FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended October 1, 1994 Commission File No. 0-11577
LADD FURNITURE, INC.
(Exact name of registrant as specified in charter)
North Carolina 56-1311320
(State or other juris- (I.R.S. Employer
diction of incorpora- Identification No.)
tion or organization)
One Plaza Center, Box HP-3, High Point, North Carolina 27261-1500
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (910) 889-0333
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 11, 1994 there were 23,096,557 shares of Common Stock
($.10 par value) of the registrant outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the thirteen weeks and thirty-nine weeks ended Oct. 1, 1994 and Oct. 2,
1993
(Amounts in thousands, except per share data)
(Unaudited)
13 Weeks Ended 39 Weeks Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Net sales $ 153,182 127,297 445,403 397,265
Cost of sales 123,640 104,905 359,752 323,477
Gross profit 29,542 22,392 85,651 73,788
Selling, general and
administrative expenses 23,562 19,907 69,127 61,765
Operating income 5,980 2,485 16,524 12,023
Other deductions (income):
Interest expense 2,328 1,379 6,168 4,144
Other, net 445 (34) 921 (185)
2,773 1,345 7,089 3,959
Earnings before income taxes 3,207 1,140 9,435 8,064
Income tax expense 962 709 2,830 3,533
Net earnings $ 2,245 431 6,605 4,531
Net earnings per common share $ 0.10 0.02 0.29 0.20
Weighted average number of
common shares outstanding 23,096 23,060 23,083 23,051
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 1, 1994 and January 1, 1994
(Amounts in thousands, except share data)
ASSETS
October 1,
1994 January 1,
(Unaudited) 1994 *
Current assets:
Cash $ 3,646 1,350
Trade accounts receivable, less allowances
for doubtful receivables, discounts,
returns and allowances of $4,389 and $4,178,
respectively (Note 4) 59,857 72,975
Inventories (Note 2) 120,168 100,639
Prepaid expenses and other current assets 12,322 6,110
Total current assets 195,993 181,074
Property, plant and equipment, net 121,364 97,497
Intangible and other assets, net 84,856 57,166
$ 402,213 335,737
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 9,009 5,815
Short-term bank borrowings (Note 5) 25,600 -
Trade accounts payable 31,953 23,414
Accrued expenses and other current liabilities 37,010 28,841
Total current liabilities 103,572 58,070
Long-term debt, excluding current installments 125,782 105,257
Deferred compensation and other liabilities 2,989 3,405
Deferred income taxes 15,049 18,902
Total liabilities 247,392 185,634
Shareholders' equity:
Preferred stock of $100 par value. Authorized
500,000 shares; no shares issued - -
Common stock of $.10 par value. Authorized
50,000,000 shares; issued 23,096,557 and
23,062,262 shares, respectively 2,310 2,306
Additional paid-in capital 49,516 49,186
Currency translation adjustment (192) (170)
Retained earnings 104,095 99,568
155,729 150,890
Less unamortized value of restricted stock (908) (787)
Total shareholders' equity 154,821 150,103
$ 402,213 335,737
* Derived from the Company's 1993 Annual Report.
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the thirty-nine weeks ended Oct. 1, 1994 and Oct. 2, 1993
(Amounts in thousands)
(Unaudited)
39 Weeks Ended
Oct. 1, Oct 2,
1994 1993
Cash flows from operating activities:
Net earnings $ 6,605 4,531
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation of property, plant and equipment 10,247 7,603
Amortization 2,176 1,899
Provision for losses on trade accounts receivable 2,332 1,629
Gain on sales of property, plant and equipment (171) (178)
Provision for deferred income taxes (199) (467)
Increase (decrease) in deferred compensation and
other liabilities (416) 1,610
Change in assets and liabilities, net of effects
from purchase of Pilliod Furniture in 1994
Increase in trade accounts receivable (11,965) (7,935)
Increase in inventories (8,794) (4,602)
(Increase) decrease in prepaid expenses and
other current assets (4,063) 38
Increase (decrease) in trade accounts payable 1,097 (4,905)
Increase in accrued expenses and other
current liabilities 4,861 225
Total adjustments (4,895) (5,083)
Net cash provided by (used in) operating activities 1,710 (552)
Cash flows from investing activities:
Acquisition of Pilliod Furniture, net of cash
acquired (Note 3) (23,847) -
Additions to property, plant and equipment (25,776) (16,551)
Proceeds from sales of property, plant and equipment 914 300
Additions to other assets (394) (860)
Net cash used in investing activities (49,103) (17,111)
Cash flows from financing activities:
Proceeds from long-term borrowings 27,511 20,000
Proceeds from short-term bank borrowings 25,600 -
Proceeds from sales of trade accounts receivable 34,000 -
Principal payments of long-term debt (35,345) (999)
Proceeds from common stock issued 23 83
Dividends paid (2,078) (2,075)
Net cash provided by financing activities 49,711 17,009
Effect of exchange rate changes on cash (22) (60)
Net increase (decrease) in cash 2,296 (714)
Cash at beginning of period 1,350 1,826
Cash at end of period $ 3,646 1,112
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 5,242 3,267
Cash paid during the period for income taxes 1,999 2,169
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LADD FURNITURE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share data)
Currency Unamortized
Number Additional trans- value of Total
of shares Common paid-in lation Retained restricted shareholders'
issued stock capital adjustment earnings stock equity
BALANCE AT JANUARY 2, 1993 23,019,631 $ 2,302 48,681 (89) 98,489 (659) 148,724
Shares issued in connection
with incentive stock
option plan 11,668 1 90 - - - 91
Shares issued in connection
with and amortization of
employee restricted
stock awards 30,963 3 415 - - (128) 290
Currency translation
adjustment - - - (81) - - (81)
Net earnings - - - - 3,846 - 3,846
Dividends paid - - - - (2,767) - (2,767)
BALANCE AT JANUARY 1, 1994 23,062,262 2,306 49,186 (170) 99,568 (787) 150,103
Shares issued in connection
with incentive stock
option plan 2,344 - 19 - - - 19
Repurchase of restricted
stock (18,424) (1) (170) - - 170 (1)
Shares issued in connection
with and amortization of
employee restricted
stock awards 50,375 5 481 - - (291) 195
Currency translation
adjustment - - - (22) - - (22)
Net earnings - - - - 6,605 - 6,605
Dividends paid - - - - (2,078) - (2,078)
BALANCE AT OCTOBER 1, 1994
(UNAUDITED) 23,096,557 $ 2,310 49,516 (192) 104,095 (908) 154,821
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Notes:
(1) Quarterly Financial Data
The quarterly consolidated financial data are unaudited but
include, in the opinion of management, 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 items in the January 1, 1994 consolidated balance sheet
have been reclassified to conform with the presentation adopted in
the current year. The reclassification did not impact the results
from operations as previously reported.
(2) Inventories
A summary of inventories follows (in thousands):
October 1, January 1,
1994 1994
Inventories on the FIFO
cost method:
Finished goods $ 67,077 55,881
Work in process 22,672 21,513
Raw materials and supplies 45,143 34,947
Total inventories on
the FIFO cost method 134,892 112,341
Less adjustments of certain inven-
tories to the LIFO cost method (14,724) (11,702)
$ 120,168 100,639
(3) Acquisition of Pilliod Furniture
On January 31, 1994, the Company acquired The Pilliod Cabinet
Company, a manufacturer of promotional priced casegoods furniture,
by purchasing all of the common stock of its parent company,
Pilliod Holding Company (Pilliod), for $24,257,000 million cash
(including acquisition expenses), the repayment of Pilliod debt of
$29,893,000 million, and the assumption of other long-term debt of
$247,000. The excess of cost over fair value of the net assets
acquired was approximately $33,219,000 and will be amortized on a
straight-line basis over 40 years. The acquisition was accounted
for as a purchase and accordingly, the net assets and operations
of Pilliod have been included in the Company's consolidated
financial statements beginning on the acquisition date.
Valuations assigned are preliminary and subject to change.
During the second quarter of 1994, management of the Company
became aware of a potential error in the inventory balances of
Pilliod. A
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review of Pilliod's inventories is being performed by
the Company and Pilliod's former external auditors. Based upon
the review to date, the Company has concluded that inventory
balances included in the January 31, 1994 audited consolidated
financial statements of Pilliod were overstated by approximately
$1.4 million. Accordingly, a $1.4 million adjustment reducing
inventory and increasing the excess cost over fair value of the
net assets acquired has been recorded. The effect of this
adjustment did not have a material impact on the 1994 consolidated
statements of operations of the Company.
Additionally, the review revealed that approximately $1.1 million
of the $1.4 million inventory overstatement existed at May 1,
1993, the previous audited balance sheet date. The impact of the
errors was to overstate Pilliod's pre-tax net earnings for the
year ended May 1, 1993 and the nine months ended January 31, 1994
by approximately $1,087,000 and $327,000, respectively.
The following unaudited pro forma data presents the combined third
quarter and nine months 1994 and 1993 results of operations of the
Company and Pilliod as though the acquisition had occurred on
January 3, 1993, giving effect to depreciation and amortization of
assets on the accounting basis recognized in recording the
purchase, the interest on funds used to effect the purchase, and
excluding certain non-recurring expenses of Pilliod during 1993.
The following unaudited pro forma data also gives effect to the
above mentioned inventory adjustments (in thousands, except per
share data):
13 Weeks Ended 39 Weeks Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Net sales $153,182 148,958 453,062 461,382
Net earnings 2,245 1,131 6,883 6,602
Net earnings per
common share $ 0.10 0.05 0.30 0.29
(4) Accounts Receivable Securitization Program
On January 31, 1994, the Company sold ownership interest in a
defined pool of trade accounts receivable for $20,000,000, the
proceeds of which were used to partially finance the Pilliod
acquisition - see Note 3. Under the agreement which expires in
January 1995, the maximum amount of the purchaser's investment can
be $40,000,000 and is subject to change based on the level of
eligible receivables and concentrations of receivables. At
October 1, 1994 the defined pool of trade accounts receivable
totaled approximately $49,478,000 and the purchaser's investment
totaled $34,000,000. The net cash proceeds are reported as
financing activities in the accompanying consolidated statement of
cash flows for the thirty-nine weeks ended October 1, 1994. The
purchaser's investment is reflected as a reduction of trade
accounts receivables
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in the accompanying October 1, 1994 consolidated balance
sheet. At October 1, 1994 the Company retained an
ownership interest in the receivable pool of approximately
$15,478,000, of which approximately $9,198,000 was subordinate
to that of the purchaser. The Company maintains
reserves which approximate the risk of loss relating to its
interest in the receivables. The Company's ongoing obligations
with respect to the receivables pool are limited to the
subordinated portion of its ownership interest. The total cost of
the program is included in selling, general and administrative
expenses in the accompanying 1994 third quarter and nine months
consolidated statements of operations. A portion of the cost of
the accounts receivable sale program is based on the purchaser's
level of investment and borrowing costs.
(5) Short-term Bank Borrowings
During the first quarter of 1994, the Company established
unsecured committed short-term bank credit lines aggregating
$35,000,000, of which $25,600,000 was outstanding at October 1,
1994. The credit lines bear interest at rates selected by the
Company of LIBOR (5.44% at October 1, 1994) plus 1 1/8% to 1 3/8%,
prime (7.75% at October 1, 1994), or at a lesser rate based on
availability of bank funds. At October 1, 1994, the Company's
interest rate for borrowings under these facilities was
approximately 5.63%. The Company pays commitment fees ranging
from 0.25% to 0.375% on the unused portion of the short-term bank
credit lines. The short-term bank borrowings were repaid October
24, 1994 utilizing funds from the Company's amended and restated
long-term credit facility and the related credit lines were
terminated on that date - see Note 6.
(6) Subsequent Event
On October 19, 1994, the Company entered into an amended and
restated credit agreement (the Amended Facility) with a syndicate
of banks which provides a $75,000,000 five-year term loan and an
$115,000,000 five-year revolving credit loan. Borrowings under
the Amended Facility are unsecured. The term loan is payable in
quarterly installments commencing March 1997 of $3,750,000 each
with a final payment of the outstanding balance on October 19,
1999. Borrowings under the Amended Facility bear interest at
rates selected periodically by the Company of LIBOR (5.56% at
October 19, 1994) plus 7/8%, prime (7.75% at October 19, 1994) or
at a lesser rate based on the availability of bank funds. Under
the Amended Facility, the Company pays a commitment fee of 1/4%
per annum on the unused portion of the revolving credit loan.
The Amended Facility requires the maintenance of certain ratios
pertaining to shareholders' equity and operating earnings and
contains covenants which relate to future borrowings, liens on
assets, specified amounts of consolidated net worth, and the
operations of the Company.
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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
Operations:
13 Weeks Ended 39 Weeks Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.7 82.4 80.8 81.4
Gross profit 19.3 17.6 19.2 18.6
Selling, general and
administrative expenses 15.4 15.6 15.5 15.6
Operating income 3.9 2.0 3.7 3.0
Other deductions
Interest expense 1.5 1.1 1.4 1.0
Other, net .3 - .2 -
1.8 1.1 1.6 1.0
Earnings before income
taxes 2.1 .9 2.1 2.0
Income tax expense .6 .6 .6 .9
Net earnings 1.5% .3% 1.5% 1.1%
The Company's 1994 third quarter and nine months operating results
were influenced by the acquisition of Pilliod on January 31, 1994.
Pilliod's results of operations are included in the Company's
consolidated financial statements from the date of acquisition - see
Note 3.
Net sales for the third quarter and first nine months of 1994 were
$153.2 million and $445.4 million, respectively, compared with $127.3
million and $397.3 million during the same periods of 1993. Net sales
for 1994 increased over prior year levels by 20.3% for the third
quarter and 12.0% for the year-to-date. On a pro forma basis, assuming
the acquisition of Pilliod had occurred at the beginning of fiscal year
1993, 1994 net sales would have increased from prior year levels by
2.8% for the third quarter and decreased from prior year levels by 3.5%
for the year-to-date. The increase in the quarter's pro forma 1994 net
sales is attributed to sales increases in medium-priced upholstery,
lower-priced casegoods and ready-to-assemble furniture. The decrease
in the year-to-date pro forma 1994 net sales was primarily due to the
discontinuance of certain American of Martinsville residential
casegoods product lines, a reduction in export shipments of contract
furniture, and a decline in sales of lower-priced upholstery products.
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Cost of sales as a percentage of net sales decreased to 80.7% for
the third quarter of 1994 and 80.8% for the year-to-date, compared to
82.4% and 81.4%, respectively, in 1993. These decreases resulted in a
increase in the gross profit margins to 19.3% for the third quarter and
19.2% for the year to date, from 17.6% and 18.6%, respectively, for the
same periods of 1993. The 1994 gross margins were positively impacted
by decreases in sales discounts and allowances, Pilliod Furniture's
gross margin, and operating efficiencies generated by the Company's
capital investment program. However, 1994 gross margins have been
negatively impacted by increased prices for particleboard and medium-
density fiberboard. Additionally, 1993's third quarter gross margins
were negatively impacted by plant disruptions resulting from the
initiation of a redeployment of manufacturing assets between three of
LADD's casegoods operating companies, as well as by discounts
associated with the liquidation of discontinued American of
Martinsville residential casegoods product lines.
Selling, general and administrative (SG&A) expenses were 15.4% of
net sales for 1994's third quarter and 15.5% for the first nine months,
compared with 15.6% for both corresponding periods of 1993. The costs
associated with the accounts receivable securitization program
increased SG&A expenses as a percentage of net sales by 0.3% for the
third quarter of 1994 and by 0.2% for the 1994 year-to-date.
Other deductions were 1.8% of net sales for the third quarter of
1994 and 1.6% for the first nine months of 1994, compared to 1.1% and
1.0% for the same periods in 1993. The increase was primarily
attributable to higher interest expense due to the partial funding of
the $54.0 million Pilliod acquisition with long and short-term bank
borrowings - see Note 2, coupled with an increase in interest rates.
Additionally, amortization expense increased in the 1994 periods as a
result of the Pilliod acquisition.
The decrease in the Company's effective income tax rate from 43.8%
in 1993's first nine months to 30.0% in the first nine months of 1994
resulted from reductions in state income taxes derived from tax
planning strategies implemented in late 1993 and the partial
utilization of net operating and capital loss carryforwards.
Net earnings were $2.2 million, or $.10 per share, for the third
quarter of 1994, compared with $.4 million, or $.02 per share for the
same quarter of 1993. Nine-month net earnings were $6.6 million, or
$.29 per share for 1994, compared with $4.5 million, or $.20 per share,
for 1993.
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Liquidity and Capital Resources
The Company's current ratio at October 1, 1994 was 1.9 to 1 as
compared to 3.1 to 1 at January 1, 1994. Net working capital declined
to $92.4 million at October 1, 1994 from $123.0 million at January 1,
1994. These reductions were primarily attributable to an increase in
short-term bank borrowings of $25.6 million, the majority of which was
used to finance the Pilliod acquisition, and a decrease in trade
receivables resulting from the Company's accounts receivable
securitization program - see Notes 4, 5 and 6.
During the first nine months of 1994, the Company generated cash
from net earnings plus depreciation and amortization of $19.0 million
compared to $14.0 million in 1993. The cash generated in the first nine
months of 1994 and 1993 was utilized to partially fund working capital
needs.
During the first nine months of 1994, capital spending totaled
$25.8 million compared to $16.6 million during the same period in 1993.
Capital expenditures were funded from operations and borrowings under
the Company's long and short-term revolving credit lines. The capital
expenditures have been mainly directed towards enhancing productivity,
modernizing the Company's existing facilities, and complying with
regulatory requirements.
During the first nine months of 1994, the Company increased long-
term borrowings by $27.5 million. These incremental borrowings were
used to fund the Pilliod acquisition and the first nine month's capital
expenditures. The Company had outstanding long-term borrowings of
$125.8 million at October 1, 1994, representing 42.1% of total
capitalization, compared to $105.3 million or 37.9% of capitalization
at January 1, 1994. At October 1, 1994, the Company had $9.4 million
in unused short-term revolving bank credit lines.
On October 19, 1994, the Company entered into an amended and
restated credit agreement (the Amended Facility - see Note 6). The
Amended Facility consists of a $75.0 million five-year term loan and an
$115.0 million five-year revolving credit line. The Amended Facility
also provides the Company with increased financial flexibility and,
based upon current borrowing levels, almost $40.0 million of unused
debt capacity to fund future working capital needs and capital
expenditures. Additionally, the Amended Facility provides a lower rate
of interest which, based on current borrowing levels, will save the
Company more than $600,000 in annual interest expense.
On October 14, 1994 the Company's stock price declined significantly
below book value in response to a high volume of selling activity. As a
result of this event, the Board of Directors on October 27, 1994
authorized the repurchase of up to 1,000,000 shares of the Company's
common stock in the open market. The Company will, from time to time,
take advantage of opportunities to buy shares for corporate purposes at
prices deemed attractive for its shareholders. The Company believes
that cash flows from operating earnings and active balance sheet
management will be sufficient to fund the stock repurchase program and
does not intend to significantly increase the Company's debt levels.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Executive Employment Agreement between the
Company and Richard R. Allen dated October 28,
1994
10.2 Executive Employment Agreement between the
Company and Fred L. Schuermann, Jr. dated October
28, 1994
10.3 Executive Employment Agreement between the
Company and Gerald R. Grubbs dated October 28,
1994
(b) Reports on Form 8-K
None
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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 15, 1994 By: s/William S. Creekmuir
William S. Creekmuir
Senior Vice President
and Chief Financial Officer
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