<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 30, 2000 1-6528
-------------------------------- -------------------------
For the quarterly period ended Commission file number
WALLACE COMPUTER SERVICES, INC.
--------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2515832
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2275 Cabot Drive Lisle, Illinois 60532
-------------------------------------------- ----------
(Address of Principal Executive Offices) (ZIP CODE)
(630) 588-5000 40,353,470
-------------------------------- ------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of June 1, 2000)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
<PAGE> 2
Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended April 30, 2000
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in
the opinion of the management, necessary to a fair statement of the
results of operations and financial position for the nine months ended
April 30, 2000, subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30
--------------------------------------------------------
% %
2000 Sales 1999 Sales
------------------------- -------------------------
<S> <C> <C> <C> <C>
Net Sales $1,160,582,000 100.0 $1,145,953,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 812,817,000 70.0 787,502,000 68.7
Selling and administrative expenses 204,831,000 17.6 184,631,000 16.1
Provision for depreciation and
amortization 58,452,000 5.0 57,199,000 5.0
Restructuring charge 38,896,000 3.4 - -
-------------- ----- -------------- -----
Total costs and expenses 1,114,996,000 96.1 1,029,332,000 89.8
-------------- ----- -------------- -----
Operating Income 45,586,000 3.9 116,621,000 10.2
-------------- ----- -------------- -----
Other income (3,190,000) (0.3) - -
Net interest expense 23,131,000 2.0 22,271,000 1.9
-------------- ----- -------------- -----
Income before Income Taxes 25,645,000 2.2 94,350,000 8.2
Provision for Income Taxes (Note 8) 13,464,000 1.2 37,740,000 3.3
-------------- ----- -------------- -----
Net Income $ 12,181,000 1.0 $ 56,610,000 4.9
============== ===== ============== =====
Basic Earnings per Share $0.29 $1.34
===== =====
Diluted Earnings per Share $0.29 $1.34
===== =====
Average Common Shares Outstanding 41,386,000 42,166,000
========== ==========
Diluted Average Common Shares Outstanding 41,646,000 42,373,000
========== ==========
Dividends Declared Per Share $0.495 $0.480
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 3
Wallace Computer Services, Inc. Page 3
FORM 10-Q
For Quarterly Period Ended April 30, 2000
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in
the opinion of the management, necessary to a fair statement of the
results of operations and financial position for the three months ended
April 30, 2000, subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
April 30
------------------------------------------------------
% %
2000 Sales 1999 Sales
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net Sales $388,718,000 100.0 $384,731,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 276,183,000 71.0 262,238,000 68.2
Selling and administrative expenses 71,313,000 18.3 61,108,000 15.9
Provision for depreciation and
amortization 19,130,000 4.9 19,213,000 5.0
Restructuring charge 38,896,000 10.0 - -
------------ ----- ------------ -----
Total costs and expenses 405,522,000 104.3 342,559,000 89.0
------------ ----- ------------ -----
Operating (Loss) Income (16,804,000) (4.3) 42,172,000 11.0
------------ ----- ------------ -----
Other income (3,190,000) (0.8) - -
Net interest expense 8,818,000 2.3 7,863,000 2.0
------------ ----- ------------ -----
(Loss) Income before Income Taxes (22,432,000) (5.8) 34,309,000 8.9
(Recovery)/Provision for Income Taxes
(Note 8) (5,767,000) (1.5) 13,724,000 3.6
------------ ----- ------------ -----
Net (Loss) Income $(16,665,000) (4.3) $ 20,585,000 5.4
============ ===== ============ =====
Basic (Loss) Earnings per Share $(0.41) $0.49
====== =====
Diluted (Loss) Earnings per Share $(0.41) $0.49
====== =====
Average Common Shares Outstanding 40,403,000 41,964,000
========== ==========
Diluted Average Common Shares Outstanding 40,407,000 42,182,000
========== ==========
Dividends Declared Per Share $0.165 $0.160
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 4
Wallace Computer Services, Inc. and Subsidiaries Page 4
Consolidated Balance Sheet
<TABLE>
<CAPTION>
April 30, 2000 July 31, 1999
(Unaudited) (Audited)
Assets ----------------------------------
------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 6,511,000 $ 8,033,000
Accounts receivable 303,694,000 297,677,000
Less-allowance for doubtful accounts 5,650,000 5,582,000
--------------- ---------------
Net receivables 298,044,000 292,095,000
Inventories (Note 1) 124,009,000 107,540,000
Current and deferred income taxes 39,057,000 37,422,000
Advances, prepaids, and other expenses 11,333,000 3,284,000
--------------- ---------------
Total current assets 478,954,000 448,374,000
--------------- ---------------
Property, plant and equipment, at cost 847,157,000 846,898,000
Less-reserves for depreciation and amortization 430,737,000 409,891,000
--------------- ---------------
Net property, plant and equipment 416,420,000 437,007,000
--------------- ---------------
Intangible assets arising from acquisitions 299,337,000 306,117,000
Cash surrender value of life insurance 50,809,000 58,796,000
Systems development costs 53,926,000 43,337,000
Other assets 3,919,000 4,028,000
--------------- ---------------
Total assets $ 1,303,365,000 $ 1,297,659,000
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion long-term debt $ 2,620,000 $ 2,290,000
Short-term notes payable 24,207,000 21,222,000
Accounts payable 94,312,000 85,577,000
Accrued salaries, wages, profit sharing and other 72,554,000 82,776,000
--------------- ---------------
Total current liabilities 193,693,000 191,865,000
--------------- ---------------
Long-term debt 458,911,000 416,653,000
Deferred income taxes 63,721,000 64,438,000
Deferred compensation and retirement benefits 37,325,000 31,992,000
Other long-term liabilities 8,329,000 9,144,000
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at April 30, 2000 and July 31, 1999 45,764,000 45,764,000
Additional capital 37,841,000 37,528,000
Deferred compensation 4,771,000 3,883,000
Retained earnings 567,252,000 581,392,000
Treasury stock (at cost)- 5,585,262 shares at
April 30, 2000 and 3,546,243 shares at
July 31, 1999 (114,242,000) (85,000,000)
--------------- ---------------
Total stockholders' equity 541,386,000 583,567,000
--------------- ---------------
Total liabilities and stockholders' equity $ 1,303,365,000 $ 1,297,659,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
Wallace Computer Services, Inc. and Subsidiaries Page 5
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30
----------------------------
2000 1999
Cash Flows from Operating Activities: ------------ ------------
<S> <C> <C>
Net income from operations $ 12,181,000 $ 56,610,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 58,452,000 57,199,000
Restructuring charge 30,896,000 0
Deferred taxes (302,000) (3,909,000)
Gain on disposal of property (306,000) (584,000)
Changes in assets and liabilities
Accounts receivable (4,036,000) (38,086,000)
Inventories (16,182,000) 300,000
Advances and prepaid expenses (1,379,000) 2,759,000
Prepaid taxes (1,635,000) (297,000)
Other assets (17,106,000) (27,247,000)
Accounts payable and other liabilities (2,759,000) 10,068,000
Accrued income taxes (750,000) 15,383,000
Deferred compensation and retirement benefits 5,333,000 2,320,000
------------ ------------
Net cash provided by operating activities 62,407,000 74,516,000
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (41,957,000) (36,788,000)
Proceeds from disposal of property 512,000 5,597,000
Net construction funds held by trustee 0 1,280,000
Other capital investments - (acquisitions)/divestitures (10,067,000) 7,044,000
------------ ------------
Net cash used in investing activities (51,512,000) (22,867,000)
------------ ------------
Cash Flows from Financing Activities:
Treasury stock transactions (34,323,000) (23,780,000)
Cash dividends paid (20,357,000) (20,095,000)
Net proceeds from short-term debt 2,984,000 4,257,000
Retirement of long-term debt (57,272,000) (69,532,000)
Proceeds from issuance of long-term debt 96,551,000 54,000,000
------------ ------------
Net cash used in financing activities (12,417,000) (55,150,000)
------------ ------------
Net changes in cash and cash equivalents (1,522,000) (3,501,000)
Cash and cash equivalents at beginning of year 8,033,000 3,501,000
------------ ------------
Cash and cash equivalents at April 30 $ 6,511,000 $ 0
============ ============
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 23,412,000 $ 17,852,000
Income taxes paid (net of refunds received) 18,655,000 24,257,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
Wallace Computer Services, Inc. and Subsidiaries Page 6
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Note 1 - Inventories
Inventories at April 30, 2000, and July 31, 1999, were as follows:
April 30, 2000 July 31, 1999
-------------- -------------
Raw materials $ 15,235,000 $ 18,043,000
Work in process 32,313,000 16,948,000
Finished products 76,461,000 72,549,000
-------------- -------------
$124,009,000 $107,540,000
============== =============
Certain inventories are stated on the last-in, first-out (LIFO) basis
for their labor and material content, and other inventories are stated
on the first-in, first-out (FIFO) basis.
Because the inventory determination under the LIFO method can only be
made at the end of each fiscal year based on the inventory levels and
costs at that time, interim period LIFO determinations must necessarily
be based upon management's estimates of expected year-end inventory
levels and costs.
Note 2 - Stock Options
As of April 30, 2000, options to purchase 2,989,452 shares of common
stock were outstanding and 2,931,352 shares of common stock were
available for future grants under the Company's Stock Incentive and
Employee Stock Purchase Plans.
The Company has authorized 100,000,000 shares of common stock and
issued 45,764,054 as of April 30, 2000. Of these shares, 5,585,262 were
held in treasury as of April 30, 2000. The number of shares held in
treasury at July 31, 1999 was 3,546,243.
Note 3 - Segment Reporting
The Company adopted SFAS No. 131 for fiscal year-ended 1999. The
Company operates in two business segments. Each segment offers
distinctive products and services and are managed separately because of
their unique production, distribution, and marketing requirements. The
Company's two reportable segments are Forms and Labels, and Integrated
Graphics.
The principal products and services supplied by the Forms and Labels
Segment include the design, manufacture and sales of both paper based
and electronic business forms, the manufacture of both electronic data
processing (EDP) labels and prime labels, and the manufacture and
distribution of a standard line of office products. The principal
products and services supplied by the Integrated Graphics Segment
include the design and manufacture of high-color, high-quality
marketing and promotional materials, and the manufacture of direct
response printing materials.
<PAGE> 7
Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Note 3 - Segment Reporting (continued)
The Company's accounting policies for the segments are the same as
those described in the Summary of Significant Accounting Policies in
the Company's 1999 Annual Report. Management evaluates segment
performance based on segment profit or loss before interest and income
taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are
accounted for at standard cost.
Summarized segment data and a reconciliation to the consolidated totals
for the nine months ended April 30, 2000, and April 30, 1999 and three
months ended April 30, 2000, and April 30, 1999 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended April 30, 2000 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forms and Labels Segment $ 579,024 $ 4,263 $ 53,240
Integrated Graphics Segment 581,558 22,465 4,514
-------------------------------------------------------------------------------------------------
Segment Total 1,160,582 26,728 57,754
-------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (19,941)
Restructuring Charge - Corporate 0 12,168 (12,168)
-------------------------------------------------------------------------------------------------
Consolidated $1,160,582 $38,896 $ 25,645
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended April 30, 1999 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forms and Labels Segment $ 574,526 0 $ 81,660
Integrated Graphics Segment 571,427 0 34,961
-------------------------------------------------------------------------------------------------
Segment Total 1,145,953 0 116,621
-------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (22,271)
Restructuring Charge - Corporate 0 0 0
-------------------------------------------------------------------------------------------------
Consolidated $1,145,953 0 $ 94,350
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended April 30, 2000 External Restructuring Income (Loss) before
(Amounts in Thousands) Sales Charge Income Taxes
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forms and Labels Segment $183,668 $ 4,263 $ 7,041
Integrated Graphics Segment 205,050 22,465 (11,676)
-------------------------------------------------------------------------------------------------
Segment Total 388,718 26,728 (4,635)
-------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (5,629)
Restructuring Charge - Corporate 0 12,168 (12,168)
-------------------------------------------------------------------------------------------------
Consolidated $388,718 $38,896 $(22,432)
=================================================================================================
</TABLE>
<PAGE> 8
Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Note 3 - Segment Reporting (continued)
<TABLE>
<CAPTION>
Three Months Ended April 30, 1999 External Restructuring Income before
(Amounts in Thousands) Sales Charge Income Taxes
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forms and Labels Segment $181,611 0 $27,021
Integrated Graphics Segment 203,120 0 15,151
-------------------------------------------------------------------------------------------------
Segment Total 384,731 0 42,172
-------------------------------------------------------------------------------------------------
Corporate / (Net Interest Expense) 0 0 (7,863)
Restructuring Charge - Corporate 0 0 0
-------------------------------------------------------------------------------------------------
Consolidated $384,731 0 $34,309
=================================================================================================
</TABLE>
There are no material changes in Segment Assets from Fiscal Year-End 1999.
Note 4 - Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In fiscal 2000, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". The statement requires that certain costs, such as
preliminary project costs and training, related to internally developed
software must be expensed as incurred. Implementation of this standard
has not affected the Company's financial condition or results of
operations.
Note 5 - Reporting on the Costs of Start-up Activities
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-up Activities", which
requires costs of start-up activities and organization costs to be
expensed as incurred. The Company adopted this standard in the first
quarter of fiscal 2000. Implementation of this standard has not
affected the Company's financial condition or results of operations.
Note 6 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This standard requires that an entity recognize derivatives as either
assets or liabilities on its balance sheet and measure those
instruments at fair value. As a result of SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133", the Company will adopt this standard
in the first quarter of fiscal 2001. Based on current circumstances,
the Company does not believe that application of SFAS No. 133 will have
a material effect on the Company's financial condition or results of
operations.
Note 7 - Restructuring and Other Charges
In February 2000, the Company announced a plan to restructure its
operations, which resulted in one-time pre-tax expense totaling $38.9
million in the third fiscal quarter ending April 30, 2000. This is
presented separately as a component of income from operations in the
Statement of Operations. The anticipated additional charges related to
this restructuring should be minimal, with the majority being
recognized in the fiscal 2000 fourth quarter.
<PAGE> 9
Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Note 7 - Restructuring and Other Charges, Continued
The Company experienced continued softness in the high-quality color
marketing and promotional printing market as well as issues relating to
the integration of the Graphic Industries acquisition. Management
reviewed its operations and developed action plans relating to both
segments that dealt with under-performing facilities, underutilized
assets, rationalization of certain product lines and a reduction in
management positions at the corporate office. The Company's plan was
approved, committed to, and for the most part, executed in the third
quarter.
The following table summarizes the activity in the restructuring reserve during
the quarter:
<TABLE>
<CAPTION>
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------
Employee Asset Write- Other Charges Total Restructuring
Termination downs
Benefits (non-cash)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring Provision $ 6,350 $ 30,896 $ 1,650 $ 38,896
-------------------------------------------------------------------------------------------------------------
Adjustments to Reserves 0 0 0 0
Cash Payments (2,827) 0 (865) (3,692)
Non-cash items 0 (30,896) 0 (30,896)
-------------------------------------------------------------------------------------------------------------
Reserve balance April 30, $ 3,523 $ 0 $ 785 $ 4,308
2000
-------------------------------------------------------------------------------------------------------------
</TABLE>
The plan resulted in four plant closings, and resizing and
consolidation of other facilities. Exit costs are primarily comprised
of tangible and intangible asset write-downs related to assets to be
disposed of and the sale of certain facilities, and severance and
severance-related costs. Under the plan, during the current quarter,
the Company terminated 376 employees, 325 of which are from plant
locations and 51 from the corporate headquarters.
Due to the changes described above, management performed a review of
its existing property, and equipment, to determine impairment as
described in Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Based on its evaluation,
management determined that significant impairment in goodwill and
long-lived assets associated with plants that were closed or are to be
closed occurred related to both segments. Certain assets that had no
long-term strategic value were considered held for disposal and either
written off or written down to estimated fair market value if the asset
was able to be sold. The amount of non-cash write-offs related to
impaired assets and allocated goodwill is $19.8 million and $11.1
million, respectively.
Note 8 - Income Taxes
Due primarily to the non-deductibility of certain restructuring
charges, primarily goodwill, the Company's annualized effective tax
rate will increase in fiscal year 2000. It is expected that the annual
effective tax rate will increase to 52.5% from the previous estimate of
40%. The tax provision in the third quarter adjusts the year-to-date
provision to the expected annual effective rate.
<PAGE> 10
Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the three-month period ended April 30, 2000, net sales increased
1.0% to $388.7 million. Adjusting for acquisitions, divestitures, and
plant closings, net sales were up 0.4% over the same quarter a year
ago. The Company estimates unit growth for the quarter was down 2%,
while increasing paper prices had the effect of increasing sales by
approximately 2%. For the nine-month period ended April 30, 2000, net
sales increased 1.3% to $1.2 billion. Adjusting for acquisitions,
divestitures, and plant closings, net sales were up 3.1% over the same
period a year ago. The estimated unit growth for the nine-month period
was approximately 1%.
Roughly one third of sales are sold to customers under a written
contract with the Company, which is up slightly from the third quarter
a year ago. Contract sales provide the Company a stable sales base
which leads to an increased, more consistent asset utilization of its
facilities. A significant portion of contract sales are sales to
customers managed by the W.I.N. system.
The Company is also hiring experienced sales representatives to
continue to capitalize on local transactional business. The combination
of higher transactional sales and increased contract sales is important
in providing stability to the Company's profitability and utilization
rates.
Net loss for the third quarter decreased to $16.7 million or 41 cents
per share (both basic and diluted), down from $20.6 million or 49 cents
per share (both basic and diluted) in the same quarter a year ago. Net
income for the nine-month period ending April 30, 2000 decreased to
$12.2 million or 29 cents per share (both basic and diluted), down from
$56.6 million or 1.34 cents per share (both basic and diluted).
The third quarter ended April 30, 2000 includes a $38.9 million pretax
charge for a restructuring program. The Company implemented the
restructuring program because of continued softness in the high-quality
color marketing and promotional printing market, along with issues
relating to the integration of the Graphic Industries acquisition.
Management reviewed its operations and developed action plans relating
to both segments that dealt with under-performing facilities,
underutilized assets, and rationalization of certain product lines.
This charge includes the write-off of goodwill associated with plants
that were closed or are to be closed, the write-off of abandoned
software, the write-down to net realizable value of property and
equipment to be sold and severance and outplacement costs. The majority
of the restructuring activity occurred in the third quarter which will
result in most of the restructuring charge also occurring in the third
quarter. Remaining additional charges (estimated to be less than $1
million) will occur in the fourth quarter of fiscal year 2000. Total
restructuring charges will be within the range initially estimated by
management. The restructuring activities did not materially effect
ongoing operations, but did result in increased uses of working capital
in the current quarter, specifically the build-up of certain finished
goods inventory in anticipation of plant closures. The Company will
realize reduced depreciation and amortization charges and reduced
employee costs during the fourth quarter of this year and moving
forward.
Cost of sales for the quarter was 71.0% of sales for the quarter as
compared to 68.2% in the third quarter of last year. The third quarter
includes a LIFO charge of $1,529,000 or 2.3 cents per share, based on
historical tax rate of 40% for comparative purposes, versus a LIFO
credit of $639,000 or 0.9 cents per share in the third quarter of last
year. Cost of sales for the nine-month period ended April 30, 2000 was
70.0% of sales as compared to 68.7% in the same period a year ago.
Total LIFO charges in the first nine months of fiscal year 2000 were
$3,219,000 or 4.7 cents, based on historical tax rate of 40% for
comparative purposes, per share versus LIFO credits of $1,231,000 or
1.8 cents per share in the same period a year ago.
<PAGE> 11
Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations, Continued
Year over year, the Forms and Labels segment's sales increased from
$181.6 million to $183.7 million, with operating income of $7.0 million
and operating margin of 3.8%, down from the prior year quarter of $27.0
million and operating margin of 14.9%. Adjusting for acquisitions and
divestitures, net sales in this segment increased 0.9%. For the
nine-month period ended April 30, 2000, segment sales increased
slightly from $574.5 million to $579.0 million, with operating income
of $53.2 million and operating margin of 9.2%, down from prior
year-to-date of $81.7 million and operating margin of 14.2%. Adjusting
for acquisitions and divestitures, net sales in this segment increased
4.2% from the same period a year ago.
The current quarter restructuring charge resulted in a reduction in
operating income of $4.3 million for this segment. This charge includes
asset write-downs, and severance and severance related costs. Excluding
the impact of this charge, operating income would have been down by
$15.7 million as compared to the same quarter last year and by $24.2
million for the same year-to-date period.
The impact of rising paper prices continues to adversely affect
operating margins in this segment. The majority of the LIFO impact
discussed earlier, resulting from the higher prices on paper grades
used primarily in this segment, impacted the results for the quarter.
Competitive market conditions continued to pressure selling prices and
operating margins in this segment, especially within the business forms
division.
Year over year, the Integrated Graphics segment's sales increased from
$203.1 million to $205.1 million, with an operating loss of $11.7
million and operating margin of (5.7%), down from prior year quarter of
$15.2 million and operating margin of 7.5%. Adjusting for acquisitions,
divestitures, and plant closings, net sales in this segment decreased
0.1%. For the nine-month period ended April 30, 2000, segment sales
increased from $571.4 million to $581.6 million, with operating income
of $4.5 million and operating margin of 0.8%, down from prior
year-to-date operating income of $35.0 million and operating margin of
6.1%. Adjusting for the acquisitions, divestitures, and plant closings,
net sales in this segment increased 2.0% from the same period a year
ago.
Sales growth over the second quarter grew in line with Company
expectations for the third quarter and was up 7.6% from prior quarter
ending January 31, 2000. Consistent with prior years, the third fiscal
quarter generates the highest level of Integrated Graphics quarterly
sales. These higher sales help to improve margins by increasing
equipment utilization in the Integrated Graphic's plants due to the
seasonal production of annual reports.
The current quarter restructuring charge resulted in a reduction in
operating income by $22.5 million for this segment. This charge
includes the write-off of allocated goodwill, asset write-downs, and
severance and severance related costs. Excluding the impact of this
charge, operating income would have been down by $4.4 million as
compared to the same quarter last year and by $8.0 million for the same
year-to-date period.
<PAGE> 12
Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations, Continued
Current year margins are below prior years due largely to an increase
in manufacturing expenses in anticipation of higher sales volumes for
the year. The Company's restructuring program was aimed at addressing
this build-up of expenses resulting from under-performing facilities
and underutilized assets. During the current quarter, three
manufacturing plants were closed and the workforce was reduced,
resulting in the significant charge against segment operating margins
in the third quarter.
Selling and administrative expenses for the quarter were 18.3% of sales
versus 15.9% in the third quarter of last year. For the nine months
ended April 30, the ratio to sales was 17.6% versus 16.1%. Included in
the current quarter are one-time charges of $5.1 million. This charge
represents an adjustment to the reserve for postretirement medical
costs arising from a change in the actuarial assumptions utilized to
estimate the benefit, an adverse judgement with respect to the purchase
price of a facility previously acquired by Graphic Industries, and
further costs associated with management changes. Included in the prior
quarter ending January 31, 2000 is a one-time charge of $2.3 million
for executive retirement benefits.
Excluding the one-time adjustments, selling and administrative expenses
for the current quarter were 17.0% of sales verses 15.9% in the third
quarter of last year. The percentage of sales was flat as compared to
the prior quarter ending January 31, 2000. For the nine months ended
April 30, the ratio to sales was 17.0% versus 16.1%. The majority of
this increase over the prior year continues to relate to the expansion
in the Company's information technology infrastructure and positioning
for business-to-business eCommerce. There has also been an increase in
year over year expenses in the financial division as the Company has
added personnel and improved financial systems. Selling expense has
increased as the Company has hired a number of sales representatives,
including experienced sales representatives, in order to increase the
transactional business. The restructuring previously mentioned and
other cost reduction opportunities have been identified which should
bring these expenses back to historical levels in the fourth quarter of
fiscal 2000.
Fiscal year 1999 year-to-date total selling & administrative
expenditures includes $1,372,000 of Year 2000 related programming
expenses, of which $319,000 relates to the third quarter fiscal year
1999, compared to no charges in the current fiscal year period to date.
Total Year 2000 costs are the same as disclosed in the Company's 1999
Annual Report.
Depreciation and amortization for the quarter was $19.1 million or 4.9%
of sales versus $19.2 million or 5.0% of sales in the third quarter a
year ago. For the nine-month period ended April 30, 2000, depreciation
and amortization was $58.5 million or 5.0% of sales versus $57.2
million or 5.0% of sales in the same period a year ago. Of the total,
software amortization and development represents $1.4 million for the
quarter, consistent with the third quarter a year ago. For the
nine-month period ended April 30, 2000, software amortization and
development was $4.7 million versus $4.0 million in the same period a
year ago. The unamortized balance of all capitalized computer software
at April 30, 2000 was $53.9 million, a 24.4% increase from fiscal
year-end, due primarily to ongoing enhancements to the Company's order
entry, customer service, and inventory management system, net of
impairment charge.
Other income for the quarter of $3.2 million represents the proceeds
received from the sale of stock that the Company received in John
Hancock's conversion from a policyholder owned company to a stockholder
based company.
<PAGE> 13
Wallace Computer Services, Inc. and Subsidiaries Page 13
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations, Continued
Interest expense for the quarter was $9.0 million, up from $8.1 million
last year. For the nine months ended April 30, 2000, interest expense
increased from $23.1 million to $25.0 million. The increase is
primarily due to increased debt levels along with rising interest rates
as compared to a year ago. Interest income for the quarter remained
flat as compared to the third quarter of last year and increased
approximately $1.0 million for the nine-month period to date. Most of
the increase is related to increased returns on the cash surrender
value of life insurance policies.
Due to the restructuring charges, a portion of which is not deductible,
the current year tax rate is expected to be 52.5%. Management
anticipates that the annual tax rate for fiscal year 2001 should be in
the range of 41% to 43%.
Some of the financial ratios for the twelve months ended April 30, 2000
were: Return on Net Sales of 3.2%, Return on Average Assets of 3.9%,
and Return on Equity of 9.1%, excluding the income effects of the
current quarter restructuring charge.
Liquidity and Capital Resources
Working capital increased by $28.8 million from July 31, 1999. Of the
total increase, $6.7 million of the increase is related to estimated
proceeds from disposition of assets due to the restructuring. Of the
$16.5 million increase in Inventory, $5.0 million is related to the
build-up in finished goods inventory in anticipation of plant closures
with the majority of the remaining increase due to seasonal build-up in
the Integrated Graphics segment. The current ratio at April 30, 2000
was 2.5 to 1.
Current inventory levels are believed to be in-line with the inventory
levels necessary to satisfy customer demand. The Company anticipates
having adequate sources of supply of raw materials to meet future
business requirements.
Of the outstanding debt as of April 30, 2000, $240.0 million has been
borrowed under a five-year Credit Agreement ("Credit Facility").
Subsequent to April 30, 2000, the Company elected to lower the maximum
aggregate principal amount available to be borrowed under the Credit
Facility from $500 million to $400 million due to significant excess
borrowing capacity. The borrowings under the Credit Facility are
classified as long-term debt as of April 30, 2000 since the Company has
the intent and ability to carry that debt long-term.
The Company has $200 million of Senior Term Notes with institutional
investors with a book value of $183.5 million classified as long-term
debt with the earliest maturity in 2006.
In addition to the credit facility and the senior notes, the Company
has unsecured money market lines of $125.0 million under which $24.2
million was borrowed at April 30, 2000, and is classified as short-term
debt.
Of the remaining long-term debt, $23.5 million is made up of industrial
revenue bonds at rates ranging from 5.1% to 5.2%. The balance of $14.5
million relates to acquisitions, $6.5 million to the former owners of
acquired businesses, with the rest being long-term debt from the
Graphic acquisition.
<PAGE> 14
Wallace Computer Services, Inc. and Subsidiaries Page 14
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Liquidity and Capital Resources, Continued
During the current quarter, Standard and Poor's lowered the Company's
credit rating from BBB+ to BBB, resulting in an anticipated increase in
annual borrowing costs by approximately $160,000.
The maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million.
Total debt currently represents 47.3% of total capitalization. The
restructuring charge to equity and share repurchases made during the
current quarter resulted in a slight increase in this ratio from the
second quarter of fiscal 2000.
Capital expenditures for the first nine months of this year totaled
$42.0 million. For the full fiscal year, capital expenditures are
expected to be in the range of $47.0 to $52.0 million, which are
expected to be financed through internally generated funds and by
borrowing against our revolving credit facility. The full fiscal year
estimate has been reduced in light of the restructuring program and a
complete review of current fixed asset utilization.
Corporate owned life insurance policies totaling $14.2 million were
surrendered in the current quarter, with the cash proceeds used to
reduce debt.
Restructuring charges in the quarter of $38.9 million consisted of
$30.9 million of non-cash items and 8.0 million of cash items. Cash
payouts for employee termination benefits, anticipated to occur over
the next 12 months, are expected to be substantially offset by proceeds
from the sale of property and equipment. The Company anticipates all
cash transactions related to the restructuring will occur within the
next 12 months.
Stockholders' equity decreased 7.2% to $541.4 million at April 30,
2000.
Common Stock
On September 8, 1999, the Board of Directors increased the annualized
dividend rate to $0.66 per share, a 3.1% increase from fiscal 1999.
During the first nine months of fiscal 2000, the Company purchased
2,509,000 shares of Wallace common stock. Total repurchases through
April 30, 2000 against the $100 million authorized by the Board in June
1997 have been $91.4 million.
<PAGE> 15
Wallace Computer Services, Inc. and Subsidiaries Page 15
Notes to Consolidated Financial Statements
April 30, 2000
(Unaudited)
Part II Other Information
Items 1 through 4 None
Item 5 Other Information
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Certain statements in this filing and elsewhere (such as in other filings
by the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management, and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, that address activities, events, or developments that the
Company expects or anticipates may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's and its subsidiaries' business and
operations, plans, references to future success and other such matters are
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to materially differ from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, general
economic, market or business conditions, changes in laws or regulations; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company and its subsidiaries; successful integration of acquisitions; labor
market conditions; changes in postal rates and paper prices; the ability of the
Company to retain its customers who generally do not operate under long-term
contracts with the Company; the potential unpredictability of the Company's net
sales due to seasonal and other factors which can lead to fluctuations in
quarterly and annual operating results; the ability of the Company to keep pace
with technological advancements in the industry; the effect of technical
advancements on the demand for the Company's goods and services; and the risk of
damage to the Company's data centers and manufacturing facilities or
interruptions in the Company's telecommunications links.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Wallace Computer Services, Inc. Separation Agreement and
General Release between the Company and Michael T. Leatherman,
dated March 15, 2000, filed herewith.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
(1) A report on Form 8-K was filed on March 16, 2000 announcing
that the Board of Directors of the Company adopted a Rights
Agreement, dated March 14, 2000, between the Company and
Harris Trust and Savings Bank, as Rights Agent.
<PAGE> 16
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALLACE COMPUTER SERVICES, INC.
June 14, 2000 /s/ Michael O. Duffield
----------------- ------------------------------------------------
Date Michael O. Duffield
Acting Chief Executive Officer, President, and
Chief Operating Officer
June 14, 2000 /s/ John J. DeCoster
----------------- ------------------------------------------------
Date John J. DeCoster
Vice-President, Controller
(Principal Accounting Officer)
