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
------- Securities Exchange Act of 1934
For the quarterly period ended September 28, 2002March 29, 2003 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
(Address of principal executive offices, Zip Code)
(276)627-2000
------------------------- ---------------
(Registrant's telephone
number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 14, 2002.April 7, 2003.
Class Number
Common Stock, par value $.02 per share 6,519,7176,540,401 Shares
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 28,March 29, December 31,
2003 2002
2001
------------ -------------------- --------
ASSETS
Current assets:
ASSETS
Current assets:
Cash .................................................... $ 8,59810,583 $ 1,9559,227
Accounts receivable, less allowances of $2,701$2,780 and $2,024 31,753 23,862$2,633 31,563 27,832
Inventories:
Finished goods ........................................ 35,724 31,28733,010 35,537
Work-in-process ....................................... 7,055 7,8337,798 6,922
Raw materials ......................................... 12,816 10,40211,821 11,699
-------- --------
Total inventories ................................. 55,595 49,52252,629 54,158
Prepaid expenses and other current assets ............... 1,035 2,3541,060 1,311
Deferred income taxes ................................... 3,153 3,1532,876 2,876
-------- --------
Total current assets .................................. 100,134 80,84698,711 95,404
Property, plant and equipment, net .......................... 60,522 66,70858,171 59,539
Goodwill .................................................... 9,072 9,072
Other assets ................................................ 5,540 6,3778,230 8,470
-------- --------
Total assets .......................................... $175,268 $163,003$174,184 $172,485
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt .................... $ 6,914 $ 6,8396,914
Accounts payable ........................................ 17,818 11,84115,267 13,386
Accrued salaries, wages and benefits .................... 11,943 9,06010,220 9,781
Other accrued expenses .................................. 4,248 1,8353,555 2,379
-------- --------
Total current liabilities ............................. 40,923 29,57535,956 32,460
Long-term debt, exclusive of current maturities ............. 24,129 30,21418,414 22,700
Deferred income taxes ....................................... 11,251 11,25113,084 13,084
Other long-term liabilities ................................. 4,419 4,6694,471 4,554
-------- --------
Total liabilities ..................................... 80,722 75,70971,925 72,798
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
6,519,7176,540,401 and 6,643,3886,568,717 shares issued and outstanding ............ 131 133131
Capital in excess of par value .............................. 13,594 17,53714,207 14,773
Retained earnings ........................................... 80,849 72,22887,937 84,799
Stock option loans .......................................... (28) (2,604)(16) (16)
-------- --------
Total stockholders' equity .............................. 94,546 87,294102,259 99,687
-------- --------
Total liabilities and stockholders' equity ............ $175,268 $163,003$174,184 $172,485
======== ========
========
The accompanying notes are an integral part of the
consolidated financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) (in thousands,
except per share data)
Three Months Nine Months
Ended
Ended
-------------------- ---------------------
September September September September
28,March 29, March 30,
2003 2002
29, 2001 28, 2002 29, 2001
--------- --------- --------- ---------------- -------
Net sales ......................................... $61,338 $60,007 $176,180 $177,972........................................ $61,298 $59,574
Cost of sales ..................................... 46,386 46,195 133,287 136,635.................................... 46,676 45,106
Restructuring and related charges (credit) (Note 2) (209) 3,548................ 2,905
------- -------
-------- --------
Gross profit .................................. 15,161 13,812 39,345 41,337................................... 14,622 11,563
Selling, general and administrative expenses ...... 7,990 7,856 23,799 22,791
Unusual charge (Note 3) ........................... 2,800..... 8,513 7,917
------- -------
-------- --------
Operating income .............................. 7,171 5,956 15,546 15,746............................... 6,109 3,646
Other expense (income),income, net ....................... (13) 6 (167) 24................................ 42 82
Interest expense .................................. 767 1,010 2,347 3,095................................. 711 834
------- ------- -------- --------
Income before income taxes .................... 6,417 4,940 13,366 12,627..................... 5,440 2,894
Income taxes ...................................... 2,278 1,704 4,745 4,490..................................... 1,974 1,027
------- -------
-------- --------
Net income ......................................................................... $ 4,1393,466 $ 3,236 $ 8,621 $ 8,1371,867
======= ======= ======== ========
Earnings per share:
Basic ................................................................................... $ .63.53 $ .49 $ 1.30 $ 1.23.28
======= =======
======== ========
Diluted ............................................................................... $ .62.52 $ .47 $ 1.26 $ 1.18.27
======= ======= ======== ========
Weighted average shares outstanding:
Basic ......................................... 6,554 6,615 6,631 6,611.......................................... 6,558 6,668
======= =======
======== ========
Diluted ....................................... 6,681 6,884 6,822 6,914........................................ 6,679 6,902
======= =======
======== ========Cash dividend declared per common share .......... $ .05
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
NineThree Months Ended
---------------------
September September
28,-----------------------
March 29, March 30,
2003 2002 29, 2001
--------- ---------
Cash flows from operating activities:
Cash received from customers ............................................. $167,824 $177,346............................... $ 57,523 $ 53,233
Cash paid to suppliers and employees ..................................... (150,676) (159,382)....................... (49,357) (48,512)
Interest paid, ............................................................ (2,367) (3,033)net ......................................... (300) (472)
Income taxes paid, net ................................................... (1,142) (4,927)..................................... (1,293) 277
-------- --------
Net cash provided by operating activities ............................ 13,639 10,004.............. 6,573 4,526
-------- --------
Cash flows from investing activities:
Capital expenditures ..................................................... (605) (3,883)....................................... (37) (67)
Other, net ............................................................... 696................................................. 14
-------- --------
Net cash provided (used)used by investing activities ..................... 91 (3,883).................. (37) (53)
-------- --------
Cash flows from financing activities:
Issuance of senior notes ................................................. 10,000
Repayment of revolving credit facility, net .............................................. (600) (10,001)
Repayment of senior notes ................................................ (5,410) (5,286).................................. (4,286) (4,286)
Purchase and retirement of common stock .................................. (3,066) (1,973).................... (566)
Dividends paid ............................................. (328)
Proceeds from exercised stock options .................................... 1,194 543
Proceeds from insurance policy loans ..................................... 795 719...................... 766
-------- --------
Net cash used by financing activities ................................ (7,087) (5,998).................. (5,180) (4,120)
-------- --------
Net increase in cash ..................................................... 6,643 123....................................... 1,356 353
Cash at beginning of period .............................................................................. 9,227 1,955 1,825
-------- --------
Cash at end of period .................................................................................. $ 8,59810,583 $ 1,9482,308
======== ========
Reconciliation of net income to net cash provided by operating activities:
Net income ................................................................................................................ $ 8,6213,466 $ 8,1371,867
Depreciation and amortization ........................................ 4,477 4,815
Unusual charge ....................................................... 2,800.......................... 1,450 1,553
Restructuring and related charges .................................... 1,755
Deferred income taxes ................................................ (209)...................... 1,967
Loss on sale of assets ............................................... 31 28................................. 14
Changes in assets and liabilities:
Accounts receivable .............................................. (7,891) (750)................................ (3,731) (6,137)
Inventories ...................................................... (6,073) (827)........................................ 1,529 1,179
Prepaid expenses and other current assets ........................ 1,863 (1,050).......... 234 1,462
Accounts payable ................................................. 5,977 (2,921)................................... 1,881 2,860
Accrued salaries, wages and benefits ............................. 2,883 (751)............... 439 (911)
Other accrued expenses ........................................... 2,413 913............................. 1,176 565
Other assets ......................................................... (167) (146)....................................... 212 187
Other long-term liabilities .......................................... (250) (35)........................ (83) (80)
-------- --------
Net cash provided by operating activities ................................... $ 13,6396,573 $ 10,0044,526
======== ========
========
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 Financial StatementsConsolidated 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 Accounting Principles Board Opinion No. 25 in accounting for
stock options and discloses the fair value of options granted as permitted by
Statement of Financial Accounting Standards No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the common stock at
date of grant.
The following table summarizes the pro forma effects assuming compensation cost
for such awards had been recorded based upon the estimated fair value (in
thousands, except per share data):
March 29, March 30,
2003 2002
------ ------
Net income as reported ........................... $3,466 $1,867
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ..................... 432 425
------ ------
Pro forma net income ........................... $3,034 $1,442
====== ======
Earnings per share:
Basic - as reported ............................ $ 0.53 $ 0.28
====== ======
Basic - pro forma .............................. $ 0.46 $ 0.22
====== ======
Diluted - as reported .......................... $ 0.52 $ 0.27
====== ======
Diluted - pro forma ............................ $ 0.46 $ 0.21
====== ======
3. Restructuring and Related Charges
TheDuring the last year, the Company approvedexecuted a plan in the fourth quarter of 2001 to closeconsolidate its
former
West End, North Carolina facility and consolidatemanufacturing operations to maximize production from this facility
into other Company facilitiesefficiencies as a result of
excess capacity created by expanded offshore sourcing. Manufacturing operations
at its former West End, North Carolina facility were phased out during the first
quarter of 2002 with certain warehousing and other activities completed in the
second quarter of 2002,
including the sale of real estate. During the third
quarter of 2002, the Company determined that $209,000 of restructuring related
inventory reserves were no longer required and credited the amount back to
income. As a result of the above, the Company recorded net restructuring and
related charges of $3.5 million for the nine month period ending September 28,
2002. The restructuring accrual at September 28, 2002,March 29, 2003
of $388,000, consists of a lease obligation and certain severance cost.
The following summarizes the 2002 restructuring and related charges (in
thousands):
Reserve Total Reserve
Balance Total Non-cash Cash Balance
12/31/01 Charges Charges Payments 9/28/02
-------- ------- ------- -------- -------
Increased depreciation due to shorter lives $1,755 $1,755
Other exit costs .......................... $ 733 1,793 $1,972 $ 554
------ ------ ------ ------ ------
Total ................................... $ 733 $3,548 $1,755 $1,972 $ 554
====== ====== ====== ====== ======
3. Unusual Charge
An unusual charge of $1.8 million ($2.8 million pretax) or $.26 per diluted
share was recorded in 2001 to write-off receivables due to the liquidation of a
former customer.
4. Property, Plant and Equipment
(in thousands)
SeptemberMarch 29, December 31,
28,2003 2002
2001
--------- ----------------- --------
Land and buildings .......................... $37,830 $42,763............................... $ 38,237 $ 38,237
Machinery and equipment ..................... 73,988 79,139.......................... 74,204 74,204
Office fixtures and equipment ............... 1,701 1,829.................... 1,710 1,710
Construction in progress .................... 200
------- -------......................... 37
-------- --------
Property, plant and equipment, at cost .. 113,719 123,731....... 114,188 114,151
Less accumulated depreciation ............... 53,197 57,023
------- -------
$60,522 $66,708
======= =======.................... 56,017 54,612
-------- --------
$ 58,171 $ 59,539
======== ========
5. Long-Term Debt
(in thousands)
SeptemberMarch 29, December 31,
28,2003 2002
2001
--------- --------
------- -------
Installment Notes:
7.28% senior notes due through March 15, 2004 .............. $ 8,572 $12,8574,285 $ 8,571
7.57% senior note due through June 30, 2005 .................. 3,900 5,0253,900
7.43% senior notes due through November 18, 2007 .. 8,571 8,571...... 7,143 7,143
6.94% senior notes due through May 3, 2011 .................... 10,000 10,000
Revolving credit facility
............................ 600
------- -------
Total ............................................. 31,043 37,053............................................... 25,328 29,614
Less current maturities ............................................................. 6,914 6,8396,914
------- -------
$24,129 $30,214Long-term debt, exclusive of current maturities ..... $18,414 $22,700
======= =======
In August 2002,6 Stockholders' Equity
During the revolving credit facility was amended to decrease available
borrowings from $35.0 million to $25.0 million.
6. Stock Option Plan
The Company maintains a stock option plan under which holdersfirst quarter of certain
exercisable stock options may obtain interest-bearing loans from2003, the Company to
facilitate their exercise of stock options. During the second quarter of 2002,
approximately 86,000purchased 28,300 shares of the Company'sits
common stock was surrendered by the
Chief Executive Officer to the Company in paymentat an aggregate consideration of a $2.6 million outstanding
loan plus accrued interest. As of September 28, 2002, approximately $28,000 in
stock option loans are outstanding.
7. Earnings Per Common Share$566,000.
Basic earnings per common share are based upon the weighted average shares
outstanding. Outstanding stock options are treated as potential common stock for
purposes of computing diluted earnings per share. Basic and diluted earnings per
share are calculated using the following share data (in thousands):
Three Months Nine Months
Ended Ended
-------------------- --------------------
September September September September
28,March 29, March 30,
2003 2002
29, 2001 28, 2002 29, 2001
-------- --------- -------- --------------- ------
Weighted average shares outstanding for basic
calculation .................. 6,554 6,615 6,631 6,611
Add:.................................. 6,558 6,668
Effect of stock options .............. 127 269 191 303
----- -----.......................... 121 234
----- -----
Weighted average shares outstanding
adjusted for diluted calculation ... 6,681 6,884 6,822 6,914................... 6,679 6,902
===== ===== ===== =====
8. Goodwill
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standard No. 142, ("SFAS 142"), "Goodwill and Other Intangible Assets". In
accordance with SFAS 142, the Company discontinued goodwill amortization and
tested goodwill of $9.1 million for impairment as of January 1, 2002 determining
that no transitional impairment loss was necessary. The Company will continue to
test goodwill for impairment at least annually. The following table presents net
income on a comparable basis, after adjustment for goodwill amortization (in
thousands, except per share amounts):
Three Months Nine Months
Ended Ended
------------------------- --------------------------
September September September September
28, 2002 29, 2001 28, 2002 29, 2001
------------ ----------- ------------ ------------
Net income:
As reported ...................... $4,139 $3,236 $8,621 $8,137
Goodwill amortization (net of tax) 84 252
------ ------ ------ ------
Adjusted net income ............ $4,139 $3,320 $8,621 $8,389
====== ====== ====== ======
Basic earnings per share:
As reported ...................... $ .63 $ .49 $ 1.30 $ 1.23
====== ====== ====== ======
As adjusted ...................... $ .63 $ .50 $ 1.30 $ 1.27
====== ====== ====== ======
Diluted earnings per share:
As reported ...................... $ .62 $ .47 $ 1.26 $ 1.18
====== ====== ====== ======
As adjusted ...................... $ .62 $ .48 $ 1.26 $ 1.21
====== ====== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
---------------------------------------------------------------
Results of Operations
The following table sets forth the percentage relationshipCompany continues to net salesimplement a blended strategy of certain items included in the Statements of Income:
Three Months Nine Months
Ended Ended
------------------ --------------------
September September September September
28, 2002 29, 2001 28, 2002 29, 2001
-------- --------- --------- ---------
Net sales ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................ 75.6 77.0 75.7 76.8
Restructuring and related charges (credit) (.3) 2.0
----- ----- ----- -----
Gross profit ........................... 24.7 23.0 22.3 23.2
Selling, general and administrative
expenses ............................... 13.0 13.1 13.5 12.8
Unusual charge ........................... 1.6
----- ----- ----- -----
Operating income .................... 11.7 9.9 8.8 8.8
Other income ............................. .1
Interest expense ......................... 1.3 1.7 1.3 1.7
----- ----- ----- -----
Income before income taxes ............. 10.4 8.2 7.6 7.1
Income taxes ............................. 3.7 2.8 2.7 2.5
----- ----- ----- -----
Net income ............................... 6.7% 5.4% 4.9% 4.6%
===== ===== ===== =====
Net sales increased $1.3 million, or 2.2%, for the three month period ended
September 28, 2002 from the comparable 2001 period. For the nine month period,
net sales decreased $1.8 million, or 1.0%, from the comparable 2001 period. The
increase for the three month period was due primarily to higher unit volume. The
nine month period decrease resulted from lower unit volume and lower average
selling prices. The Company expects fourth quarter 2002 sales to approximate
third quarter 2002 sales, resulting incombining its domestic
manufacturing capabilities with an increase in the high single digits on
a percentage basis over fourth quarter 2001.
Gross profit margin, excluding restructuring and related charges, for the three
and nine month periods of 2002 increased to 24.4% and 24.3%, respectively, from
23.0% and 23.2% for the comparable 2001 periods. The increase was due to cost
savings resulting from closing the Company's former West End, North Carolina
facility discussed below, lower raw material cost andexpanding offshore sourcing initiatives.
Selling, generalprogram and administrative expenses for the three and nine month
periods of 2002 as a percentage of net sales was 13.0% and 13.5%, respectively,
compared to 13.1% and 12.8% for the comparable 2001 periods. Selling, general
and administrative expenditures increased in the nine month period of 2002
primarily as a result of higher selling expenses related to new product
introductions.
As a result of the above, operating income before restructuring and unusual
charges, as a percentage of net sales was 11.4% and 10.8%, respectively, for the
three and nine month periods of 2002, compared to 9.9% and 10.4%, respectively,
for each of the comparable 2001 periods.
Interest expense for the three and nine month periods of 2002 decreased due
primarily to lower average debt levels.
The Company's effective income tax rate was 35.5% for the 2002 nine month period
and 34.0% for total year 2001. The increase in the effective tax rate was due
primarily to higher state income taxes.
In December 2001, the Company announced a plan to expand offshore sourcing,
realign manufacturing capacity and significantly lower operating costs.capacity. Integration of selected imported component parts
and finished items in its product line will lower costs, provide design
flexibility and offer a better value to its customers. This initiative created
excess capacity in the Company's manufacturing facilities. Accordingly, in
December 2001, the Company closeddecided to close its manufacturing operations at the
former West End, North Carolina factory and consolidatedconsolidate production from this
facility into other Company facilities. Closing the West End facility is expected to reduce costs by
$4 to $5 million annually and has eliminated approximately 13%, or 400, of the
Company's employees. ManufacturingIn 2002, manufacturing operations at the
former West End facility were completely phased out during the first quarter of 2002. In the second quarter of
2002, the Company completedand all closing related
activities including the sale of real estate.
As a result of the West End facility closing, the Company recorded total
restructuringestate were completed. Restructuring and
related charges of $6.6 million, compared to a previously
anticipated range of $7 to $9 million. Duringcost for the thirdfirst quarter of 2002 the
Company determined that $209,000 of restructuring related inventory reserves
were no longer requiredwas $2.9 million and credited the amount back to income. For the nine
month period of 2002, net restructuring and related charges of $3.5 million were
recorded. These charges consisted of
asset write-downs (through increased
depreciation), relocation of equipmentaccelerated depreciation and inventory, operatingother exit costs, including plant inefficiencies
and severance cost. The restructuring accrual at September 28, 2002March 29, 2003 of $554,000$388,000
consists of a lease obligation for real estate and severance cost.
As part of the Company's continuing efforts to evaluate its manufacturing
capacity, the Company announced in March 2003, a plan to realign production at
its Lexington, North Carolina facility. Currently this facility produces a
combination of adult bedroom and Young America(R) youth bedroom furniture. After
a transition period, the Lexington plant will focus exclusively on Young
America(R) products. Adult bedroom products currently manufactured at the
Lexington facility, will be absorbed by the Stanleytown, Virginia plant, which
will produce all adult bedroom and dining room products. The Martinsville,
Virginia location will continue to manufacture home entertainment and home
office furniture while the Robbinsville, North Carolina plant remains focused on
the production of Young America(R) products. The realignment will reduce
operations at the Lexington plant impacting approximately 150 of the 525
associates there and is expected to be completed in the second quarter of 2003.
The Company will continue to evaluate its manufacturing capacity needs
considering increased offshore sourcing, current and anticipated demand for its
product, overall market conditions and other factors deemed relevant by
management. 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 29, March 30,
2003 2002
------ ------
Net sales .............................. 100.0% 100.0%
Cost of sales .......................... 76.1 75.7
Restructuring and related charges ...... 4.9
----- -----
Gross profit ......................... 23.9 19.4
Selling, general and administrative
expenses ............................. 13.9 13.3
----- -----
Operating income ..................... 10.0 6.1
Other income, net ...................... .1 .1
Interest expense ....................... 1.2 1.4
----- -----
Income before income taxes ........... 8.9 4.8
Income taxes ........................... 3.2 1.7
----- -----
Net income ............................. 5.7% 3.1%
===== =====
Net sales increased $1.7 million, or 2.9%, for the three month period ended
March 29, 2003 from the comparable 2002 period. The increase for the three month
period was primarily due to higher average selling prices resulting from the mix
of products sold.
Gross profit margin for the three month period of 2003 increased to 23.9% from
19.4% for the comparable 2002 period. The lower gross profit margin in 2002 is
principally the result of restructuring and related charges of $2.9 million, or
4.9% of net sales. Excluding restructuring and related charges in 2002, gross
profit margin for the three month period of 2003 decreased primarily due to
lower production levels due to increased outsourcing and an increase in wages
and benefits, which were partially offset by savings from sourcing initiatives
and realignment of manufacturing capacity.
Selling, general and administrative expenses for the three month period of 2003
as a percentage of net sales was 13.9% compared to 13.3% for the comparable 2002
period. Selling, general and administrative expenditures increased in the three
month period of 2003 primarily due to the Company's sourcing program, increased
marketing and product development costs. This trend is expected to continue
resulting in higher selling, general and administrative expense in 2003 compared
to 2002.
As a result of the above, operating income as a percentage of net sales was
10.0% for the three month period of 2003, compared to 6.1% for the comparable
2002 period.
Interest expense for the three month period of 2003 decreased primarily due to
lower average debt levels.
The effective tax rate is expected to be 36.3% for 2003 compared to 35.5% for
2002. The increase in the effective tax rate is primarily due to higher state
income taxes resulting from the phase-out of certain state tax credits.
Financial Condition, Liquidity and Capital Resources
Cash generated from operations was $13.6$6.6 million in the first ninethree months of
20022003 compared to $10.0 million in the 2001 period. Working capital increased
$3.0$4.5 million in the 2002 nine month period compared to an increase of $2.5
million in the comparable 2001 period. Inventories increased $6.0 million from
year end levels due primarily to normal seasonal trends. Lower tax and interest
payments also contributed to theThe increase in cash generated2003 was
primarily due to higher collections from operations.
The Company anticipates making a $2.0 million to $3.0 million contribution to
its defined benefit plan in the fourth quarter of 2002.customers partially offset by higher
tax payments.
Net cash provided by investing activities was $91,000 in the 2002 period
compared to cash used by investing activities consisted of $3.9 millioncapital expenditures and was
$37,000 in the 20012003 period compared to $53,000 in the 2002 period. The Company received net proceeds of $696,000 from the sale of real
estate at its former West End, North Carolina facility. The decline in capital
requirements for 2002 is due to the relocation of a significant portion of the
machinery and equipment from the West End facility to other Company facilities.
As a result, capitalCapital
expenditures in 20022003 are anticipated to be approximately $1.5 million, down from $4.2 million in 2001.$2.0 million.
Net cash used by financing activities was $7.1$5.2 million in the 2003 period
compared to $4.1 million in the 2002 period. In the 2003 period, comparedcash from
operations provided cash for senior debt payments, retirement of the Company's
common stock, and cash dividends. During the first quarter of 2003, $566,000 was
used to $6.0 millionpurchase 28,300 shares of the Company's common stock in the 2001 period.open market
at an average price of $20.01. At March 29, 2003, approximately $4.4 million
remains authorized by the Company's Board of Directors to repurchase shares of
the Company's common stock. In the 2002 period, cash from operations and
proceeds from the exercise of stock options provided cash for senior debt
payments and repayment of the revolving credit facility and purchase
and retirement of the Company's common stock. During the third quarter, the
Company purchased 158,500 shares of its stock in the open market at an average
price of $19.34.facility.
At September 28, 2002, approximately $4.9 million remains
authorized by the Company's Board of Directors to repurchase shares of the
Company's common stock. In the second quarter of 2002, 85,914 shares of the
Company's common stock were surrendered by the Chief Executive Officer to the
Company in payment of a $2.6 million outstanding loan and accrued interest,
relating to stock option exercise in 2000. In the 2001 period, cash from
operations and the issuance of $10 million in senior notes provided cash for
reduction of borrowings under the revolving credit facility, senior debt
payments, the purchase and retirement of the Company's common stock and capital
expenditures.
At September 28, 2002,March 29, 2003, long-term debt including current maturities was $31.0$25.3
million. Debt service requirements are $1.4$2.6 million remaining in 2002, $6.9
million in 2003, $7.0
million in 2004, $4.3 million in 2005, $2.9 million in 2006 and $2.9 million in
2006. In August 2002, the revolving credit facility was amended to decrease
available borrowings from $35.0 million to $25.0 million.2007. As of September 28,
2002,March 29, 2003, approximately $24.2 million of additional borrowings
were available under the Company's revolving credit facility.facility and cash on hand
was $10.6 million. The Company believes that its financial resources are
adequate to support its capital needs and debt service requirements.
Critical Accounting Policies
The SEC recently issued release FR-60 related to "Disclosure of Critical
Accounting Policies".
Management has chosen accounting policies that are necessary to accurately and
fairly report the Company's operational and financial position. Below are the
critical accounting policies that involve the most significant judgments and
estimates used in the preparation of the Company's financial statements.
Allowance for doubtful accounts - The Company maintains an allowance for
doubtful receivables for estimated losses resulting from the inability of our
trade customers to make required payments. We provide an allowance for specific
customer accounts where collection is doubtful and also provide a general
allowance for other accounts based on historical collection and write-off
experience. Judgment is critical because some customers have experienced
financial difficulties. If their financial condition were to worsen, additional
allowances might be required.
Inventory valuation - Inventory is valued at the lower of cost or market. Cost
for all inventories is determined using the first-in, first-out (FIFO) method.
We evaluate our inventory to determine excess or slow moving items based on
current order activity and projections of future demand. For those items
identified, we estimate their market value or net sales value based on current
trends. An allowance is created for those items having a net sales value less
than cost. This process recognizes projected inventory losses when they become
evident rather than at the time they are sold.
Long-lived assets - Property and intangible assets are reviewed for possible
impairment when events indicate that the carrying amount of an asset may not be
recoverable. Assumptions and estimates used in the evaluation of impairment may
affect the carrying value of long-lived assets, which could result in impairment
charges in future periods. Our depreciation and amortization policies reflect
judgments on the estimated useful lives of assets.
Restructuring and related charges - The Company has provided restructuring and
related charges for closure of the West End, North Carolina facility. These
charges require judgment about the net realizable value of assets and other exit
costs to be incurred. If actual amounts differ from the estimates adjustments
will be required in future statements of income. For example, in the second
quarter of 2002 the charge for increased depreciation was reduced by
approximately $195,000 because actual proceeds from the disposal of West End's
assets exceeded the anticipated amount and in the third quarter of 2002 the
Company determined that $209,000 of restructuring related inventory reserves
were no longer required and credited the amount back to income.
The Company does not have transactions or relationships with "special purpose"
entities, and the Company does not have any off balance sheet financing other
than normal operating leases primarily for showroom and computer equipment.
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, successful implementationthe Company's success in
implementing its blended strategy of expanded offshore sourcing and domestic
manufacturing, disruptions in offshore sourcing including those arising from
supply or distribution disruptions or changes in political or economic
conditions affecting the countries from which the Company obtains offshore
sourcing, the cyclical nature of the furniture industry, fluctuations in the
price for lumber which is the most significant raw material used by the Company,
credit exposure to customers in the current economic climate, capital costs and
general economic conditions. Any forward-lookingforward 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 Facilityrevolving 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 significant impact on earningsNo borrowings were outstanding during the first nine monthsquarter of 2002.2003
under this revolving credit facility.
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 within 90 days prior to the
date hereof, 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
Exhibit 10.1 Ninth amendment,Second Amendment, dated August 16, 2002,March 1, 2003, to the
second amended and restated revolving credit facilityEmployment Agreement, dated February 15, 1994,January 1, 1991,
between the Registrant and PNC Bank, National Association. Albert L. Prillaman.(1)
Exhibit 10.2 First Amendment, dated March 1, 2003, to the
Employment Agreement, dated April 9, 2001,
between the Registrant and Jeffrey R. Scheffer.(1)
Exhibit 99.1 Certification of Albert L. Prillaman,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)
Exhibit 99.2 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
NoneA report on Form 8-K was filed on March 13, 2003, to announce plans to
realign production at the Company's Lexington, North Carolina facility.
- ---------------------------
(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: October 15, 2002April 16, 2003 By: /s/ Douglas I. Payne
------------------------
Douglas I. Payne
Executive V.P. - Finance & Administration
and Secretary (Principal Financial and
Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert L. Prillaman,Jeffrey R. Scheffer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stanley Furniture
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officersofficer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officersofficer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date October 15, 2002April 16, 2003 /s/ Albert L. PrillamanJeffrey R. Scheffer
-----------------------
Albert L. PrillamanJeffrey R.. Scheffer
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas I. Payne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stanley Furniture
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a)a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c)c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officersofficer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officersofficer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 15, 2002April 16, 2003 /s/ Douglas I. Payne
--------------------
Douglas I. Payne
Chief Financial Officer