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

Show all filings for STANLEY FURNITURE CO INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for STANLEY FURNITURE CO INC.


15-Oct-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            Nine Months Ended
                                  Sept. 28,     Sept. 29,      Sept. 28,     Sept. 29,
                                    2013          2012           2013          2012
 Net sales                           100.0%        100.0%         100.0%        100.0%
 Cost of sales                         88.4          86.0           88.7          86.7
 Gross profit                          11.6          14.0           11.3          13.3
 Selling, general and                  19.6          19.3           19.8          18.2
 administrative expenses
 Operating loss                       (8.0)         (5.3)          (8.5)         (4.9)
 CDSOA income, net                        -            .2              -          52.4
 Other income, net                       .1            .1            .1             .1
 Interest expense, net                  2.9           2.6           2.6            2.3
 (Loss) income before income         (10.8)         (7.6)         (11.1)          45.3
 taxes
 Income tax (benefit) expense          (.5)            .3           (.2)            .9
 Net (loss) income                  (10.3)%        (7.9)%        (10.9)%         44.4%


Net sales for the three month period ended September 28, 2013 were flat to the comparable 2012 period. For the nine month period ended September 28, 2013, net sales decreased $986,000, or 1.3% from the comparable 2012 period. During the three month period, a small decrease in unit volume was partially offset by higher average selling prices attributable to a price increase instituted in the second quarter of this year on the Stanley Furniture product line. The decrease during the nine month period was primarily due to lower unit volume.

Gross profit for the current three month period was $2.8 million, or 11.6% of net sales compared to $3.3 million, or 14.0% of net sales, for the three month period of 2012. Gross profit for the first nine months of 2013 decreased to $8.3 million, or 11.3% of net sales, from $10.0 million, or 13.3% of net sales, for the comparable nine months of2012. The comparable prior year nine month period includes restructuring related charges associated with the consolidation of our Virginia warehousing operations of $474,000. The reduction in gross profit for the current three and nine month periods was driven by inflation and discounting on the Stanley Furniture product line and higher raw material costs on the Young America product line. Partially offsetting these increases were pricing actions taken on the Stanley Furniture product in the previous quarter, continued operating improvements at the Young America manufacturing facility in Robbinsville, NC and favorable medical claim trends in both periods.

Selling, general and administrative expenses for the three and nine month periods of 2013 as a percentage of net sales were 19.6% and 19.8%, respectively, compared to 19.3% and 18.2% for the comparable 2012 periods. The higher percentage in the current three month period is primarily the result of increased expenditures. The higher percentage in the nine month period is primarily the result of increased expenditures and, to a lesser extent, lower sales. Selling, general and administrative expenses for the current three and nine month periods increased $77,000 and $977,000, respectively, compared to the 2012 periods. The current year expenses include restructuring charges associated with consolidating the corporate offices of $10,000 and $532,000 for the three and nine month periods, respectively. Excluding these one-time costs, higher current year expenditures were driven primarily by increased showroom, marketing and advertising costs on the Stanley Furniture product line.

As a result, operating loss as a percentage of net sales was 8.0% and 8.5% for the three and nine month periods of 2013 compared to 5.3% and 4.9% for the comparable 2012 periods.

During the prior year nine 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 $84,000 from the comparable 2012 period and $245,000 for the nine 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 nine month periods is essentially zero since we have established a valuation allowance for our deferred tax assets in excess of our deferred tax liabilities. The benefit in the current year is primarily related to the release of reserves due to lapse of statute of limitations. 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. 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 September 28, 2013, we had $10.9 million in cash, $10.0 million of short-term investments and $1.7 million in restricted cash.

Working capital, excluding cash, restricted cash and short-term investments, increased to $36.9 million at September 28, 2013 from $34.6 million on December 31, 2012. The increase was primarily the result of a $3.7 million increase in accounts receivable and a $1.9 million reduction in accounts payable. Partially offsetting this working capital increase was a $3.4 million reduction in inventories.

Cash used by operations was $11.9 million in the nine month period of 2013 compared to cash provided by operations of $30.6 million in the comparable prior year period. The cash used by operations in 2013 was the result of operating losses and to fund the increase in working capital. The cash provided by operations in the prior year was the result of the receipt of $39.9 million in CDSOA proceeds.


Net cash provided by investing activities was $9.9 million in the current nine month period compared to a use of $25.3 million in the comparable prior year period. During the nine month period of 2013, we invested $2.0 million in capital expenditures for the consolidation of our corporate offices and High Point showroom and $830,000 in final equipment payments as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina that started in early 2011. We spent $2.2 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 nine months of 2012, we invested $20.0 million of our CDSOA proceeds in short-term investments. In addition, we invested $3.2 million in capital expenditures as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina and $1.8 million as part of our investment in improved systems. We expect minimal capital expenditures during the remainder of 2013.

Net cash provided by financing activities was $2.0 million in the current nine months of 2013 compared to $2.2 million in the prior year period. Approximately $358,000 was used in the first nine months of 2013 to purchase and retire 80,077 shares of our common stock. In both years, cash was provided from loans against the increase in 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 have remained 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 distribution. On August 19, 2013, a panel of the Federal Circuit affirmed the U.S. Court of International Trade and determined that two of the appealing Non-Supporting Producers did not qualify for distributions. On October 3, 2013 those producers petitioned the Federal Circuit for a rehearing en banc. Based on what we know today, we believe that the chance Customs will seek and be entitled to obtain a return of our CDSOA distribution is remote.

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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