MEGA Brands Reports Second Quarter 2007 Financial Results



    MONTREAL, Aug. 9 /CNW Telbec/ - MEGA Brands Inc. (TSX: MB) announced its
financial results today for the second quarter and first six months ended June
30, 2007. All figures are expressed in US dollars.

    
    -------------------------------------------------------------------------
                             Financial Highlights

                                     Three-month periods   Six-month periods
                                           ended June 30,      ended June 30,
    (US $ millions, except
    earnings per share)                   2007      2006      2007      2006
    -------------------------------------------------------------------------
    (unaudited)

    Net sales                            121.5     102.2     211.6     180.8
      Product line segmentation
        Toys                              57.9      41.5     112.1      84.0
        Stationery & Activities           63.6      60.7      99.5      96.7
      Geographic segmentation
        North America                     87.1      79.3     153.3     139.0
        International                     34.3      22.9      58.3      41.7

    Net earnings (loss)                    4.0       4.1     (19.9)      4.6

    Earnings (loss) per share
        Basic                             0.12      0.13     (0.61)     0.14
        Diluted(1)                        0.12      0.12     (0.61)     0.14

    (1) The dilutive effect of outstanding options under the treasury stock
        method for the six-month period ended June 30, 2007 is nil as it is
        anti-dilutive.
    -------------------------------------------------------------------------


    "We are pleased to report strong sales growth with an increase of 19% to
$121.5 million. Toy sales were up 40% to $57.9 million on higher demand across
all categories - preschool, boys 5+, Magnetix and games & puzzles," stated
Marc Bertrand, President and CEO of MEGA Brands. "On a geographical basis,
North American sales were up 10% to $87.1 million with growth in all toy
categories and in Stationery and Activities. International sales increased by
50% to $34.3 million, driven by very strong demand for construction toys."
    "The strong top line growth in the first half of 2007 demonstrates that we
have great innovation and the right licenses. These are the fundamentals of
our business and they provide a solid foundation for our growth and
profitability," added Bertrand.

    Performance for the three-month and six-month periods ended June 30, 2007

    Net sales in the second quarter of 2007 increased 18.9% to $121.5 million
compared to $102.2 million in the corresponding period last year. Higher net
sales are mainly related to strong demand from retailers for our Toys product
lines.
    Net sales of our Toys product lines in the second quarter of 2007
increased 39.5% to $57.9 million compared to $41.5 million in the second
quarter of 2006. This growth was mainly driven by construction toys, with
higher sales in all of our principal brands in the preschool category, and of
theme toys based on two major theatrical releases, Disney's "Pirates of the
Caribbean: At World's End" and Marvel's "Spider-Man 3" in the boys 5-plus
category. Sales of MAGNETIX products also contributed to the sales growth
during the quarter, mainly because the prior year's sales were lower as a
result of shipment delays caused by design and packaging changes initiated by
the Corporation during the second quarter of 2006.
    Net sales of Stationery and Activities product lines in the second quarter
of 2007 increased by 4.8% to $63.6 million compared to $60.7 million in the
corresponding period last year. Higher stationery sales were offset by lower
sales of activity products.
    On a geographical basis, net sales in North America increased 9.8% to
$87.1 million compared to $79.3 million in the second quarter of 2006.
International net sales in the second quarter of 2007 were up 49.8% to
$34.3 million compared to $22.9 million in the corresponding period of last
year. Growth in both geographic segments was driven by construction toy sales
in the preschool and boys 5-plus categories as well as by stationery products.
International net sales accounted for 28.2% of consolidated net sales in the
second quarter of 2007 compared to 22.4% for the corresponding period for the
prior year.
    For the six-month period ended June 30, 2007, net sales increased 17.0% to
$211.6 million compared to $180.8 million in the same period last year. Sales
of Toys were up 33.5% to $112.1 million compared to $84.0 million in the first
six months of 2006 based on strong sales in the preschool category and on
theme toys based on the two major theatrical releases mentioned above in the
boys 5-plus category. Sales of MAGNETIX products for the six-month period
ended June 30, 2007 were lower than the prior year. However, the brand remains
strong with stable retail sales worldwide. Sales of Stationery and Activities
for the first six months of 2007 increased by 2.9% to $99.5 million compared
to $96.7 million for the corresponding period of the prior year. North
American sales reached $153.3 million for the first six months of 2007
compared to $139.0 million in the corresponding 2006 period, while
International sales increased to $58.3 million or 27.6% of total net sales,
compared to $41.7 million or 23.1% of total net sales in the first half of
2006 due to solid growth in both the Toys and Stationery and Activities
product lines.
    Cost of sales increased to $74.2 million in the second quarter of 2007
compared to $60.0 million in the corresponding period of 2006. For the
six-month period ended June 30, 2007, cost of sales increased to $155.0
million compared to $104.3 million for the same period in 2006. For the
purpose of financial statement presentation, MAGNETIX product recall and other
charges of $30.5 million are included in cost of sales for the six-month
period ended June 30, 2007 ($0.3 million in 2006).
    Gross profit in the second quarter of 2007 increased to $47.3 million
compared to $42.2 million in the second quarter of 2006. The gross margin
declined to 38.9% in the second quarter compared to 41.3% in the second
quarter of last year due mainly to sales of excess inventory and higher magnet
costs. Plastic resin prices in the second quarter of 2007 were in line with
the corresponding period last year.
    For the six-month period ended June 30, 2007, gross profit was
$56.6 million compared to $76.4 million for the same period in 2006. Excluding
MAGNETIX product recall and other charges of $30.5 million, gross margin was
41.2% compared to 42.3% in the first half of last year.
    Marketing and advertising expenses increased to $4.5 million in the second
quarter of 2007 compared to $3.8 million in the second quarter of 2006. This
increased investment in our brands reflects the timing of new product releases
in 2007 compared to the second quarter of 2006. For the six months ended June
30, 2007, marketing and advertising expenses increased to $10.8 million
compared to $8.1 million for the corresponding period of the prior year, again
mainly due to timing of new product releases.
    Research and development expenses increased to $6.4 million in the second
quarter of 2007 compared to $4.2 million in the corresponding period last
year. This increase is mainly related to expenses to support new product
initiatives, some of which have occurred earlier this year compared to the
prior year due to the timing of new product launches. For the six months ended
June 30, 2007, research and development expenses increased to $11.7 million
compared to $7.4 million for the corresponding period of the prior year again
due mainly to the timing of new product launches.
    Other selling, distribution and administrative expenses amounted to
$28.2 million in the second quarter of 2007 compared to $24.9 million in the
second quarter of 2006. This increase mainly reflects higher distribution
expenses resulting from sales growth in international markets. For the six
months ended June 30, 2007, other selling, distribution and administrative
expenses increased to $56.3 million compared to $48.2 million for the
corresponding period of the prior year, mainly to support our sales growth.
    As a result of the above, earnings from operations were $8.7 million for
the second quarter of 2007 compared to $10.3 million in the corresponding 2006
period. In North America, earnings from operations for the second quarter of
2007 were $2.8 million compared to $1.8 million last year. International
earnings from operations were $5.9 million compared to $8.5 million in the
second quarter of 2006.
    For the six-month period ended June 30, 2007, the loss from operations was
$26.7 million compared to an operating profit of $14.4 million in the
corresponding period of 2006. This amount includes the MAGNETIX product recall
and other charges and litigation expenses of $36.5 million, net of the
recovery of $1.0 million in product liability settlement from our insurers.
The loss from operations in North America amounted to $33.3 million compared
to earnings from operations of $6.7 million in the prior year while earnings
from operations in the International market amounted to $6.6 million compared
to $7.7 million in the same period of the prior year.
    Interest and other expenses in the second quarter of 2007 were
$6.7 million compared to $5.2 million in the same 2006 period, reflecting
mainly an increase in average long-term debt and, to a lesser extent, higher
interest rates. For the six months ended June 30, 2007, interest and other
expenses amounted to $12.8 million compared to $10.3 million in the prior
year, also reflecting the increase in average long-term debt and, to a lesser
extent, higher interest rates.
    Income taxes for the second quarter ended June 30, 2007 amounted to a
recovery of $1.9 million, compared to an expense of $1.1 million in the
corresponding period of the prior year. Reflecting the MAGNETIX product recall
and other charges for the six months ended June 30, 2007, the income tax
recovery was $19.5 million compared to $0.5 million in the prior year. 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 earnings amounted to $4.0 million or $0.12 diluted earnings per share
in the second quarter of 2007 compared to net earnings of $4.1 million or
$0.12 diluted earnings per share for the corresponding period last year.
    For the six months ended June 30, 2007, the net loss amounted to
$19.9 million, or $0.61 per diluted share compared to net earnings of
$4.6 million, or $0.14 per diluted share for the corresponding period of the
prior year. Excluding the impact of MAGNETIX product recall and other charges
and litigation expenses totaling $22.8 million after income taxes or
$0.66 diluted earnings per share, the net earnings for the six-month period
ended June 30, 2007 were $2.9 million or $0.08 per diluted share. This
compares to net earnings of $6.1 million or $0.18 diluted earnings per share
excluding the impact of MAGNETIX product recall and other charges in the
corresponding period last year. Please refer to the "Non-GAAP Financial
Measures" section of this press release.

    Non-GAAP Financial Measures

    The terms "impact of MAGNETIX product recalls and other charges and
litigation expenses", "net earnings (loss) excluding the impact of MAGNETIX
product recalls and other charges and litigation expenses" and "diluted
earnings (loss) per share excluding the impact of MAGNETIX product recalls and
other charges" do not have any standardized meaning under GAAP and are
therefore unlikely to be comparable to similar measures presented by other
companies. We present this information as a measure of operating performance
of our ongoing business without the effects of unusual items. We exclude such
items because they affect the comparability of our financial results between
periods and could potentially distort the analysis of trends in business
performance.

    MD&A Filing

    MEGA Brands will file its second quarter 2007 Management's Discussion and
Analysis, as well as its unaudited consolidated financial statements and notes
for the second quarter ended June 30, 2007 via SEDAR on August 9, 2007. The
MD&A, financial statements and notes will be available on the Corporation's
Web site as of 7:00 a.m. on August 9, 2007.

    Conference Call

    An analyst conference call will be held at 9:00 a.m. on August 9, 2007 to
discuss the second quarter results. Participants may listen to the call by
dialling 1 (800) 814-4860. For those unable to participate, a replay will be
available until August 16, 2007. The replay phone number is (416) 640-1917,
access code 21241645#. A webcast is also available at www.megabrands.com under
the investor relations section.

    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. These factors
include and are not restricted to: realization of synergies, litigation and
its inherent uncertainty, including the recovery of the full product liability
settlement amount and risks associated with product recalls, international
operations, insurance coverage, difficulty in predicting consumer preferences
and development and acceptance of new products, rate of growth or
profitability, dependence on a few large customers, fluctuations in the price
of plastic resins and other raw materials as well as currency rates,
seasonality of toy and stationery industries, risks related to licensed
products, retail environment, construction toy litigation and financing and
interest rate matters. The words "believe", "estimate", "expect", "intend",
"anticipate", "foresee", "plan", and similar expressions and variations
thereof, identify certain of such forward-looking statements, which speak only
as of the date on which they are made. 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 2006 and second quarter 2007 MD&A.

    About MEGA Brands

    MEGA Brands is a trusted family of leading global brands in construction
toys, games & puzzles, arts & crafts and stationery. We 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. For more information, please visit
http://www.megabrands.com.
    The MEGA logo, Creativity to the Rescue, MEGA BLOKS, ROSE ART, MAGNETIX
and BOARD DUDES are trademarks of MEGA Brands Inc. or its affiliates.

    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,
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                             $         $         $         $

    Net sales                          121,486   102,200   211,592   180,764
    -------------------------------------------------------------------------

    Cost of sales(1)                    74,196    59,954   154,951   104,319
    -------------------------------------------------------------------------

    Gross profit                        47,290    42,246    56,641    76,445

    Marketing and advertising
     expenses                            4,464     3,844    10,771     8,068
    Research and development
     expenses                            6,428     4,168    11,685     7,397
    Other selling, distribution
     and administrative expenses        28,246    24,879    56,298    48,184
    Voluntary product recall and
     replacement                             -       755     4,700     1,434
    Litigation expenses                  1,501       422     2,313       422
    Product liability settlement
     and related                        (1,000)      168    (1,000)      168
    Gain on foreign currency
     translation                        (1,027)   (2,295)   (1,458)   (3,584)
    -------------------------------------------------------------------------

    Earnings (loss) from
     operations                          8,678    10,305   (26,668)   14,356
    -------------------------------------------------------------------------

    Interest expense
      Interest on long-term debt         6,502     4,980    12,549     9,981
      Amortization of deferred
       financing costs                     122       143       292       308
      Other interest                        40        56       (54)      (23)
    -------------------------------------------------------------------------
                                         6,664     5,179    12,787    10,266
    -------------------------------------------------------------------------

    Earnings (loss) before income
     taxes                               2,014     5,126   (39,455)    4,090
    -------------------------------------------------------------------------

    Income taxes
      Current                             (342)   (3,149)   (1,768)   (7,199)
      Future                            (1,606)    4,225   (17,739)    6,661
    -------------------------------------------------------------------------
                                        (1,948)    1,076   (19,507)     (538)
    -------------------------------------------------------------------------

    Net earnings (loss)                  3,962     4,050   (19,948)    4,628
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings (loss) per share
      Basic                               0.12      0.13     (0.61)     0.14
      Diluted(2)                          0.12      0.12     (0.61)     0.14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Cost of sales for the six months ended June 30, 2007 includes
        $30.5 million related to the expanded MAGNETIX product recall and
        other charges.

    (2) The dilutive effect of outstanding options under the treasury stock
        method for the six-month period ended June 30, 2007 is nil as it is
        anti-dilutive


    Consolidated statements of retained earnings (deficit)
    (in thousands of US dollars)
    (Unaudited)

                                     Three-month periods   Six-month periods
                                           ended June 30,      ended June 30,
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                             $         $         $         $

    Balance, beginning of period       (11,274)  (12,134)   12,636   (12,712)

    Net earnings (loss)                  3,962     4,050   (19,948)    4,628
    -------------------------------------------------------------------------

    Balance, end of period              (7,312)   (8,084)   (7,312)   (8,084)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated statements of comprehensive income and
    Accumulated other comprehensive income
    (in thousands of US dollars)
    (Unaudited)

                                     Three-month periods   Six-month periods
                                           ended June 30,      ended June 30,
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                             $         $         $         $

    Net earnings (loss) for the period   3,962     4,050   (19,948)    4,628
    -------------------------------------------------------------------------

    Other comprehensive income,
     net of income taxes
      Gain on derivatives designated
       as cash flow hedges               1,915         -     1,399         -
    -------------------------------------------------------------------------
    Comprehensive income (loss)
     for the period                      5,877     4,050   (18,549)    4,628
    -------------------------------------------------------------------------

    Accumulated other comprehensive
     income
    Balance, beginning of period         1,235         -         -         -
    Impact of adopting the new
     accounting policy regarding
     financial instruments, net
     of income taxes                         -         -     1,751         -
    Other comprehensive income,
     net of income taxes                 1,915         -     1,399         -
    -------------------------------------------------------------------------
    Balance, end of period               3,150         -     3,150         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated balance sheets
    (in thousands of US dollars)

                                         June 30,  December 31,      June 30,
                                            2007          2006          2006
                                      (Unaudited)     (Audited)   (Unaudited)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                               $             $             $
    Assets
    Current assets
      Cash and cash equivalents            4,603        13,658        10,156
      Accounts receivable                131,092       161,612        97,269
      Inventories                        162,566       140,630       136,159
      Income taxes                         9,234         9,317        16,329
      Future income taxes                  8,064         8,354        20,286
      Prepaid expenses                    11,506        12,025         8,361
    -------------------------------------------------------------------------
                                         327,065       345,596       288,560

    Property, plant and equipment         48,199        43,213        41,765
    Intangible assets                     79,149        79,517        72,067
    Goodwill                             301,988       300,829       317,042
    Derivative financial instruments       5,089             -             -
    Future income taxes                   47,210        28,006             -
    Deferred charges                           -         3,281         4,238
    -------------------------------------------------------------------------
                                         808,700       800,442       723,672
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities
    Current liabilities
      Accounts payable and accrued
       liabilities                       112,229       153,437       117,298
      Additional consideration
       accrued on business
       combination                        58,642        57,825        55,712
      Derivative financial instruments       535             -             -
      Current portion of long-term debt    8,861         9,609         9,596
    -------------------------------------------------------------------------
                                         180,267       220,871       182,606

    Long-term debt                       364,279       302,345       293,406
    Future income taxes                   30,693        27,782        21,929
    -------------------------------------------------------------------------
                                         575,239       550,998       497,941
    -------------------------------------------------------------------------

    Shareholders' equity
      Capital stock                      237,071       236,088       232,716
      Contributed surplus                    552           720         1,099
      Retained earnings (deficit)         (7,312)       12,636        (8,084)
      Accumulated other
       comprehensive income net of
       income taxes                        3,150             -             -
    -------------------------------------------------------------------------
                                         233,461       249,444       225,731
    -------------------------------------------------------------------------
                                         808,700       800,442       723,672
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated statements of cash flows
    (in thousands of US dollars)
    (Unaudited)

                                     Three-month periods   Six-month periods
                                           ended June 30,      ended June 30,
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                             $         $         $         $

    Cash flows from operating
     activities
      Net earnings (loss)                3,962     4,050   (19,948)    4,628
      Items not affecting cash and
       cash equivalents
        Amortization of property,
         plant and equipment             3,389     3,133     6,409     6,115
        Amortization of intangible
         assets                            183        81       368       162
        Amortization of deferred
         financing costs                   122       215       292       406
        Amortization of deferred
         charges                             -        52         -       125
        Stock-based compensation
         plans                              25       587      (100)      658
        Future income taxes             (1,606)    4,225   (17,739)    6,661
        Gain on disposal of
         property, plant and
         equipment                         (20)        -      (240)        -
        Loss (gain) on foreign
         currency                          246    (2,295)      383    (3,584)
    -------------------------------------------------------------------------
                                         6,301    10,048   (30,575)   15,171

    Changes in non-cash operating
     working capital items             (45,740)  (29,518)  (32,215)   (1,735)
    -------------------------------------------------------------------------
                                       (39,439)  (19,470)  (62,790)   13,436
    -------------------------------------------------------------------------

    Cash flows from financing
     activities
      Repayment of long-term debt       (2,330)   (2,339)   (4,719)   (3,953)
      Change in revolving credit
       facility                         45,800     6,000    69,000     6,000
      Issuance of capital stock             72       275       774       985
    -------------------------------------------------------------------------
                                        43,542     3,936    65,055     3,032
    -------------------------------------------------------------------------

    Cash flows from investing
     activities
      Acquisition of property, plant
       and equipment                    (5,540)   (4,733)  (11,776)   (8,433)
      Proceeds from disposal of
       property, plant and
       equipment                             -        54       798        54
      Business combinations                  -         -      (342)  (17,500)
    -------------------------------------------------------------------------
                                        (5,540)   (4,679)  (11,320)  (25,879)
    -------------------------------------------------------------------------

    Decrease in cash and cash
     equivalents                        (1,437)  (20,213)   (9,055)   (9,411)
    Cash and cash equivalents,
     beginning of period                 6,040    30,369    13,658    19,567
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                       4,603    10,156     4,603    10,156
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary disclosure of cash
     flow information
      Interest paid                      6,143     5,522    12,531    10,378
      Income taxes paid (recovered)      1,908     2,452    (2,094)   13,874
    




For further information:

For further information: Bertrand Jolicoeur, Director, Corporate
Finance, (514) 333-3339 ext. 538

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