Exhibit 99.1
Daisytek 2nd Quarter Revenue Strong; Earnings Impacted by Charges
ALLEN, Texas--Nov. 7, 2002--
Revenue Growth Overshadowed by Negative Tape and Argentina
Performance, Office Products Costs, Goodwill and Other Charges
Daisytek International Corporation (Nasdaq:DZTK) today announced results for
its second fiscal quarter. Revenues for the quarter increased 62% to $452.9
million compared to last year's quarterly revenues of $278.8 million. Excluding
revenues for ISA International plc, which the company began consolidating in May
2002, revenue growth was 13%. U.S. computer and office supplies revenue
increased 19% over the prior year quarter. International revenues increased 16%
over the prior year quarter, excluding Argentina. Including Argentina, growth in
international revenues was 8%.
Although top-line results were in line with company expectations,
performance of the Tape Company and Argentina businesses plus incremental costs
related to the company's U.S. office products rollout and distribution center
reorganization adversely impacted second quarter results. In addition, the
company recorded goodwill impairment charges of $13.8 million related to the
Tape and Argentina businesses and incremental balance sheet reserves and
adjustments of $14.8 million (after tax), resulting in a second quarter net loss
of $27.3 million, or $1.49 per share. Prior year second quarter net income from
continuing operations was $3.2 million, or $0.19 per diluted share.
All information in this release relates to Daisytek's financial data
reported in accordance with generally accepted accounting principles. The
company has provided a summary of specific run rate factors and balance sheet
adjustments affecting its second quarter earnings, to assist in understanding of
the financial results. This includes certain nonrecurring charges which in
previous quarters have been excluded from an adjusted presentation of earnings.
Jim Powell, president and CEO, said, "Even as we move through this
challenging transition period, the stage is being set for us to accomplish great
things. While it is disappointing that we have had these negative operating
impacts, they are short-term issues. We have full confidence in our future
strategies and potential."
Achievements for the second quarter include:
-- Consolidated revenue growth of 62% over prior year
-- Excluding ISA, organic revenue growth of 13%
-- Overall U.S. revenue growth of 19%
-- International revenue growth of 16%, excluding Argentina
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-- Completion of our first 900-page full-line computer and office
supplies catalog for the U.S. market
-- New distribution facilities in California and New York are operational
and ready for the January launch of the office products initiative in
the U.S.
-- Continued improvement by ISA
-- DSO of 45 days compared to 49 in the prior year and 46 in the first
quarter FY2003
-- Launched the 2003 edition of Reseller Toolkit, a unique Web-based
marketing resource for the company's reseller customers
U.S. division revenues increased 19% over the prior year second quarter. The
increase in domestic revenue was driven by organic growth, including strong
results related to Daisytek's initiative to drive sales through the
consumer-convenient channel - including grocery, drug, online and other
resellers. Daisytek's Digital Storage division, which distributes computer
media, accessories and supplies, had an outstanding quarter with revenue growth
of 34%. Daisytek's Arlington Industries division, which distributes copier and
fax supplies, reported revenue growth of 12%.
International revenues (excluding ISA's European territory and Argentina)
increased 16% over the prior year second quarter. Including Argentina, revenues
increased by 8%. Daisytek's businesses in Australia, Canada and Mexico continued
to deliver good results. In addition, the effects of the company's expansion of
its convenience strategy into international markets is beginning to have a
positive impact on operations.
The company's Argentina business was further impacted by countrywide
economic and political issues. Daisytek's second quarter net income includes a
goodwill write-off of $1.8 million, representing all of the goodwill balance
originating from its October 2000 acquisition of Etertin y CIA, S.A. in
Argentina. The company had previously announced that it was reviewing this
goodwill balance for impairment. Goodwill charges do not affect cash flows.
"Argentina remains an important part of our long-term international
strategy, although it currently represents less than 1% of our total revenue. We
believe conditions will eventually improve in Argentina; however, the recovery
period is very uncertain. Because our operations in Argentina are currently at a
near standstill, we considered it necessary to review goodwill and other asset
values," said Powell.
In addition to Argentina, other Latin American markets are experiencing
economic uncertainty at present. Because of this, the company has also increased
certain reserve levels for accounts receivable, inventory and other assets
related to Argentina and other Latin America business by approximately $3.3
million (after tax), and is currently reviewing all levels of business into
these markets.
During August, Daisytek announced the 100% completion of its acquisition of
ISA International plc, a pan-European distributor of computer supplies, which
indirectly owns 47% of Kingfield Heath Ltd., a U.K.-based wholesaler of office
products.
"ISA is performing as expected. Service levels have improved, in-stock
percentages have increased, and the French and German operations continue to
deliver improved earnings results. The
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ISA management team is focused on margin improvements, yet was able to
report a year-over-year revenue growth of 6% for the September 2002 quarter,"
said Powell. "The ISA team continues to deliver on their plan to improve
earnings and we are optimistic that ISA will become accretive in the latter part
of this fiscal year."
The Tape Company's revenues, which represent 4% of Daisytek's total second
quarter revenues, declined 11% over the prior year second quarter, with the
business continuing to experience negative industry trends. Recent price changes
have diminished management's long-term outlook for this industry. As a result,
Daisytek's second quarter net income includes a Tape Company goodwill write-off
of $12 million, representing approximately half of the total goodwill
originating from acquisitions by prior management of Steadi-Systems in fiscal
year 1998 and VTP in fiscal year 1999. Daisytek previously announced that it was
reviewing this goodwill balance for impairment. Goodwill charges do not affect
cash flows. Also in light of the industrywide issues and current management
forecasts, the company recorded increases in reserve levels for accounts
receivable, inventory and other assets totaling approximately $0.9 million
(after tax).
"While The Tape Company management team continues to do a great job of
developing new initiatives to drive growth and profitability and manage costs,
the industry issues outweigh their current efforts. We will continue to work to
improve growth and profitability, and have already integrated much of The Tape
Company's back-office administrative functions into Daisytek," Powell said.
The company confirmed that it is on track for the January 2003 launch of its
office products initiative. Daisytek's new regional distribution facilities in
Bakersfield, Calif., and Albany, NY, are ready to support the January office
products rollout. The addition of these two new facilities expands the company's
distribution network coast to coast. Not only will the two new distribution
centers allow Daisytek to take advantage of cost-effective ground
transportation, they will support the company's goal to be the lowest-cost
single-source provider of computer supplies and office products. The new
900-page full-line Business Products 2003 catalog is completed and the company
has already begun distribution.
"Costs related to our U.S. expansion into office products, including the
production of the new catalog; higher-than-expected costs in the build-out of
our new warehouses; certain delays in converting from more expensive air
delivery to lower-cost ground; and interest costs on investment in incremental
inventory, have negatively impacted our second quarter performance," Powell
said. "This past quarter, we made three decisions that negatively impacted
short-term earnings but that we believe were important for the long-term success
of our overall business: (1) We will reset our Memphis Superhub over a longer
time period, in order to maintain the highest-possible customer service and
minimize risks. We are expecting completion by the end of December. (2) We will
give away catalogs to many customers instead of selling them in order to get the
catalog in as many hands as possible, as quickly as possible, to accelerate
revenue. (3) We will reduce our short-term cooperative marketing efforts with
office products and computer supplies vendors to ensure we are promoting
long-term channel development.
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"Although we are disappointed that our near-term performance was impacted by
these issues, adding traditional office products to our range is an important
strategic move for Daisytek. We continue to invest the necessary time, patience
and funding to ensure the success of this long-term initiative. We are confident
that we can provide outstanding one-box service at a compelling value
proposition to our customers. Our entry into office products gives us access to
a market over $6 billion in size, which virtually doubles our current
addressable market. The pieces are in place for us to gain share in this market,
and we expect significant revenue and earnings growth in coming years."
Separately, the company continues progress on its U.S. restructuring plan
that includes information technology enhancements; improvements and
consolidation of subsidiary warehouses into new regional hub facilities to
leverage distribution costs; and centralization of certain back-office
resources. The restructuring plan is expected to significantly improve the
profitability and scalability of the business. After-tax restructuring charges
were $1.9 million for the second quarter, including $1.6 million related to
warehouse and distribution initiatives and $0.3 million related to back-office
improvements.
To summarize, management estimates the approximate impact of certain adverse
run-rate factors on the second quarter versus the company's earlier earnings
expectations includes the following:
The Tape Company $0.03
Argentina 0.01
Office products initiative 0.04
Interest costs 0.03
Kingfield Heath 0.01
---------
$0.12
=========
Second quarter charges relating to goodwill write-offs, balance sheet
reserves and adjustments, and the company's ongoing restructuring plan include
the following:
After-tax charge EPS Impact
---------------- ------------
Items affecting gross margin:
Reserves/costs related to office
products initiative, logistics, and
vendor programs $6.8 million $0.37
Reserves related to The Tape Company 0.7 million 0.04
Reserves related to South American
operations 2.4 million 0.13
Other 0.3 million 0.03
---------------- ------------
$10.2 million $0.57
Items affecting selling, general and administrative expenses:
Goodwill impairment - Tape (no tax
effect) $12.0 million $0.65
Goodwill impairment - Argentina (no
tax effect) 1.8 million 0.10
Reserves related to The Tape Company 0.2 million 0.01
Reserves related to South American
operations 0.9 million 0.05
Deal costs, professional costs and
other 1.6 million 0.09
---------------- ------------
$16.5 million $0.90
Items affecting restructuring and nonrecurring costs:
Ongoing restructuring plan $1.9 million $0.10
---------------- ------------
Total $28.6 million $1.57
================ ============
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Margins were adversely impacted during the second quarter for the items
detailed above. Reported gross margins, including all of these items, were
approximately 7%. This quarter's SG&A, including all of these items, was
approximately 13% of total revenue. Resulting EBIT, including all of these
items, was a loss of $30.5 million.
Net debt (total debt less cash) increased to approximately $208.4 million
during the quarter. The increase over last year was mainly attributable to ISA's
acquisition cost, ISA assumed debt and increases in working capital deriving
from revenue growth and new product stocking at the new U.S. regional
distribution centers. Due to the magnitude of these charges, the company is
requesting certain U.S. bank covenant amendments and expects approval shortly.
The company is providing updated guidance to the market to help facilitate a
better understanding of Daisytek's outlook. These estimates are the company's
current targets, and are not predictions of actual performance. The company's
actual performance may differ from its projections; therefore, the
forward-looking information below must be read in conjunction with the business
risks listed below as well as with those highlighted in Daisytek's 10-K for the
fiscal year ended March 31, 2002.
Ralph Mitchell, executive vice president and CFO, said, "Despite Tape
Company and international challenges, Daisytek's combined revenue for Fiscal
2003 is still projected to be $1.8 billion to $1.9 billion. We expect some
second quarter earnings run-rate issues, including Tape and Argentina
performance and the costs and factors related to U.S. expansion into office
products, to persist into the third quarter and to a lesser extent into the
fourth quarter. In addition, we are dealing with disruption of supplies in the
U.S. due to the West Coast dock strike and back-ups. We are targeting ISA to
break even with funding costs in our third and fourth quarters or possibly be a
small accretion, after funding costs. As a result, we expect earnings of between
$0.16 and $0.18 per share in the December 2002 quarter and between $0.20 and
$0.22 per share in the March 2003 quarter. This is before certain charges we
expect for U.S. restructurings. These charges are expected to total $2.5 to $3
million in the December 2002 quarter and $1 to $2 million in the March 2003
quarter, before tax.
"We will review progress of our office products initiative and continued
improvements at ISA in early 2003 to determine our expectations for FY2004."
Powell concluded, "We believe our geographic and product expansions will
establish Daisytek as the world's leading distributor of computer supplies,
office products and accessories. We are committed to being the low-cost provider
in each of our markets. Ultimately, we believe that our focus on supply-chain
efficiencies and dedicated cost management, coupled with our strategies for the
long term, will create significant shareholder value," said Powell. Daisytek's
strategies for future growth are based on the following:
-- Capitalizing on the strong growth in computer supplies;
-- Expanding the supplies offering to include a full line of
office products;
-- Investing in the development of emerging, higher growth customer
channels such as drug and grocery chains and the Web-based divisions of
major corporate resellers;
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-- Developing new client services, such as the customer care and demand
generation services of the fee-based VirtualDemand division;
-- Expanding products and services described above into new and existing
international markets; and
-- Pursuing financially attractive acquisitions that support these
strategies.
Daisytek will conduct an earnings conference call today at 3:30 p.m. CST.
Please dial 801-303-7410 by 3:20 p.m. and ask to be included. Two hours later, a
recorded playback can be heard for 14 days at 402-220-1490 using access code
1494. Check www.daisytek.com for more details on the call, playback and webcast.
NOTE: If you encounter telecommunications difficulties during the call, please
redial the call-in number immediately.
About Daisytek
Daisytek International is a worldwide distributor of computer and office
supplies, peripherals and professional tape media. In addition, it offers
fee-based marketing, demand-generation and fulfillment services. Daisytek sells
its products and services in the United States, Europe, Canada, Australia,
Mexico and South America, distributing more than 25,000 products from about 500
manufacturers, including printer supplies, magnetic and data storage media,
video and motion picture film. This news release and more information about
Daisytek are available at www.daisytek.com, which is not part of this release.
Daisytek is a registered trademark of Daisytek, Incorporated. All rights
reserved.
The matters discussed in this news release contain both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking information within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. You can identify these statements by the
fact that they do not relate strictly to historical or current facts, but rather
reflect our current expectations concerning future results and events.
Forward-looking statements relating to such matters as our financial condition
and operations, including forecasted information, are based on our management's
current intent, belief or expectations regarding our industry or us. These
forward-looking statements including forecasts are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. In addition, some forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from what is expected or
forecasted in such forward-looking statements. We undertake no obligation to
update publicly any forward-looking statement for any reason, even if new
information becomes available or other events occur in the future.
Certain factors, including but not limited to, general economic conditions,
industry trends, the loss of or inability to hire skilled personnel, the loss of
key suppliers or customers, the loss or material decline in service of strategic
product shipping relationships, customer demand, product availability,
competition (including pricing and availability), risks inherent in acquiring,
integrating and operating new businesses and investments, concentrations of
credit risk, distribution efficiencies, capacity constraints, technological
difficulties, the volatility of our common stock, economic and political
uncertainties arising as a result of terrorist attacks, seasonality, exchange
rate fluctuations, foreign currency devaluations and the regulatory and trade
environment (both domestic and foreign) could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. There may be additional risks that we do not
currently view as material or that are not presently known.
Other factors that could affect Daisytek are set forth in Daisytek's 10-K
for the fiscal year ended March 31, 2002.
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Daisytek International Corporation and Subsidiaries
Unaudited Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------------------- -------------------
Net revenues $452,907 $278,769 $855,403 $551,721
Cost of revenues 422,533 249,148 786,340 490,652
------------------- -------------------
Gross profit 30,374 29,621 69,063 61,069
Selling, general and
administrative expenses 57,982 22,742 89,926 45,391
Restructuring and nonrecurring
costs 2,900 -- 5,053 4,425
------------------- -------------------
Income from continuing
operations (30,508) 6,879 (25,916) 11,253
Interest expense, net 4,068 1,786 6,996 3,340
------------------- -------------------
Income from continuing
operations before
income taxes (34,576) 5,093 (32,912) 7,913
Provision for income taxes (7,459) 1,884 (7,192) 2,968
------------------- -------------------
Income from continuing
operations before
equity in net income
of affiliate and
minority interest (27,117) 3,209 (25,720) 4,945
Equity in net income of
affiliate and minority
interest (225) -- 620 --
------------------- -------------------
Income from continuing
operations (27,342) 3,209 (25,100) 4,945
Discontinued operations
Income from operations
of discontinued
subsidiary, net of tax -- (1,120) -- (1,085)
------------------- -------------------
Net income $(27,342) $2,089 $(25,100) $3,860
=================== ===================
Net income per common share:
Basic
Income from continuing
operations $(1.49) $0.21 $(1.38) $0.33
Income from operations of
discontinued subsidiary,
net of tax -- (0.08) -- (0.07)
------------------- -------------------
Net income $(1.49) $0.13 $(1.38) $0.26
=================== ===================
Diluted
Income from continuing
operations $(1.49) $0.19 $(1.38) $0.30
Income from operations of
discontinued subsidiary,
net of tax -- (0.07) -- (0.07)
------------------- -------------------
Net income $(1.49) $0.12 $(1.38) $0.23
=================== ===================
Weighted-average common and common share equivalents outstanding:
Basic 18,355 15,498 18,173 15,116
Diluted 18,355 17,117 18,173 16,558
Daisytek International Corporation and Subsidiaries
Unaudited Consolidated Balance Sheet Data
(In Thousands) September 30, March 31,
2002 2002
---------- -----------
Total assets $ 595,061 $ 414,390
Working capital, excluding debt
and cash $ 256,517 $ 206,264
Total net debt, excluding cash $ 208,351 $ 111,640
Shareholders' equity $ 172,743 $ 196,020
CONTACT: Daisytek International Corporation
Jim Powell or Ralph Mitchell, 972/881-4700
or
Michael A. Burns & Associates
Craig McDaniel, APR, 214/521-8596 or 214/616-7186 cellular
cmcdaniel@mbapr.com
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