========================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 1-12551
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 Inverness Way East, Suite 160, Englewood, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECKMARK 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 / /
As of August 1, 2000, the Registrant had 49,274,908 shares of Common
Stock, $0.01 par value, outstanding.
========================================================================
1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following should be read in conjunction with the consolidated
historical financial statements and related notes of Mail-Well, Inc. and
its subsidiaries (the "Company") included elsewhere in this report. In
addition to the historical information contained herein, this report
contains forward-looking statements. The reader of this information
should understand that all such forward-looking statements are subject
to various uncertainties and risks that could affect their outcome. The
Company's actual results could differ materially from those suggested by
such forward-looking statements. Factors which could cause or
contribute to such differences include, but are not limited to, the
following:
* paper and other raw material costs and the ability to pass
through paper costs to customers
* general labor conditions
* ability to obtain productivity savings
* postage rates and other changes in the direct mail industry
* competition from electronic media, including the internet
* demand for printed materials
* interest rates and foreign currency exchange rates
* ability to obtain additional financing
* availability of acquisition opportunities and their related
costs
* ability to achieve cost savings from integration of
acquisitions
This entire report should be read to put such forward-looking statements
in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
OVERVIEW, HISTORICAL FINANCIAL DATA BY SEGMENT (IN THOUSANDS)
The following table presents historical financial data by segment,
including acquisitions from their purchase dates.
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales
Commercial Printing $222,282 $168,100 $ 445,682 $354,178
Envelope 209,410 176,543 411,763 371,066
Printed Office Products 94,295 41,277 163,514 76,226
Label 58,915 53,126 113,585 77,993
-------- -------- ---------- --------
Total net sales $584,902 $439,046 $1,134,544 $879,463
======== ======== ========== ========
Operating income
Commercial Printing $ 14,934 $ 13,827 $ 32,627 $ 28,253
Envelope 19,653 22,856 41,795 47,258
Printed Office Products 9,439 4,049 17,632 7,008
Label 4,388 3,941 7,939 5,622
Corporate (7,483) (5,756) (13,595) (11,596)
-------- -------- ---------- --------
Total operating income 40,931 38,917 86,398 76,545
Interest expense (23,944) (14,049) (42,936) (26,816)
Other income (expense) 207 528 329 704
Income tax expense (6,336) (10,412) (17,269) (20,677)
-------- -------- ---------- --------
Income from continuing operations $ 10,858 $ 14,984 $ 26,522 $ 29,756
======== ======== ========== ========
22
Net sales for the quarter ended June 30, 2000 increased 33.2% to
$584.9 million compared to net sales of $439.0 million for the quarter
ended June 30, 1999. This increase in net sales was attributable to
sales from companies acquired during 2000, a full quarter of sales from
companies acquired during 1999 and internal growth in Commercial
Printing and Label offset by a decline in pricing within the Envelope
segment. Gross profit of $137.1 million for the quarter ended June 30,
2000 represents a 28.9% increase over the quarter ended June 30, 1999.
Expressed as a percent of net sales, gross profit decreased by 80 basis
points to 23.4% for the quarter ended June 30, 2000 compared to 24.2%
for the quarter ended June 30, 1999. This decrease was primarily due to
unfavorable pricing in the envelope business offset by acquisitions with
higher gross profit percentages. Expressed as a percent of net sales,
other operating costs (which includes selling, administrative and other
expense) increased to 16.4% for the quarter ended June 30, 2000 from
15.4% in the quarter ended June 30, 1999. The increase was mainly due
to the impact of acquisitions. Operating income increased 5.2% from the
quarter ended June 30, 1999.
Net income from continuing operations for the quarter ended June
30, 2000 decreased 27.5% to $10.9 million from $15.0 million in the
second quarter of the prior year. This decrease was primarily due to a
70% increase in interest expense, partially offset by reduced income tax
expense. Earnings per diluted share from continuing operations
decreased 25.0% to $0.21 in the quarter ended June 30, 2000 from $0.28
in 1999.
Net sales for the six months ended June 30, 2000 increased 29.0%
to $1,134.5 million compared to net sales of $879.5 million for the six
months ended June 30, 1999. This increase in net sales was attributable
to sales from companies acquired during 2000, a full six months of sales
from companies acquired during 1999 and internal growth in Commercial
Printing and Label offset by a decline in volume and pricing within the
Envelope segment. Gross profit of $267.2 million for the six months
ended June 30, 2000 represents a 30.4% increase over the six months
ended June 30, 1999. Expressed as a percent of net sales, gross profit
increased by 30 basis points to 23.6% for the six months ended June 30,
2000 compared to 23.3% for the six months ended June 30, 1999. This
increase was primarily due to acquisitions with higher gross profit
percentages offset by pricing in the envelope business expressed as a
percent of net sales, other operating costs (which includes selling,
administrative and other expense) increased to 15.9% for the six months
ended June 30, 2000 from 14.6% in the six months ended June 30, 1999.
The increase was mainly due to the impact of acquisitions. Operating
income increased 12.9% from the six months ended June 30, 1999.
Net income from continuing operations for the six months ended
June 30, 2000 decreased 11.1% to $26.5 million from $29.8 million in the
six months of the prior year. This decrease was primarily due to a 60%
increase in interest expense, partially offset by reduced income tax
expense. Earnings per diluted share from continuing operations
decreased 8.9% to $0.51 for the six months ended June 30, 2000 from
$0.56 in 1999.
23
RESULTS OF OPERATIONS FOR SIGNIFICANT BUSINESS SEGMENTS
COMMERCIAL PRINTING
- -------------------
QUARTER ENDED JUNE 30, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999
NET SALES--Net sales increased by $54.1 million (32.2%) for the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999,
primarily due to a volume increase of approximately 15% and the balance
due to acquisitions in 1999 and 2000.
OPERATING INCOME--The increase in operating income from $13.8
million to $14.9 million in the quarter ended June 30, 2000 was due to
acquisitions in 1999 and 2000 as volume impact was offset by changes in
product mix. Total cost of sales, as a percent of sales, increased from
77.3% for the quarter ended June 30, 1999 to 78.0% for the quarter ended
June 30, 2000. This increase was primarily due to general cost
increases, mainly in raw materials, and product mix.
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX-MONTHS ENDED JUNE 30,
1999
NET SALES--Net sales increased by $91.5 million (25.8%) for the
six-months ended June 30, 2000 compared to the six-months ended June 30,
1999, primarily due to a volume increase of approximately 15% and the
balance due to acquisitions in 1999 and 2000.
OPERATING INCOME--The majority of the increase in operating income
from $28.3 million to $32.6 million in the six-months ended June 30,
2000 was due to acquisitions in 1999 and 2000 as volume impact was
offset by changes in product mix. Total cost of sales, as a percent of
sales was the same (77.7%) for both six-month periods.
ENVELOPE
- --------
QUARTER ENDED JUNE 30, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999
NET SALES--Net sales increased by $32.9 million (18.6%) for the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999.
The majority of the increase (14%) in net sales was attributable to
sales from a company acquired during 2000 and a full quarter of sales
from a company acquired during 1999, with the remainder resulting from
management's strategy to grow sales volume by lowering prices to meet
competitor's prices.
OPERATING INCOME--The decrease in operating income from $22.8
million to $19.6 million in the quarter ended June 30, 2000 versus the
quarter ended June 30, 1999 was mostly due to product mix changes and
general pricing pressures offset by the impact of 1999 and 2000
acquisitions. Total cost of sales, as a percent of sales, increased from
74.6% for the quarter ended June 30, 1999 to 79.2% for the quarter ended
June 30, 2000. The increase was due to product mix changes and pricing
pressures. The strategy to grow sales in the second quarter by lowering
prices was successful, but resulted in reduced operating margins.
Rising paper prices, which could not in some cases be immediately passed
on to customers also contributed to reduced operating margins.
24
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX-MONTHS ENDED JUNE 30,
1999
NET SALES--Net sales increased by $40.7 million (11.0%) for the
six-months ended June 30, 2000 compared to the six-months ended June 30,
1999. The majority of the increase in net sales was attributable to
sales from a company acquired during 2000 and a full six months of sales
from a company acquired during 1999. Increases in volume for the
quarter ended June 30, 2000 were offset by a decrease in volume for the
quarter ended March 31, 2000.
OPERATING INCOME--The decrease in operating income from $47.3
million to $41.8 million in the six-months ended June 30, 2000 versus
the six-months ended June 30, 1999 was due mostly to general pricing
pressures and product mix changes. Total cost of sales, as a percent of
sales, increased from 75.3% for the six-months ended June 30, 1999 to
78.5% for the six-months ended June 30, 2000. The increase was due to
product mix changes and pricing pressures offset by the impact of 1999
and 2000 acquisitions. The strategy to grow sales in the second quarter
by lowering prices was successful, but resulted in reduced operating
margins. Rising paper prices, which could not in some cases be passed
on immediately to customers also contributed to reduced operating
margins.
PRINTED OFFICE PRODUCTS
- -----------------------
QUARTER ENDED JUNE 30, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999
NET SALES--Net sales increased by $53.1 million (128.4%) for the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999.
This increase in net sales was attributable to sales from a company
acquired during 2000 offset by decreases in volume at existing
businesses. Increases in specialty label and other specialty products
like VersaSeal(R) have been more than offset by decreases in the
traditional forms business.
OPERATING INCOME--The majority of the increase in operating income
from $4.0 million to $9.4 million in the quarter ended June 30, 2000 was
due to acquisitions in 1999 and 2000 and a change in product mix. Total
cost of sales, as a percent of sales, decreased from 77.9% for the
quarter ended June 30, 1999 to 68.0% for the quarter ended June 30,
2000. Total cost of sales, as a percent of sales, was 77.7% for the
quarter ended June 30, 2000 excluding acquisitions from 2000. The
decrease was due to lower material costs through aggressive management
of our main supplier agreement and effects of a new waste reduction
program offset by the negative impact of changes in product mix.
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX-MONTHS ENDED JUNE 30,
1999
NET SALES--Net sales increased by $87.3 million (114.5%) for the
six-months ended June 30, 2000 compared to the six-months ended June 30,
1999. This increase in net sales was attributable to sales from a
company acquired during 2000 and from companies acquired during 1999
offset by decreases in volume at existing businesses. Increases in
specialty label and other specialty products like VersaSeal(R) have been
more than offset by decreases in the traditional forms business.
OPERATING INCOME--The majority of the increase in operating income
from $7.0 million to $17.6 million in the six-months ended June 30, 2000
was due to acquisitions in 1999 and 2000, productivity improvements and
a change in product mix. Total cost of sales, as a percent of sales,
decreased from 80.2% for the six-months ended June 30, 1999 to 68.7% for
the six-months ended June 30, 2000. Total cost of sales, as a percent
of sales, was 79.2% for the quarter ended June 30, 2000 excluding
acquisitions from 1999 and 2000. The decrease was due to lower material
costs through aggressive management of our main supplier agreement and
effects of a new waste reduction program offset by the negative impact
of changes in product mix.
25
CORPORATE
- ---------
Certain major production equipment is accounted for as an
operating lease on a consolidated basis while treated as a purchase on a
segment level. The Company classifies the excess of the operating lease
expense over depreciation as a corporate expense in analyzing segment
operations. The Company does not include the amortization of intangibles
recorded in acquisitions in segment results but rather includes it on a
corporate basis. In addition, corporate expenses include corporate
administrative expense, loss (gain) on disposal of assets and a
reduction of cost of sales from certain supplier rebate programs not
allocated to segments.
Corporate expenses for the quarter and six-months ended June 30,
2000 increased $1.7 million and $2.0 million respectively compared to
1999 as a result of increases in amortization expense and operating
lease expense offset by an increase in corporate retained rebates.
Amortization expense increased as a result of the acquisitions made in
1999 and 2000.
INTEREST EXPENSE
- ----------------
Interest expense, including accounts receivable securitization
discount, increased $9.9 million and $16.1 million, respectively, for
the quarter and six-months periods ended ended June 30, 2000 compared to
the same periods of 1999. Both increases occurred as a result of higher
average bank debt balances, primarily due to acquisitions, and an
increase in the weighted-average borrowing rate due to the refinancing
of certain bank facilities and a general increase in market interest
rates. The Company continued to participate in its accounts receivable
securitization agreement whereby it can sell, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable up to a maximum of $75.0 million until July 2004. At June 30,
2000 and 1999, $140.0 million and $96.0 million, respectively, had been
sold under this agreement. The receivables were sold at a discount
slightly above the prevailing commercial paper rate, plus certain other
fees.
INCOME TAX EXPENSE
- ------------------
The effective tax rate was 36.9% and 39.4% for the quarter and
six-months periods ended June 30, 2000, respectively, compared to 41.0%
for both periods in 1999. The effective tax rate was higher than the
federal statutory rates due to state and provincial income taxes and
certain goodwill amortization that is not tax deductible. See Note 9 of
the Notes to Consolidated Financial Statements included in the Company's
1999 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOW
- --------------------
Net cash flow provided by operating activities was $47.3 million
and $74.7 million for the six-months ended June 30, 2000 and 1999,
respectively. The decrease in cash flow provided by operating
activities is due to the increase in working capital. The largest
contributor to the increase in working capital is accounts receivable.
Accounts receivable has increased mostly in the Commercial Printing and
Label segments because of higher sales in the six months ended June 30,
2000 compared to the prior year. Acquisitions required cash payments of
$327.7 million and $162.6 million for the six-months ended June 30, 2000
and 1999, respectively. Other investing activities, excluding investment
in marketable securities, were $43.9 million and $39.7 million for the
six months ended June 30, 2000 and 1999, respectively. The investment in
equity securities of $12.6 million in the six-months ended June 30, 2000
resulted from funding of supplemental retirement benefits of certain
employees or former employees of American Business Products, Inc. and an
investment in Sprockets.com. Net cash flow from financing activities
was $332.7 million and $135.3 million for the six-months ended June 30,
2000 and 1999, respectively. See footnote 3 of the financial statements
contained in Item 1 for explanation of the 2000 financing activities.
At June 30, 2000, the Company had approximately $194.3 million of
available credit under its various credit facilities.
26
FOREIGN CURRENCY
- ----------------
The Company's foreign currency exposure primarily relates to its
Canadian operations. Net sales provided by the Canadian operations for
the six-months ended June 30, 2000 and 1999 was USD $104.1 million and
USD $95.4 million, respectively. The impact of the change in Canadian
Dollar exchange rates was immaterial.
SEASONALITY AND ENVIRONMENT
- ---------------------------
As the Company expands its operations into more commercial
printing and labels segments, it has become more impacted by
seasonality. Management expects the first and third quarter to report
higher sales for the Commercial Printing segment because of annual
report and car brochure business. In addition, the third quarter is
traditionally the strongest for the Label segment.
The effects of environmental matters had no material financial
impact on the historical operations of the Company and are not expected
to have a material effect on the Company's liquidity and capital
resources going forward.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the "Statement"), as
amended, which will be effective beginning in the year 2001, requires
derivative instruments to be recorded in the balance sheet at their fair
value with changes in fair value being recognized in earnings unless
specific hedging accounting criteria are met. Because of the Company's
minimal hedging and derivative activity, management does not anticipate
that the adoption of the statement will have a significant impact on its
operations and financial position.
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.
MAIL-WELL, INC.
(Registrant)
By /s/ Gerald F. Mahoney
---------------------------
Date: August 15, 2000 Gerald F. Mahoney
Chairman of the Board/
Chief Executive Officer
By /s/ Gary H. Ritondaro
---------------------------
Date: August 15, 2000 Gary H. Ritondaro
Senior Vice President,
Chief Financial Officer
31