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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 June 26, 2004
[ ] 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: 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 organizatin) 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)
----
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 July 9, 2004, 6,245,341 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)
June 26, December 31,
2004 2003
--------- --------
ASSETS
Current assets:
Cash .................................................... $ 3,922 $ 2,509
Accounts receivable, less allowances of $2,444 and $2,546 34,723 30,120
Inventories:
Finished goods ........................................ 48,267 37,815
Work-in-process ....................................... 7,565 7,638
Raw materials ......................................... 12,608 9,185
-------- --------
Total inventories .................................. 68,440 54,638
Prepaid expenses and other current assets .................... 1,426 2,855
Deferred income taxes ........................................ 2,927 2,855
-------- --------
Total current assets ....................................... 111,438 92,977
Property, plant and equipment, net ........................... 52,574 55,154
Goodwill ..................................................... 9,072 9,072
Other assets ................................................. 6,565 7,000
-------- --------
Total assets .............................................. $179,649 $164,203
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ..................... $ 4,157 $ 7,014
Accounts payable ......................................... 16,829 10,595
Accrued salaries, wages and benefits ..................... 13,241 9,511
Other accrued expenses ................................... 2,091 1,402
-------- --------
Total current liabilities .............................. 36,318 28,522
Long-term debt, exclusive of current maturities .............. 14,257 15,686
Deferred income taxes ........................................ 11,063 12,560
Other long-term liabilities .................................. 5,909 4,877
-------- --------
Total liabilities ..................................... 67,547 61,645
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized
6,245,341 and 6,201,047 shares issued and outstanding ...... 125 124
Capital in excess of par value ............................... 4,790 3,819
Retained earnings ............................................ 107,252 98,680
Accumulated other comprehensive loss ......................... (65) (65)
-------- --------
Total Stockholders' equity .............................. 112,102 102,558
-------- --------
Total liabilities and stockholders' equity ............ $179,649 $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 Six Months
Ended Ended
------------------ --------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
------- ------- -------- --------
Net Sales .................................. $70,721 $61,409 $140,943 $122,707
Cost of Sales .............................. 52,475 46,844 105,476 93,520
------- ------- -------- --------
Gross profit ............................. 18,246 14,565 35,467 29,187
Selling, general and administrative expenses 9,539 8,400 18,956 16,913
------- ------- -------- --------
Operating income ......................... 8,707 6,165 16,511 12,274
Other income, net .......................... (42) (47) (95) (89)
Interest expense ........................... 577 660 1,203 1,371
------- ------- -------- --------
Income before income taxes .............. 8,172 5,552 15,403 10,992
Income taxes ............................... 2,961 2,016 5,585 3,990
------- ------- -------- --------
Net Income ............................... $ 5,211 $ 3,536 $ 9,818 $ 7,002
======= ======= ======== ========
Earnings per share:
Basic .................................... $ .83 $ .54 $ 1.58 $ 1.07
======= ======= ======== ========
Diluted .................................. $ .80 $ .53 $ 1.51 $ 1.05
======= ======= ======== ========
Weighted average shares outstanding:
Basic .................................... 6,242 6,497 6,229 6,525
======= ======= ======== ========
Diluted .................................. 6,515 6,628 6,485 6,652
======= ======= ======== ========
Cash dividend declared per common share .... $ .10 $ .05 $ .20 $ .10
======= ======= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands)
Six Months Ended
----------------------
June 26, June 28,
2004 2003
--------- ---------
Cash flows from operating activities:
Cash received from customers ............................... $ 136,610 $ 118,895
Cash paid to suppliers and employees ....................... (125,246) (106,210)
Interest paid, net ......................................... (715) (1,754)
Income taxes paid, net ..................................... (4,067) (5,552)
--------- ---------
Net cash provided by operating activities ............... 6,582 5,379
--------- ---------
Cash flows from investing activities:
Capital expenditures ....................................... (200) (360)
Other, net ................................................. (88) (19)
--------- ---------
Net cash used by investing activities .................. (288) (379)
--------- ---------
Cash flows from financing activities:
Repayment of senior notes .................................. (4,286) (4,286)
Purchase and retirement of common stock .................... (2,709)
Dividends paid ............................................. (1,246) (652)
Proceeds from insurance policy loans ....................... 888
Proceeds from exercise of stock options .................... 651 11
--------- ---------
Net cash used by financing activities ................. (4,881) (6,748)
--------- ---------
Net increase (decrease) in cash ............................ 1,413 (1,748)
Cash at beginning of period ................................ 2,509 9,227
--------- ---------
Cash at end of period .................................. $ 3,922 $ 7,479
========= =========
Reconciliation of net income to net cash provided by operating activities:
Net income ................................................. $ 9,818 $ 7,002
Depreciation ........................................... 2,830 2,897
Deferred income taxes .................................. (1,569) (530)
Loss of sale of assets ................................. 5
Changes in assets and liabilities:
Accounts receivable ................................ (4,603) (3,727)
Inventories ........................................ (13,802) (1,405)
Prepaid expenses and other current assets .......... 1,732 99
Accounts payable ................................... 6,234 920
Accrued salaries, wages and benefits ............... 3,730 843
Other accrued expenses ............................. 689 (241)
Other assets ....................................... 491 (427)
Other long-term liabilities ........................ 1,032 (57)
--------- ---------
Net cash provided by operating activities .... $ 6,582 $ 5,379
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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:
Three Months Six Months
Ended Ended
------------------- -------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
------ ------ ------ ------
Net income as reported ........................... $5,211 $3,536 $9,818 $7,002
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ..... 432 432 825 863
------ ------ ------ ------
Pro forma net income ........................... $4,779 $3,104 $8,993 $6,139
====== ====== ====== ======
Earnings per share:
Basic - as reported ............................ $ 0.83 $ 0.54 $ 1.58 $ 1.07
====== ====== ====== ======
Basic - pro forma .............................. $ 0.77 $ 0.48 $ 1.44 $ 0.94
====== ====== ====== ======
Diluted - as reported .......................... $ 0.80 $ 0.53 $ 1.51 $ 1.05
====== ====== ====== ======
Diluted - pro forma ............................ $ 0.76 $ 0.47 $ 1.44 $ 0.93
====== ====== ====== ======
3. Property, Plant and Equipment
June 26, December 31,
2004 2003
Land and buildings ...................... $ 38,606 $ 38,606
Machinery and equipment ................. 74,643 74,550
Office furniture and equipment .......... 1,900 1,846
-------- --------
Property, plant and equipment, at cost 115,149 115,002
Less accumulated depreciation ........... 62,575 59,848
-------- --------
Property, plant and equipment, net .... $ 52,574 $ 55,154
======== ========
4. Debt
June 26, 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 ................................ 4,157 7,014
------- -------
Long-term debt, exclusive of current maturities ...... $14,257 $15,686
======= =======
5. Pension Plans
Components of pension cost:
Three Months Six Months
Ended Ended
------------------ -----------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
----- ----- ----- -----
Interest cost .......................... $ 244 $ 259 $ 487 $ 516
Expected return on plan assets ......... (242) (239) (484) (479)
Net amortization and deferral .......... 115 142 230 285
----- ----- ----- -----
Net cost .............................. 117 162 233 322
Settlement expense ..................... 217 170 435 341
----- ----- ----- -----
Total expense ......................... $ 334 $ 332 $ 668 $ 663
===== ===== ===== =====
The Plan is fully funded; therefore, no contributions are required to be
deposited in 2004.
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:
Three Months Six Months
Ended Ended
------------------ ------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
----- ------ ----- -----
Weighted average shares outstanding
for basic calculation......................... 6,242 6,497 6,229 6,525
Add: Effect of dilutive stock options............. 273 131 256 127
----- ----- ----- -----
Weighted average shares outstanding,
Adjusted for diluted calculation........... 6,515 6,628 6,485 6,652
===== ===== ===== =====
A reconciliation of the activity in Stockholders' Equity accounts for the quarter ended June 26, 2004 is as follows:
Capital in
Common Excess of Retained
Stock Par Value Earnings
Balance, December 31, 2003 ................... $ 124 $ 3,819 $ 98,680
Net Income ................................... 9,818
Exercise of stock options .................... 1 651
Tax benefit on exercise of stock options ..... 320
Dividends paid, $.10 per share ............... (1,246)
-------- -------- --------
Balance, June 26, 2004 ....................... $ 125 $ 4,790 $107,252
======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Results of Operations
We continue to pursue a blended strategy of combining domestic manufacturing
capabilities with an expanding offshore sourcing program and realignment of
manufacturing capacity. Integration of selected imported component parts and
finished items in our product line has lowered costs, provided design
flexibility and offers a better value to our customers. Sourced product
represented approximately 27% of sales during the first half of 2004 compared to
20% in 2003. We anticipate this percentage to level off at approximately 30% in
2004.
On June 18, 2004, the United States Department of Commerce imposed preliminary
duties ranging from 5% to 200% on imports of wooden bedroom furniture from
China. These duties are not expected to have a significant impact on our
operating results or business plans going forward.
Our manufacturing plants operated at approximately 80% capacity during the
second quarter of 2004. We continue to evaluate our manufacturing capacity needs
considering increased offshore sourcing, current and anticipated demand for our
products, 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 Six Months
Ended Ended
------------------ -----------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
----- ------ ------ -----
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 74.2 76.3 74.8 76.2
----- ----- ----- -----
Gross profit ............................. 25.8 23.7 25.2 23.8
Selling, general and administrative expenses 13.5 13.7 13.4 13.8
----- ----- ----- -----
Operating income ......................... 12.3 10.0 11.7 10.0
Other income, net .......................... (.1) (.1) (.1) (.1)
Interest expense ........................... .8 1.1 .9 1.1
----- ----- ----- -----
Income before income taxes ............... 11.6 9.0 10.9 9.0
Income taxes ............................... 4.2 3.2 4.0 3.3
----- ----- ----- -----
Net income ............................... 7.4% 5.8% 7.0% 5.7%
===== ===== ===== =====
Net sales increased $9.3 million, or 15.2%, for the three month period ended
June 26, 2004, from the comparable 2003 period. For the six month period, net
sales increased $18.2 million, or 14.9% from the 2003 six month period. The
increase for the three and six month periods were primarily due to higher unit
volume. While industry sales trends improved in the first half of 2004, we
believe most of our growth came from market share gains.
Gross profit margin for the three and six month periods of 2004 increased to
25.8% and 25.2%, respectively, from 23.7% and 23.8% for the comparable 2003
periods. Higher gross profit margin in 2004 was primarily due to higher
production levels at our domestic facilities and savings from sourcing
initiatives. We anticipate gross profit and operating income margins to decline
in the third quarter compared to the second quarter due to inflation in raw
materials, wages, employee benefits, and energy costs, and tariffs imposed on
wooden bedroom furniture imported from China. We believe these cost increases
will be offset with modest pricing actions and continued gains in operating
efficiencies by the fourth quarter. However, these trends may negatively impact
gross profit and operating income 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 and six month periods
of 2004 as a percentage of net sales decreased to 13.5% and 13.4%, respectively,
from 13.7% and 13.8% for the comparable 2003 periods. These percentage declines
were primarily due to higher net sales. Selling, general and administrative
expenditures increased in the three and six month periods of 2004 by $1.1
million and $2.0 million, respectively. These increases resulted from higher
selling expenses directly attributable to the increase in sales (including
additional warehouse expense) and increased bonus expense due to higher
earnings. These increases were partially offset by a $170,000 reversal of bad
debt expense in the second quarter of 2004, due to a decrease in accounts
receivable from certain customers experiencing financial difficulties compared
to an expense of $90,000 in the second quarter of 2003.
As a result of the above, operating income as a percentage of net sales was
12.3% and 11.7%, respectively, for the three and six month periods of 2004,
compared to 10% for both comparable 2003 periods.
Interest expense for the three and six month periods of 2004 decreased primarily
due to lower average debt levels.
The effective tax rate for 2004 is expected to be 36.2%, compared to 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 to support increased sales and higher 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 modestly increase during the third quarter as a result of
these 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 are 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 $6.6 million in the first six months of 2004
compared to $5.4 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 and lower
interest payments was due to timing. 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 $288,000 in the 2004 period compared
to $379,000 in 2003 and consisted of normal capital expenditures and software
purchases.
Net cash used by financing activities was $4.9 million in the 2004 period
compared to $6.7 million in the 2003 period. In the 2004 period, cash from
operations and proceeds from exercise of stock options 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 and available cash provided funds for senior debt
payments, purchase of our common stock and cash dividends.
At June 26, 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 June 26, 2004,
approximately $25 million of additional borrowings were available under the
revolving credit facility and cash on hand was $3.9 million.
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
pursuing 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, international trade policies of the United States and countries from
which the Company obtains offshore sourcing, changes in the preliminary duties
imposed on wooden bedroom furniture imported from China, the cyclical nature of
the furniture industry, fluctuations in the price for lumber which is the most
significant raw material used by the Company, fluctuations in foreign freight
cost, 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 six 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-15(e)), 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 were no changes in the Company's
internal control over financial reporting that occurred during the last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a.) The annual meeting of the Company's stockholders was held on April 14,
2004.
The stockholders of the Company elected two directors for a three-year
term expiring at the Annual Meeting of Stockholders to be held in 2007.
The election was approved by the following vote:
For Withheld
Thomas L. Millner 5,458,068 358,572
Jeffrey R. Scheffer 5,694,034 122,606
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 The Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K
(Commission File No. 0-19938) for the year ended December 31, 1998).
3.2 By-laws of the Registrant as amended (incorporated by reference to
Exhibit 3 to the Registrant's Form 10-Q (Commission File No.
0-14938) for the quarter ended September 27, 2003).
10.1 First amendment, dated April 23, 2004, to the revolving credit facility
dated August 29, 2003, between the Registrant and SouthTrust
Bank.(1)
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
None
(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: July 13, 2004 By: /s/ Douglas I. Payne
--------------------
Douglas I. Payne
Executive V.P. - Finance
& Administration and
Secretary
(Principal Financial and
Accounting Officer)