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FORM 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
APRIL 2, 1999
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.)
44 FRANKLIN STREET 03061-2002
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 MAY 1, 1999, THE COMPANY HAD 5,922,529 SHARES OF COMMON STOCK,
EXCLUDING 1,023,238 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)
April 2, 1999 December 31,
ASSETS: (Unaudited) 1998
- ------- ------------- ------------
Cash and cash equivalents $ 27,728 $ 31,965
Restricted cash 5,000 5,000
Accounts receivable 19,702 18,232
Inventories
Materials and supplies 5,659 6,326
Work in process 3,219 2,503
Finished goods 5,528 5,847
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14,406 14,676
Other current assets 13,695 13,474
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Total current assets 80,531 83,347
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Plant and equipment 73,009 73,057
Accumulated depreciation (34,470) (33,727)
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38,539 39,330
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Intangible assets 1,991 1,991
Accumulated amortization (1,524) (1,484)
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467 507
-------- --------
Other assets 9,185 10,155
Net non-current assets of discontinued operations 756 756
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Total assets $129,478 $134,095
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LIABILITIES AND SHAREHOLDERS' EQUITY:
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Current maturities of long-term debt $ 511 $ 511
Accounts payable 8,659 9,028
Accrued expenses 25,610 27,934
Income tax payable 180 --
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Total current liabilities 34,960 37,473
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Long-term debt 894 1,064
Other long-term liabilities 20,331 20,331
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Total long-term liabilities 21,225 21,395
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Common stock and additional capital 21,995 21,995
Retained earnings 64,289 64,071
Treasury stock, at cost (12,991) (10,839)
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Total shareholders' equity 73,293 75,227
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Commitments and contingencies -- --
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Total liabilities and shareholders' equity $129,478 $134,095
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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 AND RETAINED EARNINGS
(UNAUDITED)
(In thousands, except per share data) THREE MONTHS ENDED
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April 2, April 3,
1999 1998
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Net sales $42,649 $44,486
Cost of products sold 32,362 34,735
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Gross margin 10,287 9,751
Research, selling, distribution and
administrative expenses 10,093 10,492
Interest expense 204 113
Interest income (376) (8)
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Income (loss) from continuing operations before
income tax provision (benefit) 366 (846)
Income tax provision (benefit) 148 (356)
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Income (loss) from continuing operations 218 (490)
Loss from discontinued operation, net of taxes -- (301)
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Net income (loss) 218 (791)
Retained earnings, beginning of period 64,071 76,935
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Retained earnings, end of period 64,289 76,144
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Earnings per share:
Income (loss) from continuing operations $ .04 $ (0.08)
Income (loss) from discontinued operation -- (0.04)
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Net income (loss) per common share $ .04 $ (0.12)
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Average common shares 5,909 6,391
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Income (loss) per common share from continuing
operations assuming dilution $ .04 $ (0.08)
Income (loss) per common share from discontinued
operations assuming dilution $ -- $ (.04)
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Net income (loss) per common share assuming dilution $ .04 $ (0.12)
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Average common and potential common shares 5,926 6,391
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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)
THREE MONTHS ENDED
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April 2, April 3,
1999 1998
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Cash flows from operating activities of continuing operations:
Net income (loss) $ 218 $ (791)
Adjustments to reconcile net income (loss) to cash provided
by (used in) continuing operating activities:
Depreciation and amortization 1,444 1,737
Loss from discontinued operations -- 301
Net change in working capital and other assets (2,383) (2,947)
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Cash used in continuing operating activities (721) (1,700)
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Cash flows from investing activities of continuing operations:
Investment in plant and equipment (858) (2,007)
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Cash used in investing activities of continuing operations (858) (2,007)
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Cash flows from financing activities of continuing operations:
Proceeds from borrowings -- 2,100
Repayment of borrowings (170) (84)
Proceeds and tax benefits from shares issued under stock
option plans -- 292
Purchase of treasury stock (2,152) --
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Cash provided by (used in) financing activities of continuing
operations (2,322) 2,308
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Proceeds from the sale of discontinued operation 6,000
Cash provided by (used in) activities of discontinued operation (336) 251
Effect of exchange rate changes on cash -- 5
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Increase (decrease) in cash and cash equivalents (4,237) 4,857
Cash and cash equivalents at beginning of period 31,965 3,736
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Cash and cash equivalents at end of period $27,728 $ 8,593
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Interest paid $ 26 $ 102
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Income taxes paid $ 348 $ 51
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INDEBTEDNESS
On April 22, 1999, the Company entered into a new secured financing agreement
with Fleet Bank - NH, increasing the Company's revolving line of credit to $15
million from $8 million. This agreement with Fleet - NH replaces the Company's
existing credit facility, which was scheduled to expire April 30, 1999. The
agreement contains certain financial covenants with respect to consolidated
tangible net worth, capital expenditures and earnings before depreciation,
interest, income taxes, depreciation and amortization (EBITDA). Borrowings under
this facility are collateralized by a security interest in the Company's
receivables and inventory. Interest on amounts outstanding under the secured
line of credit is payable at the prime rate or at the Company's election, at
LIBOR plus a certain fixed percentage. The maturity of this financing agreement
is April 27, 2001. Without prior consent of the lenders, the agreement does not
allow the payment of dividends and restricts, among other things, the incurrence
of additional debt greater than determined amounts, guarantees or sale of
certain assets.
RECLASSIFICATION
Certain amounts from the prior year have been reclassified to conform to the
current year presentation.
STOCK OPTIONS
At April 30, 1999, options for 553,170 shares of common stock were outstanding.
Stock options for an additional 24,253 shares may be awarded under the Company's
1996 Stock Incentive Plan. In addition, the Company's stockholders approved the
1999 Shareholder Value Plan at their annual meeting held on April 30, 1999.
Stock awards may be made under the 1999 Shareholder Value Plan for up to 600,000
shares of common stock (subject to adjustments for stock splits, stock dividends
or other changes in the Company's capitalization). No options or shares have
been awarded under this plan.
SHAREHOLDER'S EQUITY
On June 24, 1998, the Company's Board of Directors authorized the repurchase
from time to time in the open market of up to one million shares of its common
stock, subject to financial and market conditions, Securities and Exchange
Commission rules and regulations and financial covenant limitations with the
Company's lender. During the first quarter of 1999, Nashua repurchased 177,500
shares of the Company's common stock in open market transactions. In addition,
the Company repurchased 170,000 additional shares in open market transactions in
April bringing the total shares repurchased to 999,154 as of April 30, 1999.
SEGMENT AND RELATED INFORMATION
In the fourth quarter of 1998, the Company adopted Statement of Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The table below presents information about reported segments.
(In thousands) Net Sales From Pretax Income (Loss) From
Continuing Operations Continuing Operations
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April 3, 1999 April 2, 1998 April 3, 1999 April 2, 1998
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Imaging Supplies $14,365 $16,695 $ (480) $ (784)
Specialty Coated and Label Products 28,192 27,760 1,921 1,665
Reconciling items:
Other 92 31 (42) (207)
Unallocated corporate expenses,
including interest - - (1,033) (1,520)
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Consolidated $42,649 $44,486 $ 366 $ (846)
OTHER
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial
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position as of April 2, 1999, the results of operations for the three month
periods ended April 2, 1999 and April 3, 1998 and cash flows for the three month
periods ended April 2, 1999 and April 3, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales in the first quarter of 1999 were $42.6 million, compared with $44.5
million in the first quarter of 1998.
The Imaging Supplies Segment sales in the first quarter of 1999 were $14.4
million, compared with $16.7 million in the first quarter of 1998. The sales
decline was a result of lower volume in the toner and developer, cartridge and
paper product lines. The toner and developer sales decline was due to lower
order rates from large international customers and decreased selling prices on
two of the segment's high volume products. The cartridge and paper product sales
decline was a result of lower selling prices across all channels as well as
reduced volume in the dealer agent and international channels.
The Specialty Coated and Label Products Segment sales in the first quarter of
1999 were $28.2 million, compared with $27.8 million in the first quarter of
1998. The increased sales were a result of higher volume in the thermal paper
and label products, compared to the same period last year.
Gross margins improved to 24.1 percent of sales in the first quarter of 1999
from 21.9 percent of sales during the same period in 1998. The improvement in
gross margin was primarily a result of reduced manufacturing costs, increased
manufacturing efficiency and improved product mix in both the Imaging Supplies
Segment and the Specialty Coated and Label Products Segment.
Research, selling, distribution and administrative expenses in the first quarter
of 1999 decreased 4 percent, or $.4 million, compared to the same period of
1998. Research expense decreased 25 percent, or $.4 million, selling and
distribution expense decreased 4 percent, or $.2 million, and administrative
expenses increased 7 percent, or $.2 million.
Pretax loss in the Imaging Supplies Segment decreased $.3 million, or 38
percent, compared to the first quarter of 1998 as a result of improved gross
margins, reduced research, selling and distribution expenses. Research expense
declined due to reduced new product testing costs. Selling and distribution
expense declined as a result of lower sales impacting variable expenses.
Pretax profit in the Specialty Coated and Label Products Segment improved $.3
million as a result of improved gross margins, partially offset by higher
administrative expenses. The administrative expense increase in the first
quarter was a result of costs related to employee training and payroll, compared
to the first quarter of 1998.
Net income in the first quarter of 1999 was $.2 million ($.04 per share),
compared to a net loss of $.8 million ($.12 per share) in the first quarter of
1998. Net income from continuing operations in the first quarter of 1999 was $.2
million ($.04 per share), compared to a loss of $.5 million ($.08 per share) in
the first quarter of 1998. Pretax income from continuing operations in the first
quarter of 1999 was $.4 million, compared to a loss of $.8 million in the first
quarter of 1998, reflecting a $.5 million improvement in gross margin, a $.4
million reduction in operating expenses and a $.3 million increase in net
interest income derived from the investment of cash generated by the sale of the
Photofinishing Group.
Details of the charges related to continuing operations and the activity
recorded during the first quarter of 1999 follows.
Balance Current Current Balance
(In thousands) Dec. 31, Period Period April 2,
1998 Provision Charges 1999
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Provisions for severance related to workforce reductions $472 $ -- $329 $143
Other 149 -- 26 123
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Total $621 $ -- $355 $266
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All charges, excluding asset write-downs, are principally cash in nature and are
expected to be funded from operations.
The estimated annual effective income tax rate was 40.5 percent for the first
quarter of 1999 and is higher than the U.S. statutory rate principally due to
the impact of state income taxes.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs being written
for, or microprocessors using, two digits (rather than four) to define the
applicable year. Company computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in system failures or miscalculations. The Company is currently
working to mitigate the Y2K issue and has established processes for assessing
the risks and associated costs.
The Company categorizes its Y2K efforts as follows: hardware, software, embedded
processors, vendors and customers. Progress in assessing and remediating
information technology systems (hardware and software) and non-information
technology systems (embedded processors) is being tracked in phases including
inventory, identification of non-compliant systems, risk assessment, project
plan development, remediation, testing and verification. The Company's Y2K
project team has completed the risk assessment phase for all major systems,
including hardware, software and embedded processors. Remediation efforts of
approximately two-thirds of the Company's major systems have been completed. The
Company expects that the internal remediation work and testing for all systems
critical to run the Company's businesses will be completed by July 1999. The
Company will use internal and external resources to remediate and test its
systems, and to develop contingency plans to mitigate risks associated with the
Y2K issue.
The Company has initiated communications with significant vendors and customers
to coordinate the Y2K issue and is in the process of determining the Company's
vulnerability if these companies fail to remediate their Y2K issues. The Company
is reviewing responses and expects to complete its analysis in the second
quarter. There can be no guarantee that the systems of other companies will be
timely remediated, or that other companies' failure to remediate Y2K issues
would not have a material adverse effect on the Company.
It is currently estimated that the aggregate cost of the Company's Y2K efforts
will be approximately $1.1 million, of which, approximately $.6 million has been
spent to date. These costs are being funded through operating cash flows and
include the costs of normal system upgrades and replacements for which the
timing was accelerated to address the Y2K issue. These amounts do not include
any costs associated with the implementation of contingency plans, which are in
the process of being developed; nor do they include internal Y2K program costs.
The Company does not separately track internal Y2K program costs. These costs
are principally the related payroll costs for the management information systems
group.
The Company has not yet developed a contingency plan for dealing with the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by the Company and certain third
parties to achieve Y2K compliance on a timely basis. The Company currently plans
to complete its analysis of the problems and costs associated with the failure
to achieve Y2K compliance and to establish a contingency plan in the event of
such a failure by September 30, 1999.
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The Company presently believes that with remediation, testing and contingency
planning, Y2K risks can be mitigated. However, although the Company is not
currently aware of any material internal operational or financial Y2K related
issues, the Company cannot provide assurances that the computer systems,
products, services or other systems upon which the Company depends will be Y2K
ready on schedule, that the costs of its Y2K program will not become material or
that the Company's contingency plans will be adequate. The Company is currently
unable to evaluate accurately the magnitude, if any, of the Y2K related issues
arising from the Company's vendors and customers. If any such risks (either with
respect to the Company or its vendors or customers) materialize, the Company
could experience serious consequences to its business which could have material
adverse effects on the Company's financial condition, results of operations and
liquidity.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates as of the date of this Form 10Q, which are
based on numerous assumptions as to future events. There can be no assurance
that these estimates will prove accurate, and actual results could differ
materially from those estimated if these assumptions prove inaccurate.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Working capital decreased $.3 million to $45.6 million from December 31, 1998.
Cash and cash equivalents declined $4.2 million, primarily as a result of
payment of certain year end accrued expenses in the amount of $2.3 million and
the repurchase of 177,500 shares of common stock in open market transactions
for $2.2 million pursuant to the Company's open market stock repurchase program
as detailed in the Shareholder's Equity section of the Notes to the Condensed
Consolidated Financial Statements. Other changes affecting working capital
included the $1.5 million increase in accounts receivable and the $.3 million
decline in accounts payable from December 31, 1998.
During April 1999, the Company entered into a new $15 million secured financing
agreement as detailed in the Indebtedness section of the Notes to the Condensed
Consolidated Financial Statements.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
MATTERS AFFECTING FUTURE RESULTS
This Form 10Q may contain forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. When used in this report,
the words "believe," "expects," "to be," "will" and similar expressions are
intended to identify such forward-looking statements. Any such forward-looking
statements and the Company's future results of operations and financial
condition are subject to risks and uncertainties which could cause actual
results to differ materially from those anticipated and from past results. Such
risks and uncertainties include, but are not limited to, 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
return the Company to profitability, risks associated with the failure by the
Company and certain third parties to achieve Year 2000 compliance on a timely
basis, and other risks detailed in the Company's filings with the
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Securities and Exchange Commission. The Company assumes no obligation to update
the information contained in this Form 10Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.01 Amended By-laws of the Company, effective as of April 13, 1999.
4.01 Amendment No. 3 to the Company's Rights Agreement, effective as
of April 30, 1999.
10.01 Amended 1996 Stock Incentive Plan of the Company, effective as
of April 13, 1999.
10.02 1999 Shareholder Rights Plan, effective as of April 30, 1999.
10.03 Loan Agreement between the Company and Fleet Bank - NH, dated as
of April 22, 1999.
10.04 Revolving credit promissory note between the Company and Fleet
Bank - NH, dated as of April 22, 1999.
10.05 Security Agreement between the Company and Fleet Bank - NH,
dated as of April 22, 1999.
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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
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(Registrant)
Date: MAY 11, 1999 BY: /s/ John L. Patenaude
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John L. Patenaude
Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial and duly
authorized officer)
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