Joseph P. Morgan - Chief Executive Officer, President, Director and Member of Executive Committee
Robert M. Ginnan - Chief Financial Officer, Executive Vice President and Treasurer
The Standard Register (SR) Q4 2013 Earnings Call February 21, 2014 10:00 AM ET
Good day, everyone, and welcome to Standard Register's 2013 Fourth Quarter and Full Year Results Conference Call. Today's call is being recorded. As a reminder, the presentation slides for today's conference are available by accessing the Investor Relations section of the Standard Register website at www.standardregister.com/investorcenter.
I will now turn the call over to Carol Merry. Please go ahead.
Thank you, Crystal. Good morning, everyone, and welcome to the Standard Register 2013 fourth quarter conference call. Earlier today, Standard Register published fourth quarter and full year 2013 results. The news release is available at the company's website. During our conference call, President and CEO, Joe Morgan; and Executive Vice President and CFO, Bob Ginnan, will discuss the company's performance and results.
Before we get started, I would like to remind you that today's presentation may contain forward-looking language and projections. These types of comments need to be taken into consideration with the Safe Harbor statement that can be found either in the earnings release Standard Register issued this morning, on the webcast slides that accompany this presentation, by accessing the company website under Investor Center or in the company's Securities and Exchange Commission filings.
In addition, the speakers may make use of financial measures that are not in accordance with generally accepted accounting principles or GAAP. It is management's belief that the use of these measures will assist the audience's understanding of our financial position. They're not meant to be used in isolation or as a substitution for GAAP, and a reconciliation between these measures and their GAAP counterparts can be found in the earnings release that was issued this morning.
For today's presentation, Joe Morgan will provide a few opening comments that will be followed by Bob Ginnan's review of the financials for the quarter and year-to-date. And Joe will then discuss the company's strategy and direction. And following his comments, we'll open up the call for your questions.
And now I'll turn the call over to Joe for his opening comments.
Joseph P. Morgan
Thank you, Carol. Good morning to everyone, and thank you for joining us today. As you know, from our previous reporting, 2013 was a very much transitional and, in many ways, transformative year for Standard Register. We're in a much different, much better position today than we were in 2013 when we began the year. We're starting to see the positive effects of our investments and the realignment actions that we have taken to stabilize the company and position us for sustainable growth over the long-term.
Today, there are many good things happening within the company and performance in the fourth quarter serves as an indicator for where we will be concentrating our attention going forward. The WorkflowOne acquisition was immediately accretive to our business, and you can see that in the increase in revenue in the fourth quarter. There are many other positive impacts as well, and I'll note a few of them, such as: the expansion of our customer base, which provides us with tremendous cross-selling opportunities; extension of our portfolio of products and solutions, which is also increasing the opportunities for our company; and also, significant purchasing power increase, which is something that we can leverage and improve our bottom line impact; and the greater depth of talent, which is a really big opportunity for the company. Our base is increasing as we take advantage of these opportunities across the company.
In addition, our investments in areas like high-speed inkjet, digital labeling, customer-facing technology, software and Healthcare are -- all of our growth areas are producing results in new customers and new work for existing customers. We brought additional talent into the company. We're driving operating performance improvements, plus advancing the growth solutions across the business. Throughout the company, we continue to be focused on managing expenses as a core part of what we do. We made good decisions on where to invest and we're frugal, as I often call our company. We spent our money very, very carefully because we have a great opportunity ahead of us. We've completed and we will continue to drive synergies across the business. We have the synergy plan well under way to achieve the $40 million that we have spoken about in the past when the integration is complete in 2015.
And the integration is proceeding rapidly and smoothly. We've completed the consolidation of the headquarters in Dayton. We've moved all selling resources into the BUs and we're integrating the facilities around the country.
Our pension liability, as you've seen, has decreased by $60 million during 2013, and we are meeting all of our funding obligations. And as reported in our earnings release, the company produced positive cash flow and net income in the fourth quarter.
Our work is not done. The markets are dynamic, but we have made very good progress in 2013, and it's being seen in the results for the quarter and for the year.
At this point, I'm going to turn it over to Bob for the financial results, and then I'll spend a little more time talking about the strategy.
Robert M. Ginnan
Thank you, Joe. Turning to the operating results. You can see, for the quarter, we had net income of $9 million versus a loss of $35 million last year. Kind of working up the P&L, revenue was $242 million, which reflects the growth Joe mentioned as a result of the acquisition. Margin, about the same percentage as last year and SG&A actually improved on a percentage basis, leaving us an operating profit of $15.8 million versus $7.1 million in the prior year. As we pointed out in the press release, we did -- as we converge policies of the 2 companies, we did reverse a vacation accrual, which was about $5 million of that operating profit there.
Pointing to the pension, in the third quarter, we elected the mark-to-market pension accounting with the corridor option. And so for the most part, pension is now out of the P&L. This represents the pension accounting adjustments made through actuarial adjustments because at the beginning of the year, our corridor was completely filled on the negative side. With the interest rate increases, we now have room in that corridor. And we've attached a chart in the back for you to get a better picture of how that corridor operates and where we are in that corridor. But for this quarter, we did recognize an expense there.
Additional restructuring of $5 million and then pretax income of $3.1 million. We did have a tax benefit that resulted -- as a result of the special rule within taxes, given our positive of the company's income and the fact that we had a loss for the year allowed us to recognize a tax benefit, thus, increasing the net income.
On a year-to-date basis, a $7.4 million loss, with $26.5 million in restructuring, about $10 million of that restructuring is the associated deal costs with the acquisition. So absent the restructuring cost there, positive on the year as well.
Looking at the segments and, actually, I'll work from the 2 charts that break out the segments and the solution, you'll see growth in each of the growth solutions within Healthcare, Marketing, Communications, Patient ID and Safety and the Patient Information Solutions and then, of course, Document Management, where the clinical forms reside that we've been talking about for quite some time.
Same with Business Solutions, growth in Marketing Communications, Customer Communications and the Product Marking & Labeling. And the interesting thing in both businesses is when you add up the 3 growth solutions versus Document Management in each business, they now outpace the prior year in terms -- or I'm sorry, outpace the Document Management. So the growth is starting to come to life there. So that's a good turning point.
On the balance sheet, most importantly, 2 things on the balance sheet. One is that the opening balance sheet work with the acquisition is all complete, and contained within the balance sheet here. And then secondly, as Joe pointed out, the $60 million decline in pension liability. Roughly $33 million of that was because of the rising interest rates and the other component comes from contributions made to the plan throughout the year. So a significant improvement in the pension liability and, thus, translating into net improvement in equity for the year, which was a very positive thing there as well.
On the cash flow, we did have positive cash flow in the quarter, a couple hundred thousand dollars, after the -- including all the restructuring payments. And for the year, we are negative $6.4 million, but we spent about $10 million on the deal costs. So positive without the deal cost for the year as well.
With that, that's the financial results. There is a chart in the back on the corridor if you'd like to understand more of that, as well as a GAAP to non-GAAP reconciliation in the back. Joe?
Joseph P. Morgan
Thanks, Bob. I'm going to talk a little bit about some of the things that are going on in each of the individual businesses, to give some more feel for the progress that's going on within the company.
For 2014, our focus is growing our growth solutions, which are reflected in the presentation. The integration achievement, we have a lot of activity going on there around operations, customer service and the overall business. And then ensuring that we achieve the operational outcome that we need, which is to be able to support our customers in the solutions that we are driving going forward. It's actually a very exciting alignment opportunity for the company.
The WorkflowOne acquisition has given us broader customer base. Very little overlap, as I said in previous calls, and some new products and solutions, as well as a broader depth technically in, from a capability standpoint, in Document Management, which we all know is one of the foundational components of our past, and continues to be important going forward, although, being a lesser part of the growth opportunity.
While the demand for printed forms, such as paper patient records, is decreasing, we know the slope of the curve. We understand the business and we're managing to that. So to go along with our Document Management service, we have positioned the company where the demand will be, which is our market focus, where growth will continue and where we can add value for our customers.
This is where I'm going to spend a little bit of time on each of the businesses. One thing that as you look at the deck that's provided along with the call, you'll see that we have 4 solution sets in each of the businesses: Healthcare and Business Solutions. You'll see Document Management as being the largest, but you'll also see that, through the acquisition, both businesses have seen growth in all of the solutions, which is pretty exciting for us. And what's really great is that there isn't a lot of customer overlap between the 2 companies. So the leverage opportunity as we get into the white space is really, really great.
So in Healthcare, the acquisition brought about 150 new hospitals and 50 to 75 new buying opportunities for our technology. These represent net new customers and very little overlap in solutions products and services, as I previously said. We are replacing printed forms and documents with our Patient Information and safety technology-enabled solutions, and this solution set continues to show strong growth. We're investing both at the capability and talent level very much in this area.
We're focused on selling promotional products, which is one of the things that came -- much more capability came with the acquisition of WorkflowOne, in Marketing Communications, into the Standard Register customer base and our Technology Solutions, conversely, into the former WorkflowOne customer base.
Our deep knowledge in the health care industry, patient engagement and patient-centric communication, is the basis for building this business. We have our HIMSS show next week, which is the largest health care technology show, that's taking place in Florida and we'll be talking about some new things that we're doing as a company that take advantage of the market knowledge that we've gained over the last couple of years.
In 2014, we will continue to focus our investments to grow our Healthcare Center of Excellence in Atlanta, which is focused on software development. We have the aim of becoming a dynamic software and related services health care business, backed by print and transactional communications solutions that are growing and expanding with our world-class customer base.
We expect growth to come from cross-selling into our large customer base within Healthcare, increasing that customer base as we look at tangent opportunities and introducing new solutions and services based on our expertise.
In parallel with that, our Business Solutions business has other opportunities. We have a tradition of printing that is foundational and still highly valuable in the hybrid landscape of digital and printed communications. A comment, we have an extremely talented sales team engaged to be a part of the future. The vast majority of those folks get it. We know where we need to go and we're spending a lot of time training our team to take full advantage of this hybrid environment.
We have invested in inkjet technology, with which we can insert color and variable data to customize the transactional documents such as checks, statements and forms that are critical to our customers' communications with their stakeholders. And this technology opens up new opportunities that could never before be addressed. And that's part of our go-forward plan as well. The inkjet technology has been installed in Sacramento, California and in Columbus, Ohio. We're already shipping profitable product to key customers.
Standard Register had a promotional products business prior to the acquisition, actually, that might be an overstatement, we had a promotional products product that we sold to customers. But WorkflowOne actually had a business, a robust operation and a very strong capability that has really been helpful for us in both Business Solutions and in Healthcare. We are taking advantage of new opportunities where we can bring this forward in addition to that marketing and consultative services around selection, kitting and distribution that allow us to leverage the Jeffersonville, Indiana investment that we made last year, which is up and operational and making great progress.
We continue to be excited about the opportunities in our Label business, where new product development is combining the application of material science and computer science technology to bring to life the future world of interactive communications between physical things, people and events. This is one of the growth areas for our business that we're very excited about, and as we look at the Mexico investments that we've made over the last several years, it fits very strongly aligned with this part of our company.
We expect growth in Business Solutions to come from deeper and broader penetration of our large customer base, where we can sell the entire suite of services that marketers need to run their businesses. We're viewed as an execution firm in this area. We're gaining new customers from partnerships that we've spoken about before like salesforce.com and ExactTarget that allow us to make marketing content seamlessly available through company sales forces and from applying our knowledge and experience in more market-specific ways.
The Jeffersonville Center of Excellence in Jeffersonville, Indiana is doing what we call marketing logistics. It's an asset for both Healthcare and Business Solutions customers, and we'll see even more benefit in 2014. We've put that in place strategically knowing that, over time, this is going to be the destination of logistics and marketing and kitting. And we're really excited about this capability and our partnership with UPS.
We continue to advance our SMARTworks customer-facing platform to improve the customer experience for all of our customers. We deployed new functionality in 2013, and we'll continue to introduce new advances in 2014. One of the great things about this part of our businesses is we've hired a new leader in Terry Williams, who's driving this change for the company as we move from a cost center to a profit center over time. We are customer-centric in this effort and everything we do, thinking about our customers as the primary driver for the future of our company.
Overall, our growth is coming from leveraging our talent, markets and customers, continuing on the transformational strategy to provide complete solutions and services for our customers' critical communications. We talk about strategy a lot in our business, we've talked about advancing our customers' reputation and how we do that is by being central, always, on critical communications. We haven't come off from that in 3 years, and that's really driving -- it drove the WorkflowOne acquisition and it drives most of the investments that we make in our business.
We've identified strong opportunities to sell our existing solutions into what the marketers call the white space in our very large customer base, as well as newly developed offerings at the beginning of their life cycles. In addition to the large and enterprise companies we are well equipped to serve, we continue to look for channel partners to introduce our solutions and customer-facing platform -- in the customer-facing platform to broaden middle-market opportunities, where a lot of dynamic innovation takes place.
We evaluate acquisitions that can enhance our offerings and bring new customers and markets. Over the last several years, we've actually made 3 acquisitions that have all been accretive. We acquired some in-mold labeling capability with patents a couple of years ago. We acquired a health care software company, which was called Dialog Medical, that has really advanced our position with content workflow and analytics. And then recently, with WorkflowOne, we've advanced our position in every solution with a broader customer base. And we're beginning to engage with international partners, where appropriate, to meet our customers' needs.
We, and I, are more confident today and more energized going into 2014. We are, though, a very skilled and aware leadership team. We understand we're in a very challenging marketplace. We're fully cognizant of those challenges and the macroeconomic conditions and industry trends. But we are confident in our strategy and absolutely determined to execute it successfully. I look forward to reporting our progress throughout 2014, and I can tell you that our team is very, very excited about the 3 things that I mentioned at the start: growing our growth solutions, ensuring that the integration takes place and that at the end of this, we have the strongest operational footprint possible in the business we support for those great customers we have in the markets we serve.
With that, Bob and I are now available for questions, and thank you.
[Operator Instructions] And your first question comes from the line of with Gary Hugh [ph] at STC Capital.
Could you just remind us, I don't know if you've given this out yet, can you give us some guidance on -- $40 million is the total synergies. Could give us a sense for what you captured to date and what you plan to sort of get through in '14?
Robert M. Ginnan
I don't think we're prepared to talk about '14 other than in terms of the total, which you mentioned there. In the fourth quarter, I would say that it's probably about $3 million actually realized in the quarter.
Okay. And do you have sort of a quantity of cash that you've expended to date on integration and then a plan for cash that you'd expend in 2014?
Robert M. Ginnan
Well, what we said, year-to-date, in our cash flow, I believe that -- let me get that here. In ...
It could be directional, too, it doesn't have to be an amount [ph].
Robert M. Ginnan
Yes. Probably, including the deal costs and the integration, we're probably about $15 million in 2013, with the number and that's all for cash flow and the deal cost fees. And as far as '14 goes, we're not prepared to disclose that specifically. However, we did say in the press release that we will be negative in the year as we really focus on integrating the companies, being the primary driver there.
Okay, that makes sense. And I don't know if you've given the information out in your past filings to come up with this number or not, but do you have a sort of pro forma Standard Register workflow, third quarter '13 revenue and EBITDA, as if the acquisition took place at the beginning of the quarter? I guess it closed August 1, so the 10-Q doesn't give a -- it's gives an okay picture but not a full picture to sort of compare the $242 million of revenue and the $25.5 million of EBITDA.
Robert M. Ginnan
Yes, in the 10-K, when we file that here in a little over a week or so, we'll have that detail in there for you.
Okay. Great. And then is there any way -- I'm not a -- by no means am I a pension expert, is there any way you could sort of give a little bit more detail on how Slide 11 works with respect to the pension? If I understood what your comment was, you don't anticipate having pension expense in your income statement, not going forward or is it something different than that?
Robert M. Ginnan
That's a potential conclusion but with a couple of caveats around that. And so if you look at that slide, when we elected the mark-to-market accounting, we did select the corridor option, which basically says that you have a quarter of plus or minus 10% of your liability, or your asset, if that would be bigger, but in our case the liability is bigger. So you have a quarter of plus or minus 10% but basically, if you're within that corridor, any of the actuarial adjustments which include interest rate changes, asset performance, et cetera, actually, just stay within that corridor and you don't take anything to the P&L. So if you look at Slide 11, what that says is, coming into the year, our corridor, I kind of think of it as a bucket was completely filled on the negative side. And with the increase in interest rates, that gain actually then reduced the liability but also started to empty the bucket. So that graph kind of gives you a feeling that roughly -- you're at roughly $40 million to $50 million bucket in terms of the corridor and we only have about $18.5 million on the negative side. Now then you -- hopefully, as interest rates rise, you start to go into the positive side but you don't take gains to the P&L either until you've surpassed that $47 million in terms of gains on the positive side either. So if rates stay flat or continue to rise, we should be pretty clean here going forward for a little bit of time.
But so I guess, I'm just trying to -- at a high-level, I'm just trying to think about the business. So you -- and the $25 million of EBIT -- $25.5 million EBITDA, that has the benefit change in it. So maybe, call it, closer to $20 million, but you'll pick up some synergies over time, ideally. And I know this is going to sound really crude to you but if $20 million is sort of 80-ish and then you pick up $30 million, $35 million more, let's say, you're kind of at $115 million or so of normalized maybe EBITDA. But you don't have any -- there's no pension expense in that and you're still -- and you're going to contribute just under $40 million, do you plan to -- at least, that's what the press release said. You're going to plan to contribute just under $40 million of cash to your pension in 2014. And do you know now -- do you have any sense for what a '15 contribution will be? Will there be -- just directionally, do you have any sense for what that will be?
Robert M. Ginnan
Yes, and I'll tell you what, we will actually put the next 3 years in the 10-K. We'll going to put that in there for you for the...
But do you think it's going to be coming down in '15 or still be able to...
Robert M. Ginnan
Yes, because 2014 is the high point. But '15 is not necessarily dramatic but 2014 is the high point.
Yes, because it's big. I mean, as I'm sure you think about that, too.
Robert M. Ginnan
Okay. All right, well, that's very helpful. And let me just try to go to my last one because I don't want take up too much of your time. And then well, I guess, one of them -- you answered or it was in your slide, there's $51.3 million drawn on the ABL facility?
Robert M. Ginnan
Okay. And how much -- the ABL is $125 million, how much -- is the whole $125 million, other than the $51.3 million, is the other amount available or is that constrained?
Robert M. Ginnan
It's pretty much available. We have a little bit of letters of credit that doesn't amount to a whole heck of a lot but takes some of that capacity. And then we have, obviously, we don't want to operate at the very end of that. So it's not technically constrained but from an operating perspective, it is.
Okay. And then do you have, like, a capital expenditures plan for 2014?
Robert M. Ginnan
We will. In the 10-K, we will put a range in there for you.
Well, if there are no more questions, this will conclude our call today, and we thank everyone for participating.
This does conclude today's conference call. You may now disconnect.
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