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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7753
_______________
DECORATOR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
_______________
Pennsylvania 25-1001433
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 436-8909
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at May 15, 2006
------------------- ---------------------------
Common Stock, Par Value $.20 Per Share 2,982,390
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
April 1, December 31,
2006 2005
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 820,415 $ 490,377
Accounts Receivable, less allowance for
doubtful accounts ($131,690 and $131,690) 5,238,902 4,574,415
Inventories 5,928,112 5,800,553
Other Current Assets 431,453 311,603
----------- -----------
TOTAL CURRENT ASSETS 12,418,882 11,176,948
----------- -----------
Property and Equipment
Land, Buildings & Improvements 7,253,929 7,253,742
Machinery, Equipment, Furniture & Fixtures 6,731,451 6,604,629
----------- -----------
Total Property and Equipment 13,985,380 13,858,371
Less: Accumulated Depreciation and Amortization 6,607,898 6,426,548
----------- -----------
Net Property and Equipment 7,377,482 7,431,823
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717
Identifiable intangible asset, less accumulated Amortization
of $1,421,713 and $1,259,713 2,473,278 2,635,278
Other Assets 508,503 318,599
----------- -----------
TOTAL ASSETS $25,509,862 $24,294,365
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 3,406,267 $ 3,075,795
Current Maturities of Long-term Debt 217,080 211,800
Accrued Expenses:
Income Taxes 226,624 --
Compensation 663,542 944,109
Other 1,225,149 852,895
----------- -----------
TOTAL CURRENT LIABILITIES 5,738,662 5,084,599
----------- -----------
Long-Term Debt 1,486,607 1,536,754
Deferred Income Taxes 600,000 585,000
----------- -----------
TOTAL LIABILITIES 7,825,269 7,206,353
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,628,053 and 4,574,490 925,611 914,898
Paid-in Capital 1,731,614 1,616,843
Retained Earnings 23,110,577 22,651,391
----------- -----------
25,767,802 25,183,132
Less: Treasury stock, at cost: 1,645,663 and 1,648,088 shares 8,083,209 8,095,120
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 17,684,593 17,088,012
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,509,862 $24,294,365
=========== ===========
The accompanying notes are an integral part of the financial statements.
1
DECORATOR INDUSTRIES, INC
STATEMENTS OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------------------------------------
April 1, 2006 April 2, 2005
------------------------ -------------------------
Net Sales $ 14,662,315 100.00% $ 12,431,382 100.00%
Cost of Products Sold 11,704,497 79.83% 9,829,683 79.07%
------------ ------------
Gross Profit 2,957,818 20.17% 2,601,699 20.93%
Selling and Administrative Expenses 2,097,304 14.30% 1,943,457 15.63%
------------ ------------
Operating Income 860,514 5.87% 658,242 5.30%
Other Income (Expense)
Interest, Investment, and 31,212 0.21% 17,293 0.14%
Other Income
Interest Expense (18,766) -0.13% (22,199) -0.18%
------------ ------------
Earnings Before Income Taxes 872,960 5.95% 653,336 5.26%
Provision for Income Taxes 325,000 2.21% 235,000 1.89%
------------ ------------
NET INCOME $ 547,960 3.74% $ 418,336 3.37%
============ ============
EARNINGS PER SHARE
BASIC $ 0.19 $ 0.15
============ ============
DILUTED $ 0.18 $ 0.14
============ ============
Weighted Average Number of Shares Outstanding
Basic 2,950,508 2,852,270
Diluted 3,002,687 2,994,455
The accompanying notes are an integral part of the financial statements.
2
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended
--------------------------
April 1, 2006 April 2, 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 547,960 $ 418,336
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 353,214 365,332
Provision for Losses on Accounts Receivable -- 5,000
Deferred Taxes 20,000 (32,000)
Stock-Based Compensation 17,152 --
(Gain)/Loss on Disposal of Assets (720) 5,707
Increase/(Decrease) from Changes in:
Accounts Receivable (665,487) (999,638)
Inventories (127,559) 48,937
Prepaid Expenses (124,850) 25,756
Other Assets (189,904) 1,806
Accounts Payable 330,472 389,897
Accrued Expenses 318,811 (138,979)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 479,089 90,154
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions -- (1,067,472)
Capital Expenditures (138,553) (50,847)
Proceeds from Property Dispositions 2,900 700
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (135,653) (1,117,619)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (44,867) (42,554)
Dividend Payments (88,774) (85,920)
Change in Checks Issued but Not Yet Presented -- 562,217
Proceeds from Exercise of Stock Options 99,993 100,003
Net Borrowings under Line-of-Credit Agreement -- 73,324
Issuance of Stock for Directors Trust 20,250 17,500
----------- -----------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (13,398) 624,570
Net Increase/(Decrease) in Cash and Cash Equivalents 330,038 (402,895)
Cash and Cash Equivalents at Beginning of Year 490,377 730,539
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 820,415 $ 327,644
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 16,083 $ 59,398
Income Taxes $ -- $ 19,923
The accompanying notes are an integral part of the financial statements.
3
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 1, 2006 AND APRIL 2, 2005
(UNAUDITED)
NOTE 1. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary to
present fairly the Company's financial position as of April 1,
2006, the changes therein for the thirteen week period then
ended and the results of operations for the thirteen week
periods ended April 1, 2006 and April 2, 2005.
NOTE 2. The financial statements included in the Form 10-Q are
presented in accordance with the requirements of the form and
do not include all of the disclosures required by accounting
principles generally accepted in the United States of America.
For additional information, reference is made to the Company's
annual report on Form 10-K for the year ended December 31,
2005. The results of operations for the thirteen week periods
ended April 1, 2006 and April 2, 2005 are not necessarily
indicative of operating results for the full year.
NOTE 3. INVENTORIES
Inventories at April 1, 2006 and December 31, 2005 consisted of the
following:
April 1, 2006 December 31, 2005
----------- -------------
Raw Material and Supplies $ 5,131,838 $ 4,982,121
In Process and Finished Goods 796,274 818,432
----------- -------------
Total Inventory $ 5,928,112 $ 5,800,553
=========== =============
NOTE 4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
weighted-average number of shares outstanding. Diluted earnings per share
includes the dilutive effect of stock options. In accordance with SFAS
No. 128, the following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Thirteen Weeks Ended
April 1, 2006 April 2, 2005
------------ -------------
Numerator:
Net income $ 547,960 $ 418,336
============ =============
Denominator:
Weighted-average number of
common shares outstanding 2,950,508 2,852,270
Dilutive effect of
stock options on net income 52,179 142,185
------------ -------------
3,002,687 2,994,455
============ =============
Diluted earnings per share: $ 0.18 $ 0.14
============ =============
4
NOTE 5. STOCK BASED EMPLOYEE COMPENSATION
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004) "Share
Based Payment" ("SFAS No. 123(R))". This standard revised the original
SFAS No. 123 by requiring the expensing of stock options. The Company
began recording the expense of stock options in its financial statements
effective January 1, 2006. For fiscal years 2005 and prior, the Company
used the original provisions of SFAS No. 123. The Company assumes no tax
benefit under SFAS 123(R), as all of its stock options qualify as
incentive stock options, and do not qualify for a tax deduction unless
there is a disqualifying disposition.
In accordance with the previous provisions of SFAS No. 123, the Company
followed the intrinsic value based method of accounting as prescribed by
APB 25, "Accounting for Stock Issued to Employees", for its stock-based
compensation. Accordingly, no compensation cost was recognized prior to
December 31, 2005.
At April 1, 2006, the Company had options outstanding under one fixed
stock option plan. If the Company had elected to recognize compensation
expense in prior years for options granted based on their fair values at
the grant dates, consistent with SFAS No. 123(R), net income and earnings
per share would have been reported as follows:
First First
Quarter Quarter
2006 2005
----------- -----------
Net Income, as reported $ 547,960 $ 418,336
Deduct: value of stock-based employee
compensation earned but not recorded
in the Statements of Earnings -- (20,272)
----------- -----------
Pro forma net income $ 547,960 $ 398,064
=========== ===========
Earnings per share:
Basic: as reported $ 0.19 $ 0.15
Basic: pro forma $ 0.19 $ 0.14
Diluted: as reported $ 0.18 $ 0.14
Diluted: pro forma $ 0.18 $ 0.13
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN STATEMENTS
RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE
COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE,
ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS
DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING
RESULTS AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR
RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND
MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS,
COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE
COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER
FACTORS. FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE
MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
FINANCIAL CONDITION
The Company's financial ratios changed as illustrated below. The financial
condition remains strong, and the long-term debt to total capitalization ratio
remained low at 7.75%
April 1, 2006 December 31, 2005
------------- -----------------
Current Ratio 2.16:1 2.20:1
Quick Ratio 1.13:1 1.06:1
LT Debt to Total Capital 7.75% 8.25%
Working Capital $6,680,220 $6,092,349
At April 1, 2006, the Company had no outstanding borrowings on its line of
credit. The Company expects to use its line of credit in 2006.
In January 2004, the Company began assigning certain account receivables under a
"Receivables Servicing and Credit Approved Receivables Purchasing Agreement"
with CIT Group/Commercial Services Inc. Only receivables from sales to the
hospitality industry may be assigned to CIT. Under the agreement CIT provides
credit checking, credit approval, and collection responsibilities for the
assigned receivables. If CIT approves an order from a hospitality customer and
the resulting receivables are not paid or disputed by the customer within ninety
days of sale, CIT will pay the receivable to the Company and assume ownership of
the receivable. CIT begins collection efforts for the assigned receivables (both
approved and not approved) when they are due (hospitality sales are made on Net
30 terms). Hospitality customers are instructed to make payments directly to CIT
and CIT then wires collected funds to the Company. The Company pays CIT
six-tenths of a percent of all assigned receivables. Management believes this
cost is mostly offset by reductions in Bad Debt expense and collection costs.
The Company entered into this arrangement to take advantage of CIT's extensive
credit checking and collection capabilities. Management believes this
arrangement has improved liquidity.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Days sales outstanding in accounts receivable were 31.6 days at April 1, 2006
compared to 31.8 days at April 2, 2005. Net accounts receivable increased by
$779,590 and inventories increased by $863,398 from April 2, 2005 to April 1,
2006, which is due to the increase in sales for the thirteen weeks ended April
1, 2006 when compared to the same period of the prior year.
Capital expenditures were $138,553 for the quarter ended April 1, 2006, compared
to $50,847 for the same period of the prior year. The major reason for this
increase was increased expenditures in the current period for the implementation
of the Company's new financial software platform.
Management does not foresee any events which will adversely affect its liquidity
during 2006.
SALES BY MARKET
The following table represents net sales to each of the three different markets
that the Company serves for the thirteen week periods ended April 1, 2006 and
April 2, 2005:
(dollars in thousands)
For the Thirteen Weeks Ended
April 1, 2006 April 2, 2005
-------------------------- -----------------------
Net % of Net % of
Sales total Sales total
-------------- ---------- ------------ ---------
Recreational Vehicle $ 9,127 62% $ 7,291 59%
Manufactured Housing 2,808 19% 2,457 20%
Hospitality 2,727 19% 2,683 21%
------------- --------- ------------ ---------
Total Net Sales $ 14,662 100% $ 12,431 100%
============= ============
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED APRIL 1, 2006, (FIRST QUARTER 2006) COMPARED TO
THIRTEEN WEEK PERIOD ENDED APRIL 2, 2005, (FIRST QUARTER 2005)
The following table shows a comparison of the results of operations between
First Quarter 2006 and First Quarter 2005:
First Quarter % First Quarter % $ Increase
2006 of Sales 2005 of Sales (Decrease) % Change
------------ -------- ------------ --------- ------------ ---------
Net Sales $ 14,662,315 100% $ 12,431,382 100% $ 2,230,933 17.9%
Cost of Products Sold 11,704,497 79.8% 9,829,683 79.1% 1,874,814 19.1%
------------ -------- ------------ -------- ------------
Gross Profit 2,957,818 20.2% 2,601,699 20.9% 356,119 13.7%
Selling and Administrative Expenses 2,097,304 14.3% 1,943,457 15.6% 153,847 7.9%
------------ --------- ------------ ------- ------------
Operating Income 860,514 5.9% 658,242 5.3% 202,272 30.7%
Other Income (Expense)
Interest, Investment and
Other Income 31,212 0.2% 17,293 0.2% 13,919 80.5%
Interest Expense (18,766) -0.2% (22,199) -0.2% 3,433 -15.5%
------------ --------- ------------ ------- ------------
Earnings Before Income Taxes 872,960 5.9% 653,336 5.3% 219,624 33.6%
Provision for Income Taxes 325,000 2.2% 235,000 1.9% 90,000 38.3%
------------ --------- ------------ ------- ------------
NET INCOME $ 547,960 3.7% $ 418,336 3.4% $ 129,624 31.0%
============ ======== ============ ======= ============
Net sales for the First Quarter 2006 were $14,662,315, compared to $12,431,382
for the same period in the previous year, a 17.9% increase. This increase
resulted from additional sales volume during First Quarter 2006 when compared to
the same period of the prior year. Sales to the Company's recreational vehicle
customers increased 25.2% in First Quarter 2006 when compared to the same period
of the prior year. Approximately 12% of the Company's sales to its recreational
vehicle customers were for Emergency Living Units ("ELU's"), compared to 14% in
the fourth quarter of 2005. Without the ELU's, recreational vehicle sales would
have increased approximately 10% over the First Quarter 2005. The recreational
vehicle industry reported a 15.2% increase in shipments during the First Quarter
2006 compared to the same period of the prior year (excluding ELU's). The
Company does not believe that the balance of 2006 will benefit from the further
production of ELU's. Sales to the Company's manufactured housing customers
increased 14.3% in First Quarter 2006 when compared to the same period of the
prior year. The manufactured housing industry increased shipments by 9.4% over
the same period. The Company believes that a portion of the increased
manufactured housing sales is attributable to the rebuilding efforts from the
2005 Gulf Coast hurricanes. Sales to the Company's hospitality customers
increased 1.6%.
Cost of products sold increased to 79.8% in the First Quarter 2006 compared to
79.1% a year ago. The major reasons for the increase in this percentage was an
increase in the percentage of raw material costs to sales, partially offset by a
decrease in the percentage of labor costs to sales and a lower percentage for
factory overhead due to fixed expenses being spread over a higher sales volume.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Selling and administrative expenses were $2,097,304 in the First Quarter 2006
versus $1,943,457 in the First Quarter 2005. The increase was mostly due to
administrative salaries and other payroll related costs. The percentage of
selling and administrative expenses to net sales decreased from 15.6% to 14.3%
as fixed expenses were spread over a higher sales volume.
Interest expense decreased to $18,766 in the First Quarter 2006 from $22,199 in
the First Quarter 2005, due to less outstanding debt during the First Quarter
2006, partially offset by the effect of higher interest rates on the Company's
variable rate obligations
Net income increased to $547,960, or 31.0%, in the First Quarter of 2006
compared to $418,336 in the First Quarter of 2005. This increase is the result
of higher sales. Diluted earnings per share increased from $0.14 per share
during the First Quarter 2005 to $0.18 per share during the First Quarter 2006.
EBITDA
EBITDA represents income before income taxes, interest expense, depreciation and
amortization and is an approximation of cash flow from operations before tax.
The Company uses EBITDA as an internal measure of performance and believes it is
a useful and commonly used measure of financial performance in addition to
income before taxes and other profitability measures under U.S. Generally
Accepted Accounting Principles ("GAAP").
EBITDA is not a measure of performance under GAAP. EBITDA should not be
construed as an alternative to operating income and income before taxes as an
indicator of the Company's operations in accordance with GAAP. Nor is EBITDA an
alternative to cash flow from operating activities in accordance with GAAP. The
Company's definition of EBITDA can differ from that of other companies.
The following table reconciles Net Income, the most comparable measure under
GAAP, to EBITDA for the first quarters of fiscal 2006 and 2005:
For the Thirteen Weeks Ended
April 1, 2006 April 2, 2005
------------- -------------
Net Income $ 547,960 $ 418,336
Add:
Interest 18,766 22,199
Taxes 325,000 235,000
Depreciation & Amortiztion 353,214 365,332
(Gain)/Loss on Disposal (720) 5,707
------------- -------------
EBITDA $ 1,244,220 $ 1,046,574
============= =============
9
Item 4. Controls and Procedures.
(a) The Company's principal executive officer and principal financial officer
have reviewed the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of April 1, 2006 and have
concluded that they were adequate and effective.
(b) During the most recent fiscal quarter, there were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
31.1 - Certification of Chief Executive Officer and President
31.2 - Certification of Chief Financial Officer
32 - Certificate required by 18 U.S.C. ss.1350.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECORATOR INDUSTRIES, INC.
(Registrant)
Date: May 15, 2006 By: /s/ William A. Bassett
------------------------------------------
William A. Bassett, Chief Executive Officer
and President
Date: May 15, 2006 By: /s/ Michael K. Solomon
------------------------------------------
Michael K. Solomon, Chief Financial Officer
11