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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
JUNE 29, 2001
or
[ ] 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 1-5492-1
NASHUA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0170100
(State of Incorporation) (IRS Employer Identification No.)
TRAFALGAR SQUARE, 2ND FLOOR 03063
NASHUA, NEW HAMPSHIRE (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (603) 880-2323
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF AUGUST 7, 2001, THE COMPANY HAD 5,862,831 SHARES OF COMMON STOCK,
EXCLUDING 1,023,818 SHARES IN TREASURY, PAR VALUE $1 PER SHARE, OUTSTANDING.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 29, 2001 December 31,
ASSETS: (Unaudited) 2000
- ------- ------------- ------------
Cash and cash equivalents $ 918 $ 1,035
Accounts receivable 32,039 27,915
Inventories
Raw materials 9,961 12,112
Work in process 2,867 3,658
Finished goods 6,486 8,956
-------- --------
19,314 24,726
Taxes receivable 714 10,708
Other current assets 6,805 7,159
-------- --------
Total current assets 59,790 71,543
-------- --------
Plant and equipment 91,691 91,018
Accumulated depreciation (40,365) (36,465)
-------- --------
51,326 54,553
-------- --------
Goodwill, net of amortization 29,698 30,490
Other assets 15,334 13,885
-------- --------
Total assets $156,148 $170,471
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- ------------------------------------
Current maturities of long-term debt $ 3,865 $ 9,806
Accounts payable 19,820 19,104
Accrued expenses 14,146 20,102
-------- --------
Total current liabilities 37,831 49,012
-------- --------
Long-term debt 32,475 35,905
Other long-term liabilities 13,397 13,217
-------- --------
Total long-term liabilities 45,872 49,122
-------- --------
Common stock 6,875 7,012
Additional paid-in capital 15,554 15,268
Retained earnings 64,938 64,979
Treasury stock, at cost (14,922) (14,922)
-------- --------
Total shareholders' equity 72,445 72,337
-------- --------
Total liabilities and shareholders' equity $156,148 $170,471
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data) THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
June 29, June 30, June 29 June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 69,069 $ 68,723 $137,371 $112,733
Cost of products sold 54,710 53,350 109,289 88,438
-------- -------- -------- --------
Gross margin 14,359 15,373 28,082 24,295
Selling, distribution and administrative expenses 12,296 13,435 24,781 22,405
Research and development expense 908 1,020 1,635 2,089
Pension settlement income -- -- -- (18,606)
Restructuring and unusual charges -- 4 145 1,456
(Income) loss from equity investment (17) 10 (42) 14
Interest expense, net 750 649 1,700 429
-------- -------- -------- --------
Income (loss) before income taxes 422 255 (137) 16,508
Provision (benefit) for income taxes 251 53 (96) 6,465
-------- -------- -------- --------
Net income (loss) $ 171 $ 202 $ (41) $ 10,043
======== ======== ======== ========
Basic earnings per share:
Net income (loss) per common share $ 0.03 $ 0.04 $ (0.01) $ 1.78
======== ======== ======== ========
Average common shares 5,688 5,649 5,665 5,648
======== ======== ======== ========
Diluted earnings per share:
Net income (loss) per common share assuming dilution $ 0.03 $ 0.04 $ (0.01) $ 1.77
======== ======== ======== ========
Dilutive effect of stock options 28 25 -- 20
======== ======== ======== ========
Average common and potential common shares 5,716 5,674 5,665 5,668
======== ======== ======== ========
Dividends declared per share $ -- $ 0.01 $ -- $ 0.01
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
----------------------------
June 29, June 30,
2001 2000
-------- --------
Cash flows from operating activities of continuing operations:
Net income (loss) $ (41) $ 10,043
Adjustments to reconcile net income (loss) to cash provided
by continuing operating activities:
Depreciation and amortization 4,949 4,102
Pension settlement income -- (18,606)
Net change in working capital and other assets 3,600 7,058
Other 117 (286)
--------- --------
Cash provided by continuing operating activities 8,625 2,311
-------- --------
Cash flows from investing activities of continuing operations:
Investment in plant and equipment (1,278) (4,876)
Proceeds from sale of plant and equipment 81 1,854
Business acquisition, net of cash acquired -- (58,619)
Other -- (107)
-------- --------
Cash used in investing activities of continuing operations (1,197) (61,748)
-------- --------
Cash flows from financing activities of continuing operations:
Repayment of borrowings (9,371) (256)
Proceeds from borrowings -- 36,780
Dividends paid -- (59)
Other 44 74
-------- --------
Cash provided by (used in) financing activities of continuing operations (9,327) 36,539
-------- --------
Cash provided by activities of discontinued operation 1,782 1,312
-------- --------
Decrease in cash and cash equivalents (117) (21,586)
Cash and cash equivalents at beginning of period 1,035 25,056
-------- --------
Cash and cash equivalents at end of period $ 918 $ 3,470
======== ========
Interest paid $ 1,766 $ 65
======== ========
Income taxes paid (refunded) for continuing operations, net $ (5,219) $ 133
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Nashua Corporation's (the "Company") Annual Report
on Form 10-K for the year ended December 31, 2000.
Certain amounts from the prior year have been reclassified to conform to the
current year presentation.
BUSINESS ACQUISITION
On April 17, 2000, the Company completed the acquisition of all outstanding
shares of stock of Rittenhouse Paper Company, an Illinois corporation
("Rittenhouse"), pursuant to a Stock Purchase Agreement, dated March 21, 2000,
by and among the Company, Rittenhouse and the stockholders of Rittenhouse.
Rittenhouse manufactures and markets a wide range of paper media,
pressure-sensitive labels and imaging supplies. In paper, Rittenhouse is
primarily a converter of large rolls of paper into products such as cut/roll,
bond paper, thermal, point-of-sale, ATM and wide format papers. In labels, it
manufactures a wide assortment of pressure-sensitive and entertainment tickets
for both commercial and consumer use. In imaging, it manufactures and markets
ribbons for use in imaging devices.
Total consideration, including direct acquisition costs, paid by the Company was
approximately $61.8 million. The Company funded $35.0 million of the purchase
price from borrowings under a secured loan agreement and the remainder from its
cash reserves. The acquisition of Rittenhouse was accounted for using the
purchase method of accounting and the operations of Rittenhouse are included in
the Consolidated Statement of Operations and Retained Earnings from the date of
acquisition. Purchase consideration was allocated to the assets acquired and
liabilities assumed based on their respective fair values, with the excess of
purchase consideration over the fair value of net assets of $31.6 million
allocated to goodwill. Goodwill is being amortized on a straight-line basis over
twenty years.
The Company began formulating plans related to workforce reductions and plant
closings prior to the purchase date. Liabilities assumed included restructuring
charges of approximately $2.1 million related primarily to planned workforce
reductions in the acquired business. The provision for planned workforce
reductions included amounts for salary and benefits for 67 employees. Payments
for severance and other plant closing costs through the second quarter of 2001
totaled $1.8 million.
RESTRUCTURING AND UNUSUAL CHARGES
Restructuring and unusual charges for the six months ended June 29, 2001 of
approximately $.1 million related to workforce reductions in the Toner Division
of the Imaging Supplies segment. Restructuring and unusual charges for the six
months ended June 30, 2000 of approximately $1.5 million related primarily to
the Company's decision to discontinue its remanufactured laser cartridge product
line in its Imaging Supplies segment.
PENSION SETTLEMENT
In the first quarter of 2000, the Company recorded a pretax gain of $18.6
million associated with the purchase of non-participating annuity contracts from
Principal Life Insurance Company to settle the
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Company's pension benefit obligation with respect to the retired salaried and
hourly employees covered under its pension plans and receiving pension benefits
as of December 1, 1999.
INCOME TAXES
On March 31, 1998, the New Hampshire Department of Revenue Administration
("DOR") issued a notice of deficiency in connection with an examination of the
Company's corporate income tax returns for the years 1989 through 1992 in the
amount of $4.4 million, including interest. The deficiency principally related
to the tax treatment of the sale of the Company's International Office Systems
business in 1990. A petition for reconsideration was filed with an appeals
officer on May 26, 1998 and a formal hearing was held before the DOR officers on
August 31, 1999. On October 27, 2000, the State of New Hampshire issued a
revised assessment of $1.8 million, including interest, in accordance with the
New Hampshire Department of Revenue hearing officer's final order. The Company
disagreed with the final order and on November 15, 2000 filed suit against the
DOR in New Hampshire Superior Court. The Company settled this tax claim with the
DOR during the second quarter of 2001 and paid $.5 million, which included
interest charges.
SEGMENT AND RELATED INFORMATION
The table below presents information about reported segments.
FOR THE QUARTER:
(In thousands)
Net Sales Pretax Income (Loss)
------------------------------- --------------------------------
Three Months Ended Three Months Ended
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------- ------------- ------------- -------------
Imaging Supplies $ 6,220 $ 7,359 $ 124 $ (603)
Specialty Paper Products 37,278 38,603 1,087 2,816
Label Products 29,859 27,692 2,241 1,917
Reconciling items:
Eliminations (4,282) (5,012) -- --
Other (6) 81 152 229
Unallocated corporate expenses -- -- (2,036) (3,116)
Amortization of goodwill -- -- (396) (335)
Interest expense, net -- -- (750) (649)
Restructuring and unusual charges -- -- (4)
------- ------- ------- -------
Consolidated $69,069 $68,723 $ 422 $ 255
======= ======= ======= =======
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FOR THE SIX MONTHS:
(In thousands)
Net Sales Pretax Income (Loss)
------------------------------- --------------------------------
Six Months Ended Six Months Ended
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------- ------------- ------------- -------------
Imaging Supplies $ 12,058 $ 16,988 $ (113) $ (1,391)
Specialty Paper Products 76,031 57,276 2,253 3,751
Label Products 57,862 46,773 3,961 2,991
Reconciling items:
Eliminations (8,694) (8,395) -- --
Other 114 91 447 106
Unallocated corporate expenses -- -- (4,048) (5,335)
Amortization of goodwill -- -- (792) (335)
Interest expense, net -- -- (1,700) (429)
Restructuring and unusual charges -- -- (145) (1,456)
Pension settlement income -- -- - 18,606
-------- -------- ------- -------
Consolidated $137,371 $112,733 $ (137) $16,508
======== ======== ======= =======
CONTINGENCIES
In December 1999, the Internal Revenue Service ("IRS") completed an examination
of the Company's corporate income tax returns for the years 1995 through 1997.
On December 16, 1999, the IRS issued a Notice of Proposed Adjustment which
assessed additional taxes of $5.2 million, excluding interest. The assessment
represents a total of $14.0 million of adjustments to taxable income for the
years under review. The proposed adjustments relate to the deductibility of
restructuring and other reserves applicable to continuing and discontinued
operations, as well as the utilization of foreign net operating losses primarily
associated with discontinued operations. The Company disagrees with the position
taken by the IRS and filed a formal protest of the proposed adjustments on April
6, 2000. A hearing was held before the IRS Appeals Officer on March 14, 2001.
In December 1998, the IRS completed an examination of the Company's corporate
income tax returns for the years 1992 through 1994. On December 11, 1998, the
IRS issued a Notice of Proposed Adjustment which assessed additional taxes of
$4.6 million, excluding interest. The assessment represents a total of $18.2
million of adjustments to taxable income for the years under review. The
proposed adjustments relate to the deductibility of restructuring and other
reserves applicable to discontinued operations, as well as certain losses
deducted in connection with the divestiture of the Company's Computer Products
Division. The Company disagrees with the positions taken by the IRS and filed a
formal protest of the proposed adjustment on January 12, 1999. Formal hearings
were held before the IRS Appeals Officer on November 16, 1999 and March 14,
2001.
The Company believes that it will prevail in all material respects against the
IRS' assertions related to the corporate income tax returns filed for years 1992
through 1994, and that it is adequately reserved for potential liabilities for
tax deficiencies that could arise from resolution of the IRS's examination of
the corporate tax returns filed for years 1995 through 1997. While management
believes that it has provided adequately for its tax liabilities, including
liabilities related to matters in dispute with taxing authorities, it can
provide no assurances that the Company will prevail in its defense against
adjustments proposed in these pending or future federal and state examinations.
In addition, management can provide no assurances that the ultimate resolution
of these open tax matters will not be in excess of current provisions.
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In August and September 1996, two individual plaintiffs initiated lawsuits in
the Circuit Court of Cook County, Illinois against the Company, Cerion
Technologies, Inc. ("Cerion"), certain directors and officers of Cerion, and the
Company's underwriter, on behalf of classes consisting of all persons who
purchased the common stock of Cerion between May 24, 1996 and July 9, 1996.
These two complaints were consolidated. In March 1997, the same individual
plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action
Complaint (the "Consolidated Complaint"). The Consolidated Complaint alleged
that, in connection with Cerion's initial public offering, the defendants issued
materially false and misleading statements and omitted the disclosure of
material facts regarding, in particular, certain significant customer
relationships. In October 1997, the Circuit Court, on motion by the defendants,
dismissed the Consolidated Complaint. The plaintiffs filed a Second Amended
Consolidated Complaint alleging substantially similar claims as the Consolidated
Complaint seeking damages and injunctive relief. On May 6, 1998, the Circuit
Court, on motion by the defendants, dismissed with prejudice the Second Amended
Consolidated Complaint. The plaintiffs filed with the Appellate Court an appeal
of the Circuit Court's ruling. On November 19, 1999, the Appellate Court
reversed the Circuit Court's ruling dismissing the Second Amended Consolidated
Complaint. The Appellate Court ruled that the Second Amended Consolidated
Complaint stated a claim and remanded the case to the Circuit Court for further
proceedings. On December 27, 1999, the Company filed a Petition for Leave to
Appeal from the Appellate Court with the Supreme Court of Illinois. In that
Petition, the Company asked the Supreme Court of Illinois to hear the Company's
further appeal and determine whether the Circuit Court or the Appellate Court is
correct. That Petition was denied and the case was remanded to the Circuit Court
for trial. Discovery is in process. The Company believes that the lawsuit is
without merit and will continue to defend itself in this matter.
The Company is involved in certain environmental matters and has been designated
by the Environmental Protection Agency ("EPA") as a potentially responsible
party ("PRP") for certain hazardous waste sites. In addition, the Company has
been notified by certain state environmental agencies that some of the Company
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, the ultimate cost to
the Company of remediation for each site is difficult to estimate. Based on the
facts currently known and the Company's prior experience with these matters, the
Company has concluded that there is at least a reasonable possibility that site
assessment, remediation and monitoring costs will be incurred by the Company
with respect to those sites which can be reasonably estimated in the aggregate
range of $1.1 million to $1.4 million for certain of the Company's continuing
operations, and a range of $.1 million to $.3 million for certain of the
Company's discontinued operations. These ranges are based, in part, on an
allocation of certain sites' costs which, due to the joint and several nature of
the liability, could increase if the other PRPs are unable to bear their
allocated share. At June 29, 2001, the Company's accrual balances were $1.2
million for continuing operations and $.2 million for discontinued operations,
which represent, in management's view, the most likely amounts within the ranges
stated above. Based on information currently available to the Company,
management believes that it is probable that the major responsible parties will
fully pay the costs apportioned to them. Management believes that, based on its
financial position and the estimated environmental accrual recorded, its
remediation expense with respect to those sites is not likely to have a material
adverse effect on its consolidated financial position or results of operations.
SUBSEQUENT EVENT
On July 6, 2001, the Company entered into supply and purchase agreements with
Avery Dennison. The Company will supply Avery Dennison with certain coated
products manufactured at the Company's Merrimack, New Hampshire plant of its
Specialty Paper Products segment. The Company will purchase certain laminated
materials from Avery Dennison. Under the terms of the agreements, the Company is
obligated to purchase minimum quantities of specified products from Avery
Dennison and is subject to
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penalties if these minimum requirements are not met. The terms of the supply and
purchase agreements generally are for the period from July 6, 2001 through
December 31, 2005 with certain renewal provisions. As a result of the
agreements, the Company will cease lamination operations at its Omaha, Nebraska
plant of its Label Products segment by September 1, 2001. The Company expects to
take a net restructuring charge of approximately $3.3 million in the third
quarter of 2001 relating to the closure of its lamination operations, including
approximately $2.7 million related to a non-cash write-off of equipment utilized
in the lamination operation and charges related to a workforce reduction of
approximately 80 employees.
In an unrelated transaction, the Company sold unutilized land in Merrimack, New
Hampshire on July 27, 2001 for approximately $.7 million. The Company expects to
recognize a gain in the third quarter of 2001 of approximately $.6 million on
the sale of this real estate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE QUARTER:
Results for the second quarter of 2001 include a full quarter of Rittenhouse
operations, while the second quarter of 2000 includes Rittenhouse results as of
the acquisition date of April 17, 2000. Quarterly sales increased slightly to
$69.1 million from second quarter 2000 sales of $68.7 million. Increased sales
in the Label Products segment more than offset declines in the Imaging Supplies
and Specialty Paper Products segments. Gross margin decreased to $14.4 million,
or 20.8 percent, for the quarter compared to $15.4 million, or 22.4 percent, for
the second quarter of 2000. Gross margin improvements in the Imaging Supplies
and Label Products segments were more than offset by a decline in the Specialty
Paper Products segment. Selling and distribution expenses, as a percent of
sales, decreased slightly from the second quarter of 2000. Administrative
expenses, as a percentage of sales, decreased to 7.3 percent from 8.8 percent
for the second quarter of 2000. Prior year administrative costs were higher
primarily due to integration costs associated with the Rittenhouse acquisition
and environmental charges incurred relative to the Omaha, Nebraska plant.
Research and development expenses decreased by $.1 million mainly due to staff
reductions in the Imaging Supplies segment. Net interest expense was $.8 million
for the second quarter of 2001, an increase of $.1 million over the same period
last year. The Company's pretax profit was $.4 million compared to a profit of
$.3 million in the second quarter of 2000. Improvements in the profitability of
the Imaging Supplies and Label Products segments and a decrease in corporate
expenses were partially offset by a decline in the profitability of the
Specialty Paper Products segment and an increase in interest expense. Corporate
administrative expenses declined mainly due to a decrease in integration costs
and staff reductions resulting from the Rittenhouse acquisition.
Net income for the second quarter of 2001 was $.2 million, or $.03 per share,
compared to net income of $.2 million, or $0.04 per share, in the second quarter
of 2000.
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Details of the restructuring and unusual activity recorded during the second
quarter of 2001 follows:
(In thousands) Balance Current Current Balance
Mar. 30, Period Period June 29,
2001 Provision Utilization 2001
------- --------- ----------- --------
Provisions for severance
related to workforce reductions $447 $ -- $(224) $223
==== ==== ====== ====
The restructuring activities provided for in the balance at March 30, 2001,
represented amounts payable to 28 employees within the Toner Division of the
Imaging Supplies segment and 1 corporate employee. The amounts charged against
the reserve and estimated remaining costs have not changed materially from the
original estimate. All charges are principally cash in nature and are expected
to be funded from operations.
The estimated effective income tax rate for the second quarter of 2001 was 59.5
percent, which is higher than the U.S. statutory rate principally due to the
impact of non-deductible goodwill and state income taxes.
IMAGING SUPPLIES SEGMENT
The Imaging Supplies segment reported a 15.5 percent decrease in sales to $6.2
million for the second quarter of 2001 compared to $7.4 million for the same
period last year. This decline was primarily due to lower sales volumes for the
segment's Ricoh-compatible products, attributable to volume declines for a large
international customer.
Gross margin percentage increased from 20.2 percent to 26.5 percent due to
manufacturing yield and productivity improvements and decreased raw material
pricing. The segment also benefited from staff and cost reductions associated
with its recent restructuring. The improvement in gross margin percentage was
partially offset by a decline in sales revenues.
The segment's pretax income for the second quarter of 2001 was $.1 million, an
improvement of $.7 million compared to the second quarter of 2000. Improved
results were primarily due to an improvement in gross margins of $.2 million and
a reduction in selling and distribution expenses of $.5 million. The decrease in
selling and distribution expenses was associated with lower sales volume,
including lower commissions and freight costs, and staff reductions. Pretax loss
for the discontinued remanufactured laser cartridge product line was $.2 million
for the second quarter of 2000.
SPECIALTY PAPER PRODUCTS SEGMENT
The Specialty Paper Products segment reported a 3.4 percent decrease in sales to
$37.3 million for the second quarter of 2001, compared to $38.6 million for the
same period last year. The decrease was mainly attributable to pricing pressures
in the converting business and reduced sales volumes for cut-sheet office papers
and thermal papers due to the economic downturn.
Gross margin percentage declined from 22.5 percent to 19.1 percent, contributing
to a decline in gross margin of $1.6 million. The decline in the segment's gross
margin percentage is mainly attributable to an unfavorable product mix and
pricing pressures.
The segment's pretax income for the quarter declined by $1.7 million to $1.1
million, compared to $2.8 million in the second quarter of 2000. This decline is
mainly attributable to a decrease in the segment's gross margin percentage and
lower sales revenues.
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LABEL PRODUCTS SEGMENT
The Label Products segment reported a 7.8 percent, or $2.2 million, increase in
sales for the second quarter of 2001 to $29.9 million, compared to $27.7 million
for the same period last year. This improvement was due to increased volume in
transportation labels and the addition of a major customer for the segment's
retail shelf labels.
Gross margin increased to $5.7 million, from $5.2 million primarily due to
increased sales revenues. Gross margin percentage increased slightly from 18.9
percent to 19.1 percent.
The segment's pretax income increased 16.9 percent to $2.2 million, compared to
$1.9 million in the second quarter of 2000. This increase is primarily
attributable to gross margin improvements resulting from increased sales,
acquisition synergies and cost controls, as well as a decrease in environmental
expenses.
RESULTS OF OPERATIONS - FOR SIX MONTHS YEAR-TO-DATE:
Sales for the first six months of 2001 increased to $137.4 million, a 21.9
percent increase over second quarter 2000 sales of $112.7 million, primarily due
to the acquisition of Rittenhouse. Increases in the Specialty Paper Products and
Label Products segments were partially offset by a decline in the Imaging
Supplies segment. Gross margin percentage decreased to 20.4 percent compared to
21.6 percent for the second quarter of 2000. Slight increases in the gross
margin percentages for the Label Products and Imaging Supplies segments were
more than offset by a decrease in the Specialty Paper Products segment. Selling
and distribution expenses, as a percent of sales, decreased to 10.6 percent from
11.2 percent primarily due to decreases in the Imaging Supplies and Label
Products segments. Administrative expenses, as a percentage of sales, decreased
from 8.7 percent to 7.4 percent primarily due to a reduction in Corporate
administrative expenses. Corporate administrative expenses declined mainly due
to decreases in integration and proxy related costs and staff reductions.
Research and development expenses decreased by $.5 million to $1.6 million, as
compared to $2.1 million for the same period in 2000, primarily a result of
exiting the remanufactured laser cartridge product line in the first quarter of
2000. Net interest expense was $1.7 million for the first six months of 2001
compared to $.4 million for the same period last year. Increased interest
expense resulted from borrowings incurred to finance the Rittenhouse
acquisition. The Company's profit before income taxes, pension settlement income
and restructuring and unusual charges was $8,000 compared to a loss of $.6
million for the first six months of 2000. Improvements in the profitability of
the Imaging Supplies and Label Products segments and a reduction in corporate
expenses were partially offset by a decrease in the profitability of the
Specialty Paper Products segment and increases in net interest expense and
goodwill amortization.
Pretax income from the sale of technology contributed $.5 million to the
Company's pretax profit for the first six months of 2001, compared to $.3
million for the same period in the prior year. The Company recognized the final
payment from the sale of its Microsharp technology during the second quarter of
2001 and has fully recognized income resulting from this sale of technology.
Net loss for the first six months of 2001 was $41,000, or $0.01 per share,
compared to net income of $10.0 million, or $1.77 per share, for the same period
in 2000. Net income for the first six months of 2001 included a pretax
restructuring charge of approximately $.1 million relating to workforce
reductions in the Toner Division of the Imaging Supplies segment. Results for
the first six months of 2000 included pretax pension settlement income of $18.6
million, and a pretax restructuring charge of approximately $1.5 million
relating primarily to the Company's decision to discontinue its remanufactured
laser cartridge product line.
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The estimated annual effective income tax rate was 70 percent for the first six
months of 2001 and is higher than the U.S. statutory rate principally due to the
impact of non-deductible goodwill and state income taxes.
IMAGING SUPPLIES SEGMENT
The Imaging Supplies segment reported a 29 percent decrease in sales to $12.1
million for the first six months of 2001, compared to $17 million for the same
period last year. This decline was primarily due to the discontinuance of the
remanufactured laser cartridge product line in the first quarter of 2000,
decreased sales of Xerox-compatible toners and lower sales volumes for the
segment's Ricoh-compatible products attributable to volume declines for a large
international customer. Remanufactured laser cartridge sales were $2.5 million
for the first six months of 2000. Sales of Xerox-compatible toners were
negatively impacted by a major customer's decision during the first quarter of
2000 to discontinue its line of private label Xerox-compatible toners
manufactured by the Company.
While the segment's gross margin percentage increased from 20.4 percent to 23.9
percent, its gross margin decreased $.6 million to $2.9 million mainly due to
lower sales revenues. Part of the improvement in gross margin percentage is
attributable to the discontinuance of the remanufactured laser cartridge product
line. The gross margin percentage for the Toner product line was 22.7 percent
for the first six months of 2000.
The segment's pretax loss for the first six months of 2001 was $.1 million, an
improvement of $1.3 million compared to the first six months of 2000. Improved
results were mainly due to lower selling and distribution and research and
development expenses, resulting from lower sales revenues and staff and cost
reductions, partially offset by a decline in gross margin. Selling and
distribution expenses decreased by $1.5 million, compared to the same period in
2000. The segment also benefited from the discontinuance of its remanufactured
laser cartridge product line, which had a loss of $.8 million for the first six
months of 2000.
SPECIALTY PAPER PRODUCTS SEGMENT
The Specialty Paper Products segment reported an $18.8 million increase in sales
for the first six months of 2001 to $76 million, compared to $57.2 million for
the same period last year as a result of the Rittenhouse acquisition. Excluding
the Rittenhouse paper converting business sales declined 11.2 percent, primarily
the result of lower volume in the cut sheet paper product line due to a
reduction in customer spending in the slowing economy.
While gross margin increased by $2.2 million, the segment's gross margin
percentage declined from 21.4 percent to 19 percent. The decline in gross margin
percentage was attributable to pricing pressures in the converting business and
an unfavorable change in product mix. The segment's pretax income for the first
six months of 2001 decreased 40 percent to $2.3 million, compared to $3.8
million for the first six months of 2000. Increases in selling, distribution and
administrative expenses more than offset the increase in gross margin dollars.
As a percentage of sales, selling, distribution and administrative expenses
increased from 13.4 percent to 15 percent. This increase is mainly attributable
to a freight allowance provided to a major customer.
LABEL PRODUCTS SEGMENT
The Label Products segment reported an $11.1 million, or 23.7 percent, increase
in sales to $57.9 million for the first six months of 2001, compared to $46.8
million for the same period last year. This increase was primarily a result of
the Rittenhouse acquisition. The segment also benefited from increased volume in
transportation labels and the addition of a major customer for the segment's
retail shelf labels.
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Gross margin percentage increased slightly for the first six months of 2001 to
18.6 percent, from 18.4 percent, for the same period in the prior year. Gross
margin increased by $2.1 million to $10.8 million, mainly due to increased sales
revenues.
The segment's pretax income increased 32.4 percent to $4.0 million, compared to
$3.0 million in the first six months of 2000. This improvement was primarily due
to the contribution of the acquired Rittenhouse business. Increased gross margin
was partially offset by increased selling, distribution and administrative
expenses. Selling, distribution and administrative expenses as a percentage of
sales decreased to 11.6 percent from 11.9 percent, primarily attributable to a
reduction in environmental charges.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Cash and cash equivalents decreased $.1 million from December 31, 2000 to $.9
million at June 29, 2001. Cash used in investing and financing activities for
the first six months of 2001 of $1.2 million and $9.3 million, respectively, was
partially offset by cash provided by continuing operating activities and
discontinued operations. Cash provided by continuing operating activities
consisted primarily of proceeds from tax refunds and inventory reductions,
partially offset by a reduction in accrued expenses and an increase in accounts
receivable. Cash provided by discontinued operations related primarily to tax
refunds. Net cash used in investing activities consisted of capital expenditures
across all segments. Net cash used in financing activities consisted of
repayments on the Company's debt.
Working capital decreased $.6 million from December 31, 2000 to $22 million at
June 29, 2001. Decreases in inventory and taxes receivable, along with an
increase in accounts payable, more than offset decreases in the current portion
of long-term debt and accrued expenses and an increase in accounts receivable.
The Company's Loan Agreement requires the Company to maintain certain financial
covenants such as Total Funded Debt to earnings before interest, income taxes,
depreciation and amortization and a Fixed Charge Coverage Ratio. The Company was
in compliance with the above financial covenants for the quarter ended June 29,
2001.
Management believes that current cash and cash equivalents, cash flows from
operations and amounts available under the Company's financing agreement are
sufficient to fund its planned capital expenditures, working capital needs and
other cash requirements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 supercedes APB Opinion No. 17,
"Intangible Assets", which required that goodwill and intangible assets be
amortized over a life not to exceed forty years. Under FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise, for impairment.
The amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the amortization provisions of FAS 142 are
effective upon adoption of FAS 142. FAS 142 is effective for fiscal years
beginning after December 15, 2001 (i.e., January 1, 2002 for calendar year
companies) and must be adopted as of the beginning of a fiscal year. The Company
will adopt FAS 142 for its 2002 fiscal year.
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Adoption of FAS 142 will have a significant effect on the Company's results of
operations, and could have a significant effect on its financial position. FAS
142 will eliminate the amortization of the Company's goodwill, which is
approximately $1.6 million on an annual basis. FAS 142 will also require a
review of the Company's goodwill for impairment. Goodwill at June 29, 2001 was
$29.7 million. The Company has not yet evaluated its goodwill for impairment
under the new guidelines of FAS 142.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August and September 1996, two individual plaintiffs initiated lawsuits in
the Circuit Court of Cook County, Illinois against the Company, Cerion
Technologies Inc. (Cerion), certain directors and officers of Cerion, and the
Company's underwriter, on behalf of classes consisting of all persons who
purchased the common stock of Cerion between May 24, 1996 and July 9, 1996.
These two complaints were consolidated. In March 1997, the same individual
plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action
Complaint (the "Consolidated Complaint"). The Consolidated Complaint alleged
that, in connection with Cerion's initial public offering, the defendants issued
materially false and misleading statements and omitted the disclosure of
material facts regarding, in particular, certain significant customer
relationships. In October 1997, the Circuit Court on motion by the defendants,
dismissed the Consolidated Complaint. The plaintiffs filed a Second Amended
Consolidated Complaint alleging substantially similar claims as the Consolidated
Complaint seeking damages and injunctive relief. On May 6, 1998, the Circuit
Court, on motion by the defendants, dismissed with prejudice the Second Amended
Consolidated Complaint. The plaintiffs filed with the Appellate Court an appeal
of the Circuit Court's ruling. On November 19, 1999, the Appellate Court
reversed the Circuit Court's ruling dismissing the Second Amended Consolidated
Complaint. The Appellate Court ruled that the Second Amended Consolidated
Complaint stated a claim and remanded the case to the Circuit Court for further
proceedings. On December 27, 1999, the Company filed a Petition for Leave to
Appeal from the Appellate Court with the Supreme Court of Illinois. In that
Petition, the Company asked the Supreme Court of Illinois to hear the Company's
further appeal and determine whether the Circuit Court or the Appellate Court is
correct. That petition was denied and the case was remanded to the Circuit Court
for trial. Discovery is in process. The Company believes that the lawsuit is
without merit and will continue to defend itself in this matter.
On March 31, 1998, the New Hampshire Department of Revenue Administration
("DOR") issued a notice of deficiency in connection with an examination of the
Company's corporate income tax returns for the years 1989 through 1992 in the
amount of $4.4 million, including interest. The deficiency principally related
to the tax treatment of the sale of the Company's International Office Systems
business in 1990. A petition for reconsideration was filed with an appeals
officer on May 26, 1998 and a formal hearing was held before the DOR officers on
August 31, 1999. On October 27, 2000, the State of New Hampshire issued a
revised assessment of $1.8 million, including interest, in accordance with the
New Hampshire Department of Revenue hearing officer's final order. The Company
disagreed with the final order and on November 15, 2000 filed suit against the
DOR in New Hampshire Superior Court. The Company settled this tax claim with the
DOR during the second quarter of 2001 and paid $.5 million, which included
interest charges.
Nashua Corporation is subject to legal proceedings and claims that arise in the
ordinary course of their business. In the opinion of management, the aggregate
liability, if any, with respect to these actions will not materially adversely
affect Nashua's financial position or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of the Company was held on
May 8, 2001.
(b) At the 2001 Annual Meeting, the stockholders of the Company elected Andrew
B. Albert, Sheldon A. Buckler, Avrum Gray, John M. Kucharski, George R.
Mrkonic, Jr., Peter J. Murphy, James F. Orr III and Mark E. Schwarz to
serve as directors of the Company until the next annual meeting of
stockholders.
(c) The matters acted upon at the 2001 Annual Meeting, and the voting
tabulation for each such matter, is as follows:
PROPOSAL 1: To elect eight directors for a term of one year:
NUMBER OF VOTES
------------------------------
NOMINEES FOR WITHHELD
------------------------- --------- --------
Andrew B. Albert 5,286,620 37,929
Sheldon A. Buckler 5,281,375 43,074
Avrum Gray 5,296,103 28,346
John M. Kucharski 5,274,564 49,885
George R. Mrkonic, Jr. 5,281,243 43,206
Peter J. Murphy 5,281,473 42,976
James F. Orr III 5,281,473 42,976
Mark E. Schwarz 5,250,613 73,836
Each of the above named individuals were elected directors of the Company.
PROPOSAL 2: To ratify the appointment of Ernst & Young LLP as independent
auditors for the year 2001.
NUMBER OF VOTES
-------------------------------------------------------------
FOR AGAINST ABSTAIN
------------- --------------- ---------------
5,245,242 39,497 39,710
The proposal was approved.
ITEM 5. OTHER INFORMATION
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes the Company to consider for inclusion in
the proxy statement and form of proxy card for the Company's 2002 Annual Meeting
of Stockholders must be received by the Company on or before November 28, 2001.
Such proposals should be directed to Nashua Corporation, Second Floor, 11
Trafalgar Square, Nashua, New Hampshire 03063, Attention: Secretary.
In addition, the Company's By-laws require all stockholder proposals to be
timely submitted in advance to the Secretary of the Company at the above address
(other than proposals submitted for inclusion in the proxy statement and form of
proxy as described above). To be timely, the Secretary must receive such notice
not less than 60 days nor more than 90 days prior to the 2002 Annual Meeting;
provided that, if less than 70 days' notice or prior public disclosure of the
date of the 2002 Annual Meeting is given or made, the notice must be received
not later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first.
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MATTERS AFFECTING FUTURE RESULTS
Information provided by the Company in this Form 10-Q may contain
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. The Company may also make forward-looking
statements in other reports filed with the Securities and Exchange Commission,
in materials delivered to stockholders and in press releases. In addition, the
Company's 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 "anticipates,"
"believes," "expects," "estimates," "intends," "plans," "projects," "can," "may"
and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those anticipated.
Such risks and uncertainties include, but are not limited to, the Company's
future capital needs, stock market conditions, price of the Company's stock,
fluctuations in customer demand, intensity of competition from other vendors,
timing and acceptance of new product introductions, general economic and
industry conditions, delays or difficulties in programs designed to increase
sales and improve profitability, the settlement of various tax issues, the
possibility of a final award of material damages in the Cerion securities
litigation and other risks detailed in this Form 10-Q and the Company's other
filings with the Securities and Exchange Commission. The Company assumes no
obligation to update the information contained in this Form 10-Q or to revise
any forward-looking statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.04 Amendment to the Revolving Credit and Term Loan Agreement
dated May 31, 2001 by and among the Company, Rittenhouse,
L.L.C., Rittenhouse Paper Company, Fleet National Bank and
LaSalle Bank, NA.
10.01 Master Agreement entered into as of July 2, 2001 between Nashua
Corporation and the Fasson Roll North America division of Avery
Dennison Corporation. Exhibit to the Company's Current Report on
Form 8-K dated July 9, 2001 and incorporated herein by
reference.
(b) Reports on Form 8-K
On July 9, 2001, the Company filed a Current Report on Form 8-K reporting,
under Items 5 and 7, that the Company had entered into supply and purchase
agreements with Avery Dennison relating to laminated and coated products.
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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: August 10, 2001 BY: /s/ John L. Patenaude
-------------------------- ------------------------------
John L. Patenaude
Vice President-Finance and
Chief Financial Officer
(principal financial and duly
authorized officer)
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