HAVERTY FURNITURE COMPANIES INC - Quarter Report: 2017 September (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2017

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromto

Commission file number:     1-14445

HAVERTY FURNITURE COMPANIES, INC.

(Exact name of registrant as specified in its charter)

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 ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐     No ☒

The numbers of shares outstanding of the registrant's two classes of $1 par value common stock as of October 31, 2017, were:  Common Stock – 19,423,144; Class A Common Stock – 1,796,296.

HAVERTY FURNITURE COMPANIES, INC.

INDEX

PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

See notes to these condensed consolidated financial statements.

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data – Unaudited)

See notes to these condensed consolidated financial statements.

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands – Unaudited)

See notes to these condensed consolidated financial statements.

HAVERTY FURNITURE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Haverty Furniture Companies, Inc. ("Havertys," "the Company," "we," "our," or "us") is a retailer of a broad line of residential furniture in the middle to upper-middle price ranges. We operate all of our stores using the Havertys brand and do not franchise our concept. We operate within a single reportable segment.  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 United States of America generally accepted accounting principles ("U.S. GAAP") for complete financial statements. The Company believes that the disclosures made are adequate to make the information not misleading.  The financial statements include the accounts of the Company and its wholly-owned subsidiary.  All significant intercompany accounts and transactions have been eliminated in consolidation. We believe all adjustments, normal and recurring in nature, considered necessary for a fair presentation have been included. We suggest that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying footnotes included in our latest Annual Report on Form 10-K.

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from those estimates.

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities.  We believe that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU's) to the FASB's Accounting Standards Codification (ASC). The Company considers the applicability and impact of all ASU's. Newly effective ASU's not noted herein were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

Share-based payments.  In March 2016, the FASB issued ASU 2016-09 which changes how companies account for certain aspects of share-based payments to employees.  Entities are now required to record all excess tax deficiencies and tax benefits as income tax expense or benefit in the income statement when the awards vest or are settled.  The change in treatment of excess tax benefits and tax deficiencies also impacts the computation of diluted earnings per share and the standard also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity. The standard allows for the repurchase of a greater number of an employee's shares for tax withholding purposes without triggering liability accounting and for entities to make a policy election to account for forfeitures as they occur. This ASU became effective for the Company beginning January 1, 2017, and its adoption had no material impact on our consolidated financial statements.  We have elected to recognize forfeitures as they occur.

Leases.  In February 2016, the FASB issued ASU 2016-02 which amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between previous U.S. GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. As a result, we will have to recognize a liability representing our lease payments and a right-of-use asset representing our right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for Havertys beginning with the first quarter 2019 and we expect to adopt using the modified retrospective method. We are assessing the

 

 

HAVERTY FURNITURE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

changes to processes and internal controls to meet the standard's reporting and disclosure requirements. For example, software has been evaluated that will assist in recognition of additional assets and liabilities to be included on the balance sheet related to operating leases with durations greater than twelve months, with certain allowable exceptions. We continue to evaluate the expected financial impact of this standard on our consolidated financial position and results of operations. 

Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Additional disclosures will be required to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts.

The FASB has issued several amendments to the revenue standard, including clarification on accounting for principal versus agent considerations (i.e., reporting gross versus net). These amendments do not change the core principle of the standard, but provide clarity and implementation guidance.

This standard is effective for Havertys beginning January 1, 2018 and will not have a material effect on Havertys' financial condition, results of operations or liquidity.  We sell home furnishings and recognize revenue at delivery and this will not change under the new standard. We have substantially completed our comprehensive implementation plan, including the implementation of new controls and processes designed to comply with ASU 2014-09.  We will use the modified retrospective (or cumulative-effect) adoption method and estimate the impact to retained earnings will be a reduction of less than $100,000.

Our insurance carrier requires us to collateralize a portion of our workers' compensation obligations. These escrowed funds are shown as restricted cash and cash equivalents on our consolidated balance sheets and are investments in money market funds held by an agent.  The changes in the balance are shown in investing activities on our consolidated statements of cash flows.  The annual agreement with our carrier governing these funds expires on December 31, 2017.

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on actual inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of inventory levels and inflation rates. Since these estimates may be affected by factors beyond management's control, interim results are subject to change based upon the final year-end LIFO inventory valuations.

The fair values of our cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and customer deposits approximate their carrying values due to their short-term nature. The assets related to our self-directed, non-qualified deferred compensation plans for certain executives and employees are valued using quoted market prices multiplied by the number of shares held, a Level 1 valuation technique. The assets related to our deferred compensation plans totaled approximately $5.7 million at September 30, 2017 and $4.4 million at December 31, 2016 and are included in other assets.  The related liabilities of the same amounts are included in other liabilities.

HAVERTY FURNITURE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

We have a $60.0 million revolving credit facility secured by our inventory, accounts receivable, cash, and certain other personal property.  Availability fluctuates based on a borrowing base calculation reduced by outstanding letters of credit.  Amounts available to borrow are based on the lesser of the borrowing base or the $60.0 million line amount, reduced by $6.0 million if a fixed charge coverage ratio test for the immediately preceding 12 months are not met.  The credit facility contains covenants that, among other things, limit our ability to incur certain types of debt or liens, pay dividends, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses.

The borrowing base was $48.4 million at September 30, 2017, there were no outstanding letters of credit, and the net availability was $42.4 million.  We have not had any borrowings under the facility, which matures March 31, 2021, since its origination in 2008.  

Our store in Lubbock, Texas sustained significant damage on December 27, 2015 from a blizzard.  We reduced the value of the property and its contents at December 31,2015 to zero and recorded an insurance recovery receivable.  In the second quarter of 2016 we opened a temporary location and began reconstruction of a new store.  We received $4.6 million in insurance proceeds during the first nine months of 2016 for the building and inventory destroyed and recorded a gain on insurance recovery of $2.5 million.  During 2017, we recorded an additional $1.4 million in gains for the insurance recovery on the building, business interruption and other expenses.  

Our store in Wichita, Kansas was closed in mid-July 2017 due to a rupture of a water pipe below the foundation and is expected to reopen in late November 2017.  We have received $0.4 million in insurance proceeds for the inventory destroyed and other expenses and we anticipate receiving additional amounts. 

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a year to date adjustment.

Our effective tax rate for the nine months ended September 30, 2017 and 2016 was 37.7% and 38.9%, respectively. The primary difference in the effective rate and the statutory rate is due to state income taxes and excess tax benefits of $0.2 million in 2017 from vested stock awards.

HAVERTY FURNITURE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As more fully discussed in Note 12 of the notes to the consolidated financial statements in our 2016 Annual Report on Form 10-K, we have awards outstanding for Common Stock under stock-based employee compensation plans.

The following table summarizes our award activity during the nine months ended September 30, 2017:

Grants of equity awards are made to certain officers and key employees under stockholder approved long-term incentive plans. The restrictions on most of the awards generally lapse annually, primarily over four year periods. During 2017, the Company granted approximately 63,000 awards for which the shares ultimately issued will be based upon the achievement of various performance measures. The restricted units earned under most of these awards vest after three years. The remaining grants have time-based vesting of one or four years. The compensation is being charged to selling, general and administrative expense over the respective grants' vesting periods, primarily on a straight-line basis.  Stock based compensation expense was approximately $3.0 million for the nine months ended September 30, 2017 and September 30, 2016. The aggregate intrinsic value of outstanding restricted common stock grants was $11.4 million at September 30, 2017. The aggregate intrinsic value of vested and outstanding stock-settled appreciation rights at September 30, 2017 was approximately $0.5 million.

As of September 30, 2017, the remaining unamortized compensation cost related to unvested equity awards was approximately $5.3 million and is expected to be recognized over a weighted-average period of 2.4 years.

HAVERTY FURNITURE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

We report our earnings per share using the two-class method.  The income per share for each class of common stock is calculated assuming 100% of our earnings are distributed as dividends to each class of common stock based on their contractual rights.

The Common Stock of the Company has a preferential dividend rate of at least 105% of the dividend paid on the Class A Common Stock. The Class A Common Stock, which has ten votes per share as opposed to one vote per share for the Common Stock (on all matters other than the election of directors), may be converted at any time on a one-for-one basis into Common Stock at the option of the holder of the Class A Common Stock.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Net Sales

Our sales are generated by customer purchases of home furnishings.  Revenue is recognized upon delivery to the customer.

Comparable-store or "comp-store" sales for the periods presented are sales from stores open throughout the period and the corresponding prior year period.  If a store expansion results in a 10% or greater increase in selling square footage, its sales are removed from the comparable store sales base until it has been open a full 12 months.

The following outlines our sales and comp-store sales increases and decreases for the periods indicated (dollars in millions, amounts and percentages may not always add to totals due to rounding):

Total written sales for the third quarter of 2017 were down 3.5% and written comparable store sales decreased 4.2% over the same period last year. During September, 55 of Havertys stores were closed for one or more days due to Hurricane Irma.  The negative impact on third quarter total written sales and written comparable store sales because of these closures is estimated at 1.2%.

Our average written ticket was up 0.5% and custom order upholstery sales grew 2.6% for the third quarter compared to the 2016 period.  For the nine months ended September 30, our average written ticket was up 2.0% and custom upholstery written business was up 4.0%.

Gross Profit

Gross profit for the third quarter of 2017 was 53.9%, up 20 basis points compared to the prior year period. Our execution on pricing and product mix and reduced product markdowns offset the higher inbound freight on imported products and negative LIFO impact.  There was a $0.5 million increase in the LIFO reserve during the third quarter of 2017 versus a $0.7 million decrease in 2017, a change of $1.2 million or 59 basis points.

Gross profit for the first nine months of 2017 was 54.3% compared to 53.6% for the same period of 2016.  The LIFO year-over-year change was $1.3 million or 21 basis points.

Our expectation for annual gross profit margins for the full year of 2017 is approximately 54.2%. Last year there was a change in the LIFO reserve that generated a positive impact in the second half of 2016.  Gross margins are expected to be approximately 15 to 25 basis points lower than the full year average due to inbound ocean freight increases and a related negative LIFO impact. We expect a negative year-over-year LIFO impact in the fourth quarter of 2017 of $1.3 to $1.5 million.

Substantially all our occupancy and home delivery costs are included in selling, general and administrative expenses as are a portion of our warehousing expenses. Accordingly, our gross profit may not be comparable to those entities that include these costs in cost of goods sold.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses are comprised of five categories: selling; occupancy; delivery and certain warehousing costs; advertising and marketing; and administrative.

Our SG&A costs as a percent of sales was 49.2% for the third quarter of 2017 and 48.1% for the same period in 2016.  Total SG&A dollars for the third quarter of 2017 were relatively flat compared to the prior year period.  Occupancy expense rose $1.0 million primarily due to increases in repairs and other costs associated with new stores and renovations. Advertising and marketing expenses were up $2.1 million in the third quarter of 2017 compared to the prior year period as our advertising plan shifted more spending into the third quarter.  Administrative costs were down $1.4 million primarily due to lower group medical expenses and incentive compensation costs. Warehouse and delivery were down $1.1 million as sales decreased for the period.  

Our SG&A costs as a percent of sales for the first nine months of the year were 49.5% for 2017 and 49.1% for 2016.  Total SG&A dollars increased $4.5 million for the nine months ended September 30, 2017 compared to the prior year period.  Our selling costs increased $0.8 million in 2017 over 2016 in step with higher sales and also for, additional staffing in our new stores, and increased bank card usage costs.  Occupancy expenses rose $2.9 million primarily due to increases in depreciation and repairs.  Our warehouse and delivery expense decreased $0.2 million in the first nine months of 2017 compared to the prior year period due partly to lower temporary personnel costs offset by delivery truck operating expenses.  Advertising and marketing costs as planned in the first nine months of 2017 were up $2.0 million compared to the prior year period.  Administrative costs declined $1.0 million for the first nine months of 2017 over the 2016 period due to lower group medical costs partly offset by higher compensation costs and technology expenses.

Our normal fixed and discretionary type expenses within SG&A costs for the third quarter of 2017 were $64.7 million and $63.3 million in 2016 and were $189.6 million and $185.7 million for the nine months ended September 30, 2017 and 2016, respectively. These costs are expected to be approximately $257.0 million for the full year 2017 versus the $249.9 million, for the same costs in 2016. The increase is largely due to depreciation and occupancy costs for new and relocated stores, overall compensation including staffing increases and inflation.  The variable type costs within SG&A for the first nine months of 2017 were 18.1% of sales, compared to 18.2% for the same period in 2016, and for the full year of 2017 are anticipated to be 18.2%, the same rate in 2016.

Liquidity and Capital Resources

Our primary cash requirements include working capital needs, contractual obligations, income tax obligations and capital expenditures.  We have funded these requirements primarily through cash generated from operations.  We have no funded debt and our lease obligations are primarily due to arrangements that are not considered capital leases but must be recorded on our balance sheets.  We believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient for the next 12 months to fund our primary obligations, dividends, stock repurchases and complete capital projects that we have underway or currently contemplate.

We also have a $60.0 million revolving credit facility.  Refer to Note F to the Notes to the Condensed Consolidated Financial Statements for additional information on our credit facility. The availability at September 30, 2017 was $42.4 million and there were no borrowed amounts outstanding.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Summary of Cash Activities

Our cash flows provided by operating activities totaled $48.7 million in the first nine months of 2017 compared to $47.2 million for the same period of 2016.  This increase was primarily due to increased net income and smaller increases in inventories and customer deposits, smaller decreases in accounts payable and accrued liabilities and decreases versus increases in other assets and liabilities. For additional information about the changes in our assets and liabilities refer to our Balance Sheet Changes discussion.

Our cash flows used in investing activities totaled $14.3 million in the first nine months of 2017 versus $11.0 million for the same period of 2016. This difference is primarily due to the maturities of commercial paper investments in 2016 partly offset by higher capital expenditures in 2016.

Financing activities used cash of $11.0 million in the first nine months of 2017 compared to $31.3 million for the same period of 2016. This difference is primarily due to the acquisition of $21.3 million of the Company's common stock in 2016.

Balance Sheet Changes for the Nine Months Ended September 30, 2017

Our balance sheet as of September 30, 2017, as compared to our balance sheet as of December 31, 2016, changed as follows:

·	decrease in accounts receivable of $1.7 million as fewer customers use Havertys' internal financing;

·	decrease in inventories of $2.4 million as stocking levels are higher at year end;

·	decrease in property and equipment of $7.0 million due primarily from a $5.2 million increase in accumulated depreciation; and

·	increase in customer deposits of $4.5 million as undelivered sales increased as is generally the case compared to year end.

Store Plans and Capital Expenditures

These plans combined with other changes should increase net selling space in 2017 by approximately 0.3%.  Our current plans for 2018 include opening two new stores and the completion of the expansion of our Western Distribution Center. These planned openings combined with expected store closures should keep net selling space in 2018 flat compared to 2017.  Total capital expenditures are estimated to be $28.0 million in 2017 and $18.0 million in 2018 depending on the timing of spending for new projects.

In addition to the above, the Company's Wichita, Kansas store was closed July 14, 2017 due to a rupture of a water pipe below the foundation.  The repairs are ongoing and this leased location is estimated to reopen in late November.

Off-Balance Sheet Arrangements

As of September 30, 2017 we had no off-balance sheet arrangements or obligations.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our annual report on Form 10-K for the year ended December 31, 2016. We had no significant changes in those critical accounting estimates since our last annual report.

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies and similar matters, and those that include the words "believes," "anticipates," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  For those statements, Havertys claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties.  The following important factors could cause future results to differ: changes in the economic environment; changes in the housing market; changes in industry conditions; competition; changes in consumer preferences and spending patterns; merchandise costs; energy costs; timing and level of capital expenditures; introduction of new products; rationalization of operations; and other risks identified in Havertys' SEC reports and public announcements.

There have been no material changes with respect to our financial instruments and their related market risks since the date of the Company's most recent annual report.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or future results.  The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The board of directors has authorized management, at its discretion, to purchase and retire limited amounts of our common stock and Class A common stock. A program was initially approved by the board on November 3, 1986 with subsequent authorizations made as to the number of shares to be purchased. On August 9, 2016, the board authorized management to purchase up to $10.0 million of common and Class A common stock after the balance of an immaterial amount from a previous authorization is utilized.  No shares of common stock or Class A common stock were repurchased during the nine months ended September 30, 2017.

(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). Unless otherwise indicated, the exhibit number of documents incorporated by reference corresponds to the exhibit number in the referenced documents.

 

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.