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TABLE OF CONTENTS
United States Securities and Exchange Commission
Washington, DC 20549
Form 10-K
| (Mark One) | |
ý |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 2002 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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| Commission file numbers: | United Stationers Inc.: 0-10653 United Stationers Supply Co.: 33-59811 |
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact Name of Registrant as Specified in its Charter)
| United Stationers Inc.: Delaware United Stationers Supply Co.: Illinois (State or Other Jurisdiction of Incorporation or Organization) |
United Stationers Inc.: 36-3141189 United Stationers Supply Co.: 36-2431718 (I.R.S. Employer Identification No.) |
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2200 East Golf Road Des Plaines, Illinois 60016-1267 (847) 699-5000 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrants' Principal Executive Offices) |
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
United Stationers Inc.: Common stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether each 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 each registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
United
Stationers Inc.: Yes ý No o
United Stationers Supply Co.: Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Act)
United
Stationers Inc.: Yes ý No o
United Stationers Supply Co.: Yes o No ý
The aggregate market value of the common stock of United Stationers Inc. based on the closing sale price of the common stock on June 28, 2002 on the Nasdaq National Market, was approximately $1,004,355,000. United Stationers Inc. owns all of the outstanding common stock of United Stationers Supply Co.
On March 21, 2003, United Stationers Inc. had outstanding 32,603,540 shares of common stock, par value $0.10 per share, and United Stationers Supply Co. had outstanding 880,000 shares of common stock, $1.00 par value per share outstanding.
The registrant United Stationers Supply Co. meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format with respect to United Stationers Supply Co.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of United Stationers Inc.'s definitive Proxy Statement relating to its 2003 Annual Meeting of Stockholders to be filed within 120 days after the end of United Stationers Inc.'s fiscal year, are incorporated herein by reference into Part III where indicated.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
FORM 10-K
For The Year Ended December 31, 2002
TABLE OF CONTENTS
Explanatory Note
This integrated Form 10-K is filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for each of United Stationers Inc., a Delaware corporation, and its wholly owned subsidiary, United Stationers Supply Co., an Illinois corporation (collectively, the "Company"). United Stationers Inc. is a holding company with no operations separate from its operating subsidiary, United Stationers Supply Co. and its subsidiaries. No separate financial information for United Stationers Supply Co. and its subsidiaries has been provided herein because management for the Company believes such information would not be meaningful because (i) United Stationers Supply Co. is the only direct subsidiary of United Stationers Inc., which has no operations other than those of United Stationers Supply Co. and (ii) all assets and liabilities of United Stationers Inc. are recorded on the books of United Stationers Supply Co. There is no material difference between United Stationers Inc. and United Stationers Supply Co. for the disclosures required by the instructions to Form 10-K and therefore, unless otherwise indicated, the responses set forth herein apply to each of United Stationers Inc. and United Stationers Supply Co.
ITEM 1. BUSINESS
General
United Stationers Inc. ("United") is a holding company incorporated in 1981 under the laws of the State of Delaware. United is the parent company of its direct wholly owned subsidiary, United Stationers Supply Co. ("USSC"), incorporated in 1922 under the laws of the State of Illinois. Except where the context otherwise requires, the term "Company" refers to United and USSC and its subsidiaries. The Company, with 2002 net sales of $3.7 billion, is North America's largest broad line wholesale distributor of business products and a provider of marketing and logistics services to resellers.
In April 1998, USSC acquired all of the capital stock of Azerty Incorporated, Azerty de Mexico, S.A. de C.V., Positive ID Wholesale Inc., and AP Support Services Incorporated (the "Azerty Acquisition"). These businesses represented the United States and Mexican operations of the Office Products Division of Abitibi-Consolidated Inc. (collectively, "Azerty"). The Azerty business is primarily a specialty wholesaler of computer consumables, peripherals and accessories in the U.S. and Mexico. The Positive ID division was sold in July 2001.
In July 2000, USSC acquired all of the capital stock of CallCenter Services, Inc. from Corporate Express, Inc. a Buhrmann Company. CallCenter Services was a customer relationship management outsourcing service company. The Wilkes-Barre, Pennsylvania, portion of CallCenter Services was sold to Customer Satisfaction, Inc. First in November 2001. The Salisbury, Maryland, portion was sold to 1-800-BARNONE, a Financial Corporation, Inc., in February 2002.
In July 2000, USSC established The Order People ("TOP")to operate as a third-party logistics and fulfillment service provider for product categories beyond office products. The Company has significantly downsized TOP's operations as part of its 2001 and 2002 restructuring initiatives.
In July 2000, USSC purchased certain assets of the wholesale business of MCSi Canada Inc. from MCSi, Inc. Azerty United Canada is a specialty distributor of computer consumables, peripherals and accessories. Azerty United Canada operates as a division of USSC.
In January 2001, Lagasse, Inc. ("Lagasse"), a wholly owned subsidiary of USSC, purchased Peerless Paper Mills, Inc., a wholesale distributor of janitorial and sanitation, paper, and food service products. Peerless was immediately merged into Lagasse. USSC had acquired Lagasse, a wholesaler of janitorial and sanitary supplies, in 1996.
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Products
The Company offers more than 40,000 stockkeeping units ("SKUs"), which can be grouped into five primary categories:
Traditional Office Products. The Company's primary business continues to be traditional office products, which accounted for approximately 30% of the Company's net sales for 2002. This has made the Company the largest North American wholesale provider of a broad line of office supplies. The Company offers more than 25,000 brand-name products and its own private brand products, including writing instruments, paper products, organizers, calendars and general office accessories.
Computer Consumables. The Company is the largest wholesale provider of computer supplies and peripherals in North America. It offers approximately 7,000 items to value-added computer resellers and office products dealers. Computer consumables accounted for approximately 34% of the Company's 2002 net sales.
Office Furniture. The Company is the nation's largest office furniture wholesaler. It currently offers more than 5,000 items—such as leather chairs, wooden and steel desks and computer furniture—from more than 60 different manufacturers. This product group accounted for approximately 12% of the Company's 2002 net sales.
Facilities Supplies. The Company is the largest wholesaler of janitorial and sanitation supplies in North America. It offers approximately 5,500 items in these major categories: janitorial and sanitation supplies, safety and security items, and shipping and mailing supplies. Facilities supplies accounted for approximately 11% of the Company's net sales during 2002.
Business Machines and Presentation Products. The Company is a leading wholesale provider of business machines—from calculators to telephones—as well as presentation products and supplies. This product class accounted for approximately 10% of the Company's 2002 net sales.
The remaining 3% of the Company's net sales for 2002 were derived from miscellaneous revenue sources.
Customers
The Company's more than 15,000 customers include independent office products dealers and contract stationers, national mega-dealers, office products superstores, computer products resellers, office furniture dealers, mass merchandisers, mail order companies, sanitary supply distributors, and e-commerce merchants. Of its 15,000 customers, no single reseller accounted for more than 6% of the Company's net sales in 2002.
Independent commercial dealers and contract stationers are the Company's most significant reseller channel for office products, contributing about 75% of its revenues in 2002. These companies typically serve medium to large businesses, institutions and government agencies.
The Company maintains and builds its business with commercial dealers, contract stationers (including the contract stationer divisions of national office product superstores) and retail dealers. It also has relationships with most major office products superstore chains.
Marketing and Customer Support
The products distributed by the Company generally are available at similar prices from multiple sources, and most customers purchase their products from more than one source. To differentiate itself from competitors, the Company concentrates its marketing efforts on providing value-added service to resellers. These include broad product offerings, a higher degree of product availability, a variety of high quality customer services, integrated systems and national distribution capabilities that allow for
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overnight delivery. United's marketing programs have emphasized two other major components. First, the Company produces an extensive array of catalogs for commercial dealers, contract stationers and retail dealers. The catalogs usually are custom printed with each reseller's name and then sold to these resellers who, in turn, distribute the catalogs to their customers. Second, the Company provides its resellers with a variety of dealer support and marketing services, including electronic commerce options, and promotional programs. These services are designed to help the reseller differentiate themselves from their competitors by addressing the needs of the end-user's procurement process.
Nearly all of the Company's 40,000 SKUs are sold through its comprehensive general line catalog, promotional pieces and specialty catalogs for the office products, computer supplies, office furniture, facilities management supplies and other specialty markets. The following is a list of the annual or semi-annual catalogs that United currently produces:
In addition, the Company produces the following quarterly promotional catalogs:
The Company also produces separate quarterly flyers covering general office supplies, office furniture, facility supplies and Universal® private brand products. Commercial dealers, contract stationers and retail dealers typically distribute only one wholesaler's catalogs, so they can streamline order entry and concentrate their purchases. To address this, the Company tries to maximize its catalog distribution by offering advertising credits to resellers, which can be used to offset the cost of the catalogs.
The Company offers resellers a variety of electronic order entry systems and business management and marketing programs. For example, the Company maintains electronic data interchange and interactive order systems that link to selected resellers. In addition, the Company's electronic order entry systems allow the reseller to forward its customers' orders directly to the Company, resulting in the delivery of pre-sold products to the reseller. In 2002, the Company received approximately 90% of its orders electronically.
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In addition to marketing its products and services through its catalogs, the Company employs a sales force of approximately 350 field salespeople and approximately 400 customer care representatives. The sales force is responsible for sales to current reseller customers, as well as for establishing relationships with additional resellers.
Distribution
The Company has a network of 35 business products regional distribution centers located in 34 metropolitan areas in 24 states. Most of these centers carry a full line of business products. The Company maintains 24 Lagasse distribution centers with a complete line of janitorial and sanitation supplies, two distribution centers in Mexico that serve computer supply resellers and two Azerty distribution centers that serve the Canadian marketplace. During 2002, the Company integrated Azerty's computer systems and product offerings with those of USSC and closed the four Azerty distribution centers. The Company intends to continue marketing computer consumables using the Azerty name.
The Company supplements its regional distribution centers with 20 local distribution points throughout the U.S. which serve as reshipment points for orders filled at the regional distribution centers. The Company uses a dedicated fleet of more than 400 trucks, most of which are contracted for by the Company, to enable direct delivery to resellers from the regional distribution centers and local distribution points.
The Company enhances its distribution capabilities through a proprietary computerized inventory locator system. If a reseller places an order for an item that is out of stock at the nearest location, the system has the capability to search for it at other distribution centers. If the item is available at another location, the system automatically forwards the order there. The alternate location coordinates shipping with the primary facility and, for the majority of resellers, provides a single on-time delivery of all items. The system effectively gives the Company added inventory support. This means the Company can provide higher service levels to the reseller, reduce back orders and minimize time spent searching for merchandise substitutes. All of these factors contribute to a high order fill rate and efficient levels of inventory. In order to meet the Company's delivery commitments and to maintain a high order fill rate, the Company carries a significant amount of inventory.
The "wrap and label" program is another service the Company offers to its resellers. This gives them the option to receive individually packaged orders customized to meet the needs of specific end users. For example, when a reseller receives orders for several individual end users, the Company can group and wrap the items separately, identifying each specific end user, so that the reseller need only deliver the already individualized packages. Resellers like the "wrap and label" program because it eliminates the need to break down bulk shipments and repackage orders before delivering them to the end user.
Purchasing and Merchandising
As the largest wholesale business products distributor in North America, the Company qualifies for substantial volume allowances and can realize significant economies of scale. The Company obtains products from approximately 500 manufacturers and is a significant customer for most of them. In 2002, no supplier accounted for more than 22% of the Company's aggregate purchases. The Company's centralized Merchandising Department interviews and selects suppliers and products to be included in the catalogs. Selection is based upon end-user acceptance, demand for the product and the manufacturer's total service, price and product quality offering.
Competition
The Company competes with office products manufacturers and with other national, regional and specialty wholesalers of office products, office furniture, computer supplies and related items, and
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facility management supplies. In most cases, competition is based primarily upon net pricing, minimum order quantity and speed of delivery.
United occasionally competes with manufacturers, which may offer lower prices to resellers. The Company remains competitive by offering a combination of value-added services: 1) marketing and catalog programs, 2) speed of delivery, 3) broad line of business products from multiple manufacturers on a "one-stop shop" basis, and 4) lower minimum order quantities. Manufacturers typically sell their products through a variety of distribution channels, which includes wholesalers and resellers.
Competition with other wholesalers is based primarily on breadth of product lines, availability of products, speed of delivery to resellers, order fill rates, net pricing to resellers, and quality of marketing and other value-added services. Management believes it is competitive in each of these areas. Most wholesale distributors of office products have local and regional operations, sometimes with limited product lines, such as writing instruments or computer products. The Company's two major competitors are S.P. Richards (a division of Genuine Parts Co.), a national wholesaler of office products and Daisytek International Corporation, a wholesaler of computer consumables. In 2003, Daisytek also entered the traditional office products industry in two U.S. markets with a limited line of both products and services.
Increased competition in the office products industry, plus increased advertising by competing companies, have heightened price awareness among end users. As a result, purchasers of commodity office products have become more price sensitive. The Company has addressed this by emphasizing to resellers the continuing advantages of its value-added services and competitive strengths (compared with those of manufacturers and other wholesalers).
Segments
See Note 4 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information on the Company's operating segments and geographical areas.
Employees
As of March 24, 2003, the Company employed approximately 6,000 people.
Management considers its relations with employees to be good. Approximately 900 of the shipping, warehouse and maintenance employees at certain of the Company's Philadelphia, Baltimore, Los Angeles, Minneapolis and New York City facilities are covered by collective bargaining agreements. Agreements with employees in Baltimore and Minneapolis will expire in April 2003 and August 2003, respectively. The other agreements expire at various times during the next three years. The Company has not experienced any work stoppages during the past five years.
Availability of the Company's Reports
The Company's Internet Web site address is www.unitedstationers.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments and exhibits to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company's Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.
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In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing, telephoning or faxing the Investor Relations Department at the following address, telephone number or fax number:
| United Stationers Inc. Attn: Investor Relations Department 2200 East Golf Road Des Plaines, IL 60016-1267 Telephone: (847) 699-5000 Fax: (847) 699-4716 |
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for their intended uses. The Company continually evaluates its properties to achieve peak efficiency to maximize customer service and leverage potential economies of scale. Substantially all owned facilities are subject to liens under USSC's Senior Credit Facility (See "Liquidity and Capital Resources" caption herein included below). As of December 31, 2002, these properties consisted of the following:
Executive Offices. The Company's office space in Illinois totals 183,800 square feet, including owned office space of 135,800 square feet in Des Plaines, leased office space of 25,000 square feet in Des Plaines, 23,000 square feet in Mt. Prospect. The Company owns approximately 48,000 square feet of office space in Orchard Park, New York. The Company's Canadian division leases approximately 17,000 square feet of office space in Montreal, Quebec. In addition, the Company leases approximately 22,000 square feet in Harahan, Louisiana and 6,000 square feet in Metarie, Louisiana.
Distribution Centers. The Company utilizes approximately 11 million square feet of warehouse space in 35 business products distribution centers, 24 janitorial and sanitation supply distribution centers, two distribution centers that serve Canada and two distribution centers that serve Mexico. Of the 11 million square feet of distribution center space, 3 million square feet was owned and 8 million square feet was leased as of December 31, 2002. The Company considers each distribution center of equal importance to its overall operations and ability to serve its customers.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not involved in any legal proceeding that it believes will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2002.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
| Name, Age and Position with the Company |
Business Experience |
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|---|---|---|
| Richard W. Gochnauer 53, President and Chief Executive Officer |
Richard W. Gochnauer became the Company's President and Chief Executive Officer in December 2002, after joining the Company as its Chief Operating Officer and as a Director in July 2002. From 1994 until he joined United, Mr. Gochnauer held the positions of Vice Chairman and President, International, and President and Chief Operating Officer of Golden State Foods, a privately held food company that manufactures and distributes food and paper products. Prior to that, he served as Executive Vice President of the Dial Corporation, with responsibility for its Household and Laundry Consumer Products businesses. Mr. Gochnauer also served as President of the Stella Cheese Company, a division of Universal Foods, and as President of the international division of Schreiber Foods, Inc. | |
Ronald C. Berg 43, Senior Vice President, Inventory Management and Facility Support |
Ronald C. Berg was named Senior Vice President, Inventory Management and Facility Support in October 2001. He had been the Vice President, Inventory Management since 1997. He started his career at United Stationers in 1987 as an Inventory Rebuyer Trainee. Mr. Berg then spent the next several years managing the inventory for such product lines as MicroUnited and furniture. He then spent a couple of years in the MicroUnited Product Management area as the Sr. Product Manager until his promotion to Director, Inventory Management in 1994. Prior to joining United Stationers, Mr. Berg managed Solar Cine Products, Inc., a family-owned, photographic equipment business. |
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Brian S. Cooper 46, Senior Vice President and Treasurer |
Brian S. Cooper became Senior Vice President and Treasurer of the Company in February 2001. Before coming to United, he was Treasurer of Burns International Services Corporation since 1997. Prior to this, Mr. Cooper spent twelve years in U.S. and international finance assignments with Amoco Corporation. He also held the position of Chief Financial Officer for Amoco's operations in Norway. |
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Kathleen S. Dvorak 46, Senior Vice President and Chief Financial Officer |
Kathleen S. Dvorak became Senior Vice President and Chief Financial Officer in October 2001. She has responsibility for all accounting functions, treasury, financial planning and investor relations. Prior to the her appointment as CFO, Ms. Dvorak was the Senior Vice President of Investor Relations and Financial Administration since October 2000. She became Vice President, Investor Relations in July 1997. She is the primary liaison to the financial community, and has been involved in various aspects of the financial function at United for the past 20 years. Ms. Dvorak has been with the Company since 1982. |
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James K. Fahey 52, Senior Vice President, Merchandising |
James K. Fahey is Senior Vice President of Merchandising for United Stationers. He is responsible for the product management, vendor logistics and marketing services functions as well as overseeing the operations of United Stationers Hong Kong, Limited. Mr. Fahey joined United Stationers in 1991. He has an extensive background in product development, consumer direct marketing, catalog merchandising and worldwide sourcing. |
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Deidra D. Gold 48, Senior Vice President, General Counsel and Secretary |
Deidra D. Gold joined the Company in November 2001 as Senior Vice President, General Counsel and Secretary. She was Vice President and General Counsel for eLoyalty Corporation, a publicly held $200 million company providing IT consulting and systems integration services to Fortune 1000 clients. Previously, Ms. Gold was Counsel and Corporate Secretary at Ameritech Corporation from March 1998 to December 1999. Ms. Gold formerly was a partner at Goldberg, Kohn in Chicago and Jones, Day in Cleveland and was also Vice President and General Counsel at Premier Industrial Corporation for a number of years. |
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Mark J. Hampton 49, Senior Vice President, Marketing |
Mark J. Hampton is Senior Vice President, Marketing with responsibility for market development, merchandising and category management. Previously, he was named Senior Vice President, Marketing and Field Support Services. Prior to that, Mr. Hampton was Senior Vice President of the Company and President and Chief Operating Officer of The Order People Company. He had served as Vice President, Marketing of the Company since September 1994 and Senior Vice President, Marketing since October 2000. Mr. Hampton began his United career in 1980 and left to work in the dealer community in 1991. He rejoined the Company in September 1992 as Midwest Regional Vice President in charge of the Midwest and then later became Vice President and General Manager of Micro United. |
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Jeffrey G. Howard 48, Senior Vice President, National Accounts and New Business Development |
Jeffrey G. Howard is Senior Vice President, National Accounts and New Business Development with responsibility for national accounts, new business development and Azerty/United Canada. Previously, he was Senior Vice President, Sales and Customer Support Services. Prior to that, Mr. Howard held the position of Senior Vice President, National Accounts since October 2000 and the position of Vice President, National Accounts since 1993. He joined the Company in 1990 as General Manager of the Los Angeles distribution center and was promoted to Western Region Vice President in 1992. Mr. Howard has held a variety of positions including Vice President, National Accounts and Vice President of Sales. He began his career in the office products industry in 1973 with Boorum & Pease Company which was acquired by Esselte Pendaflex in 1985. |
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Stephen A. Schultz 36, President, Lagasse, Inc. |
Stephen A. Schultz was named President, Lagasse, Inc. on August 13, 2001 where he is responsible for all the strategy, development and day-to-day operations of the business. Mr. Schultz joined Lagasse in early 1999 as Vice President, Marketing and Business Development and was promoted to Senior Vice President, Sales, Marketing and Service in late 2000. Mr. Schultz joined Lagasse after serving nearly 10 years in several executive sales and marketing roles for Hospital Specialty Company, a leading manufacturer and distributor of hygiene products for the institutional janitorial and sanitation industry. |
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John T. Sloan 51, Senior Vice President of Human Resources |
John T. Sloan became Senior Vice President of Human Resources in January 2002. Before joining United, Mr. Sloan was Executive Vice President of Human Resources for Sears, Roebuck & Company in Chicago since 1996. Prior to this, he served in various senior human resource and administrative capacities at The Tribune Company in Chicago for ten years and at a number of divisions within Philip Morris Incorporated, including The Seven-Up Company in St. Louis, over a period of thirteen years. |
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Joseph R. Templet 56, Senior Vice President, Field Sales |
Joseph R. Templet was named Senior Vice President, Field Sales in March 2003. He is responsible for the field sales effort, the independent dealer channel and the customer care centers. Previously, Mr. Templet was named Senior Vice President, Field Sales and Operation. In October 2000, he was named to the position of Senior Vice President, South Region. Previously, Mr. Templet had served as Vice President, South Region since 1992. He joined United Stationers in 1985 and has held the positions of Vice President, Central Region and Vice President, Marketing and Corporate Sales. Prior to United, Mr. Templet was with the Parker Pen Company, Polaroid Corporation and Procter & Gamble. |
Executive officers are appointed by the Board of Directors. Except as required by individual employment agreements between executive officers and the Company, there exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was appointed. Each executive officer serves until his or her successor is appointed and qualifies or until his or her earlier removal or resignation.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common and Preferred Stock
The Company's common stock is quoted through The NASDAQ Stock Market® ("NASDAQ") under the symbol USTR. The following table shows the high and low closing sale prices per share for the Company's common stock as reported by NASDAQ:
| |
High |
Low |
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|---|---|---|---|---|---|---|
| 2002 | ||||||
| First Quarter | $ | 42.40 | $ | 33.35 | ||
| Second Quarter | 41.28 | 29.57 | ||||
| Third Quarter | 30.43 | 23.60 | ||||
| Fourth Quarter | 32.83 | 25.69 | ||||
2001 |
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| First Quarter | $ | 27.56 | $ | 22.00 | ||
| Second Quarter | 31.56 | 22.63 | ||||
| Third Quarter | 34.25 | 27.25 | ||||
| Fourth Quarter | 34.95 | 26.50 | ||||
On March 19, 2003, there were approximately 796 holders of record of common stock.
During 2002, the Company purchased 1.4 million shares of its common stock at a cost of $38.3 million, compared with repurchases of 0.5 million shares at a cost of $12.4 million during 2001. For further information on the Company's stock repurchases, see Note 1 to the Consolidated Financial Statements.
Dividends
The Company's policy has been to reinvest earnings to fund future growth. Accordingly, the Company has not paid cash dividends and does not anticipate declaring cash dividends on its common stock in the foreseeable future. Furthermore, as a holding company, United's ability to pay cash dividends in the future depends upon the receipt of dividends or other payments from its operating subsidiary, USSC. In addition, the Company's debt agreements impose certain restrictions on the payment of dividends. For further information on the Company's debt agreements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and Note 8 to the Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data of the Company for the years ended December 31, 1998 through 2002 have been derived from the Consolidated Financial Statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data below should be read in conjunction with, and is qualified in its entirety by, the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company. Except for per share data, all amounts presented are in thousands:
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Years Ended December 31, |
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2002 |
2001 |
2000 |
1999 |
1998 |
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| Income Statement Data: | |||||||||||||||||
| Net sales | $ | 3,701,564 | $ | 3,925,936 | $ | 3,944,862 | $ | 3,442,696 | $ | 3,097,595 | |||||||
| Cost of goods sold | 3,163,589 | 3,306,143 | 3,301,018 | 2,878,539 | 2,566,158 | ||||||||||||
| Gross profit | 537,975 | 619,793 | 643,844 | 564,157 | 531,437 | ||||||||||||
| Operating expenses: | |||||||||||||||||
| Warehousing, marketing and administrative expenses | 415,980 | 444,434 | 435,809 | 377,055 | 357,867 | ||||||||||||
| Goodwill amortization | — | 5,701 | 5,489 | 4,908 | 4,207 | ||||||||||||
| Restructuring and other charges | 6,510 | (1) | 47,603 | (2) | — | — | — | ||||||||||
| Non-recurring charges | — | — | — | — | 13,852 | (3) | |||||||||||
| Total operating expenses | 422,490 | 497,738 | 441,298 | 381,963 | 375,926 | ||||||||||||
| Income from operations | 115,485 | 122,055 | 202,546 | 182,194 | 155,511 | ||||||||||||
| Interest expense | (16,860 | ) | (25,872 | ) | (40,895 | )(4) | (30,044 | ) | (46,972 | )(5) | |||||||
| Interest income | 165 | 2,079 | 2,942 | 849 | 794 | ||||||||||||
| Other expense, net(6) | (2,421 | ) | (4,621 | ) | (11,201 | ) | (9,432 | ) | (8,221 | ) | |||||||
| Income before income taxes | 96,369 | 93,641 | 153,392 | 143,567 | 101,112 | ||||||||||||
| Income tax expense | 36,141 | 36,663 | 61,225 | (4) | 60,158 | 43,094 | (5) | ||||||||||
| Net income | $ | 60,228 | $ | 56,978 | $ | 92,167 | $ | 83,409 | $ | 58,018 | |||||||
| Net income per common share—basic | $ | 1.81 | $ | 1.70 | $ | 2.70 | $ | 2.40 | $ | 1.67 | |||||||
| Net income per common share—assuming dilution | $ | 1.78 | $ | 1.68 | $ | 2.65 | $ | 2.37 | $ | 1.60 | |||||||
| Cash dividends declared per share | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Balance Sheet Data: |
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| Working capital(7) | $ | 400,587 | $ | 412,766 | $ | 495,456 | $ | 415,548 | $ | 357,024 | |||||||
| Total assets(7)(8) | 1,349,229 | 1,380,587 | 1,481,417 | 1,311,236 | 1,197,893 | ||||||||||||
| Total debt and capital leases(9) | 211,249 | 271,705 | 409,867 | 336,927 | 315,384 | ||||||||||||
| Total stockholders' equity | 558,884 | 538,681 | 478,439 | 406,009 | 370,563 | ||||||||||||
Statement of Cash Flows Data: |
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| Net cash provided by operating activities | $ | 105,730 | $ | 191,156 | $ | 38,718 | $ | 53,581 | $ | 290,866 | |||||||
| Net cash used in investing activities | (23,039 | ) | (46,327 | ) | (83,534 | ) | (26,011 | ) | (140,356 | ) | |||||||
| Net cash (used in) provided by financing activities | (93,917 | ) | (135,783 | ) | 45,655 | (27,615 | ) | (143,839 | ) | ||||||||
Other Data: |
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| EBITDA(10) | $ | 148,951 | $ | 160,596 | $ | 233,651 | $ | 211,642 | $ | 182,449 | |||||||
| EBITDA margin(11) | 4.0 | % | 4.1 | % | 5.9 | % | 6.1 | % | 5.9 | % | |||||||
| Depreciation and amortization(12) | $ | 33,466 | $ | 38,541 | $ | 31,105 | $ | 29,448 | $ | 26,938 | |||||||
| Capital expenditures, net | 23,039 | 28,618 | 39,301 | 21,331 | 24,616 | ||||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis and other parts of this Annual Report on Form 10-K contain "forward-looking statements", within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These include references to plans, strategies, objectives, projected costs and savings, anticipated future performance or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management's current expectations, forecasts and assumptions. They involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, but are not limited to: the Company's restructuring plans, including its ability to realize expected cost savings from facility rationalization, systems integration and other initiatives and the timing of any of these savings; the Company's ability to streamline its organization and operations,
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integrate acquired businesses and implement general cost-reduction initiatives; the Company's reliance on key suppliers and the impact of fluctuations in their pricing; variability in vendor allowances and promotional incentives payable to the Company based on its inventory purchase volumes or vendor participation in the Company's general line catalog and other annual and quarterly publications and the impact of these on the Company's gross margin; the Company's ability to anticipate and respond to changes in end-user demand; the impact of variability in customer demand on the Company's product offerings and sales mix and, in turn, on customer rebates payable by the Company and the Company's gross margin; competitive activity and competitive pricing pressures; reliance on key management personnel; the impact of war and acts of terrorism; and economic conditions and changes affecting the business products industry and the general economy.
Readers should not place undue reliance on forward-looking statements contained in this Annual Report on Form 10-K. The forward-looking information herein is given as of this date only, and the Company undertakes no obligation to revise or update it. The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
Overview
The Consolidated Financial Statements represent United and its wholly owned subsidiary USSC and its subsidiaries, (collectively, the "Company"). The Company is the largest general line business products wholesaler in the United States, with 2002 net sales of $3.7 billion. The Company sells its products through a national distribution network to 15,000 resellers, who in turn sell directly to end-users. These products are distributed through a computer-based network of 35 USSC regional distribution centers, 24 Lagasse distribution centers that serve the janitorial and sanitation industry, two distribution centers in Mexico that serve computer supply resellers and two distribution centers that serve the Canadian marketplace. During the second quarter of 2002, the computer systems and product offerings of Azerty were integrated into USSC.
During 2000, the Company established TOP to operate as its third-party fulfillment provider for product categories beyond office products. To become a full service provider, on July 1, 2000, the Company acquired all of the capital stock of CallCenter Services, Inc. CallCenter Services, Inc. was a customer relationship management outsourcing service company with inbound call centers in Wilkes-Barre, Pennsylvania, and Salisbury, Maryland.
In 2001, the Company did not achieve the estimated revenue to support TOP's cost structure. As a result, the Company decided to significantly downsize TOP's operations. In November 2001, the Wilkes-Barre portion of the business acquired as part of CallCenter Services, Inc. was sold to Customer Satisfaction First for a nominal cash payment, the assumption of associated liabilities and the payment of expenses relating to that business during a post-closing transition period. Disputes relating to expense payments and certain liabilities associated with this sale have adversely contributed to the operating expenses attributable to TOP during 2002. In the second quarter of 2002, the Company sold the Salisbury portion of the business acquired as a part of CallCenter Services, Inc. to 1-800-BARNONE, a Financial Corporation, Inc. for $1.2 million in cash and the assumption of $1.7 million of debt. The sale of these assets did not have a material impact on the Company's financial position or results of operations.
In 2002, the Company further downsized TOP's operations as part of the restructuring and other charges recorded in the fourth quarter of 2002 (see "Restructuring and Other Charges" below).
The Company is focused on leveraging its infrastructure across all business units to lower its operating expenses and increase cash flow. In addition, the Company continues to review its distribution network to determine the most productive and cost efficient organization, including the ability to reduce working capital requirements.
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Overview of Recent Results
Sales for 2003 through this filing date were up slightly compared with the same period last year. The Company continues to experience soft sales in all major product categories. The weak economy and high levels of unemployment continue to make substantial improvements in net sales challenging.
Restructuring and Other Charges
2002 Restructuring Plan
The Company's Board of Directors approved a restructuring plan in the fourth quarter of 2002 (the "2002 Restructuring Plan") that included additional charges related to revised real estate sub-lease assumptions used in the 2001 Restructuring Plan (described below), further downsizing of TOP operations, including severance and anticipated exit costs related to a portion of the Company's Memphis distribution center, closure of the Milwaukee, Wisconsin distribution center and the write-down of certain e-commerce-related investments. The restructuring plan calls for all initiatives to be completed within approximately one year from the commitment date.
The restructuring plan includes workforce reductions of 105 associates. These positions primarily relate to TOP and the closure of the Milwaukee, Wisconsin distribution center. The associate groups affected by the restructuring plan include management personnel, inside and outside sales representatives, distribution workers, and hourly administrative staff. The restructuring plan calls for all initiatives to be completed within approximately one year from the commitment date.
As part of the 2001 Restructuring Plan, the Company accrued certain exit costs related to facilities that were closed as part of that restructuring plan. At that time, accrued exit costs were calculated using the most current information available about the Company's ability to sub-lease the closed facilities. Further deterioration in the real estate market for the type of facilities made available as a result of the 2001 Restructuring Plan has resulted in unexpected difficulties in subleasing these facilities. As a result, additional charges related to revised real estate sub-lease assumptions as compared to those used in the 2001 Restructuring Plan are included in the 2002 Restructuring Plan.
The further downsizing of TOP's operations includes termination of fulfillment contracts with third-party customers and the elimination of approximately 240,000 square feet of warehouse space.
Non-cash asset write-downs of $2.0 million relate to certain e-commerce-related investments. Based on substantial operating losses, management has determined that the value of these investments is permanently impaired. Therefore, the book value of these investments has been written-down.
Employment termination and severance costs relate to involuntary terminations and reflect cash termination payments to be paid to associates affected by the restructuring plan. Healthcare benefits and career transition services are included in the termination and severance costs. The restructuring plan allows associates to continue their participation in the Company's healthcare plan during the term of their severance.
Accrued exit costs are primarily contractual lease obligations that existed prior to December 31, 2002 for buildings and office equipment that the Company had used in its closed or downsized facilities.
During the fourth quarter of 2002, the Company recorded pre-tax restructuring and other charges of $8.9 million, or $0.17 per share (on an after-tax basis). These charges include a pre-tax cash charge of $6.9 million and a $2.0 million non-cash charge.
As of December 31, 2002, the Company completed the closure of the Milwaukee distribution center and reduced the Company's overall workforce by 47 associates through an involuntary termination program. Implementation costs associated with this restructuring plan are not expected to be material.
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2001 Restructuring Plan Update
The Company's Board of Directors approved a restructuring plan in the third quarter of 2001 that included an organizational restructuring (including a workforce reduction of 1,375 associates, primarily relating to TOP and call center operations), a consolidation of certain distribution facilities and USSC's call center operations, an information technology platform consolidation, divestiture of TOP's call center operations and certain other assets, and a significant reduction of TOP's cost structure. As of December 31, 2002, the 2001 restructuring plan is complete. While the 2001 Restructuring Plan is complete, cash payments will continue for accrued exit costs which relate to long-term lease obligations that expire at various times over the next seven years. The Company actively pursues opportunities to sublet unused facilities.
Upon adoption of this restructuring plan in the third quarter of 2001, the Company recorded a pre-tax restructuring charge of $47.6 million, or $0.85 per share (on an after-tax basis). This charge included a pre-tax cash charge of $31.7 million and a $15.9 million non-cash charge. During the first quarter of 2002, the Company reversed $0.7 million of the pre-tax cash charge (with the reversal comprising $0.5 million of severance-related costs and $0.2 million of accrued exit costs, which were lower than originally estimated) and $1.7 million of the non-cash charge (reflecting proceeds from the sale of certain assets that exceeded their estimated net realizable value).
As of December 31, 2002, the Company has closed 10 distribution centers and three USSC call centers, eliminated one administrative office, sold the TOP call center operations as described above, and made substantial progress in implementing its planned organizational restructuring and workforce reduction. As a result, the Company reduced its workforce by 1,375 associates through its voluntary and involuntary termination programs. The Company does not expect any further workforce reductions as a result of this restructuring plan.
As a result of the 2001 Restructuring Plan, the Company estimates it achieved approximately $25 million in cost savings during 2002. However, these cost savings were substantially offset by reduced leverage of fixed costs as a result of the decline in annual net sales.
Implementation costs were recognized as incurred and consisted of costs directly related to the realization of the restructuring plan. These costs included training, stay bonuses, consulting fees, costs to relocate inventory, and accelerated depreciation. Implementation costs incurred during 2002 and 2001 totaled $5.9 million and $2.2 million, respectively. Accumulated implementation costs incurred for the period September 30, 2001 through December 31, 2002 were $8.1 million. The Company does not expect any further implementation costs related to the 2001 Restructuring Plan. For further information on the Company's restructuring plans, see Note 3 to the Consolidated Financial Statements.
Critical Accounting Policies, Judgments and Estimates
The Company's significant accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As described in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results will inevitably differ from those estimates, and such differences may be material to the Company's financial results.
The Company's critical accounting policies are those that are important to portraying the Company's financial condition and results and require especially difficult, subjective or complex judgments or estimates by management. In most cases, critical accounting policies require management to make estimates on matters that are uncertain at the time the estimate is made. The basis for the estimates is historical experience, terms of existing contracts, observance of industry trends, information provided by
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customers or vendors, and information available from other outside sources, as appropriate. The most significant accounting estimates inherent in the preparation of the Company's financial statements include the following:
Revenue Recognition. Revenue is recognized when a service is rendered or when a product is shipped and title has transferred to the customer. Management records an estimate for future product returns related to revenue recognized in the current period. This estimate is based on historical product return trends and the gross margin associated with those returns. Management also records an estimate for customer rebates which is based on estimated annual sales volume to the Company's customers. This estimate is used to determine the projected annual rebates earned by customers for growth components, volume hurdle components, and advertising allowances.
Shipping and handling costs billed to customers are treated as revenues and recognized at the time products are shipped and title has transferred to the customer. Shipping and handling costs are included in the Company's financial statements as a component of cost of goods sold and are not netted against shipping and handling revenues.
Valuation of Accounts Receivable. The Company makes judgments as to the collectibility of accounts receivable based on historical trends and future expectations. Management estimates an allowance for sales returns and doubtful accounts, which represents the collectibility of trade accounts receivable. These allowances adjust gross trade accounts receivable down to net realizable value. To determine the allowance for sales returns, management uses historical trends to estimate future period product returns. To determine the allowance for doubtful accounts, management reviews specific customers and the Company's accounts receivable aging.
Customer Rebates. Customer rebates and discounts are common practice in the business products industry and have a significant impact on the Company's overall sales and gross margin. Such rebates are reported in the Company's financial statements as a reduction of sales.
Customer rebates include volume rebates, sales growth incentives, participation in promotions and other miscellaneous discount programs. These rebates are paid to customers monthly, quarterly and/or annually. Estimates for volume rebates and growth incentives are based on estimated annual sales volume to the Company's customers. The aggregate amount of customer rebates depends on product sales mix and customer mix changes. Reported results reflect management's best current estimate of such rebates. Further changes from those underlying current estimates of sales volumes, product mix, customer mix or sales patterns may impact future results.
Manufacturers' Allowances. Manufacturers' allowances are common practice in the business products industry and have a significant impact on the Company's overall gross margin. Gross margin includes, among other items, file margin (determined by reference to invoiced price), as reduced by estimated customer discounts and rebates as discussed above, and increased by estimated manufacturers' allowances and promotional incentives. Many of these allowances and incentives are estimated on an annual basis and the potential variation between the actual amount of these margin contribution elements and the Company's estimates of them could be material to its financial results.
Approximately 55% to 60% of the Company's estimated annual manufacturers' allowances and incentives are variable, based on the volume of the Company's product purchases from manufacturers. These variable allowances are recorded based on the Company's estimated annual inventory purchase volume and are included in the Consolidated Financial Statements as a reduction to cost of goods sold to reflect the net inventory purchase cost. Manufacturers' allowances and incentives attributable to unsold inventory are carried as a component of net inventory cost. The potential amount of variable manufacturers' allowances often differs, based on purchase volume by manufacturer and product category. As a result, lower Company sales volume (which reduce inventory purchase requirements) and product sales mix changes (especially as higher margin products often benefit from higher
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manufacturers' allowance rates) can make it difficult to reach some manufacturers' allowance growth hurdles. The remaining 40% to 45% represents promotional incentives, which are based on vendor participation in various Company advertising and marketing publications. These promotional incentives are recorded as a reduction to cost of goods sold over the life of the publication to reflect net advertising cost. The Company makes available to its customers the products offered in each publication throughout the life of the publication.
Self-Insurance. The Company is primarily responsible for retained liabilities related to workers' compensation, auto and general liability and certain employee health benefits. The Company records an expense for potential claims incurred but not reported based on historical trends and certain assumptions about future events. During 2002, the Company had an annual aggregate maximum cap on employee medical benefits. In addition, the Company had both an individual per claim maximum loss and an annual aggregate maximum cap on workers' compensation claims.
Inventories. Inventories constituting approximately 88% of total inventories at December 31, 2002 have been valued under the last-in, first-out ("LIFO") method. Inventory valued under the first-in, first-out ("FIFO") and LIFO accounting methods is recorded at the lower of cost or market. Inventory reserves are recorded for shrinkage, obsolete, damaged, defective and slow-moving inventory. These reserve estimates are determined using historical trends and are adjusted, if necessary, as new information becomes available.
Pension and Postretirement Health Benefits. Calculating the Company's obligations and expenses related to its pension and postretirement health benefits requires using certain actuarial assumptions. As more fully discussed in Notes 10 and 11 to the Consolidated Financial Statements, these actuarial assumptions include discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs. To select the appropriate actuarial assumptions, management relies on current market trends, historical information and consultation with and input from the Company's outside actuaries. Pension expense for 2002 was $5.0 million, compared to $1.4 million in 2001. A one percentage point decrease in the expected long-term rate of return on plan assets and the assumed discount rate would have resulted in an increase in pension expense for 2002 of approximately $1.8 million.
Costs associated with the Company's postretirement health benefits plan were $0.9 million and $0.8 million for 2002 and 2001, respectively. A one-percentage point decrease in the assumed discount rate would have resulted in incremental postretirement healthcare expenses for 2002 of approximately $0.1 million. Based on current rates of increase in medical costs, a one percentage point increase in the assumed average health care cost trend would not have a significant impact on the Company's postretirement health plan costs.
The following tables summarizes the Company's actuarial assumptions for discount rates, expected long-term rates of return on plan assets, and rates of incr