HG Holdings, Inc. - Quarter Report: 2006 September (Form 10-Q)

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

		(unaudited)
		September 30,			December 31,
		2006			2005
ASSETS
Current assets:
Cash		$	5,400		$	12,556
Accounts receivable, less allowances of $2,502 and $1,566			38,271			36,957
Inventories:
Finished goods			45,491			52,609
Work-in-process			5,453			7,609
Raw materials			8,822			9,743
Total inventories			59,766			69,961
Prepaid expenses and other current assets			1,759			1,435
Deferred income taxes			2,442			2,462
Total current assets			107,638			123,371
Property, plant and equipment, net			48,438			50,744
Goodwill			9,072			9,072
Other assets			6,362			7,301
Total assets		$	171,510		$	190,488
LIABILITIES
Current liabilities:
Current maturities of long-term debt		$	2,857		$	2,857
Accounts payable			18,227			16,405
Accrued salaries, wages and benefits			9,636			11,144
Other accrued expenses			2,287			1,765
Total current liabilities			33,007			32,171
Long-term debt, exclusive of current maturities			7,143			8,571
Deferred income taxes			9,386			10,164
Other long-term liabilities			6,559			6,833
Total liabilities			56,095			57,739
STOCKHOLDERS’ EQUITY
Common stock, $.02 par value, 25,000,000 shares authorized 11,131,810 and 12,252,000 shares issued and outstanding			223			245
Retained earnings			115,370			132,682
Accumulated other comprehensive loss			(178	)		(178	)
Total stockholders’ equity			115,415			132,749
Total liabilities and stockholders’ equity		$	171,510		$	190,488

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Net sales		$	75,911		$	85,615		$	236,911		$	252,200
Cost of sales			60,951			65,131			184,575			190,619
Gross profit			14,960			20,484			52,336			61,581
Selling, general and administrative expenses			9,996			11,106			32,447			33,396
Operating income			4,964			9,378			19,889			28,185
Other income, net			91			71			252			190
Interest income			76			96			332			250
Interest expense			537			548			1,570			1,663
Income before income taxes			4,594			8,997			18,903			26,962
Income taxes			1,598			3,195			6,578			9,573
Net income		$	2,996		$	5,802		$	12,325		$	17,389
Earnings per share:
Basic		$	.26		$	.45		$	1.04		$	1.35
Diluted		$	.26		$	.44		$	1.01		$	1.31
Weighted average shares outstanding:
Basic			11,396			12,811			11,861			12,886
Diluted			11,657			13,198			12,147			13,294
Cash dividend declared and paid per common share		$	.08		$	.06		$	.24		$	.18

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited)

(in thousands)

 

		Nine Months Ended
		September 30,			October 1,
		2006			2005
Cash flows from operating activities:
Cash received from customers		$	234,933		$	247,093
Cash paid to suppliers and employees			(199,742	)		(214,001	)
Interest paid, net			(1,335	)		(1,431	)
Income taxes paid, net			(8,612	)		(8,447	)
Net cash provided by operating activities			25,244			23,214
Cash flows from investing activities:
Capital expenditures			(2,023	)		(3,791	)
Purchase of other assets			(17	)		(33	)
Net cash used by investing activities			(2,040	)		(3,824	)
Cash flows from financing activities:
Repayment of senior notes			(1,428	)		(2,828	)
Purchase and retirement of common stock			(28,282	)		(9,996	)
Proceeds from insurance policy loans			1,241			1,110
Dividends paid			(2,859	)		(2,330	)
Proceeds from exercised stock options			713			6,335
Tax benefit from exercise of stock options			255
Net cash used by financing activities			(30,360	)		(7,709	)
Net increase (decrease) in cash			(7,156	)		11,681
Cash at beginning of period			12,556			7,632
Cash at end of period		$	5,400		$	19,313
Reconciliation of net income to net cash provided by operating activities:
Net income		$	12,325		$	17,389
Depreciation			4,368			4,228
Deferred income taxes			(758	)		(524	)
Tax benefit from exercise of stock options			(255	)
Stock-based compensation			268
Loss on disposal of assets			23
Changes in assets and liabilities:
Accounts receivable			(1,314	)		(5,062	)
Inventories			10,195			882
Prepaid expenses and other current assets			(406	)		(1,085	)
Accounts payable			1,822			2,907
Accrued salaries, wages and benefits			(1,262	)		2,301
Other accrued expenses			777			2,349
Other assets			(265	)		(56	)
Other long-term liabilities			(274	)		(115	)
Net cash provided by operating activities		$	25,244		$	23,214

The accompanying notes are an integral part of the consolidated financial statements.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

1.	Preparation of Interim Unaudited Consolidated Financial Statements

The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, 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, we believe 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. We suggest that these consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes included in our latest Annual Report on Form 10-K.

2.	Stock-based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“FAS 123(R)”) using the modified-prospective-transition method. Under this transition method, compensation cost in 2006 includes options granted prior to but not vested as of December 31, 2005, and options granted in 2006. Therefore, results for prior periods have not been restated.

The adoption of SFAS No. 123(R) lowered net income by approximately $175 for the nine months ended September 30, 2006, and had an insignificant impact on the third quarter of 2006, compared to if we had continued to account for share-based compensation under APB No. 25, Accounting For Stock Issued to Employees.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 during the periods presented. For the purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing model and amortized to expense over the vesting periods.

		Three Months Ended			Nine Months Ended
		October			October
		1, 2005			1, 2005
Net income as reported		$	5,802		$	17,389
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related
tax effects			18			495
Pro forma net income		$	5,784		$	16,894
Earnings per share:
Basic - as reported		$	0.45		$	1.35
Basic - pro forma		$	0.45		$	1.31
Diluted - as reported		$	0.44		$	1.31
Diluted - pro forma		$	0.44		$	1.27

As of September 30, 2006, there was approximately $574 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next four years.

In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 (“FSP 123(R)”), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. FSP 123(R)-3 provides an elective alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123(R). Companies may take up to one year from the effective date of FSP 123(R)-3 to evaluate the available transition alternatives and make a one-time election as to which method to adopt. We are currently in the process of evaluating the alternative methods.

Options are granted to certain employees and directors at prices equal to the market value of the stock on the dates the options were granted. The options granted have a term of 10 years from the grant date and granted options for employees vest ratably over a four to five year period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. We have estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The weighted average for key assumptions used in determining the fair value of options granted during the nine months ended September 30, 2006 follows:

 

Expected price volatility	36.1	%
Risk-free interest rate	4.7	%
Weighted average expected life in years	5.2
Dividend yield	1.2	%

 

Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of U. S. Treasury issues with a term equal to the expected life of the option being valued.

Stock option activity during the nine months ended September 30, 2006 is as follows:

								Weighted
								Average
					Weighted			Remaining			Aggregate
		Number of			Average			Contractual			Intrinsic
		Shares			Exercise price			Term (in yrs)			Value
Outstanding at January 1, 2006			855		$	14.71			5.7
Lapsed			(23)		$	17.49
Exercised			(54)		$	13.21
Granted			25		$	27.59
Outstanding at September 30, 2006			803		$	15.14			5.2		$	4,960
Exercisable at September 30, 2006			729		$	14.14			4.8		$	5,223

The average fair market value of options granted in the first nine months of 2006 was $9.92. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the three and nine month periods of 2006 and 2005 are as follows:

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Proceeds from stock options exercised		$	0		$	1,225		$	713		$	6,335
Tax benefits related to stock options exercised		$	0		$	503		$	255		$	1,743
Intrinsic value of stock options exercised		$	0		$	1,361		$	689		$	4,718

3. Property, Plant and Equipment

		September			December
			30, 2006			31, 2005
Land and buildings		$	40,800		$	39,894
Machinery and equipment			78,435			77,693
Office furniture and equipment			2,053			1,916
Property, plant and equipment, at cost			121,288			119,503
Less accumulated depreciation			72,850			68,759
Property, plant and equipment, net		$	48,438		$	50,744

4. Debt

		September			December
			30, 2006			31, 2005
7.43% senior notes due through November 18, 2007		$	2,857		$	2,857
6.94% senior notes due through May 3, 2011			7,143			8,571
Total			10,000			11,428
Less current maturities			2,857			2,857
Long-term debt, exclusive of current maturities		$	7,143		$	8,571

The above loan agreements were amended effective July 14, 2006, to eliminate the covenant restricting our ability to pay dividends with respect to our common stock and to repurchase our common stock.

5. Employee Benefits Plans

Components of pension cost:

 

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Interest Cost		$	$232		$	230		$	696		$	715
Expected return on plan assets			(245	)		(248	)		(736	)		(761	)
Net amortization and deferral			125			106			375			328
Net Cost			112			88			335			282
Settlement Expense			341			286			652			859
Total expense		$	453		$	374		$	987		$	1,141

 

The Plan is fully funded as an ongoing plan; therefore, no contributions are required to be deposited in 2006.

On July 17, 2006, we announced our decision to terminate our defined benefit pension plan (“the Plan”). No benefits have accrued under the Plan since it was frozen in December 1995, at which time our contributions to a 401k savings plan became the primary retirement benefit. The Plan’s termination must be approved by the Internal Revenue Service and the Pension Benefit Guaranty Corporation. We expect to receive these approvals within twelve to fifteen months. As a result of the termination, we expect to make cash contributions to the Plan in the range of $1 million to $3 million between now and the final termination. In addition, we expect to record a charge to earnings in the range of $6 million and $8 million pre-tax, or $3.9 million to $5.2 million net of taxes, upon final termination. Pension expense related to this Plan for 2005 was approximately $1.2 million and is expected to be about the same for 2006.
Components of other postretirement benefit cost:

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Service cost		$	25		$	22		$	73		$	66
Interest cost			43			46			130			138
Amortization of transitions obligation			33			33			98			99
Amortization of net actuarial loss			10			17			31			51
Net periodic postretirement benefit cost		$	111		$	118		$	332		$	354

6.	Stockholders’ Equity

Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options are treated as potential common stock for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data:

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Weighted average shares outstanding for basic calculation			11,396			12,811			11,861			12,886
Add: Effect of dilutive stock options			261			387			286			408
Weighted average shares outstanding Adjusted for diluted calculation			11,657			13,198			12,147			13,294

A reconciliation of the activity in Stockholders’ Equity accounts for the quarter ended September 30, 2006 is as follows:

											Accumulated
					Capital in						Other
		Common			Excess of			Retained			Comprehensive
		Stock			Par Value			Earnings			Loss
Balance, December 31, 2005		$	245					$	132,682		$	(178	)
Net income									12,325
Exercise of stock options			1		$	712
Tax benefit on exercise of stock options						255
Stock repurchases			(23	)		(1,511	)		(26,748	)
Stock awards						246
Stock-based compensation						298			(30	)
Cash dividends paid, $.24 per share									(2,859	)
Balance, September 30, 2006		$	223					$	115,370		$	(178	)

7. New Accounting Standards

In June 2006, the Financial Standards Accounting Board (FASB) issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 details how companies should recognize, measure, present, and disclose uncertain tax positions that have been or expect to be taken. As such, financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. We are currently analyzing the effect of FIN 48 on our financial statements.

FIN 48 is effective for public companies for annual periods that begin after December 15, 2006.

In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108 (“SAB 108”), "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 eliminates the diversity of practice surrounding how public companies quantify financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and the related financial statement disclosures. We do not expect SAB 108 to have a material impact on our financial condition or results of operations. SAB 108 must be applied to annual financial statements for their first fiscal year ending after November 15, 2006.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. We have not yet determined the impact that the implementation of SFAS No. 157 will have on our results of operations or financial condition. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)” ( “SFAS No. 158” ). This standard requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. We are currently evaluating the impact that the implementation of SFAS No. 158 will have on our financial statements.  The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006.  The new measurement date requirement applies for fiscal years ending after December 15, 2008.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Over the past few years the residential wood furniture industry has experienced a surge in low cost imported products, primarily from China. Imports have grown dramatically in the past few years and according to industry sources it is estimated that imports now account for over half of all residential wood furniture sold in the United States.

In response to this trend, we developed a blended strategy of combining our domestic manufacturing capabilities with an offshore sourcing program and realigned our manufacturing capacity. We incorporate selected imported component parts and finished items in our product line to lower cost, provide design flexibility and offer a better value to our customers. Sourced product represented approximately 34% of sales during the first nine months of 2006 compared to 32% in 2005. We anticipate this percentage will be about 35% for the remainder of 2006.
Recently, we began reinvigorating our continuous improvement efforts using lean business principles to improve processes and efficiencies. These efforts have allowed us to reduce inventories, which have lowered production levels and operating margins in the first nine months of 2006. We expect this trend may continue in the near term. While these renewed efforts have shown positive results, it is difficult to project the speed and the extent to which we are able to lower costs, improve quality and reduce inventories.

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

		Three Months						Nine Months
		Ended						Ended
		September			October			September			October
		30, 2006			1, 2005			30, 2006			1, 2005
Net sales			100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales			80.3			76.1			77.9			75.6
Gross profit			19.7			23.9			22.1			24.4
Selling, general and administrative expenses			13.2			13.0			13.7			13.2
Operating income			6.5			11.0			8.4			11.2
Other income, net			.1			.1			.1			.1
Interest income			.1			.1			.1			.1
Interest expense			.7			.6			.6			.7
Income before income taxes			6.0			10.5			8.0			10.7
Income taxes			2.1			3.7			2.8			3.8
Net income			3.9	%		6.8	%		5.2	%		6.9	%

Net sales decreased $9.7 million, or 11.3%, for the three month period ended September 30, 2006, from the comparable 2005 period. For the nine month period, net sales decreased $15.3 million, or 6.1% from the 2005 nine month period. This was primarily due to lower unit volume resulting from continued weakness in demand, which we believe is due to current industry conditions, partially offset by higher average selling prices.

Gross profit margins for the three and nine month periods of 2006 were 19.7% and 22.1%, respectively compared to 23.9% and 24.4% for the comparable 2005 periods. Lower margins resulted from lower sales, decreased production levels, and higher raw material, compensation and energy costs. As a result of improving processes and reducing lead times, production levels decreased more sharply than the sales decline particularly in the second and third quarters of 2006 and led to lower margins due to the under absorption of factory overhead costs.

Selling, general and administrative expenses for the three and nine month periods as a percentage of net sales were 13.2% and 13.7%, respectively compared to 13.0% and 13.2% for the comparable 2005 periods. The higher percentage for the current year periods is primarily due to lower sales. Selling, general and administrative expenses decreased during the three and nine month periods, compared to the 2005 periods, due to lower selling expenses resulting from decreased sales and lower performance based compensation expense due to lower earnings. These lower costs were partially offset by increased bad debt expense and consulting fees related to our continuous improvement efforts.

As a result of the above, operating income as a percentage of net sales was 6.5% and 8.4%, respectively, for the three and nine month periods of 2006 compared to 11.0% and 11.2% for the comparable 2005 periods.

Interest expense for the nine month period of 2006 decreased primarily due to lower average debt levels. Interest income increased during the 2006 period due to higher interest income rates.

The effective tax rate for 2006 is expected to be 34.8%, compared to 35.3% for the total year 2005. The decrease in the effective tax rate is primarily a result of lower taxable income and an increase in tax-exempt interest income.

Our sources of liquidity include cash on hand, cash from operations and amounts available under a $25.0 million credit facility. These sources have been adequate for day-to-day expenditures, debt payments, purchases of our stock, capital expenditures and payment of cash dividends to stockholders. We expect these sources of liquidity to continue to be adequate for the future.

Working capital, excluding cash and current maturities of long-term debt, decreased $9.4 million during the first nine months of 2006 from $81.5 million at year end. The decrease was primarily due to a $10.2 million decrease in inventories, resulting from lower production levels due to lower sales and a reduction in manufacturing lead times.

Cash generated from operations was $25.2 million in the first nine months of 2006 compared to $23.2 million in the 2005 period. The increase was primarily due to lower payments to suppliers and employees due to lower production levels.

Net cash used by investing activities was approximately $2.0 million in the 2006 period compared to $3.8 million in 2005 and consisted primarily of normal capital expenditures. Capital expenditures for 2006 are anticipated to be in the range of $4.0 million to $4.5 million.

Net cash used by financing activities was $30.4 million in the 2006 period compared to $7.7 million in the 2005 period. In the 2006 period, cash from operations and proceeds from the exercise of stock options provided funds for the purchase and retirement of our common stock, cash dividends and the payment of our senior notes. During the first nine months of 2006, $28.3 million was used to purchase 1,184,190 shares of our common stock in the open market at an average price of $23.88. We currently have $37.9 million authorized by our Board of Directors to repurchase shares of our common stock. In the 2005 period, cash from operations provided funds for the purchase and retirement of our common stock, to pay cash dividends, and the payment of our senior notes. The Board of Directors increased the annual dividend policy to $0.32 per share on January 30, 2006. Our loan agreements were amended effective July 14, 2006, to eliminate the covenant restricting our ability to pay dividends with respect to our common stock and to repurchase our common stock.

At September 30, 2006, long-term debt including current maturities was $10.0 million. Debt service requirements are $1.4 million remaining in 2006, $2.9 million in 2007 and $1.4 million in 2008, 2009 and 2010. As of September 30, 2006, approximately $25.0 million of additional borrowings were available under the revolving credit facility and cash on hand was $5.4 million.

On July 17, 2006, we announced our decision to terminate our defined benefit pension plan (“the Plan”). No benefits have accrued under the Plan since it was frozen in December 1995, at which time contributions to a 401k savings plan became the primary retirement benefit. The Plan’s termination must be approved by the Internal Revenue Service and the Pension Benefit Guaranty Corporation. We expect to receive these approvals within twelve to fifteen months. As a result of the termination, we expect to make cash contributions to the Plan in the range of $1 million to $3 million between now and the final termination. In addition, we expect to record a charge to earnings in the range of $6 million and $8 million pre-tax, or $3.9 million to $5.2 million net of taxes upon final termination. Pension expense related to this Plan for 2005 was approximately $1.2 million and is expected to be about the same for 2006.

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 10-K for the fiscal year ended December 31, 2005, except as follows:

Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R. The Company uses the Black-Scholes option - pricing model, which requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that ultimately will not vest (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value stock-based compensation and consequently, the related amount recognized on the consolidated statements of income.

See note 2 to the consolidated financial statements, “Stock Based Compensation”, for a more detailed discussion of the effects of SFAS 123(R) on our results of operations and financial condition.

The Financial Standards Accounting Board (FASB) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109” in June 2006. In September 2006, the FASB issued both Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements".

See note 7 to the consolidated financial statements, “New Accounting Standards”, for a more detailed discussion of the requirements and effective dates of these new standards.

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,” 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 the cyclical nature of the furniture industry, competition in the furniture industry including competition from lower-cost foreign manufacturers, disruptions in offshore 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 China or countries from which we source products, international trade policies of the United States and countries from which we source products, manufacturing realignment, the inability to obtain sufficient quantities of quality raw materials in a timely manner, 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, environmental compliance costs, extended business interruption at manufacturing facilities, and the impact of interest rate changes on the cost of terminating our defined benefit pension plan.

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.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

Our revolving credit facility bears interest at a variable rate; therefore, changes in prevailing interest rates impact our borrowing costs. A one-percentage point fluctuation in market interest rates would not have a material impact on earnings during the first nine months of 2006.

None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions. While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of our component parts and finished items obtained from offshore sourcing and reduce our earnings, unless we are able to increase our prices for these items to reflect any such increased cost.

ITEM 4.

Controls and Procedures

(a)

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b)	Changes in internal controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities:

				Maximum number (or
			Total number of	approximate dollar
	Total		Shares purchased	value) of shares that
	number of	Average	as part of publicly	may yet be purchased
	Shares	price paid	announced plans	under the plans or
Period	Purchased	per share	or programs	programs (a)
July 2 to August 5, 2006	218,500	$22.27	218,500	$45,133,367
August 6 to September 2, 2006	151,845	$22.51	151,845	$41,715,033
September 3 to September 30, 2006	178,000	$21.47	178,000	$37,893,302
Total	548,345	$22.08	548,345

(a)

On July 17, 2006, we announced that our Board of Directors increased our stock repurchase authorization to $50 million. Consequently, we may purchase our common stock, from time to time, either directly or through agents, in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to us.

Item 6. Exhibits

3.1	Restated Certificate of Incorporation of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended July 2, 2005).
3.2	By-laws of the Registrant as amended (incorporated by reference to Exhibit 3 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended September 27, 2003).
10.1	Third amendment, dated June 14, 2006, to the revolving credit facility dated August 29, 2003, between the Registrant and Wachovia Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed on July 18, 2006).
31.1	Certification by Jeffrey R. Scheffer, our Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2	Certification by Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1	Certification of Jeffrey R. Scheffer, our Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2	Certification of Douglas I. Payne, our Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)

 

(1) Filed herewith

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.

Date: October 17, 2006		STANLEY FURNITURE COMPANY, INC.
		By: /s/ Douglas I. Payne
		Douglas I. Payne
		Executive V.P. - Finance & Administration And Secretary
		(Principal Financial and Accounting Officer)