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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1999 Commission file number 1-7088
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AMERICAN BUSINESS PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1030529
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(State of Incorporation) (IRS Employer Identification No.)
2100 RiverEdge Parkway, Suite 1200, Atlanta, Georgia 30328
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 953-8300
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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.
Yes X No
--- ---
Common Stock, $2.00 par value 15,095,995 shares
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(Class) (Outstanding at June 30, 1999)
Page 1 of 20
Exhibit Index on Page 20
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BUSINESS PRODUCTS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands except per share data)
1999 1998
----------- -----------
NET SALES $ 116,724 $ 113,336
----------- -----------
COST AND EXPENSES
Cost of goods sold 83,918 79,021
Selling and administrative expenses 25,375 24,763
Other charges -- 5,155
----------- -----------
109,293 108,939
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OPERATING INCOME 7,431 4,397
Miscellaneous income (expense) - net 546 (512)
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 7,977 3,885
INTEREST INCOME (EXPENSE)
Interest expense (1,533) (1,605)
Interest income 741 1,127
----------- -----------
(792) (478)
INCOME BEFORE INCOME TAXES 7,185 3,407
PROVISION FOR INCOME TAXES 2,561 1,488
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INCOME FROM CONTINUING OPERATIONS 4,624 1,919
DISCONTINUED OPERATION
Income from operations - net of income taxes of $37 -- 49
----------- -----------
NET INCOME $ 4,624 $ 1,968
=========== ===========
PER COMMON SHARE
Income from continuing operations
Basic $ 0.31 $ 0.12
Diluted $ 0.31 $ 0.12
Income from discontinued operation
Basic $ -- $ 0.00
Diluted $ -- $ 0.00
Net Income
Basic $ 0.31 $ 0.12
Diluted $ 0.31 $ 0.12
DIVIDENDS PER COMMON SHARE $ 0.165 $ 0.155
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,026,242 16,122,919
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 15,044,491 16,222,802
See accompanying notes to condensed consolidated financial statements.
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AMERICAN BUSINESS PRODUCTS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands except per share data)
1999 1998
----------- -----------
NET SALES $ 228,663 $ 232,430
----------- -----------
COST AND EXPENSES
Cost of goods sold 163,519 162,098
Selling and administrative expenses 50,357 51,559
Other charges -- 5,155
----------- -----------
213,876 218,812
----------- -----------
OPERATING INCOME 14,787 13,618
Miscellaneous income (expense) - net 888 (257)
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 15,675 13,361
INTEREST INCOME (EXPENSE)
Interest expense (2,575) (2,940)
Interest income 1,429 2,198
----------- -----------
(1,146) (742)
INCOME BEFORE INCOME TAXES 14,529 12,619
PROVISION FOR INCOME TAXES 5,153 4,861
----------- -----------
INCOME FROM CONTINUING OPERATIONS 9,376 7,758
DISCONTINUED OPERATION
Income from operations - net of income taxes of $117 -- 156
Loss on disposal - net of income tax benefit of $542 (1,513) --
----------- -----------
NET INCOME $ 7,863 $ 7,914
=========== ===========
PER COMMON SHARE
Income from continuing operations
Basic $ 0.62 $ 0.48
Diluted $ 0.62 $ 0.48
Income (loss) from discontinued operation
Basic $ (0.10) $ 0.01
Diluted $ (0.10) $ 0.01
Net Income
Basic $ 0.52 $ 0.49
Diluted $ 0.52 $ 0.49
DIVIDENDS PER COMMON SHARE $ 0.33 $ 0.31
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,198,507 16,204,281
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 15,225,496 16,301,991
See accompanying notes to condensed consolidated financial statements.
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AMERICAN BUSINESS PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
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(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 30,027 $ 60,034
Accounts receivable, less allowances of
$1,769 and $1,133 58,201 50,398
Inventories 31,168 32,044
Net assets of discontinued operation -- 15,000
Other 9,393 8,735
-------- --------
Total Current Assets 128,789 166,211
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 2,523 2,523
Buildings and improvements 38,560 38,115
Machinery, equipment and software 103,915 82,252
Construction in progress 3,878 12,091
-------- --------
148,876 134,981
Less accumulated depreciation 63,512 57,640
-------- --------
85,364 77,341
INTANGIBLE ASSETS FROM ACQUISITIONS
Goodwill, less amortization of $6,396 and $5,863 36,071 26,339
Other, less amortization of $5,519 and $5,328 655 619
-------- --------
36,726 26,958
DEFERRED INCOME TAXES 14,408 14,724
OTHER ASSETS 13,946 16,010
-------- --------
TOTAL ASSETS $279,233 $301,244
======== ========
CURRENT LIABILITIES
Accounts payable $ 35,657 $ 45,881
Salaries and wages 7,417 9,442
Profit sharing contributions 1,332 3,473
Current maturities of long-term debt 8,657 8,833
-------- --------
Total Current Liabilities 53,063 67,629
LONG-TERM DEBT 34,918 34,016
SUPPLEMENTAL RETIREMENT BENEFITS 19,723 20,418
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 13,995 16,441
STOCKHOLDERS' EQUITY
Common stock - $2 par value; authorized 50,000,000 shares,
issued 16,938,397 and 16,740,197 shares 33,877 33,480
Additional paid-in capital 10,857 8,169
Retained earnings 149,663 146,824
Unearned compensation (2,586) --
-------- --------
191,811 188,473
Less 1,842,402 and 1,330,102 shares of common
stock in treasury - at cost 34,277 25,733
-------- --------
157,534 162,740
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $279,233 $301,244
======== ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN BUSINESS PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands)
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations
Income from continuing operations $ 9,376 $ 7,758
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 7,195 6,110
Loss on disposition of plant and equipment 36 3,904
Loss on sale of joint venture investment -- 1,849
Change in assets and liabilities, excluding
effects of acquisitions and dispositions:
Increase in accounts receivable (4,464) (204)
(Increase) decrease in inventories 1,896 (2,634)
Decrease in other current assets 1,316 1,539
(Increase) decrease in intangible and other assets 849 (591)
Decrease in accounts payable (11,461) (4,344)
Decrease in other current liabilities (2,569) (390)
Decrease in supplemental retirement benefits
and postemployment benefits (3,141) (443)
(Increase) decrease in deferred income taxes (1) 630
-------- --------
Total adjustments (10,344) 5,426
Net cash provided (used) by continuing operations (968) 13,184
Discontinued operation
Income (loss) from discontinued operation (1,513) 156
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 1,136 1,299
Write-down of assets to net realizable value 1,156 --
Gain on disposition of plant and equipment -- (83)
Change in assets and liabilities:
(Increase) decrease in accounts receivable 321 (505)
Decrease in inventories 267 334
Increase in other current assets (1,328) (224)
(Increase) decrease in intangible and other assets 42 (107)
Increase (decrease) in accounts payable (2,661) 391
Increase (decrease) in other current liabilities (209) 4
Decrease in supplemental retirement benefits and
postemployment benefits -- 59
(Increase) decrease in deferred income taxes 317 (93)
-------- --------
Total adjustments (959) 1,075
Net cash provided (used) by discontinued operation (2,472) 1,231
Net cash provided (used) by operating activities (3,440) 14,415
CASH FLOWS FROM INVESTING ACTIVITIES
Continuing operations
Decrease in and liquidation of cash value of life insurance 1,367 4,438
Net assets acquired (15,644) --
Additions to property, plant and equipment (9,788) (8,068)
Proceeds from sale of joint venture investment -- 4,446
Proceeds from disposition of property, plant and equipment 119 3,136
-------- --------
(23,946) 3,952
Discontinued operation
Additions to property, plant and equipment (2,328) (2,560)
Proceeds from disposition of property, plant and equipment 17 85
Proceeds from disposition of discontinued operation 12,033 --
-------- --------
9,722 (2,475)
Net cash provided (used) by investing activities (14,224) 1,477
CASH FLOWS FROM FINANCING ACTIVITIES
Continuing operations
Reductions of long-term debt (114) (115)
Issuance of long-term debt 1,016 --
Sales and exchanges of common stock 499 316
Repurchase of common stock (8,544) (10,291)
Dividends paid (5,024) (5,009)
-------- --------
(12,167) (15,099)
Discontinued operation
Reductions of long-term debt (176) (93)
-------- --------
Net cash used by financing activities (12,343) (15,192)
Net increase (decrease) in cash and cash equivalents (30,007) 700
Cash and cash equivalents at beginning of period 60,034 75,092
-------- --------
Cash and cash equivalents at end of period $ 30,027 $ 75,792
======== ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN BUSINESS PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Unaudited Condensed Consolidated Financial Statements
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which in certain instances require
the use of management's estimates. The information contained in these condensed
consolidated financial statements and notes for the three and six month periods
ended June 30, 1999 and 1998 is unaudited but, in the opinion of management, all
adjustments necessary for a fair presentation of such information have been
made. All such adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to applicable rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements included herein
should be read in conjunction with the audited financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. Consolidation Policy
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. Intercompany
balances and transactions have been eliminated.
3. Nature of Operations
The Company operates two businesses: specialty packaging and printed office
products. The Company's specialty packaging business is comprised of three
segments: the extrusion of polyethylene and other materials onto papers and
nonwovens used in packaging and other products, the manufacture of soft packages
including Tyvek(R) mailers, and the manufacture of labels. The Company's printed
office products business is comprised of a single segment which supplies
custom-printed envelopes and labels, digital document services and business
forms. The markets for these products are located principally throughout the
continental United States.
4. Earnings Per Common Share
Basic earnings per common share is based upon the weighted average number of
common shares outstanding during the respective periods. Diluted earnings per
share is based upon the weighted average number of common and common equivalent
shares outstanding during the respective periods. The only common equivalent
shares are those related to stock options outstanding during the respective
periods.
5. Inventories
Inventories consisted of the following at the dates indicated:
June 30, December 31,
1999 1998
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(Unaudited)
(in thousands)
Raw materials $ 15,889 $ 16,740
Work in process 4,055 3,712
Finished goods 13,636 14,021
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33,580 34,473
Inventory obsolescence reserve (2,412) (2,429)
-------- --------
Net inventory $ 31,168 $ 32,044
======== ========
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6. Comprehensive Income
Total comprehensive income for the three and six months ended June 30, 1999 and
1998 was as follows (unaudited):
Three months ended June 30,
---------------------------
1999 1998
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(in thousands)
Net income $ 4,624 $ 1,968
Foreign currency translation adjustments -- (261)
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Comprehensive income $ 4,624 $ 1,707
======= =======
Six months ended June 30,
-------------------------
1999 1998
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(in thousands)
Net income $7,863 $ 7,914
Foreign currency translation adjustments -- (261)
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Comprehensive income $7,863 $ 7,653
====== =======
7. Acquisition
On April 30, 1999 the Company acquired substantially all of the property, rights
and assets of Tekkote Corp., a manufacturer of coated and printed products for
use in packaging and related fields. The transaction has been accounted for as a
purchase with the results of Tekkote Corp. included with those of the Company's
extrusion coating and laminating segment beginning May 1, 1999. The negotiated
purchase price was $14.3 million in cash and assumption of a note payable of
$1.0 million. The principal and interest, based on LIBOR, of the note are due
October 31, 2000.
The following are the components of net assets acquired of Tekkote Corp.:
April 30, 1999
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(in thousands)
Accounts receivable $ 2,258
Inventory 1,019
Other current assets 10
Property, plant and equipment 5,875
Other long-term assets 152
Goodwill 10,264
Other intangible assets 229
Accounts payable (3,788)
Other current liabilities (375)
--------
Net assets acquired $ 15,644
The acquired goodwill is being amortized on the straight-line basis
over 20 years.
8. Discontinued Operation
On May 28, 1999 the Company sold the business and assets of Bookcrafters USA,
Inc., its hardcover and softcover book manufacturing and distribution segment to
The Sheridan Group. Accordingly, the segment has been accounted for as a
discontinued operation and prior period financial statements were reclassified.
The Company assigned certain operating leases entered into by Bookcrafters USA,
Inc. prior to the sale. The Company guaranteed the payments on these leases
which expire between January 1, 2003 and January 1, 2004. At June 30, 1999, the
aggregate amount of guaranteed lease payments was $2,324,926.
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In the first quarter of 1999, the Company recorded a loss of $1,513,000 after
tax for the disposal of the segment. No adjustment was required to the loss on
disposal of the segment at the date of sale.
The following are the components of the net assets for discontinued operations
of BookCrafters USA, Inc.:
(in thousands) December 31,
1998
--------
Current net assets:
Accounts receivable $ 9,463
Inventory 2,483
Other assets 5
Accounts payable (3,730)
--------
Total net current assets 8,221
Long-term assets:
Property, plant and equipment, net of accumulated
depreciation of $20,719 6,682
Other long-term 97
--------
Total long-term assets 6,779
Net assets of discontinued operation $ 15,000
========
Assets are shown at their net realizable values and liabilities are
shown at their face amounts.
Summarized income statement information for BookCrafters USA, Inc. is as follows
(unaudited):
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 1999 1998
-------- -------
(in thousands)
Net sales $ 7,413 $ 11,801
Operating income $ -- $ 125
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(in thousands)
Net sales $ 18,799 $ 23,779
Operating income (loss) $ (888) $ 290
9. Compensation Plans
The Company adopted the American Business Products, Inc. 1999 Incentive
Compensation Plan (the "1999 Plan"), at the 1999 Annual Meeting of Shareholders
held on May 5, 1999. Future stock-based compensation will be made pursuant to
the 1999 plan which will replace the 1991 Stock Incentive Plan and the 1993
Directors' Stock Incentive Plan. Under the 1999 plan, options may be granted at
fair value to key employees. As of June 30, 1999, the Company has issued options
to purchase 317,000 shares of Common Stock pursuant to the 1999 Plan. The 1999
plan also provides for performance share awards. The Company issued 171,000
shares of restricted stock during the second quarter of 1999 pursuant to the
1999 Plan that may vest in whole or in part, or may be forfeited, based on the
Company's performance over the next three years. The fair value of these
restricted shares at date of grant was $2,586,375 which is recorded as unearned
compensation in the accompanying June 30, 1999 Condensed Consolidated Balance
Sheet. The Company also issued 100 shares of restricted stock pursuant to the
1999 Plan to each nonemployee director during the second quarter of 1999, for a
total of 1,000 shares, resulting in $15,125 of compensation expense recorded in
selling and administrative expenses in the accompanying condensed consolidated
income statements.
10. Shareholders' Rights Plan
On May 5, 1999, the Board of Directors adopted a Rights Plan which will expire
November 6, 2009. The Company's current Rights Plan adopted October 25, 1989
will expire November 6, 1999. Under the new rights plan, shareholders of record
on May 17, 1999, and shareholders who acquire the Company's common stock after
that date until the distribution date will receive rights to purchase six shares
of the Company's common stock
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(subject to adjustment) at a price equal to 20% of the then current market
price. In the event there is an insufficient number of authorized but unissued
shares of the Company to honor all of the rights, the Board of Directors may
substitute alternative securities or cash. The rights will be exercisable if a
person or group acquires beneficial ownership of 30% or more of the Company's
outstanding common stock, or begins a tender or exchange offer for 30% or more
of the Company's outstanding common stock. In addition, the rights will be
exercisable if an "adverse person", as determined by the Board of Directors,
acquires a beneficial ownership of 10% or more of the Company's outstanding
common stock. The Board of Directors may redeem the rights for $0.01 per right
at any time up to 20 days after the time they become exercisable. Until a
triggering event, the rights attach to and trade with the shares of the
Company's common stock. No separate rights certificate will be issued until an
event triggering the exercise of the rights occurs.
11. Business Segment Information
(unaudited)
(in thousands) Net External Net Internal Operating
THREE MONTHS ENDED JUNE 30, 1999 Sales Sales Profit (Loss)
------------ ------------ -------------
Extrusion Coating & Laminating $ 33,617 $ 504 $ 3,744
Soft Packaging 22,579 1,459 1,566
Labels 16,715 1,076 2,167
-------- ------ --------
Total Specialty Packaging Business 72,911 3,039 7,477
-------- ------ --------
Printed Office Products 43,813 -- 1,397
Corporate -- -- (897)
-------- ------ --------
Total $116,724 $3,039 $ 7,977
======== ====== ========
SIX MONTHS ENDED JUNE 30, 1999
Extrusion Coating & Laminating $ 62,473 $ 828 $ 6,070
Soft Packaging 45,829 3,043 3,449
Labels 31,945 2,689 4,343
-------- ------ --------
Total Specialty Packaging Business 140,247 6,560 13,862
-------- ------ --------
Printed Office Products 88,416 -- 3,406
Corporate -- -- (1,593)
-------- ------ --------
Total $228,663 $6,560 $ 15,675
======== ====== ========
THREE MONTHS ENDED JUNE 30, 1998
Extrusion Coating & Laminating $ 30,735 $ 143 $ 3,287
Soft Packaging 21,564 1,638 979
Labels 14,947 1,215 2,831
-------- ------ --------
Total Specialty Packaging Business 67,246 2,996 7,097
-------- ------ --------
Printed Office Products 46,090 7 (1,251)
Corporate -- -- (1,961)
-------- ------ --------
Total $113,336 $3,003 $ 3,885
======== ====== ========
SIX MONTHS ENDED JUNE 30, 1998
Extrusion Coating & Laminating $ 62,047 $ 331 $ 6,659
Soft Packaging 43,225 3,485 2,115
Labels 29,757 2,406 5,741
-------- ------ --------
Total Specialty Packaging Business 135,029 6,222 14,515
-------- ------ --------
Printed Office Products 97,401 7 1,451
Corporate -- -- (2,605)
-------- ------ --------
Total $232,430 $6,229 $ 13,361
======== ====== ========
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In all material respects, the Company accounts for intercompany sales and
transfers as if the sales or transfers were to third parties.
Operating profit for each segment is adjusted income before interest and taxes ,
which is income before interest and taxes adjusted to include, in lieu of
corporate expense allocations, a capital charge equal to 2.5% of the invested
capital used in the business segment, which has been netted with Corporate.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's continuing operations are comprised of two businesses:
Specialty Packaging and Printed Office Products. The Company's Specialty
Packaging business is comprised of three segments: the extrusion of polyethylene
and other materials onto papers and nonwovens used in packaging and other
products, the manufacture of soft packages including Tyvek(R) mailers, and the
manufacture of labels. The Company's Printed Office Products business is
comprised of a single segment, which supplies custom-printed envelopes and
labels, digital document services and business forms.
Net sales from continuing operations for the second quarter of 1999
were $116.7 million, an increase of 3.0%, compared to $113.3 million in the
second quarter of 1998. Net sales from continuing operations for the six months
ended June 30, 1999 were $228.7 million, a decrease of 1.6% from the $232.4
million of net sales for the six months ended June 30, 1998. A more detailed
analysis of net sales is included in the discussion below of the Company's two
continuing businesses: Specialty Packaging and Printed Office Products.
The Company's gross profit margin from continuing operations was 28.1%
in the second quarter of 1999 compared to 30.3% in the second quarter of 1998.
The reduced margin in the second quarter of 1999 was due primarily to lower
margin in the Company's labels and printed office products segments partially
offset by increased margin in extrusion coating and laminating and soft
packaging. The lower margin in labels and printed office products was caused
primarily by changes in product mix in the case of labels and lower revenues in
the case of printed office products. The extrusion coating and laminating margin
increased due to an improved product mix during the second quarter of 1999. The
soft packaging margin increased due to increased sales of higher margin products
for use in the package delivery markets. The Company's gross margin from
continuing operations for the six months ended June 30, 1999 was 28.5% compared
to 30.3% for the six months ended June 30, 1998. The reduced margin in the first
six months of 1999 was due primarily to lower margin in the Company's extrusion
coating and laminating, labels and printed office products segments partially
offset by increased margin in soft packaging. The explanation of margin change
for soft packaging, labels and printed office products is the same as the second
quarter, discussed above. The lower margin in extrusion coating and laminating
for the six months ended June 30, 1999 was due to lower sales, and a less
favorable product mix in the first quarter of 1999.
Selling and administrative expenses from continuing operations (as a
percentage of net sales) were 21.7% in the second quarter of 1999 compared to
21.8% in the second quarter of 1998. Selling and administrative expenses from
continuing operations for the six months ended June 30, 1999 were 22.0% compared
to 22.2% for the six months ended June 30, 1998. Included in the results for the
six months ended June 30, 1998 were charges related to management changes and
reorganization at the Company's printed office products segment of $1.4 million.
Excluding these charges, selling and administrative expenses from continuing
operations (as a percentage of sales) for the six months ended June 30, 1998
would have been 21.3%. The higher selling and administrative expenses as a
percentage of net sales for the six months ended June 30, 1999 was due primarily
to higher expenses as a percentage of net sales in the printed office products
segment due primarily to lower sales, partially offset by a decline in the
labels segment due primarily to higher sales.
During the second quarter of 1998, the Company conducted a review of a
custom-designed software system that was being developed by the Company's
printed office products business. After extensive review, the Company decided to
discontinue the software development project. The Company recorded a pre-tax
charge in the second quarter of 1998 of approximately $5.2 million to write off
the Company's investment in the project.
Miscellaneous-net income was $0.5 million in the second quarter of 1999
compared to miscellaneous-net expense of $0.5 million in the second quarter of
1998. Miscellaneous-net income for the six months ended June 30, 1999 was $0.9
million, compared to $0.3 million of miscellaneous-net expense for the six
months ended June 30, 1998. The second quarter of 1998 and the six months ended
June 30, 1998 results included a loss on the sale of the Company's investment in
Curtis 1000 Europe GmbH of approximately $1.8 million and gains from asset
disposals of approximately $1.2 million. Excluding these items,
miscellaneous-net income for the second quarter of 1998 would have been $0.2
million and miscellaneous-net income for the six months ended June 30, 1998
would have been $0.4 million.
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Interest expense for the second quarter of 1999 was $1.5 million, a
decrease of 4.5% from $1.6 million in the second quarter of 1998. Interest
expense for the six months ended June 30, 1999 was $2.6 million, a decrease of
12.4% from the $2.9 million for the six months ended June 30, 1998. The decrease
in 1999 was due primarily to reduced long-term debt.
Interest income for the second quarter of 1999 was $0.7 million, a
decrease of 34.3% from the $1.1 million in the second quarter of 1998. Interest
income for the six months ended June 30, 1999 was $1.4 million, a decrease of
35.0% from the $2.2 million for the six months ended June 30, 1998. The decrease
in 1999 was due primarily to lower average investment balances.
The Company's effective income tax rate from continuing operations
decreased to 35.6% in the second quarter of 1999 compared to 43.7% in the second
quarter of 1998. The effective tax rate was 35.5% and 38.5% for the six month
periods ended June 30, 1999 and June 30, 1998, respectively. The lower effective
rate in 1999 resulted from state tax planning strategies. The higher effective
rate in 1998 was impacted by the non-deductible portion of the loss on the sale
of the Company's investment in Curtis 1000 Europe GmbH.
Specialty Packaging
The Company's Specialty Packaging business is composed of three
segments: extrusion coating and laminating of packaging and other products, soft
packaging including Tyvek(R) mailers, and printing of labels.
On April 30, 1999, the Company acquired substantially all of the
property, rights and assets of Tekkote Corp. ("Tekkote"), a manufacturer of
coated and printed products for use in packaging and related fields whose
revenues for 1998 were approximately $30 million. The negotiated purchase price
was $14.3 million in cash and a note payable of $1.0 million due October 31,
2000. This acquisition will enable the extrusion coating and laminating segment
to offer a broader line of release liner products used in pressure sensitive
applications and packaging. The acquisition has been accounted for as a purchase
with the results of Tekkote included with those of the Company's extrusion
coating and laminating segment beginning May 1, 1999.
In the second quarter of 1999, the Company's Specialty Packaging
business' net sales were $76.0 million, an increase of 8.1% compared to $70.2
million in the second quarter of 1998. Net sales for the six months ended June
30, 1999 were $146.8 million, an increase of 3.9% compared to $141.3 million for
the six months ended June 30, 1998. The sales increase in the second quarter of
1999 was due primarily to the inclusion of sales from the acquisition of
Tekkote, and to revenue gains in the soft packaging and labels segments. A more
detailed explanation of each of the segments' results is discussed below.
The Company measures each of its businesses' and segments' operating
profit, which the Company defines as income before interest and taxes less a
capital charge equal to 2.5% of the net assets used by that business or segment.
The capital charge is in lieu of any corporate expense allocation.
In the second quarter of 1999, the Company's Specialty Packaging
business' operating profit was $7.5 million, an increase of 5.4% compared to
$7.1 million in the second quarter of 1998. The operating profit for the six
months ended June 30, 1999 was $13.9 million, a decrease of 4.5% compared to
$14.5 for the six months ended June 30, 1998. The operating profit increase in
the second quarter of 1999 was due to increased gross margin in the extrusion
coating and laminating and soft packaging segments partially offset by decreased
gross margin in the labels segment. The operating profit decrease for the six
months ended June 30, 1999 was due to decreased sales in extrusion coating and
laminating and decreased gross margin in labels, partially offset by increased
sales and gross margin in soft packaging.
The Specialty Packaging business' extrusion coating and laminating
segment generated net sales of $34.1 million in the second quarter of 1999, a
10.5% increase compared to $30.9 million in the second quarter of 1998. Net
sales for the extrusion coating and laminating segment for the six months ended
June 30, 1999 were $63.3 million, an increase of 1.5% compared to $62.4 million
for the six months ended June 30, 1998. The sales increase was due primarily to
the inclusion of sales from the Tekkote acquisition, partially offset by reduced
demand for certain mature products.
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The extrusion coating and laminating segment reported operating profit
in the second quarter of 1999 of $3.7 million, an increase of 13.9%, compared to
operating profit of $3.3 million in the second quarter of 1998. Operating profit
for the extrusion coating and laminating segment for the first six months of
1999 was $6.1 million, a decrease of 8.8%, compared to $6.7 for the six months
ended June 30, 1998. The increase in the second quarter of 1999 was due
primarily to increased demand for certain higher margin products. The decrease
in the first six months of 1999 was due primarily to lower unit prices, lower
demand for certain mature products and inventory adjustments by customers in the
first quarter of 1999.
The Company is continuing to seek to accelerate the growth of its
extrusion coating and laminating segment by developing or acquiring
complementary technologies, capabilities, manufacturing plants and personnel. In
line with this objective, the Company completed the acquisition of Tekkote
during the second quarter of 1999, discussed above. In addition, the Company is
intensifying its programs to develop additional new products and markets.
The Specialty Packaging business' soft packaging segment generated net
sales of $24.0 million in the second quarter of 1999, an increase of 3.6%
compared to $23.2 million in the second quarter of 1998. Net sales for the six
months ended June 30, 1999 for the soft packaging segment were $48.9 million, an
increase of 4.6% compared to $46.7 million for the six months ended June 30,
1998. Sales growth in 1999 resulted primarily from increased demand from the
soft goods order fulfillment market, partially offset by a reduction in sales of
Priority Mail envelopes due to customer cost containment programs in the second
quarter of 1999.
The soft packaging segment reported operating profit in the second
quarter of 1999 of $1.6 million, an increase of 60.0%, compared to operating
profit of $1.0 million in the second quarter of 1998. Operating profit for the
soft packaging segment for the six months ended June 30, 1999 was $3.4 million,
an increase of 63.1% compared to $2.1 million for the six months ended June 30,
1998. The increase in 1999 operating profit resulted from increased sales as
well as improved margins from the expansion of higher value-added packaging
applications in the growing order fulfillment market.
The Specialty Packaging business' labels segment generated net sales of
$17.8 million in the second quarter of 1999, a 10.1% increase compared to $16.2
million in the second quarter of 1998. Net sales for the six months ended June
30, 1999 for the label segment were $34.6 million, an increase of 7.7% compared
to $32.2 million for the six months ended June 30, 1998. The increase in 1999
resulted primarily from increased sales of multi-color, higher quality labels,
partially offset by declining demand for single-color labels.
The Company's labels segment reported operating profit in the second
quarter of 1999 of $2.2 million, a decrease of 23.5%, compared to operating
profit of $2.8 million in the second quarter of 1998. Operating profit for the
label segment for the six months ended June 30, 1999 was $4.3 million, a
decrease of 24.4% compared to $5.7 million for the six months ended June 30,
1998. The decrease in 1999 profits resulted from declining sales of single-color
labels for office applications, which users may produce for themselves with
personal computers and inexpensive printers, partially offset by increased sales
of higher quality labels, sales through new distribution channels and sales of
labels to packaging markets which have yielded lower margins, in part due to
inefficiencies and other start-up costs incurred in entering these new markets.
Printed Office Products
The Company's Printed Office Products segment generated net sales of
$43.8 million in the second quarter of 1999, a 5.0% decrease compared to $46.1
million in the second quarter of 1998. Net sales for the six months ended June
30, 1999 for the Printed Office Products segment were $88.4 million, a decrease
of 9.2% compared to $97.4 million for the six months ended June 30, 1998. This
segment has experienced generally declining sales in recent quarters, which
continued in the first half of 1999. Comparisons with 1998 sales also reflect
larger backlogs in the first quarter of 1998 caused by production bottlenecks in
1997 and a large order from a single customer in the first quarter of 1998 which
was not repeated in 1999.
The Company's Printed Office Products segment reported operating profit
in the second quarter of 1999 of $1.4 million compared to an operating loss of
$1.3 million in the second quarter of 1998. Operating profit for the Printed
Office Segment for the six months ended June 30, 1999 was $3.4 million, an
increase of 74.6% compared to $1.5 million for the six months ended June 30,
1998. Included in the 1998 results are charges related to management
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changes and reorganization of $1.4 million in the first quarter of 1998, charges
from the write-off of the segment's former order entry systems project of $5.2
million in the second quarter of 1998 and gains from the sale of realty rendered
redundant by the 1996-1997 plant consolidation program of $0.7 million in the
second quarter of 1998. Exclusive of these charges and gains, the Printed Office
Products segment would have reported operating profit of $3.2 million in the
second quarter of 1998 and $7.3 million for the first six months of 1998. The
decrease in 1999 operating profit was due primarily to the reduced sales in this
segment.
In March, 1999, the Company appointed a new President for its Printed
Office Products business and has developed various programs intended to halt the
revenue decline and recover revenue growth. These programs include steps to
improve the effectiveness of the business' direct sales force to develop
national accounts and to focus on core product sales. Though there can be no
assurance such programs will be successful, the Company presently expects that
these programs will generate new revenues later this year.
Discontinued Operation
On May 28, 1999, the Company sold its hardcover and softcover book
manufacturing business to The Sheridan Group. The financial statements reflect
the operating results of this business as a discontinued operation and prior
period financial information have been appropriately restated. This initiative
is part of an overall corporate restructuring intended to enhance profitability
by focusing the Company on its Specialty Packaging and Printed Office Products
businesses. As a result of this disposition, the Company recorded an additional
after tax loss of approximately $1.5 million in the first quarter of 1999.
Pro Forma Financial Information
The Company incurred charges of $1.4 million before tax due to
management changes at its Printed Office Products business during the first
quarter of 1998, which are recorded in selling and administrative expenses in
the accompanying Condensed Consolidated Income Statements, charges of $5.2
million before tax to write-off the Company's investment in the software
development project in the Printed Office Products business in the second
quarter of 1998, which is recorded in other charges in the accompanying
Condensed Consolidated Income Statements, a loss of $1.8 million before tax on
the sale of the Company's investment in Curtis 1000 Europe GmbH in the second
quarter of 1998, which is recorded in miscellaneous-net in the accompanying
Condensed Consolidated Income Statements, and a gain of $0.7 million before tax
from the sale of realty rendered redundant by the Printed Office Products plant
consolidation program in the second quarter of 1998, which is recorded in
miscellaneous-net in the accompanying Condensed Consolidated Income Statements.
Excluding these amounts, the Company would have shown income from continuing
operations of $6.1 million, or $0.38 per diluted share, and net income of $6.2
million, or $0.38 per diluted share for the second quarter of 1998, and income
from continuing operations of $12.8 million, or $0.78 per diluted share, and net
income of $12.9 million, or $0.79 per diluted share for the six months ended
June 30, 1998.
Liquidity and Capital Resources
On April 20, 1999, the Board of Directors authorized the repurchase of
an additional 2.0 million shares pursuant to the Company's current stock
repurchase program. This new authorization represents an additional 13% of the
Common Stock outstanding, which may be purchased through negotiated transactions
and open market purchases. This increases the size of the Company's current
stock repurchase program to 3.7 million shares. Since inception of the program,
the Company has purchased 1,606,300 shares at a cost of approximately $30.7
million.
Stockholders' equity decreased $5.2 million during the first six months
of 1999 due primarily to stock repurchases by the Company and totaled $157.5
million at June 30, 1999.
Cash and cash equivalents decreased $30.0 million during the first six
months of 1999 and totaled $30.0 million at June 30, 1999. Operating activities
used $3.4 million in cash during the first six months of 1999 due primarily to
reductions in current liabilities. The other significant uses of cash in 1999
were the purchase of Tekkote for $14.6 million, purchases of $12.1 million of
property, plant and equipment, repurchase of $8.5 million of Common Stock,
payment of $5.0 million in dividends and repayment of $0.3 million of debt. The
sale of the Company's book manufacturing segment provided $12.0 million in cash
during 1999. Sales and exchanges of Common Stock provided $0.5 million in cash
and proceeds from Company owned life insurance policies provided $1.4 million in
cash.
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The Company maintains a committed revolving credit agreement (the
"Credit Agreement") with a bank under which the Company may borrow up to $50
million through April 22, 2002, at interest rates related to prime and
Eurocurrency rates. At June 30, 1999 there were no borrowings under this Credit
Agreement. A wholly owned subsidiary of the Company has borrowed approximately
$6.5 million through a variable interest rate industrial revenue bond (the
"Bond") due May 1, 2031. The interest rate on the Bond was 3.80% at June 30,
1999. The Bond is supported by a letter of credit issued pursuant to the Credit
Agreement, which commensurately reduces the balance available to the Company
under the Credit Agreement.
The Company believes its liquid current assets, internal cash flow,
availability of additional borrowing under its existing loan agreements, and, to
the extent necessary, additional external financing, should adequately meet the
Company's needs for the foreseeable future.
Year 2000 Issue
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 99 for 1999). On January 1, 2000, any clock
or date recording mechanism, including date sensitive software which uses only
two digits to represent the year, may recognize a date incorrectly (e.g.,
interpret the two digits 00 as the year 1900 rather than the year 2000). This
could result in a system failure or miscalculations causing disruption of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar activities.
The Company has undertaken a program to address Year 2000 compliance
with respect to the following: (i) the Company's information technology hardware
and software ("IT systems"); (ii) the Company's non-information technology
systems, such as buildings, plant, equipment, telephone systems, and other
infrastructure systems that may contain microcontroller technology ("non-IT
systems"); and (iii) exposure from third parties with which the Company does
business.
The Company's plan with regard to the Year 2000 issue for each of the
above involves the following phases: (i) assessment of systems to determine the
extent to which the Company may be vulnerable to the Year 2000 issue; (ii) the
development of remedies to address problems discovered in the assessment phase;
(iii) the testing of such remedies; and (iv) the preparation of contingency
plans to address potential worst case scenarios should the remedies not be
successful.
The Company has analyzed its IT systems in an effort to identify any
systems that may experience problems relating to the Year 2000 issue and
implement any changes required to remedy such problems. The result of the
analysis was that most of the IT systems used by the Company were vulnerable to
potential problems relating to the Year 2000 issue. A Company-wide enterprise
resource planning ("ERP") software solution was chosen as the primary means to
address the Year 2000 issue. The ERP software was selected not only to address
the Year 2000 issue, but also to add functionality and efficiency in the
business processes of the Company. The ERP software is being implemented in
stages at each of the Company's operating companies. The first stage was
comprised primarily of the financial modules. These implementations have been
completed. The second stage includes the manufacturing and distribution modules.
Current plans call for these modules to be installed in some but not all of the
operating companies. This stage is planned to be completed during the third
quarter of 1999. Remediation and testing of IT systems not replaced by the ERP
software solution was complete as of June 30, 1999.
The Company has assessed its significant non-IT systems that may
contain embedded microcontrollers to determine what remediation efforts may be
necessary. All non-IT systems tested have been evaluated as being not likely to
experience problems relating to the Year 2000 issue or it has been determined
that non-compliance will not likely affect the functionality of the equipment.
The Company is taking steps intended to assess the Year 2000 readiness
of certain third parties whose possible lack of Year 2000 readiness could, in
the Company's opinion, cause a materially adverse impact on the Company's
business, results of operations or financial condition. The Company has
identified and contacted all parties identified as critical suppliers of goods
and services. The Company has received responses from virtually all of these
critical suppliers and has reviewed their Year 2000 readiness based upon their
responses. On the basis of these reviews and the Company's evaluation of each
supplier's potential impact on its business, contingency plans
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have been developed. These contingency plans include accepting certain potential
risk from lack of Year 2000 readiness, identifying alternative suppliers of the
goods or services and increasing inventories.
In addition, contingency plans have been developed for critical
internal and external business processes. Contingency plans are in place to
address the most likely potential risks. Management considers contingency
planning to be an ongoing project and will continue to assess and revise the
Company's contingency plans up to and beyond December 31, 1999, as necessary.
Though essential to the operation of the Company's business, the software and
operating systems the Company utilizes may be supplemented by manual processing.
The total Year 2000 remediation project is estimated to cost
approximately $25 million, of which approximately $21 million has been spent to
date. All of the projected cost is expected to be funded from operating cash
flow. Approximately 80% of the estimated spending relates to the ERP software
solution. Costs associated with the ERP software solution are treated as period
expense or capitalized and amortized in accordance with applicable accounting
principles and Company policy. Costs associated with correcting existing systems
are expensed as incurred.
Failure to successfully execute the Company's Year 2000 readiness plans
on a timely basis or the failure of external parties to achieve Year 2000
readiness on a timely basis could have a material adverse impact on the
Company's financial position and results of operations.
Forward Looking Statements; Risks and Uncertainties
From time to time, the Company or its representatives have made or may
make forward-looking statements that reflect the Company's current expectations,
hopes, intentions, plans, or strategies, orally or in writing. The words or
phrases "is expected," "will continue," "anticipates," "estimates," "plans,"
"intends," or similar expressions in any of these communications are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933,
as enacted by the Private Securities Litigation Reform Act of 1995. The Company
assumes no obligation to update any such forward-looking statements. Except for
historical information contained in this report, statements set forth in this
report are forward-looking statements.
There can be no assurance the Company's actual performance will not
differ materially from that projected in the Company's forward-looking
statements due to important factors including but not limited to those described
below. The Company's expectations with respect to future sales and profits
assume reasonable continued growth in the general economy, which affects demand
for the Company's products. However, the Company believes that future growth in
or contraction of the general economy cannot be forecasted with certainty. The
Company's Printed Office Products business has experienced generally declining
revenues since 1995 and while the Company has developed programs intended to
halt these revenue declines and to increase this business' future revenues, such
programs are new to the Company and there can be no assurance such programs will
be successful. Certain segments of the Company's Specialty Packaging business
have experienced a slowing of their historical revenue growth rates or margin
reduction primarily due to greater competition, a maturation of products, and a
maturation of certain markets in which these segments participate. The Company's
Specialty Packaging business is seeking more rapid growth through development of
new products and penetration of new, higher growth markets. However, the Company
may be less successful or it may take longer and cost more to develop new
products and distribution channels and penetrate new markets than the Company
currently anticipates. Loss of customers due to changes in customers'
manufacturing processes that reduce or eliminate their need for the Company's
products often cannot be predicted and may adversely affect the Company's
revenues and profits. The Company has been engaged in monetizing non-strategic,
redundant and low-productivity assets. The Company's ability to continue
monetizing such assets depends in part upon the Company's ability to identify
such assets as they become non-strategic or unproductive, the availability of
suitable conversion strategies, demand for such assets among other parties, and
market conditions generally. Further, the Company expects to develop programs
intended to increase the rate of growth of the Company, which may include plans
to acquire other companies, technologies, capabilities, manufacturing plants
and personnel. The Company's success in implementing an acquisition program will
depend, among other things, on the Company's ability to identify, evaluate,
negotiate, integrate and operate acquisitions; the availability of suitable
acquisitions to the Company, competition for such acquisitions, the cost and
availability of acquisition financing to the Company and others, and capital
market conditions generally, all of which are subject to uncertainty.
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Although the Company believes its plan to achieve timely Year 2000
readiness is reasonable based on known facts and circumstances it remains
possible that, dependant on factors and future events such as availability in
the labor force of information systems programmers and other information systems
personnel, the wide variety of information technology systems and components,
both hardware and software, that must be evaluated, the large number of external
parties with which the Company interacts, responsiveness of third parties beyond
the Company's control such as system vendors, service suppliers, and others with
whom the Company interacts, the capabilities of the information systems which
the Company intends to utilize, and the inability of available testing and
contingency planning procedures to identify and confirm with certainty the
resolution of all possible information technology or other Year 2000 problems,
achieving Year 2000 readiness may take longer, cost more, or be less complete
than the Company anticipates. Due to numerous uncertainties including those
listed above, no assurances can be given that the Company will achieve Year 2000
readiness on a timely basis, that third parties with whom the Company contracts
will achieve Year 2000 readiness on a timely basis, that the Company's Year 2000
project will be completed within current cost estimates, that the Year 2000
issue will not precipitate disruptions in financial markets or the economy
generally, which could materially, if indirectly, affect the Company, or that
the Year 2000 issue will not cause other consequences for the Company which
could be adverse and material.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
The 1999 Annual Meeting of Shareholders of the Company was held on May 5, 1999,
and proxies were solicited under Regulation 14A of the Securities Exchange Act
of 1934.
The following nominees for director were elected to serve as directors until the
2002 Annual Meeting of Shareholders:
VOTES VOTES
DIRECTOR FOR WITHHELD
-------- --- --------
Henry Curtis VII 13,880,698 104,143
C. Douglas Miller 13,883,876 100,965
G. Harold Northrop 13,877,321 107,519
The following directors continued in office as directors after the 1999 Annual
Meeting for the following terms:
DIRECTORS TERM EXPIRES
--------- ------------
Thomas F. Keller 2000
Daniel W. McGlaughlin 2000
Joe W. Rogers, Jr. 2000
William B. Stokely, III 2000
Larry L. Gellerstedt, III 2001
Hollis L. Harris 2001
W. Stell Huie 2001
James F. McDonald 2001
The shareholders also voted upon and approved the adoption of the American
Business Products, Inc. 1999 Incentive Compensation Plan.
VOTES VOTES
FOR AGAINST ABSTENTIONS
---------- --------- -----------
11,873,885 2,047,961 62,992
With respect to each of the foregoing matters, there were no broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
NUMBER DESCRIPTION
- ------ -----------
10.1 Employment Agreement dated May 11, 1999, between American
Business Products, Inc. and Larry L. Gellerstedt, III, filed
herewith.
10.2 Rights Agreement, dated as of May 5, 1999, between American
Business Products, Inc. and Equiserve Trust Company, N.A.,
which includes the form of Rights Certificate as Exhibit A and
the Summary of Rights to Purchase Common Stock as Exhibit B.
(Incorporated herein by reference to Exhibit 1 to the Current
Report on Form 8-K dated May 5, 1999, SEC File No.1-7088.)
10.3 American Business Products, Inc. 1999 Incentive Compensation
Plan, filed herewith.
27 Financial Data Schedules for Second Quarter 1999 10-Q (for SEC
use only)
b. Reports on Form 8-K.
On May 7, 1999 the Company filed a Current Report on Form 8-K, dated
May 5, 1999, to report the declaration of one common share purchase
right for each outstanding share of common stock of the Company payable
on May 17, 1999 to the shareholders of record as of the close of
business on that date.
On June 3, 1999 the Company filed a Current Report on Form 8-K, dated
June 1, 1999, to report the completion of the sale of its book
manufacturing business.
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.
AMERICAN BUSINESS PRODUCTS, INC.
(Registrant)
Date: July 21, 1999 /s/ Richard G. Smith
--------------------------------
Richard G. Smith
Vice President
and Chief Financial Officer
/s/ Raymond J. Wilson
--------------------------------
Raymond J. Wilson
Corporate Controller
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AMERICAN BUSINESS PRODUCTS, INC.
INDEX OF EXHIBITS
NUMBER DESCRIPTION
- ------ -----------
10.1 Employment Agreement dated May 11, 1999, between American Business
Products, Inc. and Larry L. Gellerstedt, III, filed herewith.
10.2 Rights Agreement, dated as of May 5, 1999, between American Business
Products, Inc. and Equiserve Trust Company, N.A., which includes the
form of Rights Certificate as Exhibit A and the Summary of Rights to
Purchase Common Stock as Exhibit B. (Incorporated herein by reference
to Exhibit 1 to the Current Report on Form 8-K dated May 5, 1999, SEC
File No.1-7088.)
10.3 American Business Products, Inc. 1999 Incentive Compensation Plan,
filed herewith.
27 Financial Data Schedules for Second Quarter 1999 10-Q (for SEC use
only)
20