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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 26, 2008
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-05492
NASHUA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts | 02-0170100 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11 Trafalgar Square, Suite 201, Nashua, New Hampshire 03063 | ||
(Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code (603) 880-2323
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: þ No: o
Yes: þ No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes: o No: þ
Yes: o No: þ
The number of shares outstanding of the registrant’s common stock, as of October 30, 2008:
Class | Number of Shares | |
Common Stock, $1.00 par value | 5,743,186 |
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Table of Contents
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
September 26, 2008 | December 31, | |||||||
(Unaudited) | 2007 | |||||||
(In thousands) | ||||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,867 | $ | 7,388 | ||||
Accounts receivable | 29,782 | 29,375 | ||||||
Inventories: | ||||||||
Raw materials | 11,653 | 9,079 | ||||||
Work in process | 2,994 | 2,565 | ||||||
Finished goods | 9,892 | 8,354 | ||||||
24,539 | 19,998 | |||||||
Other current assets | 2,516 | 2,828 | ||||||
Total current assets | 61,704 | 59,589 | ||||||
Plant and equipment | 70,710 | 71,096 | ||||||
Accumulated depreciation | (49,504 | ) | (47,805 | ) | ||||
21,206 | 23,291 | |||||||
Goodwill | 17,374 | 31,516 | ||||||
Intangibles, net of amortization | 275 | 331 | ||||||
Other assets | 12,184 | 12,975 | ||||||
Total assets | $ | 112,743 | $ | 127,702 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 18,346 | $ | 14,432 | ||||
Accrued expenses | 8,179 | 9,185 | ||||||
Current maturities of long-term debt | 2,500 | 1,875 | ||||||
Current maturities of notes payable to related parties | 29 | 31 | ||||||
Total current liabilities | 29,054 | 25,523 | ||||||
Long-term debt | 9,675 | 10,925 | ||||||
Notes payable to related parties | — | 18 | ||||||
Other long-term liabilities | 25,568 | 29,728 | ||||||
Total long-term liabilities | 35,243 | 40,671 | ||||||
Commitments and contingencies (see Note 10) | ||||||||
Shareholders’ equity: | ||||||||
Common stock, par value $1.00; authorized 20,000,000 shares; issued and outstanding 5,743,186 shares in 2008 and 5,640,636 shares in 2007 | 5,743 | 5,641 | ||||||
Additional paid-in capital | 15,140 | 14,562 | ||||||
Retained earnings | 45,906 | 59,648 | ||||||
Accumulated other comprehensive loss: | ||||||||
Minimum pension liability adjustment, net of tax | (18,343 | ) | (18,343 | ) | ||||
Total shareholders’ equity | 48,446 | 61,508 | ||||||
Total liabilities and shareholders’ equity | $ | 112,743 | $ | 127,702 | ||||
See accompanying notes.
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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales | $ | 66,239 | $ | 67,610 | $ | 197,168 | $ | 200,467 | ||||||||
Cost of products sold | 55,681 | 56,046 | 165,425 | 165,156 | ||||||||||||
Gross margin | 10,558 | 11,564 | 31,743 | 35,311 | ||||||||||||
Selling, distribution and administrative expenses | 9,645 | 9,959 | 30,574 | 30,397 | ||||||||||||
Research and development expense | 152 | 174 | 516 | 619 | ||||||||||||
Loss from equity investments | 62 | 29 | 191 | 169 | ||||||||||||
Interest expense | 125 | 215 | 416 | 555 | ||||||||||||
Interest income | (22 | ) | (48 | ) | (94 | ) | (117 | ) | ||||||||
Change in fair value of interest rate swap | 75 | 205 | 194 | 82 | ||||||||||||
Other income | (239 | ) | (297 | ) | (726 | ) | (912 | ) | ||||||||
Goodwill impairment charge | 14,142 | — | 14,142 | — | ||||||||||||
Income (loss) from continuing operations before income taxes | (13,382 | ) | 1,327 | (13,470 | ) | 4,518 | ||||||||||
Provision for income taxes | 307 | 475 | 272 | 1,777 | ||||||||||||
Income (loss) from continuing operations | (13,689 | ) | 852 | (13,742 | ) | 2,741 | ||||||||||
Income from discontinued operations, net of taxes | — | — | — | 289 | ||||||||||||
Net income (loss) | $ | (13,689 | ) | $ | 852 | $ | (13,742 | ) | $ | 3,030 | ||||||
Basic earnings per share: | ||||||||||||||||
Income (loss) per common share from continuing operations | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.47 | ||||||
Income per common share from discontinued operations | — | — | — | 0.05 | ||||||||||||
Net income (loss) per common share | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.52 | ||||||
Average common shares | 5,425 | 5,386 | 5,410 | 5,864 | ||||||||||||
Diluted earnings per share: | ||||||||||||||||
Income (loss) per common share from continuing operations assuming dilution | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.46 | ||||||
Income per common share from discontinued operations assuming dilution | — | — | — | 0.05 | ||||||||||||
Net income (loss) per common share assuming dilution | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.51 | ||||||
Dilutive effect of stock options | — | 79 | — | 70 | ||||||||||||
Average common and potential common shares | 5,425 | 5,465 | 5,410 | 5,934 | ||||||||||||
See accompanying notes.
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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||
September 26, | September 28, | |||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (13,742 | ) | $ | 3,030 | |||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,136 | 3,491 | ||||||
Amortization of deferred gain | (506 | ) | (505 | ) | ||||
Change in fair value of interest rate swap | 194 | 82 | ||||||
Stock based compensation | 618 | 180 | ||||||
Excess tax benefit from exercised stock based | (14 | ) | (124 | ) | ||||
Goodwill impairment charge | 14,142 | — | ||||||
(Gain)/loss on sale/disposal of fixed assets | 88 | 39 | ||||||
Loss on equity investment | 191 | 169 | ||||||
Contribution to pension plan | (4,888 | ) | (5,339 | ) | ||||
Related party repayment of loan | — | 1,071 | ||||||
Change in operating assets and liabilities | 60 | 3,566 | ||||||
Cash (used in) provided by operating activities | (721 | ) | 5,660 | |||||
Cash flows from investing activities: | ||||||||
Investment in plant and equipment | (1,088 | ) | (910 | ) | ||||
Proceeds from sale of fixed assets | — | 6 | ||||||
Investment in unconsolidated equity investment | (129 | ) | (146 | ) | ||||
Cash used in investing activities | (1,217 | ) | (1,050 | ) | ||||
Cash flows from financing activities: | ||||||||
Net repayments on revolving portion of long-term debt | — | (1,950 | ) | |||||
Principal repayment on term portion of long-term debt | (625 | ) | — | |||||
Proceeds from refinancing | — | 10,000 | ||||||
Repayment of notes payable to related parties | (20 | ) | (56 | ) | ||||
Proceeds from shares exercised under stock option plans | 48 | 554 | ||||||
Excess tax benefit from exercised stock based compensation | 14 | 124 | ||||||
Repurchase of common stock | — | (8,959 | ) | |||||
Cash used in financing activities | (583 | ) | (287 | ) | ||||
Increase (decrease) in cash and cash equivalents | (2,521 | ) | 4,323 | |||||
Cash and cash equivalents at beginning of period | 7,388 | 289 | ||||||
Cash and cash equivalents at end of period | $ | 4,867 | $ | 4,612 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid (net of amount capitalized) | $ | 360 | $ | 489 | ||||
Income taxes paid, net | $ | 45 | $ | 1,805 | ||||
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The accompanying financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. Certain prior year data have been reclassified to conform to the 2008 presentation. Unless otherwise indicated, information in these notes to condensed consolidated financial statements relate to continuing operations.
Note 2: Goodwill
For the third quarter ended September 26, 2008, we recognized a goodwill impairment charge of $14.1 million related to our Specialty Paper Products business.
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), requires that we test goodwill for impairment on an annual basis and on an interim basis when circumstances change between annual tests that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value, and to write down goodwill and non-amortizable intangible assets when impaired. Our annual impairment date is in the fourth quarter of each year. This assessment requires us to estimate the fair market value of each of our reporting units and recognize an impairment when the calculated fair market value is less than our carrying value.
The current business climate related to the ongoing economic crisis and our reliance on retail sales, banking activity and construction activity within our Specialty Paper Products business caused us to re-evaluate our current projections as well as expected market multiples during the third quarter. As a result, we performed an interim impairment test as of September 26, 2008, using a discounted cash flow model. Based on our assessment, we determined that the fair value of the reporting unit did not exceed the carrying value and therefore an impairment was necessary. The net book value of the reporting unit exceeded the fair value of the business in excess of the amount of goodwill related to the reporting unit and, therefore, we have estimated and recorded the entire amount of $14.1 million as an impairment charge in the third quarter. We will perform step 2 of FAS 142, which requires a theoretical purchase price allocation of the fair value of the reporting unit, during the fourth quarter of 2008 and we will finalize the charge.
The carrying amount of goodwill and activity for the first nine months of 2008 is as follows:
Specialty Paper | ||||||||||||
(In thousands) | Products | Label Products | Total | |||||||||
Balance as of December 31, 2007 | $ | 14,142 | $ | 17,374 | $ | 31,516 | ||||||
Impairment charge | (14,142 | ) | — | (14,142 | ) | |||||||
Balance as of September 26, 2008 | $ | — | $ | 17,374 | $ | 17,374 | ||||||
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Note 3: Acquired Intangible Assets
Details of acquired intangible assets are as follows:
As of September 26, 2008 | ||||||||||||
Weighted | ||||||||||||
Gross | Average | |||||||||||
Carrying | Accumulated | Amortization | ||||||||||
(In thousands) | Amount | Amortization | Period | |||||||||
Trademarks and tradenames | $ | 211 | $ | 98 | 15 years | |||||||
Customer relationships and lists | 829 | 667 | 12 years | |||||||||
$ | 1,040 | $ | 765 | |||||||||
Amortization Expense: | ||||||||||||
For the nine months ended September 26, 2008 | $ | 56 | ||||||||||
Estimated for the year ending December 31, 2008 | $ | 71 | ||||||||||
Estimated for the year ending December 31, 2009 | $ | 47 | ||||||||||
Estimated for the year ending December 31, 2010 | $ | 39 | ||||||||||
Estimated for the year ending December 31, 2011 | $ | 34 | ||||||||||
Estimated for the year ending December 31, 2012 | $ | 31 | ||||||||||
Estimated for the year ending December 31, 2013 | $ | 30 | ||||||||||
Estimated for the year ending December 31, 2014 and thereafter | $ | 79 |
The gross carrying amount, accumulated amortization and weighted average amortization period have been adjusted to remove fully amortized intangible assets as of September 26, 2008.
Note 4: Lease Exit Charges
During the third quarter of 2008, we recorded $.3 million related to the closure of our leased facility located in Cranbury, New Jersey as part of distribution expense. In accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (FAS 146), we calculated the costs associated with the closure of the facility and our related lease obligation. The calculation includes the discounted effect of future minimum lease payments from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting the facility or favorably terminating the lease.
(in thousands) | ||||
Balance as of June 27, 2008 | $ | — | ||
Provision for lease exit charges | 298 | |||
Balance as of September 26, 2008 | $ | 298 | ||
Note 5: Pension and Postretirement Benefits
Net periodic pension and postretirement benefit costs for the quarters ended September 26, 2008 and September 28, 2007 for the plans include the following components:
Pension Benefits for | Postretirement Benefits | |||||||||||||||
three months ended | for three months ended | |||||||||||||||
Sept. 26, | Sept. 28, | Sept. 26, | Sept. 28, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Components of net periodic (income) cost | ||||||||||||||||
Service cost | $ | 125 | $ | 120 | $ | — | $ | — | ||||||||
Interest cost | 1,491 | 1,450 | 7 | 11 | ||||||||||||
Expected return on plan assets | (1,631 | ) | (1,579 | ) | — | — | ||||||||||
Amortization of prior service cost | 1 | 1 | (17 | ) | (17 | ) | ||||||||||
Recognized net actuarial (gain)/loss | 376 | 447 | (22 | ) | (19 | ) | ||||||||||
Net periodic (income) cost | $ | 362 | $ | 439 | $ | (32 | ) | $ | (25 | ) | ||||||
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Pension Benefits for | Postretirement Benefits | |||||||||||||||
nine months ended | for nine months ended | |||||||||||||||
Sept. 26, | Sept. 28, | Sept. 26, | Sept. 28, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Components of net periodic (income) cost | ||||||||||||||||
Service cost | $ | 375 | $ | 382 | $ | — | $ | — | ||||||||
Interest cost | 4,451 | 4,330 | 21 | 33 | ||||||||||||
Expected return on plan assets | (4,900 | ) | (4,809 | ) | — | — | ||||||||||
Amortization of prior service cost | 3 | 3 | (51 | ) | (51 | ) | ||||||||||
Recognized net actuarial (gain)/loss | 1,063 | 1,307 | (64 | ) | (57 | ) | ||||||||||
Net periodic (income) cost | $ | 992 | $ | 1,213 | $ | (94 | ) | $ | (75 | ) | ||||||
We funded the pension plans $4.9 million in the first nine months of 2008 and we do not expect to make further contributions to our pension plans in 2008.
Note 6: Discontinued Operations
Discontinued operations, which include reimbursement of $.5 million from our insurance provider for the reimbursement of legal fees related to the Cerion litigation that was dismissed by the court in the first quarter of 2007, were as follows:
For the | For the | |||||||||||||||
three months ended | nine months ended | |||||||||||||||
Sept. 26, | Sept. 28, | Sept. 26, | Sept. 28, | |||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Income before income taxes | $ | — | $ | — | $ | — | $ | 500 | ||||||||
Income taxes | — | — | — | 211 | ||||||||||||
Income from discontinued operations | $ | — | $ | — | $ | — | $ | 289 | ||||||||
Note 7: Segment and Related Information
The following table presents information about our reportable segments.
Net Sales | Gross Margin | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Label Products | $ | 25,943 | $ | 27,848 | $ | 3,905 | $ | 4,986 | ||||||||
Specialty Paper Products | 41,112 | 40,357 | 6,547 | 6,398 | ||||||||||||
All other | 973 | 993 | 91 | 180 | ||||||||||||
Reconciling items: | ||||||||||||||||
Eliminations | (1,789 | ) | (1,588 | ) | 15 | — | ||||||||||
Consolidated | $ | 66,239 | $ | 67,610 | $ | 10,558 | $ | 11,564 | ||||||||
Net Sales | Gross Margin | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Label Products | $ | 77,113 | $ | 84,515 | $ | 11,690 | $ | 15,312 | ||||||||
Specialty Paper Products | 122,346 | 118,424 | 19,614 | 19,548 | ||||||||||||
All other | 2,986 | 2,998 | 445 | 489 | ||||||||||||
Reconciling items: | ||||||||||||||||
Eliminations | (5,277 | ) | (5,470 | ) | (6 | ) | (38 | ) | ||||||||
Consolidated | $ | 197,168 | $ | 200,467 | $ | 31,743 | $ | 35,311 | ||||||||
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Note 8: Income Taxes
The estimated annual effective income tax rate for continuing operations was 2.0 percent for 2008 and 39.3 percent for 2007. The expense was greater than the U.S. statutory benefit due to the impact of non-deductible goodwill impairment and state income taxes. The tax rate for 2007 is higher than the U.S. statutory rate principally due to the impact of state income taxes.
Note 9: Earnings Per Share
Reconciliations of the denominators used in our 2008 and 2007 earnings per share calculations are presented below.
Three months ended | Nine months ended | |||||||||||||||
Sept. 26, 2008 | Sept. 28, 2007 | Sept. 26, 2008 | Sept. 28, 2007 | |||||||||||||
In thousands except per share data | ||||||||||||||||
Numerator | ||||||||||||||||
Income from continuing operations | $ | (13,689 | ) | $ | 852 | $ | (13,742 | ) | $ | 2,741 | ||||||
Income from discontinued operations | — | — | — | 289 | ||||||||||||
Net income | $ | (13,689 | ) | $ | 852 | $ | (13,742 | ) | $ | 3,030 | ||||||
Denominator | ||||||||||||||||
Basic | ||||||||||||||||
Weighted-average number of common shares outstanding | 5,402 | 5,383 | 5,399 | 5,861 | ||||||||||||
Other | 23 | 3 | 11 | 3 | ||||||||||||
Denominator for basic earnings per share | 5,425 | 5,386 | 5,410 | 5,864 | ||||||||||||
Diluted | ||||||||||||||||
Basic weighted-average shares outstanding | 5,425 | 5,386 | 5,410 | 5,864 | ||||||||||||
Common stock equivalents | — | 79 | — | 70 | ||||||||||||
Denominator for dilutive earnings per share | 5,425 | 5,465 | 5,410 | 5,934 | ||||||||||||
Per share amounts | ||||||||||||||||
Basic | ||||||||||||||||
Income from continuing operations | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.47 | ||||||
Income from discontinued operations | — | — | — | 0.05 | ||||||||||||
Net income | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.52 | ||||||
Diluted | ||||||||||||||||
Income from continuing operations | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.46 | ||||||
Income from discontinued operations | — | — | — | 0.05 | ||||||||||||
Net income | $ | (2.52 | ) | $ | 0.16 | $ | (2.54 | ) | $ | 0.51 |
Market-based restricted stock of 340,288 shares for the nine months ended September 26, 2008 and 246,431 shares for the nine months ended September 28, 2007 were not included in the above computations.
Note 10: Stock-Based Compensation
We have six stock compensation plans at September 26, 2008: the 2008 Value Creation Incentive Plan, the 2008 Directors’ Plan, the 2007 Value Creation Incentive Plan, the 2004 Value Creation Incentive Plan, the 1999 Shareholder Value Plan, and the 1996 Stock Incentive Plan.
On April 28, 2008, our shareholders approved the 2008 Value Creation Incentive Plan pursuant to which restricted stock awards may be granted to certain key executives. The restricted stock will vest only upon achievement of certain target average closing prices of our common stock over the 40-consecutive trading day period which ends on the third anniversary of the date of grant, such that 33 percent of such shares shall vest if the 40-day average closing price of at least $13.00 but less than $14.00 is achieved, 66 percent of such shares shall vest if the 40-day average closing price of at least $14.00 but less than $15.00 is achieved, and 100 percent of such shares shall vest if the 40-day average closing price of $15.00 or greater is achieved. The restricted shares vest upon a change of control if the share price at the date of the change of control is equal to or greater than $13.00. Shares of the restricted stock are forfeited if the specified closing prices of our common stock are not met. 100,000 shares from the 2008 Value Creation Incentive Plan were awarded as of September 26, 2008. Zero shares are available to be awarded as of September 26, 2008.
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On April 28, 2008, our shareholders also adopted the 2008 Directors’ Plan. The plan entitles each of Nashua’s directors, with the exception of our chief executive officer, to receive restricted stock units. The restricted stock units will vest as to 25 percent of the shares subject to award as of the grant date and, for as long as the director continues to serve as a member of the Board of Directors, will vest as to an additional 25 percent of the shares subject to award at the end of each successive three-month period following the grant date until fully vested. 48,570 restricted stock units from the 2008 Directors’ Plan were awarded as of September 26, 2008. 21,430 restricted stock units were available to be awarded as of September 26, 2008.
Our four additional stock compensation plans are described in Note 8 to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Note 11: Contingencies
Environmental
We are involved in certain environmental matters and have been designated by the Environmental Protection Agency, referred to as the EPA, as a potentially responsible party for certain hazardous waste sites. In addition, we have been notified by certain state environmental agencies that some of our sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, our ultimate cost of remediation is difficult to estimate. Accordingly, estimates could either increase or decrease in the future due to changes in such factors. At September 26, 2008, based on the facts currently known and our prior experience with these matters, we have concluded that it is probable that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.6 million to $.9 million for continuing operations. These estimates could increase if other potentially responsible parties or our insurance carriers are unable or unwilling to bear their allocated share and cannot be compelled to do so. At September 26, 2008, our accrual balances relating to environmental matters were $.7 million for continuing operations. Based on information currently available, we believe that it is probable that the major potentially responsible parties will fully pay the costs apportioned to them. We believe that our remediation expense is not likely to have a material adverse effect on our consolidated financial position or results of operations.
State Street Bank and Trust
On October 24, 2007, the Nashua Pension Plan Committee filed a Class Action Complaint with the United States District Court for the District of Massachusetts against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. On January 14, 2008, the Nashua Pension Plan Committee filed a revised Complaint with the United States District Court for the District of New York against the same defendants. The Complaint alleges that the defendants violated their obligations as fiduciaries under the Employment Retirement Income Securities Act of 1974.
On February 7, 2008, the Court consolidated our action with other pending ERISA actions and appointed the Nashua Pension Plan Committee as one of the lead plaintiffs in the consolidated action. On August 22, 2008, the lead plaintiffs filed a consolidated amended complaint. On October 17, 2008, defendants filed their answer and included a counterclaim against trustees of the named plaintiff plans, including the trustees of Nashua’s Pension Plan Committee, asserting that to the extent State Street is liable to the plans, the trustees are liable to State Street for contribution and/or indemnification in the amount of any payment by State Street in excess of State Street’s share of liability. We believe the counterclaim is without merit and the trustees intend to vigorously defend against the counterclaim. Discovery commenced in March 2008 and is ongoing.
Other
We are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of our business. In the opinion of our management, the resolution of these matters will not materially affect us.
Note 12: Fair Value Measurements
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (FAS 157) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the
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asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. FAS 157 defines fair value based upon an exit price model.
Relative to FAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 amended FAS 157 to exclude FAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of FAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis.
We adopted FAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities as permitted. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of FAS 157 include those measured at fair value in goodwill impairment testing and indefinite lived intangible assets measured at fair value for impairment testing.
FAS 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FAS 157 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FAS 157 also established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that we use to measure fair value.
Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. | |
Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table sets forth the financial liability as of September 26, 2008 that we measured at fair value on a recurring basis by level within the fair value hierarchy. As required by FAS 157, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Fair Value Measurements at September 26, 2008 Using | ||||||||||||||||
Total Carrying | Quoted prices in | Significant other | Significant | |||||||||||||
Value at | active markets | observable inputs | unobservable inputs | |||||||||||||
(in thousands of dollars) | September 26, 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate swap liability | $ | 342 | $ | — | $ | 342 | $ | — |
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (FAS 159). This standard allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to fair value will be recognized in earnings. FAS 159 also established additional disclosure requirements. The requirements for FAS 159 were effective for our fiscal year beginning January 1, 2008. We have adopted FAS 159 and have elected not to measure any additional financial instruments and other items at fair value. The adoption of FAS 159 had no impact on our financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read along with our 2007 Form 10-K filed with the Securities and Exchange Commission and with the unaudited condensed consolidated financial statements included in this Form 10-Q.
Our business has been affected by the downturn in the economy as evidenced by the decline in sales, the increase in raw material cost and fuel cost impacting both gross margins and distribution cost. As a result, we incurred a severance charge of $.6 million in the second quarter in connection with the elimination of 28 positions. We estimate the annualized savings associated with the elimination of the positions to be approximately $1.6 million.
During the second quarter of 2008 we also reserved an additional $.2 million in our environmental reserve related to the settlement of our exposure to clean up cost for de minimis parties for sites in Connecticut.
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During the third quarter we completed the closure of our Cranbury, New Jersey, Addison, Illinois and Kent, Washington distribution facilities. The customers formerly serviced by these distribution centers are now being serviced directly through our manufacturing facilities and public warehouses located in the general vicinity of the distribution centers.
We have decided to consolidate our label manufacturing into the facilities located in Jefferson City, Tennessee and Omaha, Nebraska. We therefore expect to cease the converting of labels in our Jacksonville, Florida facility and close the facility during the fourth quarter of 2008. During the third quarter of 2008 we incurred an expense of $.1 million related to severance for the Jacksonville, Florida plant employees. We expect to record additional expenses of approximately $1.1 million in relation to the closure of the Florida facility.
As a result of the softness in the retail, banking and construction industries due to the economic crisis, we were required to test goodwill for impairment during the third quarter. As a result of the testing, we recognized an estimated goodwill impairment charge in the amount of $14.1 million related to the Specialty Paper Products business.
Results of Operations
Third quarter | Third quarter | First nine months | First nine months | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Net sales | $ | 66.2 | $ | 67.6 | $ | 197.2 | $ | 200.5 | ||||||||
Gross margin % | 15.9 | % | 17.1 | % | 16.1 | % | 17.6 | % | ||||||||
Selling and distribution expenses | $ | 6.5 | $ | 6.0 | $ | 19.5 | $ | 17.9 | ||||||||
General and administrative expenses | $ | 3.2 | $ | 4.0 | $ | 11.0 | $ | 12.5 | ||||||||
Research and development expenses | $ | .2 | $ | .2 | $ | .5 | $ | .6 | ||||||||
Other income | $ | (.2 | ) | $ | (.3 | ) | $ | (.7 | ) | $ | (.9 | ) | ||||
Goodwill impairment charge | $ | 14.1 | $ | — | $ | 14.1 | $ | — | ||||||||
Interest expense, net | $ | .2 | $ | .4 | $ | .5 | $ | .5 | ||||||||
Income (loss) before income taxes from continuing operations | $ | (13.4 | ) | $ | 1.3 | $ | (13.5 | ) | $ | 4.5 | ||||||
Income (loss) from continuing operations | $ | (13.7 | ) | $ | .9 | $ | (13.7 | ) | $ | 2.7 | ||||||
Income from discontinued operations, net of income taxes | $ | — | $ | — | $ | — | $ | .3 | ||||||||
Net income (loss) | $ | (13.7 | ) | $ | .9 | $ | (13.7 | ) | $ | 3.0 | ||||||
Depreciation and amortization | $ | 1.1 | $ | 1.1 | $ | 3.2 | $ | 3.5 | ||||||||
Investment in plant and equipment | $ | .4 | $ | .4 | $ | 1.1 | $ | .9 |
Our net sales from continuing operations decreased $1.4 million, or 2.0 percent, to $66.2 million for the third quarter of 2008 compared to $67.6 million for the third quarter of 2007. The decrease was mainly attributable to decreased sales in our Label Products segment partially offset by increased sales in our Specialty Paper Products segment. Our net sales decreased $3.3 million, or 1.7 percent, to $197.2 million for the first nine months of 2008 compared to $200.5 million for the first nine months of 2007. The decrease was primarily due to decreased sales in our Label Products segment.
Gross margin percentage decreased from 17.1 percent for the third quarter of 2007 to 15.9 percent for the third quarter of 2008 primarily due to decreased margin percentage in our Label Products segment. Gross margin decreased $1.0 million to $10.6 million for the third quarter of 2008 compared to $11.6 million for the third quarter of 2007 as a result of decreased margin in our Label Products segment partially offset by increased margin in our Specialty Paper Products segment. Our gross margin percentage decreased from 17.6 percent for the first nine months of 2007 to 16.1 percent for the first nine months of 2008 as a result of decreased margin percentage across both segments. Gross margin decreased $3.6 million to $31.7 million for the first nine months of 2008 compared to $35.3 million for the first nine months of 2007. The decrease was primarily attributable to a decrease in our Label products segment as a result of lower sales volume and the expected consolidation of the label converting into the Jefferson City, Tennessee and Omaha, Nebraska facilities.
Distribution expenses increased $.7 million to $3.6 million for the third quarter of 2008 compared to $2.9 million for the third quarter of 2007. The increase was mainly attributable to lease exit charges related to our closure of the Cranbury, New Jersey facility, increased small shipments in our Label Products segment, increased sales volume in our Point of Sale products and the conversion of our Cranbury, New Jersey wide format facility to a public warehouse as well as increased freight rates due to higher fuel prices. Distribution expenses increased $1.6 million to $10.4 million for the first nine months of 2008 compared to $8.8 million for the first nine months of 2007. The increase was mainly attributable to the conversion of our New Jersey plant to a distribution facility, increased freight rates due to higher fuel prices and severance expense and lease exit charges related to our decision to close the Cranbury, New Jersey distribution facility effective July 31, 2008. As a percentage of sales, distribution expenses increased from 4.4 percent for the first nine months of 2007 to 5.3 percent for the first nine months of 2008.
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Selling expenses decreased $.2 million to $2.9 million for the third quarter of 2008 compared to $3.1 million for the third quarter of 2007. The decrease is primarily due to lower bad debt expenses and lower sales incentive costs. Selling expenses were $9.1 million for the first nine months of both 2008 and 2007 as lower commission, sales incentive costs and bad debt expenses offset severance related to our 2008 workforce reduction and increased employee wage and benefit costs. As a percentage of sales, selling expenses increased from 4.5 percent for the first nine months of 2007 to 4.6 percent for the first nine months of 2008.
General and administrative expenses decreased $.8 million to $3.2 million for the third quarter of 2008 compared to $4.0 million for the third quarter of 2007. The decrease was primarily due to decreased employee wage and benefit costs related to our reduction in workforce during the second quarter of 2008 and reduced legal expenses, lower management incentive expense and lower tax expenses partially offset by increased professional fees. General and administrative expenses decreased $1.5 million to $11.0 million for the first nine months of 2008 compared to $12.5 million for the first nine months of 2007. The decrease was primarily due to lower management incentive plan and legal expenses and lower amortization of intangible assets as they become fully amortized, partially offset by increased severance expense related to our workforce reduction in the second quarter of 2008 and increased expenses related to stock grants. As a percentage of sales, general and administrative expenses decreased from 6.2 percent for the first nine months of 2007 to 5.6 percent for the first nine months of 2008.
Research and development expenses remained unchanged at $.2 million for the third quarter of 2008 and decreased $.1 million to $.5 million for the first nine months of 2008 compared to $.6 million for the first nine months of 2007.
Net interest expense was $.2 million for the third quarter of 2008 compared to $.4 million for the third quarter of 2007. The decrease was primarily due to changes in the fair value of our interest rate swap and lower interest expense related to bank debt. Net interest expense was $.5 million for the first nine months of both 2008 and 2007 as lower interest expense on our bank debt offset a decrease in the fair value of our interest rate swap.
Other income decreased $.1 million to $.2 million for the third quarter of 2008 compared to $.3 million for the third quarter of 2007 and decreased $.2 million to $.7 million for the first nine months of 2008 compared to $.9 million for the first nine months of 2007. The decreases were primarily due to lower royalty income generated from the sale of toner formulations in 2006.
For the third quarter ended September 26, 2008, we recognized a goodwill impairment charge of $14.1 million related to our Specialty Paper Products business. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), requires that we test goodwill for impairment on an annual basis and an interim basis when circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value, and to write down goodwill and non-amortizable intangible assets when impaired.
The current business climate related to the ongoing economic crisis and our reliance on retail sales, banking activity and construction activity within our Specialty Paper Products business caused us to re-evaluate our current projections as well as expected market multiples during the third quarter. As a result, we performed an interim impairment test as of September 26, 2008, using a discounted cash flow model. Based on our assessment, we determined that the fair value of the reporting unit did not exceed the carrying value and therefore an impairment was necessary. The net book value of the reporting unit exceeded the fair value of the business in excess of the amount of goodwill related to the reporting unit and, therefore, we have estimated and recorded the entire amount of $14.1 million as an impairment charge in the third quarter. We will perform step 2 of FAS 142, which requires a theoretical purchase price allocation of the fair value of the reporting unit, during the fourth quarter of 2008 and we will finalize the charge.
We have considered whether events have occurred or circumstances have changed with respect to the Label business and concluded that an interim test is not necessary. However, there can be no assurances that the goodwill related to the Label business will not be impaired in the future as a result of potential continued declines in the economy and a corresponding impact on our Label business.
The estimated annual effective income tax rate for continuing operations was 2.0 percent for 2008 and 39.3 percent for 2007. The expense was greater than the U.S. statutory benefit due to the impact of non-deductible goodwill impairment and state income taxes. The tax rate for 2007 is higher than the U.S. statutory rate principally due to the impact of state income taxes.
We have deferred tax assets, net, in the amount of $10.9 million at September 26, 2008, which we evaluate for recoverability, based upon the more-likely-than-not guidance in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We have not recorded any increase in our valuation allowance during the third quarter of 2008; however, we will continue to review these assets for recoverability during the fourth quarter and beyond. Continued declines in economic conditions and in our projections could result in an increase in the valuation allowance.
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Income from discontinued operations, net of taxes, was $.3 million for the first nine months of 2007 and included the reimbursement of legal fees related to the Cerion litigation which was favorably concluded in the first quarter of 2007.
Our net loss for the third quarter of 2008 was $13.7 million, or $2.52 per share, compared to net income of $.9 million, or $0.16 per share, for the third quarter of 2007. Our net loss for the first nine months of 2008 was $13.7 million, or $2.54 per share, compared to net income of $3.0 million, or $0.52 per share, for the first nine months of 2007.
Results of Operations by Reportable Segment
Label Products
Third quarter | Third quarter | First nine months | First nine months | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(in millions) | ||||||||||||||||
Net sales | $ | 25.9 | $ | 27.8 | $ | 77.1 | $ | 84.5 | ||||||||
Gross margin % | 15.1 | % | 17.9 | % | 15.2 | % | 18.1 | % | ||||||||
Depreciation and amortization | $ | .5 | $ | .5 | $ | 1.4 | $ | 1.6 | ||||||||
Investment in plant and equipment | $ | .3 | $ | .1 | $ | .5 | $ | .2 |
Net sales for our Label Products segment decreased $1.9 million, or 6.8 percent, to $25.9 million for the third quarter of 2008 compared to $27.8 million for the third quarter of 2007. The decrease was attributable to decreases of $1.7 million in our automatic identification product line, $.9 million in our supermarket scale product line, $.7 million in our EDP product line partially offset by increases of $.5 million in our RFID product line, $.5 million in our retail shelf product line, $.2 million in our ticket product line and $.2 million in our other product lines. The decrease in our automatic identification product line was mainly due to the impact of lower sales due to the loss of a major customer and overall softness in demand due to economic factors. The decrease in our EDP product line was due to lost business and overall market erosion as the result of customers converting to alternative label technologies. The decrease in our supermarket scale product line was the net result of customers lost and gained. The increase in our retail shelf and RFID product lines was due to increased sales to existing customers. Net sales decreased $7.4 million or 8.8 percent, to $77.1 million for the first nine months of 2008 compared to $84.5 million for the first nine months of 2007. The decrease was primarily the result of decreases of $5.9 million in our automatic identification product line due to the impact of the economic downturn and the loss of a major customer, $1.8 million in our EDP product line as a result of lost business and customers converting to alternative label technologies and $1.5 million in our supermarket scale product line, the net result of business gains and losses. The decreases were partially offset by increases of $.7 million in our RFID product line as a result of increased business, $.6 million in our ticket product line due to increased volume to new and existing customers, $.2 million in our retail shelf product line as a result of new business and $.3 million in other product lines.
Gross margin for our Label Products segment decreased $1.1 million to $3.9 million for the third quarter of 2008 compared to $5.0 million for the third quarter of 2007. As a percentage of net sales, gross margin percentage decreased from 17.9 percent for the third quarter of 2007 to 15.1 percent for the third quarter of 2008. Gross margin decreased $3.6 million to $11.7 million for the first nine months of 2008 compared to $15.3 million for the first nine months of 2007. As a percentage of net sales, gross margin percentage decreased from 18.1 percent for the first nine months of 2007 to 15.2 percent for the first nine months of 2008. The decrease for both the third quarter and first nine months was primarily attributable to the impact of the decreased sales volume and competitive pricing pressure on new business as well as higher employee wage and benefit costs and expenses related to the consolidation of our Jacksonville, Florida manufacturing into the Tennessee and Nebraska facilities.
Specialty Paper Products Segment
Third quarter | Third quarter | First nine months | First nine months | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(in millions) | ||||||||||||||||
Net sales | $ | 41.1 | $ | 40.4 | $ | 122.3 | $ | 118.4 | ||||||||
Gross margin % | 15.9 | % | 15.9 | % | 16.0 | % | 16.5 | % | ||||||||
Depreciation and amortization | $ | .5 | $ | .5 | $ | 1.5 | $ | 1.5 | ||||||||
Investment in plant and equipment | $ | .1 | $ | .3 | $ | .3 | $ | .6 |
Net sales for our Specialty Paper Products segment increased $.7 million, or 1.7 percent, to $41.1 million for the third quarter of 2008 compared to $40.4 million for the third quarter of 2007. The increase was primarily the result of increased sales of $3.5 million in our thermal point of sale product line as a result of new business and increased business with existing
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customers. The increase was partially offset by decreased sales of $1.3 million in our thermal facesheet product line, $.8 million in our wide format product line due to the impact of the soft economic environment, $.2 million in our dry gum product line and $.5 million in other product lines. Net sales increased $3.9 million or 3.3 percent to $122.3 million for the first nine months of 2008 compared to $118.4 million for the first nine months of 2007. The increase was mainly due to an increase of $9.3 million in our thermal point of sale product line attributable to new business and increased sales to existing customers. The increase was partially offset by decreased sales of $1.4 million in our wide format product line as a result of overall economic weakness, $1.0 million in our retail product line due to lower sales to a major customer, $.7 million in our core bond product line as a result of general market erosion due to technology changes, $.5 million in our thermal facesheet product line and $1.8 million in our other product lines.
Gross margin for our Specialty Paper Products segment increased $.1 million to $6.5 million for the third quarter of 2008 compared to $6.4 million for the third quarter of 2007. As a percentage of net sales, gross margin remained unchanged at 15.9 percent for the third quarters of 2008 and 2007. The increase of $.1 million was primarily the result of increased volume and lower manufacturing cost in our thermal point of sale products partially offset by competitive pricing on new point of sale business and lower volume in our paper coating and wide format businesses. Gross margin increased $.1 million to $19.6 million for the first nine months of 2008 compared to $19.5 million for the first nine months of 2007. As a percentage of net sales, gross margin decreased to 16.0 percent for the first nine months of 2008 compared to 16.5 percent for the first nine months of 2007. The $.1 million increase is mainly attributable to the increase in thermal point of sale volume and lower manufacturing spending in our point of sale business. Competitive pricing pressure, lower volume of wide format sales due to the overall construction downturn and lower volume and increased manufacturing costs in our paper coating facility offset the margin dollar increase and contributed to the margin percentage decrease for the first nine months.
Goodwill Impairment
For the third quarter ended September 26, 2008, we recognized a goodwill impairment charge of $14.1 million related to our Specialty Paper Products business.
The carrying amount of goodwill and activity for the first nine months of 2008 is as follows:
Specialty Paper | ||||||||||||
(In thousands) | Products | Label Products | Total | |||||||||
Balance as of December 31, 2007 | $ | 14,142 | $ | 17,374 | $ | 31,516 | ||||||
Impairment charge | (14,142 | ) | — | (14,142 | ) | |||||||
Balance as of September 26, 2008 | $ | — | $ | 17,374 | $ | 17,374 | ||||||
Discontinued Operations
Discontinued operations, which include reimbursement of $.5 million from our insurance provider for the reimbursement of legal fees related to the Cerion litigation that was dismissed by the court in the first quarter of 2007, were as follows:
For the | For the | |||||||||||||||
three months ended | nine months ended | |||||||||||||||
Sept. 26, | Sept. 28, | Sept. 26, | Sept. 28, | |||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Income before taxes | $ | — | $ | — | $ | — | $ | 500 | ||||||||
Income taxes | — | — | — | 211 | ||||||||||||
Income from discontinued operations | $ | — | $ | — | $ | — | $ | 289 | ||||||||
Liquidity, Capital Resources and Financial Condition
Cash and cash equivalents decreased $2.5 million to $4.9 million during the first nine months of 2008 due to cash flows used in operations, investing and financing activities of $.7 million, $1.2 million and $.6 million respectively. Our cash flows from continuing and discontinued operations are combined in our consolidated statement of cash flows.
Cash flow used in operations of $.7 million for the first nine months of 2008 was primarily attributable to $4.9 million in contributions to our pension plans which more than offset our cash from operating activities after adjusting for non-cash items such as $.5 million related to the amortization of the deferred gain related to the 2006 sales of New Hampshire real estate, $14.1 million goodwill impairment, $3.1 million of depreciation and amortization, $.6 million of stock based compensation, $.2 million loss from our equity investment and $.2 million change in the fair value of our interest rate swap.
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The increase in net operating assets and liabilities was $60,000 for the first nine months of 2008 and resulted primarily from a $4.5 million increase in inventory, a $.4 million increase in accounts receivable and a $1.0 million decrease in accrued expenses offset by a $3.9 million increase in accounts payable, a $1.0 million decrease in other assets and a $1.0 increase in other liabilities. The increase in inventory was mainly attributable to an increase of $2.1 million in our Label Products segment primarily related to increased finished goods and an increase of $2.6 million in our Specialty Paper Products segment related to the buy in of raw materials. The $3.9 million increase in accounts payable was mainly due to increases in our Specialty Paper Products segment related to the inventory buy in and in our Label Products segment.
Cash used in investing activities of $1.2 million related to cash used for investment in fixed assets.
Cash used in financing activities of $.6 million was primarily due to a quarterly payment due on our term loan.
We had $24.8 million available borrowing capacity at September 26, 2008 under our revolving loan commitment. Our loan commitments and borrowing capacity are described in Note 4 to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Cautionary Note Regarding Forward-Looking Statements
Information we provide in this Form 10-Q may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports we file with the Securities and Exchange Commission, in materials we deliver to stockholders and in our press releases. In addition, our representatives may, from time to time, make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that is not directly related to historical or current fact. Words such as “estimates,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, our future capital needs, stock market conditions, the price of our stock, fluctuations in customer demand, intensity of competition from other vendors, timing and acceptance of our new product introductions, general economic and industry conditions, delays or difficulties in programs designed to increase sales and improve profitability, the possibility of a final award of material damages in our pending litigation, goodwill impairment, and other risks detailed in this Form10-Q in our filings with the Securities and Exchange Commission. The information set forth in this Form 10-Q should be read in light of such risks. We assume no obligation to update the information contained in this Form 10-Q or to revise our forward-looking statements.
ITEM 4T. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 26, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 26, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 26, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Environmental
We are involved in certain environmental matters and have been designated by the Environmental Protection Agency, referred to as the EPA, as a potentially responsible party for certain hazardous waste sites. In addition, we have been notified by certain state environmental agencies that some of our sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, our ultimate cost of remediation is difficult to estimate. Accordingly, estimates could either increase or decrease in the future due to changes in such factors. At September 26, 2008, based on the facts currently known and our prior experience with these matters, we have concluded that it is probable that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.6 million to $.9 million for continuing operations. These estimates could increase if other potentially responsible parties or our insurance carriers are unable or unwilling to bear their allocated share and cannot be compelled to do so. At September 26, 2008, our accrual balances relating to environmental matters were $.7 million for continuing operations. Based on information currently available, we believe that it is probable that the major potentially responsible parties will fully pay the costs apportioned to them. We believe that our remediation expense is not likely to have a material adverse effect on our consolidated financial position or results of operations.
State Street Bank and Trust
On October 24, 2007, the Nashua Pension Plan Committee filed a Class Action Complaint with the United States District Court for the District of Massachusetts against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. On January 14, 2008, the Nashua Pension Plan Committee filed a revised Complaint with the United States District Court for the District of New York against the same defendants. The Complaint alleges that the defendants violated their obligations as fiduciaries under the Employment Retirement Income Securities Act of 1974.
On February 7, 2008, the Court consolidated our action with other pending ERISA actions and appointed the Nashua Pension Plan Committee as one of the lead plaintiffs in the consolidated action. On August 22, 2008, the lead plaintiffs filed a consolidated amended complaint. On October 17, 2008, Defendants filed their answer and included a counterclaim against trustees of the named plaintiff plans, including the trustees of Nashua’s Pension Plan Committee, asserting that to the extent State Street is liable to the plans, the trustees are liable to State Street for contribution and/or indemnification in the amount of any payment by State Street in excess of State Street’s share of liability. We believe the counterclaim is without merit and the trustees intend to vigorously defend against the counterclaim. Discovery commenced in March 2008 and is ongoing.
Other
We are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of our business. In the opinion of our management, the resolution of these matters will not materially affect us.
ITEM 1A. RISK FACTORS
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time.
We face significant competition.
The markets for our products are highly competitive, and our ability to effectively compete in those markets is critical to our future success. Our future performance and market position depend on a number of factors, including our ability to react to competitive pricing pressures, our ability to hire qualified sales personnel, our ability to maintain competitive manufacturing costs, our ability to introduce new value-added products and services to the market and our ability to react to the commoditization of products. Our performance could also be impacted by external factors, such as:
• | increasing pricing pressures from competitors in the markets for our products; |
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• | a faster decline than anticipated in the more mature, higher margin product lines, such as bond, carbonless, heat seal and drygum products, due to changing technologies; | ||
• | slowness in the economy and the availability of financing due to changes in the banking and financing industry could cause certain of our customers, especially in the retail and construction industry, to be impacted by adverse conditions whereby customer sales decline and/or customer reduction in size of their business through either store closures or the consolidation of warehouses causing our sales to decline; | ||
• | natural disasters such as hurricanes, floods, earthquakes and pandemic events, which could cause our customers to close a number or all of their stores or operations for an extended period of time causing our sales to be reduced during the period of closure; | ||
• | our ability to pass on raw material price increases to customers; | ||
• | our ability to pass on increased freight cost due to fuel price fluctuations; and | ||
• | our ability to pass on manufacturing cost increases. |
Our Specialty Paper Products segment operates a manufacturing facility in New Hampshire, which has relatively higher operating costs compared to manufacturing locations in other parts of the United States where some of our competitors are located or operate. Some of our competitors may be larger in size or scope than we are, which may allow them to achieve greater economies of scale on a global basis or allow them to better withstand periods of declining prices and adverse operating conditions.
In addition, there has been an increasing trend among our customers towards consolidation. With fewer customers in the market for our products, the strength of our negotiating position with these customers could be weakened, which could have an adverse effect on our pricing, margins, profitability and recoverability of assets including goodwill.
We have a wide diversity of customers but there are a number of individual customers that could impact our financial condition. The business risk associated with these customers relates to potential sales declines due to their individual business needs or loss of business to competitors and increased credit risk due to the concentration of these customers.
We are subject to credit risks.
Slowness in the economy may subject us to increased risk of non-payment of our accounts receivable. A significant delay in the collection of funds or a reduction of funds collected may impact our liquidity or increase bad debts.
Increases in raw material costs or the unavailability of raw materials may adversely affect our profitability.
We depend on outside suppliers for the raw materials used in our business. Although we believe that adequate supplies of the raw materials we use are available, any significant decrease in supplies, any increase in costs or a greater increase in delivery costs for these materials could result in a decrease in our margins, which could harm our financial condition. Our Specialty Paper Products and Label Products segments are impacted by the economic conditions and plant capacity dynamics within the paper and label industry. In general, the availability and pricing of commodity paper such as uncoated facesheet is affected by the capacity of the paper mills producing the products. Cost increases at paper manufacturers, or other producers of the raw materials which we use in our business, and capacity constraints in paper manufacturers’ operations could cause increases in the costs of raw materials, which could harm our financial condition if we are unable to recover the cost from our customers. Conversely, an excess supply of materials by manufacturers could result in lower selling prices and the risk of eroded margins.
We have periodically been able to pass on significant raw material cost increases through price increases to our customers. Nonetheless, our results of operations for individual quarters can and have been negatively impacted by delays between the time of raw material cost increases and price increases for our products to customers. Additionally, we may be unable to increase our prices to offset higher raw material costs due to the failure of competitors to increase prices and customer resistance to price increases. Additionally, we rely on our suppliers for deliveries of raw materials. If any of our suppliers were unable to deliver raw materials to us for an extended period of time, there is no assurance that our raw material requirements would be met by other suppliers on acceptable terms, or at all, which could have a material adverse effect on our results of operations.
A decline in returns on the investment portfolio of our defined benefit plans, changes in mortality tables and interest rates could require us to increase cash contributions to the plans and negatively impact our financial statements.
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Funding for the defined benefit pension plans we sponsor is determined based upon the funded status of the plans and a number of actuarial assumptions, including an expected long-term rate of return on plan assets and the discount rate utilized to compute pension liabilities. All of our defined benefit pension plan benefits are frozen. The defined benefit plans were underfunded as of December 31, 2007 by approximately $24.7 million after utilizing the actuarial methods and assumptions for purposes of Financial Accounting Standards (FAS) No. 87, Employers’ Accounting for Pensions, and FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FAS Nos. 87, 88, 106, and 132(R) . As a result, we expect to experience an increase in our future cash contributions to our defined benefit pension plans. We contributed $5.3 million in 2007 and $4.9 million in the first nine months of 2008 and do not expect to contribute funds for the remainder of 2008. In the event that actual results differ from the actuarial assumptions and financial markets impact the valuation of our pension investments, the funded status of our defined benefit plans may change and any such resulting deficiency could result in additional charges to equity and against earnings and increase our required contributions.
We are dependent on key personnel and on the retention and recruiting of key personnel for our future success.
Our future success depends to a significant extent on the continued service of our key administrative, manufacturing, sales and senior management personnel. We do not have employment agreements with most of our executives and do not maintain key person life insurance on any of these executives. We do have an employment agreement with Thomas G. Brooker, who has served as our President and Chief Executive Officer since May 4, 2006. The loss of the services of one or more of our key employees could significantly delay or prevent the achievement of our business objectives and could harm our business. While we have entered into executive severance agreements with many of our key employees, there can be no assurance that the severance agreements will provide adequate incentives to retain these employees. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees for key positions. There is market competition for qualified employees. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future.
We have from time to time in the past experienced, and we expect to continue to experience from time to time, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for certain positions.
New technologies or changes in consumer preferences may affect our ability to compete successfully.
We believe that new technologies or novel processes may emerge and that existing technologies may be further developed in the fields in which we operate. These technologies or processes could have an impact on production methods or on product quality in these fields.
Unexpected rapid changes in employed technologies or the development of novel processes that affect our operations and product range could render the technologies we utilize, or the products we produce, obsolete or less competitive in the future. Difficulties in assessing new technologies may impede us from implementing them and competitive pressures may force us to implement these new technologies at a substantial cost. Any such development could materially and adversely impact our revenues or profitability, or both.
Additionally, the preferences of our customers may change as a result of the availability of alternative products or services which could impact consumption of our products.
Any future litigation relating to our intellectual property rights could have an adverse impact on our business.
We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. Litigation may be necessary to enforce these rights, which could result in substantial costs to us and a substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors or other parties could use the intellectual property that we have developed to enhance their products or make products similar to ours and compete more efficiently with us, which could result in a decrease in our market share.
While we have attempted to ensure that our products and the operations of our business do not infringe on other parties’ patents and proprietary rights, our competitors and other parties may assert that our products and operations may be covered by patents held by them. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which may later result in issued patents upon which our products may infringe. If any of our products infringe a valid patent, we could be prevented from selling them unless we obtain a license or redesign the products to avoid infringement. A license may not always be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign any of our products to avoid infringement. Infringement and other
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intellectual property claims, regardless of merit or ultimate outcome, can be expensive and time-consuming and can divert management’s attention from our core business.
Our information systems are critical to our business, and a failure of those systems could materially harm us.
We depend on our ability to store, retrieve, process and manage a significant amount of information. If our information systems fail to perform as expected, or if we suffer an interruption, malfunction or loss of information processing capabilities, it could have a material adverse effect on our business.
Compliance with changing regulation or corporate governance and public disclosure may result in additional risks and expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and the NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention. In particular, our efforts to comply with Section 404 of Sarbanes-Oxley and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. We complied with the Section 404 requirements for our fiscal year ending December 31, 2007. We expect our compliance efforts to require the continued commitment of significant resources. Additionally, if our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, our reputation may be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could adversely affect our business and the market price of our stock.
ITEM 5. OTHER INFORMATION
Stockholder Proposals
Any stockholder proposal which is to be included in the proxy materials for the 2009 annual meeting must be received by us on or before November 25, 2008. Such proposals should be directed to Nashua Corporation, 11 Trafalgar Square, Suite 201, Nashua, New Hampshire 03063, Attention: Corporate Secretary.
In addition, our by-laws require that we be given advance notice of stockholder nominations for election to the Board of Directors and of other matters which stockholders wish to present for action at an annual meeting of stockholders, other than matters included in our proxy statement in accordance with SEC Rule 14a-8. The required notice must be in writing and received by our corporate secretary at our principal executive offices not less than 60 days nor more than 90 days prior to the annual meeting of stockholders. However, in the event that less than 70 days’ prior disclosure of the date of the meeting is first given or made (whether by public disclosure or written notice to stockholders), notice by the stockholder to be timely must be received by our corporate secretary at our principal executive offices no later than the close of business on the 10th day following the day on which such disclosure of the date of the meeting was made. The date of our 2009 annual meeting of stockholders has not yet been established, but assuming it is held on April 28, 2009, in order to comply with the time periods set forth in our by-laws, appropriate notice for the 2009 annual meeting would need to be provided to our corporate secretary no earlier than January 28, 2009 and no later than February 27, 2009.
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ITEM 6. EXHIBITS
31.1 | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 5, 2008. | ||
31.2 | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 5, 2008. | ||
32.1 | Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 5, 2008. | ||
32.2 | Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 5, 2008. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NASHUA CORPORATION | ||||
(Registrant) | ||||
Date: November 5, 2008 | By: | /s/ John L. Patenaude | ||
John L. Patenaude | ||||
Vice President-Finance, Chief Financial Officer and Treasurer (principal financial and duly authorized officer) | ||||
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