10-K 1 hvt10k2013.htm hvt10k2013.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
 
 

 [x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
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:                                           1-1445

HAVERTY FURNITURE COMPANIES, INC.


Maryland
58-0281900
(State of Incorporation)
(IRS Employer Identification Number)
   
780 Johnson Ferry Road, Suite 800
Atlanta, Georgia
 
30342
(Address of principal executive offices)
(Zip Code)
   
(404) 443-2900
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class
Name of each exchange on which registered
Common Stock ($1.00 Par Value)
New York Stock Exchange, Inc.
Class A Common Stock ($1.00 Par Value)
New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:  None.


 
 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No ¨

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  x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer   o
Accelerated filer                       x
Non-accelerated filer   (Do not check if a smaller reporting company)
Smaller reporting company     o
 

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

As of June 30, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $490,283,777 (based on the closing sale prices of the registrant’s two classes of common stock as reported by the New York Stock Exchange).

There were 20,132,901 shares of common stock and 2,382,324 shares of Class A common stock, each with a par value of $1.00 per share outstanding at February 28, 2014.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 2014 are incorporated by reference in Part III.

 
 

 

HAVERTY FURNITURE COMPANIES, INC.

Annual Report on Form 10-K for the year ended December 31, 2013

Table of Contents

     
Page
   
PART I
 
       
Item 1.
 
Business
2
Item 1A.
 
Risk Factors
6
Item 1B.
 
Unresolved Staff Comments
10
Item 2.
 
Properties
10
Item 3.
 
Legal Proceedings
11
Item 4.
 
Mine Safety Disclosures
11
       
   
PART II
 
       
Item 5.
 
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
12
Item 6.
 
Selected Financial Data
14
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
25
Item 8.
 
Financial Statements and Supplementary Data
25
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
25
Item 9A.
 
Controls and Procedures
25
Item 9B.
 
Other Information
28
       
   
PART III
 
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
28
Item 11.
 
Executive Compensation
29
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
29
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
29
Item 14.
 
Principal Accounting Fees and Services
29
       
   
PART IV
 
       
Item 15.
 
Exhibits, Financial Statement Schedules
29


 
 

 

FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition.  These statements are within the meaning of Section 27A of the Securities Act of 1933 and Section 21F of the Securities Exchange Act of 1934.

Forward-looking statements include, but are not limited to:
  • projections of sales or comparable store sales, gross profit, SG&A expenses, capital expenditures or other financial measures;
  • descriptions of anticipated plans or objectives of our management for operations or products;
  • forecasts of performance; and
  • assumptions regarding any of the foregoing.
Because these statements involve anticipated events or conditions, forward-looking statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” or similar expressions.

These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.

Although we believe that our plans, intentions and expectations as reflected in or suggested by any forward-looking statements are reasonable, they are not guarantees.  Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.

Discussed elsewhere in further detail in this report are some important risks, uncertainties and
contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report.

Forward-looking statements are only as of the date they are made and they might not be updated to reflect changes as they occur after the forward-looking statements are made.  We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission, or SEC, and you should not place undue reliance on those statements.

We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


 
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ITEM 1.       BUSINESS
 
Unless otherwise indicated by the context, we use the terms “Havertys," "we," "our," or "us" when referring to the consolidated operations of Haverty Furniture Companies, Inc.

Overview

Havertys is a specialty retailer of residential furniture and accessories. Our founder, J.J. Haverty began the business in 1885 in Atlanta, Georgia with one store and made deliveries using horse-drawn wagons. The Company grew to 18 stores and accessed additional capital for growth through its initial public offering in October 1929.

Havertys has grown to over 100 stores in 16 states in the Southern and Midwest regions. All of our retail locations are operated using the Havertys name and we do not franchise our stores. Our customers are generally college educated women in middle to upper-middle income households. Our brand recognition is very high in the markets we serve and consumer surveys indicate Havertys is associated with a high level of quality, fashion, value and service.

Merchandise and Revenues

We develop our merchandise selection with the tastes of the diverse “on trend” consumer in mind.  A wide range of styles from traditional to contemporary are in our core assortment and most of the furniture merchandise we carry bears the Havertys brand.  We also tailor our product offerings to the needs and tastes of the local markets we serve emphasizing more “coastal,” “western” or “urban” looks as appropriate.  Our custom upholstery programs and eclectic looks are an important part of our product mix and allow the on trend consumer more self-expression.

We have avoided offering lower quality, promotional price-driven merchandise favored by many regional and national chains, which we believe would devalue the Havertys brand with the consumer.  We carry nationally well-known mattress product lines such as Sealy®, Serta®, Stearns & Foster®, and
Tempur-Pedic®.

The following table sets forth the approximate percentage contributions by product and service to our gross revenues for the past three years:

   
Year ended December 31,
 
   
2013
   
2012
   
2011
 
Merchandise:
                 
Case Goods
                 
Bedroom Furniture
    18.3 %     19.4 %     19.7 %
Dining Room Furniture
    11.1       10.7       11.0  
Occasional
    11.0       11.0       11.7  
      40.4       41.1       42.4  
Upholstery
    38.8       38.2       36.6  
Mattresses
    10.8       11.5       11.9  
Accessories and Other (1)
    9.9       9.2       9.0  
Credit Service Charges
    0.1       0.0       0.1  
      100.0 %     100.0 %     100.0 %
 
    (1)           Includes delivery charges and product protection.

 
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Our customers use varying methods to purchase or finance their sales.  As an added convenience to our customers, we offer financing by a third-party finance company or through an internal revolving charge credit plan.  Sales financed by the third-party provider are not Havertys’ receivables; accordingly, we do not have any credit risk or servicing responsibility for these accounts, and there is no credit or collection recourse to Havertys. The most popular programs offered through the third-party provider for 2013 were no interest offers requiring monthly payments over periods of 18 to 36 months. The fees we pay to the third-party are included in SG&A expense.  We also maintain a small in-house financing program for our customers with the offer most frequently chosen carrying no interest for 12 months and requiring equal monthly payments. This program generates very minor credit revenue and is for credit worthy customers who prefer financing with the retailer directly or who are not able to quickly establish sufficient credit with other providers on comparable terms.

The following summarizes the different purchasing methods used as a percent of amount due from customers including sales tax:

   
Year Ended December 31,
 
   
2013
   
2012
   
2011
 
Cash or check
    9.5 %     9.3 %     10.9 %
Credit or debit cards
    54.7       54.2       53.8  
Third-party financed
    32.2       31.9       30.1  
Havertys financed
    3.6       4.6       5.2  
      100.0 %     100.0 %     100.0 %

Stores

As of December 31, 2013, we operated 119 stores serving 80 cities in 16 states with approximately 4.3 million retail square feet.  We strive to have our stores reflect the distinctive style and comfort consumers expect to find when purchasing their home furnishings.  The store’s curb appeal is important to the type of middle to upper-middle income consumer that we target and our use of classical facades and attractive landscaping complements the quality and style of our merchandise.  Interior details are also important for a pleasant and inviting shopping experience.  We have been refreshing our locations with improved merchandise layouts, new paint colors and in-store signage.  This effort, which we named “Bright Inspirations,” began in late 2010 and will be completed in 2015.  Elements of the concept include creating impact zones, merchandise stories and destination departments.  We reduced the number of items on display to open up shopping space and disciplined merchandise display creates uniformity of presentations in-store, on-line and in our advertising.

Our stores range in size from 19,000 to 66,000 selling square feet with the average being approximately 35,000 square feet.  We currently are considering a number of available “empty boxes” and new construction opportunities in existing or new markets within our distribution footprint.  We are also evaluating our existing stores for expansion, relocation or closure.  We expect a net increase of approximately 1.8% in our retail square footage in 2014.

Internet and Social Media

Our goal is to engage the customer where they are.  Since our target customers spend a great deal of time on-line and with social media, we strive to communicate with them in that space.

Our website has proven to be useful in reaching the growing number of consumers that use the internet to pre-shop before going to a store.  The site also provides our sales associates a tool to further engage the customer while she is in the store and extend her shopping experience when she returns home.  We limit on-line sales of our furniture to within our delivery network, and accessories to the continental United States.  We believe that a direct-to-customer business complements our retail store operations by building brand awareness and is an effective advertising vehicle.
 
 
 
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Our website features a variety of shopping tools including customized merchandise views, room planners and delivery availability.  We also have a large number of product reviews written by our customers which are important to shoppers.  Our site allows consumers to develop “wish lists,” place orders on-line and set delivery of their purchases.   Features for in-store or web post-purchases include “follow the truck” for deliveries and other customer service opportunities.

Our website received approximately 6.5 million unique visitors during 2013.  The “ratings and reviews” portion of our site has over 69,000 customer comments on their product purchases and the “follow the truck” and delivery confirmation feature was used by one million customers in 2013.    Although sales placed via our website are minor, sales dollars increased 11.1% in 2013 compared to 2012.

Havertys uses a multifaceted approach to Social Media.  Home fashion oriented blogs and sites like Pinterest are used to engage consumers in the “inspiration” stage.  Other sites like Facebook and Twitter are more focused on consumers moving to the “evaluation” phase.  These are also channels for post-conversion engagement to build loyalty. Most interactions are centered around home fashion ideas and inspiration.  Some customer issues do arise and we work to take care of the customer and hopefully have them acknowledge that in social media.

Suppliers

We have developed strong relationships with our suppliers and believe that we receive excellent pricing and service from our key vendors due to the volume and reliability of our purchase commitments.  We buy our merchandise from numerous foreign and domestic manufacturers and importers, the largest ten of which accounted for approximately 56% of our purchasing spending during 2013.   Almost all of our wood products, or “case goods,” are generally imported from Asia.  Upholstered items are largely produced domestically, with the exception of our leather products which are primarily imported from Asia or Mexico.

We purchase our furniture merchandise produced in Asia through agents representing manufacturers and direct from manufacturers.  We also have developed merchandise (“direct imports”) working with a variety of furniture designers.  Our team selects a manufacturer and dedicated quality control specialists are on-site during production to ensure the items meet our specifications.  Approximately 17% of our furniture merchandise sales in 2013 were generated by our direct imports.

Supply Chain and Distribution

The longer lead times required for deliveries from overseas factories and the production of merchandise exclusively for Havertys makes it imperative for us to have both warehousing capabilities and effective supply chain control.  Our merchandising team provides input to the ordering process in an effort to maintain overall inventory levels within an appropriate range and reduce the amount of written sales awaiting product delivery.  We use real-time information to closely follow our import orders from the manufacturing plant through each stage of transit and using this data can more accurately set customer delivery dates prior to receipt of product.
 

 
 
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Our distribution system uses a combination of three distribution centers (DCs), four home delivery centers (HDCs), and five local market cross-docks.  In addition to receiving both domestic product and containers of imported merchandise, the DCs are designed to shuttle prepped merchandise up to 250 miles for next day home deliveries, and serve HDCs and cross-docks within a 500-mile radius.  The HDCs provide service to markets within an additional 200 miles.  A warehousing management system using radio frequency scanners tracks each piece of inventory in real time and allows for random storage in the warehouse and efficient scheduling and changing of the workflow.  The implementation of operating standards in our warehouse and delivery functions, and the use of technology, provide measurements for determining staffing needs and increasing productivity.  We use Havertys employees for executing home delivery, and branded this service “Top Drawer Delivery,” an important function serving as the last contact with our customers in the purchase process.  We believe that our distribution and delivery system is the best in the retail furniture industry and provides us with a significant competitive advantage
 

Competition

The retail sale of home furnishings is a highly fragmented and competitive business. The degree and sources of competition vary by geographic area. We compete with numerous individual retail furniture stores as well as chains and certain department stores. Department stores benefit competitively from more established name recognition in specific markets, a larger customer base due to their non-furnishings product lines and proprietary credit cards. Furniture manufacturers have also opened their own dedicated retail stores in an effort to control and protect the distribution prospects of their branded merchandise.

We believe Havertys is uniquely positioned in the marketplace, with a targeted mix of merchandise that appeals to customers who are somewhat more affluent than those of competitive price-oriented furniture store chains. Our ability to make prompt delivery of orders through maintenance of inventory, the expansion of our custom order capabilities and tailoring merchandise to customers’ desires on a local market basis are we believe significant competitive advantages. We believe our on-line presence provides a seamless omni-channel approach that many of our competitors do not have or can not replicate.  We also consider our experienced sales personnel and the addition of in-home designers as important factors in our competitive success.

Employees

As of December 31, 2013, we had 3,266 employees: 1,937 in individual retail store operations, 173 in our corporate and credit operations, 56 in our customer-service call centers, and 1,100 in our warehouse and delivery points.  None of our employees is a party to any union contract.

Trademarks and Domain Names

We have registered our various logos, trademarks and service marks.   We believe that our trademark position is adequately protected in all markets in which we do business.   In addition, we have registered and maintain numerous internet domain names including “havertys.com.”  Collectively, the trademarks, service marks and domain names that we hold are of material importance to us.
 
 
 
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Governmental Regulation

Our operations are required to meet federal, state and local regulatory standards in the areas of safety, health and environmental pollution controls. Historically, compliance with these standards has not had a material adverse effect on our operations. We believe that our facilities are in compliance, in all material
respects, with applicable federal, state and local laws and regulations concerned with safety, health and environmental protection.

The products we sell are subject to federal regulatory standards including, but not limited to, those outlined in the Consumer Product Safety Improvement Act.  We have contracts with the third parties that supply our merchandise that require their products be in compliance with these standards.  We believe that the items we sell are in substantial compliance with the regulatory standards governing such products.

The extension of credit to consumers is a highly regulated area of our business. Numerous federal and state laws impose disclosure and other requirements on the origination, servicing and enforcement of credit accounts. These laws include, but are not limited to, the federal Truth in Lending Act, Fair and Accurate Credit Transactions Act, Gramm-Leach-Biley Act, Equal Credit Opportunity Act, Credit CARD Act, and Federal Trade Commission Act. State laws impose limitations on the maximum amount of finance charges that we can charge and also impose other restrictions on consumer creditors, such as us, including restrictions on collection and enforcement. We routinely review our contracts and procedures to ensure compliance with applicable consumer credit laws. Failure on our part to comply with applicable laws could expose us to substantial penalties and claims for damages and, in certain circumstances, may require us to refund finance charges already paid and to forego finance charges not yet paid under non-complying contracts. We believe that we are in substantial compliance with all applicable federal and state consumer credit and collections laws.

Available Information
 
Filings with the SEC
 
As a public company, we regularly file reports and proxy statements with the Securities and Exchange Commission. These reports are available on our website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Our internet address is www.havertys.com and contains, among other things, our annual report on Form 10-K, proxy statement, quarterly reports on Form 10-Q and current reports on Form 8-K.  These reports are reached via the “Investors” tab on the home page and then “SEC filings.”
 
The information on the website listed above is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document.


ITEM 1A. RISK FACTORS
 
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement in this annual report on Form 10-K or elsewhere. The following information should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), and the consolidated financial statements and related notes in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.


 
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We routinely encounter and address risks, some of which will cause our future results to be different – sometimes materially different – than we presently anticipate. The following factors, as well as others described elsewhere in this report or in our other filings with the SEC, that could materially affect our business, financial condition or operating results should be carefully considered.  Below, we describe certain important operational and strategic risks and uncertainties, but they are not the only risks we face. Our reactions to material future developments, as well as our competitors’ reactions to those developments, may also impact our business operations or financial results.  If any of the following risks actually occur, our business, financial condition or operating results may be adversely affected.

Changes in economic conditions could adversely affect demand for our products.
 
A large portion of our sales represent discretionary spending by our customers. Demand for our products is generally affected by a number of economic factors including, but not limited to: interest rates, housing starts, sales of new and existing homes, housing values, the level of mortgage refinancing, consumer confidence, debt levels and retail trends. Declining stock market values, rising food and energy costs, and higher personal taxes adversely affect demand. A decline in economic activity and conditions in the markets in which we operate would adversely affect our financial condition and results of operations.

We face significant competition from national, regional and local retailers of home furnishings.
 
The retail market for home furnishings is highly fragmented and intensely competitive. We currently compete against a diverse group of retailers, including national department stores, regional or independent specialty stores, electronics and appliance retailers with limited furniture products, and dedicated franchises of furniture manufacturers. National mass merchants such as COSTCO also have limited product offerings. We also compete with retailers that market products through store catalogs and the Internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including aggressive advertising, pricing and marketing, extension of credit to customers on terms more favorable than we offer, and expansion by our existing competitors or entry by new competitors into markets where we currently operate.

Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.

If we fail to anticipate changes in consumer preferences, our sales may decline.
 
Our products must appeal to our target consumers whose preferences cannot be predicted with certainty and are subject to change. Our success depends upon our ability to anticipate and respond in a timely manner to fashion trends relating to home furnishings. If we fail to identify and respond to these changes, our sales of these products may decline. In addition, we often make commitments to purchase products from our vendors in advance of proposed delivery dates. Significant deviation from the projected demand for products that we sell may have an adverse effect on our results of operations and financial condition, either from lost sales or lower margins due to the need to reduce prices to dispose of excess inventory.

We import a substantial portion of our merchandise from foreign sources. Changes in exchange rates or tariffs could impact the price we pay for these goods, resulting in potentially higher retail prices and/or lower gross profit on these goods.
 
The product costs of our furniture purchases for goods not produced domestically have averaged approximately 57% over the past three years.  All of our purchases are denominated in U.S. dollars. As exchange rates between the U.S. dollar and certain other currencies become unfavorable, the likelihood of

 
7

 

 
price increases from our vendors increases. Some of the products we purchase are also subject to tariffs. If tariffs are imposed on additional products or the tariff rates are increased our vendors may increase their prices. Such price increases, if they occur, could have one or more of the following impacts:
  • we could be forced to raise retail prices so high that we are unable to sell the products at current unit volumes;
  • if we are unable to raise retail prices commensurately with the cost increases, gross profit as recognized under our LIFO inventory accounting method could be negatively impacted; or
  • we may be forced to find alternative sources of comparable product, which may be more expensive than the current product, of lower quality, or the vendor may be unable to meet our requirements for quality, quantities, delivery schedules or other key terms.
Significant fluctuations and volatility in the cost of raw materials and components could adversely affect our profits.
 
The primary materials our vendors use to produce and manufacture our products are various woods and wood products, resin, steel, leather, cotton, and certain oil based products. On a global and regional basis, the sources and prices of those materials and components are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate, and other unforeseen circumstances. Significant increases in these and other costs in the future could materially affect our vendors’ costs and our profits as discussed above.

We are dependent upon the ability of our third-party producers, many of whom are located in foreign countries, to meet our requirements; any failures by these producers to meet our requirements, or the unavailability of suitable producers at reasonable prices may negatively impact our ability to deliver quality products to our customers on a timely basis or result in higher costs or reduced net sales.
 
We source substantially all of our products from non-exclusive, third-party producers, many of which are located in foreign countries. Although we have long-term relationships with many of our suppliers, we must compete with other companies for the production capacity of these independent manufacturers. We regularly depend upon the ability of third-party producers to secure a sufficient supply of raw materials, a skilled workforce, adequately finance the production of goods ordered and maintain sufficient manufacturing and shipping capacity. Although we monitor production in third party manufacturing locations, we cannot be certain that we will not experience operational difficulties with our manufacturers, such as the reduction of availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines or increases in manufacturing costs. Such difficulties may negatively impact our ability to deliver quality products to our customers on a timely basis, which may, in turn, have a negative impact on our customer relationships and result in lower net sales.
 
We also require third-party producers to meet certain standards in terms of working conditions, environmental protection and other matters before placing business with them. As a result of costs relating to compliance with these standards, we may pay higher prices than some of our competitors for products. In addition, failure by us or our independent manufacturers to adhere to labor or other laws or business practices accepted as ethical, and the potential litigation, negative publicity and political pressure relating to any of these events, could disrupt our operations or harm our reputation.

 
8

 

 
The effects of new regulations relating to conflict minerals may adversely affect our business.
 
 
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as "conflict minerals" mined from the Democratic Republic of Congo and adjoining countries, in their products, whether or not these products are manufactured by third parties. These disclosure and reporting requirements became effective for calendar year 2013. Affected companies must make disclosures for the first time by May 31, 2014, and annually thereafter. There have been and will continue to be significant costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. Our disclosure will be predicated upon the timely receipt of accurate information from suppliers, who may be unwilling or unable to provide us with the relevant information. As a result, these new requirements could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.
 

Our revenue could be adversely affected by a disruption in our supply chain.
 
Disruptions to our supply chain could result in late arrivals of product. This could negatively affect sales due to increased levels of out-of-stock merchandise and loss of confidence by customers in our ability to deliver goods as promised.

The rise of oil and gasoline prices could affect our profitability.
 
A significant increase in oil and gasoline prices could adversely affect our profitability.  We deliver substantially all of our customers’ purchases to their homes.  Our distribution system, which utilizes three DCs and multiple home delivery centers to reach our markets across 16 Southern and Midwestern states, is very transportation dependent.

If transportation costs exceed amounts we are able to effectively pass on to the consumer, either by higher prices and/or higher delivery charges, then our profitability will suffer.

Because of our limited number of distribution centers, should one become damaged, our operating results could suffer.
 
We utilize three large distribution centers to flow our merchandise from the vendor to the consumer. This system is very efficient for reducing inventory requirements, but makes us operationally vulnerable should one of these facilities become damaged.

Our information technology infrastructure is vulnerable to damage that could harm our business.
 
Our ability to operate our business from day to day, in particular our ability to manage our point-of-sale, credit operations and distribution system, largely depends on the efficient operation of our computer hardware and software systems. We use management information systems to communicate customer information, provide real-time inventory information, manage our credit portfolio and to handle all facets of our distribution system from receipt of goods in the DCs to delivery to our customers’ homes. These systems and our operations are vulnerable to damage or interruption from:
  • power loss, computer systems failures and internet, telecommunications or data network failures;
  • operator negligence or improper operation by, or supervision of, employees;
  • physical and electronic loss of data or security breaches, misappropriation and similar events;
  • computer viruses;
  • intentional acts of vandalism and similar events; and
  • tornadoes, fires, floods and other natural disasters.
 
 
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Any failure due to any of these causes, if it is not supported by our disaster recovery plan and redundant systems, could cause an interruption in our operations and result in reduced net sales and profitability.

We may incur costs resulting from security risks we face in connection with our electronic processing and transmission of confidential customer information.
 
We accept electronic payment cards in our stores and over the internet. Amounts tendered through payment card transactions represented approximately 54.7% of our business in 2013.

We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our results and prospects.


ITEM 1B.          UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2.             PROPERTIES
 
Stores
Our retail store space at December 31, 2013 totaled approximately 4.3 million square feet for 119 stores compared to 122 stores at December 31, 2012.  The following table sets forth the number of stores we operated at December 31, 2013 by state:

State
Number of Stores
 
State
Number of Stores
Florida
28
 
Louisiana
4
Texas
22
 
Maryland
4
Georgia
16
 
Kentucky
3
North Carolina
8
 
Arkansas
2
Virginia
7
 
Ohio
2
Alabama
7
 
Indiana
1
South Carolina
7
 
Kansas
1
Tennessee
6
 
Missouri
1

The 45 retail locations which we owned at December 31, 2013 had a net book value for land and buildings of $92.4 million.  Additionally, we have eight leased locations with a net book value of $13.7 million which, due to financial accounting rules, are included on our balance sheets.  The remaining 66 locations are leased by us with various termination dates through 2032 plus renewal options.


 
10

 

Distribution Facilities
We lease or own regional distribution facilities in the following locations:
 
Location
Owned or Leased
Approximate Square Footage
Braselton, Georgia
Leased
808,000
Coppell, Texas
Owned
238,000
Lakeland, Florida
Owned
226,000
Colonial Heights, Virginia
Owned
129,000
Fairfield, Ohio
Leased
50,000
Theodore, Alabama
Leased
42,000
Memphis, Tennessee
Leased
30,000

We also use five cross-dock facilities which are attached to retail locations.

Corporate Facilities
Our executive and administrative offices are located at 780 Johnson Ferry Road, Suite 800, Atlanta, Georgia. These leased facilities contain approximately 48,000 square feet of office space on two floors of a suburban mid-rise office building. We also lease 7,000 square feet of office space in Chattanooga, Tennessee for our credit operations.

For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report under Item 7 of Part II.

 
ITEM 3.        LEGAL PROCEEDINGS

There are no material pending legal proceedings to which we are a party or of which any of our properties is the subject.

 
ITEM 4.         MINE SAFETY DISCLOSURES

Not Applicable.


 
11

 

PART II

ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our two classes of common stock trade on The New York Stock Exchange (“NYSE”). The trading symbol for the common stock is HVT and for Class A common stock is HVT.A. The table below sets forth the high and low sales prices per share as reported on the NYSE and the dividends declared for the last two years:
 


 
2013
 
 
Common Stock
 
Class A Common Stock
 
Quarter Ended
High
 
Low
 
Dividend
 Declared
 
High
 
Low
 
Dividend
Declared
 
March 31
  $ 21.00     $ 16.16     $ 0.04     $ 20.83     $ 16.31     $ 0.0375  
June 30
    25.76       19.88       0.04       25.57       20.17       0.0375  
September 30
    27.85       21.76       0.08       27.51       21.93       0.0750  
December 31
    31.67       23.95       0.08       31.58       24.00       0.0750  



 
2012
 
 
Common Stock
 
Class A Common Stock
 
Quarter Ended
High
 
Low
 
Dividend
 Declared
 
High
 
Low
 
Dividend
Declared
 
March 31
  $ 13.00     $ 10.80     $     $ 12.90     $ 10.40     $  
June 30
    12.97       10.39       0.04       12.90       10.50       0.0375  
September 30
    14.31       10.77       0.04       14.05       11.00       0.0375  
December 31
    17.62       13.52       1.04 (1)     17.25       13.77       0.9875 (1)
 
  (1)  includes a special dividend of $1.00 for common stock and $0.95 for Class A common stock.


Stockholders
Based on the number of individual participants represented by security position listings, there are approximately 4,500 holders of our common stock and 160 holders of our Class A common stock as of February 21, 2014.

Dividends
The payment of dividends and the amount are determined by the Board of Directors and depend upon, among other factors, our earnings, operations, financial condition, capital requirements and general business outlook at the time such dividend is considered.  We had paid a quarterly cash dividend since 1935, but given the general economic decline, the board suspended the quarterly dividend in the fourth quarter of 2008.  The board approved dividends in the fourth quarter of 2009-2011 and reinstated the quarterly dividend in the second quarter of 2012.  A special cash dividend was paid in the fourth quarter of 2012.

Equity Compensation Plans
Information concerning the Company’s equity compensation plans is set forth under the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2014, to be filed with the Securities and Exchange Commission (the “Company’s 2014 Proxy Statement) and is incorporated herein by reference.

 
12

 

Stock Performance Graph

The following graph compares the performance of Havertys’ common stock and Class A common stock against the cumulative return of the NYSE/AMEX/Nasdaq Home Furnishings & Equipment Stores Index (SIC Codes 5700 – 5799) and the S&P Smallcap 600 Index for the period of five years commencing December 31, 2008 and ended December 31, 2013.  The graph assumes an initial investment of $100 on January 1, 2008 and reinvestment of dividends.
 

   
2008
   
2009
   
2010
   
2011
   
2012
   
2013
 
                                     
HVT
  $ 100.0     $ 147.40     $ 140.64     $ 120.24     $ 191.32     $ 370.75  
HVT-A
  $ 100.0     $ 143.16     $ 135.90     $ 117.35     $ 186.26     $ 359.97  
S&P Smallcap 600 Index
  $ 100.0     $ 125.57     $ 158.60     $ 160.22     $ 186.37     $ 263.37  
SIC Codes 5700-5799
  $ 100.0     $ 141.47     $ 147.68     $ 134.74     $ 114.28     $ 213.17  



 
13

 

 ITEM 6.                      SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 below and the “Consolidated Financial Statements and Notes thereto” included in Item 8 below.

   
Year ended December 31,
 
(Dollars in thousands, except per share data)
 
2013
   
2012
   
2011
   
2010
   
2009
 
Results of Operations
                             
Net sales
  $ 746,090     $ 670,073     $ 620,903     $ 620,331     $ 588,264  
Net sales change over prior year
    11.3 %     7.9 %     0.1 %     5.5 %     (14.9 )%
Comp-store sales change over prior year
    11.0 %     6.8 %     0.3 %     7.0 %     (14.2 )%
Gross profit
    401,496       352,035       320,716       318,767       305,498  
Percent of net sales
    53.8 %     52.5 %     51.7 %     51.4 %     51.9 %
Selling, general and administrative expenses
    348,599       328,826       315,865       311,897       310,523  
Percent of net sales
    46.7 %     49.1 %     50.9 %     50.3 %     52.8 %
Income (loss) before income taxes
    52,487       23,516       4,603       8,673       (5,408 )
Net income (loss) 1
    32,265       14,911       15,463       8,444       (4,179 )
Share Data
                                       
Diluted  net earnings (loss) per share:
                                       
Common Stock
  $ 1.41     $ 0.67     $ 0.70     $ 0.38     $ (0.20 )
Class A Common Stock
    1.35       0.59       0.67       0.36       (0.19 )
Cash dividends:
                                       
Amount per share:
                                       
Common Stock(2)
    0.240       1.12       0.1200       0.100       0.0225  
Class A Common Stock(2)
    0.225       1.06       0.1125       0.095       0.0200  
Shares outstanding (in thousands):
                                       
Common Stock
    20,122       19,471       18,829       18,512       17,519  
Class A Common Stock
    2,393       2,775       3,120       3,331       3,908  
       Total shares
    22,515       22,246       21,949       21,843       21,427  
Financial Position
                                       
Inventories
  $ 91,483     $ 96,902     $ 93,713     $ 91,938     $ 93,301  
Capital expenditures
  $ 20,202     $ 25,014     $ 17,566     $ 14,053     $ 3,259  
Depreciation/amortization expense
    21,450       19,415       18,242       16,859       19,346  
Property and equipment, net
    189,242       193,085       179,333       175,511       176,363  
Total assets
  $ 417,855     $ 402,096     $ 385,100     $ 370,239     $ 360,933  
Total debt(3)
    17,155       19,354       13,046       9,099       7,183  
Stockholders’ equity
    298,264       259,428       262,669       253,182       244,557  
Debt to total capital
    5.4 %     6.9 %     4.7 %     3.5 %     2.9 %
Interest expense, net
    1,107       624       737       815       805  
Net cash provided by operating activities
    55,889       52,168       19,072       24,201       38,495  
Other Supplemental Data:
                                       
Employees
    3,266       3,250       3,050       3,100       3,000  
Retail sq. ft. (in thousands)
    4,259       4,353       4,246       4,230       4,278  
Number of retail locations
    119       122       119       118       121  
Annual retail net sales per weighted average sq. ft.
  $ 176     $ 158     $ 148     $ 148     $ 139  

(1)  
We reduced income tax expense $3.1 million and released $2.0 million of the valuation allowance in 2010.  The valuation allowance was further reduced and we recorded a benefit to income taxes of $14.1 million in 2011, $1.2 million in 2012, and $1.4 million in 2013.
(2)  
Includes a special dividend of $1.00 for Common Stock and $0.95 for Class A Common Stock paid in the fourth quarter of 2012.
(3)  
Debt is comprised completely of lease obligations.

 
14

 

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Industry
The retail residential furniture industry's results are influenced by new and existing housing sales, consumer confidence, spending on large ticket items, interest rates and availability of credit and the overall strength of the economy.  The industry experienced a rebound in 2012 as its drivers have improved.  These factors remain tempered by continued high levels of unemployment, lower home values, and reduced access to credit, all of which provide impediments to industry growth.

Our Business
We sell home furnishings in our retail stores and via our website and record revenue when the products are delivered to our customer.  Our products are selected to appeal to a middle to upper-middle income consumer across a variety of styles.  Our commissioned sales associates receive a high level of product training and are provided a number of tools with which to serve our customers.  We also have in-home designers serving 60 stores with plans for expansion to 100 stores.  These individuals work with our sales associates to provide customers additional confidence and inspiration.  We do not outsource the delivery function, something common in the industry, but instead ensure that the “last contact” is handled by a customer-oriented Havertys delivery team.   We are recognized as a provider of high quality fashionable products and service in the markets we serve.

2013 Highlights
Sales for 2013 grew 11.3% or $76.0 million over 2012.  Our pre-tax income grew 123.2% or $29.0 million.  Gross profit as a percent of net sales increased 130 basis points, and SG&A declined 240 basis points.   The focus on “better” goods helped drive our average ticket and gross profit margins.  The higher sales volume allowed us to better leverage our fixed costs.  We continued our focus on cash flow and working capital management in 2013 and made important investments in our business.  We did not use our credit facility during the year and our total debt to total capital was 5.4% at December 31, 2013.

Management Objectives
Management is focused on capturing more market share and increasing sales per square foot of showroom space.  This organic growth will be driven by concentrating our efforts on our customers with improved interactions highlighted by new products, enhanced stores and better technology. The Company’s strategies for profitability include targeted marketing initiatives, productivity and process improvements, and efficiency and cost-saving measures.  Our focus is to serve our customers better and distinguish ourselves in the marketplace.

Key Performance Indicators
We evaluate our performance based on several key metrics which include net sales, comparable store sales, sales per square foot, gross profit, operating costs as a percentage of sales, cash flow, total debt to total capital, and earnings per share.  The goal of utilizing these measurements is to provide tools in economic decision-making such as store growth, capital allocation and product pricing.  We also employ metrics that are customer focused (customer satisfaction score, on-time-delivery and quality), and internal effectiveness and efficiency metrics (sales per employee, average sale per ticket, closing ratios per customer store visit, exceptions per deliveries, and lost time incident rate).  These measurements aid us in determining areas of our operations that are in need of additional attention and in determining compensation.


 
15

 

Operating Results

The following table provides selected statement of operations data for the periods indicated.

   
Percentage of Net Sales
 
   
2013
   
2012
   
2011
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    46.2       47.5       48.3  
Gross profit
    53.8       52.5       51.7  
Selling, general and administrative expenses
    46.7       49.1       50.9  
Income before income taxes
    7.0       3.5       0.7  
Net income
    4.3       2.2       2.5  

Net Sales

Comparable-store or “comp-store” sales is a measure which indicates the performance of our existing stores by comparing the growth in sales for these stores for a particular period over the corresponding period in the prior year.  Stores are considered non-comparable if open for less than 12 full calendar months or if the selling square footage has been changed significantly during the past 12 full calendar months.  Large clearance sales events from warehouses or temporary locations are also excluded from comparable store sales, as are periods when stores are closed or being remodeled. As a retailer, comp-store sales is an indicator of relative customer spending and store performance.

Total sales increased $76.0 million or 11.3% in 2013 and $49.2 million or 7.9% in 2012.  Comparable store sales increased 11.0% or $72.0 million in 2013 and 6.8% or $42.2 million in 2012.  The remaining $4.0 million in 2013 and $7.0 million in 2012 of the changes were from closed, new and otherwise non-comparable stores.

The following outlines our sales and comp-store sales increases and decreases for the periods indicated. (Amounts and percentages may not always add to totals due to rounding.)

     
December 31,
 
     
2013
 
2012
 
2011
 
     
Net Sales
 
Comp-Store Sales
 
 
Net Sales
 
Comp-Store Sales
 
 
Net Sales
 
Comp-Store Sales
 
Period
Ended
   
Dollars
in millions
 
%
 Increase
(decrease)
over prior
period
 
% Increase
(decrease)
over prior
period
 
Dollars
in millions
% Increase
(decrease)
over prior
period
 
% Increase
(decrease)
over prior
period
 
Dollars
in millions
% Increase
(decrease)
over prior
period
 
%
 Increase
(decrease)
over prior
period
 
 Q1    
$
186.1
 
13.8
%
11.5
%
$
163.6
6.1
%
5.7
%
$
154.2
(1.2
)%
(0.6
)%
 Q2      
171.1
 
12.9
 
11.2
   
151.5
5.9
 
5.6
   
143.1
(1.4
)
(1.4
)
 Q3      
192.7
 
11.6
 
11.8
   
172.7
11.1
 
10.0
   
155.4
(1.1
)
(0.6
)
 Q4      
196.2
 
7.6
 
9.5
   
182.3
8.4
 
6.0
   
168.3
3.8
 
3.5
 
Year
   
$
746.1
 
11.3
%
11.0
%
$
670.1
7.9
%
6.8
%
$
620.9
0.1
%
0.3
%

Sales in 2013 increased as the fundamental drivers of home furnishings purchases continue to recover.  We capitalized on this trend with improved merchandising and expansion of our complimentary in-home design service.  These generated an increase in our average ticket of 7.8% and a 19.8% increase in our custom order upholstery business.


 
16

 
Sales in 2012 increased at a strong pace as our industry began its recovery.  Our average ticket was up 7.8% as our customers responded to the value offered in our fashionable better quality merchandise.  Sales in the upholstery product category showed strength increasing 12.6% over 2011 including a 17.9% increase in custom and special orders.

Sales in 2011 remained slightly below 2010 through the first three quarters of the year.  We had better results in the historically stronger fourth quarter.  Mattress sales continued to provide a growing percentage of our business for 2011.  The appeal of our higher price point products resulted in a higher average ticket for 2011.

2014 Outlook
Our total sales for 2014 and comparable store sales growth will be measured against tougher comparisons.  We believe our appealing merchandise and expanded special order and service offerings will be important drivers for our 2014 sales results.

Gross Profit

Our cost of sales consist primarily of the purchase price of the merchandise together with inbound freight, handling within our distribution centers and transportation costs to the local markets we serve.  Our gross profit is primarily dependent upon vendor pricing, the mix of products sold and promotional pricing activity.  Substantially all of our occupancy and home delivery costs are included in selling, general and administrative expenses as is a portion of our warehousing expenses.  Accordingly, our gross profit may not be comparable to those entities that include some of these expenses in cost of goods sold.

Year-to-Year Comparisons
Gross profit as a percentage of net sales increased to 53.8% in 2013 compared to 52.5% in 2012.  Our focus on higher price point products and pricing discipline were key to the gross profit improvement combined with a $1.1 million smaller LIFO impact and an $0.8 million out-of-period adjustment.  Excluding the impact of the out-of-period adjustment, gross profit was 53.7%, up 120 basis points over 2012.

Gross profit as a percentage of net sales increased to 52.5% in 2012 as compared to 51.7% in 2011.  The expansion of our assortment’s upper-middle price point products, increased sales of custom upholstery, and successful new product introductions combined to generate the gross profit improvement.

2014 Outlook
Our merchandising strategy will be similar to 2013 using promotional pricing selectively and focusing on product fashion and customer service. We expect that annual gross profit margins for 2014 will be 53.8%, slightly ahead of the adjusted 53.7% achieved in 2013.

Selling, General and Administrative Expenses

SG&A expenses are comprised of five categories:  selling; occupancy; delivery and certain warehousing costs; advertising and administrative.  Selling expenses primarily are comprised of compensation of sales associates and sales support staff, and fees paid to credit card and third-party finance companies.  Occupancy costs include rents, depreciation charges, insurance and property taxes, repairs and maintenance expense and utility costs.  Delivery costs include personnel, fuel costs, and depreciation and rental charges for rolling stock.  Warehouse costs include supplies, depreciation and rental charges for equipment.  Advertising expenses are primarily media production and space, direct mail costs, market research expenses, employee compensation and agency fees.  Administrative expenses are comprised of compensation costs for store personnel exclusive of sales associates, information systems, executive, accounting, merchandising, advertising, supply chain, real estate and human resource departments.

 
17

 
Year-to-Year Comparisons
Our SG&A costs increased $19.8 million or 6.0% for 2013 compared to 2012.  This change was driven by our 11.3% increase in sales.  SG&A costs increased $13.0 million or 4.1% for 2012 compared to 2011.  The change was largely due to greater occupancy expense, increased advertising and marketing spending, higher delivery costs and greater administrative expenses. Total SG&A costs, as a percentage of net sales were 46.7% for 2013 as compared to 49.1% for 2012 and 50.9% for 2011.

Selling expenses generally vary with sales volume.  The amounts paid for bank card charges depends upon how many customers choose that payment option.  The cost of our third-party financing offers will vary based on usage and the types of credit programs we offer and those selected by our customers.  These costs remained relatively flat as a percentage of net sales over the past three years.

Occupancy costs increased $2.2 million in 2013 over 2012 primarily due to higher depreciation expense resulting from new stores opened in 2012 and existing store renovations.  Occupancy costs decreased $1.2 million in 2012 from 2011 as rent and utility expenses declined.  Our Bright Inspirations project has also caused some reductions in repairs and maintenance which was offset by increased depreciation.  We expect occupancy costs will increase slightly in 2014 as new store openings are primarily late in the year.

Delivery expense increased only 4.2% in 2013 over 2012 versus the 11.3% increase in sales due to efficiencies and a higher average ticket.  Delivery costs in 2012 were relatively flat compared to 2011 despite a 7.9% increase in sales due to reductions in insurance costs offset by increases in salaries.

Total advertising and marketing costs as a percentage of sales were 6.0% for 2013, 6.5% for 2012 and 6.9% for 2011.  We increased our spending $1.2 million in 2013 and $0.8 million in 2012. Our focus continues to be on television branding messages and electronic advertising that highlight Havertys fashionable products and service.

Administrative costs increased $7.4 million or 9.7% for 2013 compared to 2012.  The change was driven by an increase in incentive and compensation expense and higher health insurance costs.  Administrative costs increased $4.8 million or 6.8% in 2012 from 2011 primarily due to higher incentive compensation, salaries, stock-based compensation expense and retirement benefits.

2014 Outlook
The fixed and discretionary type expenses within SG&A for the full year of 2014 are expected to be approximately $232 million to $234 million, up approximately 4.1% to 5.0% over those same costs in 2013. These expenses are expected to be incurred at a slightly higher rate in the second half of the year.  The main increases in this category are expected to be for advertising expenses, personnel costs, and new store occupancy expense.

Variable costs within SG&A are expected to be 17.0% to 17.2% as a percent of sales for 2014.

We expect that total SG&A expenses for 2014 will be slightly lower than 2013 levels as a percentage of net sales if we are able to leverage our fixed costs with increased sales.

Provision for Income Taxes

Our effective tax rate was 38.5, 36.6% and (235.9)% for 2013, 2012 and 2011,  respectively. Refer to Note 7 of the Notes to the Consolidated Financial Statements for a reconciliation of our income tax expense to the federal income tax rate.

Our 2013 rate varies from the 35% U.S. federal statutory rate primarily due to state income taxes.

 
18

 
Our 2012 rate included a benefit from income taxes of $0.7 million related to the change in our uncertain tax positions.  This benefit was partially offset by changes in our receivables and state net operating loss carryforwards of $0.3 million.

Our 2011 rate included a benefit from income taxes of $14.1 million related to the release of almost all of the valuation allowance against our net deferred tax assets.  The $14.1 million benefit related to the release includes approximately $7.7 million that was originally charged to accumulated other comprehensive income for pension liabilities but due to the prohibition against “backward tracing” the release is included in the continuing operations provision.  Our 2011 rate also includes a $0.7 million unfavorable impact of a change in treatment of certain state port credits by the state of Georgia.  These credits were almost completely reserved in our valuation allowance as are the remaining credits.  During 2011 we also finalized the net operating loss carryback and amended returns for the tax years 2005 through 2008.  We adjusted the related receivables for refunds of tax and interest and amounts available for federal and state net operating loss carryforwards.  This resulted in additional expense of $0.4 million.

Liquidity and Capital Resources

Overview of Liquidity
Our primary cash requirements include working capital needs, contractual obligations, benefit plan contributions, income tax obligations and capital expenditures.  We have funded these requirements exclusively through cash generated from operations and have not used our credit facility since 2008.  We believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient to fund our primary obligations and complete projects that we have underway or currently contemplate for the next fiscal and foreseeable future years.

At December 31, 2013, our cash and cash equivalents balance was $83.2 million an increase of $29.6 million compared to December 31, 2012.  This increase in cash primarily resulted from strong operating results and improved working capital requirements offset by purchases of property and equipment.  Additional discussion of our cash flow results, including the comparison of 2013 activity to 2012, is set forth in the Analysis of Cash Flows section.

At December 31, 2013, our outstanding indebtedness was $17.2 million in lease obligations required to be recorded on our financial statements.  We had no amounts outstanding and $43.8 million available under our revolving credit facility.

Capital Expenditures
Our primary capital requirements have been focused on our stores and the development of both proprietary and purchased information systems.  Our capital expenditures were $20.2 million in 2013, $4.8 million less than in 2012.

Our future capital requirements will depend in large part on the number of and timing for new stores we open within a given year, the investments we make to the improvement and maintenance of our existing stores, and our investment in distribution improvements and new information systems to support our key strategies.  In 2014, we anticipate that our capital expenditures will be approximately $35.0 million, refer to our Store Expansion and Capital Expenditures discussion below.


 
19

 

Analysis of Cash Flows
The following table illustrates the main components of our cash flows (in thousands):

   
Year Ended December 31,
 
   
2013
   
2012
   
2011
 
Net cash provided by operating activities
  $ 55,889     $ 52,168     $ 19,072  
Capital expenditures
    (20,202 )     (25,014 )     (17,566 )
Free cash flow
  $ 35,687     $ 27,154     $ 1,506  
Net cash used in investing activities
  $ (20,120 )   $ (24,766 )   $ (24,222 )
Net cash used in financing activities
  $ (6,134 )   $ (23,437 )   $ (3,310 )

Cash flows from operating activities.  During 2013, net cash provided by operating activities was $55.9 million.  Our cash provided by operating activities was mainly the result of pre-tax income generated during 2013.  Cash from net income, net of depreciation and amortization and stock-based compensation expense, along with cash provided by working capital, was partially reduced by pension plan contributions.  Pension plan contributions in 2013 included a $4.2 million discretionary contribution made to improve the funded status of the plan and as part of our broader pension de-risking strategy.

The primary components of the changes in working capital are listed below:
  • Decrease in inventories of $5.4 million, mainly due to timing of sales and replenishment.
  • Decrease in other liabilities of $9.0 million, and increase in other assets of $9.9 million mainly due to the shift from a $6.8 million pension plan liability to a $9.4 million pension asset.
  • Decrease in accounts payable of $6.4 million.
During 2012, net cash provided by operating activities was $52.2 million.  We generated net income of $14.9 million during the year, and depreciation and amortization totaled $19.4 million.  Working capital increased and the major components of the change are listed below.
  • Increase in customer deposits of $6.4 million as the level of our special order business increased and deliveries at the end of 2012 were hampered by product availability.
  • Increase in accounts payable of $7.0 million, offset by increased inventory levels of $3.5 million. These increases were primarily due to our higher level of purchases in advance of the Chinese New Year and in response to our increased sales activity.
  • Decrease in other liabilities of $3.5 million as the pension plan liability decreased $4.3 million.
During 2011, net cash provided by operating activities was $19.1 million.  We had net income of $15.5 million and depreciation and amortization of $18.2 million which were reduced by deferred income tax benefit of $7.9 million.  The primary change in working capital was a $3.5 million increase in prepaid expenses.
 
 
Cash flows used in investing activities. Net cash used in investing activities was $20.1 million, $24.8 million and $24.2 million for 2013, 2012 and 2011, respectively. In each of these years, the amounts of cash used in investing activities consisted principally of capital expenditures related to store construction and improvements and information technology projects, refer to our Store Expansion and Capital Expenditures discussion below. During 2013, we invested in our distribution system for future expansion and added capacity to our internal cloud architecture to support our sales systems and video communications.  The increase in cash flows used in investing activities from 2011 to 2012 was primarily the result of additional capital spending in 2012 offset by the initial outlay of $6.8 million to restricted cash as insurance collateral during 2011.  During 2012, we completed information technology projects replacing our core network that controls the communication between our stores and data centers and invested in cloud infrastructure.  During 2011, we completed information technology projects in the e-commerce and finance areas.
 
 
20

 

Cash flows used in financing activities. Net cash used in financing activities was $6.1 million for 2013, $23.4 million for 2012 and $3.3 million for 2011.  During 2013 the number of restricted shares vesting increased as the acceleration goals of certain grants were met.  This increased the withholding taxes for vested shares and contributed to the tax benefit from stock-based plans.  During 2012 we paid a special dividend of approximately $22.0 million and we had expiring in-the-money options which generated additional option exercise activity in 2012.  During 2013, 2012, and 2011, we did not make any draws on our revolving credit facility.

Long-Term Debt
In September 2011 Havertys entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a bank.  Refer to Note 5 of the Notes to Consolidated Financial Statements for information about our Credit Agreement.

Off-Balance Sheet Arrangements

We do not generally enter into off-balance sheet arrangements.  We did not have any relationships with unconsolidated entities or financial partnerships which would have been established for the purposes of facilitating off-balance sheet financial arrangements for any period during the three years ended December 31, 2013.  Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Contractual Obligations

The following summarizes our contractual obligations and commercial commitments as of December 31, 2013 (in thousands):

   
Payments Due or Expected by Period
 
   
Total
   
Less than
 1 Year
   
1-3
Years
   
3-5
Years
   
After 5
Years
 
Lease obligations(1)
  $ 24,002     $ 1,938     $ 4,254     $ 4,440     $ 13,370  
Operating leases
    228,108       31,296       60,135       51,873       84,804  
Purchase orders
    83,707       83,707                    
Total contractual obligations(2)
  $ 335,817     $ 116,941     $ 64,389     $ 56,313     $ 98,174  
 
(1)  
These amounts are for our lease obligations recorded in our consolidated balance sheets, including interest amounts.  For additional information about our leases, refer to Note 8 of the Notes to the Consolidated Financial Statements.
 
(2)  
The contractual obligations do not include any amounts related to our pension plans.  For additional information about our plans, refer to Note 10 of the Notes to the Consolidated Financial Statements.

Store Expansion and Capital Expenditures

We have entered new markets and made continued improvements and relocations of our store base.  The following outlines the change in our selling square footage for each of the three years ended December 31 (square footage in thousands):
 
   
2013
   
2012
   
2011
 
Store Activity:
 
#
of Stores
   
Square
 Footage
   
#
of Stores
   
Square
Footage
   
#
of Stores
   
Square
Footage
 
Opened
                4       139       3       101  
Closed
    3       103       1       32       2       84  
Year end balances
    119       4,259       122       4,353       119       4,246  
 

 
 
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During 2013 we closed our Clearwater, Florida store in January, the Jackson, Mississippi location in April and the Roanoke, Virginia store in May.  We also had major remodeling projects in four stores which increased their selling square footage.

The following table summarizes our planned store activity in 2014.
 
Location
 
Quarter Opened
 
Category
Atlanta, Georgia
    Q-3  
Existing Market
Fort Worth, Texas
    Q-3  
Existing Market
Orlando, Florida
    Q-4  
Relocation
To be announced
    Q-4  
Existing Market
Fayetteville, North Carolina
    Q-4  
Relocation
To be announced
    Q-4  
Relocation

These plans and other changes should increase net selling space in 2014 by approximately 1.8% assuming the new stores open and existing stores close as planned.

Our investing activities in stores and operations in 2013, 2012 and 2011 and planned outlays for 2014 are categorized in the table below.  Capital expenditures for stores in the years noted do not necessarily coincide with the years in which the stores open.
 
(Approximate in thousands)
 
Proposed 2014
   
2013
   
2012
   
2011
 
Stores:
                       
New or replacement stores1
  $ 15,000     $ 100     $ 9,500     $ 7,800  
Remodels/expansions
    7,000       11,200       5,500       4,900  
Other improvements
    5,000       3,900       4,600       2,300  
Total stores
    27,000       15,200       19,600       15,000  
Distribution
    3,500       2,300       1,600       200  
Information technology
    4,500       2,700       3,800       2,400  
Total
  $ 35,000     $ 20,200     $ 25,000     $ 17,600  
1 Includes $4.8 million for purchase of leased locations in 2011.
 

Critical Accounting Estimates and Assumptions

Our discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures.  On an on-going basis, we evaluate our estimates, including those related to accounts receivable and allowance for doubtful accounts, pension and retirement benefits, self-insurance and realizability of deferred tax assets.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.


 
22

 

We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

Pension and Retirement benefits.  Pension and other retirement plans’ costs require the use of assumptions for discount rates, investment returns, projected salary increases and mortality rates.  Management is required to make certain critical estimates related to actuarial assumptions used to determine our pension expense and related obligation. We believe the most critical assumptions are related to (1) the discount rate used to determine the present value of the liabilities and (2) the expected long-term rate of return on plan assets. All of our actuarial assumptions are reviewed annually. Changes in these assumptions could have a material impact on the measurement of our pension expense and related obligation.

At each measurement date, we determine the discount rate by reference to rates of high quality, long-term corporate bonds that mature in a pattern similar to the future payments we anticipate making under the plans. As of December 31, 2013 and 2012, the weighted-average discount rates used to compute our benefit obligation were 4.93% and 4.13% respectively.

The expected long-term rate of return on plan assets is based upon the long-term outlook of our investment strategy as well as our historical returns and volatilities for each asset class. We also review current levels of interest rates and inflation to assess the reasonableness of our long-term rates. Our pension plan investment objective is to ensure our plan has sufficient funds to meet its benefit obligations when they become due. As a result, we periodically revise asset allocations, where appropriate, to improve returns and manage risk. The weighted-average expected long-term rates of return used to calculate our net periodic benefit cost were 6.65% in 2013 and 6.75% in 2012.

For purposes of determining the periodic expense of our defined benefit plan, we use the fair value of plan assets as the market related value.  A one-percentage-point change in the assumed rates would have the following effects on 2013 pension expense:

(Approximate in thousands)
 
1.0% Increase
   
1.0% Decrease
 
Increase (decrease) for a 1% change in discount rate
  $ (604 )   $ 669  
Increase (decrease) for a 1% change in expected long-term return on plan assets
  $ (744 )   $ 744  

Refer to Note 10 to the Notes to Consolidated Financial Statements for additional information about our pension plans and related actuarial assumptions.

Self-Insurance.  We are self-insured for certain losses related to worker’s compensation, general liability and vehicle claims for amounts up to a deductible per occurrence.  Our reserve is developed based on historical claims data and contains an actuarially developed incurred but not reported component.  The resulting estimate is discounted and recorded as a liability.  Our actuarial assumptions and discount rates are reviewed periodically and compared with actual claims experience and external benchmarks to ensure appropriateness.  A one-percentage-point change in the actuarial assumption for the discount rate would impact 2013 expense for insurance by approximately $80,000, a 1.36% change.
 
We became primarily self-insured for employee group health care claims in 2012.  We have purchased insurance coverage in order to establish certain limits to our exposure on both a per claim and aggregate basis.   We record an accrual for the estimated amount of self-insured health care claims incurred by all participants but not yet reported (IBNR) using an actuarial method of applying a development factor to the reported monthly claims amounts. The Company's risk management and accounting management utilize a consistent methodology which involves various assumptions, judgment and other factors. The most significant factors which impact the determination of a required accrual are the historical pattern of the timeliness of claims processing, any changes in the nature or types of benefit plans, changes in the plan benefit designs, and medical trends and inflation. Historical experience is continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. The Company believes that the total health care cost accruals are reasonable and adequate to cover future payments on incurred claims.
 
 
 
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Stock-based compensation. We have stock-based compensation plans and since 2004 have made grants of restricted stock, restricted stock units, and stock-settled appreciation rights. See Note 11, Stock Based Compensation Plans, to the Notes to the Consolidated Financial Statements for a complete discussion of our stock-based compensation programs. We recognize stock-based compensation expense based on the fair value of the respective awards. We estimated the fair value of our stock-settled appreciation rights awards as of the grant date based upon a Black-Scholes-Merton option pricing model. We estimate the fair value of our restricted stock awards and units as of the grant date utilizing the closing market price of our stock on that date. The compensation expense associated with these awards is recorded in the consolidated statements of income with a corresponding credit to common stock.
 
Valuation Allowance of Deferred Tax Assets. Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The
tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year and manner in which the differences are expected to reverse.

We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing taxable temporary differences, taxable income in prior carryback years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless we determine that it is more likely than not that the Company will ultimately realize the tax benefit associated with a deferred tax asset.   The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability.  Our accounting for deferred tax consequences represents our best estimate of future events.  Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

Due to the losses in the fourth quarter of 2008, and considering projections for 2009 we expected that in 2009 we would be in a cumulative loss position (defined as a pre-tax cumulative loss for the latest three years).  We recorded a $14.7 million increase to a valuation allowance against substantially all of our net deferred tax assets during the fourth quarter of 2008.

Our profitability in the fourth quarter of 2011 was sufficient such that we were no longer in a cumulative loss position.  The sustained improvements in our results and a review of other positive and negative evidence led us to conclude that the valuation allowance for most of our net deferred tax assets was no longer required.  Accordingly, during the fourth quarter of 2011 we released $14.1 million of our valuation allowance.
 
 As of December 31, 2012, the Company’s valuation allowance on deferred tax assets was $1.4 million, related to state income tax credits that were not expected to be realized.  This allowance was fully released during 2013 as these tax credits expired.


 
24

 

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the potential loss arising from adverse changes in the value of financial instruments.  The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings.

In the ordinary course of business, we are exposed to various market risks, including fluctuations in interest rates.  To manage the exposure related to this risk, we may use various derivative transactions.  As a matter of policy, we do not engage in derivatives trading or other speculative activities.  Moreover, we enter into financial instruments transactions with either major financial institutions or high credit-rated counterparties, thereby limiting exposure to credit and performance-related risks.

We have exposure to floating interest rates through our Credit Agreement.  Therefore, interest expense will fluctuate with changes in LIBOR and other benchmark rates.  We do not believe a 100 basis point change in interest rates would have a significant adverse impact on our operating results or financial position.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of our independent registered public accounting firm, the Consolidated Financial Statements of Havertys and the Notes to Consolidated Financial Statements, and the supplementary financial information called for by this Item 8, are set forth on pages F-1 to F-22 of this report.  Specific financial statements and supplementary data can be found at the pages listed in the following index:

Index
Page
Financial Statements
 
Report of Independent Registered Public Accounting Firm on the Consolidated
 Financial Statements
 
F-1
Consolidated Balance Sheets
F-2
Consolidated Statements of Income
F-3
Consolidated Statements of Comprehensive Income
F-4
Consolidated Statements of Stockholders’ Equity
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7
Schedule II – Valuation and Qualifying Accounts
F-23

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 
Not Applicable.

ITEM 9A.      CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.  Our management has evaluated, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective for the purpose of providing reasonable assurance that the information we must disclose in reports that we file or submit under the Securities Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
 
 
25

 
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2013.
 
 
Attestation Report of the Independent Registered Public Accounting Firm.  Ernst & Young LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
 
(c) Changes in Internal Control over Financial Reporting.  During the fourth quarter of 2013, there were no changes in our internal control over financial reporting that have affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 
26

 

Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

The Board of Directors and Stockholders of
Haverty Furniture Companies, Inc.

We have audited Haverty Furniture Companies, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 framework (the COSO criteria).  Haverty Furniture Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Haverty Furniture Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2013 consolidated financial statements of Haverty Furniture Companies, Inc. and our report dated March 7, 2014 expressed an unqualified opinion thereon.

 /s/ Ernst & Young LLP

Atlanta, Georgia
March 7, 2014

 
27

 

ITEM 9B.                      OTHER INFORMATION

Not applicable.

PART III


ITEM 10.                      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth certain information as of March 1, 2014, regarding our executive officers:

Name
Position with the Company
Age
Date Assumed an Executive Officer Position
Clarence H. Smith
Chairman of the Board,
President and Chief Executive Officer
63
May 1984
Steven G. Burdette
Executive Vice President, Stores
52
May 2003
J. Edward Clary
Senior Vice President, Distribution and
Chief Information Officer
53
May 2003
 
Thomas P. Curran
Senior Vice President, Marketing
61
May 1999
Allan J. DeNiro
Senior Vice President, Chief People Officer
60
October 2004
Dennis L. Fink
Executive Vice President, Chief Financial Officer
62
January 1993
Richard D. Gallagher
Senior Vice President, Merchandising
52
February 2009
Rawson Haverty, Jr.
Senior Vice President, Real Estate and Development
Director
57
May 1992
 
Jenny Hill Parker
Senior Vice President, Finance, Secretary and Treasurer
55
August 1996
Janet E. Taylor
Senior Vice President, General Counsel
52
September 2005

Rawson Haverty, Jr. and Clarence H. Smith are first cousins.

These officers are elected or appointed annually by the Board of Directors for terms of one year or until their successors are elected and qualified, subject to removal by the Board at any time. These individuals have each been executive officers of Havertys for each of the last five years.

We have adopted a Code of Conduct (the “Code”) for our directors, officers (including our principal executive officer, and principal financial and accounting officer) and employees. The Code is available on our website at www.havertys.com.  In the event we amend or waive any provisions of the Code applicable to our principal executive officer or principal financial and accounting officer, we will disclose the same by filing a Form 8-K.  The information contained on or connected to our Internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file or furnish to the SEC.

The remaining information called for by this item is incorporated by reference to “Election of Directors,” “Corporate Governance,” “Board and Committees” and “Other Information – Section 16(a) Beneficial Ownership Reporting Compliance” in our 2014 Proxy Statement.


 
28

 

ITEM 11.     EXECUTIVE COMPENSATION

The information contained in our 2014 Proxy Statement with respect to executive compensation and transactions under the heading “Compensation Discussion and Analysis” is incorporated herein by reference in response to this item.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information contained in our 2014 Proxy Statement with respect to the ownership of common stock and Class A common stock by certain beneficial owners and management, and with respect to our compensation plans under which equity securities are authorized for issuance under the headings “Ownership of Company Stock by Directors and Management” and “Equity Compensation Plan Information,” is incorporated herein by reference in response to this item.

For purposes of determining the aggregate market value of our common stock and Class A common stock held by non-affiliates, shares held by all directors and executive officers have been excluded.  The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be “affiliates” as defined under the Securities Exchange Act of 1934.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information contained in our 2014 Proxy Statement with respect to certain relationships, related party transactions and director independence under the headings “Certain Relationships and Related Transactions” and “Corporate Governance – Director Independence” is incorporated herein by reference in response to this item.

ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES

The information under the heading “Audit Fees and Related Matters” in our 2014 Proxy Statement is incorporated herein by reference to this item.

 
PART IV

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
(1)
Financial Statements.  The following documents are filed as part of this report:

Consolidated Balance Sheets – December 31, 2013 and 2012
Consolidated Statements of Income – Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income – Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows – Years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements

(2)       Financial Statement Schedule.

The following financial statement schedule of Haverty Furniture Companies, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements:

Schedule II – Valuation and Qualifying Accounts

 
29

 
All other schedules have been omitted because they are inapplicable or the required information is included in the Consolidated Financial Statements or notes thereto.
 
        (3)      Exhibits:

 
Reference is made to Item 15(b) of this Report.

Each exhibit identified below is filed as part of this report.  Exhibits not incorporated by reference to a prior filing are designated by an “*”; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.  Exhibits designated with a “+” constitute a management contract or compensatory plan or arrangement.  Our SEC File Number is 1-14445 for all exhibits filed with the Securities Exchange Act reports.

Exhibit No.
Exhibit
3.1
Articles of Amendment and Restatement of the Charter of Haverty Furniture Companies, Inc. effective May 2006 (Exhibit 3.1 to our 2006 Second Quarter Form 10-Q).
 
3.2
Amended and Restated By-Laws of Haverty Furniture Companies, Inc., as amended effective April 30, 2007 (Exhibit 3.2 to our 2007 First Quarter Form 10-Q).
 
10.1
Amended and Restated Credit Agreement by and among Haverty Furniture Companies, Inc. and Havertys Credit Services, Inc., as the Borrowers, SunTrust Bank, as the Issuing Bank and Administrative Agent and SunTrust Robinson Humphrey, Inc. as Lead Arranger, dated September 1, 2011 (Exhibit 10.1 to our 2011 Third Quarter Form 10-Q).
 
10.2
Haverty Furniture Companies, Inc., Class A Shareholders Agreement, made as of June 5, 2012, by and among, Haverty Furniture Companies, Inc., Villa Clare Partners, L.P., Clarence H. Smith, H5, L.P., Rawson Haverty, Jr., Ridge Partners, L.P. and Frank S. McGaughey (Exhibit 10.1 to our Form 8-K filed June 8, 2012); Parties added to the Agreement and Revised Annex I as of November 1, 2012 – Marital Trust FOB Margaret M. Haverty and Marital Trust B FOB Margaret M. Haverty;  Parties added to the Agreement as of December 11, 2012 – Margaret Munnerlyn Haverty Revocable Trust (Exhibit 10.1 to our First Quarter 2013 Form 10-Q); Parties added to the Agreement as of July 5, 2013 – Richard McGaughey (Exhibit 10.1 to our Second Quarter 2013 Form 10-Q).
 
+10.3
1998 Stock Option Plan, effective as of December 18, 1997 (Exhibit 10.1 to our Registration Statement on Form S-8, File No. 333-53215); Amendment No. 1 to our 1998 Stock Option Plan effective as of July 27, 2001 (Exhibit 10.2 to our Registration Statement on Form S-8, File No. 333-66012).
 
+10.4
2004 Long-Term Incentive Compensation Plan effective as of May 10, 2004 (Exhibit 5.1 to our Registration Statement on Form S-8, File No. 333-120352).
 
*+10.5
Amended and Restated Directors’ Compensation Plan, effective as of February 18, 2014.
 
+10.6
Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 2009 (Exhibit 10.9 to our 2009 Form 10-K).
 
+10.7
Form of Agreement dated December 9, 2011 regarding Change in Control with the Named Executive Officers and a Management Director (Exhibit 10.6 to our 2011 Form 10-K).
 
+10.8
Form of Agreement dated December 9, 2011, regarding Change in Control with Executive Officers who are not Named Executive Officers or Management Directors (Exhibit 10.7 to our 2011 Form 10-K).
 
 
 
30

 
+10.9
Top Hat Mutual Fund Option Plan, effective as of January 15, 1999 (Exhibit 10.15 to our 1999 Form 10-K).
 
10.10
Lease Agreement dated July 26, 2001; Amendment No. 1 dated November, 2001 and Amendment No. 2 dated July 29, 2002 between Haverty Furniture Companies, Inc. as Tenant and John W. Rooker, LLC as Landlord (Exhibit 10.1 to our 2002 Third Quarter Form 10-Q).  Amendment No. 3 dated July 29, 2005 and Amendment No. 4 dated January 22, 2006 between Haverty Furniture Companies, Inc. as Tenant and ELFP Jackson, LLC as predecessor in interest to John W. Rooker, LLC as Landlord (Exhibit 10.15.1 to our 2006 Form 10-K).
 
10.11
Contract of Sale dated August 6, 2002, between Haverty Furniture Companies, Inc. as Seller and HAVERTACQII LLC, as Landlord (Exhibit 10.2 to our 2002 Third Quarter Form 10-Q).
 
10.12
Lease Agreement dated August 6, 2002, between Haverty Furniture Companies, Inc. as Tenant and HAVERTACQII LLC, as Landlord (Exhibit 10.3 to our 2002 Third Quarter Form 10-Q).
 
*10.13
Amended and Restated Retailer Program Agreement, dated November 5, 2013, between Haverty Furniture Companies, Inc. and Capital Retail Bank (formerly known as GE Money Bank).  Portions of this document have been redacted pursuant to a request for confidential treatment filed pursuant to the Freedom of Information Act.
 
+10.14
Form of Stock-Settled Appreciation Rights Award Notice in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibit 10.2 to our Current Report on Form 8-K dated February 12, 2008).
 
+10.15
Form of Stock-Settled Appreciation Rights Award Notice in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibit 10.1 to our Current Report on Form 8-K dated February 2, 2009).
 
+10.16
Form of Restricted Stock Units Award Agreement in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibit 10.1 to our Current Report on Form 8-K dated January 22, 2010).
 
+10.17
Form of Restricted Stock Units Award Notice in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibit 10.1 to our Current Report on Form 8-K dated January 31, 2011).
 
+10.18
Form of Restricted Stock Units Award Notice in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibit 10.1 to our Current Report on Form 8-K dated January 30, 2012).
 
+10.19
Form of Restricted Stock Units Award Notice and Form of Stock Settled Appreciation Rights Award Notice in connection with the 2004 Long-Term Incentive Compensation Plan (Exhibits 10.1 and 10.2 to our Current Report on Form 8-K dated January 30, 2013).
 
*21
Subsidiaries of Haverty Furniture Companies, Inc.
 
*23.1
Consent of Independent Registered Public Accounting Firm.
 
*31.1
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
*31.2
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
*32.1
Certification pursuant to 18 U.S.C. Section 1350.



 
31

 

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 7, 2014.

 
HAVERTY FURNITURE COMPANIES, INC.
 
 
By:
/s/ CLARENCE H. SMITH
   
Clarence H. Smith
   
Chairman of the Board, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 7, 2014.

/s/ CLARENCE H. SMITH
     
/s/ FRANK S. McGAUGHEY, III
Clarence H. Smith
Chairman of the Board, President and
Chief Executive Officer
 (principal executive officer)
     
Frank S. McGaughey, III
Director
         
/s/ DENNIS L. FINK
     
/s/ TERENCE F. McGUIRK
Dennis L. Fink
Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)
     
Terence F. McGuirk
Director


/s/ JOHN T. GLOVER
     
/s/ VICKI R. PALMER
John T. Glover
Director
     
Vicki R. Palmer
Director
         
         
/s/ RAWSON HAVERTY, JR.
     
/s/ FRED L. SCHUERMANN
Rawson Haverty, Jr.
Director
     
Fred L. Schuermann
Director
         
         
/s/ L. PHILLIP HUMANN
     
/s/ AL TRUJILLO
L. Phillip Humann
Lead Director
     
Al Trujillo
Director
         
         
/s/ MYLLE H. MANGUM
       
Mylle H. Mangum
Director
       



 
32

 


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Haverty Furniture Companies, Inc.

We have audited the accompanying consolidated balance sheets of Haverty Furniture Companies, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Haverty Furniture Companies, Inc. at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Haverty Furniture Companies, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 framework and our report dated March 7, 2014 expressed an unqualified opinion thereon.


 /s/ Ernst & Young LLP

Atlanta, Georgia
March 7, 2014


 
 
F-1

 

Haverty Furniture Companies, Inc.
Consolidated Balance Sheets

   
December 31,
 
(In thousands, except per share data)
 
2013
   
2012
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 83,185     $ 53,550  
Restricted cash and cash equivalents
    7,016       7,013  
Accounts receivable
    8,172       9,710  
Inventories
    91,483       96,902  
Prepaid expenses
    6,494       9,532  
Other current assets
    4,349       3,187  
Total current assets
    200,699       179,894  
Accounts receivable, long-term
    832       814  
Property and equipment
    189,242       193,085  
Deferred income taxes
    13,253       24,366  
Other assets
    13,829       3,937  
Total assets
  $ 417,855     $ 402,096  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable
  $ 21,810     $ 28,178  
Customer deposits
    19,008       20,963  
Accrued liabilities
    36,338       33,272  
Deferred income taxes
          6,595  
Current portion of lease obligations
    959       881  
Total current liabilities
    78,115       89,889  
Lease obligations, less current portion
    16,196       18,473  
Other liabilities
    25,280       34,306  
Commitments
           
Total liabilities
    119,591       142,668  
Stockholders’ equity
               
Capital Stock, par value $1 per share
               
Preferred Stock, Authorized – 1,000 shares; Issued:  None
               
Common Stock, Authorized – 50,000 shares; Issued: 2013 – 27,853; 2012 – 27,212
    27,853       27,212  
Convertible Class A Common Stock, Authorized – 15,000 shares; Issued: 2013 – 2,915;  2012 –  3,297
    2,915       3,297  
Additional paid-in capital
    77,406       73,803  
Retained earnings
    281,222       254,310  
Accumulated other comprehensive loss
    (15,412 )     (23,378 )
Less treasury stock at cost – Common Stock (2013 – 7,731; 2012 – 7,741) and Convertible Class A Common  Stock (2013 and 2012 – 522)
    (75,720 )     (75,816 )
Total stockholders’ equity
    298,264       259,428  
                              Total liabilities and stockholders’ equity
  $ 417,855     $ 402,096  
The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-2

 

Haverty Furniture Companies, Inc.
Consolidated Statements of income

   
Year Ended December 31,
 
(In thousands, except per share data)
 
2013
   
2012
   
2011
 
                   
Net sales
  $ 746,090     $ 670,073     $ 620,903  
Cost of goods sold
    344,594       318,038       300,187  
Gross profit
    401,496       352,035       320,716  
Credit service charges
    320       293       460  
Gross profit and other revenue
    401,816       352,328       321,176  
                         
Expenses:
                       
Selling, general and administrative
    348,599       328,826       315,865  
Interest, net
    1,107       624       737  
Provision for doubtful accounts
    120       165       167  
Other income, net
    (497 )     (803 )     (196 )
Total expenses
    349,329       328,812       316,573  
                         
Income before income taxes
    52,487       23,516       4,603  
Income tax  expense (benefit)
    20,222       8,605       (10,860 )
Net income
  $ 32,265     $ 14,911     $ 15,463  
                         
                         
Basic earnings per share:
                       
Common Stock
  $ 1.45     $ 0.69     $ 0.71  
Class A Common Stock
  $ 1.37     $ 0.58     $ 0.67  
                         
Diluted earnings per share:
                       
Common Stock
  $ 1.41     $ 0.67     $ 0.70  
Class A Common Stock
  $ 1.35     $ 0.59     $ 0.67  
                         
Basic weighted average common shares outstanding:
                       
Common Stock
    19,865       19,096       18,633  
Class A Common Stock
    2,558       2,943       3,287  
                         
Diluted weighted average common shares outstanding:
                       
Common Stock
    22,815       22,382       22,153  
Class A Common Stock
    2,558       2,943       3,287  

The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-3

 

Haverty Furniture Companies, Inc.
Consolidated Statements of COMPREHENSIVE income




(In thousands)
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
                   
Net income
$
32,265
 
$
14,911
 
$
15,463
 
Other comprehensive income (loss)
                 
Defined benefit pension plans:
                 
Net gain (loss) during year
 
10,943
   
339
   
(10,315
)
Amortization of prior service cost
 
210
   
210
   
210
 
Amortization of net loss
 
1,695
   
1,873
   
947
 
Tax
 
(4,882
)
 
(921
)
 
3,389
 
Defined benefit pension plan, net
 
7,966
   
1,501
   
(5,769
)
Other comprehensive income
 
   
117
   
201
 
Total other comprehensive income (loss)
 
7,966
   
1,618
   
(5,568
)
Total comprehensive income
$
40,231
 
$
16,529
 
$
9,895
 


The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-4

 


Haverty Furniture Companies, Inc.
Consolidated Statements of Stockholders’ Equity

   
Year Ended December 31,
 
(In thousands, except share and per share data)
 
2013
   
2012
   
2011
 
   
Shares
   
Dollars
   
Shares
   
Dollars
   
Shares
   
Dollars
 
Common Stock:
                                   
Beginning balance
    27,212,184     $ 27,212       26,578,193     $ 26,578       26,272,106     $ 26,272  
Conversion of Class A Common Stock
    382,199       382       344,802       345       211,440       212  
Stock compensation transactions, net
    259,029       259       289,189       289       94,647       94  
Ending balance
    27,853,412       27,853       27,212,184       27,212       26,578,193       26,578  
Class A Common Stock:
                                               
Beginning balance
    3,297,433       3,297       3,642,235       3,642       3,853,675       3,854  
Conversion to Common Stock
    (382,199 )     (382 )     (344,802 )     (345 )     (211,440 )     (212 )
Ending balance
    2,915,234       2,915       3,297,433       3,297       3,642,235       3,642  
Treasury Stock:
                                               
Beginning balance (includes 522,410 shares Class A Stock for each of the years presented; remainder are Common Stock)
    (8,263,557 )     (75,816 )     (8,271,024 )     (75,847 )     (8,282,677 )     (75,959 )
Directors’ Plan
    10,143       96       25,649       249       11,653       112  
Purchases
                (18,182 )     (218 )            
Ending balance
    (8,253,414 )     (75,720 )     (8,263,557 )     (75,816 )     (8,271,024 )     (75,847 )
Additional Paid-in Capital:
                                               
Beginning balance
            73,803               69,209               67,214  
Stock option and restricted stock issuances
            (1,928 )             (1,605 )             (237 )
Tax benefit related to stock-based plans
            1,754               289               15  
    Directors’ Plan
            454               147               157  
  Amortization of restricted stock
            3,323               2,553               2,060  
Ending balance
            77,406               73,803               69,209  
Retained Earnings:
                                               
Beginning balance
            254,310               264,083               251,229  
   Net income
            32,265               14,911               15,463  
   Cash dividends
   (Common Stock:  2013 - $0.24; 2012 - $1.12
    and 2011 - $0.12 per share
  Class A Common Stock: 2013 - $0.225,  2012 - $1.0625 and 2011 - $0.1125 per share)
            (5,353 )             (24,684 )             (2,609 )
Ending balance
            281,222               254,310               264,083  
                                                 
Accumulated Other Comprehensive Loss:
                                               
Beginning balance
            (23,378 )             (24,996 )             (19,428 )
Pension liabilities adjustment, net of taxes
            7,966               1,501               (5,769 )
   Other
                          117               201  
Ending balance
            (15,412 )             (23,378 )             (24,996 )
 
Total Stockholders’ Equity
          $ 298,264             $ 259,428             $ 262,669  

The accompanying notes are an integral part of these consolidated financial statements

 
 
F-5

 

Haverty Furniture Companies, Inc.
Consolidated Statements of Cash flows

   
Year ended December 31,
 
(In thousands)
 
2013
   
2012
   
2011
 
                   
Cash Flows from Operating Activities
                 
Net income
  $ 32,265     $ 14,911     $ 15,463  
Adjustments to reconcile net income to net cash
provided by operating activities:
                       
Depreciation and amortization
    21,450       19,415       18,242  
Stock-based compensation expense
    3,323       2,553       2,060  
Tax benefit from stock-based plans
    (1,754 )     (289 )     (15 )
Deferred income taxes
    (652 )     (2,209 )     (7,947 )
Provision for doubtful accounts
    120       165