Inscape Corporation
TSX : INQ

Inscape Corporation

September 08, 2011 16:30 ET

Inscape Corporation Announces First Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - Sept. 8, 2011) - Mr. Madan Bhayana, Chief Executive Officer of Inscape (TSX:INQ), a leading designer, manufacturer and marketer of office systems, storage and architectural wall solutions for commercial office environments, announces the following financial results for the first quarter ended July 31, 2011:

Inscape Corporation
Summary of Consolidated Financial Results
(Unaudited) (in thousands except EPS)
Three Months Ended July 31,
2011 2010 Change
Sales $ 19,325 $ 18,066 7.0 %
Gross margin 3,061 5,522 -44.6 %
Selling, general & administrative expenses 5,685 4,797 18.5 %
Unrealized loss on foreign exchange 84 65
Unrealized gain on derivatives (124 ) (152 )
Interest income (116 ) (137 )
(Loss) income before taxes (2,468 ) 949
Income tax expense (recovery) (778 ) 304
Net (loss) income $ (1,690 ) $ 645
Basic and diluted earnings per share $ (0.12 ) $ 0.04
Weighted average number of shares (in thousands)
for basic EPS calculation 14,592 15,044
for diluted EPS calculation 14,743 15,045

Commentary and Outlook

"Our first quarter results highlight the significant business challenge facing Inscape. Sales were 7% higher than the same quarter of last year. On an equivalent exchange basis, we were pleased to see our sales grow by 22% over last year's quarter. Despite this improved sales level, we experienced a substantial loss of $1.7 million in the quarter. The loss is directly related to significantly lower gross margins; primarily due to lower realized exchange rates and partially due to lower realized net selling prices and an unfavourable product mix.

Our path forward remains clear. We must continue to grow our sales to increase our revenues by executing our strategies in three areas: strengthening our market position especially in our focus markets, increasing our market share through the effective launch and sale of our new products and continuing our track record of maximizing our operating effectiveness. The disappointing first quarter results underscore the importance and urgency of rapid and highly effective implementation of these strategies.

We continue to operate the business with a par Canadian dollar perspective. Over the past several months we have not had the opportunity to establish hedge contracts anywhere near prior levels that were available in the previous fiscal years. Recently we added a series of contingent hedge contracts that should yield exchange rates that are just slightly above par. Our management team continues to actively pursue opportunities to adjust our business to offset the negative impact of the appreciating Canadian dollar.

We expect that sales for the second quarter of fiscal 2012 will be similar to the first quarter of fiscal 2012." said Madan Bhayana, CEO.

Operating Performance

The first quarter of fiscal year 2012 ended on July 31, 2011 had a net loss of $1.7 million or 12 cents per share, compared with a net income of $0.6 million or 4 cents per share in the same quarter of last fiscal year. The deterioration of the financial results was attributable to the strength of the Canadian dollar, which rose 18.7% from last year's 86.2 cents versus the U.S. dollars to the current quarter's $1.02. The rise of the Canadian dollar and the absence of sufficient U.S. currency hedge contracts to mitigate the currency impact had a significant adverse impact on the current quarter's reported sales, gross profit as percentage of sales and net loss.

Sales in the first quarter of fiscal 2012 were $19.3 million, an increase of 7% from the sales of $18.1 million in the same quarter of last year. Last year's reported sales included a currency hedge gain of $1.6 million, compared to the current quarter's hedge gain of $0.2 million. On a normalized currency basis, the current quarter's sales were about 22% higher than the same period of last year.

Despite the growth in sales volume, gross margin as a percentage of sales in the first quarter of fiscal year 2012 fell 14.7 percentage points from last year's 30.6% to 15.8%. Over nine percentage points of the decrease resulted from the low U.S. exchange rate. The margin was further eroded by lower net realized prices, a less favourable sales mix and higher material prices, primarily steel.

Selling, general and administrative expenses ("SG&A") in the first quarter of fiscal year 2012 were $5.7 million or 29.4% of sales, compared to $4.8 million or 26.6% in the same quarter of last year. About $0.7 million of the increase in SG&A related to fixed expenditures. As disclosed in the Company's Management Discussion and Analysis for the previous fiscal year; where we communicated that "we have increased investments in our selling capacity, marketing resources and product development. We expected that fiscal year 2012 will be a transition year when we will continue to increase our long-term investments in these areas". The higher fixed SG&A was consistent with the Company's long-term strategy and it was within our financial plan. The remaining $0.2 million increase in SG&A related to higher variable selling expense for certain projects and dealer support.

At the end of the current quarter, total cash, cash equivalents and short-term investments was at $19.1 million, compared to $26.6 million at the end of last fiscal year ended on April 30, 2011. The decrease of $7.5 million consisted of a $6.5 million increase in working capital, mainly attributable to the longer collection cycle of Government projects, and $1.0 million capital expenditure in showroom build outs and new product development.

This quarter was the first period the Company reported its financial statements using the International Financial Reporting Standards ("IFRS"). As disclosed in last fiscal year's Management Discussion and Analysis, the areas that have changed from Canadian GAAP are:

1. the amortization of capital assets for any significant components,
2. the measurement of stock options at fair value,
3. recognition of the defined benefit pension plan funding deficit that existed prior to May 1, 2010 in the retained earnings of fiscal year 2010, and
4. the translation of a U.S. subsidiary's assets and liabilities at the current U.S. exchange rate

About $6 million of the U.S. subsidiary's capital assets and inventory were translated at historical exchange rates under Canadian GAAP. Under IFRS, these assets will experience translation gains or losses depending on the spot U.S. exchange rate at the date of each reporting period. The resulting gains or losses will be charged to other comprehensive income or loss of each period.

The change in accounting for defined benefit pension plans has also resulted in the recording of a retirement benefit obligation of about $3 million on the balance sheet in place of the deferred pension asset of about $1.7 million under Canadian GAAP. At the same time, the increase in pension obligation net of taxes was charged to the retained earnings of fiscal year 2010. Under Canadian GAAP, the pension obligation would have to be amortized as pension expense over a 15 year period. Since it has been fully recognized already in fiscal year 2010 with the IFRS adjustment, the annual pension expense under IFRS will be about $0.3 million lower.

The changes in relation to stock options and the amortization of capital asset components are not expected to have material impact on the financial results of the Company.

The Company will file with SEDAR the first IFRS interim financial statements and notes and the Management Discussion and Analysis within 75 days from July 31, 2011.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Friday, September 9, 2011 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-681-8606. A replay of the conference call will also be available from Friday, September 9, 2011 after 10:30 a.m. until midnight on September 16, 2011. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21535349).

Forward-Looking Statements

Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results could differ materially as a result of many factors including, but not limited to, further changes in market conditions and changes or delays in anticipated product demand. In addition, future results may also differ materially as a result of many factors, including: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in North America; length of sales cycles; significant fluctuations in international exchange rates, particularly the U.S. dollar exchange rate; restrictions in access to the U.S. market; changes in the Company's markets, including technology changes and competitive new product introductions; pricing pressures; dependence on key personnel; and other factors set forth in the Company's Ontario Securities Commission reports and filings.

About Inscape

Inscape Corporation is a leading designer, manufacturer and marketer of office systems, storage and architectural wall solutions for commercial office environments. Headquartered in Holland Landing, Ontario, the company has offices and production facilities in Canada and the United States totalling approximately 438,000 square feet and serves customers through a network of authorized dealers. For more information, please visit www.inscapesolutions.com.

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