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 March 27, 2004 [ ] 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 (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) ---- 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 Exchange Act Rule 12b-2): Yes X No As of April 12, 2004, 6,233,341 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) March 27, December 31, 2004 2003 -------- -------- ASSETS Current assets: Cash ................................................................. $ 5,351 $ 2,509 Accounts receivable, less allowances of $2,599 and $2,546 ............ 36,141 30,120 Inventories: Finished goods ..................................................... 38,176 37,815 Work-in-process .................................................... 8,257 7,638 Raw materials ...................................................... 9,908 9,185 -------- --------- Total inventories ............................................... 56,341 54,638 Prepaid expenses and other current assets ................................. 1,105 2,855 Deferred income taxes ..................................................... 2,855 2,855 -------- --------- Total current assets .................................................... 101,793 92,977 Property, plant and equipment, net ........................................ 53,804 55,154 Goodwill .................................................................. 9,072 9,072 Other assets .............................................................. 6,836 7,000 -------- --------- Total assets ........................................................... $171,505 $164,203 ======== ======== LIABILITIES Current liabilities: Current maturities of long-term debt .................................. $ 2,728 $ 7,014 Accounts payable ...................................................... 15,069 10,595 Accrued salaries, wages and benefits .................................. 11,009 9,511 Other accrued expenses ................................................ 2,461 1,402 -------- -------- Total current liabilities ........................................... 31,267 28,522 Long-term debt, exclusive of current maturities ........................... 15,686 15,686 Deferred income taxes ..................................................... 11,386 12,560 Other long-term liabilities ............................................... 6,029 4,877 -------- -------- Total liabilities .................................................. 64,368 61,645 -------- -------- STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized 6,233,341 and 6,201,047 shares issued and outstanding ................... 125 124 Capital in excess of par value ............................................ 4,412 3,819 Retained earnings ......................................................... 102,665 98,680 Accumulated other comprehensive loss ...................................... (65) (65) -------- -------- Total Stockholders' equity ........................................... 107,137 102,558 -------- -------- Total liabilities and stockholders' equity ......................... $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 Ended -------------------- March 27, March 29, 2004 2003 ------- -------- Net Sales .................................. $70,222 $61,298 Cost of Sales .............................. 53,001 46,676 ------- ------- Gross profit ............................. 17,221 14,622 Selling, general and administrative expenses 9,417 8,513 ------- ------- Operating income ......................... 7,804 6,109 Other income, net .......................... 53 42 Interest expense ........................... 626 711 ------- ------- Income before income taxes .............. 7,231 5,440 Income taxes ............................... 2,624 1,974 ------- ------- Net Income ............................... $ 4,607 $ 3,466 ======= ======= Earnings per share: Basic .................................... $ .74 $ .53 ======= ======= Diluted .................................. $ .71 $ .52 ======= ======= Weighted average shares outstanding: Basic .................................... 6,216 6,558 ======= ======= Diluted .................................. 6,449 6,679 ======= ======= Cash dividend declared per common share .... $ .10 $ .05 ======= ======= 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Preparation of Interim Unaudited Consolidated Financial 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, accordingly, no compensation cost has been recognized in the financial statements. Had the Company 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 the Company's net earnings on a pro forma basis is indicated below (in thousands, except per share data): March 27, March 29, 2004 2003 ------ ------ Net income as reported ................................ $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 ------ ------ Pro forma net income ................................ $4,214 $3,034 ====== ====== Earnings per share: Basic - as reported ................................. $ 0.74 $ 0.53 ====== ====== Basic - pro forma ................................... $ 0.68 $ 0.46 ====== ====== Diluted - as reported ............................... $ 0.71 $ 0.52 ====== ====== Diluted - pro forma ................................. $ 0.68 $ 0.46 ====== ====== 3. Property, Plant and Equipment (in thousands) March 27, December 31, 2004 2003 Land and buildings .......................... $ 38,606 $ 38,606 Machinery and equipment ..................... 74,548 74,550 Office furniture and equipment .............. 1,839 1,846 -------- -------- Property, plant and equipment, at cost ... 114,993 115,002 Less accumulated depreciation ............... 61,189 59,848 -------- -------- Property, plant and equipment, net ........ $ 53,804 $ 55,154 ======== ======== 4. Debt (in thousands) March 27, December 31, 2004 2003 7.28% senior notes due through March 15, 2004 ......... $ $ 4,286 7.57% senior note due through June 30, 2005 ........... 2,700 2,700 7.43% senior notes due through November 18, 2007 ...... 5,714 5,714 6.94% senior notes due through May 3, 2011 ............ 10,000 10,000 ------ ------ Total ............................................... 18,414 22,700 Less current maturities ............................... 2,728 7,014 ------ ------ Long-term debt, exclusive of current maturities ..... $15,686 $15,686 ======= ======= 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 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): March 27, March 29, 2004 2003 ----- ----- Weighted average shares outstanding for basic calculation........................ 6,216 6,558 Add: Effect of dilutive stock options............ 233 121 ----- ----- Weighted average shares outstanding, Adjusted for diluted calculation.......... 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 ====== ====== ======== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations We continue to implement a blended strategy of combining domestic manufacturing capabilities with an expanding offshore sourcing program and realign manufacturing capacity. Integration of selected imported component parts and finished items in our product line will lower costs, provide design flexibility and offer a better value to our customers. Sourced product represented approximately 26% of sales during the first quarter of 2004 compared to 20% in 2003. We anticipate this percentage to level off at approximately 30% in 2004. Our manufacturing plants operated at approximately 75% capacity during the first quarter of 2004. We continue to evaluate our manufacturing capacity needs considering increased offshore sourcing, current and anticipated demand for our products, the outcome of the dumping investigation regarding wooden bedroom furniture produced in China, overall market conditions and other factors 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. Three Months Ended ------------------ March 27, March 29, 2004 2003 ----- ----- Net Sales ....................................... 100.0% 100.0% Cost of Sales ................................... 75.5 76.1 ----- ----- Gross profit .................................. 24.5 23.9 Selling, general and administrative expenses .... 13.4 13.9 ----- ----- Operating income .............................. 11.1 10.0 Other income, net ............................... .1 .1 Interest expense ................................ .9 1.2 ----- ----- Income before income taxes .................... 10.3 8.9 Income taxes .................................... 3.7 3.2 ----- ----- Net income .................................... 6.6% 5.7% ===== ===== Net sales increased $8.9 million, or 14.6%, for the three month period ended March 27, 2004, from the comparable 2003 period. The increase for the three month period was primarily due to higher unit volume. 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 month period of 2004 was 24.5% compared to 23.9% for the 2003 period. Higher gross profit margin in 2004 was primarily due to higher production levels at our domestic facilities and savings from sourcing initiatives. We are experiencing inflationary pressures in wages, employee benefits and 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 month period as a percentage of net sales decreased to 13.4% from 13.9% for the comparable 2003 period. This percentage declined primarily due to higher net sales. Selling, general and administrative expenditures increased $904,000 primarily as a result of higher selling expenses directly attributable to the increase in sales, including additional warehouse expense. As a result of the above, operating income as a percentage of net sales was 11.1% for the three month period, compared to 10.0%, for the comparable 2003 period. Interest expense for the three month period of 2004 decreased primarily due to lower average debt levels. The effective tax rate for 2004 is expected to be 36.3%, compared 36.0% for the total year 2003. The higher tax rate in 2004 is due to higher state income 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 $7.5 million in the first three months of 2004 compared to $6.6 million in the 2003 period. The increase in cash received from customers and cash paid to suppliers and employees was primarily due to higher sales. Lower tax payments resulted from an overpayment in 2003. Higher sales also resulted in an increase in 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 $132,000 in the 2004 period compared to $37,000 in 2003 and consisted of normal capital expenditures and software purchases. Net cash used by financing activities was $4.6 million in the 2004 period compared to $5.2 million in the 2003 period. In the 2004 period, cash from operations provided funds for senior debt payments and cash dividends. Approximately $10.2 million remains authorized by our Board of Directors to repurchase shares of our common stock. In the 2003 period, cash from operations provided cash for senior debt payments, purchase of our common stock and cash dividends. At March 27, 2004, long-term debt including current maturities was $18.4 million. Debt service requirements are $2.7 million remaining in 2004, $4.3 million in 2005, $2.9 million in 2006 and $2.9 million in 2007. As of March 27, 2004, approximately $25 million of additional borrowings were available under the revolving credit facility and cash on hand was $5.4 million. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements. 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 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, 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 three months of 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 controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification by Jeffrey R. Scheffer, Chief Executive Officer of the Company, 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, Chief Financial Officer of the Company, 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, 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 2002. (1) 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 2002. (1) (b) Reports on Form 8-K 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 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: April 14, 2004 By: /s/ Douglas I. Payne -------------------- Douglas I. Payne Executive V.P. - Finance & Administration and Secretary (Principal Financial and Accounting Officer)