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

Second Quarter 2006 Form 10-Q

UNITED STATES

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 July 1, 2006

[ ]

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 incorporation)			(I.R.S. Employer Identification No.)

1641 Fairystone Park Highway, Stanleytown, Virginia 24168

(Address of principal executive offices, Zip Code)

(276) 627- 2000

(Registrant’s telephone number, including area code)

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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one);

Large accelerated filer ( ) Accelerated filer (x) Non-accelerated filer ( )

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (x)

As of July 12, 2006, 11,680,155 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	(unaudited)
	July 1,			December 31,
	2006			2005
ASSETS
Current assets:
Cash	$	10,627		$	12,556
Accounts receivable, less allowances of $1,972 and $1,566		37,958			36,957
Inventories:
Finished goods		46,270			52,609
Work-in-process		5,736			7,609
Raw materials		9,450			9,743
Total inventories		61,456			69,961

Prepaid expenses and other current assets		1,631			1,435
Deferred income taxes		2,503			2,462
Total current assets		114,175			123,371

Property, plant and equipment, net		48,617			50,744
Goodwill		9,072			9,072
Other assets		6,753			7,301
Total assets	$	178,617		$	190,488

LIABILITIES
Current liabilities:
Current maturities of long-term debt	$	2,857		$	2,857
Accounts payable		16,851			16,405
Accrued salaries, wages and benefits		7,950			11,144
Other accrued expenses		1,866			1,765
Total current liabilities		29,524			32,171

Long-term debt, exclusive of current maturities		7,143			8,571
Deferred income taxes		9,737			10,164
Other long-term liabilities		6,743			6,833
Total liabilities		53,147			57,739

STOCKHOLDERS’ EQUITY
Common stock, $.02 par value, 25,000,000 shares authorized 11,680,155 and 12,252,000 shares issued and outstanding		234			245
Retained earnings		125,414			132,682
Accumulated other comprehensive loss		(178	)		(178	)
Total stockholders’ equity		125,470			132,749
Total liabilities and stockholders’ equity	$	178,617		$	190,488

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

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)

	Three Months				Six Months
	Ended				Ended
	July 1,		July 2,		July 1,		July 2,
	2006		2005		2006		2005

Net sales	$	77,476	$	83,635	$	161,000	$	166,585

Cost of sales		59,858		63,003		123,624		125,488

Gross profit		17,618		20,632		37,376		41,097

Selling, general and administrative expenses		11,323		11,239		22,451		22,290

Operating income		6,295		9,393		14,925		18,807

Other income, net		68		54		161		119
Interest income		146		102		256		154
Interest expense		509		545		1,033		1,115

Income before income taxes		6,000		9,004		14,309		17,965

Income taxes		2,063		3,177		4,980		6,378

Net income	$	3,937	$	5,827	$	9,329	$	11,587

Earnings per share:

Basic	$	.33	$	.45	$	.77	$	.90
Diluted	$	.32	$	.44	$	.75	$	.87

Weighted average shares outstanding:

Basic		11,973		12,905		12,101		12,908
Diluted		12,264		13,255		12,397		13,316

Cash dividend declared and paid per common share	$	.08	$	.06	$	.16	$	.12

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

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited)

(in thousands)

	Six Months Ended
	July 1,			July 2,
	2006			2005
Cash flows from operating activities:
Cash received from customers	$	159,732		$	163,434
Cash paid to suppliers and employees		(135,731	)		(138,696	)
Interest paid, net		(1,393	)		(1,519	)
Income taxes paid, net		(6,433	)		(6,350	)
Net cash provided by operating activities		16,175			16,869

Cash flows from investing activities:
Capital expenditures		(749	)		(2,721	)
Purchase of other assets		(17	)		(33	)
Net cash used by investing activities		(766	)		(2,754	)

Cash flows from financing activities:
Repayment of senior notes		(1,428	)		(2,828	)
Purchase and retirement of common stock		(16,175	)		(9,993	)
Proceeds from insurance policy loans		1,241			1,110
Dividends paid		(1,944	)		(1,560	)
Proceeds from exercised stock options		713			5,110
Tax benefit from exercise of stock options		255
Net cash used by financing activities		(17,338	)		(8,161	)

Net increase (decrease) in cash		(1,929	)		5,954
Cash at beginning of period		12,556			7,632
Cash at end of period	$	10,627		$	13,586

Reconciliation of net income to net cash provided by operating activities:
Net income	$	9,329		$	11,587
Depreciation		2,912			2,815
Deferred income taxes		(468	)		(514	)
Tax benefit from exercise of stock options		(255	)
Stock-based compensation		297
Loss on disposal of assets		6
Changes in assets and liabilities:
Accounts receivable		(1,001	)		(3,096	)
Inventories		8,505			1,375
Prepaid expenses and other current assets		(298	)		(323	)
Accounts payable		446			3,493
Accrued salaries, wages and benefits		(2,948	)		544
Other accrued expenses		356			1,431
Other assets		(616	)		(367	)
Other long-term liabilities		(90	)		(76	)
Net cash provided by operating activities	$	16,175		$	16,869

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

STANLEY FURNITURE COMPANY, INC.

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,” (“SFAS 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 $148 for the three months ended July 1, 2006, and $194 for the first half 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	Six Months
	Ended	Ended
	July 2, 2005	July 2, 2005
Net income as reported	$5,827	$11,587
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related
tax effects	187	476
Pro forma net income	$5,640	$11,111

Earnings per share:
Basic - as reported	$ 0.45	$ 0.90
Basic - pro forma	$ 0.44	$ 0.86

Diluted - as reported	$ 0.44	$ 0.87
Diluted - pro forma	$ 0.43	$ 0.84

As of July 1, 2006, there was approximately $710 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 six months ended July 1, 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 six months ended July 1, 2006 is as follows:

Weighted

Average

Weighted

Remaining

Aggregate

Number of

Average

Contractual

Intrinsic

Exercise price

Term (in yrs)

Value

Outstanding at January 1, 2006

855

14.71

5.7

Lapsed

)

24.51

Exercised

(54

)

13.21

Granted

27.59

Outstanding at July 1, 2006

823

15.17

5.9

7,248

Exercisable at July 1, 2006

729

14.14

5.5

7,161

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

	Three Months				Six Months
	Ended				Ended
	July 1,		July 2,		July 1,		July 2,
	2006		2005		2006		2005
Proceeds from stock options exercised	$	261	$	1,796	$	713	$	5,110
Tax benefits related to stock options exercised	$	94	$	324	$	255	$	1,240
Intrinsic value of stock options exercised	$	251	$	1,004	$	689	$	3,357

3. Property, Plant and Equipment

	July 1,		December 31,
		2006		2005
Land and buildings	$	39,932	$	39,894
Machinery and equipment		78,225		77,693
Office furniture and equipment		1,903		1,916
Property, plant and equipment, at cost		120,060		119,503
Less accumulated depreciation		71,443		68,759
Property, plant and equipment, net	$	48,617	$	50,744

Debt

	July 1,		December 31,
	2006		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						Six Months
	Ended						Ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
Interest cost	$	227		$	242		$	464		$	485
Expected return on plan assets		(247	)		(257	)		(491	)		(513	)
Net amortization and deferral		120			111			250			222
Net cost		100			96			223			194
Settlement expense		95			333			311			573
Total expense	$	195		$	429		$	534		$	767

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 eighteen 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				Six Months
	Ended				Ended
	July 1,		July 2,		July 1,		July 2,
	2006		2005		2006		2005
Service cost	$	24	$	22	$	48	$	44
Interest cost		43		46		87		92
Amortization of transitions obligation		32		33		65		66
Amortization of net actuarial loss		10		17		21		34
Net periodic postretirement benefit cost	$	109	$	118	$	221	$	236

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

Six Months

Ended

July 1,

July 2,

July 1,

July 2,

2006

2005

2006

2005

Weighted average shares outstanding

for basic calculation

11,973

12,905

12,101

12,908

Add: Effect of dilutive stock options

291

350

296

408

Weighted average shares outstanding

Adjusted for diluted calculation

12,264

13,255

12,397

13,316

A reconciliation of the activity in Stockholders’ Equity accounts for the quarter ended July 1, 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

9,329

Exercise of stock options

712

Tax benefit on exercise of stock options

255

Stock repurchases

(12

)

(1,510

)

(14,653

)

Stock awards

246

Stock-based compensation

297

Cash dividends paid, $.16 per share

(1,944

)

Balance, July 1, 2006

234

125,414

(178

)

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

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 six months of 2006 compared to 31% 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 manufacturing 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 half of 2006 and we expect this trend may continue near term. How quickly and to what extent we are able to lower costs, improve quality and reduce inventories is difficult to project.

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

	Three Months						Six Months
	Ended						Ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		77.3			75.3			76.8			75.3
Gross profit		22.7			24.7			23.2			24.7
Selling, general and administrative expenses		14.6			13.4			13.9			13.4
Operating income		8.1			11.2			9.3			11.3
Other income, net		.1			.1			.1			.1
Interest income		.2			.1			.1			.1
Interest expense		.7			.6			.6			.7
Income before income taxes		7.7			10.8			8.9			10.8
Income taxes		2.6			3.8			3.1			3.8
Net income		5.1	%		7.0	%		5.8	%		7.0	%

Net sales decreased $6.2 million, or 7.4%, for the three month period ended July 1, 2006, from the comparable 2005 period. For the six month period, net sales decreased $5.6 million, or 3.4% from the 2005 six month period. This was primarily due to lower unit volume resulting from continued weakness in retail furniture activity, partially offset by higher average selling prices.

Gross profit margins for the three and six month periods of 2006 were 22.7% and 23.2%, respectively compared to 24.7% for both 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 quarter and led to lower margins due to the under absorption of factory overheard costs.

Selling, general and administrative expenses for the three and six month periods as a percentage of net sales were 14.6% and 13.9%, respectively compared to 13.4% for both comparable 2005 periods. The higher percentage for the current year periods is primarily due to lower sales. Increased bad debt and legal and professional expenses were mostly offset by lower bonus expense for both the three and six month periods of 2006, versus the comparable prior year periods.

As a result of the above, operating income as a percentage of net sales was 8.1% and 9.3%, respectively, for the three and six month periods of 2006 compared to 11.2% and 11.3% for the comparable 2005 periods.

Interest expense for the six month period of 2006 decreased primarily due to lower average debt levels. Interest income increased during the 2006 period due to higher amounts of cash.

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.

Financial Condition, Liquidity and Capital Resources

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 $4.6 million during the first half of 2006 from $81.5 million at year end. The decrease was primarily due to an $8.5 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 $16.2 million in the first six months of 2006 compared to $16.9 million in the 2005 period. The decrease was primarily due to lower receipts from customers due to lower sales offset by lower payments to suppliers and employees due to lower production levels.

Net cash used by investing activities was approximately $766,000 in the 2006 period compared to $2.8 million in 2005 and consisted primarily of normal capital expenditures. Capital expenditures for 2006 are anticipated to range from $3.0 million to $5.0 million.

Net cash used by financing activities was $17.3 million in the 2006 period compared to $8.2 million in the 2005 period. In the 2006 period, cash from operations, proceeds from insurance policy loans, and proceeds from the exercise of stock options provided funds for the purchase and retirement of our common stock and cash dividends. During the first six months of 2006, $16.2 million was used to purchase 635,845 shares of our common stock in the open market at an average price of $25.44. With the recently announced increase, we have $50 million currently 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 and cash dividends. 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 July 1, 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 July 1, 2006, approximately $25.0 million of additional borrowings were available under the revolving credit facility and cash on hand was $10.6 million.

Pension Plan Termination

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 eighteen 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.

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 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 will ultimately not complete their vesting requirements (“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.

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,” 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 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 raise prices in response to inflation and increasing costs, the cyclical nature of the furniture industry, the inability to obtain sufficient quantities of quality raw materials in a timely manner, failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner, business failures or loss of large customers, 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 six 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 second 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

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programs}

^{programs
(a)}

^{April
2
to May 6, 2006}

^203,502

^27.40

^203,502

^10,335,520

^{May
7 to
June 3, 2006}

^175,843

^25.99

^175,843

^5,765,622

^{June
4
to July 1, 2006}

^208,000

^22.96

^208,000

^989,197

^Total

^587,345

^25.41

^587,345

^(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 4. Submission of Matters to a Vote of Security Holders

(a.) The annual meeting of the Company’s stockholders was held on April 19, 2006.

(b.)	The stockholders of the Company elected two directors for a three-year term expiring at the annual meeting of stockholders to be held in 2009. The election was approved by the following vote:

	For	Withheld

Michael P. Haley	11,220,402	11,510,242

Albert L. Prillaman	11,510,242	98,151

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).

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

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.

Date: July 18, 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)