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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-14082
MERRILL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0946258
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
ONE MERRILL CIRCLE
ST. PAUL, MINNESOTA 55108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-646-4501
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 filing requirements
for the past 90 days.
Yes X No
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The number of shares outstanding of Registrant's Common Stock, par value $.01,
on June 10, 1998 was 16,453,536.
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PART I.--FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of April 30, 1998 and January 31, 1998................................ 3
Consolidated Statements of Operations for the three-month periods ended April 30, 1998 and 1997...... 4
Consolidated Statements of Cash Flows for the three-month periods ended April 30, 1998 and 1997...... 5
Notes to Consolidated Financial Statements........................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 7-9
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MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
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<CAPTION>
APRIL 30, JANUARY 31,
1998 1998
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(UNAUDITED)
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Current assets
Cash and cash equivalents........................................................... $ 1,166 $ 2,531
Trade receivables, less allowance for doubtful accounts of $7,702 and $6,992,
respectively...................................................................... 124,091 116,721
Work-in-process inventories......................................................... 26,914 13,686
Other inventories................................................................... 6,910 7,112
Other current assets................................................................ 11,235 10,290
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Total current assets.............................................................. 170,316 150,340
Property, plant and equipment, net.................................................... 41,950 41,045
Goodwill, net......................................................................... 42,454 44,437
Other assets.......................................................................... 10,564 10,657
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Total assets...................................................................... $ 265,284 $ 246,479
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to banks.............................................................. $ 7,700
Current maturities of long-term debt................................................ 2,655 $ 655
Current maturities of capital lease obligations..................................... 236 249
Accounts payable.................................................................... 35,194 29,142
Accrued expenses.................................................................... 37,238 41,033
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Total current liabilities......................................................... 83,023 71,079
Long-term debt, net of current maturities............................................. 38,225 40,225
Capital lease obligations, net of current maturities.................................. 1,558 1,616
Other liabilities..................................................................... 7,980 7,884
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Total liabilities................................................................. 130,786 120,804
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Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized; 16,401,636 and
16,315,136 shares, respectively, issued and outstanding........................... 164 163
Undesignated stock: 500,000 shares authorized; no shares issued.....................
Additional paid-in capital.......................................................... 23,537 22,401
Retained earnings................................................................... 110,797 103,111
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Total shareholders' equity........................................................ 134,498 125,675
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Total liabilities and shareholders' equity........................................ $ 265,284 $ 246,479
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The accompanying notes are an integral part
of the consolidated financial statements.
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MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
APRIL 30
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1998 1997
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Revenue......................................................................... $ 123,514 $ 109,859
Cost of revenue................................................................. 75,156 66,274
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Gross profit.................................................................. 48,358 43,585
Selling, general and administrative expenses.................................... 33,425 28,495
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Operating income.............................................................. 14,933 15,090
Interest expense................................................................ (932) (994)
Other income (expense), net..................................................... 307 (125)
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Income before provision for income taxes...................................... 14,308 13,971
Provision for income taxes...................................................... 6,296 6,217
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Net income.................................................................... $ 8,012 $ 7,754
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Net income per share:
Basic......................................................................... $ .49 $ .49
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Diluted....................................................................... $ .47 $ .47
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Dividends per common share...................................................... $ .02 $.015
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Weighted average number of shares outstanding:
Basic......................................................................... 16,332,927 15,884,166
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Diluted....................................................................... 17,194,712 16,359,347
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The accompanying notes are an integral part
of the consolidated financial statements.
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MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED
APRIL 30
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1998 1997
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Operating activities
Net income.............................................................................. $ 8,012 $ 7,754
Adjustments to reconcile net income to net cash (used in) provided by operating
activities
Depreciation and amortization......................................................... 2,791 2,743
Amortization of intangibles........................................................... 1,080 798
Writedown of goodwill................................................................. 1,000
Provision for losses on trade receivables............................................. 1,048 2,107
Deferred compensation................................................................. 1,338 689
Changes in operating assets and liabilities, net of effects from business acquisitions
Trade receivables................................................................... (8,418) (13,724)
Work-in-process inventories......................................................... (13,228) (4,365)
Other inventories................................................................... 202 417
Other current assets................................................................ (697) 2,225
Accounts payable.................................................................... 6,052 5,408
Accrued expenses.................................................................... (9,589) (2,964)
Accrued and deferred income taxes................................................... 5,794 4,110
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Net cash (used in) provided by operating activities............................... (4,615) 5,198
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Investing activities
Business acquisitions, net of cash acquired............................................. (1,443)
Purchase of property, plant and equipment............................................... (3,696) (3,504)
Other, net.............................................................................. (1,494) (1,029)
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Net cash used in investing activities............................................. (5,190) (5,976)
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Financing activities
Borrowings on notes payable to banks.................................................... 12,600 16,025
Repayments on notes payable to banks.................................................... (4,900) (14,225)
Principal payments on long-term debt and capital lease obligations...................... (71) (80)
Repurchase of common stock.............................................................. (3,065)
Dividends paid.......................................................................... (326) (239)
Exercise of stock options............................................................... 669 1,191
Tax benefit realized upon exercise of stock options..................................... 427 126
Other equity transactions, net.......................................................... 41 (3)
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Net cash provided by (used in) financing activities............................... 8,440 (270)
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Decrease in cash and cash equivalents..................................................... (1,365) (1,048)
Cash and cash equivalents, beginning of period............................................ 2,531 5,161
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Cash and cash equivalents, end of period.................................................. $ 1,166 $ 4,113
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated financial statements as of April 30, 1998 and for the three
month periods ended April 30, 1998 and 1997 have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results for the indicated
periods. Certain information and accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report.
2. NET INCOME PER SHARE
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share," and has disclosed
basic and diluted net income per share for the three month periods ended April
30, 1998 and 1997, in accordance with the Standard.
The denominator used to calculate diluted earnings per share includes the
dilutive impact of stock options which increase the actual weighted average
number of shares outstanding by 861,785 and 475,181, respectively, for the three
month periods ended April 30, 1998 and 1997, respectively.
3. SUBSEQUENT EVENT
Subsequent to April 30, 1998, the Company completed the acquisition of
substantially all of the operating assets and assumed certain liabilities of
Executech, Inc. and World Wide Scan Services, LLC (the Companies) for $3.2
million in cash. In addition, the purchase agreement requires the Company to pay
contingent cash consideration dependent on future performance of the Companies
as defined in the purchase agreement. These acquisitions are not significant to
the financial position or results of operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations, constitute 'forward-looking' statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
'forward-looking' statements involve known and unknown risks, uncertainties, or
achievements of the Company which may cause actual results to be materially
different from any future results, performance, or achievements expressed or
implied by such 'forward-looking' statements. These risks and uncertainties
include, but are not limited to, the effect of economic and financial market
conditions, government public reporting regulations, paper costs and the
integration and performance of recent acquisitions.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenue
of certain items in the Company's consolidated statements of operations for the
three-month periods ended April 30, 1998 and 1997, and the percentage changes in
the dollar amounts of such items between the two periods.
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PERCENTAGE
PERCENTAGE DOLLAR
OF REVENUE INC. (DEC.)
-------------------- 1998 VS.
1998 1997 1997
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Revenue
Financial..................................................................... 36.4% 38.5% 6%
Corporate..................................................................... 34.0 31.5 21
Commercial and other.......................................................... 18.0 18.9 7
Document management services.................................................. 11.6 11.1 18
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Total revenue............................................................... 100.0 100.0 12
Cost of revenue................................................................. 60.8 60.3 13
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Gross profit................................................................ 39.2 39.7 11
Selling, general and administrative expenses.................................... 27.1 25.9 17
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Operating income............................................................ 12.1 13.8 (1)
Interest expense................................................................ (0.8) (0.9) (6)
Other income (expense), net..................................................... 0.3 (0.1) (345)
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Income before provision for income taxes.................................... 11.6 12.8 2
Provision for income taxes...................................................... 5.1 5.7 1
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Net income.................................................................. 6.5% 7.1% 3%
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REVENUE.
Revenue for the first quarter of fiscal year 1999 increased 12%. The
financial revenue category increased 6% compared to the same period one year ago
as a result of the continued growth of financial market transactions. The
corporate revenue category for the first quarter of fiscal year 1999 increased
21% when compared to the first quarter of fiscal year 1998 corporate revenue.
This increase was driven by strong demand for corporate compliance work and
record investment company services revenue. Investment company services revenue
has grown from existing clients as well as new clients. The increase in the
commercial revenue category of 7% was primarily the result of increased business
generated by our managed communication programs which increased by 24% from last
year's first quarter. The growth was led by increased activity with Cendant
Corporation under our preferred vendor agreements. Also, revenue from real
estate products and services continues to grow as a result of our investment in
an expanded sales
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team. This growth was offset by a reduction in our other commercial business
during the quarter. Our ballot production business in fiscal year 1999 will be
completed primarily in the second quarter. The document management services
revenue increased 18% during the first quarter of fiscal year 1999 when compared
to the same period one year ago. Leading the growth was a 55% increase in
document service center revenue. This growth was driven by quarter over quarter
same site revenue increases and growth in the number of service centers since
the first quarter of fiscal year 1998.
GROSS PROFIT.
Gross profit margin in the first quarter of fiscal year 1999 was comparable
to the first quarter of fiscal year 1998 and was a result of strong margins in
our financial and corporate revenue categories and high utilization of our
production facilities in both periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses increased during the first
quarter of fiscal year 1999 compared to the first quarter of fiscal year 1998.
The overall increase is attributed to our continued expansion of sales and
marketing activities in all business segments and in part to variable costs
inherently associated with sales and profitability. The Company expects to
continue investing in sales and marketing activities throughout the year. In
addition, general and administrative expenses increased because of a writedown
of goodwill associated with the Superstar Computing acquisition, which was
completed in the first quarter of fiscal year 1998. These increases were offset
by a reduction in the provision for losses on trade receivables.
OTHER INCOME.
Other income increased in the first quarter of fiscal year 1999 compared to
the first quarter of fiscal year 1998. The increase is primarily attributable to
rental income and earnings related to the Quebecor Merrill Canada (QMC) joint
venture, which is accounted for under the equity method of accounting.
PROVISION FOR INCOME TAXES.
The effective income tax rate in the current quarter, which reflects the
estimated effective rate for fiscal year 1999, was 44.0% compared to 44.5% a
year ago. Significant differences between the effective income tax rate and
federal statutory tax rate continue to be attributable to state income taxes,
net of federal benefits and non-deductible business and entertainment expenses.
NET INCOME AND NET INCOME PER SHARE.
Net income totaled $8,012,000 or 47 cents per diluted share for the quarter
ended April 30, 1998, compared to $7,754,000 or 47 cents per diluted share in
the first quarter last year. The increase in net income for the quarter ended
April 30, 1998 did not result in an increase in diluted net income per share
because of an increase in the weighted average shares outstanding and an
increase in the dilutive impact of outstanding stock options compared to the
quarter ended April 30, 1997.
Net income, as a percentage of revenue, decreased primarily because of
higher selling, general and administrative expenses as discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 1998 increased to $87.3 million from $79.3
million at January 31, 1998. Strong sales activity during the first quarter of
fiscal year 1999 resulted in increased accounts receivable and work-in-process
inventory balances when compared to corresponding balances at January 31, 1998.
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The Company had net cash used in operating activities of $4.6 million in the
first quarter of fiscal year 1999 compared to net cash provided by operating
activities of $5.2 million in the first quarter of fiscal year 1998. This change
is driven principally by an increase in work-in-process inventories and a
reduction in accrued expenses.
Net cash used in investing activities was $5.2 million and $6.0 million for
the quarters ended April 30, 1998 and 1997, respectively. Capital expenditures
during the first quarter of fiscal year 1999 approximated $3.7 million and were
principally for leasehold improvements and reprographic and computer based
production equipment.
Net cash provided by financing activities was $8.4 million compared to net
cash used in financing activities of $.3 million for the quarters ended April
30, 1998 and 1997, respectively. This change is primarily from increased
borrowings under the Company's line of credit required to fund current quarter
operating activities.
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PART II.--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
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<S> <C> <C>
(REGISTRANT) MERRILL CORPORATION
BY (SIGNATURE) /s/ John W. Castro
(NAME AND TITLE) John W. Castro, President and Chief Executive Officer
(DATE) June 15, 1998
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) June 15, 1998
</TABLE>
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EXHIBIT INDEX
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<CAPTION>
EXHIBIT METHOD OF FILING
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<C> <S> <C>
27. Financial Data Schedule................................................ Filed herewith electronically
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 1,166
<SECURITIES> 0
<RECEIVABLES> 131,793
<ALLOWANCES> 7,702
<INVENTORY> 33,824
<CURRENT-ASSETS> 170,316
<PP&E> 99,687
<DEPRECIATION> 57,737
<TOTAL-ASSETS> 265,284
<CURRENT-LIABILITIES> 83,023
<BONDS> 39,783
0
0
<COMMON> 164
<OTHER-SE> 134,334
<TOTAL-LIABILITY-AND-EQUITY> 265,284
<SALES> 123,514
<TOTAL-REVENUES> 123,514
<CGS> 75,156
<TOTAL-COSTS> 75,156
<OTHER-EXPENSES> 33,425
<LOSS-PROVISION> 1,048
<INTEREST-EXPENSE> 932
<INCOME-PRETAX> 14,308
<INCOME-TAX> 6,296
<INCOME-CONTINUING> 8,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,012
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
