Workflow Management cleans up the balance sheet, reports a third quarter loss, and revises earnings guidance. The company is committed to restoring shareholder value through a new unified company with a continued focus on cost reduction and sales driven performance. Immediately following the results announcements, the Workflow share price fell from $3.58 to $2.51 rebounding to $3.00 by the end of the day's trading. By Jan Stoddard of Raine Consulting Workflow Management, Inc. (NASDAQ: WORK), reported fiscal 2003 third quarter results for the period ending January 31, 2003. Workflow Management, Inc. is a leading provider of end-to-end print outsourcing solutions, including e-procurement tool iGetSmart and has a number of direct mail and envelope manufacturing plants. This is the first quarter under the management of interim CEO Gerald F. Mahoney, former Chairman and CEO of Mail-Well, Inc. Topics: - Financial Summary - Chairman Comments - Q&A - Summary Financial Summary Third quarter operating loss was $777,000 compared to an operating income of $7.9 million last year. Workflow generated $1.6 million in EBITDA in the third quarter versus $10.5 million in the same period last year. Excluding write-offs and certain other charges, Workflow produced an adjusted EBITDA of $9.4 million for the third quarter. Workflow reported a net loss for the third quarter of $17.3 million or $1.31 per diluted share versus net income of $2.8 million or $0.21 per diluted share in the comparable period of fiscal 2002. The net loss during the third quarter consisted of a $6.1 million loss from continuing operations, or $0.46 per diluted share, and an $11.2 million loss from discontinued operations, or $0.85 per diluted share. During the quarter, the Company recorded certain non-recurring costs totaling approximately $11.3 million, or $0.54 per diluted share after applying a 37% effective tax rate, in its results from continuing operations. Excluding these costs, Workflow generated $0.08 per diluted share for the third quarter compared to $0.21 per diluted share in the same period a year ago. The items recorded in the results from continuing operations include: - $1.1 million inventory write-off included in the cost of revenues - $2.1 million in abandoned software costs streamlining the computer platform - $681,000 in uncollectible notes receivable - $3.8 million in severance and other employment costs (contractual) - $300,000 loss on an ineffective interest rate hedge (swap terminates in March 2004) - $3.2 million in financing fees and other banking related costs The Company has updated its earnings guidance for the fiscal year ending April 30, 2003. Based on the uncertain economic outlook, the Company anticipates continued margin and pricing pressures, and expects revenues to range from $625 to $630 million resulting in adjusted EBITDA of $40 to $42 million and diluted earnings per share from continuing operations of $0.43 to $0.46 prior to non-recurring charges. Chairman Comments: Cleaning up the balance sheet: Workflow took significant write-offs during the third quarter to clear up a number of things on the balance sheet adhering to new NYSE rules and make sure the company is "squeaky clean." Going forward, we anticipate a little restructuring (no significant restructuring costs). Unified Company: We are now functioning as one unified company, providing a myriad of printing and supply chain management solutions for our diverse customer base. We have merged our Manufacturing and Solutions Divisions together and eliminated two Group VP positions to foster a more integrated spirit of cooperation and cross selling of products. After spending two months on the road (visiting plants and offices), the key take-away is that Workflow has a good group of dedicated employees (3,000+) who execute on a daily basis and want to see the company do well and grow. We have a good sales force. I believe Sales is the lifeblood of the company and we will continue to be a sales-driven organization. The next step, although it will take time, is for SFI to begin to migrate from outside buys back into our manufacturing plants where we produce envelopes and direct mail. SFI will need to cut down number of vendors and get better prices from those that remain. Our focus is merging the businesses and getting people to work together, communicate and cooperate, especially within areas such as purchasing. Based on previous experience, this does generate savings. Sluggish economy and war uncertainty: Unfortunately, operating results for the third quarter were less than expected, due to the sluggish economy and war uncertainty. Our customers continue to curtail spending, resulting in lower volumes and ongoing margin pressure. Business is holding up; it is just not growing as profitability as expected. Once the threat of war behind us, we will see a pick up in business. (Citing previous experience from 1990-1991 Gulf War recovery.) "Don't mail into a crisis" There are scarce advertising and marketing dollars. All printing is struggling right now waiting for uncertainties in the economy to get behind us. There has been a direct impact on envelope and direct mail. While business has been stable but flat, there are overcapacity issues in the printing industry Additional cost reduction opportunities listed: To offset the softness of the economy, many costs have been cut from operations including eliminating the group VP's. Other items include: • the move of the NYC envelope plant to Long Island City • evaluation to reduce or consolidate warehousing • a headquarters move to lower cost facility in the next 4-5 months • possible consolidation of sales offices in NYC • improve running speeds at envelope plants • possible move to 7-day shifts • evaluating and merging back office functions between SFI & iGetSmart • the Canadian packaging group is moving into a new consolidated building • continuing to watch T&E • focus on reducing losing money in some operations that have been draining us • achieving savings in our purchasing. (Note: Mahoney sets a target of reducing current SGA of 22.4% to under 20%.) Q & A Session: 1. Regarding the $3.2 million financing fees, an analyst asked for more information comparing the total savings in dollars versus paying fees. The financing fees included the consulting and bank fees, and cost to restructure facility. Mahoney noted that the consultant has been eliminated. The 1/15/03 new credit facility stabilized bank relationships and gives Workflow time to strengthen balance sheet. Mahoney noted that cash flow is good, and focus is on using receivables and cash flow to pay down debt. 2. Further explanation of the $3.8 million in severance and other employment costs detailed that this was for two former Executive Officers and the CEO Executive search by the executive recruiting firm. This includes a payout of approximately $350,000.00 for the Tom D'Agostino Sr. contract through the end of 2003. 3. When asked about additional funding and capital opportunities, Mahoney listed several options and stated that he has "every indication of a fair amount of interest in investing." Options include: #1 get a firm (partner) to invest mezzanine of $40-60 million to grow company, #2 go back into market for high yield deal (He notes a number of smaller deals in the $150-200 million range are taking place.), or #3 obtain additional equity, but also working hard to get reasonable interest rates without significantly diluting current shareholders. Mahoney reiterated with "reasonable confidence" that there are investors out there that like the business. 4. An analyst asked how much cost could be taken out of the business this year. Mahoney did not want to target a specific number but stated cost savings of up to $10 million. For example, in purchasing alone," if we can't get another 1-2 point reduction, we are not doing our job." 5. Regarding the $2.1 million in abandoned software costs, Workflow is streamlining its computer platform. The abandoned costs are from a consolidated move to one centralized platform as part of a larger integration plan. This is within the printing facilities and has nothing to do with SFI or iGetSmart. 6. When asked if the market conditions are a result of the threat of Iraq or a lack of business pick-up after the Holidays, Mahoney stated that while January had been considerably off projections, February remained slow but had improved. Envelopes (geared to direct mail) ended up being all right. He foresees demand as stable - not getting worse - but with no substantial pick-ups. Mahoney noted that Workflow has not lost any key sales people or customers. Customers are just buying less and putting pricing pressure on us 7. When asked about the cost reductions to merge the two businesses, Mahoney stated that there would be some costs, but not a lot. The opportunities from this merge are biggest in SFI and iGetSmart, who continue to close on some good customers. Chase Bank just re-signed for their envelope business. 8. One analyst noted that dot.com's are making a comeback and asked if that would improve iGetSmart business. Mahoney noted that iGetSmart is an effective way to manage business for the company’s customers and is a good tool for SFI. It is a growth vehicle for Workflow and a wonderful platform to outsource print, but not a dot.com to go public. 9. Additional clarification on the discontinued operations detailed that this involved the prior discrete acquisitions of two small business equaling $20 million in sales. These businesses were not a strategic fit and will be sold. Net realizable value is $5 million (written down) with up to an additional $5 million in tax advantages. Note: There is no intention of any acquisitions in the near future. 10. When questioned on utilization of various plants, Mahoney noted that the Canadian envelope plant will gain efficiency as it moves out of three plants into one and more capacity will be gained as shifts move from a 5-day to a 7-day work week. The direct mail business on the West Coast also has a lot of capacity following a consolidation from four different plants to two new ones with increased efficiencies. The increased efficiency means that the same capacity can handle an increase from $45 million to $60 million in sales. 11. One analyst noted that it is apparent that there is a new regime as the founders of company are no longer running it, a number of write-offs and restructuring to address deficiencies has taken place, and there is a different thrust by this management team. When asked about his overall philosophy for running the business, Mahoney stated that he feels strongly, with the Board absolutely behind him, that Workflow needs to become squeaky clean and adhere to new accounting rules and new NYSE rules. He is focused on cost and is trying hard to communicate to his best ability with shareholders. He feels that the CEO has to run business for shareholder value, working all the time to enhance and improve shareholder value. 12. The Workflow Board will conclude its' search for a permanent CEO in the coming weeks. Summary: "Our Business model is good, it just needs to be tweaked." Mahoney emphasizes that Workflow has a solid foundation and very bright future. “We have a dedicated workforce and an excellent sales force. We will continue to evaluate operations on profitability and long-term cash. Workflow is a stable company, not a company in trouble, and one that is not capital intensive.” Mahoney believes that with stabilization in the economy and increased revenues, Workflow will be able to reach an EBITDA of more than $50 million.