Management's Discussion and Analysis of
Financial Condition and Results of OperationsTwelve Months Ended January 30, 1999 and January 31, 1998
Net Sales from Continuing Operations
Consolidated net sales increased 23.0% to $3,752,591,000 in the year ended January 30, 1999 from $3,050,947,000 in the same twelve-month period last year. Net sales for the Company's North America Office Products ("NAOP") segment increased 18.4% to $2,275,712,000 from $1,921,713,000 in the same twelve-month period last year, primarily reflecting internal growth and the acquisition of Data Documents Inc. ("DDI") that was effective November 26, 1997. Including the DDI revenue for periods prior to acquisition, net NAOP sales increased 7.4% year over year on a pro forma basis. Net sales for the International Office Products segment increased 36.5% to $608,884,000 from $445,970,000 in the same twelve-month period last year primarily reflecting acquisition related revenue. The Company acquired 11 International Office Product companies in fiscal 1998 and ten in fiscal 1997. Net sales for the Company's Desktop Software segment increased 41.0% to $582,121,000 from $412,861,000 in the same twelve-month period last year, primarily reflecting new customers and added software sales to existing customers. Net sales for the Other Products and Services' segment increased 4.4% to $292,597,000 from $280,209,000 in the same twelve-month period last year.
International operations accounted for 25.0% of total sales or $939,789,000 in the year ended January 30, 1999 and 23.8% of total sales or $726,962,000 in the same twelve-month period last year. The Company has continued to expand its international operations in Germany, Italy and Canada and entered the Netherlands through an acquisition in the year ended January 30, 1999. The Company currently has no specific plans to significantly expand or enter additional international markets.
Gross Profit from Continuing Operations
Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 23.3% for the year ended January 30, 1999 compared to 24.2% for the same twelve-month period in the prior year. The North America Office Products segment's gross profit percentage slightly increased year over year reflecting the Company's focus on margin improvement including increased discounts and rebates from its suppliers. This gross profit increase was offset by increased software sales (which have lower gross profit margins) in the United States and Europe and lower gross margins in certain countries reflecting competitive pressures and product mix.
Warehouse Operating and Selling Expenses from Continuing Operations
Warehouse operating and selling expenses primarily include labor and administrative costs associated with operating regional warehouses and sales offices, selling expenses including commissions related to the Company's direct sales force, and warehouse consolidation and relocation costs and expenses. Warehouse operating and selling expenses decreased as a percentage of sales to 16.0% in the year ended January 30, 1999 from 16.8% in the same twelve-month period last year. This decrease is primarily attributable to the Company's efforts to leverage and streamline its operations, including the elimination of redundant facilities and positions.
Corporate General and Administrative Expenses from Continuing Operations
Corporate general and administrative expenses include expenses incurred to provide corporate oversight and support for regional operations and depreciation of the related assets. Corporate general and administrative expenses increased to $93,753,000 in the year ended January 30, 1999 from $75,936,000 in the twelve-month period last year reflecting the Company's expanded operations. As a percentage of net sales, corporate general and administrative expenses remained constant at 2.5%.
Amortization of Intangibles from Continuing Operations
Intangibles amortization expense primarily reflects goodwill and capitalized software amortization expense. Amortization expense increased to $32,626,000 in the year ended January 30, 1999 from $23,907,000 in the same twelve-month period last year reflecting amortization of the Company's investment in its computer software applications and its acquisition activity.
Restructuring, Merger and Other Nonrecurring Charges from Continuing Operations
During the year ended January 30, 1999, the Company recorded $54,805,000 in restructuring and other nonrecurring charges and $3,130,000 in net restructuring related inventory provisions. The Company's restructuring plan provides for a gross reduction of approximately 1,000 employees and the closure of approximately 70 facilities. The total net charge of $57,935,000 includes $36,370,000 of cash charges and $21,565,000 of non-cash charges. During the twelve-month period ended January 31, 1998, the Company expensed $11,337,000 in net merger and other nonrecurring charges including $4,485,000 of transaction costs incurred by DDI in connection with its merger with the Company and for the planned reduction of 295 employees and the closure of 25 facilities. Refer to Note 4 in the Company's audited consolidated financial statements appearing elsewhere in this Form 10-K.
Operating Profit from Continuing Operations
Consolidated operating profit decreased 18.9% to $92,706,000 or 2.5% of net sales for the year ended January 30, 1999 compared to operating profit of $114,254,000 or 3.7% of net sales in the same period last year. Before restructuring, merger and other nonrecurring charges, operating profit increased 20.0% to $150,641,000 in the current period from $125,591,000 in the comparable prior period due largely to internal growth and improved operating efficiencies.
Before restructuring and merger charges, operating profit for the Company's North America Office Products segment increased 27.9% to $182,312,000, or 8.0% of related net sales, from $142,582,000, or 7.4% of related net sales in the same twelve-month period last year; primarily reflecting internal growth, the DDI acquisition, enhanced vendor discount and rebate programs and improved operating efficiencies. Before restructuring and merger charges, operating profit for the International Office Products' segment increased to $1,697,000, or 0.3% of related net sales, from an operating loss of $4,244,000, or 1.0% of related net sales in the same twelve-month period last year primarily reflecting acquisition revenue and improved performance in Australia, partially offset by an operating loss in the United Kingdom. The United Kingdom operating loss reflects lost revenue and lower gross profit margins, without a corresponding decrease in operating costs. Included in the fiscal 1998 restructuring charge is an extensive restructuring plan for the United Kingdom.
Operating profit for the Company's Desktop Software segment increased 18.9% to $34,222,000, or 5.9% of Desktop Software net sales from $28,784,000, or 7.0% of related net sales, in the same twelve-month period last year reflecting the increased percentage of large volume licensing agreements which typically have lower margins compared to traditional shrink wrap products. The Company expects the Desktop Software segment to continue to experience operating margin pressure primarily due to these lower margin, high volume customer agreements and changes in the rebate structure from the major software publishers.
Before restructuring and merger charges, operating profit for Other Products and Services' segment decreased 48.0% to $7,136,000, or 2.4% of Other Products and Services' net sales from $13,721,000, or 4.9% of Other Products and Services' net sales in the same twelve-month period last year primarily reflecting an operating loss in the promotional products business. The Company appointed a new divisional president for the promotional products business in September 1998, and has completed a number of restructuring activities including exiting the unprofitable sales promotion business line.
Before restructuring and merger charges, international operations accounted for 14.9% of total operating profit in the current fiscal year compared to 10.4% in the same twelve-month period of the prior year. Before restructuring and merger charges, international operating profit increased 71.7% to $22,439,000, or 2.4% of international net sales from $13,068,000, or 1.8% of international net sales in the same twelve-month period last year, primarily reflecting expanded international operations and improved operating performance in Australia and Canada, partially offset by the United Kingdom operating loss.
Interest Expense from Continuing Operations
Net interest expense of $75,302,000 in the year ended January 30, 1999 increased from $36,099,000 in the prior twelve-month period. This increase reflects increased borrowings under the Senior Secured Credit Facility which has higher interest rates than the previous Senior Credit Facility, and the sale in May 1998 of the Senior Notes. The proceeds from the sale of the Senior Notes were used to repay substantially all of the $90,000,000 91/8% Notes and to repay outstanding indebtedness under the Senior Secured Credit Facility. See "Liquidity and Capital Resources."
Other Income
Included in other income in fiscal 1998 is the gain on sale of marketable securities of $6,273,000 and reflects net cash proceeds of $21,110,000 offset by the cost of the marketable securities of $14,837,000.
Minority Interest
Minority interest expense of $2,222,000 in the year ended January 30, 1999 compares to income of $1,862,000 in the prior twelve-month period, reflecting a 46.8% minority interest in Corporate Express Australia and a 49.0% minority interest in Corporate Express United Kingdom through June 1997. The Company acquired a majority ownership interest in Corporate Express Australia in May 1995 and a majority ownership interest in Corporate Express United Kingdom in December 1995. In June 1997, the Company acquired the remaining 49.0% ownership interest in Corporate Express United Kingdom.
Discontinued Operations
Income from discontinued operations, net of tax, reflects the operating results of the same-day delivery business through January 1999, the date a formal plan to sell this business segment was adopted, and the estimated net loss on disposal of $52,000,000. The operating results reflect a $17,652,000 net loss for fiscal 1998 compared to net income of $4,416,000 in the prior twelve-month period. This loss reflects the disposition of certain businesses, the effect of consolidating or closing facilities including planned restructuring, and the loss or elimination of certain lower margin customers without a corresponding decrease in operating expenses.
Extraordinary Item
The extraordinary loss of $5,581,000 (which is net of tax of $3,568,000) in fiscal 1998 represents the premium paid on the early repayment of the 91/8% Senior Subordinated Notes Series B due 2004 and the write-off of deferred financing costs related to the early extinguishment of the Company's former Senior Credit Facility.
Net Income (Loss)
Net loss of $73,290,000 in the year ended January 30, 1999 compares to a net income of $50,692,000 in the prior twelve-month period. This decrease reflects the loss on discontinued operations, the higher restructuring and other nonrecurring charges recorded in the current fiscal period and the lower earnings from continuing operations. The Company experienced an effective tax rate of 82.4% in the fiscal 1998 period compared to 43.7% in the prior twelve-month period. The tax rate for both periods reflects certain non-deductible restructuring and merger costs and certain non-deductible goodwill.
Balance Sheet Items
The net accounts receivable balance at January 30, 1999 of $601,569,000 increased $83,473,000 from $518,096,000 at January 31, 1998 primarily as a result of acquired receivables and internal sales growth in existing regions. The allowance for doubtful accounts as a percentage of consolidated accounts receivable was 1.9% and 2.1% at January 30, 1999 and January 31, 1998, respectively. The Company's historical bad debt write-offs have been low due to the high credit quality of its customers, resulting from the Company's focus on large corporations.
The inventory balance at January 30, 1999 of $285,754,000 increased $34,646,000 from $251,108,000 at January 31, 1998 primarily as a result of acquired inventories and inventory growth to support increased sales and the expanded catalog offering.
Net goodwill at January 30, 1999 of $788,963,000 increased $16,110,000 from $772,853,000 reflecting additions from acquisitions of $43,668,000 offset by current year amortization of $20,985,000, write-offs of $3,067,000 related to the restructuring charge and reversals of $3,506,000.
The accounts payable trade balance at January 30, 1999 of $422,087,000 increased $97,687,000 from $324,400,000 at January 31, 1998 primarily as a result of increased inventory purchases to support sales growth and the expanded catalog offering, certain cash management initiatives and acquired trade payables.
Accrued purchase costs at January 30, 1999 of $6,417,000 decreased by $2,961,000 from the January 31, 1998 balance of $9,378,000. This decrease reflects acquisition additions of $4,742,000, payments of $4,197,000, and reversals of $3,506,000 reducing previously recorded goodwill.