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STLY > SEC Filings for STLY > Form 10-Q on 15-Jul-2013All Recent SEC Filings

Show all filings for STANLEY FURNITURE CO INC.

Form 10-Q for STANLEY FURNITURE CO INC.


15-Jul-2013

Quarterly Report


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 Consolidated Statements of Income:



                                        Three Months Ended       Six Months Ended
                                       June 29,    June 30,    June 29,    June 30,
                                         2013        2012        2013        2012
  Net sales                               100.0%      100.0%      100.0%      100.0%
  Cost of sales                             91.0        87.4        88.9        87.0
  Gross profit                               9.0        12.6        11.1        13.0
  Selling, general and administrative       21.1        18.4        19.8        17.7
  expenses
  Operating loss                          (12.1)       (5.8)       (8.7)       (4.7)
  CDSOA income, net                            -       161.1           -        76.9
  Other income, net                           .1          .1           -          .1
  Interest expense, net                      2.6         2.0         2.5         2.2
  (Loss) income before income taxes       (14.6)       153.4      (11.2)        70.1
  Income tax                                  -          2.5          -          1.2
  Net (loss) income                      (14.6)%      150.9%     (11.2)%       68.9%

Net sales for the three month period ended June 29, 2013 decreased $262,000, or 1.1%, from the comparable 2012 period. For the six month period ended June 29, 2013, net sales decreased $991,000, or 1.9% from the comparable 2012 six month period. The decrease was due primarily to lower unit volume and, to a lesser extent, lower average selling prices. The lower average selling prices are primarily related to discounting of existing designs from the Stanley Furniture product line as part of a sales growth initiative to gain retail floor sample placements, but also are related to the discounting of obsolete inventory on the Young America product line.

Gross profit for the current three month period was $2.2 million, or 9.0% of net sales. Gross profit decreased from $3.1 million, or 12.6% of net sales, from the comparable three month period of 2012. Gross profit for the first half of 2013 decreased to $5.6 million, or 11.1% of net sales, from $6.7 million, or 13.0% of net sales, for the comparable six months of 2012. The comparable prior year three and six month periods include restructuring related charges associated with the consolidation of our Virginia warehousing operations of $474,000. The reduction in gross profit for both periods was driven mostly by discounting and inflation on the Stanley Furniture line. Continued operating improvements at the Young America manufacturing facility in Robbinsville, NC have provided some offset to these increased costs.


Selling, general and administrative expenses for the three and six month periods of 2013 as a percentage of net sales were 21.1% and 19.8%, respectively, compared to 18.4% and 17.7% for the comparable 2012periods. The higher percentage in the current three and six month periods is primarily the result of increased expenditures and, to a lesser extent, lower sales. Selling, general and administrative expenses for the three and six month periods increased $624,000 and $900,000, respectively, compared to the 2012 periods. The current year expenses include restructuring charges associated with consolidating the corporate offices of $262,000 for the three month period and $522,000 for the six month period. Excluding these one-time costs, higher current year expenditures were driven by increased showroom, marketing and advertising costs.

As a result, operating loss as a percentage of net sales was 12.1% and 8.7% for the three and six month periods of 2013 compared to 5.8% and 4.7% for the comparable 2012 periods.

During the prior year three month period we recorded income, net of expenses, of $39.4 million from the receipt of funds under the Continued Dumping and Subsidy Offset Act (CDSOA).

Net interest expense for the three month period of 2013 increased $127,000 from the comparable 2012 period and $162,000 for the six month period. Interest expense is primarily composed of interest on insurance policy loans from a legacy deferred compensation plan, which increases annually based on growth in cash surrender value.

Our effective tax rate for the current three and six months is essentially zero since we have established a valuation allowance for our deferred tax assets in excess of our deferred tax liabilities. The expense in the prior year period is primarily the result of federal alternative minimum tax on the receipt of proceeds from the CDSOA distributed by U.S. Customs and Border Protection in April of last year. Federal alternative minimum tax regulations limit the ability to offset all of the income generated in the period with net operating loss carry forwards.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand and cash generated from operations. We expect cash on hand to be adequate for ongoing operational and capital expenditures for the foreseeable future. At June 29, 2013, we had $12.8 million in cash, $1.7 million in restricted cash and $10.0 million of short-term investments.

Working capital, excluding cash, restricted cash and short-term investments, increased to $37.0 million at June 29, 2013 from $34.6 million on December 31, 2012. The increase was primarily the result of a reduction of $3.7 million in accounts payable and an increase of $2.7 million in accounts receivable. Partially offsetting this working capital increase was a reduction in inventories of $3.3 million and other miscellaneous accruals of $700,000.

Cash used by operations was $10.8 million in the six month period of 2013 compared to cash provided by operations of $31.8 million in the comparable prior year period. The cash used by operations in 2013 was a result of operating losses and to fund working capital. The cash provided by operations in the prior year was the result of the receipt of $39.9 million in proceeds from the CDSOA.


Net cash provided by investing activities was $10.6 million in the current six month period of 2013 compared to a use of $23.9 million in the comparable prior year quarter. During the six month period of 2013, we invested $2.1 million in capital expenditures for the consolidation of our corporate offices and High Point showroom and $640,000 in equipment purchases as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina that started in early 2011. We spent $1.7 million as part of our continued investment in our Enterprise Resource Planning (ERP) system. Offsetting these uses of cash was the maturity of a short term investment of $15.0 million. During the first six months of 2012, we invested $20.0 million of our CDSOA proceeds in short-term investments. In addition, we invested $2.6 million in capital expenditures as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina and $1.3 million as part of our investment in improved systems. We expect to spend approximately $500,000 in capital for the remainder of the year for completion of our corporate office and showroom and in normal capital expenditures. We plan to spend $400,000 on our ERP system improvements for the remainder of 2013.

Net cash provided by financing activities was $2.0 million in the current six months of 2013 compared to $2.2 million in the prior year period. Approximately $358,000 was used in the first six months of 2013 to purchase and retire 80,077 shares of our common stock. In both years, cash was provided from loans against the cash surrender value of insurance policies. These proceeds were used to pay interest due on outstanding policy loans which is shown as a use of cash in operating activities.

Continued Dumping and Subsidy Offset Act ("CDSOA")

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection ("Customs") for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition ("Supporting Producers") for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 remain with the U.S. Treasury.

Certain manufacturers who did not support the antidumping petition ("Non-Supporting Producers") filed actions in the United States Court of International Trade, challenging the CDSOA's "support requirement" and seeking to share in the distributions. As a result, Customs held back a portion of those distributions (the "Holdback") pending resolution of the Non-Supporting Producers' claims. The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit. Customs advised that it expected to distribute the Holdback to the Supporting Producers after March 9, 2012. The Non-Supporting Producers sought injunctions first from the Court of International Trade and, when those efforts were unsuccessful, from the Federal Circuit directing Customs to retain the Holdback until the Non-Supporting Producers' appeals were resolved.

On March 5, 2012, the Federal Circuit denied the motions for injunction, "without prejudicing the ultimate disposition of these cases." As a result, we received a CDSOA distribution of $39.9 million in April 2012. If the Federal Circuit were to reverse the decisions of the Court of International Trade and determine that the Non-Supporting Producers were entitled to CDSOA distributions, it is possible that Customs may seek to have us return all or a portion of our company's share of that recent distribution. The Federal Circuit held oral arguments on March 8, 2013 concerning the appeals of two of the Non-Supporting Producers. Based on what we know today, we believe that the chance Customs will seek and be entitled to obtain a return is remote. We recorded income, net of expenses, of $39.4 million in April 2012 as a result of the receipt of these funds.

In addition, according to Customs, as of October 1, 2012, approximately $8.9 million in duties had been secured by cash deposits and bonds on unliquidated entries of wooden bedroom furniture that are subject to the CDSOA, and this amount is potentially available for distribution under the CDSOA to eligible domestic producers in connection with the case involving wooden bedroom furniture imported from China. The amount ultimately distributed will be impacted by appeals concerning the results of the annual administrative review process, which can retroactively increase or decrease the actual duties owed on entries secured by cash deposits and bonds, by collection efforts concerning duties that may be owed, and by any applicable legislation and Custom's interpretation of that legislation. Assuming that such funds are distributed and that our percentage allocation in future years is the same as it was for the 2011 distribution (approximately 30% of the funds distributed) and the $8.9 million secured by the government does not change as a result of appeals from the annual administrative review process or otherwise, we could receive approximately $2.7 million in CDSOA funds.


In November 2012, Customs disclosed that it withheld $3.0 million in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution until the amounts at issue in the pending litigation have been resolved. It is expected that Customs will continue withholding such funds until a final decision is reached in the pending litigation.Therefore, no distributions were made in December 2012 for the case involving wooden bedroom furniture from China.

Recently, Customs also disclosed that as of April 30, 2013, an additional $1.1 million of total collected duties was potentially available for distribution in 2013 to eligible domestic manufacturers of wooden bedroom furniture. Customs noted that the final amounts available for distribution in 2013 could be higher or lower than the preliminary amounts due to liquidations, re-liquidations, protests, or other events affecting entries. This amount, at least in part, may have come from the security held by Customs as of October 1, 2012, but Customs has not updated the amount of duties that remain secured by cash deposits and bonds on un-liquidated entries of wooden bedroom furniture. We expect Customs to withhold these funds from distribution if a final decision is not reached in the pending litigation before the end of the fourth quarter of 2013.

Due to the uncertainty of the various legal and administrative processes, we cannot provide assurances as to the amount of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds.

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 2012 Annual Report on Form 10-K.

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," "could", 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 profitably producing Young America products in our domestic manufacturing facility, disruptions in foreign 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, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry, business failures or loss of large customers, the inability to raise prices in response to inflation and increasing costs, a failure or interruption of our information technology infrastructure, failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner, competition in the furniture industry including competition from lower-cost foreign manufacturers, the inability to obtain sufficient quantities of quality raw materials in a timely manner, environmental, health, and safety compliance costs, limited use of operating loss carry forwards due to ownership change, extended business interruption at our manufacturing facility, and the possibility that U.S. Customs and Border Protection may seek to reclaim all or a portion of the $39.9 million of Continued Dumping and Subsidy Offset Act (CDSOA) proceeds received in the second quarter of 2012. In addition, we have made certain forward looking statements with respect to payments we expect to receive under the CDSOA, which are subject to the risks and uncertainties described in our discussion of those payments that may cause the actual payments to be subject to claims for recovery or to differ materially from those in the forward looking statements. Any forward-looking statement speaks only as of the date of this filing, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

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