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, 2002 1-6528
- -------------------------------------- ---------------------------------
For the quarterly period ended Commission file number
WALLACE COMPUTER SERVICES, INC.
---------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2515832
- -------------------------------- --------------------------------------
(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 41,421,626
- ----------------------------------- ----------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of March 1, 2002)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
------- -------
Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended January 31, 2002
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in
the opinion of the management, necessary to a fair statement of the
results of operations and financial position for the six months ended
January 31, 2002, subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Six Months Ended
January 31
--------------------------------------------------
% %
(In thousands, except per share amounts) 2002 Sales 2001 Sales
- ---------------------------------------- ------------------- -------------------
Net Sales $806,264 100.0 $870,967 100.0
Cost and Expenses
Cost of goods sold (Note 1) 596,266 74.0 631,447 72.5
Selling and administrative expenses 123,542 15.3 128,413 14.7
Provision for depreciation and
amortization (Note 5) 34,751 4.3 39,000 4.5
Restructuring charges (Notes 7 and 8) 32,832 4.1 694 0.1
-------- ----- -------- -----
Total costs and expenses 787,391 97.7 799,554 91.8
-------- ----- -------- -----
Operating Income 18,873 2.3 71,413 8.2
-------- ----- -------- -----
Interest income (535) (0.1) (542) (0.1)
Interest expense 12,064 1.5 15,615 1.8
-------- ----- -------- -----
Income before Income Taxes 7,344 0.9 56,340 6.5
Provision for Income Taxes (Note 9) 2,864 0.4 22,930 2.6
-------- ----- -------- -----
Income before the cumulative effect of a change
in accounting principle - net of tax 4,480 0.6 33,410 3.8
Cumulative effect of a change in accounting
principle - net of tax (Note 5) 144,078 17.9 0 0.0
-------- ----- -------- -----
Net (Loss) / Income (139,598) (17.3) 33,410 3.8
======== ===== ======== =====
Basic Earnings per Share Before the Cumulative Effect
of a Change in Accounting Principle $ 0.11 $ 0.82
======== ========
Cumulative Effect of a Change in Accounting
Principle $ (3.51) $ 0.00
======== ========
Basic (Loss) / Earnings per Share $ (3.40) $ 0.82
======== ========
Diluted Earnings per Share Before the Cumulative
Effect of a Change in Accounting Principle $ 0.11 $ 0.82
======== ========
Cumulative Effect of a Change in Accounting
Principle $ (3.47) $ 0.00
======== ========
Diluted (Loss) / Earnings per Share $ (3.36) $ 0.82
======== ========
Average Common Shares Outstanding 41,103 40,514
======== ========
Diluted Common Shares Outstanding 41,466 40,724
======== ========
Dividends Declared Per Share $ 0.330 $ 0.330
======== ========
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. Page 3
FORM 10-Q
For Quarterly Period Ended January 31, 2002
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Three Months Ended
January 31
------------------------------------------------
% %
(In thousands, except per share amounts) 2002 Sales 2001 Sales
- ---------------------------------------- --------- ------- --------- -------
Net Sales $ 397,105 100.0 $ 441,688 100.0
Cost and Expenses
Cost of goods sold (Note 1) 292,908 73.8 321,105 72.7
Selling and administrative expenses 63,072 15.9 64,763 14.7
Provision for depreciation and
amortization (Note 5) 16,976 4.3 19,629 4.4
Restructuring charges (Notes 7 and 8) 30,272 7.6 302 0.1
--------- ------- --------- -------
Total costs and expenses 403,228 101.5 405,799 91.9
--------- ------- --------- -------
Operating (Loss) / Income (6,123) (1.5) 35,889 8.1
--------- ------- --------- -------
Interest income (204) (0.1) (199) (0.0)
Interest expense 5,875 1.5 7,549 1.7
--------- ------- --------- -------
(Loss) / Income before income taxes (11,794) (3.0) 28,539 6.5
(Benefit) / Provision for income taxes
(Note 9) (4,447) (1.1) 11,615 2.6
--------- ------- --------- -------
Net (Loss) / Income (7,347) (1.9) 16,924 3.8
========= ======= ========= =======
Basic (Loss) / Earnings per Share $ (0.18) $ 0.42
========= =========
Diluted (Loss) / Earnings per Share $ (0.18) $ 0.41
========= =========
Average Common Shares Outstanding 41,098 40,549
========= =========
Diluted Common Shares Outstanding 41,552 40,920
========= =========
Dividends Declared Per Share $ 0.165 $ 0.165
========= =========
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. and Subsidiaries Page 4
Consolidated Balance Sheet
(Dollars in thousands) January 31, 2002 July 31, 2001
- ---------------------- (Unaudited) (Audited)
---------------- -------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable 269,426 291,222
Less-allowance for doubtful accounts 12,869 7,896
----------- -----------
Net receivables 256,557 283,326
Inventories (Note 1) 97,651 100,922
Assets held for sale (Note 7) 13,771 1,215
Current and deferred income taxes 42,212 27,498
Advances and prepaid expenses 5,969 4,321
----------- -----------
Total current assets 416,160 417,282
----------- -----------
Property, plant and equipment, at cost 822,824 893,273
Less-reserves for depreciation and amortization 485,225 502,107
----------- -----------
Net property, plant and equipment 337,599 391,166
----------- -----------
Goodwill, net of amortization (Note 5) 137,164 284,664
Cash surrender value of life insurance 15,764 15,201
System development costs, net of amortization 52,152 55,516
Other assets 2,483 2,836
----------- -----------
Total assets $ 961,322 $ 1,166,665
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 35,702 $ 997
Short-term notes payable 2,000 3,003
Accounts payable 101,874 97,384
Accrued salaries, wages, profit sharing and other 73,250 90,461
----------- -----------
Total current liabilities 212,826 191,845
----------- -----------
Long-term debt 208,874 284,087
Deferred income taxes 56,970 60,385
Deferred compensation and retirement benefits 41,079 39,128
Other long-term liabilities 10,572 10,603
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at January 31, 2002 and July 31, 2001 45,764 45,764
Additional capital 39,909 39,770
Deferred compensation 3,073 3,301
Retained earnings 416,077 570,507
Treasury stock (at cost)- 4,537,842 shares at
January 31, 2002 and 4,785,511 shares at
July 31, 2001 (73,822) (78,403)
Accumulated other comprehensive loss (Note 4) 0 (322)
----------- -----------
Total stockholders' equity 431,001 580,617
----------- -----------
Total liabilities and stockholders' equity $ 961,322 $ 1,166,665
=========== ===========
The accompanying notes are an integral part of this statement
Wallace Computer Services, Inc. and Subsidiaries Page 5
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended
(Dollars in thousands) January 31
- ---------------------- --------------------------
2002 2001
--------- ---------
Cash Flows from Operating Activities:
Net (loss) / income from operations $(139,598) $ 33,410
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in accounting
principle (Note 5) 144,078 0
Depreciation and amortization 34,751 39,000
Restructuring charges 21,791 87
Debt cost amortization 855 784
Deferred taxes (3,415) (275)
Loss / (Gain) on disposal of property 47 (13)
Changes in assets and liabilities
Accounts receivable 25,891 (11,012)
Inventories 2,873 (18,553)
Advances and prepaid expenses (2,395) 859
Prepaid taxes (14,936) 2,106
Other assets 1,563 15,790
Accounts payable and other liabilities (12,157) 21,715
Deferred compensation and retirement benefits 1,952 1,461
--------- ---------
Net cash provided by operating activities 61,300 85,359
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (11,603) (24,063)
Proceeds from disposal of property 3,069 1,170
--------- ---------
Net cash used in investing activities (8,534) (22,893)
--------- ---------
Cash Flows from Financing Activities:
Treasury stock transactions (4,481) (4,137)
Cash dividends paid (13,567) (13,362)
Proceeds from issuance of common stock 7,647 4,557
Net retirements of short-term debt (1,298) (2,399)
Retirement of long-term debt (61,067) (111,785)
Proceeds from issuance of long-term debt 20,000 65,000
--------- ---------
Net cash used in financing activities (52,766) (62,126)
--------- ---------
Net changes in cash and cash equivalents 0 340
Cash and cash equivalents at beginning of year 0 4,505
--------- ---------
Cash and cash equivalents at January 31 $ 0 $ 4,845
========= =========
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 9,372 $ 14,516
Income taxes paid (net of refunds received) 18,115 21,150
The accompanying notes are an integral part of this statement.
Wallace Computer Services, Inc. and Subsidiaries Page 6
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 1 - Inventories
Inventories at January 31, 2002, and July 31, 2001, were as follows:
(Dollars in thousands) January 31, 2002 July 31, 2001
---------------------- ---------------- -------------
Raw materials $ 13,898 $ 15,623
Work in process 17,633 16,531
Finished products 66,120 68,768
---------------- ------------
$ 97,651 $ 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 January 31, 2002, options to purchase 3,478,448 shares of common
stock were outstanding and an additional 3,874,859 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 both January 31, 2002 and July 31, 2001. Of
these shares, 4,537,842 and 4,785,511 were held in treasury as of
January 31, 2002 and July 31, 2001, respectively.
Note 3 - Segment Reporting
The Company operates in two business segments. Each segment offers
distinctive products and services and is managed separately because of
its 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.
Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 3 - Segment Reporting (continued)
The Company's accounting policies for the segments are the same as
those described in the "Summary of Significant Accounting Policies" in
the Company's 2001 Annual Report. Management evaluates segment
performance based on segment profit or loss before interest and income
taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are
accounted for at standard cost.
Segment data excludes one-time charges related to the cumulative effect
of a change in accounting principle per Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets."
Summarized segment data and a reconciliation to the consolidated totals
for the quarters ended January 31, 2002 and 2001 are as follows:
Quarter Ended January 31, 2002 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- ---------------------------------------------------------------------------------------------
Forms and Labels Segment $200,083 $ 4,558 $ 20,005
Integrated Graphics Segment 197,022 24,121 4,144
- ---------------------------------------------------------------------------------------------
Segment Total 397,105 28,679 24,149
- ---------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (5,671)
Restructuring Charge - Corporate 0 1,593 (30,272)
- ---------------------------------------------------------------------------------------------
Consolidated $397,105 $30,272 $(11,794)
=============================================================================================
Quarter Ended January 31, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- ---------------------------------------------------------------------------------------------
Forms and Labels Segment $213,825 $ 0 $ 24,078
Integrated Graphics Segment 227,863 199 12,113
- ---------------------------------------------------------------------------------------------
Segment Total 441,688 199 36,191
- ---------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (7,350)
Restructuring Charge - Corporate 0 103 (302)
- ---------------------------------------------------------------------------------------------
Consolidated $441,688 $ 302 $ 28,539
=============================================================================================
Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 3 - Segment Reporting (continued)
Summarized segment data and a reconciliation to the consolidated totals
for the six months ended January 31, 2002 and 2001 are as follows:
Six Months Ended January 31, 2002 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- ---------------------------------------------------------------------------------------------
Forms and Labels Segment $404,255 $ 4,558 $ 39,919
Integrated Graphics Segment 402,009 24,804 11,786
- ---------------------------------------------------------------------------------------------
Segment Total 806,264 29,362 51,705
- ---------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (11,529)
Restructuring Charge - Corporate 0 3,470 (32,832)
- ---------------------------------------------------------------------------------------------
Consolidated $806,264 $32,832 $ 7,344
=============================================================================================
Six Months Ended January 31, 2001 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
- ---------------------------------------------------------------------------------------------
Forms and Labels Segment $430,270 $ 0 $ 47,816
Integrated Graphics Segment 440,697 291 24,291
- ---------------------------------------------------------------------------------------------
Segment Total 870,967 291 72,107
- ---------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (15,073)
Restructuring Charge - Corporate 0 403 (694)
- ---------------------------------------------------------------------------------------------
Consolidated $870,967 $ 694 $ 56,340
=============================================================================================
Segment assets, particularly the Integrated Graphics segment, have been
impacted by restructuring and SFAS No. 142. The adoption of SFAS No.
142 and the related goodwill impairment charge reduced Integrated
Graphics goodwill by $147.5 million. Segment assets as of January 31,
2002 were $485,521 for Integrated Graphics, $341,742 for Forms and
Labels, and $134,059 for Corporate versus $627,377 for Integrated
Graphics, $424,814 for Forms and Labels, and $114,474 for Corporate at
July 31, 2001.
Note 4 - Accounting for Derivative Instruments and Hedging Activities
Effective August 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS
No. 137 and SFAS No. 138. This standard requires that an entity
recognize derivatives as either assets or liabilities on its balance
sheet and measure those instruments at fair value.
In the second quarter of fiscal year 2001, the Company entered into two
interest rate swap agreements ("Swaps") which effectively converted $75
million of floating rate debt under the revolving Credit Facility
("Credit Facility") to fixed rate debt. The purpose for entering into
the Swaps was to better match the Company's assets and liabilities and
reduce its exposure to interest rate risk. As required by the Company's
hedging and derivative use policy such Swaps were entered into with
high quality, independent counterparties at market pricing. These
parties are rated A1 and/or A+ or higher by Moody's and Standard &
Poors. The Swaps had a term that was
Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 4 - Accounting for Derivative Instruments and Hedging Activities,
(continued)
one year or less from the date of inception. These Swaps were
considered cash flow hedges and, accordingly, the fair market value of
the Swaps were recorded as liabilities in "accrued salaries, wages,
profit sharing and other" in the current liabilities section of the
balance sheet. "Accumulated other comprehensive loss" in the equity
section of the balance sheet reflects the after-tax charge to equity
corresponding to the fair market value of the Swaps. The accumulated
other comprehensive loss related to the Swaps is included in
comprehensive income. Any net gain or loss on the Swaps, which is not
significant in fiscal year 2002, is reflected in interest expense in
the income statement. As of January 31, 2002, the Company has settled
the Swaps and has no other derivative financial instruments
outstanding.
Note 5 - Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 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 Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. However, goodwill amortization continues to be recorded in
historical periods.
In completing the transitional impairment test required under SFAS No.
142, the Company determined the carrying amount of its various
reporting units and compared that amount to its fair value. Fair value
was determined with the assistance of an outside professional services
firm using a combination of market comparables and discounted cash flow
approaches. The carrying amount of the Company's Commercial Print
division was below its fair value and, as a result, impairment existed.
The amount of impairment was determined using the "implied fair value"
of the Commercial Print division reporting unit as required by SFAS No.
142. As a result of the impairment test, the Company recognized an
impairment charge to write-off goodwill in the amount of $147.5 million
($144.1 million net of tax) relating to the Commercial Print division
in the Integrated Graphics segment. The impairment loss is recognized
in the statement of operations under the caption "cumulative effect of
a change in accounting principle." In accordance with SFAS No. 142,
this charge was recorded as of the beginning of the fiscal year.
Had the provisions of SFAS No. 142 been applied for the three months
and six months ended January 31, 2001, the Company's net income, before
the cumulative effect of a change in accounting principle, and net
income / (loss) per share would have been as follows:
(In thousands, except For the Three Months Ended January 31
per share amounts) 2002 2001
--------- ----------
Net (Loss) / Income , as reported $ (7,347) $ 16,924
Add:
Goodwill amortization 0 2,004
Tax effect 0 39
--------- ----------
Adjusted Net (Loss) / Income $ (7,347) $ 18,967
========= ==========
Basic (Loss) / Earnings per Share, as reported $ (0.18) $ 0.42
Effect of SFAS No. 142 $ 0.00 $ 0.05
--------- ----------
Adjusted Basic (Loss) / Earnings per Share $ (0.18) $ 0.47
========= ==========
Diluted (Loss) / Earnings per Share, as reported $ (0.18) $ 0.41
Effect of SFAS No. 142 $ 0.00 $ 0.05
--------- ----------
Adjusted Diluted (Loss) / Earnings per Share $ (0.18) $ 0.46
========= ==========
</Table>
Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 5 - Change in Accounting Principle, (continued)
(In thousands, except For the Six Months Ended January 31
per share amounts) 2002 2001
------ -------
Net Income Before the Cumulative Effect
of a Change in Accounting Principle $4,480 $33,410
Add:
Goodwill amortization 0 3,995
Tax effect 0 63
------ -------
Adjusted Net Income Before the
Cumulative Effect of a Change in
Accounting Principle $4,480 $37,468
====== =======
Basic Earnings per Share, as reported $ 0.11 $ 0.82
Effect of SFAS No. 142 $ 0.00 $ 0.10
------ -------
Adjusted Basic Earnings per Share $ 0.11 $ 0.92
==== ====
Diluted Earnings per Share, as reported $ 0.11 $ 0.82
Effect of SFAS No. 142 $ 0.00 $ 0.10
------ -------
Adjusted Diluted Earnings per Share $ 0.11 $ 0.92
====== =======
The Company has no separately identified intangible assets resulting
from acquisitions recorded on the balance sheet. Changes in the
carrying amount of goodwill (net), by segment, for the six months ended
January 31, 2002, are as follows:
Forms and Labels Integrated Graphics
(Dollars in thousands) Segment Segment Total
---------------------- ---------------- ------------------- ---------
Balance as of July 31, 2001 $23,360 $ 261,304 $ 284,664
Pretax Impairment adjustment -
adoption of SFAS No. 142 0 (147,500) (147,500)
------- --------- ---------
Balance as of January 31, 2002 $23,360 $ 113,804 $ 137,164
======= ========= =========
Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 6 - Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Early
application is encouraged. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset. It is anticipated that
the adoption of SFAS No. 143 will have no impact on the financial
position or results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective in
fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," 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.
Note 7 - Fiscal 2002 Restructuring
In the first quarter of fiscal year 2002 the Company implemented a
restructuring program of which $30.3 million was recognized in the
current quarter and $32.8 million year to date. The restructuring
charge is presented separately as a component of income from operations
in the statement of operations. The restructuring initiatives are aimed
at improving the overall level of organizational efficiency and
effectiveness, consolidating and rationalizing existing facilities and
processes, and reducing the overall cost base of the Company. The
restructuring charges recognized include employee severance costs,
asset write-downs, equipment moving costs, consulting charges directly
related to the restructuring and other miscellaneous costs. The costs
related to equipment moving and consulting were expensed as incurred.
The Company anticipates that the restructuring program will be
completed by the end of the fiscal year with the majority of the costs
having been recognized in the current quarter. It is anticipated that
the aggregate charges associated with the restructuring will be less
than $40 million with a majority of those charges related to the
Integrated Graphics segment.
The following table summarizes the activity in the restructuring
reserve during the first six months of fiscal year 2002:
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------------------------
Employee Asset Write-downs Other Charges Total Restructuring
Termination (non-cash)
Benefits
- -------------------------------------------------------------------------------------------------------------
Restructuring Provision $6,598 $ 21,791 $ 4,443 $ 32,832
- -------------------------------------------------------------------------------------------------------------
Adjustments to Reserves 0 0 0 0
Cash Payments (3,731) 0 (3,282) (7,013)
Non-cash items 0 (21,791) 0 (21,791)
- -------------------------------------------------------------------------------------------------------------
Reserve balance January 31, $2,867 $ 0 $ 1,161 $ 4,028
2002
- -------------------------------------------------------------------------------------------------------------
Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Note 7 - Fiscal 2002 Restructuring, (continued)
The restructuring plan, implemented in the first quarter of fiscal year
2002, includes the closing of six manufacturing facilities, one
distribution and fulfillment center, one multi-use facility and
workforce reductions 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. Anticipated proceeds from the sale of assets are
categorized separately as "assets held for sale" in the current asset
portion of the balance sheet. Through the end of the second quarter,
705 employees were terminated or notified of termination, 662 of which
were from plant locations and 43 from the corporate headquarters.
Note 8 - Fiscal 2000 Restructuring
In February 2000, the Company announced a plan to restructure its
operations, which resulted in non-recurring pre-tax expense totalling
$41.6 million for fiscal year 2000. In fiscal year 2001, additional
restructuring costs of $0.7 million were incurred primarily related to
ongoing cash charges related to plant closing activities and
restructuring administrative 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 9 - Income Taxes
The annual effective tax rate for fiscal year 2002 has been adjusted to
39.0% in the current quarter. The reduction in tax rate from the prior
year is the result of no longer amortizing non-deductible goodwill
after the adoption of SFAS No. 142. The tax rate increased from 38.2%
in the first quarter primarily due to the impact of the restructuring
charge on pretax income. The annual effective tax rate for fiscal year
2001 was 40.7%.
Wallace Computer Services, Inc. and Subsidiaries Page 13
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three-month period ended January 31, 2002, net sales decreased
10.1% to $397.1 million from the quarter ended January 31, 2001. For
the six-month period ended January 31, 2002, net sales decreased 7.4%
to $806.3 million from the same period in the prior year. Both segments
were impacted by the current weak economic conditions. The Forms and
Labels segment was also impacted by decreased sales of low margin stock
paper as the Company discontinued all stock and computer paper
production and will be sourcing this product going forward. The
Integrated Graphics segment's sales also decreased in the current
quarter due to restructuring activities taking place within the
segment.
Contractual sales continued to increase in both segments, with faster
growth coming off of a smaller base in the Integrated Graphics segment.
Continued growth in contractual sales is important in providing
stability to the Company's profitability and utilization rates.
Transactional sales (i.e. non-contract sales) volume was off in both
segments. The decline in transactional sales, specifically in the
Integrated Graphics segment, is indicative of the competitive
marketplace. The double-digit decline in total transactional sales
volume was a significant factor in the decline in profitability in the
current quarter versus the second quarter of last year.
In the first quarter of fiscal year 2002 the Company implemented a new
restructuring program of which $30.3 million was recognized in the
current quarter and $2.5 million was recognized in the first quarter of
this fiscal year. The restructuring plan 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 were aimed at improving
the overall level of organizational efficiency and effectiveness,
consolidating and rationalizing existing facilities and processes, and
reducing the overall cost base of the Company. It is currently
estimated that an additional $4 million to $6 million of charges could
still be incurred relating to this restructuring initiative. The
majority of the remaining charges will occur in the third quarter of
the current fiscal year. The majority of the restructuring charge
relates to the Integrated Graphics segment.
It is anticipated that cash proceeds derived in the restructuring
through the sale of disposed equipment, working capital improvements
and improved operations will more than offset cash charges from the
restructuring in fiscal year 2002. The restructuring is also expected
to have a positive impact on cash flow in fiscal year 2003 and beyond,
and should result in annual earnings improvement of approximately $13.0
million. For further information regarding the fiscal year 2002
restructuring charge, see footnote 6.
In the six months ended January 31, 2001 the Company recognized $0.7
million of residual restructuring charges related to an earlier
restructuring initiative ("2000 restructuring") announced in the third
quarter of fiscal year 2000. The 2000 restructuring was undertaken as
the Company was experiencing continued softness in the high-quality
color marketing and promotional printing markets as well as issues
related to the integration of the Graphic Industries acquisition. The
Company's 2000 restructuring plan was approved, committed to, and for
the most part, executed in the third quarter of fiscal year 2000 with
only minor charges incurred in fiscal year 2001. The Company has not
incurred any charges related to the 2000 restructuring in fiscal year
2002 and does not anticipate any future charges related to the 2000
restructuring.
Wallace Computer Services, Inc. and Subsidiaries Page 14
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cost of sales for the quarter was 73.8% of sales as compared to 72.7%
in the second quarter of last year. LIFO income was $0.2 million in the
current quarter versus a charge of $0.3 million in the second quarter
of last year. Cost of sales for the six-month period ended January 31,
2002 was 74.0% of sales compared to 72.5% in the same period a year
ago. Total LIFO charges in the first half of fiscal year 2002 were not
significant, while in the first half of fiscal year 2001 total charges
were $1.0 million.
Year over year, the Forms and Labels segment's quarterly sales
decreased 6.4% to $200.1 million, with operating income of $20.0
million and operating margin of 10.0% versus operating income of $24.1
million and an operating margin of 11.3% in the second quarter of last
year. For the six-month period ended January 31, 2002, segment sales
decreased 6.0% to $404.3 million, with operating income of $39.9
million and an operating margin of 9.9%, versus operating income of
$47.8 million and an operating margin of 11.1% in the prior year to
date period. 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 second quarter,
operating margins have improved sequentially since the third quarter of
fiscal year 2001, as the effects of cost cutting and other
restructuring measures have taken effect.
The Integrated Graphics segment's quarterly sales decreased 13.5% to
$197.0 million, with operating income of $4.1 million and operating
margin of 2.1% versus operating income of $12.1 million and an
operating margin of 5.3% in the second quarter of last year. For the
six-month period ended January 31, 2002, segment sales decreased 8.8%
to $402.0 million, with operating income of $11.8 million and an
operating margin of 2.9% versus operating income of $24.3 million and
an operating margin of 5.5% in the prior year to date period.
Competitive and economic pressures have been significant in this
segment. The majority of the restructuring activity is occurring in
this segment as the Company is in the process of standardizing its
production processes and bringing costs in line with sales demand. The
Company will also be strengthening capabilities in strategic local
markets while continuing to focus on contract business. As part of the
restructuring plan, the Company has closed two plants and disposed of
one in this segment, with two more still in the process of being
disposed of. The plant closures are responsible for approximately $5
million of the segment's quarterly sales decline. Additionally, the
plants that were closed, or will be closed, recorded an operating loss
of $1.9 million in the current quarter. Although the Company will be
losing approximately $55 million annually in transactional sales from
the closed and sold facilities, margins for the entire Commercial Print
division are expected to improve.
Selling and administration expenses for the second quarter were 15.9%
versus 14.7% last year. Included in the current quarter are additional
reserves for bad debt in the amount of $3.3 million, the majority of
which relate to a charge taken as a result of the bankruptcy of a major
customer. The remainder of the incremental reserve continues to be
necessary in light of current economic conditions, and their impact on
the collectability of the Company's trade receivables.
Depreciation and amortization for the quarter was $17.0 million or 4.3%
of sales versus $19.6 million or 4.4% of sales in the second quarter a
year ago. Software amortization expense is up over 37% over the prior
year's second quarter due to enhancements made to the Company's order
entry, customer service, and inventory management system in the past
year. Goodwill amortization declined $2.0 million due to the adoption
of SFAS No. 142. Depreciation expense declined almost 10% in the
current quarter as a result of assets disposed of in the restructuring,
and will decline further in the third quarter.
Interest expense for the quarter was $5.9 million, down from $7.5
million last year. The majority of the decrease in interest expense can
be attributed to debt reduction. Declining interest rates, however,
account for a portion of the reduction. Interest income for the quarter
was consistent year-to-year.
Wallace Computer Services, Inc. and Subsidiaries Page 15
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The annual effective tax rate for fiscal year 2002 has been adjusted to
39.0% in the current quarter. The reduction in tax rate from the prior
year is the result of the adoption of Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The
majority of the goodwill that had previously been amortized was not tax
deductible. The tax rate increased from 38.2% in the first quarter
primarily due to the impact of the restructuring charge on pretax
income. The annual effective tax rate for fiscal year 2001 was 40.7%.
Income before the cumulative effect of a change in accounting principle
for the second quarter was a loss of $7.3 million or 18 cents per
share, down from a profit of $16.9 million or 41 cents per share in the
same quarter a year ago. Income before the cumulative effect of a
change in accounting principle for the six-month period ended January
31, 2002 decreased 86.6% to $4.5 million or 11 cents per share, from
$33.4 million or 82 cents per share in the prior year to date period.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, 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 Company has elected early adoption of SFAS No. 142. Accordingly,
the Company has stopped amortization of goodwill effective August 1,
2001. As a result of adopting SFAS No. 142, the Company has,
retroactive to the beginning of the fiscal year, recorded an impairment
charge of $144.1 million, net of tax. This impairment is recorded as a
cumulative effect of a change in accounting principle. The impairment
was measured as of the date of adoption, and relates to the Company's
Commercial Print division in the Integrated Graphics segment. Goodwill
related to the other divisions is not impaired. The gross impairment of
goodwill was $147.5 million, which reduces total goodwill in the
Integrated Graphics segment to $113.8 million. A professional services
firm was engaged to assist in the valuation process. The restructuring
activities that took place in the second quarter did not cause any
additional impairment.
Liquidity and Capital Resources
Working capital decreased by $22.1 million from July 31, 2001. Since
the first quarter of the current fiscal year, borrowings under the
revolving credit agreement have 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. At January 31,
2002, $35.0 million was classified as current under this agreement,
compared to $75.0 million classified as long-term at July 31, 2001.
Additionally, in the current quarter, the Company's profit sharing plan
was funded, decreasing current liabilities by $13.3 million. The
current ratio at January 31, 2002 was 2.0 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.
Wallace Computer Services, Inc. and Subsidiaries Page 16
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources, (continued)
Of the outstanding debt as of January 31, 2002, $35.0 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 $200.0 million. The Company has $200.0
million of Senior Term Notes with institutional investors with a book
value of $186.3 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 $50.0 million under which $2.0
million was borrowed at January 31, 2002. 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 1.35% to 1.45%. The balance of $7.5
million relates to acquisitions.
Total debt currently represents 36.4% of total capitalization. Had the
impairment of goodwill under SFAS No. 142 not been recorded this
quarter, total debt to capitalization would have been 30.0%. The
maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million.
The Credit Facility and the Senior Notes maintain cross default
provisions in which a violation of debt covenants in either debt
instrument automatically triggers a default in the other. Under the
most restrictive covenants, the Company must maintain a minimum
interest coverage of 2.5 to 1, a funded debt to EBITDA ratio not
greater than 3 to 1, consolidated indebtedness to consolidated total
capitalization of less than 65% and maintain a minimum consolidated net
worth of $421 million at quarter-end. The company has received an
amendment to the Credit Facility to exclude up to $58 million in
non-cash restructuring charges in the second quarter of fiscal year
2002 when computing the minimum interest coverage and funded debt to
EBITDA tests. The Company is currently in compliance with all debt
covenants and believes it would remain in compliance going forward. As
a result of adopting SFAS No. 142 and subsequently recording the $144.1
million charge, net of tax, for goodwill impairment, the Company has
sought an amendment to the Senior Note agreement that would reduce the
net worth requirement by $75 million. At the time of this filing, a
majority of the noteholders have agreed in concept with the proposed
amendment and it is expected that the amended agreement will be
executed in the third quarter of fiscal year 2002.
Capital expenditures for the quarter totaled $5.4 million. For the full
fiscal year, capital expenditures are expected to be between $20 and
$30 million, which are expected to be financed through internally
generated funds and by borrowing against the Credit Facility.
Stockholders' equity decreased 25.8% to $431.0 million at January 31,
2002. Almost the entire decrease can be attributed to the impairment
charge taken as a result of adopting SFAS No. 142.
Wallace Computer Services, Inc. and Subsidiaries Page 17
Notes to Consolidated Financial Statements
January 31, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective in
fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and Accounting Principles Board Opinion No. 30 which
addresses the accounting and reporting relating to the disposal of a
segment of a business. It is anticipated that the adoption of SFAS No.
144 will not have a significant impact on the financial position or
results of operations of the Company.
Common Stock
On September 8, 1999, the Board of Directors increased the annualized
dividend rate to $0.66 per share, a 3.1% increase from fiscal year
1999. Since that time, the Board of Directors maintained the quarterly
dividend rate of $0.165 per share.
During the first quarter of fiscal year 2002, the Company purchased
300,200 shares of Wallace common stock. No shares were repurchased
during the second quarter of fiscal year 2002. Total repurchases
through January 31, 2002, against the $100 million authorized by the
Board in June 1997, have been $98.5 million. On January 25, 2000 the
Board of Directors approved an additional $100 million share repurchase
authorization.
Wallace Computer Services, Inc. and Subsidiaries Page 18
Notes to Consolidated Financial Statements
January 31, 2002
(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
Wallace Computer Services, Inc. and Subsidiaries Page 19
Notes to Consolidated Financial Statements
January 31, 2002
(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, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2001.
10.2 Separation Agreement effective as of October 17, 2001 between
the Company and Michael A. Anderson, filed herewith.
(b) Reports on Form 8-K
None
Page 20
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, 2002 /s/ M. David Jones
------------------------ -----------------------------------
Date M. David Jones
Chairman of the Board and Chief
Executive Officer
March 15, 2002 /s/ Vicki L. Avril
------------------------ -----------------------------------
Date Vicki L. Avril
Senior Vice President and Chief
Financial Officer
(Principal Accounting Officer)