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The Company's investments are increasingly taking the form of operating
expense rather than capital expenditures
as the emphasis shifts from production assets to building software capability
and intellectual assets. The following are
examples of "P&L investments" made in 2001 that are expected
to either improve operating performance or foster
growth in future years:
• The Company adopted Six Sigma as a means to improve quality, customer
service, and productivity. Expense
totaled $2.4 million in the year for personnel acquisition and training.
Six Sigma expense for 2002 is forecasted at
$8 million. • The Company installed sophisticated application software to improve the customer service and productivity of sales personnel. Expense for the year totaled $4.3 million for installation and training. The Company expects to incur expense of $5.0 million in 2002. • The Company continued its investment in its e-business subsidiary, SMARTworks.com, Inc. Total expense in 2001 was $19 million compared to $9 million in 2000, with most spending directed to application and sales channel development. • The Company established a consulting unit designed to leverage the Company's industry knowledge and workflow expertise into consulting engagements aimed at improving the customer's productivity and profitability. Start-up costs were $1.0 million in 2001. The Company's pension plan had pretax income of $6 million, $4 million, and $8 million for years 2001, 2000, and 1999, respectively. The general downturn of the stock market during 2001 negatively impacted investment returns in the year. This decline in investment returns resulted in actuarial losses that will be amortized to expense in future years. The Company expects to have pension income in 2002. At currently projected actuarial assumptions, the Company expects to begin to incur pension expense in 2004.Depreciation and amortization decreased by $9 million in 2001, reversing a long-standing trend of increasing annual expense. Capital spending exceeded depreciation by an average of approximately $20 million annually for the years 1998 through 2000, which had pushed annual expense higher. In 2001, capital spending was less than half the rate of the two previous years and a significant number of assets were idled, reducing depreciation by $5 million. In addition, the Company had no goodwill on its books during 2001; by comparison, goodwill amortization was $4 million in each of the prior two years. Interest expense and income changed little over the three years. The overall effective tax race for 2001 was 41.5% (credit). This compares to races of 37.5% (credit) and 37.7% for years 2000 and 1999, respectively. The variation in tax rates in the three years relates primarily to differences in the timing of the incurrence and deductions of capital losses; excluding these items, the effective tax rates were 40.0%, 39.3%, and 40.0% for years 2001, 2000, and 1999, respectively. The Company expects its 2002 effective tax rare to be approximately 40.0%. Overall, net income before the non-operating items identified above declined $20 million from 1999 to 2000. This decrease is primarily attributable to the loss of contribution margin on the $40 million drop in revenue and the $11 million increase in SG&A expense and depreciation. The $8 million decline in 2001 net income before restructuring and other non-operating items is primarily a function of the low profitability during the restructuring period, described earlier in detail. NON-OPERATING ITEMS In 1999, the Company sold its promotional direct mail division, Communicolor, recording a gain on the sale. The results of this discontinued division's operations in 1999, including the gain, produced $15 million of net income, equivalent to $0.54 per share. In 2000, the Company implemented an early retirement plan and closed production facilities in the first and fourth quarters, recording $25 million in restructuring charges for the year. A total of $82 million in asset impairments and current asset write-offs associated with the development of the Renewal Plan were also recorded in the fourth quarter, as described earlier. In 2001, asset impairments and restructuring expenses were $42 million and $84 million, respectively. These expenses were discussed earlier. In addition, three items contributed to second quarter 2001 write-offs and adjustments that reduced pretax income by $5 million. First, a cutoff error at the end of the prior year resulted in an $8.8 million understatement of revenue. |
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