1
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
January 31, 2001 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
- ------------------------------------ ------------------------------------
(State 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 40,961,682
- ------------------------------------ --------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of March 1, 2001)
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
------ ------
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Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended January 31, 2001
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 six months ended
January 31, 2001, 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 Six Months Ended
January 31
--------------------------------------------------------
% %
2001 Sales 2000 Sales
-------------------------- --------------------------
Net Sales $ 828,323,000 100.0 $ 771,864,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 588,803,000 71.1 536,634,000 69.5
Selling and administrative expenses 128,413,000 15.5 133,518,000 17.3
Provision for depreciation and
amortization 39,000,000 4.7 39,322,000 5.1
Restructuring charges 694,000 0.1 0 0.0
------------- ----- ------------- -----
Total costs and expenses 756,910,000 91.4 709,474,000 91.9
------------- ----- ------------- -----
Operating Income 71,413,000 8.6 62,390,000 8.1
------------- ----- ------------- -----
Interest income (542,000) (0.1) (1,602,000) (0.2)
Interest expense 15,615,000 1.9 15,915,000 2.1
------------- ----- ------------- -----
Income before Income Taxes 56,340,000 6.8 48,077,000 6.2
Provision for Income Taxes 22,930,000 2.8 19,231,000 2.5
------------- ----- ------------- -----
Net Income $ 33,410,000 4.0 $ 28,846,000 3.7
============= ===== ============= =====
Basic Earnings per Share $ 0.82 $ 0.69
============= =============
Diluted Earnings per Share $ 0.82 $ 0.69
============= =============
Average Common Shares Outstanding 40,514,000 41,866,000
============= =============
Diluted Common Shares Outstanding 40,724,000 41,999,000
============= =============
Dividends Declared Per Share $ 0.33 $ 0.33
============= =============
The accompanying notes are an integral part of this statement.
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Wallace Computer Services, Inc. Page 3
FORM 10-Q
For Quarterly Period Ended January 31, 2001
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 three months ended
January 31, 2001, 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 Three Months Ended
January 31
-------------------------------------------------------
% %
2001 Sales 2000 Sales
-------------------------- --------------------------
Net Sales $ 420,510,000 100.0 $ 384,248,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 299,927,000 71.3 271,915,000 70.8
Selling and administrative expenses 64,763,000 15.4 67,710,000 17.6
Provision for depreciation and
amortization 19,629,000 4.7 19,736,000 5.1
Restructuring charges 302,000 0.1 0 0.0
------------- ----- ------------- -----
Total costs and expenses 384,621,000 91.5 359,361,000 93.5
------------- ----- ------------- -----
Operating Income 35,889,000 8.5 24,887,000 6.5
------------- ----- ------------- -----
Interest income (199,000) 0.0 (661,000) (0.2)
Interest expense 7,549,000 1.8 8,435,000 2.2
------------- ----- ------------- -----
Income before Income Taxes 28,539,000 6.8 17,113,000 4.5
Provision for Income Taxes 11,615,000 2.8 6,845,000 1.8
------------- ----- ------------- -----
Net Income $ 16,924,000 4.0 $ 10,268,000 2.7
============= ===== ============= =====
Basic Earnings per Share $ 0.42 $ 0.25
============= =============
Diluted Earnings per Share $ 0.41 $ 0.25
============= =============
Average Common Shares Outstanding 40,549,000 41,377,000
============= =============
Diluted Common Shares Outstanding 40,920,000 41,455,000
============= =============
Dividends Declared Per Share $ 0.165 $ 0.165
============= =============
The accompanying notes are an integral part of this statement.
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Wallace Computer Services, Inc. and Subsidiaries Page 4
Consolidated Balance Sheet
January 31, 2001 July 31, 2000
(Unaudited) (Audited)
---------------- ---------------
Assets
- ------
Current Assets
Cash and cash equivalents $ 4,845,000 $ 4,505,000
Accounts receivable 311,964,000 300,259,000
Less-allowance for doubtful accounts 6,599,000 5,906,000
--------------- ---------------
Net receivables 305,365,000 294,353,000
Inventories (Note 1) 126,686,000 108,133,000
Current and deferred taxes 25,957,000 27,732,000
Advances and prepaid expenses 7,252,000 8,110,000
--------------- ---------------
Total current assets 470,105,000 442,833,000
--------------- ---------------
Property, plant and equipment, at cost 877,766,000 856,827,000
Less-reserves for depreciation and amortization 472,974,000 443,981,000
--------------- ---------------
Net property, plant and equipment 404,792,000 412,846,000
--------------- ---------------
Intangible assets arising from acquisitions 292,750,000 296,745,000
Cash surrender value of life insurance 15,253,000 36,400,000
System development costs 57,867,000 55,727,000
Other assets 3,796,000 4,758,000
--------------- ---------------
Total assets $ 1,244,563,000 $ 1,249,309,000
=============== ===============
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Current portion long-term debt $ 2,043,000 $ 2,454,000
Short-term notes payable 11,003,000 12,991,000
Accounts payable 120,685,000 99,368,000
Accrued salaries, wages, profit sharing and other 82,491,000 81,277,000
--------------- ---------------
Total current liabilities 216,222,000 196,090,000
--------------- ---------------
Long-term debt 343,459,000 389,413,000
Deferred income taxes 69,637,000 69,912,000
Deferred compensation and retirement benefits 37,726,000 36,265,000
Other long-term liabilities 7,975,000 8,092,000
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at January 31, 2001 and July 31, 2000 45,764,000 45,764,000
Additional capital 38,624,000 38,486,000
Deferred compensation 3,161,000 3,159,000
Retained earnings 568,721,000 558,933,000
Treasury stock (at cost)- 5,060,443 shares at
January 31, 2001 and 5,076,661 shares at
July 31, 2000 (86,251,000) (96,805,000)
Accumulated other comprehensive loss (Note 4) (475,000) 0
--------------- ---------------
Total stockholders' equity 569,544,000 549,537,000
--------------- ---------------
Total liabilities and stockholders' equity $ 1,244,563,000 $ 1,249,309,000
=============== ===============
The accompanying notes are an integral part of this statement.
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Wallace Computer Services, Inc. and Subsidiaries Page 5
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended
January 31
----------------------------------
2001 2000
------------- -------------
Cash Flows from Operating Activities:
Net income from operations $ 33,410,000 $ 28,846,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,000,000 39,322,000
Restructuring charges 87,000 0
Deferred taxes (275,000) (168,000)
Gain on disposal of property (13,000) (326,000)
Changes in assets and liabilities
Accounts receivable (11,012,000) (2,861,000)
Inventories (18,553,000) (8,730,000)
Advances and prepaid expenses 859,000 (1,985,000)
Prepaid taxes 2,106,000 3,950,000
Other assets 15,790,000 (15,745,000)
Accounts payable and other liabilities 21,715,000 (15,320,000)
Accrued income taxes 0 (750,000)
Deferred compensation and retirement benefits 1,461,000 666,000
------------- -------------
Net cash provided by operating activities 84,575,000 26,899,000
------------- -------------
Cash Flows from Investing Activities:
Capital expenditures (24,063,000) (34,305,000)
Proceeds from disposal of property 1,170,000 2,457,000
Other capital investments-acquisitions 0 (9,496,000)
------------- -------------
Net cash used in investing activities (22,893,000) (41,344,000)
------------- -------------
Cash Flows from Financing Activities:
Treasury stock transactions (4,137,000) (30,872,000)
Cash dividends paid (13,362,000) (13,699,000)
Proceeds from issuance of common stock 4,557,000 0
Net (retirements of)/proceeds from short-term debt (2,399,000) 21,864,000
Retirement of long-term debt (111,001,000) (10,432,000)
Proceeds from issuance of long-term debt 65,000 39,551,000
------------- -------------
Net cash (used in)/provided by financing activities (61,342,000) (6,412,000)
------------- -------------
Net changes in cash and cash equivalents 340,000 (8,033,000)
Cash and cash equivalents at beginning of year 4,505,000 8,033,000
------------- -------------
Cash and cash equivalents at January 31 $ 4,845,000 $ 0
============= =============
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 14,516,000 $ 11,911,000
Income taxes paid (net of refunds received) 21,150,000 18,397,000
The accompanying notes are an integral part of this statement.
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Wallace Computer Services, Inc. and Subsidiaries Page 6
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Note 1 - Inventories
Inventories at January 31, 2001, and July 31, 2000, were as follows:
January 31, 2001 July 31, 2000
---------------- -------------
Raw materials $ 15,593,000 $ 15,913,000
Work in process 30,334,000 22,148,000
Finished products 80,759,000 70,072,000
------------ ------------
$126,686,000 $108,133,000
============ ============
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 - Stock Options
As of January 31, 2001, options to purchase 3,476,354 shares of common
stock were outstanding and 3,532,272 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 45,764,054 as of January 31, 2001. Of these shares, 5,060,443
were held in treasury as of January 31, 2001. The number of shares held
in treasury at July 31, 2000 was 5,076,661.
Note 3 - Segment Reporting
The Company adopted SFAS No. 131 for fiscal year-ended 1999. The
Company operates in two business segments. Each segment offers
distinctive products and services and are managed separately because of
their unique production, distribution, and marketing requirements. The
Company's two reportable segments are Forms and Labels, and Integrated
Graphics.
The principal products and services supplied by the Forms and Labels
Segment include the design, manufacture and sales of both paper based
and electronic business 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.
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Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
January 31, 2001
(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 fiscal 2000 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.
Summarized segment data and a reconciliation to the consolidated totals
for the six months ended January 31, 2001 and 2000 are as follows:
Six Months Ended January 31, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- -------------------------------------------------------------------------------------------
Forms and Labels Segment $406,590 $ 0 $47,816
Integrated Graphics Segment 421,733 291 24,291
- -------------------------------------------------------------------------------------------
Segment Total 828,323 291 72,107
- -------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (15,073)
Restructuring Charge - Corporate 0 403 (694)
- -------------------------------------------------------------------------------------------
Consolidated $828,323 $694 $56,340
===========================================================================================
Six Months Ended January 31, 2000 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- -------------------------------------------------------------------------------------------
Forms and Labels Segment $395,356 0 $46,199
Integrated Graphics Segment 376,508 0 16,191
- -------------------------------------------------------------------------------------------
Segment Total 771,864 0 62,390
- -------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (14,313)
Restructuring Charge - Corporate 0 0 0
- -------------------------------------------------------------------------------------------
Consolidated $771,864 0 $48,077
===========================================================================================
There are no material changes in Segment Assets from fiscal year-end
2000.
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Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
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. The Company had no
derivatives outstanding as of July 31, 2000 and thus, no transition
adjustment was required as a result of the adoption of SFAS No. 133.
In the second quarter of fiscal 2001, the Company entered into interest
rate swap agreements ("Swaps") which effectively convert $75 million of
LIBOR floating rate debt under the revolving Credit Facility ("Credit
Facility") to fixed rate debt. The purpose for entering into the Swaps
is to better match the Company's assets and liabilities and reduce its
exposure to interest rate risk. The Swaps have a term that is one year
or less from the date of inception. These Swaps are considered cash
flow hedges and, accordingly, the fair market value of the Swaps as of
January 31, 2001 are 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. Any net gain or
losses on the Swaps, which are not significant in the second quarter of
fiscal 2001, are reflected in interest expense in the income statement.
Note 5 - Restructuring and Other Charges
In February 2000, the Company announced a plan to restructure its
operations, which resulted in one-time pre-tax expense totaling $41.6
million for fiscal 2000. In the first six months of fiscal 2001,
additional restructuring costs of $0.7 million were incurred primarily
related to ongoing cash charges related to plant closing activities and
restructuring administrative costs that could previously not be accrued
for in accordance with EITF 94-3. These costs are presented separately
as a component of income from operations in the Statement of
Operations.
The restructuring was undertaken in fiscal 2000 as the Company was
experiencing continued softness in the high-quality color marketing and
promotional printing market as well as issues relating to the
integration of the Graphic acquisition. Management reviewed its
operations and developed action plans relating to both segments that
dealt with under-performing facilities, underutilized assets,
rationalization of certain product lines and a reduction in management
positions at the corporate office. The Company's plan was approved,
committed to, and for the most part, executed in the third quarter of
fiscal 2000 with only minor charges incurred subsequent to that time.
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Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Note 5 - Restructuring and Other Charges (continued)
The following table summarizes the activity in the restructuring
reserve during fiscal 2000 and the first six months of fiscal 2001:
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Employee Termination Asset Write downs Other Cash Total
Benefits (non-cash) Charges Restructuring
- -----------------------------------------------------------------------------------------------------------------------
Restructuring Provision $ 6,350 $ 30,896 $ 1,650 $ 38,896
- -----------------------------------------------------------------------------------------------------------------------
Additional restructuring charges 291 639 1,725 2,655
Adjustments to Reserves - - - -
Cash Payments (4,562) - (2,245) (6,807)
Non-cash items - (31,535) - (31,535)
- -----------------------------------------------------------------------------------------------------------------------
Reserve balance July 31, 2000 $ 2,079 $ - $ 1,130 $ 3,209
- -----------------------------------------------------------------------------------------------------------------------
Additional restructuring charges 100 87 507 694
Cash Payments (1,592) - (1,537) (3,129)
Non-cash items - (87) - (87)
- -----------------------------------------------------------------------------------------------------------------------
Reserve balance January 31, 2001 $ 587 $ - $ 100 $ 687
- -----------------------------------------------------------------------------------------------------------------------
The plan resulted in four plant closings, and resizing and
consolidation of other facilities. Exit costs are primarily comprised
of tangible and intangible asset write-downs related to assets to be
disposed of and the sale of certain facilities, and severance and
severance-related costs. Under the plan, the Company terminated 446
employees, 388 of which are from plant locations and 58 from the
corporate headquarters.
Due to the changes described above, management performed a review of
its existing property and equipment, to determine impairment as
described in Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Based on its evaluation,
management determined that significant impairment in goodwill and
long-lived assets associated with plants that were closed occurred
related to both segments. Certain assets that had no long-term
strategic value were considered held for disposal and either written
off or written down to estimated fair market value if the asset was
able to be sold. The amount of non-cash write offs related to impaired
assets is $20.6 million. The amount of allocated goodwill written off
related to plants acquired in the Graphics acquisition was $11.1
million.
The initiatives associated with this restructuring are substantially
complete as of January 31, 2001. The anticipated additional charges
related to this restructuring should continue to be minimal.
Note 6 - Income Taxes
It is expected that the annual effective tax rate for fiscal 2001 will
be 40.7%. The annual effective tax rate for fiscal 2000 was 54.5% due
primarily to the non-deductibility of certain restructuring charges.
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Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Note 7 - Recently Issued Accounting Pronouncements
In June and September 2000, the Emerging Issues Task Force of the
Financial Accounting Standards Board ("Task Force") reached a consensus
on EITF 00-10, "Accounting for Shipping and Handling Revenues and
Costs". EITF Issue 00-10 requires that all amounts billed to a customer
in a sale transaction for shipping and handling be classified as sales,
and recommends that shipping and handling expenses be classified as
cost of sales. The Company currently aggregates shipping and handling
costs and revenues in the revenue line on the income statement.
Accordingly, the Company has determined that EITF Issue 00-10 will
require reclassification of shipping and handling revenues and costs
within the income statement, but does not believe EITF Issue 00-10 will
impact its financial condition or results of operations. This statement
requires retroactive restatement and will be adopted by the Company in
the fourth quarter of fiscal 2001.
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Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the three-month period ended January 31, 2001, net sales increased
9.4% to $420.5 million from the quarter ended January 31, 2000. For the
six-month period ended January 31, 2001, net sales increased 7.3% to
$828.3 million from the same period in the prior year. The Company
estimates that unit growth remained positive, with price inflation due
to increasing material prices being partially offset by pricing
pressures brought on by competitive conditions. The impact of
acquisitions, divestitures, and plant closings on sales in both the
quarter and year-to-date periods was not material to the results.
Roughly 30% of sales are sold to customers under a written contract
with the Company. For the past year, both transactional and contract
sales have increased on a quarter over quarter basis. The combination
of higher transactional sales and increased contract sales is important
in providing stability to the Company's utilization rates and
profitability. A significant portion of contract sales are sales to
customers managed by the W.I.N. system.
Net income for the second quarter increased 64.8% to $16.9 million or
42 cents per share (basic) and 41 cents per share (diluted), from $10.3
million or 25 cents per share (both basic and diluted) in the same
quarter a year ago. Net income for the six-month period ending January
31, 2001 increased 15.8% to $33.4 million or 82 cents per share (both
basic and diluted), from $28.8 million or 69 cents per share (both
basic and diluted).
The second quarter ended January 31, 2001 includes a $0.3 million
pretax charge for costs of a restructuring announced in the third
quarter ended April 30, 2000. Restructuring charges in the six month
period ended January 31, 2001 total $0.7 million. The Company
implemented the restructuring program because of continued softness in
the high-quality color marketing and promotional printing market, along
with issues relating to the integration of the Graphic Industries
acquisition. Management reviewed its operations and developed action
plans relating to both segments that dealt with under-performing
facilities, underutilized assets, and rationalization of certain
product lines. This charge, which occurred primarily in fiscal 2000,
includes the write-off of goodwill associated with plants that were
closed, the write-off of abandoned software, the write-down to net
realizable value of property and equipment sold and severance and
outplacement costs. The additional restructuring charges incurred in
fiscal 2001 correspond primarily to ongoing cash charges related to
plant closing activities and restructuring administrative costs. Future
charges related to this restructuring should be minimal.
Cost of sales for the quarter was 71.3% of sales as compared to 70.8%
in the second quarter of last year. The second quarter included a LIFO
charge of $0.3 million or 0.5 cents per share versus a charge of $1.1
million or 1.6 cents per share in the second quarter of fiscal 2000.
Cost of sales for the six-month period ended January 31, 2001 was 71.1%
of sales as compared to 69.5% in the same period a year ago. Total LIFO
charges in the first half of fiscal 2001 were $1.0 million or 1.5 cents
per share versus a charge of $1.7 million or 2.4 cents per share in the
first half of fiscal 2000.
Year over year, the Forms and Labels segment's quarterly sales
increased 4.6% to $202.6 million, with operating income of $24.1
million and operating margin of 11.9% versus operating income of $20.7
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Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
million and an operating margin of 10.7% in the second quarter of last
year. For the six-month period ended January 31, 2001, segment sales
increased 2.8% to $406.6 million, with operating income of $47.8
million and an operating margin of 11.8%, versus operating income of
$46.1 million and an operating margin of 11.7% in the prior year to
date period. Competitive market conditions have continued to put
pressure on operating margins in this segment. Since the third quarter
of last year, margins have improved sequentially, as the effects of
cost cutting measures initiated with the restructuring announced in
that quarter have taken effect.
Year over year, the Integrated Graphics' segment quarterly sales
increased 14.4% to $217.9 million, with operating income of $12.1
million and operating margin of 5.6% versus operating income of $4.2
million and an operating margin of 2.2% in the second quarter of last
year. For the six-month period ended January 31, 2001, segment sales
increased 12.0% to $421.7 million, with operating income of $24.3
million and an operating margin of 5.8% versus operating income of
$16.3 million and an operating margin of 4.3% in the prior year to date
period. The second quarter of the current year benefited from a major
customer accelerating their normal order pattern. The revenue that was
accelerated normally occurs in the fourth quarter. In general, margins
have improved from benefits derived from the restructuring program and
other cost cutting initiatives which have been offset, in part, by
competitive pricing pressures. Ongoing competitive and economic
pressures are likely to continue.
Selling and administration expenses for the quarter were 15.4% versus
17.6% last year. Included in the second quarter of last year was a
one-time charge of $2.3 million for executive retirement benefits.
Adjusting for this one-time charge, the second quarter of fiscal 2000
would have been 17.0% of sales. The restructuring activity in the third
quarter of last fiscal year, along with other cost reduction
opportunities, have helped to decrease both selling and administrative
expenses to the current level as a percent of sales.
Depreciation and amortization for the quarter was $19.6 million or 4.7%
of sales versus $19.7 million or 5.1% of sales in the first quarter a
year ago. Depreciation expense has decreased as underperforming assets
were disposed of as part of the restructuring. Amortization expense is
up over 7% and will continue to increase in the third quarter, due
primarily to ongoing enhancements to the Company's order entry,
customer service, and inventory management system.
Interest expense for the quarter was $7.5 million, down from $8.4
million last year. The decrease is primarily attributable to the
significant reduction in debt quarter over quarter. Interest income for
the quarter decreased $0.6 million from the second quarter of last
year. The decrease in interest income can be attributed to the
surrender of several life insurance policies, the proceeds of which
were used to pay down debt.
Liquidity and Capital Resources
Working capital increased by $7.1 million from July 31, 2000. Increases
in inventory were more than offset by increases in accounts payable.
The significant increase in sales during the quarter caused accounts
receivable to increase from both prior year-end and prior quarter
levels. The current ratio at January 31, 2001 was 2.2 to 1.
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Wallace Computer Services, Inc. and Subsidiaries Page 13
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (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.
Of the outstanding debt as of January 31, 2001, $135.0 million has been
borrowed under a five-year Credit Agreement ("Credit Facility"), which
provides for a maximum aggregate principal amount available to be
borrowed of $400 million. The borrowings under the Credit Facility are
classified as long-term debt as of January 31, 2001 since the Company
has the intent and ability to carry that debt long-term. The Company
has $200 million of Senior Term Notes with institutional investors with
a book value of $184.7 million classified as long-term debt with the
earliest maturity in 2006.
In addition to the credit facility and the senior notes, the Company
has unsecured money market lines of $125 million under which $11.0
million was borrowed at January 31, 2001. 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 4.55% to 4.65%. The balance of
$10.8 million relates to acquisitions.
Total debt currently represents 38.5% of total capitalization. The
maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million.
Capital expenditures for the quarter totaled $13.2 million. For the
full fiscal year, capital expenditures are expected to be approximately
$40 million, which are expected to be financed through internally
generated funds and by borrowing against the Credit Facility.
Corporate owned life insurance policies totaling $10.9 million were
surrendered in the current quarter, with the cash proceeds used to
reduce debt. In the first quarter of fiscal 2001, policies totaling
$11.3 million were surrendered, with those proceeds also being used to
reduce debt.
Stockholders' equity increased 3.6% to $569.5 million at January 31,
2001.
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 1999. On
September 12, 2000, the Board of Directors decided to maintain the
annualized dividend rate at $0.66 per share.
During the first quarter of fiscal 2001, the Company purchased 441,000
shares of Wallace common stock. The Company did not purchase any shares
of Wallace common stock in the current quarter. Total repurchases
through January 31, 2001 against the $100 million authorized by the
Board in June 1997 have been $95.5 million. On January 25, 2000 the
Board of Directors approved an additional $100 million share repurchase
authorization. The Company intends to repurchase shares in the
near-term to the extent necessary to offset the dilutive effects of
shares issued pursuant to employee benefit plans.
14
Wallace Computer Services, Inc. and Subsidiaries Page 14
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
Part II Other Information
-------------------------
Items 1 through 3 None
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on November 29, 2000. The
results of the three proposals put to a shareholder vote are as follows:
1) Election of directors for the class of directors
For Withheld
---------- --------
John C. Pope 31,772,256 903,437
William J. Devers, Jr. 31,715,222 960,471
2) Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year 2001
For Against Abstain
---------- --------- -------
32,545,595 88,155 41,943
3) Approval of an amendment to the 1997 Stock Incentive Plan to increase the
number of shares of Common Stock reserved for issuance thereunder
For Against Abstain
---------- --------- -------
29,638,653 2,591,261 445,779
15
Wallace Computer Services, Inc. and Subsidiaries Page 15
Notes to Consolidated Financial Statements
January 31, 2001
(Unaudited)
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 Employment Agreement between the Company and M. David Jones
entered into as of November 27, 2000, previously filed as Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2000.
10.2 Severance Agreement between the Company and M. David Jones
entered into as of November 27, 2000, filed herewith.
10.3 Amendment No. 1 to the Wallace Computer Services, Inc. Amended
and Restated Executive Incentive Plan, dated November 29, 2000,
previously filed as Exhibit 10.2 to registrant's Quarterly Report
on Form 10-Q for the quarter-ended October 31, 2000.
10.4 Indemnification Agreement with Director between the Company and
M. David Jones in the form previously filed as part of Exhibit 10
to the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference to such
Report.
10.5 Indemnification Agreement with Officer between the Company and M.
David Jones in the form previously filed as part of Exhibit 10 to
the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference to such
Report.
(b) Reports on Form 8-K
None
16
Page 16
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.
March 15, 2001 /s/ M. David Jones
--------------------- -------------------------------------------------
Date M. David Jones
Chairman of the Board and Chief Executive Officer
March 15, 2001 /s/ Vicki L. Avril
--------------------- -------------------------------------------------
Date Vicki L. Avril
Senior Vice President - Chief Financial Officer
(Principal Accounting Officer)