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STLY > SEC Filings for STLY > Form 10-K on 11-Feb-2014All Recent SEC Filings

Show all filings for STANLEY FURNITURE CO INC.

Form 10-K for STANLEY FURNITURE CO INC.


11-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

Overview

The market for residential wood furniture has been significantly impacted by declines in housing activity, consumer confidence and disposable income over the last few years.Although some areas of home furnishing are beginning to see improvements in the market place, the upper end of the residential wood furniture segment continues to be depressed. During the economic downturn, we took a number of strategic steps to reposition our company and to align our cost structure and operating models with the lower sales volume and the changing marketplace. Major restructuring action was taken to consolidate facilities and ultimately reduce our domestic manufacturing footprint. At the same time, we shifted our operating strategy so that we could respond to the demands of a changing marketplace and position our company for growth. Accordingly, we transitioned the manufacturing of the Stanley Furniture product to a fully overseas sourced model and ceased domestic manufacturing operations for this product in late 2010. This transition of our Stanley Furniture product line was successfully completed in 2011. For our Young America product line, we implemented a strategy to differentiate us in the marketplace by ensuring safety, quality, selection and service. This led us to shift the production of sourced Young America items from overseas to our domestic operation. Over the past three years we have invested approximately $9.0 million in the modernization of our manufacturing facility in Robbinsville, North Carolina to enable us to be competitive as a domestic producer of this product. In addition, we upgraded the quality standards of this product during 2012. The operational disruption created by these activities, which negatively impacted our financial performance over the last three years, is now complete. The last phase of our Company's transformation occurred in 2013 with the consolidation of our corporate office and showroom in High Point, North Carolina and the implementation of a new Enterprise Resource Planning (ERP) system. The relocation of our corporate office along with the implementation of a new ERP system was a significant undertaking that had a short-term negative impact on incoming orders and our financial performance during 2013. With the major issues addressed by the end of 2013, the final phase of the Company's strategic overhaul was complete. The strength of our Balance Sheet and proceeds received from the Continued Dumping and Subsidy Offset Act (CDSOA) allowed us to act on strategic decisions that we believe have positioned us to return to growth and profitability.

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Operations:

                                                For the Years Ended
                                                    December 31,
                                              2013      2012      2011
Net sales                                     100.0 %   100.0 %   100.0 %
Cost of sales                                  89.9      87.6      88.1
Gross profit                                   10.1      12.4      11.9
Selling, general and administrative expenses   20.6      18.6      18.4
Operating loss                               (10.5)     (6.2)     (6.5)
CDSOA income, net                                 -      39.9       3.8
Other income, net                                .1        .1        .1
Interest expense, net                           2.8       2.3       2.2
Income before income taxes                   (13.2)      31.5     (4.8)
Income taxes (benefit)                         (.2)        .7
Net income (loss)                            (13.0) %    30.8 %   (4.8) %

2013 Compared to 2012

Net sales decreased $1.6 million, or 1.6%, in 2013 compared to 2012. The decrease was primarily due to lower unit volume for our Stanley Furniture product line. Partially offsetting the unit decline on the Stanley Furniture product line was increased sales and unit volume from the Young America product line, along with higher average selling prices on the Stanley Furniture product line following a second quarter price increase.

Gross profit as a percentage of net sales decreased to 10.1% in 2013 from 12.4% in 2012. The decrease in gross profit for 2013 compared to 2012 resulted from higher discounting, and from inflation on both sourced items and raw materials. Partially offsetting these cost increases were pricing actions taken on the Stanley Furniture product line, operational improvements at our manufacturing facility in Robbinsville, NC and lower medical claims. Included in our 2012 gross profit is $474,000 in restructuring charges, which consist mostly of a charge against future lease obligations in Virginia as we concluded that only a portion of the leased warehouse space was required.


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Selling, general and administrative expenses for 2013 were $20.0 million, or 20.6% of net sales, compared to $18.3 million, or 18.6% of net sales, in 2012. The current year expenses include $770,000 of restructuring charges associated with relocation of our corporate office. Excluding these one-time costs, higher current year expenditures were driven primarily by costs related to the relocation of our High Point showroom and our new showroom in Las Vegas. In addition, we had higher support and amortization costs related to the implementation of our new ERP system.

As a result of the above, our operating loss increased to $10.2 million in 2013 compared to an operating loss of $6.1 million in 2012.

In 2013, we did not receive any funds under the CDSOA involving wooden bedroom furniture imported from China. In 2012, we recorded income, net of legal expenses, of $39.3 million from CDSOA receipts.

Interest expense in 2013 increased $350,000 over 2012. 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 2013 effective tax rate was 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 was primarily related to the release of reserves due to lapse of statute of limitations. Our effective tax rate for 2012 was 2.1%. The tax expense in 2012 was primarily the result of federal alternative minimum tax on the receipt of proceeds from the CDSOA funds 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.

2012 Compared to 2011

Net sales decreased $6.1 million, or 5.8%, in 2012 compared to 2011. The decrease was primarily due to lower unit volume for our Young America product line as we completed the modernization efforts in our factory and transitioned the entire product line to higher quality standards. Partially offsetting the volume declines on the Young America product line was increased sales and unit volume on the Stanley Furniture product line, as we believe we regained market share lost during our transition to a sourced model in early 2011.

Gross profit as a percentage of net sales improved to 12.4% in 2012 from 11.9% in 2011. The improvement in gross profit for 2012 compared to 2011 resulted from higher sales volume on the Stanley Furniture product line and operational improvements from our Young America product line. Included in gross profit in 2012 and 2011 is $474,000 and $416,000, respectively, in restructuring and related charges. These charges consisted mostly of charges against future lease obligations as evaluations in each year indicated that only a portion of a leased warehouse space would be required.

Selling, general and administrative expenses for 2012 were $18.3 million, or 18.6% of net sales, compared to $19.3 million, or 18.4% of net sales, in 2011. The decline in these expenses were primarily due to the impact that lower sales had on variable selling expenses, lower spending on marketing related expenses and a decrease in bad debt expense.

As a result of the above, operating loss improved to $6.1 million in 2012 compared with an operating loss of $6.8 million in 2011.

We recorded income, net of legal expenses, of $39.3 million in 2012 from the receipt of funds under the CDSOA involving wooden bedroom furniture imported from China and other related payments compared with $4.0 million in 2011.

Interest expense in 2012 remained flat with 2011. Interest expense for both periods is composed of interest on insurance policy loans from a legacy deferred compensation plan and imputed interest on a lease related obligation in 2011.

Our effective tax rate for 2012 was 2.1%. The tax expense in 2012 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. Our 2011 effective tax rate was essentially zero as we had established a valuation allowance for our deferred tax assets in excess of our deferred tax liabilities.


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Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand and cash generated from operations. While we believe that our business strategy and restructuring efforts will be successful, we cannot predict with certainty the ultimate impact on our revenues, operating costs and cash flows from operations. The CDSOA proceeds of $39.9 million received in 2012 strengthened our balance sheet and allowed us to invest in and focus on the execution of our long-term strategy. We expect cash on hand to be adequate for ongoing expenditures and capital investments for the foreseeable future, as we return to normal capital spending and improve financial performance. At December 31, 2013 we had $7.2 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 during 2013 to $37.1 million from $34.6 million on December 31, 2012. The increase was primarily the result of an increase in accounts receivable and reductions in accounts payable, accrued compensation costs and other accruals. Partially offsetting these items was a decrease in inventories.

Cash used by operations was $15.6 million in 2013 compared to cash provided of $25.4 million in 2012 and cash used of $7.3 million in 2011. The cash used by operations in 2013 was the result of operating losses and funding the increase in working capital.The cash provided by operations during 2012 was from the receipt of $39.9 million in proceeds from the CDSOA, partialy offset by operating losses. CDSOA proceeds of $4.6 million were received in 2011, while no proceeds were received in 2013. During 2012, we paid income taxes of $768,000, largely driven by the income related to the CDSOA proceeds compared to income tax refunds of $3.6 million in 2011. The increase in cash used by operations in 2013 compared to 2012, excluding the CDSOA receipts, was primarily due to larger operating losses driven by lower sales, higher discounting and material cost inflation, partially offset by continued savings related to operational improvements.

Net cash provided by investing activities was $9.9 million in 2013 compared to cash used of $31.6 million in 2012 and $4.4 million in 2011. During 2013, we invested $2.1 million in capital expenditures for the consolidation of our corporate offices and High Point showroom and $500,000 in final equipment payments as part of the modernization of our manufacturing operation in Robbinsville, North Carolina that started in early 2011. Over the last two years we have invested $5.1 million in a new Enterprise Resource Planning System and improved websites, of which $2.4 million was spent in 2013 and $2.7 million in 2012. Offsetting these uses of cash was the maturity of a short term investment of $15.0 million. During 2012 we invested $25.0 million of our CDSOA proceeds in short-term investments. In addition, we invested $3.8 million in 2012 and $4.4 million in 2011 in capital expenditures, a majority of which was for the modernization of our Young America manufacturing operation in Robbinsville, North Carolina. Included in 2011 investing activities was a $1.6 million transfer of cash to restricted cash to secure letters of credit. Sale of assets provided cash of $81,000 and $1.6 million in 2012 and 2011, respectively. Capital expenditures for 2014 should return back to normal maintenance capital of approximately $1.4 million, with most occurring in the later part of the year.

Net cash provided by financing activities was $2.0 million in 2013 compared to $1.5 million in 2012 and $1.9 million in 2011. In 2013 and 2012, $358,000 and $661,000, respectively, were used for the purchase and retirement of our common stock. In 2013, 2012 and 2011, proceeds from insurance policy loans provided cash of $2.4 million, $2.2 million and $2.0 million, respectively.

The following table sets forth our contractual cash obligations and other commercial commitments at December 31, 2013 (in thousands):

                                                 Payment due or commitment expiration
                                                 Less Than                                   Over
                                     Total        1 year       1-3 years     4-5 years     5 years
Contractual cash obligations:
Postretirement benefits (1)        $    3,002   $       301   $       544   $       494   $    1,663
Operating leases                        8,875         1,530         2,870         1,687        2,788
Capital lease                             600           147           294           159            -
Total contractual cash obligations $   12,477   $     1,978   $     3,708   $     2,340   $    4,451
Other commercial commitments:
Letters of credit                  $    1,737   $     1,737

(1) The RP-2000 Combined Health Mortality Table with generational mortality improvements was used in estimating future benefit payments, and, for the non-pension related postretirement benefits, the health care cost trend rate for determining payments is 8.0% for 2013 and gradually declines to 5.5% in 2018 where it is assumed to remain constant for the remaining years.

Not included in the above table are unrecognized tax benefits of $351,000, due to the uncertainty of the date of occurrence.


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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. On August 19, 2013, the Federal Circuit issued a decision affirming the dismissal of the claims of two of the four Non-Supporting Producers. On January 3, 2014, the Federal Circuit denied those Non-Supporting Producers' petitions for rehearing en banc. Those Non-Supporting Producers have until April 4, 2014 to file a petition for a writ of certiorari with the U.S. Supreme Court. If the Supreme Court were to accept such petitions for certiorari review and thereafter to reverse the decisions of the Federal Circuit 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. 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, 2013, approximately $3.2 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 Customs' interpretation of that legislation. Assuming that such funds are distributed and that our percentage allocation in future years is the same as it was in 2011 when the last annual distribution was made (approximately 30% of the funds distributed) and the $3.2 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 $1.0 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 in 2012 until the amounts at issue in the pending litigation have been resolved. In December 2013, Customs disclosed that it withheld another $6.4 million in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution in 2013 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 or in December 2013 for the case involving wooden bedroom furniture from China. Assuming our historic allocation of approximately 30%, the portion of these undistributed funds that may be allocated to us is approximately $2.8 million.

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.


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New Accounting Pronouncments

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," for fiscal years, and interim periods within those years, beginning after December 15, 2013. We will adopt this guidance as required in first quarter of 2014. The adoption of this update will not have a material effect on our statements of operations, financial position or cash flows.

Critical Accounting Policies

We have chosen accounting policies that are necessary to accurately and fairly report our operational and financial position. Below are the critical accounting policies that involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Cash and equivalents - We consider highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates fair market value. Our cash and cash equivalents are primarily in bank deposits, money market funds and certificate of deposits.

Short-term investments - We consider investments with maturities of greater than three months and less than one year at the time of purchase as short-term investments. Our investments are in certificates of deposits, which we intend to hold until maturity. We report the investments at cost with earnings recognized through interest income.

Allowance for doubtful accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We perform ongoing credit evaluations of our customers and monitor their payment patterns. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would reduce our earnings.

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 our market value based on current trends. Those items having a market value less than cost are written down to their market value. If we fail to forecast demand accurately, we could be required to write off additional non-saleable inventory, which would also reduce our earnings.

Deferred Taxes -- We recognize deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statements and the tax basis of assets and liabilities given the enacted tax laws. We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that the company will realize its deferred tax assets in the future. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the forecast of future taxable income. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made.

In preparation of the company's financial statements, management exercises judgments in estimating the potential exposure to unresolved tax matters and applies a more likely than not criteria approach for recording tax benefits related to uncertain tax positions. While actual results could vary, in management's judgment, the company has adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters.

Long-lived assets - Property, plant and equipment is 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 that would lower our earnings. Our depreciation policy reflects judgments on the estimated remaining useful lives of assets.

Accruals for Self- Insurance Reserves - Accruals for self-insurance reserves (including workers' compensation and employee medical) are determined based on a number of assumptions and factors, including historical payment trends and claims history, actuarial assumptions and current and estimated future economic conditions. These estimated liabilities are not discounted. If actual trends differ from these estimates, the financial results could be impacted. Historical trends have not differed materially from these estimates.


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Off-Balance Sheet Arrangements

We do not have transactions or relationships with "special purpose" entities, and we do not have any off-balance sheet financing other than normal operating leases primarily for warehousing, showroom and office space, and certain technology equipment.

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