UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
------ Securities Exchange Act of 1934
For the quarterly period ended June 29, 2002 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 the number of shares outstanding of each of the issuer's classes of
common stock as of July 12, 2002.
Class Number
Common Stock, par value $.02 per share 6,670,513 Shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 29, December 31,
2002 2001
-------- --------
ASSETS
Current assets:
Cash .................................................... $ 10,066 $ 1,955
Accounts receivable, less allowances of $2,511 and $2,024 26,122 23,862
Inventories:
Finished goods ........................................ 34,494 31,287
Work-in-process ....................................... 7,366 7,833
Raw materials ......................................... 11,790 10,402
-------- --------
Total inventories ............................... 53,650 49,522
Prepaid expenses and other current assets ............... 1,510 2,354
Deferred income taxes ................................... 3,153 3,153
-------- --------
Total current assets .................................. 94,501 80,846
Property, plant and equipment, net .......................... 61,732 66,708
Goodwill .................................................... 9,072 9,072
Other assets ................................................ 5,738 6,377
-------- --------
$171,043 $163,003
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt .................... $ 6,839 $ 6,839
Accounts payable ........................................ 17,594 11,841
Accrued salaries, wages and benefits .................... 9,661 9,060
Other accrued expenses .................................. 2,425 1,835
-------- --------
Total current liabilities ............................. 36,519 29,575
Long-term debt, exclusive of current maturities ............. 25,329 30,214
Deferred income taxes ....................................... 11,251 11,251
Other long-term liabilities ................................. 4,506 4,669
-------- --------
Total liabilities ....................................... 77,605 75,709
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
6,670,513 and 6,643,388 shares issued and outstanding ....... 134 133
Capital in excess of par value .............................. 16,623 17,537
Retained earnings ........................................... 76,709 72,228
Stock option loans .......................................... (28) (2,604)
-------- --------
Total stockholders' equity .............................. 93,438 87,294
-------- --------
$171,043 $163,003
======== ========
The accompanying notes are an integral part of
the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended Ended
------------------- --------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------- ------- -------- --------
Net sales .................................. $55,268 $52,856 $114,842 $117,965
Cost of sales .............................. 41,795 40,604 86,901 90,439
Restructuring and related charges (Note 2) . 852 3,757
------- ------- -------- --------
Gross profit ........................... 12,621 12,252 24,184 27,526
Selling, general and administrative expenses 7,892 7,102 15,809 14,936
Unusual charge ............................. 2,800 2,800
------- ------- -------- --------
Operating income ....................... 4,729 2,350 8,375 9,790
Other expense (income), net ................ (72) 25 (154) 17
Interest expense ........................... 746 1,016 1,580 2,085
------- ------- -------- --------
Income before income taxes ............. 4,055 1,309 6,949 7,688
Income taxes ............................... 1,440 474 2,467 2,786
------- ------- -------- --------
Net income ............................. $ 2,615 $ 835 $ 4,482 $ 4,902
======= ======= ======== ========
Earnings per share:
Basic................................... $ .39 $ .13 $ .67 $ .74
======= ======= ======== ========
Diluted................................. $ .37 $ .12 $ .64 $ .71
======= ======= ======== ========
Weighted average shares outstanding:
Basic................................... 6,701 6,607 6,681 6,611
======= ======= ======== ========
Diluted................................. 6,998 6,957 6,950 6,929
======= ======= ======== ========
The accompanying notes are an integral part of the
financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended
---------------------
June 29, June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Cash received from customers ................................ $112,264 $122,897
Cash paid to suppliers and employees ........................ (98,860) (112,865)
Interest paid ............................................... (1,872) (2,411)
Income taxes paid, net ...................................... (780) (4,915)
-------- --------
Net cash provided by operating activities ............... 10,752 2,706
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................ (406) (2,515)
Other, net .................................................. 696
-------- --------
Net cash provided (used) by investing activities ........ 290 (2,515)
-------- --------
Cash flows from financing activities:
Issuance of senior notes .................................... 10,000
Repayment of revolving credit facility, net ................. (600) (6,097)
Repayment of senior notes ................................... (4,286) (5,286)
Purchase and retirement of common stock ..................... (873)
Proceeds from exercised stock options ....................... 1,160 450
Proceeds from insurance policy loans ........................ 795 719
-------- --------
Net cash used by financing activities ................... (2,931) (1,087)
-------- --------
Net increase (decrease) in cash ............................. 8,111 (896)
Cash at beginning of period ................................. 1,955 1,825
-------- --------
Cash at end of period ................................... $ 10,066 $ 929
======== ========
Reconciliation of net income to net cash provided by operating activities:
Net income .................................................. $ 4,482 $ 4,902
Depreciation and amortization ........................... 3,013 3,175
Unusual charge .......................................... 2,800
Restructuring and related charges ....................... 1,755
Deferred income taxes ................................... (209)
Loss on sale of assets .................................. 31 28
Changes in assets and liabilities:
Accounts receivable ................................. (2,260) 4,859
Inventories ......................................... (4,128) (4,385)
Prepaid expenses and other current assets ........... 1,457 (2,683)
Accounts payable .................................... 5,753 (3,811)
Accrued salaries, wages and benefits ................ 601 (1,993)
Other accrued expenses .............................. 590 377
Other assets ............................................ (380) (333)
Other long-term liabilities ............................. (162) (21)
-------- --------
Net cash provided by operating activities ................... $ 10,752 $ 2,706
======== ========
The accompanying notes are an integral part of
the financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Preparation of Interim Unaudited Financial Statements
The financial statements of Stanley Furniture Company, Inc. (referred to as
"Stanley" or the "Company") have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). In the opinion of
management, these statements include all adjustments necessary for a fair
presentation of the results of all interim periods reported herein. All such
adjustments are of a normal recurring nature. Certain information and footnote
disclosures prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to SEC rules and regulations.
However, management believes that the disclosures made are adequate for a fair
presentation of results of operations and financial position. Operating results
for the interim periods reported herein may not be indicative of the results
expected for the year. It is suggested that these financial statements be read
in conjunction with the financial statements and accompanying notes included in
Stanley's latest Annual Report on Form 10-K.
2. Restructuring and Related Charges
In the second quarter of 2002, the Company completed all closing related
activities at its former West End, North Carolina facility, including the sale
of real estate. The Company approved a plan in the fourth quarter of 2001 to
close the factory and consolidate production from this facility into other
Company facilities as a result of excess capacity created by expanded offshore
sourcing. Manufacturing operations were phased out during the first quarter of
2002 with certain warehousing and other activities completed in the second
quarter of 2002. As a result, the Company recorded $852,000 and $3.8 million in
restructuring and related charges for the three and six month period of 2002,
respectively. The restructuring accrual at June 29, 2002, consists of a lease
obligation and 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 6/29/02
-------- ------- ------- -------- -------
Increased depreciation due to shorter lives $1,786 $1,786
Other exit costs .......................... $733 1,971 $2,000 $704
---- ------ ------ ------ ----
Total ................................... $733 $3,757 $1,786 $2,000 $704
==== ====== ====== ====== ====
3. Property, Plant and Equipment
(in thousands)
June 29, December 31,
2002 2001
-------- --------
Land and buildings ...................................... $ 37,830 $ 42,763
Machinery and equipment ................................. 73,738 79,139
Office fixtures and equipment ........................... 1,701 1,829
Construction in progress ................................ 406
-------- --------
Property, plant and equipment, at cost .............. 113,675 123,731
Less accumulated depreciation ........................... 51,943 57,023
-------- --------
$ 61,732 $ 66,708
======== ========
4. Long-Term Debt
(in thousands)
June 29, December 31,
2002 2001
------- -------
7.28% senior notes due March 15, 2004 ................... $ 8,572 $12,857
7.57% senior note due June 30, 2005 ..................... 5,025 5,025
7.43% senior notes due November 18, 2007 ................ 8,571 8,571
6.94% senior notes due May 3, 2011 ...................... 10,000 10,000
Revolving credit facility ............................... 600
------- -------
Total ............................................ 32,168 37,053
Less current maturities ................................. 6,839 6,839
------- -------
$25,329 $30,214
======= =======
5. Stock Option Plan
The Company maintains a stock option plan under which holders of certain
exercisable stock options may obtain interest-bearing loans from the Company to
facilitate their exercise of stock options. During the second quarter of 2002,
approximately 86,000 shares of the Company's common stock was surrendered by the
Chief Executive Officer to the Company in payment of a $2.6 million outstanding
loan plus accrued interest. As of June 29, 2002, approximately $28,000 in stock
option loans are outstanding.
6. Earnings Per Common Share
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 Six Months
Ended Ended
---------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Weighted average shares outstanding
for basic calculation ................... 6,701 6,607 6,681 6,611
Add: Effect of stock options ............... 297 350 269 318
----- ----- ----- -----
Weighted average shares outstanding,
adjusted for diluted calculation .... 6,998 6,957 6,950 6,929
===== ===== ===== =====
7. 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 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 Six Months
Ended Ended
--------------- ---------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Net income:
As reported ...................... $2,615 $ 835 $4,482 $4,902
Goodwill amortization (net of tax) 84 168
------ ------ ------ ------
Adjusted net income ............ $2,615 $ 919 $4,482 $5,070
====== ====== ====== ======
Basic earnings per share:
As reported ...................... $ .39 $ .13 $ .67 $ .74
====== ====== ====== ======
As adjusted ...................... $ .39 $ .14 $ .67 $ .77
====== ====== ====== ======
Diluted earnings per share:
As reported ...................... $ .37 $ .12 $ .64 $ .71
====== ====== ====== ======
As adjusted ...................... $ .37 $ .13 $ .64 $ .73
====== ====== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
Results of Operations
The following table sets forth the percentage relationship to net sales of
certain items included in the Statements of Income:
Three Months Six Months
Ended Ended
--------------- ---------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 75.6 76.8 75.7 76.7
Restructuring and related charges .... 1.5 3.3
----- ----- ----- -----
Gross profit ....................... 22.9 23.2 21.0 23.3
Selling, general and administrative
expenses ........................... 14.3 13.4 13.7 12.7
Unusual charge ....................... 5.3 2.4
----- ----- ----- -----
Operating income ................ 8.6 4.4 7.3 8.3
Other income .................... .1
Interest expense ..................... 1.3 1.9 1.4 1.8
----- ----- ----- -----
Income before income taxes ......... 7.3 2.5 6.0 6.5
Income taxes ......................... 2.6 .9 2.1 2.4
----- ----- ----- -----
Net income ........................... 4.7% 1.6% 3.9% 4.2%
===== ===== ===== =====
Net sales increased $2.4 million, or 4.6%, for the three month period ended June
29, 2002 from the comparable 2001 period. For the six month period, net sales
decreased $3.1 million, or 2.6%, from the comparable 2001 period. The increase
for the three month period was due primarily to higher unit volume offset by
lower average selling prices. The six month period decrease resulted from lower
unit volume and lower average selling prices. The Company expects third quarter
2002 sales to increase in the mid to high single digits on a percentage basis
over the third quarter of 2001 and expects total year 2002 sales to increase in
the mid single digits on a percentage basis over 2001.
Gross profit margin, excluding restructuring and related charges, for the three
and six month periods of 2002 increased to 24.4% and 24.3%, respectively, from
23.2% and 23.3% 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 costs and offshore sourcing
initiatives.
Selling, general and administrative expenses for the three and six month periods
of 2002 as a percentage of net sales increased to 14.3% and 13.7%, respectively,
from 13.4% and 12.7% for the comparable 2001 periods. Selling, general and
administrative expenditures increased in the three and six month periods 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 10.1% and 10.6%, respectively, for the
three and six month periods of 2002, compared to 9.7% and 10.7%, respectively,
for each of the comparable 2001 periods.
Interest expense for the three and six 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 six 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.
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, the Company closed its West End, North
Carolina factory and consolidated 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. Manufacturing operations at the West End facility were
completely phased out during the first quarter of 2002. In the second quarter of
2002, the Company completed all closing related activities including the sale of
real estate.
As a result of the West End facility closing, the Company recorded total
restructuring and related charges of $6.8 million, compared to a previously
anticipated range of $7 to $9 million. For the three and six month period of
2002, restructuring and related charges of $852,000 and $3.8 million,
respectively, were recorded. These charges consisted of asset write-downs
(through increased depreciation), relocation of equipment and inventory,
operating inefficiencies and severance cost. The Company anticipates that any
charges related to this closing will be immaterial going forward. The
restructuring accrual at June 29, 2002 of $704,000 consists of a lease
obligation and remaining severance cost.
Financial Condition, Liquidity and Capital Resources
Cash generated from operations was $10.8 million in the first six months of 2002
compared to $2.7 million in the 2001 period. Working capital increased $458,000
in the 2002 period compared to an increase of $3.8 million in the comparable
2001 period. Inventories increased slightly from year end levels due to normal
seasonal trends. Lower tax and interest payments also contributed to the
increase in cash generated from operations.
Net cash provided by investing activities was $290,000 in the 2002 period
compared to cash used by investing activities of $2.5 million in the 2001
period. 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, capital expenditures in 2002 are
anticipated to be approximately $1 to $2 million, down from $4.2 million in
2001.
Net cash used by financing activities was $2.9 million in the 2002 period
compared to $1.1 million in the 2001 period. 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. 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 June 29, 2002,
approximately $8.0 million remains authorized by the Company's Board of
Directors to repurchase shares of the Company's common stock.
At June 29, 2002, long-term debt including current maturities was $32.2 million.
Debt service requirements are $2.6 million remaining in 2002, $6.9 million in
2003, $7.0 million in 2004, $4.3 million in 2005, and $2.9 million in 2006. As
of June 29, 2002, approximately $35.0 million of additional borrowings were
available under the Company's revolving credit facility. The Company believes
that its financial resources are adequate to support its capital needs and debt
service requirements.
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.
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 implementation of
expanded 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-looking
statement speaks only as of the date of this filing, and the Company undertakes
no obligation to update or revise any forward-looking statements, whether as a
result of new developments or otherwise.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Because the Company's obligation under its Revolving Credit Facility bears
interest at a variable rate, the Company is sensitive to changes in prevailing
interest rates. A one-percentage point fluctuation in market interest rates
would not have a material impact on earnings during the first six months of
2002.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of the Company's stockholders was held on April 24,
2002.
(c)(i) The stockholders of the Company elected two directors for a three-year
term expiring at the Annual Meeting of Stockholders to be held in 2005.
The election was approved by the following vote:
For Withheld
Robert G. Culp, III 5,477,576 49,787
T. Scott McIlhenny, Jr. 5,477,576 49,787
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Employment Agreement, dated May 2, 2002, between the
Registrant and William A. Sibbick, Jr. (1) (2)
Exhibit 10.2 Employment Agreement, dated May 2, 2002, between the
Registrant and Kelly S. Cain. (1) (2)
Exhibit 10.3 Agreement, dated April 25, 2002, between Stanley
Furniture Company, Inc. and Albert L. Prillaman
(incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K (Commission File No. 0-14938)
filed on April 25, 2002).(2)
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 25, 2002, to announce a plan
for early loan repayment by the Chief Executive Officer.
A report on form 8-K was filed on June 10, 2002, to comment on the
Registrant's outlook for the second quarter and full year 2002.
- ---------------------------
(1) Filed herewith.
(2) Management contract.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
Date: July 16, 2002 By: /s/ Douglas I. Payne
--------------------
Douglas I. Payne
Executive V.P. - Finance & Administration and
Secretary
(Principal Financial and Accounting Officer)