Haverty Furniture Companies Inc: Form 10-Q for the period ended Jun 30, 2011

Provision for Income Taxes

Our effective tax rate for the second quarter and first six months of 2011 was 7.5% and (4.4)%, respectively, compared to 7.8% and 1.5% for the same periods of 2010.

The estimated annual effective rate for 2011 and 2010 was impacted by changes in our deferred tax valuation allowance. Tax expense also includes Texas state taxes which are based on gross profit and not pre-tax income or loss. The income tax expense for 2011 also includes a discrete item related to a $155,000 reduction in our recorded income tax receivables.

We continue to review the realizability of our deferred income tax assets which is dependent on generating sufficient future income. Valuation allowances of $13.3 million associated with certain federal and state deferred tax assets could be reduced in 2011 based on, among other factors, the level of income generated in 2011.

Store Plans and Capital Expenditures

We completed the relocation of a store in Austin, Texas during the second quarter and our plans include opening one store in a new market and relocating another store during the fourth quarter of 2011. These changes should increase net selling space in 2011 by less than 1% assuming the new stores open and existing stores close as scheduled.

Our planned annual expenditures for 2011 are $19.5 million including $11.5 million for new stores and store improvements, $4.8 million for purchasing four stores previously under lease and $3.2 million for information technology.

Liquidity and Capital Resources

Our sources of capital include, but are not limited to, cash flows from operations, public and private issuances of debt and equity securities and bank borrowings. We believe that available short-term and long-term capital resources are adequate to fund our working capital requirements, capital expenditures, working capital requirements, scheduled debt payments, income tax obligations, benefit plan contributions and stock repurchases for the foreseeable future.

Our $60.0 million revolving credit facility (the “Credit Agreement”) with two banks is secured by inventory, accounts receivable, certain other personal property and cash. The borrowing base at June 30, 2011 was $51.7 million. Amounts available are reduced by $10.0 million since a fixed charge coverage ratio test was not met for the immediately preceding twelve month period, resulting in a net availability of $41.7 million. There were no borrowings under the Credit Agreement during the six months ended June 30, 2011.

We are meeting with lenders to obtain a renewal of our revolving credit facility. We expect such financing will be on terms that are at least as favorable for the Company as the present facility expiring in December 2011.

Summary of Cash Activities

Our cash flows provided by operating activities totaled $15.2 million in the first six months of 2011 compared to $18.0 million for the same period of 2010. This reduction was due to a larger decrease in accounts payable and accrued liabilities in 2011 partly offset by a reduction of inventory and a small loss in 2011 versus earnings in 2010. 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 $10.8 million in the first six months of 2011 versus $2.9 million for the same period of 2010. This increase is primarily due to investments made in restricted cash as collateral for insurance programs.

Our cash flows used in financing activities totaled $0.4 million in the first six months of 2011 compared to $2.6 million provided by financing activities for the same period of 2010. This change is primarily due to reduced proceeds from exercises of stock options in 2011 compared to 2010.

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

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

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.