Shermag trims losses in second quarter
20 November 2006 Shermag Inc. (TSX: SMG), today reported its results for the second quarter and six months ended September 29, 2006. All dollar amounts are in Canadian dollars unless otherwise indicated.
Gross revenue for the second quarter was $45.5 million compared to $51 million for the same period last year. Net revenue was $42.5 million versus $48.1 million. The net loss for the quarter was $1.1 million or $0.09 per share, fully diluted, down substantially from a loss of $4.4 million or $0.33 per share in the previous quarter and from the net loss of $2.1 million or $0.16 per share, during the same quarter the previous year. Six month gross revenue was $91.3 million compared to $102 million a year ago. Net revenue amounted to $85 million, down from the $96.3 million for the first half a year ago. Net loss for the first six months was $5.5 million or $0.41 per share, fully diluted, compared to $3.6 million or $0.27 per share, last year.
"The consistent focus on our business transformation plan is beginning to yield results as we have begun to see some progress in our efficiencies. We have also been successful in further increasing the level of imported products. These gains, however, continued to be offset in part by additional changes in the US/Canadian dollar exchange rate. The average exchange rate applied to the second quarter was CA$1.13/US$ compared to CA$1.24/US$ for the same period last year representing another 9% depreciation in the US dollar. As such, the impact in sales was $3.3 million during the quarter. Nonetheless, we have been successful in reducing our loss for the most recent period," stated Shermag President and CEO, Mr. Jeff Casselman.
Full results for the second quarter and six months ended September 29, 2006 were as follows:
Comparative results - 2nd Quarter
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(in thousands of dollars, 2nd Quarter 2nd Quarter
except per share data) 2006-2007 2005-2006
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Gross revenue $ 45,523 $ 50,967
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Gross earnings(1) $ 5,556 $ 6,679
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Loss before income taxes $ (1,831) $ (2,933)
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Net loss $ (1,147) $ (2,085)
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Loss per common share - basic $ (0.09) $ (0.16)
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Loss per common share - diluted $ (0.09) $ (0.16)
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Exports $ 31,712 $ 34,721
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(1) Excluding amortization
Comparative results - 1st Semester
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(in thousands of dollars, 1st Semester 1st Semester
except per share data) 2006-2007 2005-2006
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Gross revenue $ 91,333 $101,959
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Gross earnings(1) $ 8,343 $ 14,697
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Loss before income taxes $ (8,189) $ (5,010)
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Net loss $ (5,526) $ (3,597)
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Loss per common share - basic $ (0.41) $ (0.27)
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Loss per common share - diluted $ (0.41) $ (0.27)
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Exports $ 62,213 $ 66,639
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(1) Excluding amortization
Second quarter export sales for the quarter rose 1.7% to US$28.2 million. However, this gain was offset by the weaker US dollar.
Successful High Point Furniture Show
The new Metropolitan Home Furniture Collection, featuring contemporary designs for modern lifestyles, was showcased at the October High Point Furniture Market and received strong reviews and retail support. Last spring, Shermag concluded an agreement with Metropolitan Home Magazine to develop, market and produce a full line signature branded furniture collection.
Designed by Benjamin Noriega-Ortiz, one of the most acclaimed and influential of today's interior designers, the signature branded collection caught the eye of many. "This clearly was one of the best High Point shows we have experienced as we placed this exciting new collection with furniture retailers across North America, while at the same time we continued to add to and market the Shermag and Jaymar collections," stated Mr. Casselman.
Outlook
The Company has experienced the loss to bankruptcy of several customers, the most important being Storehouse Inc., during the first half of the year. Management believes this reflects general market conditions which continue to be difficult and highly competitive.
"At the same time, the benefits of the Company's transformation process are starting to bear fruit. Our plan to focus our domestic facilities on "choice based products" is gaining traction and efficiency, and the plan to increase imports of non-choice items is also progressing well. It is anticipated that more than 35% of our products will be sourced off-shore this year. The recent High Point Furniture Market featuring the Metropolitan Home Furniture Collection was very encouraging and underlines Shermag's strength in developing exciting new products for all parts of the modern home. This is particularly important given the context of today's challenging retail environment," concluded Mr. Casselman.
Profile
Shermag Inc. (SMG), headquartered in Sherbrooke, Québec, is a leader in the design, production, marketing and distribution of high-quality residential furniture. The Company employs more than 1500 people and is a vertically integrated manufacturer and importer with its own cutting rights, sawmill, veneer plant, manufacturing operations and global sourcing division.
Disclaimer
This news release, in particular the section under the heading "Outlook", contains forward-looking statements about the Company's operations, objectives, strategies, financial situation and performance. These statements are made based on assumptions and management's best estimates with regard to future events. However, the business of the Company is subject to risks and uncertainties that could cause actual results to differ from expected results. Important factors that could cause such differences are changes in pricing pressure being exerted by competitors, particularly Asian-based companies, significant movement in the Canadian/US dollar exchange rate, and unanticipated problems in implementing the Company's Business Transformation Plan. This is not an exhaustive list. A broader discussion of risk factors that could affect future performance can be found in the Company's Annual MD&A and Annual Information Form, filed with Canadian securities regulatory authorities. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Information for shareholders
Shermag Inc. will hold a conference call to discuss these results today
Monday, November 13, 2006 at 10:00 a.m., Eastern Time. Interested parties
can join the call by dialing (416) 340-2216 for all Toronto area callers
or 1-866-898-9626 for all other North American callers.
If you are unable to call in at this time, you may access a recording of
the conference by calling (416) 695-5800 for Toronto area or
1-800-408-3053 for others and entering the passcode 3202873(pound sign)
on your phone. This recording will be available as of 11:30 a.m. on
Monday, November 13, until midnight on Friday, November 24.
An archive webcasting of this call will be made available on November 13,
2006, as of 11:30 a.m. at www.viavid.net or in our website, in the news
section: www.shermag.com.
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SHERMAG INC.
CONSOLIDATED EARNINGS
(unaudited)
in thousands of dollars, except per share data
Three-month period ended Six-month period ended
September 29 September 30 September 29 September 30
2006 2005 2006 2005
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
------------ ------------ ------------ ------------
$ $ $ $
Gross revenue 45,523 50,967 91,333 101,959
Less : returns,
allowances and
discounts 3,006 2,899 6,334 5,672
------------ ------------ ------------ ------------
Net revenue 42,517 48,068 84,999 96,287
Cost of sales 36,961 41,389 76,656 81,590
------------ ------------ ------------ ------------
Gross profit
excluding
amortization 5,556 6,679 8,343 14,697
------------ ------------ ------------ ------------
Selling and
administrative
expenses 6,255 7,257 12,891 15,115
Financial expenses 324 438 752 880
Exchange loss (gain) (291) (250) 629 (952)
Amortization 1,099 1,461 2,260 2,912
Unusual items
(note 2) 706 1,752
------------ ------------ ------------ ------------
7,387 9,612 16,532 19,707
------------ ------------ ------------ ------------
Loss before
income taxes (1,831) (2,933) (8,189) (5,010)
Income taxes (684) (848) (2,663) (1,413)
------------ ------------ ------------ ------------
Net loss (1,147) (2,085) (5,526) (3,597)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per common
share - basic
(note 3) (0.09) (0.16) (0.41) (0.27)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per common
share - diluted
(note 3) (0.09) (0.16) (0.41) (0.27)
------------ ------------ ------------ ------------
SHERMAG INC.
CONSOLIDATED RETAINED EARNINGS
(unaudited)
in thousands of dollars
Six-month Six-month
ended period ended period
September 29, September 30,
2006 2005
------------ ------------
$ $
Balance, beginning of period 51,802 82,426
Net loss (5,526) (3,597)
------------ ------------
Balance, end of period 46,276 78,829
------------ ------------
------------ ------------
CONSOLIDATED BALANCE SHEETS
in thousands of dollars
As at As at
September 29, March 31,
2006 2006
(unaudited) (audited)
------------ ------------
$ $
Assets
Current assets
Cash and cash equivalents 624 229
Accounts receivable 32,930 33,402
Assets held for sale 1,445
Income taxes receivable 2,681 5,774
Inventories 47,899 45,128
Prepaid expenses 1,224 800
------------ ------------
85,358 86,778
Advance to a company subject to significant
influence, without interest or
reimbursement terms 1,196 1,139
Property, plant and equipment 40,643 41,439
Assets held for sale 6,257 6,342
Goodwill 2,872 2,872
Other assets 2,193 2,258
Future income taxes 224 225
------------ ------------
138,743 141,053
------------ ------------
------------ ------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 21,358 20,442
Income taxes payable 41
Installments on long-term debt 1,273 1,024
------------ ------------
22,672 21,466
Long-term debt (note 4) 22,641 20,511
Deferred credits 2,904 2,993
Future income taxes 5,217 5,308
------------ ------------
53,434 50,278
------------ ------------
SHAREHOLDERS' EQUITY
Capital stock 38,735 38,735
Contributed surplus 298 238
Retained earnings 46,276 51,802
------------ ------------
85,309 90,775
------------ ------------
138,743 141,053
------------ ------------
------------ ------------
SHERMAG INC.
CONSOLIDATED CASH FLOWS
(unaudited)
in thousands of dollars
Three-month period ended Six-month period ended
September 29 September 30 September 29 September 30
2006 2005 2006 2005
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
------------ ------------ ------------ ------------
$ $ $ $
Operating activities
Net loss (1,147) (2,085) (5,526) (3,597)
Non-cash items
Amortization 1,099 1,461 2,260 2,912
Amortization
of deferred
credits (45) (44) (89) (88)
Loss (gain)
on disposal
of assets (200) 20
Future income
taxes (40) 12 (90) (3)
Stock-based
compensation 24 50 60 61
Changes in
working capital
items 1,523 8,739 1,327 9,831
------------ ------------ ------------ ------------
Cash flows from
operating
activities 1,414 8,133 (2,258) 9,136
------------ ------------ ------------ ------------
Investing activities
Advance to a
company subject
to significant
influence (39) (57)
Property, plant
and equipment (507) (770) (856) (876)
Disposal of
property, plant
and equipment 7 25 1,882 423
Deferred credits 1 242
Deferred charges (350) (167) (695) (334)
------------ ------------ ------------ ------------
Cash flows from
investing
activities (889) (911) 274 (545)
------------ ------------ ------------ ------------
Financing activities
Net change in
long-term
revolving
credits (4,402) (58) 13,519 (9,014)
Long-term loans 4,653 10,600
Installments on
other long-term
loans (188) (5,088) (21,740) (5,145)
------------ ------------ ------------ ------------
Cash flows from
financing
activities 63 (5,146) 2,379 (14,159)
------------ ------------ ------------ ------------
Net increase
(decrease) in
cash and cash
equivalents 588 2,076 395 (5,568)
Cash and cash
equivalents,
beginning of
period 36 2,832 229 10,476
------------ ------------ ------------ ------------
Cash and cash
equivalents,
end of period 624 4,908 624 4,908
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shermag Inc.
Notes to interim consolidated financial statements
September 29, 2006 and September 30, 2005
(The amounts in the tables are in thousands of dollars except for per
share amounts)
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1 - ACCOUNTING POLICIES
Basis of presentation
These unaudited interim consolidated financial statements follow the same accounting policies as in the most recent annual audited financial statements.
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2 - UNUSUAL ITEMS
During the first semester ended September 29, 2006, no expenses related to unusual items were incurred ($1,752,000 in 2005). During this period, $547,332 was paid for employment termination costs and for the cost of consolidating manufacturing facilities, and as at September 29, 2006, the balance to be paid for employment termination costs was $720,187.
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3 - EARNINGS PER SHARE
As at September 29, 2006, the basic or diluted weighted average number of common shares outstanding is 13,348,724 shares (13,348,724 shares in 2005). Stock options were not included in the diluted earnings per common share calculation since the Company incurred a loss. Their inclusion would have created an anti-dilutive effect.
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4 - LONG-TERM DEBT
9/29/06 3/31/06
------------ ------------
$ $
Term loan, lender's prime rate (6%), payable
in monthly installments of $104,167, maturing
in 2014 (a) 9,772
Term loan, lender's prime rate plus 2% (7.25%
as at March 31, 2006) (a) (b) 21,438
Revolving credit, lender's prime rate (6%) (a) 13,519
Non-interest bearing loans from a government
agency, payable according to certain conditions 600
Non-interest bearing loans from a government
agency, payable in monthly and annual
installments, maturing at various dates until
2007 23 97
------------ ------------
23,914 21,535
Installments due within one year 1,273 1,024
------------ ------------
22,641 20,511
------------ ------------
------------ ------------
(a) On June 5, 2006, the Company concluded a refinancing agreement with a
new financial institution. This new agreement provides the Company
with a CA$55 million revolving credit or its equivalent in US
dollars, as well as a CA$10 million term loan. Following an initial
five-year term, the revolving credit will subsequently be
automatically renewed every year unless otherwise advised by either
of the two parties involved. As for the term loan, it has an eight-
year term. Both credit facilities bear interest at the lender's prime
rate and are secured by a first rank mortgage on the universality of
all present and future movable and immovable, tangible and intangible
assets. The monies were used to reimburse the existing credit
facilities at the date of the refinancing and to finance current
operations.
(b) These credits are secured by a first rank mortgage on the
universality of all present and future movable and immovable,
tangible and intangible assets.
The installments on the long-term debt for the next five periods of twelve months are $1,273,131 in 2007, $1,250,000 in 2008, 2009, 2010 and 2011.
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5 - CAPITAL STOCK
Authorized
Unlimited number of common shares, without par value, voting and participating.
Unlimited number of preferred shares of first and second rank, without par value, which can be issued in one or more series, for which the directors will determine their number, designation, rights, privileges, conditions and restrictions.
Preferred shares of second rank, series 1, annual and non-cumulative $0.06 dividend per share, non-voting, non-participating, redeemable at the Company's option at the paid-up capital amount.
2006-09-29 2006-03-31
-------------------------- --------------------------
Number of Number of
shares Amount shares Amount
------------ ------------ ------------ ------------
$ $
Issued and fully
paid
Common shares
Balance,
beginning and
end of period 13,348,724 38,286 13,348,724 38,286
Preferred shares
of second rank,
series 1
Balance,
beginning and
end of period 700,000 449 700,000 449
------------ ------------
38,735 38,735
------------ ------------
------------ ------------
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6 - ECONOMIC DEPENDENCE
During the second quarter, following their merger, the income derived from the two most important retail clients amounts to $9,559,000 ($10,703,000 in 2005) and represents 21% (21% in 2005) of the total gross revenue for the period.
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7 - INSURANCE CLAIM
On March 28, 2006, a fire at the Scierie Montauban Inc. subsidiary destroyed fixed assets. The Company's insurance program provides coverage for damage to property destroyed, profit recovery and expenditure to minimize the total cost of disruption to operations. As at March 31, 2006, the Company recorded a claim receivable of $1,099,000 equivalent to the book value of the fixed assets destroyed. During the first semester, an additional amount of $465,000 was recorded as business interruption costs, and an advance of $500,000 on the claim was received. As at September 29, 2006, the amount accounted for insurance claim receivable was $1,064,000.
>>
For further information: Investor Relations, MaisonBrison, Rick Leckner, (514) 731-0000; Shermag Inc.: Jeff Casselman, President and CEO, (819) 566-1515
Source: newswire
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