Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
10. Restructuring and Other Charges
In the third quarter of 2010, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives and was an integral component of the Second Amendment and Waiver to the Credit Agreement (Second Amendment). These actions were taken to comply with the provisions and targeted covenants of the Second Amendment and to address the impact of the global economic crisis on the Company. The Company may incur additional costs in future periods to address the ongoing and fluid nature of the economic crisis. The amount of future charges are currently not estimable by the Company.
The plan was implemented to address several key initiatives including streamlining production and administrative operations, headcount reductions and an overall response to the global economic crisis. The third quarter pre-tax charge resulting from these actions was $1.6 million ($1.0 million after tax or $0.10 per share on a basic and diluted basis). The charges were comprised of $1.2 million associated with excess facility and maintenance costs primarily related to operating leases, inventory related costs of $172,000 and costs associated with streamlining production and personnel related separation costs of $225,000. The Company incurred restructuring related costs in the second quarter of 2010 primarily related to streamlining of productions operations and personnel related separation costs aggregating $139,000. The costs associated with the restructuring and profitability enhancement plan are primarily recorded in the restructuring charges line item as part of operating income. Inventory is recorded as a component of cost of sales.
The following information summarizes the costs incurred with respect to restructuring, integration and asset impairment charges during the three and nine months ended July 31, 2010, respectively:
|
|
July 31, 2010
|
|
|
Three
Months
Ended
|
|
Nine
Months
Ended
|
|
|
|
|
|
Occupancy related costs
|
$
|
1,173,175
|
$
|
1,173,175
|
Costs incurred to streamline production, personnel and other
|
|
224,887
|
|
363,970
|
Inventory
|
|
171,529
|
|
171,529
|
Total
|
$
|
1,569,591
|
$
|
1,708,674
|
The activity pertaining to the Company's accruals related to restructuring and other charges since October 31, 2009, including additions and payments made are summarized below:
|
|
Occupancy
related costs
|
|
Costs incurred to streamline production, personnel and other
|
|
Total
|
|
|
|
|
|
|
|
Balance at October 31, 2009
|
$
|
-
|
$
|
-
|
$
|
-
|
2010 expenses
|
|
1,173,175
|
|
363,970
|
|
1,537,145
|
Paid in 2010
|
|
(42,451)
|
|
(355,282)
|
|
(397,733)
|
Balance at July 31, 2010
|
$
|
1,130,724
|
$
|
8,688
|
$
|
1,139,412
|
Champion Industries, Inc. and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, information derived from the Consolidated Statements of Operations as a percentage of total revenues.
The Company identified approximately $0.3 million or $0.03 per share on a basic and diluted basis of non-cash deferred tax related adjustments for each of the first three quarters of 2009. This adjustment was initially recorded in the fourth quarter of 2009 for the full year and therefore the interim periods for 2009 have been restated accordingly to reflect such adjustment. Accordingly, the Consolidated Financial Statements for the three and nine months ended July 31, 2009 have been restated to increase deferred income tax expense and to increase deferred income tax liability. This adjustment is related to the goodwill, trade name and masthead associated with the acquisition of The Herald-Dispatch. This deferred tax liability will remain on the balance sheet until such time as the associated intangible assets are impaired, sold or otherwise disposed of. Certain prior-year amounts have been classified to conform to the current year financial statement presentation.
|
|
Percentage of Total Revenues
|
|
|
Three Months Ended
July 31,
|
Nine Months Ended
July 31,
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
61.7
|
%
|
62.4
|
%
|
62.4
|
%
|
63.1
|
%
|
Office products and office furniture
|
|
|
27.1
|
|
26.3
|
|
25.8
|
|
25.5
|
|
Newspaper
|
|
|
11.2
|
|
11.3
|
|
11.8
|
|
11.4
|
|
Total revenues
|
|
|
100.00
|
|
100.00
|
|
100.00
|
|
100.00
|
|
Cost of sales and newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
45.6
|
|
47.6
|
|
45.7
|
|
47.9
|
|
Office products and office furniture
|
|
|
19.6
|
|
18.2
|
|
18.4
|
|
18.1
|
|
Newspaper cost of sales and operating costs
|
|
|
6.5
|
|
6.1
|
|
6.3
|
|
6.2
|
|
Total cost of sales and newspaper operating costs
|
|
|
71.7
|
|
71.9
|
|
70.4
|
|
72.2
|
|
Gross profit
|
|
|
28.3
|
|
28.1
|
|
29.6
|
|
27.8
|
|
Selling, general and administrative expenses
|
|
|
22.9
|
|
24.9
|
|
24.9
|
|
25.3
|
|
Restructuring charges
|
|
|
4.4
|
|
0.6
|
|
1.5
|
|
0.2
|
|
Income from operations
|
|
|
1.0
|
|
2.6
|
|
3.2
|
|
2.3
|
|
Interest income
|
|
|
0.0
|
|
0.0
|
|
0.0
|
|
0.0
|
|
Interest expense
|
|
|
(3.9
|
)
|
(4.1
|
)
|
(4.2
|
)
|
(3.5
|
)
|
Other income
|
|
|
0.0
|
|
0.0
|
|
0.3
|
|
0.0
|
|
(Loss) before taxes
|
|
|
(2.9
|
)
|
(1.5
|
)
|
(0.7
|
)
|
(1.2
|
)
|
Income tax benefit
|
|
|
1.1
|
|
0.6
|
|
0.3
|
|
0.5
|
|
Net loss
|
|
|
(1.8
|
)%
|
(0.9
|
)%
|
(0.4
|
)%
|
(0.7
|
)%
|
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Three Months Ended July 31, 2010 Compared to Three Months Ended July 31, 2009 (Restated)
Revenues
Total revenues decreased 7.2% in the third quarter of 2010 compared to the same period in 2009 from $34.4 million to $31.9 million. Printing revenue decreased 8.3% in the third quarter of 2010 to $19.7 million from $21.4 million in the third quarter of 2009. Office products and office furniture revenue decreased 4.2% in the third quarter of 2010 to $8.6 million from $9.0 million in the third quarter of 2009.
The decrease in printing sales was primarily associated with the continued impact of the global economic crisis. Office
products and office furniture sales were lower in the third quarter of 2010 when compared to the third quarter of 2009. This was due to lower sales in both office products and office furniture, reflective of the effects of the economic recession.
The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.6 million consisting of advertising revenue of approximately $2.7 million and $0.9 million in circulation revenues for the three months ended July 31, 2010. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.9 million consisting of advertising revenue of approximately $2.9 million and $1.0 million in circulation revenues for the three months ended July 31, 2009. The on-line revenues for the three months ended July 31, 2010 and 2009
approximated $270,000 and $271,000 and are recorded as a component of advertising revenue. The reduction in newspaper revenues is primarily associated with a decrease in advertising revenues associated with decreased advertising demand due, in part, to the global economic crisis.
Cost of Sales
Total cost of sales decreased 7.4% in the third quarter of 2010 to $22.9 million from $24.7 million in the third quarter of 2009. Printing cost of sales in the third quarter of 2010 decreased $1.8 million over the prior year and decreased as a percentage of printing sales from 76.3% in 2009 to 74.0% in 2010. The printing gross margin dollar increase resulted from lower cost of goods sold as a percentage of sales resulting from improved absorption of labor and lower material costs as a percent of sales. Office products and office furniture cost of sales were flat on decreased sales and higher cost of goods sold as a percentage of office products and office furniture sales of 69.3% in 2009 compared to 72.4% in 2010, thus representing contraction in gross margin percent in the office products and office furniture segment. The sales decline coupled with gross margin compaction led to lower overall office products and office furniture gross margin contribution.
Newspaper cost of sales and operating costs as a percent of newspaper sales were 57.4% and 53.4% for the three months ended July 31, 2010 and 2009.
Operating Expenses
In the third quarter of 2010, selling, general and administrative expenses (S,G&A) decreased on a gross dollar basis to $7.3 million from $8.6 million in 2009, a decrease of $1.2 million or 14.6%. As a percentage of total sales, the expenses decreased on a quarter to quarter basis in 2010 to 22.9% from 24.9% in 2009. The decrease in selling, general and administrative expenses is primarily the result of cost reduction initiatives implemented by the Company in response to the global economic crisis.
In the third quarter of 2010, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives and was a key provision to the Second Amendment. These actions were taken to comply with the provisions and targeted covenants of the Second Amendment and to address the impact of the global economic crisis on the Company. The Company may incur additional costs in future periods to address the ongoing and fluid nature of the economic crisis. The amount of future charges are currently not estimable by the Company.
The implementation of the restructuring and profitability enhancement plan should not have a material impact on the Company’s future liquidity position. The costs associated with the restructuring and profitability enhancement plan are primarily recorded in the restructuring charges line item as part of operating income. Inventory is recorded as a component of cost of sales.
The costs associated with the implementation of the Company's restructuring and profitability enhancement plan resulted in a pre-tax charge of $1.6 million ($1.0 million after tax or $0.10 per share on a basic and diluted basis).
In the third quarter of 2009, the Company recorded pre-tax charges associated with a reduction in force of approximately $194,000 ($120,000 after tax or $0.01 per share on a basic and diluted basis).
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Income from Operations and Other Income and Expenses
In
come from operations decreased in the third quarter of 2010 to $0.3 million from $0.9 million in the third quarter of 2009.
This decrease is the result of charges associated with the Company's restructuring and profitability enhancement plan. Other expenses (net), decreased approximately $214,000 from 2009 to 2010 primarily due to a decrease in interest expense, resulting from lower average borrowings and lower rates associated with the financing to purchase The Herald-Dispatch. The lower rates resulted from provisions of the Second Amendment entered into in the second quarter of 2010.
Income Taxes
The Company’s effective income tax benefit rate was (37.2)% for the third quarter of 2010 and a benefit of (41.8)% for the third quarter of 2009.
The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.
N
et Loss
Net loss for the third quarter of 2010
was ($571,000) compared to a loss of ($307,000) in the third quarter of 2009. Basic and diluted loss per share for the three months ended July 31, 2010 and 2009 were $(0.06) and $(0.03).
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Nine Months Ended July 31, 2010 Compared to Nine Months Ended July 31, 2009 (Restated)
Revenues
Total revenues decreased 8.7% in the first nine months of 2010 compared to the same period in 2009 to $98.0 million from $107.4 million. Printing revenue decreased 9.8% in the nine
month period
ended July 31, 2010 to $61.1 million from $67.7 million in the same period in 2009. Office products and office furniture revenue decreased 7.7% in the nine month period ended July 31, 2010 to $25.3 million
from $27.4 million in the same period in 2009. The decrease in printing sales was primarily associated with the continued impact of the global economic crisis. The decrease in the office products and office furniture segment was primarily due to lower office product and furniture sales
resulting from the global economic crisis.
The Company recorded newspaper revenues associated with
T
he Herald-Dispatch
of approximately $11.6 million consisting of advertising revenues of approximately $8.8 million and circulation revenues of approximately $2.9 million for the nine months ended July 31, 2010. The Company recorded newspaper revenues associated with The Herald Dispatch of approximately $12.3 million consisting of advertising revenue of $9.3 million and $3.0 million in circulation revenues for the nine months ended July 31, 2009. The on-line revenues for the nine months ended July 31, 2010 and 2009 approximated $0.8 million for both periods and are recorded as a component of advertising revenue. The reduction in newspaper revenue is primarily associated with a decrease in advertising revenues associated with decreased advertising demand due, in part, to the global economic crisis.
Cost of Sales
Total cost of sales decreased 11.0% in the nine months ended July 31, 2010 to $69.0 million from $77.5 million in the nine months ended July 31, 2009. Printing cost of sales decreased 13.1% in the nine months ended July 31, 2010 to $44.8 million from $51.5 million in the nine months ended July 31, 2009. The decrease in printing cost of sales was primarily due to the decrease in printing sales partially coupled with an improvement in gross margin percent, resulting from improved material and labor absorption.
Office products and office furniture cost of sales decreased 7.1% in the nine months ended July 31, 2010 to $18.0 million from $19.4 million in the nine months ended July 31, 2009 and increased as a percent of sales from 70.8% in 2009 to 71.3% in 2010. The decrease in office products and office furniture cost of sales is attributable to
a decrease in office products and office furniture sales partially offset by an increase in office products and office furniture cost of sales as a percent of office products and office furniture
sales
. Newspaper cost of sales and operating costs as a percentage of newspaper sales were 53.4% and 54.2% for the nine months ended July 31, 2010 and 2009.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Operating Expenses
During the nine months ended July 31, 2010 compared to the same period in 2009, selling, general and administrative expenses (S,G&A) decreased as a percentage of sales to 24.9% from 25.3% in 2009. Total S,G&A decreased $2.8 million. The decrease in total S,G&A is primarily reflective of reduction initiatives implemented by the Company in response to the global economic crisis. The decrease in S,G&A was partially offset by various costs associated with the Company's successful defense of a legal action approximating $330,000.
In the nine months ended July 31, 2010, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives and was a key provision to the second amendment to the Credit Agreement. These actions were taken to comply with the provisions and targeted covenants of the Second Amendment to the Credit Agreement and to address the impact of the global economic crisis on the Company. The Company may incur additional costs in future periods to address the ongoing and fluid nature of the economic crisis. The amount of future charges are currently not estimable by the Company.
The implementation of the restructuring and profitability enhancement plan should not have a material impact on the Company’s future liquidity position. The costs associated with the restructuring and profitability enhancement plan are primarily recorded in the restructuring charges line item as part of operating income. Inventory is recorded as a component of cost of sales.
The costs associated with the implementation of the Company's restructuring and profitability enhancement plan resulted in a pre-tax charge of $1.7 million ($1.1 million after tax or $0.11 per share on a basic and diluted basis).
In the third quarter of 2009, the Company recorded pre-tax charges associated with a reduction in force of approximately $194,000 ($120,000 after tax or $0.01 per share on a basic and diluted basis).
Income from Operations and Other Income and Expenses
Income from operations increased 23.9% in the nine month period ended July 31, 2010 to $3.1 million from $2.5 million in the same period of 2009. This increase is primarily the result of cost reduction initiatives implemented by the Company partially offset by restructuring related charges of $1.7 million.
Other expense (net) increased $175,000 to $3.8 million in 2010 from $3.7 million in 2009. This is primarily due to increases in interest expense, resulting from higher interest rates associated with the Administrative Agent of the Company's credit facility instituting the default rate and eliminating the LIBOR borrowing expense option for most of the first six months of 2010 and various deferred financing interest related expenses associated with this debt. Concurrent with the Second Amendment the Company was permitted to reinstate the LIBOR borrowing option and the new applicable margin was set below the default rate in effect prior to the Second Amendment.
Income Taxes
The Company’s effective income tax benefit was 35.9% for the nine months ended July 31, 2010, and a benefit of 42.9% in the same period of 2009.
The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate
.
Net Loss
Net loss for the first nine months of 2010 decreased 30.3% to ($450,000) from ($646,000) in the same period of 2009 due to the reasons discussed above. Basic and diluted loss per share for the nine months ended July 31, 2010 were ($0.05) and ($0.06) for the nine months ended July 31, 2009.
Champion Industries, Inc. and Subsidiaries
M
anagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Inflation and Economic Conditions
Management believes that the effect of inflation on the Company’s operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term sales and purchase contracts; therefore, to the extent permitted by competition, it has the ability to pass through to the customer most cost increases resulting from inflation, if any.
The United States economy has been in a recession since December 2007, according to the National Bureau of Economic Research, and it is widely believed that certain elements of the economy such as housing, were in decline before that time. The duration and depth of an economic recession in markets which the Company operates may further reduce its future advertising and circulation revenue, printing revenue, office products revenue and office furniture revenue, operating results and cash flows.
Seasonality
Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis, The Herald-Dispatch’s first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter included heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
Liquidity and Capital Resources
Net cash provided by operations for the nine months ended July 31, 2010, was $6.2 million compared to net cash provided by operations of $9.2 million during the same period in 2009. This reduction in net cash from operations is due primarily to
changes in accounts receivable offset by restructuring charges and other balance sheet changes.
Net cash used in investing activities for the nine months ended July 31, 2010 was $272,000 compared to $1.2 million during the same period in 2009. The net cash used in investing activities during the first nine months of 2010 primarily relates to the purchase of equipment and vehicles. The net cash used in investing activities during the first nine months of 2009 primarily
related to the purchase of equipment and vehicles
.
Net cash used in financing activities for the nine months ended July 31, 2010 was $7.0 million compared to $7.9 million during the same period in 2009. This decrease is primarily due to an increase in negative book cash balances, line of credit borrowings and a reduction in dividends, partially offset by higher principal payments on long-term debt.
Working capital on July 31, 2010 was $12.1 million and at October 31, 2009 was $(42.6) million. The working capital deficit at October 31, 2009 was associated with the classification as a current liability of $60.5 million of debt which was long-term. This debt was reclassified due to the Company's inability to remain in compliance with certain of its financial covenants. The Company entered into the Second Amendment in the second quarter of 2010, therefore the debt is reflected in the Company's financial statements based on contractual maturity.
Champion Industries, Inc. and Subsidiaries
M
anagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Environmental Regulation
The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, changes in business strategy or development plans and other factors referenced in this Form 10-Q , including without limitations under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
ITEM 3a. Quantitative and Qualitative Disclosure about Market Risk
The Company does not have any significant exposure relating to market risk.
ITEM 4T. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report.
(b)
Changes in Internal Controls
. There have been no changes in our internal controls over financial reporting that occurred during the first nine months of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
There were no material changes in risk factors from disclosures previously reported in our annual report on Form 10-K for the fiscal year ended October 31, 2009.
Item 6. Exhibits
(31.1)
|
Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
|
|
Exhibit 31.1 Page Exhibit 31.1-p1
|
(31.2)
|
Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Todd R. Fry
|
|
Exhibit 31.2 Page Exhibit 31.2-p1
|
(31.3)
|
Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins
|
|
Exhibit 31.3 Page Exhibit 31.3-p1
|
(32)
|
Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002
|
|
Exhibit 32 Page Exhibit 32-p1
|
SIGNATURES
Pursuant to the requirement 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.
CHAMPION INDUSTRIES, INC.
Date: September 10, 2010
|
/s/ Marshall T. Reynolds
|
|
Marshall T. Reynolds
|
|
Chief Executive Officer
|
|
|
|
|
Date: September 10, 2010
|
/s/ Toney K. Adkins
|
|
Toney K. Adkins
|
|
President and Chief Operating Officer
|
|
|
|
|
Date: September 10, 2010
|
/s/ Todd R. Fry
|
|
Todd R. Fry
|
|
Senior Vice President and Chief Financial Officer
|