UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2009April 3, 2010
or
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    .
Commission file number: 0-14938
STANLEY FURNITURE COMPANY, INC.
(Exact name of registrant as specified in its charter)
   
Delaware 54-1272589
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
(Address of principal executive offices, Zip Code)
(276) 627- 20002010
(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: Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Act, (check one):
       
Large accelerated fileroAccelerated filerþ AcceleratedNon-accelerated filerþo Non-accelerated fileroSmaller reporting companyo
   (Do not check if a smaller
reporting company)		 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As ofOctober 12, 2009, 10,332,179 May 7, 2010, 10,344,679 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share, were outstanding.
 
 

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
ITEM 6. Exhibits
SIGNATURE
EXHIBIT INDEX
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION
ITEM 1.
Consolidated Financial StatementsITEM 1.FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
         
  September 26,  December 31, 
  2009  2008 
ASSETS
        
Current assets:        
Cash $42,430  $44,013 
Accounts receivable, less allowances of $1,797 and $1,644  18,052   21,873 
Inventories:        
Finished goods  23,909   36,803 
Work-in-process  5,589   3,493 
Raw materials  5,876   7,048 
       
Total inventories  35,374   47,344 
         
Prepaid expenses and other current assets  9,023   3,758 
Deferred income taxes  3,726   3,906 
       
Total current assets  108,605   120,894 
         
Property, plant and equipment, net  33,255   35,445 
Goodwill  9,072   9,072 
Other assets  1,013   460 
       
Total assets $151,945  $165,871 
       
         
LIABILITIES
        
Current liabilities:        
Current maturities of long-term debt $1,429  $1,429 
Accounts payable  10,157   11,236 
Accrued salaries, wages and benefits  7,102   6,280 
Other accrued expenses  2,837   4,890 
       
Total current liabilities  21,525   23,835 
         
Long-term debt, exclusive of current maturities  26,428   27,857 
Deferred income taxes  2,406   2,778 
Other long-term liabilities  8,192   8,293 
       
Total liabilities  58,551   62,763 
       
         
STOCKHOLDERS’ EQUITY
        
Common stock, $.02 par value, 25,000,000 shares authorized 10,332,179 shares issued and outstanding  207   207 
Capital in excess of par value  1,750   1,058 
Retained earnings  92,131   102,603 
Accumulated other comprehensive loss  (694)  (760)
       
Total stockholders’ equity  93,394   103,108 
       
Total liabilities and stockholders’ equity $151,945  $165,871 
       
The accompanying notes are an integral part of the consolidated financial statements.

1

STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
                 
  Three Months Ended  Nine Months Ended 
  September 26,  September 27,  September 26,  September 27, 
  2009  2008  2009  2008 
                 
Net sales $38,455  $54,483  $120,545  $176,165 
                 
Cost of sales  39,056   49,493   112,829   150,394 
             
                 
Gross profit (loss)  (601)  4,990   7,716   25,771 
                 
Selling, general and administrative expenses  6,875   10,606   22,345   28,358 
             
Operating loss  (7,476)  (5,616)  (14,629)  (2,587)
                 
Other income (expense), net  45   (22)  133   215 
Interest income  3   158   44   516 
Interest expense  953   957   2,809   2,807 
             
                 
Loss before income taxes  (8,381)  (6,437)  (17,261)  (4,663)
                 
Income tax benefit  (3,308)  (2,948)  (6,789)  (2,154)
             
                 
Net loss $(5,073) $(3,489) $(10,472) $(2,509)
             
                 
Loss per share:                
                 
Basic $(0.49) $(0.34) $(1.01) $(0.24)
             
Diluted $(0.49) $(0.34) $(1.01) $(0.24)
             
                 
Weighted average shares outstanding:                
                 
Basic  10,332   10,332   10,332   10,332 
             
Diluted  10,332   10,332   10,332   10,332 
             
                 
Cash dividend declared and paid per common share $   $.10  $   $.30 
             
         
  April 3,  December 31, 
  2010  2009 
ASSETS
        
Current assets:        
Cash $33,646  $41,827 
Accounts receivable, less allowances of $1,750 and $1,747  16,123   15,297 
Inventories:        
Finished goods  23,858   22,376 
Work-in-process  5,839   8,184 
Raw materials  5,793   6,665 
       
Total inventories  35,490   37,225 
         
Income tax receivable  7,743   6,882 
Prepaid expenses and other current assets  4,688   4,898 
Deferred income taxes  1,981   3,433 
       
Total current assets  99,671   109,562 
         
Property, plant and equipment, net  30,338   31,375 
Goodwill      9,072 
Other assets  132   453 
       
Total assets $130,141  $150,462 
       
         
LIABILITIES
        
Current liabilities:        
Current maturities of long-term debt $12,857  $1,429 
Accounts payable  11,239   11,633 
Accrued salaries, wages and benefits  5,493   6,597 
Other accrued expenses  2,794   2,626 
       
Total current liabilities  32,383   22,285 
         
Long-term debt, exclusive of current maturities  15,000   26,428 
Deferred income taxes  1,981   2,128 
Other long-term liabilities  6,716   6,774 
       
Total liabilities  56,080   57,615 
       
         
STOCKHOLDERS’ EQUITY
        
Common stock, $.02 par value, 25,000,000 shares authorized and 10,344,679 and 10,332,179 shares issued and outstanding  207   207 
Capital in excess of par value  2,197   1,897 
Retained earnings  71,779   90,852 
Accumulated other comprehensive loss  (122)  (109)
       
Total stockholders’ equity  74,061   92,847 
       
Total liabilities and stockholders’ equity $130,141  $150,462 
       
The accompanying notes are an integral part of the consolidated financial statements.

 

2

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW
INCOME
(in thousands)thousands, except per share data)
         
  Nine Months Ended 
  September 26,  September 27, 
  2009  2008 
Cash flows from operating activities:
        
Cash received from customers $124,071  $176,259 
Cash paid to suppliers and employees  (120,262)  (160,516)
Interest paid  (2,725)  (2,143)
Income taxes paid  (2,531)  (4,046)
       
Net cash provided (used) by operating activities  (1,447)  9,554 
       
         
Cash flows from investing activities:
        
Capital expenditures  (1,702)  (1,485)
Purchase of other assets  (55)    
Proceeds from sale of assets  1,303     
       
Net cash provided (used) by investing activities  (454)  (1,485)
       
         
Cash flows from financing activities:
        
Repayment of senior notes  (1,429)  (1,429)
Proceeds from insurance policy loans  1,651   1,550 
Dividends paid      (3,099)
Other, net  96     
       
Net cash provided (used) by financing activities  318   (2,978)
       
         
Net increase (decrease) in cash  (1,583)  5,091 
Cash at beginning of period  44,013   31,648 
       
Cash at end of period
 $42,430  $36,739 
       
 
Reconciliation of net loss to net cash provided (used) by operating activities:
        
Net loss $(10,472) $(2,509)
         
Depreciation and amortization  4,291   7,517 
Deferred income taxes  (192)  (2,021)
Stock-based compensation  692   329 
Other, net      27 
Changes in assets and liabilities:        
Accounts receivable  3,821   266 
Inventories  11,970   10,540 
Prepaid expenses and other current assets  (8,809)  (3,164)
Accounts payable  (1,079)  (4,003)
Accrued salaries, wages and benefits  997   2,351 
Other accrued expenses  (2,161)  698 
Other assets  (404)  (334)
Other long-term liabilities  (101)  (143)
       
Net cash provided (used) by operating activities $(1,447) $9,554 
       
         
  Three Months Ended 
  April 3,  March 28, 
  2010  2009 
         
Net sales $36,524  $39,764 
         
Cost of sales  38,895   35,022 
       
         
Gross profit (loss)  (2,371)  4,742 
         
Selling, general and administrative expenses  6,138   7,817 
Goodwill impairment charge  9,072     
       
         
Operating loss  (17,581)  (3,075)
         
Other income, net  15   45 
Interest income  2   36 
Interest expense  1,058   950 
       
         
Loss before income taxes  (18,622)  (3,944)
         
Income tax expense (benefit)  451   (1,568)
       
         
Net loss $(19,073) $(2,376)
       
         
Loss per share:        
  
Basic $(1.85) $(.23)
       
Diluted $(1.85) $(.23)
       
         
Weighted average shares outstanding:        
  
Basic  10,335   10,332 
       
Diluted  10,335   10,332 
       
The accompanying notes are an integral part of the consolidated financial statements.

 

3

STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
         
  Three Months Ended 
  April 3,  March 28, 
  2010  2009 
Cash flows from operating activities:
        
Cash received from customers $35,594  $40,254 
Cash paid to suppliers and employees  (43,748)  (41,596)
Interest received (paid), net  (1)  20 
Income taxes received (paid), net  3   (2,414)
       
Net cash used by operating activities  (8,152)  (3,736)
       
         
Cash flows from investing activities:
        
Capital expenditures  (2)  (471)
Purchase of other assets  (146)    
Proceeds from sale of assets      1,303 
       
Net cash (used) provided by investing activities  (148)  832 
       
         
Cash flows from financing activities:
        
Proceeds from exercise of stock options  119     
       
Net cash provided by financing activities  119     
       
         
Net decrease in cash  (8,181)  (2,904)
Cash at beginning of period  41,827   44,013 
       
Cash at end of period
 $33,646  $41,109 
       
         
Reconciliation of net loss to net cash used by operating activities:
        
Net loss $(19,073) $(2,376)
Goodwill impairment charge  9,072     
Depreciation and amortization  1,042   1,102 
Deferred income taxes  1,307   (115)
Stock-based compensation  181   153 
         
Changes in assets and liabilities:        
Accounts receivable  (826)  590 
Inventories  1,735   1,387 
Income tax receivable  (861)    
Prepaid expenses and other current assets  192   (2,131)
Accounts payable  (394)  (1,406)
Accrued salaries, wages and benefits  (1,124)  232 
Other accrued expenses  175   (1,582)
Other assets  482   450 
Other long-term liabilities  (60)  (40)
       
Net cash used by operating activities $(8,152) $(3,736)
       
The accompanying notes are an integral part of the consolidated financial statements.

4

STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)
1.Preparation of Interim Unaudited Consolidated Financial Statements
The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and our financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. We suggest that these consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes included in our 2008latest Annual Report on Form 10-K. Subsequent events were evaluated through October 15, 2009, the date these financial statements were issued.
2.Property, Plant and Equipment
                
 September 26, December 31,  April 3, December 31, 
 2009 2008  2010 2009 
Land and buildings $38,851 $41,615  $33,900 $33,900 
Machinery and equipment 63,468 76,451  63,403 63,403 
Office furniture and equipment 1,284 1,384  1,284 1,284 
Construction in process 1,656 120  672 670 
          
Property, plant and equipment, at cost 105,259 119,570  99,259 99,257 
Less accumulated depreciation 72,004 84,125  68,921 67,882 
          
Property, plant and equipment, net $33,255 $35,445  $30,338 $31,375 
          
3.Debt
Our long-term
         
  April 3,  December 31, 
  2010  2009 
8.23% senior notes due through May 3, 2015 $25,000  $25,000 
8.44% senior notes due through May 3, 2011  2,857   2,857 
       
Total  27,857   27,857 
Less current maturities  12,857   1,429 
       
Long-term debt, exclusive of current maturities $15,000  $26,428 
       
On May 3, 2010 we made a scheduled principal payment of $1.4 million. We renegotiated the terms of our long term debt shown below, is recorded at historical cost, which approximates its fair value, based primarilyto include a no penalty pre-payment of $11.5 million on estimated current rates available to usMay 11, 2010. This leaves an outstanding balance of $15 million of debt as of May 12, 2010. Remaining debt service requirements are $3.8 million in 2011; $3.6 million in 2012, 2013 and 2014; and $458,000 in 2015. While the interest rate on the debt will remain the same for debtthe term of the samedebt, the lender is now secured by most of the Company’s assets.
The debt agreement was amended to eliminate the earnings based financial covenants for the first and second quarters of 2010 and to relax the financial covenants through the first quarter of 2011. The amended agreement requires that our loss before interest, tax expense, depreciation and amortization not exceed $5 million for the third quarter of 2010; not exceed $10 million for the cumulative two quarter period ending with the fourth quarter of 2010; and not exceed $10 million for the cumulative three quarter period ending with the first quarter of 2011. We are also required to maintain unrestricted cash on hand of $5 million at all times through the first quarter of 2011. In addition, we must maintain asset coverage of at least $15 million based on the sum of 70% of accounts receivable and 35% of finished goods inventory.
We intend to negotiate revised financial covenants for the period starting with the second quarter of 2011 through the remaining duration and adjusted for nonperformance risk and credit risk.
         
  September 26,  December 31, 
  2009  2008 
6.73% senior notes due through May 3, 2017 $25,000  $25,000 
6.94% senior notes due through May 3, 2011  2,857   4,286 
       
Total  27,857   29,286 
Less current maturities  1,429   1,429 
       
Long-term debt, exclusive of current maturities $26,428  $27,857 
       
term of the debt.

 

45

4.Income taxes
During the first quarter of 2010, we recorded a non-cash charge to establish a valuation allowance of $1.3 million against our gross deferred tax assets of $3.3 million. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative loss in the most recent three-year period, inclusive of the loss for the quarter ended April 3, 2010, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC 740, Income Taxes. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. Although realization is not assured, we have concluded that the remaining gross deferred tax asset in the amount of $2.0 million will be realized based on the reversal of deferred tax liabilities. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities. Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.
5.Goodwill
We conduct an annual impairment analysis of goodwill at December 31 of each year, unless events occur or circumstances change that would more likely than not reduce the fair value of the goodwill below its carrying value. The impairment test requires us to compare the fair value of our business reporting units to their carrying value, including goodwill. The fair value of our single reporting unit is determined based on a discounted cash flow analysis which employs present value techniques and considers market factors. Based on our first quarter operating loss and recently announced restructuring actions, we determined that impairment indicators existed in the first quarter of 2010. Upon completing our impairment analysis, a goodwill impairment charge of $9.1 million, the entire amount of goodwill associated with the business, was recognized.
6.Employee BenefitBenefits Plans
Components of other postretirement benefit cost:
                        
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 26, September 27, September 26, September 27,  April 3, March 28, 
 2009 2008 2009 2008  2010 2009 
Service cost $19 $22 $58 $66  $19 
Interest cost 71 71 213 214  $47 71 
Amortization of transition obligation 33 32 98 97  33 
Amortization of prior service cost  (2)  (2)  (6)  (6)  (38)  (2)
Amortization of accumulated loss 5 8 14 24  18 5 
              
Net periodic postretirement benefit cost $126 $131 $377 $395  $27 $126 
              
5.7.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:
                        
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 26, September 27, September 26, September 27,  April 3, March 28, 
 2009 2008 2009 2008  2010 2009 
Weighted average shares outstanding for basic calculation 10,332 10,332 10,332 10,332  10,335 10,332 
Add: Effect of dilutive stock options (1)  
              
Weighted average shares outstanding Adjusted for diluted calculation 10,332 10,332 10,332 10,332 
Weighted average shares outstanding, adjusted for diluted calculation 10,335 10,332 
              
(1)The dilutive effect of stock options is not recognized in periods in which a net loss has occurred.
Weighted-averageIn the 2010 and 2009 first quarter periods, the dilutive effect of stock options is not recognized since we have a net operating loss. Approximately 1.6 million shares in 2010 and 1.2 million shares in 2009 are issuable upon the exercise of stock options, which were not included in the diluted loss per share calculation because they were anti-dilutive, were 1.9 million and 1.1 million for the three months ending September 26, 2009 and September 27, 2008, respectively; and 1.6 million and 1.1 million for the nine months ended September 26, 2009 and September 27, 2008, respectively.anti-dilutive.

6

A reconciliation of the activity in Stockholders’ Equity accounts for the nine monthsquarter ended September 26, 2009April 3, 2010 is as follows:
                                
 Accumulated  Accumulated 
 Capital in Other  Capital in Other 
 Common Excess of Retained Comprehensive  Common Excess of Retained Comprehensive 
 Stock Par Value Earnings Loss  Stock Par Value Earnings Loss 
Balance, December 31, 2008 $207 $1,058 $102,603 $(760)
Balance, December 31, 2009 $207 $1,897 $90,852 $(109)
Net loss
  (10,472)   (19,073) 
Exercise of stock options 119 
Stock-based compensation
 692  181 
Adjustment to net periodic benefit cost
 66   (13)
                  
Balance, September 26, 2009
 $207 $1,750 $92,131 $(694)
Balance, April 3, 2010 $207 $2,197 $71,779 $(122)
                  

5

The components of other comprehensive lossincome are as follows:
                        
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 26, September 27, September 26, September 27,  April 3, March 28, 
 2009 2008 2009 2008  2010 2009 
Net loss $(5,073) $(3,489) $(10,472) $(2,509) $(19,073) $(2,376)
Adjustment to net periodic benefit cost 22  (5) 66 71   (13) 22 
              
Comprehensive loss $(5,051) $(3,494) $(10,406) $(2,438) $(19,086) $(2,354)
              
6.8.Restructuring and Related Charges
In 2008,2009, we took steps to improve our cost structure by consolidating our North Carolina manufacturingconsolidated certain warehousing operations from two facilities to one and offeredceased operating a voluntaryfree standing warehouse facility, eliminated certain positions through early retirement incentive for qualified salaried associates. Restructuringincentives and related charges in the nine monthslayoffs, and discontinued a significant number of 2009 was $172,000 and consistedslow moving items that led to a write-down of ongoing cost at our Lexington, North Carolina facility until it was sold in the first quarter of 2009.
During the third quarter of 2009, we began consolidating our Lexington, North Carolina warehouse operation into other owned facilities and recorded accelerated depreciation of $1.0 million and other related charges of $20,000.inventories.
Restructuring accrual activity for the ninethree months ended September 26,ending April 3, 2010 was as follows:
             
  Severance and other       
  termination costs  Other Cost  Total 
Accrual at January 1, 2010 $1,070      $1,070 
Charges to expense     $24   24 
Cash payments  (532)  (24)  (556)
          
Accrual at April 3, 2010 $538  $   $538 
          
Restructuring accrual activity for the three months ending March 28, 2009 was as follows:
                        
 Severance and other      Severance and other     
 termination costs Other Cost Total  termination costs Other Cost Total 
Accrual at January 1, 2009 $1,446 $1,446  $1,446 $1,446 
Charges to expense 109 $82 191  83 $82 165 
Cash payments 1,385 82 1,467   (263)  (82)  (345)
              
Accrual at September 26, 2009 $170 $  $170 
Accrual at March 28, 2009 $1,266 $ $1,266 
              
The restructuring accrual for severance and other employee termination cost is classified as “Other accrued expenses”.

7

ITEM 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We announced a major restructuring plan that we believe will eventually return our company to profitability. This plan includes the following major components:
We will transition the majority of the manufacturing of the Stanley Furniture adult product line from our Stanleytown, VA facility to several strategic off-shore vendors with whom we have existing working relationships. A substantial portion of the Stanleytown facility will become a warehousing and distribution center. In addition, we will retain a domestic assembly and finish process in our Martinsville, VA facility to continue offering multiple finish options on certain items across various product lines. These actions will take place over the balance of 2010 and reflect our belief that current demand in our price segment results in a unit volume below that necessary to support a facility the size of our Stanleytown, VA facility.
Our Young America nursery and youth product line will continue to be exclusively manufactured in our Robbinsville, NC facility, except for certain component SKUs of nominal revenue that will be phased over to our offshore vendors as part of our cost reduction efforts.
Restructuring expenses of approximately $12 to $15��million are anticipated as the plan is implemented over the balance of 2010. The majority of this expense is expected to come from accelerating the depreciation of those fixed assets that will no longer be used once the plan is fully implemented to their expected fair value over the remainder of 2010. Staffing levels at the Virginia locations are expected to be reduced by approximately 530 positions as the restructuring plan is implemented with most of the reduction anticipated in the fourth quarter of 2010.
Our transition away from overseas sources for our Young America product line continues to challenge us. We believe we have dedicated the appropriate resources to improve our efficiencies in our Robbinsville, NC facility, and we are implementing a price increase for our Young America products.
During the first quarter of 2010, we performed a goodwill impairment evaluation as a result of our first quarter operating loss and recently announced restructuring actions and recorded a goodwill impairment charge of $9.1 million representing the entire amount of goodwill associated with the business. In addition, we recorded a non-cash charge to establish a valuation allowance of $1.3 million against our gross deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Results of Operations
Net sales decreased $16.0$3.2 million, or 29.4%8.1%, for the three month period ended September 26, 2009,April 3, 2010, from the comparable 2008 period. For the nine month period, net sales decreased $55.6 million, or 31.6% from the comparable 2008 nine month2009 period. The decrease was due primarily to lower unit volume, resulting from continued weakness in demand for our price segment of residential wood furniture, which we believe is due primarily to theconsistent with current economic recession and is consistent with industry trends. Higher average unit prices of less than 1% partially offset this lower unit volume.
Gross profit in 2009for the first three months of 2010 decreased to a loss of $601,000 for the three month period and$2.4 million, or (6.5)% of net sales, from a gross profit of $7.7$4.7 million, for the nine month period. This compares to a gross profitor 11.9% of $5.0 million and $25.8 million, respectively,net sales, for the comparable three and nine month periods of 2008. Accelerated depreciation of $1.0 million related to the closing of our warehouse facility in Lexington, North Carolina is included in the three and nine month periodsmonths of 2009. Cost of salesThe decline in gross profit for the threeperiod ended April 3, 2010, resulted primarily from manufacturing inefficiencies and nine month periodsthe increased cost of 2008 include restructuring and related charges of $3.8 million and $4.1 million, respectively.
The lower gross profit and margins are primarily due to the significant decline in sales and production levels. Sales have declined at a faster rate in 2009 than we have been able to adjust our cost structure. The much lower production levels have led to significant unfavorable factory overhead variances and plant inefficiencies. Cost associated with the transition oftransitioning approximately one-third of our Young America product line (infant-to-teen furniture)revenues from off-shore sourcing tooverseas vendors into our domestic manufacturing facilities, and higher selling discounts also contributed to lower gross profit in 2009. Thesesales and production levels. Partially offsetting these factors were partially offset bylower expenses resulting from previous restructuring and on-going cost savings from restructuring steps taken in 2008 which resulted in an estimated $3 million to $4 million in savings during the first nine months of 2009.reduction efforts.

6

Selling, general and administrative expenses decreased to $6.1 million, or 16.8% of net sales, for the three and nine month periods decreased $3.7period of 2010 from $7.8 million, and $6.0 million, respectively, compared toor 19.6% of net sales, for the 2008 periods,comparable three month period of 2009. These expenses declined primarily due primarily to lower selling expenses resulting from decreased sales and cost reduction initiatives. Restructuring and related charges of $1.4 million are includedinitiatives implemented in the three and nine month periods of 2008.
As a result of the above, operating loss was $7.5 million and $14.6 million for the three and nine month periods of 2009 compared to operating loss of $5.6 million and $2.6 million, for the comparable 2008 periods.late 2009.
Interest income for the three and nine month periods of 2009 decreased over the comparable prior year periods due primarily to lower earnings on invested cash.
The effective tax rate for 2009 is expected to be 39.3%, compared to 21.1% for total year 2008. The higher effective tax rate is due to the impact of permanent differences on loss before income taxes. The primary permanent difference is the increase in the cash surrender value of life insurance policies used to fund our deferred compensation plan. We expect this relationship to continue, but the percentage impact on the effective tax rate will depend on the level of future losses or earnings.
The consolidation of our Lexington, North Carolina warehouse operation into other owned warehouse space is progressing slightly ahead of schedule and should be completed in the fourth quarter of 2009. As noted above, we recorded $1.0 million of accelerated depreciationexpense for the three month period ended September 26, 2009of 2010 increased due to higher interest rates on outstanding debt.

8

Our effective tax rate for the first quarter of 2010 is (2.4%), which differs from the U.S. federal statutory tax rate of 35% primarily due to the establishment of a deferred tax valuation allowance and we expect to record approximately $700,000 of additional accelerated depreciationa lesser extent the goodwill impairment charge, which is not deductable for tax purposes, both occurring in the finalfirst quarter of 2009. The warehouse consolidation is expected to lower our annual operating expenses by approximately $1.3 million beginning in 2010.
We will continue to evaluate our total cost structure, including our manufacturing capacity, considering current and anticipated demand for our products, overall market conditions, offshore sourcing opportunities and other factors we consider relevant. The outcome of this evaluation could result in additional restructuring charges in the fourth quarter of 2009 or in future periods.
Financial Condition, Liquidity and Capital Resources
Sources of liquidity include cash on hand and cash generated from operations. We expect these sources of liquiditycash on hand to be adequate for ongoing expenditures, debt payments and capital expenditures for the foreseeable future. We believe that cash on hand will be adequate during 20092010 in the event we do not generate cash from operations. Working capital, excluding cash and current maturities of long-term debt, decreased $8.4 million during the first ninethree months of 20092010 to $46.1$46.5 million from $54.5$46.9 million at December 31, 2008.2009. The decrease was primarily due to lower inventories and accounts receivable, in response to lower sales.inventories.
Cash used by operations was $1.4$8.2 million in the first ninethree months of 20092010 compared to cash generatedused of $9.6$3.7 million in the comparable 20082009 period. The decreaseincrease in cash used by operations was primarily due to lower receipts from customers due to lower sales.sales and higher cash paid to suppliers and employees due to manufacturing inefficiencies and the incremental cost of transitioning approximately one-third of our Young America product line revenues from overseas into domestic facilities.
Net cash used forby investing activities was $454,000$148,000 in the 20092010 period compared to $1.5 millioncash provided by investing of $832,000 in 2008.2009. Sale of assets provided cash from investing activities during the first nine monthsquarter of 2009. These assets were included in prepaid expenses and other current assets at December 31, 2008.
Net cashCash provided by financing activities was $318,000 in the 20092010 period comparedwas from the exercise of stock options.
On May 3, 2010 we made a scheduled principal payment of $1.4 million. We renegotiated the terms of our long term debt to cash usedinclude a no penalty pre-payment of $3.0$11.5 million in the 2008 period. The change is due primarily to the suspensionon May 11, 2010. This leaves an outstanding balance of quarterly cash dividend payments during 2009.

7

At September 26, 2009, long-term$15 million of debt including current maturities was $27.9 million. Debtas of May 12, 2010. Remaining debt service requirements are $1.4$3.8 million in 2010, $5.0 million in 2011, and2011; $3.6 million in 2012, 2013 and 2014. In January 2009, we entered into an amendment2014; and $458,000 in 2015. While the interest rate on the debt will remain the same for the term of the debt, the lender is now secured by most of the Company’s assets.
The debt agreement was amended to our note agreement providing that twoeliminate the earnings based financial covenants relatingfor the first and second quarters of 2010 and to operating income and earnings not apply during 2009. Instead, this amendmentrelax the financial covenants through the first quarter of 2011. The amended agreement requires that weour loss before interest, tax expense, depreciation and amortization not exceed $5 million for the third quarter of 2010; not exceed $10 million for the cumulative two quarter period ending with the fourth quarter of 2010; and not exceed $10 million for the cumulative three quarter period ending with the first quarter of 2011. We are also required to maintain unrestricted cash on hand of $5 million at all times through the first quarter of 2011. In addition, we must maintain asset coverage of at least $20$15 million based on the sum of 70% of accounts receivable and maintain earnings before interest and taxes (as defined35% of finished goods inventory. We are in our note agreement)compliance with these covenants, as amended, as of not less than a loss of $10 million for each twelve month period ending each quarter in 2009. At September 26, 2009, our cash on hand was $42.4 million and our earnings before interest and taxes (as defined in our note agreement)April 3, 2010.
We intend to negotiate revised financial covenants for the twelve months ended September 26, 2009 was a loss of $2.4 million. It is likely that we will not meet the covenant requirement on earnings before interest and taxes (as defined in our note agreement) for the twelve months ending December 31, 2009 and will need to seek a waiver or additional amendment of this requirement. In addition, in the event of noncomplianceperiod starting with the two financial covenants relating to operating income and earnings that will apply after 2009, we would also have to seek waivers or additional amendments.second quarter of 2011 through the remaining term of our long term debt. If we are not able to negotiate amendments or obtain such waivers or amendments from our lenders, then we would need to seek other funding or use our cash on hand to repay the lenders.
We are including earnings before interestlenders and taxes (as definedpay yield maintenance amounts required in our note agreement) forconnection with pre-payment. Depending on the twelve months ended September 26, 2009, which is a financial measure not derived in accordance with generally accepted accounting principles inlevel of additional funds we receive during 2010 under the United States of America, to quantify our compliance with a financial covenant in our note agreement, and not as a measure of operating results. The following table sets forth a reconciliation of loss before income taxes to earnings before interest and taxes (as defined in our note agreement) for the twelve months ended September 26, 2009 (dollars are shown in thousands):
     
  Twelve Months Ending 
  September 26, 2009 
Loss before income taxes $(7,861)
Interest expense, net  3,685 
Restructuring charge  1,777 
    
Earnings (loss) before interest and taxes (as defined in our note agreement) $(2,399)
    
Continued Dumping and Subsidy Offset Act, (CDSOA)
According to U.S. Customs and Border Protection (CBP), as of October 1, 2008, approximately $100 million in duties had been secured by cash deposits and bonds on unliquidated entries, and this amount is potentially available for distribution under the CDSOA to eligible domestic manufacturers in connection with the case involving wooden bedroom furniture imported from China. In addition, approximately $99 million of funds available for distribution were set aside by the government over the past three years principally for domestic producers that have requested CDSOA funds and are not eligible to receive funds based on the CDSOA and the government’s historical administration of the CDSOA. The government set aside these CDSOA funds in connection with two lower court cases involving the CDSOA that were decided against the government on constitutional grounds and that have been appealed. The resolution of these legal appeals will have a significant impact on the amount of additional CDSOA funds we receive with respect to the antidumping order on wooden bedroom furniture from China.
There are a number of factors that can affect how much additional CDSOA funds we receive. These factors include:
the annual administrative review process which can retroactively increase or decrease the actual duties owed on entries secured by cash deposits and bonds,
the ultimate resolution of the legal appeals discussed above, and
other administrative and legal challenges that may be instituted.
Assuming our percentage allocation in future years is the same as it was for the 2008 payment (approximately 27% of the funds distributed), that the amount of $100 million collected by the government as of October 1, 2008 does not change as a result of the annual administrative review process or otherwise, and that the government loses the pending appeals based on constitutional issues (reducing our percentage allocation by approximately 62% based on the amount of funds held back for this pending litigation in 2008), we could potentially receive approximately $10 million in additional CDSOA funds. If the government ultimately prevails on the pending constitutional legal challenges and the other assumptions remain the same, we could potentially receive approximately $54 million in additional CDSOA funds.

8

Of the approximately $100 million in duties collected by the government as of October 1, 2008, the CBP recently disclosed that $57 million was liquidated as of April 30, 2009 and is available for disbursement in 2009 to eligible domestic manufacturers. However, the CBP did not update the amount of duties collected by the government. The CBP noted in its notice that the final amounts available for distribution may be higher or lower than the preliminary amounts due to additional duties collected on entries that are liquidated before September 30, 2009 or some funds may be removed from the account because of reliquidations or administrative errors. Based on this preliminary amount we expect to receive $6 million to $7 million in the fourth quarter of 2009.
Due to the uncertainty of the various legal and administrative processes, we cannot provide assurances as to the amount of CDSOA funds that ultimately will be received, if any. Furthermore, we cannot predict when we may receive any CDSOA funds after 2009.also need to seek additional sources of funding during 2011.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2008 annual report2009 Annual Report on formForm 10-K.

9

Forward-Looking Statements
Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include our success in transitioning certain Young America products to our domestic manufacturing facilities, our success in transitioning our adult product line to offshore vendors, costs relating to the transitioning of the Stanleytown facility to a warehouse and distribution center and transitioning the Martinsville facility for domestic assembly and finish processing, the cyclical nature of the furniture industry, business failures or loss of large customers, competition in the furniture industry including competition from lower-cost foreign manufacturers, our success in transitioning Young America products to our domestic manufacturing facilities, disruptions in offshore sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, manufacturing realignment, the inability to obtain sufficient quantities of quality raw materials in a timely manner, the inability to raise prices in response to inflation and increasing costs, failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner, environmental, health, and safety compliance costs, and extended business interruption at manufacturing facilities. In addition, we have made certain forward looking statements with respect to payments we expect to receive under the Continued Dumping and Subsidy Offset Act, which are subject to the risks and uncertainties described in our discussion of those payments that may cause the actual payments to differ materially from those in the forward looking statements. Any forward-looking statement speaks only as of the date of this filing,press release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
ITEM 3. 
Quantitative and Qualitative Disclosures about Market Risk
None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions. While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of our products obtained from offshore sourcing and reduce our earnings or increase our losses, unless we are able to increase our prices for these items to reflect any such increased cost.

9

ITEM 4. 
Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
(b) Changes in internal controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the thirdfirst quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

10

PARTPart II. OTHER INFORMATION
ITEMItem 1A. 
Risk Factors
Our results of operations and financial condition can be adversely affected by numerous risks including those described in Item 1A of our 20082009 Annual Report on 10-K. There have been no material changes from those risk factors except as set forth below.
Our strategy to transition Young America Products (infant-to-teen furniture) to our domestic manufacturing facilities has,restructuring plan announced in May 2010 may not be successful, and will in the near term, increase operating expenses. Ifour reliance on foreign sourcing.
As part of a major restructuring plan, we are not successful intransitioning the implementation of this strategy, we may continue to experience significant disruptions to our operations that may result in a decline in revenues in addition to a continued increase in operating expenses.
We believe our decision to bring all Young America production back to our domestic manufacturing facilities was necessary to regain controlmajority of the entire production process so that we can reposition Young America asmanufacturing of the trusted childrens’ furniture brand for safety, broad selection, quick delivery and environmental commitment. This transition has, and will in the near term, increase operating expenses due to the disruption caused by the transition of approximately one-third of our Young AmericaStanley Furniture adult product line from our Stanleytown, Virginia facility to several strategic off-shore sourcingvendors in an effort to return the Company to profitability. Our Stanleytown facility will become a warehouse and distribution center and our domestic assembly and finish processing capabilities will be relocated to our domestic manufacturing facilities. We expectMartinsville facility. These restructuring efforts may not be successful, and we may not be able to realize the long-term benefitcost savings and other anticipated benefits. The transition could disrupt our operations and could affect our ability to be beneficial as we distinguish our Young Americameet product line from the competitiondemand which may in turn negatively impact existing customer relationships and result in the marketplace. If we are unsuccessful in implementing this strategy, we may continue to experience significant disruptionsloss of market share. Since our restructuring plan will increase our dependence on foreign off-shore vendors, it will exacerbate the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2009 regarding our reliance on foreign sourcing. Also, it is possible that the cost of our restructuring efforts will be higher than we anticipate. Additionally, we cannot guarantee that we will not have to undertake additional restructuring activities. Any of these occurrences may have a material and adverse impact on our liquidity, results of operations that may result in a decline in revenues in addition to a continued increase in operating expenses.
and our financial condition.
ITEMItem 5.
Other Information
Entry into a Material Definitive Agreement and Creation of a Direct Financial Obligation.
On May 11, 2010, the Company entered into a Second Amended and Restated Note Purchase and Private Shelf Agreement among the Company, The Prudential Insurance Company of America and other holders of Notes named therein (the “Amended Note Agreement”). Under the terms of the Amended Note Agreement, on May 11, 2010 the Company made a no penalty pre-payment of $11.5 million to the Note holders. The Amended Note Agreement requires that the Company maintain unrestricted cash on hand of $5 million at all times through the first quarter of 2011. In addition, the Company must maintain asset coverage of at least $15 million based on the sum of 70% of accounts receivable and 35% of finished goods inventory. The Amended Note Agreement temporarily eliminates certain earnings-based financial covenants through the first quarter of 2011 and revises other covenants. Pursuant to the Amended Note Agreement, the current interest rates on the Company’s outstanding Series AA Senior Notes due 2017 and the Senior Notes due 2011 of 8.23% and 8.44% will be maintained for the remaining term of the Notes.
The Company, its wholly-owned subsidiaries and the Note holders also entered into a Security Agreement dated May 11, 2010. Under the terms of the Security Agreement, the Notes are now secured by substantially all the Company’s assets. Additionally, the Company’s subsidiaries are guaranteeing all obligations of the Company under the Amended Note Agreement.
The foregoing summary is qualified in its entirety by reference to the Amended Note Agreement, which is filed as exhibit 4.1 to this Form 10-Q, and the Security Agreement, which is filed as exhibit 4.2 to this Form 10-Q.
Costs Associated with Exit or Disposal Activities.
On May 12, 2010 the Company issued a press release announcing a restructuring plan intended to return the Company to profitability. The plan includes the following primary initiatives:
The Company will transition the majority of the manufacturing of the Stanley Furniture adult product line from its Stanleytown, Virginia facility to several strategic off-shore vendors with whom the Company has existing working relationships. A substantial portion of the Stanleytown facility will become a warehousing and distribution center. In addition, the Company will relocate its domestic assembly and finish process capabilities to the Martinsville, Virginia facility in order to continue offering multiple finish options on certain items across various product lines. The Martinsville facility is currently used for warehousing purposes. These actions will take place over the balance of 2010 and reflect the Company’s belief that current demand in our price segment results in a unit volume below that necessary to support a facility the size of its Stanleytown, Virginia facility.

11

The Company’s Young America nursery and youth product line will continue to be exclusively manufactured in our Robbinsville, North Carolina facility, except for certain component SKUs of nominal revenue that will be phased over to the Company’s offshore vendors as part of its cost reduction efforts.
The Company expects the transition to affect approximately 530 Company employees, with most of the headcount reduction anticipated to occur in the fourth quarter of 2010.
In connection with the restructuring plan the Company expects to record accelerated depreciation of $8 million to $10 million. Future cash costs of $4 million to $5 million includes approximately $1.0 million for retention bonuses and $3 million to $4 million in facility conversion expense and other related expenses. The Company expects it will be substantially completed with the restructuring by the end of the fourth quarter of 2010.
The Board approved this restructuring plan on May 12, 2010.
Departure of Directors or Certain Officers; Appointment of Certain Officers
On May 12, 2010, the Company announced that Albert L Prillaman intends to retire as Chairman, effective December 31, 2010. Mr. Prillaman will remain a director after his retirement as Chairman. At Mr. Prillaman’s request, his compensation was reduced effective May 15, 2010 to $15,000 on an annualized basis, which is consistent with the cash amount to be received by non-employee directors for the remainder of 2010.
Item 6. 
Exhibits
     
 3.1  Restated Certificate of Incorporation of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended July 2, 2005).
     
 3.2  By-laws of the Registrant as amended (incorporated by reference to Exhibit 3.13 to the Registrant’s Form 8-K (Commission File No. 0-149380-14938) filed on August 26, 2009)December 7, 2007).
4.1Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 11, 2010, among the Registrant, The Prudential Insurance Company of America, the other purchasers named therein and the affiliated of Prudential who became purchasers as defined therein. (1)
4.2Security Agreement dated as of May 11, 2010, by the Registrant, certain subsidiaries of the Registrant, and Additional Grantors as defined therein, in favor of The Bank of New York Mellon Trust Company, N.A., as collateral agent for the benefit of The Prudential Insurance Company of America and each holder of Notes. (1)
     
 31.1  Certification by Albert L.Glenn Prillaman, our Chairman and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
     
 31.2  Certification by Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
     
 32.1  Certification of Albert L.Glenn Prillaman, our Chairman and Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)
     
 32.232.1  Certification of Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)
 
   
(1) Filed herewith

 

1112

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
Date: October 15, 2009May 12, 2010  STANLEY FURNITURE COMPANY, INC.
 		 
 By:  /s/ Douglas I. Payne   
  Douglas I. Payne  
  Executive V.P. — Finance &
Administration Andand Secretary
(Principal Financial and Accounting Officer) 		 

 

12

EXHIBIT INDEX
Exhibit
No.Description
31.1Certification by Albert L. Prillaman, our Chairman and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2Certification by Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1
Certification of Albert L. Prillaman, our Chairman and Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2Certification of Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)
(1)Filed herewith

13