UNITED STATES

________________________

(Mark One)

For the quarterly period ended March 29, 2014

or

For the transition period from _____ to _____.

Commission file number: 0-14938

________________________________

STANLEY FURNITURE COMPANY, INC.

______________________________________

200 North Hamilton Street, No. 200, High Point, North Carolina, 27260
(Address of principal executive offices, Zip Code)

336-884-7701

(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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (X) No ( )

                Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (check one):

 (Do not check if a smaller reporting company)

            Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ( ) No (X)

As of April 25, 2014, 14,844,689 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share, were outstanding.

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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)
(unaudited)

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 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.  We suggest 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.         Property, Plant and Equipment

During the three months of 2014, we recorded a non-cash charge to our valuation allowance of $1.9 million increasing our valuation allowance against deferred tax assets to $10.9 million at March 29, 2014.  The primary assets covered by this valuation allowance are net operating loss carry forwards. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative loss in the most recent three-year period, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC 740, Income Taxes. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. Although realization is not assured, we have concluded that the remaining net deferred tax asset in the amount of $572 will be realized based on the reversal of existing deferred tax liabilities. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities. Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made. The income tax benefit recognized during the three month periods was primarily generated due to the releasing of reserves due to lapse of statute of limitations.

The major reconciling items between our effective income tax rate and the federal statutory rate are the increase in our valuation allowance and the cash surrender value on life insurance policies.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.    Restructuring and Related Charges

            In 2011, we evaluated our overall warehousing and distribution requirements for our Stanley Furniture product line and concluded only a portion of the leased warehouse space in Stanleytown, Virginia would be required.  As a result, we took charges for future lease obligations in 2011 and in 2012 for the portions of the Stanleytown warehouse facility no longer used. 

            In 2012, we made the strategic decision to consolidate our corporate office and High Point showroom into a single multi-purpose facility in High Point, North Carolina.  During 2013, we recorded $770,000 in restructuring charges in selling, general and administrative expenses for severance and relocation costs associated with this move and consolidation, with $260,000 of that total recorded in the first quarter.

Restructuring accrual activity for the three months ending March 29, 2014 was as follows:

7.    Subsequent Event

            Subsequent to the first quarter of 2014, we concluded that revenue on our Young America product line remained below the level needed to reach profitability and that the time frame needed to assure sustainable profitability was longer than we felt was economically justified.  Therefore, we made the decision to cease manufacturing operations at our Robbinsville, North Carolina facility.  Restructuring related charges were $1.2 million in the first quarter with approximately half in cost of goods sold and the other half in selling, general and administrative expenses.  These non-cash charges were to properly value inventory, accounts receivable and other assets based on this decision.  During the second quarter we expect further restructuring and related charges as we cease production in Robbinsville, North Carolina, communicate termination dates for employees and recognize any further asset impairments. 

Overview

           Over the last several years we took a number of strategic steps to reposition our company and to align our cost structure and operating models in response to lower sales volume and the changing marketplace. Major restructuring action was taken to consolidate facilities and ultimately reduce our domestic manufacturing footprint. At the same time, we shifted our operating strategy so we could respond to the demands of a changing marketplace and position our company for growth. For our Young America product line, we implemented a strategy to differentiate us in the marketplace by ensuring safety, quality, selection and service.  This led us to shift the production of imported Young America items from overseas to our domestic operation in Robbinsville, North Carolina. After significant investment into upgrading both our manufacturing capabilities and our Young America product line, revenue remained below the level needed to reach profitability and we concluded subsequent to the first quarter of 2014 that the time frame needed to assure sustainable profitability was longer than we felt was economically justified. Therefore, we made the decision to cease manufacturing operations at our Robbinsville, North Carolina facility.  Restructuring charges related to this decision were $1.2 million in the first quarter with approximately half in cost of goods sold and the other half in selling, general and administrative expenses. These non-cash charges were to properly value inventory, accounts receivable and other assets based on this decision. During the second quarter of this year we expect further restructuring and related charges as we cease production in Robbinsville, communicate termination dates for employees and recognize any further asset impairments.  We expect cash restructuring charges mostly consisting of severance and other termination costs to occur mostly in the third quarter and range from $500,000 to $900,000.  We expect to generate $1.0 million to $2.0 million in cash after shipping remaining backlog, selling off remaining inventory, paying for severance and other costs relating to termination and final production of the Young America product line.  This cash generation is excluding any proceeds that may be received for the disposition of property, plant and equipment.

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Income:

Net sales decreased $4.2 million, or 16.0%, for the three month period ended March 29, 2014, from the comparable 2013 period, which was our strongest quarter in 2013. The decrease was due primarily to lower unit volume, predominately from the Young America product line. 

Gross profit for the first three months of 2014 decreased to $1.4 million, or 6.4% of net sales, from $3.4 million, or 13.0% of net sales, for the comparable three months of 2013.  The reduction in gross profit was driven mostly by lower sales volumes hindering absorption of fixed operational costs and higher raw material inflation.  Also included in the current quarter were restructuring charges of $590,000 for inventory write-down on the Young America product line.

Selling, general and administrative expenses increased to $5.4 million, or 24.8% of net sales, for the three month period of 2014 from $4.9 million, or 18.6% of net sales, for the comparable three month period of 2013. The current year expenses include a $588,000 restructuring charge for accounts receivable valuation and other asset write-offs related to the Young America product line.  In the prior quarter, expenses included $260,000 restructuring charge associated with consolidating our corporate offices and High Point showroom into a single multi-purpose facility in High Point, North Carolina. Excluding these one-time costs, our expenses were up $233,000 to the prior year quarter due primarily to increased software amortization expense and marketing costs.

As a result, operating loss, including the restructuring charge, as a percentage of net sales was 18.4% for the three-month period of 2014 compared to a loss of 5.6% for the comparable 2013 period.

Net interest expense for the three month period of 2014 increased $95,000 from the comparable 2013 period.  Interest expense is primarily composed of interest on insurance policy loans from a legacy deferred compensation plan.

Our effective tax rate is essentially zero since we have established a full valuation allowance for our deferred tax assets in excess of our deferred tax liabilities. The benefit in both years was primarily the release of reserves due to lapse of statute of limitations.

Financial Condition, Liquidity and Capital Resources

            Sources of liquidity include cash on hand and cash generated from operations. While we believe that our business strategy and restructuring efforts will be successful, we cannot predict with certainty the ultimate impact on our revenues, operating costs and cash flow from operations. We expect cash on hand to be adequate for ongoing operational and capital expenditures for the foreseeable future.  At March 29, 2014 we had $10.0 million in cash, $1.7 million in restricted cash and $5.0 million of short-term investments.

Working capital, excluding cash, restricted cash and short-term investments, decreased to $36.6 million at March 29, 2014 from $37.1 million on December 31, 2013. The decrease was primarily the result of decreases in inventory partially offset by an increase in accounts receivable.

Cash used by operations was $2.1 million in the current quarter of 2014 compared to $7.0 million in the comparable prior year quarter. The decrease in cash used by operations in 2014 was primarily related to a decrease in cash paid to suppliers for finished goods that support our import business due to timing of receipts of imported product.  In addition, our spending for raw materials and payments to employees were lower at our domestic operations due to reduced domestic production levels.  Partially offsetting these decreases was a reduction in cash receipts from customers due to the lower sales volume.

Net cash provided by investing activities was $4.9 million in the current quarter of 2014 compared to $3.1 million in the comparable prior year quarter. During the first quarter of 2014, the net cash provided was the result of the maturity of a short-term investment of $5.0 million.   In the prior year quarter, we invested $750,000 in capital expenditures for the consolidation of our corporate offices and High Point showroom and $400,000 in final equipment purchases as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina.  We spent $760,000 as part of our continued investment in improved information systems.  Offsetting these uses of cash in the 2013 period was the maturity of a short-term investment of $5.0 million.  With the announcement of our ceasing manufacturing in our Robbinsville, NC facility, our capital expenditure requirements will be minimal for the remainder of 2014.

Net cash used by financing activities was $33,000 in the first quarter of 2014 compared to $386,000 in the comparable prior year quarter.  In both the current and prior year quarter, $33,000 was used to fund capital lease obligations.  In the prior year quarter, approximately $353,000 was used to purchase and retire 78,988 shares of our common stock. 

Continued Dumping and Subsidy Offset Act (“CDSOA”)

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“Customs”) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”) for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 have remained with the U.S. Treasury.

Certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the United States Court of International Trade, challenging the CDSOA’s “support requirement” and seeking to share in the distributions.  As a result, Customs held back a portion of those distributions (the “Holdback”) pending resolution of the Non-Supporting Producers’ claims. The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit.  Customs advised that it expected to distribute the Holdback to the Supporting Producers after March 9, 2012.  The Non-Supporting Producers sought injunctions first from the Court of International Trade and, when those efforts were unsuccessful, from the Federal Circuit directing Customs to retain the Holdback until the Non-Supporting Producers’ appeals were resolved.

On March 5, 2012, the Federal Circuit denied the motions for injunction, “without prejudicing the ultimate disposition of these cases.”  As a result, we received a CDSOA distribution of $39.9 million in April 2012. On August 19, 2013, the Federal Circuit issued a decision affirming the dismissal of the claims of two of the four Non-Supporting Producers. On January 3, 2014, the Federal Circuit denied those Non-Supporting Producers’ petitions for rehearing en banc. Those Non-Supporting Producers have received an extension until May 2, 2014 to file a petition for a writ of certiorari with the U.S. Supreme Court.  If the Supreme Court were to accept such petitions for certiorari review and thereafter to reverse the decisions of the Federal Circuit  and determine that the Non-Supporting Producers were entitled to CDSOA distributions, it is possible that Customs may seek to have us return all or a portion of our company’s share of that distribution.  Based on what we know today, we believe that the chance Customs will seek and be entitled to obtain a return of our CDSOA distribution is remote.

In addition, according to Customs, as of October 1, 2013, approximately $3.2 million in duties had been secured by cash deposits and bonds on unliquidated entries of wooden bedroom furniture that are subject to the CDSOA, and this amount is potentially available for distribution under the CDSOA to eligible domestic producers in connection with the case involving wooden bedroom furniture imported from China. The amount ultimately distributed will be impacted by appeals concerning the results of the annual administrative review process, which can retroactively increase or decrease the actual duties owed on entries secured by cash deposits and bonds, by collection efforts concerning duties that may be owed, and by any applicable legislation and Customs’ interpretation of that legislation. Assuming that such funds are distributed and that our percentage allocation in future years is the same as it was in 2011 when the last annual distribution was made (approximately 30% of the funds distributed) and the $3.2 million secured by the government does not change as a result of appeals from the annual administrative review process or otherwise, we could receive approximately $1.0 million in CDSOA funds.

In November 2012, Customs disclosed that it withheld $3.0 million in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution in 2012 until the amounts at issue in the pending litigation have been resolved.  In December 2013, Customs disclosed that it withheld another $6.4 million in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution in 2013 until the amounts at issue in the pending litigation have been resolved. It is expected that Customs will continue withholding such funds until a final decision is reached in the pending litigation. Therefore, no distributions were made in December 2012 or in December 2013 for the case involving wooden bedroom furniture from China. Assuming our historic allocation of approximately 30%, the portion of these undistributed funds that may be allocated to us is approximately $2.8 million.  

Due to the uncertainty of the various legal and administrative processes, we cannot provide assurances as to the amount of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds. 

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2013 Annual Report on Form 10-K.

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.

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