Haverty Furniture(HVT_A) - 2019 Q1 - Quarterly Report

Filing Information Haverty Furniture Companies, Inc. filed a Form 10-Q for the quarterly period ended March 31, 2019 - Haverty Furniture Companies, Inc. filed a Form 10-Q for the quarterly period ended March 31, 2019[1][2] Registrant Details | Detail | Value | | :--- | :--- | | Registrant Name | HAVERTY FURNITURE COMPANIES, INC. | | State of Incorporation | Maryland | | IRS Employer ID No. | 58-0281900 | | Trading Symbols | HVT (Common Stock), HVTA (Class A Common Stock) | | Exchange | NYSE | | Filer Status | Accelerated filer | | Common Stock Outstanding (April 30, 2019) | 18,813,551 shares | | Class A Common Stock Outstanding (April 30, 2019) | 1,757,157 shares | PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining the company's business, accounting policies, financial instruments, and specific financial activities for the quarter ended March 31, 2019 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (March 31, 2019 vs. December 31, 2018) | (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $575,083 | $440,179 | | Total Liabilities | $293,157 | $165,550 | | Total Stockholders' Equity | $281,926 | $274,629 | | Key Changes: | | | | Right-of-use lease assets | $188,400 | — | | Property and equipment, net | $158,316 | $216,852 | | Current lease liabilities | $28,799 | — | | Noncurrent lease liabilities | $157,499 | — | | Lease obligations, less current portion | — | $46,785 | - The significant increase in total assets and liabilities is primarily due to the adoption of ASU 2016-02 (Leases), which required the recognition of right-of-use lease assets and corresponding lease liabilities on the balance sheet[7][15][17] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended March 31) | (In thousands, except per share data) | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $187,242 | $199,442 | | Gross profit | $103,083 | $108,907 | | Income before interest and income taxes | $4,376 | $8,928 | | Net income | $3,621 | $6,313 | | Comprehensive income | $3,630 | $6,338 | | Basic earnings per share (Common Stock) | $0.18 | $0.30 | | Basic earnings per share (Class A Common Stock) | $0.17 | $0.28 | | Diluted earnings per share (Common Stock) | $0.17 | $0.29 | | Diluted earnings per share (Class A Common Stock) | $0.17 | $0.28 | | Cash dividends per share (Common Stock) | $0.18 | $0.18 | | Cash dividends per share (Class A Common Stock) | $0.17 | $0.17 | - Net sales decreased by $12.2 million (6.1%) and net income decreased by $2.692 million (42.6%) in Q1 2019 compared to Q1 2018[8][46] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31) | (In thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,418 | $7,296 | | Net cash used in investing activities | $(1,509) | $(6,075) | | Net cash used in financing activities | $(4,218) | $(8,593) | | Decrease in cash, cash equivalents and restricted cash equivalents | $(309) | $(7,372) | | Cash, cash equivalents and restricted cash equivalents at end of period | $79,500 | $80,234 | - Net cash provided by operating activities decreased by $1.878 million in Q1 2019, primarily due to reduced net income[9][54] - Net cash used in investing activities decreased significantly by $4.566 million, mainly due to lower capital expenditures[9][55] - Net cash used in financing activities decreased by $4.375 million, largely due to the absence of common stock repurchases in 2019 compared to $3.5 million in 2018[9][55] Notes to Condensed Consolidated Financial Statements NOTE A – Business and Basis of Presentation Havertys operates as a retailer of residential furniture within a single reportable segment. The financial statements are unaudited and prepared in accordance with Form 10-Q instructions, relying on management estimates. A prior period cash flow statement was reclassified for the sale of property - Havertys is a retailer of residential furniture operating within a single reportable segment[10] - The cash flow statement for Q1 2018 was reclassified, reducing 'Other assets and liabilities' and 'Net cash provided by operating activities' by $998,000 and increasing 'Proceeds from sale of land, property and equipment' and 'Net cash used in investing activities' by the same amount[13] NOTE B - Recently Adopted Accounting Pronouncements The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, using the modified retrospective method without restating prior periods. This resulted in the recognition of right-of-use lease assets and lease liabilities on the balance sheet, with an immaterial impact on the consolidated statement of income and cash flows for the current period - ASU 2016-02 (Leases) was adopted effective January 1, 2019, requiring recognition of lease assets and liabilities for operating leases[15] Impact of ASU 2016-02 Adoption (January 1, 2019) | Item | Impact (in millions) | | :--- | :--- | | Derecognized Net Property and Equipment | $53.5 | | Derecognized Financing Obligations | $50.8 | | Derecognized Other Net Liabilities | $9.3 | | Derecognized Deferred Tax Assets | $2.3 | | Recognized Right-of-Use Lease Assets | $177.9 | | Recorded Lease Liabilities | $175.4 | | Net Adjustment to Equity | $6.8 (credit) | - The adoption had an immaterial impact on the consolidated statement of income and cash flows for the three-month period ended March 31, 2019[18] NOTE C – Stockholders' Equity This note details the changes in each component of stockholders' equity, including net income, dividends declared for both common and Class A common stock, restricted stock activities, and the cumulative effect adjustment from the adoption of ASU 2016-02 Changes in Stockholders' Equity (Three Months Ended March 31, 2019) | (in thousands) | Common Stock | Class A Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Balances at Dec 31, 2018 | $29,079 | $2,280 | $91,394 | $282,366 | $(1,465) | $(129,025) | $274,629 | | Net income | — | — | — | $3,621 | — | — | $3,621 | | Dividends declared (Common) | — | — | — | $(3,386) | — | — | $(3,386) | | Dividends declared (Class A) | — | — | — | $(299) | — | — | $(299) | | Restricted stock issuances | $34 | — | $(567) | — | — | — | $(533) | | Amortization of restricted stock | — | — | $1,061 | — | — | — | $1,061 | | Other comprehensive income | — | — | — | — | $9 | — | $9 | | Cumulative effect adjustment | — | — | — | $6,824 | — | — | $6,824 | | Balances at Mar 31, 2019 | $29,113 | $2,280 | $91,888 | $289,126 | $(1,456) | $(129,025) | $281,926 | NOTE D – Interim LIFO Calculations Interim LIFO calculations are based on management's estimates of inventory levels and inflation rates, which are subject to change based on final year-end valuations - Interim LIFO calculations are estimates and subject to change based on final year-end inventory valuations[22] NOTE E – Fair Value of Financial Instruments The fair values of short-term financial instruments approximate their carrying values. Assets and liabilities related to self-directed, non-qualified deferred compensation plans are valued using Level 1 inputs Deferred Compensation Plan Assets/Liabilities | (in millions) | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Deferred compensation plan assets | $7.1 | $6.4 | | Related liabilities | $7.1 | $6.4 | NOTE F – Credit Arrangement The Company maintains a $60.0 million revolving credit facility, secured by inventory and receivables, with specific covenants. As of March 31, 2019, the facility had $50.0 million in net availability and no outstanding borrowings - The Company has a $60.0 million revolving credit facility, secured by inventory, accounts receivable, cash, and other personal property[24] Credit Facility Status (March 31, 2019) | Item | Amount | | :--- | :--- | | Borrowing Base | $60.0 million | | Outstanding Letters of Credit | $0 | | Net Availability | $50.0 million | | Maturity Date | March 31, 2021 | NOTE G – Revenues Revenue is recognized upon delivery to the customer. The company disaggregates its net sales by merchandise category, showing a decrease in total net sales for the three months ended March 31, 2019, compared to the prior year - Revenue is recognized at delivery; the Company does not have a loyalty program or offer coupons for future purchases[26] Revenues Disaggregated by Source (Three Months Ended March 31) | (In thousands) | 2019 Net Sales | % of Net Sales (2019) | 2018 Net Sales | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | | Merchandise: | | | | | | Case Goods | $66,494 | 35.5% | $71,206 | 35.7% | | Upholstery | $73,031 | 39.0% | $81,798 | 41.0% | | Mattresses | $21,258 | 11.4% | $19,678 | 9.9% | | Accessories and Other | $26,459 | 14.1% | $26,760 | 13.4% | | Total Net Sales | $187,242 | 100.0% | $199,442 | 100.0% | NOTE H – Leases This note provides detailed information on the Company's operating leases, including recognized right-of-use assets and lease liabilities, weighted average lease terms and discount rates, future minimum lease payments, and components of lease expense following the adoption of ASU 2016-02 Operating Lease Assets and Liabilities (March 31, 2019) | (In thousands) | Amount | | :--- | :--- | | Right-of-use lease assets | $188,400 | | Current lease liabilities | $28,799 | | Non-current lease liabilities | $157,499 | | Total operating lease liabilities | $186,298 | Weighted Averages for Operating Leases (March 31, 2019) | Metric | Value | | :--- | :--- | | Weighted Average Remaining Lease Term | 7.53 years | | Weighted Average Discount Rate | 6.67% | Total Lease Expense (Three Months Ended March 31, 2019) | Component | Amount (in thousands) | | :--- | :--- | | Operating lease cost | $10,228 | | Short-term lease cost | $10 | | Variable lease cost | $1,531 | | Total lease expense | $11,769 | NOTE I – Other Income, net Other income for the three months ended March 31, 2018, included gains from real estate sales and insurance recoveries - Other income for Q1 2018 included approximately $0.9 million from real estate sales and insurance recoveries[33] NOTE J – Income Taxes The effective tax rate for the three months ended March 31, 2019, was 23.4%, a decrease from 25.4% in the prior year, primarily due to state income taxes and a tax benefit from vested stock awards Effective Tax Rates (Three Months Ended March 31) | Year | Effective Tax Rate | | :--- | :--- | | 2019 | 23.4% | | 2018 | 25.4% | NOTE K – Stock Based Compensation Plan This note summarizes the Company's stock-based compensation plan activity, including service-based and performance-based restricted stock awards, and stock-settled appreciation rights. Total compensation expense for Q1 2019 was $1.061 million, with $7.1 million in unvested compensation cost remaining Stock-Based Compensation Expense (Three Months Ended March 31) | Year | Amount (in thousands) | | :--- | :--- | | 2019 | $1,061 | | 2018 | $1,571 | - As of March 31, 2019, the total compensation cost related to unvested equity awards was approximately $7.1 million, expected to be recognized over a weighted-average period of 2.4 years[40] NOTE L – Earnings Per Share The Company reports earnings per share using the two-class method, with Common Stock having a preferential dividend rate. This note provides the detailed calculation of basic and diluted EPS for both Common Stock and Class A Common Stock - Common Stock has a preferential dividend rate of at least 105% of the dividend paid on Class A Common Stock[42] Earnings Per Share (Three Months Ended March 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Basic EPS (Common Stock) | $0.18 | $0.30 | | Basic EPS (Class A Common Stock) | $0.17 | $0.28 | | Diluted EPS (Common Stock) | $0.17 | $0.29 | | Diluted EPS (Class A Common Stock) | $0.17 | $0.28 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, liquidity, and capital resources. It details changes in net sales, gross profit, selling, general and administrative expenses, cash flow activities, and significant balance sheet movements, including the impact of new accounting standards and future store plans Net Sales Sales Performance (Q1 2019 vs. Q1 2018) | Metric | Q1 2019 | Change (vs. 2018) | Q1 2018 | | :--- | :--- | :--- | :--- | | Net Sales (Total) | $187.2 million | $(12.2) million (-6.1%) | $199.4 million | | Comp-Store Sales | | $(9.2) million (-4.7%) | | | Average Written Ticket | Up 6.9% | | | | Custom Order Upholstery Written Business | Grew 8.2% | | | Gross Profit Gross Profit Margin | Period | Gross Profit % | | :--- | :--- | | Q1 2019 | 55.1% | | Q1 2018 | 54.66% (108,907/199,442) | | Change | Up 44 basis points | | Expected Annual 2019 | ~54.6% | - Gross profit for Q1 2019 increased by 44 basis points compared to the prior year, despite negative impacts from promotions and markdowns in 2018[47] - The Company expects annual gross profit margins for 2019 to be approximately 54.6%, consistent with 2018[47] Selling, General and Administrative Expenses SG&A Expenses (Three Months Ended March 31) | (In thousands) | 2019 | % of Net Sales (2019) | 2018 | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | | Total SG&A | $98,879 | 52.8% | $101,004 | 50.6% | | Variable Expenses | $35,081 | 18.7% | $36,795 | 18.4% | | Fixed and Discretionary Expenses | $63,798 | 34.1% | $64,209 | 32.2% | - Total SG&A dollars decreased by $2.1 million in Q1 2019, driven by decreases in selling and delivery costs, partly offset by increased marketing and advertising[49] - Occupancy costs were down due to lower depreciation and changes from ASU 2016-02[49] - For the full year 2019, fixed and discretionary SG&A expenses are anticipated to be $258.0 million to $260.0 million (vs. $254.9 million in 2018), and variable costs are expected to be 18.1% of sales (vs. 18.3% in 2018)[51] Liquidity and Capital Resources - Primary cash requirements include working capital, contractual obligations, income taxes, and capital expenditures, funded primarily by cash generated from operations[52] - The Company has no funded debt and believes current funds and expected operations will be sufficient to meet obligations, dividends, stock repurchases, and capital projects[52] - As of March 31, 2019, the $60.0 million revolving credit facility had $50.0 million available, with no outstanding borrowings[53] Summary of Cash Activities Cash Flow Activities (Three Months Ended March 31) | Activity | 2019 (in millions) | 2018 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Operating Activities | $5.4 | $7.3 | Decreased $1.9M | | Investing Activities | $(1.5) | $(6.1) | Decreased $4.6M (less cash used) | | Financing Activities | $(4.2) | $(8.6) | Decreased $4.4M (less cash used) | - The decrease in operating cash flow was due to reduced net income and changes in other assets and liabilities[54] - The decrease in cash used in investing activities was primarily due to lower capital expenditures in 2019[55] - The decrease in cash used in financing activities was mainly due to the absence of common stock repurchases in 2019[55] Balance Sheet Changes for the Three Months Ended March 31, 2019 Key Balance Sheet Changes (March 31, 2019 vs. December 31, 2018) | Item | Change (in millions) | Primary Reason | | :--- | :--- | :--- | | Inventories | +$3.5 | In advance of Chinese New Year factory shutdown | | Property and equipment, net | -$58.5 | Transition adjustment for ASU 2016-02 (-$53.5M) | | Right-of-use lease assets | +$188.4 | Transition adjustment for ASU 2016-02 (+$177.9M) | | Customer deposits | +$5.0 | Typical increase in undelivered sales | | Accrued liabilities | -$7.8 | Typical payments for year-end accruals and elimination of reserves due to ASU 2016-02 | | Current lease liabilities | +$28.8 | Adoption of ASU 2016-02 | | Noncurrent lease liabilities | +$157.5 | Adoption of ASU 2016-02 | | Current lease obligations | -$4.0 | Adoption of ASU 2016-02 | | Noncurrent lease obligations | -$46.8 | Adoption of ASU 2016-02 | Store Plans and Capital Expenditures Planned Store Openings/Relocations (2019) | Location | Quarter | Category | | :--- | :--- | :--- | | Newnan, GA | Q3-19 | Opening | | St. Louis, MO | Q3-19 | New Market | | To be announced | Q4-19 | New Market | | Baton Rouge, LA | Q4-19 | Relocation | - These plans are expected to increase net selling space by approximately 2.0% in 2019[56] - Total capital expenditures are estimated to be $19.0 million in 2019[56] Off-Balance Sheet Arrangements - As of March 31, 2019, the Company had no off-balance sheet arrangements or obligations[57] Critical Accounting Estimates - There have been no significant changes in critical accounting estimates since the Company's 2018 Annual Report on Form 10-K[58] Forward-Looking Information This section serves as a safe harbor statement for forward-looking statements, outlining various factors that could cause actual future results to differ materially from projections, including economic conditions, housing market changes, competition, and merchandise costs - The report contains forward-looking statements protected by the Private Securities Litigation Reform Act of 1995[60] - Key factors that could cause future results to differ include changes in the economic environment, housing market, industry conditions, competition, consumer preferences, merchandise costs, energy costs, supplier relationships, tariffs, capital expenditures, and new product introductions[60] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company reported no material changes in its financial instruments and related market risks since its most recent annual report on Form 10-K - No material changes in financial instruments and their related market risks have occurred since the Company's most recent annual report on Form 10-K[61] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019. New internal controls were implemented to address the adoption of the new lease accounting standard (ASU 2016-02) - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[62] - New internal controls were implemented to adequately evaluate contracts and assess the impact of the new lease accounting standard (ASU 2016-02) on financial statements[63] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is cross-referenced to Note A of the condensed consolidated financial statements - Information on legal proceedings is described in Note A to the unaudited condensed consolidated financial statements[65] Item 1A. Risk Factors Readers are directed to the Company's Annual Report on Form 10-K for a comprehensive discussion of risk factors, with an acknowledgment that additional unknown risks may also exist - Risk factors are discussed in Part I, 'Item 1A. Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2018[66] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The board of directors has authorized management to repurchase common stock and Class A common stock. A new authorization of up to $15.0 million was approved on November 16, 2018, to be utilized after the remaining $1.3 million from a previous authorization - The board authorized management to purchase up to $15.0 million of common and Class A common stock on November 16, 2018, following the utilization of approximately $1.3 million from a previous authorization[67] Item 6. Exhibits This section lists all exhibits filed with or incorporated by reference into the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and XBRL financial information - Key exhibits include Articles of Amendment and Restatement of the Charter, By-laws, Certifications of CEO and CFO (31.1, 31.2, 32.1), and XBRL financial information (101)[69] SIGNATURES - The report was signed on May 6, 2019, by Clarence H. Smith (Chairman of the Board, President, and CEO) and Richard B. Hare (Executive Vice President and CFO)[73]