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HVT > SEC Filings for HVT > Form 10-Q on 6-Nov-2012All Recent SEC Filings




Quarterly Report

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

Net Sales

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

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

                                                    2012                                                                                     2011
                                Net Sales                                Comp-Store Sales                                Net Sales                                Comp-Store Sales
                                     %                $                                   $                                                     $               %                  $
                                  Increase        Increase         % Increase         Increase                            % Increase         Increase        Increase           Increase
                                (decrease)       (decrease)        (decrease)        (decrease)                           (decrease)       (decrease)       (decrease)        (decrease)
                                over prior       over prior        over prior        over prior                           over prior       over prior       over prior        over prior
Period       Total Dollars        period           period            period            period          Total Dollars        period           period           period            period
 Q1         $         163.6             6.1 %   $         9.4              5.7 %    $         8.7     $         154.2            (1.2 )%   $      (1.9 )           (0.6 )%    $      (0.9 )
 Q2                   151.5             5.9               8.4              5.6                8.0               143.1            (1.4 )           (2.0 )           (1.4 )            (2.0 )
 Q3                   172.7            11.1              17.3             10.0               15.4               155.4            (1.1 )           (1.8 )           (0.6 )            (1.0 )
9 months
30                    487.8             7.8              35.1              7.1               32.1               452.6            (1.2 )           (5.6 )           (0.9 )            (3.8 )
 Q4                       -               -                 -                -                  -               168.3             3.8              6.2              3.5               5.6
Year                      -               -                 -                -                  -               620.9             0.1              0.6              0.3               1.7

Stores are non-comparable if open for less than one year or if the selling square footage has been changed significantly during the past 12 full months. Large clearance sales events from warehouse or temporary locations are excluded from comparable store sales as are periods when stores are closed.

Our average ticket is up approximately 11.6% for the third quarter and 7.5% for the first nine months of the year as our customers respond to the value offered in our better quality merchandise. Sales in the upholstery product category continued to show strength in the third quarter and first nine months of 2012 increasing 20.9% and 16.7% over the prior year periods, respectively.

Gross Profit

Gross profit for the third quarter of 2012 was 52.5%, up 70 basis points compared to 51.8% in the prior year period. Gross profit for the nine months ended September 30, 2012 was 52.4% compared to 51.4% for the same period in 2011. Our expansion of upper-middle price point products in our assortment and focus on pricing discipline were the primary factors in generating the gross profit improvement.

We plan to remain competitive, but not overly aggressive with our pricing structure. Gross profit margins for the fourth quarter of 2012 are expected to be similar to the third quarter rate of 52.5%.

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

Selling, General and Administrative Expenses

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

Total SG&A expenses as a percent of sales for the three months ended September 30, 2012 decreased 2.5% to 49.3% from 51.8% in the prior year period. Total SG&A dollars for the third quarter of 2012 increased $4.6 million compared to the prior year period. Selling expenses increased $3.2 million as commissions rose and customers increased their usage of free interest credit promotions offered by our third party financing provider. Our administrative expenses included increased accruals of $0.8 million for incentive compensation and $0.7 million for non-management compensation. We benefited from reduced expense of $0.7 million related to employee group health benefit costs.

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

SG&A costs for the nine months ended September 30, 2012 decreased 2.0% to 49.8% as a percent of sales from 51.8%. Total SG&A dollars for the first nine months of 2012 rose $8.4 million compared to the prior year period. This change included increased selling expenses of $3.5 million due to higher sales, increased compensation of $3.8 million related to incentive and non-management salaries and lower employee group health benefit costs of $2.5 million.

Our expectations for SG&A costs for the full year 2012 are unchanged from those discussed in our Form 10-K for the year ended December 31, 2011. SG&A costs for the fourth quarter of 2012 are estimated to be higher than in the third quarter in dollars but lower as a percent of sales. Fixed and discretionary type expenses for the fourth quarter are expected to increase approximately $0.5 million from the third quarter level to $55 million. Variable costs are estimated to be 17.8% as a percent of sales.

Provision for Income Taxes

Our effective tax rate for the third quarter and first nine months ended September 30, 2012 was 41.2% and 39.4% respectively, compared to 35.6% benefit and (2.5)% expense for the same periods of 2011.

We settled certain state audits during the second quarter of 2012 which reduced our gross uncertain tax positions to $0.6 million at September 30, 2012 from $1.1 million at December 31, 2011. The settlements and related changes to our unrecognized tax benefits and changes arising from reductions in our income tax receivables increased tax expense for the nine months ended September 30, 2012 by approximately $88,000.

Liquidity and Capital Resources

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

We also have a $50.0 million revolving credit facility. Availability fluctuates under a borrowing base calculation and is reduced by outstanding letters of credit. The borrowing base was $44.9 million and there were no outstanding letters of credit at September 30, 2012. Amounts available are based on the lesser of the borrowing base or the $50.0 million line amount and reduced by $6.2 million since a fixed charge coverage ratio test was not met for the immediately preceding twelve months, resulting in a net availability of $38.7 million. There were no borrowed amounts outstanding under the facility at September 30, 2012.

Summary of Cash Activities

Our cash flows provided by operating activities totaled $48.3 million in the first nine months of 2012 compared to $30.1 million for the same period of 2011. This increase was primarily due to earnings in 2012 compared to a loss in 2011 and an increase in accounts payable and accrued expenses in 2012. For additional information about the changes in our assets and liabilities refer to our Balance Sheet Changes discussion.

Our cash flows used in investing activities totaled $19.9 million in the first nine months of 2012 versus $21.1 million for the same period of 2011. This decrease was primarily due to the initial investment of $6.8 million made in 2011 in restricted cash as collateral for insurance programs and partially offset by increased capital expenditures in 2012.

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

Financing activities used cash of $3.0 million in the first nine months of 2012 compared to $0.5 million for the same period of 2011. This increase was primarily due to the 2012 payment of $1.8 million in dividends while none were paid in the same period of 2011.

Balance Sheet Changes for the Nine Months Ended September 30, 2012

Our balance sheet as of September 30, 2012, as compared to our balance sheet as of December 31, 2011, changed as follows:

increase in cash of $25.4 million;

decrease in inventories of $9.2 million as higher than expected sales outpaced replenishment;

increase in property and equipment of $7.7 million as we invested in and expanded our store base;

increase in customer deposits of $7.1 million due to the normal seasonal differences in the timing of written business relative to the end of the period and to delivery of product to customers; and

increase in accrued liabilities of $6.9 million due to timing of payments and additional amounts related to self-insurance reserves.

Store Plans and Capital Expenditures

We opened a new store in Baltimore, Maryland during the second quarter and Midland, Texas early in the third quarter. During the fourth quarter we will add a store in the Dallas, Texas market, and a replacement store in Atlanta, Georgia. These changes would increase net selling square footage by approximately 2.5% in 2012 assuming the new stores open and the existing store closes as scheduled. Store plans for 2013 include opening one new store and the expansion of three showrooms. We also have stores reaching the end of their lease term and are subject to closure if terms of renewal are not reached. These changes would decrease net selling square footage by approximately 1.4% in 2013.

Our planned annual expenditures for 2012 are $25.0 million including $19.8 million for new stores and store improvements and $4.1 million for information technology. Capital expenditures for 2013 are estimated to be $20.0 million for new stores, store improvements and information technology.

Off-Balance Sheet Arrangements

As of September 30, 2012 we had no off-balance sheet arrangements or obligations.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our annual report on Form 10-K for the year ended December 31, 2011. We had no significant changes in those critical accounting estimates since our last annual report.

Self-insurance Reserves for Healthcare

We became primarily self-insured for employee group health care claims in 2012. We have purchased insurance coverage in order to establish certain limits to our exposure on both a per claim and aggregate basis. We record an accrual for the estimated amount of self-insured health care claims incurred by all participants but not yet reported (IBNR) using an actuarial method of applying a development factor to the reported monthly claims amounts. The Company's risk management and accounting management utilize a consistent methodology which involves various assumptions, judgment and other factors. The most significant factors which impact the determination of a required accrual are the historical pattern of the timeliness of claims processing, any changes in the nature or types of benefit plans, changes in the plan benefit designs, and medical trends and inflation. Historical experience is continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. The Company believes that the total health care cost accruals are reasonable and adequate to cover future payments on incurred claims.

Forward-Looking Information

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

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