UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

 

Commission File Number 1-5842

 

Bowne & Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

(212) 924-5500

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

 

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 þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ

 

The Registrant had 28,098,486 shares of Common Stock outstanding as of August 1, 2007.

 

 

TABLE OF CONTENTS

 

PART I

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share information and where noted)

 

 

The financial information as of June 30, 2007 and for the three and six month periods ended June 30, 2007 and 2006 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations and of cash flows for each period presented have been made on a consistent basis. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the Company’s annual report on Form 10-K and consolidated financial statements for the year ended December 31, 2006. The Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements reflect discontinued operations as described in more detail in Note 3. Operating results for the three and six months ended June 30, 2007 may not be indicative of the results that may be expected for the full year.

 

 

St Ives Financial

 

In January 2007, the Company completed its acquisition of St Ives Financial, the financial print division of St Ives plc, for $8,208 in cash. In February 2007, the Company paid an additional $1,415 to St Ives plc, which represented a working capital adjustment as defined in the Purchase and Sale Agreement. The net cash outlay for the acquisition was $9,588, which included acquisition costs of $321 and was net of cash acquired of $356. Based upon preliminary estimates, the excess purchase price over identifiable net tangible assets of $10,843 is reflected as part of goodwill and intangible assets in the Condensed Consolidated Balance Sheet as of June 30, 2007. A total of $4,143 has been allocated to goodwill and a total of $6,700 has been allocated to the value of customer relationships and is being amortized over the estimated useful life of six years. Further refinements to the purchase price allocation are possible. The final purchase price allocation is not expected to have a material effect on the Company’s financial statements.

 

In accordance with Emerging Issues Task Force (“EITF”) Issue No. 95-03, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-03”), the Company accrued $2,809 as of the acquisition date related to integration costs associated with the acquisition of this business. These costs include estimated severance and lease termination costs related to the elimination of redundant functions and excess facilities and equipment related to St Ives Financial operations. This amount is included in the goodwill balance related to this acquisition. As of June 30, 2007, the remaining balance accrued was $140.

 

Pro forma financial information related to this acquisition has not been provided, as it is not material to the Company’s results of operations.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed as of the date of acquisition:

 

 

 

During the second quarter of 2006, the Company determined that it intended to sell its DecisionQuest^® and its JFS Litigators’ Notebook^® (“JFS”) businesses. These businesses along with DecisionQuest Discovery Services, the Company’s document scanning and coding business, which was sold in January 2006, were the components of the Company’s litigation solutions business. As a result of these actions, effective with the second quarter of 2006, the litigation solutions business was no longer presented as a separate reportable segment of the Company and the results of operations for these businesses were classified as discontinued operations in the Condensed Consolidated Statement of Operations.

 

As discussed in more detail in Note 3 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006, the Company sold its DecisionQuest business in September 2006, its joint venture investment in CaseSoft, Ltd., (“CaseSoft”) in May 2006, and its DecisionQuest Discovery Services business in January 2006. As of June 30, 2007, the JFS business remains classified as held for sale.

 

In addition, the Company also recorded expenses of $8,218 during the year ended December 31, 2006 related to the estimated costs expected to be incurred in exiting the facilities, which were leased by DecisionQuest and Bowne Business Solutions Inc., the Company’s document outsourcing business, which was sold in November 2004. The accrued costs represent the present value of the expected facility costs over the remainder of the lease, net of sublease payments expected to be received. The total amount included in the Condensed Consolidated Balance Sheet as of June 30, 2007 and December 31, 2006 related to this liability is $6,671 and $8,023, respectively. As of June 30, 2007 and December 31, 2006, $1,633 and $1,350, respectively, are included in accrued expenses and other obligations and $5,038 and $6,673, respectively, are included in deferred rent and other noncurrent liabilities.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assets and liabilities of the JFS business have been reclassified in the Condensed Consolidated Balance Sheet as assets and liabilities held for sale and consist of the following:

 

 

The results of the Company’s discontinued litigation solutions business for the three and six months ended June 30, 2007 consist of the results of JFS and adjustments to the accrual for exit costs associated with leased facilities formerly occupied by the discontinued businesses. The results for the three and six months ended June 30, 2006 consist of the results of JFS, DecisionQuest, including the Company’s equity share of income (loss) from the joint venture investment in CaseSoft until its sale in May 2006, and the realized gain from the sale of CaseSoft. In addition, during the quarter ended June 30, 2006 the Company booked an impairment charge of $13,334 related to the DecisionQuest business as a result of the sale of CaseSoft. The results for the six months ended June 30, 2006 also include the results of the Company’s document scanning and coding business until its sale in January 2006. The results are as follows:

 

 

The Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 include approximately $2,607 and $3,741, respectively, in accrued expenses and other obligations related primarily to estimated indemnification liabilities associated with the discontinued globalization business, which was sold in September 2005, as described more fully in Note 3 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2005. The Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 also include $624 and $1,344, respectively, in accrued expenses and other obligations related primarily to estimated indemnification liabilities associated with Bowne Business Solutions Inc. Income from discontinued operations before income taxes includes adjustments related to the estimated indemnification liabilities associated with the discontinued globalization business of approximately $681 for the six months ended June 30, 2007.

 

 

The Company classifies its investments in marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Marketable securities at June 30, 2007 and December 31, 2006 consist primarily of short-term securities including auction rate securities of approximately $15.6 million and $42.5 million, respectively. These underlying securities are fixed income securities such as long-term corporate bonds or municipal notes issued with a variable interest rate that is reset every 7, 28 or 35 days via a Dutch auction.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In accordance with the existing stock repurchase program, as described more fully in Note 16 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006, the Company repurchased approximately 0.3 million shares of its common stock for approximately $5.7 million (an average price of $17.20 per share) during the three months ended June 30, 2007 and for the six months ended June 30, 2007 the Company repurchased approximately 1.2 million shares of its common stock for approximately $18.7 million (an average price of $16.01 per share). As of June 30, 2007, there was approximately $33.0 million available for share repurchases. Since the inception of the Company’s share repurchase program in December 2004 through June 30, 2007, the Company has repurchased approximately 11.0 million shares of its common stock for approximately $164.0 million, an average price of $14.89 per share.

 

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”), the Company has measured the share-based compensation expense for stock options granted during the six months ended June 30, 2007 and 2006 based upon the estimated fair value of the award on the date of grant and recognizes the compensation expense over the award’s requisite service period. The Company has not granted stock options with market or performance conditions. The weighted-average fair value of stock options granted during the three and six months ended June 30, 2007 was $5.30 and $5.01, respectively. The company did not grant any stock options during the three months ended June 30, 2006. The weighted-average fair value of stock options granted during the six months ended June 30, 2006 was $5.27. The weighted-average fair values were calculated using the Black-Scholes-Merton option pricing model. The following weighted-average assumptions were used to determine the fair value of the stock options granted in 2007 and 2006:

 

 

 

 

The Company uses historical data to estimate the expected dividend yield and expected volatility of the Company’s stock in determining the fair value of the stock options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant and the expected life of the options represents the estimated length of time the options are expected to remain outstanding, which is based on the history of exercises and cancellations of past grants made by the Company. In accordance with SFAS 123(R), the Company estimated pre-vesting forfeitures of approximately 12.5% for the options granted during the three and six months ended June 30, 2007 and 2006, which was based on the historical experience of the vesting and forfeitures of stock options granted in prior years.

 

The Company recorded compensation expense related to stock options of $303 and $605 for the three and six months ended June 30, 2007, respectively, and $278 and $559 for the three and six months ended June 30, 2006, respectively, which is included in selling and administrative expenses in the Condensed Consolidated Statement of Operations. As of June 30, 2007, there was approximately $1,671 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.6 years.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Option Plans

 

The Company maintains four stock incentive plans: a 1992 Plan, a 1997 Plan, a 1999 Plan (which was amended in May 2006) and a 2000 Plan, which are described more fully in Note 17 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006. The Company uses treasury shares to satisfy stock option exercises from the 2000 Plan, deferred stock units and restricted stock awards. To the extent treasury shares are not used, shares are issued from the Company’s authorized and unissued common shares.

 

The details of the stock option activity for the six months ended June 30, 2007 is as follows:

 

 

The total intrinsic value of the options exercised during the three and six months ended June 30, 2007 was $3,883 and $3,984, respectively, and $307 and $1,724 for the three and six months ended June 30, 2006, respectively. The amount of cash received from the exercise of stock options was $10,780 and $9,350 for the six months ended June 30, 2007 and 2006, respectively. The tax benefit recognized related to compensation expense for stock options amounted to $20 and $39 for the three and six months ended June 30, 2007, respectively, and $39 and $81 for the three and six months ended June 30, 2006, respectively. The actual tax benefit realized for the tax deductions from stock option exercises was $1,495 and $1,530 for the three and six months ended June 30, 2007, respectively, and $119 and $672 for the three and six months ended June 30, 2006, respectively. The excess tax benefits related to stock option exercises resulted in cash flows from financing activities of $621 and $101 for the six months ended June 30, 2007 and 2006, respectively.

 

The following table summarizes weighted-average option exercise price information as of June 30, 2007:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about nonvested stock option awards as of June 30, 2007:

 

 

Total compensation expense recognized for stock options that vested during the three and six months ended June 30, 2007 amounted to $11 and $19, respectively. Total compensation expense recognized for stock options that vested during the three and six months ended June 30, 2006 amounted to $57.

 

Deferred Stock Awards

 

The Company maintains a program for certain key executives and directors that provides for the conversion of a portion of their cash bonuses or directors’ fees into deferred stock units. These units are convertible into the Company’s common stock on a one-for-one basis, generally at the time of retirement or earlier under certain specific circumstances and are included as shares outstanding in computing the Company’s basic and diluted earnings per share. As of June 30, 2007 and December 31, 2006, the amounts included in stockholders’ equity for these units were $5,397 and $5,196, respectively. As of June 30, 2007 and December 31, 2006, there were 487,666 and 481,216 units outstanding, respectively.

 

Additionally, the Company has a Deferred Sales Compensation Plan for certain sales personnel. This plan allows a salesperson to defer payment of commissions to a future date. Participants may elect to defer commissions to be paid in either cash, a deferred stock equivalent (the value of which is based upon the value of the Company’s common stock), or a combination of cash or deferred stock equivalents. The amounts deferred, plus any matching contribution made by the Company, will be paid upon retirement, termination or in certain hardship situations. Amounts accrued which the employees participating in the plan have elected to be paid in deferred stock equivalents amounted to $2,234 and $2,341 as of June 30, 2007 and December 31, 2006, respectively. In January 2004, the Plan was amended to require that the amounts to be paid in deferred stock equivalents would be paid solely in the Company’s common stock. As of June 30, 2007 and December 31, 2006, these amounts are a component of additional paid in capital in stockholders’ equity. In the event of a change of control or if the Company’s net worth, as defined, falls below $100 million, then the payment of certain vested employer matching amounts due under the plan may be accelerated. As of June 30, 2007 and December 31, 2006, there were 180,381 and 191,085, respectively, deferred stock equivalents outstanding under this Plan. These awards are included as shares outstanding in computing the Company’s basic and diluted earnings per share.

 

Compensation expense related to deferred stock awards amounted to $279 and $538 for the three and six months ended June 30, 2007, respectively and $229 and $478 for the three and six months ended June 30, 2006, respectively.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Stock Awards

 

In accordance with the 1999 Incentive Compensation Plan, the Company has granted certain senior executives restricted stock awards. The shares have various vesting conditions and are subject to certain terms and restrictions in accordance with the agreements. The fair value of the restricted shares is determined based on the fair value of the Company’s stock at the date of grant and is charged to compensation expense over the requisite service periods.

 

Compensation expense related to restricted stock awards amounted to $108 and $217 for the three and six months ended June 30, 2007, respectively, and $223 and $453 for the three and six months ended June 30, 2006, respectively. As of June 30, 2007 unrecognized compensation expense related to restricted stock grants amounted to $417, which will be recognized over a weighted-average period of 1.4 years. As of June 30, 2007 there were 44,669 unvested shares of restricted stock outstanding with a weighted-average grant date fair value of $15.09. There were no shares granted or vested during the six months ended June 30, 2007.

 

Long-Term Equity Incentive Plan and Restricted Stock Units

 

The Company’s Board of Directors approved a Long-Term Equity Incentive Plan (“LTEIP”) which became effective retroactive to January 1, 2006 upon the approval of the 1999 Amended Incentive Compensation Plan on May 25, 2006. In accordance with the 1999 Amended Incentive Plan, certain officers and key employees can be granted restricted stock units (“RSUs”) at a target level based on certain criteria. The actual amount of RSUs earned is based on the level of performance achieved relative to established goals for the three-year performance cycle beginning January 1, 2006 through December 31, 2008 and range from 0% to 200% of the target RSUs granted. The performance goal is based on the average return on invested capital (“ROIC”) for the three-year performance cycle. The LTEIP provides for accelerated payout if the maximum average ROIC performance target is attained within the initial two-years of the three-year performance cycle. The awards are subject to certain terms and restrictions in accordance with the agreements. The fair value of the RSUs granted is determined based on the fair value of the Company’s stock at the date of grant and is being charged to compensation expense for most employees based on the date of grant through the expected payment date, which is expected to be in March 2009. The compensation expense related to these grants for certain officers and employees who are eligible for retirement or will become eligible for retirement during the performance cycle is calculated based on the beginning date of the performance period through the ending date of the performance cycle. Compensation expense for all awards is also based on the estimated level of performance achieved as of the reporting period. The Company estimated pre-vesting forfeitures of approximately 12.5% related to these grants.

 

The Company granted 15,000 RSUs during the three and six months ended June 30, 2007. Compensation expense recognized related to RSUs amounted to $1,044 and $2,306 for the three and six months ended June 30, 2007, respectively, based upon an estimated performance level through the end of the performance cycle. There was no compensation expense recorded during the three or six months ended June 30, 2006. The unrecognized compensation expense related to RSU grants amounted to approximately $5,757, which will be recognized over a weighted-average period of 1.4 years. In March 2007, the Company issued 40,000 shares of common stock to the Company’s former Chief Executive Officer who retired as of December 31, 2006. The shares represent the pro rata portion that he was eligible to receive as of his retirement date, in accordance with his LTEIP agreement. Compensation expense related to these shares was recognized during 2006. The total number of unvested RSUs as of June 30, 2007 was 447,500, with a weighted-average grant date fair value of $13.92.

 

 

Shares used in the calculation of basic earnings per share are based on the weighted-average number of shares outstanding. Shares used in the calculation of diluted earnings per share are based on the weighted-average number of shares outstanding adjusted for the assumed exercise of all potentially dilutive stock-based awards. Basic and diluted earnings per share are calculated by dividing the net income by the weighted-average number of shares outstanding during each period. The weighted-average diluted shares outstanding for the three months ended

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2007 and 2006 excludes the dilutive effect of 365,284 and 810,896 stock options, respectively, since such options have an exercise price in excess of the average market value of the Company’s common stock during the respective periods and also excludes 307,379 and 273,522 stock options, respectively, which have an anti-dilutive effect under the application of the treasury stock method. The weighted-average diluted shares outstanding for the six months ended June 30, 2007 and 2006 excludes the dilutive effect of 395,336 and 754,244 stock options, respectively, since such options have an exercise price in excess of the average market value of the Company’s common stock during the respective periods and also excludes 351,629 and 320,252 stock options, respectively, which have an anti-dilutive effect under the application of the treasury stock method.

 

In accordance with EITF Issue No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” the weighted-average diluted shares outstanding for the three and six months ended June 30, 2007 and 2006 includes the effect of 4,058,445 shares that could be issued upon the conversion of the Company’s convertible subordinated debentures under certain circumstances, and the numerator used in the calculation of diluted earnings per share was increased by an amount equal to the interest cost, net of tax, on the convertible subordinate debentures of $577 and $572 for the three months ended June 30, 2007 and 2006, respectively, and $1,154 and $1,144 for the six months ended June 30, 2007 and 2006, respectively, since the effects are dilutive to the earnings per share calculation for these periods.

 

The following table sets forth the basic and diluted average share amounts:

 

 

 

 

Inventories of $27,384 as of June 30, 2007 included raw materials of $5,928 and work-in-process of $21,456. As of December 31, 2006, inventories of $25,591 included raw materials of $6,185 and work-in-process of $19,406.

 

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as follows:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The gross amounts and accumulated amortization of identifiable intangible assets are as follows:

 

 

The increase in customer relationships as of June 30, 2007 is primarily attributable to the preliminary allocation of the purchase price related to the acquisition of St Ives Financial as described in more detail in Note 2.

 

 

The Company continually reviews its business, manages costs and aligns its resources with market demand, especially in light of the volatility of the capital markets and the resulting variability in transactional financial printing activity. As a result, the Company took several steps over the past several years to reduce fixed costs, eliminate redundancies and better position the Company to respond to market pressures or unfavorable economic conditions. As a result of these steps, the Company incurred restructuring charges for severance and personnel-related costs related to headcount reductions and costs associated with closing down and consolidating facilities.

 

During the first half of 2007, the Company continued to implement further cost reductions. On June 11, 2007, the Company entered into a modification (the “Lease Amendment”) of its existing lease (the “Lease”) dated as of February 24, 2005 with New Water Street Corp. (“Landlord”) for its office facilities at 55 Water Street, New York, New York (the “55 Water Street facility”). Pursuant to the Lease Amendment, which became effective on signing, the leased space under the Lease was reduced by approximately 61,000 square feet (the “Terminated Space”). In consideration of entering into the Lease Amendment, the Company made a payment to the Landlord of $2.0 million. In conjunction with the Lease Amendment, the Company entered into an agreement with the successor tenant of the Landlord for the Terminated Space. In consideration of entering into the agreement, the successor tenant paid the Company $0.8 million to vacate the Terminated Space and for limited rights to use certain of the Company’s conference room facilities, which will be charged at the Company’s standard rates in effect from time to time. The Company incurred restructuring and non-cash asset impairment charges of approximately $5.7 million as a result of entering into the Lease Amendment. These charges consist of non-cash asset impairments of approximately $3.3 million primarily related to the write-off of leasehold improvements associated with the Terminated Space, exit costs of approximately $1.2 million primarily consisting of broker fees associated with the Lease Amendment, and the $2.0 million payment to the Landlord reduced by the $0.8 million received from the successor tenant.

 

Restructuring, integration and asset impairment charges for the first half of 2007 included (i) facility exit costs and asset impairment charges related to the reduction of leased space at the Company’s New York City facility as described above, (ii) severance and integration costs related to the integration of the St Ives Financial business, (iii) additional company-wide workforce reductions, (iv) facility exit costs and an asset impairment charge related to the consolidation of the Company’s financial communications facility in Philadelphia with the Philadelphia facility previously occupied by St Ives Financial, and (v) facility exit costs related to the MBC segment. These actions resulted in restructuring, integration, and asset impairment costs totaling $7,938 for the three months ended June 30, 2007 and $10,048 for the six months ended June 30, 2007.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following information summarizes the costs incurred with respect to restructuring, integration and asset impairment charges during the three and six months ended June 30, 2007:

 

 

 

The activity pertaining to the Company’s accruals related to restructuring charges and integration costs (excluding asset impairments and other non-cash adjustments) since December 31, 2005, including additions and payments made are summarized below:

 

 

The majority of the remaining accrued severance and personnel-related costs are expected to be paid by the end of 2007.

 

On August 6, 2007, the Company announced a plan to integrate its manufacturing capabilities. By integrating its manufacturing capabilities, the Company will create a robust platform that includes digital and offset printing, binding, mail service and fulfillment capabilities. This new model will allow the Company to realize operating efficiencies through streamlined workflows and work sharing between sites during peak periods. As the first major step in the execution of the plan, the Company will consolidate its Milwaukee, Wisconsin digital print facility with

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

its existing print facility in South Bend, Indiana, making it the Company’s first fully integrated manufacturing facility, with digital and offset capabilities. The Company expects the shutdown of the Milwaukee facility will be completed in the fourth quarter of 2007.

 

The Company will continue to evaluate other facilities where future consolidations make sense, and expects to complete the full integration of all of its manufacturing capabilities in the first half of 2008.

 

 

The components of debt at June 30, 2007 and December 31, 2006 are as follows:

 

 

There were no borrowings outstanding under the $150 million five-year senior, unsecured revolving credit facility, which is described more fully in Note 11 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006. The terms of the revolving credit agreement provide certain limitations on additional indebtedness, liens, restricted payments, asset sales and certain other transactions. Additionally, the Company is subject to certain financial covenants based on its results of operations. The Company was in compliance with all loan covenants as of June 30, 2007 and based upon its current projections, the Company believes it will be in compliance with the quarterly loan covenants for the remainder of fiscal year 2007. The Company is not subject to any financial covenants under the convertible subordinated debentures.

 

The Company’s Canadian subsidiary has a $4.3 million Canadian dollar credit facility. There was no balance on this credit facility as of June 30, 2007 or December 31, 2006.

 

The Company also has various capital lease obligations which are included in long-term debt.

 

 

In May 2007, the Company’s synthetic lease for printing equipment matured. At the end of the facility term, the Company had the option of purchasing the equipment for the estimated residual value of $6.3 million. On May 16, 2007, the Company exercised its option to purchase the equipment by refinancing $4.9 million through a four year operating lease and purchasing the remaining $1.4 million of equipment outright. The future minimum operating lease payments associated with the refinanced equipment as of June 30, 2007 are $0.4 million in 2007, $0.8 million per year for 2008 through 2010, and $0.3 million in 2011. The synthetic lease is described more fully in the Company’s annual report on Form 10-K for the year ended December 31, 2006.

 

 

The Company sponsors a defined benefit pension plan, which covers certain United States employees not covered by union agreements. Benefits are based upon salary and years of service. The Company’s policy is to contribute an amount necessary to meet the ERISA minimum funding requirements. This plan has been closed to new participants effective January 1, 2003. In addition, effective January 1, 2003, benefits for current participants in the plan are computed at a reduced accrual rate for credited service after January 1, 2003, except for certain employees who continue to accrue benefits under the pre-January 1, 2003 formula if they satisfy certain age and years of service requirements. The Company also has an unfunded supplemental executive retirement plan (“SERP”) for certain executive management employees. The defined benefit pension plan and SERP are described more fully in Note 12 of the Notes to Consolidated Financial Statements in the Company’s annual report on

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Form 10-K for the year ended December 31, 2006. Also, certain non-union international employees are covered by other retirement plans.

 

The components of the net periodic benefit cost are as follows:

 

 

 

The amortization of transition (asset)/liability, prior service cost and actuarial loss for the three and six months ended June 30, 2007, included in the above table, has been recognized in the net periodic benefit cost and included in other comprehensive income, net of tax.

 

As discussed in more detail in Note 12 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2006, the Company adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” during the fourth quarter of 2006.

 

The Company will record the plans’ funded status as of December 31, 2007, the measurement date, and will adjust the balance in accumulated comprehensive income during the fourth quarter of 2007.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In January 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requires that we recognize income tax benefits arising from uncertain tax positions in our financial statements based on a more-likely-than-not recognition threshold as of the date of adoption. As a result of adopting FIN 48 the Company recognized a $590 decrease to its unrecognized tax benefits, which is reflected as an adjustment to retained earnings as of January 1, 2007.

 

The total gross amount of unrecognized tax benefits included in the Condensed Consolidated Balance Sheet as of the date of adoption was $11,281, including estimated interest and penalties of $1,520. Any prospective adjustments to these unrecognized tax benefits will be recorded as a change to the Company’s provision for income taxes and would impact our effective tax rate. The total gross amount of unrecognized tax benefits as of June 30, 2007 is $9,164, including estimated interest and penalties of $1,263. The reduction of the unrecognized tax benefits since the date of adoption primarily reflects settlements of income tax audits as well as the lapse of applicable statutes of limitations, and is included in the Company’s tax provision for the three and six months ended June 30, 2007. The Company accrues interest and penalties related to reserves for income taxes as a component of its income tax provision.

 

The Company files income tax returns in the United States, and in various state, local and foreign jurisdictions. It is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position and a significant amount of time may elapse before an uncertain tax position is finally resolved. The Company recognizes tax benefits for uncertain tax positions which it believes are more-likely-than-not to be sustained based on the known facts at that point in time. The Company adjusts these tax benefits, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter may result in recognition of a previously unrecognized tax benefit.

 

In May 2007, the FASB issued FASB Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1 amends FIN 48, by providing guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective upon the initial adoption of FIN 48, which the Company adopted as of January 1, 2007. The implementation of this standard did not have a material impact on the Company’s financial statements.

 

Audits of the Company’s U.S. federal income tax returns for 2001 through 2004 have been completed this year. During the first quarter of 2007, the Company was notified that its 2005 U.S. federal income tax return will also be audited. The Company’s income tax returns filed in state and local jurisdictions have been audited at various times. Our foreign jurisdictions do not have any active income tax audits in process as of June 30, 2007.

 

Income tax expense for the three months ended June 30, 2007 was $7,236 on pre-tax income from continuing operations of $23,019 compared to $10,034 on pre-tax income from continuing operations of $20,210 for the same period in 2006. The effective tax rate for the three months ended June 30, 2007 was 31.4%, which was significantly lower than the effective tax rate for the three months ended June 30, 2006 of 49.6%, primarily due to tax benefits of approximately $2,734 related to settlement of the aforementioned audits of the Company’s 2002 through 2004 federal income tax returns, and a reduction in unrecognized tax benefits. Income tax expense for the six months ended June 30, 2007 was $8,445 on pre-tax income from continuing operations of $34,341 compared to $12,057 on pre-tax income from continuing operations of $23,698 for the same period in 2006. The effective tax rate for the six months ended June 30, 2007 was 24.6%, which was significantly lower than the effective tax rate for the six months ended June 30, 2006 of 50.9%, primarily due to tax benefits of approximately $6,681 related to completion of the aforementioned audits of the 2002 through 2004 federal income tax returns, settlement of the audit of the 2001 federal income tax return which was completed in the first quarter of 2007 and a reduction in unrecognized tax benefits.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company provides financial communications and other services that help companies produce and manage their investor communications and their marketing & business communications including, but not limited to, regulatory and compliance documents, personalized financial statements, enrollment books and sales collateral. The Company’s services span the entire document lifecycle and involve both electronic and printed media. The Company helps its clients compose their documents, manage the content and finalize the documents, translate the documents when necessary, prepare the documents for filing, personalize the documents and print and distribute the documents, both through the mail and electronically.

 

During the fourth quarter of 2006, the Company changed the way it reports and evaluates segment information. The Company had previously reported the costs associated with administrative, legal, finance and other support services which are not directly attributable to the segments in the “Corporate/Other” category. The Company now also includes in the “Corporate/Other” category certain other expenses (such as stock-based compensation and supplemental retirement plan expenses) that had previously been allocated to the individual operating segments. The Company’s previous years’ segment information has been restated to conform to the current year’s presentation. The services of each of the Company’s segments are described further below:

 

Financial Communications — This segment provides services that enable the preparation, filing, printing and distribution of transactional, compliance reporting and investment management regulatory documents, commercial printing and other services.

 

Marketing & Business Communications — Bowne’s digital print and personalized communications segment provides a portfolio of services to create, manage and distribute personalized communications, including financial and healthcare statements, pre- and post-enrollment kits, marketing material and direct mail.

 

Information regarding the operations of each business segment is set forth below. Performance is evaluated based on several factors, of which the primary financial measure is segment profit. Segment profit is defined as gross margin (revenue less cost of revenue) less selling and administrative expenses. Segment performance is evaluated exclusive of interest, income taxes, depreciation, amortization, certain shared corporate expenses, restructuring, integration and asset impairment charges, purchased in-process research and development, and other expenses and other income. Segment profit is measured because management believes that such information is useful in evaluating the results of certain segments relative to other entities that operate within these industries and to its affiliated segments. Therefore, this information is presented in order to reconcile to income from continuing operations before income taxes. The Corporate/Other category includes (i) corporate expenses for shared administrative, legal, finance and other support services which are not directly attributable to the operating segments, (ii) stock-based compensation and supplemental retirement plan expenses which are not directly attributable to the segments, (iii) restructuring, integration and asset impairment charges, (iv) gains (losses) and other expenses and income and (v) purchased in-process research and development.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Cautionary Statement Concerning Forward-Looking Statements

 

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). The 1995 Act provides a “safe harbor” for forward-looking statements to encourage companies to provide information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected.

 

This report includes and incorporates by reference forward-looking statements within the meaning of the 1995 Act. These statements are included throughout this report, and in the documents incorporated by reference in this report, and relate to, among other things, projections of revenues, earnings, earnings per share, cash flows, capital expenditures, working capital or other financial items, output, expectations regarding acquisitions, discussions of estimated future revenue enhancements, potential dispositions and cost savings. These statements also relate to the Company’s business strategy, goals and expectations concerning the Company’s market position, future operations, margins, profitability, liquidity and capital resources. The words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will” and similar terms and phrases identify forward-looking statements in this report and in the documents incorporated by reference in this report.

 

Although the Company believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The Company’s operations involve risks and uncertainties, many of which are outside the Company’s control, and any one of which, or a combination of which, could materially affect the Company’s results of operations and whether the forward-looking statements ultimately prove to be correct.

 

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors including, but not limited to:

 

 

Many of these factors are described in greater detail in the Company’s filings with the SEC, including those discussed elsewhere in this report or incorporated by reference in this report. All future written and oral forward-

looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the previous statements.

 

Overview

 

The Company reported continued strong operating results for the 2007 second quarter and year-to-date periods. These results are a direct effect of the increased revenue in the Financial Communications segment, notably non-transactional revenue, the favorable impact of the cost saving measures and strategic initiatives implemented by the Company, and improved profitability in the Marketing & Business Communications (“MBC”) segment. Diluted earnings per share from continuing operations improved to $0.49 for the three months ended June 30, 2007 compared to $0.30 during the same period in 2006 and improved to $0.81 for the six months ended June 30, 2007 compared to $0.34 during the same period in 2006.

 

In January 2007, the Company acquired St Ives Financial, the financial print division of St Ives plc, for approximately $9.6 million in cash, which includes a $1.4 million working capital adjustment. The integration of the St Ives Financial business was substantially completed during the first quarter of 2007. The acquisition expands Bowne’s position in the Public Limited Company market and the European investment management marketplace, where St Ives Financial has a well-established reputation among significant blue-chip clients. The transaction also gives Bowne an immediate presence in Luxembourg and expands the Company’s presence in Philadelphia, an important domestic market. This acquisition is discussed in more detail in Note 2 of the Notes to Condensed Consolidated Financial Statements.

 

As previously discussed in Note 15 of the Notes to Condensed Consolidated Financial Statements, during the fourth quarter of 2006, the Company changed the way it reports and evaluates segment information. The Company had previously reported the costs associated with administrative, legal, finance and other support services, which are not directly attributable to the segments in the category “Corporate/Other”. The Company now also includes in the “Corporate/Other” category certain other expenses (such as stock-based compensation and supplemental retirement plan expenses) that had previously been allocated to the individual operating segments. The Company’s results for the three and six months ended June 30, 2006 have been reclassified to conform to this presentation.

 

The results of the Company’s two reporting segments are discussed below:

 

 

Items Affecting Comparability

 

The Company continually reviews its business, manages its costs and aligns its resources with market demand, especially in light of the volatility of the capital markets experienced over the last several years and the resulting variability in transactional financial printing activity. As a result, the Company took several steps over the last several years to reduce fixed costs, eliminate redundancies and better position the Company to respond to market pressures or unfavorable economic conditions.

 

The following table summarizes the expenses incurred for restructuring, integration and asset impairment charges during the three and six months ended June 30, 2007 and 2006: