Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Three Months Ended July 31, 2011 Compared to Three Months Ended July 31, 2010
Revenues
Total revenues increased 0.4% in the third quarter of 2011 compared to the same period in 2010, from $31.9 million to $32.0 million. Printing revenue decreased slightly in the third quarter of 2011, to $19.6 million from $19.7 million in the third quarter of 2010. Office products and office furniture revenue increased 2.9% in the third quarter of 2011, to $8.9 million from $8.6 million in the third quarter of 2010. Office products and office furniture sales were higher in the third quarter of 2011 when compared to the third quarter of 2010. This was due to higher office furniture
sales. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.6 million, consisting of advertising revenue of approximately $2.6 million and $0.9 million in circulation revenues for the three months ended July 31, 2011. 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 on-line revenues for the three months ended July 31, 2011 and 2010 approximated $243,000 and $270,000 and are recorded as a component of advertising revenue. The newspaper revenues were essentially flat when compared with the comparable quarter of the previous year.
Cost of Sales
Total cost of sales increased 3.0% in the third quarter of 2011, to $23.5 million from $22.9 million in the third quarter of 2010. Printing cost of sales in the third quarter of 2011 increased $0.4 million over the prior year and increased as a percentage of printing sales from 74.0% in 2010 to 76.3% in 2011. The printing gross margin dollar decrease resulted from higher cost of goods sold as a percentage of sales, resulting primarily from higher material costs as a percent of sales. Office products and office furniture cost of sales were higher on increased sales
and higher cost of goods sold as a percentage of office products and office furniture sales of 72.4% in 2010 compared to 73.0% in 2011, thus representing contraction in gross margin percent in the office products and office furniture segment. The sales increase was offset with gross margin compaction which led to flat overall office products and office furniture gross margin contribution. Newspaper cost of sales and operating costs as a percent of newspaper sales were 59.6% and 57.4% for the three months ended July 31, 2011 and 2010.
Operating Expenses
In the third quarter of 2011, selling, general and administrative expenses (S, G&A) increased on a gross dollar basis to $7.4 million from $7.3 million in 2010, an increase of $0.1 million or 0.9%. As a percentage of total sales, the expenses increased slightly on a quarter to quarter basis in 2011 to 23.1% from 22.9% in 2010.
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 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).
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
Income from operations increased in the third quarter of 2011, to $1.1 million from $0.3 million in the third quarter of 2010. This increase is the result of charges associated with the Company's restructuring and profitability enhancement plan recorded in 2010. Other income and expenses (net) reflected other income of approximately $0.4 million in 2011 compared to other expense of $1.2 million in 2010. The Company recorded a gain on early extinguishment of debt to a related party in 2011 of approximately $1.3 million. In addition, interest expense decreased due to lower borrowings and
lower rates associated with the Second Amendment to the Credit Agreement and expiration of a LIBOR Swap agreement.
Income Taxes
The Company’s effective income tax expense rate was 40.6% for the third quarter of 2011 and a benefit of (37.2)% for the third quarter of 2010. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.
Net Income (Loss)
Net income for the third quarter of 2011 was $876,000 compared to a loss of ($571,000) in the third quarter of 2010 due to the reasons discussed above. Basic and diluted earnings (loss) per share for the three months ended July 31, 2011 and 2010 were $0.09 and $(0.06).
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Nine Months Ended July 31, 2011 Compared to Nine Months Ended July 31, 2010
Revenues
Total revenues decreased 3.1% in the first nine months of 2011 compared to the same period in 2010, to $95.0 million from $98.0 million. Printing revenue decreased 3.8% in the nine month period ended July 31, 2011, to $58.8 million from $61.1 million in the same period in 2010. Office products and office furniture revenue decreased 0.3% in the nine month period ended July 31, 2011, to $25.2 million from $25.3 million in the same period in 2010. 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 sales partially offset by higher office furniture sales. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $11.0 million, consisting of advertising revenues of approximately $8.3 million and circulation revenues of approximately $2.7 million for the nine months ended July 31, 2011. The Company recorded newspaper revenues associated with The Herald Dispatch of approximately $11.6 million, consisting of advertising revenue of $8.8 million and $2.9 million in circulation revenues for the nine months ended July 31, 2010. The on-line revenues for the nine months ended July 31, 2011 and 2010 approximated $0.8 million and $0.8 million and are recorded as a component of advertising revenue. The reduction in newspaper revenue is primarily
associated with a decrease in advertising revenues, which we believe is reflective of macro industry dynamics coupled with the residual effect of the global economic crisis.
Cost of Sales
Total cost of sales increased 0.1% in the nine months ended July 31, 2011 to $69.1 million from $69.0 million in the nine months ended July 31, 2010. Printing cost of sales decreased 0.3% in the nine months ended July 31, 2011 to $44.6 million from $44.8 million in the nine months ended July 31, 2010. The decrease in printing cost of sales was primarily due to the decrease in printing sales partially offset with a decrease in gross margin percent, resulting from higher material costs. Office products and office furniture cost of sales increased 0.4% in the nine
months ended July 31, 2011 to $18.1 million from $18.0 million in the nine months ended July 31, 2010 and increased as a percent of sales from 71.3% in 2010 to 71.8% in 2011. The increase in office products and office furniture cost of sales is attributable to 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 57.7% and 53.4% for the nine months ended July 31, 2011 and 2010.
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, 2011 compared to the same period in 2010, selling, general and administrative expenses (S,G&A) decreased as a percentage of sales to 22.9% from 24.9% in 2010. Total S,G&A decreased $2.6 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. In 2010, S, G&A was impacted by various costs associated with the Company's successful defense of a legal action approximating $330,000.
In the nine months ended July 31, 2011 and 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 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 2010, and $250,000 ($150,000 after tax or $0.01 per share on a basic and diluted basis) in 2011.
Income from Operations and Other Income and Expenses
Income from operations increased 26.4% in the nine month period ended July 31, 2011, to $4.0 million from $3.1 million in the same period of 2010. This increase is primarily the result of a $1.5 million reduction in restructuring related charges, which decreased from $1.7 million in 2010 to $0.2 million in 2011. Other (expense) (net) decreased to $1.5 million in 2011 from $3.8 million in 2010. This is primarily due to two factors: lower interest expense and gain on early extinguishment of debt to a related party. The decreases in interest expense resulted
from lower 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 as well as higher interest rates associated with a swap contract in 2010. In addition, the Company recorded a gain on early extinguishment of debt to a related party in the third quarter of 2011 of approximately $1.3 million.
Income Taxes
The Company’s effective income tax was an expense of 41.8% for the nine months ended July 31, 2011, and a benefit of 35.9% in the same period of 2010. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate
.
Net income (loss)
Net income (loss) for the first nine months of 2011 increased to net income of $1.4 million from a net loss of ($450,000) in the same period of 2010 due to the reasons discussed above. Basic and diluted earnings (loss) per share for the nine months ended July 31, 2011 were $0.14 and ($0.05) for the nine months ended July 31, 2010.
Champion Industries, Inc. and Subsidiaries
Management’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 contracts; therefore, to the extent permitted by competition, it has the ability to pass through to its customers most cost increases resulting from inflation, if any. In addition, the Company is not particularly energy dependent; therefore, an increase in energy costs should not have a significant impact on the Company.
Our operating results depend on the relative strength of the economy on both a regional and national basis. Recessionary conditions applicable to the economy as a whole and specifically to our core business segments, have had a significant adverse impact on the Company's business. A continuing or a deepening of the recessionary conditions we are experiencing could significantly affect our revenue categories and associated profitability.
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. The global economic crisis as well as other macro-economic factors and customer demand has impacted this general trend in recent years. The Company is unable to predict if this trend has
fundamentally shifted until such time a more stable economic climate is present.
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, 2011, was $4.2 million compared to net cash provided by operations of $6.2 million during the same period in 2010. This reduction in net cash from operations is due primarily to
cash received from income tax refunds in 2010 and other balance sheet changes.
Net cash used in investing activities for the nine months ended July 31, 2011 was $159,000 compared to $272,000 during the same period in 2010. Cash flows used in investing activities in 2011 and 2010 were primarily associated with the purchase of property and equipment.
Net cash used in financing activities for the nine months ended July 31, 2011 was $4.0 million compared to $7.0 million during the same period in 2010. This decrease is primarily due to a decrease in debt payments in 2011.
Working capital on July 31, 2011 was $12.5 million and at October 31, 2010 was $13.1 million.
Champion Industries, Inc. and Subsidiaries
Management’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 3. Quantitative and Qualitative Disclosure about Market Risk
The Company does not have any significant exposure relating to market risk.
ITEM 4. 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 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.