Teknion Corporation
TSX : TKN.SV

Teknion Corporation

April 10, 2006 16:05 ET

Teknion Corporation Announces First Quarter 2006 Results

TORONTO, ONTARIO--(CCNMatthews - April 10, 2006) - Teknion Corporation (TSX:TKN.SV) announced its results today for the three months ended February 28, 2006.



Financial Highlights (complete statements and MD&A follow)

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---------------------------------------------------------------------
(in $000s except per share amounts) Three months ended
February 28
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2006 2005
---------------------------------------------------------------------
Sales $134,033 $135,859
EBITDA (1) $(1,914) $(251)
Loss before income taxes $(7,471) $(6,095)
Net loss $(7,532) $(6,323)
EPS diluted $(0.12) $(0.10)
Shareholders' equity $205,327 $229,944
Common shares outstanding 64,116,131 64,101,256
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(1) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization


Geographic Segmentation

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(in $000s) Three months ended
February 28
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2006 2005
---------------------------------------------------------------------
Sales:
Canada $50,864 $45,716
United States 67,725 79,175
International 15,444 10,968
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$134,033 $135,859
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Sales for the first quarter of 2006 of $134.0 million were slightly (1%) lower than sales of $135.9 million in the same period of 2005. Historically, sales in the first quarter are weaker than in subsequent quarters.

The Company incurred a net loss in the period of $7.5 million or $0.12 per share compared to a net loss of $6.3 million or $0.10 per share in the same period of the previous year.

Sales in Canada and for the International division grew by 11% and 41% respectively. Sales in the U.S. were lower by 14%. The Company expects to show growth in its U.S. revenue, and its overall corporate revenue, in the second quarter as compared to both the first quarter of this year as well as the second quarter of 2005.

"First quarter revenue was in line with our expectation," commented David Feldberg, President and CEO. Mr. Feldberg continued, "We are encouraged by the strength of the market and the activity that we are seeing, and we expect to grow our revenue in 2006."

Conference Call

Management will hold a conference call to discuss the first quarter results on Tuesday, April 11, 2006 at 8:00 a.m. (ET). The dial-in number for the call is 416-340-2216 or 1-866-898-9626. The conference call will also be broadcast live over the Internet. To access the webcast, please access the "Financial Reports" page of the "Investor Information" section at www.teknion.com and follow the conference call links at least 15 minutes prior to the beginning of the call.

The telephone number to listen to the call after it is completed (Instant Replay) is 416-695-5800 or 1-800-408-3053. The Passcode for the Instant Replay is 3181470. The Instant Replay will be available until midnight, April 18, 2006. The conference call will also be archived on Teknion's web site. Please access the "Financial Reports" page of the "Investor Information" section at www.teknion.com.

Cautionary Statement

Certain of the above statements are forward-looking statements with respect to the Company's future prospects. These statements involve risks and uncertainties that could cause the Company's financial results to differ materially from stated expectations as a consequence of a number of factors, including but not limited to: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in the Company's North American and international markets and operations; significant fluctuations in exchange rates for currencies in which the Company does business; changes in the cost of raw materials; the ability to maintain the proprietary nature of the Company's intellectual property in the design and manufacturing of its products; changes in the size and timing of customers' order patterns; changes in the Company's markets, including technology change, changes in customer requirements, frequent new product introductions by competitors and emerging standards; the Company's dependence on key personnel; the Company's dependence on key commitments from significant dealers and distributors; potential liabilities arising from product defects; environmental matters and other factors set forth in the Company's reports and filings with Canadian securities regulators. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Teknion Corporation (TSX:TKN.SV) is a leading international designer, manufacturer and marketer of office systems and related office furniture products. Teknion's headquarters are located in Toronto, Ontario. The company has offices and facilities in Canada, the United States, the United Kingdom and the Pacific Rim, and serves clients through a network of authorized dealers worldwide. Visit Teknion at www.teknion.com.


Teknion Corporation - Q1 2006

Management's Discussion and Analysis

The following management's discussion and analysis ("MD&A") of the financial condition and results of operations for Teknion Corporation ("Teknion" or the "Company") should be read in conjunction with the Company's unaudited interim consolidated financial statements and the notes to those statements. In addition, the Company's continuous disclosure filings including the 2005 audited annual consolidated financial statements and annual MD&A are available at www.sedar.com.

Overview

For the first quarter of fiscal 2006, the Company reported a loss before income taxes of $7.5 million and sales of $134.0 million as compared to a loss of $6.1 million and sales of $135.9 million in the first quarter of the prior year. In the immediately preceding quarter, the fourth quarter of 2005, the Company reported earnings before income taxes of $9.2 million on sales of $173.1 million. Both the project-oriented nature of the Company's business and the unexpected spike of business in the immediately preceding quarter contributed to a decline in sales in the current quarter, as explained below.

Results of Operations



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Three months Three months Three months
ended ended ended
---------------------------------------------------------------------
(in $000s except February 28, February 28, November 30,
per share amounts) 2006 2005 2005
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Sales $134,033 $135,859 $173,135
Gross margin $31,983 $33,645 $51,654
Gross margin (% of sales) 23.9% 24.8% 29.8%
Earnings (loss) before
income taxes $(7,471) $(6,095) $9,163
EBITDA (1) $(1,914) $(251) $15,136
Net loss $(7,532) $(6,323) $(11,319)
Loss per share (basic and
diluted) $(0.12) $(0.10) $(0.17)
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(1) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. The term EBITDA is a non-GAAP financial measure and does not necessarily have a standardized meaning amongst issuers. The Company believes that EBITDA is a useful figure because it measures operating results before allocating the cost of income taxes, interest and capital investments. EBITDA is also commonly regarded as an indirect measure of operating cash flow, an important indicator of the operating performance of any business.



Geographic Segmentation

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Three months Three months Three months
ended ended ended
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February 28, February 28, November 30,
(in $000s) 2006 2005 2005
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Sales:
Canada $50,864 $45,716 $56,918
United States 67,725 79,175 95,788
International 15,444 10,968 20,429
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$134,033 $135,859 $173,135
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Sales for the first quarter ended February 28, 2006 declined by 1% to $134.0 million compared to $135.9 million in the first quarter of the prior year. In the fourth quarter of the prior year, sales reached $173.1 million, the highest quarterly sales in almost five years and 19% higher than in the third quarter. The project-oriented nature of the Company's business can result in significant fluctuations in order levels from period to period, and the first quarter of the Company's fiscal year is historically weaker than subsequent quarters. In addition, the significant and unexpected spike in sales in the fourth quarter contributed to the extension of lead times resulting in a decline in sales in the first quarter. The Company has adjusted its capacity where necessary, lead times have returned to a normal level and order entry has improved significantly.

On a segmented basis, U.S. sales declined by 14% (7% in source currency) as compared to the first quarter of the prior year. For the first time in seven quarters the Company's revenue growth rate was lower than the growth rate reported for the industry as a whole. The Business and Institutional Furniture Manufacturers Association ("BIFMA") reported industry growth of approximately 11% in the period. The market continues to be strong and Teknion believes that based on current order-entry, the Company's sales growth in the U.S. has resumed.

Canadian sales increased 11% to $50.9 million as compared to the first quarter of the prior year. Consistent with 2005, the strength of the Canadian economy and Teknion's leading market position resulted in this strong growth.

International sales were also higher, increasing to $15.4 million, or 41% as compared to the first quarter of the prior year. A large project in the Middle East was a significant contributor to sales growth in the quarter.

Gross margin as a percentage of sales was 23.9% compared to 24.8% in the first quarter of the prior year. The decline in gross margin reflects the impact of further weakening of the U.S. dollar, which reduced gross margin by approximately 2% of sales. The Company's cost reduction and price realization initiatives offset a substantial portion of the negative impact of the weaker U.S. dollar.

In the fourth quarter of the prior year, gross margin was 29.8%. There were a number of factors that positively affected the gross margin in the fourth quarter as compared to the current quarter, including significantly higher capacity utilization, favourable realty tax assessments and a stronger U.S. dollar as compared to the current period.

Selling, general and administrative expenses (SG&A) were $33.7 million or 25.1% of sales compared to $33.0 million or 24.3% of sales in the first quarter of the prior year. The increase in SG&A reflects cost increases incurred to support anticipated growth in 2006.

The Company's income tax expense in the current quarter and the first quarter of the prior year reflects estimated cash taxes payable with respect to the periods. The income tax expense in the fourth quarter of 2005 reflects cash taxes payable and an adjustment to the Company's valuation allowance for future tax assets totaling $20.3 million.



Quarterly Results

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($000s except Q1 Q4 Q3 Q2
per share amounts) 2006 2005 2005 2005
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Sales $134,033 $173,135 $145,605 $151,584
Earnings (loss)
before income tax $(7,471) $9,163 $(3,022) $448
Net earnings (loss) $(7,532) $(11,319) $(3,246) $234
Earnings (loss) per
share (basic and
diluted) $(0.12) $(0.17) $(0.05) $(0.00)
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($000s except Q1 Q4 Q3 Q2
per share amounts) 2005 2004 2004 2004
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Sales $135,859 $137,988 $118,626 $126,392
Earnings (loss)
before income tax $(6,095) $(1,715) $(8,784) $353
Net earnings (loss) $(6,323) $(9,909) $(5,235) $1,416
Earnings (loss) per
share (basic and
diluted) $(0.10) $(0.16) $(0.08) $0.02
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A discussion of the fluctuations in the quarterly results are included in the Company's 2005 annual MD&A. Discussion of the current quarter compared to the prior year comparative quarter and the immediately preceding quarter is included above.



Liquidity and Capital Resources

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Three months Three months
ended ended
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February 28, February 28,
(in $000s) 2006 2005
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Cash used in operations before
non-cash working capital changes $(2,738) $(487)

Cash used in operations after
non-cash working capital changes $(4,923) $(22,276)

Shareholders' equity $205,327 $229,944

Net debt-to-equity (1) 0.40:1 0.34:1

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(1) Net debt is defined as operating loans plus long-term debt less cash.

Cash used in operations before working capital changes was $2.7 million, an increase as compared to cash used of $487 thousand in the first quarter of fiscal 2005, reflecting the increase in the operating loss.

During the quarter, non-cash working capital increased $2.2 million.. This increase primarily reflects the net effect of the significant reduction in both accounts receivable, and accounts payable and accrued liabilities. The decline in accounts receivable of $32.9 million reflects the collection of amounts owing from the strong sales of the fourth quarter. The decline in accounts payable and accrued liabilities reflects the timing of certain year-end payments, and the impact of lower sales volume and the corresponding lower level of purchases in the quarter.

The Company's net debt-to-equity ratio was 0.40:1 at quarter end as compared to 0.33:1 at November 30, 2005. The operating line increased in the quarter to finance the net loss in the quarter, the increase in working capital, and some additions to fixed assets required to increase efficiency and capacity in certain product areas. Capital spending for the quarter totaled $6.1 million and is expected to be $25 million for the year.

Outlook

Management continues to believe that, over the long term, the worldwide business environment will increasingly require that organizations utilize costly office space more effectively and improve the working environment to increase employee productivity. The Company also believes that these factors, combined with increased commercial construction and capital spending, as well as the growing use of technology and the increasing awareness of workplace health and safety, will allow long-term growth in the contract office furniture industry to exceed growth in GDP.

The Company believes that the positive trend of growing customer demand reflected in the BIFMA statistics throughout 2005 and early 2006 bodes well for the office furniture industry. Most industry observers believe that the industry will continue to grow in 2006.

The Company remains confident that its focused growth strategies, combined with its comprehensive product lines, innovative designs and extensive dealer network, will enable the Company to capitalize on renewed demand in its markets as business conditions improve. In addition, new sales and marketing programs are broadening the Company's customer base into market segments in the U.S. where the Company did not previously have a strong presence, including the health, education and government sectors.

The Company's strategies for future growth and improvement to its operating results are to: continue to develop its sales and marketing initiatives to expand its presence and market share, focusing on market segments where the Company previously did not have a strong presence; leverage the strength and economies of scale resulting from the vertical integration and recent modernization of its manufacturing facilities and processes; maintain its focus on design and innovation to ensure it can respond quickly with new and enhanced products to meet the needs of its customers; continue its focus on cost improvement and efficiency; and make prudent acquisitions that meet the Company's long-term strategic objectives.

As a result of these strategies and an anticipated improvement in the market for the Company's products, management expects to generate improved financial performance in fiscal 2006 compared to fiscal 2005.

Cautionary Statement

Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results could differ materially as a consequence of a number of factors, including: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in the Company's North American and international markets and operations; significant fluctuations in exchange rates for currencies in which the Company does business; changes in the cost of raw materials; the ability to maintain the proprietary nature of the Company's intellectual property in the design and manufacturing of its products; changes in the size and timing of customers' order patterns; changes in the Company's markets, including technology change, changes in customer requirements, frequent new product introductions by competitors and emerging standards; the Company's dependence on key personnel; the Company's dependence on key commitments from significant dealers and distributors; potential liabilities arising from product defects; environmental matters and other factors set forth in the Company's reports and filings with Canadian securities regulators. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Teknion Corporation (TSX:TKN.SV) is a leading international designer, manufacturer and marketer of office systems and related office furniture products. Teknion's headquarters are located in Toronto, Ontario. The company has offices and facilities in Canada, the United States, the United Kingdom, and the Pacific Rim, and serves clients through a network of authorized dealers worldwide. Visit Teknion at www.teknion.com.



TEKNION CORPORATION
Consolidated Interim Statements of Earnings
(Unaudited)


Periods ended February 28, 2006 and 2005

(in thousands of dollars, except Three months ended
per share amounts) February 28
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2006 2005
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Sales $ 134,033 $ 135,859

Cost of sales 102,050 102,214

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Gross margin 31,983 33,645

Expenses:
Selling, general and administrative 33,660 33,042
Depreciation and amortization 4,543 4,982
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38,203 38,024
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Loss from operations (6,220) (4,379)

Interest expense, net 1,014 862
Loss on disposal of property, plant and equipment 237 854
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Loss before income taxes (7,471) (6,095)

Income taxes:
Current 61 228

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Net loss $ (7,532) $ (6,323)
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Loss per share:
Basic and diluted $ (0.12) $ (0.10)
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Consolidated Interim Statements of Retained Earnings
(Unaudited)

Periods ended February 28, 2006 and 2005
Three months ended
(in thousands of dollars) February 28
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2006 2005
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Retained earnings, beginning of period $ 116,486 $ 137,140

Net loss (7,532) (6,323)

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Retained earnings, end of period $ 108,954 $ 130,817
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TEKNION CORPORATION
Consolidated Balance Sheets
(Unaudited)


(in thousands of dollars)
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As at As at
February 28, November 30,
2006 2005
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Assets

Current assets:
Cash $ 12,588 $ 10,435
Accounts receivable 92,619 125,505
Inventory 52,470 52,215
Prepaid expenses and other deposits 4,712 4,189
Future income taxes 1,203 1,203
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163,592 193,547

Property, plant and equipment 171,235 170,426
Goodwill 30,874 30,874

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$ 365,701 $ 394,847
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Liabilities and Shareholders' Equity

Current liabilities:
Operating loans $ 77,166 $ 63,056
Accounts payable and accrued liabilities 63,574 98,377
Income taxes payable 687 920
Due to affiliated companies 950 51
Current portion of long-term debt 1,544 1,711
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143,921 164,115

Long-term debt 15,250 16,087
Future income taxes 1,203 1,203
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160,374 181,405

Shareholders' equity:
Share capital 107,005 107,005
Retained earnings 108,954 116,486
Contributed surplus 108 94
Currency translation adjustment (10,740) (10,143)
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205,327 213,442

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$ 365,701 $ 394,847
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TEKNION CORPORATION
Consolidated Interim Statements of Cash Flows
(Unaudited)


Periods ended February 28, 2006 and 2005
Three months ended
(in thousands of dollars) February 28
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---------------------------------------------------------------------
2006 2005
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Cash provided by (used in):

Operations:
Net loss $ (7,532) $ (6,323)
Items not affecting cash:
Depreciation and amortization 4,543 4,982
Loss on disposal of property,
plant and equipment 237 854
Amortization of stock-based compensation 14 -
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(2,738) (487)
Change in non-cash operating working
capital (2,185) (21,789)
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(4,923) (22,276)

Financing:
Operating loans 14,110 20,423
Repayment of long-term debt (1,004) (401)
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13,106 20,022

Investments:
Purchase of property, plant and equipment (6,068) (2,604)
Proceeds on disposal of property,
plant and equipment 165 -
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(5,903) (2,604)

Foreign exchange gain (loss) on cash held
in foreign currencies (127) 405
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Increase (decrease) in cash 2,153 (4,453)

Cash, beginning of period 10,435 11,154

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Cash, end of period $ 12,588 $ 6,701
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TEKNION CORPORATION

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands of dollars)

Periods ended February 28, 2006, and 2005

1. Basis of presentation

These 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 November 30, 2005. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2005, including notes thereto.

2. Share capital

The Company has 64,116,131 issued and outstanding shares as at February 28, 2006. There are 39,919,846 multiple voting shares which carry 10 votes per share and are convertible into subordinate voting shares on a one-for-one basis. The Company also has 24,196,285 subordinate voting shares which carry one vote per share. In addition, as at February 28, 2006, there are 4,280,870 subordinate voting shares issuable pursuant to outstanding stock options. During the quarter, the Company granted 512,500 stock options at an exercise price of $5.60. The stock options have a term of five years and vest equally over four years. There were no stock options exercised in the quarter. As at March 31, 2006, there were no changes to the number of shares issued and outstanding reported above.



3. Supplemental cash flow information Three months ended
February 28 February 28
--------------------------
--------------------------
2006 2005
--------------------------

Interest paid $ 1,116 $ 976
Interest received 79 60
Income taxes paid 742 505
Income taxes recovered 419 146


4. Geographic segmented information Three months ended
February 28 February 28
--------------------------
--------------------------
2006 2005
--------------------------

Sales:
Canada $ 50,864 $ 45,716
United States 67,725 79,175
International 15,444 10,968
--------------------------
$ 134,033 $ 135,859
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--------------------------



Contact Information

  • Teknion Corporation
    Steven E. Cohen
    Senior Vice President,
    Corporate Development
    (416) 661-1577, ext. 2456
    or
    Teknion Corporation
    Scott E. Bond
    Senior Vice President,
    Chief Financial Officer & Secretary
    (416) 661-1577, ext. 2391
    www.teknion.com