Stanley Furniture Part II: No Margin of Safety in This Armoire

As value investors, we are always seeking a Margin of Safety. The MoS can be found in several different areas, including normalized earnings power, discounted cash flow, or hidden real estate or land values. I wrote last week that based on discounted cash flows and an estimate of ongoing normalized earnings power that Stanley Furniture does not currently offer a margin of safety at its price of around $3 per share.  However, due to some recent corporate actions, it is possible that the assets of STLY could be worth more than what the stock market is currently quoting.

According to a press release from December 20 (emphasis added),

Stanley Furniture Company, Inc. (Nasdaq-NGS:STLY) announced today that it has pre-paid in full its outstanding debt under its note agreement with Prudential Insurance Company of America and other lenders. The amount prepaid was $15 million plus accrued interest. In connection with the prepayment, the lenders agreed to waive the yield-maintenance premium due on prepayment provided under the note agreement. The Company indicated that cash on hand after the debt prepayment was approximately $19 million.

At the same time, STLY also announced they completed a recent rights offering by adding 4M new shares at a price of $3. This cash facilitated the debt prepayment.  Taking a look at the latest financial filing from October 2 and adjusting for the new cash balance and elimination of debt, the new Total Stockholders Equity, aka book value (assets minus liabilities) is $75.1M from the previous balance of $58M, an increase of nearly 30%.  Compared to the total market cap of $37M this looks like an outstanding investment.

The problem is that 4M new shares were issued. This increases the shares outstanding by 40%, actually lowering the book value per share from $5.60 to $5.24. Though the stock is still trading below book value, over half of the assets are in inventory and property and equipment. Given the current competitive environment I’m not sure how reliable the estimates are for the value of the inventory or the equipment that makes it, thus lowering our perceived value even further. Further cash flow and earnings declines will also lower the asset value as cash leaves the balance sheet.

One other interesting piece on STLY is the potential CDSOA payments I discussed in my previous post. CDSOA payments are coming slowly from the government and most are being held up through lawsuits. STLY believes they are owed around $30M in payments. If it was to receive those, this analysis changes completely. Though it may not be enough to jumpstart the business, it may be enough for an activist investor to get involved and distribute the cash to shareholders.

Without any insight into the outcome of the CDSOA lawsuits or the government agency distributing the payments, I think that buying STLY on that premise would be speculative.  I will continue to monitor STLY for further developments as getting full access to those payments could result in a rewarding Special Situations play.

Disclosure: I have no position in STLY.

PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
October 2, December 31,
2010 2009
ASSETS
Current assets:
Cash
$ 16,889 $ 41,827
Accounts receivable, less allowances of $1,794 and $1,747
16,076 15,297
Inventories:
Finished goods
22,812 22,376
Work-in-process
4,571 8,184
Raw materials
3,290 6,665
Total inventories
30,673 37,225
Prepaid expenses and other current assets
3,895 4,898
Income tax receivable
4,951 6,882
Deferred income taxes
3,763 3,433
Total current assets
76,247 109,562
Property, plant and equipment, net
25,641 31,375
Goodwill
9,072
Other assets
1,027 453
Total assets
$ 102,915 $ 150,462
LIABILITIES
Current liabilities:
Current maturities of long-term debt
$ 15,000 $ 1,429
Accounts payable
9,387 11,633
Accrued salaries, wages and benefits
6,269 6,597
Other accrued expenses
3,439 2,626
Total current liabilities
34,095 22,285
Long-term debt, exclusive of current maturities
26,428
Deferred income taxes
3,868 2,128
Other long-term liabilities
6,942 6,774
Total liabilities
44,905 57,615
STOCKHOLDERS’ EQUITY
Common stock, $.02 par value, 25,000,000 shares authorized, 10,344,679 and 10,332,179 shares issued and outstanding, respectively
207 207
Capital in excess of par value
2,565 1,897
Retained earnings
55,386 90,852
Accumulated other comprehensive loss
(148 ) (109 )
Total stockholders’ equity
58,010 92,847
Total liabilities and stockholders’ equity
$ 102,915 $ 150,462
The accompanying notes are an integral part of the consolidated financial statements.

 

2


Table of Contents
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
Ended Ended
October 2, September 26, October 2, September 26,
2010 2009 2010 2009
Net sales
$ 34,897 $ 38,455 $ 109,323 $ 120,545
Cost of sales
35,586 39,056 117,494 112,829
Gross profit (loss)
(689 ) (601 ) (8,171 ) 7,716
Selling, general and administrative expenses
5,756 6,875 18,172 22,345
Goodwill impairment charge
9,072
Operating loss
(6,445 ) (7,476 ) (35,415 ) (14,629 )
Other income (expense), net
(17 ) 45 19 133
Interest income
3 3 44
Interest expense
857 953 2,830 2,809
Loss before income taxes
(7,319 ) (8,381 ) (38,223 ) (17,261 )
Income tax benefit
(2,385 ) (3,308 ) (2,757 ) (6,789 )
Net loss
$ (4,934 ) $ (5,073 ) $ (35,466 ) $ (10,472 )
Loss per share:
Basic
$ (.48 ) $ (0.49 ) $ (3.43 ) $ (1.01 )
Diluted
$ (.48 ) $ (0.49 ) $ (3.43 ) $ (1.01 )
Weighted average shares outstanding:
Basic
10,345 10,332 10,341 10,332
Diluted
10,345 10,332 10,341 10,332
The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
Nine Months Ended
October 2, September 26,
2010 2009
Cash flows from operating activities:
Cash received from customers
$ 108,151 $ 124,071
Cash paid to suppliers and employees
(125,495 ) (120,262 )
Interest paid
(3,046 ) (2,725 )
Income taxes received (paid)
6,429 (2,531 )
Net cash used by operating activities
(13,961 ) (1,447 )
Cash flows from investing activities:
Capital expenditures
(1,203 ) (1,702 )
Purchase of other assets
(28 ) (55 )
Proceeds from sale of assets
1,147 1,303
Net cash used by investing activities
(84 ) (454 )
Cash flows from financing activities:
Repayment of senior notes
(12,857 ) (1,429 )
Proceeds from insurance policy loans
1,845 1,651
Proceeds from exercise of stock options
119
Other
96
Net cash (used) provided by financing activities
(10,893 ) 318
Net decrease in cash
(24,938 ) (1,583 )
Cash at beginning of period
41,827 44,013
Cash at end of period
$ 16,889 $ 42,430
Reconciliation of net loss to net cash used by operating activities:
Net loss
$ (35,466 ) $ (10,472 )
Goodwill impairment charge
9,072
Depreciation and amortization
6,815 4,291
Deferred income taxes
1,410 (192 )
Stock-based compensation
549 692
Other
30
Changes in assets and liabilities:
Accounts receivable
(779 ) 3,821
Inventories
6,552 11,970
Income tax receivable
1,931
Prepaid expenses and other current assets
(2,019 ) (8,809 )
Accounts payable
(2,246 ) (1,079 )
Accrued salaries, wages and benefits
(697 ) 997
Other accrued expenses
1,143 (2,161 )
Other assets
(424 ) (404 )
Other long-term liabilities
168 (101 )
Net cash used by operating activities
$ (13,961 ) $ (1,447 )
The accompanying notes are an integral part of the consolidated financial statements.
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2 Responses to Stanley Furniture Part II: No Margin of Safety in This Armoire

  1. David Hasselhoff says:

    In addition to the uncertainty of CDSOAs, one thing that really worries me is the rights offering to repurchase debt early. Here is why:
    Throughout his entire career, Warren Buffet has financed every company he has purchased with cash (with the exception of BNSF). His reason for doing so? Because he believes that BRK shares are undervalued, and therefore purchasing a company with stock would mean he would be overpaying for the company.
    STLY management must believe that repurchasing cheap debt at $3 per share creates value (or not know what they are doing). This means the STLY management team values their own stock under $3 and estimates the STLY returns will be less than 6% (or whatever rate the debt is).
    To me there is only one reason to sell additional shares: You have no other access to cash. I have not read all of the details of the debt prepayment or researched the company in detail, however, this is something that worries me.

    However, for the more speculative folks, this stock represents one of the last legal forms of online gambling. If CDSOAs are honoredm you doubled your money, if not you might just have enough for a lottery ticket.

  2. Pingback: The Finance Cooler | Blog | From the Mailbag: Stanley Furniture Co (STLY)

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