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 June 28, 2003
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 1-14637
BANTA CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0148550
- --------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) I.D. Number)
225 Main Street, Menasha, Wisconsin 54952
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 751-7777
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 / /
Common stock outstanding as of August 6, 2003 - 25,441,747 shares.
BANTA CORPORATION AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended June 28, 2003
INDEX
Page Number
-----------
PART I FINANCIAL INFORMATION:
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 28, 2003 and December 28, 2002........................ 3
Condensed Consolidated Statements of Earnings
for the Three Months and Six Months Ended June 28, 2003
and June 29, 2002 ........................................ 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 28, 2003
and June 29, 2002.......................................... 5
Notes to Condensed Consolidated Financial Statements -
June 28, 2003..............................................6-10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................. 11-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.. 15
Item 4 - Controls and Procedures..................................... 15
PART II OTHER INFORMATION
Item 1 - Legal Proceedings........................................... 16
Item 4 - Submission of Matters to a Vote of Security Holders......... 16
Item 6 - Exhibits and Reports on Form 8-K............................ 16
SIGNATURES ................................................................. 17
EXHIBIT INDEX .............................................................. 18
2
Part 1 Item 1. Financial Statements
BANTA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS June 28, 2003 December 28, 2002
------------- -----------------
(unaudited)
Current Assets
Cash and cash equivalents $ 195,007 $ 154,836
Receivables 192,808 212,988
Inventories 61,574 69,388
Other current assets 24,798 22,938
------------------------- ------------------------
Total Current Assets 474,187 460,150
------------------------- ------------------------
Plant and equipment 938,029 913,564
Less accumulated depreciation 658,815 635,593
------------------------- ------------------------
Plant and equipment, net 279,214 277,971
Goodwill 65,269 62,740
Other assets 5,503 4,403
------------------------- ------------------------
Total Assets $ 824,173 $ 805,264
========================= ========================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities
Accounts payable $ 114,734 $ 102,635
Accrued salaries and wages 33,998 36,258
Other accrued liabilities 22,056 27,512
Current maturities of long-term debt 19,408 19,377
------------------------- ------------------------
Total Current Liabilities 190,196 185,782
------------------------- ------------------------
Long-term debt 97,388 111,489
Deferred income taxes 16,032 13,679
Other non-current liabilities 45,938 41,201
------------------------- ------------------------
Total Liabilities 349,554 352,151
------------------------- ------------------------
Shareholders' Investment
Preferred stock-$10 par value;
authorized 300,000 shares; none issued - -
Common stock-$.10 par value, authorized 75,000,000 shares;
28,678,930 and 28,503,446 shares issued, respectively 2,868 2,850
Amount in excess of par value of stock 24,591 20,003
Accumulated other comprehensive earnings (loss) 4,716 (2,126)
Treasury stock, at cost - 3,256,400 shares (70,175) (70,175)
Retained earnings 512,619 502,561
------------------------- ------------------------
Total Shareholders' Investment 474,619 453,113
------------------------- ------------------------
$ 824,173 $ 805,264
========================= ========================
See accompanying notes to unaudited condensed consolidated financial statements
3
BANTA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Net sales $ 336,731 $ 332,263 $ 673,161 $ 666,230
Cost of goods sold 262,596 258,643 528,055 523,718
------------- ------------- ------------- -------------
Gross earnings 74,135 73,620 145,106 142,512
Selling and administrative expenses 50,358 48,892 100,333 97,307
Restructuring charge 5,553 - 6,469 -
Litigation settlement 4,602 - 4,602 -
------------- ------------- ------------- -------------
Earnings from operations 13,622 24,728 33,702 45,205
Interest expense (2,005) (2,943) (4,626) (6,053)
Other income (expense), net (31) 155 756 94
------------- ------------- ------------- -------------
Earnings before income taxes 11,586 21,940 29,832 39,246
Provision for income taxes 4,330 8,560 11,330 15,378
Net earnings $ 7,256 $ 13,380 $ 18,502 $ 23,868
============= ============= ============= =============
Basic earnings per share of common stock $ 0.29 $ 0.53 $ 0.73 $ 0.95
============= ============= ============= =============
Diluted earnings per share of common stock $ 0.28 $ 0.52 $ 0.72 $ 0.93
============= ============= ============= =============
Cash dividends per share of common stock $ 0.17 $ 0.16 $ 0.33 $ 0.32
============= ============= ============= =============
See accompanying notes to unaudited condensed consolidated financial statements
4
BANTA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Six Months Ended
June 28, 2003 June 29, 2002
------------- -------------
Cash Flows from Operating Activities
Net earnings $ 18,502 $ 23,868
Depreciation and amortization 31,274 37,081
Deferred income taxes 2,050 915
Non-cash restructuring charges 5,543 -
Gain on sale of plant and equipment (345) (95)
Change in operating assets and liabilities
Decrease in receivables 20,226 33,585
(Increase) decrease in inventories 7,842 (1,305)
Increase (decrease) in accounts payable
and accrued liabilities (2,218) 1,448
Net change in other current assets and liabilities (590) 1,169)
Net change in other non-current assets and liabilities 2,745 (3,605)
Tax benefit from exercise of stock options 646 2,313
------------- -------------
Cash provided from operating activities 85,675 93,036
------------- -------------
Cash Flows From Investing Activities
Capital expenditures (31,776) (14,891)
Business acquisition (2,379) -
Additions to long-term investments - (1,261)
------------- -------------
Cash used for investing activities (34,155) (16,152)
------------- -------------
Cash Flows From Financing Activities
Repayments of long-term debt, net (14,070) (20,596)
Dividends paid (8,080) (7,987)
Proceeds from exercise of stock options 5,069 14,054
Other (1,110) (2,492)
------------- -------------
Cash used for financing activities (18,191) (17,021)
------------- -------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 6,842 5,704
Net increase in cash 40,171 65,567
Cash and cash equivalents at the beginning of period 154,836 65,976
------------- -------------
Cash and cash equivalents at the end of the period $ 195,007 $ 131,543
============= =============
Cash payments for:
Interest, net of capitalized interest $ 4,708 $ 5,758
Income taxes 9,780 8,739
See accompanying notes to unaudited condensed consolidated financial statements
5
BANTA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 2003
(UNAUDITED)
1) Basis of Presentation
The unaudited condensed consolidated financial statements of Banta
Corporation (the Corporation) included herein have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations, although the Corporation believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Corporation's latest Annual Report on Form 10-K.
In the opinion of management, the aforementioned financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results for the interim periods.
Results for the three and six months ended June 28, 2003 are not
necessarily indicative of results that may be expected for the year ending
January 3, 2004. Certain prior year amounts have been reclassified to
conform to the 2003 presentation.
2) Inventories
Inventories consist of the following (dollars in thousands):
June 28, 2003 December 28, 2002
------------- -----------------
Raw materials and supplies $28,419 $30,477
Work-in-process and finished goods 33,155 38,911
------- -------
$61,574 $69,388
======= =======
3) Earnings Per Share of Common Stock
Basic earnings per share of common stock is computed by dividing net
earnings by the weighted average number of common shares outstanding during
the period. Diluted earnings per share of common stock is computed by
dividing net earnings by the weighted average number of common shares and
common equivalent shares outstanding during the period. The common
equivalent shares relate entirely to the assumed exercise of stock options.
The weighted average shares used in the computation of earnings per share
consist of the following (in millions of shares):
Three Months Ended Six Months Ended
------------------ ----------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Basic 25.4 25.2 25.3 25.1
Diluted 25.6 25.6 25.5 25.5
6
4) Comprehensive Earnings
Comprehensive earnings consist of the following (dollars in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Net earnings $ 7,256 $13,380 $18,502 $23,868
Other comprehensive earnings (loss):
Foreign currency translation
adjustments 5,420 6,347 6,842 5,704
------- ------- ------- -------
Comprehensive earnings $12,676 $19,727 $25,344 $29,572
======= ======= ======= =======
5) Goodwill
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective
December 30, 2001. Under SFAS No. 142, goodwill is no longer amortized but
is reviewed for impairment on an annual basis.
Changes in the carrying amount of goodwill by segment during the six months
ended June 28, 2003 consist of the following (dollars in thousands):
Supply-chain
Print management Healthcare Total
----- ---------- ---------- -----
Balance at December 28, 2002 $35,502 $5,624 $21,614 $62,740
Translation adjustments for goodwill
denominated in foreign currencies - 529 - 529
Acquisition of business (see Note 9) 2,000 -0- -0- 2,000
------- ------ ------- -------
Balance at June 28, 2003 $37,502 $6,153 $21,614 $65,269
======= ====== ======= =======
6) Stock-Based Compensation
As of June 28, 2003, the Corporation's stock-based employee compensation
plans were accounted for under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. In compliance with
APB Opinion No. 25, no stock-based employee compensation cost is reflected
in net earnings. The following table illustrates the effect on net earnings
and earnings per share if the Corporation had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation (dollars in thousands,
except per share amounts):
7
Three Months Ended Six Months Ended
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Net earnings, as reported $ 7,256 $ 13,380 $ 18,502 $ 23,868
Less compensation expense
determined under SFAS No. 123,
net of related taxes (733) (711) (1,372) (1,288)
--------- --------- --------- ---------
Pro forma net earnings $ 6,523 $ 12,669 $ 17,130 $ 22,580
========= ========= ========= =========
Earnings per share
As reported:
Basic $ .29 $ .53 $ .73 $ .95
========= ========= ========= =========
Diluted $ .28 $ .52 $ .72 $ .93
========= ========= ========= =========
Pro forma:
Basic $ .26 $ .50 $ .68 $ .90
========= ========= ========= =========
Diluted $ .25 $ .49 $ .67 $ .89
========= ========= ========= =========
7) Restructuring Charge
Effective January 1, 2003, the Corporation adopted SFAS No 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies the previous guidance on the subject.
It requires, among other things, that a liability for a cost associated
with an exit or disposal activity initiated after December 31, 2002 be
recognized at fair value when the liability is incurred rather than at the
commitment date to the exit or disposal plan.
On January 28, 2003, the Corporation announced a restructuring involving
its consumer catalog business and a realignment of operating activities
within its supply-chain management sector. The plan, which will be
implemented throughout 2003, is expected to consolidate certain operations,
leverage existing capacity, improve efficiencies and reduce costs.
Implementation of the plan is expected to result in a pre-tax charge
totaling between $15 million to $18 million. Through the six months ended
June 28, 2003, the Corporation has recorded $6.5 million in pre-tax charges
relating to this plan, $5.6 million of which was incurred in the second
quarter. The majority of the remaining charge is expected to be recorded in
the fourth quarter of 2003. The restructuring costs (based on the high end
of the range) are projected as follows: employees' severance and benefits,
$8.8 million; facility costs including lease terminations, $4.0 million;
and impaired assets and other, $5.2 million.
8
The reconciliation of the beginning and ending restructuring account
balances as of June 28, 2003 are as follows (dollars in thousands):
Balance at Charges/ Payments/ Balance at
December 28, 2002 Additions Reductions June 28, 2003
----------------- --------- ---------- -------------
Employee severance and
benefits liabilities $ - $5,717 $1,101 $4,616
Impaired assets - 536 - 536
Other liabilities -0- 216 216 -0-
--- ------ --- ---
Total $-0- $6,469 $1,317 $5,152
==== ====== ====== ======
Approximately $13.3 million of the restructuring expenses are expected for
the print segment, with $5.4 million and $6.3 million incurred for the
three and six months ended June 28, 2003, respectively. The remaining $4.7
million of these expenses are expected for the supply-chain management
segment, with $217,000 incurred for the three and six months ended June 28,
2003.
8) Litigation Settlement
On June 26, 2003, the Corporation settled its lawsuit with Singapore-based
Mentor Media, Ltd. (Mentor) relating to its proposed acquisition of Mentor.
The Corporation recorded a charge of $4.6 million in the second quarter of
2003 in connection with the settlement.
9) Acquisition of Business
On February 24, 2003, the Corporation acquired Qualipak Incorporated
("Qualipak") for $2.4 million in cash. Qualipak is a provider of secondary
packaging, kit assembly, fulfillment and distribution services for
publishers, consumer healthcare markets and over-the-counter
pharmaceuticals. The purchase price plus the liabilities assumed exceeded
the fair value of the tangible and intangible assets acquired by $2.0
million, which has been recorded as goodwill. The Corporation has included
the results of Qualipak in the consolidated financial statements since the
acquisition date.
The purchase agreement relating to this acquisition includes a provision
for additional contingent payments based on incremental qualified sales, as
defined, for calendar 2003 and 2004. Should these payments be made, the
Corporation would record a corresponding increase to goodwill.
10) New Accounting Standard
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation Number ("FIN") 46, "Consolidation of Variable Interest
Entities." FIN 46 requires that companies that control another entity
through "variable" interests other than voting interests consolidate the
controlled entity. FIN 46 is effective for variable interest entities
created after January 31, 2003 and to any variable interest entities in
which the Corporation acquires an interest after that date. FIN 46 is
effective for the quarter ending September 27, 2003 for variable interest
entities in which the Corporation held a variable interest that it acquired
before February 1, 2003. The Corporation is currently evaluating the
9
provisions of FIN 46, but does not currently expect adoption of FIN 46 will
have a material effect on its financial condition or results of operations.
11) Segment Information
The Corporation operates in two primary business segments, print and
supply-chain management, with other business operations in healthcare
products. Summarized segment data for the three and six months ended June
28, 2003 and June 29, 2002 are as follows (dollars in thousands):
Three Months Ended Six Months Ended
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Net sales
Print $231,240 $236,578 $463,601 $472,555
Supply-Chain Management 80,011 69,424 161,546 142,627
Healthcare 25,480 26,261 48,014 51,048
-------- -------- -------- --------
Total $336,731 $332,263 $673,161 $666,230
======== ======== ======== ========
Earnings from operations
Print $9,624 $20,847 $22,910 $39,513
Supply-Chain Management 5,413 5,721 14,434 10,426
Healthcare 3,726 2,530 6,388 5,115
-------- -------- -------- --------
Total $18,763 $29,098 $43,732 $55,054
======== ======== ======== ========
The following table presents a reconciliation of segment earnings from
operations to the totals contained in the condensed consolidated financial
statements for the three and six months ended June 28, 2003 and June 29,
2002 (dollars in thousands):
Three Months Ended Six Months Ended
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Reportable segment earnings from $18,763 $29,098 $43,732 $55,054
operations
Corporate expenses (not allocable (5,141) (4,370) (10,030) (9,849)
to segments)
Interest expense (2,005) (2,943) (4,626) (6,053)
Other income (expense) (31) 155 756 94
------- ------- ------- -------
Earnings before income taxes $11,586 $21,940 $29,832 $39,246
======= ======= ======= =======
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST SIX MONTHS OF 2003 COMPARED TO 2002
Net Sales
- ---------
Net sales for the second quarter of 2003 on a consolidated basis totaled $337
million, 1% higher than the $332 million in the second quarter of 2002. Net
sales for the quarter by segment are shown below (dollars in thousands):
Segment Quarter 2 Quarter 2 Increase
2003 2002 (Decrease) %
---- ---- ------------
Print $231,240 $236,578 (2%)
Supply-Chain Management 80,011 69,424 15%
Healthcare 25,480 26,261 (3%)
Total $336,731 $332,263 1%
Print segment sales for the second quarter of 2003 were 2% lower than the prior
year period. The key issues related to revenues in this segment were:
o Sales in the Book Group were down 6% from the prior year second quarter,
primarily the result of less activity in the educational market. Publishers
appear to remain concerned about the impact large state and local
government budget deficits will have on educational spending. Educational
sales within this group were down by approximately $4 million from the
prior year second quarter. Mitigating this decline was the increase of $2
million in literature management sales during the quarter compared to the
prior year second quarter.
o The Catalog Group sales for the second quarter were 3% below the prior year
quarter. The restructuring and modernization of the catalog print platform
was delayed during the second quarter, negatively affecting equipment
availability and productivity. The group used less efficient, more costly
capacity to continue to serve customers, increasing costs and reducing
operating earnings. This will continue into the third quarter of 2003.
o Revenues for the Publications Group were up 8% from the second quarter last
year despite a 5% reduction in advertising pages. The group continues to
grow by targeting magazines that are less dependent on ad cycles, such as
association publications, and adding new value-added services such as
magazine issue reprints.
o Direct Marketing Group sales for the second quarter were 10% below the
second quarter of 2002. The continued slow economy has negatively impacted
both the commercial and direct mail segments. Retailers, consumer package
goods companies and financial service companies have become increasingly
conservative relative to the number and frequency of pieces mailed.
Net sales for the Supply-Chain Management segment were 15% higher in the second
quarter of 2003 compared to the second quarter of 2002. The improved revenues
reflect continued excellent year-over-year performance by a number of the
Corporation's major technology customers, thereby driving demand for
supply-chain services. This revenue increase was achieved despite an environment
of weak technology sales overall. Revenue from Hewlett-Packard Company under a
five-year supply-chain management contract expiring in 2004 totaled
approximately $115 million in 2002, and these revenues are expected to be
comparable in fiscal 2003. This contract provides for the possibility of annual
extensions. The Corporation currently believes that it will either extend its
contract with Hewlett-Packard or seek to develop replacement sources of revenue
prior to the expiration of the contract.
11
Healthcare segment net sales in the second quarter were 3% lower versus the
comparable period in 2002, impacted by lower sales to a few large customers.
Net sales for the Corporation for the first half of 2003 were $673 million, an
increase of 1% from sales in the first half of 2002. Print segment sales for the
six-month period were $464 million compared to $473 million in the first half of
2002, a decrease of 2%. Print sales for the first half of 2003 were below the
prior year period as the result of the factors discussed above for the quarter,
with the exception of the Catalog Group. The negative impact of the
restructuring plan on revenues was not an issue during the first quarter of
2003, in which sales for this group exceeded the prior year quarter by 14%. For
the first six months of 2003, sales for the Catalog Group were 5.5% higher than
the prior year, with strong volume in the first quarter of 2003 offsetting the
restructuring related decreases in the second quarter of 2003.
Net sales for the Supply-Chain Management segment in the first six months of
2003 were $162 million, an increase of 13% over the prior year first half sales
of $143 million. Increased sales to customers in the technology sector was the
primary factor for improvement in both the second quarter and the first half of
2003.
Healthcare sales in the first half of 2003 were 6% lower than the prior year.
First half sales declined as a result of lower sales to a few large customers.
Earnings from operations
- ------------------------
Consolidated earnings from operations, including the restructuring (Note 7) and
litigation settlement (Note 8), of $13.6 million in the second quarter of 2003
decreased significantly from the $24.7 million in the prior year second quarter.
Operating earnings as a percentage of sales were 4.0%, down from the prior
year's 7.4%.
Operating margins for the Print segment in the second quarter of 2003 decreased
to 4.2% from 8.8% in the second quarter of 2002. This decrease is primarily
related to the following operational factors:
o Approximately $4.0 million in reduced operating earnings from the Catalog
Group as the result of extra costs and disruption caused by the delay in
consolidating the St. Paul facility to other locations. This delay
accounted for 1.7 percentage points of the total 4.6 percentage point
decline in the operating margin. In addition, the resulting unanticipated
short-term loss of catalog production capacity is expected to reduce third
quarter 2003 earnings from operations by an additional $4 to $5 million
dollars.
o Restructuring charges of $5.4 million recorded during the quarter accounted
for 2.3 percentage points of the operating margin decline.
Operating margins for the Supply-Chain Management segment were 6.8% in the
second quarter of 2003, a reduction from the prior year second quarter operating
margins of 8.2%. Operating margins were negatively impacted by the litigation
settlement and restructuring costs recorded during the second quarter. Both
costs totaled a reduction of 6.0 percentage points. These negative impacts were
offset in part by a higher proportion of value-added content in the product mix.
The Healthcare segment improved operating margins in the second quarter of 2003
to 14.6%, as compared to 9.6% in the second quarter of 2002. Approximately 60%
of the margin improvement is due to improved pricing and the balance is due to
operating improvements.
Earnings from operations for the first half of 2003 decreased to $33.7 million
from the $45.2 million for the prior period. Operating margins of 5.0% for the
first half of 2003 were lower than the 6.8% for the same period in 2002. Print
segment operating margins were 4.9% for the first six months of 2003,
12
compared to 8.4% in the prior year period. The factors affecting margins for
this segment for the first half of 2003 were similar to those described above
for the second quarter. Operating margins for the Supply-Chain Management
segment were 8.9% for the six-month period ended June 28, 2003 compared to 7.3%
for the prior year. The increased margin from product mix described above for
the second quarter positively affected the first half of 2003, offset by the
litigation settlement and restructuring costs in the second quarter of 2003.
Healthcare segment operating margins of 13.3% for the first half of 2003
compared to 10.0% in the first half of 2002. Approximately 40% of the margin
improvement for the first half of 2003 is due to improved pricing, and the
balance is due to operating improvements.
Interest Expense
- ----------------
Interest expense for the second quarter of 2003 was $2.0 million, a reduction of
32% compared to interest expense of $2.9 million in the prior year quarter.
Interest expense for the first half of 2003 was $4.6 million, a reduction of 24%
compared to the first half of 2002. The reduction in interest expense is the
result of continuing reductions in long-term debt. Essentially all of the
Corporation's long-term debt is at fixed interest rates. As a result, lower
market interest rates have not significantly impacted the Corporation's interest
expense.
Income Taxes
- ------------
As reflected below, the Corporation's effective second quarter tax rate for 2003
was lower than the second quarter 2002 rate. The tax rate for the first half of
2003 was also lower than that of the prior year period. The reduction in the
effective tax rate was due to lower tax rates on earnings of the Corporation's
European and Asian operations and higher revenues within those jurisdictions.
Effective Tax Rate
2003 2002
------------- -------------
Second Quarter 37.4% 39.0%
First Half 38.0% 39.2%
Liquidity and Capital Resources
- -------------------------------
The Corporation's net working capital increased by $9.6 million at the end of
the first half of 2003 compared to the end of fiscal 2002. Increased cash
balances of $40.2 million offset decreases in receivables of $20.2 million and
in inventories of $7.8 million. Increased cash is primarily the result of
increased cash flow from operations.
The Corporation has in effect a stock repurchase program pursuant to which it
may repurchase shares of its common stock on the open market or in privately
negotiated transactions from time to time. During the quarter ended June 28,
2003, the Corporation did not repurchase any shares of its common stock.
Capital expenditures were $32 million during the first half of 2003, an increase
of $17 million from the amount expended during the first half of 2002. Capital
expenditures for the full year are expected to be in the range of $90 - $100
million and will be funded by cash provided from operations.
Total debt as a percentage of total capitalization at June 28, 2003 was 20.0%,
which was slightly lower than the 22.4% at December 28, 2002.
13
Given cash and cash equivalents on hand as well as borrowing capacity currently
in place, the Corporation believes it has sufficient liquidity to fund its
operations for the foreseeable future.
For discussion of certain pending litigation see Part II, Item 1.
CRITICAL ACCOUNTING POLICIES
The Corporation's accounting policies are more fully described in Note 1 to the
consolidated financial statements included in the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 2002. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and
footnotes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of the
Corporation's consolidated financial statements include estimates as to the
recovery of receivables and the realization of inventories, plant and equipment
and goodwill. Significant assumptions are also used in the determination of
liabilities related to pension and post-retirement benefits, income taxes and
environmental matters. The process of determining significant estimates is fact
specific and takes into account factors such as historical experience, current
and expected economic conditions, product mix, and in some cases, actuarial
assumptions. The Corporation re-evaluates these significant factors as facts and
circumstances dictate. Historically, actual results have not differed
significantly from those determined using the estimates described above.
The Corporation believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o Revenue Recognition. Revenues are recognized on products shipped to
unaffiliated customers when the risk of loss transfers or when services are
performed. The Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the
application of accounting principles generally accepted in the United
States to selected revenue recognition issues. In addition, revenues in the
supply-chain management segment are recognized in accordance with Emerging
Issues Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent." Each major contract is evaluated based
on various criteria, with management judgment required to assess the
importance of each criterion in reaching the final decision.
o Goodwill. The Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", effective
December 30, 2001. Under SFAS No. 142, goodwill is no longer amortized, but
is reviewed for impairment on an annual basis. The Corporation's analysis,
which is performed in the fourth quarter of each fiscal year unless other
indicators of impairment exist, is based on the comparison of the fair
value of its reporting units to the carrying value of the net assets of the
respective reporting units.
o Retirement Benefits. The Corporation has significant pension and
post-retirement benefit costs that are developed from actuarial valuations.
The valuations reflect key assumptions regarding, among other things,
discount rates, expected return on plan assets, retirement ages and years
of service. Consideration is given to current market conditions, including
changes in interest rates and investment returns, in making these
assumptions. Changes in these assumptions will affect the amount of pension
and post-retirement expense recognized in future periods.
14
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
This document includes forward-looking statements. Statements that describe
future expectations, including revenue and earnings projections, plans, results
or strategies, are considered forward-looking. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those currently anticipated. Factors that could affect actual
results include, among others, changes in customers' order patterns or demand
for the corporation's products and services; pricing; changes in raw material
costs and availability; unanticipated changes in sourcing of raw materials by
customers; unanticipated changes in operating expenses; unanticipated production
difficulties, including with respect to the Catalog Group modernization; changes
in the pattern of outsourcing supply-chain management functions by customers;
unanticipated acquisition or loss of significant customer contracts or
relationships; unanticipated issues related to the restructurings in the catalog
and supply-chain management businesses and expected cost savings related
thereto; unanticipated results relating to ongoing litigation; and any
unanticipated delay in the economic recovery. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements. The forward-looking statements included herein are
made as of the date hereof, and the Corporation undertakes no obligation to
update publicly such statements to reflect subsequent events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation is exposed to market risk from changes in interest rates and
foreign exchange rates. As of June 28, 2003, the Corporation had no notes
payable outstanding against lines of credit with banks. Since essentially all
the Corporation's long-term debt is at fixed interest rates, exposure to
interest rate fluctuations is minimal.
Exposure to adverse changes in foreign exchange rates is not considered
material. Potential market risk associated with changes in foreign exchange is
considered in contractual arrangements with customers.
Item 4. Controls and Procedures
The Corporation's management, with the participation of the Corporation's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Corporation's disclosure controls and procedures (as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Corporation's Chief Executive Officer and
Chief Financial Officer have concluded that as of the end of such period, the
Corporation's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Corporation in the reports that it files or submits under
the Exchange Act. There have not been any changes in the Corporation's internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Corporation's internal control over financial reporting.
15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is a defendant in an action commenced by the creditors'
committee in the Xyan.com bankruptcy matter. The claim relates to transactions
that occurred in 2001 in which the Corporation acquired certain assets from
Xyan.com. The creditors' committee is currently seeking recovery of
approximately $2 million to $6 million. The Corporation believes that it has
meritorious grounds in the Xyan.com case to obtain results that are favorable to
the Corporation. However, in the event that the case was decided in a manner
unfavorable to the Corporation, such result could impact the Corporation's
results of operations.
On June 26, 2003, the Corporation settled its lawsuit with Singapore-based
Mentor Media, Ltd. (Mentor) relating to its proposed acquisition of Mentor. The
Corporation recorded a charge of $4.6 million in the second quarter of 2003 in
connection with the settlement.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 29, 2003, the only matters
submitted to a vote of the Corporation's shareholders was the election of nine
directors. All of the persons nominated as directors were elected for terms
expiring at the 2004 annual meeting. The following table sets forth certain
information with respect to such election:
Shares
Shares Withholding
Name Voted For Authority
---- --------- ---------
Jameson A. Baxter 20,904,207 172,733
Donald D. Belcher 20,938,939 138,001
John F. Bergstrom 20,933,720 143,220
Ursula M. Burns 20,939,133 137,807
Henry T. DeNero 20,920,457 156,483
Richard L. Gunderson 20,897,904 179,036
Raymond C. Richelsen 20,930,134 146,806
Stephanie A. Streeter 20,913,927 163,013
Michael J. Winkler 19,941,802 1,135,138
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
31.1 - Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 - Certification of Periodic Financial Report by the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K -
The Corporation filed a Current Report on Form 8-K, dated May 2, 2003,
furnishing under Item 12 the Corporation's press release dated April 29,
2003, with respect to financial results for the quarter ended March 29,
2003 and earnings guidance for fiscal 2003.
16
SIGNATURES
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.
BANTA CORPORATION
/s/ Gerald A. Henseler
-----------------------
Gerald A. Henseler
Executive Vice President and Chief Financial Officer
Date: August 8, 2003
17
BANTA CORPORATION
EXHIBIT INDEX TO FORM 10-Q
For The Quarter Ended June 28, 2003
Exhibit Number
- --------------
31.1 Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Periodic Financial Report by the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
18