Havertys - 10-Q quarterly report FY

Availability fluctuates under a borrowing base calculation and is reduced by outstanding letters of credit.  The borrowing base was $56.6 million at March 31, 2010.  Amounts available are reduced by $10.0 million since a fixed charge coverage ratio test is not met for the immediately preceding twelve month period and also reduced by $7.6 million for outstanding letters of credit at March 31, 2010, resulting in a net availability of $39.0 million.  There were no borrowed amounts outstanding under the Credit Agreement at March 31, 2010. We are in compliance with the terms of the Credit Agreement at March 31, 2010 and there exists no default or event of default.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes we make a year to date adjustment.

The effective tax rates for the quarters ended March 31, 2010 and 2009 were 3.2% and (1.0)%, respectively.  Our income tax expense for the quarter ended March 31, 2010 of approximately $969,000, that would otherwise be recognized, was reduced by a change in the valuation allowance for deferred taxes. We reduced the amount of our valuation allowance by $891,000 based on our review of the realizability of our deferred tax assets.  The income tax benefit for the three months ended March 31, 2009 that would otherwise be recognized was offset by an increase in the valuation allowance for deferred taxes.  The remainder of the tax expense in both periods is for Texas state taxes, which are based on gross profit and not pre-tax income or loss.

 
 

The fair values of our cash and cash equivalents, accounts receivable, accounts payable and customer deposits approximate the carrying value due to their short-term nature.  The assets related to our self-directed, non-qualified deferred compensation plan for certain executives and employees are valued using quoted market prices multiplied by the number of shares held, a Level 1 valuation technique.  These assets totaled approximately $1.6 million at March 31, 2010 and $1.5 million at December 31, 2009 and are included in other assets.  The related liability of the same amount is included in other liabilities.

HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We report our earnings per share using the two-class method.  The income or loss per share for each class of common stock is calculated assuming 100% of our earnings or losses are distributed as dividends to each class of common stock based on their contractual rights.

The Common Stock of the Company has a preferential dividend rate of at least 105% of the dividend paid on the Class A Common Stock. The Class A Common Stock, which has ten votes per share as opposed to one vote per share for the Common Stock (on all matters other than the election of directors), may be converted at any time on a one-for-one basis into Common Stock at the option of the holder of the Class A Common Stock.

The following is a reconciliation of the loss and number of shares used in calculating the diluted loss per share for Common Stock and Class A Common Stock (amounts in thousands):

For the three months ended March 31, 2010 and 2009 we did not include in the computation of diluted earnings (loss) per share approximately 1,034,000 and 2,040,000 shares, respectively. These shares represent underlying stock options, awards and common stock equivalents not included in the computation of diluted earnings (loss) per share because inclusion of such shares would be anti-dilutive.

HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We have a defined benefit pension plan covering substantially all employees hired on or before December 31, 2005.  The pension plan was closed to any employees hired after that date.  The benefits are based on years of service and the employee’s final average compensation.  Effective January 1, 2007, no new benefits are earned under this plan for additional years of service after December 31, 2006.

We also have a non-qualified, non-contributory supplemental executive retirement plan (SERP) for employees whose retirement benefits are reduced due to their annual compensation levels.  The SERP limits the total amount of annual retirement benefits that may be paid to a participant in the SERP from all sources (Retirement Plan, Social Security and the SERP) to $125,000.  The SERP is not funded so we pay benefits directly to participants.

Net pension costs included the following components (in thousands):

Qualified pension plan obligations are funded in accordance with prescribed regulatory requirements and with an objective of meeting funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments.  We expect to make a $3.0 million contribution to our qualified pension plan in 2010.

Comprehensive income (loss) represents net earnings (loss) plus any revenue, expenses, gains or losses that are specifically excluded from net income and recognized directly as a component of stockholders’ equity.

The reconciliation of net income (loss) to comprehensive income (loss) is as follows (in thousands):

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of Havertys’ financial condition and results of operations should be read together with the accompanying Condensed Consolidated Financial Statements and related notes thereto and our 2009 Annual Report to Stockholders.

Net Sales

Our sales are generated by customer purchases of home furnishings.  Revenue is recognized upon delivery to the customer.

Sales for the first quarter of 2010 increased $11.8 million or 8.2% as compared to the prior year period and comparable stores sales increased 10.1% or $14.2 million.  The remaining $2.4 million of the change in sales in the first quarter of 2010 was from new, closed and otherwise non-comparable stores.  Stores are non-comparable if open for less than one year or if the selling square footage has been changed significantly during the past 12 full months. Large clearance sales events from warehouse or temporary locations are excluded from comparable store sales, as are periods when stores are closed or being extensively remodeled.

The double digit percent increase for the first quarter of 2010 was our second consecutive quarter of positive comparable store sales.  These increases resulted from broad based improvements across all of our regions relative to the very difficult sales environment last year.  We believe highlighting more of our price point sensitive items within our merchandise line-up and showcasing their value has been effective with today’s cost conscious customer.

Gross Profit

Gross profit for the first quarter of 2010 was 52.1%, compared to 51.1% in the prior year period.  This expansion was the result of a reduction in the volume of damaged and close-out merchandise along with improvements generated by product mix and pricing discipline.

 

We continue to evaluate a variety of pricing promotions to determine what is most meaningful and how to best communicate value to the consumer.  Our strategy is to generally use promotional pricing selectively during traditional holiday and other sales events or to highlight specific products or categories.  We plan to remain competitive, but not overly aggressive with our pricing structure, as we strive to maintain our gross profit margins at or near 51.7%, our 2008 level.  We anticipate increasing freight and material costs and labor rates for our suppliers could generate potential pressure on product costs which may be difficult to initially recover in our retail pricing.

Substantially all of our occupancy and home delivery costs are included in selling, general and administrative expenses as are a portion of our warehousing expenses. Accordingly, our gross profit may not be comparable to those entities that include these costs in cost of goods sold.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are comprised of five categories:  selling; occupancy; delivery and certain warehousing costs; advertising and marketing; and administrative.

Our first quarter 2010 sales were up 8.2% and through rigorous cost reductions we were able to decrease SG&A by 2.5% or $2.0 million compared to last year’s first quarter.

Selling expenses generally vary with sales volume; however as a percent of net sales for the first quarter of 2010, they decreased 55 basis points compared to the prior year period due in part to lower third-party finance costs.  Occupancy costs are a significant portion of our SG&A costs and are generally fixed.  Depreciation expense included in occupancy costs was approximately $700,000 lower in the first quarter of 2010 compared to the prior year period.  We are evaluating several store locations with leases reaching renewal for potential renegotiations of option terms or possible closures.  We closed two locations in the first quarter of 2010 and plan to open a new store in the fourth quarter.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Delivery and warehousing expenses included in SG&A in the first quarter of 2010 were relatively flat as compared to the prior year period even with the higher volume.  In response to the lower sales levels experienced during the prior years, we adjusted our routes in many of our markets and reduced total headcount, equipment and related delivery expenses for greater efficiencies.  Delivery and warehousing expenses for the first quarter of 2010 as a percent of net sales were down compared to the prior year period by 61 basis points due to cost controls and efficiencies which were partly offset by higher fuel costs.

We have adjusted our advertising mix with less focus on newspaper and more on direct mail and television.  Our advertising and marketing expenses as a percentage of sales were 6.8% and 7.7% for the first quarter of 2010 and 2009, respectively.  Our spending decreased by $0.4 million for the first quarter of 2010 compared to the prior year period.  We expect to continue our advertising and marketing strategies as our campaigns have resulted in high brand awareness relative to our spend.

 

Our administrative costs were down $1.4 million for the quarter ended March 31, 2010, as compared to the prior year period. The decrease is due in large part to reductions in compensation.

 
 

Credit Service Charge Revenue and Allowance for Doubtful Accounts

The in-house financing offer most frequently chosen by our customers carries no interest for 12 months and requires equal monthly payments. This program generates very minor credit revenue and it is more cost effective than outsourcing.  We offer our customers different credit promotions through a third-party credit provider. Sales financed by this provider are not Havertys’ receivables; accordingly, we do not have any credit risk or service responsibility for these accounts, and there is no credit or collection recourse to Havertys. The most popular programs offered through the third-party provider for the first quarter 2010 were no interest offers requiring 18 or 24 monthly payments.

The following summarizes credit service charge revenue, the financing vehicles used, accounts receivable and allowance for doubtful accounts (in thousands):

During January 2008, we ceased offering internally financed programs with no interest payment terms greater than 12 months which had been a significant driver of our portfolio. Collections on our portfolio have continued and with the change in programs, accounts receivable have declined.  The allowance is $0.7 million lower than the year ago balance due to the reduction in total accounts receivable and a more than proportionate reduction of the total dollars in delinquent and problem categories.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest, net

Interest expense (income), net is primarily comprised of interest expense on our lease obligations and commitment fees on our unused credit facility.

Provision for Income Taxes

Our tax rate for the first quarter of 2010 was 3.2% and (1.0%) for the first quarter of 2009.  The tax expense generated by our income during the first quarter of 2010 was offset by a decrease in our deferred tax valuation allowance.  The tax benefit resulting from our loss during the first quarter of 2009 was offset by an increase in our deferred tax valuation allowance.  The tax expense reported for the first quarter of 2010 and 2009 is for Texas state taxes which are based on gross profit and not pre-tax income or loss.

We continue to review the realizability of our deferred income tax assets in determining the appropriateness of the related valuation allowance.

Store Plans and Capital Expenditures

We did not renew the leases for our Albany, Georgia and Fredericksburg, Virginia locations and closed those stores in the first quarter of 2010.  We plan to enter the Columbus, Georgia market with a single store during the fourth quarter of 2010.  These, and other potential changes, should reduce net selling space in 2010 by approximately 1% to 2%.

Our planned expenditures for 2010 are $15.2 million including $10.5 million for new stores and store improvements and $4.4 million for information technology.  Expenditures will depend on the number of new locations and the level of improvements they might require.

Liquidity and Capital Resources

Our sources of capital include, but are not limited to, cash flows from operations, public and private issuances of debt and equity securities and bank borrowings.  We believe that cash balances, funds from operations, proceeds from sales of properties and use of our Credit Agreement are adequate to fund our working capital requirements, capital expenditures, scheduled debt payments, income tax obligations and benefit plan contributions for the foreseeable future.

Our $60.0 million revolving credit facility (the “Credit Agreement”) with two banks terminates in December 2011.  The Credit Agreement is secured by inventory, accounts receivable and cash. The borrowing base at March 31, 2010 was $56.6 million.  Amounts available are reduced by $10.0 million since a fixed charge coverage ratio test is not met for the immediately preceding twelve month period and also reduced $7.6 million for outstanding letters of credit at March 31, 2010, resulting in a net availability of $39.0 million. There were no borrowed amounts outstanding under the Credit Agreement at March 31, 2010.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Summary of Cash Activities

During the first quarter of 2010, our principal source of cash was $7.6 million derived from operations.

Our cash flows provided by operating activities totaled $7.6 million in the first quarter of 2010 compared to $0.4 million used in operations for the same period of 2009.  This increase was primarily the result of net income of $2.4 million in the first quarter of 2010 compared to the net loss of $7.3 million for the same period of 2009.  For additional information about the changes in our assets and liabilities, refer to our Balance Sheet Changes discussion.

Our cash flows used in investing activities totaled $0.7 million in the first quarter of 2010 versus $6.2 million provided in the same period of 2009.  This decrease is primarily due to proceeds of $6.6 million from a sale-leaseback transaction in 2009.

Our cash flows provided by financing activities totaled $1.1 million in the first quarter of 2010 compared to $0.07 million used for the same period of 2009.  This change is primarily due to $1.6 million in proceeds from exercises of stock options in 2010.

Balance Sheet Changes for the Three Months Ended March 31, 2010

Our balance sheet as of March 31, 2010, as compared to our balance sheet as of December 31, 2009, changed as follows:

 

 

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies and similar matters, and those that include the words “believes,” “anticipates,” “estimates” or similar expressions constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  For those statements, Havertys claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainti es.  The following important factors could cause future results to differ: changes in the economic environment; changes in industry conditions; competition; merchandise costs; energy costs; timing and level of capital expenditures; introduction of new products; rationalization of operations; and other risks identified in Havertys’ SEC reports and public announcements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes with respect to our financial instruments and their related market risks since the date of the Company’s most recent annual report.  We have exposure to floating interest rates through our Credit Agreement.  Therefore, interest expense will fluctuate with changes in LIBOR and other benchmark rates.  We do not believe a 100 basis point change in interest rates would have a significant adverse impact on our operating results or financial position.

Item 4.  Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to ou r management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results.  The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Item 6.   Exhibits

The exhibits listed below are filed with or incorporated by reference into this report (those filed with this report are denoted by an asterisk). Unless otherwise indicated, the exhibit number of documents incorporated by reference corresponds to the exhibit number in the referenced documents.

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.