<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 978
<SECURITIES> 0
<RECEIVABLES> 187,622
<ALLOWANCES> 8,500
<INVENTORY> 77,747
<CURRENT-ASSETS> 264,343
<PP&E> 195,309
<DEPRECIATION> 82,270
<TOTAL-ASSETS> 379,383
<CURRENT-LIABILITIES> 59,641
<BONDS> 165,303
0
0
<COMMON> 13,111
<OTHER-SE> 137,922
<TOTAL-LIABILITY-AND-EQUITY> 379,383
<SALES> 390,368
<TOTAL-REVENUES> 403,267
<CGS> 206,805
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,428
<INTEREST-EXPENSE> 10,063
<INCOME-PRETAX> 15,718
<INCOME-TAX> 5,623
<INCOME-CONTINUING> 10,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,095
<EPS-PRIMARY> .87
<EPS-DILUTED> .86
</TABLE>
