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, 2002
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
780 JOHNSON FERRY ROAD, SUITE 800, ATLANTA, GEORGIA 30342
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (404) 443-2900
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 8, 2002 were: Common Stock - 17,139,999 Class A Common Stock - 4,554,276.
HAVERTY FURNITURE COMPANIES, INC.
INDEX
Page No.
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Part I. Financial Information:
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Income -
Quarter and six months ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Comprehensive Income -
Quarter and six months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Quantitative and Qualitative Disclosure of Market Risk 10
Part II. Other Information 11
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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30 December 31
2002 2001
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ASSETS
Current Assets
Cash and cash equivalents $ 1,838 $ 727
Accounts receivable 162,597 192,685
Less allowance for doubtful accounts (6,800) (6,900)
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155,797 185,785
Inventories, at LIFO 111,803 103,662
Other current assets 11,106 15,581
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Total Current Assets 280,544 305,755
Property and equipment 274,901 258,658
Less accumulated depreciation and amortization (116,927) (112,259)
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157,974 146,399
Deferred income taxes 6,919 6,640
Other assets 2,971 2,111
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$ 448,408 $ 460,905
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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
June 30 December 31
2002 2001
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 13,500 $ 25,000
Accounts payable and accrued expenses 83,290 87,533
Current portion of long-term debt and
capital lease obligations 12,275 11,370
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Total Current Liabilities 109,065 123,903
Long-term debt and capital lease obligations,
less current portion 122,606 131,599
Other liabilities 4,058 4,005
Stockholders' Equity
Capital stock, par value $1 per share - -
Preferred Stock, Authorized: 1,000 shares;
Issued: None
Common Stock, Authorized:
50,000 shares; Issued: 2002 - - 23,056;
2001 - - 22,509 shares (including shares in treasury:
2002 and 2001 - - 5,927 and 5,932, respectively) 23,056 22,509
Convertible Class A Common Stock, Authorized:
15,000 shares; Issued: 2002 - - 5,081 shares;
2001 - - 5,247 shares (including shares in
treasury: 2002 and 2001 - - 522) 5,081 5,247
Additional paid-in capital 40,472 37,396
Retained earnings 203,358 195,119
Accumulated other comprehensive income (loss) (1,162) (697)
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270,805 259,574
Less cost of Common Stock and
Convertible Class A Common Stock in treasury (58,126) (58,176)
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212,679 201,398
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$ 448,408 $ 460,905
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See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Quarter Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Net sales $164,892 $ 152,116 $339,845 $ 319,715
Cost of goods sold 86,734 79,855 177,431 167,963
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Gross profit 78,158 72,261 162,414 151,752
Credit service charges 2,151 2,834 4,534 5,888
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Gross profit and other revenue 80,309 75,095 166,948 157,640
Expenses:
Selling, general and administrative 71,373 67,373 142,967 138,868
Interest 1,799 2,761 3,839 5,925
Provision for doubtful accounts 962 968 2,149 1,979
Other expense (income), net 187 (65) 1,237 (2)
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74,321 71,037 150,192 146,770
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Income before income taxes 5,988 4,058 16,756 10,870
Income taxes 2,246 1,495 6,284 4,000
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Net income $ 3,742 $ 2,563 $ 10,472 $ 6,870
======== ========= ======== =========
Weighted average common shares - basic 21,631 20,936 21,519 20,872
Weighted average diluted common shares 22,388 21,460 22,321 21,402
Basic earnings per share $ 0.17 $ 0.12 $ 0.49 $ 0.33
======== ========= ======== =========
Diluted earnings per share $ 0.17 $ 0.12 $ 0.47 $ 0.32
======== ========= ======== =========
Cash dividends per common share:
Common Stock $ 0.0525 $ 0.0525 $ 0.105 $ 0.105
Class A Common Stock $ 0.0500 $ 0.0500 $ 0.100 $ 0.100
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See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30
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2002 2001
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Operating Activities
Net income $ 10,472 $ 6,870
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,837 8,138
Provision for doubtful accounts 2,149 1,979
Gain on sale of property and equipment (13) (43)
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Subtotal 20,445 16,944
Changes in operating assets and liabilities:
Accounts receivable 27,839 18,225
Inventories (8,141) (444)
Other current assets 4,475 (1,876)
Accounts payable and accrued expenses (4,987) (18,442)
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Net cash provided by operating activities 39,631 14,407
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Investing Activities
Purchases of property and equipment (19,434) (13,068)
Proceeds from sale of property and equipment 35 468
Other investing activities (860) 97
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Net cash used in investing activities (20,259) (12,503)
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Financing Activities
Net (decrease) increase in borrowings under
revolving credit facilities (14,000) 1,700
Payments on long-term debt and capital lease obligations (5,588) (5,601)
Proceeds from exercise of stock options 3,409 1,432
Dividends paid (2,233) (2,168)
Other financing activities 151 607
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Net cash used in financing activities (18,261) (4,030)
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Increase (decrease) in cash and cash equivalents 1,111 (2,127)
Cash and cash equivalents at beginning of period 727 3,256
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Cash and cash equivalents at end of period $ 1,838 $ 1,129
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See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Quarter Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Net income $ 3,742 $2,563 $ 10,472 $ 6,870
Other comprehensive income:(1)
Cumulative effect of adopting SFAS 133 -- -- 53
Change in fair value of derivatives accounted
for as hedges (822) -- (465) (377)
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Total other comprehensive income (loss) (822) -- (465) (324)
------- ------ -------- -------
Comprehensive income $ 2,920 $2,563 $ 10,007 $ 6,546
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(1) Components of comprehensive income are reported net of related taxes.
See notes to condensed consolidated financial statements.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain statements we make in this report, and other written or oral statements made by or on behalf of the Company, may constitute "forward-looking statements" within the meaning of the federal securities laws. Examples of such statements in this report include descriptions of our plans with respect to new store openings and relocations, our plans to enter new markets and expectations relating to our continuing growth. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. Management believes that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. Such statements speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. The following are some of the factors that could cause the Company's actual results to differ materially from the anticipated results described in the Company's forward-looking statements: the ability to maintain favorable arrangements and relationships with key suppliers (including domestic and international sourcing); conditions affecting the availability and affordability of retail real estate sites; the ability to attract, train and retain highly qualified associates to staff corporate positions, existing and new stores and distribution facilities; general economic and financial market conditions, which affect consumer confidence and the spending environment for big ticket items; competition in the retail furniture industry; and changes in laws and regulations, including changes in accounting standards, tax statutes or regulations.
RESULTS OF OPERATIONS
Net sales for the second quarter and six months ended June 30, 2002, increased 8.4% and 6.3% over the same periods for 2001, respectively. Comparable-store sales increased 6.6% and 4.9% for the second quarter and six-month period, respectively. A store's results are included in the comparable-store sales computation beginning with the one-year anniversary of its opening, expansion, or the date when it was otherwise non-comparable. Management believes that the increase is indicative of many consumers fulfilling desires to purchase home furnishings which were deferred in the prior year. Recent unsettling economic news, coupled with reluctance by consumers to spend discretionary sums as their stock market wealth declines, may cause some consumers to postpone big ticket purchases such as furniture over the next few months. The Company has continued to provide a consistent and effective message of the Company's breadth of fashionable merchandise in its advertising rather than marketing a variety of promotional opportunities. Management believes that the merchandising and advertising of well-known brand name products and accessory items selected to appeal to its customer base have improved sales for all of the Company's merchandise, including its own private-label products.
Gross profit, as a percent of sales, was 47.4% for the second quarter of 2002 compared to 47.5% for the comparable period of 2001 and 47.8% compared to 47.5% for the six months ended June 30, 2002 and 2001, respectively. The decrease in the second quarter of 2002 was caused largely by closeouts from store relocations and remodelings. Management believes that the decline was partly offset by the impact of increasing the mix of products imported from Asia and the Havertys brand products, since these items generally carry a modestly higher gross margin. The Company expanded its private-label merchandise line from approximately 18% of items selected for inclusion in the Company's core assortment at the end of the first quarter of 2001 to 30% at the end of the first quarter of 2002.
Second quarter credit service charge revenues decreased to 1.3% of net sales from 1.9% in the prior year period. This reduction is due to the continuing trend toward more customer usage of financing alternatives, offered by or through the Company, which allow for longer periods of free interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Selling, general and administrative expenses, as a percent of net sales, decreased to 43.3% from 44.3% for the quarter and to 42.1% from 43.4% for the six months ended June 30 as compared to the prior year periods. This reduction is attributed to emphasis on containing costs along with the increased sales volume which allows for the normal leveraging of fixed costs. During the second quarter of 2002, the Company incurred and recorded expenses of approximately $1.5 million associated with the planned openings of ten new stores and three distribution facilities. These additional expenses were offset in part by reduced advertising costs. Lower paper prices during the period significantly reduced the cost of the Company's newspaper inserts and mailers, which are an important part of the Company's overall advertising media mix.
The provision for doubtful accounts, as a percent of net sales, was 0.6% for the second quarter and first six months of 2002 and 2001. Management does not expect the provision to vary much from this rate for the remainder of 2002. The impact of a possible difficult economic environment is likely to be offset by a lower overall level of accounts receivable due to the outsourcing of one credit program late last year.
Interest expense decreased $1 million and $2.1 million for the quarter and the six months ended June 30, 2002 periods. This is due to a 20.6% and 17.5% decrease in the Company's average debt level and a reduction in the effective interest rate by 60 and 90 basis points in the comparable periods.
Net income, as a percent of sales, was 2.3% and 1.7% for the second quarter and 3.1% and 2.2% for the six months ended June 30, 2002 and 2001, respectively. Diluted earnings per share were $0.17 and $0.12 for the second quarter and $0.47 and $0.32 for the six months ended June 30, 2002 and 2001, respectively.
LIQUIDITY AND SOURCES OF CAPITAL
The Company has historically used internally generated funds, bank borrowings and private placements with institutions to finance its operations and growth. Net cash provided by operating activities was $39.6 million during the first six months of 2002 versus only $14.4 million for the same period last year. Accounts receivable during the first six months decreased at a faster pace than in the prior year. During 2001, accounts payable decreased during the first half of the year since purchases were reduced in reaction to slower sales.
Investing activities used $20.3 million of cash during the six months ended June 30, 2002. Capital expenditures during the period were $19.4 million for new store construction and renovations, most of which will be completed in the third quarter.
Financing activities used $18.3 million of cash during the first half of 2002. The Company reduced its borrowings under its revolving and short-term credit facilities by $14 million, and made $5.6 million in long-term debt repayments.
The Company has two revolving credit facilities totaling $80 million with three and one-half year terms and a $45 million short-term revolving note. These unsecured facilities were syndicated with six commercial banks and accrue interest at LIBOR plus a spread which is based on a fixed charge coverage ratio. At June 30, 2002, borrowings under the facilities were $76.0 million of which $62.5 million was classified as long-term debt. The Company has used $3.6 million of availability for letters of credit and accordingly at June 30, 2002, there was $45.4 million of unused borrowing capacity under these facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
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 (47.4% of total debt was fixed or interest rate protected as of June 30, 2002). The Company's average effective interest rate on all borrowings (excluding capital leases) was 5.3% at June 30, 2002.
Capital expenditures for the remainder of 2002 are presently expected to include the following: construction of a new replacement store in the Dallas/Ft. Worth market; the remodeling of one existing Haverty store and six former Homelife stores; the exercise of purchase options on three leased locations; the purchase of equipment for new replacement distribution facilities; the purchase of trailers and equipment for shuttling prepped merchandise to local markets for home delivery; other real estate projects that will not be completed in 2002; and various information systems and software. The preliminary estimate for these second half 2002 capital expenditures is approximately $34 million.
The Company's remaining capital expenditures for 2002 will be funded by the proceeds from a sale-leaseback transaction that was completed during the third quarter of 2002. This transaction generated approximately $41.8 million from the sale of 11 retail store locations. Management expects that the resulting increase in rent expense will average approximately $4.6 million annually for the initial 20-year lease term, largely offset by lower depreciation and interest expense. Management expects proceeds from the third quarter 2002 sales of warehouse facilities to be exited will be approximately $7 million.
SEASONALITY
Although the Company does not consider its business to be seasonal, sales are somewhat higher in the second half of the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At June 30, 2002, the Company had two outstanding interest-rate swap agreements, each having a notional amount of $10 million at rates of 5.75% and 5.72% and maturing September 30, 2005. Under the agreements, the Company makes payments at the fixed rate and receives payments at variable rates that are based on LIBOR, adjusted quarterly.
The Company also had at June 30, 2002, an outstanding Treasury lock agreement having a notional amount of $25 million at a base Treasury yield of 5.27% and terminating during the third quarter of 2002. This instrument was related to the sale-leaseback transaction which was also completed in the third quarter. Under the agreement, the Company makes payments if the yield at termination is below the base Treasury yield and receives payment if the Treasury return increases above the base Treasury yield.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The 2002 Annual Meeting of Stockholders of the Company was held on May 7, 2002.
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:
L. Phillip Humann
John T. Glover
Mylle B. Mangum
Fred L. Schuermann
The number of votes cast "for" or "withheld" was as follows: Mr. Humann: For =
12,070,714, Withheld = 276,807; Mr. Glover: For = 8,934,735, Withheld =
3,412,786; Ms. Mangum: For = 12,143,189, Withheld = 204,332; Mr. Schuermann:
For = 12,143,134, Withheld = 204,387.
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, Sr. Rawson Haverty, Jr. Clarence H. Ridley Frank S. McGaughey, III Fred J. Bates M. Tony Wilkerson John E. Slater, Jr. Vicki R. Palmer Clarence H. Smith |
The number of votes cast by the holders of Class A Common Stock was as follows
for each of the following nominees: Mr. Haverty, Sr., Mr. McGaughey and Ms.
Palmer: For = 3,959,741, Withheld = -0-; for each of the remaining nominees:
For = 3,920,989, Withheld = 38,752.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report.
Exhibit
Number -- Description of Exhibit
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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(b) Reports on Form 8-K.
None.
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 August 14, 2002 By: /s/ Dennis L. Fink
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Dennis L. Fink,
Executive Vice President and
Chief Financial Officer
(principal financial officer)
By: /s/ Dan C. Bryant
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Dan C. Bryant,
Vice President and Controller
(principal accounting officer)
By: /s/ Jenny H. Parker
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Jenny H. Parker,
Vice President,
Secretary and Treasurer
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EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Haverty Furniture Companies, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, John E. Slater, Jr., Chief Executive Officer of the Company, and Dennis L. Fink, Executive Vice President and Chief Financial Officer, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2002 By: /s/ John E. Slater, Jr.
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John E. Slater, Jr.
Chief Executive Officer
By: /s/ Dennis L. Fink
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Dennis L. Fink
Executive Vice President and
Chief Financial Officer
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