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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
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 1-13970
CHROMCRAFT REVINGTON, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1848094
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1330 Win Hentschel Blvd., Ste. 250, West Lafayette, IN 47906
(Address, including zip code, of registrant's principal executive offices)
(765) 807-2640
(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.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding for each of the registrant's classes
of common stock, as of the latest practicable date:
Common Stock, $.01 par value - 6,152,876 shares as of November 6, 2006
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INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations - Three
and Nine Months Ended September 30, 2006 and October 1,
2005..................................................... 3
Condensed Consolidated Balance Sheets - September 30,
2006, October 1, 2005 and December 31, 2005.............. 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2006 and October 1, 2005...... 5
Condensed Consolidated Statement of Stockholders' Equity
- Nine Months Ended September 30, 2006................... 6
Notes to Condensed Consolidated Financial Statements..... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 20
Item 4. Controls and Procedures..................................... 20
PART II. Other Information
Item 1A.Risk Factors................................................ 21
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................... 21
Item 5. Other Information........................................... 22
Item 6. Exhibits.................................................... 22
SIGNATURES............................................................. 22
2
PART I.
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
Chromcraft Revington, Inc.
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------- --------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2006 2005 2006 2005
--------- ------- --------- --------
Sales $35,348 $40,836 $121,589 $128,896
Cost of sales 34,798 31,887 103,912 99,156
------- ------- -------- --------
Gross margin 550 8,949 17,677 29,740
Selling, general and administrative expenses 6,885 6,720 20,933 20,301
------- ------- -------- --------
Operating income (loss) (6,335) 2,229 (3,256) 9,439
Interest expense, net 63 342 193 660
------- ------- -------- --------
Earnings (loss) before income tax expense (benefit) (6,398) 1,887 (3,449) 8,779
Income tax expense (benefit) (1,941) 696 (797) 3,239
------- ------- -------- --------
Net earnings (loss) $(4,457) $ 1,191 $ (2,652) $ 5,540
======= ======= ======== ========
Earnings (loss) per share of common stock
Basic $ (1.01) $ .28 $ (.60) $ 1.30
Diluted $ (1.01) $ .27 $ (.60) $ 1.28
Shares used in computing earnings (loss) per share
Basic 4,423 4,322 4,406 4,253
Diluted 4,423 4,398 4,406 4,315
See accompanying notes to condensed consolidated financial statements.
3
Condensed Consolidated Balance Sheets (unaudited)
Chromcraft Revington, Inc.
(In thousands)
Sept. 30, Oct. 1, Dec. 31,
2006 2005 2005
--------- ------- --------
Assets
Cash and cash equivalents $ 2,384 $ -- $ --
Accounts receivable 18,949 22,257 18,735
Inventories 34,700 36,556 37,009
Prepaid expenses and other 2,840 2,660 1,922
------- ------- -------
Current assets 58,873 61,473 57,666
Property, plant and equipment, net 26,115 30,664 30,274
Deferred income taxes and other 1,672 804 1,319
------- ------- -------
Total assets $86,660 $92,941 $89,259
======= ======= =======
Liabilities and Stockholders' Equity
Accounts payable $ 4,554 $ 5,072 $ 5,448
Accrued liabilities 8,058 9,073 7,340
------- ------- -------
Current liabilities 12,612 14,145 12,788
Bank debt -- 4,390 --
Deferred compensation 2,010 2,585 2,486
Other long-term liabilities 1,037 1,364 1,323
------- ------- -------
Total liabilities 15,659 22,484 16,597
Stockholders' equity 71,001 70,457 72,662
------- ------- -------
Total liabilities and stockholders' equity $86,660 $92,941 $89,259
======= ======= =======
See accompanying notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows (unaudited)
Chromcraft Revington, Inc.
(In thousands)
Nine Months Ended
-------------------
Sept. 30, Oct. 1,
2006 2005
--------- -------
Operating Activities
Net earnings (loss) $(2,652) $ 5,540
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities
Depreciation expense 2,502 2,643
Non-cash asset impairment charges 2,867 --
Non-cash ESOP compensation expense 620 670
Non-cash stock compensation expense 371 184
Non-cash inventory write-downs 3,378 12
Deferred income taxes (1,131) 372
Loss on disposal of property, plant and equipment 19 230
Changes in operating assets and liabilities
Accounts receivable (214) (4,124)
Inventories (1,069) (2,902)
Prepaid expenses and other (484) (1,216)
Accounts payable and accrued liabilities (164) 429
Deferred compensation and other long-term assets
and liabilities (430) (571)
------- -------
Cash provided by operating activities 3,613 1,267
------- -------
Investing Activities
Capital expenditures, net (1,229) (1,047)
------- -------
Cash used in investing activities (1,229) (1,047)
------- -------
Financing Activities
Net borrowing under an unsecured bank revolving credit line -- 4,390
Net prepayments under a secured bank revolving credit line -- (1,450)
Principal payments on a bank term loan -- (4,250)
Stock repurchase from related party -- (754)
Exercise of stock options -- 1,844
------- -------
Cash used in financing activities -- (220)
------- -------
Change in cash and cash equivalents 2,384 --
Cash and cash equivalents at beginning of period -- --
------- -------
Cash and cash equivalents at end of period $ 2,384 $ --
======= =======
See accompanying notes to condensed consolidated financial statements.
5
Condensed Consolidated Statement of Stockholders' Equity (unaudited)
For the Nine Months Ended September 30, 2006
Chromcraft Revington, Inc.
(In thousands, except share data)
Common Stock Capital in
----------------- Excess of
Shares Amount Par Value
--------- ------ ----------
Balance at January 1, 2006 7,923,563 $79 $17,604
Net loss -- -- --
ESOP compensation expense -- -- 113
Issuance of restricted
stock awards 5,600 -- --
Amortization of unearned
compensation -
restricted stock awards -- -- 170
Stock option compensation
expense -- -- 201
--------- --- -------
Balance at September 30,
2006 7,929,163 $79 $18,088
========= === =======
See accompanying notes to the consolidated financial statements
6
Unearned Treasury Stock Total
ESOP Retained --------------------- Stockholders'
Shares Earnings Shares Amount Equity
-------- -------- ---------- -------- -------------
$(17,385) $93,364 (1,776,287) $(21,000) $72,662
-- (2,652) -- -- (2,652)
507 -- -- -- 620
-- -- -- -- --
-- -- -- -- 170
-- -- -- -- 201
--------- ------- ----------- --------- -------
$(16,878) $90,712 (1,776,287) $(21,000) $71,001
========= ======= =========== ========= =======
7
Notes to Condensed Consolidated Financial Statements (unaudited)
Chromcraft Revington, Inc.
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006.
The balance sheet at December 31, 2005 has been derived from the audited
financial statements at that date but does not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Chromcraft Revington's annual report on Form 10-K
for the year ended December 31, 2005.
Note 2. Restructuring and Asset Impairment Charges
On August 29, 2006, the board of directors of the Company approved the
restructuring of certain of the Company's operations. The restructuring program
includes the shutdown, relocation, consolidation and outsourcing of certain
furniture manufacturing and distribution operations. The purposes of the
restructuring are to reduce fixed costs, to improve the utilization of a global
supply chain and to increase asset utilization.
Asset impairment charges were recorded to reduce the carrying values of
buildings, machinery and equipment to fair value. The determination of fair
value was based on information obtained from real estate and equipment brokers.
Restructuring charges include inventory write-downs to reflect anticipated net
realizable value, one-time termination benefits, and costs to shutdown, vacate
and prepare the facilities for sale. The exit activities for the disposal of the
facilities are expected to be completed on or before December 31, 2007.
8
Restructuring costs and related impairment charges recorded for the three and
nine months ended September 30, 2006 were as follows:
(In thousands)
---------------
Restructuring charges:
Costs to shutdown, vacate and prepare
for sale $ 36
One-time termination benefits 122
Inventory write-downs 2,748
------
2,906
Property, plant and equipment
impairment charges 2,867
------
$5,773
======
(In thousands)
--------------
Statements of Operations classification:
Cost of sales $5,633
Selling, general and administrative
expenses 140
------
$5,773
======
At September 30, 2006, the Company has accrued $122,000 for one-time termination
benefits. The Company expects to incur total costs of $1,200,000, including
amounts above, for one-time termination benefits and costs to shutdown, vacate
and prepare the facilities for sale as follows:
(In thousands)
--------------
Costs to shutdown, vacate and
prepare for sale $ 700
One-time termination benefits 500
------
$1,200
======
As of September 30, 2006, the Company has expensed $158,000 of these costs.
9
Note 3. Inventories
Inventories consisted of the following:
(In thousands)
------------------------------
Sept. 30, Oct. 1, Dec. 31,
2006 2005 2005
--------- ------- --------
Raw materials $11,249 $11,855 $11,754
Work-in-process 4,725 6,508 5,619
Finished goods 22,033 20,968 22,627
------- ------- -------
38,007 39,331 40,000
LIFO reserve (3,307) (2,775) (2,991)
------- ------- -------
$34,700 $36,556 $37,009
======= ======= =======
Note 4. Property, Plant and Equipment
At September 30, 2006, carrying values of buildings, machinery and equipment
reflect impairment charges as described in Note 2 to the Condensed Consolidated
Financial Statements. Property, plant and equipment consisted of the following:
(In thousands)
-------------------------------
Sept. 30, Oct. 1, Dec. 31,
2006 2005 2005
--------- -------- --------
Land $ 2,231 $ 2,231 $ 2,231
Buildings and improvements 31,342 34,733 34,740
Machinery and equipment 46,539 51,706 52,339
Leasehold improvements 1,041 974 1,017
Construction in progress 194 583 267
-------- -------- --------
81,347 90,227 90,594
Less accumulated depreciation and amortization (55,232) (59,563) (60,320)
-------- -------- --------
$ 26,115 $ 30,664 $ 30,274
======== ======== ========
Note 5. Accrued Liabilities
Accrued liabilities consisted of the following:
(In thousands)
------------------------------
Sept. 30, Oct. 1, Dec. 31,
2006 2005 2005
--------- ------- --------
Employee related benefits $2,625 $2,269 $1,825
Deferred compensation 799 1,054 1,055
Commissions 778 917 778
Property taxes 731 738 585
Compensation related 519 1,125 644
Other 2,606 2,970 2,453
------ ------ ------
$8,058 $9,073 $7,340
====== ====== ======
10
Note 6. Employee Stock Ownership Plan
Chromcraft Revington sponsors a leveraged employee stock ownership plan ("ESOP")
that covers substantially all employees who have completed six months of
service. Chromcraft Revington makes annual contributions to the ESOP Trust equal
to the ESOP Trust's repayment of its loan from the Company. As the ESOP loan is
repaid, shares are released and allocated to ESOP accounts of active employees
based on the proportion of debt service paid in the year. Chromcraft Revington
accounts for its ESOP in accordance with AICPA Statement of Position 93-6,
"Accounting for Employee Stock Ownership Plans." Accordingly, unearned ESOP
shares are reported as a reduction of stockholders' equity as reflected in the
Condensed Consolidated Statement of Stockholders' Equity of the Company. As
shares are committed to be released, Chromcraft Revington reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. ESOP compensation expense, a
non-cash charge, for the three and nine months ended September 30, 2006, was
$182,000 and $620,000, respectively, compared to $238,000 and $670,000,
respectively, for the prior year periods. ESOP shares consisted of the
following:
(In thousands)
------------------------------
Sept. 30, Oct. 1, Dec. 31,
2006 2005 2005
--------- ------- --------
Allocated shares 244 184 244
Committed to be released shares 51 51 --
Unearned ESOP shares 1,688 1,755 1,739
------- ------- -------
Total ESOP shares 1,983 1,990 1,983
Unearned ESOP shares, at cost $16,878 $17,555 $17,385
======= ======= =======
Fair value of unearned ESOP shares $16,675 $23,839 $22,775
======= ======= =======
Note 7. Earnings per Share of Common Stock
Due to the net loss for the three and nine months ended September 30, 2006, loss
per share, basic and diluted, are the same, as the effect of potential common
shares would be anti-dilutive.
For the three and nine months ended October 1, 2005, weighted average shares
used in the calculation of diluted earnings per share included dilutive
potential common shares of approximately 76,000 and 62,000, respectively.
Note 8. Stock Based Compensation
The Company has the following stock-based compensation plans:
1992 Stock Option Plan
The Company's 1992 Stock Option Plan, as amended ("1992 Plan"), provides for the
granting of either incentive stock options ("ISO's") or stock options which do
not qualify as incentive stock options ("non-ISO's"). The total number of shares
of common stock which may be issued under stock options granted pursuant to the
1992 Plan is 1,800,000 shares. ISO's granted under the 1992 Plan are exercisable
over no greater than a 10-year period, and are granted at exercise prices no
less than the fair market value of Chromcraft Revington's common shares as of
the date of grant. Options vest ratably ranging from immediate on the date of
grant up to a five-year period. The compensation committee of the board of
directors determines the vesting period and exercise prices of non-ISO's. At
September 30, 2006, there were 263,025 shares available for future awards.
11
The purpose of the 1992 Plan is to attract and retain persons of ability as key
employees and to motivate key employees to exert their best efforts on behalf of
the Company.
Directors' Stock Plan
The Company's Amended and Restated Directors' Stock Plan ("Directors' Plan")
provides for the granting of restricted stock or non-ISO's to members of the
board of directors who are not employees of the Company. Under the Directors'
Plan, eligible directors of the Company receive an award of either 800 shares of
restricted common stock or an option to purchase 2,500 shares of common stock on
the day following their re-election to the Board at each annual meeting of
stockholders. Any new director who is elected or appointed for the first time to
the board of directors receives an award of either 3,000 shares of restricted
common stock or an option to purchase 10,000 shares of common stock. The
Compensation Committee of the board of directors determines whether awards under
the Directors' Plan are made in restricted stock or stock options. The total
number of shares of common stock subject to the Directors' Plan is 150,000
shares. No restricted common stock or options will be granted under the
Directors' Plan after December 1, 2016. Shares of restricted common stock
granted to directors under the Directors' Plan will vest on the day immediately
preceding the next annual meeting of stockholders following the award date.
Non-ISO's granted under the Directors' Plan are 100% vested on the date of the
grant and are granted at exercise prices equal to the fair market value of the
Company's common shares as of the date of the grant. The options are exercisable
for a period of ten years. At September 30, 2006, there were 54,400 shares
available for future awards.
The Directors' Plan is designed to promote the interests of the Company and its
stockholders through the granting of restricted common stock and options to the
non-employee members of the Company's board of directors, thereby encouraging
their focus on long-term stockholder value of the Company.
Accounting for the Plans
Effective January 1, 2006, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment," ("FAS 123 (R)") using the modified prospective
application method for transition for its two stock-based compensation plans.
Accordingly, prior year amounts have not been restated.
The adoption of FAS 123 (R) increased the net loss by approximately $29,000 and
$90,000, respectively, after-tax for the three and nine months ended September
30, 2006, respectively, compared to amounts that would have been reported if the
Company had continued to account for stock-based compensation under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
12
The following table illustrates the effect on net earnings and earnings per
share for the three and nine months ended October 1, 2005, if the Company had
applied the fair value recognition provisions of FAS 123 (R) to stock-based
employee compensation for these periods. For purposes of pro forma disclosure,
the value of the options is estimated using a Black-Scholes option-pricing model
and is amortized to expense over the options' vesting periods.
(In thousands, except per
share data)
---------------------------------
Three Months Nine Months
Ended Ended
October 1, 2005 October 1, 2005
--------------- ---------------
Net earnings, as reported $1,191 $5,540
Add: Stock-based employee compensation
expense included in reported net earnings,
net of related tax effects 75 116
Deduct: Total stock-based employee
compensation expense determined under
fair-value based method for all awards, net
of related tax effects (101) (327)
------ ------
Pro forma net earnings $1,165 $5,329
====== ======
Earnings per share
Basic - as reported $ .28 $ 1.30
Basic - pro forma $ .27 $ 1.25
Diluted - as reported $ .27 $ 1.28
Diluted - pro forma $ .26 $ 1.24
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.
The Company has estimated the fair value of all stock option awards as of the
date of 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.
Historical information is the primary basis for the selection of the expected
volatility and life of an option. The risk-free interest rate is selected based
upon the yield of the U.S. Treasury issue with a term equal to the expected life
of the option being valued.
In November 2005, the FASB issued Staff Position No. FAS 123 (R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards" ("FSP 123 (R)-3"). 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 FAS 123 (R) to
evaluate the available transition alternatives and make a one-time election as
to which method to adopt. The Company is currently in the process of evaluating
the alternative methods.
13
Stock option activity during the nine months ended September 30, 2006 was as
follows:
Weighted (In
Weighted Average thousands)
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term (in yrs.) Value
--------- -------- -------------- ----------
Outstanding at January 1, 2006 643,270 $12.07 6.4
Lapsed -- --
Exercised -- --
Granted 2,518 13.30
-------
Outstanding at September 30, 2006 645,788 12.07 5.6 $3,757
=======
Exercisable at September 30, 2006 605,788 $12.17 5.6 $3,509
=======
The weighted average per share grant-date fair value of options granted in the
three and nine months ended September 30, 2006 was $-0- and $5.88, respectively,
compared to $-0- and $4.92, respectively, for the prior year periods. There were
no stock options exercised during the nine months ended September 30, 2006. New
shares are issued by the Company upon the exercise of options. Cash proceeds,
tax benefits and intrinsic value related to total stock options exercised during
the three and nine months ended October 1, 2005 was as follows:
(In thousands)
---------------------------------
Three Months Nine Months
Ended Ended
October 1, 2005 October 1, 2005
--------------- ---------------
Proceeds from stock options exercised $387 $1,843
Tax benefits related to stock options exercised 10 64
Intrinsic value of stock options exercised 176 941
The intrinsic value of options that vested during the three and nine months
ended September 30, 2006 was $-0- and $262,000, respectively, compared to $-0-
and $787,000 for the prior year periods, respectively. As of September 30, 2006,
there were 40,000 unvested options and approximately $103,000 of unrecognized
compensation cost related to non-vested stock options. Since the options vest on
March 15, 2007, the cost will be recognized by the end of the first quarter of
2007.
Compensation expense recognized for stock options was $62,000 and $200,000 for
the three and nine months ended September 30, 2006, respectively, compared to
$20,000 and $85,000 for the prior year periods, respectively. The related tax
benefit for the compensation expense was $22,000 and $65,000 for the three and
nine months ended September 30, 2006, respectively, compared to $7,000 and
$31,000 for the prior year periods, respectively.
Restricted Stock Awards
In the second quarter of 2006, the Company granted 5,600 shares of restricted
common stock to its non-employee directors under the Directors' Plan. The fair
value of the awards at the date of grant was $72,000 and was reflected as part
of stockholders' equity. The awards provided that the 5,600 shares vest on the
day immediately preceding the next annual meeting of stockholders following the
14
award date. The awards are being recognized as compensation expense ratably over
the one year vesting period. As of September 30, 2006, there were 5,600 shares
unvested with unearned compensation expense of $44,000.
During 2005, the Company awarded 42,000 shares of restricted common stock to its
Chairman and Chief Executive Officer in connection with his employment with the
Company. The award provided that 14,000 shares will vest based on continued
employment on December 31, 2005, 2006, and 2007. The fair value of the award at
the date of grant was $568,000 and was reflected as part of stockholders'
equity. The award is being recognized as compensation expense ratably over the
vesting period. As of September 30, 2006, there were 28,000 shares unvested with
unearned compensation expense of $237,000.
Compensation expense recognized for restricted stock awards during the three and
nine months ended September 30, 2006 was $65,000 and $170,000, respectively. The
related tax benefit for the compensation expense was $23,000 and $55,000 for the
three and nine months ended September 30, 2006, respectively.
Note 9. Subsequent Event
On October 5, 2006, the board of directors of the Company approved the closure
of the Company's wood processing facility in Warrenton, North Carolina by
December 8, 2006. The Company plans to sell its facility in Warrenton, as well
as related equipment, and lay off 58 associates at this site. The Company
intends to source furniture parts produced at this facility from various
suppliers.
The Company expects to incur total restructuring costs and related asset
impairment charges of $1.0 million to $1.5 million pretax to write-down its
building, equipment and inventories and to record costs associated with exit or
disposal activities. Most of these charges are expected to be recorded in the
fourth quarter of 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Beginning in the late 1990's, the U.S. furniture industry began undergoing a
dramatic shift from a domestic manufacturing base to a highly competitive global
supply chain. Global manufacturers, primarily in China and other Asian
countries, have used substantially lower labor costs and somewhat lower material
costs to achieve a competitive advantage over U.S. based manufacturers. As a
result, numerous U.S. based manufacturing operations have been closed or have
converted to alternative business models.
On September 1, 2006, the Company announced that its board of directors approved
a restructuring of certain of its operations. The purposes of the restructuring
are to improve the utilization of a global supply chain, to reduce fixed costs
and to increase overall asset utilization. As part of the restructuring program,
the Company will begin to outsource globally its Sumter brand bedroom and dining
room furniture that were produced at its Sumter, South Carolina, facilities to
contract manufacturers located primarily in Asia. Furniture manufacturing
operations in Sumter, South Carolina, ceased on October 31, 2006. In addition,
the Company will begin distributing the Sumter brand furniture consolidated with
other products from its existing Lincolnton, North Carolina, distribution
facilities by January 1, 2007. The Company plans to sell its 521,000 square foot
facilities in Sumter, South Carolina. The restructuring program also includes
closing the Company's warehouse and distribution center in Knoxville,
15
Tennessee, which distributes Silver brand occasional furniture, by December 31,
2006. The Company will combine its Silver and Peters-Revington occasional
furniture product lines and distribute these products from its existing
facilities in Delphi, Indiana. The Company plans to sell its 160,000 square foot
building in Knoxville, Tennessee. The final component of this restructuring
program involves relocating and consolidating the Company's upholstered
furniture operations with other manufacturing operations located in Lincolnton,
North Carolina by November 30, 2006. The Company plans to sell its 152,000
square foot upholstery plant. In connection with these restructuring activities,
the Company will layoff approximately 216 associates.
As a result, the Company recorded a restructuring and impairment charge of
$5,773,000 pretax or $3,492,000 after tax, or a $.79 loss per share, for the
three months ended September 30, 2006. The charge includes asset impairments of
$2,867,000 pretax, inventory write downs of $2,748,000 pretax to reflect the
anticipated net realizable value, one-time termination benefits and other exit
related costs of $158,000 pre-tax. Costs to shutdown, vacate, relocate and
prepare the facilities for sale associated with the wind down of these
operations will be recorded as incurred.
In connection with the restructuring, the Company determined that it is unlikely
that certain state net operating loss carryforwards will now be utilized. As a
result, the Company recorded a non-cash income tax charge of $325,000, or $.08
loss per share, for the three months ended September 30, 2006 related to
establishing a valuation allowance for such state net operating loss
carryforwards.
After recognizing the aforementioned restructuring and impairment charge and tax
valuation allowance, the net loss for the third quarter of 2006 was $4,457,000,
or $1.01 loss per share, as compared to net earnings of $1,191,000, or $.27 per
share on a diluted basis, for the prior year period. Excluding the impact of the
restructuring and impairment charge and the tax valuation allowance, the Company
would have had a net loss of $640,000, or $.14 loss per share, for the three
months ended September 30, 2006.
Fourth quarter operating results will be negatively impacted by the previously
announced closure of the Company's Warrenton, North Carolina wood processing
plant on December 8, 2006. The Company expects to incur most of the
restructuring costs and related asset impairment charges of $1.0 million to $1.5
million in the three months ending December 31, 2006. In addition to the
Warrenton restructuring costs, the Company expects to incur fourth quarter
restructuring expenses for one-time termination benefits and costs to shutdown,
vacate and prepare for sale the various facilities in connection with the
restructuring activities announced on September 1, 2006. After considering the
impact of these restructuring costs, the Company expects to incur an operating
loss for the three months ending December 31, 2006.
Management believes the restructuring activities are an important step in
repositioning the Company in the global furniture marketplace and in
strengthening the Company's ability to remain competitive. These actions are
expected to provide customers with better value, broader product selection and
improved delivery services. This strategic transformation of the Company's
business model involves a significant expansion of global sourcing activities,
as well as a conversion of U.S. operations towards an increased focus on
distribution and logistics of imported products and a shift in its manufacturing
operations towards use of demand flow and value added mass customization
techniques. As the Company continues to adapt to the global furniture
marketplace and integrate functions common to its various products, additional
restructuring charges, asset impairments, transition costs and/or increased
operating expenses may be necessary in the future.
16
Results of Operations
The following table sets forth the Condensed Consolidated Statements of
Operations of Chromcraft Revington for the three and nine months ended September
30, 2006 and October 1, 2005 expressed as a percentage of sales.
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2006 2005 2006 2005
--------- ------- --------- -------
Sales 100.0% 100.0% 100.0% 100.0%
Gross margin after restructuring and impairment charges 1.6 21.9 14.5 23.1
---------------------------------------------------------------------------------------------------
Gross margin before restructuring and impairment charges 17.5 21.9 19.2 23.1
---------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 19.5 16.4 17.2 15.8
----- ----- ----- -----
Operating income (loss) (17.9) 5.5 (2.7) 7.3
Interest expense, net 0.2 0.9 0.2 0.5
----- ----- ----- -----
Earnings (loss) before income taxes (18.1) 4.6 (2.9) 6.8
Income tax expense (benefit) (5.5) 1.7 (0.7) 2.5
----- ----- ----- -----
Net earnings (loss) (12.6)% 2.9% (2.2)% 4.3%
===== ===== ===== =====
Consolidated sales for the third quarter ended September 30, 2006 of $35,348,000
represented a 13.4% decrease from $40,836,000 reported for the same quarter last
year. Sales of all furniture categories, particularly occasional furniture,
were lower as compared to the prior year period. Shipments of both domestically
produced and imported furniture were lower as compared to the same period last
year.
For the first nine months of 2006, consolidated sales decreased 5.7% to
$121,589,000 from $128,896,000 for the same period last year. Sales of all
furniture categories, particularly bedroom furniture, were lower as compared to
the prior year period. Shipments of imported furniture were higher for the nine
months ended September 30, 2006, as compared to the prior year period.
Consolidated sales were lower for the third quarter and first nine months of
2006 primarily due to competitive pressure and, for the third quarter of 2006, a
weak retail furniture environment. The number of units sold decreased as
compared to both prior year periods.
Gross margin for the three months ended September 30, 2006 decreased $8,399,000
to $550,000 from $8,949,000 for the year ago period. Gross margin for the nine
months ended September 30, 2006 decreased $12,063,000 to $17,677,000 from
$29,740,000 for the prior year period. The Company recorded a restructuring and
asset impairment charge of $5,633,000 in the three months ended September 30,
2006 in connection with the shutdown, relocation, consolidation, and outsourcing
of certain furniture manufacturing and distribution operations. The charge
consisted of an asset impairment charge of $2,867,000 to reduce the carrying
value of buildings, machinery and equipment to fair value, a write-down of
$2,748,000 to reflect anticipated net realizable value of inventories and
$18,000 to record costs associated with disposal and exit activities.
17
Gross margin, before the restructuring and impairment charge, decreased
$2,766,000 to $6,183,000, or 17.5% of sales, for the three months ended
September 30, 2006 from $8,949,000, or 21.9% of sales, for the prior year
period. For the first nine months of 2006, gross margin before the restructuring
and impairment charge decreased $6,430,000 to $23,310,000, or 19.2% of sales,
from $29,740,000, or 23.1% of sales, for the same period last year. The gross
margin percentage decrease for the three and nine months ended September 30,
2006 was primarily due to a reduced domestic production level, which affected
fixed cost absorption and manufacturing efficiencies, as well as an unfavorable
sales mix and higher manufacturing costs.
Selling, general and administrative expenses for the three months ended
September 30, 2006 increased $165,000 to $6,885,000, or 19.5% of sales, from
$6,720,000, or 16.4% of sales, for the year ago period. For the nine months
ended September 30, 2006, selling, general and administrative expenses increased
$632,000 to $20,933,000, or 17.2% of sales, from $20,301,000, or 15.8% of sales,
for the same period last year. Higher selling, general and administrative
expenses for 2006, as compared to the prior year periods, was primarily due to
an increase in professional fees, one-time termination benefit costs associated
with the restructuring and higher selling related costs, partially offset by
lower bad debt expense.
Interest expense for the three and nine months ended September 30, 2006 was
$63,000 and $193,000, respectively, as compared to $342,000 and $660,000,
respectively, for the same periods in 2005. Interest expense was lower this year
as compared to the prior year period since the Company had no bank indebtedness
in 2006.
Chromcraft Revington's effective income tax (benefit) rate for the three and
nine months ended September 30, 2006 was (30.3%) and (23.1%), respectively, as
compared to 36.9% and 36.9%, respectively, for the prior year periods. The
income tax benefit for 2006 was reduced by a $325,000 valuation allowance
established for certain state net operating losses. The Company determined, due
to the restructuring activities, that it is unlikely that certain state net
operating loss carryforwards will be utilized. In addition, the income tax
benefit was negatively impacted by the distribution of the operating loss for
state tax purposes in 2006.
The net loss for the three months ended September 30, 2006 was $4,457,000, or
$1.01 loss per share, as compared to net earnings of $1,191,000, or $.27 per
share on a diluted basis, for the prior year period. Excluding the impact of the
restructuring and impairment charge and the tax valuation allowance, the Company
would have had a net loss of $640,000, or $.14 loss per share, for the third
quarter of 2006.
For the first nine months of 2006, the net loss was $2,652,000, or $.60 loss per
share, as compared to net earnings of $5,540,000, or $1.28 per share on a
diluted basis, for the prior year period. Excluding the restructuring and asset
impairment charge and the tax valuation allowance, the Company would have had
net earnings of $1,165,000, or $.26 per share on a diluted basis, for the nine
months ended September 30, 2006.
Financial Condition, Liquidity and Capital Resources
Operating activities provided cash of $3,613,000 for the nine months ended
September 30, 2006 as compared to $1,267,000 for the same period last year. The
increase in cash from operating activities in 2006 as compared to the prior year
period was primarily due to a lower investment in working capital attributable
to the lower sales activity. Cash provided by operating activities for the first
nine months of 2006 was partially offset by lower cash earnings as compared to
the prior year period.
18
Restructuring costs and impairment charges, recorded in the third quarter of
2006, were primarily non-cash items. The Company expects to incur cash
restructuring costs of $1,200,000 for one-time termination benefits and expenses
to shutdown, vacate and prepare the facilities for sale. The majority of the
costs are expected to be paid by the end of the first quarter of 2007. These
cash expenditures do not include expected cash proceeds from the sale of the
buildings, machinery and equipment ranging from $3.5 million to $4.5 million.
Investing activities used cash of $1,229,000 for capital expenditures during the
first nine months of 2006, as compared to $1,047,000 spent during the same
period last year. The Company expects to spend approximately $1,900,000 in 2006
on capital expenditures.
The Company did not use cash for financing activities in the first nine months
of 2006. In the prior year period, cash was used to reduce bank indebtedness and
repurchase common stock, which was partially offset by cash generated from stock
option exercises.
The Company's primary source of liquidity is cash on hand, cash flow from
internal operations and cash proceeds from asset sales. The Company also
maintains an unsecured revolving loan facility with a bank ("Facility") that
provides for borrowings primarily for working capital requirements, letters of
credit and capital expenditures. The Company had approximately $14.7 million in
availability under the Facility at September 30, 2006. The Facility matures on
September 30, 2008. Availability under the Facility is based on a multiple of
trailing twelve months cash flow. At December 31, 2006, the Company expects
availability under the Facility will be reduced to between $10 million and $11
million. In 2007, the Company may restructure its Facility in order to provide
additional bank credit availability. Management believes that its internal cash
resources and external borrowing capacity are adequate to meet its short and
long term liquidity requirements.
Recent Accounting Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. The Interpretation seeks to reduce
the diversity in practice associated with certain aspects of measurement and
recognition in accounting for income taxes. In addition, FIN 48 requires
expanded disclosure with respect to the uncertainty in income taxes and is
effective at the beginning of the 2007 fiscal year. Management is evaluating the
impact of adopting FIN 48 on the Company's financial statements.
In September 2006, FASB issued FASB No. 157, "Fair Value Measurements" (SFAS
157), which is effective prospectively for the fiscal year beginning after
November 15, 2007. SFAS 157 provides a single authoritative definition of fair
value, a framework for measuring fair value, and requires additional disclosure
about fair value measurements. Although the Company has not completed its
analysis of SFAS 157, it is not expected to have a material impact.
In September 2006, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108). SAB 108 provides guidance regarding the process of
quantifying financial statement misstatements. In order to halt the current
diversity in practice, SAB 108 recommends that registrants should quantify
errors using both a balance sheet approach (the "iron curtain" method) and an
income statement approach (the "rollover" approach). The balance sheet approach
quantifies a misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origination. The income statement quantifies a
misstatement based on the amount of the error originating in the current year
income statement, while ignoring the carryover effects of prior year
misstatements. SAB
19
108 recommends that companies quantify an error under both the rollover and iron
curtain approaches and by evaluating the materiality of the error measured under
each approach. If deemed material, companies would be required to adjust their
financial statements. SAB 108 is effective for the first fiscal year ending
after November 15, 2006. The Company will adopt SAB 108 in the fourth quarter of
2006 and is in the process of assessing the impact on its results of operations,
financial position and liquidity.
Forward-Looking Statements
Certain information and statements contained in this report, including without
limitation, in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations," are forward-looking statements
that are based on current expectations and assumptions. These forward-looking
statements can be generally identified as such because they include future tense
or dates, or are not historical or current facts, or include words such as
"anticipates," "believes," "may," "could," "expects," or words of similar
import. Forward-looking statements are not guarantees of performance or outcomes
and are subject to certain risks and uncertainties that could cause actual
results or outcomes to differ materially from those reported, expected or
anticipated as of the date of this report.
Among such risks and uncertainties that could cause actual results or outcomes
to differ materially from those reported, expected or anticipated are the
ability of the Company to complete the various restructuring activities
described above as currently planned and at estimated costs; general economic
conditions; import and domestic competition in the furniture industry; ability
of the Company to execute business strategies; market interest rates; consumer
confidence levels; cyclical nature of the furniture industry; consumer and
business spending; changes in relationships with customers; customer acceptance
of existing and new products; new home and existing home sales; and other
factors that generally affect business. An additional list of risks relating to
the Company's business is located in the Company's Form 10-K for the fiscal year
ended December 31, 2005.
The Company does not undertake any obligation to update or revise publicly any
forward-looking statements to reflect information, events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company had no bank indebtedness during the first nine months of 2006 and,
therefore, no interest rate risk.
The Company sources certain raw materials and finished furniture, primarily from
China. These purchases are fixed price contracts payable in U.S. dollars and,
therefore, the Company has no material foreign exchange rate risk exposure.
As part of the restructuring activities, as described above, certain inventories
were written down to anticipated net realizable value. These inventories are
subject to market changes, which may result in more discounts and reduce
expected selling prices further.
Item 4. Controls and Procedures
Chromcraft Revington's principal executive officer and principal financial
officer have concluded, based upon their evaluation, that the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended), were effective as of the end of
the period covered by this Form 10-Q.
20
There have been no significant changes in Chromcraft Revington's internal
control over financial reporting that occurred during the third quarter of 2006
that may have materially affected, or are reasonably likely to materially
affect, Chromcraft Revington's internal control over financial reporting.
PART II.
Item 1A. Risk Factors
The following is an additional risk factor for the Company:
WE ARE ENGAGING IN RESTRUCTURING ACTIVITIES, AND THESE ACTIVITIES WILL
NEGATIVELY IMPACT OUR EARNINGS.
Our restructuring activities in 2006 will negatively impact our earnings for
2006. Additional restructuring charges, asset impairments, transition costs
and/or increased operating costs may be necessary in the future. The impact of
any current or future restructuring activities on our earnings is dependent upon
the restructuring activities being completed as planned and at estimated costs.
In addition, restructuring activities can result in unanticipated adverse
effects on our business that may further negatively impact our earnings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to shares of Chromcraft
Revington common stock repurchased by the Company during the three months ended
September 30, 2006.
Purchase of Equity Securities
Maximum number
Total number of (or approximate
shares purchased dollar value) of
as part of shares that may yet
Total number Average publicly be purchased under
of shares price paid announced plans the plans or
Period purchased per share or programs programs (1)
------ ------------ ---------- ---------------- -------------------
July 2, 2006 to July 29, 2006 -- -- -- 702,965
July 30, 2006 to August 26, 2006 -- -- -- 702,965
August 27, 2006 to September 30, 2006 -- -- -- 702,965
--- --- ---
Total -- -- --
=== === ===
(1) The Company has maintained a share repurchase program since 1997.
21
Item 5. Other Information
On October 26, 2006, Cochrane Furniture Company, Inc. ("Cochrane Furniture")
and Stephen D. Healy entered into a Retirement and Consulting Agreement (the
"Consulting Agreement"). Mr. Healy currently serves as the President of
Cochrane Furniture, a wholly-owned subsidiary of the Company, but is not an
executive officer of the Company.
The Consulting Agreement provides that, upon his retirement from Cochrane
Furniture on or before December 31, 2006, Mr. Healy will provide certain
consulting services to the Company, Cochrane Furniture or any of the Company's
subsidiaries or affiliates through March 31, 2007 as may be requested by the
Chairman of the Company up to 160 hours per month. Mr. Healy will be paid a
consulting fee during this period of approximately $19,000 per month. From
April 1, 2007 until June 30, 2008, Mr. Healy may, in his discretion, accept
consulting assignments from the Company, Cochrane Furniture or any of the
Company's subsidiaries or affiliates. Mr. Healy will be paid a consulting fee
during this subsequent period of $1,000 per day (but not to exceed $15,000 for
any period of 20 consecutive business days if the Company, Cochrane Furniture or
any of the Company's subsidiaries or affiliates has engaged Mr. Healy to provide
consulting services during each of such days).
The foregoing description of the material terms of the Consulting Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Consulting Agreement, a copy of which is filed as Exhibit 10.93 to this Form
10-Q.
Item 6. Exhibits
10.93 Retirement and Consulting Agreement dated October 26, 2006, between
Cochrane Furniture Company, Inc. and Stephen D. Healy (filed herewith).
31.1 Certification of Principal Executive Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer required pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
32.1 Certifications of Principal Executive Officer and Chief Financial Officer
required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Chromcraft
Revington, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chromcraft Revington, Inc.
(Registrant)
Date: November 14, 2006 By: /s/ Frank T. Kane
------------------------------------
Frank T. Kane
Vice President-Finance
(Duly Authorized Officer and
Principal Accounting and Financial
Officer)
22