Inscape Corporation
TSX : INQ

Inscape Corporation

September 09, 2008 16:30 ET

Inscape Corporation Announces First Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - Sept. 9, 2008) - Peter Brunelle, President and 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, 2008:



Inscape Corporation
Summary of Consolidated Financial Results
(Unaudited) (in thousands except EPS)

Three Months Ended July 31,
2008 2007 Change
---------------------------------------------------------- -----------------
Sales $ 20,262 $ 24,100 -15.9%
----------------------------------------------------------
Gross margin 5,091 7,245 -29.7%
Selling, general &
administrative expenses 5,948 5,982 -0.6%
Interest income (284) (271)
----------------------------------------------------------
(Loss) Income before taxes (573) 1,534
Income taxes (210) 504
----------------------------------------------------------
Net (loss) income $ (363) $ 1,030
----------------------------------------------------------
----------------------------------------------------------

Basic and diluted (loss)
earnings per share $ (0.02) $ 0.07

Weighted average number
of shares (in thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,097 15,120


Commentary and Outlook

"Sales results in the quarter reflected a decline in project business relative to the prior year which directly impacted our system category sales. The shift in project activity combined with the negative impact of foreign exchange versus the prior year were the primary drivers of the gross margin decline and resulting operating loss", said Peter Brunelle, President and CEO. "With the new products to be launched in the second half of the fiscal year, we anticipate adding to our existing distribution channel, thereby improving access to more opportunities." In spite of a softening demand environment, we expect that sales for the second quarter of fiscal 2009 will be above first quarter levels but not quite in line with the second quarter of fiscal 2008" said Mr. Brunelle.

Operating Performance

The first quarter of fiscal 2009 ended July 31, 2008 had a net loss of $0.4 million compared to a net income of $1.0 million for the same period of fiscal 2008.

Sales for the first quarter of fiscal 2008 were 15.9% lower than the same quarter of fiscal 2008 due to a decline of 7.9% in the U.S. dollar exchange rate from prior year as well as project business decline in a few key markets. On a comparable exchange rate basis, sales of current quarter were 8.8% behind the same period of fiscal 2008.

Gross margin as a percentage of sales was 25.1% compared to 30.1% of last year. The unfavourable U.S. exchange rate and lower sales volume eroded the gross margin by 560 basis points. The decline was partially offset by improved variable production costs and reduced overheads.

SG&A expenses of $5.9 million in the first quarter of fiscal 2009 were at a similar level as in the same quarter of fiscal 2008. SG&A expenses as a percentage of sales increased from 24.8% in the first quarter of fiscal 2008 to 29.4% in the current quarter. SG&A expenses as a percent of sales were higher in this year's quarter due to lower absorption of fixed overheads; as well as, higher investments in sales and marketing efforts.

Cash, cash equivalents and short-term investments in total decreased by $3.0 million compared to the levels at last year-end on April 30, 2008. The decrease was mainly due to the reduction of trade payable amounts and the payments of normally higher accrued expenses at the April 30, 2008 year end. The Company maintained a strong financial position with cash and liquid short-term non-commercial papers totalling $24.7 million and no debt.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Wednesday, September 10, 2008 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-945-0427. A replay of the conference call will also be available from Wednesday, September 10, 2008 after 10:30 a.m. until midnight on Wednesday, September 17, 2008. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21391040).

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 485,000 square feet and serves customers through a growing network of authorized dealers. For more information, please visit www.inscapesolutions.com.



INSCAPE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)(in thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
July 31 April 30
2008 2008
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 6,388 $ 6,126
Short-term investments 18,302 21,618
Accounts receivable 11,399 12,732
Inventory (Note 5) 5,097 5,340
Derivative assets 46 688
Prepaid expenses 1,129 786
----------------------------------------------------------------------------
42,361 47,290
CAPITAL ASSETS 25,466 25,896
OTHER ASSETS 1,710 1,673
FUTURE INCOME TAX ASSETS 2,081 2,156
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$ 71,618 $ 77,015
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LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 9,291 $ 13,075
Income taxes payable 310 960
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9,601 14,035
OTHER LONG-TERM OBLIGATIONS 588 622
FUTURE INCOME TAX LIABILITIES 2,783 3,115
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12,972 17,772
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SHAREHOLDERS' EQUITY
SHARE CAPITAL 57,059 57,059
CONTRIBUTED SURPLUS 84 84
ACCUMULATED OTHER COMPREHENSIVE INCOME 15 310
RETAINED EARNINGS 1,488 1,790
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58,646 59,243
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$ 71,618 $ 77,015
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----------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)(in thousands, except per share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended July 31,
2008 2007
----------------------------------------------------------------------------

SALES $ 20,262 $ 24,100
COST OF GOODS SOLD 15,171 16,855
----------------------------------------------------------------------------
GROSS MARGIN 5,091 7,245

EXPENSES
Selling, general and administrative 5,948 5,982
Interest income (284) (271)
----------------------------------------------------------------------------
5,664 5,711
----------------------------------------------------------------------------
(LOSS) INCOME BEFORE TAXES (573) 1,534
INCOME TAXES (210) 504
----------------------------------------------------------------------------
NET (LOSS) INCOME $ (363) $ 1,030
----------------------------------------------------------------------------
BASIC AND DILUTED (LOSS) INCOME PER SHARE (Note 6) $ (0.02) $ 0.07
----------------------------------------------------------------------------
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INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)(in thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended July 31,
2008 2007
----------------------------------------------------------------------------
NET (LOSS) INCOME $ (363) $ 1,030
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES

Unrealized (loss) gain on derivatives designated
as cash flow hedges, (net of taxes $60, 2007 - $261) (132) 516

Realized gain on derivatives designated as cash
flow hedges classified to income, (net of taxes
$81, 2007 - $36) (163) (71)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES (295) 445
----------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME, NET OF TAXES $ (658) $ 1,475
----------------------------------------------------------------------------
----------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended July 31,
(Unaudited)(in thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Other Total AOCI Total
Comprehensive and Share-
Share Contributed Income Retained Retained holders
Capital Surplus ("AOCI") Earnings Earnings Equity
----------------------------------------------------------------------------
BALANCE
- May 1,
2008 (as
previously
reported) $ 57,059 $ 84 $ 310 $ 1,790 $ 2,100 $ 59,243
Trans-
itional
adjustment
on
adoption
of
new
accounting
policies
on
inventories
(net of
taxes of
$34) (Note 2) 61 61 61
----------------------------------------------------------------------------
BALANCE
- May 1,
2008, as
restated 57,059 84 310 1,851 2,161 59,304
Net loss - - - (363) (363) (363)

Other
Compre-
hensive
Loss - - (295) - (295) (295)
----------------------------------------------------------------------------
BALANCE
- July 31,
2008 $ 57,059 $ 84 $ 15 $ 1,488 $ 1,503 $ 58,646
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Other Total Total
Comprehensive AOCI Share-
Share Contributed Income and holders
Capital Surplus ("AOCI") Defecit Defecit Equity
----------------------------------------------------------------------------
BALANCE
- April
30, 2007 $ 57,059 $ 84 $ - $ (2,958) $ (2,958) $ 54,185
Opening
balance
adjustment
for
unrealized
gain on
cash flow
hedges
(net of
taxes of
$392) - - 776 - 776 776
----------------------------------------------------------------------------
BALANCE
- May 1,
2007 57,059 84 776 (2,958) (2,182) 54,961

Net Income - - - 1,030 1,030 1,030
Realized
gain on
derivatives
designated
as cash
flow hedges
classified
to income
(net of
taxes of $36) - - (71) - (71) (71)

Unrealized
gain on
derivatives
designated
as cash
flow hedges
(net of
taxes of $261) - - 516 - 516 516
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BALANCE
- July 31,
2007 $ 57,059 $ 84 $ 1,221 $ (1,928) $ (707) $ 56,436
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----------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(in thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended July 31,
2008 2007
----------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES:

OPERATING ACTIVITIES
Net (loss) income $ (363) $ 1,030
Items not affecting cash:
Amortization 1,047 1,210
Unrealized loss on short-term investments held
for trading 55 -
Future income taxes (126) (359)
Deferred expenses and other expenses (88) (98)
Stock based compensation 17 (108)
Foreign exchange loss (gain) 119 (177)
Gain on sale of capital assets (1) -
----------------------------------------------------------------------------
660 1,498
Changes in non-cash operating working capital items (2,967) (1,313)
----------------------------------------------------------------------------
Cash (used for) generated from operating activities (2,307) 185
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Short-term investments held for trading 3,261 7,572
Additions to capital assets (617) (705)
Proceeds from sale of capital assets 44 44
----------------------------------------------------------------------------
Cash generated from investing activities 2,688 6,911
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Foreign exchange (loss) gain on cash and cash
equivalents (119) 177
----------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 262 7,273
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,126 4,551
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,388 $ 11,824
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CASH AND CASH EQUIVALENTS CONSIST OF:
Cash $ 2,226 $ 3,911
Cash equivalents 4,162 7,913
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$ 6,388 $ 11,824
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SUPPLEMENTAL INFORMATION
Income taxes paid $ 606 $ 541



Inscape Corporation
Notes to the Interim Consolidated Financial Statements
For periods ended July 31
Unaudited (in thousands except share and per share amounts)


1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements (the "interim consolidated financial statements") have been prepared in accordance with Canadian generally accepted accounting principles. These interim financial statements do not include all of the disclosure requirements for annual consolidated financial statements, and accordingly, these statements should be read in conjunction with the consolidated financial statements for the year ended April 30, 2008 including the notes thereto. These interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the periods reported.

2. ACCOUNTING POLICIES

Change in Accounting Policies

These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2008, except for the new accounting policies as noted below.

On May 1, 2008 the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") new accounting standards:

(a) Inventories

Section 3031 "Inventories" - This standard provides guidance on the determination of cost of inventories to include the cost of purchase, other costs incurred in bringing the inventories to their present location and condition, costs of conversion and systematic allocation of fixed and variable production overheads. The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. The standard permits reversal of write-down of inventories arising from an increase in net realizable value. The new standard also requires additional disclosures including the accounting policies adopted in measuring inventories, the carrying amount of inventories, amount of inventories recognized as an expense during the period, the amount of write-downs during the period and the amount of any reversal of write-downs that is recognized as a reduction of expenses. As a result of adopting the new standard retrospectively without restatement, opening retained earnings at the beginning of the period was increased by an after-tax amount of $61.

(b) Financial Instruments

Section 3862 "Financial Instruments - Disclosures" - This standard requires the disclosure of information about: a) the significance of financial instruments for the entity's financial position and performance and b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.

Section 3863 "Financial Instruments - Presentation" - This section establishes standards for presentation of financial instruments and non-financial derivatives.

The adoption of these standards had no impact on the Company's financial statements except for additional disclosures in Note 3.

(c) Capital Management

Section 1535 "Capital Disclosures" - This standard requires the disclosure of information about an entity's objectives, policies and processes for managing capital, including disclosures of any externally imposed capital requirements and the consequences of non-compliance. The adoption of this standard had no impact on the Company's financial statements except for additional disclosures in Note 4.

Future Accounting Policy Changes

International Financial Reporting Standards ("IFRS")

In February 2008, the CICA announced that accounting standards for public companies will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Accordingly the Company will adopt the IFRS for its fiscal years beginning May 1, 2011.

The Company is currently evaluating the impact of the adoption of these new standards on its consolidated financial statements.

3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The following table provides a comparison of carrying and fair values of financial instruments as at July 31, 2008 and April 30, 2008:



July 31, 2008 April 30, 2008
----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Class amount value amount value
----------------------------------------------------------------------------
Cash and cash equivalents Held for trading $ 6,388 $ 6,388 $ 6,126 6,126

Short-term investments Held for trading 18,357 18,302 21,580 21,618

Accounts receivable Loans and
receivables 11,399 11,399 12,732 12,732

Derivative assets Held for trading - 46 - 688

Accunts payables and Other
accrued liabilities liabilities $ 9,292 $ 9,292 $ 13,075 $13,075

Other long-term Other
liabilities liabilities 588 588 622 622
----------------------------------------------------------------------------


Risk exposures of the Company's financial instruments and the related risk management are as follows:

(a) Credit risk - The Company's cash equivalents, short-term investments, and trade accounts receivable are subject to the risk that the counter-parties may fail to discharge their obligation to pay the Company. The Company's investment policy specifies the types of permissible investments, the minimum credit ratings required and the maximum balances allowed. Management reports to the Board of Directors quarterly the Company's investment portfolios to show their compliance with the investment policy. The Company has credit policies and procedures to manage trade accounts receivable credit risk by assessing new customers' credit history, reviewing of credit limits, monitoring aging of accounts receivable and establishing allowance for doubtful accounts based on specific customer information and general historical trends. The Company's has historically experienced minimal customer defaults on trade accounts receivable. As at July 31, 2008, the allowance for doubtful accounts was $216 (April 30, 2008 - $210).

(b) Currency risk - The Company's U.S. dollar denominated cash and trade accounts receivable are subject to the risk that their fair values will fluctuate because of changes in U.S. dollar exchange rate relative to the Canadian dollar. The Company uses U.S. dollar forward exchange contracts to manage the currency risk. The Company has a policy in place to ensure that all such derivatives are used only to manage currency risk and not for trading purposes. Based on the same mix of U.S. dollar denominated sales and expenses, for the three months ended July 31, 2008, a 5% rise in the U.S. dollar exchange rate is estimated to increase the Company's net income by $390 (2007 - $510) and a 5% decline in the U.S. dollar exchange rate is estimated to reduce the Company's net income by $390 (2007 - $510). The sensitivity is lower in the period ended July 31, 2008 than for the same period in 2007 because of lower sales and gross margin in 2008.

(c) Interest rate risk - The Company's cash equivalents and short-term investments are subject to the risk that the fair value of interest incomes will fluctuate because of changes in market interest rates. The Company manages the interest rate risk by investing in highly liquid financial instruments with staggering maturity dates. For the three months ended July 31, 2008, each 100 basis point variation in the market interest rate is estimated to result in a change of $43 in the Company's net income (2007 - $28). The sensitivity is higher in the period ended July 31, 2008 than for the same period in 2007 because of an increase in the invested amounts in 2008.

(d) Liquidity risk - Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company's liquidity risk is minimal as its cash, cash equivalents and short-term investments are consistently in excess of the financial liabilities. The Company is debt-free and has a line of credit of $10,000 which remained unused as at July 31, 2008.

4. CAPITAL MANAGEMENT

The Company objectives when managing capital are:

a. to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and

b. to provide an adequate return to shareholders through growth in earnings.

Management defines capital as the Company's total shareholders' equity excluding components of accumulated other comprehensive income arising from cash flow hedges. The Company manages its capital structure and makes modifications in response to changes in economic conditions and the risks associated with the underlying strategic initiatives. In order to maintain or adjust the capital structure, the Company may utilize its cash balances and short-term investments, adjust the amount of dividends paid to shareholders, return capital to shareholders, and/or issue new shares or debt instruments. Although the Company does not establish a specific quantitative return on capital target, it formulates and implements strategic plans to achieve sustainable growth in earnings. The Company has no externally imposed capital requirements.

5. INVENTORY



July 31, April 30,
2008 2008
---------------------------------------------------------------------------
Raw materials $ 4,247 $ 4,178
Work-in-process 388 440
Finished goods 462 722
---------------------------------------------------------------------------
$ 5,097 $ 5,340
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Raw materials are measured at the lower of cost and replacement cost, determined on a first-in, first-out basis. Work-in-progress and finished goods are measured at the lower of cost and net realizable value, determined on a first-in, first-out basis. For the three months ended July 31, 2008, inventories of $14,672 (2007 - $15,761) were expensed and included in cost of goods sold.

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:



Three Months Ended July 31.

Numerator 2008 2007
----------------------------------------------------------------------------

Net (loss) income for the quarter for basic and
diluted earnings per share $ (363) $ 1,030

----------------------------------------------------------------------------
----------------------------------------------------------------------------

Denominator 2008 2008
----------------------------------------------------------------------------
Weighted average number of shares outstanding for
basic earnings per share 15,096,817 15,096,817
Weighted average number of shares outstanding for
diluted earnings per share 15,096,817 15,120,316
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Stock options for 787,000 shares were not included in the computation of diluted earnings per share for the three months ended July 31, 2008 (2007 - 524,500) as they were anti-dilutive for the period.

7. SEGMENT INFORMATION

The Company operates under one reporting segment, which is the design, manufacture and distribution of office systems and furniture.



Three Months Ended July 31,

2008 2007
----------------------------------------------------------------------------
Sales from
United States $ 16,841 $ 20,516
Canada 2,888 3,337
Other 533 247
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$ 20,262 $ 24,100
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July 31 April 30
2008 2008
----------------------------------------------------------------------------
Capital Assets
Canada $ 24,011 $ 24,502
United States 1,455 1,394
----------------------------------------------------------------------------
$ 25,466 $ 25,896
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. PENSION EXPENSE

Total pension expense relating to the various defined benefit plans for the three-month period ended July 31, 2008 is $114 (2007 - $82).

Contact Information

  • Inscape Corporation
    Kent Smallwood CA
    Chief Financial Officer
    (905) 836-7676
    (905) 836-5037 (FAX)
    Website: www.inscapesolutions.com