Management
Discussion and Analysis| Management
Discussion and Analysis |
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SIGNIFICANT ITEMS During the first fiscal month of 1998, the Company acquired Uarco, Incorporated, a competitor approximately half the size of Standard Register. The Company paid $245 million in cash and financed the purchase by borrowing $230 million under a bank revolving credit agreement. $60 million of goodwill was created. On April 1, 1999, the Company sold its promotional direct mail printing operation, Communicolor, to R. R. Donnelley & Sons Company for $98 million, recording an after-tax gain of $16 million. This gain, net of operating losses incurred by this division prior to the sale, increased the Company's net income in 1999 by $15 million or $0.54 per diluted share. In July, 2000, the Company undertook an analysis of its asset utilization as a preliminary step to the development of a new strategic plan. As a result of the analysis, long-term asset impairments of $74 million (rounded) and current asset write-offs of $8 million were recorded in the fourth quarter 2000. Assets judged to be impaired included $48 million of goodwill related to the 1998 Uarco acquisition, $17 million of idled production equipment, $6 million of software no longer utilized, and a $2 million write-down in the value of an investment in which the Company holds an approximate 10% interest. These write-offs of long-term and short-term assets reduced the year 2000 pretax income by $82 million or $1.82 per diluted share after tax. In order to reduce excess capacity and fixed operating costs, the Company closed several manufacturing facilities during 2000, including its Dayton, Ohio equipment plant and printing plants in Toccoa, Georgia; Corning, Iowa; and Dayton, Ohio. The Company also offered an early retirement plan to select employees in its Dayton, Ohio headquarters. These actions produced pretax restructuring charges totaling $25 million, equivalent to $0.57 per diluted share. The Company expects annual savings from these actions to recover the cash component of these charges within 12-15 months. RESULTS OF OPERATIONS: 2000 Compared to 1999 Three of the above significant items had material effects on the comparison of the Company's performance in years 2000 and 1999: the 1999 gain on the sale of Communicolor, the year-end 2000 asset write-offs and the year 2000 restructuring charges. Excluding the effects of these special items, Net Income in 2000 was $36 million or $1.33 per diluted share, compared to $56 million or $1.98 per diluted share in 1999. The table below and the commentary that follows it present a summary level comparative analysis of the major factors responsible for this decrease in Net Income, as adjusted for the special items. Dollar amounts are in rounded millions, except per share amounts.
Revenue declined by $61 million or 5%. Business forms and related services were down 10%, reflecting lower demand for traditional paper forms due to inroads made by competing electronic technologies. Also contributing to the decline in traditional forms was the loss of approximately $20 million in annual business from some member hospitals of the Novation group purchasing organization. Sales of equipment and related supplies and services declined 11% in the year, attributed in part to a relatively high level of replacement installations in 1999 related to customers' Y2K concerns. Revenue from all other products and services increased 5%, led by Imaging Services which was up 16%. The gross margin was $21 million lower as a result of the decline in revenue. Despite lower production volumes, the percentage gross margins improved slightly from 38.3% of revenue in 1999 to 38.5% in 2000 as a result of the plant closings early in the year that reduced fixed costs. The gross margin was reduced modestly in both years for LIFO inventory adjustments related to the rising cost of paper. The rise in paper prices during 2000 proceeded somewhat uncertainly, increasing by $60.00 per ton in April, rolling back $40.00 per ton in July, and then moving back to the April level in September. Paper mills generally operated above 90% utilization by taking downtime and closing less efficient plants. A $60.00 per ton increase for forms bond attempted early in 2001 was not supported and was pulled back because of overall excess supply and weak demand. The Company has been generally successful in recovering any paper cost increases within a short period of time by raising the prices of its business forms. Selling, General & Administrative Expenses increased by $7 million or 2% over 1999. Figures shown below are in rounded millions.
The EmPower software initiative undertaken in October 1999 to install a Company-wide software system was stopped in the second half of 2000 when the on-going strategy work pointed toward separate strategic business units that could not be individually well served by a single application software package. The Company did successfully complete a data warehouse and several standard corporate installations, including payroll, human resources, general ledger and other financial applications. Future IT spending on mission critical operating systems will be cost justified by and tailored to the unique requirements of each strategic business unit. SMARTworks is the Company's business to business e-commerce initiative built initially around managing Standard Register's customers' documents and office supplies. In order to exploit this application's technical leadership position, the Company opted in July 2000 to establish SMARTworks.com, Inc. as a wholly owned subsidiary and an independent business unit with a broader e-commerce target customer base and mission. Spending on software development increased significantly following the launch; spending in 2001 is expected to more than double that for 2000, primarily supporting application software and sales channel development. Depreciation increased $4 million to $51 million as a result of capital spending in recent years averaging approximately $65 million. Goodwill amortization was unchanged at $4 million. Interest expense was slightly lower as a result of the 1999 repayment of $31 million of debt. Interest rates were fixed in both years at approximately 6.1% as a result of an interest rate swap. Pretax operating income was down $31 million or one-third from the 1999 level. This decrease was largely due to the effects of lower revenue, mitigated by plant cost reductions. The overall effective tax rate increased by 1.1 percentage points to 38.7%. This rise related to the below normal tax rate in 1999 as a result of a capital gain realized upon the sale of Communicolor; this capital gain permitted the Company to deduct offsetting capital losses incurred but not deductible in previous years. RESULTS OF OPERATIONS: 1999 Compared to 1998 Net Income was $71 million or $2.52 per diluted share in 1999, compared to $60 million or $2.08 per diluted share in 1998. As mentioned at the outset, the Company sold its direct mail division, Communicolor, at a profit in 1999. Excluding Communicolor operating results in both years and the gain on the 1999 sale, Net Income on Continuing Operations was $56 million in 1999 vs. $57 million in 1998; earnings per diluted share were comparatively lower - $1.98 vs. $1.99. The Company acquired Uarco during the first month of 1998 and established a restructuring liability as part of the initial valuation to cover anticipated integration costs. The business plan was to achieve cost reductions from the consolidation of the two companies and to gradually improve margins in unprofitable acquired accounts. Three major and seven smaller printing plants were closed, with most productive capacity relocated to nearby facilities. The distribution network, including field sales operations and warehousing for the two companies was consolidated. The Company achieved the targeted annual cost reductions, mostly in the second half of 1998, but was ultimately not as successful in improving unprofitable accounts. A summary level comparison of the two years' operating results appears below; dollar amounts are in rounded millions, except per share amounts.
Revenue on Continuing Operations rose $27 million or 2%. Traditional business forms sales were off 4%, but all other product categories were up 10% overall, led by strong growth in labels. Sales results for 1999 were undermined somewhat by abnormally high sales turnover attributed to the prior year consolidation of the Standard Register and Uarco sales forces. The gross margin rose $12 million and the percentage margin improved slightly from 38.2% to 38.3%. LIFO inventory adjustments were favorable in 1998 as paper prices fell, but turned unfavorable in 1999 as paper prices rebounded. Excluding LIFO adjustments in both years, the percentage gross margin improved from 37.9% in 1998 to 38.6% in 1999. This improvement occurred broadly across most product categories as a result of cost reductions from second half 1998 plant consolidations that followed the January 1998 acquisition of Uarco. S,G&A Expenses were up $12 million during the year. The majority of that increase can be traced to first year expenditures for the Company's EmPower software initiative, higher spending on the SMARTworks e-commerce offering, and working capital charges related to high turnover in the newly consolidated and reorganized sales force. Depreciation increased $6 million, reflecting higher capital expenditures. Interest expense was essentially unchanged and the tax rate was lower by 2.7 percentage points, mostly as a result of the capital gain on the sale of Communicolor discussed earlier. ENVIRONMENTAL MATTERS The Company has been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned. The Company's policy is to accrue for investigation and remediation at sites where costs are probable and estimable. At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on the operating results or financial condition of the Company. LIQUIDITY AND CAPITAL RESOURCES At year-end 2000, the Company had a net debt position of $147 million - $204 million of total debt less $57 million of cash. With Shareholders' Equity of $494 million, the Company's net debt to capital ratio was a very strong 23%. At $57 million, the cash position was essentially unchanged from the prior year-end. The major elements of the year's cash flow appear below:
New capital spending and annual depreciation in 2000 were $66 million and $51 million, respectively. The Company's forecast of capital expenditures for 2001 is in the range of $50 million to $60 million; depreciation is estimated at $45 million. In December, 1997, the Company entered into a five year, $300 million revolving credit agreement with nine banks. Current borrowings under the revolver are $200 million. The Company effectively fixed its interest rate at approximately 6.1% by entering into a $200 million interest rate swap agreement in 1998. In January, 2001, the Company announced a new strategic plan, described briefly below as a subsequent event. The plan includes a restructuring action expected to produce a $109 million charge. As a result of the cash component of this charge, estimated at $53 million, the Company will likely be required to amend or refinance the current revolving credit agreement. Given the Company's current strong financial condition and the improvements expected as a result of the restructuring, the Company expects to be successful in this endeavor. The Company expects to pay a modestly higher rate of interest as a result of spreads over LIBOR that have widened since the current revolver was established. The Company expects to meet its operating cash needs over the next year through a combination of internal cash flow, current cash reserves and available credit. SUBSEQUENT EVENT On January 25, 2001, the Company announced a new business strategy designed to recover the market value of the Company and establish a platform for long-term earnings growth and shareholder return. The plan has four components, including restructuring, reorganization, performance improvement and growth initiatives. After an extensive analysis, the Company decided to jettison selected elements of its business that did not provide an adequate return or were not consistent with the Company's new strategic direction. These elements were estimated to represent $225 - $250 million of the Company's $1.266 billion in annual revenue. In conjunction with these actions, the Company also targeted $125 million in annual cost reductions resulting primarily from a reduction of 2,400 jobs and a 30% reduction in production capacity. A restructuring charge estimated at $109 million will be recorded in the first quarter 2001, including cash costs of $53 million, mostly for severance and other personnel related items, and $56 million of asset write-downs. The Company will change from a single functional organizational structure to four strategic business units with distinct profiles and missions, including Document Management, Fulfillment Services, Labels and Label Systems, and SMARTworks.com. These organizational changes will take place during 2001 and the Company expects to report along these segments no later than first quarter 2002. OTHER MATTERS - IMPLEMENTATION OF SAB 101 The Securities and Exchange Commission (SEC) issued Staff Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in December 1999. The SAB summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. During fiscal year 2000, a comprehensive review of the Company's revenue recognition policies was performed and it was determined that the Company is in compliance with SAB 101. |
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