UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
780 Johnson Ferry Road, Suite 800, Atlanta, Georgia 30342
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 443-2900
(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. [x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). [x] Yes [ ] No
The numbers of shares outstanding of the registrant's two classes of
$1 par value common stock as of July 31, 2005 were: Common Stock -
18,391,637; Class A Common Stock - 4,306,021.
EXPLANATORY NOTE
Haverty Furniture Companies, Inc. is filing this Amendment No. 1 to
its Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
solely to correct the following Edgar conversion errors: Page 1 under
the June 30, 2005 column for "Notes payable to banks", page 2 under the
column for the Six Months Ended June 30, 2004 for "Net Sales", and on
page 18 under Part II, Item 4, Submission of Matters to a Vote of Security
Holders. With the exception of the foregoing, no other information in the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 has been
supplemented, updated or amended.
HAVERTY FURNITURE COMPANIES, INC.
INDEX
Page No.
PART FINANCIAL INFORMATION:
I.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004 1
Condensed Consolidated Statements of Income -
Six Months ended June 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash
Flows - 3
Six Months ended June 30, 2005 and 2004
Notes to Condensed Consolidated Financial 4
Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30 December 31
2005 2004
------------ -------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 861 $ 10,122
Auction rate securities -- 5,000
Accounts receivable 86,754 81,132
Inventories 110,359 110,812
Prepaid expenses 10,337 6,654
Deferred income taxes 2,113 2,249
Other current assets 4,213 14,453
------------ -------------
Total current assets 214,637 230,422
Accounts receivable, long-term 9,220 9,396
Property and equipment 210,322 205,037
Other assets 11,700 12,711
------------ -------------
$ 445,879 $ 457,566
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 11,350 $ -
Accounts payable 25,352 31,202
Customer deposits 26,111 24,040
Accrued liabilities 37,095 45,460
Current portion of long-term debt and
capital lease obligations 12,816 20,270
------------ -------------
Total current liabilities 112,724 120,972
Long-term debt and capital lease
obligations, less current portion 37,982 44,228
Other liabilities 19,662 20,108
------------ -------------
Total liabilities 170,368 185,308
Stockholders' Equity
Capital stock, par value $1 per share:
Preferred Stock, Authorized: 1,000 shares;
Issued: None
Common Stock, Authorized: 50,000 shares;
Issued: 2005 - 24,370;
2004 - 24,293 shares 24,370 24,293
Convertible Class A Common Stock,
Authorized: 15,000 shares;
Issued: 2005 - 4,830;
2004 - 4,840 shares 4,830 4,840
Additional paid-in capital 55,661 55,108
Long-term incentive plan deferred
compensation (2,360) (2,971)
Retained earnings 252,196 250,511
Accumulated other comprehensive loss (1,005) (1,295)
Less treasury stock at cost -
Common Stock (2005 - 5,932;
2004 - 5,937 shares) and Convertible
Class A Common Stock (2005 and
2004 - 522 shares) (58,181) (58,228)
------------ -------------
Total stockholders' equity 275,511 272,258
------------ -------------
$ 445,879 $ 457,566
=========== =========
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 Six Months Ended
June 30 June 30
--------------------- -------------------------
2005 2004 2005 2004
--------- ---------- ----------- ------------
Restated - Restated -
See Note B) See Note B)
Net sales $ 192,394 $ 179,614 $ 400,027 $ 369,915
Cost of goods sold 95,310 88,960 198,334 181,299
---------- ----------- ----------- -----------
Gross profit 97,084 90,654 201,693 188,616
Credit service charge 875 1,163 1,865 2,467
---------- ----------- ----------- -----------
Gross profit and other
revenue 97,959 91,817 203,558 191,083
Expenses:
Selling, general and
administrative 95,249 85,149 195,138 174,151
Interest 397 964 1,298 2,089
Provision for doubtful
accounts 311 198 517 329
Other expense (income), net 20 (264) (439) (853)
---------- ----------- ----------- -----------
95,977 86,047 196,514 175,716
Income before income taxes 1,982 5,770 7,044 15,367
Income taxes 673 2,124 2,561 5,675
---------- ----------- ----------- -----------
Net income $ 1,309 $ 3,646 $ 4,483 $ 9,692
========== =========== =========== ===========
Basic earnings per share:
Common Stock $0.06 $0.16 $0.20 $0.44
Class A Common Stock $0.05 $0.15 $0.19 $0.41
Diluted earnings per share:
Common Stock $0.06 $0.16 $0.20 $0.42
Class A Common Stock $0.05 $0.15 $0.19 $0.40
Weighted average shares -
basic:
Common Stock 18,431 18,221 18,403 18,154
Class A Common Stock 4,311 4,343 4,314 4,354
Weighted average shares -
assuming dilution:
Common Stock 22,913 23,048 22,956 23,116
Class A Common Stock 4,311 4,343 4,314 4,354
Cash dividends per share:
Common Stock $0.0625 $0.0625 $0.125 $0.125
Class A Common Stock $0.0575 $0.0575 $0.115 $0.115
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Six Months Ended June 30
-------------------------
2005 2004
------------ -----------
(Restated -
See Note B)
Cash Flows from Operating Activities:
Net income $ 4,483 $ 9,692
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 10,524 9,452
Provision for doubtful accounts 517 329
Gain on sale of property and
equipment 32 94
Other 830 126
Changes in operating assets and
liabilities:
Accounts receivable (5,963) 7,328
Inventories 453 (12,094)
Customer deposits 2,071 3,979
Other assets and liabilities 6,212 2,923
Accounts payable and accrued
liabilities (14,216) (16,231)
------------ -----------
Net cash provided by operating
activities 4,943 5,598
------------ -----------
Cash Flows from Investing Activities:
Capital expenditures (15,937) (10,835)
Purchases of auction rate securities -- (15,000)
Proceeds from sale of property and
equipment 96 911
Sales of auction rate securities 5,000 --
Other investing activities 1,209 2,196
------------ -----------
Net cash used in investing
activities (9,632) (22,728)
------------ -----------
Cash Flows from Financing Activities
Proceeds from borrowings under 334,350 --
revolving credit facilities
Payments of borrowings under revolving (323,000) --
credit facilities
------------ -----------
Net increase in borrowings under
revolving credit facilities 11,350 --
Payments on long-term debt and capital
lease obligations (13,700) (6,650)
Proceeds from exercise of stock options 576 1,792
Dividends paid (2,798) (2,768)
------------ -----------
Net cash used in financing
activities (4,572) ( 7,626)
------------ -----------
Decrease in cash and cash equivalents (9,261) (24,756)
Cash and cash equivalents at beginning of
the year
10,122 31,591
------------ -----------
Cash and cash equivalents at end of
period $ 861 $ 6,835
============ ===========
See notes to condensed consolidated financial statements.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
------------------------------
Haverty Furniture Companies, Inc. ("Havertys" or the "Company") is a
full-service home furnishings retailer. 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, 2004. As a
result of the lease adjustments discussed in Note B below, certain
information included in that Form 10-K was restated in Form 10-K/A,
which was filed with the Securities and Exchange Commission ("SEC")
on June 27, 2005. Certain prior-year amounts have been reclassified
to conform to the 2004 financial statement presentation.
NOTE B - Restatement of Previously Issued Condensed Consolidated
Financial Statements
--------------------------------------------------------------------
The Company recently reviewed its lease accounting and determined
that it was appropriate to restate its consolidated financial
statements for the fiscal years ended December 31, 2002 through
2004. These adjustments related to lease accounting matters,
including those discussed by the SEC in its February 7, 2005 letter
("SEC Letter") to the American Institute of Certified Public
Accountants ("AICPA"). In the SEC Letter, the SEC expressed its
views on the amortization of leasehold improvements, rent holidays
and landlord/tenant incentives.
In its earnings release for the year and quarter ended December
31, 2004, the Company first reported recording adjustments totaling
$0.4 million to adjust straight-line rent expense and to correct its
accounting for leases. As then discussed, it had been our policy
to depreciate our property and equipment, including assets on leased
properties, over the estimated useful lives of those assets. In
some cases, these assets on leased properties were depreciated over
a period of time that included both the initial term of the lease
and one or more option periods. However, in certain instances,
when calculating straight-line rent expense, the Company excluded
option periods which had been included for depreciation purposes.
In December 2004, the Company revised its computation of straight-
line rent to include certain option periods where failure to
exercise such options would result in an economic penalty. As a
result, the Company concluded that rent expense was cumulatively
understated by $0.4 million as of December 31, 2004, and as the
amount was immaterial, recorded the adjustment in the quarter then
ended.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to the issuance of the SEC letter and the additional
clarification from the SEC concerning the acceptable accounting
methods, we undertook an additional review of our accounting
policies relative to rent holidays. The adjustment described below
changes our accounting practices to expense straight-line rent from
the point at which the Company takes control and possession of a
leased site (generally at the beginning of construction).
Previously, the Company began straight-lining of rent at the
earlier of the dates actual rent payments commenced or the opening
of the store. The cumulative pre-tax adjustment of $2.8 million
reflects the correct treatment for rent holidays and the adjustment
for option periods noted above.
The Company corrected these errors through restatement of its
consolidated financial statements reported on Form 10-K for the
fiscal year ended December 31, 2004. The Company filed a Form 10-
K/A for the fiscal year ended December 31, 2004 on June 27, 2005.
The condensed consolidated balance sheet as of December 31, 2004
contained herein reflects all adjustments included in that Form 10-
K/A.
The impacts of these restatement adjustments on the condensed
consolidated statements of income are summarized below (in
thousands, except per share data):
For the Three Months Ended June 30, 2004
-----------------------------------------
Previously As
Income Statement Data Reported Adjustments Restated
----------------------- ---------- ----------- --------
Selling, general and
administrative expenses $ 84,946 $ 203 $ 85,149
Income before income taxes 5,973 (203) 5,770
Income taxes 2,228 (104) 2,124
--------- -------- --------
Net income $ 3,745 $ (99) $ 3,646
========= ======== ========
Earnings per share of Common
Stock:
Basic $0.17 $0.16
Diluted $0.16 $0.16
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the Six Months Ended June 30, 2004
--------------------------------------
Previously As
Income Statement Data Reported Adjustments Restated
--------------------- ---------- ----------- ----------
Selling, general and
administrative expenses $ 173,737 $ 414 $ 174,151
Income before income taxes 15,781 (414) 15,367
Income taxes 5,886 (211) 5,675
---------- -------- ----------
Net income $ 9,895 $(203) $ 9,692
========== ======== ==========
Earnings per share of Common
stock:
Basic $0.44 $0.44
Diluted $0.43 $0.42
The restatement adjustments did not affect total cash flows
provided by or used in operating, investing or financing activities
for the three or six months ended June 30, 2004.
NOTE C - Earnings Per Share
---------------------------
Effective for the quarter ended June 30, 2004, the Company began
reporting 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.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 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 will be 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 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 Six Months
June 30 Ended June 30
----------------- ---------------
2005 2004 2005 2004
------- ------ ------- -------
Common:
Weighted average share
outstanding 18,431 18,221 18,403 18,154
Assumed conversion of Class A
Common shares 4,311 4,343 4,314 4,354
Diluted options 171 484 239 608
-------- ------- ------- ------
Total weighed-average diluted
common shares 22,913 23,048 22,956 23,116
======== ======= ======= =======
NOTE D - Stock-Based Compensation
---------------------------------
At June 30, 2005, the Company had three stock-based employee
compensation plans under which awards have been made: a non-
compensatory employee stock purchase plan, a stock option plan and a
long-term incentive plan. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost for any
options is 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. Restricted stock
compensation is charged to expense over the vesting periods of the
grants. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation
(in thousands, except per share amounts):
Quarter Ended Six Months Ended
June 30 June 30
----------------- ------------------
2005 2004 2005 2004
------- -------- -------- -------
(Restated (Restated
See Note B) See Note B)
Net income, as reported $ 1,309 $ 3,646 $ 4,483 $ 9,692
Reported stock-based
compensation expense,
net of taxes 238 -- 446 --
Pro forma stock-based
employee compensation expense
net of tax (900) (696) (1,779) (1,365)
--------- --------- --------- ---------
Pro forma net income $ 647 $ 2,950 $ 3,150 $ 8,327
========= ========= ========= =========
Earnings per share:
As reported
Basic:
Common $0.06 $0.16 $0.20 $0.44
Class A $0.05 $0.15 $0.19 $0.41
Diluted:
Common $0.06 $0.16 $0.20 $0.42
Class A $0.05 $0.15 $0.19 $0.40
Pro Forma:
Basic:
Common $0.03 $0.13 $0.14 $0.37
Class A $0.03 $0.12 $0.13 $0.35
Diluted:
Common $0.03 $0.13 $0.14 $0.37
Class A $0.03 $0.12 $0.13 $0.35
NOTE E- 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 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.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F - Other (income) expense, net
------------------------------------
The Company includes in this line item 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." During the first quarter of 2005, the
Company received additional insurance proceeds of approximately $0.2
million from certain coverages for facilities damaged by hurricanes.
During the first quarter of 2004, the Company had a reduction in its
impairment reserve of approximately $0.5 million.
NOTE G - Comprehensive Income
-----------------------------
Total comprehensive income was comprised of the following (in
thousands):
Quarter Ended Six Months
June 30 Ended June 30
---------------- ---------------
2005 2004 2005 2004
------- ------- ------ ------
Net income $ 1,309 $ 3,646 $ 4,483 $ 9,692
Changes in derivatives,
net of applicable
income tax 145 145 290 290
-------- -------- -------- --------
Total comprehensive
income $ 1,454 $ 3,791 $ 4,773 $ 9,982
======== ======== ======== ========
NOTE H - Pension Plans
----------------------
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," to improve financial statement disclosures for defined
benefit plans. This standard requires that companies provide more
details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to
expanded annual disclosures, the Company is required to report the
various elements of its pension costs on a quarterly basis. SFAS
No. 132 (revised 2003) is effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15,
2003.
HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net pension cost included the following components (in thousands):
Quarter Ended Six Months
June 30 Ended June 30
--------------- ----------------
2005 2004 2005 2004
------- ------- ------- -------
Service cost-benefits
earned during the period $ 705 $ 639 $ 1,410 $ 1,278
Interest cost on projected
benefit obligations 814 782 1,628 1,564
Expected return on plan
assets (1,015) (980) (2,030) (1,960)
Amortization of prior
service costs 33 33 66 66
------- ------ -------- -------
Net pension cost $ 537 $ 474 $ 1,074 $ 948
======= ====== ======== =======
The Company disclosed in its financial statements for the year
ended December 31, 2004, a planned $3.5 million contribution to the
pension plan in 2005. No contributions were made to the plan in
the first six months of 2005, but $3.5 million is expected to be
contributed prior to December 31, 2005.
NOTE I - Accounting and Disclosure Changes
------------------------------------------
Accounts receivable balances resulting from certain credit
promotions have scheduled payment amounts which extend beyond one
year. Prior to June 30, 2004, the Company classified its accounts
receivable portfolio as a current asset in accordance with trade
practice. In the aggregate, and based on historical experience,
the receivables are collected in seven to eight months. Effective
June 30, 2004, for those credit promotions 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 June 30, 2005 and 2004, the accounts
receivable contractually due beyond one year from the respective
balance sheet dates totaled approximately $28.5 million and
$27.9 million, respectively.
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 federal
securities laws. 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 and the roll-out of our
distribution system. 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. Words such as "expects",
"anticipates", "intends", "plans", "believes", "estimates",
variations of such words and similar expressions are intended to
identify such forward-looking statements. 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. We
believe that these forward-looking statements are reasonable;
however, you should not place undue reliance on such statements.
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, whether caused
by war, strikes, tariff, politics or otherwise; 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:
2005 2004 2003
-------------------------------- -------------------------------- -------------------------------
Comp-Store Comp-Store Comp-Store
Net Sales Sales Net Sales Sales Net Sales Sales
------------------- ------------ ------------------- ------------ ------------------- ----------
% Increase % Increase % Increase % Increase % Increase % Increase
(decrease) (decrease) (decrease) (decrease) (decrease) (decrease)
Period Dollars over period over period Dollars over prior over prior Dollars over prior over prior
Ended (000)s period period (000)s period period (000)s period period
------ -------- ----------- ----------- --------- ---------- ----------- -------- ---------- ----------
Q1 207.6 9.1 4.7 190.3 8.5 4.0 175.4 0.2 (6.6)
Q2 192.4 7.1 2.3 179.6 6.5 2.6 168.6 2.3 (2.2)
Q3 - - - 197.4 1.1 (1.0) 195.4 11.2 6.1
Q4 - - - 216.8 5.6 3.0 205.3 8.9 5.7
----------------------------- -------------------------------- -------------------------------
Year 400.0 8.1 3.5 784.2 5.3 2.1 744.6 5.8 1.0
============================= ================================ ===============================
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Total sales increased $12.8 million or 7.1% and $30.1 million or
8.1% in the second quarter and the first six months of 2005,
respectively. Comparable store sales rose 2.3% or $4.1 million in
the second quarter and 3.5% or $13.0 million during the first six
months of 2005. The remaining $8.7 million and $17.1 million of
the increases in the second quarter and first six months of 2005,
respectively, were from new and otherwise non-comparable stores.
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.
Retail sales of big-ticket home goods were weak from mid 2002 to
mid 2003, which was widely reported to be due to consumer anxiety
about employment uncertainty, threats of war, war and geopolitical
unrest. There was also a lingering negative effect from lower
stock market values. Beginning in June 2003 we had positive comp-
store monthly sales results that continued throughout the remainder
of 2003 and through April 2004 (excluding November 2003 which was
0.4% negative). Sales in our Florida and Southeast markets during
August and September of 2004 were negatively impacted by record-
breaking severe weather from four hurricanes within a six-week
period. These lost sales were particularly significant because our
Florida stores normally produce approximately 23% of our total
sales. We do expect that the storm damage will continue to
generate some incremental sales through August of 2005 as damaged
furniture is replaced and related redecorating activity continues.
We believe that continued strong housing sales and low interest
rates are a positive factor for the industry, but consumer
confidence and further indications of a strengthening economy are
key to increased spending for big- ticket furniture items. Many
retailers have been advertising aggressive sales promotions 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, we have used some promotional pricing during traditional
sales events. Supplementing the pricing promotions, we also offer
free-interest and deferred payment financing promotions. During
the remainder of the year we expect to continue with this approach
of providing a selection of specially priced merchandise and
competitive financing promotions to increase traffic in our stores.
We will also be using additional advertising methods to reach our
target customers.
Our sales during the first six months of 2005 increased across all
of our major categories of furnishings, with casual dining,
recliners and sleeper sofas and bedding performing better than the
average. Our average price per item was up slightly and our
average sales transaction was modestly higher in the second quarter
over the prior year period. Net sales for each period by category
were as follows (in millions):
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- ----------------------------------
% of Net % of Net % of Net % of Net
2005 Sales 2004 Sales 2005 Sales 2004 Sales
------- --------- ------- -------- ------ -------- ------- --------
Upholstery $ 48.4 25.2% $ 44.2 24.6% $ 99.3 24.8% $ 92.1 24.9%
Bedroom 41.4 21.5 40.9 22.8 86.8 21.7 82.8 22.4
Formal Dining 13.7 7.1 14.0 7.8 28.7 7.2 28.5 7.7
Casual Dining 11.9 6.2 8.8 4.9 23.1 5.8 18.2 4.9
Recliners
and Sleeper 13.9 7.2 12.8 7.1 30.1 7.5 27.1 7.3
Sofas
Occasional 31.6 16.4 29.7 16.5 67.6 16.9 62.9 17.0
------ ------- ------- ------ ------ ------ ------- ------
Total
Furniture
Sales 160.9 83.6 150.4 83.7 335.6 83.9 311.6 84.2
------ ------- ------- ------ ------ ------ ------- ------
Bedding 18.0 9.4 17.7 9.9 36.9 9.2 34.1 9.2
Accessories
and Other 13.5 7.0 11.5 6.4 27.5 6.9 24.2 6.6
------ ------- ------- ------ ------ ------ ------- ------
Net Sales $192.4 100.0% $179.6 100.0% $400.0 100.0% $369.9 100.0%
====== ======= ======= ====== ====== ====== ======= ======
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Gross Profit
Cost of goods sold consists primarily of the purchase price of the
merchandise together with inbound freight costs. Our gross profit
is largely dependent upon merchandising capabilities, vendor
pricing and the mix of products sold. We have developed strong
relationships with our suppliers and believe that we receive
excellent pricing and superior service from our key vendors in
exchange for distribution of their products. 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 second quarter was flat compared to the prior
year period and up approximately 10 basis points on a sequential
basis over the first quarter of this year. During the first half
of 2005 we closed five local warehouses and our Florida regional
warehouse facility. This generated higher than normal markdowns
which, combined with pricing pressure on certain products, has
impacted gross profit margins by approximately 55 basis points as
compared to the six months ended June 30, 2004.
We expect to have improvement in the third and fourth quarter of 25
to 50 basis points over the 2004 gross profit margin level in those
periods due to several factors related to merchandise selection,
the consolidation of our distribution network and improved supply
chain management. We now have fewer pools of inventory, which
reduces product handling and damage resulting in fewer markdowns,
and a tighter supply chain, which reduces the level of closeouts
for discontinued merchandise.
Substantially all of our purchasing, receiving, warehousing
and distribution costs are included in selling, general and
administrative expenses. Accordingly our gross profit may not
be comparable to those entities that include these costs in cost of
goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses are comprised
of five categories: selling; occupancy; warehouse and delivery;
administrative; and advertising. Selling expenses are primarily
comprised of compensation of sales associates and sales support
staff and bank card charges. Occupancy costs include rents,
depreciation charges, insurance and property taxes, repairs and
maintenance expenses and utility costs. Warehouse and delivery costs
include personnel, fuel costs, and depreciation and rental charges
for equipment and rolling stock. Administrative expenses are
comprised of compensation costs for store management, information
systems, executive, finance, merchandising, real estate and human
resource departments, as well as retirement costs for all Havertys
employees. Advertising expenses are primarily media production
and space, direct mail costs and market research expenses.
Our SG&A costs in the second quarter were up 210 basis points as a
percent of sales on a comparable basis. Higher fixed costs were
not leveraged as sales in May and June did not meet planned levels.
Our distribution system is designed to support the expansion of
our business efficiently. However, the system is more
transportation oriented and rising fuel costs have an immediate
impact on profitability. Our operations team is carefully
evaluating cost saving opportunities to adjust deliveries to our
markets without negatively impacting our customer service. Demurrage
costs for the second quarter were $0.4 million, lower than the $0.6
million expense in the first quarter. These costs are incurred when
imported containers are not unloaded and returned to the port within
the required time period. We are working to reduce these charges
but we do not expect to eliminate them entirely, particularly as
carriers reduce their "free" turnaround time.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Our SG&A costs for the first half of 2005 were up 170 basis points
as a percent of sales on a comparable basis. Our operations were
affected by the last major phase of our distribution transition.
The overall impact from closing and consolidating six warehouses
into our new Florida Distribution Center was costly. The expenses
associated with operating duplicative facilities, moving, training
and severance costs were approximately $1.9 million. While this
transition has been difficult and demonstrably expensive in period
costs and human capital, we believe it is necessary. We are better
positioned to handle our growing share of the dynamic Florida
markets more efficiently and have improved our ability to add new
markets and stores in this state.
We also experienced increased costs during the first half related
to ongoing operations for insurance, utilities and professional
service fees. Insurance costs were up $1.0 million in the second
quarter and $1.9 million for the six months ended June 30, 2005
compared to the respective periods of 2004. The increases are
primarily in the areas of medical and workers' compensation.
Utilities have increased approximately 21% over the prior year for
the quarter and the six months ended June 30, 2005. The new
regulatory requirements and the cost of compliance with the
Sarbanes-Oxley Act contributed to a $0.2 million increase in the
second quarter and a $0.8 million increase for the first half of
2005 in professional service fees as compared to the 2004 periods.
Credit Service Charge Revenue and Allowance for Doubtful Accounts
Our credit service charge revenue has continued to decline as
customers choose credit promotions with no interest features. The
in-house financing program most frequently chosen by our customers
during the second quarter was a no interest offer requiring 20 to
23 equal monthly payments. This program and the similar 12-month
program generates very minor credit revenue, but helps us reduce
our interest expense and bad debts due to the faster payout
relative to our deferred payment in-house credit programs. 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
program offered through the third party provider is a deferred
payment for 12 to 18 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 longer-term no interest equal monthly payments offer which we
began in the first quarter of 2005 is currently the most popular of
all the credit programs offered. During the second quarter of
2005, the amounts financed under all credit programs as a percent
of sales was 38.7% as compared to 39.7% in the second quarter of
2004. 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):
Three Months Six Months
ended Ended
June 30 June 30
---------------- ----------------
2005 2004 2005 2004
------- ------- ------- -------
Credit Service Charge Revenue $ 875 $1,163 $1,865 $2,467
Amount Financed as a % of Sales
Havertys 23.3% 26.7% 23.0% 23.4%
Third-Party 15.4% 13.0% 16.3% 17.4%
-------- -------- ------- -------
38.7% 39.7% 39.3% 40.8%
% Financed by Havertys with
No Interest for 12 months 24.6% 37.1% 25.8% 48.9%
No Interest for > 12 months 54.2% 40.8% 52.2% 25.2%
No Interest < 12 months 9.6% 11.6% 10.2% 14.1%
Other 11.6% 10.5% 11.8% 11.8%
-------- -------- ------- -------
100.0% 100.0% 100.0% 100.0%
June 30
--------------------
2005 2004
-------- ---------
Accounts receivable $98,574 $93,697
Allowance for doubtful accounts 2,600 3,700
Allowance as a % of accounts
receivable 2.6% 3.9%
Our allowance for doubtful accounts as a percentage of the
receivables pool is lower in 2005 due to improvements in the
delinquency and problem category percentages from 2004. We believe
that the amounts we pay for the third party credit program are
justified compared to the increased costs associated with a larger
receivables portfolio and the collection risks of the more
promotional credit offers needed to remain competitive.
Balance Sheet Changes for the Six Months Ended June 30, 2005
Cash balances declined by approximately $9.3 million from December
31, 2004 to June 30, 2005 as we utilized cash balances and cash
generated from operations to make capital expenditures.
Accounts receivable increased approximately $6.0 million during the
first quarter due to the popularity of our no interest credit offer
requiring 20 to 23 equal monthly payments.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Other current assets declined by approximately $10.2 million as we
utilized cash held in escrow to acquire a property previously
financed under a capital lease, collected vendor rebates
receivables, and had a lower amount receivable at June 30, 2005
from our third-party customer credit provider.
Accounts payable decreased $5.9 million due lower purchases as
overall inventory was reduced during the second quarter and a
reduction in the level of inventory in transit.
Accrued liabilities declined by approximately $8.4 million due to
payments during the period for the 2004 bonus accrual, certain
property and sales taxes, and a group health insurance liability to
a prior provider.
Capital lease obligations declined as we elected to purchase a
property under a capital lease as previously discussed.
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 flows generated from operations provide us with a significant
source of liquidity. Cash provided by operations remained positive
at $4.9 million in spite of increases in accounts receivables and
reductions in accounts payable and accrued liabilities. Net income
was $4.5 million and depreciation and amortization was $10.5
million.
Cash flows used in investing activities of $9.6 million in the
first six months of 2005 were primarily for capital expenditures of
$15.9 million offset in part by the sales of auction rate
securities.
Cash flows used in financing activities were $4.6 million as we
borrowed a net $11.4 million under our revolving credit facilities
and repaid $13.7 million of debt and capital lease obligations and
paid $2.8 million in dividends.
Financings
In addition to term borrowings and capital leases, we have
revolving lines of credit available for general corporate purposes
and as interim financing for capital expenditures. These credit
facilities are syndicated with six commercial banks and are
comprised of two revolving lines totaling $80.0 million that
terminate in September 2005. We expect to renew these facilities
by early September with existing lenders and a five year term.
Borrowings under these facilities are unsecured and accrue interest
at LIBOR plus a spread that is based on a fixed-charge coverage
ratio. We had $11.4 million outstanding under these facilities at
June 30, 2005. We had letters of credit in the amount of $4.7
million outstanding at June 30, 2005 and these amounts are
considered part of the facilities usage. We had an unused capacity
of $63.9 million at June 30, 2005.
Store Expansion and Capital Expenditures
We have entered several new markets and made continued improvements
and relocations of our store base. Our total selling square
footage increases per year have historically averaged in the 5% to
6% range.
We are expecting to add approximately 1.9% retail square footage
during 2005. We opened an additional store in the Metro DC market
during the first quarter. We also plan to open a new store in the
new markets of Indianapolis, Indiana and Columbus, Ohio in the
fourth quarter. Three of our best stores are also being physically
expanded during 2005. Two older stores in Shreveport, Louisiana
will be replaced by a single, better located showroom in the fourth
quarter. We will also be closing one store in Austin, Texas in the
fourth quarter and have not identified its replacement site.
We plan to open approximately five stores in 2006. These include a
store in Ft. Lauderdale, Florida; a location near Stonecrest Mall,
east of Atlanta; a relocated store in South Dallas, Texas in the
Cedar Hill area; and two additional stores in Florida. We are
aggressively evaluating other possible new locations which we
believe will become available in existing retail sites in the near
term. Our strategy is to pursue opportunities in denser markets
which we can serve using our existing distribution.
Our planned expenditures for 2005 are $40.0 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 2005 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
The Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the
President and Chief Executive Officer of the Company and the Chief
Financial Officer of the Company, of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of
the period covered by this report.
Based upon that evaluation, the President and Chief Executive
Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
As disclosed in our Form 10-K/A filed on June 27, 2005, we made
changes in our internal control over financial reporting with
respect to lease accounting. We have assigned specific financial
accounting and reporting personnel together with our real estate
department to review all new leases during each quarterly period.
Specifically, these individuals, subject to a second level review,
are responsible for the following with respect to each of our new
leases:
* A consistent lease period (generally, the initial
non-cancelable lease term plus certain option periods where
failure to exercise such options would result in an
economic penalty) is used when calculating depreciation of
leasehold improvements and in determining straight-line rent
expense and classification of leases as either operating or
capital; and
* Commencement of the lease term and straight-line rent expense
is calculated based on the date when the Company takes
possession and the right to control use of the leased premises.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2005 Annual Meeting of Stockholders of the Company was held on
May 16, 2005. There were two proposals on the ballot.
Proposal 1: All nine incumbent directors nominated were elected by
the holders of Class A Common Stock of the Company to a one
year term with the following votes:
NOMINEE FOR WITHHELD
---------------------- ---------------- ----------------
Clarence H. Ridley 4,018,688 0
Clarence H. Smith 4,018,688 0
Rawson Haverty, Jr. 4,018,688 0
Frank S. McGaughey, III 4,018,688 0
John T. Glover 4,018,288 400
Mylle H. Mangum 4,018,688 0
Fred L. Schuermann 4,018,688 0
Al Trujillo 4,018,688 0
Ben M Haverty 4,018,688 0
Proposal 2: All three incumbent directors nominated were elected by
the holders of Common Stock of the Company to a one year
term with the following votes:
NOMINEE FOR WITHHELD
---------------------- ---------------- -----------------
L. Phillip Humann 13,974,196 3,066,804
Vicki R. Palmer 16,074,644 966,355
Terrence F. McGuirk 16,194,184 846,815
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 marked 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).
+10.5 Employee Stock Purchase Plan, as amended and
restated as of October 29, 1999 (Exhibit 10.7 to
our 2000 Form 10-K); Amendment No. 1 to the
Employee Stock Purchase Plan (Exhibit 10.2 to our
Registration Statement on Form S-8; File No. 333-
66010).
+10.5.1 Amendment to the Employee Stock Purchase Plan
effective as of July 1, 2005 (Exhibit 10.5.1 to our
2005 2nd Quarter Form 10-Q).
+10.7 Amended and Restated Directors Deferred
Compensation Plan effective as of January 1, 2005
(Exhibit 10.7 to our 2005 2nd Quarter Form 10-Q).
*31.1 Certification of Chief Executive Officer pursuant
to sec. 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant
to sec. 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of Chief Executive Officer and the
Chief Financial Officer pursuant to 18 U.S.C. sec
1350, as adopted, pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.
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: August 12, 2005 By: /s/ Jenny Hill Parker
---------------------------
Jenny Hill Parker
Vice President and
Chief Executive Officer