Inscape Corporation
TSX : INQ

Inscape Corporation

December 05, 2006 18:05 ET

Inscape Corporation Announces Second Quarter Results

HOLLAND LANDING, ONTARIO--(CCNMatthews - Dec. 5, 2006) - Peter Brunelle, President and Chief Executive Officer of Inscape (TSX:INQ), a leading designer, manufacturer and distributor of office furniture solutions, announced the following financial results for the second quarter and the six months ended October 31, 2006:



Inscape Corporation
Summary of Consolidated Financial Results
(Unuadited)
(in thousands except EPS and number of shares)

Three Months Ended October 31,
2006 2005 Change
---------------------------------------------------------------------------

Sales $ 22,701 $ 25,540 -11.1%
--------------------------------------------------------------
Gross margin 5,632 6,213 -9.4%
Selling, general &
administrative expenses 5,786 6,237 -7.2%
Interest (income) (255) (192)
Restructuring costs
(after-tax) 0 330
--------------------------------------------------------------
Income (loss) before taxes 101 (162)
Income taxes 76 94
--------------------------------------------------------------
Net income (loss) $ 25 $ (256)
--------------------------------------------------------------
--------------------------------------------------------------

Basic income (loss) per share $ 0.00 $ (0.02)(1)

Weighted average number of
shares 15,097 15,097
(in thousands)

(1) reflects impact of restructuring costs of $0.02 per share


Six Months Ended October 31,
2006 2005 Change
---------------------------------------------------------------------------

Sales $ 43,179 $ 49,023 -11.9%
--------------------------------------------------------------
Gross margin 11,074 11,626 -4.7%
Selling, general &
administrative expenses 11,147 12,418 -10.2%
Interest (income) (436) (352)
Restructuring costs
(after-tax) 0 330
--------------------------------------------------------------
Income (loss) before taxes 363 (770)
Income taxes 16 (93)
--------------------------------------------------------------
Net income (loss) $ 347 $ (677)
--------------------------------------------------------------
--------------------------------------------------------------

Basic loss per share $ 0.02 $ (0.04)(1)

Weighted average
number of shares 15,097 15,097
(in thousands)

(1) reflects impact of restructuring costs of $0.02 per share


Commentary and Outlook

"I am encouraged by the strong order growth experienced during the second quarter which contributed to a revenue increase of 10.9% versus first quarter results. We continue to focus on expanding our market access through the addition of dealers and independent rep groups and look forward to the revenue impact of new product introductions over the second half of the fiscal year. As a result, momentum continues to build and we anticipate that the trend of sequential quarterly growth which commenced in the first quarter of fiscal 2007 will continue. Based on current order levels, we expect that sales for the third quarter of fiscal 2007 will be stronger than both the second quarter of fiscal 2007 and the third quarter of fiscal 2006.

During the quarter we successfully concluded ratification of the collective bargaining agreement with our unionized workforce. The terms of the new three year agreement provide much improved flexibility to adjust our capacity as required in order to better respond to customer demand. While we remain dedicated to improving service levels and improving our cost profile, the second quarter included a number of promotional expenses related to the launch of new products which impacted our profitability. Moving forward we anticipate a continued positive leveraging of operating results as revenues grow" said Peter Brunelle, CEO of Inscape Corporation.

Operating Performance

Sales in the second quarter of fiscal 2007 were 11.1% behind the same quarter of fiscal 2006. Year-to-date sales for the six-month period were 11.9% lower than the same period of fiscal 2006. Excluding the unfavourable impact of the U.S. dollar exchange rate, sales for both the three-month and six-month periods would be 8.7% lower than the corresponding periods of the previous year. Gross margin as a percentage of sales for the second quarter of fiscal 2007 was 24.8% compared to 24.3% for the same quarter of fiscal 2006. The increase was achieved through an improvement in production costs; however, these were offset by a decline in gross margin relating to a weaker U.S. dollar and by lower sales volume. For the same reasons, gross margin percentage of 25.6% for the first six-month period of fiscal 2007 was ahead of the 23.7% of the previous year.

SG&A expenses in the second quarter of fiscal 2007 were $0.5 million lower than the same quarter of fiscal 2006 mainly due to lower variable selling expenses. On a year-to-date basis, SG&A expenses were $1.3 million less than the year before. The decrease was primarily a result of lower variable selling expenses combined with the absence of accelerated amortization for the closing New York showroom that was recorded in the previous year.

In spite of the lower sales volume, operating result of the second quarter of fiscal 2007 was a breakeven compared to a net loss of $0.3 million in the same quarter of prior year, which included after-tax restructuring costs of $0.3 million. Year-to-date earnings were improved from a net loss of $0.7 million in fiscal 2006 to a net income of $0.3 million in fiscal 2007 due to improvement in gross margin percentage, lower SG&A expenses and the absence of restructuring costs.

Operations during the six-month period generated cash of $2.2 million. As at October 31, 2006 the Company maintained a strong financial position with no debt while cash, cash equivalents and short-term investments totalled $17.9 million.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Wednesday, December 6, 2006, to discuss the Company's second quarter and six months results and to provide additional outlook on the next quarter. To participate, please call 1-888-313-1094. A replay of the conference call will also be available from Wednesday, December 6, 2006 after 10:30 a.m. until midnight on Wednesday, December 13, 2006. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21309778).

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 during the next fiscal year. 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 distributor of high quality office furniture headquartered in Holland Landing, Ontario, Canada. The Company offers innovative and integrated product solutions that effectively and efficiently landscape modern office interiors, including movable walls, systems and storage products. Company operations are based across two manufacturing facilities totalling approximately 485,000 square feet.
Visit Inscape at www.inscapesolutions.com.



INSCAPE CORPORATION
CONSOLIDATED BALANCE SHEETS
Unaudited (in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
October 31, 2006 April 30, 2006
---------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 3,305 $ 1,472
Short-term investments 14,600 15,522
Accounts receivable 10,820 8,040
Inventory 4,596 4,160
Prepaid expenses 934 803
Income taxes receivable 1,611 1,876
---------------------------------------------------------------------------
35,866 31,873
CAPITAL ASSETS 29,300 30,091
OTHER ASSETS (Note 2) 1,169 1,458
FUTURE INCOME TAX ASSET 5,085 5,084
---------------------------------------------------------------------------
$ 71,420 $ 68,506
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 13,263 $ 10,025
ASSET RETIREMENT OBLIGATIONS 136 134
OTHER LONG-TERM OBLIGATIONS 889 995
FUTURE INCOME TAX LIABILITY 4,369 4,936
---------------------------------------------------------------------------
18,657 16,090
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SHAREHOLDERS' EQUITY
SHARE CAPITAL 57,059 57,059
CONTRIBUTED SURPLUS 84 84
DEFICIT (4,380) (4,727)
---------------------------------------------------------------------------
52,763 52,416
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$ 71,420 $ 68,506
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INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (in thousands, except per share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
October 31 October 31 October 31 October 31
2006 2005 2006 2005
---------------------------------------------------------------------------

SALES $ 22,701 $ 25,540 $ 43,179 $ 49,023
COST OF GOODS SOLD 17,069 19,327 32,105 37,397
---------------------------------------------------------------------------
GROSS MARGIN 5,632 6,213 11,074 11,626

EXPENSES
Selling, general and
administrative 5,786 6,237 11,147 12,418
Restructuring costs and
asset impairment - 501 - 501
Interest income (255) (192) (436) (352)
---------------------------------------------------------------------------
5,531 6,546 10,711 12,567
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES 101 (333) 363 (941)
INCOME TAXES (RECOVERY)
(Note 8) 76 (77) 16 (264)
---------------------------------------------------------------------------
NET INCOME (LOSS) $ 25 $ (256) $ 347 $ (677)
---------------------------------------------------------------------------
BASIC AND DILUTED INCOME
(LOSS) PER SHARE (Note 3) $ 0.00 $ (0.02) $ 0.02 $ (0.04)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF DEFICIT
Unaudited (in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
October 31 October 31 October 31 October 31
2006 2005 2006 2005
---------------------------------------------------------------------------
(DEFICIT) RETAINED
EARNINGS, BEGINNING OF
PERIOD $ (4,405) $ 1,037 $ (4,727) $ 3,119
NET INCOME (LOSS) 25 (256) 347 (677)
DIVIDENDS - (1,660) - (3,321)
---------------------------------------------------------------------------
DEFICIT, END OF PERIOD $ (4,380) $ (879) $ (4,380) $ (879)
---------------------------------------------------------------------------


INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
October 31 October 31 October 31 October 31
2006 2005 2006 2005
---------------------------------------------------------------------------
NET INFLOW (OUTFLOW) (Restated- (Restated-
OF CASH RELATED Note 1) Note 1)
TO THE FOLLOWING
ACTIVITIES:

OPERATING
Net income (loss) $ 25 $ (256) $ 347 $ (677)
Items not affecting cash:
Amortization 1,178 1,386 2,317 2,748
Future income taxes (125) 151 (640) 249
Deferred expenses and
other expenses 28 (465) 78 (639)
Stock based compensation 28 (1) 19 29
Restructuring costs
and asset impariment - 501 - 501
Loss (gain) on sale of
capital assets 41 (134) 34 (100)
---------------------------------------------------------------------------
1,175 1,182 2,155 2,111
Changes in non-cash
operating working
capital items 760 1,045 224 (194)
---------------------------------------------------------------------------
1,935 2,227 2,379 1,917
---------------------------------------------------------------------------

FINANCING
Dividends paid - (1,660) - (3,321)

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

INVESTING
Short-term investments (1,388) 24 922 10,157
Additions to capital assets (778) (559) (1,634) (1,391)
Proceeds from sale of
capital assets 113 214 166 351
---------------------------------------------------------------------------
(2,053) (321) (546) 9,117
---------------------------------------------------------------------------
NET CASH (OUTFLOW) INFLOW (118) 246 1,833 7,713
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,423 9,510 1,472 2,043
---------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,305 $ 9,756 $ 3,305 $ 9,756
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
CONSIST OF:
Cash $ 3,305 $ 1,365 $ 3,305 $ 1,365
Cash equivalents - 8,391 - 8,391
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$ 3,305 $ 9,756 $ 3,305 $ 9,756
---------------------------------------------------------------------------
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SUPPLEMENTAL INFORMATION
Income taxes
(recovered) paid $ (3) $ (124) $ 195 $ 613


A receivable of $341 as at October 31, 2006 (2005 - $632) relating to disposal of an equipment in October 2005 is not included in the above statements of cash flows.

Inscape Corporation

Notes to the Interim Consolidated Financial Statements

For periods ended October 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; however, they do not include all of the disclosure requirements for annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2006. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended April 30, 2006 including 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.

Certain comparative amounts for cash and cash equivalents have been restated for the three-month period and six-month period ending October 31, 2005 to reclassify their components in the statement of cash flows and to conform to the presentation adopted for the year ended April 30, 2006. The Company has removed money market and fixed income securities with original maturities in excess of three months of $7,778 from cash and cash equivalents and presented these amounts as short-term investments.

2. OTHER ASSETS



October 31, April 30,
2006 2006
---------------------------------------------------------------------------
Deferred pension asset $ 839 $ 998
Long-term receivable 160 248
Property redevelopment costs (net of
accumulated amortization of $1,013;
April 2006 - $967) 170 212
---------------------------------------------------------------------------
$ 1,169 $ 1,458
---------------------------------------------------------------------------
---------------------------------------------------------------------------


3. EARNINGS PER SHARE

The following tables set forth the computation of basic and diluted earnings per share:



Three Months Ended October 31,
Numerator 2006 2005
---------------------------------------------------------------------------

Net income (loss) for the quarter for basic and
diluted earnings per share $ 25 $ (256)

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

Denominator 2006 2005
---------------------------------------------------------------------------
Denominator for basic and diluted earnings per
share
Weighted average shares 15,096,817 15,096,817
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six Months Ended October 31,
Numerator 2006 2005
---------------------------------------------------------------------------

Net income (loss) for the six-month period for
basic and diluted earnings per share $ 347 $ (677)

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

Denominator 2006 2005
---------------------------------------------------------------------------
Denominator for basic and diluted earnings per
share
Weighted average shares 15,096,817 15,096,817
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Stock options for 760,500 shares (October 31, 2005 - 722,400 shares) were not included in the computation of diluted earnings per share, as they were anti-dilutive for the periods presented.

4. STOCK-BASED COMPENSATION

During the second quarter of fiscal 2007, stock options with share appreciation rights for 116,000 Class B subordinated voting shares with exercise price of $3.35 were issued (2005 - 100,000). No compensation expense has been recorded for these options as the market price of the Company's shares at balance sheet date was below the exercise price.

5. SEGMENT INFORMATION

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



Three Months Ended October 31,
2006 2005
---------------------------------------------------------------------------
Sales from
United States $ 18,280 $ 22,309
Canada 4,195 2,666
Other 226 565
---------------------------------------------------------------------------
$ 22,701 $ 25,540
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six Months Ended October 31,
2006 2005
---------------------------------------------------------------------------
Sales from
United States $ 35,865 $ 42,302
Canada 6,708 5,928
Other 606 793
---------------------------------------------------------------------------
$ 43,179 $ 49,023
---------------------------------------------------------------------------
---------------------------------------------------------------------------

October 31, April 30,
2006 2006
---------------------------------------------------------------------------
Capital Assets
Canada $ 27,990 $ 28,884
United States 1,310 1,207
---------------------------------------------------------------------------
$ 29,300 $ 30,091
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---------------------------------------------------------------------------


6. PENSION EXPENSE

The pension expense relating to the various defined benefit plans for the three-month period ended is $148 (2005 - $126). For the six-month period ended October 31, 2006, the expense is $296 (2005 - $252).

7. RESTRUCTURING COSTS AND ASSET IMPAIRMENT

The table below shows changes in the liabilities incurred in the third quarter of fiscal 2005 relating to the discontinuance of manufacturing operations at its Scarborough, Ontario metal filing and seating facilities and the changed business model in New York:



Three Months Ended October 31, 2006
---------------------------------------------------------------------------
Opening Changes Payments Ending
balance Liability
---------------------------------------------------------------------------
Employee termination expenses $ 18 - 18 $ -
Lease restructuring 975 (18) 63 894
---------------------------------------------------------------------------
$ 993 (18) 81 $ 894
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three Months Ended October 31, 2005
---------------------------------------------------------------------------
Opening Changes Payments Ending
balance Liability
---------------------------------------------------------------------------
Employee termination expenses $ 143 - 27 $ 116
Lease restructuring 1,260 (45) 78 1,137
---------------------------------------------------------------------------
$ 1,403 (45) 105 $ 1,253
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six Months Ended October 31, 2006
---------------------------------------------------------------------------
Opening Changes Payments Ending
balance Liability
---------------------------------------------------------------------------
Employee termination expenses $ 39 - 39 $ -
Lease restructuring 1,042 (44) 104 894
---------------------------------------------------------------------------
$ 1,081 (44) 143 $ 894
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six Months Ended October 31, 2005
---------------------------------------------------------------------------
Opening Changes Payments Ending
balance Liability
---------------------------------------------------------------------------
Employee termination expenses $ 182 - 66 $ 116
Lease restructuring 1,519 (192) 190 1,137
---------------------------------------------------------------------------
$ 1,701 (192) 256 $ 1,253
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. INCOME TAXES

Income taxes for the six-month period ended October 31, 2006 include a net recovery of $168 (2005 - nil) relating to re-measurement of future income tax assets and future income tax liabilities as a result of Federal corporate income tax rate reductions which were enacted in June 2006.

Contact Information

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