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, 2006
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
780 Johnson Ferry Road, Suite 800
Atlanta, Georgia 30342
(Address of principal executive office) (Zip Code)
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 [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer [ ] Accelerated filer [x]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [x]
The numbers of shares outstanding of the registrant's two
classes of $1 par value common stock as of April 30, 2006 were:
Common Stock - 18,256,255; Class A Common Stock - 4,264,221.
HAVERTY FURNITURE COMPANIES, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION: ________
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005 1
Condensed Consolidated Statements of Income -
Three Months ended March 31, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows -
Three Months ended March 31, 2006 and 2005 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 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits 16
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
2006 2005
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 7,823 $ 11,121
Accounts receivable, net 71,031 80,716
Inventories 120,364 107,631
Prepaid expenses 11,899 11,713
Deferred income taxes 2,375 2,375
Other current assets 5,692 7,615
----------- ----------
Total current assets 219,184 221,171
Accounts receivable, long-term 8,514 10,394
Property and equipment 218,373 217,391
Other assets 13,454 14,096
----------- ----------
$ 459,525 $ 463,052
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 10,000 $ 4,300
Accounts payable 35,827 42,203
Customer deposits 27,710 27,517
Accrued liabilities 36,351 43,643
Current portion of long-term debt 13,139 13,139
----------- ----------
Total current liabilities 123,027 130,802
Long-term debt, less current portion 29,522 31,022
Other liabilities 22,970 21,958
----------- ----------
Total liabilities 175,519 183,782
----------- ----------
Stockholders' Equity
Capital stock, par value $1 per share:
Preferred Stock, Authorized: 1,000 shares;
Issued: None
Common Stock, Authorized: 50,000 shares;
Issued: 2006 - 24,466; 2005 - 24,387
shares 24,466 24,387
Convertible Class A Common Stock,
Authorized: 15,000 shares;
Issued: 2006 - 4,802;
2005 - 4,828 shares 4,802 4,828
Additional paid-in capital 54,538 53,722
Retained earnings 263,496 259,887
Accumulated other comprehensive loss (1,051) (1,306)
Less treasury stock at cost - Common Stock
(2006 - 6,253; 2005 - 6,254 shares) and
Convertible Class A Common Stock (2006 and
2005 - 522 shares) (62,245) (62,248)
----------- ----------
Total stockholders' equity 284,006 279,270
----------- ----------
$ 459,525 $ 463,052
=========== ==========
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,
------------------------
2006 2005
------------ -----------
Net sales $ 209,088 $ 207,634
Cost of goods sold 104,314 108,951
----------- -----------
Gross profit 104,774 98,683
Credit service charge 762 989
----------- -----------
Gross profit and other revenue 105,536 99,672
----------- -----------
Expenses:
Selling, general and administrative 98,550 93,962
Interest, net (34) 901
Provision for doubtful accounts 34 206
Other (income) expense, net (1,218) (459)
----------- -----------
97,332 94,610
----------- -----------
Income before income taxes 8,204 5,062
Income taxes 3,101 1,888
----------- -----------
Net income $ 5,103 $ 3,174
----------- -----------
Basic earnings per share:
Common Stock $0.23 $0.14
Class A Common Stock $0.22 $0.13
Diluted earnings per share:
Common Stock $0.23 $0.14
Class A Common Stock $0.22 $0.13
Weighted average shares - basic:
Common Stock 18,163 18,374
Class A Common Stock 4,286 4,316
Weighted average shares - assuming
dilution:
Common Stock 22,620 23,015
Class A Common Stock 4,286 4,316
Cash dividends per share:
Common Stock $0.0675 $0.0625
Class A Common Stock $0.0625 $0.0575
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,
------------------------
2006 2005
----------- ----------
Cash Flows from Operating Activities:
Net income $ 5,103 $ 3,174
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 5,278 5,272
Provision for doubtful accounts (34) 206
Deferred income taxes 73 63
(Gain) loss on sale of property and
equipment (1,253) 57
Other 355 341
Changes in operating assets and
liabilities:
Accounts receivable 11,600 (3,022)
Inventories (12,733) (5,201)
Customer deposits 194 2,241
Other assets and liabilities 3,654 6,842
Accounts payable and accrued
liabilities (13,671) (14,257)
----------- -----------
Net cash used in operating
activities (1,434) (4,284)
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures (7,323) (7,172)
Proceeds from sale of property and
equipment 2,112 63
Other investing activities 124 960
----------- -----------
Net cash used in investing
activities (5,087) (6,149)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings under
revolving credit facilities 317,365 7,000
Payments of borrowings under revolving
credit facilities (311,665) (4,900)
----------- -----------
Net increase in borrowings under
revolving credit facilities 5,700 2,100
Payments on long-term debt and capital
lease obligations (1,500) (8,961)
Proceeds from exercise of stock options 516 534
Dividends paid (1,493) (1,397)
----------- -----------
Net cash provided by (used in)
financing activities 3,223 (7,724)
----------- -----------
Decrease in cash and cash equivalents (3,298) (18,157)
Cash and cash equivalents at beginning of
the year 11,121 24,137
----------- -----------
Cash and cash equivalents at end of period $ 7,823 $ 5,980
=========== ===========
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
- -------------------------------
Haverty Furniture Companies, Inc. ("Havertys" or the "Company") is a
specialty retailer of residential furniture and accessories. 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 entity 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, 2005.
NOTE B -Reclassification Adjustments
- ------------------------------------
Prior to December 31, 2005, cash on hand in depository bank accounts
and checks outstanding for disbursing bank accounts were both
classified as cash and cash equivalents in the balance sheets and
statements of cash flows. At December 31, 2005 and all prior periods,
checks outstanding for disbursing bank accounts have been reclassified
to accounts payable. For balance sheet and statement of cash flow
purposes, the amount of checks outstanding for disbursing bank
accounts reclassified from cash and cash equivalents to accounts
payable totaled approximately $2.9 million at March 31, 2005. Certain
other prior year amounts have been reclassified to conform to the
current presentation.
NOTE C - Accounts Receivable
- ----------------------------
Accounts receivable balances resulting from certain credit promotions
have scheduled payment amounts 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, 2006 and 2005, the accounts
receivable contractually due beyond one year from the respective
balance sheet dates totaled approximately $15.5 million and $26.2
million, respectively.
NOTE D- 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
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
on management's estimates of expected year-end inventory levels and
costs. Since these are affected by factors beyond management's
control, interim results are subject to the final year-end LIFO
inventory valuation.
NOTE E - Earnings Per Share
- ---------------------------
The Company reports 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 applying 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 is 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 and awards
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,
----------------
2006 2005
------- -------
Common:
Weighted average shares outstanding 18,163 18,374
Assumed conversion of Class A Common shares 4,286 4,316
Diluted options and stock awards 171 325
-------- --------
Total weighted-average diluted common shares 22,620 23,015
======== ========
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - Stock-Based Compensation
- ----------------------------------
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment"
(Statement 123(R)), which is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (Statement 123). Statement
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (Opinion 25) and amends FASB Statement No. 95, "Statement
of Cash Flows." Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an
alternative.
We adopted SFAS 123(R) on January 1, 2006 and applied the modified
prospective transition method. Under this transition method, we (1)
did not restate any prior periods and (2) are recognizing compensation
expense for all share-based payment awards that were outstanding, but
not yet vested, as of January 1, 2006, based upon the same estimated
grant-date fair values and service periods used to prepare our SFAS
123 pro forma disclosures.
At March 31, 2006, we have options or awards outstanding under two
stock-based employee compensation plans. As permitted by Statement
123, we had previously accounted for share-based payments to employees
using Opinion 25's intrinsic value method. Accordingly, no stock-
based employee compensation costs for any options were 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. We have transitioned from the use of options to
restricted stock awards as the primary vehicle in our stock-based
compensation strategy.
On August 18, 2005, the Board of Directors of Havertys, upon the
recommendation of the Board's Executive Compensation and Employee
Benefits Committee (the "Executive Compensation Committee"), approved
the acceleration of vesting of all "out-of-the-money", unvested stock
options held by current employees, including executive officers and
certain employee directors. An option was considered out-of-the-money
if the stated option exercise price was greater than $12.57, the
closing price of Havertys' common stock on August 18, 2005. All
unvested options to purchase approximately 482,650 shares of common
stock, which otherwise would have vested on a yearly basis through
2008 were out-of-the money and became immediately exercisable. The
weighted average exercise price of the accelerated options is $17.49.
The decision to initiate the acceleration was made primarily to reduce
compensation expense that would be expected to be recorded in future
periods following our adoption of Statement 123(R). As a result of
the acceleration, we reduced this expected compensation expense, net
of tax, by a total of approximately $3,700,000 (approximately
$2,000,000 in 2006, $1,100,000 in 2007, and $600,000 in 2008). These
amounts are based on fair value calculations using the Black-Scholes
methodology.
The following table illustrates the effect on net income if we had
applied the fair value recognition provisions of Statement 123(R) to
stock-based employee compensation (in thousands, except per share
amounts). For purposes of this pro forma disclosure, the value of the
options is estimated using a Black-Scholes option-pricing model and
amortized to expense over the options vesting periods. The resulting
pro forma earnings per common share are $0.03 less than the reported
earnings per common share.
Quarter Ended
March 31, 2005
---------------
Net income, as reported $ 3,174
Less: Pro forma stock-based
employee compensation expense,
net of tax (674)
_________
Pro forma net income $ 2,500
=========
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below summarizes options activity during the three months
ended March 31, 2006.
Weighted
Option Average
Shares Price
- -------------------------------------------------------------
Outstanding at December 31, 2005 2,344,700 $ 14.92
Exercised (52,700) 9.78
Canceled (19,300) 17.95
- -------------------------------------------------------------
Outstanding at March 31, 2006 2,272,700 $ 15.02
=============================================================
Exercisable at March 31, 2006 2,272,700 $ 15.02
=============================================================
All of the options outstanding at March 31, 2006 were for Common
Stock. The following table summarizes information about the stock
options outstanding as of March 31, 2006:
- --------------------------------------------------------------
Options Outstanding and Exercisable
- --------------------------------------------------------------
Weighted
Average
Number Remaining Weighted
Outstanding Contractual Average
Range of and Life Exercise
Exercise Prices Exercisable (Years) Price
$ 6.94 - 10.13 125,300 2.5 $ 9.77
10.81 - 15.94 1,604,900 5.3 13.80
17.01 - 20.75 542,500 5.0 19.84
- --------------------------------------------------------------
$ 6.94 - 20.75 2,272,700 5.0 $15.02
==============================================================
Grants of restricted common stock are made to certain officers, key
employees and members of the board of directors under the 2004 LTIP
Plan. The forfeiture provisions on the awards generally expire
annually, over periods not exceeding four years. Vesting may
accelerate if we reach certain financial goals set by the Executive
Compensation Committee.
The table below summarizes the restricted stock award activity during
the three months ended March 31, 2006:
# Shares
-------------
Outstanding at December 31, 2005 158,300
Granted 125,250
Forfeited (450)
-------------
Outstanding at March 31, 2006 283,100
==============
As of March 31, 2006, there was approximately $3,420,000 of
unrecognized compensation cost related to unvested share-based
compensation awards granted. That cost is expected to be recognized
over the next four years.
In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
("FSP 123(R)"), "Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards." FSP 123(R)-3 provides an
elective alternative transition method for calculating the pool of
excess tax benefits available to
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
absorb tax deficiencies recognized subsequent to the adoption of FAS
123(R). Companies may take up to one year from the effective date of
FSP 123(R)-3 to evaluate the available transition alternatives and
make a one-time election as to which method to adopt. We are
currently in the process of evaluating the alternative methods.
NOTE G - Other (income) expense, net
- -------------------------------------
Other (income) expense, net includes 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." We had gains of approximately $1.3 million from the
sale of a warehouse and other properties during the first quarter of
2006. We received additional insurance proceeds of approximately $0.2
million during the first quarter of 2005 from certain coverages for
facilities damaged by hurricanes.
NOTE H - Comprehensive Income
- ------------------------------
Total comprehensive income was comprised of the following (in
thousands):
Quarter Ended
March 31,
------------------
2006 2005
-------- --------
Net income $ 5,103 $ 3,174
Changes in derivatives,
net of applicable income tax 31 145
Changes in minimum pension liability 224 --
-------- --------
Total comprehensive income $ 5,358 $ 3,319
======== ========
NOTE I - Pension Plans
- ----------------------
Net pension cost included the following components (in thousands):
Quarter Ended
March 31,
-----------------
2006 2005
-------- ------
Service cost-benefits earned during the period $ 863 $ 705
Interest cost on projected benefit obligations 918 814
Expected return on plan assets (1,107) (1,015)
Amortization of prior service costs 36 33
Amortization of actuarial loss 110 -
-------- --------
Net pension cost $ 820 $ 537
======== ========
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company disclosed in its financial statements for the year ended
December 31, 2005, a planned $6.0 million contribution to the pension
plan in 2006. No contributions were made to the plan in the first
three months of 2006, but $6.0 million is expected to be contributed
prior to December 31, 2006.
NOTE J - Recently Issued Accounting Pronouncements
- --------------------------------------------------
SFAS 155: In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155 (SFAS 155), "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133
and 140." SFAS 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole, eliminating the need to
separate the derivative from its host, if the holder elects to account
for the whole instrument on a fair value basis. This new accounting
standard is effective January 1, 2007. The adoption of SFAS 155 is
not expected to have an impact on our financial statements.
SFAS 156: In March 2006, the FASB issued Statement of Financial
Accounting Standards No. 156 (SFAS 156), "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140." SFAS 156
requires that all separately recognized servicing rights be initially
measured at fair value, if applicable. In addition, this Statement
permits an entity to choose between two measurement methods
(amortization method or fair value measurement method) for each class
of separately recognized servicing assets and liabilities. This new
accounting standard is effective January 1, 2007. The adoption of
SFAS 156 is not expected to have an impact on our financial
statements.
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 Securities Act
of 1933, and the Securities Exchange Act of 1934, as amended by the
Private Securities Litigation Reform Act of 1995, 15 U.S.C.A. Sections
77Z-2 and 78U-5 (Supp. 1996). 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. 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. 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. 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; 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:
2006 2005 2004
----------------------------- ----------------------------- -------------------------------
Comp-Store Comp-Store Comp-Store
Net Sales Sales Net Sales Sales Net Sales Sales
------------------ ---------- ----------------- ----------- ------------------ ------------
% Increae %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 (000)s period period (000)s period period (000)s period period
- ------- ------- ---------- ---------- ------- ---------- ---------- -------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Q1 $209.1 0.7% (0.6)% $207.6 9.1% 4.7% $190.3 8.5% 4.0%
Q2 - - - 192.4 7.1 2.3 179.6 6.5 2.6
Q3 - - - 202.0 2.3 (1.0) 197.4 1.1 (1.0)
Q4 - - - 225.6 4.1 1.2 216.8 5.6 3.0
------- -------- -------- -------- ------- -------- --------- ------ ------
Year $209.1 0.7% (0.6)% $827.7 5.5% 1.8% $784.2 5.3% 2.1%
======= ======== ======== ======== ======= ======== ========= ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Total sales increased $1.5 million or 0.7% in the first quarter of
2006 while comparable sales decreased 0.6%. The increase in total
sales was generated by a $2.7 million increase from new and otherwise
non-comparable stores and a decrease in comparable store sales of $1.2
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.
We believe that although the overall economy has improved, higher
energy costs and rising interest rates have contributed to consumer's
reluctance to increase spending for big-ticket furniture items.
During the first quarter of 2006 there was continued discounting
activity in many of our markets by several retailers 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, our strategy is
generally to use some promotional pricing during traditional holiday
and other sales events. Supplementing the pricing promotions, we also
offer free-interest and deferred payment financing promotions.
During the first quarter of 2006, we promoted a longer term no
interest financing program similar to those offered by other
retailers. Although more costly, we believe it helped increase our
business during a sluggish sales period. Additionally, these stronger
financing programs require a larger minimum purchase and accordingly
help increase our average sales transactions. We increased the
assortment of specially priced merchandise and promoted to a select
customer group a more aggressive financing offer and successfully
increased our written business in the later weeks of April. We expect
to continue to use a combination of pricing and financing promotions
to help stimulate sales.
Gross Profit
Cost of goods sold consists primarily of the purchase price of the
merchandise together with inbound freight, handling within our
distribution centers and transportation costs to the local markets we
serve.
Our gross profit is largely dependent upon merchandising capabilities,
vendor pricing, transportation costs and the mix of products sold.
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 for the first quarter increased 258 basis points compared
to the prior year period and increased 168 basis points on a
sequential basis over the fourth quarter of last year. Gross profit
for the first three months of 2006 benefited from a $0.8 million or 40
basis points as a percent of sales reduction in warehouse handling
expense from the comparative prior year period. We also recorded a
favorable adjustment of $0.5 million related to inventory which is not
expected to recur. During the first three months of 2005, we closed
five local warehouses and our Florida regional warehouse facility.
This generated higher than normal inventory close-out sales which,
combined with pricing pressure on certain products and higher handling
costs, impacted gross profit margin.
Our gross profit also is impacted by the level of sales financed using
our in-house long-term no interest credit promotions. During the
first quarter of 2006, this impact was $0.4 million less than the
comparable year ago period.
Substantially all of our occupancy and home delivery costs are
included in selling, general and administrative expenses as are a
portion of our warehousing expenses. Accordingly our gross profit may
not be comparable to those entities that include these costs in cost
of goods sold.
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses are comprised of
five categories: selling; occupancy; delivery; certain warehouse
costs; advertising; and administrative. Selling expenses primarily
are comprised of compensation of sales associates and sales support
staff and fees paid to credit card and third party finance companies.
Occupancy costs include rents, depreciation charges, insurance and
property taxes, repairs and maintenance expenses and utility costs.
Delivery costs include certain personnel, fuel costs, and depreciation
and rental charges for rolling stock. Warehouse costs include
demurrage, supplies, depreciation and rental charges for equipment.
Advertising expenses are primarily media production and space, direct
mail costs and market research expenses and employee compensation.
Administrative expenses are comprised of compensation costs for store
management, information systems, executive, finance, merchandising,
supply chain, real estate and human resource departments.
Our SG&A costs in the first quarter were up $4.6 million or 188 basis
points as a percent of sales compared to the prior year period. Our
distribution system and store support infrastructure is designed to
support the expansion of our business efficiently. However, we need
increased sales performance to properly leverage these costs.
During the first quarter of 2006, we offered through a third-party
finance company a more promotional credit program than in the prior
year period. The increased costs of this program coupled with more
usage caused the charges that we incurred to increase $1.4 million on
a comparative period basis.
Warehouse operating expenses were down $0.9 million in the first
quarter of 2006 as compared to the prior year period. This reduction
is primarily related to the increased costs incurred in 2005 to effect
the distribution consolidation.
We increased our advertising dollars to reach our additional markets
and amounts were directed to support the pricing promotional activity
during the quarter. These changes increased our costs by $1.2 million
on a comparative period basis.
Our administrative costs were up $1.4 million in the first quarter
2006 as compared to the 2005 period. This increase is due in large
part to our entrance into two new major markets in late 2005. We did
have a slight reduction in professional service fees but these were
offset by the costs associated with strengthening our human capital in
certain critical operating areas.
Credit Service Charge Revenue and Allowance for Doubtful Accounts
We offer a long term promotion of no interest with 19 to 22 equal
monthly payments. This promotion and the shorter term but similar 13
to 18 month programs were the in-house financing offers most
frequently chosen by our customers during the first quarter. These
programs and the similar 12-month program generate very minor credit
revenue, but incur lower bad debts relative to our deferred payment in-
house credit programs. In addition, we offer 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 programs offered through the third-party
provider for the first quarter of 2006 were no interest offers
requiring 19 to 34 equal monthly payments. The longer term promotion
was offered as a sales stimulant during the first quarter of 2006. The
third-party provider also offers our customers a deferred payment for
12 months with an interest accrual that is waived if the entire
balance is paid in full at the end of the deferral period.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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,
-----------------
2006 2005
------- -------
Credit Service Charge Revenue $ 762 $ 989
======= =======
Amount Financed as a % of Sales
Havertys 14.7% 22.6%
Third-Party 25.8% 17.2%
------- -------
40.5% 39.8%
======= =======
% Financed by Havertys with
No Interest for 12 months 30.4% 27.0%
No Interest for > 12 months 39.9% 50.3%
No Interest < 12 months 12.8% 10.6%
Other 16.9% 12.1%
-------- -------
100.0% 100.0%
======== =======
March 31,
--------------------
2006 2005
-------- ---------
Accounts receivable $ 81,545 $ 96,044
Allowance for doubtful accounts 2,000 2,700
Allowance as a % of accounts receivable 2.5% 2.8%
Our allowance for doubtful accounts as a percentage of receivables is
lower in 2006 due to improvements in the delinquency and problem
category percentages from 2005.
Interest expense, net
Interest expense, net is primarily comprised of interest expense on
the Company's debt and the amortization of the discount on the
Company's receivables which have deferred or no interest payment
terms. The following table summarizes the components of interest
expense, net (in thousands):
Quarter Ended March 31,
-----------------------
2006 2005
---------- -----------
Interest expense on debt $ 939 $ 1,215
Amortization of discount on
accounts receivable (844) (155)
Other, including capitalized
interest and interest income (129) (159)
--------- ----------
$ (34) $ 901
========= ==========
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Interest expense on debt decreased in 2006 as average debt
decreased and the effective interest rate was relatively unchanged.
We make available to certain customers interest free credit
programs, which generally range from 3 to 24 months. In connection
with these programs which are greater than 12 months, we are required
to discount the payments to be received over the life of the interest
free credit program. On the basis of the credit worthiness of the
customers and our low delinquency rates under these programs, we
discount the receivables utilizing the prime rate of interest at the
date of sale. The discount is recorded as a charge to cost of goods
sold and as a contra receivable and is amortized as a credit to
interest expense over the life of the receivable. The discount on the
receivables is adjusted for prepayments at the time of prepayment.
There is no assumption for prepayment recorded at inception.
The amount of amortization has increased as the level of
receivables generated under longer term, free interest financing
promotions has increased.
Other (income) expense
Other (income) expense includes any gains or losses on the sales of
real estate and miscellaneous income or expense items which are non-
recurring in nature. During 2006, we had gains from the sale of our
Nashville warehouse and other properties of $1.3 million. We received
additional insurance proceeds of approximately $0.2 million during
the first quarter of 2005, from certain coverages for facilities
damaged by hurricanes.
Provision for Income Taxes
The effective tax rate was 37.8% and 37.3% the three months ended
March 31, 2006 and 2005, respectively. The effective tax rate differs
from the statutory rate primarily due to state income taxes, net of
the Federal tax benefit.
Balance Sheet Changes for the Quarter Ended March 31, 2006
Cash balances declined by approximately $3.3 million from December 31,
2005 to March 31, 2006 as we utilized cash balances and cash generated
from financing activities to make capital expenditures.
Accounts receivable declined approximately $12.0 million since the end
of the last year due to the popularity of the longer term no interest
credit promotion offered through our third-party credit provider.
Inventories increased approximately $12.7 million during the first
quarter as we utilized our increased warehouse space and improved our
in-stock position.
Other current assets declined by approximately $1.9 million as we had
a lower amount receivable at March 31, 2006 from our third-party
credit provider.
Accounts payable decreased $6.4 million due to the timing of
disbursements and checks clearing the bank.
Accrued liabilities declined $7.3 million due to payments during the
quarter for certain property and sales taxes, the 2005 bonus accrual
and amounts for contingent rents.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 used in operations was $1.4 million as we experienced increases
in inventories and reductions in accounts payable and accrued
liabilities offset in part by a reduction in accounts receivable. Net
income was $5.1 million and depreciation and amortization was $5.3
million.
Cash flows used in investing activities of $5.1 million in the first
three months of 2006 were primarily for capital expenditures of $7.3
million offset in part by $2.1 million in proceeds from the sales of
property and equipment.
Cash flows provided by financing activities were $3.2 million as we
increased the borrowings under our revolving credit facilities by $5.7
million, repaid $1.5 million of debt and paid $1.5 million in
dividends.
Financings
We have revolving lines of credit available for general corporate
purposes and as interim financing for capital expenditures. These
credit facilities are syndicated with five commercial banks and are
comprised of two revolving lines totaling $80.0 million that terminate
in August 2010. Borrowings under these facilities are unsecured and
accrue interest at LIBOR plus a spread that is based on a fixed-charge
coverage ratio. We owed $10.0 million under these facilities at March
31, 2006. We also had letters of credit in the amount of $5.4 million
outstanding at March 31, 2006, and these amounts are considered part
of the facilities usage. Our unused capacity was $64.6 million at
March 31, 2006.
Store Expansion and Capital Expenditures
We have entered several new markets during the past twelve months and
made continued improvements and relocations of our store base. Our
total selling square footage has increased an average of approximately
4% over the past 10 years.
We are expecting to add approximately 1.5% retail square footage net
of store closures during 2006. We recently opened a new store in the
growing southeastern area of the metro-Atlanta market. Additionally,
we expect to open a new store in the new markets of Ft. Lauderdale and
Port Charlotte, Florida and replace a store in Dallas, Texas. Our
plans for 2006 include the opening of one or two additional stores and
the closing of three older stores. We are evaluating a number of
opportunities which we believe will become available in existing
retail sites in the near term. Our strategy is to pursue
opportunities in densely populated markets which we can serve using
our existing distribution.
Our planned expenditures for 2006 are $28.0 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 2006 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
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO) of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and
CFO, concluded that the Company's disclosure controls and procedures
were effective to provide reasonable assurance that information
required to be disclosed in the Company's reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms and that such information is accumulated
and communicated to the Company's management, including the CEO and
CFO, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation
described in the immediately preceding paragraph that occurred during
the period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) 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). Exhibits designated with a "+" constitute a
management contract or compensatory plan or arrangement. 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 (Commission File No. 1-14445)
3.1 Articles of Incorporation 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 First Quarter 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).
*+10.7 Director's Deferred Compensation Plan as amended
and restated January 1, 2006.
*31.1 Certification of Chief Executive Officer pursuant
to sec. 302 of the Sarbanes-Oxley Act of 2002 (15
U.S.C. sec 7241).
*31.2 Certification of Chief Financial Officer pursuant
to sec. 302 of the Sarbanes-Oxley Act of 2002 (15
U.S.C. sec 7241).
*32.1 Certification of Chief Executive Officer and the
Chief Financial Officer pursuant to sec. 906 of
the Sarbanes-Oxley Act of 2002 (15 U.S.C. sec
1350).
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 9, 2006 By: /s/ Clarence H. Smith
-------------------------------------
Clarence H. Smith
President and Chief Executive
Officer
By: /s/ Dennis L. Fink
------------------------------------
Dennis L. Fink
Executive Vice President and
Chief Financial Officer