended June 30 1999 1998 --------------- --------------- <S> <C> <C> Operating Activities Net income $ 11,260 $ 5,389 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,270 6,993 Provision for doubtful accounts 2,200 4,083 Gain on sale of property and equipment (3) (9) ----------- ----------- Subtotal 20,727 16,456 Changes in operating assets and liabilities: Accounts receivable 16,360 21,285 Inventories 162 1,782 Other current assets (1,072) (1,023) Accounts payable and accrued expenses 3,301 316 Income taxes (667) (3,596) ----------- ---------- Net cash provided by operating activities 38,811 35,220 ----------- ----------- Investing Activities Purchases of property and equipment (15,403) (5,657) Proceeds from sale of property and equipment 49 137 Other investing activities 359 264 ----------- ----------- Net cash used in investing activities (14,995) (5,256) ---------- ---------- Financing Activities Net decrease in short-term borrowings (17,500) (82,500) Proceeds from issuance of long-term debt --- 70,300 Payment of long-term debt and capital lease obligations( (4,484) ( 4,510) Purchase of treasury stock (2,311) (13,439) Exercise of stock options 2,279 2,884 Dividends paid (1,984) (1,855) Other financing activities 71 47 ----------- ----------- Net cash used in financing activities (23,929) (29,073) ----------- ----------- (Decrease) increase in cash and cash equivalents (113) 891 Cash and cash equivalents at beginning of period 1,874 390 ----------- ----------- Cash and cash equivalents at end of period $ 1,761 $ 1,281 ----------- ----------- ----------- ----------- </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. On July 30, 1999, the Company declared a two-for-one stock split in the form of a stock dividend which will be paid on August 25, 1999, to shareholders of record on August 11, 1999. Accordingly, the stock split has been recognized in these financial statements by reclassifying approximately $13,350,000, the par value of the additional shares to be issued as a result of the split, from additional paid in capital to common stock. For all periods presented, all shares outstanding and per share amounts have been restated to reflect the stock split. 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
ITEM 2. 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 second quarter and six months ended June 30, 1999, increased 16.6% and 16.2% over the same periods for 1998, respectively. Comparable-store sales increased 14.3% and 13.4% over the year-earlier periods, respectively. The Company's largest markets, Dallas and Atlanta, experienced the strongest comparable-store sales for the quarter and six months period. However, such increases were broad based, as five of the six regions had increases greater than 10% for both periods. 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 was slightly improved, 47.1% for the second quarter of 1999 compared to 46.9% for the 1998 period and 47.2% compared to 47.0% for the six months ended June 30, 1999, and 1998, respectively. The margins in 1998 were pressured because the Company was liquidating discontinued inventory in conjunction with closing its clearance center in Dallas. The Company reduced inventories $3 million in the second quarter, the seasonally slowest quarter of the year. Management anticipates that margins will improve in the seasonally-stronger second half of the year. Selling, general and administrative expenses as a percent of net sales decreased to 41.7% from 43.6% and 41.1% from 42.7% for the quarter and six months ended June 30, 1999 and 1998, respectively. Effective cost controls in advertising and administrative costs and continued leveraging of fixed costs, particularly for occupancy, have contributed to these improvements. The provision for doubtful accounts as a percentage of net sales decreased to 0.6% from 1.6% and 0.8% from 1.6% for the quarter and six months ended June 30, 1999, and 1998, respectively. This continued reduction reflects the trend of decreased delinquencies and bankruptcies and a general reduction in overall receivables. These combined factors led to a $400,000 reduction in the second quarter provision in order to reduce the allowance for doubtful accounts by that amount, 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. 6
Management does not expect significant changes in the current consumer credit environment for the remainder of 1999. Interest expense decreased $0.4 million and $0.8 million, and as a percent of net sales, to 2.1% from 2.8% and to 2.1% from 2.7% for the quarter and six months ended June 30, 1999 and 1998, respectively, from the year-earlier periods. The Company's effective interest rate was slightly lower at 7.1% for the quarter and 7.0% for the six month period with a decrease in average debt levels of 9.4% and 10.3% for the quarter and six month periods, 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 $38.8 million during the first six months of 1999. The Company carries its own customer accounts receivables which provided positive cash flows as receivables decreased $16.4 million due to less customer usage of credit promotions offered, shortened free interest periods (which accelerate payoffs) and more customer purchases using national credit cards. Investing activities used $15.0 million of cash during the six months ended June 30, 1999. Capital expenditures during the period were $15.4 million primarily for additional store locations, which will open primarily in the latter half of 1999. Financing activities used $23.9 million of cash during the six months ended June 30, 1999, primarily to reduce debt in the amount of $22.0 million. 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 June 30, 1999). The Company's average effective interest rate on all borrowings (excluding capital leases) was 7.0% at June 30, 1999. The Company opened one store in the second quarter and has two additional stores scheduled to open during the third quarter of 1999 as well as the closing of one clearance center. Three stores are scheduled for opening in the fourth quarter, one of which is a relocation, and three existing stores will be physically expanded during the second half of 1999. Capital expenditures for the remainder of 1999 to support these projects, and additional ones which will be completed in 2000, are estimated to be $16 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. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 are being scheduled for remediation during the third 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. 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 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 9
PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The 1999 Annual Meeting of Stockholders of the Company was held on April 30, 1999. 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: Robert R. Woodson L. Phillip Humann John T. Glover Mylle B. Mangum The number of votes cast "for" or "withheld" was as follows: Mr. Woodson: For = 7,939,466, Withheld = 111,440; Mr. Humann: For = 7,930,366, Withheld = 120,540; Mr. Glover: For = 7,938,866, Withheld = 112,040 and Ms. Mangum: For = 7,938,766, Withheld = 112,140. 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: Rawson Haverty Clarence H. Smith John E. Slater, Jr. Rawson Haverty, Jr. Clarence H. Ridley Frank S. McGaughey, III Fred J. Bates M. Tony Wilkerson Lynn H. Johnston The number of votes cast by the holders of Class A Common Stock was as follows: for each of the above nominees: For = 2,363,140, Withheld = 22. 10
PART II. OTHER INFORMATION (Continued) Item 5. OTHER INFORMATION As stated in the Company's 1999 Proxy Statement, proposals by stockholders intended to be presented at the 2000 Annual Meeting must be received at the office of the Company no later than November 23, 1999, for inclusion in the Company's Proxy Statement for the 2000 Annual Meeting. In connection with the Company's Annual Meeting of Shareholders to be held in 2000, if the Company does not receive notice of a matter or proposal to be considered by February 6, 2000, then the persons appointed by the Board of Directors to act as the proxies for such Annual Meeting (named in the form of proxy) will be allowed to use their discretionary voting authority with respect to any such matter or proposal at the Annual Meeting, if such matter or proposal is raised at the Annual Meeting. 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. 11
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 August 13, 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 12