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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to .
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Commission file number: 0-14938
STANLEY FURNITURE COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1272589
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
(Address of principal executive offices, Zip Code)
(276) 627-2000
(Registrant's telephone number, including area code)
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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 is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes X No
As of April 12, 2004, 6,233,341 shares of common stock of Stanley
Furniture Company, Inc., par value $.02 per share were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 27, December 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash ................................................................. $ 5,351 $ 2,509
Accounts receivable, less allowances of $2,599 and $2,546 ............ 36,141 30,120
Inventories:
Finished goods ..................................................... 38,176 37,815
Work-in-process .................................................... 8,257 7,638
Raw materials ...................................................... 9,908 9,185
-------- ---------
Total inventories ............................................... 56,341 54,638
Prepaid expenses and other current assets ................................. 1,105 2,855
Deferred income taxes ..................................................... 2,855 2,855
-------- ---------
Total current assets .................................................... 101,793 92,977
Property, plant and equipment, net ........................................ 53,804 55,154
Goodwill .................................................................. 9,072 9,072
Other assets .............................................................. 6,836 7,000
-------- ---------
Total assets ........................................................... $171,505 $164,203
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt .................................. $ 2,728 $ 7,014
Accounts payable ...................................................... 15,069 10,595
Accrued salaries, wages and benefits .................................. 11,009 9,511
Other accrued expenses ................................................ 2,461 1,402
-------- --------
Total current liabilities ........................................... 31,267 28,522
Long-term debt, exclusive of current maturities ........................... 15,686 15,686
Deferred income taxes ..................................................... 11,386 12,560
Other long-term liabilities ............................................... 6,029 4,877
-------- --------
Total liabilities .................................................. 64,368 61,645
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized
6,233,341 and 6,201,047 shares issued and outstanding ................... 125 124
Capital in excess of par value ............................................ 4,412 3,819
Retained earnings ......................................................... 102,665 98,680
Accumulated other comprehensive loss ...................................... (65) (65)
-------- --------
Total Stockholders' equity ........................................... 107,137 102,558
-------- --------
Total liabilities and stockholders' equity ......................... $171,505 $164,203
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Ended
--------------------
March 27, March 29,
2004 2003
------- --------
Net Sales .................................. $70,222 $61,298
Cost of Sales .............................. 53,001 46,676
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Gross profit ............................. 17,221 14,622
Selling, general and administrative expenses 9,417 8,513
------- -------
Operating income ......................... 7,804 6,109
Other income, net .......................... 53 42
Interest expense ........................... 626 711
------- -------
Income before income taxes .............. 7,231 5,440
Income taxes ............................... 2,624 1,974
------- -------
Net Income ............................... $ 4,607 $ 3,466
======= =======
Earnings per share:
Basic .................................... $ .74 $ .53
======= =======
Diluted .................................. $ .71 $ .52
======= =======
Weighted average shares outstanding:
Basic .................................... 6,216 6,558
======= =======
Diluted .................................. 6,449 6,679
======= =======
Cash dividend declared per common share .... $ .10 $ .05
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands)
Three Months Ended
March 27, March 29,
2004 2003
-------- --------
Cash flows from operating activities:
Cash received from customers ............................... $ 64,258 $ 57,523
Cash paid to suppliers and employees ....................... (56,315) (49,357)
Interest paid, net ......................................... (160) (300)
Income taxes paid, net ..................................... (250) (1,293)
-------- --------
Net cash provided by operating activities ............... 7,533 6,573
-------- --------
Cash flows from investing activities:
Capital expenditures ....................................... (44) (37)
Other, net ................................................. (88)
-------- --------
Net cash used by investing activities .................. (132) (37)
-------- --------
Cash flows from financing activities:
Repayment of senior notes .................................. (4,286) (4,286)
Purchase and retirement of common stock .................... (566)
Dividends paid ............................................. (622) (328)
Proceeds from exercised stock options ...................... 349
-------- --------
Net cash used by financing activities ................. (4,559) (5,180)
-------- --------
Net increase in cash ....................................... 2,842 1,356
Cash at beginning of period ................................ 2,509 9,227
-------- --------
Cash at end of period .................................. $ 5,351 $ 10,583
======== ========
Reconciliation of net income to new cash provided by operating activities:
Net income ................................................. $ 4,607 $ 3,466
Depreciation ........................................... 1,421 1,450
Deferred income taxes .................................. (1,174)
Changes in assets and liabilities:
Accounts receivable ................................ (6,021) (3,731)
Inventories ........................................ (1,703) 1,529
Prepaid expenses and other current assets .......... 1,977 234
Accounts payable ................................... 4,474 1,881
Accrued salaries, wages and benefits ............... 1,498 439
Other accrued expenses ............................. 1,059 1,176
Other assets ....................................... 243 212
Other long-term liabilities ........................ 1,152 (83)
-------- --------
Net cash provided by operating activities .... $ 7,533 $ 6,573
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Preparation of Interim Unaudited Consolidated Financial Statements
The consolidated financial statements of Stanley Furniture Company, Inc.
(referred to as "Stanley" or the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, these statements include all adjustments
necessary for a fair presentation of the results of all interim periods reported
herein. All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or omitted pursuant to
SEC rules and regulations. However, management believes that the disclosures
made are adequate for a fair presentation of results of operations and financial
position. Operating results for the interim periods reported herein may not be
indicative of the results expected for the year. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and accompanying notes included in Stanley's latest Annual
Report on Form 10-K.
2. Stock Compensation
The Company applies the provisions of Accounting Principles Board Opinion No. 25
in accounting for its stock options and, accordingly, no compensation cost has
been recognized in the financial statements. Had the Company determined
compensation cost based on the fair value method as defined in Statement of
Financial Accounting Standards (SFAS) No. 123, and as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS Statement No. 123", the impact on the Company's net earnings
on a pro forma basis is indicated below (in thousands, except per share data):
March 27, March 29,
2004 2003
------ ------
Net income as reported ................................ $4,607 $3,466
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects .......... 393 432
------ ------
Pro forma net income ................................ $4,214 $3,034
====== ======
Earnings per share:
Basic - as reported ................................. $ 0.74 $ 0.53
====== ======
Basic - pro forma ................................... $ 0.68 $ 0.46
====== ======
Diluted - as reported ............................... $ 0.71 $ 0.52
====== ======
Diluted - pro forma ................................. $ 0.68 $ 0.46
====== ======
3. Property, Plant and Equipment
(in thousands)
March 27, December 31,
2004 2003
Land and buildings .......................... $ 38,606 $ 38,606
Machinery and equipment ..................... 74,548 74,550
Office furniture and equipment .............. 1,839 1,846
-------- --------
Property, plant and equipment, at cost ... 114,993 115,002
Less accumulated depreciation ............... 61,189 59,848
-------- --------
Property, plant and equipment, net ........ $ 53,804 $ 55,154
======== ========
4. Debt
(in thousands)
March 27, December 31,
2004 2003
7.28% senior notes due through March 15, 2004 ......... $ $ 4,286
7.57% senior note due through June 30, 2005 ........... 2,700 2,700
7.43% senior notes due through November 18, 2007 ...... 5,714 5,714
6.94% senior notes due through May 3, 2011 ............ 10,000 10,000
------ ------
Total ............................................... 18,414 22,700
Less current maturities ............................... 2,728 7,014
------ ------
Long-term debt, exclusive of current maturities ..... $15,686 $15,686
======= =======
5. Pension Plans
Components of pension cost for the three months ended:
(in thousands)
March 27, March 29,
2004 2003
----- -----
Interest cost ............................... $ 243 $ 257
Expected return on plan assets .............. (242) (240)
Net amortization and deferral ............... 115 143
----- -----
Net cost .................................. 116 160
Settlement expense .......................... 218 171
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Total expense ............................. $ 334 $ 331
===== =====
The Plan is fully funded; therefore, no contributions are required to be
deposited for the 2004 plan year.
6. Stockholders' Equity
Basic earnings per common share are based upon the weighted average shares
outstanding. Outstanding stock options are treated as potential common stock for
purposes of computing diluted earnings per share. Basic and diluted earnings per
share are calculated using the following share data (in thousands):
March 27, March 29,
2004 2003
----- -----
Weighted average shares outstanding
for basic calculation........................ 6,216 6,558
Add: Effect of dilutive stock options............ 233 121
----- -----
Weighted average shares outstanding,
Adjusted for diluted calculation.......... 6,449 6,679
===== =====
A reconciliation of the activity in Stockholders' Equity accounts for the
quarter ended March 27, 2004 is as follows (in thousands, except per share
data):
Capital in
Common Excess of Retained
Stock Par Value Earnings
Balance, December 31, 2003 ............. $124 $3,819 $ 98,680
Net Income ............................. 4,607
Exercise of stock options .............. 1 348
Tax benefit on exercise of stock options 245
Dividends paid, $.10 per share ......... (622)
------ ------ --------
Balance, March 27, 2004 ................ $125 $4,412 $102,665
====== ====== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
We continue to implement a blended strategy of combining domestic manufacturing
capabilities with an expanding offshore sourcing program and realign
manufacturing capacity. Integration of selected imported component parts and
finished items in our product line will lower costs, provide design flexibility
and offer a better value to our customers. Sourced product represented
approximately 26% of sales during the first quarter of 2004 compared to 20% in
2003. We anticipate this percentage to level off at approximately 30% in 2004.
Our manufacturing plants operated at approximately 75% capacity during the first
quarter of 2004. We continue to evaluate our manufacturing capacity needs
considering increased offshore sourcing, current and anticipated demand for our
products, the outcome of the dumping investigation regarding wooden bedroom
furniture produced in China, overall market conditions and other factors we
consider relevant. Further capacity reductions could cause asset impairment or
other restructuring charges in the future.
The following table sets forth the percentage relationship to net sales of
certain items included in the Consolidated Statements of Income.
Three Months
Ended
------------------
March 27, March 29,
2004 2003
----- -----
Net Sales ....................................... 100.0% 100.0%
Cost of Sales ................................... 75.5 76.1
----- -----
Gross profit .................................. 24.5 23.9
Selling, general and administrative expenses .... 13.4 13.9
----- -----
Operating income .............................. 11.1 10.0
Other income, net ............................... .1 .1
Interest expense ................................ .9 1.2
----- -----
Income before income taxes .................... 10.3 8.9
Income taxes .................................... 3.7 3.2
----- -----
Net income .................................... 6.6% 5.7%
===== =====
Net sales increased $8.9 million, or 14.6%, for the three month period ended
March 27, 2004, from the comparable 2003 period. The increase for the three
month period was primarily due to higher unit volume. While industry sales
trends appear to be improving, we believe most of our growth continues to come
from market share gains.
Gross profit margin for the three month period of 2004 was 24.5% compared to
23.9% for the 2003 period. Higher gross profit margin in 2004 was primarily due
to higher production levels at our domestic facilities and savings from sourcing
initiatives. We are experiencing inflationary pressures in wages, employee
benefits and raw materials, primarily lumber. These trends may negatively impact
gross profit margins in the future if we are not able to raise prices or achieve
additional cost savings.
Selling, general and administrative expenses for the three month period as a
percentage of net sales decreased to 13.4% from 13.9% for the comparable 2003
period. This percentage declined primarily due to higher net sales. Selling,
general and administrative expenditures increased $904,000 primarily as a result
of higher selling expenses directly attributable to the increase in sales,
including additional warehouse expense.
As a result of the above, operating income as a percentage of net sales was
11.1% for the three month period, compared to 10.0%, for the comparable 2003
period.
Interest expense for the three month period of 2004 decreased primarily due to
lower average debt levels.
The effective tax rate for 2004 is expected to be 36.3%, compared 36.0% for the
total year 2003. The higher tax rate in 2004 is due to higher state income
taxes.
Financial Condition, Liquidity and Capital Resources
Our sources of liquidity include cash on hand, cash from operations and amounts
available under a $25.0 million credit facility. These sources have been
adequate for day-to-day expenditures, debt payments, purchases of our stock,
capital expenditures and payment of cash dividends to stockholders. We expect
these sources of liquidity to continue to be adequate for the future.
Working capital has increased due to higher overall finished goods inventory
levels as the proportion of our sales from sourced products has increased. To
support our delivery performance, we maintain a higher inventory level of
sourced products compared to those we manufacture. We expect finished goods
inventories to increase during the second quarter due to normal seasonal trends.
Capital expenditures for 2004 are anticipated to be approximately $2.0 million
to $3.0 million for normal replacements and improvements. As both our sales and
the proportion of sourced goods increase we anticipate the need for additional
warehouse space. Near-term we anticipate leasing space to accommodate our needs.
However, should we decide to invest in our own facilities this could increase
our anticipated capital expenditures.
Cash generated from operations was $7.5 million in the first three months of
2004 compared to $6.6 million in the 2003 period. The increase in cash received
from customers and cash paid to suppliers and employees was primarily due to
higher sales. Lower tax payments resulted from an overpayment in 2003. Higher
sales also resulted in an increase in accounts receivable. Accounts payable and
accrued salaries, wages and benefits increased primarily due to the timing of
payments.
Net cash used by investing activities was $132,000 in the 2004 period compared
to $37,000 in 2003 and consisted of normal capital expenditures and software
purchases.
Net cash used by financing activities was $4.6 million in the 2004 period
compared to $5.2 million in the 2003 period. In the 2004 period, cash from
operations provided funds for senior debt payments and cash dividends.
Approximately $10.2 million remains authorized by our Board of Directors to
repurchase shares of our common stock. In the 2003 period, cash from operations
provided cash for senior debt payments, purchase of our common stock and cash
dividends.
At March 27, 2004, long-term debt including current maturities was $18.4
million. Debt service requirements are $2.7 million remaining in 2004, $4.3
million in 2005, $2.9 million in 2006 and $2.9 million in 2007. As of March 27,
2004, approximately $25 million of additional borrowings were available under
the revolving credit facility and cash on hand was $5.4 million. The Company
believes that its financial resources are adequate to support its capital needs
and debt service requirements.
Forward-Looking Statements
Certain statements made in this report are not based on historical facts, but
are forward-looking statements. These statements can be identified by the use of
forward-looking terminology such as "believes," "estimates", "expects," "may,"
"will," should," or "anticipates," or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy. These
statements reflect the Company's reasonable judgment with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include competition in the furniture industry including
competition from lower-cost foreign manufacturers, the Company's success in
implementing its blended strategy of expanded offshore sourcing and domestic
manufacturing, disruptions in offshore sourcing including those arising from
supply or distribution disruptions or changes in political or economic
conditions affecting the countries from which the Company obtains offshore
sourcing, the cyclical nature of the furniture industry, fluctuations in the
price for lumber which is the most significant raw material used by the Company,
credit exposure to customers, capital costs and general economic conditions. Any
forward looking statement speaks only as of the date of this filing, and the
Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new developments or otherwise.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Because the Company's obligation under its revolving credit facility bears
interest at a variable rate, the Company is sensitive to changes in prevailing
interest rates. A one-percentage point fluctuation in market interest rates
would not have a material impact on earnings during the first three months of
2004.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14(c)), based on their evaluation of such controls and procedures
conducted as of the end of the period covered by this report, are effective
to ensure that information required to be disclosed by the Company in the
reports it files under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission
and that such information is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation referred to
above.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2 Certification by Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1 Certification of Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2 Certification of Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002. (1)
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 17, 2004, to provide the detail
of tax fees paid to PricewaterhouseCoopers, LLP ("PWC").
(1) Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
Date: April 14, 2004 By: /s/ Douglas I. Payne
--------------------
Douglas I. Payne
Executive V.P. - Finance &
Administration and Secretary
(Principal Financial and
Accounting Officer)