Cinram Announces First Quarter Results

TORONTO, May 4 /PRNewswire-FirstCall/ -- Cinram International Inc. ("Cinram" or the "Company") (TSX: CRW) today reported its results for the first quarter ended March 31, 2006.

Cinram reported consolidated revenue of $447.8 million for the quarter ended March 31, 2006, compared to $453.8 million for the same quarter in the prior year. Net earnings were $3.9 million or $0.07 per share basic and diluted for the quarter ended March 31, 2006, compared to $4.1 million or $0.07 per share basic and diluted for the same quarter in the prior year. The Company generated earnings before interest, taxes and amortization (EBITA(1)), before unusual items, of $81.7 million, compared to $78.2 million for the same quarter in the prior year. EBITA(1), including unusual items, was $70.3 million for the quarter ended March 31, 2006, compared to $74.3 million for the same quarter in the prior year. Unusual items recorded during the quarter consisted of one-time transaction costs associated with the Company's income trust conversion incurred during the quarter, combined with facility restructuring charges in California and Louviers, France.

"The year is off to an exciting start with the overwhelming shareholder approval for the conversion of Cinram into an income trust and the shipment of the first High Definition DVD titles," stated Isidore Philosophe, Chief Executive Officer. "If the one-time transaction costs and charges were excluded, Cinram's EBITA would have been ahead of those recorded for the same quarter last year. We believe that Cinram's solid cash flows for the first quarter will provide a good start for our new income trust structure."

Product revenues

For the quarter ended March 31, 2006, DVD revenue was $225.5 million, compared to $224.2 million for the same quarter in the prior year. The increase was mainly due to higher unit volumes, partially offset by lower selling prices. DVD revenue accounted for approximately 50% of consolidated revenue for the quarter ended March 31, 2006, up slightly from 49% in the prior year. The Company also recorded its first high definition HD-DVD revenues of $66,000 during the first quarter of 2006.

The Company's CD revenue was $65.7 million for the quarter ended March 31, 2006, compared to $73.1 million for the same quarter in the prior year. CD revenue accounted for approximately 15% of Cinram's 2006 consolidated revenue, compared to 16% for the same quarter in the prior year.

The printing segment, which encompasses the results of Ivy Hill Corporation, generated revenue of $42.0 million for the quarter ended March 31, 2006, compared to $51.8 million for the same quarter in the prior year. Printing accounted for approximately 9% of consolidated revenue for the quarter, down slightly from 11% for the same quarter in the prior year.

Distribution revenue increased to $77.4 million for the quarter ended March 31, 2006, compared to $59.9 million for the same quarter in the prior year. Distribution revenue represented approximately 17% of consolidated revenue for the quarter, compared to 13% for the same quarter in the prior year.

Geographic revenues

North American revenue was $327.0 million for the quarter ended March 31, 2006, compared to $351.7 million for the same quarter in the prior year. The decrease was attributable mainly to a decrease in CD and printing revenues, offset by higher distribution revenues. In 2006, North American revenue represented 73% of consolidated revenue for the quarter, compared to 78% for the same quarter in the prior year.

In Europe, revenue for the quarter ended March 31, 2006 was $120.8 million, compared to $102.1 million for the same quarter in the prior year, the increase was due to higher DVD volume and higher distribution revenue, primarily as a result of a major studio contract that came into effect in the second half of 2005. These gains were partially offset by lower audio CD, VHS video cassette and CD-ROM sales. European revenue represented 27% of consolidated revenue for the quarter, compared to 22% for the same quarter in the prior year.

Other financial highlights

Gross profit was $81.8 million for the quarter ended March 31, 2006, compared to $75.8 million for the same quarter in the prior year. Gross profit margins for the quarter ended March 31, 2006 were 18%, compared to 17% for the same quarter in the prior year, due to increased contribution from distribution activities, DVD and CD cost improvements, lower raw material costs, and lower depreciation and amortization costs.

Selling, general and administrative expenses were $36.9 million for the quarter ended March 31, 2006, compared to $35.8 million for the same quarter in the prior year. During the quarter, we incurred higher advisory costs relating to various projects, other than the income trust conversion.

Amortization of capital and intangible assets for the quarter ended March 31, 2006 was $54.2 million, compared to $55.8 million for the same quarter in the prior year, mainly due to the fact that certain assets have been fully-depreciated by the end of 2005.

Unusual Items

To effect the reorganization into an income trust, the Company incurred significant transaction costs of $3.5 million in the quarter. These costs include fees paid to financial, tax and legal advisors and other costs which have been recognized as unusual items in the consolidated statement of earnings. The Company will continue to incur additional transaction costs during the second quarter of 2006.

During the first quarter of 2006, management formulated an exit plan to shut down a combined CD and DVD manufacturing facility located in Commerce, California, transferring current production to the Pennsylvania facility. The plan was finalized in early March and termination notices were provided on March 27, 2006 to approximately 350 employees. As a result, contractual severance, employee related costs and other costs amounting to $3.0 million were recorded as an unusual item in the Company's Home Video and audio CD segments.

Also in the first quarter of 2006, management moved forward with a plan to shut down the CD operations at its manufacturing facility located in Louviers, France. The Louviers facility will continue to be utilized for DVD manufacturing. The plan was finalized in March and notice was provided to the workers council during the quarter affecting approximately 120 employees. As a result, contractual severance, employee related costs and other costs amounting to $4.7 million were recorded as an unusual item in the Company's audio CD segment.

Share volume data

For the quarter ended March 31, 2006, the basic weighted average number of Cinram shares outstanding was 57.3 million, compared with 56.9 million for the same quarter in the prior year.

Reconciliation of EBITA and EBIT to net earnings ------------------------------------------------------------------------- Three months ended March 31 (unaudited, in thousands of U.S. dollars) 2006 2005 ------------------------------------------------------------------------- EBITA(1) $ 70,291 $ 74,326 ------------------------------------------------------------------------- Amortization of capital assets 36,750 38,137 Amortization of intangible assets and deferred financing fees 17,413 17,676 ------------------------------------------------------------------------- EBIT(2) $ 16,128 $ 18,513 ------------------------------------------------------------------------- Interest expense 11,737 13,114 Interest income (855) (290) Income taxes 1,311 1,614 ------------------------------------------------------------------------- Net earnings $ 3,935 $ 4,075 ------------------------------------------------------------------------- (1) EBITA is defined herein as earnings before interest expense, interest income, income taxes and amortization, and is a standard measure that is commonly reported and widely used in the industry to assist in understanding and comparing operating results. EBITA is not a defined term under generally accepted accounting principles (GAAP). Accordingly, this measure should not be considered as a substitute or alternative for net earnings or cash flow, in each case as determined in accordance with GAAP. See reconciliation of EBITA to net earnings under GAAP as found in the table above. (2) EBIT is defined herein as earnings before interest expense, interest income and income taxes, and is a standard measure that is commonly reported and widely used in the industry to assist in understanding and comparing operating results. EBIT is not a defined term under generally accepted accounting principles (GAAP). Accordingly, this measure should not be considered as a substitute or alternative for net earnings or cash flow, in each case as determined in accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as found in the table above. May 5 conference call and webcast

Cinram's management team will host a conference call to discuss the first quarter results on Friday, May 5, 2006 at 8 a.m. (ET). To participate, dial 416-644-3423 or 1-800-814-4890 - reservation No. 21186205. The call will also be webcast live at http://investors.cinram.com/.

Income Trust Conversion

As previously announced, the conversion of the Corporation to an income trust structure under a Plan of Arrangement was approved by its shareholders on April 28, 2006; a final order to that effect was issued by the Ontario Superior Court of Justice; and closing of the transaction is scheduled to take place on May 5, 2006.

About Cinram

Cinram International Inc. is the world's largest provider of pre-recorded multimedia products and related logistics services. With facilities in North America and Europe, Cinram manufactures and distributes pre-recorded DVDs, VHS video cassettes, audio CDs, audio cassettes and CD-ROMs for motion picture studios, music labels, publishers and computer software companies around the world. The Company's shares are listed on the Toronto Stock Exchange (CRW) and are included in the S&P/ TSX Composite Index. For more information, visit our Web site at http://www.cinram.com/.

Certain statements included in this release constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or results of the multimedia duplication/ replication industry, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, impact the demand for the Company's products and services; multimedia duplication/replication industry conditions and capacity; the ability of the Company to implement its business strategy; the Company's ability to retain major customers; the Company's ability to invest successfully in new technologies and other factors which are described in the Company's filings with the securities commissions.

INTERIM CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars) ------------------------------------------------------------------------- March 31 December 31 2006 2005 (unaudited) ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 121,658 $ 89,921 Accounts receivable 437,163 589,417 Inventories 43,216 45,482 Prepaid expenses 17,142 20,610 Future income taxes 33,813 33,835 ----------------------------------------------------------------------- 652,992 779,265 Capital assets 572,821 601,481 Goodwill 330,072 330,274 Intangible assets 226,958 241,604 Deferred financing fees 17,447 18,954 Other assets 10,163 13,948 Future income taxes 28,528 28,416 ------------------------------------------------------------------------- $1,838,981 $2,013,942 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 99,539 $ 202,550 Accrued liabilities 323,794 351,580 Income taxes payable 6,431 15,479 Current portion of long-term debt 94,740 62,136 Current portion of obligations under capital leases 759 727 ----------------------------------------------------------------------- 525,263 632,472 Long-term debt 599,640 674,137 Obligations under capital leases 3,154 3,272 Other long-term liabilities 55,431 55,135 Future income taxes 103,510 103,018 Shareholders' equity: Capital stock 173,830 173,775 Contributed surplus 4,699 4,634 Retained earnings 319,569 317,121 Foreign currency translation adjustment 53,885 50,378 ----------------------------------------------------------------------- 551,983 545,908 ------------------------------------------------------------------------- $1,838,981 $2,013,942 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (unaudited, in thousands of U.S. dollars, except per share amounts) ------------------------------------------------------------------------- Three months ended March 31 March 31 2006 2005 ------------------------------------------------------------------------- Revenue $ 447,827 $ 453,818 Cost of goods sold 366,036 377,989 ------------------------------------------------------------------------- Gross profit 81,791 75,829 Selling, general and administrative expenses 36,868 35,776 Amortization of intangible assets and deferred financing fees 17,413 17,676 Unusual items 11,382 3,864 ------------------------------------------------------------------------- Earnings before the undernoted 16,128 18,513 Interest on long-term debt 11,620 12,976 Other interest 117 138 Interest income (855) (290) ------------------------------------------------------------------------- Earnings before income taxes 5,246 5,689 Income taxes 1,311 1,614 ------------------------------------------------------------------------- Net earnings 3,935 4,075 Retained earnings, beginning of period 317,121 240,367 Dividends declared (1,487) (1,386) ------------------------------------------------------------------------- Retained earnings, end of period $ 319,569 $ 243,056 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share: Basic $ 0.07 $ 0.07 Diluted 0.07 0.07 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of shares outstanding (in thousands): Basic 57,304 56,858 Diluted 57,998 57,468 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, In thousands of U.S. dollars) ------------------------------------------------------------------------- Three months ended March 31 March 31 2006 2005 ------------------------------------------------------------------------- Cash provided by (used in): Operations: Net earnings $ 3,935 $ 4,075 Items not involving cash: Amortization 54,163 55,813 Non-cash stock-based compensation 65 229 Future Income taxes 1,444 - Loss on disposition of capital assets 15 28 Change in non-cash operating working capital 24,175 (59,453) ----------------------------------------------------------------------- 83,797 692 Financing: Increase in long-term debt - 39,000 Repayment of long-term debt (41,893) (16,713) Decrease in obligations under capital leases (179) (250) Issuance of common shares 55 2,331 (Decrease) increase in other long-term liabilities (290) 405 Dividends paid (1,487) (1,386) ----------------------------------------------------------------------- (43,794) 23,387 Investments: Purchase of capital assets (12,927) (33,286) Proceeds on disposition of capital assets 28 173 Decrease in other assets 3,788 9,488 ----------------------------------------------------------------------- (9,111) (23,625) Foreign exchange loss on cash held in foreign currencies 845 (1,663) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 31,737 (1,209) Cash and cash equivalents, beginning of period 89,921 41,789 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 121,658 $ 40,580 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 12,088 $ 14,240 Income taxes paid 10,623 3,297 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents are defined as cash and short-term deposits, which have an original maturity of less than 90 days.