Stanley Furniture Company Inc. has a market cap of $39.7 million; its shares were traded at around $2.77 with and P/S ratio of 0.3.
Highlight of Business Operations:Interest expense for the three and nine months of 2011 decreased over the comparable prior year due to the payoff of all outstanding debt in December 2010. The current period interest is composed of interest on insurance policy loans from a legacy deferred compensation plan and imputed interest on a lease related obligation, both being non-cash charges. Our effective tax rate for the current three and nine months is essentially zero since we have used all of our available carry back income and have established a valuation allowance for our deferred tax assets in excess of our deferred tax liabilities. We expect this trend to continue for the remainder of the year. The income tax benefit for the first nine months of 2011 includes a benefit of $300,000 for the resolution of uncertain tax benefits and an increase in tax expense of $286,000 as a result of finalizing our 2010 income tax returns. 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 sufficient for ongoing expenditures and capital spending for 2011 in the event we do not generate cash from operations. Working capital, excluding cash and restricted cash, decreased during the first nine months of 2011 to $24.3 million from $27.2 million at December 31, 2010. The decrease was primarily due to the receipt of tax refunds and proceeds from the sale of assets, partially offset by higher accounts receivable and inventories. Cash used by operations was $6.8 million in the first nine months of 2011 compared to $14.0 million in the 2010 period. The decrease in cash used by operations was primarily due to lower cash paid to suppliers and employees resulting from savings related to our operational transitions of our Stanley Furniture product line, improved operational efficiencies in our Young America product line, higher average selling prices on our Young America product line and proceeds from the Continued Dumping and Subsidy Offset Act. These improvements were partially offset by a decrease in cash received from customers due to lower sales and a reduction in income tax refunds. Net cash used by investing activities was $2.7 million in the 2011 period compared to $84,000 in 2010. The increase in cash used was the result of a transfer of $1.6 million to secure letters of credit and an increase of $1.4 million in capital expenditures over the prior year period. We have continued our strategic investment program in our operations which should improve our ability to service our customers and lower our costs. During the first nine months of 2011, capital expenditures were $2.6 million, and we anticipate spending another $4.0 million to $6.0 million over the next fifteen months. Approximately $1.5 million to $2.0 million of this will be spent in the fourth quarter of 2011. Cash provided by financing activities in the 2011 period was $1.9 million compared to cash used by financing activities in the 2010 period of $10.9 million. Cash was provided in both periods from loans against the cash value of corporate owned insurance policies. During 2010, cash was used to pay down senior notes. On August 25, 2011 we executed our renewal option and entered into a five-year operating lease commencing January 1, 2012 for the Martinsville facility. The lease commencement coincides with the end of our rent free period on the facility. The minimum lease commitments over the five-year term are approximately $2.0 million. Continued Dumping and Subsidy Offset Act (CDSOA) We received CDSOA proceeds of $1.1 million during the second quarter of 2011. Previously we recorded income of $1.6 million, $9.3 million, and $11.5 million in 2010, 2009, and 2008, respectively, from CDSOA payments and other related payments, net of legal expenses. These payments came from the case involving Wooden Bedroom Furniture imported from China. The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (CBP) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to qualified affected domestic producers. Antidumping duties for merchandise entering the U.S. after September 30, 2007 remain with the U.S. Treasury. Approximately $152 million of CDSOA funds that otherwise would have been available for distribution to qualifying affected domestic producers of wooden bedroom furniture were withheld by the government over the past five years as a result of two court cases involving challenges to the CDSOA on constitutional grounds. In 2009, the U.S. Court of Appeals for the Federal Circuit determined in one of those cases that the CDSOA does not violate the Constitutions free speech and equal protection guarantees. In May 2010, the U.S. Supreme Court denied a petition for certiorari that sought review of the Federal Circuits decision. In 2010, the Federal 9
Gross profit for the current period of $3.8 million, or 14.7% of net sales, improved $5.1 million from the comparable three month period of 2010. Gross profit for the first nine months of 2011 increased to $9.1 million, or 11.4% of net sales, from a gross loss of $10.1 million, or (9.2%) of net sales, for the comparable nine months of 2010. Gross profit for the nine months of 2011 includes net restructuring charges of $491,000. Included in the three and nine month periods of 2010 are $2.3 million and $5.5 million in restructuring and related charges, respectively. The remaining margin improvement for the three and nine month comparisons resulted primarily from the transition of our Stanley Furniture product line to an offshore sourced model. Improved operating efficiencies in the manufacturing of our Young America products along with higher average selling prices on this product line also contributed to the improved margins in comparison to the prior three and nine months period of 2010.
Net cash used by investing activities was $2.7 million in the 2011 period compared to $84,000 in 2010. The increase in cash used was the result of a transfer of $1.6 million to secure letters of credit and an increase of $1.4 million in capital expenditures over the prior year period. We have continued our strategic investment program in our operations which should improve our ability to service our customers and lower our costs. During the first nine months of 2011, capital expenditures were $2.6 million, and we anticipate spending another $4.0 million to $6.0 million over the next fifteen months. Approximately $1.5 million to $2.0 million of this will be spent in the fourth quarter of 2011.
Selling, general and administrative expenses were $5.0 million, or 19.0% of net sales, for the three months ended October 1, 2011, compared to $5.1 million, or 14.8% of net sales, for the comparable three months of 2010. The three month expense comparison was essentially flat as a result of lower commissions offset by higher marketing and advertising cost. For the first nine months of 2011, selling, general and administrative expenses decreased to $14.8 million, or 18.5% of net sales, from $16.3 million, or 14.9% of net sales, for the comparable first nine months of 2010. The decline in expenses is primarily due to lower selling expenses resulting from decreased sales. Partially offsetting these lower costs were higher marketing and advertising expenses, which are expected to continue. The increase in the percentage of net sales, for both periods, is a result of the lower sales volumes in the current periods compared to prior year.
Net sales for the current quarter experienced a decline compared to the previous three sequential quarters. On lower sales, gross profit improved to $3.8 million for the current quarter, or 14.7% of net sales. Included in gross profit for the second quarter of 2011 was a benefit of $277,000 reversing previously accrued restructuring charges. Included in gross profit in the first quarter of 2011 and fourth quarter of 2010 were restructuring charges of $768,000 and $4.9 million, respectively. The improved margin trend resulted from completing the transition of our Stanley Furniture product line to an offshore sourced model, eliminating the majority of our fixed costs at a previously owned domestic facility. Also contributing to the favorable trends are improved operating efficiencies in the domestic manufacturing of our Young America product line, representing substantially all of the improvement from the second to the third quarter of 2011.
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