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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 April 2, 2005
[ ] 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 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)
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 22, 2005, 6,504,622 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)
April 2, December 31,
2005 2004
-------- -------
ASSETS
Current assets:
Cash .................................................... $ 17,272 $ 7,632
Accounts receivable, less allowances of $2,057 and $1,961 40,599 36,036
Inventories:
Finished goods ........................................ 50,985 52,646
Work-in-process ....................................... 9,367 8,449
Raw materials ......................................... 11,326 12,563
-------- --------
Total inventories .................................. 71,678 73,658
Prepaid expenses and other current assets .................... 955 1,585
Deferred income taxes ........................................ 2,409 2,414
-------- --------
Total current assets ....................................... 132,913 121,325
Property, plant and equipment, net ........................... 51,155 51,342
Goodwill ..................................................... 9,072 9,072
Other assets ................................................. 6,701 7,149
-------- --------
Total assets .............................................. $199,841 $188,888
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ..................... $ 4,257 $ 4,257
Accounts payable ......................................... 17,292 16,056
Accrued salaries, wages and benefits ..................... 10,581 10,573
Other accrued expenses ................................... 4,275 1,872
-------- --------
Total current liabilities .............................. 36,405 32,758
Long-term debt, exclusive of current maturities .............. 11,428 11,428
Deferred income taxes ........................................ 10,488 10,742
Other long-term liabilities .................................. 6,667 6,695
-------- --------
Total liabilities ..................................... 64,988 61,623
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized
6,504,622 and 6,415,002 shares issued and outstanding .... 130 129
Capital in excess of par value ............................... 12,940 10,335
Retained earnings ............................................ 121,934 116,952
Accumulated other comprehensive loss ......................... (151) (151)
-------- --------
Total stockholders' equity .............................. 134,853 127,265
-------- --------
Total liabilities and stockholders' equity ............ $199,841 $188,888
======== ========
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
-----------------
April 2, March 27,
2005 2004
------- -------
Net sales ........................................ $82,950 $71,520
Cost of sales .................................... 62,485 54,299
------- -------
Gross profit ................................... 20,465 17,221
Selling, general and administrative expenses ..... 11,051 9,417
------- -------
Operating income ............................... 9,414 7,804
Other income, net ................................ 65 53
Interest income .................................. 51 6
Interest expense ................................. 569 632
------- -------
Income before income taxes .................... 8,961 7,231
Income taxes ..................................... 3,201 2,624
------- -------
Net Income ..................................... $ 5,760 $ 4,607
======= =======
Earnings per share:
Basic .......................................... $ .89 $ .74
======= =======
Diluted ........................................ $ .86 $ .71
======= =======
Weighted average shares outstanding:
Basic .......................................... 6,468 6,216
======= =======
Diluted ........................................ 6,700 6,449
======= =======
Cash dividend declared per common share .......... $ .12 $ .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)
Three Months Ended
--------------------
April 2, March 27,
2005 2004
-------- --------
Cash flows from operating activities:
Cash received from customers ............................. $ 78,365 $ 65,556
Cash paid to suppliers and employees ..................... (67,967) (57,613)
Interest received (paid), net ............................ 45 (160)
Income taxes paid, net ................................... (269) (250)
-------- --------
Net cash provided by operating activities ............. 10,174 7,533
-------- --------
Cash flows from investing activities:
Capital expenditures ..................................... (1,196) (44)
Other, net ............................................... (6) (88)
-------- --------
Net cash used by investing activities ................ (1,202) (132)
-------- --------
Cash flows from financing activities:
Repayment of senior notes ................................ (4,286)
Purchase and retirement of common stock .................. (1,868)
Dividends paid ........................................... (778) (622)
Proceeds from exercised stock options .................... 3,314 349
-------- --------
Net cash provided (used) by financing activities .... 668 (4,559)
-------- --------
Net increase in cash ..................................... 9,640 2,842
Cash at beginning of period .............................. 7,632 2,509
-------- --------
Cash at end of period ................................ $ 17,272 $ 5,351
======== ========
Reconciliation of net income to new cash provided by operating activities:
Net income ............................................... $ 5,760 $ 4,607
Depreciation ......................................... 1,402 1,421
Deferred income taxes ................................ (249) (1,174)
Changes in assets and liabilities:
Accounts receivable .............................. (4,563) (6,021)
Inventories ...................................... 1,980 (1,703)
Prepaid expenses and other current assets ........ 612 1,977
Accounts payable ................................. 1,236 4,474
Accrued salaries, wages and benefits ............. 252 1,498
Other accrued expenses ........................... 3,319 1,059
Other assets ..................................... 453 243
Other long-term liabilities ...................... (28) 1,152
-------- --------
Net cash provided by operating activities .. $ 10,174 $ 7,533
======== ========
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 have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission ("SEC"). In our
opinion, 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 amounts in 2004 have been
reclassified to conform to the 2005 presentation. 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, we believe 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 our latest Annual Report on Form 10-K.
2. Stock Compensation
We apply the provisions of Accounting Principles Board Opinion No. 25 in
accounting for our stock options and, accordingly, no compensation cost has been
recognized in the financial statements. Had we 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 our net earnings on a pro forma basis is
indicated below:
April 2, March 27,
2005 2004
Net income as reported ........................... $5,760 $4,607
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ..... 289 393
------ ------
Pro forma net income ........................... $5,471 $4,214
====== ======
Earnings per share:
Basic - as reported ............................ $ 0.89 $ 0.74
====== ======
Basic - pro forma .............................. $ 0.85 $ 0.68
====== ======
Diluted - as reported .......................... $ 0.86 $ 0.71
====== ======
Diluted - pro forma ............................ $ 0.82 $ 0.68
====== ======
3. Property, Plant and Equipment
April 2, December 31,
2005 2004
-------- --------
Land and buildings ...................... $ 38,823 $ 38,775
Machinery and equipment ................. 74,974 74,846
Office furniture and equipment .......... 3,297 2,386
-------- --------
Property, plant and equipment, at cost 117,094 116,007
Less accumulated depreciation ........... 65,939 64,665
-------- --------
Property, plant and equipment, net .... $ 51,155 $ 51,342
======== ========
4. Debt
April 2, December 31,
2005 2004
------- -------
7.57% senior note due through June 30, 2005 ......... $ 1,400 $ 1,400
7.43% senior notes due through November 18, 2007 .... 4,285 4,285
6.94% senior notes due through May 3, 2011 .......... 10,000 10,000
------- -------
Total ............................................. 15,685 15,685
Less current maturities ............................. 4,257 4,257
------- -------
Long-term debt, exclusive of current maturities ... $11,428 $11,428
======= =======
5. Employee Benefits Plans
Components of pension cost for the three months ended:
April 2, March 27,
2005 2004
------ ------
Interest cost ................... $ 242 $ 243
Expected return on plan assets .. (256) (242)
Net amortization and deferral ... 111 115
----- -----
Net cost ...................... 97 116
Settlement expense .............. 240 218
----- -----
Total expense ................. $ 337 $ 334
===== =====
The Plan is fully funded; therefore, no contributions are required to be
deposited in 2005.
Components of other postretirement benefit cost for the three months ended:
April 2, March 27,
2005 2004
------- -------
Service Cost ................................... 22 17
Interest Cost .................................. 46 43
Amortization of transitions obligation ......... 33 33
Amortization of net actuarial loss ............. 17 10
--- ---
Net periodic postretirement benefit cost ..... 118 103
=== ===
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:
April 2, March 27,
2005 2004
----- -----
Weighted average shares outstanding
for basic calculation...................... 6,468 6,216
Add: Effect of dilutive stock options.......... 232 233
----- -----
Weighted average shares outstanding,
Adjusted for diluted calculation........ 6,700 6,449
===== =====
A reconciliation of the activity in Stockholders' Equity accounts for the
quarter ended April 2, 2005 is as follows:
Accumulated
Capital in Other
Common Excess of Retained Comprehensive
Stock Par Value Earnings Loss
---- --------- -------- -------
Balance, December 31, 2004 $129 $10,335 $ 116,952 $ (151)
Net income.................................... 5,760
Exercise of stock options..................... 2 3,312
Tax benefit on exercise of stock options 916
Stock repurchases............................. (1) (1,867)
Stock awards.................................. 244
Cash dividends paid, $.12 per share........... (778)
---- -------- --------- --------
Balance, April 2, 2005 $130 $ 12,940 $ 121,934 $ (151)
==== ======== ========= ========
7. New Accounting Standards
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 151, "Inventory Costs". The new Statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This Statement requires that those items be
recognized as current-period charges and requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. This statement is effective for fiscal years
beginning after June 15, 2005. We do not expect adoption of this statement to
have a material impact on our financial condition or results of operations.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. This
Statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25.
Statement No. 123(R) will require the fair value of all stock option awards
issued to employees to be recorded as an expense over the related vesting
period. The Statement also requires the recognition of compensation expense for
the fair value of any unvested stock option awards outstanding at the date of
adoption. We are evaluating these new rules, but expect no material impact upon
adoption relating to outstanding options since a majority of the awards under
the existing incentive stock option plan will be fully vested prior to the
effective date of the revised rules. The Securities and Exchange Commission has
ruled that FAS 123(R) is now effective for public companies for annual, rather
than interim, periods that begin after June 15, 2005.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
----------------------------------------------------------------------
Results of Operations
The execution of our blended strategy of combining domestic manufacturing
capabilities with an offshore sourcing program continues to produce positive
results. We incorporate selected imported component parts and finished items in
our product line to lower cost, provide design flexibility and offer a better
value to our customers. Sourced product represented approximately 30% of sales
during the first quarter of 2005 compared to 26% and 28% in the first quarter of
2004 and the full year 2004, respectively. We anticipate sourced product to
remain about 30% of sales for the remainder of 2005.
During the first quarter our manufacturing plants operated at approximately 75%
to 80% of their estimated capacity. We are maintaining our manufacturing
capacity at current levels to provide protective capacity for improved demand.
We will continue to evaluate our manufacturing capacity needs considering
offshore sourcing opportunities, current and anticipated demand for our
products, overall market conditions and other factors we consider relevant.
Should capacity reductions become necessary, this 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
-----------------
April 2, March 27,
2005 2004
------- ------
Net sales ........................................ 100.0% 100.0%
Cost of sales .................................... 75.3 75.9
----- -----
Gross profit ................................... 24.7 24.1
Selling, general and administrative expenses ..... 13.3 13.2
----- -----
Operating income ............................... 11.3 10.9
Other income, net ................................ .1 .1
Interest income .................................. .1
Interest expense ................................. .7 .9
----- -----
Income before income taxes ..................... 10.8 10.1
Income taxes ..................................... 3.9 3.7
----- -----
Net income ..................................... 6.9% 6.4%
===== =====
Net sales increased $11.4 million, or 16%, for the three month period ended
April 2, 2005, from the comparable 2004 period. The increase was primarily due
to higher unit volume and higher average selling prices. Industry sales growth
appears to have slowed during the first quarter of 2005 compared to the trends
reported in 2004. We believe most of our growth came from market share gains.
Gross profit margin for the three month period of 2005 was 24.7% compared to
24.1% for the 2004 period. Our gross profit margin was negatively impacted by
inflation in raw materials, wages, employee benefits, energy, freight costs and
tariffs imposed on wooden bedroom furniture imported from China. These higher
costs were more than offset by increasing our prices, leveraging our fixed cost
by operating our manufacturing facilities at modestly higher production levels
and improved operational efficiencies.
Selling, general and administrative expenses for the three month period as a
percentage of net sales increased slightly to 13.3% from 13.2% for the
comparable 2004 period. Selling, general and administrative expenditures
increased $1.6 million primarily as a result of higher selling expenses directly
attributable to the increase in sales and additional warehousing expense.
As a result of the above, operating income as a percentage of net sales was
11.3% for the three month period, compared to 10.9%, for the comparable 2004
period. We continue to experience inflationary pressures in raw materials,
compensation cost, energy and freight costs. These inflationary trends and
increased warehousing expense will negatively impact operating margins in the
future if we are not able to raise prices or achieve additional cost savings.
Interest expense for the three month period of 2005 decreased primarily due to
lower average debt levels. Interest income increased during the period due to
higher amounts of cash.
The effective tax rate for 2005 is expected to be 35.7%, compared to 36.1% for
the total year 2004. The decrease in the effective tax rate is a result of the
"American Jobs Creation Act of 2004" which allows for a deduction based on
qualified domestic production activities. We expect a modest decline in our
effective tax rate as this deduction is phased in over the next six years.
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, excluding cash and current maturities of long-term debt,
decreased $1.7 million during the first quarter of 2005 to $83.5 million from
$85.2 million at year end. The decrease was primarily due to lower inventories,
higher income taxes payable and an increase in accounts payable; partially
offset by an increase in accounts receivable.
Capital expenditures for 2005 are anticipated to be approximately $4.0 million
to $6.0 million for normal replacements and improvements. As both our sales and
the proportion of sourced goods increased, our need for additional warehouse
space has increased. Currently we are renting space to accommodate our needs. To
partially address the need for additional warehouse space, approximately $1.0
million of the 2005 capital expenditures will be used to expand warehouse space
and improve the manufacturing flow at one of our facilities. However, since this
will not completely alleviate the need for rented warehouse space, we continue
to evaluate long-term solutions which could result in additional capital
expenditures in 2005.
Cash generated from operations was $10.2 million in the first three months of
2005 compared to $7.5 million in the 2004 period. The increase in the first
three months of 2004 was due to higher receipts from customers due to higher
sales, partially offset by higher payments to suppliers and employees. Payments
to suppliers and employees increased primarily to fund higher production,
increased purchases of sourced product and higher selling and administrative
expenses.
Net cash used by investing activities was $1.2 million in the 2005 period
compared to $132,000 in 2004 and consisted of normal capital expenditures.
Capital expenditures in the first quarter of 2005 have returned to more historic
levels. Over the past three years, capital expenditures were lower due to the
relocation of a significant portion of machinery and equipment from a closed
facility to other facilities in lieu of normal replacements.
Net cash provided by financing activities was $668,000 in the 2005 period
compared to net cash used of $4.6 million in the 2004 period. In the 2005
period, cash from operations and proceeds from the exercise of stock options
provided funds for the purchase and retirement of our common stock and cash
dividends. During the first quarter of 2005, $1.9 million was used to purchase
38,480 shares of our common stock in the open market at an average price of
$48.55. Approximately $8.3 million remains authorized by our Board of Directors
to repurchase shares of our common stock. In the 2004 period, cash from
operations provided funds for senior debt payments and cash dividends.
At April 2, 2005, long-term debt including current maturities was $15.7 million.
Debt service requirements are $4.3 million remaining in 2005, $2.9 million in
2006, $2.9 million in 2007 and $1.4 million in 2008. As of April 2, 2005,
approximately $25 million of additional borrowings were available under the
revolving credit facility and cash on hand was $17.3 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 our 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, our success in executing a
blended strategy of combining 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 we obtain offshore sourcing, international
trade policies of the United States and countries from which we obtain sourcing,
the cyclical nature of the furniture industry, fluctuations in the price for
lumber which is the most significant raw material used, 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 we undertake 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
Our revolving credit facility bears interest at a variable rate; therefore,
changes in prevailing interest rates impact our borrowing costs. A
one-percentage point fluctuation in market interest rates would not have a
material impact on earnings during the first three months of 2005.
None of our foreign sales or purchases are denominated in foreign currency and
we do not have any foreign currency hedging transactions.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Under the supervision
and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer concluded
that our disclosure controls and procedures were effective as of the end
of the period covered by this quarterly report.
(b) Changes in internal controls. There were no changes in our internal
control over financial reporting that occurred during the first quarter
that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
Maximum number (or
Total number of approximate dollar
Total shares purchased value) of shares that
number of Average as part of publicly may yet be purchased
shares price paid announced plans under the plans or
Period purchased per share or programs programs (a)
- ------ --------- ------------ -------------------- ------------
January 1 to February 5, 2005 $10,200,000
February 6 to March 5, 2005 $10,200,000
March 6 to April 2, 2005 38,480 $48.55 38,480 $ 8,300,000
----------- ----------- -----------
Total 38,480 $48.55 38,480
=========== =========== ===========
(a) On October 13, 2003, we announced that our Board of Directors had authorized
the use of an additional $10 million to repurchase our common stock, bringing
the total amount authorized to $10.2 million. Consequently, we may purchase our
common stock, from time to time, either directly or through agents, in the open
market, through negotiated purchases or otherwise, at prices and on terms
satisfactory to us.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by Jeffrey R. Scheffer, our Chief Executive Officer, 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, our Chief Financial Officer, 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, our Chief Executive Officer, 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, our Chief Financial Officer, 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: April 26, 2005 By: /s/ Douglas I. Payne
--------------------
Douglas I. Payne
Executive V.P. - Finance &
Administration and Secretary
(Principal Financial and Accounting
Officer)