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 September 29, 2001 or
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Transition report pursuant to Section 13 or 15(d) of the
------- Securities Exchange Act of 1934
For the transition period from to .
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
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(Address of principal executive offices, Zip Code)
(540) 627-2000
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(Registrant's telephone number, including area code)
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(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.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 12, 2001.
Class Number
Common Stock, par value $.02 per share 6,579,788 Shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 29, December 31,
2001 2000
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ASSETS
Current assets:
Cash............................................................... $ 1,948 $ 1,825
Accounts receivable, less allowances of $2,366 and $2,230.......... 31,174 33,224
Inventories:
Finished goods................................................... 35,923 30,521
Work-in-process.................................................. 8,558 9,507
Raw materials.................................................... 10,769 14,395
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Total inventories 55,250 54,423
Prepaid expenses and other current assets.......................... 1,285 568
Deferred income taxes.............................................. 2,514 2,514
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Total current assets............................................. 92,171 92,554
Property, plant and equipment, net..................................... 69,919 70,455
Goodwill, less accumulated amortization of $4,284 and $4,032........... 9,156 9,408
Other assets........................................................... 6,377 6,789
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$177,623 $179,206
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt............................... $ 6,839 $ 6,714
Accounts payable................................................... 16,586 19,507
Accrued salaries, wages and benefits............................... 10,028 10,779
Other accrued expenses............................................. 2,466 1,795
-------- --------
Total current liabilities........................................ 35,919 38,795
Long-term debt, exclusive of current maturities........................ 40,043 45,455
Deferred income taxes.................................................. 10,651 10,860
Other long-term liabilities............................................ 4,584 4,619
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Total liabilities.................................................. 91,197 99,729
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STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
6,579,788 and 6,596,436 shares issued and outstanding.................. 132 132
Capital in excess of par value......................................... 16,951 18,160
Retained earnings ..................................................... 72,044 63,907
Stock option loans..................................................... (2,701) (2,722)
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Total stockholders' equity......................................... 86,426 79,477
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$177,623 $179,206
======== ========
The accompanying notes are an integral part of
the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Nine Months
Ended Ended
--------------------- ---------------------
September September September September
29, 2001 30, 2000 29, 2001 30, 2000
-------- -------- -------- --------
Net sales.................................................. $60,007 $71,440 $177,972 $214,531
Cost of sales.............................................. 46,195 53,948 136,635 161,881
------- ------- -------- --------
Gross profit........................................... 13,812 17,492 41,337 52,650
Selling, general and administrative expenses............... 7,856 8,429 22,791 25,417
Unusual charge (Note 5).................................... 2,800
------- ------- -------- --------
Operating income....................................... 5,956 9,063 15,746 27,233
Other expense (income), net................................ 6 (38) 24 (55)
Interest expense........................................... 1,010 999 3,095 2,925
------- ------- -------- --------
Income before income taxes............................. 4,940 8,102 12,627 24,363
Income taxes............................................... 1,704 3,037 4,490 9,137
------- ------- -------- --------
Net income............................................. $ 3,236 $ 5,065 $ 8,137 $ 15,226
======= ======= ======== ========
Earnings per share:
Basic.................................................. $ .49 $ .71 $ 1.23 $ 2.12
======= ======= ======== ========
Diluted................................................ $ .47 $ .68 $ 1.18 $ 2.02
======= ======= ======== ========
Weighted average shares outstanding:
Basic.................................................. 6,615 7,130 6,611 7,178
======= ======= ======== ========
Diluted................................................ 6,884 7,434 6,914 7,549
======= ======= ======== ========
The accompanying notes are an integral part of the
financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
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September September
29, 2001 30, 2000
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Cash flows from operating activities:
Cash received from customers........................................... $ 177,346 $ 208,546
Cash paid to suppliers and employees................................... (159,382) (189,832)
Interest paid.......................................................... (3,033) (3,092)
Income taxes paid, net................................................. (4,927) (9,154)
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Net cash provided by operating activities.......................... 10,004 6,468
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Cash flows from investing activities:
Capital expenditures................................................... (3,883) (7,723)
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Cash flows from financing activities:
Issuance of senior notes............................................... 10,000
Proceeds from (repayment of) revolving credit facility, net............ (10,001) 17,000
Repayment of senior notes.............................................. (5,286) (5,236)
Purchase and retirement of common stock................................ (1,973) (12,823)
Proceeds from exercised stock options.................................. 543 343
Proceeds from insurance policy loans................................... 719 639
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Net cash used by financing activities.................................. (5,998) (77)
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Net increase (decrease) in cash........................................ 123 (1,332)
Cash at beginning of period............................................ 1,825 3,597
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Cash at end of period.............................................. $ 1,948 $ 2,265
========= =========
Reconciliation of net income to net cash provided
by operating activities:
Net income............................................................. $ 8,137 $ 15,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization...................................... 4,815 6,061
Unusual charge..................................................... 2,800
Deferred income taxes.............................................. (209)
Loss on sale of assets............................................. 28 54
Changes in assets and liabilities:
Accounts receivable............................................ (750) (6,080)
Inventories.................................................... (827) (9,425)
Prepaid expenses and other current assets...................... (1,050) (1,185)
Accounts payable............................................... (2,921) (556)
Accrued salaries, wages and benefits........................... (751) 1,593
Other accrued expenses......................................... 913 914
Other assets and long-term liabilities......................... (181) (134)
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Net cash provided by operating activities.............................. $ 10,004 $ 6,468
========= =========
The accompanying notes are an integral part of
the financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands)
1. Preparation of Interim Financial Statements
The 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 financial statements be read
in conjunction with the financial statements and accompanying notes included in
Stanley's latest Annual Report on Form 10-K.
2. Property, Plant and Equipment
(Unaudited)
September December 31,
29, 2001 2000
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Land and buildings.................................. $ 42,216 $ 41,445
Machinery and equipment............................. 78,980 75,869
Office fixtures and equipment....................... 1,829 1,829
Construction in progress............................ 516 610
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Property, plant and equipment, at cost.......... 123,541 119,753
Less accumulated depreciation....................... 53,622 49,298
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$ 69,919 $ 70,455
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3. Long-Term Debt
(Unaudited)
September December 31,
29, 2001 2000
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7.28% senior notes due March 15, 2004................... $12,857 $17,143
7.57% senior note due June 30, 2005..................... 5,025 6,025
7.43% senior notes due November 18, 2007................ 10,000 10,000
6.94% senior notes due May 3, 2011...................... 10,000
Revolving credit facility............................... 9,000 19,001
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Total........................................... 46,882 52,169
Less current maturities............................. 6,839 6,714
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$40,043 $45,455
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4. Stock Option Plan
The Company maintains a stock option plan under which holders of certain
exercisable stock options may obtain interest-bearing loans from the Company to
facilitate their exercise of stock options. Such loans are evidenced by
promissory notes and are collateralized by the shares of stock. As of September
29, 2001, approximately $2.7 million in stock option loans are outstanding.
5. Unusual Charge
In the second quarter, the Company recorded an unusual charge net of taxes of
$1.8 million ($2.8 million pre-tax) or $.26 per diluted share to write-off the
entire receivable due from Homelife, the Company's largest customer. On July 16,
2001, Homelife announced closure of its stores and filed for protection under
Chapter 11 of the Federal Bankruptcy Code. Historically, sales to Homelife have
accounted for approximately 7% of total sales.
6. Earnings Per Common Share
Basic earnings per common share are based upon the weighted average shares
outstanding. Outstanding stock options are treated as common stock equivalents
for purposes of computing diluted earnings per share. Basic and diluted earnings
per share are calculated using the following share data (unaudited):
Three Months Nine Months
Ended Ended
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September September September September
29, 2001 30, 2000 29, 2001 30, 2000
-------- -------- -------- --------
Weighted average shares outstanding
for basic calculation...................... 6,615 7,130 6,611 7,178
Add: Effect of stock options.................. 269 304 303 371
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Weighted average shares outstanding,
adjusted for diluted calculation....... 6,884 7,434 6,914 7,549
===== ===== ===== =====
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 Statements of Income:
Three Months Nine Months
Ended Ended
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September September September September
29, 2001 30, 2000 29, 2001 30, 2000
-------- -------- -------- --------
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 77.0 75.5 76.8 75.5
----- ----- ----- -----
Gross profit........................ 23.0 24.5 23.2 24.5
Selling, general and administrative
expenses............................ 13.1 11.8 12.8 11.8
Unusual charge........................ 1.6
----- ----- ----- -----
Operating income.................... 9.9 12.7 8.8 12.7
Interest expense...................... 1.7 1.4 1.7 1.4
----- ----- ----- -----
Income before income taxes.......... 8.2 11.4 7.1 11.4
Income taxes.......................... 2.8 4.3 2.5 4.3
----- ----- ----- -----
Net income............................ 5.4% 7.1% 4.6% 7.1%
===== ===== ===== =====
Net sales decreased $11.4 million, or 16.0%, for the three month period ended
September 29, 2001 from the comparable 2000 period. For the nine month period,
net sales decreased $36.6 million, or 17.0%, from the comparable 2000 period.
The decrease was due primarily to lower unit volume in the Company's collections
offering (bedroom, dining room, tables and entertainment units). An unusual
charge of $2.8 million pre-tax was recorded in the second quarter of 2001 to
write-off the receivable due from the Company's former largest customer that
filed for protection under Chapter 11 of the Federal Bankruptcy Code and has
pursued a complete liquidation of its assets. The elimination of shipments to
this customer, which historically accounted for about 7% of total sales, reduced
net sales for both the three and nine month periods ended September 29, 2001.
The Company expects a slight improvement in sales comparisons for the fourth
quarter of 2001, resulting in a sales decline on a percentage basis in the mid
to upper single digits compared to the fourth quarter of 2000. In response to
order trends the Company reduced production during 2001 through selective
downtime at its facilities. As a result, total inventories approximate year end
levels and declined $3.6 million from the second quarter of 2001. The Company
will continue to monitor order trends to manage inventory levels until business
conditions improve.
Gross profit margin for the three and nine month periods of 2001 decreased to
23.0% and 23.2%, respectively, from 24.5% for each of the comparable 2000
periods. The decrease resulted primarily from lower sales and production in the
three and nine month periods of 2001. Start-up costs associated with the new
home office factory, which began production in March 2000, reduced gross profit
in the prior year periods. Improved performance from this facility partially
offset the impact of lower sales and production levels in the three and nine
month periods of 2001.
Selling, general and administrative expenses, excluding the second quarter
unusual charge, for the three and nine month periods of 2001 as a percentage of
net sales increased to 13.1% and 12.8%, respectively, from 11.8% for each of the
comparable 2000 periods. These percentages were higher due principally to lower
net sales. Selling, general and administrative expenditures declined $573,000
and $2.6 million, respectively, in the three and nine month periods of 2001
primarily as a result of lower selling expenses directly attributable to the
decrease in sales.
As a result of the above, operating income, excluding the second quarter unusual
charge, as a percentage of net sales was 9.9% and 10.4%, respectively, for the
three and nine month periods of 2001, compared to 12.7% for each of the
comparable 2000 periods.
Interest expense for the 2001 three and nine month periods approximated prior
year periods as higher average debt levels were offset by lower average interest
rates.
The Company's effective income tax rate was 35.6% for the 2001 nine month period
and 37.0% for total year 2000. The lower tax rate for 2001 is a result of
increased state tax credits.
Financial Condition, Liquidity and Capital Resources
Cash generated from operations increased to $10.0 million in the first nine
months of 2001 compared to $6.5 million in the 2000 period due primarily to
lower tax payments resulting from lower taxable income levels. Working capital
increased only $2.5 million in the 2001 period compared to an increase of $15.6
million in the comparable 2000 period.
Net cash used by investing activities was $3.9 million in the 2001 period
compared to $7.7 million in the 2000 period. Cash requirements were higher in
the 2000 period due to capital expenditures related to a new manufacturing
facility. Included in the 2000 capital expenditures on the Statements of Cash
Flows was $2.7 million of 1999 capital purchases included in accounts payable at
December 31, 1999 and $5.0 million of capital purchases in the 2000 period.
These purchases were primarily for plant and equipment and other assets in the
normal course of business. Capital expenditures in 2001 are anticipated to be
approximately $4.5 million.
Net cash used by financing activities was $6.0 million in the 2001 period
compared to $77,000 in the 2000 period. In the 2001 period, cash from operations
and proceeds from the issuance of $10.0 million in senior notes provided cash
for reduction of borrowings under the revolving credit facility, senior debt
payments, capital expenditures and purchase and retirement of the Company's
common stock. In the 2000 period, cash from operations and borrowings under the
revolving credit facility provided cash for the purchase and retirement of the
Company's common stock, capital expenditures and senior debt payments. During
the nine months ended September 29, 2001, the Company purchased 86,000 shares of
its stock on the open market at an average price of $22.94. At September 29,
2001, approximately $8.0 million remains authorized by the Company's Board of
Directors to repurchase shares of the Company's common stock.
In April 2001, the Company issued $10.0 million of 6.94% senior notes due in
2011. At September 29, 2001, long-term debt including current maturities was
$46.9 million. Debt service requirements are $1.4 million in 2001, $6.8 million
in 2002, $6.9 million in 2003, $7.0 million in 2004 and $4.3 million in 2005. As
of September 29, 2001, approximately $24.7 million of additional borrowings were
available under the Company's revolving credit facility. The Company believes
that its financial resources are adequate to support its capital needs and debt
service requirements.
Recently Issued Statements of Financial Accounting Standards
Recently the Financial Accounting Standards Board issued SFAS No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets", which are
required to be adopted by the Company at the beginning of 2002. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations subsequent to June 30, 2000. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. The Company believes the
effect of SFAS No. 142 will be to increase earnings per share by approximately
$.03 for fiscal 2002.
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," "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 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 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, competition in the furniture industry, 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 nine months of
2001.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Option Agreement, dated April 30, 2001, between the
Registrant and Jeffrey R. Scheffer. (1) (2)
(b) Reports on Form 8-K
None
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(1) Filed herewith.
(2) Management contract.
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: October 16, 2001 By: /s/ Douglas I. Payne
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Douglas I. Payne
Executive V.P. - Finance & Administration
and Secretary
(Principal Financial and Accounting Officer)