Stanley Furniture Reports Second Quarter Sales Decrease

Furniture World Magazine

Stanley Furniture Company, Inc. reported sales and earnings for the second quarter of 2006. Both sales and earnings slightly exceeded management's updated guidance range provided in mid June 2006. Second quarter sales and earnings were below the record levels from the year-ago quarter. Net sales of $77.5 million declined 7.4% and earnings per share of $.32 decreased 27.3% from the second quarter of last year. For the first half of 2006, net sales of $161.0 million decreased 3.4% from the comparable prior year period. Earnings per share declined 13.8% to $.75 compared to $.87 in the first half of 2005. Second quarter operating income was $6.3 million, or 8.1% of net sales, compared to $9.4 million, or 11.2% of net sales, in the year ago quarter. Year-to-date operating income declined to $14.9 million, or 9.3% of net sales, from $18.8 million, or 11.3% of net sales in the first half of 2005. 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 overhead costs. Working capital, excluding cash and current maturities of long-term debt, decreased $4.6 million during the first half of 2006 to $76.9 million from $81.5 million at December 31, 2005. Total inventories of $61.5 million have decreased $8.5 million and $10.8 million since December 31, 2005 and the year- ago quarter, respectively. Strong cash flow in the first six months of 2006 along with $1.9 million of cash on hand was used to purchase $16.2 million of the Company's common stock, pay cash dividends of $1.9 million, and reduce debt $1.4 million. As announced earlier , the Company's Board of Directors has authorized $50 million to be used to repurchase shares of the Company's common stock. At July 1, 2006 total debt outstanding was $10.0 million and cash on hand amounted to $10.6 million. The Company also announced its decision to terminate its defined benefit pension plan. No benefits have accrued under this plan since it was frozen in December 1995, at which time Company contributions to a 401k savings plan became the primary retirement benefit. The Company anticipates making additional cash contributions to the pension plan in the range of $1 million to $3 million between now and the final termination. The Company expects to record a charge to earnings in the range of $6 million to $8 million pre-tax, or $3.9 million to $5.2 million net of taxes ($.33 to $.43 per share), upon final termination. The termination will be a standard termination for purposes of the Pension Benefit Guaranty Corporation. It is expected to take 12 to 18 months to obtain the necessary government approvals and complete the plan termination. Pension expense related to this plan for 2005 was approximately $1.2 million and is expected to be about the same for 2006. Business Outlook: "We are disappointed with the decline in sales; however, we believe this is a result of overall current industry conditions," commented Jeffrey R. Scheffer, chairman, president and chief executive officer. "Quite frankly, we expect this weaker sales environment to persist for a while and as a result we have lowered our sales and earnings guidance for the balance of the year. We are very pleased with strong cash flow for the first half of 2006 and the progress we have made in our continuous improvement efforts using lean manufacturing principles. These efforts have already resulted in a significant decrease in inventories while improving customer service levels and we believe we are laying the ground work to further improve processes and efficiencies." Management offers the following guidance for total year 2006. This guidance excludes any potential receipt of funds by us under the Continued Dumping and Subsidy Offset Act involving tariffs collected by the U.S. government on wooden bedroom furniture imported from China. - Net sales are expected to be in the range of $323.5 million to $331 million, a decrease of 1% to 3% compared to the prior year. - Operating income is expected to be in the range of $29.8 million to $31.5 million. - The Company's effective tax rate is expected to be 34.8% in 2006. - Earnings per share are expected to be in the range of $1.52 to $1.61 compared to $1.77 for 2005. Management offers the following guidance for the quarter ending September 30, 2006. - Net sales are expected to be in the range of $81.0 million to $83.5 million, a decrease of 2.5% to 5.4% from the third quarter of 2005. - Operating income is expected to be in the range of $7.4 million to $8.0 million. - Earnings per share are expected to be in the range of $.38 to $.41 compared to record earnings of $.44 per share in the year-ago quarter. Other Information All earnings per share amounts are on a diluted basis. Established in 1924, Stanley Furniture Company, Inc. is a leading manufacturer of wood furniture targeted at the upper-medium price range of the residential market. Manufacturing facilities are located in Stanleytown and Martinsville, Va. and Robbinsville and Lexington, N.C. Its common stock is traded on the Nasdaq stock market under the symbol STLY.