SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 30, 2002 1-6528
- ----------------------------- ---------------------------
For the quarterly period ended Commission file number
WALLACE COMPUTER SERVICES, INC.
-------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2515832
- ------------------------------ ---------------------------------------
or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2275 Cabot Drive Lisle, Illinois 60532
------------------------------------------- ------------
(Address of Principal Executive Offices) (ZIP CODE)
(630) 588-5000 41,590,884
- ---------------------------------- --------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of June 1, 2002)
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.
X Yes No
------- -------
Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended April 30, 2002
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in the
opinion of the management, necessary to a fair statement of the results of
operations and financial position for the nine months ended April 30, 2002,
subject to year-end audit by independent public accountants. These
adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Nine Months Ended
April 30
-------------------------------------------------------------
% %
(In thousands, except per share amounts) 2002 Sales 2001 Sales
- ---------------------------------------- ----------- ------- ----------- -------
Net Sales $ 1,175,462 100.0 $ 1,287,165 100.0
Cost and Expenses
Cost of goods sold (Note 1) 864,337 73.5 934,591 72.6
Selling and administrative expenses 179,689 15.3 191,039 14.8
Provision for depreciation and
amortization (Note 5) 50,674 4.3 58,975 4.6
Restructuring charges (Notes 7 and 8) 38,194 3.2 724 0.1
----------- ------- ----------- -------
Total costs and expenses 1,132,894 96.4 1,185,329 92.1
----------- ------- ----------- -------
Operating Income 42,568 3.6 101,836 7.9
----------- ------- ----------- -------
Interest income (695) (0.1) (694) (0.1)
Interest expense 17,062 1.5 22,727 1.8
----------- ------- ----------- -------
Income before Income Taxes 26,201 2.2 79,803 6.2
Provision for Income Taxes (Note 9) 10,218 0.9 32,480 2.5
----------- ------- ----------- -------
Income before the cumulative effect of a change
in accounting principle - net of tax 15,983 1.4 47,323 3.7
Cumulative effect of a change in accounting
principle - net of tax (Note 5) 144,078 12.3 0 0.0
----------- ------- ----------- -------
Net (Loss) / Income $ (128,095) (10.9) $ 47,323 3.7
=========== ======= =========== =======
Basic Earnings per Share Before the Cumulative Effect
of a Change in Accounting Principle $ 0.39 $ 1.16
=========== ===========
Cumulative Effect of a Change in Accounting Principle $ (3.50) $ 0.00
=========== ===========
Basic (Loss) / Earnings per Share $ (3.11) $ 1.16
=========== ===========
Diluted Earnings per Share Before the Cumulative Effect
of a Change in Accounting Principle $ 0.38 $ 1.16
=========== ===========
Cumulative Effect of a Change in Accounting Principle $ (3.46) $ 0.00
=========== ===========
Diluted (Loss) / Earnings per Share $ (3.08) $ 1.16
=========== ===========
Average Common Shares Outstanding (Note 11) 41,218 40,635
=========== ===========
Diluted Common Shares Outstanding (Note 11) 41,619 40,881
=========== ===========
Dividends Declared Per Share $ 0.495 $ 0.495
=========== ===========
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. Page 3
FORM 10-Q
For Quarterly Period Ended April 30, 2002
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Three Months Ended
April 30
------------------------------------------------
% %
(In thousands, except per share amounts) 2002 Sales 2001 Sales
- ---------------------------------------- --------- ------- --------- -------
Net Sales $ 369,198 100.0 $ 416,199 100.0
Cost and Expenses
Cost of goods sold (Note 1) 268,071 72.6 303,145 72.8
Selling and administrative expenses 56,147 15.2 62,626 15.0
Provision for depreciation and
amortization (Note 5) 15,923 4.3 19,975 4.8
Restructuring charges (Notes 7 and 8) 5,362 1.5 30 0.0
--------- ------- --------- -------
Total costs and expenses 345,503 93.6 385,776 92.7
--------- ------- --------- -------
Operating Income 23,695 6.4 30,423 7.3
--------- ------- --------- -------
Interest income (160) (0.0) (152) (0.0)
Interest expense 4,998 1.4 7,113 1.7
--------- ------- --------- -------
Income before income taxes 18,857 5.1 23,462 5.6
Provision for income taxes (Note 9) 7,354 2.0 9,549 2.3
--------- ------- --------- -------
Net Income $ 11,503 3.1 $ 13,913 3.3
========= ======= ========= =======
Basic Earnings per Share $ 0.28 $ 0.34
========= =========
Diluted Earnings per Share $ 0.27 $ 0.34
========= =========
Average Common Shares Outstanding (Note 11) 41,454 40,884
========= =========
Diluted Common Shares Outstanding (Note 11) 42,001 41,269
========= =========
Dividends Declared Per Share $ 0.165 $ 0.165
========= =========
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. and Subsidiaries Page 4
Consolidated Balance Sheet
April 30, 2002
(Dollars in thousands) (Unaudited) July 31, 2001
- ----------------------------------------------------------- ------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable 261,467 291,222
Less-allowance for doubtful accounts 11,931 7,896
----------- -----------
Net receivables 249,536 283,326
Inventories (Note 1) 91,370 100,922
Assets held for sale (Notes 7 and 8) 13,367 1,215
Current and deferred income taxes 34,856 27,498
Advances and prepaid expenses 5,895 4,321
----------- -----------
Total current assets 395,024 417,282
----------- -----------
Property, plant and equipment, at cost 818,330 893,273
Less-reserves for depreciation and amortization 493,748 502,107
----------- -----------
Net property, plant and equipment 324,582 391,166
----------- -----------
Goodwill, net of amortization (Note 5) 140,311 284,664
Cash surrender value of life insurance 15,890 15,201
System development costs, net of amortization 50,741 55,516
Other assets 2,549 2,836
----------- -----------
Total assets $ 929,097 $ 1,166,665
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 856 $ 997
Short-term notes payable 11,000 3,003
Accounts payable 98,882 97,384
Accrued salaries, wages, profit sharing and other 67,379 90,461
----------- -----------
Total current liabilities 178,117 191,845
----------- -----------
Long-term debt 209,353 284,087
Deferred income taxes 49,982 60,385
Deferred compensation and retirement benefits 42,086 39,128
Other long-term liabilities 10,572 10,603
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,055 at April 30, 2002 and July 31, 2001 45,764 45,764
Additional capital 41,178 39,770
Deferred compensation 3,065 3,301
Retained earnings 419,990 570,507
Treasury stock (at cost)- 4,378,615 shares at
April 30, 2002 and 4,785,511 shares at
July 31, 2001 (71,010) (78,403)
Accumulated other comprehensive loss (Note 4) 0 (322)
----------- -----------
Total stockholders' equity 438,987 580,617
----------- -----------
Total liabilities and stockholders' equity $ 929,097 $ 1,166,665
=========== ===========
The accompanying notes are an integral part of this statement
Wallace Computer Services, Inc. and Subsidiaries Page 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended
(Dollars in thousands) April 30
- ---------------------- ------------------------
2002 2001
--------- ---------
Cash Flows from Operating Activities:
Net (loss) / income from operations $(128,095) $ 47,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in accounting
principle (Note 5) 144,078 0
Depreciation 42,044 46,259
Amortization 8,630 12,716
Restructuring charges 23,518 355
Debt cost amortization 1,296 1,189
Deferred taxes (10,416) (87)
Loss on disposal of property 41 7
Changes in assets and liabilities
Accounts receivable 34,437 4,248
Inventories 9,269 (6,998)
Advances and prepaid expenses (2,664) 2,348
Prepaid taxes (7,580) 2,196
Other assets 403 11,771
Accounts payable and other liabilities (21,618) (7,618)
Deferred compensation and retirement benefits 2,959 2,613
--------- ---------
Net cash provided by operating activities 96,302 116,322
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (16,214) (30,025)
Proceeds from disposal of property 7,092 1,371
Other capital investments-acquisitions (Note 10) (4,818) 0
--------- ---------
Net cash used in investing activities (13,940) (28,654)
--------- ---------
Cash Flows from Financing Activities:
Treasury stock transactions (4,481) (7,096)
Cash dividends paid (20,401) (20,121)
Proceeds from issuance of common stock 11,010 5,386
Net proceeds from/(retirements of) short-term debt 7,578 (3,405)
Retirement of long-term debt (95,791) (161,935)
Proceeds from issuance of long-term debt 19,723 95,000
--------- ---------
Net cash used in financing activities (82,362) (92,171)
--------- ---------
Net changes in cash and cash equivalents 0 (4,503)
Cash and cash equivalents at beginning of year 0 4,505
--------- ---------
Cash and cash equivalents at April 30 $ 0 $ 2
========= =========
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 16,931 $ 23,849
Income taxes paid (net of refunds received) 23,852 31,597
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. and Subsidiaries Page 6
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 1 - Inventories
Inventories at April 30, 2002, and July 31, 2001, were as follows:
(Dollars in thousands) April 30, 2002
(Unaudited) July 31, 2001
----------------------- -------------- -------------
Raw materials $ 11,498 $ $15,623
Work in process 17,728 16,531
Finished products 62,144 68,768
---------- ------------
$ 91,370 $ 100,922
========== ============
Certain inventories are stated on the last-in, first-out (LIFO) basis
for their labor and material content, and other inventories are stated
on the first-in, first-out (FIFO) basis.
Because the inventory determination under the LIFO method can only be
made at the end of each fiscal year based on the inventory levels and
costs at that time, interim period LIFO determinations must necessarily
be based upon management's estimates of expected year-end inventory
levels and costs.
Note 2 - Capital Stock
As of April 30, 2002, options to purchase 3,112,733 shares of common
stock were outstanding and an additional 4,039,716 shares of common
stock were available for future grants under the Company's Stock
Incentive and Employee Stock Purchase Plans.
The Company has authorized 100,000,000 shares of common stock and
issued 45,764,055 as of both April 30, 2002 and July 31, 2001. Of these
shares, 4,378,615 and 4,785,511 were held in treasury as of April 30,
2002 and July 31, 2001, respectively.
Note 3 - Segment Reporting
The Company operates in two business segments, the Forms and Labels
segment and the Integrated Graphics segment.
The principal products and services supplied by the Forms and Labels
Segment include the design and manufacture of paper based forms, the
manufacture of both electronic data processing (EDP) labels and prime
labels, and the manufacture and distribution of a standard line of
office products. The principal products and services supplied by the
Integrated Graphics Segment include the design and manufacture of
high-color, high quality marketing and promotional materials, and the
manufacture of direct response printing materials. Both segments offer
services to customers including warehousing and distribution, kitting
and fulfillment, print on demand and contract outsourcing.
Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 3 - Segment Reporting (continued)
The Company's accounting policies for the segments are the same as
those described in the "Summary of Significant Accounting Policies" in
the Company's 2001 Annual Report. Management evaluates segment
performance based on segment profit or loss before interest and income
taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are
accounted for at standard cost.
Segment data excludes one-time charges related to the cumulative effect
of a change in accounting principle per Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets."
Summarized segment data and a reconciliation to the consolidated totals
for the quarters ended April 30, 2002 and 2001 are as follows:
Quarter Ended April 30, 2002 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- --------------------------------------------------------------------------------
Forms and Labels Segment $184,335 $1,036 $20,512
Integrated Graphics Segment 184,863 3,335 8,545
- --------------------------------------------------------------------------------
Segment Total 369,198 4,371 29,057
- --------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (4,838)
Restructuring Charge - Corporate 0 991 (5,362)
- --------------------------------------------------------------------------------
Consolidated $369,198 $5,362 $18,857
================================================================================
Quarter Ended April 30, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- --------------------------------------------------------------------------------
Forms and Labels Segment $196,889 $ 42 $17,736
Integrated Graphics Segment 219,310 290 12,717
- --------------------------------------------------------------------------------
Segment Total 416,199 332 30,453
- --------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (6,961)
Restructuring Charge - Corporate 0 (302) (30)
- --------------------------------------------------------------------------------
Consolidated $416,199 $ 30 $23,462
================================================================================
Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 3 - Segment Reporting (continued)
Summarized segment data and a reconciliation to the consolidated totals
for the nine months ended April 30, 2002 and 2001 are as follows:
Nine Months Ended April 30, 2002 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- --------------------------------------------------------------------------------
Forms and Labels Segment $ 588,594 $ 5,592 $60,431
Integrated Graphics Segment 586,868 28,134 20,331
- --------------------------------------------------------------------------------
Segment Total 1,175,462 33,726 80,762
- --------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (16,367)
Restructuring Charge - Corporate 0 4,468 (38,194)
- --------------------------------------------------------------------------------
Consolidated $1,175,462 $38,194 $26,201
================================================================================
Nine Months Ended April 30, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- --------------------------------------------------------------------------------
Forms and Labels Segment $ 627,158 $ 42 $65,552
Integrated Graphics Segment 660,007 581 37,008
- --------------------------------------------------------------------------------
Segment Total 1,287,165 623 102,560
- --------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (22,033)
Restructuring Charge - Corporate 0 101 (724)
- --------------------------------------------------------------------------------
Consolidated $1,287,165 $ 724 $79,803
================================================================================
Segment assets, particularly the Integrated Graphics segment, have been
impacted by restructuring and SFAS No. 142. The adoption of SFAS No.
142 and the related goodwill impairment charge reduced Integrated
Graphics goodwill by $147.5 million. Segment assets as of April 30,
2002 were $476.4 million for Integrated Graphics, $346.3 million for
Forms and Labels, and $106.4 million for Corporate versus $627.4
million for Integrated Graphics, $424.8 million for Forms and Labels,
and $114.5 million for Corporate at July 31, 2001.
Note 4 - Accounting for Derivative Instruments and Hedging Activities
Effective August 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS
No. 137 and SFAS No. 138. This standard requires that an entity
recognize derivatives as either assets or liabilities on its balance
sheet and measure those instruments at fair value.
In the second quarter of fiscal year 2001, the Company entered into two
interest rate swap agreements ("Swaps") which effectively converted $75
million of floating rate debt under the revolving Credit Facility
("Credit Facility") to fixed rate debt. The purpose for entering into
the Swaps was to better match the Company's assets and liabilities and
reduce its exposure to interest rate risk. As required by the Company's
hedging and derivative use policy such Swaps were entered into with
high quality, independent counterparties at market pricing. These
parties were
Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 4 - Accounting for Derivative Instruments and Hedging Activities
(continued)
rated A1 and/or A+ or higher by Moody's and Standard & Poors. The Swaps
had a term that was one year or less from the date of inception. These
Swaps were considered cash flow hedges and, accordingly, the fair
market values of the Swaps were recorded as liabilities in "accrued
salaries, wages, profit sharing and other" in the current liabilities
section of the balance sheet. "Accumulated other comprehensive loss" in
the equity section of the balance sheet reflects the after-tax charge
to equity corresponding to the fair market value of the Swaps. The
accumulated other comprehensive loss related to the Swaps is included
in comprehensive income. Any net gain or loss on the Swaps, which is
not significant in fiscal year 2002, is reflected in interest expense
in the income statement. In the second quarter of fiscal year 2002, the
Company settled the Swaps and has no other derivative financial
instruments outstanding.
Note 5 - Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses
financial accounting and reporting for acquired goodwill and other
intangible assets. The Company is required to adopt the provisions of
SFAS No. 142 on August 1, 2002, but had the option of adopting early,
as of August 1, 2001. Under SFAS No. 142, goodwill is no longer
amortized, and the rules for measuring goodwill impairment use a
fair-value-based test. Under the new rules, a fair value of each of the
Company's reporting units with assigned goodwill must be calculated
using either market comparables or a discounted cash flow approach, or
a combination thereof. Once the fair value of the reporting unit has
been determined, the book value of net assets, including intangibles,
of that reporting unit must be compared to the total market value
derived in the first step to determine impairment.
The Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. However, goodwill amortization continues to be recorded in
historical periods.
In completing the transitional impairment test required under SFAS No.
142, the Company determined the carrying amount of its various
reporting units and compared that amount to its fair value. Fair value
was determined with the assistance of an outside professional services
firm using a combination of market comparables and discounted cash flow
approaches. The carrying amount of the Company's Commercial Print
division was above its fair value and, as a result, impairment existed.
The amount of impairment was determined using the "implied fair value"
of the Commercial Print division reporting unit as required by SFAS No.
142. As a result of the impairment test, the Company recognized an
impairment charge to write-off goodwill in the amount of $147.5 million
($144.1 million net of tax) relating to the Commercial Print division
in the Integrated Graphics segment. The impairment loss is recognized
in the statement of operations under the caption "cumulative effect of
a change in accounting principle." In accordance with SFAS No. 142,
this charge was recorded as of the beginning of fiscal year 2002.
Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 5 - Change in Accounting Principle (continued)
Had the provisions of SFAS No. 142 been applied for the three months
and nine months ended April 30, 2001, the Company's net income, before
the cumulative effect of a change in accounting principle, and net
income per share would have been as follows:
(In thousands, except For the Three Months Ended April 30
per share amounts) 2002 2001
------- -------
Net Income, as reported $11,503 $13,913
Add:
Goodwill amortization 0 2,004
Tax effect 0 (103)
------- -------
Adjusted Net Income $11,503 $15,814
======= =======
Basic Earnings per Share, as reported $ 0.28 $ 0.34
Effect of SFAS No. 142 $ 0.00 $ 0.05
------- -------
Adjusted Basic Earnings per Share $ 0.28 $ 0.39
======= =====
Diluted Earnings per Share, as reported $ 0.27 $ $0.34
Effect of SFAS No. 142 $ 0.00 $ 0.04
------- -------
Adjusted Diluted Earnings per Share $ 0.27 $ 0.38
======= =======
Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 5 - Change in Accounting Principle (continued)
(In thousands, except For the Nine Months Ended April 30
per share amounts) 2002 2001
---------- ----------
Net Income Before the Cumulative Effect
of a Change in Accounting Principle $ 15,983 $ 47,323
Add:
Goodwill amortization 0 5,999
Tax effect 0 (39)
---------- ----------
Adjusted Net Income Before the
Cumulative Effect of a Change in
Accounting Principle $ 15,983 $ 53,283
========== ==========
Basic Earnings per Share, as reported $ 0.39 $ 1.16
Effect of SFAS No. 142 $ 0.00 $ 0.15
---------- ----------
Adjusted Basic Earnings per Share $ 0.39 $ 1.31
========== ==========
Diluted Earnings per Share, as reported $ 0.38 $ 1.16
Effect of SFAS No. 142 $ 0.00 $ 0.14
---------- ----------
Adjusted Diluted Earnings per Share $ 0.38 $ 1.30
========== ==========
Apart from goodwill, the Company has no other material identified
intangible assets resulting from acquisitions recorded on the balance
sheet. Changes in the carrying amount of goodwill (net), by segment,
for the nine months ended April 30, 2002, are as follows:
Forms and Labels Integrated Graphics
(Dollars in thousands) Segment Segment Total
--------------------------- ---------------- ------------------- --------
Balance as of July 31, 2001 $23,360 $261,304 $284,664
Pretax Impairment adjustment -
adoption of SFAS No. 142 0 (147,500) (147,500)
Thomas Packaging Acquisition (Note 10) 3,147 0 3,147
------- -------- --------
Balance as of April 30, 2002 $26,507 $113,804 $140,311
======= ======== ========
Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 6 - Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Early
application is encouraged. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset. It is anticipated that
the adoption of SFAS No. 143 will have no impact on the financial
position or results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective in
fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121," Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." However SFAS No. 144 retains the fundamental provisions
of SFAS No. 121 related to the recognition and measurement of the
impairment of long lived assets to be "held and used." It is
anticipated that the adoption of SFAS No. 144 will not have a
significant impact on the financial position or results of operations
of the Company.
Note 7 - Fiscal 2002 Restructuring
In the first quarter of fiscal year 2002 the Company implemented a
restructuring program of which $5.4 million was recognized in the
current quarter and $38.2 million year to date. The restructuring
charge is presented separately as a component of income from operations
in the statement of operations. The restructuring initiatives are aimed
at improving the overall level of organizational efficiency and
effectiveness, consolidating and rationalizing existing facilities and
processes, and reducing the overall cost base of the Company. The
restructuring charges recognized include employee severance costs,
asset write-downs, equipment moving costs, consulting charges directly
related to the restructuring and other miscellaneous costs. The costs
related to equipment moving and consulting were expensed as incurred.
The Company anticipates that the restructuring program will be
completed by the end of the fiscal year. It is anticipated that the
aggregate charges associated with the restructuring will be in the
$42-$45 million range with a majority of those charges related to the
Integrated Graphics segment.
The following table summarizes the activity in the restructuring
reserve during the first nine months of fiscal year 2002:
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------------------------
Employee Asset Write-downs Other Charges Total Restructuring
Termination (non-cash)
Benefits
- -------------------------------------------------------------------------------------------------------------
Restructuring Provision $ 8,312 $ 23,517 $ 6,365 $ 38,194
- -------------------------------------------------------------------------------------------------------------
Cash Payments (7,481) 0 (5,386) (12,866)
Non-cash items 0 (23,517) 0 (23,518)
- -------------------------------------------------------------------------------------------------------------
Reserve balance April 30, $ 831 $ 0 $ 979 $ 1,810
2002
- -------------------------------------------------------------------------------------------------------------
Wallace Computer Services, Inc. and Subsidiaries Page 13
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Note 7 - Fiscal 2002 Restructuring (continued)
The restructuring plan, implemented in the first quarter of fiscal year
2002, included the closing of six manufacturing facilities, one
distribution and fulfillment center, one multi-use facility and
workforce reductions in excess of 10% of the total workforce. Cash
proceeds are being derived in the restructuring through the sale of
three manufacturing facilities and sales of equipment and buildings.
The related assets from these manufacturing facilities and disposed
equipment have been written down to net realizable value as of April
30, 2002 and categorized separately as "assets held for sale" in the
current asset portion of the balance sheet. Through the end of the
third quarter, 797 employees have been terminated or notified of
termination, 753 of which were from plant locations and 44 from the
corporate headquarters.
Note 8 - Fiscal 2000 Restructuring
In February 2000, the Company announced a plan to restructure its
operations, which resulted in non-recurring pre-tax expense totaling
$41.6 million for fiscal year 2000. In fiscal year 2001, additional
restructuring costs of $0.7 million were incurred primarily related to
ongoing cash charges related to plant closing activities and
restructuring administrative functions that had not previously been
accrued in accordance with EITF 94-3. The restructuring costs are
presented separately as a component of income from operations in the
consolidated statements of income. At July 31, 2001, the Company had
completed all activities related to the fiscal 2000 restructuring and
has not recognized any additional costs for this restructuring in the
current fiscal year.
Note 9 - Income Taxes
The annual effective tax rate for fiscal year 2002 is 39.0%. The
reduction in tax rate from the prior year is the result of the adoption
of SFAS No. 142. The majority of the goodwill that had previously been
amortized was not tax deductible. The tax rate was adjusted to 39.0% in
the second quarter from 38.2% in the first quarter primarily due to the
impact of the restructuring charge on pretax income. The annual
effective tax rate for fiscal year 2001 was 40.7%.
Note 10 - Acquisitions
On March 18, 2002, the Company acquired Thomas Packaging Corporation, a
manufacturer of regulatory labels and inserts as well as prime labels
for the pharmaceutical industry. The acquisition price, excluding fees,
was $5.0 million of cash and a note payable of $0.6 million. As of
April 30, 2002, the Company has recorded $3.1 million of goodwill
related to this purchase.
Note 11 - Earnings per Share
The following summarizes share information as a basis for both the
basic and diluted earnings per share computation:
Three Months Nine Months
Ended April 30 Ended April 30
------------------- -----------------
(In thousands) 2002 2001 2002 2001
- ------------------ ------------------- -----------------
Average shares outstanding - basic 41,454 40,884 41,218 40,635
Effect of dilutive securities 547 385 401 246
------------------- -----------------
Average shares outstanding - diluted 42,001 41,269 41,619 40,881
=================== =================
Wallace Computer Services, Inc. and Subsidiaries Page 14
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the three-month period ended April 30, 2002, net sales decreased
11.3% to $369.2 million from the quarter ended April 30, 2001. For the
nine-month period ended April 30, 2002, net sales decreased 8.7% to
$1,175.5 million from the same period in the prior year. Both segments
were impacted by weak economic conditions. The Forms and Labels segment
was also impacted by decreased sales of low margin stock paper as the
Company discontinued all stock and computer paper production and will
be sourcing this product going forward. The Integrated Graphics
segment's sales also decreased in the current quarter due to the
closing of five plants in conjunction with the fiscal 2002
restructuring.
Contractual sales continued to increase in both segments, with faster
growth on a smaller base in the Integrated Graphics segment. Continued
growth in contractual sales is important in providing stability to the
Company's profitability and utilization rates. Transactional sales
(i.e. non-contract sales) volume was off in both segments. The decline
in total transactional sales volume is spread across all areas, but the
majority of the shortfall was in commercial print, which has been the
area most severely affected by the slow economy. Additionally,
approximately $18 million of the reduction is related to discontinued
operations and exiting the production of low margin products in
conjunction with the fiscal 2002 restructuring program.
In the first quarter of fiscal year 2002 the Company implemented a new
restructuring program of which $5.4 million was recognized in the
current quarter and $38.2 million was recognized in the current year to
date period. The restructuring plan included the closing of six
manufacturing facilities, one distribution and fulfillment center, one
multi-use facility and workforce reductions of over 10% of the total
workforce. The restructuring initiatives were aimed at improving the
overall level of organizational efficiency and effectiveness,
consolidating and rationalizing existing facilities and processes, and
reducing the overall cost base of the Company. The Company has a
reserve of $1.8 million as of quarter end for costs directly related to
the restructuring. It is currently estimated that an additional $4
million to $7 million of charges could still be incurred relating to
this restructuring initiative. This is an increase from total
anticipated restructuring charges at the end of the second quarter. The
increase is due to higher than originally anticipated reductions in
workforce, equipment move costs, and less than expected cash proceeds
from asset sales. The majority of the restructuring charge relates to
the Integrated Graphics segment.
It is anticipated that cash proceeds derived in the restructuring
through the sale of disposed equipment, working capital improvements
and improved operations will more than offset cash charges from the
restructuring in fiscal year 2002. The restructuring is also expected
to have a positive impact on cash flow in fiscal year 2003 and beyond,
and should result in annual earnings improvement of approximately $13.0
million. For further information regarding the fiscal year 2002
restructuring charge, see footnote 7.
In the nine months ended April 30, 2001 the Company recognized $0.7
million of residual restructuring charges related to an earlier
restructuring initiative ("2000 restructuring") announced in the third
quarter of fiscal year 2000. The 2000 restructuring was undertaken as
the Company was experiencing continued softness in the high-quality
color marketing and promotional printing markets as well as issues
related to the integration of the Graphic Industries acquisition. The
Company's 2000 restructuring plan was approved, committed to, and for
the most part, executed in the third quarter of fiscal year 2000 with
only minor charges incurred in fiscal year 2001. The Company has not
incurred any charges related to the 2000 restructuring in fiscal year
2002 and does not anticipate any future charges related to the 2000
restructuring.
Wallace Computer Services, Inc. and Subsidiaries Page 15
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. The
Company is required to adopt the provisions of SFAS No. 142 on August
1, 2002, but had the option of adopting early, as of August 1, 2001.
Under SFAS No. 142, goodwill is no longer amortized, and the rules for
measuring goodwill impairment use a fair-value-based test. Under the
new rules, a fair value of each of the Company's reporting units with
assigned goodwill must be calculated using either market comparables or
a discounted cash flow approach, or a combination thereof. Once the
fair value of the reporting unit has been determined, the book value of
net assets, including intangibles, of that reporting unit must be
compared to the total market value derived in the first step to
determine impairment.
The Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. As a result of adopting SFAS No. 142, the Company has,
retroactive to the beginning of the fiscal year, recorded an impairment
charge of $144.1 million, net of tax. This impairment is recorded as a
cumulative effect of a change in accounting principle. The impairment
was measured as of the date of adoption, and relates to the Company's
Commercial Print division in the Integrated Graphics segment. Goodwill
related to the other divisions is not impaired. The gross impairment of
goodwill was $147.5 million, which reduces total goodwill in the
Integrated Graphics segment to $113.8 million. A professional services
firm was engaged to assist in the valuation process. The restructuring
activities that took place in the second quarter did not cause any
additional impairment.
Cost of sales for the quarter was 72.6% of sales as compared to 72.8%
in the third quarter of last year. LIFO income was $0.4 million in the
current quarter versus income of $0.2 million in the third quarter of
last year. Cost of sales for the nine-month period ended April 30, 2002
was 73.5% of sales compared to 72.6% in the same period a year ago.
Total LIFO income in the first three quarters of fiscal year 2002 was
$0.4 million, while in the first three quarters of fiscal year 2001
total charges were $0.9 million.
Year over year, the Forms and Labels segment's quarterly sales
decreased 6.4% to $184.3 million, with operating income of $20.5
million and operating margin of 11.1% versus operating income of $17.7
million and an operating margin of 9.0% in the third quarter of last
year. For the nine-month period ended April 30, 2002, segment sales
decreased 6.1% to $588.6 million, with operating income of $60.4
million and an operating margin of 10.3%, versus operating income of
$65.6 million and an operating margin of 10.5% in the prior year to
date period. The adoption of SFAS No. 142 had minimal impact on
operating income of this segment. Competitive market and current
economic conditions have continued to put pressure on operating margins
in this segment. As the effects of cost cutting and other restructuring
measures have been realized, income has continued to improve for the
past four sequential quarters, returning to the levels seen in the
first half of fiscal 2001.
The Integrated Graphics segment's quarterly sales decreased 15.7% to
$184.9 million, with operating income of $8.5 million and operating
margin of 4.6% versus operating income of $12.7 million and an
operating margin of 5.8% in the third quarter of last year. For the
nine-month period ended April 30, 2002, segment sales decreased 11.1%
to $586.9 million, with operating income of $20.3 million and an
operating margin of 3.5% versus operating income of $37.0 million and
an operating margin of 5.6% in the prior year to date period. Had the
provisions of SFAS No. 142 been in place in fiscal year 2001, operating
income in the third quarter would have been $14.6 million or 6.6%. For
the nine month period, on the
Wallace Computer Services, Inc. and Subsidiaries Page 16
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
same basis, operating income would have been $42.5 million or 6.4%.
Competitive and economic pressures have been significant in this
segment. The majority of the restructuring activity has occurred in
this segment as the Company is in the process of standardizing its
production processes and bringing costs in line with sales demand. The
Company will also be strengthening capabilities in strategic local
markets while continuing to focus on contract business. As part of the
restructuring plan, the Company has closed two plants and disposed of
three in this segment. The plant closures and plant sales are
responsible for approximately $12 million of the segment's quarterly
sales decline. Although the Company will be losing approximately $55
million annually in transactional sales from the closed and sold
facilities, margins for the entire Commercial Print division are
expected to show year over year improvement.
Selling and administrative expenses as a percent of sales for the third
quarter were 15.2% versus 15.0% last year. Selling and administrative
expenses declined 10.3% from the prior year's third quarter. A portion
of the decline can be attributed to the variable selling expenses which
declined due to lower sales volume. In addition, cost reductions and
restructuring initiatives have helped reduce selling and administrative
expense to the current levels.
Depreciation and amortization for the quarter was $15.9 million or 4.3%
of sales versus $20.0 million or 4.8% of sales in the third quarter a
year ago. Software amortization expense is up 16% over the prior year's
third quarter due to enhancements made to the Company's order entry,
customer service, and inventory management system in the past year.
Goodwill amortization declined $2.0 million due to the adoption of SFAS
No. 142. Depreciation expense declined 16.0% in the current quarter as
a result of disposing of assets in the restructuring.
Interest expense for the quarter was $5.0 million, down from $7.1
million last year. The majority of the decrease in interest expense can
be attributed to debt reduction. Declining interest rates, however,
account for a portion of the reduction. Interest income for the quarter
was consistent year-to-year.
The annual effective tax rate for fiscal year 2002 is 39.0%. The
reduction in tax rate from the prior year is the result of the adoption
of SFAS No. 142. The majority of the goodwill that had previously been
amortized was not tax deductible. The tax rate was adjusted to 39.0% in
the second quarter from 38.2% in the first quarter primarily due to the
impact of the restructuring charge on pretax income. The annual
effective tax rate for fiscal year 2001 was 40.7%.
Net income for the third quarter was $11.5 million or $0.27 per share,
down from $13.9 million or $0.34 per share in the same quarter a year
ago. Income before the cumulative effect of a change in accounting
principle for the nine-month period ended April 30, 2002 decreased
66.2% to $16.0 million or $0.38 per share, from $47.3 million or $1.16
per share in the prior year to date period. Restructuring charges
reduced earnings by $0.08 per share in the third quarter and $0.56 in
the current year to date period.
Liquidity and Capital Resources
Working capital decreased by $8.5 million from July 31, 2001. Plant
closures and plant sales, along with the decision to outsource stock
and computer paper production, have reduced working capital needs. The
decline in accounts receivables is the result of the declining sales
volume. The current ratio at April 30, 2002 was 2.2 to 1.
Wallace Computer Services, Inc. and Subsidiaries Page 17
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
Current inventory levels are believed to be in-line with the inventory
levels necessary to satisfy customer demand. The Company anticipates
having adequate sources of supply of raw materials to meet future
business requirements.
As of April 30, 2002, there were no borrowings under a five-year
revolving Credit Agreement ("Credit Facility"), which provides for a
maximum aggregate principal amount available to be borrowed of $200.0
million. The Company has $200.0 million of Senior Term Notes with
institutional investors with a book value of $186.8 million classified
as long-term debt with the earliest maturity in 2006.
In addition to the Senior Notes, the Company has unsecured money market
lines of $25.0 million under which $11.0 million was borrowed at April
30, 2002. The $11.0 million from the unsecured money market lines is
classified as short-term debt.
Of the remaining long-term debt, $15.0 million is made up of industrial
revenue bonds at rates ranging from 1.70% to 1.80%. The balance of $8.4
million relates to acquisitions.
Total debt currently represents 33.5% of total capitalization. The
maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million.
The Credit Facility and the Senior Notes maintain cross default
provisions in which a violation of debt covenants in either debt
instrument automatically triggers a default in the other. Under the
most restrictive covenants, the Company must maintain a minimum
interest coverage of 2.5 to 1, a funded debt to EBITDA ratio not
greater than 3 to 1, consolidated indebtedness to consolidated total
capitalization of less than 65% and a minimum consolidated net worth of
$421 million at quarter-end. The company has received an amendment to
the Credit Facility to exclude up to $58 million in non-cash
restructuring charges in the second quarter of fiscal year 2002 when
computing the minimum interest coverage and funded debt to EBITDA
tests. The Company is currently in compliance with all debt covenants
and will remain in compliance going forward. As a result of adopting
SFAS No. 142 and subsequently recording the $144.1 million charge for
goodwill impairments (net of tax), the Company has sought an amendment
to the Senior Note Indenture to provide additional flexibility under
the minimum consolidated net worth covenant. This amendment would
exclude $75 million of the charge for goodwill impairment from the
definition of net worth for purposes of meeting the minimum net worth
test. In May 2002, subsequent to quarter end, the Company received the
written consent to the amendment by the required noteholders and has
submitted it to the trustee for execution. It is anticipated that the
Senior Note Indenture will be legally modified in the fourth quarter.
Capital expenditures for the quarter totaled $4.6 million. For the full
fiscal year, capital expenditures are expected to be between $20 and
$25 million, which are expected to be financed through internally
generated funds and by borrowing against the Credit Facility.
Stockholders' equity decreased 24.4% to $439.0 million from July 31,
2001. The decrease can be attributed to the impairment charge taken as
a result of adopting SFAS No. 142.
Wallace Computer Services, Inc. and Subsidiaries Page 18
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Early
application is encouraged. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset. It is anticipated that
the adoption of SFAS No. 143 will have no impact on the financial
position or results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective in
fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and Accounting Principles Board Opinion No. 30 which
addresses the accounting and reporting relating to the disposal of a
segment of a business. It is anticipated that the adoption of SFAS No.
144 will not have a significant impact on the financial position or
results of operations of the Company.
Common Stock
On September 8, 1999, the Board of Directors increased the annualized
dividend rate to $0.66 per share, a 3.1% increase from fiscal year
1999. Since that time, the Board of Directors has maintained the
quarterly dividend rate of $0.165 per share.
During the first quarter of fiscal year 2002, the Company purchased
300,200 shares of Wallace common stock. No shares were repurchased
during the second or third quarters of fiscal year 2002. Total
repurchases through April 30, 2002, against the $100 million authorized
by the Board in June 1997, have been $98.5 million. On January 25, 2000
the Board of Directors approved an additional $100 million share
repurchase authorization.
Wallace Computer Services, Inc. and Subsidiaries Page 19
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Part II Other Information
Items 1 through 3 None
Item 4 None
Item 5 Other Information
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Certain statements in this filing and elsewhere (such as in other filings
by the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management, and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, that address activities, events, or developments that the
Company expects or anticipates may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's and its subsidiaries' business and
operations, plans, references to future success and other such matters are
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to materially differ from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, general
economic, market or business conditions, changes in laws or regulations; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company and its subsidiaries; successful integration of acquisitions; labor
market conditions; changes in postal rates and paper prices; the ability of the
Company to retain its customers who generally do not operate under long-term
contracts with the Company; the potential unpredictability of the Company's net
sales due to seasonal and other factors which can lead to fluctuations in
quarterly and annual operating results; the ability of the Company to keep pace
with technological advancements in the industry; the effect of technical
advancements on the demand for the Company's goods and services; and the risk of
damage to the Company's data centers and manufacturing facilities or
interruptions in the Company's telecommunications links.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Wallace Computer Services, Inc. 2001 Stock Incentive Plan dated
December 5, 2001, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 2001.
10.2 Separation Agreement effective as of October 17, 2001 between the
Company and Michael A. Anderson previously filed as Exhibit 10.2
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 2002.
10.3 The Company adopted in the third quarter an Amended and Restated
Executive Severance Pay Plan, in which all "named executive
officers" as that term is defined in Item 402(a)(3) of Regulation
S-K with the exception of Messrs. Jones and Duffield are Level II
participants and certain other executive employees are either
Level I participants or Level II participants. A copy of the
Amended and Restated Plan is attached.
Wallace Computer Services, Inc. and Subsidiaries Page 20
Notes to Consolidated Financial Statements
April 30, 2002
(Unaudited)
Part II Other Information (continued)
Item 6 Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K
(1) A report on Form 8-K was filed on May 23, 2002 announcing
the termination of the engagement of Arthur Andersen LLP as
independent auditor and the engagement of Deloitte & Touche
LLP as independent auditor effective June 16, 2002.
Page 21
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.
WALLACE COMPUTER SERVICES, INC.
June 12, 2002 /s/ M. David Jones
-------------------- -------------------------------------------------
Date M. David Jones
Chairman of the Board and Chief Executive Officer
June 12, 2002 /s/ Vicki L. Avril
-------------------- -------------------------------------------------
Date Vicki L. Avril
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)