UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORMForm 10-Q
(Mark One)
X Quarterly report pursuant to Section[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 orOR 15(d) of the
------- Securities Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberMarch 27, 2003 or
------------------
Transition report pursuant to Section2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
------- Securities Exchange Act ofOR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Forfor the transition period from to .
---------- -------------- ----
Commission file number 0-14938.number: 0-14938
STANLEY FURNITURE COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1272589
(State or other jurisdiction of (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)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)----
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. YESYes X NO
----- -------No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): YESYes X NO
----- -------
Indicate the numberNo
As of April 12, 2004, 6,233,341 shares outstanding of each of the issuer's classes of common stock as of October 10, 2003.
Class Number
Common Stock,Stanley
Furniture Company, Inc., par value $.02 per share 6,003,299 Shareswere outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SeptemberMarch 27, December 31,
2004 2003 2002
-------- --------
ASSETS
Current assets:
Current assets:
Cash .......................................................................................................................... $ 1,4065,351 $ 9,2272,509
Accounts receivable, less allowances of $3,032$2,599 and $2,633 .... 33,714 27,832$2,546 ............ 36,141 30,120
Inventories:
Finished goods ............................................. 37,685 35,537..................................................... 38,176 37,815
Work-in-process ............................................ 8,298 6,922.................................................... 8,257 7,638
Raw materials .............................................. 8,412 11,699...................................................... 9,908 9,185
-------- -----------------
Total inventories ...................................... 54,395 54,158............................................... 56,341 54,638
Prepaid expenses and other current assets .................... 774 1,311................................. 1,105 2,855
Deferred income taxes ........................................ 3,379 2,876..................................................... 2,855 2,855
-------- -----------------
Total current assets ....................................... 93,668 95,404.................................................... 101,793 92,977
Property, plant and equipment, net ............................... 55,945 59,539........................................ 53,804 55,154
Goodwill ........................................................................................................................... 9,072 9,072
Other assets ..................................................... 7,565 8,470.............................................................. 6,836 7,000
-------- -----------------
Total assets ............................................... $166,250 $172,485........................................................... $171,505 $164,203
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ........................................................... $ 2,728 $ 7,014
$ 6,914
Accounts payable ............................................. 15,214 13,386...................................................... 15,069 10,595
Accrued salaries, wages and benefits ......................... 11,865 9,781.................................. 11,009 9,511
Other accrued expenses ....................................... 2,587 2,379................................................ 2,461 1,402
-------- --------
Total current liabilities .................................. 36,680 32,460........................................... 31,267 28,522
Long-term debt, exclusive of current maturities .................. 17,818 22,700........................... 15,686 15,686
Deferred income taxes ............................................ 12,592 13,084..................................................... 11,386 12,560
Other long-term liabilities ...................................... 4,483 4,554............................................... 6,029 4,877
-------- --------
Total liabilities .......................................... 71,573 72,798.................................................. 64,368 61,645
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized
6,003,2996,233,341 and 6,568,7176,201,047 shares issued and outstanding ............ 120 131................... 125 124
Capital in excess of par value ................................... 14,773............................................ 4,412 3,819
Retained earnings ................................................ 94,562 84,799
Stock option loans ............................................... (5) (16)......................................................... 102,665 98,680
Accumulated other comprehensive loss ...................................... (65) (65)
-------- --------
Total stockholders'Stockholders' equity ................................... 94,677 99,687........................................... 107,137 102,558
-------- --------
Total liabilities and stockholders' equity ................. $166,250 $172,485......................... $171,505 $164,203
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Nine Months
Ended
Ended
September September September September--------------------
March 27, March 29,
2004 2003
28, 2002 27, 2003 28, 2002
------- ------- -------- --------
Net sales ....................................... $65,227 $61,338 $187,934 $176,180Sales .................................. $70,222 $61,298
Cost of sales ................................... 49,586 46,386 143,106 133,287
Restructuring and related charges (credit) ...... (209) 3,548Sales .............................. 53,001 46,676
------- -------
-------- --------
Gross profit .................................. 15,641 15,161 44,828 39,345............................. 17,221 14,622
Selling, general and administrative expenses .... 9,170 7,990 26,083 23,7999,417 8,513
------- -------
-------- --------
Operating income .............................. 6,471 7,171 18,745 15,546......................... 7,804 6,109
Other income, net ............................... (61) (13) (150) (167).......................... 53 42
Interest expense ................................ 698 767 2,069 2,347........................... 626 711
------- ------- -------- --------
Income before income taxes .................... 5,834 6,417 16,826 13,366.............. 7,231 5,440
Income taxes .................................... 2,118 2,278 6,108 4,745............................... 2,624 1,974
------- -------
-------- --------
Net income ....................................Income ............................... $ 3,7164,607 $ 4,139 $ 10,718 $ 8,6213,466
======= ======= ======== ========
Earnings per share:
Basic ............................................................................. $ .61.74 $ .63 $ 1.68 $ 1.30.53
======= =======
======== ========
Diluted ......................................................................... $ .59.71 $ .62 $ 1.65 $ 1.26.52
======= ======= ======== ========
Weighted average shares outstanding:
Basic ......................................... 6,116 6,554 6,369 6,631.................................... 6,216 6,558
======= =======
======== ========
Diluted ....................................... 6,318 6,681 6,502 6,822.................................. 6,449 6,679
======= ======= ======== ========
Cash dividend declared per common share ............. $ .10 $ .05
$ .15
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands)
Three Months Ended
March 27, March 29,
2004 2003
-------- --------
Cash flows from operating activities:
Cash received from customers ............................... $ 64,258 $ 57,523
Cash paid to suppliers and employees ....................... (56,315) (49,357)
Interest paid, net ......................................... (160) (300)
Income taxes paid, net ..................................... (250) (1,293)
-------- --------
Net cash provided by operating activities ............... 7,533 6,573
-------- --------
Cash flows from investing activities:
Capital expenditures ....................................... (44) (37)
Other, net ................................................. (88)
-------- --------
Net cash used by investing activities .................. (132) (37)
-------- --------
Cash flows from financing activities:
Repayment of senior notes .................................. (4,286) (4,286)
Purchase and retirement of common stock .................... (566)
Dividends paid ............................................. (622) (328)
Proceeds from exercised stock options ...................... 349
-------- --------
Net cash used by financing activities ................. (4,559) (5,180)
-------- --------
Net increase in cash ....................................... 2,842 1,356
Cash at beginning of period ................................ 2,509 9,227
-------- --------
Cash at end of period .................................. $ 5,351 $ 10,583
======== ========
Reconciliation of net income to new cash provided by operating activities:
Net income ................................................. $ 4,607 $ 3,466
Depreciation ........................................... 1,421 1,450
Deferred income taxes .................................. (1,174)
Changes in assets and liabilities:
Accounts receivable ................................ (6,021) (3,731)
Inventories ........................................ (1,703) 1,529
Prepaid expenses and other current assets .......... 1,977 234
Accounts payable ................................... 4,474 1,881
Accrued salaries, wages and benefits ............... 1,498 439
Other accrued expenses ............................. 1,059 1,176
Other assets ....................................... 243 212
Other long-term liabilities ........................ 1,152 (83)
-------- --------
Net cash provided by operating activities .... $ 7,533 $ 6,573
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
September 27, September 28,
2003 2002
--------- ---------
Cash flows from operating activities:
Cash received from customers .................................... $ 181,942 $ 167,824
Cash paid to suppliers and employees ............................ (159,628) (150,676)
Interest paid, net .............................................. (2,078) (2,367)
Income taxes paid, net .......................................... (7,786) (1,142)
--------- ---------
Net cash provided by operating activities ................... 12,450 13,639
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................ (630) (605)
Other, net ...................................................... (19) 696
--------- ---------
Net cash (used) provided by investing activities ............ (649) 91
--------- ---------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit facility, net ..... 704 (600)
Repayment of senior notes ....................................... (5,486) (5,410)
Purchase and retirement of common stock ......................... (14,787) (3,066)
Dividends paid .................................................. (952)
Proceeds from exercised stock options ........................... 11 1,194
Proceeds from insurance policy loans ............................ 888 795
--------- ---------
Net cash used by financing activities ....................... (19,622) (7,087)
--------- ---------
Net increase (decrease) in cash ................................. (7,821) 6,643
Cash at beginning of period ..................................... 9,227 1,955
--------- ---------
Cash at end of period ....................................... $ 1,406 $ 8,598
========= =========
Reconciliation of net income to net cash provided by operating activities:
Net income ...................................................... $ 10,718 $ 8,621
Depreciation and amortization ............................... 4,345 4,477
Restructuring and related charges (non-cash) ................ 1,755
Deferred income taxes ....................................... (995)
Loss on sale of assets ...................................... 4 31
Changes in assets and liabilities:
Accounts receivable ..................................... (5,882) (7,891)
Inventories ............................................. (237) (6,073)
Prepaid expenses and other current assets ............... 632 1,863
Accounts payable ........................................ 1,828 5,977
Accrued salaries, wages and benefits .................... 2,084 2,883
Other accrued expenses .................................. 208 2,413
Other assets ............................................ (184) (167)
Other long-term liabilities ............................. (71) (250)
--------- ---------
Net cash provided by operating activities ........ $ 12,450 $ 13,639
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Preparation of Interim Unaudited Consolidated financial statementsFinancial Statements
The consolidated financial statements of Stanley Furniture Company, Inc.
(referred to as "Stanley" or the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, these statements include all adjustments
necessary for a fair presentation of the results of all interim periods reported
herein. All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or omitted pursuant to
SEC rules and regulations. However, management believes that the disclosures
made are adequate for a fair presentation of results of operations and financial
position. Operating results for the interim periods reported herein may not be
indicative of the results expected for the year. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and accompanying notes included in Stanley's latest Annual
Report on Form 10-K.
2. Stock Compensation
The Company applies the provisions of Accounting Principles Board Opinion No. 25
in accounting for its stock options and, disclosesaccordingly, no compensation cost has
been recognized in the financial statements. Had the Company determined
compensation cost based on the fair value of options grantedmethod as permitted bydefined in Statement of
Financial Accounting Standards (SFAS) No. 123. No stock-based employee
compensation cost is reflected in123, and as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS Statement No. 123", the impact on the Company's net income, as all options granted under those
plans had an exercise price equal to the market value of the common stock at
date of grant.
The following table summarizes theearnings
on a pro forma effects assuming compensation cost
for such awards had been recorded based upon the estimated fair valuebasis is indicated below (in thousands, except per share data):
Three Months Nine Months
Ended Ended
September September September SeptemberMarch 27, March 29,
2004 2003
28, 2002 27, 2003 28, 2002
-------- -------- -------- --------------- ------
Net income as reported .................. $ 3,716 $ 4,139 $ 10,718 $ 8,621................................ $4,607 $3,466
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ...................... 393 432
399 1,295 1,301
-------- -------- -------- --------------- ------
Pro forma net income .................... $ 3,284 $ 3,740 $ 9,423 $ 7,320
======== ======== ======== =========................................ $4,214 $3,034
====== ======
Earnings per share:
Basic - as reported .................................................... $ 0.610.74 $ 0.63 $ 1.68 $ 1.30
======== ======== ======== =========0.53
====== ======
Basic - pro forma ........................................................ $ 0.540.68 $ 0.57 $ 1.48 $ 1.10
======== ======== ======== =========0.46
====== ======
Diluted - as reported ................................................ $ 0.590.71 $ 0.62 $ 1.65 $ 1.26
======== ======== ======== =========0.52
====== ======
Diluted - pro forma .................................................... $ 0.520.68 $ 0.56 $ 1.45 $ 1.08
======== ======== ======== =========0.46
====== ======
3. Restructuring and Related Charges
Beginning in December 2001, the Company has executed a plan to consolidate its
manufacturing operations to maximize production efficiencies as a result of
excess capacity created by expanded offshore sourcing. Manufacturing operations
at its former West End, North Carolina facility were phased out during 2002,
including the sale of real estate. The remaining restructuring accrual at
September 27, 2003 of $252,000 consists of a lease obligation and certain
severance cost.
4.3. Property, Plant and Equipment
(in thousands)
SeptemberMarch 27, December 31,
2004 2003 2002
-------- --------
Land and buildings ........................................................... $ 38,23738,606 $ 38,23738,606
Machinery and equipment ............................ 74,309 74,204..................... 74,548 74,550
Office fixturesfurniture and equipment ...................... 1,710 1,710
Construction in progress ........................... 212.............. 1,839 1,846
-------- --------
Property, plant and equipment, at cost ......... 114,468 114,151... 114,993 115,002
Less accumulated depreciation ...................... 58,523 54,612............... 61,189 59,848
-------- --------
Property, plant and equipment, net ........ $ 55,94553,804 $ 59,53955,154
======== ========
5.4. Debt
(in thousands)
SeptemberMarch 27, December 31,
2004 2003 2002
------- -------
7.28% senior notes due through March 15, 2004 ................... $ 4,285 $ 8,5714,286
7.57% senior note due through June 30, 2005 ....................... 2,700 3,9002,700
7.43% senior notes due through November 18, 2007 ....... 7,143 7,143...... 5,714 5,714
6.94% senior notes due through May 3, 2011 ......................... 10,000 10,000
Revolving credit facility .............................. 704
------- ------------- ------
Total ................................................ 24,832 29,614............................................... 18,414 22,700
Less current maturities ............................................................... 2,728 7,014
6,914
------- ------------- ------
Long-term debt, exclusive of current maturities ...... $17,818 $22,700..... $15,686 $15,686
======= =======
During the third quarter, the Company entered into a new revolving credit
agreement. The new agreement provides for maximum borrowings of $25.0 million
and matures in August 2005. Interest is payable monthly at the reserve adjusted
LIBOR plus .50% per annum (1.62% on September 27, 2003) or, at the Company's
option, prime minus 1.0% (3.0% on September 27, 2003). There were no material
changes in the financial covenants under the new agreement.
5. Pension Plans
Components of pension cost for the three months ended:
(in thousands)
March 27, March 29,
2004 2003
----- -----
Interest cost ............................... $ 243 $ 257
Expected return on plan assets .............. (242) (240)
Net amortization and deferral ............... 115 143
----- -----
Net cost .................................. 116 160
Settlement expense .......................... 218 171
----- -----
Total expense ............................. $ 334 $ 331
===== =====
The Plan is fully funded; therefore, no contributions are required to be
deposited for the 2004 plan year.
6. Stockholders' Equity
During the first nine months of 2003, the Company purchased and retired 565,000
shares of its common stock at an aggregate consideration of $14.8 million.
Basic earnings per common share are based upon the weighted average shares
outstanding. Outstanding stock options are treated as potential common stock for
purposes of computing diluted earnings per share. Basic and diluted earnings per
share are calculated using the following share data (in thousands):
Three Months Nine Months
Ended Ended
September September September SeptemberMarch 27, March 29,
2004 2003
28, 2002 27, 2003 28, 2002
-------- -------- -------- ------------- -----
Weighted average shares outstanding
for basic calculation...................... 6,116 6,554 6,369 6,631calculation........................ 6,216 6,558
Add: Effect of dilutive stock options......... 202 127 133 191
----- -----options............ 233 121
----- -----
Weighted average shares outstanding,
adjustedAdjusted for diluted calculation....... 6,318 6,681 6,502 6,822calculation.......... 6,449 6,679
===== =====
===== =====
A reconciliation of the activity in Stockholders' Equity accounts for the
quarter ended March 27, 2004 is as follows (in thousands, except per share
data):
Capital in
Common Excess of Retained
Stock Par Value Earnings
Balance, December 31, 2003 ............. $124 $3,819 $ 98,680
Net Income ............................. 4,607
Exercise of stock options .............. 1 348
Tax benefit on exercise of stock options 245
Dividends paid, $.10 per share ......... (622)
------ ------ --------
Balance, March 27, 2004 ................ $125 $4,412 $102,665
====== ====== ========
7. Recent Accounting Pronouncements
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB
Statement No. 123". FAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to permit additional transition methods for entities
that adopt the fair-value based method of accounting for stock-based employee
compensation. For those companies that do not elect to change their method of
accounting for stock-based employee compensation, FAS 148 requires increased
disclosure of the pro forma impact of applying the fair value method to the
reported operating results. The increased disclosure requirements apply to the
Company's interim and annual financial statements beginning in the first quarter
of 2003 and are presented in Note 2 of the financial statements.
In April 2003, the FASB issued Statement No. 149 (FAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". FAS 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company did not have any derivative instruments or hedging activities
during the nine months ended September 27, 2003. Adoption of FAS 149 did not
have a material effect the Company's financial statements.
In May 2003, the FASB issued Statement No. 150 (FAS 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". FAS 150 establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption of
FAS 150 did not have a material effect on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company continuesWe continue to implement a blended strategy of combining its domestic manufacturing
capabilities with an expanding offshore sourcing program and realign
manufacturing capacity. Integration of selected imported component parts and
finished items in itsour product line will lower costs, provide design flexibility
and offer a better value to itsour customers. This initiative created
excess capacity inSourced product represented
approximately 26% of sales during the Company's manufacturing facilities. Accordingly, in
December 2001, the Company decided to close its manufacturing operations at the
West End, North Carolina factory and consolidate production from this facility
into other Company facilities. In 2002, manufacturing operations at the West End
facility were completely phased out and all closing related activities including
the sale of real estate were completed. Restructuring and related cost for the
nine month period of 2002 was $3.5 million and consisted of accelerated
depreciation and other exit costs, including plant inefficiencies and severance
cost. During the thirdfirst quarter of 2002, the Company determined that $209,000 of
restructuring related inventory reserves were no longer required and credited
the amount back2004 compared to income. The restructuring accrual consisting of a lease
obligation for real estate and severance costs continued20% in
2003. We anticipate this percentage to be paid down during
2003, and islevel off at approximately $252,000 as of September 27, 2003.
As part of the Company's continuing efforts to evaluate its30% in 2004.
Our manufacturing capacity, the Company announced in March 2003, a plan to realign productionplants operated at its Lexington, North Carolina facility. Currently this facility produces a
combination of adult bedroom and Young America(R) youth bedroom furniture. After
a transition period, the Lexington plant will focus exclusively on Young
America(R) products. Adult bedroom products currently manufactured at the
Lexington facility will be absorbed by the Stanleytown, Virginia plant, which
will produce adult bedroom and dining room products. The Martinsville, Virginia
location will continue to manufacture home entertainment and home office
furniture while the Robbinsville, North Carolina plant remains focused on the
production of Young America(R) products. The realignment has reduced operations
at the Lexington plant impacting approximately 150 of the 525 associates there
and was completed75% capacity during the secondfirst
quarter of 2003.
The Company will2004. We continue to evaluate itsour manufacturing capacity needs
considering increased offshore sourcing, current and anticipated demand for its
product,our
products, the outcome of the dumping investigation regarding wooden bedroom
furniture produced in China, overall market conditions and other factors deemed relevant by
management.we
consider relevant. Further capacity reductions could cause asset impairment or
other restructuring charges in the future.
The following table sets forth the percentage relationship to net sales of
certain items included in the Consolidated Statements of Income:Income.
Three Months
Nine Months
Ended
Ended
September September September September------------------
March 27, March 29,
2004 2003
28, 2002 27, 2003 28, 2002
------ ------- ------ ------------- -----
Net sales ..................................... 100.0% 100.0%Sales ....................................... 100.0% 100.0%
Cost of sales ................................. 76.0 75.6Sales ................................... 75.5 76.1 75.7
Restructuring and related charges (credit) .... (.3) 2.0
----- -----
----- -----
Gross profit ................................ 24.0 24.7.................................. 24.5 23.9 22.3
Selling, general and administrative expenses .................................... 14.1 13.0.... 13.4 13.9 13.5
----- -----
----- -----
Operating income ............................ 9.9 11.7.............................. 11.1 10.0 8.8
Other income, net ............................. (.1) (.1) (.1)............................... .1 .1
Interest expense .............................. 1.1 1.3 1.1 1.3
----- -----................................ .9 1.2
----- -----
Income before income taxes ...................................... 10.3 8.9 10.4 9.0 7.6
Income taxes ...................................................................... 3.7 3.2 3.7 3.3 2.7
----- -----
----- -----
Net income .................................... 6.6% 5.7% 6.7% 5.7% 4.9%
===== =====
===== =====
Net sales increased $3.9$8.9 million, or 6.3%14.6%, for the three month period ended
SeptemberMarch 27, 20032004, from the comparable 2002 period. For the nine month period,
net sales increased $11.8 million, or 6.7%, from the 20022003 period. The increase for the three
and nine month periodsperiod was primarily due to higher unit volume. The higher unit volume in the third quarter was partially offset by lower
average selling prices.While industry sales
trends appear to be improving, we believe most of our growth continues to come
from market share gains.
Gross profit margin for the three and nine month periodsperiod of 20032004 was 24.0% and
23.9%, respectively,24.5% compared to
24.7% and 22.3%23.9% for the 2002 periods. The lower2003 period. Higher gross profit margin for the nine month period of 2002 isin 2004 was primarily due
to restructuring and related charges resulting from closing a factory to realign
the Company's manufacturing facilities. Excluding restructuring and related
charges in 2002, gross profit margin for the three and nine month period of 2003
decreased primarily due to transition and start up costs from increased sourcing
including lowerhigher production levels at the Company'sour domestic facilities and an
increase in wages and benefits. These costs were mostly offset by savings from sourcing
initiativesinitiatives. We are experiencing inflationary pressures in wages, employee
benefits and realignment of manufacturing capacity.raw materials, primarily lumber. These trends may negatively impact
gross profit margins in the future if we are not able to raise prices or achieve
additional cost savings.
Selling, general and administrative expenses for the three and nine month periods of 2003period as a
percentage of net sales increaseddecreased to 14.1% and13.4% from 13.9%,
respectively, from 13.0% and 13.5% for the comparable 2002 periods.2003
period. This percentage declined primarily due to higher net sales. Selling,
general and administrative expenditures increased in the three and nine month
periods$904,000 primarily as a result
of 2003 primarily duehigher selling expenses directly attributable to the Company's sourcing program, increased
marketing and product development costs. This trend is expected to continue
resultingincrease in higher selling, general and administrative expense in the fourth
quarter of 2003 compared to the fourth quarter of 2002.sales,
including additional warehouse expense.
As a result of the above, operating income as a percentage of net sales was
9.9%
and 10.0%11.1% for the three and nine month periods of 2003,period, compared to 11.7% and
8.8%10.0%, respectively, for the comparable 2002 periods.2003
period.
Interest expense for the three and nine month periodsperiod of 20032004 decreased primarily due to
lower average debt levels.
The effective tax rate for 2004 is expected to be 36.3%, compared 36.0% for 2003 compared to 35.5% for
2002.the
total year 2003. The increase in the effectivehigher tax rate in 2004 is primarily due to higher state income
taxes resulting from the phase-out of certain state tax credits.taxes.
Financial Condition, Liquidity and Capital Resources
Our sources of liquidity include cash on hand, cash from operations and amounts
available under a $25.0 million credit facility. These sources have been
adequate for day-to-day expenditures, debt payments, purchases of our stock,
capital expenditures and payment of cash dividends to stockholders. We expect
these sources of liquidity to continue to be adequate for the future.
Working capital has increased due to higher overall finished goods inventory
levels as the proportion of our sales from sourced products has increased. To
support our delivery performance, we maintain a higher inventory level of
sourced products compared to those we manufacture. We expect finished goods
inventories to increase during the second quarter due to normal seasonal trends.
Capital expenditures for 2004 are anticipated to be approximately $2.0 million
to $3.0 million for normal replacements and improvements. As both our sales and
the proportion of sourced goods increase we anticipate the need for additional
warehouse space. Near-term we anticipate leasing space to accommodate our needs.
However, should we decide to invest in our own facilities this could increase
our anticipated capital expenditures.
Cash generated from operations was $12.5$7.5 million in the first ninethree months of
20032004 compared to $13.6$6.6 million in the 20022003 period. The increase in cash received
from customers and cash paid to suppliers and employees was primarily due to
higher sales. HigherLower tax payments resultingresulted from an overpayment in 2003. Higher
sales also resulted in an increase in earnings offset
cash generated from higher sales.accounts receivable. Accounts payable and
accrued salaries, wages and benefits increased primarily due to the timing of
payments.
Net cash used by investing activities was $649,000$132,000 in the 20032004 period compared
to cash provided by investing activities of $91,000 in 2002. In 2002, the
Company received net proceeds of $696,000 from the sale of real estate at its
former West End, North Carolina facility. Capital expenditures$37,000 in 2003 are
anticipated to be approximately $1.0 to $1.5 million.and consisted of normal capital expenditures and software
purchases.
Net cash used by financing activities was $19.6$4.6 million in the 2004 period
compared to $5.2 million in the 2003 period. In the 2004 period, comparedcash from
operations provided funds for senior debt payments and cash dividends.
Approximately $10.2 million remains authorized by our Board of Directors to
$7.0 million in the 2002 period.repurchase shares of our common stock. In the 2003 period, cash from operations
available cash and proceeds from the revolving credit facility
provided funds for the purchase of Company common stock, senior debt payments,
and cash dividends. During the 2003 period, $14.8 million was used to purchase
565,000 shares of the Company's common stock in the open market at an average
price of $26.15. Approximately $10.2 million remains authorized by the Company's
Board of Directors to repurchase shares of the Company's common stock. In the
2002 period, cash from operations and proceeds from the exercise of stock
options provided cash for senior debt payments, purchase of our common stock and repayment of the revolving
credit facility.cash
dividends.
At SeptemberMarch 27, 2003,2004, long-term debt including current maturities was $24.8$18.4
million. Debt service requirements are $2.1$2.7 million remaining in 2003, $7.0
million in 2004, $4.3
million in 2005, $2.9 million in 2006 and $2.9 million in 2007. During the third quarter, the Company entered into a new revolving credit
agreement. The new agreement provides for maximum borrowings of $25.0 million
and matures in August 2005. As of SeptemberMarch 27,
2003,2004, approximately $24.3$25 million of additional borrowings were available under
thisthe revolving credit facility and cash on hand was $1.4$5.4 million. The Company
believes that its financial resources are adequate to support its capital needs
and debt service requirements.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB
Statement No. 123". FAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to permit additional transition methods for entities
that adopt the fair-value based method of accounting for stock-based employee
compensation. For those companies that do not elect to change their method of
accounting for stock-based employee compensation, FAS 148 requires increased
disclosure of the pro forma impact of applying the fair value method to the
reported operating results. The increased disclosure requirements apply to the
Company's interim and annual financial statements beginning in the first quarter
of 2003 and are presented in Note 2 of the financial statements.
In April 2003, the FASB issued Statement No. 149 (FAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". FAS 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company did not have any derivative instruments or hedging activities
during the nine months ended September 27, 2003. Adoption of FAS 149 did not
have a material effect the Company's financial statements.
In May 2003, the FASB issued Statement No. 150 (FAS 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". FAS 150 establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption of
FAS 150 did not have a material effect on the Company's financial statements.
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,""estimates", "expects," "may,"
"will," "should,should," or "anticipates""anticipates," or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy. These
statements reflect the Company's reasonable judgment with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include competition in the furniture industry including
competition from lower-cost foreign manufacturers, the Company's success in
implementing its blended strategy of expanded offshore sourcing and domestic
manufacturing, disruptions in offshore sourcing including those arising from
supply or distribution disruptions or changes in political or economic
conditions affecting the countries from which the Company obtains offshore
sourcing, the cyclical nature of the furniture industry, fluctuations in the
price for lumber which is the most significant raw material used by the Company,
credit exposure to customers, in the current economic climate, capital costs and general economic conditions. Any
forward looking statement speaks only as of the date of this filing, and the
Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new developments or otherwise.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Because the Company's obligation under its revolving credit facility bears
interest at a variable rate, the Company is sensitive to changes in prevailing
interest rates. A one-percentage point fluctuation in market interest rates
would not have a material impact on earnings during the first ninethree months of
2003.2004.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14(c)), based on their evaluation of such controls and procedures
conducted as of the end of the period covered by this report, are effective
to ensure that information required to be disclosed by the Company in the
reports it files under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission
and that such information is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal control over financial
reportingcontrols or in other factors that occurred duringcould significantly
affect these controls subsequent to the Company's last fiscal quarter that have
materially affected, or are reasonably likelydate of the evaluation referred to
materially affect, the
Company's internal control over financial reporting.above.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 By-laws of the Registrant as amended.(1)
Exhibit 10.1 Credit Agreement, dated August 29, 2003, between the
Registrant and SouthTrust Bank.(1)
Exhibit
31.1 Certification by Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U.S.C.SectionU.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
Exhibit
31.2 Certification by Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U.S.C.SectionU.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.(1)
Exhibit
32.1 Certification of Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 20022002. (1)
Exhibit
32.2 Certification of Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 20022002. (1)
(b) Reports on Form 8-K
None
- ---------------------------A report on Form 8-K was filed on March 17, 2004, to provide the detail
of tax fees paid to PricewaterhouseCoopers, LLP ("PWC").
(1) Filed herewith.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: OctoberApril 14, 20032004 By: /s/ Douglas I. Payne
--------------------------------------------
Douglas I. Payne
Executive V.P. - Finance &
Administration and Secretary
(Principal Financial and
Accounting Officer)