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 July 2,October 1, 2005
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.) | |
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
(Address of principal executive offices, Zip Code)
(276) 627- 2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act): Yes X No
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 July 15,October 1, 2005, 12,742,25412,834,160 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | (unaudited) | | | | | (unaudited) | | | |
| | July 2, | | December 31, | | | October 1, | | December 31, | |
| | 2005 | | 2004 | | | 2005 | | 2004 | |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash | | $ | 13,586 | | $ | 7,632 | | | $ | 19,313 | | $ | 7,632 | |
Accounts receivable, less allowances of $2,260 and $1,961 | | | 39,132 | | | 36,036 | | |
Accounts receivable, less allowances of $2,308 and $1,961 | | | | 41,098 | | | 36,036 | |
Inventories: | | | | | | | | | | | | | | |
Finished goods | | | 53,660 | | | 52,646 | | | | 53,102 | | | 52,646 | |
Work-in-process | | | 8,072 | | | 8,449 | | | | 9,025 | | | 8,449 | |
Raw materials | | | 10,551 | | | 12,563 | | | | 10,649 | | | 12,563 | |
Total inventories | | | 72,283 | | | 73,658 | | | | 72,776 | | | 73,658 | |
| | | | | | | | | | | | | | |
Prepaid expenses and other current assets | | | 1,745 | | | 1,585 | | | | 1,007 | | | 1,585 | |
Deferred income taxes | | | 2,404 | | | 2,414 | | | | 2,521 | | | 2,414 | |
Total current assets | | | 129,150 | | | 121,325 | | | | 136,715 | | | 121,325 | |
| | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 51,290 | | | 51,342 | | | | 50,970 | | | 51,342 | |
Goodwill | | | 9,072 | | | 9,072 | | | | 9,072 | | | 9,072 | |
Other assets | | | 6,560 | | | 7,149 | | | | 7,726 | | | 7,149 | |
Total assets | | $ | 196,072 | | $ | 188,888 | | | $ | 204,483 | | $ | 188,888 | |
| | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 2,857 | | $ | 4,257 | | | $ | 2,857 | | $ | 4,257 | |
Accounts payable | | | 19,549 | | | 16,056 | | | | 18,963 | | | 16,056 | |
Accrued salaries, wages and benefits | | | 10,873 | | | 10,573 | | | | 12,630 | | | 10,573 | |
Other accrued expenses | | | 2,063 | | | 1,872 | | | | 2,478 | | | 1,872 | |
Total current liabilities | | | 35,342 | | | 32,758 | | | | 36,928 | | | 32,758 | |
| | | | | | | | | | | | | | |
Long-term debt, exclusive of current maturities | | | 10,000 | | | 11,428 | | | | 10,000 | | | 11,428 | |
Deferred income taxes | | | 10,218 | | | 10,742 | | | | 10,325 | | | 10,742 | |
Other long-term liabilities | | | 6,619 | | | 6,695 | | | | 6,580 | | | 6,695 | |
Total liabilities | | | 62,179 | | | 61,623 | | | | 63,833 | | | 61,623 | |
| | | | | | | | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | |
Common stock, $.02 par value, 25,000,000 shares authorized12,742,254 and 12,830,004 shares issued and outstanding | | | 255 | | | 257 | | |
Common stock, $.02 par value, 25,000,000 shares authorized 12,834,160 and 12,830,004 shares issued and outstanding | | | | 257 | | | 257 | |
Capital in excess of par value | | | 6,810 | | | 10,207 | | | | 8,533 | | | 10,207 | |
Retained earnings | | | 126,979 | | | 116,952 | | | | 132,011 | | | 116,952 | |
Accumulated other comprehensive loss | | | (151 | ) | | (151 | ) | | | (151 | ) | | (151 | ) |
Total stockholders’ equity | | | 133,893 | | | 127,265 | | | | 140,650 | | | 127,265 | |
Total liabilities and stockholders’ equity | | $ | 196,072 | | $ | 188,888 | | | $ | 204,483 | | $ | 188,888 | |
The accompanying notes are an integral part of the consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
| | Three Months | | Six Months | | | Three Months | | Nine Months | |
| | Ended | | Ended | | | Ended | | Ended | |
| | July 2, | | June 26, | | July 2, | | June 26, | | | October September | | October September | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 1, 2005 | | 25, 2004 | | 1, 2005 | | 25, 2004 | |
| | | | | | | | | | | | | | | | | | |
Net sales | | $ | 83,635 | | $ | 72,223 | | $ | 166,585 | | $ | 143,743 | | | $ | 85,615 | | $ | 78,803 | | $ | 252,200 | | $ | 222,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 63,003 | | | 53,977 | | | 125,488 | | | 108,276 | | | | 65,131 | | | 59,389 | | | 190,619 | | | 167,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 20,632 | | | 18,246 | | | 41,097 | | | 35,467 | | | | 20,484 | | | 19,414 | | | 61,581 | | | 54,881 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 11,239 | | | 9,539 | | | 22,290 | | | 18,956 | | | | 11,106 | | | 10,636 | | | 33,396 | | | 29,592 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 9,393 | | | 8,707 | | | 18,807 | | | 16,511 | | | | 9,378 | | | 8,778 | | | 28,185 | | | 25,289 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income, net | | | 54 | | | 42 | | | 119 | | | 95 | | | | 71 | | | 50 | | | 190 | | | 145 | |
Interest income | | | 102 | | | 10 | | | 154 | | | 16 | | | | 96 | | | 4 | | | 250 | | | 21 | |
Interest expense | | | 545 | | | 587 | | | 1,115 | | | 1,219 | | | | 548 | | | 588 | | | 1,663 | | | 1,808 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 9,004 | | | 8,172 | | | 17,965 | | | 15,403 | | | | 8,997 | | | 8,244 | | | 26,962 | | | 23,647 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income taxes | | | 3,177 | | | 2,961 | | | 6,378 | | | 5,585 | | | | 3,195 | | | 2,959 | | | 9,573 | | | 8,544 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | $ | 5,827 | | $ | 5,211 | | $ | 11,587 | | $ | 9,818 | | |
Net income | | | $ | 5,802 | | $ | 5,285 | | $ | 17,389 | | $ | 15,103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | .45 | | $ | .42 | | $ | .90 | | $ | .79 | | | $ | .45 | | $ | .42 | | $ | 1.35 | | $ | 1.21 | |
Diluted | | $ | .44 | | $ | .40 | | $ | .87 | | $ | .76 | | | $ | .44 | | $ | .40 | | $ | 1.31 | | $ | 1.16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 12,905 | | | 12,485 | | | 12,908 | | | 12,458 | | | | 12,811 | | | 12,569 | | | 12,886 | | | 12,499 | |
Diluted | | | 13,255 | | | 13,031 | | | 13,316 | | | 12,970 | | | | 13,198 | | | 13,100 | | | 13,294 | | | 13,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividend declared per common share | | $ | .06 | | $ | .05 | | $ | .12 | | $ | .10 | | | $ | .06 | | $ | .05 | | $ | .18 | | $ | .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)
| | Six Months Ended | | | Nine Months Ended | |
| | July 2, | | June 26, | | | October | | September | |
| | 2005 | | 2004 | | | 1, 2005 | | 25, 2004 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Cash received from customers | | $ | 163,434 | | $ | 139,410 | | | $ | 247,093 | | $ | 212,934 | |
Cash paid to suppliers and employees | | | (138,696 | ) | | (128,046 | ) | | | (214,001 | ) | | (198,687 | ) |
Interest paid, net | | | (1,519 | ) | | (715 | ) | | | (1,431 | ) | | (1,791 | ) |
Income taxes paid, net | | | (6,350 | ) | | (4,067 | ) | | | (8,447 | ) | | (7,748 | ) |
Net cash provided by operating activities | | | 16,869 | | | 6,582 | | | | 23,214 | | | 4,708 | |
| | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Capital expenditures | | | (2,721 | ) | | (200 | ) | | | (3,791 | ) | | (402 | ) |
Purchase of other assets | | | (33 | ) | | (88 | ) | | | (33 | ) | | (119 | ) |
Net cash used by investing activities | | | (2,754 | ) | | (288 | ) | | | (3,824 | ) | | (521 | ) |
| | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Repayment of senior notes | | | (2,828 | ) | | (4,286 | ) | | | (2,828 | ) | | (5,586 | ) |
Purchase and retirement of common stock | | | (9,993 | ) | | | | | | (9,996 | ) | | | |
Proceeds from insurance policy loans | | | 1,110 | | | | | | | 1,110 | | | 993 | |
Dividends paid | | | (1,560 | ) | | (1,246 | ) | | | (2,330 | ) | | (1,876 | ) |
Proceeds from exercised stock options | | | 5,110 | | | 651 | | | | 6,335 | | | 1,944 | |
Net cash used by financing activities | | | (8,161 | ) | | (4,881 | ) | | | (7,709 | ) | | (4,525 | ) |
| | | | | | | | | | | | | | |
Net increase in cash | | | 5,954 | | | 1,413 | | | | 11,681 | | | (338 | ) |
Cash at beginning of period | | | 7,632 | | | 2,509 | | | | 7,632 | | | 2,509 | |
Cash at end of period | | $ | 13,586 | | $ | 3,922 | | | $ | 19,313 | | $ | 2,171 | |
| | | | | | | | | | | | | | |
Reconciliation of net income to net cash provided by operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 11,587 | | $ | 9,818 | | | $ | 17,389 | | $ | 15,103 | |
Depreciation | | | 2,815 | | | 2,830 | | | | 4,228 | | | 4,230 | |
Deferred income taxes | | | (514 | ) | | (1,569 | ) | | | (524 | ) | | (1,822 | ) |
Changes in assets and liabilities: | | | | | | | | | | | | | | |
Accounts receivable | | | (3,096 | ) | | (4,603 | ) | | | (5,062 | ) | | (10,058 | ) |
Inventories | | | 1,375 | | | (13,802 | ) | | | 882 | | | (17,727 | ) |
Prepaid expenses and other current assets | | | (323 | ) | | 1,732 | | | | (1,085 | ) | | 1,260 | |
Accounts payable | | | 3,493 | | | 6,234 | | | | 2,907 | | | 6,957 | |
Accrued salaries, wages and benefits | | | 544 | | | 3,730 | | | | 2,301 | | | 4,663 | |
Other accrued expenses | | | 1,431 | | | 689 | | | | 2,349 | | | 1,294 | |
Oher assets | | | (367 | ) | | 491 | | |
Other assets | | | | (56 | ) | | (205 | ) |
Other long-term liabilities | | | (76 | ) | | 1,032 | | | | (115 | ) | | 1,013 | |
Net cash provided by operating activities | | $ | 16,869 | | $ | 6,582 | | | $ | 23,214 | | $ | 4,708 | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. | Preparation of Interim Unaudited Consolidated Financial Statements |
The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain amounts in 2004 have been reclassified to conform to the 2005 presentation. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes included in our latest Annual Report on Form 10-K.
On April 26, 2005, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on June 6, 2005. All share and per share amounts for all periods presented have been adjusted to reflect the stock split. At the April 26, 2005 stockholders meeting, stockholders approved an amendment to the Company’s certificate of incorporation increasing the number of authorized shares of common stock from 10 million to 25 million.
We apply the provisions of Accounting Principles Board Opinion No. 25 in accounting for our stock options and no compensation cost has been recognized in the financial statements. Had we determined compensation cost based on the fair value method as defined in Statement of Financial Accounting Standards (SFAS) No. 123, and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS Statement No. 123”, the impact on our net earnings on a pro forma basis is indicated below:
| | Three Months | | Six Months | | | Three Months | | Nine Months | |
| | Ended | | Ended | | | Ended | | Ended | |
| | July 2, | | June 26, | | July 2, | | June 26, | | | October | | September | | October | | September | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 1, 2005 | | 25, 2004 | | 1, 2005 | | 25, 2004 | |
Net income as reported | | $ | 5,827 | | $ | 5,211 | | $ | 11,587 | | $ | 9,818 | | | $ | 5,802 | | $ | 5,285 | | $ | 17,389 | | $ | 15,103 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | 187 | | | 432 | | | 476 | | | 825 | | |
Deduct:Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | | 18 | | | 452 | | | 495 | | | 1,350 | |
Pro forma net income | | $ | 5,640 | | $ | 4,779 | | $ | 11,111 | | $ | 8,993 | | | $ | 5,784 | | $ | 4,833 | | $ | 16,894 | | $ | 13,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic - as reported | | $ | 0.45 | | $ | 0.42 | | $ | .90 | | $ | .79 | | | $ | 0.45 | | $ | 0.42 | | $ | 1.35 | | $ | 1.21 | |
Basic - pro forma | | $ | 0.44 | | $ | 0.38 | | $ | .86 | | $ | .72 | | | $ | 0.45 | | $ | 0.38 | | $ | 1.31 | | $ | 1.10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted - as reported | | $ | 0.44 | | $ | 0.40 | | $ | .87 | | $ | .76 | | | $ | 0.44 | | $ | 0.40 | | $ | 1.31 | | $ | 1.16 | |
Diluted - pro forma | | $ | 0.43 | | $ | 0.38 | | $ | .84 | | $ | .72 | | | $ | 0.44 | | $ | 0.37 | | $ | 1.27 | | $ | 1.07 | |
3.Property, Plant and Equipment
3. | Property, Plant and Equipment
|
| | October 1, | | December 31, | |
| | 2005 | | 2004 | |
Land and buildings | | $ | 38,823 | | $ | 38,775 | |
Machinery and equipment | | | 75,756 | | | 74,846 | |
Office furniture and equipment | | | 5,108 | | | 2,386 | |
Property, plant and equipment, at cost | | | 119,687 | | | 116,007 | |
Less accumulated depreciation | | | 68,717 | | | 64,665 | |
Property, plant and equipment, net | | $ | 50,970 | | $ | 51,342 | |
| | July 2, | | December 31, | |
| | | 2005 | | | 2004 | |
Land and buildings | | $ | 38,823 | | $ | 38,775 | |
Machinery and equipment | | | 75,636 | | | 74,846 | |
Office furniture and equipment | | | 4,160 | | | 2,386 | |
Property, plant and equipment, at cost | | | 118,619 | | | 116,007 | |
Less accumulated depreciation | | | 67,329 | | | 64,665 | |
Property, plant and equipment, net | | $ | 51,290 | | $ | 51,342 | |
| | July 2, | | December 31, | | | October 1, | | December 31, | |
| | | 2005 | | | 2004 | | | 2005 | | 2004 | |
7.57% senior note due through June 30, 2005 | | | | | $ | 1,400 | | | | | | $ | 1,400 | |
7.43% senior notes due through November 18, 2007 | | $ | 4,286 | | | 4,285 | | | $ | 4,285 | | | 4,285 | |
6.94% senior notes due through May 3, 2011 | | | 8,571 | | | 10,000 | | | | 8,572 | | | 10,000 | |
Total | | | 12,857 | | | 15,685 | | | | 12,857 | | | 15,685 | |
Less current maturities | | | 2,857 | | | 4,257 | | | | 2,857 | | | 4,257 | |
Long-term debt, exclusive of current maturities | | $ | 10,000 | | $ | 11,428 | | | $ | 10,000 | | $ | 11,428 | |
5. | Employee Benefits Plans |
Components of pension cost:
| | Three Months | | Six Months | | | Three Months | | Nine Months | |
| | Ended | | Ended | | | Ended | | Ended | |
| | July 2, | | June 26, | | July 2, | | June 26, | | | October | | September | | October | | September | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 1, 2005 | | 25, 2004 | | 1, 2005 | | 25, 2004 | |
Interest cost | | $ | 242 | | $ | 244 | | $ | 485 | | $ | 487 | | | $ | 230 | | $ | 243 | | $ | 715 | | $ | 730 | |
Expected return on plan assets | | | (257 | ) | | (242 | ) | | (513 | ) | | (484 | ) | | | (248 | ) | | (242 | ) | | (761 | ) | | (726 | ) |
Net amortization and deferral | | | 111 | | | 115 | | | 222 | | | 230 | | | | 106 | | | 115 | | | 328 | | | 345 | |
Net cost | | | 96 | | | 117 | | | 194 | | | 233 | | | | 88 | | | 116 | | | 282 | | | 349 | |
Settlement expense | | | 333 | | | 217 | | | 573 | | | 435 | | | | 286 | | | 143 | | | 859 | | | 578 | |
Total expense | | $ | 429 | | $ | 334 | | $ | 767 | | $ | 668 | | | $ | 374 | | $ | 259 | | $ | 1,141 | | $ | 927 | |
The Plan is fully funded; therefore, no contributions are required to be deposited in 2005. However, we plan to makemade a discretionary contribution of approximately $1$1.5 million to $2 million in the third quarter of 2005.
Components of other postretirement benefit cost:
| | Three Months | | Six Months | | | | Three Months Ended | | Nine Months Ended | |
| | Ended | | Ended | | | | October 1, | | September | | October | | September | |
| | July 2, | | June 26, | | July 2, | | June 26, | | | | 2005 | | | 25, 2005 | | | 1, 2005 | | | 25, 2005 | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | |
Service Cost | | $ | 22 | | $ | 17 | | $ | 44 | | $ | 34 | | |
Interest Cost | | | 46 | | | 43 | | | 92 | | | 86 | | |
Service cost | | Service cost | $ | 22 | | $ | 17 | | $ | 66 | | $ | 51 | |
Interest cost | | Interest cost | | 46 | | 43 | | 138 | | 129 | |
Amortization of transitions obligation | | | 33 | | | 33 | | | 66 | | | 66 | | Amortization of transitions obligation | | 33 | | 33 | | 99 | | 99 | |
Amortization of net actuarial loss | | | 17 | | | 10 | | | 34 | | | 20 | | Amortization of net actuarial loss | | 17 | | | 10 | | | 51 | | | 30 | |
Net periodic postretirement benefit cost | | $ | 118 | | $ | 103 | | $ | 236 | | $ | 206 | | Net periodic postretirement benefit cost | $ | 118 | | $ | 103 | | $ | 354 | | $ | 309 | |
Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options are treated as potential common stock for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data:
| | Three Months | | Six Months | |
| | Ended | | Ended | |
| | July 2, | | June 26, | | July 2, | | June 26, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
Weighted average shares outstanding for basic calculation | | | 12,905 | | | 12,485 | | | 12,908 | | | 12,458 | |
Add: Effect of dilutive stock options | | | 350 | | | 546 | | | 408 | | | 512 | |
Weighted average shares outstanding, Adjusted for diluted calculation | | | 13,255 | | | 13,031 | | | 13,316 | | | 12,970 | |
| | Three Months | | Nine Months | |
| | Ended | | Ended | |
| | October | | September | | October | | September | |
| | 1, 2005 | | 25, 2004 | | 1, 2005 | | 25, 2004 | |
Weighted average shares outstanding for basic calculation | | | 12,811 | | | 12,569 | | | 12,886 | | | 12,499 | |
Add: Effect of dilutive stock options | | | 387 | | | 531 | | | 408 | | | 520 | |
Weighted average shares outstanding, adjusted for diluted calculation | | | 13,198 | | | 13,100 | | | 13,294 | | | 13,019 | |
A reconciliation of the activity in Stockholders’ Equity accounts for the quarter ended July 2,October 1, 2005
is as follows:
| | | | | | | | Accumulated | | |
| | | | Capital in | | | | Other | | | | | | | | | Accumulated | |
| | Common | | Excess of | | Retained | | Comprehensive | | | | | Capital in | | | | Other | |
| | Stock | | Par Value | | Earnings | | Loss | | | Common | | Excess of | | Retained | | Comprehensive | |
| | | | | | | | | | | | | | | Stock | | Par Value | | Earnings | | Loss | |
Balance, December 31, 2004 | | $ | 257 | | $ | 10,207 | | $ | 116,952 | | $ | (151 | ) | | $ | 257 | | $ | 10,207 | | $ | 116,952 | | $ | (151 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | 11,587 | | | | | | | | | | | | | 17,389 | | | | |
Exercise of stock options | | | 4 | | | 5,106 | | | | | | | | | | 6 | | | 6,329 | | | | | | | |
Tax benefit on exercise of stock options | | | | | | 1,240 | | | | | | | | | | | | | 1,743 | | | | | | | |
Stock repurchases | | | (6 | ) | | (9,987 | ) | | | | | | | | | (6 | ) | | (9,990 | ) | | | | | | |
Stock awards | | | | | | 244 | | | | | | | | | | | | | 244 | | | | | | | |
Cash dividends paid, $.12 per share | | | | | | | | | (1,560 | ) | | | | |
Balance, July 2, 2005 | | $ | 255 | | $ | 6,810 | | $ | 126,979 | | $ | (151 | ) | |
Cash dividends paid, $.18 per share | | | | | | | | | | (2,330) | | | | |
Balance, October 1, 2005 | | | $ | 257 | | $ | 8,533 | | $ | 132,011 | | $ | (151 | ) |
7. | New Accounting Standards |
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardStandards No. 151, “Inventory Costs”. The new Statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect adoption of this statement to have a material impact on our financial condition or results of operations.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. Statement No. 123(R) will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. The Statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We are evaluating these new rules, but expect no material impact upon adoption relating to outstanding options since a majority of the awards under the existing incentive stock option plan will be fully vested prior to the effective date of the revised rules. The Securities and Exchange Commission has ruled that FAS 123(R) is now effective for public companies for annual, rather than interim, periods that beginbegan after June 15, 2005.
Item 2. | Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
The execution of our blended strategy of combining domestic manufacturing capabilities with an offshore sourcing program continues to produce positive results. We incorporate selected imported component parts and finished items in our product line to lower cost, provide design flexibility and offer a better value to our customers. Sourced product represented approximately 31%32% of sales during the first halfnine months of 2005 compared to 28%27% in 2004. We anticipate sourced product to remain about 30% of salesapproximate this level for the remainder of 2005.
During the first half ourOur manufacturing plants have operated at approximately 75% to 80% of their estimated capacity.capacity during the first nine months of 2005. We are maintaining our manufacturing capacity at current levels to provide protective capacity for improved demand. We will continue to evaluate our manufacturing capacity needs considering offshore sourcing opportunities, current and anticipated demand for our products, overall market conditions and other factors we consider relevant. Should capacity reductions become necessary, this could cause asset impairment or other restructuring charges in the future.
The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Income.
| | Three Months | | Six Months | | | | Three Months | | Nine Months | |
| | Ended | | Ended | | | | Ended | | Ended | |
| | July 2, | | June 26, | | July 2, | | June 26, | | | | October | | September | | October | | September | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | | 1, 2005 | | | 25, 2004 | | | 1, 2005 | | | 25, 2004 | |
Net sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | | 75.3 | | | 74.7 | | | 75.3 | | | 75.3 | | Cost of sales | | 76.1 | | | 75.4 | | | 75.6 | | | 75.3 | |
Gross profit | | | 24.7 | | | 25.3 | | | 24.7 | | | 24.7 | | Gross profit | | 23.9 | | 24.6 | | 24.4 | | 24.7 | |
Selling, general and administrative expenses | | | 13.4 | | | 13.2 | | | 13.4 | | | 13.2 | | Selling, general and administrative expenses | | 13.0 | | | 13.5 | | | 13.2 | | | 13.3 | |
Operating income | | | 11.2 | | | 12.1 | | | 11.3 | | | 11.5 | | Operating income | | 11.0 | | 11.1 | | 11.2 | | 11.4 | |
Other income, net | | | .1 | | | | | | .1 | | | .1 | | Other income, net | | .1 | | .1 | | .1 | | .1 | |
Interest income | | | .1 | | | | | | .1 | | | | | Interest income | | .1 | | | | .1 | | | |
Interest expense | | | .6 | | | .8 | | | .7 | | | .9 | | Interest expense | | .6 | | | .7 | | | .7 | | | .8 | |
Income before income taxes | | | 10.8 | | | 11.3 | | | 10.8 | | | 10.7 | | Income before income taxes | | 10.5 | | 10.5 | | 10.7 | | 10.6 | |
Income taxes | | | 3.8 | | | 4.1 | | | 3.8 | | | 3.9 | | Income taxes | | 3.7 | | | 3.8 | | | 3.8 | | | 3.8 | |
Net income | | | 7.0 | % | | 7.2 | % | | 7.0 | % | | 6.8 | % | Net income | | 6.8 | % | | 6.7 | % | | 6.9 | % | | 6.8 | % |
Net sales increased $11.4$6.8 million, or 15.8%8.6%, for the three month period ended July 2,October 1, 2005, from the comparable 2004 period. For the sixnine month period of 2005, net sales increased $22.8$ 29.7 million, or 15.9%13.3% from the 2004 sixnine month period. The increase was primarily due to higher unit volume and to a lesser extent higher average selling prices.prices and higher unit volume. Industry sales growth appears to have slowed during the first halfnine months of 2005 compared to the trends reported in 2004.
Gross profit margins for both the three and sixnine month periods of 2005 was 24.7%were 23.9% and 24.4%, respectively compared to 25.3%24.6% and 24.7% for the three and sixnine month periods of 2004, respectively.2004. Gross profit margins were negatively impacted by inflation in raw materials, wages, employee benefits, energy, freight costs and tariffs imposed on wooden bedroom furniture imported from China. OffsettingOperational inefficiencies and lower production levels in the third quarter of 2005 compared to the prior year period also contributed to the lower gross profit margins. Partially offsetting these higher costs were increased prices, higherselling prices. While we expect the operating efficiencies to improve, we also anticipate lower production levels and improved operating efficiencies.in the fourth quarter of 2005 versus the comparable prior year period. We continue to experience inflationary pressures in raw materials, compensation cost, energy and freight costs. However, we anticipate higher selling prices and improved operating efficiencies to offset these cost increases in the second half of 2005.
Selling, general and administrative expenses for the three and sixnine month periods of 2005 as a percentage of net sales increased slightlywere 13.0% and 13.2%, respectively compared to 13.4% from 13.2%13.5% and 13.3% for the comparable 2004 periods. Selling, general and administrative expenditures increased $1.7 million$470,000 and $3.3$3.8 million for the three and sixnine month period,periods of 2005, respectively, primarily as a result of higher selling expenses directly attributable to the increase in sales and additional warehousing expense. Also contributing to the lower selling, general and administrative expenses in the 2004 periods was a reversal of bad debt expense, as a result of a decrease in accounts receivable from certain customers experiencing financial difficulties.
As a result of the above, operating income as a percentage of net sales was 11.2%11.0% and 11.3%11.2% for the three and sixnine month period,periods of 2005, respectively compared to 12.1%11.1% and 11.5%,11.4% for the comparable 2004 periods.
Interest expense for the sixthree and nine month periodperiods of 2005 decreased primarily due to lower average debt levels. Interest income increased during the period2005 periods due to higher amounts of cash.
The effective tax rate for 2005 is expected to be 35.5%, compared to 36.1% for the total year 2004. The decrease in the effective tax rate is a result of the “American Jobs Creation Act of 2004” which allows for a deduction based on qualified domestic production activities. We expect a modest decline in our effective tax rate as this deduction is phased in over the next six years.
Financial Condition, Liquidity and Capital Resources
Our sources of liquidity include cash on hand, cash from operations and amounts available under a $25.0 million credit facility. These sources have been adequate for day-to-day expenditures, debt payments, purchases of our stock, capital expenditures and payment of cash dividends to stockholders. We expect these sources of liquidity to continue to be adequate for the future.
Working capital, excluding cash and current maturities of long-term debt, decreased $2.1$1.9 million during the first halfnine months of 2005 to $83.1$83.3 million from $85.2 million at year end. The decrease was primarily due to lower inventories and an increase in accounts payable; partially offset by an increase in accounts receivable resulting from higher sales.
Cash generated from operations was $16.9$23.2 million in the first sixnine months of 2005 compared to $6.6$4.7 million in the 2004 period. The increase was due to higher receipts from customers due to higher sales, partially offset by higher payments to suppliers and employees. Payments to suppliers and employees increased primarily to fund higher production, increased purchases of sourced product and higher selling and administrative expenses. We anticipate making a discretionary contribution of approximately $1.0 million to $2.0 million to our defined benefit plan in 2005.
Net cash used by investing activities was $2.8$3.8 million in the 2005 period compared to $288,000$521,000 in 2004 and consisted of normal capital expenditures. Capital expenditures in 2005 have returned to more historic levels. Over the past three years, capital expenditures were lower due to the relocation of a significant portion of machinery and equipment from a closed facility to other facilities in lieu of normal replacements. Capital expenditures for 2005 have returned to more historic levels and are anticipated to be approximately $5.5 million to $6.5 million for normal replacements and improvements, including approximately $1.0 million to expand warehouse space and improve manufacturing flow at one of our facilities.$6.0 million. As both our sales and the proportion of sourced goods increased, our need for additional warehouse space has increased. We are currently renting space to accommodate our needs, but continue to evaluate long-term solutions which could result in additional future capital expenditures.
Net cash used by financing activities was $8.2$7.7 million in the 2005 period compared to $4.9$4.5 million in the 2004 period. In the 2005 period, cash from operations and proceeds from the exercise of stock options provided funds for the purchase and retirement of our common stock, senior debt payments and cash dividends. During the first halfnine months of 2005, $10.0 million was used to purchase 473,000 shares of our common stock in the open market at an average price of $21.11. Approximately $10.2$20.2 million remainsis currently authorized by our Board of Directors to repurchase shares of our common stock. In the 2004 period, cash from operations provided funds for senior debt payments and cash dividends.
At July 2,October 1, 2005, long-term debt including current maturities was $12.9 million. Debt service requirements are $1.4 million remaining in 2005, $2.9 million in both 2006 $2.9 million inand 2007 and $1.4 million in both 2008 and 2009. As of July 2,October 1, 2005, approximately $25$25.0 million of additional borrowings were available under the revolving credit facility and cash on hand was $13.6$19.3 million.
Forward-Looking Statements
Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,”“estimates”, “expects,”“may,”“will,” should,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include competition in the furniture industry including competition from lower-cost foreign manufacturers, our success in executing a blended strategy of combining offshore sourcing and domestic manufacturing, disruptions in offshore sourcing including those arising from supply or distribution disruptions or changes in political or economic conditions affecting the countries from which we obtain offshore sourcing, international trade policies of the United States and countries from which we obtain sourcing, the cyclical nature of the furniture industry, fluctuations in the price for lumber which is the most significant raw material used, fluctuations in foreign freight cost, credit exposure to customers, capital costs and general economic conditions. Any forward looking statement speaks only as of the date of this filing, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our revolving credit facility bears interest at a variable rate; therefore, changes in prevailing interest rates impact our borrowing costs. A one-percentage point fluctuation in market interest rates would not have a material impact on earnings during the first sixnine months of 2005.
None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions.
ITEM 4. | Controls and Procedures |
(a) | Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. |
(b) | Changes in internal controls.controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the secondthird quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities:
| | | | | | | | Maximum number (or | |
| | | | | | Total number of | | approximate dollar | |
| | Total | | | | shares purchased | | value) of shares that | |
| | number of | | Average | | as part of publicly | | may yet be purchased | |
| | shares | | price paid | | announced plans | | under the plans or | |
Period | | purchased | | per share | | or programs | | programs (a) | |
| | | | | | | | | | | | | |
April 3 to May 7, 2005 | | | 26,006 | | $ | 21.28 | | | 26,006 | | $ | 17,700,000 | |
May 8 to June 4, 2005 | | | 325,892 | | $ | 20.42 | | | 325,892 | | $ | 11,100,000 | |
June 5 to July 2, 2005 | | | 44,500 | | $ | 20.63 | | | 44,500 | | $ | 10,200,000 | |
| | | | | | | | | | | | | |
Total | | | 396,398 | | $ | 20.50 | | | 396,398 | | | | |
(a)On April 27, 2005, we announced that our Board of Directors had authorized the use of an additional $10 million to repurchase our common stock, bringing the total amount authorized to $18.3 million. Consequently, we may purchase our common stock, from time to time, either directly or through agents, in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to us. | | | | Maximum number (or |
| | | Total number of | approximate dollar |
| Total | | shares purchased | value) of shares that |
| number of | Average | as part of publicly | may yet be purchased |
| shares | price paid | announced plans | under the plans or |
Period | purchased | per share | or programs | programs (a) |
| | | | |
July 3 to August 6, 2005 | | | | $10,200,000 |
August 7 to September 3, 2005 | | | | $10,200,000 |
September 4 to October 1, 2005 | 86 | $26.77 | 86 | $10,200,000 |
| | | | |
Total | 86 | $26.77 | 86 | |
Item 4.(a) | SubmissionOn both April 27, 2005, and October 17, 2005, we announced that our Board of MattersDirectors increased our stock repurchase authorization by an additional $10 million, bringing the total amount authorized to a Vote of Security Holders
|
(a.) | The annual meeting of the Company’s stockholders was held on April 26, 2005. |
(b.) | The stockholders of the Company elected two directors for a three-year term expiring at the annual meeting of stockholders to be held in 2008. The election was approved by the following vote: |
| | For | | Withheld |
| | | | |
Robert G. Culp, III | | 5,678,315 | | 564,149 |
| | | | |
T. Scott McIllhenny, Jr. | | 5,643,970 | | 598,494 |
(c) (i) | The stockholders approved the amendment to the Company’s restated certificate of incorporation to increase the number of shares of$20.2 million. Consequently, we may purchase our common stock, from 10,000,000time to 25,000,000. The amendment was approved withtime, either directly or through agents, in the following vote:open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to us. |
For | 5,226,901 |
Against | 1,012,845 |
Abstain | 2,718 |
| (ii) | The stockholders approved the amendment to the Company’s 2000 Incentive Compensation Plan to re-approve the performance criteria contained therein. The amendment was approved with the following vote: |
For | 5,146,767 |
Against | 451,590 |
Abstain | 5,176 |
Broker Non Votes | 638,931 |
Item 6. | Exhibits and Reports on Form 8-K |
3.1 | The Restated Certificate of Incorporation of the Registrant as amended. (1)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 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended September 27, 2003). | |
| | |
10.1 | Second amendment, dated June 15, 2005, to the revolving credit facility dated August 29, 2003, between the Registrant and Wachovia Bank. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed on June 16, 2005). | |
| | |
31.1 | Certification by Jeffrey R. Scheffer, our Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) | |
| | |
31.2 | Certification by Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) | |
| | |
32.1 | Certification of Jeffrey R. Scheffer, our Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1) | |
| | |
32.2 | Certification of Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1) | |
A report on Form 8-K was filed on June 16, 2005, reporting an amendment to the revolving credit facility between the Registrant and Wachovia Bank.None
A report on Form 8-K was filed on May 2, 2005, reporting the termination of the employment agreement between the Registrant and Albert L. Prillaman and disclosing compensation policy for non-employee directors.
(1) Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 19,October 18, 2005 | | STANLEY FURNITURE COMPANY, INC. |
| | By: /s//s/ Douglas I. Payne |
| | Douglas I. Payne |
| | Executive V.P. - Finance & Administration and |
| | Secretary |
| | (Principal Financial and Accounting Officer) |