Acquisition of Peerless Paper Mills, Inc.
On January 5, 2001, the Company’s subsidiary Lagasse, Inc. (“Lagasse”) acquired all of the capital stock of Peerless Paper Mills, Inc. (“Peerless”). Peerless is a wholesale distributor of janitorial/sanitation, paper, and food service products. A Certificate of Dissolution was filed with the Commonwealth of Pennsylvania to dissolve Peerless as of January 5, 2001. Upon its dissolution, Peerless was merged into Lagasse. The purchase price of approximately $32.3 million was financed through the Company’s Senior Credit Facility. This acquisition enabled the Company to expand the Lagasse product line, enhance scale and infrastructure, and add experienced management to the Lagasse operation. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed, based upon the estimated fair values at the date of acquisition. The excess of cost over fair value of approximately $15.1 million was allocated to goodwill. The pro forma effects of the acquisition were not material.
Acquisition of CallCenter Services, Inc.
On July 1, 2000, the Company acquired all of the capital stock of CallCenter Services, Inc. from Corporate Express, a Buhrmann Company. The purchase price of approximately $10.7 million was financed through the Company’s Senior Credit Facility. CallCenter Services is a customer relationship management outsourcing service company. It has two inbound call centers, in Wilkes-Barre, Pennsylvania and Salisbury, Maryland, with a total of up to 1,000 seats. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed, based upon the estimated fair values at the date of acquisition. The excess of cost over fair value of approximately $3.1 million was allocated to goodwill. The pro forma effects of the acquisition were not material.
Second Quarter Ended June 30, 2001 compared with the
Second Quarter Ended June 30, 2000
Net Sales. Net sales for the second quarter of 2001 totaled $978.9 million, up 3.7%, compared with $944.0 million in the second quarter of 2000. The recent acquisitions contributed to the Company’s sales growth.
Office furniture sales declined by mid-single-digits, compared with the prior year quarter. These results continue to reflect slowing consumer demand and weak macro economic conditions. While the current economic environment present challenges, the Company sees an opportunity for sales growth as dealers shift their inventory investment to wholesalers to limit their working capital requirements. Furthermore, in a weak economy consumers tend to shift their demand toward the mid-priced furniture lines offered by the Company.
The janitorial and sanitation product category achieved a 40% growth rate, compared with the prior year. This growth was primarily achieved through the acquisition of Peerless Paper Mills, Inc. This product category is primarily distributed through the Lagasse operating unit, which achieved an estimated growth rate percentage of approximately 20%, excluding the acquisition of Peerless. This increase is based on continued market expansion in a fragmented industry. However, this product category is being negatively impacted by the current economic conditions mainly in non-consumable products. The growth within customer channels is concentrated mainly in national, mail order, and independent dealer accounts.
Sales of traditional office products experienced a decline in the mid-single-digits versus the prior year quarter. Uncertainty surrounding the economy slowed consumption of office products within the commercial sector, particularly in small-to-mid size companies.
Sales in the computer supplies category grew at a percentage rate in the high single-digits over the prior-year quarter. The acquisition of Azerty Canada in July 2000 contributed substantially to the sales growth within this category.
Gross Margin. Gross margin dollars for the second quarter were $155.0 million, up $6.2 million or 4.2% from last year. The gross margin rate was 15.8% in the second quarter of 2001 and 2000. The margin dollar increase was primarily due to the sales increase. The margin rate, excluding TOP, was 16.0%, compared with 15.8% last year.
Operating Expenses. Operating expenses increased 10.2% to $112.8 million, compared with $102.4 million last year. Operating expenses as a percentage of net sales were 11.5% in the second quarter of 2001 and 10.8% in the same period last year. Operating expenses in 2001 include $4.9 million invested in TOP. Excluding TOP, operating expenses during the second quarter of 2001 increased 7.8% to $108.3 million, or 11.1% of net sales, compared with $100.5 million or 10.7% of net sales in the comparable prior year period. This increase was primarily due to an increase in payroll costs and depreciation expense. The Company is currently taking steps to reduce its cost structure which will include such actions as a facility rationalization, a workforce reduction, and transitioning to an integrated information technology platform.
Income from Operations. Income from operations declined 8.9% to $42.2 million, or 4.3% of net sales, compared with $46.4 million, or 4.9% of net sales last year. Income from operations, excluding the investments in TOP, was $47.9 million, or 4.9% of net sales, compared with $48.2 million, or 5.1% of net sales.
Interest Expense, net. Interest expense for the second quarter of 2001 totaled $6.4 million, compared with $5.6 million in the same period last year. This increase is primarily due to the funding required to support the investments in TOP.
Other (Income) / Expense. Other expense recorded in the second quarter of 2001, excluding a gain on the sale of a distribution center, totaled $2.1 million compared with $2.7 million in the same period last year. This expense represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined). Costs related to the Receivables Securitization Program vary on a monthly basis and are generally related to certain short-term interest rates. Other expense as presented on the Condensed Consolidated Statement of Income for the second quarter of 2001 includes a $2.4 million gain on the sale of the Company’s Denver distribution center.
Income Before Income Taxes and Extraordinary Item. Income before taxes and extraordinary item for the second quarter of 2001 totaled $36.1 million, compared with $38.1 million last year.
Income Taxes. Income tax expense recorded in the second quarter of 2001 totaled $14.4 million, compared with $15.3 million last year.
Net Income. Net income totaled $21.7 million, or 2.2% of net sales, compared with $22.8 million, or 2.4% of net sales after excluding a $6.5 million extraordinary charge related to the early retirement of debt in 2000. Diluted earnings per share for the second quarter of 2001 totaled $0.65, flat compared with the prior year excluding the extraordinary charge. However, excluding TOP’s second quarter 2001 and 2000 operating loss of $3.4 million and $1.1 million, respectively, diluted earnings per share increased 10.3% to $0.75 (including the $2.4 million gain on the sale of the Denver distribution center).
Six Months Ended June 30, 2001 compared with the
Six Months Ended June 30, 2000
Net Sales. Net sales for the first six months of 2001 totaled $2.0 billion, up 5.1%, compared with $1.9 billion for the first six months of 2000. After adjusting for one fewer workday, sales rose 6.0% for the first six months of 2001, compared with the same period last year. Sales in the Company’s core business were relatively flat compared with last year.
Gross Margin. Gross margin dollars in the first six months of 2001 were $321.1 million, up $14.2 million or 4.6% from last year. The gross margin rate was unchanged at 15.8% for the first six months of 2001, compared with the same period last year. The margin dollar increase was primarily due to the sales increase. Excluding TOP, the gross margin rate increased 0.2% to 16.0% compared to last year.
Operating Expenses. Operating expenses increased 10.6% to $232.5 million, compared with $210.2 million last year. Operating expenses as a percentage of net sales were 11.4% for the first six months of 2001 compared with 10.8% in 2000. Operating expenses in 2001 and 2000 include $10.4 million and $1.8 million, respectively, invested in TOP. Excluding TOP, operating expenses increased 6.7% to $222.1 million, or 11.0% of net sales. The Company is currently taking steps to reduce its cost structure which will include such actions as a facility rationalization, a workforce reduction, and transitioning to an integrated information technology platform.
Income from Operations. Income from operations as a percentage of net sales declined to 4.4% compared with 5.0% last year. Income from operations, excluding the investments in TOP, increased $2.8 million to $101.3 million, or 5.0% of net sales, compared with last year’s $98.5 million, or 5.1% of net sales.
Interest Expense, net. Interest expense for the six months ended June 2001 totaled $14.5 million, compared with $13.0 million last year. The first six months of 2001 includes interest expense savings related to the redemption of the 12.75% Notes offset by the additional funding required to support TOP.
Other Expense, net. Other expense for the six months ended June 2001 totaled $2.1 million, compared with $5.4 million in the same period last year. This expense represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined). Costs related to the Receivables Securitization Program vary on a monthly basis and are generally related to certain short-term interest rates. The decline in other expense is due to a $2.4 million gain on the sale of the Company’s Denver distribution center.
Income Before Taxes and Extraordinary Item. Income before taxes and extraordinary item for the six months ended June 2001 totaled $72.0 million, compared with $78.3 million last year.
Income Taxes. Income tax expense for the six months ended June 2001 totaled $28.6 million, compared with $31.7 million last year.
Net Income. Net income totaled $43.4 million, or 2.1% of net sales, compared with $46.6 million, or 2.1% of net sales excluding a $6.5 million extraordinary charge related to the early retirement of debt in 2000. Diluted earnings per share declined 4.5% to $1.28 from $1.34 last year, excluding the extraordinary charge. However, excluding the 2001 and 2000 TOP operating losses of $12.7 million and $1.8 million, respectively, diluted earnings per share increased 10.2% to $1.51, compared with $1.37 last year, excluding the extraordinary charge.
Liquidity and Capital Resources
Credit Agreement
On June 30, 2000, the Company entered into the Third Amended and Restated Revolving Credit and Term Loan Agreement (the “Credit Agreement”). The Credit Agreement, among other things, provides for an additional $150.0 million, five-year term loan facility (the “Tranche A-1 Facility”).
As of June 30, 2001, the available credit under the Credit Agreement included $163.6 million of term loan borrowings (the “Term Loan Facilities”) and up to $250.0 million of revolving loan borrowings (the “Revolving Credit Facility”). In addition, the Company has $100.0 million of 8.375% Senior Subordinated Notes due 2008 and $29.8 million of industrial development bonds.
As of June 30, 2001, the Term Loan Facilities consisted of a $38.6 million Tranche A term loan facility (the "Tranche A Facility") and a $125.0 million Tranche A-1 Facility. Amounts outstanding under the Tranche A Facility are to be repaid in 11 quarterly installments ranging from $3.1 million at September 30, 2001 to $3.7 million at March 31, 2004. Amounts outstanding under the Tranche A-1 Facility are to be repaid in 16 quarterly installments of $7.8 million.
The Revolving Credit Facility is limited to $250.0 million, less the aggregate amount of letter of credit liabilities, and contains a provision for swingline loans in an aggregate amount up to $25.0 million. The Revolving Credit Facility matures on March 31, 2004. The Company had $55.0 million outstanding under the Revolving Credit Facility at June 30, 2001.
The Term Loan Facilities and the Revolving Credit Facility are secured by first priority pledges of the stock of USSC, all of the stock of domestic direct and indirect subsidiaries of USSC, the stock of Lagasse and Azerty and certain of the foreign and direct and indirect subsidiaries of USSC (excluding USS Receivables Company, Ltd.) and security interests and liens upon all accounts receivable, inventory, contract rights and certain real property of USSC and its domestic subsidiaries other than accounts receivables sold in connection with the Receivables Securitization Program.
The loans outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest as determined within a pricing matrix. The interest rate is based on the ratio of total debt to earnings before interest, taxes, depreciation, and amortization, excluding the results of TOP. The Tranche A Facility and Revolving Credit Facility bear interest at the prime rate plus 0% to 1.00%, or, at the Company’s option, the London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.25%. The Tranche A-1 Facility bears interest at the prime rate plus 0.25% to 1.25%, or, at the Company’s option, LIBOR plus 1.50% to 2.50%.
The Credit Agreement contains representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type. At June 30, 2001, the Company was in compliance with all covenants contained in the Credit Agreement.
Liquidity and Capital Resources (continued)
The right of United to participate in any distribution of earnings or assets of USSC is subject to the prior claims of the creditors of USSC. In addition, the Credit Agreement contains certain restrictive covenants, including covenants that restrict or prohibit USSC’s ability to pay cash dividends and make other distributions to United.
Management believes that the Company's cash on hand, anticipated funds generated from operations and borrowings available under the Credit Agreement, will be sufficient to meet the short-term (fewer than 12 months) and long-term operating and capital needs of the Company, as well as to service its debt in accordance with its terms. There is, however, no assurance that this will be accomplished.
United is a holding company and, as a result, its primary source of funds is cash generated from operating activities of its operating subsidiary, USSC, and bank borrowings by USSC. The Credit Agreement and the indentures governing the Notes contain restrictions on the ability of USSC to transfer cash to United.
8.375% Senior Subordinated Notes:
The 8.375% Senior Subordinated Notes (the “8.375% Notes”) were issued on April 15, 1998, pursuant to the 8.375% Notes Indenture. As of March 31, 2001, the aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The 8.375% Notes are unsecured senior subordinated obligations of USSC, and payment of the 8.375% Notes is fully and unconditionally guaranteed by the Company and USSC’s domestic “restricted” subsidiaries that incur indebtedness (as defined in the 8.375% Notes Indenture) on a senior subordinated basis. The 8.375% Notes mature on April 15, 2008, and bear interest at the rate of 8.375% per annum, payable semi-annually on April 15 and October 15 of each year.
Receivables Securitization Program
In connection with the Company’s $163.0 million Receivables Securitization Program, the Company sells, on a revolving basis, its eligible accounts receivable (except for certain excluded accounts receivable, which initially includes all accounts receivable from the Azerty and Lagasse) to the USS Receivables Company, a wholly owned offshore, bankruptcy-remote special purpose limited liability company. This company in turn ultimately transfers the eligible accounts receivable to a third-party, multi-seller asset-backed commercial paper program, existing solely for the purpose of issuing commercial paper rated A-1/P-1 or higher. The sale of trade accounts receivable includes not only those eligible accounts receivable that existed on the closing date of the Receivables Securitization Program, but also eligible accounts receivable created thereafter. Costs related to this facility vary on a monthly basis and generally are related to certain interest rates. These costs are included in the Consolidated Statements of Income, included elsewhere herein, under the caption Other Expense.
Liquidity and Capital Resources (continued)
Affiliates of PNC Bank and The Chase Manhattan Bank act as funding agents. The funding agents, together with other commercial banks rated at least A-1/P-1, provide standby liquidity funding to support the purchase of the accounts receivable by the Receivables Company under 364-day liquidity facilities. The Receivables Company retains an interest in the eligible receivables transferred to the third party. As a result of the Receivables Securitization Program, the balance sheet assets of the Company as of June 30, 2001 and December 31, 2000 exclude $152.0 million and $150.0 million, respectively, of accounts receivable sold to the Receivables Company.
Cash Flow
The statements of cash flows for the Company for the periods indicated are summarized below:
| | For the Six Months | |
| | Ended June 30, | |
| |
| |
| | 2001 | | 2000 | |
| |
| |
| |
| | (dollars in thousands) | |
| | Net cash provided by operating activities | $ | 115,477 | | $ | 30,832 | |
| | Net cash used in investing activities | (51,487 | ) | (15,378 | ) |
| | Net cash used in financing activities | (64,172 | ) | (6,774 | ) |
| | | | | | | |
Net cash provided by operating activities for the six months ended June 30, 2001 was $115.5 million, including a $105.5 million reduction in inventory, $43.4 million of net income and a $28.5 million decrease in accounts receivable partially offset by a $59.3 million decline in accounts payable. Net cash provided by operating activities reached $30.8 million for the six months ended June 30, 2000. This was primarily due to $40.2 million of net income, a $48.1 million decrease in inventory, and $14.9 million of depreciation partially offset by a $40.0 million increase in accounts receivable, a $23.7 million increase in accrued liabilities, and a $21.3 million decline in accounts payable.
Net cash used in investing activities for the six months ended June 30, 2001 was $51.5 million, including $32.3 million for the acquisition of Peerless Paper Mills, Inc. and $22.5 million for purchase of property, plant and equipment partially offset by $3.4 million of proceeds from the sale of the Company’s Denver distribution center. Net cash used in investing activities for the six months ended June 30, 2000 was $15.4 million for the purchase of property, plant and equipment.
Net cash used in financing activities for the six months ended June 30, 2001 was $64.2 million, including a $43.0 million net repayment on the Company’s Revolving Credit Facility and an $18.3 million payment on the Company’s Term Loan Facilities. Net cash used in financing activities for the six months ended June 30, 2000 was $6.8 million, including a $104.3 million payment on the Company’s Term Loan Facilities, a $53.0 million net repayment on the Company’s Revolving Credit Facility partially offset by additional term loan borrowings of $150.0 million.
Liquidity and Capital Resources (continued)
Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. Interest rate exposure at June 30, 2001 is principally limited to the Company’s outstanding debt of $349.1 million and $152.0 million of receivables sold under the Receivables Securitization Program, whose discount rate varies with market interest rates (“Receivables Exposure”). Approximately 20% of the outstanding debt and Receivables Exposure are priced at interest rates that are fixed. The remaining debt and Receivables Exposure is priced at interest rates that float with the market. A 50 basis point movement in interest rates would result in an approximate $2.0 million annualized increase or decrease in interest expense and loss on the sale of certain accounts receivable.
The Company will from time to time enter into interest rate swaps or collars on its debt. The Company does not use derivative financial or commodity instruments for trading purposes. Typically, the use of such derivative instruments is limited to interest rate swaps or collars on the Company’s outstanding long-term debt. The Company’s exposure related to such derivative instruments is, in the aggregate, not material to the Company’s financial position, results of operations and cash flows.
The Company’s foreign currency exchange rate risk is limited principally to the Mexican Peso, Canadian Dollar, Italian Lira, as well as product purchases from Asian countries currently paid in U.S. dollars. Many of the products which the Company sells in Mexico and Canada are purchased in U.S. dollars while the sale is invoiced in the local currency. The Company’s foreign currency exchange rate risk is not material to the Company’s financial position, results of operations and cash flows. The Company has not previously hedged these transactions and may enter into such transactions when it believes there is a financial advantage to doing so.
UNITED STATIONERS INC. AND SUBSIDIARIES
PART II – OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS - Not applicable
ITEM 2 CHANGES IN SECURITIES - Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES - Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of United Stationers Inc. held on May 9, 2001, the following matters were voted on:
(a) Election of Directors: For the election of the following persons to serve as directors of the corporation for a three year term expiring in 2004, or until their respective successors shall be duly elected and qualified:
Class II Directors:
| | | Number of Votes |
| | |
|
| | | For | | Withheld |
| | |
| |
|
| -- Roy W. Haley | | 27,884,214 | | 542,248 |
| -- Benson P. Shapiro | | 27,996,074 | | 430,388 |
| -- Alex D. Zoghlin | | 28,000,639 | | 425,823 |
ITEM 5 OTHER INFORMATION - Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
| | (a) | Exhibit | |
| | | Number | |
| | | 2 | Not applicable |
| | | 11 | Not applicable |
| | | 15.1 | Letter regarding unaudited interim financial information |
| | | 15.2 | Letter regarding unaudited interim financial information |
| | | 18 | Not applicable |
| | | 19 | Not applicable |
| | | 22 | Not applicable |
| | | 23 | Not applicable |
| | | 24 | Not applicable |
| | | 99 | Not applicable |
| | | | |
| | (b) | The Company filed the following reports on Form 8-K: |
| - | | - | The Company reported under Item 5 on April 25, 2001, earnings per share of $0.64 for its first quarter ended March 31, 2001, compared with $0.69 in the first quarter of 2000. Net income for the latest three months was $21.6 million, down from $23.9 million in the comparable prior-year quarter. |
UNITED STATIONERS INC. AND SUBSIDIARIES
SIGNATURE
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.
| | UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO. |
| |
|
| | (Registrant) |
| Date: August 10, 2001 | /s/ Eileen A. Kamerick |
| |
|
| | Eileen A. Kamerick |
| | Executive Vice President and Chief Financial Officer |
UNITED STATIONERS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
| (a) | Exhibit | |
| | Number | |
| | | |
| | 2 | Not applicable |
| | 11 | Not applicable |
| | 15.1 | Letter regarding unaudited interim financial information |
| | 15.2 | Letter regarding unaudited interim financial information |
| | 18 | Not applicable |
| | 19 | Not applicable |
| | 22 | Not applicable |
| | 23 | Not applicable |
| | 24 | Not applicable |
| | 99 | Not applicable |
