Standard Register fourth quarter revenue decreases to $161.4M

Feb 24 2012

Standard Register (NYSE: SR) today announced its financial results for the fourth quarter and full year 2011. The Company reported revenue of $161.4 million and a net loss of $95.5 million, or $3.28 per diluted share for the fourth quarter of 2011. The results compare to prior year fourth quarter revenue of $172.7 million and a net profit of $1.5 million, or $0.05 per diluted share. Non-GAAP net income, adjusted for pension loss amortization, restructuring charges and the deferred tax allowance, was $0.9 million, or $0.03 per diluted share, for the fourth quarter of 2011 as compared to $4.9 million, or $0.18 per diluted share, for the same period in 2010.

For the full year 2011, the Company reported revenue of $648.1 million and a net loss of $87.7 million, or $3.02 per diluted share. The annual results compare to prior year revenue of $668.4 million and a net profit of $0.4 million, or $0.01 per diluted share. Non-GAAP net income, adjusted for pension loss amortization and settlement, restructuring charges, the deferred tax valuation allowance, and post-retirement termination benefits, was $7.7 million for the full year, or $0.26 per diluted share as compared to $13.2 million, or $0.46 per diluted share, in 2010.

"We faced a number of challenges in 2011 as we continue to manage our transition to a core solutions business. We are not satisfied with our 2011 results, but we have taken aggressive steps to accelerate our transition and properly align our resources to capitalize on the opportunities we see across our platform," said Joseph P. Morgan, Jr., president and chief executive officer.

Morgan continued, "Our transition to market-facing business units, together with the investments we have made to enhance our digital print capabilities, healthcare software and services offering and innovative delivery and security systems, have enabled us to provide solutions that align brand communications with our customers' corporate priorities and standards and create growth opportunities."

Fourth Quarter Results

Total revenues declined 7 percent to $161.4 million in the fourth quarter versus $172.7 million in the prior year. Core solution revenues were flat during the quarter including the loss of a single Healthcare customer whose fourth quarter seasonal project did not repeat in 2011. Excluding the effect of the customer loss, core solutions generated revenue growth. Legacy products, such as business forms and transactional labels, across all business units continued to decline.

Healthcare revenue declined 11 percent to $59.3 million in the fourth quarter compared to $66.3 million in the prior year. Core solutions, excluding the impact of the loss of the seasonal customer noted previously, showed improved growth driven by the acquisition of 100 percent of the ownership interests in iMedConsent, LLC (dba Dialog Medical) which the Company completed in the third quarter as well as organic growth in patient communications and patient identification and safety solutions. Legacy clinical documents and administrative forms sales declined at an accelerated rate as customers advanced implementation of Electronic Medical Records (EMR) initiatives.

Financial Services grew 2 percent to $44.7 million in the fourth quarter compared to $43.9 million in the prior year as the Company completed the implementation of a new core solutions customer as well as the continued ramp up of several customers implemented in previous periods. These sales served to offset the loss of legacy and core solutions from a customer that is expected to impact revenues in this segment by an additional $15-18 million in the coming year. The Commercial Markets business unit experienced an 11 percent decline to $39.7 million for the quarter from $44.7 million in the prior year due to erosion in both legacy and core solutions.

The Industrial business unit generated $17.7 million in revenue for the quarter, roughly in line with its results for the fourth quarter of 2010. Overall softness in manufacturing parts solutions related to slowed growth among HVAC/R, electrical distribution and home appliance manufacturers and a reduction in transactional documents during the quarter were the key drivers of performance.

Gross margin as a percent of revenue decreased to 29.6 percent for the current year quarter from 32.0 percent in the prior year quarter. Fixed cost absorption challenges due to unit declines, material cost increases, particularly in pressure sensitive labels, and pricing pressures all contributed to the change. Selling, general and administrative expenses, excluding pension loss amortization, declined $0.8 million to $45.2 million, or 28.0 percent of revenue, relative to $46.0 million and 26.6 percent for the prior year quarter.

Full Year Results

Total revenues declined 3 percent for the full year versus 2010. As with the quarter, declines in legacy products outpaced the growth that was experienced from core solutions. However, as the year advanced the mix changed from 63 percent legacy and 37 percent core for 2010 to 60 percent legacy and 40 percent core for 2011 signaling a subtle shift in the portfolio composition.

Healthcare revenues declined 6 percent to $236.8 million from $251.0 million in the prior year mainly due to administrative and clinical documents that are largely being phased out as part of the EMR initiatives. The acquisition of Dialog Medical improved our software and services offering and contributed $2.2 million in revenue during the second half of 2011. In spite of the customer loss incurred during the fourth quarter, core solutions grew organically during the year.

Revenues in the Financial Services unit declined less than 1 percent for the year to $174.2 million from $175.7 million in 2010 reflecting a still heavy concentration in declining legacy transactional products. Implementation of new customers and expansion in marketing and critical communication solutions largely offset these declines. Commercial Markets revenues were $159.4 million for the year, a 7 percent decline from $170.6 million in 2010. The upgrade of our digital print network was very evident in this segment as we posted solid growth for the year. However, softness in core solutions sales as well as decreases in areas such as transaction labels created an overall decline for the segment.

Industrial revenues grew 9 percent to $77.8 million from $71.1 million in 2010 reflecting a strong first half within our customer base followed by a weaker second half. In-mold labeling solutions continued to make progress in increasing the pipeline of opportunities as well as booked revenues. Our Mexico operation also made progress with 24 percent revenue growth over the prior year and reporting profit for the current year.

Gross margin as a percent of revenue declined to 30.6 percent in the current year from 31.4 percent during the prior year. Selling, general and administrative expenses, excluding pension loss amortization, declined $3.6 million for the full year to $182.4 million, or 28.1 percent of revenue as compared to $185.9 million and 27.8 percent of revenue in the prior year.

For 2011, capital expenditures were $21.5 million the majority of which supported the advancement of the Company's core growth solutions. These expenditures consisted of $14.2 million in cash and $7.3 million in capital leases. In addition, the Company acquired 100 percent of the ownership interests of iMedConsent, LLC for $4.9 million in cash. Related to this acquisition a $0.7 million note payable will be paid over two years and, up to an additional $2.0 million in contingent payments will be made based upon the performance of the business through the two-year anniversary of the transaction. Pension funding contributions were $25.0 million for 2011. Non-GAAP cash on a net debt basis was negative $11.6 million for the year.

For 2012, the Company is planning to spend $9-11 million in capital expenditures to further support its core solutions offering and is planning to contribute at least the minimum requirement of $27 million for Pension funding.

Strategic Restructuring Program

On January 23, 2012, the Company announced a strategic restructuring program to better align resources in support of its growing core solutions business and to reduce costs to offset the impact of declining revenue in its legacy operations. The restructuring is expected to result in an estimated $45 million in annual savings and the elimination of 12 percent to 15 percent of its workforce over the next 6 to 9 months. Costs associated with the restructuring program reduced fourth quarter 2011 earnings by $5.5 million pre-tax, or $0.11 per diluted share. The balance of the costs will reduce 2012 earnings by approximately $1.5 million pre-tax, or $0.03 per diluted share.

Deferred Tax Valuation Allowance, Pension Valuation and Postretirement Healthcare Plan Termination

During the fourth quarter the Company recorded a non-cash charge to tax expense of $89.5 million to establish a valuation allowance against certain deferred tax assets, which reduced earnings per diluted share by $3.08. The action is necessary under accounting standards that require recording a valuation allowance when it is more likely than not that a portion of the asset will not be realized. The valuation allowance will be maintained until sufficient evidence exists to support its reversal.

Additionally, the Company recorded a non-cash actuarial loss of $80.5 million to other comprehensive income within equity as a result of actual pension asset performance as compared to actuarial assumptions and liability increases caused by continued declines in the discount rate. The recording of this loss has no impact on 2011 earnings and pension amortization for 2012 is expected at $5.8 million per quarter or $23.0 million for the full year.

During the third quarter, Standard Register terminated its postretirement healthcare plan effective December 31, 2011. The elimination of these benefits triggered a one-time favorable $20.2 million pre-tax impact to earnings due to the elimination of $5.1 million of accumulated postretirement benefit obligations recorded as a long-term liability on the balance sheet and a net credit of $15.1 million for the immediate recognition of previously unrecognized prior service credits and actuarial losses that resided in accumulated other comprehensive income and deferred tax liabilities. Going forward, the Company will no longer amortize the unrecognized prior service credits and actuarial losses that have been favorably impacting pre-tax earnings by $1.0 million per quarter or $4.0 million annually.

Change in Inventory Accounting Method

In the fourth quarter of 2011, the Company changed its method of accounting for inventory from using a combination of the LIFO method and the FIFO method to using the FIFO method for all of its inventories. The Company believes the new method of accounting for inventory is preferable because the FIFO method better reflects the current value of inventories, is used by key users of financial statements including the Company's lenders which use FIFO to value the collateral and to calculate its borrowing capacity and compliance with debt covenants, enhances comparability with industry peers, and provides consistency across all of operations regarding the method of accounting used for financial reporting. All prior periods presented have been adjusted to apply the new method of accounting.

Dividend

On January 23, 2012 Standard Register announced the suspension of its quarterly dividend as required by Ohio law, which calls for cash dividends to be paid only out of a corporation's statutory surplus. Because of the decline in book equity related to additional fourth quarter actuarial losses in the Company's pension plan and the valuation allowance established against deferred tax assets, there is not currently a statutory surplus. The suspension of the dividend results in the annual retention of approximately $6 million of capital by the Company. The $0.05 per share dividend which was declared on December 8, 2011 for shareholders on record as of February 24, 2012 will be paid on March 9, 2012.