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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended October 3, 1998
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Commission File No. 0-11577
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LADD Furniture, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1311320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Post Office Box 26777
4620 Grandover Parkway
Greensboro, North Carolina 27417-6777
(Address of principal executive offices) (Zip Code)
(336) 294-5233
(Registrants' telephone number, including area code)
(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 [ ]
As of November 6, 1998 there were 7,831,080 shares of Common Stock ($.30 par
value) of the registrant outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the thirteen weeks and thirty-nine weeks ended
Sept. 27, 1997 and Oct. 3, 1998
(Amounts in thousands, except per share data)
(Unaudited)
13 Weeks Ended 39 Weeks Ended
-------------------------- -------------------------
Sept. 27, Oct. 3, Sept. 27, Oct. 3,
1997 1998 1997 1998
--------- ------- ------- -------
Net sales $ 129,935 142,896 378,875 425,810
Cost of sales 106,791 115,160 309,621 344,066
--------- ------- ------- -------
Gross profit 23,144 27,736 69,254 81,744
Selling, general and administrative expenses 17,794 19,932 53,907 60,229
--------- ------- ------- -------
Operating income 5,350 7,804 15,347 21,515
--------- ------- ------- -------
Other deductions:
Interest expense 2,701 2,220 8,425 7,175
Other expense, net (199) 148 516 332
--------- ------- ------- -------
2,502 2,368 8,941 7,507
--------- ------- ------- -------
Earnings before income taxes 2,848 5,436 6,406 14,008
Income tax expense 1,110 2,117 2,498 5,460
--------- ------- ------- -------
Net earnings $ 1,738 3,319 3,908 8,548
========= ======= ======= =======
Net earnings per common share - basic $ 0.22 0.42 0.51 1.10
========= ======= ======= =======
Net earnings per common share - diluted $ 0.22 0.41 0.50 1.06
========= ======= ======= =======
Weighted average number of
common shares outstanding - basic 7,758 7,831 7,738 7,801
========= ======= ======= =======
Weighted average number of
common shares outstanding - diluted 7,867 8,034 7,826 8,074
========= ======= ======= =======
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 3, 1998 and October 3, 1998
(Amounts in thousands, except share data)
ASSETS
October 3,
January 3, 1998
1998* (Unaudited)
---------- -----------
Current assets:
Cash $ 75 156
Trade accounts receivable, less allowances for
doubtful receivables, discounts, returns and
allowances of $2,735 and $3,051, respectively 83,297 94,861
Inventories 93,189 103,353
Prepaid expenses and other current assets 8,016 7,124
-------- -------
Total current assets 184,577 205,494
-------- -------
Property, plant and equipment, net 67,530 66,189
Intangible and other assets, net 77,083 73,836
-------- -------
$329,190 345,519
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 6,807 6,590
Trade accounts payable 29,488 36,982
Accrued expenses and other current liabilities 31,952 38,617
-------- -------
Total current liabilities 68,247 82,189
-------- -------
Long-term debt, excluding current installments 118,586 109,540
Deferred and other liabilities 11,432 13,067
-------- -------
Total liabilities 198,265 204,796
-------- -------
Shareholders' equity:
Preferred stock of $100 par value. Authorized
500,000 shares; no shares issued -- --
Common stock of $.30 par value. Authorized
50,000,000 shares; issued 7,759,683 shares
and 7,831,080 shares, respectively 2,328 2,349
Additional paid-in capital 50,102 51,331
Retained earnings 78,495 87,043
-------- -------
130,925 140,723
-------- -------
$329,190 345,519
======== =======
* Derived from the Company's 1997 audited Consolidated Financial Statements.
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the thirty-nine weeks ended Sept. 27, 1997 and Oct. 3, 1998
(Amounts in thousands)
(Unaudited)
39 Weeks Ended
---------------------------
Sept. 27, Oct. 3,
1997 1998
-------- -------
Cash flows from operating activities:
Net earnings $ 3,908 8,548
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation of property, plant and equipment 7,580 7,640
Amortization 3,115 2,832
Provision for losses on trade accounts receivable 593 955
Gain on sales of assets (145) (165)
Provision for deferred income taxes 773 269
Forgiveness of debt -- (217)
Increase in deferred and other liabilities 131 606
Change in assets and liabilities:
Increase in trade accounts receivable (17,728) (12,519)
Increase in inventories (8,899) (10,164)
Decrease in prepaid expenses and other
current assets 2,206 892
Increase in trade accounts payable 2,722 7,494
Increase in accrued expenses and other
current liabilities 6,703 7,818
-------- -------
Total adjustments (2,949) 5,441
-------- -------
Net cash provided by operating activities 959 13,989
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (4,129) (6,335)
Proceeds from sales of property, plant and equipment 16 69
Reductions in intangible and other assets 601 484
-------- -------
Net cash used in investing activities (3,512) (5,782)
-------- -------
Cash flows from financing activities:
Proceeds from borrowings 12,464 1,005
Principal payments on borrowings (14,886) (10,051)
Other 5,165 920
-------- -------
Net cash provided by (used in) financing activities 2,743 (8,126)
-------- -------
Net increase in cash 190 81
Cash at beginning of period 469 75
-------- -------
Cash at end of period $ 659 156
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 8,601 7,144
Cash paid (net of refunds received) during the period for income taxes (4,587) 2,561
======== =======
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share data)
Number Additional Total
of shares Common paid-in Retained shareholders'
issued stock capital earnings equity
---------- ------- ------- ------ --------
BALANCE AT DECEMBER 28, 1996 7,719,567 $ 2,316 49,401 72,183 123,900
Purchase of restricted
stock (3,273) (1) -- -- (1)
Shares issued in connection
with incentive stock
option plan 4,500 2 51 -- 53
Shares issued in connection
with employee defined
contribution plan 38,889 11 536 -- 547
Amortization of employee
restricted stock awards -- -- 114 -- 114
Net earnings -- -- -- 6,312 6,312
---------- ------- ------- ------ --------
BALANCE AT JANUARY 3, 1998 7,759,683 2,328 50,102 78,495 130,925
Shares issued in connection
with incentive stock
option plan 75,747 22 977 -- 999
Retirement of stock and purchase
of restricted stock (4,350) (1) (86) -- (87)
Amortization of employee
restricted stock awards -- -- 50 -- 50
Non-qualified stock options -- -- 261 -- 261
Net earnings -- -- -- 5,229 5,229
---------- ------- ------- ------ --------
BALANCE AT OCTOBER 3, 1998
(UNAUDITED) 7,831,080 $ 2,349 51,304 83,724 137,377
========== ======= ======= ====== ========
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Notes:
(1) Quarterly Financial Statements
The quarterly consolidated financial statements of LADD Furniture,
Inc. and its subsidiaries (referred to as "LADD" or the "Company")
are unaudited and have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission ("SEC").
In the opinion of management, these statements include all
adjustments necessary for a fair statement of the operating results
for the interim periods indicated. All such adjustments are of a
normal recurring nature. Certain information and footnote
disclosures prepared in accordance with generally accepted
accounting principles have been either condensed or omitted pursuant
to SEC rules and regulations. However, management believes that the
disclosures made are adequate for a fair presentation of results of
operations and financial position. It is suggested that these
financial statements be read in conjunction with the financial
statements and accompanying notes included in the Company's latest
Annual Report on Form 10-K.
(2) Inventories
A summary of inventories follows (in thousands):
January 3, October 3,
1998 1998
--------- --------
Inventories on the FIFO cost method:
Finished goods $ 49,329 56,642
Work in process 15,697 15,105
Raw materials and supplies 38,170 42,642
--------- --------
Total inventories on the FIFO cost method 103,196 114,389
Less adjustments of certain inventories to the
LIFO cost method (10,007) (11,036)
--------- --------
$ 93,189 103,353
========= ========
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth the percentage relationship of net sales to
certain items included in the Consolidated Statements of Earnings:
13 Weeks Ended 39 Weeks Ended
Sept. 27, Oct. 3, Sept. 27, Oct. 3,
1997 1998 1997 1998
------ ------ ------ ------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 82.2 80.6 81.7 80.8
------ ------ ------ ------
Gross profit 17.8 19.4 18.3 19.2
Selling, general and administrative expenses 13.7 13.9 14.2 14.1
------ ------ ------ ------
Operating income 4.1 5.5 4.1 5.1
------ ------ ------ ------
Other deductions
Interest expense 2.1 1.6 2.2 1.7
Other expense, net (0.2) 0.1 0.2 0.1
------ ------ ------ ------
1.9 1.7 2.4 1.8
------ ------ ------ ------
Earnings before income taxes 2.2 3.8 1.7 3.3
Income tax expense 0.9 1.5 0.7 1.3
------ ------ ------ ------
Net earnings 1.3 % 2.3 % 1.0 % 2.0 %
====== ====== ====== ======
Total net sales for the third quarter of 1998 increased 10.0%, to $142.9
million, as compared to $129.9 million in the third quarter of 1997. The
following table compares net sales for the third quarter by operating group:
Sept. 27, Oct. 3, Percent
1997 1998 Increase Change
-------- ------- -------- -------
Residential Casegoods $ 72,068 80,348 8,280 11.5 %
Residential Upholstery 28,017 31,483 3,466 12.4 %
Contract Sales 29,850 31,065 1,215 4.1 %
-------- ------- ------ ------
$129,935 142,896 12,961 10.0 %
======== ======= ====== ======
Total net sales for the first nine months of 1998 increased 12.4%, to
$425.8 million, as compared to $378.9 million in the first nine months of 1997.
The following table compares net sales for the first nine months by operating
group:
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Sept. 27, Oct. 3, Percent
1997 1998 Increase Change
--------- ------- -------- -------
Residential Casegoods $208,240 234,608 26,368 12.7 %
Residential Upholstery 88,731 95,388 6,657 7.5 %
Contract Sales 81,904 95,814 13,910 17.0 %
-------- ------- ------ ------
$378,875 425,810 46,935 12.4 %
======== ======= ====== ======
The increased net sales of residential casegoods and upholstery for the
third quarter and first nine month's of 1998 compared to the same periods of
1997 were due largely to an improved overall industry conditions at retail, as
well as the Company's recent successful new product introductions. The contract
sales growth in both 1998 periods was due primarily to continued hotel expansion
and refurbishment, a trend which the Company anticipates will continue for the
balance of 1998 and into 1999. However, because of the very strong growth rate
in contract sales since the 1997 fourth quarter, the comparative year-over-year
growth rate decelerated during the third quarter of 1998. The Company believes
that production capacity available either at its own casegoods manufacturing
facilities or through outside contractors will be sufficient to accommodate
anticipated contract sales growth over the remainder of 1998. The Company's
order backlog increased 11% during the third quarter, to $105.5 million.
Cost of sales as a percentage of net sales decreased to 80.6% for the
third quarter of 1998 and 80.8% for the year-to-date, from 82.2% and 81.7%,
respectively, in 1997. This decrease resulted in an increase in gross profit
margins to 19.4% for the 1998 third quarter and 19.2% for the year-to-date, from
17.8% and 18.3%, respectively, in 1997. Although the gross profit percent for
the first nine months of 1998 increased 0.9%, the 1998 first nine months gross
margin was negatively impacted by higher raw material costs (primarily lumber),
an approximate $1.4 million increase in the Company's LIFO charges, and price
discounts offered to customers to liquidate discontinued products. The increase
in the third quarter gross profit percent of 1.6% was a result of improved
manufacturing efficiencies, along with the production and shipment of a number
of recent new product introductions having higher margins.
Selling, general and administrative (SG&A) expenses increased to 13.9% of
net sales for the third quarter of 1998 from 13.7% for the same period in 1997,
while the first nine months SG&A expenses decreased to 14.1% from 14.2% in 1997.
The Company believes that its SG&A expense as a percent of net sales will
continue at an annualized rate approximating 14.0% over the remainder of 1998.
Other deductions (principally interest expense) represented 1.7% of net
sales for the third quarter and 1.8% for the first nine months of 1998, down
from 1.9% and 2.4%, respectively, in 1997. Average outstanding borrowings
declined approximately $6.9 million for the third quarter and $3.7 million for
the first nine months of 1998 compared to the same periods of 1997. In addition,
the overall effective interest rate was approximately 1.1% lower for both 1998
periods. As a result, interest expense declined by $481,000, or 17.8%, in the
third quarter and by $1.3 million, or 14.8%, for the first nine months of 1998.
The decline in the effective interest rate was primarily due to improved
operating performance, which, as provided in the Company's bank credit facility,
reduced the Company's interest rate margin on its bank debt by 0.25% as of April
21, 1998 and 0.25% as of July 21, 1998. Also, the Company's loan agreement was
amended effective May 15, 1998 to reduce its interest rate margin an additional
0.25% due to continued improvement in the
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Company's operating performance. Further, the reduction of the base prime
lending rate by 0.25% on September 30, 1998 and another 0.25% on October 16,
1998 should also have a favorable impact on the Company's interest expense in
the fourth quarter of 1998. Based upon borrowing levels at October 3, 1998, such
decreases could reduce interest expense by approximately $580,000 on an annual
basis. "Other expense, net" decreased for the first nine months of 1998 as
compared to 1997, due to increased profits from the Company's transportation
operations, and a $217,000 forgiveness of debt during 1998 from a state
Industrial Development Authority under the terms of the financing.
The Company's estimated annual effective income tax rate was 39% for the
first nine months of both 1998 and 1997. The Company anticipates that its
combined effective Federal and state tax rate will continue to approximate 39%
over the remainder of 1998. For the first nine months of 1998, the Company's net
earnings totaled $8.5 million, compared to $3.9 million in the year-earlier
period. For the fiscal third quarter ended October 3, 1998, the Company's net
earnings totaled $3.3 million, compared to $1.7 million in the comparable 1997
quarter. The 1998 third quarter net earnings represented the Company's highest
third quarter profit since 1988.
Liquidity and Capital Resources
The Company's current ratio was 2.5 to 1 at October 3, 1998 and 2.7 to 1
at January 3, 1998. Net working capital totaled $123.3 million at October 3,
1998, compared to $116.3 million at January 3, 1998. As a result of the
Company's sales growth and increased backlog, trade accounts receivable and
inventories have increased over the 1997 fiscal year end amounts. The increase
in inventories was largely due to production scheduled during the third quarter
to satisfy current sales demands. In addition, the Company's trade accounts
payable and accrued expenses also increased during the first nine months of
1998, largely due to the Company's increased production levels.
During the first nine months of 1998, the Company generated $14.0 million
in cash from operating activities, compared to $1.0 million in the 1997 period.
The increase in cash provided by operations is attributable to higher cash
earnings, offset to some extent by increased working capital needs.
During the first nine months of 1998, capital spending totaled $6.3
million, compared to $4.1 million during the year-earlier period. The Company's
total capital expenditures for all of 1998 are expected to approximate $8.5
million, as compared to $7.5 million for all of 1997.
The total debt ratio (total debt as a percentage of total debt plus
shareholders' equity) was 45.2% at October 3, 1998, compared to 48.9% at January
3, 1998. The decrease resulted from improved operating performance, which
allowed the Company to repay debt while simultaneously increasing its equity
base. At October 3, 1998, $30.9 million was available for future borrowings
under the Company's revolving credit loan. Management believes that unused
credit lines available under the Company's revolving credit loan, in addition to
cash generated from operations, will be adequate to fund the Company's future
operations and planned capital expenditures.
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Year 2000 Compliance
The Company continues to address actively the business issues associated
with the expected impact of the Year 2000 ("Y2K") on information technology
systems and non-information technology systems (i.e., embedded technology) both
internally and in relation to the Company's external customers and suppliers.
Factors involved in assessing such business issues include the evaluation and
testing of the Company's systems; evaluation, upgrading and certifying of
automated plant machinery and equipment; and assessing the compliance strategies
of significant customers and vendors and monitoring the status of those
strategies (including electronic commerce with those companies).
The Company has created a corporate-wide Y2K Steering Committee with
subcommittees located at each of the Company's business units for the purpose of
directing the Company's compliance efforts and identifying and addressing the
impact on information technology systems and non-information technology systems
in the event of non-compliance. An inventory of all the Company's equipment
containing date sensitive embedded technology has been completed, and at the
present time only a small portion of this equipment has not been either tested
or deemed to be Y2K compliant. Since the fourth quarter of 1994, the Company has
been upgrading its information systems technology with Y2K compliant software to
support its manufacturing, sales and order entry, and financial reporting
systems. As a result, a significant portion of the Company's systems were Y2K
compliant prior to 1998 and the remainder of the critical systems are expected
to be compliant by the end of the current fiscal year. The Company does not
believe any material exposures or contingencies exist with respect to its
internal information systems, as the installation of remaining software changes
is anticipated to be completed in the necessary time frame. At the present time,
the Company believes it has completed over 90% of the necessary internal
software and hardware implementation required for Y2K compliance and, therefore,
has not yet developed a contingency plan. If by the end of fiscal 1998 the
Company's critical systems are not Y2K compliant, a contingency plan will be
formulated at that time.
The Company is currently requesting assurances from its major suppliers
and business partners that they will be Y2K compliant so that there will be no
disruption of their products or services as the new century begins. The Company
is assessing the risk of each of its significant suppliers and business partners
to determine the possible impact of their non-compliance, if that should occur.
Where appropriate, contingency plans and alternative suppliers are being
developed or investigated. Although the Company is presently not aware of any
material exposures or contingencies related to the Y2K compliance efforts of its
significant vendors and business partners, if a significant vendor or business
partner should be non-compliant there can be no assurance such an event will not
have a material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. The Company believes the actions it is
taking (including the continued monitoring of third-party compliance and the
development of appropriate contingency plans) will minimize these risks and
believes it is taking responsible steps to prevent any major disruptions of its
business units.
The Company believes the actions it has taken since late 1994 have
minimized the costs and expenses incurred in 1998, and estimates that a majority
of the expenditures have already been incurred by the Company. Anticipated
expenditures relating to the Y2K compliance are expected to be less than
$500,000 in total for both 1998 and 1999. However, new developments may
subsequently occur that could affect the Company's estimates of the costs for
Y2K compliance.
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Forward-Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. These statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "should", or
"anticipates." The Company cautions readers that these forward-looking
statements, including without limitation, those relating to sales, operating
costs, working capital, liquidity, capital needs, interest costs and Y2K
compliance, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements. This is due to several important factors herein identified,
including without limitation: anticipated growth in sales; success of new
product introductions; increased cash flow from operations; anticipated selling,
general and administrative expenses; projected capital spending; decreased
interest expense; Y2K readiness (particularly with respect to third-party vendor
compliance); and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Amendment No. 7 and Consent to Loan and Security Agreement
dated as of July 12, 1996 among LADD Furniture, Inc., certain
of its subsidiaries, the financial institutions party thereto
from time to time as the lenders, NationsBank, N.A. (South)
and Fleet Capital Corporation as the "Co-Agents," and
NationsBank, N.A. (South), as agent for the lenders.
10-2 Supplement No. 1 to Amendment No. 7 and Consent to Loan and
Security Agreement dated as of July 12, 1996 among LADD
Furniture, Inc., certain of its subsidiaries, the financial
institutions party thereto from time to time as the lenders,
NationsBank, N.A. (South) and Fleet Capital Corporation as the
"Co-Agents," and NationsBank, N.A. (South), as agent for the
lenders.
10-3 Supplemental Retirement Income Plan for Salaried Employees of
LADD Furniture, Inc., as amended and restated effective
January 1, 1994, and as further amended effective January 1,
1997, and October 22, 1998.
10-4 LADD Furniture, Inc. Executive Retirement Plan effective
January 1, 1998.
27-1 (edgar version only)
(b) Reports on Form 8-K
On July 21, 1998, the Company filed with the Commission a Form 8-K
dated July 21, 1998 which reported under Item 5 the Press Release
dated July 20, 1998 reporting the Company's second quarter 1998
results of operations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LADD Furniture, Inc.
Date: November 13, 1998 By: s/William S. Creekmuir
------------------------------
William S. Creekmuir
Executive Vice President
and Chief Financial Officer
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