Business News

Standard Register Reports Third Quarter 2013 Financial Results

Wednesday 30. October 2013 - Third Quarter Highlights

Acquired WorkflowOne in transaction valued at $216.5 million
Renewed and extended credit facility
Annual savings of $40 million expected when integration is complete at end of 2015
Pension accounting change to provide greater transparency for investors; prior periods have been restated
Standard Register (NYSE: SR) today announced its financial results for the third quarter of 2013. The Company reported revenue of $199.3 million and a net loss of $23.2 million or $3.92 per diluted share. The results compare to third quarter 2012 revenue of $145.7 million and net income of $2.5 million or $0.43 per diluted share. Results for the third quarter and first three quarters of 2013 include two months of results from WorkflowOne, which Standard Register acquired on August 1, 2013.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA), which excludes certain items as detailed in the attached reconciliation, was $8.0 million compared to $9.3 million for the third quarter of 2012.
“We continue to be challenged by revenue declines in certain printed and transactional forms, however, we are encouraged by the execution of key investments focused on growth solutions and overall rapid pace of integrating WorkflowOne,” said Joseph P. Morgan, Jr., president and chief executive officer. “The acquisition has expanded both our customer base and portfolio of solutions, and we are beginning to realize synergies, including some initial cross-selling of each other’s capabilities. With greater financial stability and flexibility, we are in a more manageable position with our pension obligation and have more resources for investment and executing our strategy. It is an exciting transformational time for our company as we focus on the evolving opportunities of applying workflow, content and analytics to our customers’ communication needs.”
Third Quarter Results
Total revenue for the third quarter of 2013 was $199.3 million compared to $145.7 million in the prior year quarter. Net loss for the third quarter of 2013 was $23.2 million or $3.92 per diluted share compared to net income of $2.5 million or $0.43 per diluted share last year. The change in pension accounting had the effect of adjusting net income for the third quarter of 2012 to $2.5 million from a net loss of $2.6 million. The third quarter of 2013 includes WorkflowOne revenue of $68.3 million and a net loss of $0.6 million, along with $18.5 million of acquisition, integration and restructuring expenses.
Healthcare revenue was $62.9 million compared to $51.5 million in the third quarter of 2012. Operating profit was $2.1 million compared to $2.3 million in the prior year quarter. Technology-enabled healthcare solutions were the primary drivers of sales to new and existing customers, while volumes in clinical documents continued to decline.
Business Solutions revenue was $136.5 million compared to $94.2 million in the third quarter last year. As previously reported, reductions in revenue with a large financial services customer that reorganized its distribution channels and restructured operations are expected to total $18 to $20 million for the year. Revenue from this customer declined $5.4 million during the third quarter. The business unit posted an operating loss of $1.5 million compared to operating profit of $2.3 million in the prior year third quarter.
Gross margin as a percentage of revenue decreased to 26.9 percent from 28.8 percent for the same quarter last year. Gross margin was affected by WorkflowOne transaction expenses, fair value accounting treatment required for finished goods acquired in the WorkflowOne transaction and the ramp-up of the new digital print and distribution Center of Excellence in Jeffersonville, Indiana. Pricing pressure, product mix and declines in volumes also contributed to the decline in gross margin.
Selling, general and administrative (SG&A) expenses were $54.4 million, including $18.9 million of SG&A of WorkflowOne, compared to $37.7 million for the same quarter last year.
First Three Quarters Results
Total revenue was $477.8 million and the Company incurred a net loss of $16.5 million or $2.79 per diluted share for the first three quarters of 2013, compared to revenue of $458.4 million and net income of $6.8 million or $1.16 per diluted share for the first three quarters of 2012. The 2013 results include two months of WorkflowOne. The change in pension accounting had the effect of adjusting net income for the first three quarters of 2012 to $6.8 million from a net loss of $8.9 million.
Adjusted EBITDA, which excludes certain items as detailed in the attached reconciliation, was $27.9 million compared to $31.3 million for the first three quarters of 2012.
Healthcare revenues were $160.6 million compared to $163.3 million in the first three quarters of 2012. Operating profit for the first three quarters of 2013 was $6.0 million compared to $8.6 million for the prior year.
Business Solutions revenues were $317.2 million compared to $295.1 million in the first three quarters of the prior year. Operating profit was $2.3 million compared to $5.6 million for the prior year.
Consolidated gross margin as a percent of revenue was 28.2 percent in the first three quarters of 2013 compared to 29.8 percent for the same period in 2012. SG&A expenses were $124.5 million, including $18.9 million of SG&A of WorkflowOne, compared to $123.4 million in the prior year.
Cash flow on a net debt basis was negative by $6.6 million for the first three quarters of 2013 compared to positive cash flow of $4.0 million for the first three quarters of 2012.
Capital expenditures were $9.1 million compared to $2.4 million in the first three quarters of last year. The Company continues to invest in infrastructure at its digital and distribution Center of Excellence in Jeffersonville, Indiana. Investments were also made in software technology, workflow and digital manufacturing capability.
The Company contributed $18.8 million to its qualified pension plan in the first three quarters of 2013 compared to $18.7 million in the first three quarters of 2012. Total pension contributions for 2013 are expected to be $24.7 million compared to $22.7 million of contributions made in 2012. The Company is encouraged by the recent rise in long-term interest rates. If rates hold at their present level, the Company’s pension liability would be reduced at the end of 2013 by an actuarial gain.
Pension Accounting Change
The Company changed its method of accounting for its pension plans to a more preferable method to recognize actuarial gains and losses in the income statement in the year incurred rather than amortizing them over time. Under the new method permitted under Generally Accepted Accounting Principles (GAAP), certain asset investment gains and losses and liability actuarial gains and losses in excess of a recognition corridor (10 percent of the greater of plan assets or benefit obligations) will be recognized in the fourth quarter of each year. All historical financial information has been retrospectively adjusted to reflect this pension accounting change, increasing net income by $13.5 million for the first two quarters of 2013 and $15.6 million for the first three quarters of last year. The new method of accounting will provide greater transparency and permit investors to more clearly evaluate and compare the company’s operating performance. The change has no impact on benefits to participants, the Company’s pension liability or pension funding obligations.
Acquisition of WorkflowOne
On August 1, 2013, Standard Register announced that it acquired WorkflowOne in a transaction valued at $216.5 million, financed by assuming $210 million of long-term debt and the issuance of warrants with an estimated value of $6.5 million. Standard Register expects to achieve $40 million in annual savings when the integration of the two companies is complete.
On September 26, 2013, the Company’s Board of Directors approved a new strategic restructuring program in connection with the acquisition of WorkflowOne and the integration of the two companies. Total costs of the restructuring program, which is expected to continue through the end of the calendar year 2015, will be approximately $29.8 million. Except for $0.5 million of inventory impairment, the balance of the restructuring charges will be cash expenditures. The Company also expects to incur approximately $8.5 million in integration costs in connection with the acquisition.
Renewal and Expansion of Credit Facility
During the third quarter, Standard Register announced that it completed an early renewal and an expansion of its credit facility. The Company entered into a five-year $125 million senior-secured asset-based credit facility that provides additional liquidity and the ability to capitalize on opportunities for growth aligned with its strategic objectives. The new facility amends and extends its existing credit facility, which was due to mature on March 31, 2014. The facility is secured by the Company’s existing and future working capital assets.