DAYTON, Ohio - Standard Register today reported its financial results for the second quarter and first half ended July 1, 2007.
Results of Operations
Revenue on Continuing Operations for the second quarter 2007 was $211.2 million, compared to $222.7 million reported for the comparable quarter of 2006. Through the first half, Revenue on Continuing Operations was $438.6 million, down 2.8 percent in comparison to last year's $451.2 million.
The Net Loss for the quarter was $4.6 million or $0.16 per share, versus a Net Loss of $8.5 million or $0.29 per share reported for prior year. Through six months, the Net Loss was $5.5 million or $0.19 per share, compared to a Net Loss of $7.0 million or $0.24 per share in 2006.
Changing sales levels at three customer accounts figured prominently in the quarter and year-to-date results, reducing revenue by $12 million and $20 million in the respective periods. Excluding the changes in these accounts, revenue was even with last year for the quarter and rose 1.7 percent for the first half.
Restructuring charges primarily relate to the consolidation of the Middlebury, VT plant's capacity into other manufacturing locations, announced in the first quarter of the year and completed in June. Impairment expense was adjusted in the quarter for equipment originally slated for disposal that was put back in service.
Pension loss amortization was higher for both the quarter and first half periods. This amortization is primarily the result of asset losses from the weak stock market in 2001 and 2002 and lower interest rates. A pension settlement charge was also recorded in the quarter as a result of large lump-sum payments under the Company's non-qualified retirement plan. The pension settlement expense accelerates the amortization of prior year's pension losses in proportion to the lump-sum payments.
The results of InSystems and Digital Solutions operations and their sale are reported above as discontinued operations. InSystems was sold June 5, 2006 and Digital Solutions was sold April 21, 2007.
Second quarter pretax Income on Continuing Operations, excluding restructuring, impairment, pension loss amortization, and the pension settlement charge was $3.3 million, versus $12.2 million in the prior year. The $8.9 million decrease is primarily attributed to approximately $6.0 million in lower gross margin on the three significant customer accounts mentioned earlier, and about $3.0 million in reduced Document and Label Solutions (DLS) gross margins due to lower sales of traditional document products and temporarily higher quality, overtime, and training costs stemming from the Middlebury restructuring.
On a year-to-date basis, Income on Continuing Operations before restructuring, impairment, pension loss amortization, and pension settlement expenses was $12.7 million, compared to $26.4 million in 2006. The $13.8 million decline in this measure is primarily a function of four items - an approximate $11.0 million reduction in gross margin from the three referenced accounts, a $10.0 million margin drop due to reduced sales of traditional printed products and the temporarily higher manufacturing costs, offset by approximately $4.0 million in higher margins from revenue gains in digital print, services, and Document Systems, plus $2.7 million in lower SG&A and depreciation expenses.
"Setting aside the three significant accounts, several trends are apparent in our first half results that serve to reinforce our strategy," said Dennis Rediker, Standard Register's president and chief executive officer.
"Our traditional DLS print business is under pressure brought about by advancing digital technology and an oversupplied industry. Our annual rate of decline is approximately 5 percent which mirrors industry trends. We believe we can gain market share in select vertical markets where we have expertise and focus, but we must continue to improve cost and productivity to remain competitive and produce sustaining cash flows.
"Our label business is growing, but not at the general pace of the market. Labels are an opportunity for us and we are investing for growth, as illustrated by our recent venture into Mexico.
"Our newer digital print and service initiatives are gaining traction. Through the first half, revenue from digital print was up 18 percent, services rose 11 percent, Document Systems increased 19 percent, and commercial print was 11 percent ahead of last year."
On the balance sheet, net debt increased $3.2 million in the quarter, ending at $54.1 million. Net debt, debt less cash and short-term investments, has increased $13.2 million since the outset of the year, primarily reflecting the timing of capital expenditures and other disbursements that were about $12.5 million heavier in the first six months of the year than the expected annual rate would suggest.
Restructuring
On July 20th, the Company announced that it had completed a restructuring action as part of an overall plan to reduce its annual operating costs by $40 million. That action eliminated approximately 250 positions, primarily in management and overhead, representing $22 million in annual compensation and related costs. This was in addition to the plant (Middlebury, VT) and warehousing restructuring action announced in the first quarter of the year and completed in June, which targets annual savings of approximately $5 million, and other cost saving initiatives targeted to reduce purchasing and other non-compensation costs by approximately $13 million annually.
Outlook
The first half of the year produced revenue of about $439 million and operating income before restructuring, impairment, pension loss amortization, and pension settlement of $12.7 million. After deducting interest and other expense, this non-GAAP earnings figure is reduced to $11.1 million pretax, equivalent to $0.24 per share after tax.
"Looking ahead to the second half of the year, we expect revenue to be higher than in our first half," said Rediker, adding, "our outlook now calls for total year 2007 revenue approximately equal to last year's $894 million figure. Further, we expect our second half cost of sales and SG&A expenses to be approximately $15 million below our first half costs as a result of the cost reduction plans announced earlier. The remaining $25 million in cost savings should flow through in 2008. The combination of higher revenue and lower costs should make our second half earnings significantly better than our first half and set us up for a solid 2008 result."