Inscape Corporation
TSX : INQ

Inscape Corporation

December 06, 2007 16:30 ET

Inscape Corporation Announces Second Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - Dec. 6, 2007) - Peter Brunelle, President and Chief Executive Officer of Inscape (TSX:INQ), a leading designer, manufacturer and distributor of office furniture solutions, announces the following financial results for the second quarter ended October 31, 2007:



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

Three Months Ended
October 31,
2007 2006 Change
---------------------------------------------------------------------------
Sales $ 24,314 $ 22,701 7.1%
-------------------------------------------------------------------
Gross margin 7,538 5,632 33.8%
Selling, general & administrative expenses 5,930 5,696 4.1%
Interest income (227) (165)
Income before taxes 1,835 101
Income taxes 730 76
-------------------------------------------------------------------
Net income $ 1,105 $ 25
-------------------------------------------------------------------
-------------------------------------------------------------------

Basic and diluted earnings per share $ 0.07 $ -

Weighted average number of shares (in
thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,119 15,097


Six Months Ended
October 31,
2007 2006 Change
---------------------------------------------------------------------------
Sales $ 48,414 $ 43,179 12.1%
-------------------------------------------------------------------
Gross margin 14,783 11,074 33.5%
Selling, general & administrative expenses 11,912 11,052 7.8%
Interest income (498) (341)
Income before taxes 3,369 363
Income taxes 1,234 16
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Net income $ 2,135 $ 347
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-------------------------------------------------------------------

Basic and diluted earnings per share $ 0.14 $ 0.02

Weighted average number of shares (in
thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,119 15,097


Commentary and Outlook

"We continue to make great progress in all areas of our business to better serve our customers and generate solid financial results, especially in light of the challenges posed by the appreciating Canadian dollar relative to the US currency" said Peter Brunelle, CEO of Inscape Corporation. "Our sales for the period represented the fourth consecutive quarterly year over year improvement and were slightly ahead of our projections due to the favourable timing of certain customer projects. All key operating metrics continue to improve and we remain especially encouraged by the improvement in our Gross Margin, reflecting the impact of numerous continuous improvement activities. During the quarter, work commenced on automation projects in our filing plant that will allow us to continuously improve both our responsiveness to customers and our efficiency. We continued to make good progress on various product development initiatives and anticipate the introduction of a new line of filing products in the fourth quarter" said Mr Brunelle. Based on current order levels and the impact of project timing, we expect that sales for the third quarter of fiscal 2008 will be below the third quarter of fiscal 2007" said Mr. Brunelle.

Operating Performance

The second quarter of fiscal 2008 had a net income of $1.1 million compared to a breakeven result in the same quarter of prior year. Year-to-date October 31, 2007 net income was $2.1 million compared to $0.3 million for the same period of last year. The improvements were due to gain in sales volume, improvement in gross margin and decline in SG&A expenses as a percentage of sales.

Sales for the second quarter of fiscal 2008 climbed 7.1% compared to the same quarter of fiscal 2007 in spite of a sharp decline in the average USD exchange rate from Cdn. $1.14 to $1.11 during the period. Without the adverse USD exchange rate movement, the quarterly sales would have increased by 9.6% . Sales for the six-month period ended October 31, 2007 were 12.1% ahead of the same period of a year earlier. On a comparable exchange rate basis, the year-over-year gain was 14.0% . The sales improvements were driven by increased demand for various product lines and greater than anticipated project revenue as a result of timing issues.

Gross margin as a percentage of sales for the second quarter of fiscal 2008 was 31.0% compared to 24.8% for the same quarter of fiscal 2007. On an annual basis, year-to-date October gross margin was 30.5% compared to prior year's 25.6% . The improvements were a result of reduced production costs, higher sales volume and better logistics management. These improvements were offset by the further decline of the U.S. dollar during the quarter.

SG&A expenses for the second quarter of fiscal 2008 were $0.2 million higher than the same quarter of fiscal 2007 due to certain non-recurring administrative expenses. As a percentage of sales, SG&A expenses decreased to 24.4% for the second quarter of fiscal 2008 from 25.1% for the same quarter of fiscal 2007. Year-to-date SG&A expenses were up $0.9 million from a year ago due to higher variable selling expenses, an accrual for preliminary capital tax assessments and certain non-recurring administrative expenses. However, as a percentage of sales, year-to-date SG&A expenses reduced by one percentage point to 24.6% .

The Company maintained a strong financial position with cash and short-term investments of $22.4 million and no debt.

Conference Call

INSCAPE will host a conference call at 8:30 a.m. on Friday, December 7, 2007 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-926-5068. A replay of the conference call will also be available from Friday, December 7, 2007 after 10:30 a.m. until midnight on Friday, December 14, 2007. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21355093).

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 US.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 product solutions that seamlessly integrate to create highly flexible office interiors, including moveable 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, April 30,
2007 2007
ASSETS
CURRENT
Cash and cash equivalents $ 5,235 $ 4,551
Short-term investments 17,129 16,759
Accounts receivable 10,553 11,656
Inventory 5,286 4,250
Derivatives asset (Note 2) 4,892 -
Prepaid expenses 1,079 742
Income taxes receivable 179 106
---------------------------------------------------------------------------
44,353 38,064
CAPITAL ASSETS 27,110 27,542
OTHER ASSETS 1,488 1,519
FUTURE INCOME TAX ASSET 2,552 4,535
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$ 75,503 $ 71,660
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 10,985 $ 12,356
Income taxes payable - 95
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10,985 12,451
OTHER LONG-TERM OBLIGATIONS 706 955
FUTURE INCOME TAX LIABILITY 4,798 4,069
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16,489 17,475
---------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL 57,059 57,059
CONTRIBUTED SURPLUS 84 84
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 2) 2,694 -
DEFICIT (823) (2,958)
---------------------------------------------------------------------------
59,014 54,185
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$ 75,503 $ 71,660
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---------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)(in thousands, except per share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months ended Six Months Ended
October 31, October 31,
2007 2006 2007 2006
---------------------------------------------------------------------------

SALES $ 24,314 $ 22,701 $ 48,414 $ 43,179
COST OF GOODS SOLD 16,776 17,069 33,631 32,105
---------------------------------------------------------------------------
GROSS MARGIN 7,538 5,632 14,783 11,074

EXPENSES
Selling, general and
administrative 5,930 5,696 11,912 11,052
Interest income (227) (165) (498) (341)
---------------------------------------------------------------------------
5,703 5,531 11,414 10,711
---------------------------------------------------------------------------
INCOME BEFORE TAXES 1,835 101 3,369 363
INCOME TAXES (Note 7) 730 76 1,234 16
---------------------------------------------------------------------------
NET INCOME $ 1,105 $ 25 $ 2,135 $ 347
---------------------------------------------------------------------------
BASIC AND DILUTED INCOME PER
SHARE (Note 3) $ 0.07 $ 0.00 $ 0.14 $ 0.02
---------------------------------------------------------------------------
---------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)(in thousands)
---------------------------------------------------------------------------
Three Months ended Six Months Ended
October 31, October 31,
2007 2006 2007 2006
---------------------------------------------------------------------------

NET INCOME $ 1,105 $ 25 $ 2,135 $ 347
OTHER COMPREHENSIVE INCOME,
NET OF TAXES
Realized gain on derivatives
designated as cash flow
hedges classified to income,
net of taxes (544) - (615) -
Unrealized gain on
derivatives designated as
cash flow hedges, net of taxes 2,017 - 2,533 -
---------------------------------------------------------------------------
1,473 - 1,918 -
---------------------------------------------------------------------------
COMPREHENSIVE INCOME, NET OF
TAXES $ 2,578 $ 25 $ 4,053 $ 347
---------------------------------------------------------------------------
---------------------------------------------------------------------------



INSCAPE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended October 31,2007
(Unaudited)(in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumu-
lated
Other
Compreh- Total Total
Contri- ensive AOCI Share-
Share buted Income and holders'
Capital Surplus ("AOCI") Deficit Deficit 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
$392) - - 776 - 776 776
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BALANCE - May
1, 2007 57,059 84 776 (2,958) (2,182) 54,961

Net Income - - - 2,135 2,135 2,135

Realized gain
on derivatives
designated
as cash flow
hedges
classified to
income
(net of taxes
$311) - - (615) - (615) (615)

Unrealized
gain on
derivatives
designated as
cash flow
hedges
(net of
taxes
$1,280) - - 2,533 - 2,533 2,533
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BALANCE -
October 31,
2007 $ 57,059 $ 84 $ 2,694 $ (823) $ 1,871 $ 59,014
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INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months ended Six Months Ended
October 31, October 31,
2007 2006 2007 2006
---------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH
RELATED
TO THE FOLLOWING ACTIVITIES:

OPERATING
Net income $ 1,105 $ 25 $ 2,135 $ 347
Items not affecting cash:
Amortization 1,184 1,178 2,394 2,317
Short-term investments
unrealized loss 29 - 29 -
Future income taxes (235) (125) (594) (640)
Deferred expenses and other
expenses (96) 28 (194) 78
Stock based compensation 48 28 (60) 19
Loss on sale of capital assets 1 41 1 34
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2,036 1,175 3,711 2,155
Changes in non-cash operating
working capital items 558 760 (755) 224
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2,594 1,935 2,956 2,379
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INVESTING
Short-term investments (7,971) (1,388) (399) 922
Additions to capital assets (1,259) (778) (1,964) (1,634)
Proceeds from sale of capital
assets 47 113 91 166
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(9,183) (2,053) (2,272) (546)
---------------------------------------------------------------------------
NET CASH (OUTFLOW) INFLOW (6,589) (118) 684 1,833
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 11,824 3,423 4,551 1,472
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CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 5,235 $ 3,305 $ 5,235 $ 3,305
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CASH AND CASH EQUIVALENTS
CONSIST OF:
Cash $ 5,097 $ 3,305 $ 5,097 $ 3,305
Cash equivalents 138 - 138 -
---------------------------------------------------------------------------
$ 5,235 $ 3,305 $ 5,235 $ 3,305
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SUPPLEMENTAL INFORMATION
Income taxes paid (recovered) $ 59 $ (3) $ 600 $ 195


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. 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, 2007 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

These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2007, except for the new accounting policies as noted below.

On May 1, 2007 the Corporation adopted the following Canadian Institute of Chartered Accountants ("CICA") new accounting standards on recognition, measurement and presentation of financial instruments:

(a) Section 1530 "Comprehensive Income" - "comprehensive income" is the change in equity of the Corporation during a period from transactions and other events from non-owner sources, which include net income from operations and other comprehensive income ("OCI"). Examples of items included in OCI are changes in the fair value of available-for-sale financial assets and the effective portion of changes in the fair value of cash flow hedging instruments. OCI net of taxes is disclosed in the "Consolidated Statements of Comprehensive Income" for the three-month and six-month periods ended October 31, 2007.

(b) Section 3251 "Equity" - this standard describes the presentation of equity and changes in equity during an accounting period with respect to comprehensive income. As a result of the implementation of the standard, the "Consolidated Statements of Retained Earnings (Deficit)" has been reformatted and replaced by the "Consolidated Statements of Changes in Shareholders' Equity" to disclose separately the changes in the components of shareholders' equity. "Accumulated other comprehensive income" (the portion of comprehensive income not already included in net income) is presented as a separate line in shareholders' equity on the consolidated balance sheet.

(c) Section 3855 "Financial Instruments, Recognition and Measurement" - a financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. This standard requires all financial instruments be classified according to their characteristics or management's intent or choice, with the corresponding measurement and the recognition of associated gains and losses implications as summarized below:



---------------------------------------------------------------------------
Measurement
subsequent to
Financial initial
Instrument Class recognition(1) Gains and Losses
---------------------------------------------------------------------------
Financial Held for trading Fair value Recognized in net income
assets in the current period
--------------------------------------------------------------
Held to maturity Amortized cost Recognized in net income
in the period that the
asset is derecognized or
impaired
--------------------------------------------------------------
Loans and Amortized cost Recognized in net income
receivables in the period that the
asset is derecognized or
impaired
--------------------------------------------------------------
Available for sale Fair value Recognized in OCI until
realized through disposal
or impaired
--------------------------------------------------------------
Held for trading Fair value Recognized in net income
in the current period
--------------------------------------------------------------
Financial Other liabilities Amortized cost Recognized in net income
liabilities in the period that the
liability is derecognized
---------------------------------------------------------------------------

(1) All financial instruments, including derivatives designated in
qualifying hedging relationships and any embedded derivatives, are
initially measured at fair value.

Upon adoption of this new accounting standard, the Corporation's financial
assets and liabilities are classified as follows:

---------------------------------------------------------------------------
Cash and cash equivalents and short-term investments Held for trading
---------------------------------------------------------------------------
Accounts receivable Loans and receivables
---------------------------------------------------------------------------
Accounts payable Other liabilities
---------------------------------------------------------------------------
Other long-term obligations Other liabilities
---------------------------------------------------------------------------


(d) Section 3861 "Financial instruments - Disclosure and Presentation" - this standard prescribes information that should be disclosed about financial instruments and non-financial derivatives. Under this standard, the accounting polices on financial instruments have been applied retroactively without restatement. Accordingly, the Corporation's comparative financial statements are not required to be restated.

(e) Section 3865 "Hedges" - this standard establishes formal documentation, designation and effectiveness assessment as pre-requisites for application of hedge accounting. The Corporation enters into foreign exchange contracts to hedge its exposure to foreign currency risk on its accounts receivable from anticipated sales which are denominated in U.S. dollar. These contracts are designated as cash flow hedges with their fair values as at October 31, 2007 recorded as derivative assets on the consolidated balance sheet. The effective portion of the change in these fair values during the period is included in other comprehensive income ("OCI").

On the adoption of this standard, the Company had an unrealized gain on its cash flow hedges of $776 (net of taxes of $392) which was recorded as the opening accumulated OCI balance. During the six-month period ended October 31, 2007, realized gain of $615 (net of taxes of $311) was reclassified from accumulated OCI to net income. Unrealized gain of $2,533 (net of taxes of $1,280) was recorded to OCI during the six-month period. The balance of accumulated OCI of $2,694 as at October 31, 2007 is expected to be fully reclassified to net income within the next 12 months, when the U.S. dollar denominated accounts receivable being hedged are recognized on the balance sheet.

3. EARNINGS PER SHARE

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


Three Months Ended October 31,
Numerator 2007 2006
---------------------------------------------------------------------------

Net income for the quarter for basic and diluted
earnings per share $ 1,105 $ 25

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

Denominator 2007 2006
---------------------------------------------------------------------------
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 15,119,203 15,096,817
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Six Months Ended October 31,
Numerator 2007 2006
---------------------------------------------------------------------------

Net income for the period for basic and diluted
earnings per share $ 2,135 $ 347

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

Denominator
---------------------------------------------------------------------------
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 15,119,446 15,096,817
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Stock options for 522,000 shares were not included in the computation of diluted earnings per share for the three-month and six-month periods ended October 31, 2007 (2006 - 760,500 shares) as they were anti-dilutive for the periods presented.

4. 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,
2007 2006
------------------------------------------------------------------
Sales from
United States $ 20,966 $ 18,280
Canada 3,174 4,195
Other 174 226
------------------------------------------------------------------
$ 24,314 $ 22,701
------------------------------------------------------------------
------------------------------------------------------------------

Six Months Ended October 31,
2007 2006
------------------------------------------------------------------
Sales from
United States $ 41,482 $ 35,865
Canada 6,511 6,708
Other 421 606
-----------------------------------------------------------------
$ 48,414 $ 43,179
------------------------------------------------------------------
------------------------------------------------------------------

October 31, April 30,
2007 2007
------------------------------------------------------------------
Capital Assets
Canada $ 25,533 $ 26,256
United States 1,577 1,286
------------------------------------------------------------------
$ 27,110 $ 27,542
------------------------------------------------------------------


5. PENSION EXPENSE

Total pension expense relating to the various defined benefit plans for the three-month period ended October 31, 2007 is $80 (2006 - $148). For the six-month period ended October 31, 2007, the pension expense is $163 (2006 - $296).

6. RESTRUCTURING COSTS AND ASSET IMPAIRMENT

The table below shows changes in the liabilities incurred in the third and fourth quarters of fiscal 2005 relating to the discontinuance of manufacturing operations at its Scarborough, Ontario metal filing and seating facilities and the closing of New York showroom:



Three Months Ended October 31, 2007
---------------------------------------------------------------------------
Opening Ending
balance Changes Payments Liability
---------------------------------------------------------------------------
Employee termination expenses $ - - - $ -
Lease restructuring 624 (66) 44 514
---------------------------------------------------------------------------
$ 624 (66) 44 $ 514
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Six Months Ended October 31, 2007
---------------------------------------------------------------------------
Opening Ending
balance Changes Payments Liability
---------------------------------------------------------------------------
Employee termination expenses $ - - - $ -
Lease restructuring 699 (86) 99 514
---------------------------------------------------------------------------
$ 699 (86) 99 $ 514
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


The lease restructuring provision is expected to be fully settled in the first quarter of fiscal year 2011.

7. INCOME TAXES

Income taxes for the six-month period ended October 31, 2007 include a net recovery of $85 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 2007 (2006 - $168).

8. COMPARATIVE FIGURES

Certain of the prior year's figures have been reclassified to conform to the current year's presentation.

Contact Information

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