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 MARCH 31, 1998 -------------- OR [ ] TRANSITION 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 May 14, 1998 were: Common Stock - 8,853,983; Class A Common Stock - 2,782,611.
2 HAERTY FURNITURE COMPANIES, INC . INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> <C> Part I. Financial Information: Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income - Three months ended March 31, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows - 4 Three months ended March 31, 1998 and 1997 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II. Other Information 8 </TABLE>
3 PART I. FINANCIAL INFORMATION HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> March 31 December 31 1998 1997 -------- ------------ <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 1,058 $ 390 Accounts receivable 199,941 211,263 Less allowance for doubtful accounts 8,500 8,500 -------- -------- 191,441 202,763 Inventories, at LIFO 80,402 80,713 Other current assets 6,255 5,763 -------- -------- TOTAL CURRENT ASSETS 279,156 289,629 Property and equipment 189,287 187,113 Less accumulated depreciation and amortization 75,636 72,495 -------- -------- 113,651 114,618 Other assets 1,989 2,267 -------- -------- $394,796 $406,514 ======== ======== </TABLE> -1-
4 HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) <TABLE> <CAPTION> March 31 December 31 1998 1997 -------- ------------ <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ -- $ 82,500 Accounts payable and accrued expenses 43,402 41,463 Current portion of long-term debt and capital lease obligations 8,955 8,945 -------- -------- TOTAL CURRENT LIABILITIES 52,357 132,908 Long-term debt and capital lease obligations, less current portion 177,734 111,489 Deferred income taxes 199 199 Other liabilities 2,381 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 -- 9,876,114; 1997 -- 9,604,063 shares (including shares in treasury: 1998 - 891,733; 1997 - 756,133) 9,876 9,604 Convertible Class A Common Stock, Authorized: 1998 and 1997 -- 15,000,000 shares; Issued: 1998 - 3,078,098 shares; 1997 -- 3,096,267 shares (including shares in treasury: 1998 and 1997 -- 249,055) 3,078 3,096 Additional paid-in capital 37,461 35,363 Retained earnings 122,555 120,117 -------- -------- 172,970 168,180 Less cost of Common Stock and Convertible Class A Common Stock in treasury 10,845 8,626 -------- -------- 162,125 159,554 -------- -------- $394,796 $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> Three Months Ended March 31 ----------------------------- 1998 1997 --------- --------- <S> <C> <C> Net sales $ 129,368 $ 114,749 Cost of goods sold 68,437 60,280 --------- --------- Gross profit 60,931 54,469 Credit service charges 4,298 3,804 --------- --------- 65,229 58,273 Costs and expenses: Selling, general and administrative 54,210 49,205 Interest 3,495 3,617 Provision for doubtful accounts 2,132 1,367 --------- --------- 59,837 54,189 --------- --------- Other (expense) income, net (151) 72 --------- --------- INCOME BEFORE INCOME TAXES 5,241 4,156 Income taxes 1,887 1,496 --------- --------- NET INCOME $ 3,354 $ 2,660 ========= ========= Diluted earnings per share $ 0.28 $ 0.23 Basic earnings per share $ 0.29 $ 0.23 Weighted average diluted shares 11,842 11,771 Weighted average basic shares 11,691 11,678 Cash dividends per common share: Common Stock $ .080 $ .080 Class A Common Stock $ .075 $ .075 </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> Three Months Ended March 31 --------------------------- 1998 1997 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,354 $ 2,660 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,461 3,326 Provision for doubtful accounts 2,132 1,367 Gain on sale of property and equipment (11) (19) -------- -------- Subtotal 8,936 7,334 Changes in operating assets and liabilities: Accounts receivable 9,190 2,989 Inventories 311 (3,155) Other current assets (492) (50) Accounts payable and accrued expenses 2,333 1,762 Income taxes (394) 234 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 19,884 9,114 -------- -------- INVESTING ACTIVITIES Purchases of property and equipment (2,583) (6,827) Proceeds from sale of property and equipment 100 34 Other investing activities 278 47 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (2,205) (6,746) -------- -------- FINANCING ACTIVITIES Net decrease in short-term borrowings (82,500) (300) Proceeds from issuance of long-term debt 67,300 -- Payment of long-term debt and capital lease obligations (1,045) (786) Purchase of treasury stock (2,219) (1,138) Exercise of stock options 2,352 552 Dividends paid (916) (918) Other financing activities 17 26 -------- -------- NET CASH USED IN FINANCING ACTIVITIES (17,011) (2,564) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 668 (196) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 390 414 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,058 $ 218 ======== ======== </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. NOTE C - Supplementary Cash Flow Information The Company made total cash payments for interest (including capitalized interest) of approximately $3,542,000 and $3,631,000 for the three-months ended March 31, 1998 and 1997, respectively. The Company made total income tax payments of approximately $2,381,000 and $1,337,000 for the three months ended March 31, 1998 and 1997, respectively. -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, competition 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 first quarter of 1998 increased 12.7 % to $129.4 million compared to sales of $114.7 million for the first quarter of 1997. The sales increase for the period was attributable both to increased consumer demand for home furnishings and to the new stores and large replacement stores opened by the Company. Retail square footage increased 5.2% from 3,010,000 square feet at the end of the first quarter of 1997 to 3,167,000 square feet at the end of the first quarter of 1998. Comparable store sales increased 6.5% for the quarter ended March 31,1998 as the Company experienced significant sales increases in its two largest markets, Dallas and Atlanta. Overall, lower long term interest rates and steady economic growth stimulated housing markets, mortgage refinancings and consumer spending on home furnishings. A store's results are included in the comparable-store sales computation beginning with the one year anniversary of its opening. Gross profit as a percent of sales was 47.1% for the first three months of 1998 compared to 47.5% for the comparable period of 1997. The decrease for the period was primarily attributable to a low level of inventory close-out sales during early 1997 as compared to the more typical levels in 1998. Selling, general and administrative expenses as a percent of net sales decreased to 41.9% for the three months ended March 31, 1998 from 42.9% in the prior year period. During the second quarter of 1997, the Company completed the roll-out of its on-line inventory and automated store system to all of its locations. These systems have yielded improvements in warehouse and delivery processes and their related costs. In general, increases in administrative costs were held lower as a percent of sales than the sales increase as the Company benefited from the cumulative impact of automation and consolidation of a number of routine functions in recent years. The provision for doubtful accounts as a percentage of net sales increased to 1.6% for the first quarter of 1998 from 1.2% for the first quarter of 1997. This 1.6% provision was lower than the levels of the last half of 1997 and slightly better than expected. The Company's provision is higher than historical levels and reflects 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. During the three months ended March 31, 1998, the Company experienced a moderating to improving trend in its rate of delinquencies and new consumer bankruptcies, which are indicators of future write-offs. Management expects that given the current consumer credit environment, the provision for doubtful accounts will remain at approximately 1.6% to 1.7% of net sales for the remainder of 1998. -6-
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest expense was relatively flat in actual dollars but decreased to 2.7% from 3.1% as a percent of net sales for the first quarter. The Company's effective interest rate was slightly higher as compared to the year ago period but this was offset by lower average debt levels. Net earnings as a percent of net sales were 2.6% for the first quarter of 1998 and 2.3% for the first quarter of 1997. Diluted earnings per share were $0.28 and $0.23 ($0.29 and $0.23 basic) for the three months ended March 31, 1998 and 1997, respectively. 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 $19.9 million during the first three months of 1998 versus $9.1 million for the 1997 period. Inventories were held constant despite the growth in retail square footage. Receivables decreased $11.3 million as more customers chose to pay cash for their purchases and delinquent accounts were reduced. Investing activities used $2.2 million of cash during the three months ended March 31, 1998. Capital expenditures during the period were $2.6 million primarily for improvements of two additional leased store locations which opened early in the second quarter of 1998. Financing activities used $17.0 million of cash during the first quarter of 1998 including $15.2 million to reduce debt and $2.2 million for the acquisition of treasury stock. The Company entered into a five year, $105 million revolving credit facility on March 31, 1998 syndicated with five commercial banks. This facility was implemented to replace the Company's existing bank line-of-credit agreements and provide a multi-year commitment for the Company's capital requirements. Accordingly, the $67.3 million of bank borrowings at March 31, 1998 were classified as long term debt. Borrowings under the new credit facility are unsecured and accrue interest at competitive money-market rates. 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 (90% of total debt was fixed or interest rate protected at March 31, 1998). The Company's average effective interest rate on all borrowings (excluding capital leases) was 7.3% at March 31, 1998. The Company opened two stores in April 1998 and has four additional stores scheduled to open during the second half of 1998. All of these new facilities will be occupied under operating leases. Capital expenditures for the remainder of 1998 to support improvements for this expansion and additional projects which will be completed in 1999 are estimated to be $9 million. The Company is considering other new stores for late 1998 or 1999, some of which may require ownership and which would increase the estimated 1998 capital expenditures. 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. -7-
10 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. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. 4.2 -- Credit Agreements dated March 31, 1998, among Haverty Furniture Companies, Inc., Havertys Credit Services, Inc. and the Lenders Listed Therein, Agented by SunTrust Bank, Atlanta. 27 -- Financial Data Schedule (only submitted to SEC in electronic format). (b) Reports on Form 8-K. None. -8-
11 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 May 15, 1998 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, Controller (Principal accounting officer) By /s/ Jenny H. Parker ------------------------------------- Jenny H. Parker, Corporate Secretary and Vice President, Finance -9-