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| STLY > SEC Filings for STLY > Form 10-Q on 15-Jul-2003 | All Recent SEC Filings |
15-Jul-2003
Quarterly Report
Results of Operations
The Company continues to implement a blended strategy of combining its domestic manufacturing capabilities with an expanding offshore sourcing program and realign manufacturing 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 decided to close its manufacturing operations at the West End, North Carolina factory and consolidate production from this facility into other Company facilities. In 2002, manufacturing operations at the West End facility were completely phased out and all closing related activities including the sale of real estate were completed. Restructuring and related cost for the three and six month periods of 2002 was $852,000 and $3.8 million, respectively and consisted of accelerated depreciation and other exit costs, including plant inefficiencies and severance cost. The restructuring accrual at June 28, 2003 of $314,000 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 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 has reduced operations at the Lexington plant impacting approximately 150 of the 525 associates there and was completed during 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 Six Months
Ended Ended
------------------- -------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------ ------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 76.3 75.6 76.2 75.7
Restructuring and related charges . 1.5 3.3
----- ----- ----- -----
Gross profit .................... 23.7 22.9 23.8 21.0
Selling, general and administrative
expenses ........................ 13.7 14.3 13.8 13.7
----- ----- ----- -----
Operating income ................ 10.0 8.6 10.0 7.3
Other income, net ................. (.1) (.1) (.1)
Interest expense .................. 1.1 1.3 1.1 1.4
----- ----- ----- -----
Income before income taxes ...... 9.0 7.3 9.0 6.0
Income taxes ...................... 3.2 2.6 3.3 2.1
----- ----- ----- -----
Net income ........................ 5.8% 4.7% 5.7% 3.9%
===== ===== ===== =====
Net sales increased $6.1 million, or 11.1%, for the three month period ended
June 28, 2003 from the comparable 2002 period. For the six month period, net
sales increased $7.9 million, or 6.8%, from the 2002 period. The increase for
the three and six month periods was primarily due to higher unit volume.
Gross profit margin for the three and six month periods of 2003 increased to 23.7% and 23.8%, respectively, from 22.9% and 21.0% for the comparable 2002 periods. The lower gross profit margin for the three and six month periods of 2002 is primarily due to restructuring and related charges resulting from closing a factory to realign the Company's manufacturing facilities. Excluding restructuring and related charges in 2002, gross profit margin for the three and six month period of 2003 decreased primarily due to transition costs from increased sourcing including lower production levels at the Company's domestic facilities, and an increase in wages and benefits. These costs 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 decreased to 13.7% from 14.3% for the comparable 2002 period, primarily due to higher sales. Selling, general and administrative expenditures increased in the three and six month periods 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 the second half of 2003 compared to the second half of 2002.
As a result of the above, operating income as a percentage of net sales was 10.0% for both the three and six month periods of 2003, compared to 8.6% and 7.3%, respectively, for the comparable 2002 periods.
Interest expense for the three and six month periods 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 $5.4 million in the first six months of 2003 compared to $10.8 million in the 2002 period. The decrease in 2003 was primarily due to higher tax payments, as a result of increased earnings.
Net cash used by investing activities was $379,000 in the 2003 period compared to cash provided by investing activities of $290,000 in 2002. The Company received net proceeds in 2002 of $696,000 from the sale of real estate at its former West End, North Carolina facility. Capital expenditures in 2003 are anticipated to be approximately $1.0 to $2.0 million.
Net cash used by financing activities was $6.7 million in the 2003 period compared to $2.9 million in the 2002 period. In the 2003 period, cash from operations and available cash provided funds for senior debt payments, purchase of the Company's common stock, and cash dividends. During the first half of 2003, $2.7 million was used to purchase 115,396 shares of the Company's common stock in the open market at an average price of $23.48. At June 28, 2003, approximately $12.2 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.
At June 28, 2003, long-term debt including current maturities was $25.3 million. Debt service requirements are $2.6 million remaining in 2003, $7.0 million in 2004, $4.3 million in 2005, $2.9 million in 2006 and $2.9 million in 2007. As of June 28, 2003, approximately $24.2 million of additional borrowings were available under the Company's revolving credit facility and cash on hand was $7.5 million. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB Statement No. 123". FAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to permit additional transition methods for entities that adopt the fair-value based method of accounting for stock-based employee compensation. For those companies that do not elect to change their method of accounting for stock-based employee compensation, FAS 148 requires increased disclosure of the pro forma impact of applying the fair value method to the reported operating results. The increased disclosure requirements apply to the Company's interim and annual financial statements beginning in the first quarter of 2003 and are presented in Note 2 of the financial statements.
In April 2003, the FASB issued Statement No. 149 (FAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company did not have any derivative instruments or hedging activities during the six months ended June 28, 2003. Adoption of FAS 149 is not expected to materially affect the Company's financial statements.
In May 2003, the FASB issued Statement No. 150 (FAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of FAS 150 is not expected to materially affect the Company's financial statements.
Forward-Looking Statements
Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "estimates," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include competition in the furniture industry including competition from lower-cost foreign manufacturers, the Company's success in implementing its blended strategy of expanded offshore sourcing and domestic manufacturing, disruptions in offshore sourcing including those arising from supply or distribution disruptions or changes in political or economic conditions affecting the countries from which the Company obtains offshore sourcing, the cyclical nature of the furniture industry, fluctuations in the price for lumber which is the most significant raw material used by the Company, credit exposure to customers 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.
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