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STLY > SEC Filings for STLY > Form 10-Q on 17-Jul-2012All Recent SEC Filings

Show all filings for STANLEY FURNITURE CO INC.



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 30,       July 2,      June 30,      July 2,
                                         2012           2011         2012          2011
 Net sales                               100.0 %        100.0 %      100.0 %       100.0 %
 Cost of sales                            87.4           86.8         87.0          90.2
 Gross profit                             12.6           13.2         13.0           9.8
 Selling, general and administrative
 expenses                                 18.4           17.3         17.7          18.3
 Operating loss                          (5.8)          (4.1)        (4.7)         (8.5)
 CDSOA income, net                       161.1            4.0         76.9           2.1
 Other income, net                          .1             .1           .1            .1
 Interest expense, net                     2.0            2.1          2.2           2.1
 Income (loss) before income taxes       153.4          (2.1)         70.1         (8.4)
 Income tax                                2.5             .1          1.2
 Net income (loss)                       150.9 %        (2.2) %       68.9 %       (8.4) %

Net sales for the three month period ended June 30, 2012 decreased $3.0 million, or 10.8%, from the comparable 2011 period. For the six month period ended June 30, 2012, net sales decreased $2.8 million, or 5.1% from the comparable 2011 six month period. The decreases to the comparable prior year periods were primarily due to lower unit volume on our Young America product line. We attribute the lower unit volume to lost sales resulting from the conversion of the entire product line to a newly enhanced design and construction method. This conversion of our product line is expected to be largely complete as we exit the third quarter of 2012.

Gross profit for the current three month period was $3.1 million, or 12.6% of net sales. Gross profit decreased from $3.6 million, or 13.2% of net sales, from the comparable three month period of 2011. Gross profit for the first half of 2012 increased to $6.7 million, or 13.0% of net sales, from $5.3 million, or 9.8% of net sales, for the comparable six months of 2011. The current three and six month periods include restructuring related charges of $474,000. The comparable prior year three month period included a reversal of restructuring charges of $277,000, and the comparable prior year six month period included net restructuring charges of $491,000. See Note 6 to the Consolidated Notes to the Financial Statements for further details on restructuring and related charges. The increased restructuring charges in the second quarter of 2012 compared to the second quarter of 2011 was offset by improved operating efficiencies and lower cost structure in the manufacturing of our Young America product line. The gross profit improvement for the six month comparison resulted from the lower fixed cost burden on the Stanley Furniture product line as it continued the transition to a fully sourced offshore model in the first half of 2011 combined with the continued improvement in operating efficiencies in the manufacturing of our Young America product line.

Selling, general and administrative expenses for the three and six month periods of 2012 as a percentage of net sales were 18.4% and 17.7%, respectively, compared to 17.3% and 18.3% for the comparable 2011 periods. The higher percentage in the current three month period is a result of lower sales. The lower percentage in the current six month period is a result of the reduction in spending on marketing and advertising costs when compared to the prior year. Selling, general and administrative expenses for the three and six month periods decreased $264,000 and $804,000, respectively, compared to the 2011 periods.

As a result, operating loss as a percentage of net sales was 5.8% and 4.7% for the three and six month periods of 2012 compared to 4.1% and 8.5% for the comparable 2011 periods.

During the current 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). In the comparable 2011 three month period we recorded income of $1.1 million related to proceeds received from the CDSOA.

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 current 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 this 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. With the exception of this tax event, we expect our rate to continue at essentially zero for the remainder of the year.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand and cash generated from operations. We expect these sources of liquidity to be sufficient to fund our ongoing operations and capital expenditures for the foreseeable future. At June 30, 2012 cash was $47.4 million including $1.6 million of restricted cash and $20.0 million of short-term investments.

Working capital, excluding cash, restricted cash and short-term investments, increased during the first six months of 2012 to $29.8 million from $28.8 million on December 31, 2011. The increase was largely the result of a reduction in accounts payable as we paid for finished goods in-transit from overseas suppliers at the end of 2011.

Cash provided by operations was $31.8 million for the six months of 2012 compared to a use of $4.2 million in the comparable prior year period. The cash provided by operations was the result of the receipt of $39.9 million in proceeds from the CDSOA. In the prior year, we received $1.1 million in CDSOA proceeds. In the current year, we paid income taxes of $728,000, largely driven by the income related to the CDSOA proceeds while we received $3.0 million in income tax refunds in the prior year period as the result of net operating losses carried back to prior years. The remaining improvement in cash provided from operations was the result of lower fixed cost to support our Stanley Furniture product line and operating improvements at our Young America manufacturing facility.

Net cash used by investing activities was $23.9 million in the six months of 2012 compared to cash provided by investing activities of $600,000 in the comparable prior year period. 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. Cash provided in the prior year period was driven by proceeds of $1.5 million from sale of assets, partially offset by $834,000 in normal capital expenditures. Capital expenditures for the remainder of 2012 are anticipated to be $2.0 million in support of the strategic investment in our Young America manufacturing facility. The $1.3 million spent in the first six months of 2012 for our investment in new systems is a part of an estimated $3.0 million total investment through the end of 2013. We anticipate spending an additional $1.0 million in 2012 and the remaining $700,000 in 2013.

Net cash provided by financing activities was $2.2 million in the current six months of 2012 compared to $2.1 million in the prior year period. 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.

In 2011, we evaluated our overall warehousing and distribution requirements for our Stanley Furniture product line and concluded that a distribution warehouse in Asia combined with our Martinsville, Virginia warehouse would have adequate space to service our Stanley Furniture product line. In 2011 we began to reduce our usage of the leased facility at Stanleytown, Virginia and took a restructuring charge of $499,000 against future lease payments. During the second quarter of 2012, we further reduced our dependence on the Stanleytown warehouse and took an additional restructuring charge of $474,000.

In the first quarter of 2012, we entered into a lease agreement for a new corporate office and showroom location that will allow for the consolidation of our corporate offices and our High Point Market showroom into a single location in High Point, North Carolina. As a result of this consolidation, we expect to record between $500,000 and $750,000 in restructuring charges for severance and relocation cost in the second half of 2012 and first part of 2013. In addition, we entered into a lease agreement to open a new showroom within the Las Vegas Design Center at World Market Center Las Vegas in January 2013. With the addition of these leases, our future minimum operating lease payments will be $1.5 million in 2013 and 2014, $1.6 million in 2015, $1.2 million in 2016, $800,000 in 2017 and $3.7 million thereafter.

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 to 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 the Holdback. 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, 2011, approximately $9.1 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 $9.1 million collected by the government as of October 1, 2011 does not change as a result of the annual administrative review process or otherwise, we could receive approximately $2.7 million in CDSOA funds.

Recently, Customs disclosed that as of April 30, 2012, $1.8 million in collected duties was potentially available for distribution in 2012 to eligible domestic manufactures of wooden bedroom furniture. Customs noted that the final amounts available for distribution in 2012 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, 2010, 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. Assuming our percentage allocation in 2012 is the same as it was for the 2011 distributions and the 2012 preliminary CDSOA amount does not change, we expect to receive approximately $500,000 in the fourth quarter of 2012.

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 2011 Annual Report on Form 10-K, except as noted below.

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.

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, 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, failure or interruption of our information technology infrastructure, limited use of operating loss carry forwards due to ownership change extended business interruption at our manufacturing facility, and the possibility that U.S. Customes and Border Protection may seek return of all or a portion of the 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 Continued Dumping and Subsidy Offset Act, 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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