10-Q 1 decorator_10-q.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-Q _______________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 1, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7753 _______________ DECORATOR INDUSTRIES, INC. (Exact name of registrant as specified in its charter) _______________ Pennsylvania 25-1001433 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 436-8909 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Outstanding at May 15, 2006 ------------------- --------------------------- Common Stock, Par Value $.20 Per Share 2,982,390 ================================================================================ PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DECORATOR INDUSTRIES, INC BALANCE SHEETS
April 1, December 31, 2006 2005 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 820,415 $ 490,377 Accounts Receivable, less allowance for doubtful accounts ($131,690 and $131,690) 5,238,902 4,574,415 Inventories 5,928,112 5,800,553 Other Current Assets 431,453 311,603 ----------- ----------- TOTAL CURRENT ASSETS 12,418,882 11,176,948 ----------- ----------- Property and Equipment Land, Buildings & Improvements 7,253,929 7,253,742 Machinery, Equipment, Furniture & Fixtures 6,731,451 6,604,629 ----------- ----------- Total Property and Equipment 13,985,380 13,858,371 Less: Accumulated Depreciation and Amortization 6,607,898 6,426,548 ----------- ----------- Net Property and Equipment 7,377,482 7,431,823 ----------- ----------- Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717 Identifiable intangible asset, less accumulated Amortization of $1,421,713 and $1,259,713 2,473,278 2,635,278 Other Assets 508,503 318,599 ----------- ----------- TOTAL ASSETS $25,509,862 $24,294,365 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 3,406,267 $ 3,075,795 Current Maturities of Long-term Debt 217,080 211,800 Accrued Expenses: Income Taxes 226,624 -- Compensation 663,542 944,109 Other 1,225,149 852,895 ----------- ----------- TOTAL CURRENT LIABILITIES 5,738,662 5,084,599 ----------- ----------- Long-Term Debt 1,486,607 1,536,754 Deferred Income Taxes 600,000 585,000 ----------- ----------- TOTAL LIABILITIES 7,825,269 7,206,353 ----------- ----------- Stockholders' Equity Common Stock $.20 par value: Authorized shares, 10,000,000; Issued shares, 4,628,053 and 4,574,490 925,611 914,898 Paid-in Capital 1,731,614 1,616,843 Retained Earnings 23,110,577 22,651,391 ----------- ----------- 25,767,802 25,183,132 Less: Treasury stock, at cost: 1,645,663 and 1,648,088 shares 8,083,209 8,095,120 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 17,684,593 17,088,012 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,509,862 $24,294,365 =========== ===========
The accompanying notes are an integral part of the financial statements. 1 DECORATOR INDUSTRIES, INC STATEMENTS OF EARNINGS (UNAUDITED)
For the Thirteen Weeks Ended ---------------------------------------------------------- April 1, 2006 April 2, 2005 ------------------------ ------------------------- Net Sales $ 14,662,315 100.00% $ 12,431,382 100.00% Cost of Products Sold 11,704,497 79.83% 9,829,683 79.07% ------------ ------------ Gross Profit 2,957,818 20.17% 2,601,699 20.93% Selling and Administrative Expenses 2,097,304 14.30% 1,943,457 15.63% ------------ ------------ Operating Income 860,514 5.87% 658,242 5.30% Other Income (Expense) Interest, Investment, and 31,212 0.21% 17,293 0.14% Other Income Interest Expense (18,766) -0.13% (22,199) -0.18% ------------ ------------ Earnings Before Income Taxes 872,960 5.95% 653,336 5.26% Provision for Income Taxes 325,000 2.21% 235,000 1.89% ------------ ------------ NET INCOME $ 547,960 3.74% $ 418,336 3.37% ============ ============ EARNINGS PER SHARE BASIC $ 0.19 $ 0.15 ============ ============ DILUTED $ 0.18 $ 0.14 ============ ============ Weighted Average Number of Shares Outstanding Basic 2,950,508 2,852,270 Diluted 3,002,687 2,994,455
The accompanying notes are an integral part of the financial statements. 2 DECORATOR INDUSTRIES, INC STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Thirteen Weeks Ended -------------------------- April 1, 2006 April 2, 2005 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 547,960 $ 418,336 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization 353,214 365,332 Provision for Losses on Accounts Receivable -- 5,000 Deferred Taxes 20,000 (32,000) Stock-Based Compensation 17,152 -- (Gain)/Loss on Disposal of Assets (720) 5,707 Increase/(Decrease) from Changes in: Accounts Receivable (665,487) (999,638) Inventories (127,559) 48,937 Prepaid Expenses (124,850) 25,756 Other Assets (189,904) 1,806 Accounts Payable 330,472 389,897 Accrued Expenses 318,811 (138,979) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 479,089 90,154 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid for acquisitions -- (1,067,472) Capital Expenditures (138,553) (50,847) Proceeds from Property Dispositions 2,900 700 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (135,653) (1,117,619) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term Debt Payments (44,867) (42,554) Dividend Payments (88,774) (85,920) Change in Checks Issued but Not Yet Presented -- 562,217 Proceeds from Exercise of Stock Options 99,993 100,003 Net Borrowings under Line-of-Credit Agreement -- 73,324 Issuance of Stock for Directors Trust 20,250 17,500 ----------- ----------- NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (13,398) 624,570 Net Increase/(Decrease) in Cash and Cash Equivalents 330,038 (402,895) Cash and Cash Equivalents at Beginning of Year 490,377 730,539 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 820,415 $ 327,644 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 16,083 $ 59,398 Income Taxes $ -- $ 19,923
The accompanying notes are an integral part of the financial statements. 3 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS THIRTEEN WEEKS ENDED APRIL 1, 2006 AND APRIL 2, 2005 (UNAUDITED) NOTE 1. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Company's financial position as of April 1, 2006, the changes therein for the thirteen week period then ended and the results of operations for the thirteen week periods ended April 1, 2006 and April 2, 2005. NOTE 2. The financial statements included in the Form 10-Q are presented in accordance with the requirements of the form and do not include all of the disclosures required by accounting principles generally accepted in the United States of America. For additional information, reference is made to the Company's annual report on Form 10-K for the year ended December 31, 2005. The results of operations for the thirteen week periods ended April 1, 2006 and April 2, 2005 are not necessarily indicative of operating results for the full year. NOTE 3. INVENTORIES Inventories at April 1, 2006 and December 31, 2005 consisted of the following: April 1, 2006 December 31, 2005 ----------- ------------- Raw Material and Supplies $ 5,131,838 $ 4,982,121 In Process and Finished Goods 796,274 818,432 ----------- ------------- Total Inventory $ 5,928,112 $ 5,800,553 =========== ============= NOTE 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options. In accordance with SFAS No. 128, the following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations: For the Thirteen Weeks Ended April 1, 2006 April 2, 2005 ------------ ------------- Numerator: Net income $ 547,960 $ 418,336 ============ ============= Denominator: Weighted-average number of common shares outstanding 2,950,508 2,852,270 Dilutive effect of stock options on net income 52,179 142,185 ------------ ------------- 3,002,687 2,994,455 ============ ============= Diluted earnings per share: $ 0.18 $ 0.14 ============ ============= 4 NOTE 5. STOCK BASED EMPLOYEE COMPENSATION In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004) "Share Based Payment" ("SFAS No. 123(R))". This standard revised the original SFAS No. 123 by requiring the expensing of stock options. The Company began recording the expense of stock options in its financial statements effective January 1, 2006. For fiscal years 2005 and prior, the Company used the original provisions of SFAS No. 123. The Company assumes no tax benefit under SFAS 123(R), as all of its stock options qualify as incentive stock options, and do not qualify for a tax deduction unless there is a disqualifying disposition. In accordance with the previous provisions of SFAS No. 123, the Company followed the intrinsic value based method of accounting as prescribed by APB 25, "Accounting for Stock Issued to Employees", for its stock-based compensation. Accordingly, no compensation cost was recognized prior to December 31, 2005. At April 1, 2006, the Company had options outstanding under one fixed stock option plan. If the Company had elected to recognize compensation expense in prior years for options granted based on their fair values at the grant dates, consistent with SFAS No. 123(R), net income and earnings per share would have been reported as follows: First First Quarter Quarter 2006 2005 ----------- ----------- Net Income, as reported $ 547,960 $ 418,336 Deduct: value of stock-based employee compensation earned but not recorded in the Statements of Earnings -- (20,272) ----------- ----------- Pro forma net income $ 547,960 $ 398,064 =========== =========== Earnings per share: Basic: as reported $ 0.19 $ 0.15 Basic: pro forma $ 0.19 $ 0.14 Diluted: as reported $ 0.18 $ 0.14 Diluted: pro forma $ 0.18 $ 0.13 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN STATEMENTS RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER FACTORS. FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FINANCIAL CONDITION The Company's financial ratios changed as illustrated below. The financial condition remains strong, and the long-term debt to total capitalization ratio remained low at 7.75% April 1, 2006 December 31, 2005 ------------- ----------------- Current Ratio 2.16:1 2.20:1 Quick Ratio 1.13:1 1.06:1 LT Debt to Total Capital 7.75% 8.25% Working Capital $6,680,220 $6,092,349 At April 1, 2006, the Company had no outstanding borrowings on its line of credit. The Company expects to use its line of credit in 2006. In January 2004, the Company began assigning certain account receivables under a "Receivables Servicing and Credit Approved Receivables Purchasing Agreement" with CIT Group/Commercial Services Inc. Only receivables from sales to the hospitality industry may be assigned to CIT. Under the agreement CIT provides credit checking, credit approval, and collection responsibilities for the assigned receivables. If CIT approves an order from a hospitality customer and the resulting receivables are not paid or disputed by the customer within ninety days of sale, CIT will pay the receivable to the Company and assume ownership of the receivable. CIT begins collection efforts for the assigned receivables (both approved and not approved) when they are due (hospitality sales are made on Net 30 terms). Hospitality customers are instructed to make payments directly to CIT and CIT then wires collected funds to the Company. The Company pays CIT six-tenths of a percent of all assigned receivables. Management believes this cost is mostly offset by reductions in Bad Debt expense and collection costs. The Company entered into this arrangement to take advantage of CIT's extensive credit checking and collection capabilities. Management believes this arrangement has improved liquidity. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) Days sales outstanding in accounts receivable were 31.6 days at April 1, 2006 compared to 31.8 days at April 2, 2005. Net accounts receivable increased by $779,590 and inventories increased by $863,398 from April 2, 2005 to April 1, 2006, which is due to the increase in sales for the thirteen weeks ended April 1, 2006 when compared to the same period of the prior year. Capital expenditures were $138,553 for the quarter ended April 1, 2006, compared to $50,847 for the same period of the prior year. The major reason for this increase was increased expenditures in the current period for the implementation of the Company's new financial software platform. Management does not foresee any events which will adversely affect its liquidity during 2006. SALES BY MARKET The following table represents net sales to each of the three different markets that the Company serves for the thirteen week periods ended April 1, 2006 and April 2, 2005: (dollars in thousands) For the Thirteen Weeks Ended April 1, 2006 April 2, 2005 -------------------------- ----------------------- Net % of Net % of Sales total Sales total -------------- ---------- ------------ --------- Recreational Vehicle $ 9,127 62% $ 7,291 59% Manufactured Housing 2,808 19% 2,457 20% Hospitality 2,727 19% 2,683 21% ------------- --------- ------------ --------- Total Net Sales $ 14,662 100% $ 12,431 100% ============= ============ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) RESULTS OF OPERATIONS THIRTEEN WEEK PERIOD ENDED APRIL 1, 2006, (FIRST QUARTER 2006) COMPARED TO THIRTEEN WEEK PERIOD ENDED APRIL 2, 2005, (FIRST QUARTER 2005) The following table shows a comparison of the results of operations between First Quarter 2006 and First Quarter 2005:
First Quarter % First Quarter % $ Increase 2006 of Sales 2005 of Sales (Decrease) % Change ------------ -------- ------------ --------- ------------ --------- Net Sales $ 14,662,315 100% $ 12,431,382 100% $ 2,230,933 17.9% Cost of Products Sold 11,704,497 79.8% 9,829,683 79.1% 1,874,814 19.1% ------------ -------- ------------ -------- ------------ Gross Profit 2,957,818 20.2% 2,601,699 20.9% 356,119 13.7% Selling and Administrative Expenses 2,097,304 14.3% 1,943,457 15.6% 153,847 7.9% ------------ --------- ------------ ------- ------------ Operating Income 860,514 5.9% 658,242 5.3% 202,272 30.7% Other Income (Expense) Interest, Investment and Other Income 31,212 0.2% 17,293 0.2% 13,919 80.5% Interest Expense (18,766) -0.2% (22,199) -0.2% 3,433 -15.5% ------------ --------- ------------ ------- ------------ Earnings Before Income Taxes 872,960 5.9% 653,336 5.3% 219,624 33.6% Provision for Income Taxes 325,000 2.2% 235,000 1.9% 90,000 38.3% ------------ --------- ------------ ------- ------------ NET INCOME $ 547,960 3.7% $ 418,336 3.4% $ 129,624 31.0% ============ ======== ============ ======= ============
Net sales for the First Quarter 2006 were $14,662,315, compared to $12,431,382 for the same period in the previous year, a 17.9% increase. This increase resulted from additional sales volume during First Quarter 2006 when compared to the same period of the prior year. Sales to the Company's recreational vehicle customers increased 25.2% in First Quarter 2006 when compared to the same period of the prior year. Approximately 12% of the Company's sales to its recreational vehicle customers were for Emergency Living Units ("ELU's"), compared to 14% in the fourth quarter of 2005. Without the ELU's, recreational vehicle sales would have increased approximately 10% over the First Quarter 2005. The recreational vehicle industry reported a 15.2% increase in shipments during the First Quarter 2006 compared to the same period of the prior year (excluding ELU's). The Company does not believe that the balance of 2006 will benefit from the further production of ELU's. Sales to the Company's manufactured housing customers increased 14.3% in First Quarter 2006 when compared to the same period of the prior year. The manufactured housing industry increased shipments by 9.4% over the same period. The Company believes that a portion of the increased manufactured housing sales is attributable to the rebuilding efforts from the 2005 Gulf Coast hurricanes. Sales to the Company's hospitality customers increased 1.6%. Cost of products sold increased to 79.8% in the First Quarter 2006 compared to 79.1% a year ago. The major reasons for the increase in this percentage was an increase in the percentage of raw material costs to sales, partially offset by a decrease in the percentage of labor costs to sales and a lower percentage for factory overhead due to fixed expenses being spread over a higher sales volume. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) Selling and administrative expenses were $2,097,304 in the First Quarter 2006 versus $1,943,457 in the First Quarter 2005. The increase was mostly due to administrative salaries and other payroll related costs. The percentage of selling and administrative expenses to net sales decreased from 15.6% to 14.3% as fixed expenses were spread over a higher sales volume. Interest expense decreased to $18,766 in the First Quarter 2006 from $22,199 in the First Quarter 2005, due to less outstanding debt during the First Quarter 2006, partially offset by the effect of higher interest rates on the Company's variable rate obligations Net income increased to $547,960, or 31.0%, in the First Quarter of 2006 compared to $418,336 in the First Quarter of 2005. This increase is the result of higher sales. Diluted earnings per share increased from $0.14 per share during the First Quarter 2005 to $0.18 per share during the First Quarter 2006. EBITDA EBITDA represents income before income taxes, interest expense, depreciation and amortization and is an approximation of cash flow from operations before tax. The Company uses EBITDA as an internal measure of performance and believes it is a useful and commonly used measure of financial performance in addition to income before taxes and other profitability measures under U.S. Generally Accepted Accounting Principles ("GAAP"). EBITDA is not a measure of performance under GAAP. EBITDA should not be construed as an alternative to operating income and income before taxes as an indicator of the Company's operations in accordance with GAAP. Nor is EBITDA an alternative to cash flow from operating activities in accordance with GAAP. The Company's definition of EBITDA can differ from that of other companies. The following table reconciles Net Income, the most comparable measure under GAAP, to EBITDA for the first quarters of fiscal 2006 and 2005: For the Thirteen Weeks Ended April 1, 2006 April 2, 2005 ------------- ------------- Net Income $ 547,960 $ 418,336 Add: Interest 18,766 22,199 Taxes 325,000 235,000 Depreciation & Amortiztion 353,214 365,332 (Gain)/Loss on Disposal (720) 5,707 ------------- ------------- EBITDA $ 1,244,220 $ 1,046,574 ============= ============= 9 Item 4. Controls and Procedures. (a) The Company's principal executive officer and principal financial officer have reviewed the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of April 1, 2006 and have concluded that they were adequate and effective. (b) During the most recent fiscal quarter, there were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits 31.1 - Certification of Chief Executive Officer and President 31.2 - Certification of Chief Financial Officer 32 - Certificate required by 18 U.S.C. ss.1350. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DECORATOR INDUSTRIES, INC. (Registrant) Date: May 15, 2006 By: /s/ William A. Bassett ------------------------------------------ William A. Bassett, Chief Executive Officer and President Date: May 15, 2006 By: /s/ Michael K. Solomon ------------------------------------------ Michael K. Solomon, Chief Financial Officer 11