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 June 28, 2008
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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 12, 2008
------------------- ------------------------------
Common Stock, Par Value $.20 Per Share 2,933,002 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
June 28, December 29,
2008 2007
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 18,536 $ 17,544
Accounts Receivable, less allowance for
doubtful accounts ($266,745 and $136,745) 4,632,621 3,423,072
Inventories 5,186,621 5,181,645
Income Taxes Receivable 886,509 575,594
Other Current Assets 520,237 292,777
----------- -----------
TOTAL CURRENT ASSETS 11,244,524 9,490,632
----------- -----------
Property and Equipment
Land, Buildings & Improvements 9,193,421 9,193,421
Machinery, Equipment, Furniture & Fixtures and Software 8,055,879 7,985,675
----------- -----------
Total Property and Equipment 17,249,300 17,179,096
Less: Accumulated Depreciation and Amortization 8,253,400 7,895,607
----------- -----------
Net Property and Equipment 8,995,900 9,283,489
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 3,734,163 3,629,943
Identifiable intangible asset, less accumulated Amortization
of $2,555,713 -- 1,339,278
Other Assets 311,360 520,562
----------- -----------
TOTAL ASSETS $24,285,947 $24,263,904
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 3,083,146 $ 2,315,836
Current Maturities of Long-term Debt 1,792,000 599,444
Checks Issued But Not Yet Presented 424,689 241,815
Accrued Expenses:
Compensation 592,626 432,932
Other 2,460,752 1,987,226
----------- -----------
TOTAL CURRENT LIABILITIES 8,353,213 5,577,253
----------- -----------
Long-Term Debt 675,000 1,409,000
Deferred Income Taxes 878,000 866,000
----------- -----------
TOTAL LIABILITIES 9,906,213 7,852,253
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,646,846 and 4,636,375 929,369 927,275
Paid-in Capital 1,944,394 1,880,861
Retained Earnings 19,818,894 21,530,436
----------- -----------
22,692,657 24,338,572
Less: Treasury stock, at cost: 1,713,844 and 1,613,844 shares 8,312,923 7,926,921
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 14,379,734 16,411,651
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,285,947 $24,263,904
=========== ===========
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
-------------------------------------------- -------------------------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------- -------------------- --------------------- --------------------
Net Sales $ 12,563,069 100.0% $ 12,671,235 100.0% $ 23,066,967 100.0% $ 24,918,652 100.0%
Cost of Products Sold 10,366,143 82.5% 10,421,302 82.2% 19,373,831 84.0% 20,738,310 83.2%
------------- ------------ ------------ ------------
Gross Profit 2,196,926 17.5% 2,249,933 17.8% 3,693,136 16.0% 4,180,342 16.8%
Selling and Administrative
Expenses 3,906,527 31.1% 2,149,300 17.0% 6,160,603 26.7% 4,221,578 16.9%
------------- ------------ ------------ ------------
Operating Income/(Loss) (1,709,601) -13.6% 100,633 0.8% (2,467,467) -10.7% (41,236) -0.1%
Other Income (Expense)
Interest, Investment and
Other Income 15,161 0.1% 32,290 0.3% 34,610 0.2% 55,491 0.2%
Interest Expense (33,089) -0.2% (19,323) -0.2% (63,190) -0.3% (42,584) -0.2%
------------- ------------ ------------ ------------
Earnings Before Income Taxes (1,727,529) -13.7% 113,600 0.9% (2,496,047) -10.8% (28,329) -0.1%
Provision for Income Taxes (667,000) -5.3% 50,000 0.4% (960,000) -4.1% 0 0.0%
------------- ------------ ------------ ------------
NET INCOME/(LOSS) $ (1,060,529) -8.4% $ 63,600 0.5% $ (1,536,047) -6.7% $ (28,329) -0.1%
============= ============ ============ ============
EARNINGS PER SHARE
BASIC $ (0.36) $ 0.02 $ (0.52) $ (0.01)
============= ============== ============ ============
DILUTED $ (0.36) $ 0.02 $ (0.52) $ (0.01)
============= ============== ============ ============
Weighted Average Number of
Shares Outstanding
Basic 2,928,299 3,004,209 2,932,427 3,002,719
Diluted 2,928,299 3,024,121 2,932,427 3,002,719
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
------------------------------
June 28, June 30,
2008 2007
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,536,047) $ (28,329)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Depreciation and Amortization 713,241 740,557
Provision for Losses on Accounts Receivable 130,715 59,077
Deferred Taxes (92,000) (11,000)
Stock-Based Compensation 21,127 14,899
Gain on Disposal of Assets (4,000) (13,127)
Noncash charges for asset impairment 1,270,077 --
Increase/(Decrease) from Changes in:
Accounts Receivable (1,339,144) (1,416,632)
Inventories (4,976) (394,962)
Prepaid Expenses (434,375) 479,912
Other Assets (4,597) (105,128)
Accounts Payable 767,310 1,663,200
Accrued Expenses 529,000 (60,772)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,331 927,695
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions -- (538,654)
Capital Expenditures (143,652) (110,922)
Proceeds from Property Dispositions 3,880 19,647
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (139,772) (629,929)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (519,444) (109,026)
Dividend Payments (175,495) (180,130)
Change in Checks Issued but Not Yet Presented 182,874 2,415
Net Borrowings under Line-of-Credit Agreement 978,000 (30,000)
Issuance of Stock for Directors Trust 44,500 40,500
Purchase of Common Stock for Treasury (386,002) --
----------- -----------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 124,433 (276,241)
Net Increase in Cash and Cash Equivalents 992 21,525
Cash and Cash Equivalents at Beginning of Year 17,544 11,379
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,536 $ 32,904
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 58,088 $ 38,601
Income Taxes $ 5,453 $ 49,511
The accompanying notes are an integral part of the financial statements.
3
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED JUNE 28, 2008 AND JUNE 30, 2007
(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 June 28, 2008, the changes therein
for the twenty-six week period then ended and the results of operations
for the twenty-six week periods ended June 28, 2008 and June 30, 2007.
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 29, 2007. The results of operations for the twenty-six week
periods ended June 28, 2008 and June 30, 2007 are not necessarily
indicative of operating results for the full year.
NOTE 3. INVENTORIES
Inventories at June 28, 2008 and December 29, 2007 consisted of the
following:
June 28, December 29,
2008 2007
----------- -----------
Raw Material and Supplies $ 4,384,611 $ 4,275,090
In Process and Finished Goods 802,010 906,555
----------- -----------
Total Inventory $ 5,186,621 $ 5,181,645
=========== ===========
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. No dilution is
shown for the thirteen week period ended June 28, 2008 or the
twenty-six week periods ended June 28, 2008 and June 30, 2007 since the
effect of the stock options on the net loss 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 Twenty-Six Weeks Ended
---------------------------- ------------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
------------ ------------ ------------ --------------
Numerator:
Net (loss)/income $(1,060,529) $ 63,600 $(1,536,047) $ (28,329)
=========== =========== =========== ===========
Denominator:
Weighted-average number of
common shares outstanding 2,928,299 3,004,209 2,932,427 3,002,719
Dilutive effect of
stock options on net income 0 19,912 0 0
----------- ----------- ----------- -----------
2,928,299 3,024,121 2,932,427 3,002,719
=========== =========== =========== ===========
Diluted earnings per share: $ (0.36) $ 0.02 $ (0.52) $ (0.01)
=========== =========== =========== ===========
4
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 funded debt to total capitalization ratio
remained low at 14.6%
June 28, December 29,
2008 2007
---------- -----------
Current Ratio 1.35:1 1.70:1
Quick Ratio 0.73:1 0.77:1
Funded Debt to Total Capital 14.6% 10.9%
Working Capital $2,891,311 $3,913,379
In May 2006, the Company entered into a new line-of-credit agreement with
Wachovia Bank. This agreement replaced 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
interest rate is LIBOR plus 150 basis points and the Company is required to
maintain certain financial covenants. The fourth quarter loss caused the Company
to violate a financial covenant in its loan agreement with Wachovia Bank. The
loan agreement states that the ratio of Senior Funded Debt to EBITDA may not
exceed 2.75 to 1.00. The Company believes it is in compliance with all other
conditions of the loan agreement. Wachovia has provided a waiver for this
violation through the end of the third quarter of 2008. The waiver agreement
changes the interest rate from LIBOR plus 150 basis points to LIBOR plus 275
basis points until the Company is in compliance with the covenant. The Company
does not expect to be in compliance with the covenant by the end of the fourth
quarter of 2008, unless it is able to sell its idled properties. At June 28,
2008, the Company had $1,652,000 in outstanding borrowings on its
line-of-credit. The Company expects to use its line of credit throughout 2008.
Wachovia has advised the Company that the Bank would like to enter into a
forbearance agreement during the remaining term of their commitment. Management
believes that if the terms of the forbearance agreement are onerous or if
Wachovia decides to accelerate repayment of the credit line that it has
alternative sources of financing to replace the line with Wachovia.
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
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
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 a percentage 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.
Days Sales Outstanding (DSO) in accounts receivable were 32.9 days at June 28,
2008 compared to 30.6 and 33.0 days at December 29, 2007 and June 30, 2007,
respectively. Net accounts receivable were $4,632,621 at June 28, 2008, compared
to $3,423,072 and $5,082,722 at December 29, 2007 and June 30, 2007,
respectively. Inventories were $5,186,621 at June 28, 2008, as compared to
$5,181,645 and $6,265,827 at December 29, 2007 and June 30, 2007, respectively.
The decrease in inventory from a year ago is due to the reduction of excess
inventories from last year. Accounts payable were $3,083,146 at June 28, 2008,
as compared to $2,315,836 and $3,563,671 at December 29, 2007 and June 30, 2007,
respectively. The changes in accounts receivable and accounts payable from
year-end are normal seasonal fluctuations.
Capital expenditures were $143,652 for the six months ended June 28, 2008,
compared to $110,922 for the same period of the prior year.
The Company will idle two facilities during the Third Quarter of 2008. These
facilities have been placed for sale. Neither facility has any debt associated
with it, and upon completion of the sales, the proceeds should provide enough
funds to pay down the outstanding borrowings on the Company's line of credit.
Management cannot predict when the sales will occur.
The Company's recent performance has caused the Board of Directors to suspend
the quarterly dividend. The Board will consider reinstatement of the dividend
when the Company's performance returns to a consistent level of profitability.
This action will help improve liquidity.
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 June
28, 2008 and June 30, 2007:
(dollars in thousands)
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
--------------------------------------- --------------------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
------------------ ----------------- ----------------- ------- -------
Net % of Net % of Net % of Net % of
Sales total Sales total Sales total Sales total
-------- ------- ------- ------- ------- ------- ------- -------
Recreational Vehicle $ 4,503 36% $ 6,998 55% $ 9,323 40% $14,383 58%
Manufactured Housing 2,571 20% 2,248 18% 4,962 22% 4,162 17%
Hospitality 5,489 44% 3,425 27% 8,782 38% 6,374 25%
------- ------- ------- ------- ------- ------- ------- -------
Total Net Sales $12,563 100% $12,671 100% $23,067 100% $24,919 100%
======= ======= ======= =======
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
RESULTS OF OPERATIONS
The Company recorded a charge of $1,430,000 during the Second Quarter 2008. This
charge included the impairment of the Company's Identifiable Intangible Asset.
This asset arose from the Company's contract with Fleetwood Enterprises, signed
in January 2004. The impairment charge of $1,015,278 was in addition to the
regular quarterly amortization of $162,000 that the Company had been recognizing
since the inception of the contract. Management's analysis determined that the
revenues and profit margins provided by the contract had fallen sharply
and impaired the asset. In addition to the impairment of the Intangible Asset,
the Company recognized other impairment charges of $254,799 from obsolete
software and the closure of two of its manufacturing facilities. The plant
closures also include expenses of $159,923 for severance pay and rent.
THIRTEEN WEEK PERIOD ENDED JUNE 28, 2008, (SECOND QUARTER 2008) COMPARED TO
THIRTEEN WEEK PERIOD ENDED JUNE 30, 2007, (SECOND QUARTER 2007)
The following table shows a comparison of the results of operations between
Second Quarter 2008 and Second Quarter 2007:
Second Quarter % Second Quarter % $ Increase
2008 of Sales 2007 of Sales (Decrease) % Change
-------------- -------- -------------- -------- ------------ --------
Net Sales $ 12,563,069 100% $ 12,671,235 100% $ (108,166) -0.9%
Cost of Products Sold 10,366,143 82.5% 10,421,302 82.2% (55,159) -0.5%
-------------- -------- ------------ -------- ------------
Gross Profit 2,196,926 17.5% 2,249,933 17.8% (53,007) -2.4%
Selling and Administrative Expenses 3,906,527 31.1% 2,149,300 17.0% 1,757,227 81.8%
-------------- --------- ------------ -------- ------------
Operating (Loss)/Income (1,709,601) -13.6% 100,633 0.8% (1,810,234) -1798.8%
Other Income/(Expense)
Interest, Investment and
Other Income 15,161 0.1% 32,290 0.3% (17,129) -53.0%
Interest Expense (33,089) -0.2% (19,323) -0.2% (13,766) 71.2%
-------------- -------- ------------ ------- ------------
Earnings Before Income Taxes (1,727,529) -13.7% 113,600 0.9% (1,841,129) -1620.7%
Provision for Income Taxes (667,000) -5.3% 50,000 0.4% (717,000) -1434.0%
-------------- -------- ------------ -------- ------------
NET (LOSS)/INCOME $ (1,060,529) -8.4% $ 63,600 0.5% $ (1,124,129) -1767.5%
============== ======== ============ ======== ============
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Net sales for the Second Quarter 2008 were $12,563,069, compared to $12,671,235
for the same period in the previous year, a 0.9% decrease. Sales to the
Company's recreational vehicle customers decreased 35.7% in Second Quarter 2008
when compared to the same period of the prior year. The recreational vehicle
industry reported a 22.0% decrease in shipments during the Second Quarter 2008
compared to the same period of the prior year. Sales to the Company's
manufactured housing customers increased 14.4% in Second Quarter 2008 when
compared to the same period of the prior year. The current year's sales
increased due to the acquisition of Doris Lee Draperies in the fourth quarter of
2007, as the manufactured housing industry showed an 11.0% decrease in shipments
from the prior year. Sales to the Company's hospitality customers increased
60.3% in the Second Quarter 2008 when compared to the same period of the prior
year, due to increased sales activity in the Company's ongoing hospitality
business, as well as the effect of the Superior Drapery acquisition which only
reflected one month of operations for the Second Quarter 2007.
Cost of products sold increased to 82.5% of net sales in the Second Quarter 2008
compared to 82.2% of net sales a year ago. The major reasons for the increase in
this percentage were an increase in labor costs as a percent of sales due to
lower production levels, a higher percentage for factory overhead due to fixed
expenses being spread over a lower sales volume, and charges for inventory
obsolescence due to falling demand in the recreational vehicle market.
Selling and administrative expenses were $3,906,527 in the Second Quarter 2008
versus $2,149,300 in the Second Quarter 2007. The major reason for this increase
was the charge of $1,430,000 related to the writeoff of impaired assets and the
closing of the underperforming facilities. Also included in this quarter's
expenses is an unusually high charge to the bad debt reserve of $125,715. Most
of the bad debt charge has been established for customers in the Recreational
Vehicle industry. Without these charges, selling and administrative expenses
would have been $2,350,812. The percentage of selling and administrative
expenses to net sales increased from 17.0% in the Second Quarter 2007 to 31.1%
in the Second Quarter 2008 due to the impaired assets and bad debt charge.
Without these unusual charges, selling and administrative expenses for the
Second Quarter 2008 would have been 18.7%. The increase from the prior year is
due to expenses arising from the Superior Drapery acquisition as well as
increased commissions on hospitality market sales.
Interest expense increased to $33,089 in the Second Quarter 2008 from $19,323 in
the Second Quarter 2007, due to increased borrowings on the Company's line of
credit during the Second Quarter 2008.
Net loss was $1,060,529 in the Second Quarter 2008 compared to net income of
$63,600 in the Second Quarter 2007. This decrease is largely the result of the
special charges taken in the quarter. Without these special charges, the second
quarter loss would have been approximately $110,000. Diluted earnings per share
decreased from $0.02 earnings per share during the Second Quarter 2007 to $0.36
loss per share during the Second Quarter 2008.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
TWENTY-SIX WEEK PERIOD ENDED JUNE 28, 2008, (FIRST SIX MONTHS 2008) COMPARED TO
TWENTY-SIX WEEK PERIOD ENDED JUNE 30, 2007, (FIRST SIX MONTHS 2007)
The following table shows a comparison of the results of operations between
First Six Months 2008 and First Six Months 2007:
First First
Six Months % Six Months % $ Increase
2008 of Sales 2007 of Sal (Decrease) % Change
------------ -------- ------------ -------- ------------ --------
Net Sales $ 23,066,967 100% $ 24,918,652 100% $ (1,851,685) -7.4%
Cost of Products Sold 19,373,831 84.0% 20,738,310 83.2% (1,364,479) -6.6%
------------ -------- ------------ -------- ------------
Gross Profit 3,693,136 16.0% 4,180,342 16.8% (487,206) -11.7%
Selling and Administrative Expenses 6,160,603 26.7% 4,221,578 16.9% 1,939,025 45.9%
------------ -------- ------------ -------- ------------
Operating Loss (2,467,467) -10.7% (41,236) -0.1% (2,426,231) 5883.8%
Other Income/(Expense)
Interest, Investment and
Other Income 34,610 0.2% 55,491 0.2% (20,881) -37.6%
Interest Expense (63,190) -0.3% (42,584) -0.2% (20,606) 48.4%
------------ -------- ------------ -------- ------------
Earnings Before Income Taxes (2,496,047) -10.8% (28,329) -0.1% (2,467,718) 8710.9%
Provision for Income Taxes (960,000) -4.1% 0 0.0% (960,000) N/A
------------ -------- ------------ -------- ------------
NET LOSS $ (1,536,047) -6.7% $ (28,329) -0.1% $ (1,507,718) 5322.2%
============ ======== ============ ======= ============
Net sales for the First Six Months 2008 were $23,066,967, compared to
$24,918,652 for the same period in the previous year, a 7.4% decrease. Sales to
the Company's recreational vehicle customers decreased 35.2% in the First Six
Months 2008 when compared to the same period of the prior year. The recreational
vehicle industry reported a 17.1% decrease in shipments during the first half of
2008 compared to the same period of the prior year. Sales to the Company's
manufactured housing customers increased 19.2% in the First Six Months 2008 when
compared to the same period of the prior year. The current year's sales
increased due to the acquisition of Doris Lee Draperies in the fourth quarter of
2007, as the manufactured housing industry showed a 7.4% decrease in shipments
from the prior year. Sales to the Company's hospitality customers increased
37.8% in the First Six Months 2008 when compared to the same period of the prior
year, due to increased sales activity in the Company's ongoing hospitality
business, as well as the effect of the Superior Drapery acquisition which only
reflected one month of operations for the First Six Months 2007.
Cost of products sold increased to 84.0% of net sales in the First Six Months
2008 compared to 83.2% of net sales a year ago. The major reasons for the
increase in this percentage were an increase in labor costs as a percent of
sales due to lower production levels, and a higher percentage for factory
overhead due to fixed expenses being spread over a lower sales volume.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Selling and administrative expenses were $6,160,603 in the First Six Months 2008
versus $4,221,578 in the First Six Months 2007. The major reason for this
increase was the charge of $1,430,000 to writeoff the Company's intangible asset
and the closing of underperforming facilities. Also included in the First Six
Months 2008 expenses is an unusually high charge to the bad debt reserve of
$130,715. Most of the bad debt charge has been established for customers in the
recreational vehicle industry. Without these charges, selling and administrative
expenses would have been $4,599,888. The major reasons for this increase were
the increased commissions for hospitality market sales, the Superior Drapery
business acquired in June 2007 and the Doris Lee Draperies business acquired in
December 2007. The percentage of selling and administrative expenses to net
sales increased from 16.9% for the First Six Months 2007 to 26.7% for the First
Six Months 2008. Without the $1,430,000 and $130,715 charges, selling and
administrative expenses for the First Six Months 2008 would have been 19.9%.
Interest expense increased to $63,190 in the First Six Months 2008 from $42,584
in the First Six Months 2007, due to greater outstanding borrowings during the
First Six Months 2008 on the Company's revolving line of credit compared to the
same period of the prior year.
Net loss was $1,536,047 in the First Six Months 2008 compared to $28,329 net
loss in the First Six Months 2007. The major reason for the increased loss was
the $1,430,000 asset impairment charge and the $130,715 bad debt expense.
Without these special charges, the loss would have been approximately $590,000.
In addition, profitability was adversely affected by the assimilation costs of
the customers acquired in the Doris Lee Draperies acquisition. These costs
included the higher labor, freight, and other costs associated with moving
production from the Doris Lee facility to the Company's own facilities. Diluted
loss per share increased from $0.01 during the First Six Months 2007 to $0.52
during the First Six Months 2008.
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 June 28, 2008
and June 30, 2007:
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
---------------------------- ------------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
------------ ------------ ------------- ---------------
Net (Loss)/Income $(1,060,529) $ 63,600 $(1,536,047) $ (28,329)
Add:
Interest 33,089 19,323 63,190 42,584
Taxes (667,000) 50,000 (960,000) --
Depreciation & Amortization 354,906 366,903 713,241 740,557
Gain on Disposal of Assets -- -- (4,000) (13,127)
Noncash charge for Asset Impairment 1,270,077 -- 1,270,077 --
----------- ----------- ----------- ------------
EBITDA $ (69,457) $ 499,826 $ (453,539) $ 741,685
=========== =========== =========== ===========
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 June 28, 2008 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 5. Other Information
The Company's recent performance has caused the Board of Directors to suspend
the quarterly dividend. The Board will consider reinstatement of the dividend
when the Company's performance returns to a consistent level of profitability.
Item 6. Exhibits
31.1 - Certification of Principal Executive Officer
31.2 - Certification of Principal 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 12, 2008 By: /s/ William A. Johnson
-------------------------------------
William A. Johnson,
Chief Executive Officer and President
Date: August 12, 2008 By: /s/ Michael K. Solomon
-------------------------------------------
Michael K. Solomon, Chief Financial Officer
12