HG Holdings, Inc. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

Form 10-Q

For the quarterly period ended September 28, 2013

or

For the transition period from to.

Commission file number: 0-14938

STANLEY FURNITURE COMPANY, INC.

(Exact name of registrant as specified in its charter)

200 North Hamilton Street, High Point, North Carolina, 27260
(Address of principal executive offices, Zip Code)

336-884-7701

(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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (X) No ( )

                Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (check one):

            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 October 9, 2013, 14,509,119 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share, were outstanding.

PART I.  FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share data)

(unaudited)

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

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

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

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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)
(unaudited)

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.

A correction of an immaterial presentation error was made in the Consolidated Statements of Comprehensive Income for the prior year three and nine month periods. 

2.         Property, Plant and Equipment

3.         Income taxes

During the nine months of 2013, we recorded a non-cash charge to our valuation allowance of $3.6 million, increasing our valuation allowance against deferred tax assets to $7.2 million at September 28, 2013.  The primary assets covered by this valuation allowance are net operating losses. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance.  Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative operating loss in the most recent three-year period, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC 740, Income Taxes. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. Although realization is not assured, we have concluded that the remaining net deferred tax asset in the amount of $622 will be realized based on the reversal of existing deferred tax liabilities. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities. Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.  The income tax benefit recognized during the three and nine month periods was primarily generated due to the releasing of reserves due to lapse of statute of limitations.

During the nine months of 2012, we utilized $39.4 million of our net operating loss carry forwards against the income recognized by proceeds from the Continued Dumping and Subsidy Offset Act distributed by U.S. Customs and Border Protection in April of 2012. The income tax expense recognized during the three and nine month periods was primarily generated from the federal alternative minimum tax.  The alternative minimum tax limited our ability to offset income generated during the period with net operating loss carry forwards.

The major reconciling items between our effective income tax rate and the federal statutory rate are the changes in our valuation allowance and the cash surrender value on life insurance policies.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.         Employee Benefit Plans

Components of other postretirement benefit cost:

5.         Stockholders’ Equity

Basic earnings per common share are based upon the weighted average shares outstanding.  Outstanding stock options and restricted stock 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:

During the three and nine month periods ended September 28, 2013, the dilutive effect of outstanding stock options and restricted stock is not recognized since we have a net loss for those periods.  Approximately 2.0 million shares in 2013 were issuable upon the exercise of stock options.  Also, 373,000 shares of restricted stock in 2013 were not included because they were anti-dilutive.  During the three and nine month periods ended September 29, 2012, approximately 1.8 million and 729,000 stock options, respectively, were excluded from the diluted per share calculation as they would be anti-dilutive.  In addition, 205,000 shares of restricted stock were not included in the three month period of 2012 because they were anti-dilutive.

A reconciliation of the activity in Stockholders’ Equity accounts for the first nine months of 2013 is as follows:

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.    Restructuring and Related Charges

In 2012, we made the strategic decision to consolidate our corporate office and High Point showroom into a single multi-purpose facility in High Point, North Carolina.  During the current nine month period, we recorded $532 in restructuring charges in selling, general and administrative expenses for severance and relocation costs associated with this move and consolidation.

Restructuring accrual activity for the nine months ending September 28, 2013 was as follows:

Restructuring accrual activity for the nine months ending September 29, 2012 was as follows:

The restructuring accrual is classified as “Other accrued expenses”.

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

Results of Operations

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

Selling, general and administrative expenses for the three and nine month periods of 2013 as a percentage of net sales were 19.6% and 19.8%, respectively, compared to 19.3% and 18.2% for the comparable 2012 periods.  The higher percentage in the current three month period is primarily the result of increased expenditures.  The higher percentage in the nine month period is primarily the result of increased expenditures and, to a lesser extent, lower sales.  Selling, general and administrative expenses for the current three and nine month periods increased $77,000 and $977,000, respectively, compared to the 2012 periods. The current year expenses include restructuring charges associated with consolidating the corporate offices of $10,000 and  $532,000 for the three and nine month periods, respectively. Excluding these one-time costs, higher current year expenditures were driven primarily by increased showroom, marketing and advertising costs on the Stanley Furniture product line.

As a result, operating loss as a percentage of net sales was 8.0% and 8.5% for the three and nine month periods of 2013 compared to 5.3% and 4.9% for the comparable 2012 periods.

During the prior year nine month period we recorded income, net of expenses, of $39.4 million from the receipt of funds under the Continued Dumping and Subsidy Offset Act (CDSOA). 

Net interest expense for the three month period of 2013 increased $84,000 from the comparable 2012 period and $245,000 for the nine month period.  Interest expense is primarily composed of interest on insurance policy loans from a legacy deferred compensation plan, which increases annually based on growth in cash surrender value.

Our effective tax rate for the current three and nine month periods is essentially zero since we have established a valuation allowance for our deferred tax assets in excess of our deferred tax liabilities.  The benefit in the current year is primarily related to the release of reserves due to lapse of statute of limitations.  The expense in the prior year period is primarily the result of federal alternative minimum tax on the receipt of proceeds from the CDSOA distributed by U.S. Customs and Border Protection.  Federal alternative minimum tax regulations limit the ability to offset all of the income generated in the period with net operating loss carry forwards.

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 adequate for ongoing operational and capital expenditures for the foreseeable future.  At September 28, 2013, we had $10.9 million in cash, $10.0 million of short-term investments and $1.7 million in restricted cash.

Working capital, excluding cash, restricted cash and short-term investments, increased to $36.9 million at September 28, 2013 from $34.6 million on December 31, 2012.  The increase was primarily the result of a $3.7 million increase in accounts receivable and a $1.9 million reduction in accounts payable. Partially offsetting this working capital increase was a $3.4 million reduction in inventories.

Cash used by operations was $11.9 million in the nine month period of 2013 compared to cash provided by operations of $30.6 million in the comparable prior year period.  The cash used by operations in 2013 was the result of operating losses and to fund the increase in working capital.  The cash provided by operations in the prior year was the result of the receipt of $39.9 million in CDSOA proceeds.

Net cash provided by investing activities was $9.9 million in the current nine month period compared to a use of $25.3 million in the comparable prior year period.  During the nine month period of 2013, we invested $2.0 million in capital expenditures for the consolidation of our corporate offices and High Point showroom and $830,000 in final equipment payments as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina that started in early 2011. We spent $2.2 million as part of our continued investment in our Enterprise Resource Planning (ERP) system. Offsetting these uses of cash was the maturity of a short term investment of $15.0 million.  During the first nine months of 2012, we invested $20.0 million of our CDSOA proceeds in short-term investments. In addition, we invested $3.2 million in capital expenditures as part of the modernization of our Young America manufacturing operation in Robbinsville, North Carolina and $1.8 million as part of our investment in improved systems. We expect minimal capital expenditures during the remainder of 2013.

Net cash provided by financing activities was $2.0 million in the current nine months of 2013 compared to $2.2 million in the prior year period. Approximately $358,000 was used in the first nine months of 2013 to purchase and retire 80,077 shares of our common stock.  In both years, cash was provided from loans against the increase in cash surrender value of insurance policies.These proceeds were used to pay interest due on outstanding policy loans which is shown as a use of cash in operating activities.

Continued Dumping and Subsidy Offset Act (“CDSOA”)

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“Customs”) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”) for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 have remained with the U.S. Treasury.

Certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the United States Court of International Trade, challenging the CDSOA’s “support requirement” and seeking to share in the distributions.  As a result, Customs held back a portion of those distributions (the “Holdback”) pending resolution of the Non-Supporting Producers’ claims.  The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit.  Customs advised that it expected to distribute the Holdback to the Supporting Producers after March 9, 2012.  The Non-Supporting Producers sought injunctions first from the Court of International Trade and, when those efforts were unsuccessful, from the Federal Circuit directing Customs to retain the Holdback until the Non-Supporting Producers’ appeals were resolved.

On March 5, 2012, the Federal Circuit denied the motions for injunction, “without prejudicing the ultimate disposition of these cases.”  As a result, we received a CDSOA distribution of $39.9 million in April 2012. If the Federal Circuit were to reverse the decisions of the Court of International Trade and determine that the Non-Supporting Producers were entitled to CDSOA distributions, it is possible that Customs may seek to have us return all or a portion of our company’s share of that distribution.  On August 19, 2013, a panel of the Federal Circuit affirmed the U.S. Court of International Trade and determined that two of the appealing Non-Supporting Producers did not qualify for distributions.  On October 3, 2013 those producers petitioned the Federal Circuit for a rehearing en banc. Based on what we know today, we believe that the chance Customs will seek and be entitled to obtain a return of our CDSOA distribution is remote.

In addition, according to Customs, as of October 1, 2012, approximately $8.9 million in duties had been secured by cash deposits and bonds on unliquidated entries of wooden bedroom furniture that are subject to the CDSOA, and this amount is potentially available for distribution under the CDSOA to eligible domestic producers in connection with the case involving wooden bedroom furniture imported from China. The amount ultimately distributed will be impacted by appeals concerning the results of the annual administrative review process, which can retroactively increase or decrease the actual duties owed on entries secured by cash deposits and bonds, by collection efforts concerning duties that may be owed, and by any applicable legislation and Custom’s interpretation of that legislation. Assuming that such funds are distributed and that our percentage allocation in future years is the same as it was for the 2011 distribution (approximately 30% of the funds distributed) and the $8.9 million secured by the government does not change as a result of appeals from the annual administrative review process or otherwise, we could receive approximately $2.7 million in CDSOA funds.

In November 2012, Customs disclosed that it withheld $3.0 million in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution until the amounts at issue in the pending litigation have been resolved.  It is expected that Customs will continue withholding such funds until a final decision is reached in the pending litigation. Therefore, no distributions were made in December 2012 for the case involving wooden bedroom furniture from China.

Recently, Customs also disclosed that as of April 30, 2013, an additional $1.1 million of total collected duties was potentially available for distribution in 2013 to eligible domestic manufacturers of wooden bedroom furniture.  Customs noted that the final amounts available for distribution in 2013 could be higher or lower than the preliminary amounts due to liquidations, re-liquidations, protests, or other events affecting entries. This amount, at least in part, may have come from the security held by Customs as of October 1, 2012, but Customs has not updated the amount of duties that remain secured by cash deposits and bonds on un-liquidated entries of wooden bedroom furniture. We expect Customs to withhold these funds from distribution if a final decision is not reached in the pending litigation before the end of the fourth quarter of 2013. 

Due to the uncertainty of the various legal and administrative processes, we cannot provide assurances as to the amount of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2012 Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements made in this report are not based on historical facts, but are forward-looking statements.  These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could”, or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy.  These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Such risks and uncertainties include our success in profitably producing Young America products in our domestic manufacturing facility, disruptions in foreign sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry,  business failures or loss of large customers, the inability to raise prices in response to inflation and increasing costs, a failure or interruption of our information technology infrastructure, failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner, competition in the furniture industry including competition from lower-cost foreign manufacturers, the inability to obtain sufficient quantities of quality raw materials in a timely manner, environmental, health, and safety  compliance costs,  limited use of operating loss carry forwards due to ownership change, extended business interruption at our manufacturing facility, and the possibility that U.S. Customs and Border Protection may seek to reclaim all or a portion of the $39.9 million of Continued Dumping and Subsidy Offset Act (CDSOA) proceeds received in the second quarter of 2012. In addition, we have made certain forward looking statements with respect to payments we expect to receive under the CDSOA, which are subject to the risks and uncertainties described in our discussion of those payments that may cause the actual payments to be subject to claims for recovery or to differ materially from those in the forward looking statements.  Any forward-looking statement speaks only as of the date of this filing, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

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 products obtained from offshore sourcing and reduce our earnings or increase our losses, 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 6. Exhibits 

(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.