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 September 30, 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 November 14, 2006
------------------- --------------------------------
Common Stock, Par Value $.20 Per Share 2,998,240 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
ASSETS September 30, December 31,
2006 2005
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and Cash Equivalents $ 91,940 $ 490,377
Accounts Receivable, less allowance for
doubtful accounts ($223,338 and $131,690) 4,347,354 4,574,415
Inventories 6,727,144 5,800,553
Other Current Assets 933,517 311,603
----------- -----------
TOTAL CURRENT ASSETS 12,099,955 11,176,948
----------- -----------
Property and Equipment
Land, Buildings & Improvements 8,675,164 7,253,742
Machinery, Equipment, Furniture & Fixtures 7,473,695 6,604,629
----------- -----------
Total Property and Equipment 16,148,859 13,858,371
Less: Accumulated Depreciation and Amortization 6,978,812 6,426,548
----------- -----------
Net Property and Equipment 9,170,047 7,431,823
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717
Identifiable intangible asset, less accumulated Amortization
of $1,745,713 and $1,259,713 2,149,278 2,635,278
Other Assets 193,770 318,599
----------- -----------
TOTAL ASSETS $26,344,767 $24,294,365
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 3,337,909 $ 3,075,795
Current Maturities of Long-term Debt 212,840 211,800
Checks Issued but Not Yet Presented 307,553 --
Accrued Expenses:
Compensation 823,863 944,109
Other 1,404,383 852,895
----------- -----------
TOTAL CURRENT LIABILITIES 6,086,548 5,084,599
----------- -----------
Long-Term Debt 1,716,610 1,536,754
Deferred Income Taxes 785,000 585,000
----------- -----------
TOTAL LIABILITIES 8,588,158 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 1,779,463 1,616,843
Retained Earnings 23,056,892 22,651,391
----------- -----------
25,761,966 25,183,132
Less: Treasury stock, at cost: 1,629,813 and 1,648,088 shares 8,005,357 8,095,120
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 17,756,609 17,088,012
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,344,767 $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 Thirty-Nine Weeks Ended
--------------------------------------------- ------------------------------------------------
September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005
-------------------- -------------------- -------------------- ----------------------
Net Sales $ 12,469,174 100.0% $12,597,173 100.0% $ 41,610,158 100.0% $ 38,304,507 100.0%
Cost of Products Sold 10,715,218 85.9% 10,098,594 80.2% 34,165,199 82.1% 30,615,829 79.9%
------------ ----------- ------------ ------------
Gross Profit 1,753,956 14.1% 2,498,579 19.8% 7,444,959 17.9% 7,688,678 20.1%
Selling and
Administrative Expenses 2,069,259 16.6% 1,937,602 15.4% 6,409,928 15.4% 6,084,010 15.9%
------------ ----------- ------------ ------------
Operating (Loss)/Income (315,303) -2.5% 560,977 4.4% 1,035,031 2.5% 1,604,668 4.2%
Other Income (Expense)
Interest, Investment and
Other Income 32,866 0.2% 23,866 0.2% 90,993 0.2% 64,025 0.2%
Interest Expense (24,444) -0.2% (17,791) -0.1% (62,253) -0.2% (58,988) -0.2%
------------ ----------- ------------ ------------
Earnings Before Income Taxes (306,881) -2.5% 567,052 4.5% 1,063,771 2.5% 1,609,705 4.2%
Provision for Income Taxes (120,000) -1.0% 220,000 1.7% 390,000 0.9% 603,000 1.6%
------------ ----------- ------------ ------------
NET (LOSS)/INCOME $ (186,881) -1.5% $ 347,052 2.8% $ 673,771 1.6% $ 1,006,705 2.6%
============ =========== ============ ============
EARNINGS PER SHARE
Basic $ (0.06) $ 0.12 $ 0.23 $ 0.35
============ =========== ============ ============
Diluted $ (0.06) $ 0.12 $ 0.22 $ 0.34
============ =========== ============ ============
Weighted Average
Number of Shares
Outstanding
Basic 2,996,241 2,882,788 2,977,424 2,871,720
Diluted 2,996,241 2,979,321 3,030,863 2,996,446
The accompanying notes are an integral part of the financial statements.
2
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended
---------------------------------------
September 30, 2006 October 1, 2005
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 673,771 $ 1,006,705
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,076,306 1,084,040
Provision for Losses on Accounts Receivable 91,658 14,000
Deferred Taxes 165,000 (87,000)
Stock-Based Compensation 37,893 --
Loss on Disposal of Assets 339 164,850
Increase/(Decrease) from Changes in:
Accounts Receivable 134,403 (1,863,779)
Inventories (926,591) (442,808)
Prepaid Expenses (586,914) 133,239
Other Assets 124,829 (110,256)
Accounts Payable 262,114 729,032
Accrued Expenses 431,742 257,733
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,484,550 885,756
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions -- (1,067,472)
Capital Expenditures (2,331,569) (372,077)
Proceeds from Property Dispositions 3,200 65,373
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,328,369) (1,374,176)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (153,104) (127,832)
Dividend Payments (268,270) (258,768)
Change in Checks Issued but Not Yet Presented 307,553 434,861
Proceeds from Exercise of Stock Options 164,453 100,003
Net Borrowings under Line-of-Credit Agreement 334,000 --
Issuance of Stock for Directors Trust 60,750 44,500
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 445,382 192,764
Net Decrease in Cash and Cash Equivalents (398,437) (295,656)
Cash and Cash Equivalents at Beginning of Year 490,377 730,539
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 91,940 $ 434,883
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 55,075 $ 90,538
Income Taxes $ 516,015 $ 356,772
The accompanying notes are an integral part of the financial statements.
3
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006 AND OCTOBER 1, 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 September 30, 2006, the changes
therein for the thirty-nine week period then ended and the results of
operations for the thirty-nine week periods ended September 30, 2006
and October 1, 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 thirty-nine week
periods ended September 30, 2006 and October 1, 2005 are not
necessarily indicative of operating results for the full year.
NOTE 3. INVENTORIES
Inventories at September 30, 2006 and December 31, 2005 consisted of
the following:
September 30, 2006 December 31, 2005
------------------ -----------------
Raw Material and Supplies $5,994,411 $4,982,121
In Process and Finished Goods 732,733 818,432
---------- ----------
Total Inventory $6,727,144 $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, except for the
thirteen weeks ended September 30, 2006, in which the effect of stock
options is antidilutive. 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 Thirty-Nine Weeks Ended
-------------------------------------- ------------------------------------
September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005
------------------ --------------- ------------------ ---------------
Numerator:
Net income $ (186,881) $ 347,052 $ 673,771 $1,006,705
=========== ========== ========== ==========
Denominator:
Weighted-average number of
common shares outstanding 2,996,241 2,882,788 2,977,424 2,871,720
Dilutive effect of
stock options on net income 0 96,533 53,439 124,726
----------- ---------- ---------- ----------
2,996,241 2,979,321 3,030,863 2,996,446
=========== ========== ========== ==========
Diluted earnings per share: $ (0.06) $ 0.12 $ 0.22 $ 0.34
=========== ========== ========== ==========
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 September 30, 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 Thirty-Nine Weeks Ended
-------------------------------------- ---------------------------------------
September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005
------------------ --------------- ------------------ ---------------
Net Income, as reported $ (186,881) $ 347,052 $ 673,771 $ 1,006,705
Deduct: value of stock-based employee
compensation earned but not recorded
in the Statements of Earnings -- (18,644) -- (55,904)
----------- ----------- ----------- -------------
Pro forma net income $ (186,881) $ 328,408 $ 673,771 $ 950,801
=========== =========== =========== =============
Earnings per share:
Basic: as reported $ (0.06) $ 0.12 $ 0.23 $ 0.35
Basic: pro forma $ (0.06) $ 0.11 $ 0.23 $ 0.33
Diluted: as reported $ (0.06) $ 0.12 $ 0.22 $ 0.34
Diluted: pro forma $ (0.06) $ 0.11 $ 0.22 $ 0.32
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 8.82%
September 30, 2006 December 31, 2005
------------------ -----------------
Current Ratio 1.99:1 2.20:1
Quick Ratio 0.88:1 1.06:1
LT Debt to Total Capital 8.82% 8.25%
Working Capital $6,013,407 $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 September 30, 2006,
the Company had $334,000 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 30.9 days at September 30,
2006 compared to 37.3 days at October 1, 2005. Net accounts receivable decreased
by $967,099 from October 1, 2005 to September 30, 2006, which is mostly due to
lower days sales outstanding for the thirteen weeks ended September 30, 2006
when compared to the same period of the prior year. Inventories increased by
$1,170,685 for the same period. Management expects to reduce inventory balances
by year-end.
Capital expenditures were $2,331,569 for the thirty-nine weeks ended September
30, 2006, compared to $372,077 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, in addition to $1,037,887 in costs to expand the Red Bay facility and
to build a new Company owned facility in Abbotsford, Wisconsin. These items were
construction in progress at September 30, 2006. A new financial software package
was also capitalized at a cost of $409,480.
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 thirty-nine week periods ended
September 30, 2006 and October 1, 2005:
(dollars in thousands)
For the Thirteen Weeks Ended For the Thirty-Nine Weeks Ended
-------------------------------------- --------------------------------------
September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005
------------------ ---------------- ------------------ ----------------
Net % of Net % of Net % of Net % of
Sales total Sales total Sales total Sales total
------- --- ------- --- ------- --- ------- ---
Recreational Vehicle $ 7,389 59% $ 7,227 57% $24,766 60% $21,579 56%
Manufactured Housing 2,260 18% 2,647 21% 7,610 18% 7,775 20%
Hospitality 2,820 23% 2,723 22% 9,234 22% 8,951 24%
------- --- ------- --- ------- --- ------- ---
Total Net Sales $12,469 100% $12,597 100% $41,610 100% $38,305 100%
======= ======= ======= =======
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 30, 2006, (THIRD QUARTER 2006) COMPARED TO
THIRTEEN WEEK PERIOD ENDED OCTOBER 1, 2005, (THIRD QUARTER 2005)
The following table shows a comparison of the results of operations between
Third Quarter 2006 and Third Quarter 2005:
Third Quarter % Third Quarter % $ Increase
2006 of Sales 2005 of Sales (Decrease) % Change
------------- -------- ------------- -------- ----------- --------
Net Sales $ 12,469,174 100% $ 12,597,173 100% $(127,999) -1.0%
Cost of Products Sold 10,715,218 85.9% 10,098,594 80.2% 616,624 6.1%
------------ ---- ------------ ---- ---------
Gross Profit 1,753,956 14.1% 2,498,579 19.8% (744,623) -29.8%
Selling and Administrative Expenses 2,069,259 16.6% 1,937,602 15.4% 131,657 6.8%
------------ ---- ------------ ---- ---------
Operating (Loss)/Income (315,303) -2.5% 560,977 4.4% (876,280) -156.2%
Other Income (Expense)
Interest, Investment and
Other Income 32,866 0.2% 23,866 0.2% 9,000 37.7%
Interest Expense (24,444) -0.2% (17,791) -0.1% (6,653) 37.4%
------------ ---- ------------ ---- ---------
Earnings Before Income Taxes (306,881) -2.5% 567,052 4.5% (873,933) -154.1%
Provision for Income Taxes (120,000) -1.0% 220,000 1.7% (340,000) -154.5%
------------ ---- ------------ ---- ---------
NET (LOSS)/INCOME $ (186,881) -1.5% $ 347,052 2.8% $(533,933) -153.8%
============ ==== ============ ==== =========
Net sales for the Third Quarter 2006 were $12,469,174, compared to $12,597,173
for the same period in the previous year, a 1.0% decrease. Sales to the
Company's recreational vehicle customers increased 2.2% in Third Quarter 2006
when compared to the same period of the prior year. The recreational vehicle
industry reported a 5.0% decrease in shipments during the Third Quarter 2006
compared to the same period of the prior year. Sales to the Company's
manufactured housing customers decreased 14.6% in the Third Quarter 2006 when
compared to the same period of the prior year. The manufactured housing industry
reported decreased shipments by 18.4% over the same period. Sales to the
Company's hospitality customers increased 3.6%.
Cost of products sold increased to 85.9% in the Third Quarter 2006 compared to
80.2% a year ago. The major reasons for the increase was an unusually high
increase in the Company's reserve for inventory obsolescence of $382,000 and
higher costs of material and labor as a percentage of sales. The obsolescence
charge, amounting to 3.1% of net sales, was unusually high and comprises
materials that do not have ongoing placements in our customers' current
programs.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Selling and administrative expenses were $2,069,259 in the Third Quarter 2006
versus $1,937,602 in the Third Quarter 2005. An increase in the allowance for
bad debts, advertising expenses for the hospitality market, the recognition of
stock option expense (non-cash), and depreciation on the Company's new financial
software package were major factors contributing to this increase. The
percentage of selling and administrative expenses to net sales increased from
15.4% to 16.6% as a result of the higher costs and somewhat lower volume.
Interest expense was $24,444 in the Third Quarter 2006 compared to $17,791 in
the Third Quarter 2005. Higher interest rates on the Company's variable rate
obligations in 2006 as well as borrowings on the Company's line of credit
contributed to this increase.
Net loss was $186,881, in the Third Quarter of 2006 compared to net income of
$347,052 in the Third Quarter 2005, a difference of $533,933. Net income in the
Third Quarter 2006 was lower due to lower sales, higher cost of goods sold and
increases in administrative costs. Diluted earnings per share decreased from
$0.12 during the Third Quarter 2005 to a loss of $0.06 during the Third Quarter
2006.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 30, 2006, (FIRST NINE MONTHS 2006)
COMPARED TO THIRTY-NINE WEEK PERIOD ENDED OCTOBER 1, 2005,
(FIRST NINE MONTHS 2005)
The following table shows a comparison of the results of operations between
First Nine Months 2006 and First Nine Months 2005:
First First
Nine Months % Nine Months % $ Increase
2006 of Sales 2005 of Sales (Decrease) % Change
------------ -------- ----------- -------- ----------- --------
Net Sales $ 41,610,158 100% $ 38,304,507 100% $ 3,305,651 8.6%
Cost of Products Sold 34,165,199 82.1% 30,615,829 79.9% 3,549,370 11.6%
------------ ---- ------------ ---- -----------
Gross Profit 7,444,959 17.9% 7,688,678 20.1% (243,719) -3.2%
Selling and Administrative Expenses 6,409,928 15.4% 6,084,010 15.9% 325,918 5.4%
------------ ---- ------------ ---- -----------
Operating Income 1,035,031 2.5% 1,604,668 4.2% (569,637) -35.5%
Other Income (Expense)
Interest, Investment and
Other Income 90,993 0.2% 64,025 0.2% 26,968 42.1%
Interest Expense (62,253) -0.2% (58,988) -0.2% (3,265) 5.5%
------------ ---- ------------ ---- -----------
Earnings Before Income Taxes 1,063,771 2.5% 1,609,705 4.2% (545,934) -33.9%
Provision for Income Taxes 390,000 0.9% 603,000 1.6% (213,000) -35.3%
------------ ---- ------------ ---- -----------
NET INCOME $ 673,771 1.6% $ 1,006,705 2.6% $ (332,934) -33.1%
============ ==== ============ ==== ===========
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Net sales for the First Nine Months 2006 were $41,610,158, compared to
$38,304,507 for the same period in the previous year, an 8.6% increase. Sales to
the Company's recreational vehicle customers increased 14.8% in the First Nine
Months 2006 when compared to the same period of the prior year. The recreational
vehicle industry reported an 8.0% increase in shipments during the first nine
months of 2006 compared to the same period of the prior year. Sales to the
Company's manufactured housing customers decreased 2.1% in the First Nine Months
2006 when compared to the same period of the prior year. The manufactured
housing industry decreased shipments by 5.3% over the same period. Sales to the
Company's hospitality customers increased 3.2%.
Cost of products sold increased to 82.1% in the First Nine Months 2006 compared
to 79.9% a year ago. The major reason for the increase in this percentage was an
increase in inventory reserves and higher costs of some materials and an
increase in the percentage of labor costs to sales, partially offset by a lower
percentage for factory overhead due to fixed expenses being spread over a higher
sales volume.
Selling and administrative expenses were $6,409,928 in the First Nine Months
2006 versus $6,084,010 in the First Nine Months 2005. The First Nine 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 $491,565.
Higher salaries and wages, computer implementation costs, advertising
expenditures for the hospitality market, 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
15.9% to 15.4% as fixed expenses were spread over a higher sales volume.
Interest expense increased to $62,253 in the First Nine Months 2006 from $58,988
in the First Nine Months 2005, mainly due to higher interest rates on the
Company's variable rate obligations.
Net income was $673,771 in the First Nine Months of 2006 compared to $1,006,705
in the First Nine Months of 2005, a decrease of 33.1%. This decrease is the
result of higher cost of products sold and increases in selling and
administrative expenses during the First Nine Months 2006 when compared to the
same period of the prior year. Diluted earnings per share decreased from $0.34
during the First Nine Months 2005 to $0.22 during the First Nine 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 thirty-nine week periods ended September
30, 2006 and October 1, 2005:
For the Thirteen Weeks Ended For the Thirty-Nine Weeks Ended
------------------------------------- -------------------------------------
September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005
------------------ --------------- ------------------ ---------------
Net (Loss)/Income $(186,881) $347,052 $ 673,771 $1,006,705
Add:
Interest 24,444 17,791 62,253 58,988
Taxes (120,000) 220,000 390,000 603,000
Depreciation & Amortization 369,840 350,930 1,076,306 1,084,040
Loss on Disposal of Assets 1,064 4,228 339 164,850
--------- -------- ---------- ----------
EBITDA $ 88,467 $940,001 $2,202,669 $2,917,583
========= ======== ========== ==========
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 September 30, 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 6. Exhibits
The following exhibits are filed herewith:
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: November 14, 2006 By: /s/ William A. Bassett
----------------- ---------------------------------------
William A. Bassett, Chief Executive Officer
and President
Date: November 14, 2006 By: /s/ Michael K. Solomon
----------------- ---------------------------------------
Michael K. Solomon, Chief Financial Officer
13