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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 April 3, 1999
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Commission File No. 0-11577
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 Identification Number)
incorporation or organization)
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
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As of May 13, 1999 there were 7,825,783 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 ended April 3, 1999 and April 4, 1998
(Amounts in thousands, except per share data)
(Unaudited)
13 Weeks Ended
----------------------------
April 3, April 4,
-------- ---------
1999 1998
-------- ---------
Net sales $ 157,144 147,409
Cost of sales 126,973 120,733
--------- ---------
Gross profit 30,171 26,676
Selling, general and administrative expenses 22,416 20,350
--------- ---------
Operating income 7,755 6,326
--------- ---------
Other deductions:
Interest expense 2,048 2,584
Other income, net (95) (126)
--------- ---------
1,953 2,458
--------- ---------
Earnings before income taxes 5,802 3,868
Income tax expense 2,205 1,508
--------- ---------
Net earnings $ 3,597 2,360
--------- ---------
Net earnings per common share - basic $ 0.46 0.30
========= =========
Net earnings per common share - diluted $ 0.45 0.30
========= =========
Weighted average number of
common shares outstanding - basic 7,840 7,760
========= =========
Weighted average number of
common shares outstanding - diluted 7,951 7,940
========= =========
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LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 1999 and January 2, 1999
(Amounts in thousands, except share data)
ASSETS
April 3,
1999 January 2,
(Unaudited) 1999 (*)
------------ -------------
Current assets:
Cash $ 147 110
Trade accounts receivable, less allowances for
doubtful receivables, discounts, returns and
allowances of $3,222 and $2,482, respectively 99,008 90,286
Inventories 103,699 98,798
Prepaid expenses and other current assets 8,168 8,771
--------- --------
Total current assets 211,022 197,965
--------- --------
Property, plant and equipment, net 65,408 66,297
Intangible and other assets, net 70,907 72,703
--------- --------
$ 347,337 336,965
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 6,590 6,590
Trade accounts payable 36,339 31,296
Accrued expenses and other current liabilities 41,710 37,384
--------- --------
Total current liabilities 84,639 75,270
--------- --------
Long-term debt, excluding current installments 102,420 104,585
Deferred and other liabilities 12,107 12,589
--------- --------
Total liabilities 199,166 192,444
--------- --------
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 7,833,746 shares
and 7,831,080 shares, respectively 2,350 2,349
Additional paid-in capital 51,470 51,418
Retained earnings 94,351 90,754
--------- --------
148,171 144,521
--------- --------
$ 347,337 336,965
========= ========
(*) Derived from the Company's 1998 audited Consolidated Financial Statements.
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LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the thirteen weeks ended April 3, 1999 and April 4, 1998
(Amounts in thousands)
(Unaudited)
13 Weeks Ended
---------------------------
April 3, April 4,
1999 1998
--------- ---------
Cash flows from operating activities:
Net earnings $ 3,597 2,360
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation of property, plant and equipment 2,674 2,544
Amortization 919 1,008
Provision for losses on trade accounts receivable 303 259
Gain on sales of assets (227) (45)
Provision for deferred income taxes (1,187) 1,057
Forgiveness of debt -- (217)
Increase in deferred and other liabilities 159 85
Change in assets and liabilities:
Increase in trade accounts receivable (9,025) (8,671)
Increase in inventories (4,901) (1,912)
(Increase) decrease in prepaid expenses and
other current assets 603 (630)
Increase in trade accounts payable 5,043 7,729
Increase in accrued expenses and other
current liabilities 5,169 2,269
-------- --------
Total adjustments (470) 3,476
-------- --------
Net cash provided by operating activities 3,127 5,836
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,810) (1,269)
Proceeds from sales of assets 1,660 1
Additions to intangible and other assets (555) (227)
-------- --------
Net cash used in investing activities (705) (1,495)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 590 --
Principal payments on borrowings (2,755) (4,310)
Other (220) 8
-------- --------
Net cash used in financing activities (2,385) (4,302)
-------- --------
Net increase in cash 37 39
Cash at beginning of period 110 75
-------- --------
Cash at end of period $ 147 114
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Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,894 2,554
Cash paid (net of refunds received) during the period for income taxes (1,658) 40
======== ========
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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 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 22 985 -- 1,007
Retirement of stock and purchase
of restricted stock (4,350) (1) (86) -- (87)
Amortization of employee
restricted stock awards -- -- 87 -- 87
Tax benefit from exercise of stock options -- -- 330 -- 330
Net earnings -- -- -- 12,259 12,259
----------- ------- ------- ------- --------
BALANCE AT JANUARY 2, 1999 7,831,080 2,349 51,418 90,754 144,521
Shares issued in connection
with incentive stock
option plan 4,000 1 48 -- 49
Shares issued in connection
with long-term incentive plan 15,666 5 250 -- 255
Purchase and retirement of stock (17,000) (5) (266) -- (271)
Amortization of employee
restricted stock awards -- -- 20 -- 20
Net earnings -- -- -- 3,597 3,597
----------- ------- ------- ------- --------
BALANCE AT APRIL 3, 1999
(UNAUDITED) 7,833,746 $ 2,350 51,470 94,351 148,171
=========== ======= ======= ======= ========
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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.
(2) Inventories
A summary of inventories follows (amounts in thousands):
April 3, January 2,
1999 1999
---------------- --------------
Inventories on the FIFO cost method:
Finished goods $ 55,006 51,414
Work in process 15,847 15,708
Raw materials and supplies 43,372 42,374
-------------- ------------
Total inventories on the FIFO cost method 114,225 109,496
Less adjustments of certain inventories to the
LIFO cost method (10,526) (10,698)
-------------- ------------
$ 103,699 98,798
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(3) Repurchase Common Stock
On December 10, 1998, the Company's Board of Directors authorized the
repurchase of up to 600,000 shares of the Company's common stock over the
next 24 months, not to exceed $10,000,000. During the first quarter of
1999, the Company purchased 17,000 shares for approximately $271,000 and
immediately retired the stock.
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(4) Interest Rate Swap Agreement
On March 30, 1999, the Company entered into a five-year interest rate swap
agreement having a notional amount of $25,000,000 in order to reduce the
impact of changes in interest rates on its floating rate long-term debt.
The swap agreement commenced on April 19, 1999 and expires on April 19,
2004 with a fixed LIBOR rate of 5.635% per annum. The three-month floating
LIBOR rate at April 3, 1999 was 5.00%. On a quarterly basis, the Company
will pay to or receive from the counterparty to the agreement the
difference between the fixed interest rate and the floating interest rate.
The Company is exposed to credit loss in the event of nonperformance by
the other party to the interest rate swap agreements. However, the Company
does not anticipate nonperformance by the counterparty. The effect of the
swap agreement will be to increase interest expense annually by
approximately $160,000 based upon existing floating interest rates.
See Exhibit 10-1 of Item 6 to this Quarterly Report on Form 10-Q.
(5) Segment Information
The Company manufactures and markets casegoods and upholstered furniture
for two business segments - the residential furniture market and the
contract furniture market. The residential furniture segment principally
manufactures and sells to various retailers at wholesale prices. The
contract furniture segment principally manufactures and sells to
hospitality, government and assisted-living facilities at retail prices.
The products in both segments consist of casegoods, upholstery, and
accessories. The Company has no operations located outside the United
States and has no sales to foreign countries that are individually
material.
Profit by business segment represents nets sales, less operating expenses,
less interest expense. A portion of corporate expenses is included in each
segment. Unallocated corporate expenses are included in the "Corporate"
column. The following table shows net sales and profits by business
segment for the quarters ended April 3, 1999 and April 4, 1998 and assets
at April 3, 1999 and January 2, 1999 (amounts in thousands):
April 3, 1999 Residential Contract Corporate Consolidated
------------- ----------- -------- --------- ------------
Net Sales $119,203 37,941 -- 157,144
Profit 4,484 2,683 (1,365) 5,802
Assets 266,292 68,959 12,086 347,337
April 4, 1998 Residential Contract Corporate Consolidated
------------- ----------- -------- --------- ------------
Net Sales $114,705 32,704 -- 147,409
Profit 3,382 2,061 (1,575) 3,868
Assets (Jan. 2, 1999) 256,623 65,703 14,639 336,965
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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
-------------------------
April 3, April 4,
1999 1998
------ ------
Net sales 100.0% 100.0%
Cost of sales 80.8 81.9
------ ------
Gross profit 19.2 18.1
Selling, general and administrative expenses 14.3 13.8
------ ------
Operating income 4.9 4.3
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Other deductions
Interest expense 1.3 1.8
Other expense, net (0.1) (0.1)
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1.2 1.7
------ ------
Earnings before income taxes 3.7 2.6
Income tax expense 1.4 1.0
------ ------
Net earnings 2.3% 1.6%
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Total net sales for the first quarter of 1999 increased 6.6%, to $157.1
million, as compared to $147.4 million in the first quarter of 1998. The
following table compares net sales by segment:
April 3, April 4, Percent
1999 1998 Increase Change
------------ ------------ --------- --------
Residential $ 119,203 114,705 4,498 3.9%
Contract 37,941 32,704 5,237 16.0%
------------ ------------ --------- ------
$ 157,144 147,409 9,735 6.6 %
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The Company's order backlog increased 3% during the first quarter of
1999. The increased net sales of the residential segment for the first quarter
of 1999 were due largely to the success of the recent residential product
introductions, as well as improved retail furniture sales for the industry
overall. The contract segment
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sales growth in the 1999 period was due primarily to continued hotel expansion
and refurbishment and increased sales to the assisted-living facilities, trends
that the Company anticipates will continue for the balance of 1999. The Company
believes that (i) through existing production capacity; (ii) the planned
addition of a new contract manufacturing facility, which will commence
operations in the second half of 1999; and (iii) through production either from
other LADD manufacturing plants or outside contractors, capacity will be
sufficient to accommodate the contract sales growth anticipated for the
remainder of 1999.
Cost of sales as a percentage of net sales decreased to 80.8% for the
first quarter of 1999, from 81.9% in 1998. This decrease resulted in an increase
in gross profit margins to 19.2% for the 1999 first quarter, from 18.1% in 1998.
The 1.1% increase in the first quarter gross profit percent was a result of
improved manufacturing efficiencies, along with the production and shipment of
recent product introductions carrying higher margins. In addition, improved
margins were due to aggressive price discounting in the 1998 first quarter,
principally for the sales of discontinued product, which was not as prevalent in
the 1999 first quarter.
Selling, general and administrative (SG&A) expenses increased to 14.3%
of net sales for the first quarter of 1999, from 13.8% for the same period in
1998. The increase over the prior year was primarily attributable to marketing
costs associated with recently introduced licensed furniture collections. The
Company believes that its SG&A expense as a percent of net sales will be in the
range of 14.0% to 14.5% for 1999.
Other deductions (principally interest expense) represented 1.2% of net
sales for the 1999 first quarter, down from 1.7% in 1998. Average outstanding
borrowings were $10.9 million less for the first quarter of 1999 compared to the
year-earlier period and the overall effective interest rate was approximately
1.1% lower for the 1999 quarter. As a result, interest expense in the first
quarter declined by $536,000, or 20.7%. The decline in the effective interest
rate was primarily due to: (i) reductions in the Company's interest rate margin,
as provided for in the Company's bank credit facility, based on improved
operating performance; and (ii) reductions in the base lending rates. Further,
as a result of the improved 1999 first quarter operating results, the Company's
interest rate margin was further reduced by 0.125% effective April 15, 1999.
Based upon borrowing levels at April 3, 1999, the effect of this reduction,
along with a February 1, 1999 amendment to the bank credit facility, which
reduced the interest margin an additional 0.25%, will be to reduce interest
expense by approximately $400,000 on an annual basis.
The Company's estimated annual effective income tax rate was 38% for the
first quarter of 1999, compared to 39% for the comparable 1998 quarter. The
decrease in the effective tax rate resulted from the implementation of state tax
planning strategies. The Company anticipates that its combined effective Federal
and state tax rate will continue to approximate 38% over the remainder of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 2.5 to 1 at April 3, 1999, compared to
2.6 to 1 at January 2, 1999. Net working capital totaled $126.4 million at April
3, 1999 and $122.7 million at January 2, 1999. As a result of the Company's
sales growth and increased backlog, trade accounts receivable and inventories
have increased from January 2, 1999 levels. The increase in inventories was
largely due to production in the first quarter of 1999 to satisfy current sales
demands. In addition, the Company's trade accounts payable and accrued expenses
also increased during the 1999 first quarter, largely due to the increased
production levels.
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During the first quarter of 1999, the Company generated $3.1 million in
cash from operating activities, compared to $5.8 million in the 1998 period. The
decrease in cash provided by operations was attributable to increased working
capital requirements.
During the 1999 first quarter, capital spending totaled $1.8 million,
compared to $1.3 million during the year-earlier period. Total capital
expenditures for all of 1999 are expected to approximate $12.0 million, as
compared to $9.1 million for all of 1998. The increase in the Company's
anticipated capital expenditures is due in part to capacity expansions planned
at contract facilities.
The Company's total debt ratio (total debt as a percentage of total debt
plus shareholders' equity) was 42.4% at April 3, 1999, compared to 43.5% at
January 2, 1999. The decrease resulted from improved operating performance,
which allowed the Company to continue repaying debt while simultaneously
increasing its equity base.
On March 26, 1999, the Company purchased and retired 17,000 shares of
its common stock for approximately $271,000. The stock repurchase was authorized
by the Company's Board of Directors and financed through the Company's revolving
credit line.
At April 3, 1999, $36.8 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, planned capital expenditures and lease commitments, and any future
repurchases of the Company's common stock.
On March 30, 1999, the Company entered into a five-year interest rate
swap agreement having a notional amount of $25.0 million in order to reduce the
impact of changes in interest rates on its floating rate long-term debt. The
swap agreement effectively converts a portion of the floating rate to a fixed
rate on the Company's long-term debt and commenced on April 19, 1999. The
Company pays to or receives from the bank the difference between the floating
three-month LIBOR rate and the fixed rate of 5.635% per annum on a quarterly
basis.
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YEAR 2000 COMPLIANCE
The Company continues to actively address 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 of non-compliance on information technology systems and non-information
technology systems. An inventory of all the Company's equipment containing date
sensitive embedded technology has been completed, and at the present time, a
majority of this equipment has been either tested and/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 information technology systems
were Y2K compliant prior to 1998. At the present time, the Company believes it
has completed almost all of the necessary internal software and hardware
implementation required for Y2K compliance. The Company does not believe any
material exposures or contingencies exist with respect to its internal
information systems.
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 with
regard to Y2K issues have minimized Y2K related capital costs and expenses
incurred to date and estimates that it has already incurred a majority of the
required Y2K compliance expenditures. These amounts exclude funds invested in
the purchase and lease of personal computers and the implementation of other
computer system upgrades. While such investments were made primarily to resolve
technological obsolescence and capacity constraints, they also resulted in the
new equipment and upgraded systems being Y2K compliant. Anticipated expenditures
and lease commitments relating the Y2K compliance are expected to be less than
$400,000 for the remainder of 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," "forecasts,"
"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; the effect of the interest rate swap agreement, 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 Interest rate swap agreement dated March 30, 1999
between the Company and Fleet National Bank.
10-2 Amendment to the 1994 Incentive Stock Option Plan dated
March 10, 1999.
27-1 (edgar version only)
(b) Reports on Form 8-K
On February 5, 1999, the Company filed with the Commission a
Form 8-K dated February 4, 1999 which reported under Item 5 the
Press Release dated February 4, 1999 reporting the Company's
fourth quarter 1998 and 1998 full year operating results.
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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: May 14, 1999 By: /s/ William S. Creekmuir
--------------------------
William S. Creekmuir
Executive Vice President
and Chief Financial Officer
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