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UNITED STATES
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, 2005
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: 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 Identification No.)
organization)
780 Johnson Ferry Road, Suite 800, Atlanta, Georgia 30342
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 443-2900
(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 [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [x] No [ ]
The number of shares outstanding of the registrant's two classes of
$1 par value common stock as of May 1, 2005 were: Common Stock -
18,426,933; Class A Common Stock - 4,311,321.
HAVERTY FURNITURE COMPANIES, INC.
INDEX
Page No.
PART FINANCIAL INFORMATION:
I.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004 1
Condensed Consolidated Statements of Income -
Quarter Ended March 31, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows-
Quarter Ended March 31, 2005 and 2004 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data - unaudited)
March 31 December 31
2005 2004
------------ -------------
(Restated -
See Note B)
ASSETS
Current Assets
Cash and cash equivalents $ 3,051 $ 10,122
Auction rate securities 5,000 5,000
Accounts receivable 82,983 81,132
Inventories 116,013 110,812
Prepaid expenses 7,081 6,654
Deferred income taxes 2,181 2,249
Other current assets 6,062 14,453
--------- ---------
Total current assets 222,371 230,422
Accounts receivable, long-term 10,361 9,396
Property and equipment 206,817 205,037
Other assets 12,298 12,711
--------- ---------
$ 451,847 $ 457,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 2,100 $ -
Accounts payable 35,829 31,202
Customer deposits 26,281 24,040
Accrued liabilities 37,662 45,460
Current portion of long-term debt and
capital lease obligations 13,202 20,270
--------- ---------
Total current liabilities 115,074 120,972
Long-term debt and capital lease
obligations, less current portion 42,335 44,228
Other liabilities 19,383 20,108
--------- ---------
Total liabilities 176,792 185,308
Stockholders' Equity
Capital stock, par value $1 per share:
Preferred Stock, Authorized: 1,000 shares;
Issued: None
Common Stock, Authorized: 50,000 shares;
Issued: 2005 - 24,358;
2004 - 24,293 shares 24,358 24,293
Convertible Class A Common Stock,
Authorized: 15,000 shares;
Issued: 2005 - 4,838;
2004 - 4,840 shares 4,838 4,840
Additional paid-in capital 55,571 55,108
Long-term incentive plan deferred
compensation (2,621) (2,971)
Retained earnings 252,287 250,511
Accumulated other comprehensive loss (1,150) (1,295)
Less treasury stock at cost -
Common Stock (2005 and
2004 - 5,937 shares) and
Convertible Class A Common Stock
(2005 and 2004 - 522 shares) (58,228) (58,228)
--------- ---------
Total stockholders' equity 275,055 272,258
--------- ---------
$ 451,847 $ 457,566
========= =========
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data - Unaudited)
Quarter Ended
March 31
-------------------------
2005 2004
----------- ------------
(Restated -
See Note B)
Net sales $ 207,634 $ 190,301
Cost of goods sold 103,024 92,339
---------- ---------
Gross profit 104,610 97,962
Credit service charge 989 1,304
---------- ---------
Gross profit and other revenue 105,599 99,266
---------- ---------
Expenses:
Selling, general and administrative 99,889 89,002
Interest 901 1,125
Provision for doubtful accounts 206 131
Other (income) expense, net (459) (589)
---------- ---------
100,537 89,669
---------- ---------
Income before income taxes 5,062 9,597
Income taxes 1,888 3,550
---------- ---------
Net income $ 3,174 $ 6,047
========== =========
Basic earnings per share:
Common Stock $ 0.14 $ 0.27
Class A Common Stock $ 0.13 $ 0.26
Diluted earnings per share:
Common Stock $ 0.14 $ 0.26
Class A Common Stock $ 0.13 $ 0.25
Weighted average shares - basic:
Common Stock 18,374 18,087
Class A Common Stock 4,316 4,364
Weighted average shares - assuming dilution:
Common Stock 23,015 23,185
Class A Common Stock 4,316 4,364
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Quarter Ended March 31
---------------------------
2005 2004
--------- -----------
(Restated -
See Note B)
Cash Flows from Operating Activities:
Net income $ 3,174 $ 6,150
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 5,272 4,774
Provision for doubtful accounts 206 131
Deferred income taxes 63 -
Gain on sale of property and
equipment 57 103
Other 341 -
Changes in operating assets and
liabilities:
Accounts receivable (3,022) 10,001
Inventories (5,201) (3,340)
Customer deposits 2,241 3,041
Other assets and liabilities 6,842 2,013
Accounts payable and accrued (3,171) (11,291)
liabilities
--------- ---------
Net cash provided by operating
activities 6,802 11,582
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (7,172) (4,486)
Purchases of auction rate securities - (15,000)
Proceeds from sale of property and
equipment 63 902
Other investing activities 960 1,790
--------- ---------
Net cash used in investing (6,149) (16,794)
activities
--------- ---------
Cash Flows from Financing Activities
Proceeds from borrowings under
revolving credit facilities 7,000 -
Payments of borrowings under revolving
credit facilities (4,900) -
--------- ---------
Net increase in borrowings under
revolving credit facilities 2,100 -
Payments on long-term debt and capital
lease obligations (8,961) (1,902)
Proceeds from exercise of stock options 534 1,381
Dividends paid (1,397) (1,379)
Other financing activities - 56
--------- ---------
Net cash used in financing
activities (7,724) ( 1,844)
--------- ---------
Decrease in cash and cash equivalents (7,071) (7,056)
Cash and cash equivalents at beginning of
the year 10,122 31,591
--------- ---------
Cash and cash equivalents at end of
period $ 3,051 $ 24,535
========= =========
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
- ------------------------------
Haverty Furniture Companies, Inc. ("Havertys" or the "Company") is a
full-service home furnishings retailer. The Company operates all of
its stores using the Havertys brand and does not franchise its
concept. 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 in the United States for complete financial statements.
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries and one Variable Interest Equity under
FIN 46. All significant intercompany accounts and transactions
have been eliminated in consolidation. In the opinion of
management, all adjustments of a normal recurring nature considered
necessary for a fair presentation have been included.
The preparation of condensed consolidated financial statements in
conformity with accounting principles in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the consolidated
financial statements and reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
For further information, refer to the consolidated financial
statements and footnotes thereto included in Havertys Annual Report
on Form 10-K for the fiscal year ended December 31, 2004. As a
result of the lease adjustments discussed in Note B below, certain
information included in that Form 10-K will be restated in Form 10-
K/A, which will be filed with the Securities and Exchange Commission
("SEC") on or about May 31, 2005. Certain prior-year amounts have
been reclassified to conform to the 2004 financial statement
presentation.
NOTE B - Restatement of Previously issued Condensed Consolidated
Financial Statements
- -------------------------------------------------------------------
The Company recently reviewed its lease accounting and determined
that it was appropriate to restate its consolidated financial
statements for the fiscal years ended December 31, 2002 through
2004. These adjustments related to lease accounting matters,
including those discussed by the SEC in its February 7, 2005 letter
("SEC Letter") to the American Institute of Certified Public
Accountants ("AICPA"). In the SEC Letter, the SEC expressed its
views on the amortization of leasehold improvements, rent holidays
and landlord/tenant incentives.
The Company first reported recording, in the earnings release for
the year and quarter ended ended December 31, 2004, adjustments
totaling $0.4 million to adjust straight-line rent expense and to
correct its accounting for leases. As then discussed, it had been
our policy to depreciate our property and equipment, including
assets on leased properties, over the estimated useful lives of
those assets. In some cases, these assets on leased properties were
depreciated over a period of time that included both the initial
term of the lease and one or more option periods. However, in
certain instances, when calculating straight-line rent expense, the
Company excluded option periods which had been included for
depreciation purposes. In December 2004, the Company revised its
computation of straight-line rent to include certain option periods
where failure to exercise such options would result in an economic
penalty. As a result, the Company concluded that rent expense was
cumulatively understated by $0.4 million as of December 31, 2004,
and as the amount was immaterial, recorded the adjustment in the
quarter then ended.
Subsequent to the issuance of the SEC letter, and the additional
clarification from the SEC concerning the acceptable accounting
methods, we undertook an additional review of our accounting
policies relative to rent holidays. The adjustment described below
changes our accounting practices to expense straight-line rent
from the point at which the Company takes control and possession of
a leased site (generally at the beginning of construction).
Previously, the Company began straight-lining of rent at the
earlier of the dates actual rent payments commenced or the opening
of the store. The cumulative pre-tax adjustment of $2.8 million
reflects the correct treatment for rent holidays and the adjustment
for option periods noted above.
The Company is correcting these errors through restatement of its
consolidated financial statements reported on Form 10-K for the
fiscal year ended December 31, 2004. The Company expects to file
a Form 10-K/A for the fiscal year ended December 31, 2004 by May
31, 2005. The condensed consolidated balance sheet as of December
31, 2004 contained herein reflects all adjustments to be included
in that Form 10-K/A.
The impacts of these restatement adjustments on the condensed
consolidated financial statements are summarized below (in
thousands, except per share data):
As of December 31, 2004
-------------------------------------
Previously As
Balance Sheet Data Reporded Adjustments Restated
- ------------------ ---------- ----------- ---------
Accrued liabilities $ 50,584 $ (5,124) $ 45,460
Total current liabilities 126,096 (5,124) 120,972
Other liabilities:
Deferred income taxes 1,151 (1,073) 78
Straight-line lease
liabilities - long term - 7,895 7,895
Total liabilities 183,610 1,698 185,308
Retained earnings 252,209 (1,698) 250,511
Total liabilities and
stockholders' equity $ 457,566 $ - $ 457,566
For the Quarter Ended March 31, 2004
-------------------------------------
Previously As
Income Statement Data Reporded Adjustments Restated
- ---------------------- ---------- ----------- ---------
Selling, general and
administrative expenses $ 88,791 $ 211 $ 89,002
Income before income taxes 9,808 (211) 9,597
Income taxes 3,658 (108) 3,550
---------- --------- --------
Net income $ 6,150 $ (103) 6,047
Earnings per common share:
Basic $ 0.28 $ 0.27
Diluted $ 0.27 $ 0.26
The restatement adjustments did not affect total cash flows
provided by or used in operating, investing or financing activities
for the quarter ended March 31, 2004. The liability for accrued
straight-line rent has been reclassified from current to long-term
in connection with the restatement in recognition of the portion
which will be realized in periods beyond one year.
NOTE C - Earnings Per Share
- ---------------------------
Effective for the quarter ended June 30, 2004, the Company began
reporting its earnings per share using the two-class method as
required by the Emerging Issues Task Force (EITF). The EITF reached
final consensus on Issue No. 03-6, "Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings Per Share
(SFAS 128)," at their March 17, 2004 meeting. EITF 03-6 requires
the income per share for each class of common stock to be calculated
assuming 100% of the Company's earnings 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 effective result of EITF 03-6 is that the basic earnings per
share for the Common Stock is 105% of the basic earnings per share
of the Class A Common Stock. Additionally, given the Company's
current capital structure, diluted earnings per share for Common
Stock under EITF 03-6 will be the same as was previously reported
using the if-converted method.
The amount of earnings used in calculating diluted earnings per
share of Common Stock is equal to net income since the Class A
shares are assumed to be converted. Diluted earnings per share of
Class A Common Stock includes the effect of dilutive common stock
options which reduces the amount of undistributed earnings allocated
to the Class A Common Stock.
The following is a reconciliation of the number of shares used in
calculating the diluted earnings per share for Common Stock under
SFAS 128 and EITF 03-6 (shares in thousands):
Quarter Ended
March 31,
-------------------
2005 2004
-------- --------
Common:
Weighted average shares outstanding 18,374 18,087
Assumed conversion of Class A
Common shares 4,316 4,364
Dilutive options 325 734
-------- ---------
Total weighed-average diluted
common shares 23,015 23,185
======== =========
NOTE D - Stock-Based Compensation
- ----------------------------------
At March 31, 2005, the Company had three stock-based employee
compensation plans under which awards have been made: a non-
compensatory employee stock purchase plan, a stock option plan and a
long-term incentive plan. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost for any
options is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation (in thousands, except per share
amounts):
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Quarter ended
March 31,
----------------------
2005 2004
--------- ---------
(Restated -
See Note B)
Net income, as reported $ 3,174 $ 6,047
Deduct, total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of related tax effects (674) (668)
--------- --------
Pro forma net income $ 2,500 $ 5,379
========= ========
Earnings per share:
As reported
Basic:
Common $ 0.14 $ 0.27
Class A $ 0.13 $ 0.26
Diluted:
Common $ 0.14 $ 0.26
Class A $ 0.13 $ 0.25
Pro Forma:
Basic:
Common $ 0.11 $ 0.24
Class A $ 0.10 $ 0.23
Diluted:
Common $ 0.11 $ 0.24
Class A $ 0.10 $ 0.23
NOTE E- 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.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F - Other (income) expense, net
- -------------------------------------
The Company includes in this line item any gains or losses on sales
of land, property and equipment, impairment losses and changes in
previously estimated losses and other miscellaneous income or
expense items which are non-recurring in nature. The following are
the significant gains or losses that have been included in "other
(income) expense, net." During the first quarter of 2005, the
Company received additional insurance proceeds of approximately $0.2
million from certain coverages for facilities damaged by hurricanes.
During the first quarter of 2004, the Company had a reduction in its
impairment reserve of approximately $0.5 million.
NOTE G - Comprehensive Income
- -----------------------------
Total comprehensive income was comprised of the following (in
thousands):
Quarter Ended
March 31,
--------------------
2005 2004
-------- ---------
(Restated -
See Note B)
Net income $ 3,174 $ 6,047
Changes in derivatives,
net of applicable income
tax 145 145
--------- ---------
Total comprehensive income $ 3,319 $ 6,192
========= =========
NOTE H - Pension Plans
- ----------------------
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," to improve financial statement disclosures for defined
benefit plans. This standard requires that companies provide more
details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to
expanded annual disclosures, the Company is required to report the
various elements of its pension costs on a quarterly basis. SFAS
No. 132 (revised 2003) is effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15,
2003.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net pension cost included the following components (in thousands):
Quarter Ended
March 31
------------------
2005 2004
------- -------
Service cost-benefits earned during the period $ 705 $ 639
Interest cost on projected benefit obligations 814 782
Expected return on plan assets (1,015) (980)
Amortization of prior service costs 33 33
-------- -------
Net pension cost $ 537 $ 474
======== =======
The Company disclosed in its financial statements for the year
ended December 31, 2004, a planned $3.5 million contribution to the
pension plan in 2005. No contributions were made to the plan in
the first three months of 2005, but $3.5 million is expected to be
contributed prior to December 31, 2005.
NOTE I - Accounting and Disclosure Changes
- ------------------------------------------
Accounts receivable balances resulting from certain credit
promotions have scheduled payment amounts which extend beyond one
year. Prior to June 30, 2004, the Company classified its accounts
receivable portfolio as a current asset in accordance with trade
practice. In the aggregate, and based on historical experience,
the receivables are collected in seven to eight months. Effective
June 30, 2004, for those credit promotions which extend beyond one
year, the Company classifies a portion of the receivables as long-
term based on the specific programs' historical collection rate,
which is generally faster than the scheduled rate. The portions of
receivables contractually due beyond one year classified as current
and long-term are estimates. The timing of actual collections that
are contractually due beyond one year may be different from the
amounts estimated to be collected within one year. However, based
on experience, management does not believe the collection rate will
differ significantly. At March 31, 2005 and December 31, 2004, the
accounts receivable contractually due beyond one year from the
respective balance sheet dates totaled approximately $26.2 million
and $20.4 million, respectively.
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 and the roll-out of our
distribution system. The forward-looking statements regarding
future events and our future results are based on current
expectations, estimates, forecasts and projections about the
industry and markets in which we operate and the beliefs and
assumptions of our management. Words such as "expects",
"anticipates", "intends", "plans", "believes", "estimates",
variations of such words and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned
that these forward-looking statements are only predictions and are
subject to risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statement. We
believe 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 Havertys' actual results to differ materially from
the expected results described in our forward-looking statements:
the ability to maintain favorable arrangements and relationships
with key suppliers (including domestic and international sourcing);
any disruptions in the flow of imported merchandise, whether caused
by war, strikes, tariff, politics or otherwise; conditions affecting
the availability and affordability of retail and distribution real
estate sites; the ability to attract, train and retain highly
qualified associates to staff existing and new stores, distribution
facilities and corporate positions; 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.
Operating Results and Financial Condition
The following discussion of Havertys' financial condition and
results of operations should be read together with our condensed
consolidated financial statements and related notes thereto
included herein.
Net Sales
Our sales are generated by customer purchases of home furnishings
in our retail stores and revenue is recognized upon delivery to the
customer. The following outlines our sales and comp-store sales
increases for the periods indicated:
2005 2004 2003
----------------------------- ------------------------------ ---------------------------
Comp-Store Comp-Store Comp-Store
Net Sales Sales Net Sales Sales Net Sales Sales
------------------ ---------- ----------------- ----------- ---------------- ----------
% % % % % %
Increase Increase Increase Increase Increase Increase
(decrease) (decrease) (decrease) (decrease) (decrease) (decrease)
Period Dollars over prior over prior Dollars over prior over prior Dollars over prior over prior
Ended (000s) period period (000s) period period (000s) period period
- ------ ------- ---------- ---------- -------- ---------- ---------- ------- --------- ---------
Q1 207.6 9.1 4.7 190.3 8.5 4.0 175.4 0.2 (6.6)
Q2 179.6 6.5 2.6 168.6 2.3 (2.2)
Q3 197.4 1.1 (1.0) 195.4 11.2 6.1
Q4 216.8 5.6 3.0 205.3 8.9 5.7
---------------------------- ----------------------------- --------------------------
Year 207.6 9.1 4.7 784.2 5.3 2.1 744.6 5.8 1.0
============================ ============================= ==========================
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Total sales increased $17.3 million or 9.1% in the first quarter of
2005 while comparable sales increased 4.7%. The increase in total
sales was generated by an $8.4 million increase from new and
otherwise non-comparable stores and an increase in comparable store
sales of $8.9 million. 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 warehouses or temporary locations are excluded
from comparable store sales, as are periods when stores are closed
for remodeling.
Retail sales of big-ticket home goods were weak from mid 2002 to
mid 2003, which was widely reported to be due to consumer anxiety
about employment uncertainty, threats of war, war and geopolitical
unrest. There was also a lingering negative effect from lower
stock market values. Beginning in June 2003 we had positive comp-
store monthly sales results that continued throughout the remainder
of 2003 and through April 2004 (excluding November 2003 which was
0.4% negative). Sales in our Florida and Southeast markets during
August and September of 2004 were negatively impacted by record-
breaking severe weather from four hurricanes within a six-week
period. These lost sales were particularly significant because our
Florida stores normally produce approximately 23% of our total
sales. We do expect that the storm damage will continue to
generate some incremental sales through August of 2005 as damaged
furniture is replaced and from associated redecorating activity.
We believe that continued strong housing sales and low interest
rates are a positive factor for the industry, but consumer
confidence and further indications of a strengthening economy are
key to increased spending for big- ticket furniture items. Many
retailers have been advertising aggressive sales promotions to
stimulate business and increase their sales volume. We believe
that this approach would negatively impact our "everyday low
pricing" integrity with our customers over the longer term.
Instead, we have used some promotional pricing during traditional
sales events. Supplementing the pricing promotions, we also offer
free-interest and deferred payment financing promotions. During
the remainder of the year we expect to continue with this approach
of providing a selection of specially priced merchandise and
competitive financing promotions to increase traffic in our stores.
Our sales during the first three months of 2005 increased across
all of our major categories of furnishings, with casual dining,
recliners and sleeper sofas and bedding performing better than the
average. Our average price per item was up slightly and our
average sales transaction was modestly higher in the first quarter
over the prior year period. Net sales for each period by category
were as follows (in millions):
Quarter Ended March 31,
--------------------------------------
% of % of
2005 Net Sales 2004 Net Sales
-------- --------- -------- --------
Upholstery $ 50.9 24.5% $ 47.9 25.2%
Bedroom 45.5 21.9 41.9 22.0
Formal Dining 14.9 7.2 14.5 7.6
Casual Dining 11.2 5.4 9.4 4.9
Recliners and Sleeper sofas 16.2 7.8 14.4 7.6
Occasional 36.0 17.3 33.2 17.4
-------- ------ -------- -------
Total Furniture Sales 174.7 84.1 161.3 84.7
-------- ------ -------- -------
Bedding Sales 18.9 9.1 16.4 8.7
Accessories and Other 14.0 6.8 12.6 6.6
-------- ------ -------- -------
Net Sales $ 207.6 100.0% $ 190.3 100.0%
======== ====== ======== =======
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Gross Profit
Cost of goods sold consists primarily of the purchase price of the
merchandise together with inbound freight costs. Our gross profit
is largely dependent upon merchandising capabilities, vendor
pricing and the mix of products sold. We have developed strong
relationships with our suppliers and believe that we receive
excellent pricing and superior service from our key vendors in
exchange for distribution of their products. The continued
improvements related to the products imported from Asia and pricing
pressure on domestic suppliers have also generated good values for
us. Many retailers have used the decreased costs to support their
heavy promotional pricing. Our approach has been to offer products
with greater value at our established middle to upper-middle price
points. Gross profit as a percentage of sales for the quarter
ended March 31, 2005, was in line with the results of the most
recent three quarters. However, we closed five local warehouses
and our Florida regional warehouse facility generating higher
than normal markdowns which combined with continuing pricing
pressure on certain products impacted gross profit margins by
approximately 110 basis points as compared to the first quarter of
2004.
Gross profit will be impacted in the second quarter by the
remaining Florida inventory close outs, but should be improved in
the second half of 2005 by several factors related to merchandise
selection, the consolidation of our distribution network and
improved supply chain management. We now have fewer pools of
inventory, which reduces product handling and damage resulting in
fewer markdowns, and a tighter supply chain, which reduces the
level of closeouts for discontinued merchandise.
Substantially all of our purchasing and receiving costs, or
warehouse and distribution costs are included in selling, general
and administrative 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; warehouse and delivery;
administrative; and advertising. Selling expenses are primarily
comprised of compensation of sales associates, sales support staff
and bank card charges. Occupancy costs include rents, depreciation
charges, insurance and property taxes, repairs and maintenance
expenses and utility costs. Warehouse and delivery costs include
personnel, fuel costs, and depreciation and rental charges for
equipment and rolling stock. Administrative expenses are comprised
of compensation costs for store management, information systems,
executive, finance, merchandising, real estate and human resource
departments, as well as retirement costs for all Havertys
employees. Advertising expenses are primarily media production and
space, direct mail costs and market research expenses.
Our SG&A costs were up 134 basis points as a percent of sales on a
comparable basis. Our operations were significantly affected by
the last major phase of our distribution transition. The overall
impact from closing and consolidating six warehouses into our new
Florida Distribution Center, while operating in the height of the
season, was more costly than we had estimated. The expenses
associated with operating duplicative facilities, moving, training
and severance costs were approximately $1.9 million. Increased
demurrage charges related to larger quantities of imported goods
arriving during this transition were an unexpected additional
impact of approximately $0.6 million. While this transition has
been difficult and demonstrably expensive in period costs and human
capital, we believe it is necessary. We are better positioned to
more efficiently handle our growing share of the dynamic Florida
markets and have improved our ability to add new markets and stores
in this state.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
We also experienced increased costs during the quarter related to
ongoing operations for fuel, insurance and professional service
fees. Rising energy costs impact our business from the inbound
freight we pay for our inventory shipments to the expenses
associated with moving product from our distribution centers to
local market delivery points and the final delivery to our
customers' homes. Our transportation fuel costs increased $0.4
million on a period-over-period basis. We are analyzing
modifications to our routes and delivery schedules to reduce fuel
usage and may raise the fee we charge our customers for delivery.
Insurance costs were up $0.9 million compared to last year's first
quarter of 2005, primarily in the areas of medical and workers'
compensation. The new regulatory requirements and the cost of
compliance with Sarbanes-Oxley contributed to a $0.5 million
increase in professional service fees in the first quarter as
compared to the 2004 period.
Credit Service Charge Revenue and Allowance for Doubtful Accounts
Our credit service charge revenue has continued to decline as
customers choose credit promotions with no interest features. The
in-house financing program most frequently chosen by our customers
during the first quarter was a no interest offer requiring 20 to 23
equal monthly payments. This program and the similar 12-month
program generates very minor credit revenue, but helps us reduce
our interest expense and bad debts due to the faster payout
relative to our deferred payment in-house credit programs. We
offer to our customers the opportunity to apply for credit with a
third party credit provider. Sales financed by this provider are
not Havertys' receivables and 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
program offered through the third party provider is a deferred
payment for 12 to 18 months with an interest accrual that is waived
if the entire balance is paid in full at the end of the deferral
period.
The longer term no interest equal monthly payments offer which we
began in the first quarter of 2005 is currently the most popular of
all the credit programs offered. During the first quarter of 2005,
the amounts financed under all credit programs as a percent of
sales was 39.8% as compared to 41.9% in 2004. The following
highlights the impact these changes have had on our credit service
charge revenue and related accounts receivable and allowance for
doubtful accounts (in thousands):
Quarter Ended
March 31
------------------
2005 2004
--------- --------
Credit Service Charge Revenue $ 989 $ 1,304
Amount Financed as a % of Sales
Havertys 22.6% 20.3%
Third-Party 17.2 21.6
-------- ---------
39.8 41.9
======== =========
% Financed by Havertys with
No Interest for 12 months 27.0% 63.6
No Interest for >12 months 50.3 5.8
No Interest < 12 months 10.6 17.2
Other 12.1 13.4
-------- --------
100.0% 100.0%
======== ========
March 31
---------------------
2005 2004
--------- --------
Accounts receivable $96,044 $101,254
Allowance for doubtful accounts 2,700 4,000
Allowance as a % of accounts
receivable 2.8% 4.0%
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Our allowance for doubtful accounts declined in 2005 as lower
levels of in-house receivables were generated. We believe that the
amounts we pay for the third party credit program are justified
compared to the increased costs associated with a larger
receivables portfolio and the collection risks of the more
promotional credit offers needed to remain competitive. Our
allowance for doubtful accounts as a percentage of the receivables
pool is lower in 2005 due to improvements in the delinquency and
problem category percentages from 2004.
Balance Sheet Changes for the Quarter Ended March 31, 2005
Cash balances declined by approximately $7.1 million from December
31, 2004 to March 31, 2005 as we utilized cash balances and cash
generated from operations to pay down borrowings.
Inventories increased approximately $5.2 million during the first
quarter as imported products require longer lead times and orders
are shipped in larger quantities.
Other current assets declined by approximately $8.3 million as we:
utilized cash held in escrow to acquire a property previously
financed under a capital lease; collected vendor rebates
receivables; and had a lower amount receivable at March 31, 2005
from our third-party customer credit provider.
Accounts payable increased commensurate with the increase in
inventory levels.
Accrued liabilities declined by approximately $7.6 million due to
payments during the quarter for: the 2004 bonus accrual, certain
property and sales taxes, and a group health insurance liability to
a prior provider.
Capital lease obligations declined as we elected to purchase a
property under a capital lease as previously discussed.
Liquidity and Capital Resources
The following discusses the sources of our cash flows and
commitments which impact our liquidity and capital resources on
both a short-term and long-term basis
Cash flows generated from operations provide us with a significant
source of liquidity. Cash provided by operations remained positive
at $6.8 million in spite of increases in inventories and accounts
receivables. Net income was $3.2 million and depreciation and
amortization were $5.3 million.
Cash flows used in investing activities of $6.1 million in the
first three months of 2005 were primarily for capital expenditures
of $7.2 million.
Cash flows used in financing activities were $7.7 million as we
repaid $9.0 million of long-term debt and capital lease obligations.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Financings
In addition to term borrowings and capital leases, we have
revolving lines of credit available for general corporate purposes
and as interim financing for capital expenditures. These credit
facilities are syndicated with six commercial banks and are
comprised of two revolving lines totaling $80.0 million that
terminate in September 2005. Borrowings under these facilities are
unsecured and accrue interest at LIBOR plus a spread that is based
on a fixed-charge coverage ratio. We had $2.1 million outstanding
under these facilities at March 31, 2005. We had letters of credit
in the amount of $4.7 million outstanding at March 31, 2005 and
these amounts are considered part of the facilities usage. We had
an unused capacity of $73.2 million at March 31, 2005.
Store Expansion and Capital Expenditures
We have entered several new markets and made continued improvements
and relocations of our store base. Our total selling square
footage increases per year have historically averaged in the 5% to
6% range.
We are expecting to add approximately 4% retail square footage
during 2005. We opened an additional store in the Metro DC market
during the first quarter. We also plan to open a new store in the
new markets of Indianapolis, Indiana; Ft. Lauderdale, Florida; and
Columbus, Ohio in the fourth quarter. Three of our best stores are
also being physically expanded during 2005.
We plan to open approximately six stores in 2006. These include a
location near Stonecrest Mall, east of Atlanta, a relocated store
in South Dallas, Texas in the Cedar Hill area, a new store in Boca
Raton, Florida and three additional stores in Florida. We are
aggressively evaluating other possible new locations which we
believe will become available in existing retail sites in the near
term. Our strategy is to pursue opportunities in denser markets
which we can serve using our existing distribution.
Our planned expenditures for 2005 are $46.1 million for stores,
distribution and information technology. Capital expenditures for
stores do not necessarily coincide with the years in which the
store opens. Cash balances, funds from operations, proceeds from
sales of properties and bank lines of credit are expected to be
adequate to finance our 2005 capital expenditures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes with respect to the Company's
derivative financial instruments and other financial instruments
and their related market risk since the date of the Company's most
recent annual report.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the
President and Chief Executive Officer of the Company and the Chief
Financial Officer of the Company, of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of
the period covered by this report.
That evaluation included consideration of the views expressed in
the SEC Letter in which the SEC staff clarified its interpretations
of certain generally accepted accounting principles related to
leasehold improvements, rent holidays and landlord/tenant
incentives. Prior to the SEC Letter, we believed that our lease
accounting was consistent with generally accepted accounting
principles. However, based on the clarifications expressed in the
SEC Letter which resulted in the restatement discussed in Note B to
the Condensed Consolidated Financial Statements, the Company's
management, including the President and Chief Executive Officer and
the Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were not effective as of
December 31, 2004 relating to the Company's accounting for leases,
which represents a material weakness in internal control over
financial reporting as of December 31, 2004. As of the date of this
filing, the Company believes its disclosure controls and procedures
are effective.
In connection with correcting its lease accounting, the Company has
instituted controls and procedures to ensure:
* Use of a consistent lease period (generally, the initial non-
cancelable lease term plus certain option periods where failure
to exercise such options would result in economic penalty) when
calculating depreciation of leasehold improvements and in
determining straight-line rent expense and classification of
its leases as either an operating lease or a capital lease;
and
* Commencement of the lease term and straight-line rent expense
on the date when the Company takes possession and the right to
control use of the leased premises.
Other than changes made to the Company's internal control over
financial reporting related to accounting for leases, the Company
has not identified any change in its internal control over
financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
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 document.
Exhibit
Number Description of Exhibit
3.1 Articles of Incoporation of Haverty Furniture Companies, Inc.,
as amended and restated on March 6, 1973, and amended on
April 24, 1979, and as amended on April 24, 1985 (Exhibit 3.1
to our 1985 Second Quarter Form 10-Q); Amendment to the
Articles of Incorporation dated April 26, 1986 (Exhibit 3.1.1
to our 1986 (Exhibit 3.1.1 to our 1986 Form 10-Q); Amendment
to the Articles of Incorporation dated April 28, 1989
(Exhibit 3.1.2 to our 1989 Form 10-Q); Amendment to the
Articles of Incorporation dated April 28, 1995 (Exhibit 3.1.3
to our 1996 Form 10-K).
3.2 Amended and Restated By-Laws of Haverty Furniture Companies,
Inc., as amended on February 26, 2004 (Exhibit 3.2 to our
2003 Form 10-K).
*31.1 Certification of Chief Executive Officer pursuant to sec.
302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to sec.
302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. sec 1350, as
adopted, pursuant to sec. 906 of the Sarbanes-Oxley Act of
2002.
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 16, 2005 By: /s/ CLARENCE H. SMITH
--------------------------------
Clarence H. Smith
President and
Chief Executive Officer
Date: May 16, 2005 By: /s/ DENNIS L. FINK
-------------------------------
Dennis L. Fink
Executive Vice President and
Chief Financial Officer