SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
-------
For the quarterly period ended September 26, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
Commission file number 0-14938.
STANLEY FURNITURE COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1272589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1641 Fairystone Park Highway, Stanleytown, Virginia 24168
(Address of principal executive offices, Zip Code)
(540)627-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 7, 1998.
Class Number
Common Stock, par value $.02 per share 7,175,579 Shares
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
(Unaudited)
September December
26,1998 31, 1997
ASSETS
<S> <C> <C>
Current assets:
Cash..................................................................... $ 1,576 $ 756
Accounts receivable, less allowances of $2,384 and $1,895................ 36,678 27,427
Inventories:
Finished goods........................................................ 20,943 21,220
Work-in-process....................................................... 7,401 6,997
Raw materials......................................................... 16,852 17,513
---------- -----------
45,196 45,730
Prepaid expenses and other current assets................................ 1,908 1,571
Deferred income taxes.................................................... 1,072 770
---------- -----------
Total current assets........................................... 86,430 76,254
Property, plant and equipment, net........................................... 51,579 51,714
Goodwill, less accumulated amortization of $3,276 and $3,024................. 10,164 10,416
Other assets................................................................. 4,497 4,841
---------- -----------
$152,670 $143,225
========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt.................................... $ 5,136 $ 5,086
Accounts payable........................................................ 18,801 18,164
Accrued salaries, wages and benefits.................................... 10,733 9,687
Other accrued expenses.................................................. 2,231 1,877
---------- -----------
Total current liabilities........................................... 36,901 34,814
Long-term debt, exclusive of current maturities.............................. 41,405 47,491
Deferred income taxes........................................................ 10,201 10,448
Other long-term liabilities.................................................. 2,225 2,225
---------- -----------
Total liabilities........................................................ 90,732 94,978
---------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
7,175,579 and 6,865,518 shares issued and outstanding.................... 142 137
Capital in excess of par value............................................... 40,568 37,439
Retained earnings ........................................................... 21,228 10,671
----------- ----------
Total stockholders' equity............................................... 61,938 48,247
----------- ----------
$152,670 $143,225
=========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended Ended
September September September September
26 , 1998 28, 1997 26, 1998 28, 1997
<S> <C> <C> <C> <C>
Net sales................................................... $63,832 $54,270 $183,386 $153,370
Cost of sales............................................... 48,449 40,982 138,585 115,133
--------- -------- -------- --------
Gross profit........................................ 15,383 13,288 44,801 38,237
Selling, general and administrative expenses................ 8,209 7,501 24,310 21,828
--------- -------- -------- --------
Operating income..................................... 7,174 5,787 20,491 16,409
Other expense, net.......................................... 159 94 242 227
Interest expense............................................ 1,035 992 3,221 2,493
--------- -------- -------- --------
Income before income taxes.............................. 5,980 4,701 17,028 13,689
Income taxes................................................ 2,274 1,766 6,472 5,227
--------- -------- -------- --------
Net income.................................................. $ 3,706 $ 2,935 $ 10,556 $ 8,462
========= ======== ======== ========
Earnings per share:
Basic..................................................... $ .52 $ .38 $ 1.51 $ .97
========== ========= =========== ==========
Diluted................................................... $ .46 $ .34 $ 1.32 $ .88
========== ========= =========== ==========
Weighted average shares outstanding:
Basic..................................................... 7,144 7,692 7,005 8,728
========= ======== =========== =========
Diluted................................................... 8,063 8,630 8,003 9,588
========= ======== =========== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
<TABLE>
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
September September
26, 1998 28, 1997
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.................................................. $173,838 $146,302
Cash paid to suppliers and employees.......................................... (155,948) (137,431)
Interest paid................................................................. (3,545) (2,880)
Income taxes paid, net........................................................ (5,530) (6,461)
---------- ----------
Net cash provided (used) by operating activities............................ 8,815 (470)
---------- ----------
Cash flows from investing activities:
Capital expenditures.......................................................... (4,000) (1,369)
Other, net................................................................... (13) (100)
---------- ----------
Net cash used by investing activities....................................... (4,013) (1,469)
---------- ----------
Cash flows from financing activities:
Purchase and retirement of common stock....................................... (15,000)
(Repayment of) proceeds from revolving credit facility........................ (950) 10,197
Repayment of Senior Notes..................................................... (5,086) (725)
Proceeds from insurance policy loans.......................................... 536 480
Proceeds from exercised stock options......................................... 1,518 160
---------- ----------
Net cash used by financing activities....................................... (3,982) (4,888)
---------- ----------
Net increase (decrease) in cash............................................... 820 (6,827)
Cash at beginning of year..................................................... 756 8,126
---------- ----------
Cash at end of period....................................................... $ 1,576 $ 1,299
========== ==========
Reconciliation of net income to net cash provided
(used) by operating activities:
Net income................................................................. $ 10,556 $ 8,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......................................... 4,315 4,070
Other, net............................................................. 132 76
Changes in assets and liabilities:
Accounts receivable.................................................. (9,251) (7,212)
Inventories.......................................................... 534 (5,629)
Prepaid expenses and other current assets............................ (483) (873)
Accounts payable..................................................... 637 1,685
Accrued salaries, wages and benefits................................. 1,046 272
Other accrued expenses............................................... 1,970 (605)
Deferred income taxes................................................ (549) (635)
Other assets......................................................... (92) (81)
---------- ----------
Net cash provided (used) by operating activities........................... $ 8,815 $ (470)
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. Preparation of Interim Financial Statements
The financial statements of Stanley Furniture Company, Inc. (referred to as
"Stanley" or the "Company") have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). In the opinion of
management, these statements include all adjustments necessary for a fair
presentation of the results of all interim periods reported herein. All such
adjustments are of a normal recurring nature. Certain information and footnote
disclosures prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to SEC rules and regulations.
However, management believes that the disclosures made are adequate for a fair
presentation of results of operations and financial position. Operating results
for the interim periods reported herein may not be indicative of the results
expected for the year. It is suggested that these financial statements be read
in conjunction with the financial statements and accompanying notes included in
Stanley's latest annual report on Form 10-K.
2. Property, Plant and Equipment
<TABLE>
(Unaudited)
September December
26, 1998 31, 1997
<S> <C> <C>
Land and buildings........................ $34,427 $33,941
Machinery and equipment................... 50,497 48,180
Office fixtures and equipment............. 1,803 1,836
Construction in progress.................. 1,643 588
------- -------
Property, plant and equipment, at cost. 88,370 84,545
Less accumulated depreciation.............. 36,791 32,831
------- -------
$51,579 $51,714
======= =======
</TABLE>
3. Long-Term Debt
<TABLE>
(Unaudited)
September December
26 , 1998 31,1997
<S> <C> <C>
7.28% senior notes due March 15, 2004.. $25,714 $30,000
7.57% senior note due June 30, 2005.... 7,825 8,625
7.43% senior notes due November 18, 2007. 10,000 10,000
Revolving credit facility................ 3,002 3,952
------- -------
Total................................... 46,541 52,577
Less current maturities.................... 5,136 5,086
------- -------
$41,405 $47,491
======= =======
</TABLE>
4. Earnings Per Common Share and Stock Split
Basic earnings per common share are based upon the weighted average shares
outstanding. Outstanding stock options are treated as common stock equivalents
for purposes of computing diluted earnings per share and represent the
difference between basic and diluted weighted average shares outstanding.
On April 7, 1998, the Board of Directors approved a two-for-one stock split
which was distributed in the form of a stock dividend on May 15, 1998 to
stockholders of record on May 1, 1998. Accordingly, 3,478,462 shares were
issued, and approximately $70,000 was transferred to common stock from capital
in excess of par value, representing the aggregate par value ($.02 per share) of
the shares issued. All related amounts have been retroactively adjusted to
reflect the stock split.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales increased $9.6 million, or 17.6%, for the three month period ended
September 26, 1998 from the comparable 1997 period. For the nine month period,
net sales increased $30.0 million, or 19.6%, from the comparable 1997 period.
The increase was due primarily to higher unit volume.
Gross profit margin for the third quarter of 1998 decreased to 24.1% from 24.5%
in the year ago quarter. This decrease was due primarily to the phase out of
upholstered products. In August 1998, the Company announced plans to phase out
its upholstered product line and began implementing these plans during the third
quarter of 1998. The Company expects to complete the phase out of these products
in the fourth quarter of 1998.
Gross profit margin for the nine month period of 1998 decreased to 24.4% from
24.9% for the comparable 1997 periods. The decrease resulted primarily from
higher raw material costs, principally lumber, partially offset by improved
operating efficiencies.
Selling, general and administrative expenses for the three and nine month
periods of 1998 as a percentage of net sales decreased to 12.9% and 13.3%,
respectively, from 13.8% and 14.2% for the comparable 1997 periods. The lower
percentages in 1998 were due principally to higher net sales. The majority of
the increased expenditures in 1998 were selling expenses directly attributable
to the sales increase.
As a result of the above, operating income for the three and nine month periods
of 1998 increased to $7.2 million and $20.5 million, or 11.2% of net sales for
both periods, from $5.8 million and $16.4 million, or 10.7% of net sales, for
both the comparable 1997 periods.
Interest expense for the 1998 three and nine month periods increased primarily
due to higher average debt levels resulting from the Company's June and November
1997 repurchases of its common stock.
The Company's effective income tax rate was 38% for both the 1998 nine month
period and total year 1997.
Financial Condition, Liquidity and Capital Resources
At September 26, 1998, long-term debt including current maturities was $46.5
million. Debt service requirements are $8.1 million in 1999, $5.2 million in
2000, $6.7 million in 2001, and $6.8 million in 2002. As of September 26, 1998,
approximately $21.0 million of additional borrowings were available under the
Company's revolving credit facility. In October 1998, the Board of Directors
authorized the use of $10.0 million to repurchase the Company's common stock.The
Company believes that its financial resources are adequate to support its
capital needs and debt service requirements.
Cash generated from operations increased to $8.8 million in the 1998 period
compared to cash used by operations of $470,000 during the 1997 period, due
primarily to increased sales. The cash used in the 1997 period funded payments
to suppliers and employees.
Net cash used by investing activities was $4.0 million in the 1998 period
compared to $1.5 million in the 1997 period. Expenditures in each year were
primarily for plant and equipment and other assets in the normal course of
business.
Net cash used by financing activities was $4.0 million in the 1998 compared to
$4.9 million in the 1997 period. In the 1998 period, cash generated from
operations and proceeds from the exercise of stock options were used to reduce
borrowings and fund capital expenditures. In the 1997 period cash and borrowings
under the revolving credit facility were used to finance the June 1997 stock
repurchase.
Year 2000
In early 1998, the Company initiated a cross-functional team to identify and
address internal hardware and software compliance issues arising from the many
challenges posed by the year 2000 on information systems. Key financial
information and operational systems, including equipment with embedded
microprocessors, have been inventoried and assessed. Detailed plans are in place
for system modifications or replacements, and a compliance plan for equipment
with embedded technology is currently being developed and is expected to be
completed by the end of 1998.
Since 1996, the Company has been upgrading information systems technology, with
year 2000 compliant software, to support its sales, manufacturing and
administrative functions. As a result, substantially all cost and upgrades have
been incurred and completed to-date with the final compliance for both
information and operational systems planned for implementation by mid-1999. The
cost of system upgrades is estimated at less than $1.0 million, of which the
majority has been incurred. The estimated cost to complete year 2000 compliance
is less than $100,000. Testing of critical systems is ongoing and will be
completed by the end of 1999.
In addition, the Company is communicating with key customers, suppliers,
financial institutions and others with whom it does business to determine year
2000 compliance and is currently assessing the potential impact on operations if
third parties are not successful in converting their systems in a timely manner.
However, there can be no assurance that the systems of other companies will be
timely converted and will not have an adverse effect on the Company.
The Company believes it is taking reasonable steps to prevent major
interruptions in its business, resulting from the year 2000 compliance issue.
However, contingency plans are currently being developed to minimize the impact
of any such interruptions, such as, backup procedures and identification of
alternate suppliers.
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," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. These statements
reflect the Company's 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 the cyclical nature of the furniture industry,
fluctuations in the price for lumber which is the most significant raw material
used by the Company, competition in the furniture industry, capital costs and
general economic conditions.
PART II. OTHER INFORMATION
Item 5. Other Information
On October 13, 1998, the Company announced that its Board of Directors had
authorized the use of up to $10 million to repurchase shares of the Company's
common stock, par value $.02 per share (the "Common Stock"). These repurchases
may be made from time to time in the open market or in privately negotiated
transactions, at prevailing market prices that the Company deems appropriate.
Based on the current market value of the Common Stock, the authorization would
allow the Company to repurchase approximately 12% of the 7.2 million shares of
Common Stock outstanding.
The SEC has adopted Rule 14a-4(c), effective June 29, 1998, which determines how
proxies designated by public corporations may use discretionary voting authority
on stockholder proposals made at annual meetings. The Company will have
unrestricted use of discretionary voting authority if it does not receive prior
written notice of an intent to submit a proposal at the meeting. For the
Company's 1999 annual meeting of stockholders, this notice must be received by
February 2, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Schedule of Computation of Earnings Per Share.*
Exhibit 27. 1 Financial Data Schedule for the quarter ended
September 26, 1998.*
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 7, 1998 to announce the
Company's plans to phase out its upholstered product line.
* Filed herewith.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
Date: October 13, 1998 By: /s/Douglas I. Payne
Douglas I. Payne
Sr. V.P. - Finance and Administration,
Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Exhibit 11
STANLEY FURNITURE COMPANY, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
September September September September
26, 1998 28, 1997 26, 1998 28, 1997
<S> <C> <C> <C> <C>
Net income used in calculating basic and diluted
earnings per common share............................ $3,706 $2,935 $10,556 $8,462
======== ======== ======== ========
Basic earnings per common share:
Weighted average shares outstanding.................... 7,144 7,692 7,005 8,728
======== ======== ======== ========
Basic earnings per common share........................ $ .52 $ .38 $ 1.51 $ .97
======== ======== ======== ========
Diluted earnings per common share:
Weighted average shares outstanding.................... 7,144 7,692 7,005 8,728
Add shares issuable assuming exercise of stock
options ........................................... 919 938 998 860
Weighted average shares outstanding
used in calculating diluted
earnings per common share........................ 8,063 8,630 8,003 9,588
======== ======== ======== ========
Diluted earnings per common share.................... $ .46 $ .34 $ 1.32 $ .88
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-END> sep-26-1998
<CASH> 1,576
<SECURITIES> 0
<RECEIVABLES> 36,678
<ALLOWANCES> 2,384
<INVENTORY> 45,196
<CURRENT-ASSETS> 86,430
<PP&E> 88,370
<DEPRECIATION> 36,791
<TOTAL-ASSETS> 152,670
<CURRENT-LIABILITIES> 36,901
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 61,796
<TOTAL-LIABILITY-AND-EQUITY> 152,670
<SALES> 183,386
<TOTAL-REVENUES> 183,386
<CGS> 138,585
<TOTAL-COSTS> 162,895
<OTHER-EXPENSES> 242
<LOSS-PROVISION> 460
<INTEREST-EXPENSE> 3,221
<INCOME-PRETAX> 17,028
<INCOME-TAX> 6,472
<INCOME-CONTINUING> 10,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,556
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.32
</TABLE>
