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CRC > SEC Filings for CRC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CHROMCRAFT REVINGTON INC

Form 10-Q for CHROMCRAFT REVINGTON INC


13-Nov-2012

Quarterly Report


Note 12. Management's Plans for Operations

The Company incurred a net loss of $717 and $3,437, respectively, for the three and nine months ended September 29, 2012 compared to $1,042 and $4,100 for the same periods in 2011. The decrease in the net loss of $325 for the third quarter of 2012 compared to the same period in 2011 was primarily due to a $238 deferred income tax benefit resulting from the final allocation of the purchase price of EOC to the assets acquired and liabilities assumed.

In order for the Company to be in compliance with its net income (loss) financial covenants under the Credit Facility, our net loss for the nine months ended September 29, 2012 and for the year ended December 31, 2012 must not exceed $3,500. The Company was in compliance with this financial covenant for the nine months ended September 29, 2012. However, management believes it is probable that the Company will not be in compliance with this financial covenant for the year ended December 31, 2012. As such, we will need to seek a waiver of this likely noncompliance from Gibraltar.

In addition, based upon management's current financial projections, management believes it is probable that the Company will not be in compliance with the net income (loss) financial covenants under the Credit Facility in 2013. The financial covenants for 2013 were established in 2012 and at a time when management's operating plan for 2013 had not yet been prepared. Although management is still in the process of finalizing our 2013 operating plan, management believes that the current net income (loss) financial covenant for the first three quarters in 2013 and for the year ending December 31, 2013, as set forth in the Waiver and Loan Modification Agreement attached as Exhibit 10.1 to this Form 10-Q, will need to be amended.

In this regard, we have initiated discussions with Gibraltar regarding obtaining a waiver of our probable noncompliance with our net income (loss) financial covenant for the year ended December 31, 2012 as well as an amendment to our financial covenants for 2013. If Gibraltar grants such a waiver and amends the covenants for 2013, it is possible that Gibraltar may impose additional conditions and require other concessions from the Company beyond what Gibraltar required as a condition to providing its previous waiver of the Company's noncompliance with the net income (loss) financial covenant under the Credit Facility for the six months ended June 30, 2012. We also are discussing with Gibraltar the possibility of including eligible inventory to our borrowing base as a means to assure that we have adequate credit availability under our Credit Facility.


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Management has continued its efforts to reduce its net losses to improve the Company's financial performance and to be in compliance with the financial and other covenants in the Credit Facility for the fiscal year ended December 31, 2012. These efforts focus on increasing sales volume in both the residential and commercial product markets. Management's anticipation of future growth is not contingent solely upon a significant improvement in the economic conditions for the furniture industry, but instead on identifying key opportunities in the residential and commercial product markets and providing the product and strong service to exceed our customers' expectations. These efforts also focus on gross margin improvement, primarily by implementing identified cost reductions and improving efficiencies in its operating facilities and supply chain process, as well as exploring pricing opportunities. In addition, the Company will continue to closely monitor and control its selling, general and administrative expenses to be in line with its revenues. We recently reorganized our sales management team to provide a more focused approach to increasing sales which resulted in reduced headcount and annual savings going forward of approximately $500. Management is also revising its operating plan beyond 2012.

There is no assurance that Gibraltar will grant such a waiver or agree to such an amendment. In the event that Gibraltar is unwilling to agree to the waiver and amend the net income (loss) financial covenants for 2013 to levels that the Company believes it can achieve, then Gibraltar could declare an event of default, terminate the Credit Facility and not extend further credit to the Company, declare upon notice to the Company all amounts then outstanding under the Credit Facility to be immediately due and payable, charge a default rate of interest, take possession and sell assets of the Company that constitute collateral for the Credit Facility and exercise any other rights and remedies that Gibraltar may have. Any of these actions would adversely affect our liquidity, business and ability to continue to operate.

Further, if our trade creditors were to impose unfavorable terms on us, this could negatively impact our ability to obtain raw materials, products and services on acceptable terms. We have implemented expense controls and limitations on capital expenditures to conserve cash at the present time.

Because we presently are incurring losses, the continued availability of credit under our Credit Facility is critical to meeting our short term liquidity needs and to our ability to continue to operate. Assuming that Gibraltar grants the waiver and agrees to the amendment discussed above, the Company expects additional borrowings under the Credit Facility in the fourth quarter of 2012 and throughout 2013.

Under our Directors Stock Plan, our non-employee directors are granted an annual award of either restricted common stock or stock options of the Company. There were an insufficient number of shares authorized and available for issuance to satisfy the full amount of the 2012 restricted stock award to our non-employee directors under our Directors Stock Plan. Accordingly, our non-employee directors agreed to receive fewer shares of restricted stock at the present time, with the understanding that the directors will receive the balance of their 2012 restricted stock award on or before the 2013 annual meeting of stockholders of the Company in such form (either in cash or stock) as will be determined by the Compensation Committee.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

A sluggish economy, weak consumer confidence, continued high levels of unemployment and reduced consumer access to credit have continued to affect demand for residential furniture in our price segment and product categories. We anticipate the ongoing difficult environment in the residential furniture market will continue at least into the first quarter of 2013. We believe the recent signs of marginal improvement in the housing market are tempered by the uncertainty over the outcome of the upcoming federal "fiscal cliff" which includes increased taxes and reduced federal spending scheduled for the end of 2012 and its impact on consumer spending.


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Shipments of residential furniture in the third quarter of 2012 were comparable to the same period in 2011. Residential furniture sales for the third quarter of 2012 were lower as compared to the second quarter of 2012, primarily due to lower sales of dining room furniture. The challenging economic conditions led to a slight decline in residential sales orders in the third quarter of 2012 as compared to the prior quarter. Shipments of commercial products increased in the third quarter of 2012 compared to the second quarter of 2012, primarily due to higher sales of seating products. Commercial shipments increased for the third quarter of 2012 compared to the prior year period, primarily due to the acquisition of EOC. Increased commercial sales orders in the third quarter of 2012 resulted in our highest order volume since the third quarter of 2011. We expect our acquisition of EOC, a California-based manufacturer and distributor of commercial office suites and waiting area furniture products, and with an extensive health care line, will continue to complement our current commercial product line by offering its branded products to our current customers while also expanding our customer base.

We continue to review our product offerings and reduce operating costs to be in line with our current revenue base. A prolonged economic downturn could cause outcomes to differ materially from those expected above.

In addition to management's plans for operations as discussed in Note 12 to the Condensed Consolidated Financial Statements, we recently reorganized our sales management team to provide a more focused approach to increasing sales which resulted in reduced headcount and annual savings going forward of approximately $0.5 million. We will continue to closely monitor opportunities for further cost reductions and improved efficiencies.

Results of Operations

The following table sets forth the Condensed Consolidated Statements of
Operations of Chromcraft Revington for the three and nine months ended September
29, 2012 and October 1, 2011 expressed as a percentage of sales.

                                                       Three Months Ended                         Nine Months Ended
                                                September 29,          October 1,         September 29,          October 1,
                                                     2012                 2011                 2012                 2011
Sales                                                     100.0 %            100.0 %                100.0 %            100.0 %
Cost of sales                                              80.6               81.0                   80.9               83.0
Gross margin                                               19.4               19.0                   19.1               17.0
Selling, general and administrative expenses               25.5               26.4                   26.7               26.8
Operating loss                                             (6.1 )             (7.4 )                 (7.6 )             (9.8 )
Interest expense                                           (0.9 )             (0.5 )                 (1.2 )             (0.5 )
Loss before income tax benefit                             (7.0 )             (7.9 )                 (8.8 )            (10.3 )
Income tax benefit                                          1.8                  -                    0.6                  -
Net loss                                                   (5.2 ) %           (7.9 ) %               (8.2 ) %          (10.3 ) %


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2012 Compared to 2011

Consolidated sales for the three and nine months ended September 29, 2012 of $13.7 million and $41.7 million, respectively, represented a 3.4% and 5.6% increase, respectively from the same periods last year.

Shipments of residential furniture for the three months ended September 29, 2012 were comparable to the prior year period, resulting primarily from an increase in shipments of home entertainment furniture offset by lower sales of dining room furniture. The lower sales of dining room furniture reflected the impact of continued weakness in consumer demand for residential products in our price segment which we believe is consistent with industry trends; the continuing economic difficulties which reflect the ongoing labor market struggles and reduced consumer access to credit. Commercial furniture shipments for the third quarter of 2012 were higher than the same period last year due to sales of office suites and waiting area furniture, primarily to the health care industry resulting from our acquisition of EOC in March of 2012.

Shipments of residential furniture for the nine months ended September 29, 2012 were comparable to the prior year period. Shipments of commercial furniture for the nine months ended September 29, 2012 were higher than the same period in 2011 due to shipments of office suites and waiting area furniture products, primarily to the health care industry, and, to a lesser extent, increased sales of seating products. The consolidated sales increase for the three months and nine months ended September 29, 2012 compared to the same periods in 2011 was primarily due to higher unit volume.

Gross margin was $2.7 million, or 19.4% of net sales, for the third quarter of 2012 compared to $2.5 million, or 19.0% of net sales, for the prior year period. The incremental gross margin contributed by EOC products and lower import sourcing expense in the third quarter of 2012 was partially offset by higher labor costs as compared to the third quarter of 2011.

Gross margin for the nine months ended September 29, 2012 was $8.0 million, representing an 18.6% increase over the $6.7 million gross margin in the prior year period. The higher gross margin in the nine months ended September 29, 2012 as compared to the same period last year was primarily due to a favorable product sales mix, lower import sourcing expense and increased sales.

Selling, general and administrative expenses were 25.5% of net sales in the three months ended September 29, 2012 as compared to 26.4% of net sales in the prior year period. The decreased percentage was primarily due to the spreading of certain fixed costs over a higher sales volume for the third quarter of 2012 as compared to the prior year period. Selling, general and administrative expenses for the nine months ended September 29, 2012 were $11.1 million, or 26.7% of net sales as compared to $10.6 million, or 26.8% of net sales in the prior year period. The increase in selling, general and administrative expenses for the nine months ended September 29, 2012 compared to the prior year period was primarily a result of the operating expenses of EOC and $0.2 million in fees resulting from the termination of our revolving credit facility with FBCC in April 2012.


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Net interest expense, which includes Credit Facility fees, was $0.1 million and $0.5 million for the three months and nine months ended September 29, 2012, respectively, compared to $0.1 million and $0.2 million for the prior year periods, respectively. The increase for the nine months ended September 29, 2012 compared to the prior year period was primarily due to the write-off of deferred financing fees resulting from the termination of the credit facility with FBCC in April 2012 and $0.1 million in interest expense on borrowings on our revolving credit facility in 2012.

The Company recorded a deferred income tax benefit of $238 for the three and nine months ended September 29, 2012, respectively, as compared to $0 and $0, respectively, for the same periods in 2011. The tax benefit in 2012 resulted from the final allocation of the purchase price of EOC to the assets acquired and liabilities assumed. At December 31, 2011 and 2010, the Company maintained a full valuation allowance against the entire net deferred income tax balance. The Company expects to maintain a full valuation allowance on its entire net deferred tax assets at December 31, 2012.

Financial Condition, Liquidity and Capital Resources

Working capital, excluding cash, the revolving credit facility and the effect of the acquisition of EOC, decreased $2.1 million in the first nine months of 2012 primarily due to a decrease in accounts receivable and an increase in accounts payable. Accounts receivable decreased at the end of the third quarter of 2012 compared to December 31, 2011 primarily due to lower sales in the third quarter of 2012 as compared to the fourth quarter of 2011, which experienced high sales volume late in the quarter. The increase in accounts payable at September 29, 2012 compared to December 31, 2011 is primarily due to the Company's efforts to limit borrowings on the Company's revolving credit facility.

Operating activities of the Company used $1.1 million of cash in the first nine months of 2012 as compared to $2.6 million of cash used in the prior year period. The reduction in cash used for operating activities in the first nine months of 2012 compared to the prior year period was primarily due to an increase in cash from net working capital and a lower operating loss.

Investing activities includes the Company's purchase of EOC for $0.5 million, of which $0.1 million was paid at closing, net of cash acquired, and the balance of the purchase price will be paid in equal quarterly installments which began in July 2012 and will end April 2015. Investing activities also includes capital expenditures of $0.1 million for the first nine months of 2012. The Company expects to spend approximately $0.2 million for capital expenditures in 2012.

Financing activities provided $1.4 million in the first nine months of 2012 which includes $1.5 million of net borrowings on the Company's revolving credit facility, primarily to fund the cash used in operating activities.

The Company had an outstanding loan balance of $2.4 million and approximately $2.5 million of availability under the Credit Facility at September 29, 2012. The Company had approximately $1.9 million of availability under the Credit Facility at November 9, 2012. Availability fluctuates from time to time during any given period based on the amount of the Company's eligible accounts receivable, lockbox receipts, and outstanding advances under the Credit Facility.


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In order for the Company to be in compliance with its net income (loss) financial covenants under the Credit Facility, our net loss for the nine months ended September 29, 2012 and for the year ended December 31, 2012 must not exceed $3.5 million. The Company was in compliance with this financial covenant for the nine months ended September 29, 2012. However, management believes it is probable that the Company will not be in compliance with this financial covenant for the year ended December 31, 2012. As such, we will need to seek a waiver of this likely noncompliance from Gibraltar.

In addition, based upon management's current financial projections, management believes it is probable that the Company will not be in compliance with the net income (loss) financial covenants under the Credit Facility in 2013. The financial covenants for 2013 were established in 2012 and at a time when management's operating plan for 2013 had not yet been prepared. Although management is still in the process of finalizing our 2013 operating plan, management believes that the current net income (loss) financial covenant for the first three quarters in 2013 and for the year ending December 31, 2013, as set forth in the Waiver and Loan Modification Agreement attached as Exhibit 10.1 to this Form 10-Q, will need to be amended.

In this regard, we have initiated discussions with Gibraltar regarding obtaining a waiver of our probable noncompliance with our net income (loss) financial covenant for the year ended December 31, 2012 as well as an amendment to our financial covenants for 2013. If Gibraltar grants such a waiver and amends the covenants for 2013, it is possible that Gibraltar may impose additional conditions and require other concessions from the Company beyond what Gibraltar required as a condition to providing its previous waiver of the Company's noncompliance with the net income (loss) financial covenant under the Credit Facility for the six months ended June 30, 2012. We also are discussing with Gibraltar the possibility of including eligible inventory to our borrowing base as a means to assure that we have adequate credit availability under our Credit Facility.

There is no assurance that Gibraltar will grant such a waiver or agree to such an amendment. In the event that Gibraltar is unwilling to agree to the waiver and amend the net income (loss) financial covenants for 2013 to levels that the Company believes it can achieve, then Gibraltar could declare an event of default, terminate the Credit Facility and not extend further credit to the Company, declare upon notice to the Company all amounts then outstanding under the Credit Facility to be immediately due and payable, charge a default rate of interest, take possession and sell assets of the Company that constitute collateral for the Credit Facility and exercise any other rights and remedies that Gibraltar may have. Any of these actions would adversely affect our liquidity, business and ability to continue to operate.

Further, if our trade creditors were to impose unfavorable terms on us, this could negatively impact our ability to obtain raw materials, products and services on acceptable terms. We have implemented expense controls and limitations on capital expenditures to conserve cash at the present time.

Because we presently are incurring losses, the continued availability of credit under our Credit Facility is critical to meeting our short term liquidity needs and to our ability to continue to operate. Assuming that Gibraltar grants the waiver and agrees to the amendment discussed above, the Company expects additional borrowings under the Credit Facility in the fourth quarter of 2012 and throughout 2013.


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We will need to generate adequate cash flow from operations in the near future in order to meet our short term and long term liquidity needs. We believe that further deterioration in our revenues would expose us to declining margins as a result of unabsorbed fixed manufacturing overhead, operating inefficiencies and an imbalance between our inventory levels and customer demand which would likely result in continued losses and reduced liquidity. In the absence of adequate cash flow from operations, the Company will need to further restrict expenditures, sell assets, seek additional business funding or capital or consider other alternatives.

Our ability to obtain additional funding or capital would likely be limited because Gibraltar has a first-priority lien on all of our assets as collateral for our Credit Facility, and the Credit Facility contains restrictions on most other indebtedness of the Company as well as other liens on our assets without Gibraltar's prior consent. Our financial results also could adversely affect the availability and terms of any such funding or capital. The loan and security agreement for our Credit Facility does allow us to incur other indebtedness at a favorable interest rate under certain government programs up to $1.5 million for capital expenditures and improvements for our Senatobia, Mississippi facility without the consent of Gibraltar.

Recently Issued Accounting Standards

There have been no recent accounting standards or changes in accounting standards during the nine months ended September 29, 2012, that are of significance, or potential significance to the Company, as compared to the recent accounting standards described in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Forward-Looking Statements

Certain information and statements contained in this report including, without limitation, in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. These forward-looking statements can be generally identified as such because they include future tense or dates, are not historical or current facts, or include words such as "believe," "may," "expect," "intend," "plan," "anticipate," or words of similar import. Forward-looking statements express management's current expectations or forecasts of future events or outcomes, but are not guarantees of performance or outcomes and are subject to certain risks and uncertainties that could cause actual results or outcomes to differ materially from those in such statements.

Among such risks and uncertainties that could cause actual results or outcomes to differ materially from those identified in the forward-looking statements are the impact of the current economic difficulties in the United States and elsewhere; import and domestic competition in the furniture industry; our ability to execute our business strategies; our ability to grow sales and reduce expenses to eliminate our operating losses; the recent slowdown in the U.S. office furniture market will continue; our ability to sell the right product mix; our inability to raise prices in response to increasing costs; continued credit availability under our Credit Facility and our ability to fully utilize the Credit Facility; our ability to raise additional financing, if needed; our ability to anticipate or respond to changes in the tastes or needs of our end users in a timely manner; supply disruptions with products manufactured in China, Vietnam and other Asian countries; market interest rates; consumer confidence levels; cyclical nature of the furniture industry; consumer and business spending; changes in relationships with customers; customer acceptance of existing and new products; new home and existing home sales; financial viability of our customers and their ability to continue or increase product orders; loss of key management; other factors that generally affect business; and certain risks set forth in the Company's annual report on Form 10-K for the year ended December 31, 2011.


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The Company does not undertake any obligation to update or revise publicly any forward-looking statements to reflect information, events, circumstances or outcomes after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or circumstances.

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