November 12, 1998
PUBLISHERS EQUIPMENT CORP (PECN)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS
AND RESULTS OF OPERATIONS
The Company serves the printing industry worldwide with new and remanufactured single-width, web-fed offset printing equipment through its wholly owned subsidiary King Press Corporation. Its products meet the needs of printers and publishers, and range from cost effective presses for newspaper production to heatset equipment that meet the high quality requirements of commercial printers. The Company's customer base includes a broad range of small newspapers, commercial and semi-commercial printers.
Results of Operations
Three Months Ended September 30, 1998
REVENUES. Revenues of $5,529,000 for the third quarter of 1998 increased more than three-fold compared to an abnormally low $1,632,000 level recorded in the third quarter of 1997. Increases were achieved for both domestic and foreign revenues in the current quarter.
Revenues derived from sales to domestic customers increased approximately 61 percent in the third quarter of 1998 compared to the third quarter of 1997. The Company delivered five equipment orders in the third quarter of 1998 compared to only two orders for the year
earlier period. Domestic printing equipment markets have been active in 1998, with the fundamentals for the health of the markets remaining positive during the year. Advertising expenditures, which represent the major source for income for our industry's customer base
increased during the year and newsprint cost, which represents the single largest component of a newspapers production expense, has remained stable.
Domestic advertising expenditures are expected to increase approximately 9 percent for the full year of 1998 compared to 1997, and continued, but somewhat slower growth in 1999 is forecast in trade publications. This outlook, together with stable newsprint cost would indicate that domestic printing equipment market conditions will remain favorable into 1999.
Revenues derived from sales to foreign customers increased over nine-fold in the third quarter of 1998 compared to the third quarter of 1997, accounting for approximately 63 percent of total revenues in the current period compared to 23 percent for the prior period. Equipment orders were delivered to customers in the Netherlands, Channel Islands and Brazil in the current quarter, while the timing of equipment orders in 1997 produced only a single equipment delivery to the Netherlands in the prior period.
The single largest factor affecting foreign printing equipment sales in 1998 has been the currency crisis in Asian countries, which has now spread to South America, with Brazil, Argentina and Venezuela being the most affected. This crisis has greatly reduced economic
activity in the affected countries, including the purchase of printing equipment. The Pacific Rim has been one of the most rapidly emerging markets for printing equipment in the world, and until this crisis is resolved, the growth of foreign equipment sales by all equipment suppliers will be constrained.
Page 7 of 11 sequentially numbered pages. GROSS PROFIT. Gross profit for the third quarter of 1998 of $1,067,000, or 19.3 percent of revenues, compares to $297,000, or 18.1 percent of revenues, for the third quarter of 1997. The improvement in gross profit expressed
as a percent of revenues in the current quarter is a result of the higher level of revenues in the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense of $760,000, or 13.7 percent of revenues, for the third quarter of 1998 compares to $505,000, or 30.9 percent of revenues, for the third quarter of 1997. The improvement in selling, general and administrative expense expressed as a percent of revenues
in the current quarter is a result of the higher level of revenues in the quarter.
OTHER INCOME (EXPENSE). Interest expense of $75,000 for the third quarter of 1998 compares to $82,000 for the third quarter of 1997. Interest expense in the current quarter is attributable primarily to term debt in the restructured King Press Corporation credit facility
(see Financial Position and Liquidity). Interest expense in third quarter of 1997 is attributable primarily to borrowings under the King Press Corporation revolving line of credit. The Company had net other expense of $5,000 in the third quarter of 1998 compared to net other
expense of $1,000 for the third quarter of 1997.
PROVISION FOR TAX. The Company utilized available net operating loss carryforwards to offset federal and state income tax liabilities for the third quarter of 1998 ( see Note 1 of Notes to Consolidated Financial Statements).
NET INCOME(LOSS). Net income of $228,000, or 4.1 percent of revenues, for the third quarter of 1998 compares to a net loss of $291,000, or 17.8 percent of revenues, for the third quarter of 1997.
Nine Months Ended September 30, 1998
REVENUES. Revenues of $12,023,000 for the first nine months of 1998, compare to $7,629,000 for the first nine months of 1997, an increase of approximately 58 percent.
Revenues derived from sales to domestic customers increased approximately 76 percent in the first nine months of 1998 compared to the year earlier period.
Revenues derived from sales to foreign customers increased approximately 32 percent in the first nine months of 1998, accounting for approximately 36 percent of total revenues, compared to the year earlier period when foreign sales accounted for approximately 42
percent of total revenues.
GROSS PROFIT. Gross profit for the first nine months of 1998 of $2,555,000, or 21.3 percent of revenues, compares to $2,021,000, or 26.5 percent of revenues for the first nine months of 1997. The reduction in gross profit expressed as a percent of revenues in the
current period results primarily from lower profit margins on equipment contracts in 1998. The Company attributes this reduction in contract profit margin to competitive pricing conditions prevailing in both domestic and foreign markets. Currency crises in certain foreign
countries (see Revenues-Three months ended September 30, 1998) has shifted the attention of equipment suppliers to remaining active market areas, greatly increasing the competitive environment in these markets, which includes the United States.
Page 8 of 11 sequentially numbered pages. SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE. Selling, general and administrative expense of $2,018,000, or 16.8 percent of revenues, for the first nine months of 1998 compares to $1,897,000, or 24.9 percent of revenues, for the first nine months of 1997. The improvement in selling,
general and administrative expense expressed as a percent of revenues in the current period is a result of the higher level of revenues in the period.
OTHER INCOME (EXPENSE). Interest expense of $242,000 for the first nine months of 1998 compares to $247,000 for the first nine months of 1997, and is attributable primarily to borrowings under the King Press Corporation revolving line of credit. Net other expense of
$11,000 for the first nine months of 1998 compares to net other expense of $15,000 for the
first nine months of 1997.
PROVISION FOR TAX. The Company utilized available net operating loss carryforwards to offset federal and state income tax liabilities for the first nine months of 1998 (see Note 1 of Notes to Consolidated Financial Statements).
NET INCOME (LOSS). Net income of $285,000 or 2.4 percent of revenues, for the first nine months of 1998, compares to a net loss of $135,000 or 1.8 percent of revenues, for the first nine months of 1997.
Financial Position and Liquidity
The Company's wholly-owned operating subsidiary King Press Corporation was supported in the third quarter of 1998 by a newly restructured credit facility that includes (i) a secured $2,000,000 revolving line of credit that expires July 15, 1999; (ii) a secured $2,500,000 term
loan that expires July 15, 2001; and, (iii) a $1,000,000 advisory line of credit. The loan agreement pertaining to the revolving line of credit and term loan includes restrictions on indebtedness, liens and the disposal of assets, and requires that certain financial ratios be
maintained; and, provides security through a cross collateralization of all King Press Corporation assets. The advisory line of credit is conditional and includes restrictions on its use.
At September 30, 1998, King Press Corporation had no borrowings outstanding under the revolving and advisory lines of credit, and a balance of $2,476,000 owed under the term loan, $159,000 of which is current. The Company was in compliance with all provisions of
the loan agreement at September 30, 1998, and expects to renew the revolving line of credit at its July 15, 1999 maturity.
The Company's backlog at September 30, 1998, totaled $6,047,000, compared to $6,629,000 at December 31, 1997. These backlog amounts include a $3.3 million equipment order for a customer in Saudi Arabia that was placed on hold by the Company in the fourth quarter 1997 when the customer requested a restructured contract payment schedule. The
restructuring of the payment schedule has been accomplished, but the customer has not made a scheduled payment required to restart the contract. The company expects to restart the contract, but there can be no assurance that this will occur.
|
