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
October 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 40,979,862
- ----------------------------------- --------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of November 30, 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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Page 2
Wallace Computer Services, Inc.
FORM 10-Q
For Quarterly Period Ended October 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
October 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
October 31
----------------------------------------------------
% %
(In thousands, except per share amounts) 2001 Sales 2000 Sales
- ---------------------------------------- ------------------------ ------------------------
Net Sales $ 409,159 100.0 $ 429,280 100.0
Cost and Expenses
Cost of goods sold (Note 1) 303,358 74.1 310,344 72.3
Selling and administrative expenses 60,470 14.8 63,650 14.8
Provision for depreciation and
amortization (Note 5) 17,775 4.3 19,371 4.5
Restructuring charges (Notes 6 and 7) 2,560 0.6 392 0.1
--------- --------- --------- ---------
Total costs and expenses 384,163 93.9 393,757 91.7
--------- --------- --------- ---------
Operating Income 24,996 6.1 35,523 8.3
--------- --------- --------- ---------
Interest income (331) (0.1) (343) (0.1)
Interest expense 6,189 1.5 8,066 1.9
--------- --------- --------- ---------
Income before Income Taxes 19,138 4.7 27,800 6.5
Provision for Income Taxes (Note 8) 7,311 1.8 11,315 2.6
--------- --------- --------- ---------
Net Income 11,827 2.9 16,485 3.8
========= ========= ========= =========
Basic Earnings per Share $ 0.29 $ 0.41
========= =========
Diluted Earnings per Share $ 0.29 $ 0.41
========= =========
Average Common Shares Outstanding 41,109 40,479
========= =========
Diluted Common Shares Outstanding 41,408 40,541
========= =========
Dividends Declared Per Share $ 0.165 $ 0.165
========= =========
The accompanying notes are an integral part of this statement.
Page 3
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Balance Sheet
<Table>
<Caption>
(Dollars in thousands) October 31, 2001 July 31, 2001
- ---------------------- (Unaudited) (Audited)
---------------- -------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable 291,691 291,222
Less-allowance for doubtful accounts 9,111 7,896
----------- -----------
Net receivables 282,580 283,326
Inventories (Note 1) 107,233 100,922
Current and deferred income taxes 22,121 27,498
Advances and prepaid expenses 4,386 5,536
----------- -----------
Total current assets 416,320 417,282
----------- -----------
Property, plant and equipment, at cost 899,004 893,273
Less-reserves for depreciation and amortization 516,830 502,107
----------- -----------
Net property, plant and equipment 382,174 391,166
----------- -----------
Goodwill, net of amortization (Note 5) 284,664 284,664
Cash surrender value of life insurance 15,493 15,201
System development costs, net of amortization 54,119 55,516
Other assets 2,665 2,836
----------- -----------
Total assets $ 1,155,435 $ 1,166,665
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 55,867 $ 997
Short-term notes payable 2,000 3,003
Accounts payable 105,499 97,384
Accrued salaries, wages, profit sharing and other 88,108 90,461
----------- -----------
Total current liabilities 251,474 191,845
----------- -----------
Long-term debt 209,510 284,087
Deferred income taxes 60,352 60,385
Deferred compensation and retirement benefits 40,540 39,128
Other long-term liabilities 10,603 10,603
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at October 31, 2001 and July 31, 2001 45,764 45,764
Additional capital 39,840 39,770
Deferred compensation 3,224 3,301
Retained earnings 575,189 570,507
Treasury stock (at cost)- 4,976,865 shares at
October 31, 2001 and 4,785,511 shares at
July 31, 2001 (80,957) (78,403)
Accumulated other comprehensive loss (Note 4) (104) (322)
----------- -----------
Total stockholders' equity 582,956 580,617
----------- -----------
Total liabilities and stockholders' equity $ 1,155,435 $ 1,166,665
=========== ===========
The accompanying notes are an integral part of this statement.
Page 4
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended
(Dollars in thousands) October 31
- ---------------------- --------------------------
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net income from operations $ 11,827 $ 16,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17,775 19,371
Restructuring charges 0 81
Deferred taxes (33) (371)
(Gain) loss on disposal of property 69 (3)
Changes in assets and liabilities
Accounts receivable 746 (8,164)
Inventories (6,311) (26,251)
Advances and prepaid expenses 1,150 1,048
Prepaid taxes 5,228 11,715
Other assets (1,428) 7,465
Accounts payable and other liabilities 6,166 35,431
Deferred compensation and retirement benefits 1,413 2,176
-------- --------
Net cash provided by operating activities 36,602 58,983
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (6,182) (10,903)
Proceeds from disposal of property 33 779
-------- --------
Net cash used in investing activities (6,149) (10,124)
-------- --------
Cash Flows from Financing Activities:
Treasury stock transactions (4,481) (4,137)
Cash dividends paid (6,805) (6,686)
Proceeds from issuance of common stock 1,544 115
Net retirements of short-term debt (1,134) (381)
Retirement of long-term debt (29,577) (40,789)
Proceeds from issuance of long-term debt 10,000 0
-------- --------
Net cash used in financing activities (30,453) (51,878)
-------- --------
Net changes in cash and cash equivalents 0 (3,019)
Cash and cash equivalents at beginning of year 0 4,505
-------- --------
Cash and cash equivalents at October 31 $ 0 $ 1,486
======== ========
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 8,443 $ 11,426
Income taxes paid (net of refunds received) 2,332 914
The accompanying notes are an integral part of this statement.
Page 5
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Note 1 - Inventories
Inventories at October 31, 2001, and July 31, 2001, were as follows:
(Dollars in thousands) October 31, 2001 July 31, 2001
---------------------- ---------------- -------------
Raw materials $ 14,690 $ 15,623
Work in process 27,246 16,531
Finished products 65,297 68,768
---------------- -------------
$107,233 $100,922
================ =============
Certain inventories are stated on the last-in, first-out (LIFO) basis
for their labor and material content, and other inventories are stated
on the first-in, first-out (FIFO) basis.
Because the inventory determination under the LIFO method can only be
made at the end of each fiscal year based on the inventory levels and
costs at that time, interim period LIFO determinations must necessarily
be based upon management's estimates of expected year-end inventory
levels and costs.
Note 2 - Stock Options
As of October 31, 2001, options to purchase 3,819,180 shares of common
stock were outstanding and 2,414,127 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 October 31, 2001. Of these shares, 4,976,865
were held in treasury as of October 31, 2001. The number of shares held
in treasury at July 31, 2001 was 4,785,511.
Note 3 - Segment Reporting
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 paper based forms,
the manufacture of both electronic data processing (EDP) labels and
prime labels, and the manufacture and distribution of a standard line
of office products. The principal products and services supplied by the
Integrated Graphics Segment include the design and manufacture of
high-color, high quality marketing and promotional materials, and the
manufacture of direct response printing materials.
Page 6
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 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 2001 Annual Report. Management evaluates segment
performance based on segment profit or loss before interest and income
taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are
accounted for at standard cost.
Summarized segment data and a reconciliation to the consolidated totals
for the quarters ended October 31, 2001 and 2000 are as follows:
Quarter Ended October 31, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- -------------------------------------------------------------------------------------------------
Forms and Labels Segment $204,172 $ 0 $19,827
Integrated Graphics Segment 204,987 683 7,729
- -------------------------------------------------------------------------------------------------
Segment Total 409,159 683 27,556
- -------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (5,858)
Restructuring Charge - Corporate 0 1,877 (2,560)
- -------------------------------------------------------------------------------------------------
Consolidated $409,159 $2,560 $19,138
=================================================================================================
Quarter Ended October 31, 2000 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- -------------------------------------------------------------------------------------------------
Forms and Labels Segment $216,445 $ 0 $23,736
Integrated Graphics Segment 212,835 92 12,179
- -------------------------------------------------------------------------------------------------
Segment Total 429,280 92 35,915
- -------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (7,723)
Restructuring Charge - Corporate 0 300 (392)
- -------------------------------------------------------------------------------------------------
Consolidated $429,280 $ 392 $27,800
=================================================================================================
There are no material changes in Segment Assets from Fiscal Year-End 2001.
Page 7
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 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.
In the second quarter of fiscal year 2001, the Company entered into two
interest rate swap agreements ("Swaps") which effectively converted $75
million of floating rate debt under the revolving Credit Facility
("Credit Facility") to fixed rate debt. The purpose for entering into
the Swaps 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 October 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. The accumulated other comprehensive loss related to the
Swaps is included in comprehensive income. Any net gain or loss on the
Swaps, which is not significant in fiscal year 2002, is reflected in
interest expense in the income statement. As of October 31, 2001, the
Company has $50 million of Swaps outstanding with an expiration date of
November 30, 2001.
Note 5 - Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets", which addresses financial accounting and reporting
for acquired goodwill and other intangible assets. The Company is
required to adopt the provisions of SFAS No. 142 on August 1, 2002, but
has the option of adopting early, as of August 1, 2001. Under SFAS No.
142, goodwill is no longer amortized, and the rules for measuring
goodwill impairment use a fair-value-based test. Under the new rules, a
fair value of each of the Company's reporting units with assigned
goodwill must be calculated using either market comparables or a
discounted cash flow approach, or a combination thereof. Once the fair
value of the reporting unit has been determined, the fair value of net
assets, including intangibles, of that reporting unit must be compared
to the total market value derived in the first step to determine
impairment. The Financial Accounting Standards Board recognizes that
this is a time consuming process and, as such, SFAS No. 142 allows
companies six months from the date of adoption to determine if there is
going to be an impairment, and twelve months from date of adoption to
finalize the impairment calculation and disclose the amount of the
impairment.
Page 8
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Note 5 - Recently Issued Accounting Pronouncements (continued)
The Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. However, goodwill amortization continues to be presented in the
October 31, 2000 Statement of Operations. Had the provisions of SFAS
No. 142 been applied for the three months ended October 31, 2000, the
Company's net income and net income per share would have been as
follows:
(In thousands, except For the Three Months Ended October 31
per share amounts) 2001 2000
------- -------
Net Income, as reported $11,827 $16,485
Add:
Goodwill amortization 0 1,991
Tax effect 0 24
------- -------
Adjusted Net Income $11,827 $18,500
======= =======
Basic Earnings per Share, as reported $ 0.29 $ 0.41
Effect of SFAS No. 142 $ 0.00 $ 0.05
------- -------
Adjusted Basic Earnings per Share $ 0.29 $ 0.46
======= =======
Diluted Earnings per Share, as reported $ 0.29 $ 0.41
Effect of SFAS No. 142 $ 0.00 $ 0.05
------- -------
Adjusted Diluted Earnings per Share $ 0.29 $ 0.46
======= =======
Valuations and analysis are currently in process to determine if there
is a goodwill impairment as of the date of adoption. The Company has
engaged a professional services firm to assist in the valuation process
for its commercial print division in the Integrated Graphics segment,
where initial tests have indicated that partial impairment is likely.
The definitive amount of the loss will be known by the end of the
fourth quarter and will be reported as a change in accounting principle
in the current fiscal year.
There was no goodwill amortization recognized in the first quarter of
fiscal 2002 and, as of October 31, 2001, net goodwill was $262 million
and $23 million for the Integrated Graphics, and Forms and Labels
segments, respectively. The net goodwill balance as of October 31, 2001
remains unchanged from the July 31, 2001 balance. There were no
intangible assets recorded for the Company as of October 31, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective in
fiscal 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", and Accounting Principles Board Opinion No. 30 which
addresses the accounting and reporting relating to the disposal of a
segment of a business. It is anticipated that the adoption of SFAS No.
144 will not have a significant impact on the financial position or
results of operations of the Company.
Page 9
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Note 6 - Fiscal 2002 Restructuring
In the first quarter of fiscal 2002 the Company implemented a
restructuring program of which $2.6 million was recognized in the
quarter and is presented separately as a component of income from
operations in the Statement of Operations. The restructuring
initiatives are aimed at improving the overall level of organizational
efficiency and effectiveness, consolidating and rationalizing existing
facilities and processes, and reducing the overall cost base of the
company. The restructuring charges recognized in the quarter consist of
employee severance costs and consulting charges directly related to the
restructuring. The Company anticipates that the restructuring program
will be completed by the end of the fiscal year with the majority of
costs being recognized in the second quarter of fiscal 2002. It is
anticipated that the aggregate charges associated with the
restructuring will be approximately $35 million with a majority of
those charges related to the Integrated Graphics segment.
The restructuring plan, formally announced in the second quarter of
fiscal 2002, includes the closing of six manufacturing facilities, one
distribution and fulfillment center, one multi-use facility and
workforce reductions in excess of 10% of the total workforce. It is
anticipated that cash proceeds will be derived in the restructuring
through the anticipated sale of three manufacturing facilities and
sales of disposed equipment. Through the end of the first quarter 59
employees were terminated, 42 of which were from plant locations and 17
from the corporate headquarters. No restructuring accruals were
established as of the end of the first quarter since the closures and
workforce reductions mentioned above were not announced until the
second quarter.
As the company has adopted the provisions of SFAS No. 142 in fiscal
2002, impaired goodwill associated with closed facilities will be
measured at the reporting unit level.
Note 7 - Fiscal 2000 Restructuring
In February 2000, the Company announced a plan to restructure its
operations, which resulted in non-recurring pre-tax expense totalling
$41.6 million for fiscal year 2000. In fiscal year 2001, additional
restructuring costs of $0.5 million were incurred primarily related to
ongoing cash charges related to plant closing activities and
restructuring administrative costs that could previously not be accrued
in accordance with EITF 94-3. The restructuring costs are presented
separately as a component of income from operations in the Consolidated
Statements of Income. The Company does not anticipate any future
charges related to this restructuring initiative.
Note 8 - Income Taxes
It is expected that the annual effective tax rate for fiscal 2002 will
be 38.2%. The reduction in tax rate in the current quarter is the
result of the adoption of SFAS No. 142. The majority of the goodwill
that had previously been amortized was not tax deductible. The annual
effective tax rate for fiscal 2001 was 40.7%.
Page 10
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 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 October 31, 2001, net sales decreased
4.7% to $409.2 million from the quarter ended October 31, 2000. Both
segments were impacted by the current economic conditions.
Over 30% of sales are sold to customers under a written contract with
the Company, which is up slightly from the first quarter a year ago.
The Company has continued to increase contract sales in both segments,
which is important in providing stability to the Company's
profitability and utilization rates. A significant portion of contract
sales are sales to customers managed by the W.I.N. system.
Transactional sales (i.e. non-contract sales) volume was off in both
segments. Decreased sales in the Office Products division, which is
largely transaction business, was impacted by customers who have
modified their ordering patterns in an effort to reduce their inventory
levels.
In the first quarter of fiscal 2002 the Company implemented a new
restructuring program of which $2.6 million was recognized in the
quarter. The restructuring plan, formally announced in the second
quarter of fiscal 2002, includes the closing of six manufacturing
facilities, one distribution and fulfillment center, one multi-use
facility and workforce reductions of approximately 10% of the total
workforce. The restructuring initiatives are aimed at improving the
overall level of organizational efficiency and effectiveness,
consolidating and rationalizing existing facilities and processes, and
reducing the overall cost base of the company. It is anticipated that
the aggregate charges associated with the restructuring will be
approximately $35 million with the majority of those charges related to
the Integrated Graphics segment.
It is anticipated that cash proceeds derived in the restructuring
through the anticipated sale of three manufacturing facilities, the
sale of disposed equipment, working capital improvements and improved
operations will more than offset cash charges from the restructuring in
fiscal 2002. The restructuring is expected to have a positive impact on
cash in fiscal 2003 and beyond, and should result in earnings
improvement of approximately $13.0 million over the same time frame. No
restructuring accruals were established as of the end of the first
quarter since the closures and workforce reductions mentioned above
were not announced until the second quarter.
In the first quarter ended October 31, 2000 the Company recognized $0.4
million of residual restructuring charges related to an earlier
restructuring initiative ("2000 restructuring") announced in the third
quarter of fiscal 2000. The 2000 restructuring was undertaken as the
Company was experiencing continued softness in the high-quality color
marketing and promotional printing markets as well as issues related to
the integration of the Graphic Industries acquisition. The Company's
2000 restructuring plan was approved, committed to, and for the most
part, executed in the third quarter of fiscal year 2000 with only minor
charges incurred in fiscal 2001. The Company did not incur any charges
related to the 2000 restructuring in the first quarter of fiscal 2002
and does not anticipate any future charges related to the 2000
restructuring.
Page 11
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cost of sales for the quarter was 74.1% of sales as compared to 72.3%
in the first quarter of last year. The LIFO charge was $0.2 million in
the current quarter versus $0.7 million in the first quarter last year.
Year over year, the Forms and Labels segment's sales decreased 5.7% to
$204.2 million, with operating income of $19.8 million and operating
margin of 9.7% versus operating income of $23.7 million and an
operating margin of 11.0% in the first quarter of last year.
Competitive market and current economic conditions have continued to
put pressure on operating margins in this segment. While operating
income is down from the prior year's first quarter, operating income as
a percent of sales has remained relatively consistent for the last
three quarters as the Company has attempted to offset margin
compression with cost cutting activities.
The Integrated Graphics' segment sales decreased 3.7% to $205.0
million, with operating income of $7.7 million and operating margin of
3.8% versus operating income of $12.2 million and an operating margin
of 5.7% in the first quarter of last year. Competitive and economic
pressures have been significant in this segment. The majority of the
restructuring activity is occurring in this segment as the Company will
be standardizing its production processes and bringing costs in line
with sales demand. The Company will also be strengthening capabilities
in strategic locations and placing greater focus on contract business.
As part of the restructuring plan, the Company will be closing two
plants and selling three plants within this segment.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets", which addresses financial accounting and reporting
for acquired goodwill and other intangible assets. The Company is
required to adopt the provisions of SFAS No. 142 on August 1, 2002, but
has the option of adopting early, as of August 1, 2001. Under SFAS No.
142, goodwill is no longer amortized, and the rules for measuring
goodwill impairment use a fair-value-based test. Under the new rules, a
fair value of each of the Company's reporting units with assigned
goodwill must be calculated using either market comparables or a
discounted cash flow approach, or a combination thereof. Once the fair
value of the reporting unit has been determined, the fair value of net
assets, including intangibles, of that reporting unit must be compared
to the total market value derived in the first step to determine
impairment. The Financial Accounting Standards Board recognizes that
this is a time consuming process and, as such, SFAS No. 142 allows
companies six months from the date of adoption to determine if there is
going to be an impairment, and twelve months from date of adoption to
finalize the impairment calculation and disclose the amount of the
impairment.
The Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. Valuations and analysis are currently in process to determine if
there is an impairment as of the date of adoption. The Company has
engaged a professional services firm to assist in the valuation process
for its commercial print division in the Integrated Graphics segment,
where initial tests have indicated that impairment is likely. The
definitive amount of the loss will be known by the end of the fourth
quarter and will be reported as a change in accounting principle in the
current fiscal year.
Page 12
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective in
fiscal 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", and Accounting Principles Board Opinion No. 30 which
addresses the accounting and reporting relating to the disposal of a
segment of a business. It is anticipated that the adoption of SFAS No.
144 will not have a significant impact on the financial position or
results of operations of the Company.
Selling and administration expenses for the first quarter were 14.8%
for both the current and the previous year. Cost reduction activities
have made it possible to keep a consistent percentage of sales despite
declining sales.
Depreciation and amortization for the quarter was $17.8 million or 4.3%
of sales versus $19.4 million or 4.5% of sales in the first quarter a
year ago. Amortization expense is up over 37%, due primarily to ongoing
enhancements to the Company's order entry, customer service, and
inventory management system. Goodwill amortization declined $2.0
million due to the adoption of SFAS No. 142.
Interest expense for the quarter was $6.2 million, down from $8.1
million last year. The majority of the decrease in interest expense can
be attributed to debt reduction. Declining interest rates, however,
account for some of the reduction. Interest income for the quarter
decreased slightly from the first quarter of last year.
It is expected that the annual effective tax rate for fiscal 2002 will
be 38.2%. The reduction in tax rate in the current quarter is the
result of the adoption of SFAS No. 142. The majority of the goodwill
that had previously been amortized was not tax deductible. The annual
effective tax rate for fiscal 2001 was 40.7%.
Net income for the first quarter decreased 28.3% to $11.8 million or
29 cents per share, from $16.5 million or 41 cents per share in the
same quarter a year ago.
Liquidity and Capital Resources
Working capital decreased by $60.6 million from July 31, 2001. In the
current quarter, $55 million borrowed under the revolving credit
agreement has been classified as current as this agreement expires on
October 31, 2002. In previous quarters borrowings under this agreement
were classified as long-term debt. The current ratio at October 31,
2001 was 1.7 to 1.
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 October 31, 2001, $55 million has been
borrowed under a five-year revolving Credit Agreement ("Credit
Facility"), which provides for a maximum aggregate principal amount
available to be borrowed of $200 million. The borrowings under the
Credit Facility are classified as current as of October 31, 2001 as
this agreement expires on October 31, 2002. The Company has $200
million of Senior Term Notes with institutional investors with a book
value of $185.9 million classified as long-term debt with the earliest
maturity in 2006.
Page 13
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In addition to the Credit Facility and the senior notes, the Company
has unsecured money market lines of $75 million under which $2.0
million was borrowed at October 31, 2001. The $2.0 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 2.10% to 2.20%. The balance of $8.6
million relates to acquisitions.
Total debt currently represents 31.4% 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 $6.2 million. For the full
fiscal year, capital expenditures are expected to be between $30 and
$40 million, which are expected to be financed through internally
generated funds and by borrowing against the Credit Facility.
Stockholders' equity increased 0.4% to $583.0 million at October 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.
Since that time, the Board of Directors maintained the quarterly
dividend rate of $0.165 per share.
During the first quarter of fiscal 2002, the Company purchased 300,200
shares of Wallace common stock. Total repurchases through October 31,
2001 against the $100 million authorized by the Board in June 1997 have
been $98.5 million. On January 25, 2000 the Board of Directors approved
an additional $100 million share repurchase authorization.
Page 14
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 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 December 5, 2001. 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
---------- --------
Bettye Martin Musham 36,944,200 774,331
Andrew J. McKenna, Jr. 37,015,253 703,278
2) Approval of the 2001 Stock Incentive Plan
For Against Abstain
---------- --------- -------
29,606,037 7,613,843 498,651
3) Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year 2002
For Against Abstain
---------- --------- -------
37,253,083 432,562 32,886
Page 15
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 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 Wallace Computer Services, Inc. 2001 Stock Incentive Plan
dated December 5, 2001, filed herewith.
(b) Reports on Form 8-K
None
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.
December 14, 2001 /s/ M. David Jones
- ------------------------ -------------------------------------------------
Date M. David Jones
Chairman of the Board and Chief Executive Officer
December 14, 2001 /s/ Vicki L. Avril
- ------------------------ -------------------------------------------------
Date Vicki L. Avril
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)