7===============================================================================
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 July 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)
(954) 436-8909
--------------------------------------------------
Registrant's telephone number, including area code
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 August 14, 2006
- -------------------------------------- ------------------------------
Common Stock, Par Value $.20 Per Share 2,995,815 shares
================================================================================
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
July 1, December 31,
2006 2005
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 587,114 $ 490,377
Accounts Receivable, less allowance for
doubtful accounts ($148,338 and $131,690) 5,726,759 4,574,415
Inventories 6,647,701 5,800,553
Other Current Assets 594,072 311,603
----------- -----------
TOTAL CURRENT ASSETS 13,555,646 11,176,948
----------- -----------
Property and Equipment
Land, Buildings & Improvements 7,639,277 7,253,742
Machinery, Equipment, Furniture & Fixtures 6,854,317 6,604,629
----------- -----------
Total Property and Equipment 14,493,594 13,858,371
Less: Accumulated Depreciation and Amortization 6,772,868 6,426,548
----------- -----------
Net Property and Equipment 7,720,726 7,431,823
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717
Identifiable intangible asset, less accumulated Amortization
of $1,583,713 and $1,259,713 2,311,278 2,635,278
Other Assets 818,178 318,599
----------- -----------
TOTAL ASSETS $27,137,545 $24,294,365
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 4,159,195 $ 3,075,795
Current Maturities of Long-term Debt 217,363 211,800
Accrued Expenses:
Income Taxes 145,173 --
Compensation 868,580 944,109
Other 1,708,896 852,895
----------- -----------
TOTAL CURRENT LIABILITIES 7,099,207 5,084,599
----------- -----------
Long-Term Debt 1,451,232 1,536,754
Deferred Income Taxes 584,000 585,000
----------- -----------
TOTAL LIABILITIES 9,134,439 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 1,761,116 1,616,843
Retained Earnings 23,333,647 22,651,391
----------- -----------
26,020,374 25,183,132
Less: Treasury stock, at cost: 1,632,238 and 1,648,088 shares 8,017,268 8,095,120
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 18,003,106 17,088,012
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,137,545 $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 For the Twenty-Six Weeks Ended
------------------------------------------- --------------------------------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
-------------------- ------------------- -------------------- --------------------
Net Sales $ 14,478,669 100.0% $13,275,952 100.0% $ 29,140,984 100.0% $ 25,707,334 100.0%
Cost of Products Sold 11,745,484 81.1% 10,687,552 80.5% 23,449,981 80.5% 20,517,235 79.8%
------------ ----------- ----------- ------------
Gross Profit 2,733,185 18.9% 2,588,400 19.5% 5,691,003 19.5% 5,190,099 20.2%
Selling and Administrative
Expenses 2,243,365 15.5% 2,202,951 16.6% 4,340,669 14.9% 4,146,408 16.1%
------------ ----------- ----------- ------------
Operating Income 489,820 3.4% 385,449 2.9% 1,350,334 4.6% 1,043,691 4.1%
Other Income (Expense)
Interest, Investment and
Other Income 26,915 0.2% 22,866 0.2% 58,127 0.2% 40,159 0.2%
Interest Expense (19,043) -0.2% (18,998) -0.2% (37,809) -0.1% (41,197) -0.2%
------------ ----------- ----------- ------------
Earnings Before Income Taxes 497,692 3.4% 389,317 2.9% 1,370,652 4.7% 1,042,653 4.1%
Provision for Income Taxes 185,000 1.2% 148,000 1.1% 510,000 1.7% 383,000 1.5%
------------ ----------- ----------- ------------
NET INCOME $ 312,692 2.2% $ 241,317 1.8% $ 860,652 3.0% $ 659,653 2.6%
============ =========== =========== ============
EARNINGS PER SHARE
BASIC $ 0.10 $ 0.08 $ 0.29 $ 0.23
============ =========== =========== ============
DILUTED $ 0.10 $ 0.08 $ 0.28 $ 0.22
============ =========== =========== ============
Weighted Average Number of Shares
Outstanding
Basic 2,985,524 2,880,102 2,968,016 2,866,186
Diluted 3,040,076 3,015,562 3,021,382 3,005,009
The accompanying notes are an integral part of the financial statements.
2
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Twenty-six Weeks Ended
----------------------------
July 1, July 2,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 860,652 $ 659,653
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 706,466 733,110
Provision for Losses on Accounts Receivable 16,563 8,000
Deferred Taxes 4,000 (86,000)
Stock-Based Compensation 27,885 --
(Gain)/Loss on Disposal of Assets (725) 160,622
Increase/(Decrease) from Changes in:
Accounts Receivable (1,169,907) (1,754,591)
Inventories (847,148) (199,402)
Prepaid Expenses (287,469) 69,953
Other Assets (499,579) (64,435)
Accounts Payable 1,083,400 867,597
Accrued Expenses 926,145 24,493
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 820,283 419,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions -- (1,067,472)
Capital Expenditures (673,344) (222,627)
Proceeds from Property Dispositions 3,200 69,600
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (670,144) (1,220,499)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (98,959) (85,164)
Dividend Payments (178,396) (172,315)
Change in Checks Issued but Not Yet Presented -- 571,642
Proceeds from Exercise of Stock Options 164,453 100,003
Net Borrowings under Line-of-Credit Agreement 19,000 --
Issuance of Stock for Directors Trust 40,500 33,500
----------- -----------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (53,402) 447,666
Net Increase/(Decrease) in Cash and Cash Equivalents 96,737 (353,833)
Cash and Cash Equivalents at Beginning of Year 490,377 730,539
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 587,114 $ 376,706
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 32,543 $ 75,568
Income Taxes $ 282,451 $ 186,372
The accompanying notes are an integral part of the financial statements.
3
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED JULY 1, 2006 AND JULY 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 July 1, 2006, the changes therein
for the twenty-six week period then ended and the results of
operations for the twenty-six week periods ended July 1, 2006 and
July 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 twenty-six week periods ended July 1, 2006 and
July 2, 2005 are not necessarily indicative of operating results for
the full year.
NOTE 3. INVENTORIES
Inventories at July 1, 2006 and December 31, 2005 consisted of the
following:
July 1, December 31,
2006 2005
----------- -----------
Raw Material and Supplies $ 6,154,989 $ 4,982,121
In Process and Finished Goods 492,712 818,432
----------- -----------
Total Inventory $ 6,647,701 $ 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 For the Twenty-Six Weeks Ended
----------------------------- -----------------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
---------- ---------- ---------- ----------
Numerator:
Net income $ 312,692 $ 241,317 $ 860,652 $ 659,653
========== ========== ========== ==========
Denominator:
Weighted-average number of
common shares outstanding 2,985,524 2,880,102 2,968,016 2,866,186
Dilutive effect of
stock options on net income 54,552 135,460 53,366 138,823
---------- ---------- ---------- ----------
3,040,076 3,015,562 3,021,382 3,005,009
========== ========== ========== ==========
Diluted earnings per share: $ 0.10 $ 0.08 $ 0.28 $ 0.22
========== ========== ========== ==========
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 July 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:
For the thirteen weeks ended For the twenty-six weeks ended
----------------------------- -----------------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Income, as reported $ 312,692 $ 241,317 $ 860,652 $ 659,653
Deduct: value of stock-based employee
compensation earned but not recorded
in the Statements of Earnings -- (16,988) -- (37,260)
----------- ----------- ----------- -----------
Pro forma net income $ 312,692 $ 224,329 $ 860,652 $ 622,393
=========== =========== =========== ===========
Earnings per share:
Basic: as reported $ 0.10 $ 0.08 $ 0.29 $ 0.23
Basic: pro forma $ 0.10 $ 0.08 $ 0.29 $ 0.22
Diluted: as reported $ 0.10 $ 0.08 $ 0.28 $ 0.22
Diluted: pro forma $ 0.10 $ 0.07 $ 0.28 $ 0.21
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 7.46%
July 1, December 31,
2006 2005
------------ ------------
Current Ratio 1.91:1 2.20:1
Quick Ratio 0.97:1 1.06:1
LT Debt to Total Capital 7.46% 8.25%
Working Capital $6,456,439 $6,092,349
In May 2006, the Company entered into a new line-of-credit agreement with
Wachovia Bank. This agreement replaces the previous agreement that the Company
had with Washington Mutual Bank. The agreement with Wachovia provides for a
revolving line of credit of up to $5,000,000, and expires in June 2009. The
terms and conditions of the new line are similar to the previous line-of-credit.
In addition, the Company may borrow an additional $1,000,000 up until June 30,
2007 as a term loan with a thirty-six month amortization. At July 1, 2006, the
Company had $19,000 in outstanding borrowings on its line of credit. The Company
expects to use its line-of-credit from time to time throughout 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 35.1 days at July 1, 2006
compared to 34.8 days at July 2, 2005. Net accounts receivable increased by
$515,494 from July 2, 2005 to July 1, 2006, which is due to the increase in
sales for the thirteen weeks ended July 1, 2006 when compared to the same period
of the prior year. Inventories increased by $1,334,648 for the same period. The
inventory increase is attributable to both the increased sales levels and to
excess inventories which management expects to reduce by year-end.
Capital expenditures were $673,344 for the twenty-six weeks ended July 1, 2006,
compared to $222,627 for the same period of the prior year. The major reason for
this increase was $379,819 in expenditures in the current year to purchase a
building previously leased by the Company's Red Bay, Alabama operation. Capital
spending for the balance of 2006 is projected to exceed $2,000,000. Included in
this total is a new Company owned property to replace the current leased
facility in Abbotsford, Wisconsin and an expansion of the Red Bay, Alabama
facility.
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 and twenty-six week periods ended July
1, 2006 and July 2, 2005:
(dollars in thousands)
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
------------------------------------------------ --------------------------------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
-------------------- ------------------ ------------------- -------------------
Net % of Net % of Net % of Net % of
Sales total Sales total Sales total Sales total
------- ------ ------- ------ -------- ------- -------- ------
Recreational Vehicle $ 8,250 57% $ 7,060 53% $ 17,377 60% $ 14,351 56%
Manufactured Housing 2,542 18% 2,671 20% 5,350 18% 5,128 20%
Hospitality 3,687 25% 3,545 27% 6,414 22% 6,228 24%
------- ------ ------- ------ -------- ------- -------- ------
Total Net Sales $ 14,479 100% $13,276 100% $ 29,141 100% $ 25,707 100%
======== ======= ======== ========
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED JULY 1, 2006, (SECOND QUARTER 2006) COMPARED TO
THIRTEEN WEEK PERIOD ENDED JULY 2, 2005, (SECOND QUARTER 2005)
The following table shows a comparison of the results of operations between
Second Quarter 2006 and Second Quarter 2005:
Second Quarter % Second Quarter % $ Increase
2006 of Sales 2005 of Sales (Decrease) % Change
------------ -------- ------------ -------- ---------- --------
Net Sales $ 14,478,669 100% $ 13,275,952 100% $1,202,717 9.1%
Cost of Products Sold 11,745,484 81.1% 10,687,552 80.5% 1,057,932 9.9%
------------ ------ ------------ ------ ----------
Gross Profit 2,733,185 18.9% 2,588,400 19.5% 144,785 5.6%
Selling and Administrative Expenses 2,243,365 15.5% 2,202,951 16.6% 40,414 1.8%
------------ ------ ------------ ------ ----------
Operating Income 489,820 3.4% 385,449 2.9% 104,371 27.1%
Other Income (Expense)
Interest, Investment and
Other Income 26,915 0.2% 22,866 0.2% 4,049 17.7%
Interest Expense (19,043) -0.2% (18,998) -0.2% (45) 0.2%
------------ ------ ------------ ------ ----------
Earnings Before Income Taxes 497,692 3.4% 389,317 2.9% 108,375 27.8%
Provision for Income Taxes 185,000 1.2% 148,000 1.1% 37,000 25.0%
------------ ------ ------------ ------ ----------
NET INCOME $ 312,692 2.2% $ 241,317 1.8% $ 71,375 29.6%
============ ====== ============ ====== ==========
Net sales for the Second Quarter 2006 were $14,478,669, compared to $13,275,952
for the same period in the previous year, a 9.1% increase. Sales to the
Company's recreational vehicle customers increased 16.9% in Second Quarter 2006
when compared to the same period of the prior year. The recreational vehicle
industry reported a 13.5% increase in shipments during the Second Quarter 2006
compared to the same period of the prior year. Sales to the Company's
manufactured housing customers decreased 4.8% in the Second Quarter 2006 when
compared to the same period of the prior year. The manufactured housing industry
decreased shipments by 5.2% over the same period. Sales to the Company's
hospitality customers increased 4.0%.
Cost of products sold increased to 81.1% in the Second Quarter 2006 compared to
80.5% a year ago. The major reason for the increase in this percentage was due
to an increase in inventory reserves and higher costs of some materials,
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 $2,243,365 in the Second Quarter 2006
versus $2,202,951 in the Second Quarter 2005. The Second Quarter 2005 included a
pre-tax charge of $165,647 resulting from the Company's decision to convert its
financial systems to a different software platform. Without this charge, selling
and administrative expenses would have increased by $206,061. Higher salaries
and wages and performance bonus accruals, computer implementation costs, and the
recognition of stock option expense (non-cash) were the major factors
contributing to this increase. The percentage of selling and administrative
expenses to net sales decreased from 16.6% to 15.5% as fixed expenses were
spread over a higher sales volume.
Interest expense was $19,043 in the Second Quarter 2006 compared to $18,998 in
the Second Quarter 2005. Higher interest rates on the Company's variable rate
obligations in 2006 were offset by less outstanding debt during the Second
Quarter 2006.
Net income was $312,692, in the Second Quarter of 2006 compared to $241,317 in
the Second Quarter 2005, an increase of 29.6%. Without the software conversion
charge in 2005, net income would have been approximately $340,000 for the Second
Quarter 2005. Comparative net income in the Second Quarter 2006 was lower due to
higher cost of goods sold and increases in administrative costs. Diluted
earnings per share increased from $0.08 during the Second Quarter 2005 to $0.10
during the Second Quarter 2006.
TWENTY-SIX WEEK PERIOD ENDED JULY 1, 2006, (FIRST SIX MONTHS 2006) COMPARED TO
TWENTY-SIX WEEK PERIOD ENDED JULY 2, 2005, (FIRST SIX MONTHS 2005)
The following table shows a comparison of the results of operations between
First Six Months 2006 and First Six Months 2005:
First First
Six Months % Six Months % $ Increase
2006 of Sales 2005 of Sales (Decrease) % Change
------------ -------- ------------ -------- ----------- --------
Net Sales $ 29,140,984 100% $ 25,707,334 100% $ 3,433,650 13.4%
Cost of Products Sold 23,449,981 80.5% 20,517,235 79.8% 2,932,746 14.3%
------------ ------ ------------ ------ -----------
Gross Profit 5,691,003 19.5% 5,190,099 20.2% 500,904 9.7%
Selling and Administrative Expenses 4,340,669 14.9% 4,146,408 16.1% 194,261 4.7%
------------ ------ ------------ ------ -----------
Operating Income 1,350,334 4.6% 1,043,691 4.1% 306,643 29.4%
Other Income (Expense)
Interest, Investment and
Other Income 58,127 0.2% 40,159 0.2% 17,968 44.7%
Interest Expense (37,809) -0.1% (41,197) -0.2% 3,388 -8.2%
------------ ------ ------------ ------ -----------
Earnings Before Income Taxes 1,370,652 4.7% 1,042,653 4.1% 327,999 31.5%
Provision for Income Taxes 510,000 1.7% 383,000 1.5% 127,000 33.2%
------------ ------ ------------ ------ -----------
NET INCOME $ 860,652 3.0% $ 659,653 2.6% $ 200,999 30.5%
============ ====== ============ ====== ===========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Net sales for the First Six Months 2006 were $29,140,984, compared to
$25,707,334 for the same period in the previous year, a 13.4% increase. Sales to
the Company's recreational vehicle customers increased 21.1% in the First Six
Months 2006 when compared to the same period of the prior year. The recreational
vehicle industry reported a 14.3% increase in shipments during the first half of
2006 compared to the same period of the prior year. Sales to the Company's
manufactured housing customers increased 4.3% in the First Six Months 2006 when
compared to the same period of the prior year. The manufactured housing industry
increased shipments by 1.7% over the same period. The Company believes that a
portion of the increased industry manufactured housing sales is attributable to
the rebuilding efforts from the 2005 Gulf Coast hurricanes, and that without
these additional units, year to date industry production may have decreased. The
Company does not benefit from the production of FEMA units in the manufactured
housing market. Sales to the Company's hospitality customers increased 3.0%.
Cost of products sold increased to 80.5% in the First Six Months 2006 compared
to 79.8% a year ago. The major reason for the increase in this percentage was an
increase in inventory reserves and higher costs of some materials, 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.
Selling and administrative expenses were $4,340,669 in the First Six Months 2006
versus $4,146,408 in the First Six Months 2005. The First Six Months 2005
included a pre-tax charge of $165,647 resulting from the Company's decision to
convert its financial systems to a different software platform. Without this
charge, selling and administrative expenses would have increased by $359,908.
Higher salaries and wages and performance bonus accruals, computer
implementation costs, and the recognition of stock option expense (non-cash)
were the major factors contributing to this increase. The percentage of selling
and administrative expenses to net sales decreased from 16.1% to 14.9% as fixed
expenses were spread over a higher sales volume.
Interest expense decreased to $37,809 in the First Six Months 2006 from $41,197
in the First Six Months 2005, due to less outstanding debt during the First Six
Months 2006, partially offset by the effect of higher interest rates on the
Company's variable rate obligations
Net income was $860,652 in the First Six Months of 2006 compared to $659,653 in
the First Six Months of 2005, an increase of 30.5%. This increase is the result
of higher sales in 2006 and the effect of the $165,647 pre-tax charge in the
Second Quarter 2005 for the software conversion. Diluted earnings per share
increased from $0.22 during the First Six Months 2005 to $0.28 during the First
Six Months 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
The following table reconciles Net Income, the most comparable measure under
GAAP, to EBITDA for the thirteen and twenty-six week periods ended July 1, 2006
and July 2, 2005:
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
------------------------------- ---------------------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
---------- ---------- ----------- -----------
Net Income $ 312,692 $ 241,317 $ 860,652 $ 659,653
Add:
Interest 19,043 18,998 37,809 41,197
Taxes 185,000 148,000 510,000 383,000
Depreciation & Amortization 353,252 367,778 706,466 733,110
(Gain)/Loss on Disposal of Assets (5) 154,915 (725) 160,622
---------- ---------- ----------- -----------
EBITDA $ 869,982 $ 931,008 $ 2,114,202 $ 1,977,582
========== ========== =========== ===========
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 July 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.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 24, 2006. During
this meeting, a vote was taken to approve the Company's 2006 Incentive Stock
Option Plan. The stockholders voted to approve the Plan. The results of the
voting were as follows:
Broker
Shares Voting FOR Shares Voting AGAINST Shares ABSTAINED Non-Vote TOTAL
- ----------------- --------------------- ---------------- -------- --------
1,836,559 89,187 7,450 658,621 2,591,817
Item 6. Exhibits
The following exhibits are filed herewith:
10AA - Revolving Promissory Note and Term Promissory Note, and related Loan
Agreement and Addendum, dated as of May 24, 2006 with Wachovia Bank.
10BB - 2006 Incentive Stock Option Plan.
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.
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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: August 14, 2006 By: /s/ William A. Bassett
-------------------------------------
William A. Bassett,
Chief Executive Officer and President
Date: August 14, 2006 By: /s/ Michael K. Solomon
-------------------------------------
Michael K. Solomon,
Chief Financial Officer
13