(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 |
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: 1-14451-14445
HAVERTY FURNITURE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
| 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 or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emergency growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting company |
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, 2014,2017, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $541,601,095$477,498,547 (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 20,568,28319,427,144 shares of common stock and 2,080,6201,767,296 shares of Class A common stock, each with a par value of $1.00 per share outstanding at February 28, 2015.27, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 11, 20157, 2018 are incorporated by reference in Part III.
HAVERTY FURNITURE COMPANIES, INC.
Annual Report on Form 10-K for the year ended December 31, 20142017
Table of Contents
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.
1
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 119124 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®, Tempur-Pedic®, Serta®, Stearns & Foster®, and
| Year ended December 31, | |||||||||
| 2014 | 2013 | 2012 | |||||||
| Merchandise: | |||||||||
| Case Goods | |||||||||
| Bedroom Furniture | 17.0 | % | 18.3 | % | 19.4 | % | |||
| Dining Room Furniture | 11.1 | 11.2 | 10.7 | ||||||
| Occasional | 10.6 | 11.0 | 11.0 | ||||||
| 38.7 | 40.5 | 41.1 | |||||||
| Upholstery | 39.9 | 38.8 | 38.2 | ||||||
| Mattresses | 10.9 | 10.8 | 11.5 | ||||||
Accessories and Other (1) | 10.5 | 9.9 | 9.2 | ||||||
| 100.0 | % | 100.0 | % | 100.0 | % | ||||
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 20142017 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 as a selling 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.
2
The following summarizes the different purchasing methods used as a percent of amount due from customers including sales tax:
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Cash or check | 8.6 | % | 9.5 | % | 9.3 | % | 8.8 | % | 8.5 | % | 9.7 | % | |||||||||||
| Credit or debit cards | 56.1 | 54.7 | 54.2 | 59.8 | 58.0 | 56.3 | |||||||||||||||||
| Third-party financed | 32.1 | 32.2 | 31.9 | 30.8 | 32.5 | 32.6 | |||||||||||||||||
| Havertys financed | 3.2 | 3.6 | 4.6 | 0.6 | 1.0 | 1.4 | |||||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Stores
As of December 31, 2014,2017, we operated 119124 stores serving 8084 cities in 16 states with approximately 4.34.5 million retail square feet. Our stores range in size from 19,000 to 66,000 selling square feet with the average being approximately 35,000 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 refreshingare very intentional in having open shopping spaces and 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 createsensures uniformity of presentations in-store, on-lineonline and in our advertising.
We currently are looking for available "empty boxes" and new construction opportunities in existing or new markets where our target customers shop withinhave no plans to expand outside our distribution footprint. Our position in southeast Florida will be strengthened asfootprint and there are a limited number of markets that we open two additional stores in 2015.do not currently serve that are expansion candidates. We are also evaluating certain existing stores for expansion, relocation or closure. We expect a net increaseslight decrease of approximately 3.8%1.4% in our retail square footage in 2015.2018.
Internet
We know that most consumers use the internet to pre-shop and we strive for havertys.com to be an extension of our stores and brand. Our website features a variety of helpful tools including suggested accessories, upholstery customizations anda design center with 3D room planners.planners, upholstery customization, and inspired accessories to create shareable "Idea Boards." We also provide information on which showroom has an item and delivery availability. A large number of product reviews written by our customers is also provided which some consumers find important in the decision makingdecision-making process. Our site allows consumers to develop "wish lists," and to place orders on-lineonline, and set delivery of their purchases. We limit on-lineonline sales of our furniture to within our delivery network, and accessories to the continental United States. Sales placed through our website increased 10.0% in 2017 compared to 2016 and currently are approximately at the level of a single large store and sales increased 13.6% in 2014 compared to 2013.mid-sized market.
Our sales associates also use havertys.com in the store as a tool to further engage the customer while she is in the store and extend her shopping experience when she returns home. Our site is undergoing changes in 2015 to have responsive sizing when accessed using mobile devices and provide more interactive opportunities with the customer. We believe that a direct-to-customer business complements our retail store operations by building brand awareness.
3
Suppliers
We buy our merchandise from numerous foreign and domestic manufacturers and importers, the largest ten of which accounted for approximately 53%55% of our product purchases during 2014.2017. Most of our wood products, or "case goods," are 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 sourcing companies and also buy direct from manufacturers. We have developed a growing direct import program which works with industry designers and manufacturers in some of the best factories throughout Asia. We have dedicated quality control specialists on-site during production to ensure the items meet our specifications. Approximately 17%34% of our furniture merchandisecase goods sales in 20142017 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 effectiveend-to-end supply chain control.visibility. Our merchandising team provides input to the orderingautomated procurement 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.
Our distribution system currently uses a combination of three distribution centers (DCs), and four home delivery centers (HDCs), and two local market cross-docks. In addition to receiving. The DCs receive 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.merchandise. 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 implementationDCs are also designed to shuttle prepped merchandise up to 250 miles for next day home deliveries and serve HDCs within a 500-mile radius. The HDCs provide service to markets within an additional 200 miles. We use a third-party to handle over-the-road delivery of operating standards in our warehouseproduct from the DCs to the HDCs and delivery functions, and the use of technology, provide measurements for determining staffing needs and increasing productivity.market areas. 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. Operating standards in our warehouse and delivery functions provide measurements for determining staffing needs and increasing productivity. We believe that our distribution and delivery system is the best in the retail furniture industry and provides us with a significant competitive advantage.
4
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. Departmentchains. Retail 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. Furnitureopened by furniture manufacturers have also opened their own dedicated retail stores in an effort to control and protect the distribution prospects of their branded merchandise.merchandise compete with us in certain markets. Mass merchants, certain department stores, and some electronics and appliance retailers also have limited furniture product offerings. There has been growth in the e-commerce channel both from internet only retailers and those with a brick-and-mortar presence.
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 competitivepromotional price-oriented furniture store chains.stores. Our ability to make prompt delivery of orders through maintenance of inventory, the expansion of our custom order capabilities and the tailoring of merchandise to customers' desires on a local market basis are we believe significant competitive advantages. We believe our on-lineonline presence provides most elements of a seamless omni-channel approach that many of our competitors do not have or can notcannot replicate. We also consider the expansion of our experienced sales personnelcustom order capabilities, free in-home design service, the tailoring of merchandise on a local market basis, and the additionability to make prompt delivery of in-home designers as important factors in ourorders through maintenance of inventory, significant competitive success.
advantages.
5
Employees
As of December 31, 2014,2017, we had 3,3883,551 employees: 2,0472,193 in individual retail store operations, 179194 in our corporate and credit operations, 5767 in our customer-service call centers, and 1,1051,097 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.
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.8-K, which may be accessed free of charge. 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.
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.
We routinely encounter and address risks, some of which willmay 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.
6
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.manufacturers and national department stores. National mass merchants such as COSTCOand electronics and appliance retailers also have limited product offerings. We also compete with retailers that market products through store catalogs and the Internet.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, and extension of credit to customers on terms more favorable than we offer.
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. ChangesThis exposes us to certain risks that include political and economic conditions. Recently, political discourse in exchange ratesthe United States has increasingly focused on ways to discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions. Proposals to address this concern include the possibility of imposing tariffs or tariffsother penalties on goods manufactured outside the United States to attempt to discourage these practices. It has also been suggested that the United States may materially modify or withdraw from some of its existing trade agreements. Any of these actions, if ultimately enacted, could negatively impact the price we pay for these goods, resulting in potentially higher retail prices and/our ability to source products from foreign jurisdictions and could adversely affect results of operations or lower gross profitprofitability.
Based on these goods.
| · | 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. |
7
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 and political 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 or limitations on our ability to source from certain third-party producers 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 and quality in many 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.
Our vendors might fail in meeting our quality control standards or reacting to changes to the legislative or regulatory framework regarding product safety.
All of our vendors must comply with applicable product safety laws and regulations, and we are dependent on them to ensure that the products we buy comply with all safety standards. Any actual, potential or perceived product safety concerns could expose us to government enforcement action or private litigation and result in recalls and other liabilities. These could harm our brand's image and negatively affect our business and operating results.
Our revenue could be adversely affected by a disruptionrisks in our supply chain.
Optimal product flow is dependent on demand planning and forecasting, production to plan by suppliers, and timely transportation. We often make commitments to purchase products from our vendors in advance of proposed production 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.
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.
8
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 is very transportation dependent to reach the 21 states we deliver to from our marketsstores across 16 Southern and Midwestern states, is very transportation dependent.states.
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, distribution system and 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:
We invest in industry standard security technology to protect the Company's data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods. We are continuously installing new and upgrading existing information technology systems. We use employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected, to the greatest extent possible, against cyber risks and security breaches. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for all companies, including ours. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards.
9
Nevertheless, as cyber threats evolve, change and become more difficult to detect and successfully defend against, one or more cyber-attacks might defeat our or a third-party service provider's security measures in the future and obtain the personal information of these causes, ifcustomers or employees. Employee error or other irregularities may also result in a defeat of security measures and a breach of information systems. Moreover, hardware, software or applications we use may have inherent defects of design, manufacture or operations or could be inadvertently or intentionally implemented or used in a manner that could compromise information security. A security breach and loss of information may not be discovered for a significant period of time after it is not supported byoccurs. While we have no knowledge of a material security breach to date, any compromise of data security could result in a violation of applicable privacy and other laws or standards, the loss of valuable business data, or a disruption of our disaster recovery planbusiness. A security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential information could give rise to unwanted media attention, materially damage to our customer relationships and redundant systems, could cause an interruption in our operationsreputation, and result in reduced net sales and profitability.
Not applicable.
Stores
Our retail store space at December 31, 20142017 totaled approximately 4.34.5 million square feet for 119124 stores. The following table sets forth the number of stores we operated at December 31, 20142017 by state:
| State | Number of Stores | State | Number of Stores | Number of Stores | State | Number of Stores | ||
| Florida | 28 | Louisiana | 4 | 29 | Louisiana | 4 | ||
| Texas | 22 | Maryland | 4 | 24 | Maryland | 4 | ||
| Georgia | 17 | Kentucky | 2 | 18 | Arkansas | 3 | ||
| North Carolina | 8 | Arkansas | 2 | 9 | Kentucky | 2 | ||
| Virginia | 7 | Ohio | 2 | 8 | Ohio | 2 | ||
| South Carolina | 7 | Indiana | 1 | |||||
| Alabama | 7 | Indiana | 1 | 6 | Kansas | 1 | ||
| South Carolina | 7 | Kansas | 1 | |||||
| Tennessee | 6 | Missouri | 1 | 5 | Missouri | 1 | ||
The 4443 retail locations which we owned at December 31, 20142017 had a net book value for land and buildings of $88.7$85.5 million. Additionally, we had 1319 leased locations open withwhose properties have a net book value of $42.6$57.7 million which, due to financial accounting rules, are included on our balance sheets. The remaining 62 locations are leased by us with various termination dates through 2032 plus renewal options.
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 | |
| Colonial Heights, Virginia | Owned | 129,000 |
| Fairfield, Ohio | Leased | 50,000 |
| Theodore, Alabama | Leased | 42,000 |
| Memphis, Tennessee | Leased | 30,000 |
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Corporate Facilities
Our executive and administrative offices are located at 780 Johnson Ferry Road, Suite 800, Atlanta, Georgia. We lease approximately 48,000 square feet of office space on two floors of a suburban mid-rise office building. We also lease 7,0003,100 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.
There are no material pending legal proceedings to which we are a party or of which any of our properties is the subject.
Not Applicable.
applicable.
EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following are the names, ages and current positions of our executive officers and certain significant employees and, if they have not held those positions for the past five years, their former positions during that period with Havertys or other companies.
Name, age and office (at December 31, 2014) and year elected to office | Principal occupation during last five years other than office of the Company currently held | |||||||||
Name, age and office (at December 31, 2017) and year elected to office | Name, age and office (at December 31, 2017) and year elected to office | Principal occupation during last five years other than office of the Company currently held | ||||||||
| Clarence H. Smith | 64 | Chairman of the Board President and Chief Executive Officer Director | 2012 2002 1989 | President and Chief Executive Officer | 67 | Chairman of the Board President and Chief Executive Officer Director | 2012 2002 1989 | President and Chief Executive Officer | ||
| Steven G. Burdette | 53 | Executive Vice President, Stores | 2008 | Has held this position for the last five years | 56 | Executive Vice President, Operations | 2017 | Executive Vice President, Stores, 2008-2017 | ||
| J. Edward Clary | 54 | Senior Vice President, Distribution and Chief Information Officer | 2008 | Has held this position for the last five years | 57 | Executive Vice President, and Chief Information Officer | 2015 | Senior Vice President, Distribution and Chief Information Officer 2008-2015 | ||
| Kathleen Daly-Jennings | 52 | Senior Vice President, Marketing since joining Havertys in June 2014 | 2014 | Head of Industry, Retail Vertical with Google, 2007 - 2014 | ||||||
| Allan J. DeNiro | 61 | Senior Vice President, Chief People Officer | 2010 | Chief People Officer 2006 - 2010 | 64 | Senior Vice President, Chief People Officer | 2010 | Has held this position for the last five years | ||
| Dennis L. Fink | 63 | Executive Vice President, Chief Financial Officer | 2006 | Has held this position for the last five years | ||||||
| Richard D. Gallagher | 53 | Executive Vice President, Merchandising | 2014 | Senior Vice President, Merchandising, 2009- 2014 | 56 | Executive Vice President, Merchandising | 2014 | Senior Vice President, Merchandising, 2009-2014 | ||
| Richard B. Hare | 51 | Executive Vice President and Chief Financial Officer | 2017 | Senior Vice President, Finance, Treasurer and Chief Financial Officer of Carmike Cinemas, Inc., 2006-2016 | ||||||
| Rawson Haverty, Jr. | 58 | Senior Vice President, Real Estate and Development Director | 1988 1992 | Has held this position for the last five years | 61 | Senior Vice President, Real Estate and Development Director | 1988 1992 | Has held this position for the last five years | ||
| Jenny Hill Parker | 56 | Senior Vice President, Finance, Secretary and Treasurer | 2010 | Vice President, Finance, Secretary and Treasurer 1998 - 2010 | 59 | Senior Vice President, Finance, Secretary and Treasurer | 2010 | Has held this position for the last five years | ||
| Janet E. Taylor | 53 | Senior Vice President, General Counsel | 2010 | Vice President and General Counsel 2006 - 2010 | 56 | Senior Vice President, General Counsel | 2010 | Has held this position for the last five years | ||
Rawson Haverty, Jr. and Clarence H. Smith are first cousins.
Our executive 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.
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:
| 2014 | ||||||||||||||||||||||||
| Common Stock | Class A Common Stock | |||||||||||||||||||||||
Quarter Ended | High | Low | Dividend Declared | High | Low | Dividend Declared | ||||||||||||||||||
| March 31 | $ | 31.57 | $ | 25.21 | $ | 0.08 | $ | 31.25 | $ | 25.67 | $ | 0.075 | ||||||||||||
| June 30 | 30.48 | 23.49 | 0.08 | 30.00 | 23.87 | 0.075 | ||||||||||||||||||
| September 30 | 26.84 | 20.68 | 1.08 | (1) | 26.54 | 20.82 | 1.025 | (1) | ||||||||||||||||
| December 31 | 23.00 | 19.54 | 0.08 | 23.25 | 19.61 | 0.075 | ||||||||||||||||||
| 2017 | ||||||||||||||||||||||||
| Common Stock | Class A Common Stock | |||||||||||||||||||||||
Quarter Ended | High | Low | Dividend Declared | High | Low | Dividend Declared | ||||||||||||||||||
| March 31 | $ | 25.50 | $ | 21.05 | $ | 0.1200 | $ | 25.40 | $ | 21.45 | $ | 0.1125 | ||||||||||||
| June 30 | 26.30 | 22.90 | 0.1200 | 26.05 | 22.70 | 0.1125 | ||||||||||||||||||
| September 30 | 26.60 | 21.05 | 0.1500 | 26.40 | 21.20 | 0.1425 | ||||||||||||||||||
| December 31 | 27.23 | 22.60 | 0.1500 | 27.10 | 23.00 | 0.1425 | ||||||||||||||||||
| 2013 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Class A Common Stock | Common Stock | Class A Common Stock | |||||||||||||||||||||||||||||||||||||||||||||
Quarter Ended | High | Low | Dividend Declared | High | Low | Dividend Declared | High | Low | Dividend Declared | High | Low | Dividend Declared | ||||||||||||||||||||||||||||||||||||
| March 31 | $ | 21.00 | $ | 16.16 | $ | 0.04 | $ | 20.83 | $ | 16.31 | $ | 0.0375 | $ | 21.76 | $ | 17.42 | $ | 0.10 | $ | 21.73 | $ | 17.52 | $ | 0.0950 | ||||||||||||||||||||||||
| June 30 | 25.76 | 19.88 | 0.04 | 25.57 | 20.17 | 0.0375 | 21.48 | 16.65 | 0.10 | 20.92 | 16.90 | 0.0950 | ||||||||||||||||||||||||||||||||||||
| September 30 | 27.85 | 21.76 | 0.08 | 27.51 | 21.93 | 0.0750 | 22.33 | 17.61 | 0.12 | 21.72 | 18.33 | 0.1125 | ||||||||||||||||||||||||||||||||||||
| December 31 | 31.67 | 23.95 | 0.08 | 31.58 | 24.00 | 0.0750 | 24.50 | 16.58 | 1.12 | 24.40 | 17.04 | 1.0625 | ||||||||||||||||||||||||||||||||||||
Stockholders
Based on the number of individual participants represented by security position listings, there are approximately 3,0603,564 holders of our common stock and 180163 holders of our Class A common stock as of February 20, 2015.28, 2018.
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 hadhave paid a quarterly cash dividend in each year 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 2012.1935. A special cash dividend of $1.00 for common stock and $0.95 for Class A common stock was paid in the fourth quarter of 2012 and in the third quarter of 2014.2016.
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 11, 2015,7, 2018, to be filed with the Securities and Exchange Commission (the "Company's 20152018 Proxy Statement) and is incorporated herein by reference.
13
Stock Repurchase Program
(a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet be Purchased and Dollars to be Spent Under the Plans or Programs | |||||||||||||
| December 1 – December 31, 2014 | 37,076 | $ | 21.68 | 37,076 | 241,988 | |||||||||||
| $ | 10,000,000 | |||||||||||||||
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, 20092012 and ended December 31, 2014.2017. The graph assumes an initial investment of $100 on January 1, 20092012 and reinvestment of dividends.
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||||||||||||||||||||
| HVT | $ | 100.0 | $ | 95.41 | $ | 81.57 | $ | 129.79 | $ | 251.52 | $ | 186.86 | $ | 100.00 | $ | 193.79 | $ | 143.97 | $ | 142.48 | $ | 168.48 | $ | 163.73 | ||||||||||||||||||||||||
| HVT-A | $ | 100.0 | $ | 94.93 | $ | 81.97 | $ | 130.11 | $ | 251.44 | $ | 184.09 | $ | 100.00 | $ | 193.25 | $ | 141.48 | $ | 140.86 | $ | 164.39 | $ | 166.22 | ||||||||||||||||||||||||
| S&P Smallcap 600 Index | $ | 100.0 | $ | 126.31 | $ | 127.59 | $ | 148.42 | $ | 209.74 | $ | 221.81 | $ | 100.00 | $ | 141.31 | $ | 149.45 | $ | 146.50 | $ | 185.40 | $ | 209.94 | ||||||||||||||||||||||||
| SIC Codes 5700-5799 | $ | 100.0 | $ | 109.58 | $ | 102.39 | $ | 92.74 | $ | 158.18 | $ | 145.94 | $ | 100.00 | $ | 178.54 | $ | 158.54 | $ | 118.16 | $ | 119.04 | $ | 148.65 | ||||||||||||||||||||||||
14
The following selected financial data and non-GAAP financial measures 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, | Year ended December 31, | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
| Results of Operations | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 768,409 | $ | 746,090 | $ | 670,073 | $ | 620,903 | $ | 620,331 | $ | 819,866 | $ | 821,571 | $ | 804,870 | $ | 768,409 | $ | 746,090 | ||||||||||||||||||||
| Net sales change over prior year | 3.0 | % | 11.3 | % | 7.9 | % | 0.1 | % | 5.5 | % | (0.2 | )% | 2.1 | % | 4.7 | % | 3.0 | % | 11.3 | % | ||||||||||||||||||||
| Comp-store sales change over prior year | 3.6 | % | 11.0 | % | 6.8 | % | 0.3 | % | 7.0 | % | (1.3 | )% | 2.1 | % | 2.5 | % | 3.6 | % | 11.0 | % | ||||||||||||||||||||
| Gross profit | 412,366 | 401,496 | 352,035 | 320,716 | 318,767 | 444,923 | 443,337 | 430,776 | 412,366 | 401,496 | ||||||||||||||||||||||||||||||
| Percent of net sales | 53.7 | % | 53.8 | % | 52.5 | % | 51.7 | % | 51.4 | % | 54.3 | % | 54.0 | % | 53.5 | % | 53.7 | % | 53.8 | % | ||||||||||||||||||||
| Selling, general and administrative expenses | 364,654 | 348,599 | 328,826 | 315,865 | 311,897 | 402,884 | 399,236 | 384,801 | 364,654 | 348,599 | ||||||||||||||||||||||||||||||
| Percent of net sales | 47.5 | % | 46.7 | % | 49.1 | % | 50.9 | % | 50.3 | % | 49.1 | % | 48.6 | % | 47.8 | % | 47.5 | % | 46.7 | % | ||||||||||||||||||||
Income before income taxes(1) | 25,257 | 52,487 | 23,516 | 4,603 | 8,673 | 43,223 | 45,821 | 45,275 | 25,257 | 52,487 | ||||||||||||||||||||||||||||||
Net income (1)(2) | 8,589 | 32,265 | 14,911 | 15,463 | 8,444 | 21,075 | 28,356 | 27,789 | 8,589 | 32,265 | ||||||||||||||||||||||||||||||
| Share Data | ||||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | $ | 0.37 | $ | 1.41 | $ | 0.67 | $ | 0.70 | $ | 0.38 | $ | 0.98 | $ | 1.30 | $ | 1.22 | $ | 0.37 | $ | 1.41 | ||||||||||||||||||||
| Class A Common Stock | 0.33 | 1.35 | 0.59 | 0.67 | 0.36 | 0.94 | 1.27 | 1.17 | 0.33 | 1.35 | ||||||||||||||||||||||||||||||
Adjusted diluted earnings per share:(3) | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | $ | 0.37 | $ | 1.41 | $ | 0.67 | $ | 0.70 | $ | 0.38 | $ | 0.98 | $ | 1.30 | $ | 1.22 | $ | 0.37 | $ | 1.41 | ||||||||||||||||||||
| Impact of Tax Act in December 2017 | 0.27 | — | — | — | — | |||||||||||||||||||||||||||||||||||
Pension settlement expense (1) | 0.90 | — | — | — | — | — | — | — | 0.90 | — | ||||||||||||||||||||||||||||||
Out-of-period adjustment(4) | — | (0.02 | ) | 0.02 | — | — | — | — | — | — | (0.02 | ) | ||||||||||||||||||||||||||||
Adjusted diluted earnings per common share(3) | $ | 1.28 | $ | 1.39 | $ | 0.69 | $ | 0.70 | $ | 0.38 | $ | 1.25 | $ | 1.30 | $ | 1.22 | $ | 1.28 | $ | 1.39 | ||||||||||||||||||||
| Cash dividends – amount per share: | ||||||||||||||||||||||||||||||||||||||||
Common Stock(5) | 1.3200 | $ | 0.2400 | 1.1200 | 0.1200 | 0.1000 | $ | 0.540 | $ | 1.440 | $ | 0.360 | $ | 1.320 | $ | 0.240 | ||||||||||||||||||||||||
Class A Common Stock(5) | 1.2500 | $ | 0.2250 | 1.0625 | 0.1125 | 0.0950 | $ | 0.510 | $ | 1.365 | $ | 0.340 | $ | 1.250 | $ | 0.225 | ||||||||||||||||||||||||
| Shares outstanding (in thousands): | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | 20,568 | 20,122 | 19,471 | 18,829 | 18,512 | 19,452 | 19,287 | 20,124 | 20,568 | 20,122 | ||||||||||||||||||||||||||||||
| Class A Common Stock | 2,081 | 2,393 | 2,775 | 3,120 | 3,331 | 1,767 | 1,818 | 2,032 | 2,081 | 2,393 | ||||||||||||||||||||||||||||||
| Total shares | 22,649 | 22,515 | 22,246 | 21,949 | 21,843 | 21,219 | 21,104 | 22,156 | 22,649 | 22,515 | ||||||||||||||||||||||||||||||
| Financial Position | ||||||||||||||||||||||||||||||||||||||||
| Inventories | $ | 107,139 | $ | 91,483 | $ | 96,902 | $ | 93,713 | $ | 91,938 | $ | 103,437 | $ | 102,020 | $ | 108,896 | $ | 107,139 | $ | 91,483 | ||||||||||||||||||||
| Capital expenditures | $ | 30,882 | $ | 20,202 | $ | 25,014 | $ | 17,566 | $ | 14,053 | $ | 24,465 | $ | 29,838 | $ | 27,143 | $ | 30,882 | $ | 20,202 | ||||||||||||||||||||
| Depreciation/amortization expense | 22,613 | 21,450 | 19,415 | 18,242 | 16,859 | 30,516 | 29,045 | 25,756 | 22,613 | 21,450 | ||||||||||||||||||||||||||||||
| Total assets | $ | 460,987 | $ | 417,855 | $ | 402,096 | $ | 385,100 | $ | 370,239 | $ | 461,329 | $ | 454,505 | $ | 471,251 | $ | 460,987 | $ | 417,855 | ||||||||||||||||||||
Total debt(6) | 49,065 | 17,155 | 19,354 | 13,046 | 9,099 | 54,591 | 55,474 | 53,125 | 49,065 | 17,155 | ||||||||||||||||||||||||||||||
| Stockholders' equity | 292,083 | 298,264 | 259,428 | 262,669 | 253,182 | 294,142 | 281,871 | 301,739 | 292,083 | 298,264 | ||||||||||||||||||||||||||||||
| Debt to total capital | 14.4 | % | 5.4 | % | 6.9 | % | 4.7 | % | 3.5 | % | 15.7 | % | 16.4 | % | 15.0 | % | 14.4 | % | 5.4 | % | ||||||||||||||||||||
| Net cash provided by operating activities | 55,454 | 55,889 | 52,168 | 19,072 | 24,201 | 52,457 | 60,054 | 52,232 | 55,454 | 55,889 | ||||||||||||||||||||||||||||||
| Other Supplemental Data: | ||||||||||||||||||||||||||||||||||||||||
| Employees | 3,388 | 3,266 | 3,250 | 3,050 | 3,100 | 3,551 | 3,656 | 3,596 | 3,388 | 3,266 | ||||||||||||||||||||||||||||||
| Retail sq. ft. (in thousands) | 4,283 | 4,259 | 4,353 | 4,246 | 4,230 | |||||||||||||||||||||||||||||||||||
| Retail sq. ft. (in thousands) at year end | 4,517 | 4,494 | 4,380 | 4,283 | 4,259 | |||||||||||||||||||||||||||||||||||
| Annual retail net sales per weighted average sq. ft. | $ | 183 | $ | 176 | $ | 158 | $ | 148 | $ | 148 | $ | 185 | $ | 188 | $ | 185 | $ | 183 | $ | 176 | ||||||||||||||||||||
| Average sale per written ticket | $ | 2,091 | $ | 2,048 | $ | 2,002 | $ | 1,912 | $ | 1,860 | ||||||||||||||||||||||||||||||
Due to rounding amounts may not add to totals.
| (1) | Includes for 2014 the impact of the settlement of the pension plan of a $21.6 million increase in expense and a tax benefit of $0.9 million, for a total impact of $20.7 million after tax or $0.90 per share. |
| (2) | We reduced the valuation allowance and |
| (3) | Adjusted diluted earnings per share is a non-GAAP financial measure. |
| (4) | We recorded an out-of-period adjustment in 2013 related to certain vendors' pricing allowances. The non-cash adjustment increased gross profit by $0.8 million or $0.02 per diluted share. |
| (5) | Includes special dividends of $1.00 for Common Stock and $0.95 for Class A Common Stock paid in the third quarter of 2014 and in the fourth quarter of 2016. |
| (6) | Debt is comprised completely of lease obligations. |
15
Overview
Industry
The retail residential furniture industry's results are influenced by the overall strength of the economy, 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.credit. These factors remain tempered by continued high levels of unemployment, lowerrising consumer debt, home values,inventory constraints, and reducedtight access to home mortgage 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 over 100 in-home designers serving 109most of our stores. These individuals work with our sales associates to provide customers additional confidence and inspiration.inspiration in their furniture purchase journey. 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 exceptional service in the markets we serve.
Sales for 2014 grew 3.0%were slightly lower in 2017 than in 2016, falling 0.2% or $22.3 million over 2013.$1.7 million. Our average ticket increased 2% but store traffic was down mid-single digits. Gross profit as a percent of net sales decreased 10increased 30 basis points andin spite of a negative 33 basis points impact from LIFO. SG&A costs increased 80less than 1% but with less leverage increased 50 basis points. We terminated and settled the obligations related to our defined benefit pension plan and recordedpoints as a pretax chargepercent of $21.6 million.sales. Our pre-tax income was $25.3$43.2 million, and excluding the pension charge and an out-of-period adjustment in 2013 decreased 9.2%a decrease of 5.7% or $4.8$2.6 million. We experienced import vendor and supply chain disruptions to our business from which we began to recover late in the year. Our fourth quarter results were a pre-tax loss of $5.0 million. Excluding the pension charge, our fourth quarter pre-tax income was $16.6of $14.1 million up 5.5% overdown from $17.3 million in the prior year period. We continued our focus on cash flow and made $24.5 million in important capital expenditure investments in our business and returned cash to our stockholders. We did not use our credit facility during the year and our total debt to total capital was 14.4% at December 31, 2014.paid $11.4 million in dividends in 2017.
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, services, 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, EBITDA, 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, inventory out-of-stock, 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 andbut are not evaluated in determining compensation.isolation from others, so as not to conflict with our company goals.
16
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Statement of Operations Data: | ||||||||||||
| Net sales | $ | 768,409 | $ | 746,090 | $ | 670,073 | ||||||
| Gross profit | 412,366 | 401,496 | 352,035 | |||||||||
| Selling, general and administrative expenses | 364,654 | 348,599 | 328,826 | |||||||||
| Pension settlement expense | 21,623 | — | — | |||||||||
| Income before interest and income taxes | 26,308 | 53,594 | 24,140 | |||||||||
| Income before income taxes | 25,257 | 52,487 | 23,516 | |||||||||
| Net income | $ | 8,589 | $ | 32,265 | $ | 14,911 | ||||||
| Other Financial Data: | ||||||||||||
| EBIT | $ | 26,308 | $ | 53,594 | $ | 24,140 | ||||||
| Pension settlement expenses | 21,623 | — | — | |||||||||
| Q-1 2013 gross profit adjustment | — | (835 | ) | 835 | ||||||||
| Adjusted EBIT | $ | 47,931 | $ | 52,759 | $ | 24,975 | ||||||
| Adjusted EBIT as a percent of net sales | 6.2 | % | 7.1 | % | 3.7 | % | ||||||
| Adjusted EBIT | $ | 47,931 | $ | 52,759 | $ | 24,975 | ||||||
| Interest expense, net | 1,051 | 1,107 | 624 | |||||||||
| Adjusted income before income taxes | $ | 46,880 | $ | 51,652 | $ | 24,351 | ||||||
| Net income | $ | 8,589 | $ | 32,265 | 14,911 | |||||||
| Pension settlement expense, net of tax | 20,725 | — | — | |||||||||
| Out-of-period adjustment, net of tax | — | (518 | ) | 518 | ||||||||
| Adjusted net income | $ | 29,314 | $ | 31,747 | $ | 15,429 | ||||||
| Earnings per diluted share | $ | 0.37 | $ | 1.41 | $ | 0.67 | ||||||
| Non-cash pension settlement expense | 0.90 | — | — | |||||||||
| Out-of-period adjustment | — | (0.02 | ) | 0.02 | ||||||||
| Adjusted earnings per diluted share | $ | 1.28 | $ | 1.39 | $ | 0.69 | ||||||
| Due to rounding amounts may not add to the totals. | ||||||||||||
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 $22.3decreased $1.7 million or 3.0%0.2% in 20142017 and $76.0increased $16.7 million or 11.3%2.1% in 2013.2016. Comparable store sales increased 3.6%decreased 1.3% or $26.2$10.9 million in 20142017 and 11.0%increased 2.1% or $72.0$16.2 million in 2013.2016. The remaining $3.9$9.2 million in 20142017 and $4.0$0.5 million in 20132016 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, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | Comp-Store Sales | Net Sales | Comp-Store Sales | Net Sales | Comp-Store Sales | 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 | 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 | $ | 181.7 | (2.3 | )% | (0.9 | )% | $ | 186.1 | 13.8 | % | 11.5 | % | $ | 163.6 | 6.1 | % | 5.7 | % | $ | 200.4 | 3.0 | % | 1.6 | % | $ | 194.5 | 1.7 | % | 0.9 | % | $ | 191.3 | 5.3 | % | 3.8 | % | ||||||||||||||||||||||||||||||||||||||
| Q2 | 175.1 | 2.4 | 3.2 | 171.1 | 12.9 | 11.2 | 151.5 | 5.9 | 5.6 | 196.8 | 1.1 | (0.2 | ) | 194.8 | 3.8 | 3.8 | 187.7 | 7.2 | 4.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 | 198.5 | 3.0 | 3.5 | 192.7 | 11.6 | 11.8 | 172.7 | 11.1 | 10.0 | 207.6 | (1.9 | ) | (2.9 | ) | 211.7 | 0.8 | 1.2 | 209.9 | 5.7 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q4 | 213.0 | 8.6 | 8.3 | 196.2 | 7.6 | 9.5 | 182.3 | 8.4 | 6.0 | 215.0 | (2.6 | ) | (3.5 | ) | 220.6 | 2.2 | 2.5 | 215.9 | 1.4 | (0.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year | $ | 768.4 | 3.0 | % | 3.6 | % | $ | 746.1 | 11.3 | % | 11.0 | % | $ | 670.1 | 7.9 | % | 6.8 | % | $ | 819.9 | (0.2 | )% | (1.3 | )% | $ | 821.6 | 2.1 | % | 2.1 | % | $ | 804.9 | 4.7 | % | 2.5 | % | ||||||||||||||||||||||||||||||||||||||
Sales in 2014 were challenged by weather in2017 declined slightly as the first quarter and case goods vendor supply and import flow issues through muchlevel of the remainder ofour store traffic weakened throughout the year. The store displays in this important categoryOur average ticket increased 2.1% allowing our sales results to not moderate at the same pace as traffic. Our in-home designers were not as robust aspart of 20.6% of our merchandise team had planned and began to recover insales, with their average ticket twice the fourth quarter. Our improved custom order configurator web based tool helped our specialty upholstery sales to continue to grow with a 10.8% increase over 2013 including a 19.3% growth rate in the fourth quarter. We also expanded our in-home-design service in 2014 which has yielded higher average tickets.overall average.
Sales in 20132016 began slowly as first quarter consumer spending remained at its sluggish end of 2015 pace. Throughout 2016 our business became more concentrated around holidays and we adjusted our advertising cadence accordingly. Our average ticket increased as the fundamental drivers2.3% and our in-home designers were part of home furnishings purchases continued to recover. We capitalized on this trend with improved merchandising and expansion19.7% 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.sales.
Sales in 20122015 increased at a strongmodest pace asduring the first nine months of the year. We did have some product availability issues during the first quarter resulting from the impact of the West Coast port slowdown. We experienced a softening in our industry began its recovery.business in the fourth quarter, more prevalent in Texas but also across many of our markets. Our average ticket was up 7.8%increased 4.7% as our customers responded to the value offered incustom upholstery sales increased 11.8% over 2014 as more business involved a member of 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.in-home design team.
We believe as the general economy improves and consumer spending and the housing market strengthens, our business will benefit. We have upgraded stores, offer appealing merchandise and expanded special order and service offerings which will be important drivers for our 20152018 sales results. We are growingexpect our weighted averageretail square footage approximately 3.4%. We do anticipate headwindswill remain relatively flat in 2015 for certain of our markets due to changes in the competitive landscape.
2018.
Gross Profit
Our cost of sales consistgoods sold consists 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 was 53.7%54.3% in 20142017 compared to 53.8%54.0% in 2013. Our2016. We use the LIFO impact was $0.5 million greater in 2014 than in 2013inventory valuation method and during 2014 we had slightly lower delivery fee revenue and higher than normal clearance sale activity resulting from store and local warehouse closings. We recorded an $0.8 million positive out-of-period adjustment in the first quarter 2013 for vendor pricing allowances. Excluding the impact of changes in the out-of-period adjustment, gross profitLIFO reserve generated a $2.7 million or 33 basis points negative impact in 2017 over 2016. Our execution on product mix and pricing was 53.7% in 2013.able to offset this impact and deliver an overall improvement of 63 basis points. Our Havertys branded merchandise provides a strong value and fashion statement to consumers. The increasing sales generated by our in‑home designers have boosted higher margin mix opportunities through custom upholstery and accessories sales.
Gross profit as a percentage of net sales increased to 53.8%was 54.0% in 20132016 compared to 52.5%53.5% in 2012. Our focus on higher price point products and pricing discipline were key to2015. The use of the gross profit improvement combined withLIFO method generated a $1.1$1.9 million smaller LIFOor 23 basis points positive impact and the $0.8 million out-of-period adjustment.in 2016 over 2015.
Our merchandising strategy will be similar to 2014 using promotional pricing selectively and focusing on product fashion and customer service. We expect thatexpectations for 2018 are for annual gross profit margins for 2015 will beof approximately 53.3%, down slightly reflecting some higher import costs54.7%. This increase is based on anticipated changes to our product mix and lower markdowns. We do not plan to increase the impact of increased competition in certainlevel of our markets.promotional pricing.
Selling, General and Administrative Expenses
SG&A expenses are comprised of five categories: selling; occupancy;selling, occupancy, delivery and certain warehousing costs;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.
We classify our SG&A expenses as either variable or fixed and discretionary. Our variable expenses include the costs in the selling and delivery categories and certain warehouse expenses as these amounts will generally move in tandem with our level of sales. The remaining categories and expenses are classified as fixed and discretionary because these costs do not fluctuate with sales. The following table outlines our SG&A expenses by classification:
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| (In thousands) | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||
| Variable | $ | 149,694 | 18.2 | % | $ | 149,299 | 18.2 | % | $ | 143,861 | 17.9 | % | ||||||||||||
| Fixed and discretionary | 253,190 | 30.9 | 249,937 | 30.4 | 240,940 | 29.9 | ||||||||||||||||||
| $ | 402,884 | 49.1 | % | $ | 399,236 | 48.6 | % | $ | 384,801 | 47.8 | % | |||||||||||||
| $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | |||||||||||||||||||
| Variable | $ | 134,168 | 17.5 | % | $ | 124,770 | 16.7 | % | $ | 116,933 | 17.5 | % | ||||||||||||
| Fixed and discretionary | 230,486 | 30.0 | 223,829 | 30.0 | 211,893 | 31.6 | ||||||||||||||||||
| $ | 364,654 | 47.5 | % | $ | 348,599 | 46.7 | % | $ | 328,826 | 49.1 | % | |||||||||||||
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Year-to-Year Comparisons
Our SG&A as a percent of sales increased 50 basis points to 49.1% from 48.6% in 2016. The fixed and discretionary expenses increased $3.3 million or 1.3% in 2017 over 2016. This change was primarily due to increases in advertising and marketing expenses of $2.9 million and higher depreciation, rent, and other occupancy costs totaling $3.7 million. These increases were partly offset by $3.0 million in lower administrative costs driven by lower medical costs. Our variable expenses increased slightly due to continued growth generated by our in-home designers and increases in delivery costs.
Our SG&A costs as a percent of sales increased 80 basis points to 47.5% for 201448.6% from 46.7%47.8% in 2013. The fixed and discretionary expenses of $230.5 million in 2014 were $6.7 million or 3% above the 2013 level primarily due to increases in spending on advertising of $2.6 million, depreciation and other occupancy costs of $1.8 million and greater communication and data expense of $2.2 million. Variable expense as a percent of sales for 2014 increased to 17.5% from 16.7% in 2013. Our selling costs as a percent of sales increased 47 basis points in 2014 over 2013 due in part to the expansion of our in-home design program. Labor and insurance costs increased in our delivery and certain warehouse operations.
2015. The fixed and discretionary expenses increased $11.9$9.0 million or 3.7% in 2016 over 2015. This change was primarily due to a $6.5 million rise in administrative costs driven by increases in medical insurance and compensation expense. Our depreciation expense increased $3.3 million offset partly by a reduction of $1.3 million in 2013 to $223.8 million from $211.9 million in 2012. This increase was driven by $7.8 million in additional administrative costs primarily from greater incentive and compensation expense and higher health insuranceall other occupancy costs. Our new stores and improvements generated a $2.0 million increase in depreciation in 2013 compared to 2012. We also spent $1.2 million more on advertising in 2013 over 2012. Our variable expenses were lowerincreased 30 basis points as a percent of net sales in 2013 compared to 2012 primarilyour in-home design business grew and due to efficiencies in our warehouse andslightly higher delivery functions and changes in credit costs.
Variable costs within SG&A for 2018 are expected to be 17.3% to 17.5%18.5% as a percent of sales, for 2015.
Interest Expense
Our interest expense for the years 20122015 to 20142017 is primarily driven by amounts related to our lease obligations. For leases accounted for as capital and financing lease obligations, we only record straight-line rent expense for the land portion in occupancy costs in SG&A along with depreciationamortization on the additional asset recorded. Rental payments are recognized as a reduction of the obligations and as interest expense. The number of stores, including those under construction, which are accounted for in this manner has increased from eight17 in 2012,2015 to sixteen19 in 2014.2017. We expect interest expense for lease obligations will be $2.7$2.3 million in 2015.2018.
Provision for Income Taxes
The Tax Cuts and Jobs Act (the "Tax Act") was signed into law on December 22, 2017. The Tax Act significantly revises the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21%. It also eliminates certain deductions and enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property. We have not completed our determination of the accounting implications of the Tax Act. However, we have reasonably estimated the effects of the Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017 of approximately $10.6 million. This amount is primarily comprised of the determination and remeasurement of net deferred tax assets related to depreciation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the IRS, U.S. Treasury Department, and other standard-setting bodies, we may make adjustments to the provisional amounts. We also recognized a tax benefit of $4.7 million for the re-measurement of deferred tax assets and liabilities for which our accounting is complete. The total of these adjustments was additional deferred tax expense of $5.9 million and is what we believe is the impact of the Tax Act.
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Our effective tax rate was 66.0%, 38.5%51.2% in 2017, 38.1% in 2016, and 36.6% for 2014, 201338.6% in 2015. The 2016 and 2012, 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.
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, 2014,2017, our cash and cash equivalents balance was $65.5$79.5 million, a decreasean increase of $17.7$16.0 million compared to December 31, 2013.2016. This decreasechange in cash primarily resulted from strong operating results offset by purchases of property and equipment the payment of special cashand dividends paid to stockholders and the purchases of certificates of deposit.stockholders. Additional discussion of our cash flow results, including the comparison of 20142017 activity to 2013,2016, is set forth in the Analysis of Cash Flows section.
At December 31, 2014,2017, our outstanding indebtedness was $49.1$54.6 million in lease obligations required to be recorded on our balance sheet. We had no amounts outstanding and $43.8$47.4 million available under our revolving credit facility.
Capital Expenditures
Our primary capital requirements have been focused on our stores, distribution centers, and the development of both proprietary and purchased information systems. We have successfully concluded our store remodeling program and in 2017 we completed the expansion of our Florida Distribution Center and began a similar project in our Western Distribution Center. Our capital expenditures were $30.9$24.5 million in 2014, $10.72017, $5.4 million moreless than in 2013.2016.
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 tofor the improvement and maintenance of our existing stores, and our investment in distribution improvements and new information systems to support our key strategies. In 2015,2018, we anticipate that our capital expenditures will be approximately $31$20.0 million, refer to our Store Expansion and Capital Expenditures discussion below.
Analysis of Cash Flows
The following table illustrates the main components of our cash flows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 55,454 | $ | 55,889 | $ | 52,168 | $ | 52,457 | $ | 60,054 | $ | 52,232 | ||||||||||||
| Capital expenditures | (30,882 | ) | (20,202 | ) | (25,014 | ) | (24,465 | ) | (29,838 | ) | (27,143 | ) | ||||||||||||
| Free cash flow | $ | 24,572 | $ | 35,687 | $ | 27,154 | $ | 27,992 | $ | 30,216 | $ | 25,089 | ||||||||||||
| Net cash used in investing activities | $ | (41,372 | ) | $ | (20,120 | ) | $ | (24,766 | ) | $ | (21,608 | ) | $ | (13,187 | ) | $ | (28,355 | ) | ||||||
| Net cash used in financing activities | $ | (31,786 | ) | $ | (6,134 | ) | $ | (23,437 | ) | $ | (14,839 | ) | $ | (54,045 | ) | $ | (18,699 | ) | ||||||
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Cash flows from operating activities. During 2014,2017, net cash provided by operating activities was $55.5$52.5 million. Cash from net income, net of depreciation and amortization, pension settlement expense and stock-based compensation expense was partially reduced by cash used for working capital.
The primary components of the changes in working capitaloperating assets and liabilities are listed below:
| · | Increase in inventories of |
| · | Increase in prepaid expenses of $2.5 million primarily from the timing of the payment of taxes and computer maintenance agreements. |
| · | Increase in customer deposits of $2.9 million. |
| · | Decrease in accounts payable of $5.2 million. |
| · | Decrease in accrued liabilities of $4.3 million primarily from the timing of payments for compensation and real estate and property taxes. |
During 2016, net cash provided by operating activities was $60.1 million. The primary components of the changes in operating assets and liabilities are listed below:
| · | Decrease in inventories of $6.9 million as we operated with leaner quantities in our distribution centers. |
| · | Increase in other assets of $2.5 million, resulting from increased prepaid maintenance contracts and assets held under a non-qualified deferred compensation plan. |
| · | Increase in prepaid expenses of $2.7 million primarily from the timing of the payment of payroll taxes and computer maintenance agreements. |
| · | Decrease in accounts payable of $2.2 million. |
| · | Increase in customer deposits of $3.9 million. |
During 2015, net cash provided by operating activities was $52.2 million. The primary components of the changes in operating assets and liabilities are listed below:
| · | Increase in inventories of $2.3 million, mainly due to the increase in showrooms, reduced $0.5 million for the inventory in our Lubbock store that was destroyed. |
| · | Decrease in other current assets of |
| · | Decrease in other assets of |
| · | Increase in accounts payable of |
| · | Decrease in |
Cash flows used in investing activities. Net cash used in investing activities was $41.4$21.6 million, $20.1$13.2 million and $24.8$28.4 million for 2014, 20132017, 2016 and 2012,2015, 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, distribution, and information technology projects, refer to our Store Expansion and Capital Expenditures discussion below. During 2014,2017, we received approximately $2.0 million in additioninsurance proceeds to offset costs of rebuilding and repairing two stores. During 2016, partly offsetting the expenditures for new stores and one store's majorthe expansion of the Florida distribution center we purchased $10.0had $12.7 million of investments which matured and received $3.0 million in certificates of deposit. During 2013, we invested in our distribution systeminsurance proceeds for future expansion and added capacity to our internal cloud architecture to support our sales systems and video communications. 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.destroyed Lubbock store.
Cash flows used in financing activities. Net cash used in financing activities was $31.8$14.8 million for 2014, $6.12017, $54.0 million for 20132016 and $23.4$18.7 million for 2012.2015. During 20142017 we paid $11.4 million in dividends. During 2016 we purchased $21.3 million in treasury stock, paid $9.4 million in dividends, and paid $21.0 million as a special dividend of approximately $22.6 million.dividend. 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 shares2015 we purchased $14.0 million in treasury stock and contributed to the tax benefit from stock-based plans. During 2012 we paid a special dividend of approximately $22.0$8.1 million and we had expiring in-the-money options which generated additional option exercise activity in 2012. During 2014, 2013, and 2012, we did not make any draws on our revolving credit facility.dividends. We also received $6.7 million in construction allowances.
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Long-Term Debt
In September 2011March 2016 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 dohave not generally enterentered into agreements which meet the SEC's definition of an off-balance sheet arrangements. We did notarrangement other than operating leases and have made no financial commitments to or guarantees with respect to 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, 2014. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
special purpose entities.
Contractual Obligations
The following summarizes our contractual obligations and commercial commitments as of
December 31, 20142017 (in thousands):
| Payments Due or Expected by Period | Payments Due or Expected by Period | |||||||||||||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||||||||||||||||||
Lease obligations(1) | $ | 68,239 | $ | 4,706 | $ | 10,079 | $ | 10,273 | $ | 43,181 | $ | 69,885 | $ | 6,087 | $ | 12,263 | $ | 10,736 | $ | 40,799 | ||||||||||||||||||||
| Operating leases | 202,777 | 32,148 | 59,535 | 48,065 | 63,029 | 153,474 | 31,643 | 55,126 | 35,502 | 31,203 | ||||||||||||||||||||||||||||||
| Purchase orders | 90,806 | 90,806 | — | — | — | 88,426 | 88,426 | — | — | — | ||||||||||||||||||||||||||||||
Total contractual obligations(2) | $ | 361,822 | $ | 127,660 | $ | 69,614 | $ | 58,338 | $ | 106,210 | $ | 311,785 | $ | 126,156 | $ | 67,389 | $ | 46,238 | $ | 72,002 | ||||||||||||||||||||
| (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 retirement benefits. 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):
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||
| Store Activity: | # of Stores | Square Footage | # of Stores | Square Footage | # of Stores | Square Footage | # of Stores | Square Footage | # of Stores | Square Footage | # of Stores | Square Footage | |||||||||||||||||||||||||
| Opened | 5 | 167 | — | — | 4 | 139 | 3 | 100 | 4 | 146 | 4 | 159 | |||||||||||||||||||||||||
| Closed | 5 | 160 | 3 | 103 | 1 | 32 | 3 | 85 | 1 | 33 | 2 | 73 | |||||||||||||||||||||||||
| Year end balances | 119 | 4,283 | 119 | 4,259 | 122 | 4,353 | 124 | 4,517 | 124 | 4,494 | 121 | 4,380 | |||||||||||||||||||||||||
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The following table summarizes our store activity in 20142017 and plans for 2018. Our store in Lubbock, Texas sustained significant damage from a blizzard at the end of December 2015. We operated in a temporary location during the rebuilding process. For additional information about the gain associated with this event, refer to Note 1, Other Income, of the Notes to the Consolidated Financial Statements.
Location | Opening (Closing) Quarter Actual or Planned | Category |
| New Market | ||
| Columbia, SC | (Q-1-18) | Closure |
| To be announced | Closure | |
| To be announced | Q-4-18 | New Market |
| To be announced | Closure |
These plans and other changes should increasedecrease net selling space in 20152018 by approximately 3.8%1.4% assuming the new stores open and existing stores close as planned.
Our investing activities in stores and operations in 2014, 20132017, 2016 and 20122015 and planned outlays for 20152018 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.
| Proposed 2015 | 2014 | 2013 | 2012 | Proposed 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
| Stores: | ||||||||||||||||||||||||||||||||
| New or replacement stores | $ | 13,000 | $ | 12,900 | $ | 100 | $ | 9,500 | $ | 1,100 | $ | 6,300 | $ | 6,800 | $ | 7,800 | ||||||||||||||||
| Remodels/expansions | 8,000 | 6,900 | 11,200 | 5,500 | 2,000 | 5,300 | 3,900 | 8,900 | ||||||||||||||||||||||||
| Other improvements | 3,000 | 4,200 | 3,900 | 4,600 | 3,900 | 3,600 | 4,200 | 3,700 | ||||||||||||||||||||||||
| Total stores | 24,000 | 24,000 | 15,200 | 19,600 | 7,000 | 15,200 | 14,900 | 20,400 | ||||||||||||||||||||||||
| Distribution | 3,500 | 3,500 | 2,300 | 1,600 | 11,000 | 6,500 | 9,200 | 2,800 | ||||||||||||||||||||||||
| Information technology | 3,500 | 3,400 | 2,700 | 3,800 | 2,000 | 2,800 | 5,700 | 3,900 | ||||||||||||||||||||||||
| Total | $ | 31,000 | $ | 30,900 | $ | 20,200 | $ | 25,000 | $ | 20,000 | $ | 24,500 | $ | 29,800 | $ | 27,100 | ||||||||||||||||
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.income taxes. 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.
We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:
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 20142017 expense for insurance by approximately $82,000,$85,000, a 1.3%1.1% change.
We becameare primarily self-insured for employee group health care claims in 2012.claims. 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.
At December 31, 2017, we have made grants of restricted stock, restricted stock units, and stock-settled appreciation rights. See Note 12, 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 valuereasonable estimate of the respective awards. We estimated the fair value of our stock-settled appreciation rights awards aseffects of the grant date based uponTax Act on our existing deferred tax balances and recorded additional provisional tax expense of $10.6 million. This provisional amount is primarily related to depreciation deductions. We also recognized a Black-Scholes-Merton option pricing model. We estimatetax benefit of $4.7 million for the fair valueremeasurement of deferred tax assets and liabilities for which 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 awardsaccounting is recorded in the consolidated statements of income with a corresponding credit to common stock.
complete.
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.
24
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-22F-24 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 | |
| Consolidated Statements of Comprehensive Income | |
| Consolidated Statements of Stockholders' Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to Consolidated Financial Statements | |
| Schedule II – Valuation and Qualifying Accounts |
Not Applicable.
(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.
(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 (2013 framework). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2014.2017.
Attestation Report of the Independent Registered Public Accounting Firm. Ernst & YoungGrant Thornton 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 2014,2017, 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.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Haverty Furniture Companies, Inc.
We have audited the internal control over financial reporting of Haverty Furniture Companies, Inc. (a Maryland corporation) and subsidiary (the "Company") as of December 31, 2014,2017, based on criteria established in the 2013 Internal Control – Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 framework (the COSO criteria). Haverty Furniture Companies, Inc.'sInternal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated March 2, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company'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'sCompany's internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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.
Definition and limitations of internal control over financial reporting
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.
Atlanta, GeorgiaGA
March 16, 20152, 2018
Not applicable.
PART III
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.
We provide some information about our executive officers in Part I of this report under the heading "Executive Officers and Certain Significant Employees of the Registrant." 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 20152018 Proxy Statement.
The information contained in our 20152018 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.
The information contained in our 20152018 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.
The information contained in our 20152018 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.
The information under the heading "Audit Fees and Related Matters" in our 20152018 Proxy Statement is incorporated herein by reference to this item.
PART IV
Consolidated Balance Sheets – December 31, 20142017 and 20132016
Consolidated Statements of Comprehensive Income – Years ended December 31, 2014, 20132017, 2016 and 20122015
Consolidated Statements of Stockholders' Equity – Years ended December 31, 2014, 20132017, 2016 and 20122015
Consolidated Statements of Cash Flows – Years ended December 31, 2014, 20132017, 2016 and 20122015
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
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.
29
| Exhibit No. | Exhibit |
| +10.3 | |
| + | |
| + | |
| +10.6.1 | |
| +10.7 | Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 2009 (Exhibit 10.9 to our |
| +10.8 | |
| + | |
| +10.9 | |
| +10.10 | |
| +10.11 |
30
| Exhibit No. | Exhibit |
| *23.1 | |
| *23.2 | |
| *31.1 | |
| *31.2 |
31
| Exhibit No. | Exhibit |
| *32.1 | |
| *101 | The following financial information from |
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 16, 2015.2, 2018.
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 16, 2015.2, 2018.
| /s/ CLARENCE H. SMITH | /s/ | |||
Clarence H. Smith Chairman of the Board, President and Chief Executive Officer (principal executive officer) | ||||
Executive Vice President and Chief Financial Officer (principal financial and accounting officer) | ||||
| /s/ L. ALLISON DUKES | /s/ MYLLE H. MANGUM | |||
L. Allison Dukes Director | Director |
| /s/ JOHN T. GLOVER | /s/ VICKI R. PALMER | |||
John T. Glover Lead 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 | Al Trujillo Director | |||
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Haverty Furniture Companies, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Haverty Furniture Companies, Inc. (a Maryland corporation) and subsidiary (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and schedules (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated March 2, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2016.
Atlanta, GA
March 2, 2018
F-1
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, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows of Haverty Furniture Companies, Inc. ("the Company") for each of the three years in the periodyear ended December 31, 2014.2015. Our auditsaudit 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.
audit.
We conducted our auditsaudit 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 provideaudit provides 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, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years inCompany for the periodyear ended December 31, 2014,2015, 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.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 16, 20154, 2016
Haverty Furniture Companies, Inc.
Consolidated Balance Sheets
| December 31, | December 31, | |||||||||||||||
| (In thousands, except per share data) | 2014 | 2013 | 2017 | 2016 | ||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 65,481 | $ | 83,185 | $ | 79,491 | $ | 63,481 | ||||||||
| Investments | 7,250 | — | ||||||||||||||
| Restricted cash and cash equivalents | 8,017 | 7,016 | 8,115 | 8,034 | ||||||||||||
| Accounts receivable | 7,146 | 8,172 | ||||||||||||||
| Accounts receivable, net | 2,408 | 4,244 | ||||||||||||||
| Inventories | 107,139 | 91,483 | 103,437 | 102,020 | ||||||||||||
| Prepaid expenses | 6,418 | 6,494 | 11,314 | 8,836 | ||||||||||||
| Other current assets | 8,010 | 4,349 | 5,922 | 7,500 | ||||||||||||
| Total current assets | 209,461 | 200,699 | 210,687 | 194,115 | ||||||||||||
| Accounts receivable, long-term | 731 | 832 | ||||||||||||||
| Accounts receivable, long-term, net | 254 | 462 | ||||||||||||||
| Property and equipment | 225,162 | 189,242 | 229,215 | 233,667 | ||||||||||||
| Deferred income taxes | 17,610 | 13,253 | 12,375 | 18,376 | ||||||||||||
| Other assets | 8,023 | 13,829 | 8,798 | 7,885 | ||||||||||||
| Total assets | $ | 460,987 | $ | 417,855 | $ | 461,329 | $ | 454,505 | ||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable | $ | 24,152 | $ | 21,810 | $ | 20,501 | $ | 25,662 | ||||||||
| Customer deposits | 23,687 | 19,008 | 27,813 | 24,923 | ||||||||||||
| Accrued liabilities | 39,960 | 36,338 | 37,582 | 41,904 | ||||||||||||
| Deferred income taxes | 5,689 | — | ||||||||||||||
| Current portion of lease obligations | 2,387 | 959 | 3,788 | 3,461 | ||||||||||||
| Total current liabilities | 95,875 | 78,115 | 89,684 | 95,950 | ||||||||||||
| Lease obligations, less current portion | 46,678 | 16,196 | 50,803 | 52,013 | ||||||||||||
| Other liabilities | 26,351 | 25,280 | 26,700 | 24,671 | ||||||||||||
| Commitments | — | — | ||||||||||||||
| Total liabilities | 168,904 | 119,591 | 167,187 | 172,634 | ||||||||||||
| Stockholders' equity | ||||||||||||||||
| Capital Stock, par value $1 per share | ||||||||||||||||
| Preferred Stock, Authorized – 1,000 shares; Issued: None | ||||||||||||||||
| Common Stock, Authorized – 50,000 shares; Issued: 2014 – 28,327; 2013 – 27,853 | 28,327 | 27,853 | ||||||||||||||
| Convertible Class A Common Stock, Authorized – 15,000 shares; Issued: 2014 – 2,603; 2013 – 2,915 | 2,603 | 2,915 | ||||||||||||||
| Common Stock, Authorized – 50,000 shares; Issued: 2017 – 28,950; 2016 –28,793 | 28,950 | 28,793 | ||||||||||||||
| Convertible Class A Common Stock, Authorized – 15,000 shares; Issued: 2017 – 2,290; 2016 – 2,340 | 2,290 | 2,340 | ||||||||||||||
| Additional paid-in capital | 79,726 | 77,406 | 88,978 | 86,273 | ||||||||||||
| Retained earnings | 260,031 | 281,222 | 287,390 | 277,707 | ||||||||||||
| Accumulated other comprehensive income (loss) | (2,168 | ) | (15,412 | ) | (2,144 | ) | (1,830 | ) | ||||||||
| Less treasury stock at cost – Common Stock (2014 – 7,759; 2013 – 7,731) and Convertible Class A Common Stock (2014 and 2013 – 522) | (76,436 | ) | (75,720 | ) | ||||||||||||
| Less treasury stock at cost – Common Stock (2017 – 9,498; 2016 – 9,506) and Convertible Class A Common Stock (2017 and 2016 – 522) | (111,322 | ) | (111,412 | ) | ||||||||||||
| Total stockholders' equity | 292,083 | 298,264 | 294,142 | 281,871 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 460,987 | $ | 417,855 | $ | 461,329 | $ | 454,505 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Haverty Furniture Companies, Inc.
Consolidated Statements of Comprehensive Income
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands, except per share data) | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Net sales | $ | 768,409 | $ | 746,090 | $ | 670,073 | $ | 819,866 | $ | 821,571 | $ | 804,870 | ||||||||||||
| Cost of goods sold | 356,043 | 344,594 | 318,038 | 374,943 | 378,234 | 374,094 | ||||||||||||||||||
| Gross profit | 412,366 | 401,496 | 352,035 | 444,923 | 443,337 | 430,776 | ||||||||||||||||||
| Credit service charges | 298 | 320 | 293 | 161 | 229 | 286 | ||||||||||||||||||
| Gross profit and other revenue | 412,664 | 401,816 | 352,328 | 445,084 | 443,566 | 431,062 | ||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||
| Selling, general and administrative | 364,654 | 348,599 | 328,826 | 402,884 | 399,236 | 384,801 | ||||||||||||||||||
| Pension settlement expense | 21,623 | — | — | |||||||||||||||||||||
| Provision for doubtful accounts | 257 | 120 | 165 | 224 | 383 | 314 | ||||||||||||||||||
| Other income, net | (178 | ) | (497 | ) | (803 | ) | (3,358 | ) | (4,107 | ) | (1,617 | ) | ||||||||||||
| Total expenses | 386,356 | 348,222 | 328,188 | 399,750 | 395,512 | 383,498 | ||||||||||||||||||
| Income before interest and income taxes | 26,308 | 53,594 | 24,140 | 45,334 | 48,054 | 47,564 | ||||||||||||||||||
| Interest expense, net | 1,051 | 1,107 | 624 | 2,111 | 2,233 | 2,289 | ||||||||||||||||||
Income before income taxes | 25,257 | 52,487 | 23,516 | 43,223 | 45,821 | 45,275 | ||||||||||||||||||
| Income tax expense | 16,668 | 20,222 | 8,605 | 22,148 | 17,465 | 17,486 | ||||||||||||||||||
| Net income | $ | 8,589 | $ | 32,265 | $ | 14,911 | $ | 21,075 | $ | 28,356 | $ | 27,789 | ||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Defined benefit pension plan adjustments; net of tax expense (benefit) of ($2,954), $4,822 and $921 | $ | 13,244 | $ | 7,966 | $ | 1,501 | ||||||||||||||||||
| Other comprehensive income | — | — | 117 | |||||||||||||||||||||
| Total other comprehensive income | 13,244 | 7,966 | 1,618 | |||||||||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||
Defined benefit pension plans adjustments; net of tax expense (benefit) of $105, $66 and $141 | $ | (314 | ) | $ | 108 | $ | 230 | |||||||||||||||||
| Comprehensive income | $ | 21,833 | $ | 40,231 | $ | 16,529 | $ | 20,761 | $ | 28,464 | $ | 28,019 | ||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||
| Common Stock | $ | 0.38 | $ | 1.45 | $ | 0.69 | $ | 1.00 | $ | 1.32 | $ | 1.24 | ||||||||||||
| Class A Common Stock | $ | 0.33 | $ | 1.37 | $ | 0.58 | $ | 0.95 | $ | 1.27 | $ | 1.18 | ||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||
| Common Stock | $ | 0.37 | $ | 1.41 | $ | 0.67 | $ | 0.98 | $ | 1.30 | $ | 1.22 | ||||||||||||
| Class A Common Stock | $ | 0.33 | $ | 1.35 | $ | 0.59 | $ | 0.94 | $ | 1.27 | $ | 1.17 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Haverty Furniture Companies, Inc.
Consolidated Statements of Stockholders' Equity
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share data) | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Shares | Dollars | Shares | Dollars | Shares | Dollars | Shares | Dollars | |||||||||||||||||||||||||||||||||||||
| Common Stock: | ||||||||||||||||||||||||||||||||||||||||||||||||
| COMMON STOCK: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | 27,853,412 | $ | 27,853 | 27,212,184 | $ | 27,212 | 26,578,193 | $ | 26,578 | 28,792,735 | $ | 28,793 | 28,485,758 | $ | 28,486 | 28,326,770 | $ | 28,327 | ||||||||||||||||||||||||||||||
| Conversion of Class A Common Stock | 311,824 | 312 | 382,199 | 382 | 344,802 | 345 | 50,353 | 50 | 214,400 | 214 | 48,951 | 49 | ||||||||||||||||||||||||||||||||||||
| Stock compensation transactions, net | 161,534 | 162 | 259,029 | 259 | 289,189 | 289 | 107,149 | 107 | 92,577 | 93 | 110,037 | 110 | ||||||||||||||||||||||||||||||||||||
| Ending balance | 28,326,770 | 28,327 | 27,853,412 | 27,853 | 27,212,184 | 27,212 | 28,950,237 | 28,950 | 28,792,735 | 28,793 | 28,485,758 | 28,486 | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock: | ||||||||||||||||||||||||||||||||||||||||||||||||
| CLASS A COMMON STOCK: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | 2,915,234 | 2,915 | 3,297,433 | 3,297 | 3,642,235 | 3,642 | 2,340,059 | 2,340 | 2,554,459 | 2,554 | 2,603,410 | 2,603 | ||||||||||||||||||||||||||||||||||||
| Conversion to Common Stock | (311,824 | ) | (312 | ) | (382,199 | ) | (382 | ) | (344,802 | ) | (345 | ) | (50,353 | ) | (50 | ) | (214,400 | ) | (214 | ) | (48,951 | ) | (49 | ) | ||||||||||||||||||||||||
| Ending balance | 2,603,410 | 2,603 | 2,915,234 | 2,915 | 3,297,433 | 3,297 | 2,289,706 | 2,290 | 2,340,059 | 2,340 | 2,554,459 | 2,554 | ||||||||||||||||||||||||||||||||||||
| Treasury Stock: | ||||||||||||||||||||||||||||||||||||||||||||||||
| TREASURY STOCK: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance (includes 522,410 shares Class A Stock for each of the years presented; remainder are Common Stock) | (8,253,414 | ) | (75,720 | ) | (8,263,557 | ) | (75,816 | ) | (8,271,024 | ) | (75,847 | ) | (10,028,315 | ) | (111,412 | ) | (8,884,024 | ) | (90,302 | ) | (8,281,277 | ) | (76,436 | ) | ||||||||||||||||||||||||
| Directors' Compensation Plan | 9,213 | 88 | 10,143 | 96 | 25,649 | 249 | 7,812 | 90 | 16,248 | 172 | 14,274 | 136 | ||||||||||||||||||||||||||||||||||||
| Purchases | (37,076 | ) | (804 | ) | — | — | (18,182 | ) | (218 | ) | — | — | (1,160,539 | ) | (21,282 | ) | (617,021 | ) | (14,002 | ) | ||||||||||||||||||||||||||||
| Ending balance | (8,281,277 | ) | (76,436 | ) | (8,253,414 | ) | (75,720 | ) | (8,263,557 | ) | (75,816 | ) | (10,020,503 | ) | (111,322 | ) | (10,028,315 | ) | (111,412 | ) | (8,884,024 | ) | (90,302 | ) | ||||||||||||||||||||||||
| Additional Paid-in Capital: | ||||||||||||||||||||||||||||||||||||||||||||||||
| ADDITIONAL PAID-IN CAPITAL: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | 77,406 | 73,803 | 69,209 | 86,273 | 83,179 | 79,726 | ||||||||||||||||||||||||||||||||||||||||||
| Stock option and restricted stock issuances | (2,232 | ) | (1,928 | ) | 1,605 | (1,662 | ) | (975 | ) | (1,312 | ) | |||||||||||||||||||||||||||||||||||||
| Tax benefit related to stock-based plans | 896 | 1,754 | 289 | |||||||||||||||||||||||||||||||||||||||||||||
| Tax (cost) benefit related to stock-based plans | — | (121 | ) | 253 | ||||||||||||||||||||||||||||||||||||||||||||
| Directors' Compensation Plan | 337 | 454 | 147 | 549 | 318 | 479 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | 3,319 | 3,323 | 2,553 | 3,818 | 3,872 | 4,033 | ||||||||||||||||||||||||||||||||||||||||||
| Ending balance | 79,726 | 77,406 | 73,803 | 88,978 | 86,273 | 83,179 | ||||||||||||||||||||||||||||||||||||||||||
| Retained Earnings: | ||||||||||||||||||||||||||||||||||||||||||||||||
| RETAINED EARNINGS: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | 281,222 | 254,310 | 264,083 | 277,707 | 279,760 | 260,031 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 8,589 | 32,265 | 14,911 | 21,075 | 28,356 | 27,789 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends (Common Stock: 2014 - $1.32; 2013 - $0.24 and 2012 - $1.12 per share Class A Common Stock: 2014 - $1.25; 2013 - $0.225 and 2012 - $1.0625 per share) | (29,780 | ) | (5,353 | ) | (24,684 | ) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends (Common Stock: 2017 – $ 0.54; 2016 - $1.44; and 2015 - $0.36 per share Class A Common Stock: 2017- $0.51; 2016 -$1.365 and 2015 - $0.34 per share) | (11,392 | ) | (30,409 | ) | (8,060 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Ending balance | 260,031 | 281,222 | 254,310 | 287,390 | �� | 277,707 | 279,760 | |||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
| ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | (15,412 | ) | (23,378 | ) | (24,996 | ) | (1,830 | ) | (1,938 | ) | (2,168 | ) | ||||||||||||||||||||||||||||||||||||
| Pension liabilities adjustment, net of taxes | 13,244 | 7,966 | 1,501 | (314 | ) | 108 | 230 | |||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 117 | |||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | (2,168 | ) | (15,412 | ) | (23,378 | ) | (2,144 | ) | (1,830 | ) | (1,938 | ) | ||||||||||||||||||||||||||||||||||||
Total Stockholders' Equity | $ | 292,083 | $ | 298,264 | $ | 259,428 | ||||||||||||||||||||||||||||||||||||||||||
TOTAL STOCKHOLDERS' EQUITY | $ | 294,142 | $ | 281,871 | $ | 301,739 | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
Haverty Furniture Companies, Inc.
Consolidated Statements of Cash flows
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||||||
| Net income | $ | 8,589 | $ | 32,265 | $ | 14,911 | $ | 21,075 | $ | 28,356 | $ | 27,789 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
| Depreciation and amortization | 22,613 | 21,450 | 19,415 | 30,516 | 29,045 | 25,756 | ||||||||||||||||||
| Gain on insurance recovery | (2,848 | ) | (3,338 | ) | — | |||||||||||||||||||
| Proceeds from insurance recovery received for business interruption and destroyed inventory | 2,867 | 2,599 | — | |||||||||||||||||||||
| Stock-based compensation expense | 3,319 | 3,323 | 2,553 | 3,818 | 3,872 | 4,033 | ||||||||||||||||||
| Tax benefit from stock-based plans | (896 | ) | (1,754 | ) | (289 | ) | ||||||||||||||||||
| Excess tax benefit from stock-based plans | — | (80 | ) | (397 | ) | |||||||||||||||||||
| Deferred income taxes | 4,800 | (652 | ) | (2,209 | ) | 5,559 | (1,120 | ) | (3,019 | ) | ||||||||||||||
| Provision for doubtful accounts | 257 | 120 | 165 | 224 | 383 | 314 | ||||||||||||||||||
| Pension settlement expense | 21,623 | — | — | |||||||||||||||||||||
| Other | 641 | 459 | 614 | 82 | (400 | ) | (160 | ) | ||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||
| Accounts receivable | 870 | 1,400 | 1,210 | 1,820 | 1,514 | 960 | ||||||||||||||||||
| Inventories | (15,656 | ) | 5,419 | (3,458 | ) | (2,112 | ) | 6,876 | (2,305 | ) | ||||||||||||||
| Customer deposits | 4,679 | (1,955 | ) | 6,391 | 2,890 | 3,887 | (2,650 | ) | ||||||||||||||||
| Other assets and liabilities | (2,023 | ) | (2,638 | ) | 1,819 | (932 | ) | (9,508 | ) | (590 | ) | |||||||||||||
| Accounts payable and accrued liabilities | 6,638 | (1,548 | ) | 11,046 | (10,502 | ) | (2,032 | ) | 2,501 | |||||||||||||||
| Net Cash Provided by Operating Activities | 55,454 | 55,889 | 52,168 | 52,457 | 60,054 | 52,232 | ||||||||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||||||||||||
| Capital expenditures | (30,882 | ) | (20,202 | ) | (25,014 | ) | (24,465 | ) | (29,838 | ) | (27,143 | ) | ||||||||||||
| Purchase of certificates of deposit | (10,000 | ) | — | — | ||||||||||||||||||||
| Restricted cash and cash equivalents | (1,001 | ) | (3 | ) | (200 | ) | ||||||||||||||||||
| Maturities of investments | — | 12,725 | 7,250 | |||||||||||||||||||||
| Purchase of commercial paper and certificates of deposit | — | — | (9,975 | ) | ||||||||||||||||||||
| Proceeds from insurance for destroyed property and equipment | 1,987 | 3,011 | — | |||||||||||||||||||||
| Other investing activities | 511 | 85 | 448 | 870 | 915 | 1,513 | ||||||||||||||||||
| Net Cash Used in Investing Activities | (41,372 | ) | (20,120 | ) | (24,766 | ) | (21,608 | ) | (13,187 | ) | (28,355 | ) | ||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||||||||||||
| Proceeds from borrowings under revolving credit facilities | — | — | — | — | — | — | ||||||||||||||||||
| Payments of borrowings under revolving credit facilities | — | — | — | — | — | — | ||||||||||||||||||
| Net change in borrowings under revolving credit facilities | — | — | — | — | — | — | ||||||||||||||||||
| Construction allowance receipts | 1,590 | 1,574 | 6,701 | |||||||||||||||||||||
| Payments on lease obligations | (1,088 | ) | (867 | ) | (766 | ) | (3,482 | ) | (3,125 | ) | (2,534 | ) | ||||||||||||
| Proceeds from exercise of stock options | — | 872 | 2,457 | |||||||||||||||||||||
| Tax benefit from stock-based plans | 896 | 1,754 | 289 | |||||||||||||||||||||
| Excess tax benefit from stock-based plans | — | 80 | 397 | |||||||||||||||||||||
| Dividends paid | (29,780 | ) | (5,353 | ) | (24,684 | ) | (11,392 | ) | (30,409 | ) | (8,060 | ) | ||||||||||||
| Common stock repurchased and retired | (804 | ) | — | (218 | ) | |||||||||||||||||||
| Other financing activities | (1,010 | ) | (2,540 | ) | (515 | ) | ||||||||||||||||||
| Common stock repurchased | — | (21,282 | ) | (14,002 | ) | |||||||||||||||||||
| Taxes on vested restricted shares | (1,555 | ) | (883 | ) | (1,201 | ) | ||||||||||||||||||
| Net Cash Used In Financing Activities | (31,786 | ) | (6,134 | ) | (23,437 | ) | (14,839 | ) | (54,045 | ) | (18,699 | ) | ||||||||||||
| Increase (Decrease) in cash and Cash Equivalents | (17,704 | ) | 29,635 | 3,965 | 16,010 | (7,178 | ) | 5,178 | ||||||||||||||||
| Cash and Cash Equivalents at Beginning of Year | 83,185 | 53,550 | 49,585 | 63,481 | 70,659 | 65,481 | ||||||||||||||||||
| Cash and Cash Equivalents at End of Year | $ | 65,481 | $ | 83,185 | $ | 53,550 | $ | 79,491 | $ | 63,481 | $ | 70,659 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
Notes To Consolidated Financial Statements
Note 1, Description of Business and Summary of Significant Accounting Policies:
Business:
Haverty Furniture Companies, Inc. ("Havertys," "we," "our," or "us") is a retailer of a broad line of residential furniture in the middle to upper-middle price ranges. We have 119124 showrooms in 16 states at December 31, 2014.2017. All of our stores are operated using the Havertys name and we do not franchise our stores. We offer financing through a third-party finance company as well as an internal revolving charge credit plan as well as a third-party finance company. We operate in one reportable segment, home furnishings retailing.plan.
Basis of Presentation:
The consolidated financial statements include the accounts of Havertys and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation.
Use of Estimates:
The preparation of financial statements in conformity with United States of America generally accepted accounting principles ("US GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents includes all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle inwithin five days.
Restricted Cash and Cash Equivalents:
Our insurance carrier requires us to collateralize a portion of our workers' compensation obligations. These funds are investments in money market funds held by an agent. The agreement with our carrier governing these funds is on an annual basis expiring on December 31.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Leasehold improvements and buildings under lease are amortized over the shorter of the estimated useful life or the lease term of the related asset. Amortization of buildings under lease is included in depreciation expense.
Estimated useful lives for financial reporting purposes are as follows:
| Buildings | 25 – 33 years | |
| Improvements | 5 – 15 years | |
| Furniture and Fixtures | 3 – 15 years | |
| Equipment | 3 – 15 years | |
| Buildings under lease | 15 years |
Customer Deposits:
Customer deposits consist of cash collections on sales of undelivered merchandise, customer advance payments, and deposits on credit sales for undelivered merchandise.
F-7
Revenue Recognition:
We recognize revenue from merchandise sales and related service fees, net of sales taxes, upon delivery to the customer. A reserve for merchandise returns and customer allowances is estimated based on our historical returns and allowance experience and current sales levels.
We typically offer our customers an opportunity for us to deliver their purchases and most choose this service. Delivery fees of approximately $27,293,000, $27,588,000$25,728,000, $25,467,000 and $21,699,000$27,650,000 were charged to customers in 2014, 20132017, 2016 and 2012,2015, respectively, and are included in net sales. The costs associated with deliveries are included in selling, general and administrative expenses and were approximately $36,395,000, $32,736,000$39,582,000, $39,222,000 and $31,411,000$37,730,000 in 2014, 20132017, 2016 and 2012,2015, respectively.
Credit service charges are recognized as revenue as assessed to customers according to contract terms. The costs associated with credit approval, account servicing and collections are included in selling, general and administrative expenses.
Cost of Goods Sold:
Our cost of goods sold includes the direct costs of products sold, warehouse handling and transportation costs.
Selling, General and Administrative Expenses:
Our selling, general and administrative ("SG&A") expenses are comprised of advertising, selling, occupancy, delivery and administrative costs as well as certain warehouse expenses. The costs associated with our purchasing, warehousing, delivery and other distribution costs included in SG&A expense were approximately $70,420,000, $64,302,000$77,368,000, $77,266,000 and $61,991,000$73,803,000 in 2014, 20132017, 2016 and 2012,2015, respectively.
Leases:
In the case of certain leased stores, we may be extensively involved in the construction or major structural modifications of the leased properties. As a result of this involvement, we are deemed the "owner" for accounting purposes during the construction period, and are required to capitalize the total fair market value of the portion of the leased property we use, excluding land, on our consolidated balance sheet. Following construction completion, we perform an analysis under ASC 840, "Leases," to determine if can we can apply sale-leaseback accounting. We have determined that each of the leases remaining on our consolidated balance sheet did not qualify for such accounting treatment. In conjunction with these leases, we also record financing obligations equal to the landlord reimbursements and fair market value of the assets. We do not report rent expense for the properties which are owned for accounting purposes. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest expense. Depreciation expense is also recognized on the leased asset.
Deferred Escalating Minimum Rent and Lease Incentives:
Certain of our operating leases contain predetermined fixed escalations of the minimum rentals during the term of the lease. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease, beginning with the point at which we obtain control and possession of the leased properties, and record the difference between the amounts charged to operations and amounts paid as "Accruedaccrued liabilities." The liability for deferred escalating minimum rent approximated $10,850,000$8,565,000 and $11,581,000$8,797,000 at December 31, 20142017 and 2013,2016, respectively. Any operating lease incentives we receive are deferred and subsequently amortized on a straight-line basis over the life of the lease as a reduction of rent expense. The liability for lease incentives approximated $1,373,000$1,139,000 and $1,766,000$676,000 at December 31, 20142017 and 2013,2016, respectively.
Advertising Expense:
Advertising costs, which include television, radio, newspaper, digital, and other media advertising, are expensed upon first showing. The total amount of prepaid advertising costs included in other current assets was approximately $718,000$602,000 and $604,000$324,000 at December 31, 20142017 and 2013,2016, respectively. We incurred approximately $45,067,000, $43,030,000$47,921,000, $45,132,000 and $41,883,000$45,784,000 in advertising expense during 2014, 20132017, 2016 and 2012,2015, respectively.
F-8
Interest Expense, net:
Interest expense is comprised of amounts incurred related to our debt and lease obligations recorded on our balance sheet, net of interest income. The total amount of interest expense was approximately $1,423,000, $1,218,000$2,512,000, $2,568,000 and $866,000$2,615,000 during 2014, 20132017, 2016 and 2012,2015, respectively.
Other Income, net:
Other income, net includes any gains or losses on sales of property and equipment and miscellaneous income or expense items outside of core operations. We had a store receive significant damage on December 27, 2015 from a blizzard. We reduced the value of the property and its contents at December 31, 2015 to zero and recorded an insurance recovery receivable. During 2016, we recorded $2,228,000 in gains for the insurance recovery on the building and $1,110,000 for inventory, business interruption and other expenses. We received additional amounts in 2017 for the remaining full replacement value of the building as construction was completed and recognized a gain of $1,351,000. During 2017 we also recorded $1,500,000 in gains from insured losses related to a store damaged by a faulty underground sprinkler line and losses from Hurricane Irma. The sale of former retail locations also generated gains of $525,000 in 2017 and $700,000 in 2016. Other income, net for the year ended December 31, 2015 includes proceeds received of $800,000 for the settlement related to credit card litigation.
Self-Insurance:
We are self-insured, for amounts up to a deductible per occurrence, for losses related to general liability, workers' compensation and vehicle claims. Beginning in 2012 we becameWe are primarily self-insured for employee group health care claims. We have purchased insurance coverage in order to establish certain limits to our exposure on a per claim basis. We maintain an accrual for these costs based on claims filed and an estimate of claims incurred but not reported or paid, based on historical data and actuarial estimates. The current portion of these self-insurance reserves is included in accrued liabilities and the non-current portion is included in other liabilities. These reserves totaled $8,863,000$8,975,000 and $8,220,000$9,095,000 at December 31, 20142017 and 2013,2016, respectively.
Fair Values of Financial Instruments:
The fair values of our cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and customer deposits approximate their carrying amounts due to their short-term nature. The assets that are related to our self-directed, non-qualified deferred compensation plans for certain executives and employees are valued using quoted market prices, a Level 1 valuation technique. The assets totaled approximately $2,728,000$5,986,000 and $2,081,000$4,410,000 at December 31, 20142017 and 2013,2016, respectively, and are included in other assets. The related liability of the same amount is included in other liabilities.
Impairment of Long-Lived Assets:
We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. If an indicator of impairment is identified, we evaluate the long-lived assets at the individual property or store level, which is the lowest level at which individual cash flows can be identified. When evaluating these assets for potential impairment, we first compare the carrying amount of the asset to the store's estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying amount of the asset, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset to the store's assets' estimated fair value, which is determined on the basis of fair value for similar assets or future cash flows (discounted and with interest charges). If required, an impairment loss is recorded in SG&A expense for the difference in the asset's carrying value and the asset's estimated fair value. No such losses were recorded in 2014, 2013 and 2012.2017, 2016 or 2015.
Earnings Per Share:
We report our earnings per share using the two class method. The income per share for each class of common stock is calculated assuming 100% of our earnings are distributed as dividends to each class of common stock based on their contractual rights. See Note 13 for the computational components of basic and diluted earnings per share.
Accumulated Other Comprehensive Income (Loss):
Accumulated other comprehensive income (loss) ("AOCI"), net of income taxes, werewas comprised of unrecognized pension and retirement liabilities totaling approximately $2,168,000$2,144,000 and $15,412,000$1,830,000 at December 31, 20142017 and 2013,2016, respectively. TheSee Note 11 for the amounts reclassified out of AOCI to SG&A expense related to our defined benefit pension plans.supplemental executive retirement plan.
Recently Issued and Adopted Accounting Pronouncement:
Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU's) to the FASB's Accounting Standards Codification.
Codification (ASC). We considered the applicability and impact of all ASU's. ASU's not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
Share-based Payments. In March 2016, the FASB issued ASU 2016-09 a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from the other income tax cash flows. The standard also allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee's behalf for withheld shares should be presented as a financing activity on our cash flow statements, and provides an accounting policy election to account for forfeitures as they occur. We adopted ASU 2016-09 on January 1, 2017 and applied it prospectively or retrospectively, depending on the area covered by this standard. Excess tax (costs) benefits of ($121,000) in 2016 and $253,000 in 2015 were recorded to additional paid-in capital that would have increased income tax expense in 2016 and reduced income tax expense in 2015, if this new guidance had been adopted as of the respective dates. We chose to adopt the provisions related to the cash flow presentation of excess benefits prospectively and prior periods have not been adjusted. We have elected to recognize forfeitures as they occur. The new standard did not have a significant impact on our financial statements except as described above.
Revenue Recognition.In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers andwhich supersedes most currentprevious revenue recognition guidance, including industry-specific guidance. This ASU is based on the core principleThe new standard requires that an entity shoulda company recognize revenue to depict the transfer ofwhen it transfers promised goods or services to customers in an amount that reflects the consideration to which the entitycompany expects to be entitledreceive in exchange for those goods or services. This ASU also requiresAdditional disclosures sufficientwill be required to enablehelp users toof financial statements understand the nature, amount timing, and uncertaintytiming of revenue and cash flows arising from contractscontracts.
The FASB has issued several amendments to the revenue standard, including clarification on accounting for principal versus agent considerations (i.e., reporting gross versus net). These amendments do not change the core principle of the standard, but provide clarity and implementation guidance.
This standard is effective for Havertys beginning January 1, 2018 and will not have a material effect on Havertys' financial condition, results of operations or liquidity. We sell home furnishings and recognize revenue at delivery and this will not change under the new standard. We have substantially completed our comprehensive implementation plan, including the implementation of new controls and processes designed to comply with customers, includingASU 2014-09. We will use the modified retrospective (or cumulative-effect) adoption method. We will recognize an inventory asset related to product returns and a related liability for returns and allowances and adjust our existing reserve and deferred income tax assets with the impact increasing retained earnings approximately $130,000.
F-10
Leases. In February 2016, the FASB issued ASU 2016-02 which amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures about contracts with customers, significant judgmentsdisclosures. The main difference between previous U.S. GAAP and changes in judgments,the amended standard is the recognition of lease assets and assets recognized fromlease liabilities by lessees on the costsbalance sheet for those leases classified as operating leases under previous U.S. GAAP. As a result, we will have to obtain or fulfillrecognize a contract. Entities haveliability representing our lease payments and a right-of-use asset representing our right to use the option of using either a full retrospective or a modified retrospective approachunderlying asset for the adoption oflease term on the new standard. Thisbalance sheet. ASU 2016-02 is effective for Havertys beginning with the interimfirst quarter 2019 and annual periods beginning on or after December 15, 2016 (early adoption is not permitted).we expect to adopt using the modified retrospective method. We are currently evaluatingassessing the changes to processes and internal controls to meet the standard's reporting and disclosure requirements. For example, software has been evaluated that will assist in recognition of additional assets and liabilities to be included on the balance sheet related to operating leases with durations greater than twelve months, with certain allowable exceptions. We continue to evaluate the expected financial impact of this ASU to determine our adoption method and the impact it will havestandard on our consolidated financial statements.position and results of operations.
Segment Information
We operate within a single reportable segment. The following table presents the net sales of each major product category and service for each of the last three years:
| Year Ended December 31, | ||||||||||||||||||||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||||||||||||||
| Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | |||||||||||||||||||
| Merchandise: | ||||||||||||||||||||||||
| Case Goods | ||||||||||||||||||||||||
| Bedroom Furniture | $ | 132,484 | 16.2 | % | $ | 132,250 | 16.1 | % | $ | 135,855 | 16.9 | % | ||||||||||||
| Dining Room Furniture | 92,921 | 11.3 | 94,918 | 11.5 | 92,966 | 11.6 | ||||||||||||||||||
| Occasional | 75,909 | 9.2 | 81,996 | 10.0 | 79,219 | 9.8 | ||||||||||||||||||
| 301,314 | 36.7 | 309,164 | 37.6 | 308,040 | 38.3 | |||||||||||||||||||
| Upholstery | 330,340 | 40.3 | 328,903 | 40.0 | 321,484 | 39.9 | ||||||||||||||||||
| Mattresses | 88,311 | 10.8 | 86,659 | 10.6 | 84,897 | 10.6 | ||||||||||||||||||
Accessories and Other (1) | 99,901 | 12.2 | 96,845 | 11.8 | 90,449 | 11.2 | ||||||||||||||||||
| $ | 819,866 | 100.0 | % | $ | 821,571 | 100.0 | % | $ | 804,870 | 100.0 | % | |||||||||||||
(1) Includes delivery charges and product protection.
F-11
Note 2, Accounts Receivable:
Amounts financed under our in-house credit programs, as a percent of net sales including sales tax, were approximately 3.2%0.6% in 2014, 3.6%2017, 1.0% in 20132016 and 4.6%1.4% in 2012.2015. The credit programsprogram selected most often by our customers is "12 months no interest with equal monthly payments." The terms of the other programs vary as to payment terms (30 days to three years) and interest rates (0% to 21%). The receivables are collateralized by the merchandise sold.
Accounts receivable balances resulting from certain credit promotions have scheduled payment amounts which extend beyond one year. These receivable balances have been historically collected earlier than the scheduled dates. The amounts due per the scheduled payment dates approximate as follows: $7,351,000$2,604,000 in 2015, $712,0002018, $273,000 in 2016, $133,0002019, $39,000 in 20172020 and $31,000$16,000 in 20182021 for receivables outstanding at December 31, 2014.2017.
Accounts receivable are shown net of the allowance for doubtful accounts of approximately $350,000$270,000 and $360,000 at December 31, 20142017 and 2013.2016, respectively. We provide an allowance utilizing a methodology which considers the balances in problem and delinquent categories of accounts, historical write-offs, existing economic conditions and management judgment. We assess the adequacy of the allowance account at the end of each quarter. Interest assessments are continued on past-due accounts but no "interest on interest" is recorded. Delinquent accounts are generally written off automatically after the passage of nine months without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of a discharged bankruptcy or other circumstances that make further collections unlikely.
We believe that the carrying value of existing customer receivables, net of allowances, approximates fair value because of their short average maturity. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising our account base and their dispersion across 16 states.
Note 3, Inventories:
Inventories are measured using the last-in, first-out (LIFO) method of valuation because it results in a better matching of current costs and revenues. The excess of current costs over our carrying value of inventories was approximately $18,956,000$19,177,000 and $18,737,000$17,946,000 at December 31, 20142017 and 2013,2016, respectively. The use of the LIFO valuation method as compared to the FIFO method had a negative impact on our cost of goods sold of approximately $219,000$1,231,000 in 2014,2017 and $438,000 in 2015 and a positive impact of $259,000approximately $1,448,000 in 2013, and a negative impact of $886,000 in 2012.2016. During 2013,2016, inventory quantities declined resulting in liquidations of LIFO inventory layers. The effect of the liquidations (included in the preceding LIFO impact amounts) decreased cost of goods sold by an immaterial amount in 2013.amount. We believe this information is meaningful to the users of these consolidated financial statements for analyzing the effects of price changes, for better understanding our financial position and for comparing such effects with other companies.
F-12
Note 4, Property and Equipment:
Property and equipment are summarized as follows:
| (In thousands) | 2014 | 2013 | |||||||
| Land and improvements | $ | 48,410 | $ | 47,650 | |||||
| Buildings and improvements | 245,188 | 235,468 | |||||||
| Furniture and fixtures | 96,715 | 92,375 | |||||||
| Equipment | 43,236 | 39,954 | |||||||
| Buildings under lease | 36,756 | 19,577 | |||||||
| Construction in progress | 16,146 | 902 | |||||||
| 486,451 | 435,926 | ||||||||
| Less accumulated depreciation | (253,009 | ) | (240,808 | ) | |||||
| Less accumulated lease amortization | (8,280 | ) | (5,876 | ) | |||||
| Property and equipment, net | $ | 225,162 | $ | 189,242 | |||||
| (In thousands) | 2017 | 2016 | ||||||
| Land and improvements | $ | 47,804 | $ | 48,264 | ||||
| Buildings and improvements | 279,209 | 270,156 | ||||||
| Furniture and fixtures | 103,695 | 115,263 | ||||||
| Equipment | 48,745 | 47,222 | ||||||
| Buildings under lease | 56,902 | 55,894 | ||||||
| Construction in progress | 7,124 | 3,876 | ||||||
| 543,479 | 540,675 | |||||||
| Less accumulated depreciation | (295,491 | ) | (292,003 | ) | ||||
| Less accumulated lease amortization | (18,773 | ) | (15,005 | ) | ||||
| Property and equipment, net | $ | 229,215 | $ | 233,667 | ||||
Note 5, Credit Arrangement:
In September 2011 HavertysMarch 2016 we entered into anthe First Amendment to Amended and Restated Credit Agreement (the "Credit Agreement") with a bank. The Credit Agreement amended and restated the credit agreement governingamends our then existing revolving credit facility to reduceincrease the aggregate commitments under the facility tofrom $50.0 million fromto $60.0 million, extend the maturity date to March 31, 2021 from September 1, 2016, from December 22, 2011, lower the commitment fees on unused amounts, reduce the applicable margin for interest rates on borrowings, modify the borrowing base calculation, and modify certain ofchange the covenants. The Credit Agreement provides for an aggregate availability for letters ofcollateral reporting requirements. We have not had any borrowings under the revolving credit of $20.0 million.facility since its origination in 2008.
The $50.0$60.0 million revolving credit facility is secured by inventory, accounts receivable,cash and certain other personal property. Our Credit Agreement includes negative covenants that limit our ability to, among other things (a) incur, assume or permit to exist additional indebtedness or guarantees; (b) incur liens and engage in sale leaseback transactions or real estate sales in excess of $100.0 million; (c) pay dividends or redeem or repurchase capital stock; (d) engage in certain transactions with affiliates; and (e) alter the business that we conduct. These covenants are not expected to impact our liquidity or capital resources.the Company conducts.
Availability fluctuates under a borrowing base calculation and is reduced by outstanding letters of credit. The borrowing base was $57.6$53.4 million and there were no outstanding letters of credit at December 31, 2014.2017. Amounts available are based on the lesser of the borrowing base or the $50.0$60.0 million line amount and reduced by $6.2$6.0 million since a fixed charge coverage ratio test was not met for the immediately preceding twelve months, resulting in a net availability of $43.8$47.4 million. There were no borrowed amounts outstanding under the Credit Agreement at December 31, 2014.2017.
F-13
Note 6, Accrued Liabilities and Other Liabilities:
Accrued liabilities and other liabilities consist of the following:
| (In thousands) | 2014 | 2013 | 2017 | 2016 | ||||||||||||
| Accrued liabilities: | ||||||||||||||||
| Employee compensation, related taxes and benefits | $ | 15,145 | $ | 14,318 | $ | 13,527 | $ | 15,024 | ||||||||
| Taxes other than income and withholding | 9,322 | 8,231 | 8,677 | 10,856 | ||||||||||||
| Self-insurance reserves | 5,942 | 5,326 | 5,962 | 5,945 | ||||||||||||
| Other | 9,551 | 8,463 | 9,416 | 10,079 | ||||||||||||
| $ | 39,960 | $ | 36,338 | $ | 37,582 | $ | 41,904 | |||||||||
| Other liabilities: | ||||||||||||||||
| Straight-line lease liability | $ | 10,850 | $ | 11,581 | $ | 8,565 | $ | 8,797 | ||||||||
| Self-insurance reserves | 2,921 | 2,894 | 3,013 | 3,150 | ||||||||||||
| Other | 12,580 | 10,805 | 15,122 | 12,724 | ||||||||||||
| $ | 26,351 | $ | 25,280 | $ | 26,700 | $ | 24,671 | |||||||||
Note 7, Income Taxes:
On December 22, 2017, the President signed into Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act contains significant changes to corporate taxes, including a permanent reduction of the corporate tax rate from 35% to 21% effective January 1, 2018. The Tax Act's other major changes applicable to Havertys include the elimination of certain deductions and an enhanced and extended option to claim accelerated depreciation deductions on qualified property.
In December 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 25%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of some of these balances or potentially give rise to new deferred tax amounts. At December 31, 2017, we have made a reasonable estimate of the effects on our existing deferred tax balances. The provisional amount recorded related to the remeasurement of our deferred tax balance was an additional expense of $10,639,000. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the IRS and other standard-setting bodies, we may make adjustments to the provisional amounts. We recognized a tax benefit of $4,771,000 for the remeasurement of deferred tax assets and liabilities for which our accounting is complete.
F-14
Income tax expense (benefit) consists of the following:
| (In thousands) | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||||
| Current | |||||||||||||||||||||||||
| $ | 10,257 | $ | 18,253 | $ | 9,375 | $ | 14,239 | $ | 16,259 | $ | 17,598 | ||||||||||||||
| State | 1,611 | 2,621 | 1,439 | 2,350 | 2,326 | 2,907 | |||||||||||||||||||
| 11,868 | 20,874 | 10,814 | 16,589 | 18,585 | 20,505 | ||||||||||||||||||||
| Deferred | |||||||||||||||||||||||||
| Federal | 4,323 | (706 | ) | (2,235 | ) | 5,829 | (690 | ) | (2,476 | ) | |||||||||||||||
| State | 477 | 54 | 26 | (270 | ) | (430 | ) | (543 | ) | ||||||||||||||||
| 4,800 | (652 | ) | (2,209 | ) | 5,559 | (1,120 | ) | (3,019 | ) | ||||||||||||||||
| $ | 16,668 | $ | 20,222 | $ | 8,605 | $ | 22,148 | $ | 17,465 | $ | 17,486 | ||||||||||||||
The differences between income tax expense in the accompanying Consolidated Financial Statements and the amount computed by applying the statutory Federal income tax rate are as follows:
| (In thousands) | 2014 | 2013 | 2012 | |||||||||
| Statutory rates applied to income before income taxes | $ | 8,840 | $ | 18,370 | $ | 8,231 | ||||||
| State income taxes, net of Federal tax benefit | 788 | 1,610 | 769 | |||||||||
| Net permanent differences | 42 | 316 | 8 | |||||||||
| Release of valuation allowance in accumulated other comprehensive income related to settled pension obligations | 6,866 | — | — | |||||||||
| Change in deferred tax asset valuation allowance | — | (1,363 | ) | (1,207 | ) | |||||||
| Change in state credits | 110 | 1,466 | 1,129 | |||||||||
Change for net operating loss carrybacks, amended returns and related receivables | — | (204 | ) | 342 | ||||||||
| Change in deferred tax rate | — | — | (125 | ) | ||||||||
| Change in reserve for uncertain tax positions | — | — | (674 | ) | ||||||||
| Other | 22 | 27 | 132 | |||||||||
| $ | 16,668 | $ | 20,222 | $ | 8,605 | |||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||
| Statutory rates applied to income before income taxes | $ | 15,129 | $ | 16,037 | $ | 15,846 | ||||||
| State income taxes, net of Federal tax benefit | 1,306 | 1,494 | 1,487 | |||||||||
| Net permanent differences | 95 | 99 | (11 | ) | ||||||||
| Other | (250 | ) | (165 | ) | 164 | |||||||
| Tax Act, net impact | 5,868 | — | — | |||||||||
| $ | 22,148 | $ | 17,465 | $ | 17,486 | |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The amounts in the following table are grouped based on broad categories of items that generate the deferred tax assets and liabilities.
| (In thousands) | 2014 | 2013 | 2017 | 2016 | ||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Accounts receivable related | $ | 743 | $ | 610 | ||||||||||||
| Net property and equipment | 5,787 | 11,977 | ||||||||||||||
| Accounts receivable | $ | 433 | $ | 808 | ||||||||||||
| Property and equipment | 6,434 | 10,276 | ||||||||||||||
| Leases | 5,055 | 5,007 | 4,356 | 5,913 | ||||||||||||
| Accrued liabilities | 9,523 | 776 | 8,171 | 12,217 | ||||||||||||
| State tax credits | — | 110 | ||||||||||||||
| Retirement benefits | 720 | 4,633 | 492 | 513 | ||||||||||||
| Other | 31 | 28 | 62 | 69 | ||||||||||||
| Total deferred tax assets | 21,859 | 23,141 | 19,948 | 29,796 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Inventory related | 9,198 | 8,951 | ||||||||||||||
| Inventory | 7,034 | 10,082 | ||||||||||||||
| Other | 740 | 643 | 539 | 1,338 | ||||||||||||
| Total deferred tax liabilities | 9,938 | 9,594 | 7,573 | 11,420 | ||||||||||||
| Net deferred tax assets | $ | 11,921 | $ | 13,547 | $ | 12,375 | $ | 18,376 | ||||||||
| (In thousands) | 2014 | 2013 | |||||||
| Current assets (liabilities): | |||||||||
| Current deferred assets | $ | 5,801 | $ | 11,048 | |||||
| Current deferred liabilities | (11,490 | ) | (10,754 | ) | |||||
| (5,689 | ) | 294 | |||||||
| Non-current assets (liabilities): | |||||||||
| Non-current deferred assets | 38,978 | 39,974 | |||||||
| Non-current deferred liabilities | (21,368 | ) | (26,721 | ) | |||||
| 17,610 | 13,253 | ||||||||
| Net deferred tax assets | $ | 11,921 | $ | 13,547 | |||||
We review our deferred tax assets to determine the need for a valuation allowance. Based on evidence we conclude that it is more-likely-than-not that our deferred tax assets will be realized and therefore a valuation allowance is not required.
We established a valuation allowance in 2008 against virtually all of our deferred tax assets due to our operating loss in that year and projected loss in 2009. A portion of the allowance was charged to AOCI and was increased in 2009. Our profitability in 2011 was sufficient for us to release the valuation allowance. The "backward-tracing" prohibition in ASC 740, Income Taxes required us to record the total amount of the release as a tax benefit in net income including the portion originally charged to AOCI. This resulted in a debit valuation allowance of $6,866,000 remaining in AOCI until the settlement of the Plan's pension obligations in 2014 when this amount was reversed and included in total tax expense.
Uncertain Tax Positions
Note 8, Long-Term Debt and Lease Obligations:
Long-term debt and lease obligations are summarized as follows:
| (In thousands) | 2014 | 2013 | 2017 | 2016 | |||||||||||||
Revolving credit notes (a) | $ | — | $ | — | $ | — | $ | — | |||||||||
Lease obligations (b) | 49,065 | 17,155 | 54,591 | 55,474 | |||||||||||||
| 49,065 | 17,155 | 54,591 | 55,474 | ||||||||||||||
| Less portion classified as current | (2,387 | ) | (959 | ) | (3,788 | ) | (3,461 | ) | |||||||||
| $ | 46,678 | $ | 16,196 | $ | 50,803 | $ | 52,013 | ||||||||||
(a) We have a revolving credit agreement as described in Note 5.
(b) These obligations are related to properties under lease with aggregate net book values of approximately $40,538,000$38,129,000 and $13,701,000$40,889,000 at December 31, 20142017 and 2013,2016, respectively.
The approximate aggregate maturities of these lease obligations during the five years subsequent to December 31, 20142017 and thereafter are as follows: 2015 - $2,387,000; 2016 - $2,740,000, 2017 - $2,931,000; 2018 - $3,139,000;$3,788,000; 2019 - $3,351,000$4,018,000,
2020 - $4,222,000; 2021 - $3,672,000; 2022 - $3,776,000 and $34,517,000$35,115,000 thereafter. These maturities are net of imputed interest of approximately $19,174,000$15,294,000 at December 31, 2014.
Note 9, Stockholders' Equity:
Common Stock has a preferential dividend rate of at least 105% of the dividend paid on Class A Common Stock. Class A Common Stock has greater voting rights which include: voting as a separate class for the election of 75% of the total number of directors and on all other matters subject to shareholder vote, each share of Class A Common Stock has ten votes and votes with the Common Stock as a single class. Class A Common Stock is convertible at the holder's option at any time into Common Stock on a 1-for-1 basis; Common Stock is not convertible into Class A Common Stock.
A special cash dividend of $1.00 for Common Stock and $0.95 for Class A Common Stock was paid in the third quarter of 2014 and the fourth quarter of 2012, respectively.2016. Aggregate dividends paid on Common Stock was $27,077,000, $4,787,000$10,473,000, $27,674,000 and $21,721,000$7,358,000 in 2014, 20132017, 2016 and 2012,2015, respectively. Aggregate dividends paid on Class A Common Stock was $2,703,000, $566,000$919,000, $2,735,000 and $2,963,000$702,000 in 2014, 20132017, 2016 and 2012,2015, respectively.
Note 10, Benefit Plans:
We also have a non-qualified, non-contributory supplemental executive retirement plan (the "SERP") for employees whose retirement benefits are reduced due to their annual compensation levels. The SERP provides annual benefits amounting to 55% of final average earnings less benefits payable from Social Security benefits and our former pension plan and Social Security benefits.which was settled in 2014. The SERP limits the total amount of annual retirement benefits that may be paid to a participant from all sources (Retirement Plan,(former pension plan, Social Security and the SERP) to $125,000. The SERP is not funded so we pay benefits directly to participants. The SERP was frozen as of December 31, 2015 and no additional benefits were accrued after that date.
The following table summarizes information about our pension plan and SERP.
| Pension Plan | SERP | |||||||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2014 | 2013 | 2017 | 2016 | ||||||||||||||||||
| Change in benefit obligation: | ||||||||||||||||||||||||
| Benefit obligation at beginning of the year | $ | 73,456 | $ | 80,610 | $ | 5,974 | $ | 6,368 | $ | 7,674 | $ | 7,719 | ||||||||||||
| Service cost | — | — | 117 | 134 | ||||||||||||||||||||
| Interest cost | 3,232 | 3,278 | 289 | 259 | 321 | 341 | ||||||||||||||||||
| Plan settlements | (83,453 | ) | — | — | — | |||||||||||||||||||
| Special termination benefits | 813 | — | — | — | ||||||||||||||||||||
| Actuarial losses (gains) | 10,700 | (6,838 | ) | 1,095 | (595 | ) | 509 | (72 | ) | |||||||||||||||
| Benefits paid | (3,935 | ) | (3,594 | ) | (205 | ) | (192 | ) | (305 | ) | (314 | ) | ||||||||||||
| Benefit obligation at end of year | 813 | 73,456 | 7,270 | 5,974 | 8,199 | 7,674 | ||||||||||||||||||
| Change in plan assets: | ||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | 82,904 | 73,842 | — | — | ||||||||||||||||||||
| Employer contribution | — | 4,200 | 205 | 192 | 305 | 314 | ||||||||||||||||||
| Actual return on plan assets | 5,297 | 8,456 | — | — | ||||||||||||||||||||
| Plan settlements | (83,453 | ) | — | — | — | |||||||||||||||||||
| Benefits paid | (3,935 | ) | (3,594 | ) | (205 | ) | (192 | ) | (305 | ) | (314 | ) | ||||||||||||
| Fair value of plan assets at end of year | 813 | 82,904 | — | — | — | — | ||||||||||||||||||
| Funded status of the plan – (underfunded) | $ | — | $ | 9,448 | $ | (7,270 | ) | $ | (5,974 | ) | $ | (8,199 | ) | $ | (7,674 | ) | ||||||||
| Accumulated benefit obligations | $ | — | $ | 73,456 | $ | 7,270 | $ | 5,974 | $ | 8,199 | $ | 7,674 | ||||||||||||
Amounts recognized in the consolidated balance sheets consist of:
| Pension Plan | SERP | |||||||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2014 | 2013 | 2017 | 2016 | ||||||||||||||||||
| Noncurrent assets | $ | — | $ | 9,448 | $ | — | $ | — | ||||||||||||||||
| Current liabilities | — | — | (228 | ) | (214 | ) | $ | (365 | ) | $ | (369 | ) | ||||||||||||
| Noncurrent liabilities | — | — | (7,042 | ) | (5,760 | ) | (7,834 | ) | (7,305 | ) | ||||||||||||||
| $ | — | $ | 9,448 | $ | (7,270 | ) | $ | (5,974 | ) | $ | (8,199 | ) | $ | (7,674 | ) | |||||||||
| Pension Plan | SERP | |||||||||||||||
| (In thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Prior service cost | $ | — | $ | — | $ | (432 | ) | $ | (641 | ) | ||||||
| Net actuarial loss | — | (11,176 | ) | (1,663 | ) | (568 | ) | |||||||||
| $ | — | $ | (11,176 | ) | $ | (2,095 | ) | $ | (1,209 | ) | ||||||
was $1,968,000 in 2017 and $1,550,000 in 2016.
Net pension cost included the following components:
| Pension Plan | SERP | SERP | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||
| Service cost-benefits earned during the period | $ | — | $ | — | $ | — | $ | 117 | $ | 134 | $ | 97 | $ | — | $ | — | $ | 129 | ||||||||||||||||||
| Interest cost on projected benefit obligation | 3,232 | 3,278 | 3,506 | 289 | 259 | 262 | 321 | 341 | 314 | |||||||||||||||||||||||||||
| Expected return on plan assets | (4,475 | ) | (4,948 | ) | (4,474 | ) | — | — | — | |||||||||||||||||||||||||||
| Amortization of prior service cost | — | — | — | 210 | 210 | 210 | — | — | 210 | |||||||||||||||||||||||||||
| Amortization of actuarial loss | 244 | 1,627 | 1,847 | 68 | 26 | 90 | 102 | 169 | ||||||||||||||||||||||||||||
| Settlement loss recognized | 20,810 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Special termination benefit recognized | 813 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Curtailment loss recognized | — | — | 222 | |||||||||||||||||||||||||||||||||
| Net pension costs | $ | 20,624 | $ | (43 | ) | $ | 879 | $ | 616 | $ | 671 | $ | 595 | $ | 411 | $ | 443 | $ | 1,044 | |||||||||||||||||
The net periodic benefit cost for the SERP for the year ended December 31, 2015, includes the impact of freezing the plan as of December 31, 2015, which resulted in fully recognizing the outstanding prior service cost basis at that date. The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic cost in
F-17
Assumptions
We use a measurement date of December 31 for our pension and SERP plan. Assumptions used to determine benefit obligations at December 31 are as follows:
| Pension Plan | SERP | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||
| Discount rate | n/a | 4.93% | 4.09% | 4.96% | ||||||||||
| Rate of compensation increase | n/a | n/a | 3.50% | 3.50% | ||||||||||
Assumptions used to determine net periodic benefit cost for years ended December 31 are as follows:
| Pension Plan | SERP | SERP | |||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||||||||
| Discount rate | 4.93% | 4.13% | 4.60% | 4.96% | 4.08% | 4.60% | 4.30 | % | 4.58 | % | 4.09 | % | |||||||||||||||||||
| Expected long-term return on plan assets | 6.00% | 6.65% | 6.75% | n/a | n/a | n/a | |||||||||||||||||||||||||
| Rate of compensation increase | n/a | n/a | n/a | 3.50% | 3.50% | 3.50% | n/a | n/a | 3.50 | % | |||||||||||||||||||||
| 2017 | 2016 | |||||||
| Discount rate | 3.68 | % | 4.30 | % | ||||
| Rate of compensation increase | n/a | n/a | ||||||
| Fair Value Measurements | ||||||||||||||||||||||||
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | |||||||||||||||||||
| Money Market Funds | $ | 813 | $ | 813 | $ | — | $ | 380 | $ | 380 | $ | — | ||||||||||||
| Equity Securities: | ||||||||||||||||||||||||
| Haverty Class A Common Stock | 6,348 | 6,348 | ||||||||||||||||||||||
U.S. Large Cap Passive(a) | 9,151 | 9,151 | ||||||||||||||||||||||
| U.S. Small/Mid Cap Growth | 1,183 | 1,183 | ||||||||||||||||||||||
| U.S. Small/Mid Cap Value | 1,174 | 1,174 | ||||||||||||||||||||||
| International Equity | 6,316 | 6,316 | ||||||||||||||||||||||
| Emerging Markets Equity | 1,530 | 1,530 | ||||||||||||||||||||||
| — | — | — | 25,702 | 6,348 | 19,354 | |||||||||||||||||||
| Fixed Income: | ||||||||||||||||||||||||
Opportunistic(b) | 8,143 | 8,143 | ||||||||||||||||||||||
| Passive | 4,294 | 4,294 | ||||||||||||||||||||||
Long Duration Active(c) | 16,964 | 16,964 | ||||||||||||||||||||||
| Long Duration Passive | 6,478 | 6,478 | ||||||||||||||||||||||
Long Duration Investment Grade(d) | 20,943 | 20,943 | ||||||||||||||||||||||
| — | — | — | 56,822 | — | 56,822 | |||||||||||||||||||
| Total | $ | 813 | $ | 813 | $ | — | $ | 82,904 | $ | 6,728 | $ | 76,176 | ||||||||||||
Cash Flows
| (In thousands) | SERP | |||
| 2015 | $ | 228 | ||
| 2016 | 260 | |||
| 2017 | 369 | |||
| 2018 | 372 | |||
| 2019 | 379 | |||
| 2020-2024 | 2,098 | |||
| (In thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | 2023-2027 | ||||||||||||||||||
| Benefit Payments | $ | 365 | $ | 376 | $ | 404 | $ | 431 | $ | 431 | $ | 2,437 | ||||||||||||
Other Plans
We have an employee savings/retirement (401(k)) plan to which substantially all our employees may contribute. We match employee contributions 100% of the first 1% of eligible pay and 50% of the next 5% contributed by participants. We expensed matching employer contributions of approximately $3,449,000, $3,104,000$3,932,000, $3,884,000 and $2,907,000$3,661,000 in 2014, 20132017, 2016 and 2012,2015, respectively.
We offer no post-retirement benefits other than the plans discussed above and no significant post-employment benefits.
Note 11, Accumulated Other Comprehensive Income (loss):
The following summarizes the changes in the balance and the reclassifications out of accumulated other comprehensive income (loss) on our Consolidated Balance SheetSheets to the Consolidated StatementStatements of Comprehensive Income (amounts in thousands):
| Year Ended December 31, | |||||||||||||
| 2014 | 2013 | 2012 | |||||||||||
| Beginning balance | $ | (15,412 | ) | $ | (23,378 | ) | $ | (24,996 | ) | ||||
| Other comprehensive income (loss) | |||||||||||||
| Defined benefit pension plans: | |||||||||||||
| Net gain (loss) during year | (10,974 | ) | 10,943 | 339 | |||||||||
Amortization of prior service cost(1) | 210 | 210 | 210 | ||||||||||
Amortization of net loss(1) | 244 | 1,695 | 1,873 | ||||||||||
Settlement loss recognized(2) | 20,810 | — | — | ||||||||||
| 10,290 | 12,848 | 2,422 | |||||||||||
Tax expense (benefit)(3) | (2,954 | ) | 4,882 | 921 | |||||||||
| Defined benefit pension plans, net | 13,244 | 7,966 | 1,501 | ||||||||||
Other (4) | — | — | 117 | ||||||||||
| Total other comprehensive income | 13,244 | 7,966 | 1,618 | ||||||||||
| Ending balance | $ | (2,168 | ) | $ | (15,412 | ) | $ | (23,378 | ) | ||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Beginning balance | $ | (1,830 | ) | $ | (1,938 | ) | $ | (2,168 | ) | |||
| Other comprehensive income (loss) | ||||||||||||
| Defined benefit pension plan: | ||||||||||||
| Net loss (gain) during year | (509 | ) | 72 | (230 | ) | |||||||
Amortization of prior service cost(1) | — | — | 432 | |||||||||
Amortization of net loss(1) | 90 | 102 | 169 | |||||||||
| (419 | ) | 174 | 371 | |||||||||
| Tax expense (benefit) | (105 | ) | 66 | 141 | ||||||||
| Total other comprehensive income (loss) | (314 | ) | 108 | 230 | ||||||||
| Ending balance | $ | (2,144 | ) | $ | (1,830 | ) | $ | (1,938 | ) | |||
F-18
| (1) | These amounts are included in the computation of net periodic pension costs and were reclassified to selling, general and administrative costs. For 2015, this includes $222,000 in curtailment loss on the SERP. |
Note 12, Stock-Based Compensation Plans:
We have issued options and outstanding awards for Common Stock under three stock-basedtwo employee compensation plans, the 2014 Long Term Incentive Plan (the "2014 LTIP Plan"), and the 2004 Long Term Incentive Plan (the "2004 LTIP Plan") and the 1998 Stock Option Plan (the "1998 Plan"). No new awards may be granted under the 1998 Plan and as of December 31, 2014 all previously granted awards have been exercised, forfeited, or expired. No new awards may be granted under the 2004 LTIP Plan. As of December 31, 2014, 1,187,9412017, approximately 842,000 shares were available for awards and options under the 2014 LTIP Plan.
The following table summarizes our equity award activity during the years ended December 31, 2014, 20132017, 2016 and 2012:2015:
| Restricted Stock Award | Stock-Settled Appreciation Rights | Options | ||||||||||||||||||||||
Shares or Units | Weighted-Average Award Price | Rights | Weighted-Average Award Price | Shares | Weighted-Average Exercise Price | |||||||||||||||||||
| Outstanding at January 1, 2011 | 432,025 | $ | 12.13 | 144,049 | $ | 8.87 | 292,100 | $ | 14.20 | |||||||||||||||
| Granted | 252,700 | 12.34 | — | — | — | — | ||||||||||||||||||
Exercised or restrictions lapsed(1) | (127,050 | ) | 11.87 | (22,300 | ) | 8.94 | (236,100 | ) | 12.89 | |||||||||||||||
| Forfeited or expired | (1,750 | ) | 12.34 | — | — | (6,000 | ) | 12.84 | ||||||||||||||||
| Outstanding at December 31, 2012 | 555,925 | 12.28 | 121,749 | 8.85 | 50,000 | 20.56 | ||||||||||||||||||
| Granted | 162,150 | 18.15 | 112,000 | 18.14 | — | — | ||||||||||||||||||
Exercised or restrictions lapsed(1) | (277,975 | ) | 12.24 | (84,049 | ) | 8.90 | (48,000 | ) | 20.75 | |||||||||||||||
| Forfeited or expired | (3,100 | ) | 15.00 | — | — | (2,000 | ) | 15.90 | ||||||||||||||||
| Outstanding at December 31, 2013 | 437,000 | 14.46 | 149,700 | 15.78 | — | — | ||||||||||||||||||
| Granted | 146,748 | 28.72 | — | — | ||||||||||||||||||||
Exercised or restrictions lapsed(1) | (235,925 | ) | 14.01 | (13,725 | ) | 12.30 | ||||||||||||||||||
| Forfeited or expired | (26,501 | ) | 24.28 | (6,000 | ) | 18.14 | ||||||||||||||||||
| Outstanding at December 31, 2014 | 321,322 | $ | 20.49 | 129,975 | $ | 16.04 | — | — | ||||||||||||||||
| Exercisable at December 31, 2014 | 51,975 | $ | 12.88 | — | — | |||||||||||||||||||
| Restricted units expected to vest | 321,322 | $ | 20.49 | |||||||||||||||||||||
| Exercisable at December 31, 2013 | 37,700 | $ | 8.76 | — | — | |||||||||||||||||||
| Exercisable at December 31, 2012 | 96,224 | $ | 8.89 | 50,000 | $ | 20.56 | ||||||||||||||||||
| Restricted Stock Award | Stock-Settled Appreciation Rights | |||||||||||||||
Shares or Units | Weighted-Average Award Price | Rights | Weighted-Average Award Price | |||||||||||||
| Outstanding at December 31, 2014 | 321,322 | $ | 20.49 | 129,975 | $ | 16.04 | ||||||||||
| Granted | 176,135 | 23.97 | — | |||||||||||||
Restrictions lapsed or exercised (1) | (147,595 | ) | 18.94 | (29,100 | ) | 8.74 | ||||||||||
| Forfeited or expired | (5,372 | ) | 24.84 | — | ||||||||||||
| Outstanding at December 31, 2015 | 344,490 | $ | 22.87 | 100,875 | $ | 18.14 | ||||||||||
| Granted | 209,394 | 18.80 | — | |||||||||||||
| Restrictions lapsed or exercised | (140,864 | ) | 20.55 | — | ||||||||||||
| Forfeited or expired | (15,700 | ) | 20.45 | — | ||||||||||||
| Outstanding at December 31, 2016 | 397,320 | $ | 21.64 | 100,875 | $ | 18.14 | ||||||||||
| Granted | 199,382 | 22.00 | — | |||||||||||||
Restrictions lapsed or exercised(1) | (157,406 | ) | 22.02 | (43,875 | ) | 18.14 | ||||||||||
| Forfeited or expired | (5,032 | ) | 20.09 | — | ||||||||||||
| Outstanding at December 31, 2017 | 434,264 | $ | 21.69 | 57,000 | $ | 18.14 | ||||||||||
| Exercisable at December 31, 2017 | 57,000 | $ | 18.14 | |||||||||||||
| Restricted units expected to vest | 417,590 | $ | 21.71 | |||||||||||||
| Exercisable at December 31, 2016 | 74,875 | $ | 18.14 | |||||||||||||
| Exercisable at December 31, 2015 | 48,875 | $ | 18.14 | |||||||||||||
| (1) | The total intrinsic value of stock-settled appreciation rights exercised was approximately $457,000 in 2015 and $284,000 in 2017. |
The fair value for stock-settled appreciation rights arewere estimated at the date of grant using a Black‑Scholes pricing model. The aggregate intrinsic value of vested and outstanding stock-settled appreciation rights at December 31, 20142017 was approximately $475,000 and $777,000, respectively.$257,000.
The total fair value of restricted common stock shares that vested in 2014, 20132017, 2016 and 20122015 was approximately $5,985,000, $6,308,000$3,972,000, $2,577,000 and $1,528,000,$3,097,000, respectively. The aggregate intrinsic value of outstanding restricted stock awards was $7,290,000$9,836,000 at December 31, 2014.2017.
Grants of restricted common stock, restricted units, performance units and stock-settled appreciation rights have been made to certain officers and key employees under the 2004 and the 2014 LTIP Plan. The restrictions on the restricted units generally lapse or vest annually, primarily over four year periods. The performance units are based on one-year performance periods but cliff vest in three years from grant date. The compensation for all awards is being charged to selling, general and administrative expense over the respective grants' vesting periods, primarily on a straight-line basis, and was approximately $3,319,000, $3,323,000$3,818,000, $3,872,000 and $2,553,000$4,033,000 in 2014, 20132017, 2016 and 2012,2015, respectively. The tax benefit recognized related to all awards was approximately $1,451,000, $1,471,000 and $1,533,000 in 2017, 2016 and 2015, respectively. As of December 31, 2014,2017, the total compensation cost related to unvested equity awards was approximately $4,536,000$4,486,000 and is expected to be recognized over a weighted-average period of 2.22.3 years.
F-19
Note 13, Earnings Per Share:
The following is a reconciliation of the income (loss) and number of shares used in calculating the diluted earnings per share for Common Stock and Class A Common Stock (amounts in thousands except per share data):
| Numerator: | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Common: | ||||||||||||||||||||||||
| Distributed earnings | $ | 27,077 | $ | 4,787 | $ | 21,721 | $ | 10,473 | $ | 27,674 | $ | 7,358 | ||||||||||||
| Undistributed earnings | (19,220 | ) | 23,972 | (8,522 | ) | 8,896 | (1,869 | ) | 17,995 | |||||||||||||||
| Basic | 7,857 | 28,759 | 13,199 | 19,369 | 25,805 | 25,353 | ||||||||||||||||||
| Class A Common earnings | 732 | 3,506 | 1,712 | 1,706 | 2,551 | 2,436 | ||||||||||||||||||
| Diluted | $ | 8,589 | $ | 32,265 | $ | 14,911 | $ | 21,075 | $ | 28,356 | $ | 27,789 | ||||||||||||
| Class A Common: | ||||||||||||||||||||||||
| Distributed earnings | $ | 2,703 | $ | 566 | $ | 2,963 | $ | 919 | $ | 2,735 | $ | 702 | ||||||||||||
| Undistributed earnings | (1,971 | ) | 2,940 | (1,251 | ) | 787 | (184 | ) | 1,734 | |||||||||||||||
| $ | 732 | $ | 3,506 | $ | 1,712 | $ | 1,706 | $ | 2,551 | $ | 2,436 | |||||||||||||
| Denominator: | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Common: | ||||||||||||||||||||||||
| Weighted average shares outstanding - basic | 20,426 | 19,865 | 19,096 | 19,381 | 19,492 | 20,430 | ||||||||||||||||||
| Assumed conversion of Class A Common Stock | 2,199 | 2,558 | 2,943 | 1,801 | 2,014 | 2,067 | ||||||||||||||||||
| Dilutive options, awards and common stock equivalents | 315 | 392 | 343 | 417 | 341 | 301 | ||||||||||||||||||
| Total weighted average diluted Common Stock | 22,940 | 22,815 | 22,382 | 21,599 | 21,847 | 22,798 | ||||||||||||||||||
| Class A Common: | ||||||||||||||||||||||||
| Weighted average shares outstanding | 2,199 | 2,558 | 2,943 | 1,801 | 2,014 | 2,067 | ||||||||||||||||||
| Basic net earnings per share | ||||||||||||||||||||||||
| Common Stock | $ | 0.38 | $ | 1.45 | $ | 0.69 | $ | 1.00 | $ | 1.32 | $ | 1.24 | ||||||||||||
| Class A Common Stock | $ | 0.33 | $ | 1.37 | $ | 0.58 | $ | 0.95 | $ | 1.27 | $ | 1.18 | ||||||||||||
| Diluted net earnings per share | ||||||||||||||||||||||||
| Common Stock | $ | 0.37 | $ | 1.41 | $ | 0.67 | $ | 0.98 | $ | 1.30 | $ | 1.22 | ||||||||||||
| Class A Common Stock | $ | 0.33 | $ | 1.35 | $ | 0.59 | $ | 0.94 | $ | 1.27 | $ | 1.17 | ||||||||||||
F-20
Note 14, Commitments:
We lease certain property and equipment under operating leases. Initial lease terms range from 5 years to 30 years and certain leases contain renewal options ranging from one to 25 years or provide for options to purchase the related property at fair market value or at predetermined purchase prices. The leases generally require us to pay all maintenance, property taxes and insurance costs.
The following schedule outlines the future minimum lease payments and rentals under operating leases:
| (In thousands) | Operating Leases | |||
| 2015 | $ | 32,148 | ||
| 2016 | 31,085 | |||
| 2017 | 28,450 | |||
| 2018 | 26,615 | |||
| 2019 | 21,450 | |||
| Subsequent to 2020 | 63,029 | |||
| Total minimum lease payments | 202,777 | |||
| Less total minimum sublease rentals | (12 | ) | ||
| Net minimum lease payments | $ | 202,765 | ||
| (In thousands) | Operating Leases | |||
| 2018 | $ | 31,643 | ||
| 2019 | 28,862 | |||
| 2020 | 26,264 | |||
| 2021 | 21,074 | |||
| 2022 | 14,428 | |||
| Subsequent to 2022 | 31,203 | |||
| Total minimum lease payments | $ | 153,474 | ||
Step rent and other lease concessions (free rent periods) are taken into account in computing lease expense on a straight-line basis. Lease concessionsLandlord allowances for capital improvements have not been significant, but are recorded as a reduction of expense over the term of the lease. Net rental expense applicable to operating leases consisted of the following for the years ended December 31:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||||||||||||||
| Property | ||||||||||||||||||||||||
| Minimum | $ | 27,264 | $ | 27,370 | $ | 27,633 | $ | 27,543 | $ | 26,594 | $ | 27,211 | ||||||||||||
| Additional rentals based on sales | 79 | — | — | 21 | 4 | 27 | ||||||||||||||||||
| Sublease income | (144 | ) | (146 | ) | (137 | ) | (90 | ) | (58 | ) | (206 | ) | ||||||||||||
| 27,199 | 27,224 | 27,496 | 27,474 | 26,540 | 27,032 | |||||||||||||||||||
| Equipment | 2,568 | 2,444 | 2,162 | 3,084 | 3,031 | 2,943 | ||||||||||||||||||
| $ | 29,767 | $ | 29,668 | $ | 29,658 | $ | 30,558 | $ | 29,571 | $ | 29,975 | |||||||||||||
Note 15, Supplemental Cash Flow Information:
| (In thousands) | 2017 | 2016 | 2015 | |||||||||
| Cash paid for income taxes | 18,763 | $ | 26,574 | $ | 13,509 | |||||||
| Income tax refunds received | 9 | 100 | 5 | |||||||||
| Cash paid for interest | 2,486 | 2,540 | 2,583 | |||||||||
| Noncash financing and investing activity: | ||||||||||||
| Fixed assets acquired (adjusted) related to capital lease and financing obligations | 1,009 | 3,890 | 3,176 | |||||||||
| Increase in financing obligations | 2,598 | 5,474 | 6,594 | |||||||||
F-21
Note 16, Selected Quarterly Financial Data (Unaudited):
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 20142017 and 20132016 (in thousands, except per share data):
| 2014 Quarter Ended | 2017 Quarter Ended | |||||||||||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | |||||||||||||||||||||||||
| Net sales | $ | 181,737 | $ | 175,132 | $ | 198,541 | $ | 212,999 | $ | 200,427 | $ | 196,829 | $ | 207,647 | $ | 214,962 | ||||||||||||||||
| Gross profit | 97,862 | 94,144 | 106,203 | 114,156 | 109,596 | 107,119 | 112,015 | 116,193 | ||||||||||||||||||||||||
| Credit service charges | 81 | 71 | 72 | 75 | 45 | 42 | 38 | 35 | ||||||||||||||||||||||||
| Income before taxes | 9,956 | 7,812 | 12,468 | (4,978 | ) | 9,740 | 9,694 | 9,719 | 14,070 | |||||||||||||||||||||||
| Net income | 6,129 | 4,829 | 7,824 | (10,192 | ) | 5,986 | 6,185 | 5,983 | 2,921 | |||||||||||||||||||||||
| Basic net earnings (loss) per share: | ||||||||||||||||||||||||||||||||
| Basic net earnings per share: | ||||||||||||||||||||||||||||||||
| Common | 0.27 | 0.21 | 0.35 | (0.45 | ) | 0.28 | 0.29 | 0.28 | 0.14 | |||||||||||||||||||||||
| Class A Common | 0.26 | 0.20 | 0.33 | (0.43 | ) | 0.27 | 0.28 | 0.27 | 0.13 | |||||||||||||||||||||||
| Diluted net earnings (loss) per share: | ||||||||||||||||||||||||||||||||
| Diluted net earnings per share: | ||||||||||||||||||||||||||||||||
| Common | 0.27 | 0.21 | 0.34 | (0.45 | ) | 0.28 | 0.29 | 0.28 | 0.13 | |||||||||||||||||||||||
| Class A Common | 0.26 | 0.20 | 0.33 | (0.43 | ) | 0.27 | 0.27 | 0.27 | 0.13 | |||||||||||||||||||||||
The fourth quarter includes $1.9 million of 2014other income primarily from gains on insurance recoveries of $1.3 million. The fourth quarter also includes additional income tax expense of $21.6$5.9 million a $0.90 per share impact, fordue to the settlement of the defined benefit pension plan.Tax Act.
| 2013 Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Net sales | $ | 186,090 | $ | 171,114 | $ | 192,722 | $ | 196,164 | ||||||||
| Gross profit | 100,309 | 91,311 | 103,877 | 106,000 | ||||||||||||
| Credit service charges | 86 | 76 | 78 | 79 | ||||||||||||
| Income before taxes | 13,450 | 7,866 | 15,388 | 15,783 | ||||||||||||
| Net income | 8,260 | 4,830 | 9,494 | 9,681 | ||||||||||||
| Basic net earnings per share: | ||||||||||||||||
| Common | 0.37 | 0.22 | 0.42 | 0.43 | ||||||||||||
| Class A Common | 0.35 | 0.20 | 0.40 | 0.41 | ||||||||||||
| Diluted net earnings per share: | ||||||||||||||||
| Common | 0.36 | 0.21 | 0.42 | 0.42 | ||||||||||||
| Class A Common | 0.34 | 0.20 | 0.40 | 0.41 | ||||||||||||
| 2016 Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Net sales | $ | 194,511 | $ | 194,774 | $ | 211,690 | $ | 220,595 | ||||||||
| Gross profit | 104,419 | 104,160 | 113,737 | 121,020 | ||||||||||||
| Credit service charges | 65 | 54 | 54 | 56 | ||||||||||||
| Income before taxes | 7,587 | 8,762 | 12,125 | 17,347 | ||||||||||||
| Net income | 4,669 | 5,374 | 7,336 | 10,947 | ||||||||||||
| Basic net earnings per share: | ||||||||||||||||
| Common | 0.21 | 0.25 | 0.35 | 0.52 | ||||||||||||
| Class A Common | 0.20 | 0.24 | 0.33 | 0.50 | ||||||||||||
| Diluted net earnings per share: | ||||||||||||||||
| Common | 0.21 | 0.24 | 0.34 | 0.51 | ||||||||||||
| Class A Common | 0.20 | 0.23 | 0.33 | 0.51 | ||||||||||||
Because of rounding the amounts will not necessarily add to the totals computed for the year. Also because of rounding and the use of the two class method in calculating per share data, the quarterly per share data will not necessarily add to the annual totals.
F-22
Schedule II – Valuation and Qualifying Accounts
Haverty Furniture Companies, Inc. and subsidiaries:
| Column A | Column B | Column C | Column D | Column E | Column B | Column C | Column D | Column E | ||||||||||||||||||||||||
(In thousands) | Balance at beginning of period | Additions charged to costs and expenses | Deductions Describe (1)(2) | Balance at end of period | Balance at beginning of period | Additions charged to costs and expenses | Deductions Describe (1)(2) | Balance at end of period | ||||||||||||||||||||||||
| Year ended December 31, 2014: | ||||||||||||||||||||||||||||||||
| Year ended December 31, 2017: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 350 | $ | 257 | $ | 257 | $ | 350 | $ | 360 | $ | 314 | $ | 404 | $ | 270 | ||||||||||||||||
| Reserve for cancelled sales and allowances | $ | 1,277 | $ | 11,126 | $ | 10,776 | $ | 1,627 | $ | 1,772 | $ | 11,601 | $ | 11,909 | $ | 1,464 | ||||||||||||||||
| Year ended December 31, 2013: | ||||||||||||||||||||||||||||||||
| Year ended December 31, 2016: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 395 | $ | 120 | $ | 165 | $ | 350 | $ | 395 | $ | 418 | $ | 453 | $ | 360 | ||||||||||||||||
| Reserve for cancelled sales and allowances | $ | 1,152 | $ | 10,402 | $ | 10,277 | $ | 1,277 | $ | 1,659 | $ | 11,402 | $ | 11,289 | $ | 1,772 | ||||||||||||||||
| Year ended December 31, 2012: | ||||||||||||||||||||||||||||||||
| Year ended December 31, 2015: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 525 | $ | 165 | $ | 295 | $ | 395 | $ | 350 | $ | 269 | $ | 224 | $ | 395 | ||||||||||||||||
| Reserve for cancelled sales and allowances | $ | 1,100 | $ | 9,027 | $ | 8,975 | $ | 1,152 | $ | 1,627 | $ | 11,466 | $ | 11,434 | $ | 1,659 | ||||||||||||||||
| (1) | Allowance for doubtful accounts: uncollectible accounts written off, net of recoveries. |
| (2) | Reserve for cancelled sales and allowances: impact of sales cancelled after delivery plus amount of allowance given to customers. |
F-23