HG Holdings, Inc. - Quarter Report: 2014 March (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 March 29, 2014
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____.
Commission file number: 0-14938
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STANLEY FURNITURE COMPANY, INC.
(Exact name of registrant as specified in its charter)
______________________________________
| Delaware |
| 54-1272589 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
200 North Hamilton Street, No. 200, 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):
| Large accelerated filer ( ) | Accelerated filer ( ) |
| Non-accelerated filer (X) | Smaller reporting company ( ) |
(Do not check if a smaller reporting company)
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 April 25, 2014, 14,844,689 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share, were outstanding.
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STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Employee Benefits Plans
Components of other postretirement benefit cost:
|
|
Three Months Ended | ||||
|
|
March 29, 2014 |
|
March 30, 2013 | ||
|
|
| ||||
| Interest cost | $ | 27 |
| $ | 25 |
| Amortization of prior service benefit |
| (38) |
|
| (41) |
| Amortization of accumulated loss |
| 3 |
|
| 8 |
| Net periodic postretirement benefit income | $ | (8) |
| $ | (8) |
5. 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:
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| Three Months Ended | ||
|
| March 29, 2014 |
| March 30, 2013 |
|
|
| ||
| Weighted average shares outstanding for basic calculation | 14,163 |
| 14,162 |
| Add: Effect of dilutive stock options |
|
|
|
| Weighted average shares outstanding, adjusted for diluted calculation | 14,163 |
| 14,162 |
In the 2014 and 2013 first quarter periods, the dilutive effect of stock options is not recognized since we have a net loss. Approximately 1.8 million shares in 2014 and 2.1 million shares in 2013 are issuable upon the exercise of stock options, which were not included in the diluted per share calculation because they were anti-dilutive. Also, 677,000 shares in 2014 and 367,000 shares in 2013 of restricted stock were not included because they were anti-dilutive.
A reconciliation of the activity in Stockholders’ Equity accounts for the quarter ended March 29, 2014 is as follows:
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Common Stock |
|
Capital in Excess of Par Value |
Retained Earnings |
Accumulated Other Comprehensive Loss | ||||||
| Balance, December 31, 2013 | $ | 283 |
| $ | 15,732 |
| $ | 59,784 | $ | (158) | |
| Net loss |
|
|
|
|
|
| (4,410) |
|
| ||
| Stock-based compensation |
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|
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| 223 |
|
|
|
| ||
| Adjustment to net periodic benefit cost |
|
|
|
|
| (35) | |||||
| Balance, March 29,2014 | $ | 283 |
| $ | 15,955 |
| $ | 55,374 | $ | (193) | |
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STANLEY FURNITURE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Restructuring and Related Charges In 2011, we evaluated our overall warehousing and distribution requirements for our Stanley Furniture product line and concluded only a portion of the leased warehouse space in Stanleytown, Virginia would be required. As a result, we took charges for future lease obligations in 2011 and in 2012 for the portions of the Stanleytown warehouse facility no longer used. 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 2013, we recorded $770,000 in restructuring charges in selling, general and administrative expenses for severance and relocation costs associated with this move and consolidation, with $260,000 of that total recorded in the first quarter. Restructuring accrual activity for the three months ending March 29, 2014 was as follows: Lease Obligations Severance and other termination costs Total Accrual at January 1, 2014 $ 488 $ 169 $ 657 Charges to expense Cash payments (61) (104) (165) Accrual at March 29, 2014 $ 427 $ 65 $ 492 Restructuring accrual activity for the three months ending March 30, 2013 was as follows: Lease Obligations Severance and other termination costs Total Accrual at January 1, 2013 $ 732 $ 732 Charges to expense $ 260 260 Cash payments (61) (54) (115) Accrual at March 30, 2013 $ 671 $ 206 $ 877 The restructuring accrual is classified as “Other accrued expenses”. 7. Subsequent Event Subsequent to the first quarter of 2014, we concluded that revenue on our Young America product line remained below the level needed to reach profitability and that the time frame needed to assure sustainable profitability was longer than we felt was economically justified. Therefore, we made the decision to cease manufacturing operations at our Robbinsville, North Carolina facility. Restructuring related charges were $1.2 million in the first quarter with approximately half in cost of goods sold and the other half in selling, general and administrative expenses. These non-cash charges were to properly value inventory, accounts receivable and other assets based on this decision. During the second quarter we expect further restructuring and related charges as we cease production in Robbinsville, North Carolina, communicate termination dates for employees and recognize any further asset impairments. 8 9 10 11 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 ability to control costs in connection with ceasing production at our Robbinsville, NC facility, our ability to collect receivables from Young America customers whose businesses are negatively impacted by the cease of Young America production, our ability to manage relations with Stanley Furniture customers who have also been Young America customers, 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, failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner, competition in the furniture industry, environmental, health, and safety compliance costs, failure or interruption of our information technology infrastructure, and the possibility that U.S. Customs 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. Any forward looking statement speaks only as of the date of this news release 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 March 29, 2014, the end of the period covered by this quarterly report. (b) Changes in internal controls over financial reporting. As identified in our 2013 Annual Report on Form 10-K, a material weakness in internal control over financial reporting was identified as we did not design and maintain effective controls over access of key accounting personnel to initiate, modify and record transactions and standing data in our financial systems that impact key accounts and disclosures. Specifically, some key accounting personnel had this access, including the ability to both prepare and post manual journal entries without an independent review by someone without this access. By February 10, 2014, the access of key accounting personnel to initiate, modify and record transactions and standing data was limited to only those areas specific to job function, those with responsibility to independently review manual journal entries no longer had the ability to prepare and post such entries. The access listings for all key accounting personnel were reviewed and approved and access was adjusted accordingly. These changes made during the three months ended March 29, 2014 materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. These controls have been tested and we found them to be effective as key accounting personnel access was deemed appropriate after that date. Therefore, we have concluded the material weakness has been remediated as of March 29, 2014. 12 Part II. OTHER INFORMATION Item 1A. Risk Factors The following description of risk factors includes material changes to, and supersedes, the description of risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ending December 31, 2013. Our results of operations and financial condition can be adversely affected by numerous risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this document. Should any of these risks actually materialize, our business, financial condition and future prospects could be negatively impacted. As a result of our decision to cease production of our Young America product line: · Our ability to control costs as we cease production in our Robbinsville facility and to realize value on the disposal of fixed assets could adversely affect earnings and liquidity. · We may not be able to collect receivables from customers whose businesses are negatively impacted by the cease of Young America production. · The Stanley product line market share could be negatively impacted by this decision due to shared resources and shared customer base. As a result of our reliance on foreign sourcing for our Stanley Furniture product line: · Our ability to service customers could be adversely affected and result in lower sales, earnings and liquidity. Our supply of goods could be interrupted for a variety of reasons. Physical damage from a natural disaster, fire or other cause to any one of our sourcing partners’ factories could interrupt production for an extended period of time. Our sourcing partners may not supply goods that meet our manufacturing, quality or safety specifications, in a timely manner and at an acceptable price. We may reject goods that do not meet our specifications, requiring us to find alternative sourcing arrangements at a higher cost, or possibly forcing us to discontinue the product. Also, delivery of goods from our foreign sourcing partners may be delayed for reasons not typically encountered with domestic manufacturing or sourcing, such as shipment delays caused by customs or labor issues. · Our ability to properly forecast consumer demand on product with extended lead times could result in lower sales, earnings and liquidity. Our use of foreign sources exposes us to risks associated with forecasting future demand on product with extended order lead times. Extended order lead times may adversely affect our ability to respond to sudden changes in demand, resulting in the purchase of excess inventory in the face of declining demand, or lost sales due to insufficient inventory in the face of increasing demand, either of which could have an adverse effect on our sales, earnings and liquidity. · Changes in political, economic and social conditions, as well as laws and regulations, in the countries from which we source products could adversely affect us. Foreign sourcing is subject to political and social instability in countries where our sourcing partners are located. This could make it more difficult for us to service our customers. Also, significant fluctuations of foreign exchange rates against the value of the U.S. dollar could increase costs and decrease earnings. · International trade policies of the United States and countries from which we source products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports could increase our costs and decrease our earnings. 13 We may not be able to sustain sales, earnings and liquidity levels due to economic downturns. The furniture industry historically has been cyclical in nature and has fluctuated with economic cycles. During economic downturns, the furniture industry tends to experience longer periods of recession and greater declines than the general economy. We believe that the industry is significantly influenced by economic conditions generally and particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics and credit availability. These factors not only affect the ultimate consumer, but also impact smaller independent brick-&-mortar furniture retailers, which are our primary customers. As a result, a worsening of current conditions could lower our sales and earnings and impact our liquidity. Business failures, or the loss, of large customers could result in a decrease in our future sales and earnings. Although we have no single customer representing 10% or more of our total annual sales, the possibility of business failures, or the loss of large customers could result in a decrease of our future sales and earnings. Lost sales may be difficult to replace and any amounts owed to us may become uncollectible. We may not be able to maintain or to raise prices in response to inflation and increasing costs. Future market and competitive pressures may prohibit us from successfully raising prices to offset increased costs of finished goods, freight and other inflationary items. This could lower our earnings. Failure to anticipate or respond to changes in consumer tastes and fashions in a timely manner could result in a decrease in our sales and earnings. Residential furniture is a fashion business based upon products styled for a changing marketplace and is sometimes subject to changing consumer trends and tastes. If we are unable to predict or respond to changes in these trends and tastes in a timely manner, we may lose sales and have to sell excess inventory at reduced prices. This could lower our sales and earnings. We may not be able to sustain current sales and earnings due to the actions and strength of our competitors. The furniture industry is very competitive and fragmented. We compete with mostly overseas manufacturers and/or retailers who source products from overseas and sell into our markets. In addition, some competitors have greater financial resources than we have and often offer extensively advertised, highly promoted products. As a result, we are continually subject to the risk of losing market share, which may lower our sales and earnings. Future cost of compliance with environmental, safety and health regulations could reduce our earnings. We are subject to federal, state and local laws and regulations in the areas of safety, health and environmental protection. The timing and ultimate magnitude of costs for compliance with environmental, health and safety regulations are difficult to predict and could reduce our earnings. Our business and operations would be adversely impacted in the event of a failure or interruption of our information technology infrastructure. The proper functioning of our information technology infrastructure is critical to the efficient operation and management of our business. If our information technology systems fail or are interrupted, our operations may be adversely affected and operating results could be harmed. Our information technology systems, and those of third parties providing service to us, may also be vulnerable to damage or disruption caused by circumstances beyond our control. These include catastrophic events, power anomalies or outages, natural disasters, computer system or network failures, viruses or malware, physical or electronic break-ins, unauthorized access and cyber attacks. Any material disruption, malfunction or similar challenges with our information technology infrastructure, or disruptions or challenges relating to the transition to new processes, systems or providers, could have a material adverse effect on the operation of our business and our results of operations. 14 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 3.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed February 3, 2010). 31.1 Certification by Glenn Prillaman, 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 Micah S. Goldstein, 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 Glenn Prillaman, 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 Micah S. Goldstein, 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) 101 The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) condensed consolidated statements of comprehensive loss, (iv) condensed consolidated statements of cash flows, (v) the notes to the consolidated financial statements, and (vi) document and entity information.(1) (1) Filed herewith 15 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: April 30, 2014 STANLEY FURNITURE COMPANY, INC. By: /s/ Micah S. Goldstein Micah S. Goldstein Chief Financial Officer (Principal Financial and Accounting Officer) 16