Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - HG Holdings, Inc.exhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - HG Holdings, Inc.exhibit32_1.htm
EX-31.2 - EXHIBIT 31.2 - HG Holdings, Inc.exhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - HG Holdings, Inc.exhibit31_1.htm
EX-10.2 - EXHIBIT 10.2 - HG Holdings, Inc.exhibit10_2.htm
EX-10.1 - EXHIBIT 10.1 - HG Holdings, Inc.exhibit10_1.htm

 

UNITED STATES

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 October 1, 2016

Or

 

[   ]

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 of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

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

 

 

(336-884-7700)

(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):

 

Large accelerated filer  (  )   

Accelerated filer                 (  )

Non-accelerated filer    (  )

Smaller reporting company (X)

(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 October 21, 2016, 14,732,199 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)

October 1,

2016

(unaudited)

December 31,

2015

ASSETS

 

 

 

 

 

Current assets:

Cash

$

7,293

 

$

6,497

Restricted cash

663

663

Accounts receivable, less allowances of $555 and $404, on each respective date

 

5,142

 

 

6,925

Inventory

21,349

20,934

Prepaid expenses and other current assets

 

503

 

 

959

Total current assets

34,950

35,978

 

 

 

 

 

 

Property, plant and equipment, net

1,654

1,787

Cash surrender value of life insurance policies, net

 

-

 

 

22,253

Other assets

 

2,940

 

3,128

Total assets

$

39,544

 

$

63,146

LIABILITIES

 

 

 

 

 

Current liabilities:

Accounts payable

$

5,319

 

$

5,883

Accrued salaries, wages and benefits

1,420

1,367

Other accrued expenses

 

968

 

 

334

Total current liabilities

7,707

7,584

 

 

 

 

 

 

Deferred compensation

3,969

4,301

Supplemental retirement plan

 

1,732

 

 

1,797

Other long-term liabilities

 

2,373

 

1,812

Total liabilities

 

15,781

 

 

15,494

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $0.02 par value, 25,000,000 shares authorized,14,732,199 and 14,906,831 shares issued
    and outstanding on each respective date

275

283

Capital in excess of par value

 

16,721

 

 

17,521

Retained earnings

8,871

32,023

Accumulated other comprehensive loss

 

(2,104)

 

 

(2,175)

Total stockholders’ equity

 

23,763

 

47,652

Total liabilities and stockholders’ equity

$

39,544

 

$

63,146

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

 

2


 

 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share data)

(unaudited)

Three Months

Ended

Nine Months

Ended

Oct. 1,

2016

Sept. 26,

2015

Oct. 1,

2016

Sept. 26,

2015

Net sales

$

11,036

 

$

13,760

 

$

34,772

 

$

43,565

Cost of sales

 

9,201

 

 

10,350

 

 

28,334

 

 

33,333

Gross profit

 

1,835

 

 

3,410

 

 

6,438

 

 

10,232

Selling, general, and administrative expenses

 

3,807

 

 

2,823

 

 

10,626

 

 

9,921

Operating (loss) income

 

(1,972)

 

 

587

 

 

(4,188)

 

 

311

Income from Continued Dumping and Subsidy Offset Act, net

 

-

 

 

-

 

 

-

 

 

4,896

Other income, net

5

12

16

52

Interest (income) expense, net

 

(6)

 

 

216

 

 

103

 

 

756

(Loss) income from continuing operations before taxes

 

(1,961)

 

 

383

 

 

(4,275)

 

 

4,503

Income tax expense (benefit)

 

119

  

 

(8)

 

 

682

     

 

71

Net (loss) income from continuing operations

 

(2,080)

 

 

391

 

 

(4,957)

 

 

4,432

Net income (loss) from discontinued operations

 

-

 

74

 

-

 

(9)

Net (loss) income

$

(2,080)

 

$

465

 

$

(4,957)

 

$

4,423

Basic (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

$

(.15)

$

.03

$

(.35)

$

.31

Income (loss) from discontinued operations

 

     -

 

 

     -

 

 

-

 

 

     -

Net (loss) income

$

(.15)

$

.03

$

(.35)

$

.31

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per share:

(Loss) income from continuing operations

$

(.15)

 

$

.03

 

$

(.35)

 

$

.30

Income (loss) from discontinued operations

 

     -

 

     -

 

-

 

    -

Net (loss) income

$

(.15)

 

$

.03

 

$

(.35)

 

$

.30

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

14,094

 

14,285

 

14,143

 

14,260

Diluted

 

14,094

 

 

14,548

 

 

14,143

 

 

14,531

Dividends per share:

 

 

 

 

 

 

 

 

 

 

 

Special dividend

$

1.25

$

-

$

1.25

$

-

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

 

3


 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)

Three Months

Ended

Nine Months

Ended

Oct. 1,

2016

Sept. 26,

2015

Oct. 1,

2016

Sept. 26,

2015

Net (loss) income

$

(2,080)

$

465

$

(4,957)

$

4,423

Other comprehensive (loss) income:

Amortization of prior service cost

-

23

-

69

Amortization of actuarial loss

 

(24)

 

(29)

 

(71)

 

(87)

Adjustments to net periodic benefit cost

 

(24)

 

(6)

 

(71)

 

(18)

Comprehensive (loss) income

$

(2,056)

$

471

$

(4,886)

$

4,441

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

 

4


 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended

 October 1,

2016

September 26,

2015

Cash flows from operating activities:

 

 

 

 

 

Cash received from customers

$

36,818

$

42,426

Cash paid to suppliers and employees

 

(39,389)

 

 

(44,091)

Cash from Continued Dumping and Subsidy Offset Act

-

4,896

Interest paid, net

 

(193)

 

 

(670)

Income taxes paid

 

(415)

 

(103)

Net cash (used) provided by operating activities

 

(3,179)

 

 

2,458

Cash flows from investing activities:

 

 

 

 

 

Proceeds from surrender of corporate-owned life insurance policies

28,139

-

Decrease in restricted cash

 

-

 

 

527

Purchase of other assets

 

(14)

 

-

Net cash provided by investing activities

 

28,125

 

 

527

Cash flows from financing activities:

 

 

 

 

 

Payment of dividends

(17,618)

-

Payments on insurance policy loans

 

(5,495)

 

 

(4,279)

Repurchase and retirement of common stock

(1,012)

-

Stock purchase and retirement for tax withholdings on vesting of restricted awards

 

(14)

 

 

-

Net cash used by financing activities

 

(24,139)

 

(4,279)

 

 

 

 

 

 

Cash flows from discontinued operations:

Cash (used) provided by operating activities

 

(11)

 

 

1,287

Net cash (used) provided by discontinued operations

 

(11)

 

1,287

 

 

 

 

 

 

Net increase (decrease) in cash

796

(7)

Cash at beginning of period

 

6,497

 

 

5,584

Cash at end of period

$

7,293

$

5,577

 

 

 

 

 

 

Reconciliation of net loss to net cash (used) provided by operating activities:

Net (loss) income

$

(4,957)

 

$

4,423

Loss from discontinued operations

-

9

Depreciation and amortization

 

350

 

 

352

Stock-based compensation

218

539

 

 

 

 

 

 

Changes in assets and liabilities:

Accounts receivable

 

1,783

 

 

(888)

Inventories

(415)

3,208

Prepaid expenses and other assets

 

50

 

 

(1,253)

Accounts payable

(564)

(2,521)

Accrued salaries, wages and benefits

 

157

 

 

(161)

Other accrued expenses

68

(1,030)

Other long-term liabilities

 

131

 

 

(220)

Net cash (used) provided by operating activities

$

(3,179)

$

2,458

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

 

5


 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 in the United States 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.

 

Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.

 

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.  These reclassifications do not have an impact on the consolidated statements of operations or the consolidated statement of comprehensive (loss) income.

 

2.          Property, Plant and Equipment

 

 

(in thousands)

October 1,

2016

December 31,

2015

Machinery and equipment

2,675

 

$ 

2,675

Leasehold improvements

 

1,833

 

1,833

Property, plant and equipment, at cost

 

4,508

 

 

4,508

Less accumulated depreciation

 

2,854

 

2,721

Property, plant and equipment, net

1,654

 

$ 

1,787

 

 

3.         Income taxes

 

During the first nine months of 2016, we expect to use approximately $19.7 million of our $40.1 million net operating loss carry-forwards against taxable income resulting from our surrender of corporate-owned life insurance policies.  The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these policies when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies.  The aggregate impact of the surrender of these policies in the first nine months of this year was $24.0 million in taxable income.  The income tax expense associated with the surrender of the corporate-owned life insurance policies was largely recognized during the first quarter when the policies were surrendered. The income tax expense recognized during the current three month period was the result of additional alternative minimum tax liability associated with the surrender of the corporate-owned life insurance policies and state income taxes.  The income tax expense recognized during the current nine month period was the result of federal alternative minimum tax and, to a lesser extent, the impact of surrendering these policies have on state income taxes.  During the first nine months of 2016, we reduced our valuation allowance against deferred tax assets from $19.2 million to $12.6 million at October 1, 2016, as a result of the use of a portion of our net operating loss carry-forwards.

 

6


 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

 

3.          Income taxes (continued)

 

We maintain a valuation allowance against deferred tax assets that currently exceed our deferred tax liabilities.  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, excluding income from the Continued Dumping and Subsidy Offset Act, 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, resulting in no deferred tax asset balance being recognized. 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.

 

Our effective tax rates for the current three and nine month periods were negative 6.1% and negative 16.0%, respectively, driven by the impact of the alternative minimum tax and state related taxes on the surrender of corporate owned life insurance policies.  The effective tax rates in the prior year three and nine month periods were a benefit of 1.8% and an expense of 1.6%, respectively, also driven by the impact of the alternative minimum tax limiting the ability to offset the income received from the Continued Dumping and Subsidy Offset Act during those periods.  The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and the cash surrender value on life insurance policies.

 

4.         Employee Benefit Plans

 

Components of other postretirement benefit cost (in thousands):

 

Three Months

Ended

Nine Months

Ended

Oct. 1,

2016

Sept. 26,

2015

Oct. 1,

2016

Sept. 26,

2015

Interest cost

$

64

 

$

70

 

$

191

 

$

210

Amortization of prior service benefit

-

(23)

 -

 (69)

Amortization of actuarial loss

 

24

 

 

       29

 

 

71

 

 

       87

Net periodic postretirement benefit cost

$

88

$

76

$

262

$

228

 

 

5.         Stockholders’ Equity

 

Basic earnings per common share are based upon the weighted average shares outstanding.  Outstanding stock options and restricted stock 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):

 

 

Three Months

Ended

Nine Months

Ended

Oct. 1,

2016

Sept. 26,

2015

Oct. 1,

2016

Sept. 26,

2015

Weighted average shares outstanding for basic calculation

14,094

 

14,285

 

14,143

 

14,260

Add: Effect of dilutive stock awards

-

263

-

271

Weighted average shares outstanding,

    adjusted for diluted calculation

14,094

 

14,548

 

14,143

 

14,531

 

 

7


 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

 

5.         Stockholders’ Equity (continued)

 

In the three and nine month periods ended October 1, 2016, the dilutive effect of stock options is not recognized since we had a net loss.  Approximately 1.2 million shares in the three and nine month periods of 2016 were issuable upon the exercise of stock options.  These were not included in the diluted per share calculation because they were anti-dilutive.  Also, 638,000 shares in 2016 of restricted stock were not included because they were anti-dilutive.  In the three and nine month periods ended September 26, 2015, approximately 1.4 million stock options were excluded from the diluted per share calculation as they would be anti-dilutive.

 

A reconciliation of the activity in stockholders’ equity accounts for the first nine months ended October 1, 2016 is as follows (in thousands):

 

Accumulated

Other

Comprehensive

Loss

Capital in

Excess of

Par Value

Common

Stock

Retained

Earnings

Balance at December 31, 2015

$

283

 

$

17,521

 

$

32,023

 

$

(2,175)

Net loss

-

-

(4,957)

-

Purchase and retirement of common stock

 

 (8)

 

 

(1,004)

 

 

-

 

 

-

Stock purchase and retirement for tax withholdings

    on vesting of restricted awards

-

(14)

-

-

Stock-based compensation

 

-

 

 

218

 

 

-

 

 

-

Dividends

-

-

(18,195)

-

Adjustment to net periodic benefit cost

 

-

 

 

-

 

 

          -  

 

 

71

Balance at October 1, 2016

$

275

$

16,721

$

8,871

$

(2,104)

 

 

6.         Income from Continued Dumping and Subsidy Offset Act (CDSOA)

 

We did not receive any CDSOA distributions in the 2016 three and nine month periods.  In the prior year nine month period, we recorded income of $4.9 million from CDSOA distributions previously withheld by U.S. Customs and Border Protection pending resolution of non-supporting producers’ claims seeking to share in these distributions.     

 

7.         Discontinued Operations

 

During the second 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 and sell the related assets of this facility.  Manufacturing operations were ceased in the third quarter of 2014 and as a result this product line was reflected as a discontinued operation pursuant to the provisions of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) for all periods presented.   

 

8


 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

 

7.         Discontinued Operations (continued)

 

Loss from discontinued operations, net of taxes, comprised the following (in thousands):

 

Three Months

Ended

Nine Months

Ended

Oct. 1,

2016

Sept. 26,

2015

Oct. 1,

2016

Sept. 26,

2015

Net sales

$

-

 

$

16

 

$

-

 

$

554

Cost of sales

-

41

-

 760

Selling, general and administrative expenses, net

 

-

 

 

      (36)

 

 

-

 

 

(134)

Other income

 

-

 

      63

 

-

 

63

Income (loss) from discontinued operations

    before income taxes

 

-

 

 

 74

 

 

-

 

 

(9)

Income taxes

 

-

 

-

 

-

 

-

Income (loss) from discontinued operations

    after income taxes

$

-

 

$

74

 

$

-

 

$

(9)

 

Loss from discontinued operations included write-down of inventories and other assets, severance and other termination costs and operating losses related to final manufacturing production.

 

8.         Corporate-owned Life Insurance Policies

 

In January 2016, we made the decision to liquidate two of our twenty-seven corporate-owned life insurance policies with cash surrender value of $2.6 million.  We used $2.5 million of the proceeds to pay down outstanding loans and accrued interest on corporate-owned life insurance policies, lowering our outstanding loan levels to $3.1 million.  In March 2016, we made the decision to liquidate the remaining twenty-five life insurance policies with cash surrender value of $25.6 million.  We received $22.4 million in proceeds on March 28, 2016, comprised of the cash surrender value net of $3.2 million in remaining outstanding loans and accrued interest.  The decision to liquidate was made after continued review of the financial stability of Genworth Life Insurance Company, the issuer of the policies.

 

9.         Subsequent Events

 

Subsequent to quarter end, we entered into a revolving credit facility with Wells Fargo Bank, National Association that provides for maximum borrowings of $4.0 million and matures October 2018. The facility is secured by our accounts receivable, inventory and certain other assets. The facility contains covenants requiring us to maintain a minimum fixed charge coverage ratio of 1.1 times with an initial compliance date at December 31, 2017.

 

As previously announced, the Board of Directors planned to declare an additional special dividend of $0.25 per share once we secured a revolving credit facility sufficient to fund fluctuations in working capital.  As a result of our securing the credit facility, the Board has declared a special dividend of $0.25 per share payable on November 18, 2016 to shareholders of record as of the close of business on November 11, 2016.

 

9


 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

 

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

 

Three Months Ended

Nine Months Ended

Oct. 1,

2016

Sept. 26,

2015 

Oct. 1,

2016

Sept. 26,

2015

Net sales

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Cost of sales

83.4

 

75.2

 

81.5

 

76.5

 

Gross profit

16.6

 

 

24.8

 

 

18.5

 

 

23.5

 

Selling, general and administrative expenses

34.5

 

20.5

 

30.5

 

22.8

 

Operating (loss) income

(17.9)

 

 

4.3

 

 

(12.0)

 

 

.7

 

CDSOA income

-

-

-

11.3

Other income, net

-

 

 

.1

 

 

-

 

 

.1

 

Interest (income) expense, net

(.1)

 

1.6

 

.3

 

1.7

 

(Loss) income from continuing operations before income taxes

(17.8)

 

 

2.8

 

 

(12.3)

 

 

10.4

 

Income tax expense (benefit)

1.1

 

(.1)

 

2.0

 

.2

 

Net (loss) income from continuing operations

(18.9)

 

 

2.9

 

 

(14.3)

 

 

10.2

 

Net income (loss) from discontinued operations

-

 

.5

 

-

 

-

 

Net (loss) income

(18.9)

%

 

3.4

%

 

(14.3)

%

 

10.2

%

 

Net sales of $11.0 million for the three month period ended October 1, 2016, decreased $2.7 million, or 19.8%, compared to the comparable 2015 period.   For the nine month period ended October 1, 2016, net sales decreased $8.8 million, or 20.2%, from the comparable 2015 period.  The decrease in both periods was due to lower unit volume and lower average selling prices.  Lower unit volume was primarily a result of delays in shipping new product introduced in 2015 as the production ramp up of the new factory in Vietnam dedicated solely to our new product has taken longer than originally anticipated.  The initial orders of 2015 introductions are shipping and should begin to generate orders on retail floors in the near term.  Lower average selling prices are the result of aggressive discounting to move older discontinued product and also on inline product to achieve additional floor space to fuel future sales and generate cash while we prepare for sales from newer product.

 

Gross profit for the current three month period decreased to $1.8 million, or 16.6% of net sales, from $3.4 million, or 24.8% of net sales, for the comparable three months of 2015.  Gross profit for the current nine month period decreased to $6.4 million, or 18.5% of net sales, from $10.2 million, or 23.5% of net sales, for the comparable nine months of 2015.  The decrease in gross profit and gross margin in both the three and nine month periods was driven by lower sales volume, higher discounting and higher quality costs.  Partially offsetting the impact of these items in the three and nine month periods was lower ocean freight costs.  The prior year three and nine month periods contained higher freight costs resulting from West Coast port issues.

 

Selling, general and administrative expenses for the three and nine month periods of 2016 were $3.8 million and $10.6 million, or 34.5% and 30.5% of net sales, respectively, compared to $2.8 million and $9.9 million, or 20.5% and 22.8% of net sales, in the comparable 2015 periods.  For the three month period, these expenses increased due to higher advertising and showroom costs, the decline in cash surrender value growth of corporate-owned life insurance policies due to the surrendering of these policies in the first quarter of 2016 and higher legal and professional expenses related to the engagement of Stephens Inc. to assist with an ongoing review of strategic and capital allocation opportunities.  Higher expenses in the nine month period were primarily due to the decline in cash surrender value growth of corporate-owned life insurance policies as we continued to pay down policy loans throughout 2015 and then the surrendering of these polices in the first quarter of this year.  The decline in cash surrender value growth of corporate-owned life insurance policies, net of expenses was $379,000 in the current three month period and $920,000 during the nine month period.  Approximately 60% of this growth was in selling, general and administrative expenses and the remaining 40% was in cost of goods sold.  The elimination of this growth is partially offset by the elimination of interest expense.  The higher selling, general and administrative percentages in the current year are due to higher expenditures and lower sales impairing absorption for fixed costs.

 

10


 

 

As a result, operating losses as a percentage of net sales were 17.9% for the current three month period and 12.0% for the current nine month period compared to income of 4.3% in the prior year three month period and 0.7% in the prior year nine month period.

 

During the prior year nine month period we recorded income of $4.9 million from the receipt of funds under the Continued Dumping and Subsidy Offset Act (CDSOA).  No proceeds were received in the current three and nine month periods.

 

Interest (income) expense for the three and nine month periods of 2016 decreased $222,000 and $653,000, respectively, from the comparable 2015 periods.  Interest expense is composed of interest on loans against cash surrender value of insurance policies used to fund our legacy deferred compensation plan.  The decrease in expense is due to paying down these outstanding loans with excess cash starting in late 2015 and eventually paying them off when we liquidated our corporate-owned life insurance policies in the first quarter of 2016.   

 

Our effective tax rates for the current three and nine month periods were negative 6.1% and 16.0%, respectively.  As indicated above, we surrendered our corporate-owned life insurance policies during the first quarter of 2016, which resulted in taxable income for the period.  The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these polices when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies.  The aggregate impact of the surrender of these policies in the first quarter of this year was $24.0 million in taxable income.  The income tax expense associated with the surrender of the corporate-owned life insurance policies was largely recognized during the first quarter when the policies were surrendered. The income tax expense recognized during the current three month period was the result of additional alternative minimum tax liability associated with the surrender of the corporate-owned life insurance policies and state income taxes.  The income tax expense recognized during the current nine month period was the result of federal alternative minimum tax and, to a lesser extent, the impact of surrendering these policies have on state income taxes.  The effective tax rates in the prior year three and nine month periods were a benefit of 1.8% and an expense of 1.6%, respectively.  The income tax expense in the prior year nine month period was driven by the impact of the alternative minimum tax limiting the ability to offset the income received from the Continued Dumping and Subsidy Offset Act during the period.  The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and the cash surrender value on life insurance policies.

 

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 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 and borrowings under the revolving credit facility to be adequate for ongoing operational and capital expenditures over the next twelve months.  At October 1, 2016, we had $7.3 million in cash and $663,000 in restricted cash.

 

Working capital, excluding cash and restricted cash, decreased to $19.3 million at October 1, 2016 from $21.2 million on December 31, 2015.  The decrease was primarily the result of a decrease in accounts receivable as a result of our lower sales volumes, an increase in other accrued expenses driven by accrued taxes and a decrease in prepaid and other assets.  Partially offsetting these factors was an increase in inventories and a decrease in accounts payable.

 

Cash used by operations was $3.2 million in the current nine months of 2016 compared to cash generated from operations of $2.5 million in the comparable prior year period.  The cash generation in 2015 was the result of receiving $4.9 million on CDSOA proceeds during the period. Excluding these proceeds, the cash use was approximately $700,000 higher in the current nine months of 2016 due to the increase in operating losses tied to lower sales volumes and product discounting and from higher tax payments on the taxable income from the surrender of our corporate-owned life insurance policies, partially offset by lower freight costs and lower interest payments on loans against corporate owned life insurance policies.

 

11


 

 

Cash generated from investing activities in the first nine months of 2016 was due to $28.1 million in proceeds from the surrender of corporate-owned life insurance policies.  Cash provided by investing activities was $527,000 in the prior year nine months with the release of restricted cash.  

 

Net cash used by financing activities in the current nine months of 2016 was $24.1 million compared to $4.3 million in the comparable nine months of 2015.  During the current year we used $17.6 million for a special dividend, $5.5 million to pay off the remaining outstanding life insurance policy loans in conjunction with our decision to surrender these corporate-owned life insurance policies and $1.0 million for the repurchase and retirement of 400,000 shares of our common stock.  In the first nine months of 2015 we used $4.3 million to pay-down life insurance policy loans.

 

Subsequent to quarter end, we entered into a revolving credit facility with Wells Fargo Bank, National Association that provides for maximum borrowings of $4.0 million and matures October 2018. The facility is secured by our accounts receivable, inventory and certain other assets. The facility contains covenants requiring us to maintain a minimum fixed charge coverage ratio of 1.1 times with an initial compliance date at December 31, 2017. As previously announced, the Board of Directors planned to declare an additional special dividend of $0.25 per share once we secured a revolving credit facility sufficient to fund fluctuations in working capital.  As a result of our securing the credit facility, the Board has declared a special dividend of $0.25 per share payable on November 18, 2016 to shareholders of record as of the close of business on November 11, 2016.

 

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.

 

In November 2015, Customs distributed $1.2 million in collected duties that were available for distribution in 2015.  Our portion of this distribution was $412,000, representing 33.6% of the balance available for distribution.  As of April 30, 2016, Customs preliminarily reported that approximately $3.2 million is potentially available for distribution under the CDSOA during the fourth quarter of calendar year 2016 to eligible domestic manufacturers in connection with the case involving bedroom furniture imported from China.  The final amounts available for distribution may be higher or lower than the preliminary amounts reported due to liquidations, reliquidations, protests, and other events affecting entries that may take place before the end of the government’s fiscal year.  Assuming our percentage allocation in 2016 is the same as it was for the 2015 distribution (approximately 33.6% of the funds distributed) and the $3.2 million collected by the government as of April 30, 2016 does not change, we could receive approximately $1.1 million in CDSOA funds in the fourth quarter of 2016.

 

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

 

New Accounting Pronouncements

 

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842) (“ASU 2016-02”), which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  The effective date for the standard for public entities is for fiscal years beginning after December 15, 2016. Early adoption is permitted. We are evaluating the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.

 

12


 

 

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230).  The guidance is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The effective date for the standard for public entities is for fiscal years beginning after December 15, 2017.  Early adoption is permitted, provided all amendments are adopted in the same period.  The guidance requires application using a retrospective transition method.  We do not anticipate ASU 2016-15 to have a material impact to our consolidated financial statements.

 

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 2015 Annual Report on Form 10-K.

 

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,” “could”, 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 disruptions from transitioning  to and using a single contract manufacturer for substantially all of our products including those arising in the event the manufacturer is not able to manufacture as anticipated in terms of cost, quality or timeliness or in the event we lost this relationship, disruptions in foreign sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, the inability to raise prices in response to inflation and increasing costs, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry, business failures or loss of large customers, failure to anticipate or respond to changes in consumer tastes, fashions and perceived values in a timely manner, competition in the furniture industry, environmental, health, and safety compliance costs, and failure or interruption of our information technology infrastructure.  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

 

None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions.  While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of our products obtained from offshore sourcing and reduce our earnings or increase our losses, unless we are able to increase our prices for these items to reflect any such increased cost.

 

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 over financial reporting.  There were no changes in our internal control over financial reporting that occurred during the third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

13


 

 

ITEM 5. Other Information

 

On October 25, 2016, the Company entered into a secured $6 million revolving credit facility (the “Credit Facility”) with Wells Fargo Bank, National Association (the “Lender”) with an excess availability requirement of $2 million resulting in maximum borrowings of $4.0 million under the facility, subject to borrowing base eligibility requirements.   The Credit Facility matures in October 2018 and is secured by the Company’s accounts receivable, inventory and certain other assets pursuant to a Security Agreement (the “Security Agreement”) among the Company, Stanley Furniture Company 2.0, LLC, a Virginia limited liability company (“Stanley 2.0”) and the Lender. Borrowings under the Credit Facility bear interest at a variable per annum rate equal to the daily three month London Bank Interbank Offered Rate plus 3.5%. 

 

The Credit Facility contains certain customary warranties, representations and affirmative and negative covenants, including covenants that, among other things limits the ability of the Company and its subsidiaries to incur certain types of debt or liens, pay dividends except for the additional $0.25 per share special dividend declared October 25, 2016, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses. The Credit Facility also include a covenant requiring the Company to maintain a minimum fixed charge ratio of not less than 1.10 to 1.0 with an initial compliance date at December 31, 2017.

 

The Credit Facility contains customary events of default for similar financing transactions, including (a) failure to make payments when due, (b) default in compliance with covenants in the Credit Facility or material contracts, (c) insolvency of the Company or Stanley 2.0, (d) the existence or occurrence of a Material Adverse Change as defined in the Credit Facility, or (e) if a person or group acquires more than 25% of the voting power of the outstanding voting stock of the Company; however, the event of default in clause (e) will not arise if the Company provides written notice to the Lender within two business days after the Company becomes aware of such acquisition or an SEC filing is made with respect to such acquisition and, within 10 days after such notice, such person or group passes background checks required by the Lender and the Lender, in its sole discretion, consents to such acquisition. Upon the occurrence and during the continuation of an event of default, the Lender may declare amounts due under the Credit Facility immediately due and payable.

 

The Company’s subsidiary, Stanley 2.0, has unconditionally guaranteed the obligations of the Company under the Credit Facility.

 

The foregoing description of the Credit Facility and the Security Agreement is qualified in its entirety by reference to the Credit Facility and the Security Agreement filed as Exhibit 10.1 and Exhibit 10.2, respectively, to this Quarterly Report on Form 10-Q and are hereby incorporated by reference.

 

14


 

ITEM 6. Exhibits

 

 

  3.1

Restated Certificate of Incorporation of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended July 2, 2005).

 

 

  3.2

By-laws of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed December 11, 2015).

 

 

10.1

Credit Agreement, dated as of October 25, 2016, by and between the Company and Wells Fargo Bank, National Association.(1)


   10.2       

   Security Agreement, dated as of October 25, 2016, by and among the Company, Stanley Furniture Company 2.0. LLC and Wells Fargo Bank, National Association. (1)

 

 

31.1

Certification by Glenn Prillaman, 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 Anita W. Wimmer, our Principal 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 Glenn Prillaman, 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 Anita W. Wimmer, our Principal Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)

 

 

101

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended October 1, 2016, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) condensed consolidated statements of comprehensive (loss) income, (iv) condensed consolidated statements of cash flows, (v) the notes to the consolidated financial statements, and (vi) document and entity information.(1)

                                        

(1)        Filed herewith

 

15


 

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.

 

 

Date: October 25, 2016

STANLEY FURNITURE COMPANY, INC.

By:

/s/ Anita W. Wimmer

Anita W. Wimmer

Principal Financial and Accounting Officer

 

16