| Description of Business and Summary of Significant Accounting Policies | Note 1, Description of Business and Summary of Significant Accounting Policies: Business: Haverty Furniture Companies, Inc. (“Havertys,” “we,” “our,” or “us”) is a retailer of a broad line of residential furniture in the middle to upper-middle price ranges. We have 120 showrooms in 16 states at December 31, 2018. All of our stores are operated using the Havertys name and we do not franchise our stores. We offer financing through a third-party finance company as well as an internal revolving charge credit plan. Basis of Presentation: The consolidated financial statements include the accounts of Havertys and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with United States of America generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash and cash equivalents includes all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five days. Restricted Cash Equivalents: Our insurance carrier requires us to collateralize a portion of our workers’ compensation obligations. These funds are investments in money market funds held by an agent. The agreement with our carrier governing these funds is on an annual basis expiring on December 31. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method. Property and Equipment: Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Leasehold improvements and buildings under lease are amortized over the shorter of the estimated useful life or the lease term of the related asset. Amortization of buildings under lease is included in depreciation expense. Estimated useful lives for financial reporting purposes are as follows: Buildings 25 – 33 years Improvements 5 – 15 years Furniture and Fixtures 3 – 15 years Equipment 3 – 15 years Buildings under lease 15 years Customer Deposits: Customer deposits consist of cash collections on sales of undelivered merchandise, customer advance payments, and deposits on credit sales for undelivered merchandise. Revenue Recognition: We recognize revenue from merchandise sales and related service fees, net of sales taxes, upon delivery to the customer. A reserve for merchandise returns and customer allowances is estimated based on our historical returns and allowance experience and current sales levels. We typically offer our customers an opportunity for us to deliver their purchases and most choose this service. Delivery fees of approximately $34,405,000, $25,728,000 and $25,467,000 were charged to customers in 2018, 2017 and 2016, respectively, and are included in net sales. The costs associated with deliveries are included in selling, general and administrative expenses and were approximately $40,236,000, $39,582,000 and $39,222,000 in 2018, 2017 and 2016, respectively. Credit service charges are recognized as revenue as assessed to customers according to contract terms. The costs associated with credit approval, account servicing and collections are included in selling, general and administrative expenses. Cost of Goods Sold: Our cost of goods sold includes the direct costs of products sold, warehouse handling and transportation costs. Selling, General and Administrative Expenses: Our selling, general and administrative (“SG&A”) expenses are comprised of advertising, selling, occupancy, delivery and administrative costs as well as certain warehouse expenses. The costs associated with our purchasing, warehousing, delivery and other distribution costs included in SG&A expense were approximately $80,383,000, $77,368,000 and $77,266,000 in 2018, 2017 and 2016, respectively. Leases: In the case of certain leased stores, we may be extensively involved in the construction or major structural modifications of the leased properties. As a result of this involvement, we are deemed the “owner” for accounting purposes during the construction period, and are required to capitalize the total fair market value of the portion of the leased property we use, excluding land, on our consolidated balance sheet. Following construction completion, we perform an analysis under ASC 840, “ Leases Deferred Escalating Minimum Rent and Lease Incentives: Certain of our operating leases contain predetermined fixed escalations of the minimum rentals during the term of the lease. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease, beginning with the point at which we obtain control and possession of the leased properties, and record the difference between the amounts charged to operations and amounts paid as accrued liabilities. The liability for deferred escalating minimum rent approximated $7,608,000 and $8,565,000 at December 31, 2018 and 2017, respectively. Any operating lease incentives we receive are deferred and subsequently amortized on a straight-line basis over the life of the lease as a reduction of rent expense. The liability for lease incentives approximated $1,209,000 and $1,139,000 at December 31, 2018 and 2017, respectively. Advertising Expense: Advertising costs, which include television, radio, newspaper, digital, and other media advertising, are expensed upon first showing. The total amount of prepaid advertising costs included in other current assets was approximately $746,000 and $602,000 at December 31, 2018 and 2017, respectively. We incurred approximately $48,315,000, $47,921,000 and $45,132,000 in advertising expense during 2018, 2017 and 2016, respectively. Interest Expense, net: Interest expense is comprised of amounts incurred related to our debt and lease obligations recorded on our balance sheet, net of interest income. The total amount of interest expense was approximately $2,451,000, $2,512,000 and $2,568,000 during 2018, 2017 and 2016, respectively. Other Income, net: Other income, net includes any gains or losses on sales of property and equipment and miscellaneous income or expense items outside of core operations. We had a store receive significant damage on December 27, 2015 from a blizzard. We reduced the value of the property and its contents at December 31, 2015 to zero and recorded an insurance recovery receivable. During 2016, we recorded $2,228,000 in gains for the insurance recovery on the building and $1,110,000 for inventory, business interruption and other expenses. We received additional amounts in 2017 for the remaining full replacement value of the building as construction was completed and recognized a gain of $1,351,000. During 2017 we also recorded $1,500,000 in gains from insured losses related to a store damaged by a faulty underground sprinkler line and losses from Hurricane Irma. The sale of former retail locations and other operating assets generated losses of $425,000 in 2018 and gains of $525,000 in 2017 and $700,000 in 2016. Self-Insurance: We are self-insured, for amounts up to a deductible per occurrence, for losses related to general liability, workers’ compensation and vehicle claims. We are primarily self-insured for employee group health care claims. We have purchased insurance coverage in order to establish certain limits to our exposure on a per claim basis. We maintain an accrual for these costs based on claims filed and an estimate of claims incurred but not reported or paid, based on historical data and actuarial estimates. The current portion of these self-insurance reserves is included in accrued liabilities and the non-current portion is included in other liabilities. These reserves totaled $8,933,000 and $8,975,000 at December 31, 2018 and 2017, respectively. Fair Values of Financial Instruments: The fair values of our cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and customer deposits approximate their carrying amounts due to their short-term nature. The assets that are related to our self-directed, non-qualified deferred compensation plans for certain executives and employees are valued using quoted market prices, a Level 1 valuation technique. The assets totaled approximately $5,995,000 and $5,986,000 at December 31, 2018 and 2017, respectively, and are included in other assets. The related liability of the same amount is included in other liabilities. Impairment of Long-Lived Assets: We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. If an indicator of impairment is identified, we evaluate the long-lived assets at the individual property or store level, which is the lowest level at which individual cash flows can be identified. When evaluating these assets for potential impairment, we first compare the carrying amount of the asset to the store’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying amount of the asset, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset to the store’s assets’ estimated fair value, which is determined on the basis of fair value for similar assets or future cash flows (discounted and with interest charges). If required, an impairment loss is recorded in SG&A expense for the difference in the asset’s carrying value and the asset’s estimated fair value. No such losses were recorded in 2018, 2017 or 2016. Earnings Per Share: We report our earnings per share using the two-class method. The income per share for each class of common stock is calculated assuming 100% of our earnings are distributed as dividends to each class of common stock based on their contractual rights. See Note 13 for the computational components of basic and diluted earnings per share. Accumulated Other Comprehensive Income (Loss): Accumulated other comprehensive income (loss) (“AOCI”), net of income taxes, was comprised of unrecognized retirement liabilities totaling approximately $1,465,000 and $2,144,000 at December 31, 2018 and 2017, respectively. See Note 11 for the amounts reclassified out of AOCI to SG&A expense related to our supplemental executive retirement plan. Segment Information We operate within a single reportable segment. We use a market area approach for both financial and operational decision making. Each of these market areas are considered individual operating segments. The individual operating segments all have similar economic characteristics. The retail stores within the market areas are similar in size and carry substantially identical products selected for the same target customer. We also use the same distribution methods chain-wide. The net sales of each major product category and service for the last three years is disclosed below in Recently Adopted Accounting Pronouncements, Revenue Recognition. Recently Issued Accounting Pronouncements: Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). We considered the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations. Leases. As of January 1, 2019, we will recognize a cumulative-effect adjustment to increase retained earnings approximately $7,000,000 due to the derecognition of assets and liabilities associated with legacy build-to-suit arrangements and the deferred gain on previous sale-leaseback transactions. We will elect the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We will not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, we will elect a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). We will not elect for real properties the accounting policy to account for lease and non-lease components as a single component. The adoption of ASU 2016-02 will have a significant impact on our consolidated balance sheet as we will record material assets and obligations primarily related to approximately 84 retail leases and corporate office and warehouse leases. We expect to record lease liabilities of approximately $176,000,000 based on the present value of the remaining minimum rental payments using discount rates as of the effective date. We expect to record corresponding right-of-use assets of approximately $178,000,000, based upon the lease liabilities adjusted for prepaid and deferred rent and unamortized tenant improvement allowances as of January 1, 2019. We do not expect a material impact on our consolidated statement of income or our consolidated statement of cash flows. Recently Adopted Accounting Pronouncements: Share-based Payments. Revenue Recognition. We sell home furnishings and recognize revenue at delivery. Havertys does not have a loyalty program or sell gift certificates. We also do not offer coupons for redemption for future purchases, such as those that other retailers might issue for general marketing purposes or for those issued in conjunction with prior purchases. The product protection plan we offer is handled by a third-party and we have no performance obligation or inventory risk associated with this service. Havertys is acting as an agent for these sales and records this revenue, net of related costs, at the time the covered products are delivered to the customer. Estimated refunds for returns and allowances are recorded based on estimated margin using our historical return patterns. Under the new standard, we record estimated refunds for sales returns on a gross basis rather than on a net basis. The standard requires the carrying value of the return asset to be presented separately from inventory and subject to impairment testing on its own, separately from inventory on hand. At December 31, 2018, the estimated return inventory was $730,000 and is included in the line item “Other current assets” and the estimated refund liability was $1,950,000 million and is included in the line item “Accrued liabilities” on the Consolidated Balance Sheets. We record customer deposits when payments are received in advance of the delivery of merchandise, which totaled $24,465,000 and $27,813,000 at December 31, 2018 and December 31, 2017, respectively. Of the customer deposit liabilities at December 31, 2017, approximately $27,730,000 has been recognized through net sales in the twelve months ended December 31, 2018. We adopted ASC Topic 606 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new standard were as follows: (in thousands) Balance at December 31, 2017 Adjustments Due to ASU 2014-09 Balance at January 1, 2018 Balance Sheet Assets Estimated to be returned inventory $ — $ 786 $ 786 Deferred income taxes 12,375 (45 ) 12,330 Liabilities Refund on estimated returns and allowances — 2,072 2,072 Reserve for cancelled sales and allowances 1,464 (1,464 ) — Equity Retained earnings 287,390 133 287,523 Upon adoption of ASC Topic 606, we adopted the following policy elections and practical expedients: · Our contracts are similar as to customer types, deliverables, timing of transfer of goods and other characteristics and we elected to use the portfolio method in accounting for our contracts. · We exclude from revenue amounts collected from customers for sales tax. · We finance less than 1% of sales. We do not adjust the promised amount of consideration for the effects of a significant financing component since receivables from financed sales are paid within one year of delivery. · We expense sales commissions within SG&A at the time revenue is recognized because the amortization period would be one year or less. · We do not disclose the value of unsatisfied performance obligations because delivery is made within one year of the customer purchase. The following table presents the differences resulting from the adoption of ASC Topic 606 on line items in our consolidated balance sheet. The impact of the adoption on line items in our other financial statements was not material. December 31, 2018 (in thousands) As Reported Balances Without Adoption of ASC 606 Effect of Change Higher/(Lower) Balance Sheet Assets Estimated to be returned inventory (included in other current assets) $ 730 $ — $ 730 Deferred income taxes 12,544 12,582 (38) Liabilities Refund on estimated returns and allowances (included in other current liabilities) 1,950 — 1,950 Reserve for cancelled sales and allowances (included in other current liabilities) — 1,373 (1,373) Equity Retained Earnings $ 282,366 $ 282,251 $ 115 The following table presents our revenues disaggregated by each major product category and service for each of the last three years (dollars in thousands, amounts and percentages may not always add due to rounding): Year Ended December 31, 2018 2017 2016 Net Sales % of Net Sales Net Sales % of Net Sales Net Sales % of Net Sales Merchandise: Case Goods Bedroom Furniture $ 131,673 16.1 % $ 132,484 16.2 % $ 132,250 16.1 % Dining Room Furniture 92,865 11.4 92,921 11.3 94,918 11.5 Occasional 72,193 8.8 75,909 9.2 81,996 10.0 296,731 36.3 301,314 36.7 309,164 37.6 Upholstery 326,114 39.9 330,340 40.3 328,903 40.0 Mattresses 85,055 10.4 88,311 10.8 86,659 10.6 Accessories and Other (1) 109,833 13.4 99,901 12.2 96,845 11.8 $ 817,733 100.0 % $ 819,866 100.0 % $ 821,571 100.0 % (1) Includes delivery charges and product protection. Restricted Cash in Statement of Cash Flows. Our restricted cash equivalents are funds used to collateralize a portion of our workers’ compensation obligations as required by our insurance carrier. These escrowed funds are shown as restricted cash and cash equivalents on our balance sheets and are investments in money market funds held by an agent. The annual agreement with our carrier governing these funds expires on December 31, 2018. The following table provides a reconciliation of cash, cash equivalents, and restricted cash equivalents reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows. (In thousands) December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015 Cash and cash equivalents $ 71,537 $ 79,491 $ 63,481 $ 70,659 Restricted cash equivalents 8,272 8,115 8,034 8,005 Total cash, cash equivalents and restricted cash equivalents $ 79,809 $ 87,606 $ 71,515 $ 78,664 |
