DAYTON, Ohio, July 28 -- Standard Register today reported financial results for the second quarter ended July 3, 2005.
Results of Operations
Standard Register today reported revenue growth and significant operating profit improvements for both the quarter and year-to-date periods.
Revenue for the second quarter 2005 was $225.5 million, a 2.1 percent increase over the $220.9 million result for the same quarter of 2004. Through the first half of the year revenue was $457.4 million, 3.7 percent ahead of the $441.1 million reported for the first six months of 2004.
For the quarter, pretax income from continuing operations was $0.4 million compared to a pretax loss of $6.3 million in the prior year. For the first six months of the year, pretax income from continuing operations was $4.3 million vs. a loss in 2004 of $17.4 million. [Results appear in the table that follows.]
"We have seen revenue growth in our core business, despite a very competitive marketplace, and have also seen good progress in the top line of several of our new initiatives. We continue to make good progress in recovering the higher paper costs levied over the past 18 months and have trimmed costs and improved productivity, all of which has helped our bottom line," said Dennis L. Rediker, Standard Register's chief executive officer.
The state of Ohio enacted new tax legislation in June that had a significant unfavorable effect on second quarter earnings after tax. The new legislation replaced income and property taxes with a revenue based tax that effectively wiped away most of the Company's Ohio deferred tax assets. This change increased accrued income tax expense and reduced net income by $2.9 million, equivalent to $0.10 per share. Going forward, the new legislation is expected to have a neutral effect to Standard Register's net income when compared to the prior tax calculation methodology.
An updated actuarial analysis, based on final 2004 census data, indicates lower total pension expense for 2005 than originally estimated - $23.8 million vs. $27.2 million. A $0.9 million favorable adjustment was made in the second quarter to conform the first half expense to 50 percent of the expected annual amount. Approximately $19.0 million of the $23.8 million in annual 2005 expense relates to the non-cash amortization of past pension losses.
The Company also incurred $1.5 million of restructuring expense in the quarter, most related to cost reductions undertaken at InSystems. Revenue at InSystems showed modest growth in the quarter on the strength of a pick-up in new license sales.
In addition, a $0.4 million after tax gain was recorded in the quarter as an adjustment related to the previous sale of the Company's equipment service business, as post-closing contract details are being wound down.
The effects on earnings of restructuring, impairment, pension loss amortization, the Ohio tax law change, and the adjustment to the gain on sale are displayed in the table below.
On a total basis, the Company reported a net loss in the quarter of $2.3 million, or $0.08 per share, compared to a net loss in 2004 of $2.6 million, or $0.09 per share. Through six months, the Company's results are at break-even vs. a net loss last year of $9.1 million, or $0.32 per share.
Net cash flow was very strong in the quarter on the strength of improved operations and working capital turnover. Net debt, total debt less cash, came down by $9.9 million in the quarter after satisfying funding requirements for capital expenditures, restructuring, dividends, pension funding, and all other operations.
Cash flow over the past 12 months has been sufficient to reduce net debt by a total of $41.5 million.
The Company continues to expect modest revenue growth for the year, in line with previous guidance, adjusted for the extra week in the 2004 accounting calendar.
Good progress has also been made on improving operating margins. Past guidance called for the Company to improve its operating profit before restructuring and impairment charges by 5 percentage points in relation to revenue from the first-half 2004 to the second-half 2005. The first-half 2005 result reflected a 3.8 percentage point improvement thus far over the first- half 2004 base period.
We expect to see further improvement in the percentage operating margin in the second half of the year, but our current outlook indicates we may fall short of our 5 percentage point goal as a result of investments in our Digital Pen and Paper (DPP) and Print-on-Demand (POD) Services initiatives.
"DPP is an emerging market that shows promise. Although the initial adoption rate is proving slower than originally expected, we are encouraged by the results of our many customer pilots and the growing list of channel partners. Our second half calls for continued investment in product and market development," said Rediker.
"In addition, we have concluded that we must step up the level of investment in our POD Services business in order to ensure that we catch the building market momentum in this important growth segment. This will translate into an up-tick in our capital expenditures and SG&A expenses in the second half of the year, vis-a-vis our first-half run-rate," said Rediker, adding, "We will continue to strive for the 5 percentage point improvement, but that goal must be secondary to our strategic long-term business interests."
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