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MEGA Brands announces second quarter 2008 results, closing of CA$75 million financing and $9.3 million insurance recovery
2008-08-19 05:00:00
MONTREAL, Aug. 19 /EMWNews/ - MEGA Brands Inc. (TSX: MB) (the "Corporation") today announces its financial results for the second quarter and six-month periods ended June 30, 2008. Concurrently, the Corporation announces the closing of a private placement offering of senior unsecured convertible debentures for gross proceeds of CA$75 million. The proceeds of the offering, combined with amendments to the Corporation's senior secured credit facilities, provide the Corporation with the financial resources and flexibility to meet working capital requirements leading up to the peak toy selling season and to continue the implementation of its Value Enhancement Plan. The Corporation also announces that, subsequent to the closing of the second quarter financial statements, it has reached an agreement in principle with its insurers for the recovery of an additional $9.3 million related to the settlement of lawsuits for magnet ingestion. The Corporation expects to receive payment shortly and to record this amount in its third quarter results. This insurance payment will bring the total recovery to $12.9 million, nearly the full amount of the $13.5 million settlement paid by the Corporation in 2006. "Looking ahead, the next two quarters are traditionally the strongest in our business and our objective is to restore profitability," stated Marc Bertrand, President and CEO of MEGA Brands. "This year's new product launches are occurring in the third and fourth quarters and we are well positioned to build sales momentum through the balance of the year." Second Quarter 2008 Results Net sales in the second quarter of 2008 decreased 12.4% to $106.4 million compared to $121.5 million in the corresponding period last year. This decrease reflects lower sales in the Toys and Stationery and Activities product lines as well as additional product recall charges. Net sales of our Toys product lines declined to $47.3 million compared to $57.9 million in the second quarter of 2007. This decrease is due mainly to lower shipments of licensed toys in the Boys 5-plus category, offsetting increased sales of preschool construction toys. In the second quarter of 2007, the Corporation experienced strong sales of licensed products based on two major theatrical releases, Disney's "Pirates of the Caribbean: At World's End" and Marvel's "Spider-Man 3". The decrease in sales also reflects $2.5 million of additional product recall charges related to MAGTASTIK and MAGNAMAN. Net sales of Stationery and Activities product lines declined to $59.1 million compared to $63.6 million in the second quarter of 2007. This decrease is explained mainly by lower shipments of lower-margin children's activity products which have been discontinued under the Corporation's SKU rationalization program. On a geographical basis, net sales in North America decreased to $71.1 million compared to $87.1 million in the second quarter of 2007. International net sales increased to $35.3 million compared to $34.3 million in the second quarter of 2007. International net sales accounted for 33.1% of total net sales in the second quarter of 2008 compared to 28.3% in the corresponding 2007 period. Cost of sales was $71.6 million compared to $74.2 million in the second quarter of 2007. The Corporation continued to experience higher input costs and cost of sales also reflects the underutilization of its manufacturing facilities in Montreal and China. Gross profit was $34.8 million compared to $47.3 million in the second quarter of 2007. Gross margin declined to 32.7% compared to 38.9% in the second quarter of 2007, mainly as a result of higher costs, unfavorable product mix due to lower sales of construction toys in the Boys 5-plus category as well as additional product recall charges. Marketing and advertising expenses increased to $5.3 million compared to $4.5 million in the second quarter of 2007. This increase reflects higher advertising spending in International markets. Research and development expenses decreased to $3.9 million compared to $6.4 million in the second quarter of 2007. This decrease reflects mainly a reduction in third-party services, the completion of upfront R&D work for the new MagNext product line and cost savings resulting from the Corporation's SKU rationalization program. Other selling, distribution and administrative expenses decreased to $26.0 million compared to $28.2 million in the second quarter of 2007. This decrease reflects mainly a reduction in administrative expenses as well as lower warehousing costs offset by higher direct distribution costs. The Corporation recorded integration charges of $0.9 million during the period relating to the centralization of distribution activities in North America. As a result of the above, loss from operations was $2.4 million compared to earnings from operations of $8.7 million in the second quarter of 2007. Total interest expense was $1.3 million compared to $6.7 million in the second quarter of 2007. Interest on long-term debt and other interest declined to $6.2 million compared to $6.5 million in the second quarter of 2007, reflecting lower indebtedness. During the second quarter of 2008, the Corporation recorded a change in fair value of $5.6 million related to the interest rate swap on part of its Term B credit facility. Income tax recovery was $0.1 million compared to a recovery of $1.9 million in the second quarter of 2007. The tax rate used to establish the income tax expense for the quarterly results is the applicable estimated effective rate of each entity of the group. The effective tax rate reflects the Corporation's structure for tax purposes as well as the financing structure put in place following the acquisition of MEGA Brands America. Net loss was $3.6 million or $0.10 diluted loss per share compared to net earnings of $4.0 million or $0.12 diluted earnings per share in the second quarter of 2007. Recent Developments On August 18, 2008, the Corporation executed a sixth amending agreement (the "Sixth Amendment") to its Credit Agreement dated July 26, 2005 providing for certain changes to the terms and conditions of its senior secured Credit Facilities maturing in 2012, including a waiver of the cumulative minimum EBIDTA ratio covenant for the period ended June 30, 2008. Additionally, the Sixth Amendment introduces the concept of a new definition of the calculation of EBIDTA allowing for the add-back of certain non-recurring and non-cash items. The covenant includes a minimum EBITDA at the end of each quarter up to and including June 30, 2010, at which point more stringent covenants previously in place under the Credit Agreement become effective. The revolving credit facility has been reduced to $100 million. On August 18, 2008, the Corporation announced the closing of a private placement offering of senior unsecured convertible debentures for gross proceeds of CA$75 million. The proceeds of the Offering will be used as working capital and for general corporate purposes. The debentures, maturing on August 31, 2013, will bear interest at a rate of 8% payable semi-annually in arrears and will be convertible at the option of the holder at any time prior to the maturity date based on a conversion price equal to approximately CA$3.19 per common share, subject to customary anti-dilution adjustments. The debentures will be convertible into 23,512,500 common shares, representing 39% of the common shares of the Corporation on an as converted basis. The debentures were issued to Fairfax Financial Holdings Ltd., Chiefswood Holdings Limited, The Owners Fund and Victor J. Bertrand Sr., the founder and chairman of the board of directors of the Corporation, with Fairfax investing CA$64 million and Mr. Bertrand investing $7 million in the offering. This financing was undertaken by the Corporation in connection with its consideration of its strategic alternatives, including the sale of its Stationery and Activities business. The financing was approved by the Toronto Stock Exchange and required certain amendments to the Corporation's credit facilities which were agreed to by the lenders. MD&A Filing The Corporation's Management's Discussion and Analysis for the second quarter ended June 30, 2008 was filed with SEDAR on August 18, 2008 and will be available on the Corporation's Web site as of 7:00 a.m. August 19, 2008. Conference Call An analyst conference call will be held at 9:00 a.m. on August 19, 2008 to discuss the results. Participants may listen to the call by dialing 1 (800) 814-4862. For those unable to participate, a replay will be available until August 26, 2008. The replay phone number is 1 (416) 640-1917, access code 21278141#.
About MEGA Brands
MEGA Brands is a trusted family of leading global brands in
construction toys, games & puzzles, arts & crafts and stationery. They
offer engaging creative experiences for children and families through
innovative, well-designed, affordable and high-quality products that
deliver on our Creativity to the Rescue promise. Visit
http://www.megabrands.com for more information.
The MEGA logo, Creativity to the Rescue, Mega Bloks, Rose Art, MagNext
and Board Dudes are trademarks of MEGA Brands Inc. or its affiliates.
Forward-Looking Statements
All statements in this press release that do not directly and
exclusively relate to historical facts constitute "forward-looking
statements". These statements represent the Corporation's intentions,
plans, expectations and beliefs. In certain instances, these statements
require us to make assumptions and there is significant risk that these
assumptions may not be correct. Furthermore, these statements are subject
to risks, uncertainties and other factors, many of which are beyond the
Corporation's control. The Corporation 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, other
than as required by applicable legislation. Readers are cautioned not to
place undue reliance on these forward-looking statements. More information
about the risks that could cause our actual results to significantly differ
from our current expectations can be found in the "Risks and Uncertainties"
section of our 2007 annual MD&A as well as Q1 and Q2 2008 MD&A.
Consolidated statements of earnings
(in thousands of US dollars, except per share data)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Net sales 106,385 121,486 185,777 211,592
-------------------------------------------------------------------------
Cost of sales 71,630 74,196 123,219 154,951
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Gross profit 34,755 47,290 62,558 56,641
Marketing and advertising
expenses 5,294 4,464 9,245 10,771
Research and development
expenses 3,856 6,428 8,406 11,685
Other selling,
distribution and
administrative expenses 26,008 28,246 53,566 56,298
Voluntary product recall
and replacement - - - 4,700
Litigation expenses 2,311 1,501 3,453 2,313
Product liability
settlement and related
expenses - (1,000) - (1,000)
Loss (gain) on foreign
currency translation (336) (1,027) 1,019 (1,458)
-------------------------------------------------------------------------
Earnings (loss) from
operations (2,378) 8,678 (13,131) (26,668)
-------------------------------------------------------------------------
Interest expense
Interest on long-term
debt 6,158 6,502 11,429 12,549
Change in fair value
of interest rate swap (5,578) - (5,578) -
Amortization of deferred
financing costs 874 122 1,814 292
Other interest (172) 40 18 (54)
-------------------------------------------------------------------------
1,282 6,664 7,683 12,787
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (3,660) 2,014 (20,814) (39,455)
-------------------------------------------------------------------------
Income taxes
Current 393 (342) 1,314 (1,768)
Future (481) (1,606) (8,908) (17,739)
-------------------------------------------------------------------------
(88) (1,948) (7,594) (19,507)
-------------------------------------------------------------------------
Net earnings (loss) (3,572) 3,962 (13,220) (19,948)
-------------------------------------------------------------------------
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Earnings (loss) per share
Basic (0.10) 0.12 (0.36) (0.61)
Diluted(1) (0.10) 0.12 (0.36) (0.61)
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(1) The dilutive effect of outstanding options under the treasury stock
method for the three-month period ended June 30, 2008 and for the
six-month periods ended June 30, 2007 and June 30, 2008 is nil as it
is anti-dilutive.
Consolidated statements of deficit
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Balance, beginning of
period (94,148) (11,274) (84,500) 12,636
Net earnings (loss) (3,572) 3,962 (13,220) (19,948)
-------------------------------------------------------------------------
Balance, end of period (97,720) (7,312) (97,720) (7,312)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of comprehensive income (loss) and
Accumulated other comprehensive income (loss)
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Net earnings (loss) for
the period (3,572) 3,962 (13,220) (19,948)
-------------------------------------------------------------------------
Other comprehensive income
(loss), net of income taxes
Gain (loss) on derivatives
designated as cash flow
hedges 356 1,915 (3,552) 1,399
-------------------------------------------------------------------------
Comprehensive income (loss)
for the period (3,216) 5,877 (16,772) (18,549)
-------------------------------------------------------------------------
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Accumulated other
comprehensive income (loss)
Balance, beginning of period (6,173) 1,235 (2,265) -
Impact of adopting the new
accounting policy regarding
financial instruments, net of
income taxes - - - 1,751
Other comprehensive income
(loss), net of income taxes 356 1,915 (3,552) 1,399
-------------------------------------------------------------------------
Balance, end of period (5,817) 3,150 (5,817) 3,150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated balance sheets
(in thousands of US dollars)
June December June
30, 31, 30,
2008 2007 2007
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $
Assets
Current assets
Cash and cash equivalents 7,728 8,505 4,603
Accounts receivable 122,760 125,784 131,092
Inventories 112,236 91,681 162,566
Income taxes 9,902 8,219 9,234
Future income taxes 3,986 4,286 8,064
Derivative financial instruments - 306 -
Prepaid expenses 21,991 19,650 11,506
-------------------------------------------------------------------------
278,603 258,431 327,065
Property, plant and equipment 43,239 42,620 48,199
Intangible assets 74,274 74,606 79,149
Goodwill 298,938 298,938 301,988
Derivative financial instruments - - 5,089
Future income taxes 49,086 35,119 47,210
-------------------------------------------------------------------------
744,140 709,714 808,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities 112,289 136,592 112,229
Additional consideration accrued
on business combination 54,775 54,775 58,642
Derivative financial instruments 1,682 - 535
Current portion of long-term debt 5,521 8,303 8,861
-------------------------------------------------------------------------
174,267 199,670 180,267
Long-term debt 325,328 252,441 364,279
Derivative financial instruments 4,260 3,659 -
Future income taxes 34,587 31,550 30,693
-------------------------------------------------------------------------
538,442 487,320 575,239
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 308,677 308,601 237,071
Contributed surplus 558 558 552
Deficit (97,720) (84,500) (7,312)
Accumulated other comprehensive
income (loss) net of income taxes (5,817) (2,265) 3,150
-------------------------------------------------------------------------
205,698 222,394 233,461
-------------------------------------------------------------------------
744,140 709,714 808,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of cash flows
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Cash flows from operating
activities
Net earnings (loss) (3,572) 3,962 (13,220) (19,948)
Items not affecting cash
and cash equivalents
Amortization of property,
plant and equipment 3,853 3,389 7,460 6,409
Amortization of
intangible assets 166 183 332 368
Stock-based compensation
plans (203) 25 (632) (100)
Future income taxes (481) (1,606) (8,908) (17,739)
Gain on disposal of
property, plant and
equipment - (20) - (240)
Loss on foreign currency 245 246 890 383
-------------------------------------------------------------------------
8 6,179 (14,078) (30,867)
Changes in non-cash
operating working capital
items (13,075) (45,740) (43,244) (32,215)
-------------------------------------------------------------------------
(13,067) (39,561) (57,322) (63,082)
-------------------------------------------------------------------------
Cash flows from financing
activities
Repayment of long-term
debt (2,312) (2,330) (4,665) (4,719)
Change in revolving
credit facility 26,500 45,800 75,000 69,000
Amortization of deferred
financing costs 875 122 1,815 292
Amortization of
comprehensive loss on
interest rate swap 575 - 575 -
Unrealized gain on
derivative financial
instruments related to
interest rate swap (6,153) - (6,153) -
Addition to deferred
financing costs - - (2,666) -
Issuance of capital stock - 72 76 774
-------------------------------------------------------------------------
19,485 43,664 63,982 65,347
-------------------------------------------------------------------------
Cash flows from investing
activities
Acquisition of property,
plant and equipment (2,763) (5,540) (7,437) (11,776)
Proceeds from disposal of
property, plant and
equipment - - - 798
Business combinations - - - (342)
-------------------------------------------------------------------------
(2,763) (5,540) (7,437) (11,320)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 3,655 (1,437) (777) (9,055)
Cash and cash equivalents,
beginning of period 4,073 6,040 8,505 13,658
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 7,728 4,603 7,728 4,603
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of
cash flow information
Interest paid 2,538 6,143 8,231 12,531
Income taxes paid
(recovered) 2,863 1,908 2,553 (2,094)
Non cash item
Property, plant and
equipment acquired by
means of capital leases - - 622 -
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