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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10-Q


[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 28, 2004


OR


[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ________ to ________


Commission file number 0-01097



THE STANDARD REGISTER COMPANY

(Exact name of Registrant as specified in its charter)


OHIO

31-0455440

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)


600 ALBANY STREET, DAYTON OHIO

45408

(Address of principal executive offices)

(Zip Code)


(937) 221-1000

(Registrant’s telephone number, including area code)




Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X     No    


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  X     No


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class

 

Outstanding as of March 28, 2004

Common stock, $1.00 par value

 

23,781,850 shares

Class A stock, $1.00 par value

 

4,725,000 shares







#






THE STANDARD REGISTER COMPANY

FORM 10-Q

For the Quarter Ended March 28, 2004




INDEX


 

Page

Part I – Financial Information

 
   
 

Item 1. Consolidated Financial Statements

 
     
  

a)

Consolidated Statement of Income and Comprehensive Income

 
   

for the 13 Weeks Ended March 28, 2004 and March 30, 2003

3

     
  

b)

Consolidated Balance Sheet

 
   

as of March 28, 2004 and December 28, 2003

4

     
  

c)

Consolidated Statement of Cash Flows

 
   

for the 13 Weeks Ended March 28, 2004 and March 30, 2003

6

     
  

d)

Notes to Consolidated Financial Statements

7

     
 

Item 2. Management's Discussion and Analysis of Financial Condition

14

   

and Results of Operations

 
     
 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

28

   
 

Item 4. Controls and Procedures

28

     
     

Part II – Other Information

 
     
 

Item 1. Legal Proceedings

29

   
 

Item 2. Changes in Securities and Use of  Proceeds

29

   
 

Item 3. Defaults upon Senior Securities

29

   
 

Item 4. Submission of Matters to a Vote of Security Holders

29

   
 

Item 5. Other Information

29

   
 

Item 6. Exhibits and Reports on Form 8-K

29

   

Signatures

30

  





PART I - FINANCIAL INFORMATION

THE STANDARD REGISTER COMPANY

 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 (Dollars in thousands, except per share amounts)

 

13 Weeks Ended

 

13 Weeks Ended

 

March 28

 

March 30

 

2004

 

2003

REVENUE

   

  Products

 $             189,168

 

 $             193,088

  Services

                  36,886

 

                  43,055

    Total revenue

                226,054

 

                236,143

COST OF SALES

   

  Products

                116,843

 

                116,647

  Services

                  25,668

 

                  30,995

    Total cost of sales

                142,511

 

                147,642

GROSS MARGIN

                  83,543

 

                  88,501

OPERATING EXPENSES

   

  Research and development

                    3,605

 

                    5,034

  Selling, general and administrative

                  75,837

 

                  71,525

  Depreciation and amortization

                  10,636

 

                  12,593

  Restructuring charges

                    3,381

 

                           -

      Total operating expenses

                  93,459

 

                  89,152

LOSS FROM OPERATIONS

                  (9,916)

 

                     (651)

OTHER INCOME (EXPENSE)

   

  Interest expense

                     (690)

 

                  (1,663)

  Investment income and other

                         50

 

                       396

    Total other expense

                     (640)

 

                  (1,267)

LOSS BEFORE INCOME TAXES

                (10,556)

 

                  (1,918)

INCOME TAX BENEFIT

                  (4,057)

 

                     (786)

NET LOSS

$               (6,499)

 

$               (1,132)

LOSS PER SHARE

$                 (0.23)

 

$                 (0.04)

Dividends Paid Per Share

$                   0.23

 

$                   0.23

NET LOSS

$              (6,499)

 

$               (1,132)

Deferred cost on interest rate swap, net of $815

   

     deferred income tax expense

                           -

 

                    1,210

Unrealized gain on available-for-sale securities

                           -

 

                       660

Deferred cost on forward contract net of $0 and $146

   

      deferred tax expense

                     (138)

 

                       216

Foreign currency translation adjustment

                         -   

 

                       500

COMPREHENSIVE (LOSS) INCOME

$               (6,637)

 

$                 1,454

See accompanying notes.

   
 



THE STANDARD REGISTER COMPANY

    

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    
 

March 28,

 

December 28,

A S S E T S

2004

 

2003

    

CURRENT ASSETS

   

  Cash and cash equivalents

 $     58,019

 

 $     76,959

  Accounts and notes receivable, less allowance for doubtful

   

    accounts of $3,301 and $3,740, respectively

      131,727

 

      125,943

  Inventories

        51,646

 

        49,757

  Prepaid income taxes

          1,594

 

          2,251

  Deferred income taxes

        19,350

 

        19,297

  Prepaid expense

        13,488

 

        11,254

      Total current assets

      275,824

 

      285,461

    
    

PLANT AND EQUIPMENT

   

  Buildings and improvements

        69,502

 

        68,891

  Machinery and equipment

      224,338

 

      224,294

  Office equipment

      166,262

 

      167,524

      Total

      460,102

 

      460,709

    Less accumulated depreciation

      309,896

 

      304,075

      Depreciated cost

      150,206

 

      156,634

  Plant and equipment under construction

          6,321

 

          3,556

  Land

          3,233

 

          3,233

  Net assets held for sale

             685

 

          2,115

      Total plant and equipment

      160,445

 

      165,538

    
    

OTHER ASSETS

   

  Goodwill

        53,616

 

        53,616

  Intangible assets, net

        14,716

 

        15,007

  Deferred tax asset

        76,604

 

        72,654

  Software development costs, net

        11,642

 

        12,197

  Restricted cash

          1,983

 

          1,971

  Other

        22,699

 

        22,513

      Total other assets

      181,260

 

      177,958

    

      Total assets

 $   617,529

 

 $   628,957

    

See accompanying notes.

   
 



THE STANDARD REGISTER COMPANY

    

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    
 

March 28,

 

December 28,

LIABILITIES AND SHAREHOLDERS' EQUITY  

2004

 

2003

    

CURRENT LIABILITIES

   

  Current portion of long-term debt

 $              -

 

 $            12

  Accounts payable

        25,746

 

        32,089

  Accrued compensation

        29,101

 

        23,928

  Deferred revenue

        11,227

 

        10,979

  Accrued restructuring

          3,342

 

          2,828

  Other current liabilities

        24,334

 

        29,987

      Total current liabilities

        93,750

 

        99,823

    

LONG-TERM LIABILITIES

   

  Long-term debt

      125,000

 

      125,000

  Pension benefit obligation

        90,393

 

        89,608

  Retiree health care obligation

        49,321

 

        49,769

  Deferred compensation

        15,193

 

        15,526

  Other long-term liabilities

             574

 

             643

      Total long-term liabilities

      280,481

 

      280,546

    

SHAREHOLDERS' EQUITY

   

  Common stock, $1.00 par value:

   

    Authorized 101,000,000 shares

   

    Issued 2004 -25,705,612; 2003 - 25,667,217

        25,706

 

        25,667

  Class A stock, $1.00 par value:

   

    Authorized 9,450,000 shares

   

    Issued - 4,725,000

          4,725

 

          4,725

  Capital in excess of par value

        57,178

 

        56,687

  Accumulated other comprehensive losses

    (121,657)

 

    (121,499)

  Retained earnings

      331,657

 

      338,164

  Treasury stock at cost:

   

     1,923,762 shares

      (49,351)

 

      (49,351)

  Unearned compensation - restricted stock

        (4,960)

 

        (5,805)

     Total shareholders' equity

      243,298

 

      248,588

    

     Total liabilities and shareholders' equity

 $   617,529

 

 $   628,957

    
    

See accompanying notes.

   
 

THE STANDARD REGISTER COMPANY

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Dollars in thousands)

 

 13 Weeks Ended

 

 13 Weeks Ended

 

March 28

 

March 30

 

2004

 

2003

CASH FLOWS FROM OPERATING ACTIVITIES

   

  Net loss

 $             (6,499)

 

 $             (1,132)

  Adjustments to reconcile net loss to net

   

  cash (used in) provided by operating activities:

   

    Depreciation and amortization

                10,636

 

                12,593

    Restructuring charges

                  3,381

 

                         -

    Pension and postretirement benefit expense

                  5,785

 

                  2,690

    Amortization of unearned compensation - restricted stock

                     633

 

                     526

    Loss on sale of assets

                       67

 

                     143

    Deferred income taxes

                (4,003)

 

                   (321)

    Other

                       66

 

                       58

  Changes in operating assets and liabilities:

   

      Accounts and notes receivable

                (5,784)

 

                15,765

      Inventories

                (1,889)

 

                  6,020

      Prepaid income taxes

                     657

 

                   (246)

      Other assets

                (2,930)

 

                (1,356)

      Restructuring spending

                (2,866)

 

                (1,307)

      Accounts payable and accrued expenses

                   (276)

 

                (7,902)

      Pension and postretirement obligation

                (5,448)

 

              (10,504)

      Deferred income

                     248

 

                  1,349

      Other liabilities

                   (402)

 

                   (799)

        Net cash (used in) provided by operating activities

                (8,624)

 

                15,577

CASH FLOWS FROM INVESTING ACTIVITIES

   

  Additions to plant and equipment

                (5,310)

 

                (4,238)

  Proceeds from sale of plant and equipment

                     907

 

                  1,835

  Additions to other investments

                         -

 

                   (293)

        Net cash used in investing activities

                (4,403)

 

                (2,696)

CASH FLOWS FROM FINANCING ACTIVITIES

   

  Principal payments on long-term debt

                     (12)

 

              (27,449)

  Proceeds from issuance of common stock

                     657

 

                     559

  Dividends paid

                (6,555)

 

                (6,527)

        Net cash used in financing activities

                (5,910)

 

              (33,417)

Effect of exchange rate changes on cash

                       (3)

 

                     529

NET DECREASE IN CASH AND CASH EQUIVALENTS

              (18,940)

 

              (20,007)

  Cash and cash equivalents at beginning of period

                76,959

 

              122,579

CASH AND CASH EQUIVALENTS

   

  AT END OF PERIOD

 $             58,019

 

 $           102,572

See accompanying notes.

   
 



THE STANDARD REGISTER COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



NOTE 1 – BASIS OF PRESENTATION


The accompanying consolidated financial statements include the accounts of The Standard Register Company and its wholly owned subsidiaries (collectively, the Company) after elimination of intercompany transactions, profits, and balances.  The Company’s investments in international joint ventures are included in the accompanying consolidated financial statements using the equity method of accounting.  The Company’s share of earnings (losses) from these joint ventures is included in Investment income (expense) for periods ending one month prior to the Company’s fiscal period-end in order to ensure timely preparation of the consolidated financial statements.  The consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required for complete annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 28, 2003 included in the Company’s Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included.  The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.  Certain prior-year amounts have been reclassified to conform to the current-year presentation.

NOTE 2 – RESTRUCTURING CHARGES


In January 2001, the Company announced a restructuring and renewal plan (Renewal Plan), designed to establish a solid platform for long-term earnings growth and recover its market value.  The Renewal Plan was comprised of four components: restructuring, reorganization, performance improvement, and investments for future growth.  In 2001, the Company completed a major restructuring plan and in the last two fiscal years has executed additional restructuring actions as part of a multi-year program aimed at realigning our resources to improve utilization and profitability.  These restructuring plans are more fully described in Note 3 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2003.

A summary of total restructuring charges recorded in 2004 is as follows:


   

Directly to

 

Charges to

 

2004

   

Restructuring

 

Restructuring

 

Restructuring

 

 

 

Expense

 

Accrual

 

Expense

2004 restructuring

  

 $          215

 

 $      2,297

 

 $        2,512

2003 restructuring

  

             268

 

               -

 

             268

2001 restructuring

  

             601

 

               -

 

             601

 

 

 

 

 

 

 

 

Total restructuring expense

 

 

 $        1,084

 

 $      2,297

 

 $        3,381



Liabilities for costs associated with a restructuring cannot be recorded until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  Therefore, certain restructuring costs, primarily sublease payments and the associated taxes, utilities and maintenance costs, and remaining relocation costs will be expensed as incurred through 2006.  All costs are included in restructuring charges in the accompanying Consolidated Statements of Income.


2004 Restructuring

As part of a drive to reduce costs and accelerate growth, the Company integrated its sales specialist organization with its regional sales organization to improve coordination, resource deployment, and productivity; adjusted its Client Services model to improve efficiency and performance through better alignment of resources with the sales organization and customer base; and went to a shared service model in various administrative areas to reduce costs and increase focus on key initiatives.  As a result, the Company eliminated a number of positions, particularly in the Document and Label Solutions segment.

In a continuing effort to reduce costs, the Company also plans to outsource part of its information technology operations in the second quarter of 2004, including hardware management, help desk support, and telecommunications.

Pre-tax components of 2004 restructuring charges are as follows:


  

Total Costs

   

Cumulative-

  

Expected

 

Q1 2004

 

to-Date

  

to be

 

Restructuring

 

Restructuring

 

 

Incurred

 

Expense

 

Expense

Severance and employer related costs

 

$               3,900

 

$               2,332

 

$                 2,332

Contract lease termination costs

 

                     150

 

                  135

 

                       135

Other exit costs

 

                       50

 

                    45

 

                         45

 

 

$               4,100

 

$               2,512

 

$                 2,512

BY SEGMENT:

      

Document and Label Solutions

 

$               2,900

 

$               2,221

 

$                 2,221

Fulfillment Services

 

                     200

 

                   165

 

                       165

Other

 

                  1,000

 

                   126

 

                       126

Total

 

$               4,100

 

$               2,512

 

$                 2,512


A summary of the 2004 restructuring accrual activity is as follows:


 

 Charged to

 

 Incurred

 

Balance

 

Accrual

 

in 2004

 

2004

Severance and employer related costs

$            2,162

 

$             (635)

 

$            1,527

Contract termination costs

                  135

 

                      -

 

            135

      Total

$            2,297

 

$             (635)

 

$            1,662



2003 Restructuring

In the second quarter of 2003, the Company initiated several actions to improve utilization and profitability and to provide for continuing investment in growth initiatives.  The Company consolidated four printing and service operations within the Fulfillment Services segment to form a new state-of-the-art regional print-on-demand and fulfillment center in Dallas, Texas.  Within the Document and Label Solutions segment, a rotary printing plant was closed to trim excess capacity and several warehouses were consolidated in response to shifting demand in favor of print-on-demand services.  

Within the InSystems segment, the Company determined that certain software development initiatives would not produce an adequate return and elected to stop further investment in those projects.  In conjunction with this decision and to further reduce costs, the Company reduced staffing levels within this segment.  The Company also eliminated management and other positions at its corporate headquarters.  Most of these actions were completed by the end of 2003.  In addition, the Company planned for the relocation of SMARTworks personnel and support operations, which occurred in the first quarter of 2004.  

Pre-tax components of 2003 restructuring charges are as follows:


  

Total Costs

 

Total

 

Cumulative

  

Expected

 

Q1 2004

 

To-date

  

to be

 

Restructuring

 

Restructuring

 

 

Incurred

 

Expense

 

Expense

       

Severance and employer related costs

 

$           11,054

 

$                    -

 

$           11,054

Contract termination costs:

      

Lease obligations

 

               3,100

 

                  125

 

               2,186

Contractual lease obligations for taxes,

      

utilities, and maintenance costs

 

                 398

 

                    (3)

 

                   395

Associated costs:

      

Travel

 

                  332

 

                      -

 

                   332

Equipment removal and relocation

 

               2,904

 

                       -

 

                2,904

Other exit costs

 

                1,792

 

                  146

 

                1,938

 

 

$          19,580

 

$                268

 

$           18,809

BY SEGMENT:

      

Document and Label Solutions

 

$          11,505

 

$                  30

 

$           11,096

Fulfillment Services

 

            4,967

 

                    74

 

               4,442

InSystems

 

             2,324

 

                       -

 

             2,324

Other

 

                784

 

                  164

 

                 947

Total

 

$         19,580

 

$                268

 

$           18,809

A summary of the 2003 restructuring accrual activity is as follows:

 

Charged to

 

Incurred

 

Reversed

 

Balance

 

Incurred

 

Balance

 

Accrual

 

in 2003

 

in 2003

 

2003

 

in 2004

 

2004

Severance and employer related costs

 $       10,807

 

 $    (9,415)

 

 $         (64)

 

 $  1,328

 

 $       (955)

 

 $       373

Contract termination costs

            2,330

 

          (830)

 

                -

 

     1,500

 

          (193)

 

       1,307

      Total

 $       13,137

 

 $  (10,245)

 

 $         (64)

 

 $  2,828

 

 $    (1,148)

 

 $    1,680



2001 Restructuring

Due to the nature of the charges and the duration of the 2001 restructuring program, estimates of the liability for contract exit costs required significant judgment.  The Company has been unable to sublease as many of the facilities as expected or to buyout the leases with as favorable terms as originally anticipated.  As a result, the liability for contract exit and termination costs was in excess of the amount originally estimated.  Approximately $3,275 of remaining lease payments will be charged to restructuring expense as incurred through 2006, of which $601 was expensed in the first quarter of 2004.


NOTE 3 – INVENTORIES


The components of inventories are as follows:

  

March 28,

 

December 28,

 

 

2004

 

2003

     

Finished products

 

 $        43,178

 

 $       38,975

Jobs in process

 

             3,441

 

            5,506

Materials and supplies

 

             5,027

 

            5,276

     

Total

 

 $        51,646

 

 $       49,757



NOTE 4 – EARNINGS PER SHARE


The weighted-average number of shares outstanding for calculation of earnings per share (EPS) was 28,483,032 and 28,202,146 for the 13-week periods ended March 28, 2004 and March 30, 2003, respectively.  The effects of stock options on diluted EPS are reflected through the application of the treasury stock method.  Under this method, proceeds received by the Company, based on assumed exercise, are hypothetically used to repurchase the Company’s shares at the average market price for the period. Due to the net loss incurred in first quarters 2004 and 2003, no outstanding options were included in the EPS computation because they would automatically result in anti-dilution.


NOTE 5 – STOCK OPTIONS

The Company has two stock-based employee compensation plans, which are fully described in Note 14 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2003.  The Company accounts for those plans using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost is recognized in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  

Had compensation cost for the Company’s stock-based employee compensation plans been determined based on the fair value of such awards at the grant dates consistent with the provisions of SFAS No. 123, the Company’s total and per share net income would be reduced as follows:



  

13 Weeks Ended

 

13 Weeks Ended

 

 

 

 March 28, 2004

 

 March 30, 2003

 

Net loss as reported

 

 $        (6,499)

 

 $     (1,132)

 

Less total compensation expense determined under

    

the fair value based method for all awards, net

 

             (401)

 

           (448)

 

Proforma net loss

 

 $        (6,900)

 

 $     (1,580)

 

Net loss per share

     

As reported

 

 $         (0.23)

 

 $       (0.04)

 

Proforma

 

 $         (0.24)

 

 $       (0.06)

 


NOTE 6 – PENSION PLANS

The Company has a qualified defined benefit plan and a nonqualified supplementary benefit plan that provides supplemental pension payments in excess of qualified plan payments including payments in excess of limits imposed by federal tax law and other benefits.  In addition, the Company has a noncontributory supplemental nonqualified retirement plan for elected officers.  These plans are more fully described in Note 15 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2003.  

Net periodic benefit cost includes the following components:

 

13 Weeks Ended

 

13 Weeks Ended

 

March 28, 2004

 

March 30, 2003

Service cost of benefits earned

 $               3,094

 

 $          3,129

Interest cost on projected benefit obligation

                  6,716

 

             6,844

Expected return on plan assets

                (8,319)

 

            (9,650)

Amortization of prior service costs

                     280

 

                266

Curtailment loss

                         -

 

                156

Amortization of net loss from prior periods

                  4,463

 

             1,898

Total

 $               6,234

 

 $          2,643


The Company does not have a minimum funding requirement in 2004.  The Company contributed $5,000 to the qualified pension plan in the first quarter; the plan was funded by an additional $5,000 in April 2004.


NOTE 7 – POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

In addition to providing pension benefits, the Company provides certain healthcare benefits for eligible retired employees as described in Note 16 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2003.  


Postretirement benefit cost includes the following components:

 

 13 Weeks Ended

 

 13 Weeks Ended

 

 

March 28, 2004

 

March 30, 2003

 

Service cost

 $                      -

 

 $              -

 

Interest cost

                    617

 

             922

 

Amortization of prior service cost

                   (552)

 

           (407)

 

Amortization of net loss from prior periods

                    334

 

             440

 

   Total

 $                 399

 

 $          955

 

The funding policy is to pay claims as they occur. Payments for postretirement health benefits, net of retiree contributions, were approximately $870 in first quarter 2004.  


NOTE 8 SEGMENT REPORTING

In fiscal 2004, the Company reclassified certain operating segments that are included in its reportable segments. The Company’s three reportable segments continue to be Document and Label Solutions, Fulfillment Services, and InSystems.

SMARTworks, previously a wholly owned subsidiary, was merged and became part of the Company’s corporate center.  Corporate center costs are generally allocated to reportable segments, except for certain components of pension expense and new product development costs that are not being allocated in 2004.  The document systems group that was previously part of InSystems became part of Document and Label Solutions.  Commercial Print, a new operating segment, is aggregated with International and PathForward into Other.  

Segment profit and loss information for 2003 has been revised from previously reported amounts to reflect the current organizational structure.  2003 asset amounts have not been revised because it is not practicable to do so.  

Information about the Company’s operations by segment for the 13-week periods ended March 28, 2004 and March 30, 2003 is as follows:

    

Document

        
    

and Label

 

Fulfillment

      
    

Solutions

 

Services

 

InSystems

 

Other

 

Total

Revenue from external customers

 

2004

 

$       158,365

 

$      59,533

 

$       3,291

 

$        4,865

 

$      226,054

 

 

2003

 

         165,357

 

        60,210

 

          5,956

 

         4,620

 

         236,143

Intersegment revenues

 

2004

 

$                   -

 

$                -

 

$               -

 

$                -

 

$                  -

 

 

2003

 

                    -

 

                 -

 

                -

 

            127

 

               127

Operating income (loss) (a)

 

2004

 

$           2,057

 

$      (2,453)

 

$     (2,469)

 

$      (1,826)

 

$        (4,691)

 

 

2003

 

            4,081

 

        (1,094)

 

        (1,272)

 

       (1,124)

 

             591

Total assets

 

2004

 

$        270,102

 

$       71,031

 

$      88,306

 

$         8,688

 

$      438,127

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) 2004 operating income (loss) includes the following restructuring charges

    
    

$        2,251

 

$           239

 

$               -

 

$                -

 

$           2,490




Reconciling information between reportable segments and the Company’s consolidated financial statements for the 13-week periods ended March 28, 2004 and March 30, 2003 is as follows:

  

Thirteen Weeks Ended

  

March 28,

 

March 30,

 

 

2004

 

2003

     

Operating Income (Loss)

 

 $        (4,691)

 

 $            591

Corporate restructuring charges

 

             (891)

 

                  -

Corporate and other

 

          (4,334)

 

          (1,242)

Total other expense

 

             (640)

 

          (1,267)

   Loss before income tax benefit

 

 $      (10,556)

 

 $        (1,918)

     

Total Assets

 

 $      438,127

  

Corporate and unallocated

 

        179,402

 

 

   Total consolidated assets

 

 $      617,529

 

 



Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Dollars in Millions, Except Per Share Amounts)


References to “we,” “us,” “our,” “the Company,” or “Standard Register” refer to The Standard Register Company unless the context indicates otherwise.

FORWARD-LOOKING INFORMATION

This report includes forward-looking statements covered by the Private Securities Litigation Reform Act of 1995.  Because such statements deal with future events, they are subject to various risks and uncertainties and actual results for fiscal year 2004 and beyond could differ materially from the Company’s current expectations.  Forward-looking statements are identified by words such as “anticipates,” “projects,” “expects,” “plans,” “intends,” “believes,” “estimates,” “targets,” and other similar expressions that indicate trends and future events.  Factors that could cause the Company’s results to differ materially from those expressed in forward-looking statements include, without limitation, variation in demand and acceptance of the Company’s products and services, the frequency, magnitude, and timing of paper and other raw material price changes, general business and economic conditions beyond the Company’s control, timing of the completion and integration of acquisitions, the consequences of competitive factors in the marketplace, ability to retain large customer contracts, the Company’s success in attracting and retaining key personnel, and the effect of alternative technologies on the Company’s traditional product offerings.  The Company undertakes no obligation to update forward-looking statements as a result of new information since these statements may no longer be accurate or timely.  

We caution you that the following risks and factors, and those other business risks discussed elsewhere in this report, could cause our actual results to differ materially from those included in forward-looking statements.

Variation in demand and acceptance of our products and services

We have a wide array of products and services—from printed products to digital solutions to managed services.  Our custom-printed single- and multiple-part business forms represent mature products that are in decline as companies increasingly adopt electronic forms and other e-business solutions.  These declines could be offset by capturing increased market share in the traditional document business and generating new revenue through solutions such as print-on-demand, document automation software and managed services. Demand for our new offerings will vary by customer and industry, depending on their technological advancement and business priorities.

Frequency, magnitude, and timing of paper and other raw material price changes

When paper mills raise prices on raw material, we generally increase prices to recover these costs.  We have historically been successful in passing on most increases over several quarters.

General business and economic conditions beyond our control

Economic conditions impact the demand for our products and services.  A weak economy can cause delays in customers’ investments in technology, business process improvements and other initiatives as well as cause lower consumption of forms, labels and customer communications through reduced business activity.

Timing of the completion and integration of acquisitions

In order to take advantage of growth opportunities and to enhance the products and services we offer, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.  These risks and uncertainties include: (1) our ability to achieve strategic objectives, cost savings, and other benefits from the acquisition; (2) the risk that the technologies acquired do not prove to be those needed to succeed in those markets; (3) the potential loss of key employees of the acquired business; (4) the risk of entering new markets in which we have limited experience; and (5) the impact from future impairments of goodwill of an acquired business.

Consequences of competitive factors in the marketplace

Some of the industries in which we operate are highly competitive, and we expect that this level of competition on pricing and product offerings will continue.  Factors that could affect our ability to compete successfully include competitive pressures that result in increased price reductions and further consolidation of the forms industry, resulting in much larger competitors.

Ability to retain large customer contracts

Approximately 35% of our revenue is generated through contractual agreements with a number of healthcare group purchasing organizations.  Our ability to retain and grow these relationships generally impacts revenue in this industry segment.  

Success in attracting and retaining key personnel  

Our success depends in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel.  The loss of services of any of our key personnel or our inability to attract or retain qualified personnel in the future could impair our ability to meet our key objectives.

The effect of alternative technologies on our traditional product offerings

The market for our traditional products is undergoing significant change.  Our success, in part, is dependent on our ability to successfully develop and introduce new digital products and services.


OVERVIEW

The Company

We are a leading provider of information solutions for the healthcare, financial services, insurance, pharmaceutical, manufacturing, and transportation industries.  Our products and services include the design, production, management, and distribution of printed and electronic documents; label solutions; data-capture systems; document security; fulfillment and other outsourcing services; e-business solutions; and consulting services.  

As a strategic partner in migrating companies from paper-based to digital processes, our strategy is to provide a full spectrum of solutions – from printed documents to consulting to digital solutions - and continue to expand capabilities that help organizations effectively capture, manage, and use information to improve their business results.  Organizations leverage Standard Register’s deep industry expertise and innovative solutions to increase efficiency, reduce cost, enhance security, and strengthen customer loyalty.  Our operations include three reportable segments: Document and Label Solutions, Fulfillment Services, and InSystems.


Industry challenges

The overall market for most printed business documents will increasingly be marked by unfavorable economic forces.  The industry is currently oversupplied, and competing software and Internet technologies will continue to make inroads, eliminating or devaluing the role of many traditional paper forms.  These conditions will lead to lower unit demand and relatively weak pricing.  The pace of change is expected to be gradual, but is difficult to predict.

Advances in digital printing will increasingly intrude on the quality and cost advantages historically claimed by conventional long-run offset printing.  For many print applications, this will require the industry to add capital investment and will accelerate the “commoditization” of custom printed documents.  


Business Challenges  

The above industry conditions, exacerbated by some post 2001 restructuring sales productivity issues, resulted in revenue decreases in each of the past two years.  The lower revenue has, in turn, produced substantial profit declines.  The expected payoff from the significant realignment and investments made in our sales force in recent months has taken time to develop.  

Our strategy of expanding our portfolio of products and services to provide for long-term growth requires that we redirect some investment away from traditional capital spending and toward people, technology, and other capabilities, most of which are expensed.  This places additional stress on our near-term profitability.

The weak stock market in 2001 and 2002, coupled with historically low interest rates, has driven our pension plan from an overfunded to an underfunded position.  Pensions produced earnings in 2002 equal to $0.04 per share, but resulted in annual expense in 2003 equivalent to $0.76 per share, the latter including a pension settlement charge of $0.57 per share triggered by an unusually high number of retirements.  Pension expense for 2004 is currently estimated at $0.51 per share with no settlement charge expected.  

Paper costs have changed little in recent years; however, paper companies announced price increases that are effective in April 2004.  Although the document-pricing environment is difficult, we have increased our prices and expect to recover these higher paper costs over the next several quarters.  

Our Focus

Our objective is to improve the sales trend in our core document business by taking market share in targeted accounts and vertical markets where we have a strong reputation and value proposition.  We will continue to reduce costs and improve productivity in order to stay cost competitive.  

We plan to provide for increasing market demand for digital print-on-demand output, including color and variable print.  Services that provide the customer with added convenience, design capability, and control over the process are expected to be a strong differentiator.  

We intend to continue to bring our customers software products and support services, such as InSystems, SMARTworks®, and ExpeData™ solutions that improve their ability to capture, manage, and move information in their business processes.  We also plan on continuing to offer a portfolio of Standard Register managed services that help our customers reduce costs and improve their business processes, allowing them to concentrate on their core competencies.  

We expect to maintain our current strong financial condition and to maintain our focus on cash flow.


CRITICAL ACCOUNTING POLICIES

In preparing these unaudited financial statements and accounting for the underlying transactions and balances, we applied the accounting policies disclosed in the Notes to the Consolidated Financial Statements contained in our annual report on Form 10-K for the year ended December 28, 2003.  Preparation of these unaudited financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Although we believe our estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates.

We believe that some of the more critical estimates and related assumptions are in the areas of pension and postretirement healthcare benefits, restructuring charges, impairment of long-lived assets, and business combinations.  For a detailed discussion of these critical accounting estimates, see the Management Discussion and Analysis (MD&A) included in our annual report on Form 10-K for the year ended December 28, 2003.  We have discussed the development and selection of the critical accounting policies and the related disclosure included herein with the Audit Committee of the Board of Directors.

RESULTS OF OPERATIONS

The following discussion and analysis provides information which management believes is relevant to an understanding of our consolidated results of operations and financial condition, supplemented with a discussion of segment results.  This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.  

Unless otherwise noted, references to 2004 and 2003 refer to the thirteen-week periods ended March 28, 2004, and March 30, 2003.

 

Thirteen Weeks Ended

 

March 28,

 

March 30,

 

2004

 

2003

Revenue

$226.1

 

$236.1

% Decrease

-4.3%

 

-10.5%

Gross Margin

          83.5

 

         88.5

% Revenue

37.0%

 

37.5%

    

SG&A and R&D Expense

          79.4

 

         76.5

Depreciation & Amortization

          10.6

 

         12.6

Restructuring

            3.4

 

              -

Loss From Operations

           (9.9)

 

         (0.6)

    

Interest Expense

           (0.7)

 

         (1.7)

Investment and Other Income

            0.1

 

           0.4

Pretax Loss

         (10.5)

 

         (1.9)

Net Loss

 $        (6.5)

 

 $      (1.1)

Basic and Diluted Loss per Share

        (0.23)

 

      (0.04)


Summary

We reported a net loss of $6.5 million, or $0.23 per share, in 2004 compared with a net loss of $1.1 million, or $0.04 per share, in 2003.  Restructuring expense in 2004 accounted for $3.4 million in pretax expense, equivalent to $0.07 per share after tax.  Excluding restructuring expense, earnings declined $0.12 per share versus the prior year–the net effect of weaker pricing, decreased unit sales, significantly higher pension expense, lower operating costs, and lower interest expense.  Pension expense in 2004 was equivalent to approximately $0.13 per share, compared with approximately $0.05 per share in 2003.


Revenue

Consolidated revenue decreased approximately $10.0 million or 4.3%, primarily due to lower pricing and reduced volume.  

Lower pricing accounted for approximately 2.5 of the 4.3 percentage point reduction in consolidated revenue.  Operating in a very competitive environment, the Document and Label Solutions segment accounted for the majority of this decrease. While we experienced growth in products such as pharmacy labels, the new business gained was at lower pricing.

Overall volume declined slightly, reducing consolidated revenue approximately 1.8%.  Decreased license revenue in the InSystems segment accounted for the majority of this decrease.  We also witnessed a decrease in conventional offset printing in our Stanfast centers, but a corresponding increase in digital print on demand.  Unit sales in the core business were comparable between years, reflecting the positive impact of recent changes in our sales organization, incentives, and focus.

Our earnings prospects for 2004 are heavily dependent on the success of our initiatives to improve the revenue trend.  The changes in sales structure, planning tools, and incentives have placed increased focus on penetrating strategic accounts and vertical markets where we have a strong presence and value proposition.  An example is our agreement with Broadlane, Inc., where we were one of five vendors selected to meet their hospitals’ document management needs, estimated at $100 million annually.  We have thus far secured contracts valued at $26.0 million annually from member hospitals and have begun to realize revenue in 2004 as their existing inventories are depleted.

We were encouraged by revenue trends in the first quarter of 2004.  Typically we see a decline in first quarter revenue from the previous fourth quarter; however, revenue for the first quarter of 2004 was slightly higher than in the fourth quarter of 2003.  Although modest, this was the third consecutive quarter of revenue growth.  Key indicators of future revenue are also positive, including solid gains in both our production backlogs and our unbilled custom finished inventories awaiting future shipment to customers.  In addition, new contract activity has increased significantly versus prior quarters.

Gross Margin  

Gross margin decreased slightly to 37.0% in 2004 compared with 37.5% in 2003. Lower volume, pricing, and an unfavorable product mix were the primary factors, partially offset by a favorable $2.8 million one-time supplier rebate and cost savings from the recent restructurings.

SG&A and R&D

Selling, general, and administrative (SG&A) and Research and Development (R&D) expense increased $2.9 million compared with the first quarter 2003.  Pension expense increased $3.8 million and expenditures associated with the new ExpeData ™ digital pen and paper technology solutions initiative were $1.3 million.  Excluding these items, expense was down $2.0 million, primarily as a result of restructuring actions.  Pension benefits are measured using actuarial valuations that are discussed more fully in the MD&A of our annual report on Form 10-K for the year ended December 28, 2003.  We expect 2004 pension expense to increase by approximately $15.0 million over the 2003 amount, before the 2003 settlement charge of $25.2 million.  Assumptions and factors that are significantly impacting expense in 2004 include:

º

A reduction of the expected long-term rate of return from 9.0% for 2003 to 8.75% for 2004 is expected to increase annual pension expense by approximately $6.0 million.

º

Amortization of net losses from prior periods is expected to increase annual pension expense by approximately $10.0 million.  The decline in U.S. equity markets in recent years resulted in negative returns on our pension funds in 2001 and 2002; however, actual return on plan assets was approximately 22% in 2003.  Differences between actual and expected return on assets are recognized in the pension cost calculation over five years.


Net periodic pension benefit cost includes the following components:

 

Thirteen Weeks Ended

 

March 28,

 

March 30,

 

2004

 

2003

Service cost of benefits earned

 $            3.1

 

 $        3.1

Interest cost on projected benefit obligation

               6.7

 

           6.8

Expected return on plan assets

             (8.3)

 

          (9.6)

Amortization of prior service costs

               0.3

 

           0.3

Curtailment loss

                  -

 

           0.1

Amortization of net loss from prior periods

               4.4

 

           1.9

Total

 $            6.2

 

 $        2.6

Income Statement Classification

   

Cost of sales

 $            1.3

 

 $        1.5

SG&A and R&D Expense

               4.9

 

           1.1

Total

 $            6.2

 

 $        2.6

Interest Expense

Interest expense was $1.0 million lower in first quarter 2004 as a result of lower debt balances and lower interest rates.  An interest rate swap that fixed our borrowing rate at an all-in rate of 6.65% for 2002, expired in January 2003, allowing us to take advantage of much lower floating rate debt.

Restructuring

In January 2001, we announced a restructuring and renewal plan (Renewal Plan), designed to establish a solid platform for long-term earnings growth and recover our market value.  The Renewal Plan was comprised of four components: restructuring, reorganization, performance improvement, and investments for future growth.  In 2001, we completed a major restructuring plan and in the last two fiscal years we have executed additional restructuring actions as part of a multi-year program aimed at realigning our resources to improve utilization and profitability.

For a detailed discussion of these restructurings, see the MD&A included in our annual report on Form 10-K for the year ended December 28, 2003.  


A summary of total restructuring charges recorded in 2004 is as follows:

   

Charges

   

Total

   

Directly to

 

Charges to

 

2004

   

Restructuring

 

Restructuring

 

Restructuring

 

 

 

Expense

 

Accrual

 

Expense

2004 restructuring

  

 $           0.2

 

 $         2.3

 

 $           2.5

2003 restructuring

  

              0.3

 

               -

 

              0.3

2001 restructuring

  

              0.6

 

               -

 

              0.6

Total restructuring expense

 

 

 $           1.1

 

 $         2.3

 

 $           3.4


Liabilities for costs associated with a restructuring cannot be recorded until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  Therefore, certain restructuring costs, primarily sublease payments and the associated taxes, utilities and maintenance costs, and remaining relocation costs will be expensed as incurred through 2006.  All costs are included in restructuring charges in the accompanying Consolidated Statements of Income.


2004 Restructuring

As part of a drive to reduce costs and accelerate growth, the Company integrated its sales specialist organization with its regional sales organization to improve coordination, resource deployment, and productivity; adjusted its Client Services model to improve efficiency and performance through better alignment of resources with the sales organization and customer base; and went to a shared service model in various administrative areas to reduce costs and increase focus on key initiatives.  As a result, the Company eliminated a number of positions, particularly in the Document and Label Solutions segment.  In a continuing effort to reduce costs, we also plan to outsource part of our information technology operations in the second quarter of 2004, including hardware management, help desk support, and telecommunications.  We expect to recover the cash portion of these restructuring actions from savings realized over the next two quarters.


Pre-tax components of the 2004 restructuring charge are as follows:


  

Total Costs

 

Total

 

Cumulative-

  

Expected

 

Q1 2004

 

to-Date

  

to be

 

Restructuring

 

Restructuring

 

 

Incurred

 

Expense

 

Expense

Severance and employer related costs

 

$              3.9

 

$                2.3

 

$                2.3

Contract lease termination costs

 

              0.1

 

                0.1

 

               0.1

Other exit costs

 

              0.1

 

                0.1

 

               0.1

 

 

$              4.1

 

$                2.5

 

$                2.5

BY SEGMENT:

      

Document and Label Solutions

 

$              2.9

 

$                2.2

 

$                2.2

Fulfillment Services

 

              0.2

 

                0.2

 

               0.2

Other

 

              1.0

 

                0.1

 

                0.1

Total

 

$              4.1

 

$                2.5

 

$                2.5


A summary of the 2004 restructuring accrual activity is as follows:


 

Charged to

 

Incurred

 

Balance

 

Accrual

 

in 2004

 

2004

Severance and employer related costs

$                2.2

 

$             (0.6)

 

$                 1.6

Contract termination costs

                0.1

 

                   -

 

                  0.1

      Total

$                2.3

 

$             (0.6)

 

$                 1.7


2003 Restructuring

In the second quarter of 2003, the Company initiated several actions to improve utilization and profitability and to provide for continuing investment in growth initiatives.  The Company consolidated four printing and service operations within the Fulfillment Services segment to form a new state-of-the-art regional print-on-demand and fulfillment center in Dallas, Texas.  Within the Document and Label Solutions segment, a rotary printing plant was closed to trim excess capacity and several warehouses were consolidated in response to shifting demand in favor of print-on-demand services.  

Within the InSystems segment, the Company determined that certain software development initiatives would not produce an adequate return and elected to stop further investment in those projects.  In conjunction with this decision and to further reduce costs, the Company reduced staffing levels within this segment.  The Company also eliminated management and other positions at its corporate headquarters.  Most of these actions were completed by the end of 2003.  In addition, we planned for the relocation of SMARTworks personnel and support operations, which occurred in the first quarter of 2004.  

Pre-tax components of the 2003 restructuring charge are as follows:

 

Total Costs

 

Total

 

Cumulative-

 

Expected

 

Q1 2004

 

to-Date

 

to be

 

Restructuring

 

Restructuring

 

Incurred

 

Expense

 

Expense

Severance and employer related costs

$               11.1

 

$                 -

 

$          11.1

Contract termination costs:

     

Lease obligations

                  3.1

 

              0.1

 

             2.2

Contractual lease obligations for taxes,

     

utilities, and maintenance costs

                  0.4

 

                  -

 

             0.4

Associated costs:

    

                -

Travel

                  0.3

 

                  -

 

             0.3

Equipment removal and relocation

                  2.9

 

                  -

 

             2.9

Other exit costs

                  1.8

 

              0.2

 

             2.0

 

$               19.6

 

$             0.3

 

$          18.9

BY SEGMENT:

     

Document and Label Solutions

$               11.5

 

$                 -

 

$          11.1

Fulfillment Services

                  5.0

 

                  0.1

 

             4.5

InSystems

                  2.3

 

                  -

 

             2.3

Other

                  0.8

 

              0.2

 

             1.0

Total

$               19.6

 

$             0.3

 

$          18.9

A summary of the 2003 restructuring accrual activity is as follows:


 

Charged to

 

Incurred

 

Reversed

 

Balance

 

Incurred

 

Balance

 

Accrual

 

in 2003

 

in 2003

 

2003

 

in 2004

 

2004

Severance and employer related costs

$           10.8

 

$        (9.4)

 

$      (0.1)

 

$        1.3

 

$      (0.9)

 

$       0.4

Contract termination costs

              2.3

 

         (0.8)

 

            -  

 

         1.5

 

       (0.2)

 

        1.3

      Total

$           13.1

 

$      (10.2)

 

$      (0.1)

 

$        2.8

 

$      (1.1)

 

$       1.7

2001 Restructuring

Due to the nature of the charges and the duration of the 2001 restructuring program, estimates of the liability for contract exit costs required significant judgment.  The Company has been unable to sublease as many of the facilities as expected or to buyout the leases with as favorable terms as originally anticipated.  As a result, the liability for contract exit and termination costs was in excess of the amount originally estimated.  Approximately $3.3 million of remaining lease payments will be charged to restructuring expense as incurred through 2006, of which $0.6 million was expensed in the first quarter of 2004.



SEGMENT REPORTING

In fiscal 2004, we reclassified certain operating segments that are included in our reportable segments. Our three reportable segments continue to be Document and Label Solutions, Fulfillment Services, and InSystems.

SMARTworks, previously a wholly owned subsidiary, was merged and became part of our corporate center.  Corporate center costs are allocated to reportable segments except for certain components of pension expense and new product development costs that are not being allocated in 2004.  The document systems group that was previously part of InSystems became part of Document and Label Solutions.  Commercial Print, a new operating segment, is aggregated with International and PathForward into Other.  Segment profit and loss information for 2003 has been revised from previously reported amounts to reflect the current organizational structure.  

The segment discussions that follow include quarterly operating results, excluding LIFO inventory adjustments, interest income, and interest expense not allocated to the business segments.  

Document and Label Solutions

This segment provides custom printed documents, storage and distribution services, pressure sensitive labels, hardware, document management software, maintenance and supplies. It primarily serves companies in the healthcare, financial, manufacturing, and distribution markets.  This segment’s document systems group also focuses on hardware and software solutions for negotiable and secure document output in insurance, banking, healthcare and other markets.  


DOCUMENT AND LABEL SOLUTIONS

   

 

Thirteen Weeks Ended

 

March 28,

 

March 30,

 

2004

 

2003

Revenue

 $     158.4

 

 $     165.4

% Change

-4.2%

 

-13.4%

Income from Operations*

 $         2.1

 

 $         4.1

% Revenue

2.1%

 

2.5%

Income from Operations, excluding

   

   restructuring charges

 $         4.3

 

 $         4.1

% Revenue

3.5%

 

2.5%

    

* First quarter 2004 operating income includes $2.2 million of restructuring charges.

As previously discussed, pricing pressure in the marketplace was the primary factor impacting the revenue decline in this segment.  Technology inroads continue to reduce demand for some of our traditional products.  However, we experienced growth in products such as pharmacy labels and are beginning to recognize revenue from the new contracts won under the Broadlane agreement, although the new business gained is at lower pricing.  We continue to believe there are many opportunities for growth in this segment and have undertaken initiatives, including recent changes in our sales organization and incentives.  These initiatives are showing signs of increased volume from new business as well as existing accounts.  


This segment is succeeding in obtaining new contracts and customers; however, some of this new business is at lower gross margins, which is having an impact on operating income. Excluding $2.2 million of restructuring charges in 2004, operating income increased slightly over 2003.  A favorable one-time supplier rebate of $2.8 million along with lower selling costs, helped to offset the impact of lower revenue.  

The revenue trends discussed earlier are prevalent in this segment.  Typically we see a decline in first quarter revenue from the previous fourth quarter; however, revenue for the first quarter of 2004 was slightly higher than fourth quarter of 2003.  This was the third consecutive quarter of modest revenue growth.  Key indicators of future revenue are also positive, including solid gains in both our production backlogs and our unbilled custom finished inventories awaiting future shipment to customers.


Fulfillment Services

This segment helps our customers communicate effectively with their customers by helping them provide customized information and marketing materials.  Examples are monthly billing statements, customized marketing brochures and information kits, and one-to-one marketing communications.  This segment also offers short-run, quick print production (print-on demand) services.  We focus on outsourcing services that primarily serve large-and middle-market companies in the financial services, healthcare, and membership industries.  


FULFILLMENT SERVICES

 

Thirteen Weeks Ended

  

March 28,

 

March 30,

 

 

2004

 

2003

Revenue

 

 $    59.5

 

 $     60.2

% Change

 

-1.1%

 

-8.8%

     

Loss from Operations*

 

 $     (2.5)

 

 $     (1.1)

% Revenue

 

-3.3%

 

-1.8%

     

Loss from Operations, excluding

    

   restructuring charges

 

 $     (2.3)

 

 $     (1.1)

% Revenue

 

-2.9%

 

-1.8%

     

* First Quarter 2004 operating income includes $0.2 million of restructuring charges.

Revenue in 2004 decreased slightly compared with 2003.  Growth in digital print on demand (POD) business was offset by lower volume of document outsourcing and traditional short-run offset.  A heavy programming backlog impeded the document outsourcing revenue in the first quarter of 2004.  This segment’s focus remains on growing document outsourcing and digital print on demand revenue.  

The decline in operating income is primarily a function of the lower-margin POD revenue together with higher material costs, increased overtime, and temporary labor from consolidating four operations in the second half of 2003.

InSystems

Our InSystems segment offers solutions that enable companies to improve processes, and organize, manage, and distribute information in both paper and digital format.  They focus on software solutions for the automation of document-intensive business processes in the financial services industry, particularly insurance.



INSYSTEMS

Thirteen Weeks Ended

 

March 28,

 

March 30,

 

2004

 

2003

Revenue

 $       3.3

 

 $        6.0

% Change

-44.7%

  

Loss from Operations

 $     (2.5)

 

 $      (1.3)

% Revenue

-75.0%

 

-21.4%


The revenue decrease in 2004 is primarily due to reduced license revenue.  In the areas of the insurance industry in which we operate, we are still experiencing a slowdown in software spending as customers delay software purchases.  During 2003, one of InSystems’ larger customers was acquired by another company.  As a result of this acquisition, revenue from this customer will be phased out during 2004.  The effect on first quarter 2004 was a reduction of revenue of approximately $0.6 million.

The lower license revenue, which is at much higher margins than service revenue, had a significant impact on operating income.  The business is now focused on its proven core products where there are solid market opportunities.  

ENVIRONMENTAL MATTERS

We have been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned.  Our policy is to accrue for investigation and remediation at sites where costs are probable and estimable.  At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on our operating results, financial condition, or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our discussion will provide information on the cash flow for 2004, the net investment and capital structure at quarter-end, and our significant contractual obligations.  


Major elements of the Statements of Cash Flows are summarized below:


CASH INFLOW (OUTFLOW)

 

March 28,

 

March 30,

 

 

2004

 

2003

     

Net Loss plus non-cash adjustments 1

 

$       10.1

 

$        14.6

Changes in operating assets & liabilities,

    

   net of acquisition effects:

    

Accounts receivable

 

         (5.8)

 

         15.8

Inventories

 

         (1.9)

 

           6.0

Prepaid income taxes

 

           0.7

 

          (0.2)

Restructuring spending

 

         (2.9)

 

          (1.3)

Accounts payable and accrued expenses

 

         (0.2)

 

          (7.9)

Pension and postretirement obligations

 

         (5.4)

 

        (10.5)

All other

 

         (3.2)

 

         (0.9)

Net cash (used in) provided by operating activities

         (8.6)

 

         15.6

     

Capital expenditures

 

         (5.3)

 

          (4.2)

Proceeds from sale of plant and equipment

 

           0.9

 

           1.8

Additions to investments

 

               -

 

          (0.3)

Net cash used for investing activities

 

         (4.4)

 

          (2.7)

     

Debt payments

 

               -

 

        (27.5)

Dividends paid

 

         (6.6)

 

          (6.5)

Purchase of treasury stock

 

               -

 

               -

Proceeds from issuance of common stock

 

           0.7

 

           0.6

Net cash used for financing activities

 

         (5.9)

 

        (33.4)

Effect of exchange rates on cash

 

               -

 

           0.5

Net cash flow

 

$     (18.9)

 

$     (20.0)

     

1 Non-cash adjustments included above include depreciation, amortization, asset impairments, restructuring, gain or loss on sale of assets, and other items reported on the Consolidated Statement of Cash Flows under the category “Adjustments to reconcile net loss to net cash (used in) provided by operating activities.”

First quarter’s capital spending and dividend payments, $5.3 million and $6.6 million, respectively, were consistent with the rate of spending for the previous several quarters.  The $18.9 million decline in our cash balance was primarily attributable to $10.1 million in higher working capital balances (accounts receivable, inventories, prepaid income taxes, and accounts payable and accrued expenses).  Also impacting the cash outflow in 2004 was $2.9 million of restructuring spending and $5.0 million in pension funding.  

Cash Flow from Operating Activities

Accounts receivable increased from year-end as a result of slightly higher revenue and the timing of invoices.  The inventory increase reflected a build in the level of custom documents produced and awaiting future shipment to customers.  Restructuring spending was primarily for severance and other benefits paid to terminated associates and lease payments on previously vacated facilities.  This spending will continue through 2006, as severance and related employer costs, lease payments and other associated costs related to restructurings are incurred.  We contributed $5.0 million to the qualified pension plan in the first quarter; the plan was funded by an additional $5.0 million in April 2004.


Cash Flows From Investing Activities

Our investing activities included capital expenditures totaling $5.3 million in 2004, primarily for machinery and equipment.  We expect to spend $20-$25 million on capital projects in 2004, including improvements to our internal systems infrastructure and current year investments in our print-on-demand strategy.  We do not expect to receive any significant cash proceeds from asset dispositions in the near future.

Cash Flows From Financing Activities

The balance of long-term debt was unchanged from year-end 2003.  We paid $6.6 million of dividends to shareholders in 2004.  The Company has paid a $.23 quarterly dividend in each quarter of the last four years.  

Net Investment and Capital Structure

NET INVESTMENT

March 28,

 

December 28,

 

2004

 

2003

Accounts and Notes Receivable

$          131.7

 

$           125.9

Inventories

             51.6

 

              49.8

Prepaid Expense

             13.5

 

              11.3

Prepaid Income Taxes

                1.6

 

                2.2

Deferred Income Taxes

             19.4

 

              19.3

Accounts Payable & Accruals

            (90.4)

 

            (97.0)

Accrued Restructuring

              (3.3)

 

              (2.8)

Net Current Assets Excl Cash and Debt

             124.1

 

           108.7

Turnover *

7.3x

 

8.3x

    

Capital Assets @ NBV

           160.4

 

            165.5

YTD Capital Expenditures

             (5.3)

 

          (18.3)

YTD Depreciation

               9.4

 

             41.0

    

Goodwill, Software & Intangibles

             68.3

 

              68.6

Retiree Healthcare Liability

           (49.3)

 

           (49.8)

Pension Liability

           (90.4)

 

           (89.6)

Long-term Deferred Tax Asset

             76.7

 

             72.7

Other Long-term Net Assets

             20.5

 

             20.5

Total

$          310.3

 

$          296.6

    

CAPITAL STRUCTURE

 

 

 

Total Debt

$          125.0

 

$          125.0

Less Cash and Cash Equivalents

             58.0

 

             77.0

Net Debt

             67.0

 

             48.0

    

Equity

           243.3

 

           248.6

Total

$           310.3

 

$          296.6

Net Debt: Total Capital

21.6%

 

16.2%

    

* The turnover calculation divides the quarter’s revenue times four by the ending balance of net current assets.

The turnover of net current assets was 7.3x at March 28, 2004 compared to 8.3x at December 28, 2003.  This decrease in turnover reflects the increase in accounts receivable and inventories, previously discussed.  

The net book value (NBV) of capital assets decreased $5.1 million as expenditures continued to lag behind depreciation.  The balance is expected to decrease further in the remainder of 2004 as an estimated $39 million in depreciation will once again exceed capital spending, currently estimated at $20 to $25 million.

Total debt at March 28, 2004 was $125.0 million.  The lower cash balance at quarter-end contributed to an increase in the net debt to total capital ratio to 21.6%, compared to 16.2% at year-end 2003.  This ratio reflects a continuing strong financial condition.

At March 28, 2004, we had a $150 million unsecured revolving credit facility agreement with ten banks. The agreement provides for a four-year commitment of up to $150 million, maturing May 2005.  The credit facility incurs interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon our net debt to total capital ratio.  The credit facility also contains financial covenants that require us to maintain, among other things, a minimum coverage of interest expense.  

Contractual Obligations

There have been no material changes in our contractual obligations since year-end 2003 outside the normal course of business.

Our near-term cash requirements are primarily related to funding our operations and capital expenditures.  The remaining cash requirements of our restructuring programs are approximately $8.0 million primarily for severance and lease obligations and are expected to be paid over several years, including approximately $4.0 million during the remainder of 2004.  The remaining cash requirements for lease obligations are net of expected sublease rental income.  If we are unable to sublease the facilities, our cash requirements under the restructuring plans could increase.  We do not have a minimum funding requirement in 2004, although we made voluntary contributions to our defined benefit pension plan of $5.0 million in first quarter 2004 and $5.0 million in the second quarter of 2004.  Our expected cash requirements for our postretirement healthcare benefit plan are approximately $4.0 million for 2004.  

We believe that the combination of internally generated funds, available cash reserves, and our existing credit facility are sufficient to fund our operations, including capital expenditures, dividends, remaining restructuring costs, and investments in growth initiatives over the next year.  In our judgment, our strong balance sheet could support additional debt financing, if necessary, to pursue acquisitions.





THE STANDARD REGISTER COMPANY

FORM 10-Q

For the Quarter Ended March 28, 2004



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK


The Company is exposed to interest rate risk on its borrowings under a revolving credit facility and the Company’s short-term investments, as outlined in the 2003 Form 10K. The Company is also exposed to market risk from changes in the cost of paper, the principal raw material used in the production of business forms.  There have been no material changes in the Company’s exposure to these items since the Company’s disclosure in Item 7A, Part II of Form 10-K for the year ended December 28, 2003.


ITEM 4. CONTROLS AND PROCEDURES


We maintain disclosure controls and procedures over financial reporting that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  


An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.  Subsequent to the date of this evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls, and no corrective actions taken with regard to significant deficiencies or material weaknesses in such controls.  




#




PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS


There have been no material legal proceedings within the reporting period that the Company has been involved with beyond those conducted in a normal course of business.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS


None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


None


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


None


ITEM 5.  OTHER INFORMATION


None.


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K


a)

Exhibits


Exhibit  #    Description


2

Plan of acquisition, reorganization, arrangement

      liquidation or succession

Not applicable


 3

  Articles of incorporation and bylaws

Not applicable

 4

  Instruments defining the rights of security

Not applicable

10

  Material contracts

Not applicable

11

  Statement re: computation of per share earnings

Not applicable

15

  Letter re: unaudited interim financial information

Not applicable

18

  Letter re: change in accounting principles

Not applicable

19

  Report furnished to security holders

Not applicable

22

  Published reports regarding matters submitted

  to vote of security holders

Not applicable

23.1

  Consent of Independent Auditor

Included


24

  Power of attorney

Not applicable

31.1

  Certification of Chief Executive Officer pursuant to

 Section 302 of the Sarbanes-Oxley Act of 2002

Included

31.2

  Certification of Chief Financial Officer pursuant to

 Section 302 of the Sarbanes-Oxley Act of 2002

Included

32

  Certifications pursuant to 18 U.S.C Section 1350, as adopted

 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Included

99.1

  Review report of Independent Auditor

   

Included


b)

Reports on Form 8K


Reports on Form 8K related to the Company’s press releases announcing the results of operations for the year ended December 28, 2003 and the quarter ended March 28, 2004 were filed by the Company on February 17, 2004 and April 27,2004, respectively.

#





THE STANDARD REGISTER COMPANY

FORM 10-Q

For the Quarter Ended March 28, 2004





SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



May 3, 2004





/s/ Craig J. Brown

By Craig J. Brown, Sr. Vice President, Treasurer

 

Chief Financial Officer, and Chief Accounting Officer






#







Exhibit 31.1


CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dennis L. Rediker, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of The Standard Register Company;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  May 3, 2004


/s/ Dennis L. Rediker


Dennis L. Rediker

President and Chief Executive Officer




Exhibit 31.2


CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Craig J. Brown, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of The Standard Register Company;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  May 3, 2004



/s/ Craig J. Brown


Craig J. Brown

Senior Vice President, Treasurer and Chief Financial Officer




Exhibit 32


CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report of The Standard Register Company (the “Company”) on Form 10-Q for the period ending March 28, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis L. Rediker, President and Chief Executive Officer, and I, Craig J. Brown, Senior Vice President, Treasurer and Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:


(1)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:  May 3, 2004



/s/ Dennis L. Rediker


Dennis L. Rediker

President and Chief Executive Officer



/s/ Craig J. Brown


Craig J. Brown

Senior Vice President, Treasurer and

Chief Financial Officer