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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
COMMISSION FILE NUMBER 1-12551
------------------------
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE CANTERBURY GREEN
201 BROAD STREET
STAMFORD, CT 06901
(Address of principal executive offices) (Zip Code)
203-595-3000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is 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.
Large accelerated filer / / Accelerated filer /X/ Non-accelerated filer / /
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of July 31, 2006 the registrant had 53,315,883 shares of common
stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, 2006 DECEMBER 31, 2005(A)
------------- --------------------
(UNAUDITED)
-----------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 668 $ 1,035
Accounts receivable, net.............................. 211,666 247,277
Inventories, net...................................... 98,346 108,704
Other current assets.................................. 29,417 25,767
---------- ----------
Total current assets.............................. 340,097 382,783
Property, plant and equipment, net........................ 273,621 317,606
Goodwill.................................................. 229,298 311,146
Investment in affiliate................................... 49,293 --
Other intangible assets, net.............................. 21,398 23,961
Other assets, net......................................... 27,240 44,068
---------- ----------
Total assets...................................... $ 940,947 $1,079,564
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.................. $ 3,261 $ 2,791
Accounts payable...................................... 101,068 124,901
Accrued compensation and related liabilities.......... 42,727 53,765
Other current liabilities............................. 64,709 79,051
---------- ----------
Total current liabilities......................... 211,765 260,508
Long-term debt............................................ 663,355 809,345
Deferred income taxes..................................... 4,891 10,045
Other liabilities......................................... 36,699 49,216
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock....................................... -- --
Common stock.......................................... 533 530
Paid-in capital....................................... 241,367 239,432
Retained deficit...................................... (225,984) (305,091)
Deferred compensation................................. -- (1,825)
Accumulated other comprehensive income................ 8,321 17,404
---------- ----------
Total shareholders' equity (deficit).............. 24,237 (49,550)
---------- ----------
Total liabilities and shareholders' equity (deficit)...... $ 940,947 $1,079,564
========== ==========
(A) Derived from the audited consolidated financial statements as of
December 31, 2005.
See notes to condensed consolidated financial statements.
1
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2006 2005 2006 2005
-------- -------- --------- --------
Net sales.................................. $357,895 $421,736 $ 784,572 $871,338
Cost of sales.............................. 284,576 341,468 621,450 707,371
Selling, general and administrative........ 49,157 61,371 105,494 129,029
Amortization of intangible assets.......... 1,264 1,276 2,562 2,606
Restructuring, impairment and other
charges.................................. 17,213 5,070 30,687 15,089
-------- -------- --------- --------
Operating income....................... 5,685 12,551 24,379 17,243
(Gain) loss on sale of non-strategic
businesses............................... (9,573) 539 (132,925) 1,260
Interest expense, net...................... 14,960 18,802 32,997 36,995
Loss on early extinguishment of debt....... 32,744 -- 32,744 --
Other (income) expense..................... (2,993) 445 (2,771) 434
-------- -------- --------- --------
Income (loss) before income taxes...... (29,453) (7,235) 94,334 (21,446)
Income tax expense......................... 3,641 3,374 15,227 11,721
-------- -------- --------- --------
Net income (loss)...................... $(33,094) $(10,609) $ 79,107 $(33,167)
======== ======== ========= ========
Income (loss) per share:
Income (loss) per share--basic..... $ (0.62) $ (0.22) $ 1.49 $ (0.69)
======== ======== ========= ========
Income (loss) per share--diluted... $ (0.62) $ (0.22) $ 1.47 $ (0.69)
======== ======== ========= ========
Weighted average shares--basic..... 53,257 48,804 53,183 48,292
Weighted average shares--diluted... 53,257 48,804 53,862 48,292
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2006 2005
--------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 79,107 $(33,167)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization, excluding
amortization of deferred financing costs........ 21,402 25,955
Amortization of deferred financing costs.......... 1,028 2,230
Loss on early extinguishment of debt.............. 32,744 --
Non-cash restructuring and impairment charges..... 7,795 7,689
Other non-cash charges, net....................... 7,521 (170)
(Gain) loss on sale of non-strategic businesses... (132,925) 1,260
Equity income in affiliate........................ (2,288) --
Changes in operating assets and liabilities:
Accounts receivable............................... 17,154 25,723
Inventories....................................... (4,796) (2,247)
Accounts payable and accrued compensation and
related liabilities............................. (31,036) (20,553)
Other working capital changes..................... (18,957) (9,415)
Other, net........................................ (843) (6,877)
--------- --------
Net cash used in operating activities........... (24,094) (9,572)
Cash flows from investing activities:
Proceeds from divestitures, net..................... 213,104 4,158
Capital expenditures................................ (12,971) (12,652)
Acquisition payments................................ (4,653) (3,995)
Distributions from affiliate........................ 1,533 --
Proceeds from sale of property, plant and
equipment.......................................... 409 284
--------- --------
Net cash provided by (used in) investing
activities..................................... 197,422 (12,205)
Cash flows from financing activities:
Repayment of 9 5/8% senior notes.................... (339,502) --
Repayments under senior secured revolving credit
facility, net...................................... (123,931) --
Repayments of other long-term debt.................. (12,087) (1,018)
Payment of redemption premiums and expenses......... (26,142) --
Payment of debt issuance costs...................... (3,770) --
Proceeds from issuance of term loan................. 325,000 --
Borrowings under revolving credit facility.......... 5,000 --
Borrowings under senior secured revolving credit
facility, net...................................... -- 14,824
Proceeds from exercise of stock options............. 1,744 9,082
--------- --------
Net cash provided by (used in) financing
activities..................................... (173,688) 22,888
Effect of exchange rate changes on cash and cash
equivalents................................................ (7) (63)
--------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (367) 1,048
Cash and cash equivalents at beginning of year.............. 1,035 796
--------- --------
Cash and cash equivalents at end of quarter................. $ 668 $ 1,844
========= ========
See notes to condensed consolidated financial statements.
3
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
(the "Financial Statements") of Cenveo, Inc. and subsidiaries
(collectively, "Cenveo" or the "Company") have been prepared in accordance
with Rule 10-01 of Regulation S-X promulgated by the Securities and
Exchange Commission (the "SEC") and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of the Company, however, the Financial Statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position and results of
operations and its cash flows as of and for the three and six month periods
ended June 30, 2006. The results of operations for the three and six month
periods ended June 30, 2006 are not indicative of the results to be
expected for the full year primarily due to the effect of the March 31,
2006 sale of Supremex, Inc. and certain other assets (see Notes 3, 6 and
9), the Company's debt refinancing in June 2006 (see Note 7) and
seasonality (see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Seasonality"). These Financial
Statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005 (the
"Form 10-K").
It has been the Company's practice to close its quarters on the
Saturday closest to the last day of the calendar quarter so that each
quarter has the same number of days and 13 full weeks. The financial
statements and other financial information in this report are presented
using a calendar convention. The reporting periods, which consist of 13 and
26 weeks ended on July 1, 2006 and July 2, 2005, are reported as ending on
June 30, 2006 and 2005, respectively, since the effect is not material.
NEW ACCOUNTING PRONOUNCEMENTS. In June 2006, the FASB issued FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109), which is effective for the
Company on January 1, 2007. This interpretation was issued to clarify the
accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company is currently
evaluating the potential impact of this interpretation. See Note 2.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
2. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards 123 (revised 2004), Share-Based Payment
("SFAS 123R"), which requires the recognition of expense related to the
fair value of the Company's stock-based compensation awards (including
grants of employee stock options and restricted stock), using an
appropriate fair value option-pricing model. The Company elected to use the
modified prospective transition method as permitted by SFAS 123R and,
therefore, has not restated its financial results for prior periods. The
Company selected the Black-Scholes-Merton option-pricing model
("Black-Scholes Model") as the most appropriate fair-value method for its
non-vested grants outstanding and is recognizing compensation cost on a
straight-line basis over the vesting periods of the grants. Under this
transition method, stock-based compensation expense for the three and six
month periods ended June 30, 2006 includes compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of Statement of Financial Accounting Standards
123, Share-Based Payment ("SFAS 123"). The effects of the change
4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCK-BASED COMPENSATION (CONTINUED)
from applying the original provisions of SFAS 123 for the three and six
months ended June 30, 2006 are as follows (in millions, except per share
data):
THREE MONTHS SIX MONTHS
------------ ----------
Income (loss) before income taxes and net income........ $ (0.4) $ (1.1)
====== ======
Cash flow from operations and financing activities...... $ -- $ --
====== ======
Earnings per share basic and diluted.................... $(0.01) $(0.02)
====== ======
The Company did not issue any form of stock-based compensation during
the six months ended June 30, 2006. In addition, none of the Company's
stock-based compensation awards vested during the six months ended June 30,
2006. The only change to the Company's stock based compensation awards from
the amounts presented as of December 31, 2005 was the exercise of
approximately 107,000 and 291,000 stock options for shares of the Company's
common stock and the cancellation of approximately 226,000 and 261,000
stock options in the three and six months ended June 30, 2006,
respectively, and the cancellation of 20,000 restricted stock units in the
three months ended June 30, 2006. See Notes 1 and 15 in the Form 10-K.
Prior to January 1, 2006, the Company accounted for stock-based
compensation awards using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). This method required compensation expense to be
recognized for the excess of the quoted market price of the stock at the
grant date or the measurement date over the amount an employee must pay to
acquire the stock.
A summary of the effect on net loss and net loss per common share in
each period as if the fair value method, calculated under the Black-Scholes
Model, had been applied to all outstanding unvested stock options and
restricted stock during the three and six month periods ended June 30, 2005
is as follows (in thousands, except per share data):
THREE MONTHS SIX MONTHS
------------ ------------
Loss as reported........................................ $(10,609) $(33,167)
Add: stock-based compensation expense determined
under the intrinsic value method included in net
loss, net of related taxes....................... (939) (747)
Less: stock-based compensation expense determined
under fair value method, net of related taxes.... (77) (1,381)
-------- --------
Pro forma net loss...................................... $(11,625) $(35,295)
======== ========
Loss per share--basic and diluted:
As reported......................................... $ (0.22) $ (0.69)
======== ========
Pro forma........................................... $ (0.24) $ (0.73)
======== ========
In November 2005, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP"), No. 123 (R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards.
FSP No. 123 (R)-3 provides an elective alternative method that establishes
a computational component to arrive at the beginning balance of the paid-in
capital pool related to employee compensation and a simplified method to
determine the subsequent impact on the paid-in capital pool of employee
awards that are fully vested and outstanding upon the adoption of SFAS No.
123(R). This election is not available for adoption until January 1, 2007.
The Company is currently evaluating the transition method.
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF NON-STRATEGIC BUSINESSES
Supremex
On March 31, 2006, the Company sold to Supremex Income Fund, a new
open-ended trust formed under the laws of the Province of Quebec (the
"Fund"), all of the shares of Supremex Inc. ("Supremex"), a Canadian
subsidiary of the Company, and certain other assets of the envelope, forms
and labels segment. At closing, the Company received proceeds of
approximately $187 million, net of transaction expenses and subject to the
finalization of a working capital adjustment, and approximately 11.4
million units of the Fund, valued at approximately $98 million based upon
the Fund's initial public offering share price of $10.00 Canadian dollars
per unit ($8.57 US per unit). The proceeds to the Company at closing
included approximately $72.6 million of receivables. The units in the Fund
owned by the Company at March 31, 2006 represented a 36.5% economic and
voting interest in the Fund. The March 31, 2006 sale resulted in a pre-tax
gain of approximately $124 million in the first quarter of 2006, after the
allocation of $55.8 million of goodwill to the business as required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). On April 20, 2006, the Company received
$71.1 million of proceeds relating to $69.7 million of receivables from the
March 31, 2006 sale, the Company recorded a pre-tax gain of approximately
$1.4 million as a result of the Canadian dollar strengthening against the
U.S. dollar.
On April 28, 2006, the Company sold 2.5 million units in the Fund
relating to an over-allotment option to the underwriters for approximately
$21 million, which resulted in a reduction to the Company's economic and
voting interest in the Fund to 28.6%. In connection with the sale, the
Company recorded a pre-tax gain of approximately $9.3 million in the second
quarter of 2006, after the allocation of $5.5 million of goodwill to the
business.
The Company's investment in the Fund was $49.3 million as of June 30,
2006, which includes $20.4 million of goodwill associated with the retained
interest in the Fund. Beginning in the second quarter of 2006, the
Company's ownership interest in the Fund is being accounted for under the
equity method. During the three months ended June 30, 2006, the Company
recorded $2.3 million of equity income relating to its investment in the
fund and received $1.5 million of cash distributions from the Fund.
Other
On April 21, 2006, the Company sold a small non-strategic business
located in Somerville, Massachusetts for proceeds of $2.6 million and
recorded a loss on sale of $1.1 million.
During the three months ended June 30, 2005, the Company sold a small
non-strategic business for $1.1 million, and recognized a loss on sale of
$0.5 million. During the six months ended June 30, 2005, the Company sold
four small non-strategic businesses for $4.2 million, and recognized a loss
on sale of $1.3 million. From July 1, 2005 through December 31, 2005, the
Company sold two additional non-strategic businesses.
The following table summarizes the net sales and operating income of
all businesses that have been sold during 2005 and the first six months of
2006, which are included in the condensed consolidated statements of
operations (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2006 2005 2006 2005
------- ------- ------- --------
Net sales................................. $ 535 $46,817 $46,440 $101,656
Operating income (loss)................... $ (643) $ 8,323 $ 7,089 $ 16,294
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF NON-STRATEGIC BUSINESSES (CONTINUED)
The dispositins of these non-strategic businesses have not been
accounted for as discontinued operations in the condensed consolidated
financial statements, because either the Company has continuing involvement
with these entities or the operations are not significant.
4. INVENTORIES
Inventories by major category are as follows (in thousands):
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Raw materials.......................................... $ 30,171 $ 33,970
Work in process........................................ 30,241 28,313
Finished goods......................................... 43,224 52,320
-------- --------
103,636 114,603
Reserves............................................... (5,290) (5,899)
-------- --------
Inventories, net....................................... $ 98,346 $108,704
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows (in thousands):
JUNE 30, DECEMBER 31,
2006 2005
--------- ------------
Land and land improvements............................. $ 15,840 $ 18,460
Buildings and improvements............................. 94,436 108,229
Machinery and equipment................................ 443,746 500,535
Furniture and fixtures................................. 9,832 11,579
Construction in progress............................... 6,665 14,532
--------- ---------
570,519 653,335
Accumulated depreciation............................... (296,898) (335,729)
--------- ---------
Property, plant and equipment, net..................... $ 273,621 $ 317,606
========= =========
6. COMPREHENSIVE INCOME (LOSS)
A summary of comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net income (loss)................... $(33,094) $(10,609) $ 79,107 $(33,167)
Other comprehensive income (loss):
Minimum pension liability
adjustment................... -- -- 6,004 --
Unrealized loss on cash flow
hedges....................... (224) -- (224) --
Currency translation
adjustment.................... 559 (2,837) (14,863) (4,441)
-------- -------- -------- --------
Comprehensive income (loss)......... $(32,759) $(13,446) $ 70,024 $(37,608)
======== ======== ======== ========
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
In connection with the sale of Supremex and certain other assets, the
Company reclassified into the gain on sale of non-strategic businesses from
other comprehensive income $6.0 million of minimum pension liability
adjustment and $14.3 million of currency translation adjustment relating to
the business sold during the first quarter of 2006 and $1.7 million of
currency translation adjustment relating to the exercising of the
over-allotment option sold on April 28, 2006 (see Notes 3 and 9).
7. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Term Loan, due 2013.................................... $325,000 $ --
7 7/8% Senior Subordinated Notes, due 2013............. 320,000 320,000
9 5/8% Senior Notes, due 2012.......................... 10,498 350,000
Revolving Credit Facility, due 2012.................... 5,000 --
Senior Secured Credit Facility......................... -- 123,931
Other.................................................. 6,118 18,205
-------- --------
666,616 812,136
Less current maturities............................... (3,261) (2,791)
-------- --------
Long-term debt......................................... $663,355 $809,345
======== ========
Debt Refinancing
On June 23, 2006, the Company completed a tender offer and consent
solicitation (the "Tender Offer") for any and all of its 9 5/8% Senior
Notes due 2012 and extinguished $339.5 million in aggregate principal
amount of its 9 5/8% Senior Notes (approximately 97% of the outstanding
amount) that were tendered and accepted for purchase under the terms of the
Tender Offer.
On June 21, 2006, the Company entered into a credit agreement that
provides for $525 million of senior secured credit facilities with a
syndicate of lenders (the "Credit Facilities"). The Credit Facilities
consist of a $200 million six-year revolving credit facility ("Revolving
Credit Facility") and a $325 million seven-year term loan facility ("Term
Loan"). The Credit Facilities contain customary financial covenants,
including maintenance of a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. Borrowing rates under the
Credit Facilities are determined at the Company's option at the time of
each borrowing and are based on the London Interbank Offered Rate ("LIBOR")
or the prime rate publicly announced from time to time, in each case plus a
specified interest rate margin (see "Interest rate swaps"). The Credit
Facilities are secured by substantially all of the Company's assets.
Proceeds from the Credit Facilities and other available cash was used to
fund the Tender Offer, to retire the Company's existing Senior Secured
Credit Facility due 2008 (which had no amounts outstanding), and for $3.8
million of debt issuance costs, which have been capitalized and are being
amortized over the terms of the Credit Facilities.
As of June 30, 2006, the Company was in compliance with all covenants
under its debt agreements.
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Loss on early extinguishment of debt
In connection with the debt refinancing in June 2006, the Company
incurred a $32.7 million loss on early extinguishment of debt related to
the Tender Offer and the retirement of the Senior Secured Credit Facility,
which consisted of the following (in thousands):
Tender Offer premiums................................... $25,212
Write-off of previously unamortized deferred financing
costs.................................................. 6,602
Tender Offer expenses................................... 930
-------
$32,744
=======
Interest rate swaps
In June 2006, the Company entered into interest rate swap agreements to
hedge interest rate exposure for $220 million notional amount of its
floating rate debt. This hedge of interest rate risk was designated and
documented at inception as a cash flow hedge and is evaluated for
effectiveness at least quarterly. Effectiveness of this hedge is calculated
by comparing the fair value of the derivative to a hypothetical derivative
that would be a perfect hedge of floating rate debt. There was no
ineffectiveness from this hedge through June 30, 2006. At June 30, 2006,
the Company recorded a liability of $0.4 million, which represents the
decrease in fair value of floating rate cash inflows that are less than the
fixed cash outflows over the remaining term of the hedges. The decrease of
cash inflows largely reflects the decrease in LIBOR as compared to LIBOR at
the time that the Company entered into the swap agreements. The liability
is included in "Other liabilities" and the net amount after income taxes is
included in "Accumulated other comprehensive income" in the Company's
condensed consolidated balance sheet as of June 30, 2006. The accounting
for gains and losses associated with changes in the fair value of cash flow
hedges and the effect on the Company's condensed consolidated financial
statements will depend on whether the hedge is highly effective in
achieving offsetting changes in fair value of cash flows of the liability
hedged. As of June 30, 2006, the Company does not anticipate reclassifying
any ineffectiveness into its results of operations for the remainder of
2006.
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Three Months Ended June 30, 2006
Restructuring and impairment charges for the three months ended June
30, 2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.............. $2,688 $5,899 $ 548 $ 9,135
Asset impairments...................... 2,011 362 -- 2,373
Equipment moving expenses.............. 1,628 1,057 -- 2,685
Lease termination (income) expenses.... 28 1,945 (339) 1,634
Building clean-up and other expenses... 718 668 -- 1,386
------ ------ ----- -------
Total restructuring and impairment
charges.......................... $7,073 $9,931 $ 209 $17,213
====== ====== ===== =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed manufacturing plants in Atlanta, Georgia; Chestertown, Maryland;
Phoenix, Arizona and Terre Haute, Indiana during
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
the second quarter of 2006. As a result of these closures, the segment
recorded impairment charges of $1.7 million related to equipment taken out
of service at these locations, employee separation costs of $1.7 million
related to workforce reductions, equipment moving expenses of $1.3 million
for the redeployment of equipment and building clean-up and other related
expenses of $0.4 million.
The segment incurred impairment charges of $0.1 million related to
equipment taken out of service, employee separation costs of $0.5 million
related to workforce reductions, and equipment moving expenses of $0.1
million for the redeployment of equipment and building clean-up and other
expenses of $0.3 million related to the Denver, Colorado and Kankakee,
Illinois locations that were closed in the first quarter of 2006.
The segment incurred impairment charges of $0.2 million related to
equipment taken out of service and equipment moving and other expenses of
$0.2 million for the redeployment of equipment related to locations closed
in the fourth quarter of 2005.
The segment incurred employee separation costs of $0.5 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. The commercial printing segment closed plants in
Cambridge, Maryland; Glen Burnie, Maryland and St. Louis, Missouri during
the second quarter of 2006. In connection with the closures, the segment
recorded employee separation costs of $1.8 million related to workforce
reductions, asset impairment charges of $0.4 million related to equipment
taken out of service at these locations, equipment moving expenses of $0.4
million and building clean-up and other expenses of $0.7 million.
In connection with plant closures in Denver, Colorado and Phoenix,
Arizona that the Company announced in the first quarter of 2006, the
segment incurred employee separation costs of $1.1 million related to
workforce reductions, equipment moving expenses of $0.5 million for the
redeployment of equipment and lease termination expenses of $1.9 million
representing the net present value of costs that are not expected to be
recovered over the remaining terms of two leased facilities no longer in
use.
The segment incurred equipment moving expenses of $0.2 million
associated with plants closed in 2005.
The segment incurred employee separation costs of $2.9 million related
to workforce reductions at other locations relating to the Company's cost
savings initiatives.
CORPORATE. In the fourth quarter of 2005, the Company made significant
changes to its corporate management team and staff and moved its corporate
headquarters from Denver, Colorado to Stamford, Connecticut. In the second
quarter of 2006, the Company incurred employee separation costs of $0.5
million related to these changes and recorded lease termination income of
$0.3 million resulting from adjusting its estimate of the net present value
of the cost of the lease that is not expected to be recovered over its
remaining life, upon subleasing its former corporate headquarters in the
second quarter of 2006.
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
Six Months Ended June 30, 2006
Restructuring and impairment charges for the six months ended June 30,
2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.............. $ 4,926 $ 9,588 $1,101 $15,615
Asset impairments...................... 3,877 407 -- 4,284
Equipment moving expenses.............. 2,398 1,959 -- 4,357
Lease termination expenses............. 1,905 1,945 (339) 3,511
Building clean-up and other expenses... 892 2,028 -- 2,920
------- ------- ------ -------
Total restructuring and impairment
charges.......................... $13,998 $15,927 $ 762 $30,687
======= ======= ====== =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed six manufacturing plants and an office location during the first six
months of 2006. As a result of these closures, the segment recorded
impairment charges of $3.0 million related to equipment taken out of
service at these locations, employee separation costs of $3.6 million
related to workforce reductions, and equipment moving expenses of $2.0
million. In addition, the segment recorded lease termination expenses of
$1.9 million, representing the net present value of costs that are not
expected to be recovered over the remaining terms of three leased
facilities no longer in use and building clean-up and other expenses of
$0.6 million.
The segment incurred impairment charges of $0.9 million related to
equipment taken out of service, equipment moving expenses of $0.4 million
for the redeployment of equipment and building clean-up and other expenses
of $0.3 million related to locations closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $1.3 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. In connection with the print segment's five plant
closures in the first six months of 2006, the segment recorded employee
separation costs of $3.0 million related to workforce reductions, asset
impairment charges of $0.4 million related to equipment taken out of
service at these locations, equipment moving expenses of $1.0 million,
building clean-up and other expenses of $1.3 million and lease termination
expenses of $1.9 million representing the net present value of costs that
are not expected to be recovered over the remaining terms of two leased
facilities no longer in use.
The segment incurred employee separation costs of $2.4 million related
to workforce reductions, equipment moving expenses of $1.0 million and
building cleaning and other expenses of $0.7 million for three plants
closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $4.2 million related
to workforce reductions at other locations relating to the Company's cost
savings initiatives.
CORPORATE. In the first six months of 2006, the Company incurred
employee separation costs of $1.1 million and recorded lease termination
income of $0.3 million resulting from adjusting its estimate of the net
present value of the cost of the lease that is not expected to be recovered
over its remaining life, upon subleasing its former corporate headquarters.
11
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
Three Months Ended June 30, 2005
Restructuring, impairment and other charges for the three months ended
June 30, 2005 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
--------- ---------- --------- ------
Employee separation costs............... $1,835 $1,790 $337 $3,962
Asset impairments....................... 552 -- -- 552
Building clean-up and other expenses.... -- (79) -- (79)
------ ------ ---- ------
Total restructuring charges............. 2,387 1,711 337 4,435
Other charges........................... -- -- 635 635
------ ------ ---- ------
Total restructuring, impairment and
other charges..................... $2,387 $1,711 $972 $5,070
====== ====== ==== ======
ENVELOPES, FORMS AND LABELS. During the three months ended June 30,
2005, the envelopes, forms and labels segment recorded employee separation
costs of $1.8 million related to a corporate-wide initiative to reduce
selling, general and administrative expenses and asset impairment charges
of $0.6 million related to equipment being taken out of service.
COMMERCIAL PRINTING. During the three months ended June 30, 2005, the
commercial printing segment recorded employee separation costs of $1.8
million related to a corporate-wide initiative to reduce selling, general
and administrative expenses.
CORPORATE. During the three months ended June 30, 2005, the Company
recorded employee separation costs of $0.3 million related to a
corporate-wide initiative to reduce selling, general and administrative
expenses and other charges of $0.5 million in connection with the Company's
evaluation of strategic alternatives and in connection with a special
meeting of shareholders and $0.1 million related to the resignation of its
former chief executive officer in January of 2005.
Six Months Ended June 30, 2005
Restructuring, impairment and other charges for the six months ended
June 30, 2005 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
--------- ---------- --------- -------
Employee separation costs.............. $1,835 $2,186 $ 337 $ 4,358
Asset impairments...................... 552 7,136 -- 7,688
Building clean-up and other expenses... (14) 471 -- 457
------ ------ ------ -------
Total restructuring charges............ 2,373 9,793 337 12,503
Other charges.......................... -- -- 2,586 2,586
------ ------ ------ -------
Total restructuring, impairment and
other charges.................... $2,373 $9,793 $2,923 $15,089
====== ====== ====== =======
ENVELOPES, FORMS AND LABELS. During the six months ended June 30, 2005,
the envelopes, forms and labels segment recorded employee separation costs
of $1.8 million related to a corporate-wide initiative to reduce selling,
general and administrative expenses and asset impairment charges of $0.6
million related to equipment being taken out of service.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
COMMERCIAL PRINTING. During the six months ended June 30, 2005, the
commercial printing segment recorded asset impairment charges of $7.1
million related to operations that had operating losses in 2004 and
continued to perform poorly in 2005. During the first quarter of 2005,
management determined that the carrying value of the equipment at these
plants would not be recoverable from the cash flows generated from their
continued use.
The segment completed the closure of a small printing operation located
in Phoenix, Arizona and the consolidation of its production into its Los
Angeles, California printing plant in the second quarter of 2005 and
recorded employee separation costs of $0.3 million and $0.3 million of
building clean-up and other expenses.
The segment completed the consolidation of its printing operations in
Seattle, Washington and San Francisco, California during the six months
ended June 30, 2005 and incurred $0.2 million of restructuring costs.
During the six months ended June 30, 2005, the segment recorded
employee separation costs of $1.8 million related to a corporate-wide
initiative to reduce selling, general and administrative expenses.
CORPORATE. During the six months ended June 30, 2005, the Company
recorded employee separation costs of $0.3 million related to a
corporate-wide initiative to reduce selling, general and administrative
expenses and other charges of $0.5 million in connection with the Company's
evaluation of strategic alternatives and in connection with a special
meeting of shareholders and $2.1 million related to the resignation of its
former chief executive officer in January of 2005.
A summary of the activity charged to the restructuring liabilities is
as follows (in thousands):
LEASE EMPLOYEE PENSION
TERMINATION SEPARATION WITHDRAWAL
COSTS COSTS LIABILITIES TOTAL
----------- ---------- ----------- --------
Balance at December 31, 2005.......... $ 6,067 $ 3,734 $ 950 $ 10,751
Accruals, net..................... 3,511 15,615 -- 19,126
Payments.......................... (2,021) (17,222) (248) (19,491)
------- -------- ----- --------
Balance at June 30, 2006.............. $ 7,557 $ 2,127 $ 702 $ 10,386
======= ======== ===== ========
9. PENSION PLANS
The components of the net periodic pension expense for the Company's
pension plans and supplemental executive retirement plans are as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2006 2005 2006 2005
----- ----- ------- -------
Service cost............................... $ 42 $ 650 $ 756 $ 1,309
Interest cost.............................. 275 890 1,162 1,719
Expected return on plan assets............. (176) (970) (1,353) (1,899)
Net amortization and deferral.............. 69 125 278 300
----- ----- ------- -------
Net periodic pension expense............... $ 210 $ 695 $ 843 $ 1,429
===== ===== ======= =======
The Company expects to contribute $1.1 million to its pension plans in
2006. As of June 30, 2006, the Company had made contributions of $0.7
million. In connection with the sale of Supremex on
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION PLANS (CONTINUED)
March 31, 2006 (Notes 3 and 6), the Company has no further obligation
relating to Supremex's pension plans.
10. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based upon the weighted
average number of common shares outstanding for the period. Diluted income
(loss) per share reflects the potential dilution that could occur if
options, restricted stock and restricted stock units to issue common stock
were exercised computed using the treasury stock method. The only Company
securities as of June 30, 2006 that could dilute basic income per share for
periods subsequent to June 30, 2006 are: (1) outstanding stock options
which are exercisable into 1,814,322 shares of the Company's common stock
and (2) 416,600 shares of restricted stock and restricted stock units
("Restricted Stock") of the Company's common stock.
The following table sets forth the computation of basic and diluted
income (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2006 2005 2006 2005
-------- -------- ------- --------
Numerator for basic and diluted income
(loss) per share:
Net income (loss).................... $(33,094) $(10,609) $79,107 $(33,167)
======== ======== ======= ========
Denominator weighted average common
shares outstanding:
Basic shares......................... 53,257 48,804 53,183 48,292
Dilutive effect of stock options
and Restricted Stock........... -- -- 679 --
-------- -------- ------- --------
Diluted shares....................... 53,257 48,804 53,862 48,292
======== ======== ======= ========
Basic income (loss) per share............ $ (0.62) $ (0.22) $ 1.49 $ (0.69)
======== ======== ======= ========
Diluted income (loss) per share.......... $ (0.62) $ (0.22) $ 1.47 $ (0.69)
======== ======== ======= ========
11. SEGMENT INFORMATION
In the third quarter of 2005, the Company changed its management
structure and realigned its manufacturing operations into two operating
segments--the envelope, forms and labels segment and the commercial
printing segment. The envelope, forms and labels segment is in the business
of manufacturing customized envelopes and packaging products, stock
envelopes, traditional and specialty business forms, and labels used for
such applications as mailing, messaging and bar coding. The commercial
printing segment is in the business of designing, manufacturing and
distributing printed products that include advertising literature,
corporate identity materials, financial printing, calendars, greeting
cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. Segment data for 2005 has been restated to reflect the new operating
segments.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses. Intercompany sales from the
commercial print segment to the envelopes, forms and labels segment were
$2.9 million and $5.7 million for the three months ended and $7.9 million
and $9.1 million for the six months ended June 30, 2006 and 2005,
respectively. Intercompany sales from the envelopes, forms and labels
segment
14
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
to the commercial print segment were $2.9 million and $10.6 million for the
three months ended and $6.4 million and $16.6 million for the six months
ended June 30, 2006 and 2005, respectively.
The following tables present certain segment information (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
2006 2005 2006 2005
-------- ---------- -------- --------
Net sales:
Envelopes, forms and labels...... $187,399 $ 227,012 $421,145 $460,895
Commercial printing.............. 170,496 194,724 363,427 410,443
-------- ---------- -------- --------
Total............................ $357,895 $ 421,736 $784,572 $871,338
======== ========== ======== ========
Operating income (loss):
Envelopes, forms and labels...... $ 17,171 $ 19,980 $ 42,589 $ 40,132
Commercial printing.............. (5,315) (2,203) (5,794) (10,631)
Corporate........................ (6,171) (5,226) (12,416) (12,258)
-------- ---------- -------- --------
Total............................ $ 5,685 $ 12,551 $ 24,379 $ 17,243
======== ========== ======== ========
Restructuring, impairment and other
charges:
Envelopes, forms and labels...... $ 7,073 $ 2,387 $ 13,998 $ 2,373
Commercial printing.............. 9,931 1,711 15,927 9,793
Corporate........................ 209 972 762 2,923
-------- ---------- -------- --------
Total............................ $ 17,213 $ 5,070 $ 30,687 $ 15,089
======== ========== ======== ========
Net sales by product line:
Commercial printing.............. $169,975 $ 189,689 $362,104 $404,535
Envelopes........................ 142,540 184,026 330,234 370,412
Business forms and labels........ 45,380 48,021 92,234 96,391
-------- ---------- -------- --------
Total............................ $357,895 $ 421,736 $784,572 $871,338
======== ========== ======== ========
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
Identifiable assets:
Envelopes, forms and labels....... $446,404 $ 613,580
Commercial printing............... 411,328 438,938
Corporate......................... 83,215 27,046
-------- ----------
Total............................. $940,947 $1,079,564
======== ==========
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENT
On July 12, 2006, the Company completed the acquisition of all of the
common stock of Rx Label Technology Corporation ("Rx Technology"), a
portfolio company of Pfingsten Partners, LLC and Hilco Equity Partners,
L.P., for approximately $50 million in cash. This new subsidiary of the
Company will operate under the name Rx Technology Corporation. Rx
Technology operates from a facility built in 2004 located in Joplin, MO. Rx
Technology's results of operations and cash flows from the July 12, 2006
acquisition date will be included in the Company's consolidated results of
operations and cash flows.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cenveo, Inc. and its subsidiaries, which we refer
to as Cenveo, should be read in conjunction with the accompanying
consolidated financial statements and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2005. Item 7 of
our 2005 Form 10-K describes our contractual obligations and the
application of our critical accounting policies. There have been no
significant changes as of June 30, 2006 pertaining to these topics, other
than the repayment of all amounts outstanding of our senior secured credit
facility and our debt refinancing completed in June of 2006. See "Long Term
Debt" below.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. We believe these
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of Cenveo. All such statements involve risks and
uncertainties, and as a result, actual results could differ materially from
those projected, anticipated or implied by these statements. Such
forward-looking statements involve known and unknown risks. See Item 1A.
"Risk Factors" under Part II of this report.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
BUSINESS OVERVIEW
We are a leading provider of print and visual communications, with
one-stop services from design through fulfillment. Our broad portfolio of
services and products include commercial printing, envelopes, labels,
packaging and business documents delivered through a network of production,
fulfillment and distribution facilities throughout North America. In
September 2005, we initiated a major restructuring program that we expect
to continue throughout 2006. We operate in two segments: envelopes, forms
and labels and commercial printing.
ENVELOPES, FORMS AND LABELS. Our envelopes, forms and labels segment
specializes in the manufacturing and printing of customized envelopes for
billing and remittance and direct mail advertising. This segment also
produces business forms and labels, custom and stock envelopes and mailers
sold to third-party dealers such as print distributors, office products
suppliers and office-products retail chains.
COMMERCIAL PRINTING. Our commercial printing segment specializes in the
printing of annual reports, car brochures, brand marketing collateral,
financial communications, specialty packaging and general commercial
printing.
CONSOLIDATED OPERATING RESULTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes an overview of our consolidated results for the
three and six month periods ended June 30, 2006, accompanied by a
discussion of the results of each of our business segments for the same
periods.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income (loss)
as well as the net sales and operating income (loss) of our operating
segments that we use internally to assess our operating performance.
Division sales exclude sales of divested operations and division operating
income (loss) excludes corporate
17
expenses, restructuring, impairment and other charges and the results of
divested operations. It has been our practice to close our quarters on the
Saturday closest to the last day of the calendar month so that each quarter
has the same number of days and 13 full weeks. The financial statements and
other financial information in this report are presented using a calendar
convention. The reporting periods, which consist of 13 and 26 week periods
ending on July 1, 2006 and July 2, 2005, are reported as ending on June 30,
2006 and 2005, respectively, since the effect is not material.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005 2006 2005
---------------------------------------- -------- -------- -------- --------
Division net sales.......................... $357,360 $374,919 $738,132 $769,682
Divested operations.................... 535 46,817 46,440 101,656
-------- -------- -------- --------
Net sales................................... $357,895 $421,736 $784,572 $871,338
======== ======== ======== ========
Division operating income................... $ 29,503 $ 13,552 $ 59,631 $ 25,372
Corporate expenses...................... 5,962 4,254 11,654 9,334
Restructuring, impairment and other
charges............................... 17,213 5,070 30,687 15,089
Divested operations..................... 643 (8,323) (7,089) (16,294)
-------- -------- -------- --------
Operating income............................ 5,685 12,551 24,379 17,243
(Gain) loss on sale of non-strategic
businesses............................ (9,573) 539 (132,925) 1,260
Interest expense, net................... 14,960 18,802 32,997 36,995
Loss on early extinguishment of debt.... 32,744 -- 32,744 --
Other (income) expense.................. (2,993) 445 (2,771) 434
-------- -------- -------- --------
Income (loss) before income taxes........... (29,453) (7,235) 94,334 (21,446)
Income tax expense...................... 3,641 3,374 15,227 11,721
-------- -------- -------- --------
Net income (loss)........................... $(33,094) $(10,609) $ 79,107 $(33,167)
======== ======== ======== ========
Income (loss) per share--basic.............. $ (0.62) $ (0.22) $ 1.49 $ (0.69)
======== ======== ======== ========
Income (loss) per share--diluted............ $ (0.62) $ (0.22) $ 1.47 $ (0.69)
======== ======== ======== ========
NET SALES
Net sales declined $63.8 million in the second quarter of 2006, as
compared to the second quarter of 2005, reflecting lower sales for our
envelopes, forms and labels segment of $39.6 million and $24.2 million for
our commercial printing segment. Net sales for the six months ended June
30, 2006 declined $86.8 million, as compared to the six months ended June
30, 2005, reflecting lower sales for our envelopes, forms and labels
segment of $39.8 million and $47.0 million for our commercial printing
segment. As a result of the sale of Supremex on March 31, 2006, net sales
for our envelopes, forms and labels segment were lower in the three and six
months ended June 30, 2006. Excluding sales of operations that have been
divested ("division net sales"), division net sales were also lower
primarily due to lower commercial printing sales. Division net sales of
envelopes, forms and labels were fairly consistent for the three and six
months ended June 30, 2006, as compared to 2005. See "Segment Operations"
below for a more detailed discussion of the primary factors for the change
in our net sales for our segments.
OPERATING INCOME
Operating income decreased $6.9 million in the second quarter of 2006,
as compared to the second quarter of 2005. This decrease was primarily due
to operating income of the envelopes, forms and
18
labels segment decreasing by $2.8 million and the operating loss of the
commercial printing segment increasing by $3.1 million.
Operating income increased $7.1 million in the first six months of
2006, as compared to 2005. This increase was primarily due to the operating
income of the envelopes, forms and labels segment increasing by $2.5
million and the operating loss of the commercial printing segment
decreasing by $4.8 million.
Excluding restructuring, impairment and other charges and operating
income of divested operations, the operating income of our two segments
("division operating income") increased $16.0 million in the second quarter
of 2006 as compared to the second quarter of 2005 and increased $34.3
million for the first six months of 2006 as compared to 2005. These results
reflect the benefits of our strategy of reducing fixed costs, improving the
procurement of raw materials, improving productivity through plant
consolidations and divesting or closing underperforming operations. See
"Segment Operations" below for a more detailed discussion of the primary
factors for the change in our operating income for our segments.
CORPORATE EXPENSES. Corporate expenses include the costs of our
corporate headquarters. These costs were higher for the three and six
months ended June 30, 2006, as compared to the three and six months ended
June 30, 2005, primarily due to the movement of certain functions to the
corporate office in Stamford, Connecticut and from stock option expense due
to the adoption of a new accounting standard on January 1, 2006. See Note 2
to our condensed consolidated financial statements included herein.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. In September 2005, a new
senior management team implemented significant cost savings programs
including the consolidation of purchasing activities, the rationalization
of our manufacturing platform, corporate and field human resources
reductions, implementation of company-wide purchasing initiatives and
streamlining of our information technology infrastructure. As of June 30,
2006, our total liability for restructuring was approximately $10.4
million. See Note 8 to the condensed consolidated financial statements
included herein.
During the three months ended June 30, 2006, we incurred $17.2 million
of restructuring and impairment charges, which included $9.1 million of
employee separation costs, $2.4 million of asset impairments, equipment
moving expenses of $2.7 million, lease termination costs of $1.6 million
and other exit costs of $1.4 million. During the six months end June 30,
2006, we incurred $30.7 million of restructuring and impairment charges,
which included $15.6 million of employee separation costs, $4.3 million of
asset impairments, equipment moving expenses of $4.4 million, lease
termination costs of $3.5 million and other exit costs of $2.9 million. We
anticipate additional restructuring and impairment charges during the
remainder of 2006, although at decreased amounts.
During the three months ended June 30, 2005, we incurred $5.1 million
of restructuring, impairment and other charges, which included $4.0 million
of employee separation costs, $0.6 million of asset impairments and $0.6
million of other charges. During the six months ended June 30, 2005, we
incurred $15.1 million of restructuring, impairment and other charges,
which included $4.4 million of employee separation costs, $7.7 million of
asset impairments, $0.5 million in building cleanup and other expenses and
$2.6 million of other charges.
GAIN ON SALE OF NON-STRATEGIC BUSINESSES. On March 31, 2006, we
recorded a pre-tax gain of approximately $124 million on the sale of all of
the shares of Supremex, Inc. ("Supremex"), a former Canadian subsidiary of
ours, and certain other assets to Supremex Income Fund, a new open-ended
trust formed under the laws of the Province of Quebec (the "Fund"). At
closing, we received proceeds of approximately $187 million (which included
approximately $72.6 million of receivables) and approximately 11.4 million
units in the Fund, which represented a 36.5% economic and voting interest
in the Fund. See Note 3 to the condensed consolidated financial statements
included herein. On April 20, 2006, we received $71.1 million of proceeds
relating to $69.7 million of receivables from the March 31, 2006 sale, we
recorded a pre-tax gain of approximately $1.4 million as a result of the
Canadian dollar strengthening against the U.S. dollar.
19
On April 28, 2006, we sold 2.5 million units in the Fund relating to an
over-allotment option to the underwriters for approximately $21 million.
The sale resulted in a reduction to our economic and voting interest in the
Fund to 28.6%. In connection with the sale, we recorded a pre-tax gain on
sale of non-strategic business of approximately $9.3 million in the second
quarter of 2006.
On April 21, 2006, we sold a small non-strategic business and recorded
a loss on sale of $1.1 million.
During the three and six months ended June 30, 2005, we sold certain
small non-strategic businesses and recognized losses on the sales of $0.5
million and $1.3 million, respectively.
INTEREST EXPENSE, NET. Interest expense decreased $3.8 million to $15.0
million in the second quarter of 2006 from $18.8 million in the second
quarter of 2005, primarily due to lower average debt balances outstanding.
Interest expense in the second quarter of 2006 reflects average outstanding
debt of $678.5 million and a weighted average interest rate of 8.6%,
compared to average outstanding debt of $817.7 million and a weighted
average interest rate of 8.3% during the second quarter of 2005.
Interest expense decreased $4.0 million to $33.0 million during the
first six months of 2006 from $37.0 million for the first six months of
2005, primarily due to lower average debt balances outstanding. Interest
expense during the first six months of 2006 reflects average outstanding
debt of $747.3 million and a weighted average interest rate of 8.5%,
compared to the average outstanding debt of $822.9 million and a weighted
average interest rate of 8.3% during the first six months of 2005.
As a result of our debt refinancing in June 2006, we expect lower
interest expense for the remainder of 2006. See Long-Term Debt below and
Note 7 to the condensed consolidated financial statements included herein.
LOSS ON EXTINGUISHMENT OF DEBT. In June 2006, we incurred a $32.7
million loss on early extinguishment of debt related to our debt
refinancing. See Long-Term Debt below and Note 7 to the condensed
consolidated financial statements included herein.
OTHER INCOME. During the three and six months ended June 30, 2006 the
Company recorded equity income of $2.3 million relating to its investment
in the Fund. See Note 3 to the condensed consolidated financial statements
included herein.
INCOME TAXES
Income tax expense for the three months ended June 30, 2006 was $3.6
million, which included $1.8 million of taxes relating to the
deconsolidation of the Company's US income tax group in connection with the
sale of Supremex and related assets, $1.3 million of a valuation allowance
against foreign tax credits and $0.5 million of state and local taxes.
During the three months ended June 30, 2006, we did not recognize any tax
benefit from the net operating losses of our domestic operations. Income
tax expense for the three months ended June 30, 2005 was $3.4 million,
which primarily consisted of taxes on our Canadian operations.
Income tax expense for the six months ended June 30, 2006 was $15.2
million, which included $3.2 million of taxes on our Canadian operations,
income taxes of $8.4 million on the gain on sale of Supremex, $1.8 million
of taxes relating to the deconsolidation of the Company's US income tax
group, $1.3 million of a valuation allowance against foreign tax credits
and $0.5 million of state and local taxes. During the six months ended June
30, 2006, we provided income taxes for our Canadian operations at an
effective rate of approximately 34%, as these operations are expected to
generate taxable income in 2006. Income tax expense for the six months
ended June 30, 2005 was $11.7 million, which consisted of taxes on our
Canadian operations of $8.0 million and a valuation allowance against
foreign tax credits of $3.7 million.
The Company recognized a $220 million gain for US income tax purposes
on the sale of the Supremex and related assets. The utilization of our net
operating and capital losses allowed the release of valuation allowances
for deferred tax assets of $84.6 million in the six months ended June 30,
2006,
20
which offset the tax expense on the gain on sale of Supremex, except for
$8.4 million which was primarily alternative minimum tax.
We established valuation allowances of $18.2 million and $25.2 million
against tax benefits of the net operating losses of our domestic
operations, alternative minimum tax credits and foreign tax credits that
were generated in the three and six months ended June 30, 2006,
respectively, including $4.4 million relating to the gain on sale of
Supremex in the six months ended June 30, 2006.
SEGMENT OPERATIONS
Our chief executive officer monitors the performance of the ongoing
operations of our two operating segments. We assess performance based on
division net sales and division operating income. Sales and operating
income of our two segments have been presented to show each segment without
the sales of divested operations and to show the operating income of each
segment without the results of divested operations and excluding
restructuring, impairment and other charges. Sales and operating income of
operations divested and restructuring, impairment and other charges are
included in the tables below to reconcile segment sales and operating
income reported in Note 11 to the condensed consolidated financial
statements to division net sales and division operating income on which our
segments are evaluated.
ENVELOPES, FORMS AND LABELS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(IN THOUSANDS) 2006 2005 2006 2005
-------------- -------- -------- -------- --------
Segment net sales......................... $187,399 $227,012 $421,145 $460,895
Divested operations................... -- (39,394) (41,391) (83,407)
-------- -------- -------- --------
Division net sales........................ $187,399 $187,618 $379,754 $377,488
======== ======== ======== ========
Segment operating income.................. $ 17,171 $ 19,980 $ 42,589 $ 40,132
Restructuring and impairment
charges.............................. 7,073 2,387 13,998 2,373
Divested operations................... -- (7,618) (8,663) (16,217)
-------- -------- -------- --------
Division operating income................. $ 24,244 $ 14,749 $ 47,924 $ 26,288
======== ======== ======== ========
Division operating income margin.......... 13% 8% 13% 7%
DIVISION NET SALES
Division net sales for our envelopes, forms and labels segment declined
slightly in the second quarter of 2006 compared to the second quarter of
2005.
* Sales of envelopes to our transactional and direct mail customers
increased approximately $0.7 million.
* Sales of envelopes and other products to the office products retail
customers increased approximately $1.0 million, which was primarily
due to increased volume.
* Sales of business forms, envelopes and labels to our distributor
channel declined approximately $1.9 million, primarily due to the
decline in our traditional documents business as a result of
customer's capabilities to print high quality documents, due to the
closure of two plants in the second half of 2005 and the decision not
to retain certain low margin business.
For the first six months of 2006 as compared to 2005, division net
sales for envelopes, forms and labels increased $2.3 million.
* Strong sales of direct mail envelopes resulting in a $3.7 million
increase in our direct envelope business.
* Sales of envelopes and other products to our office products retail
customers increased $2.3 million.
21
* Sales of business forms, labels and envelopes to our distributor
channel declined $3.6 million primarily due to the decline in our
traditional documents business as a result of customer's capabilities
to print high quality documents, due to the closure of two plants in
the second half of 2005 and the decision not to retain certain low
margin business.
DIVISION OPERATING INCOME
Division operating income of our envelopes, forms and labels segment
increased $9.5 million in the second quarter of 2006, as compared to the
second quarter of 2005. This increase was primarily due to improved margins
and significantly lower fixed manufacturing, selling and administrative
expenses. Margins improved primarily due to reduced variable manufacturing
costs of approximately $1.2 million. Plant consolidations and aggressive
cost reduction programs reduced fixed manufacturing costs by approximately
$5.1 million and selling, general and administrative expenses by
approximately $3.1 million.
Division operating income of the segment increased $21.6 million during
the first six months of 2006, as compared to the corresponding period in
2005. This increase was due to higher sales and reductions in variable
costs. Plant consolidations and other cost reduction programs have lowered
fixed manufacturing costs by $10.0 million and selling, general and
administrative expenses by $8.0 million.
COMMERCIAL PRINTING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(IN THOUSANDS) 2006 2005 2006 2005
-------------- -------- -------- -------- --------
Segment net sales......................... $170,496 $194,724 $363,427 $410,443
Divested operations................... (535) (7,423) (5,049) (18,249)
-------- -------- -------- --------
Division net sales........................ $169,961 $187,301 $358,378 $392,194
======== ======== ======== ========
Segment operating loss.................... $ (5,315) $ (2,203) $ (5,794) $(10,631)
Restructuring and impairment
charges.............................. 9,931 1,711 15,927 9,793
Divested operations................... 643 (705) 1,574 (77)
-------- -------- -------- --------
Division operating income................. $ 5,259 $ (1,197) $ 11,707 $ (915)
======== ======== ======== ========
Division operating income margin.......... 3% (1)% 3% 0%
DIVISION NET SALES
Division net sales of the commercial printing segment declined $17.3
million in the second quarter of 2006, as compared to the second quarter of
2005. This decline was due primarily to the loss of sales at the plants
that were closed in 2005 and in the first six months of 2006. Since the
first quarter of 2005, we have closed seven commercial printing plants that
had weak market positions and eroding sales.
Division net sales declined $33.8 million in the first six months of
2006, as compared to the corresponding period of 2005. This decline was due
primarily to the loss of sales at the plants that were closed in 2005 and
2006 and due to anticipated declines due to lower sales trends at certain
of our plants in the fourth quarter of 2005.
DIVISION OPERATING INCOME
Division operating income for our commercial printing segment increased
$6.5 million in the second quarter of 2006, as compared to the second
quarter of 2005. The savings in fixed costs from plant closures
substantially offset the impact of the decline in sales. In addition, we
have significantly reduced the cost structure of this segment through
headcount reductions and lowering fixed expenses at our ongoing printing
operations, which resulted in a reduction in fixed manufacturing costs of
approximately $3.2 million and selling, general and administrative expenses
of approximately $3.3 million.
22
Division operating income of the segment increased $12.6 million during
the first six months of 2006, as compared to the corresponding period in
2005. Division operating income improved $1.6 million as a result of the
closure of underperforming plants and $10.9 million due to reductions in
fixed expenses at our ongoing printing operations.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities was $24.1 million in the first six months of 2006, which was
primarily due to the increase in our working capital of $37.6 million,
offset in part by the net income adjusted for non-cash items of $14.4
million. The increase in our working capital primarily resulted from the
timing of payments to our vendors and from interest payments that were
accelerated in connection with our debt refinancing, see "Debt Refinancing"
below, offset in part by collections of accounts receivable from our
customers.
Net cash used in operating activities was $9.6 million in the first six
months of 2005, which was primarily due to a decrease in our working
capital of $6.5 million.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash provided
by investing activities was $197.4 million in the first six months of 2006,
primarily reflecting cash proceeds of $213.1 million from the sale of
Supremex and certain other assets, offset in part by capital expenditures
of $13.0 million and deferred payments relating to acquisitions of $4.7
million.
Net cash used in investing activities was $12.2 million in the first
six months of 2005, primarily reflecting capital expenditures of $12.7
million and deferred acquisition payments of $4.0 million, offset in part
by proceeds from the sale of non-strategic businesses of $4.2 million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash used in
financing activities was $173.7 million in the first six months of 2006,
primarily resulting from the repayment of $123.9 million of our senior
secured credit facility and other debt of $12.1 million with proceeds from
the sale of Supremex and other assets, the repayment of $339.5 million of
our 9 5/8% senior notes and the payment of $26.1 million of redemption
premiums and expenses and $3.8 million of debt issuance costs in connection
with our debt refinancing, which were offset in part by the proceeds from
issuance of our term loan of $325 million and our revolving credit facility
of $5.0 million in connection with our debt refinancing, see "Debt
Refinancing" below.
Net cash provided by financing activities was $22.9 million in the
first six months of 2005, primarily resulting from the increase in
borrowings under our Senior Secured Credit Facility of $14.8 million and
proceeds from the exercise of stock options of $9.1 million, slightly
offset by the repayment of $1.0 million in debt.
LONG-TERM DEBT. Our total outstanding debt was $666.6 million at June 30,
2006, a decrease of $145.5 million from December 31, 2005. This decrease was
primarily due to the repayment of all amounts outstanding under our Senior
Secured Credit Facility and another credit facility primarily with proceeds
received from the sale of Supremex and from our debt refinancing in June 2006.
As of June 30, 2006, approximately 83% of our outstanding debt was subject to
fixed interest rates. See Note 7 to the condensed consolidated financial
statements included herein.
Debt Refinancing
On June 23, 2006, we completed a tender offer and consent solicitation
(the "Tender Offer"), for any and all of our 9 5/8% Senior Notes due 2012
and extinguished $339.5 million in aggregate principal amount of our 9 5/8%
Senior Notes (approximately 97% of the outstanding amount) that were
tendered and accepted for purchase under the terms of the Tender Offer.
On June 21, 2006, we entered into a credit agreement that provides for
$525 million of senior secured credit facilities with a syndicate of
lenders (the "Credit Facilities"). The Credit Facilities consist of a $200
million six-year revolving credit facility (the "Revolving Credit
Facility"), and a $325 million seven-year term loan facility (the "Term
Loan"). The Credit Facilities contain customary financial covenants,
including maintenance of a maximum consolidated leverage ratio and a
minimum
23
consolidated interest coverage ratio. Borrowing rates under the Credit
Facilities are determined at our option at the time of each borrowing and
are based on the London Interbank Offered Rate ("LIBOR") or the prime rate
publicly announced from time to time, in each case plus a specified
interest rate margin. The Credit Facilities are secured by substantially
all of our assets. We used proceeds from the Credit Facilities and other
available cash to fund the Tender Offer, to retire our existing Senior
Secured Credit Facility due 2008 (which had no amounts outstanding), and
for $3.8 million of debt issuance costs.
In June 2006, we entered into interest rate swap agreements to hedge
the interest rate exposure for $220 million notional amount of our floating
rate debt. This hedge of interest rate risk was designated and documented
at inception as a cash flow hedge. These interest rate swap agreements
provide a fixed interest rate of 7.56% on $220 million notional amount of
our floating rate debt.
On June 30, 2006 we had outstanding letters of credit of approximately
$26.3 million and $0.5 million surety bonds related to performance and
payment guarantees. In addition, we had an outstanding letter of credit of
$0.8 million issued in support of other debt. Based on our experience with
these arrangements, we do not believe that any obligations that may arise
will be significant. Our current credit ratings are as follows:
SENIOR
CREDIT SENIOR SUBORDINATED LAST
REVIEW AGENCY FACILITIES NOTES NOTES UPDATE
--------------------------------------------- ---------- ------ ------------ --------
Standard & Poor's............................ BB- B+ B- May 2006
Moody's...................................... Ba3 B1 B3 May 2006
The terms of our existing debt do not have any rating triggers that
impact our funding other than potentially lowing our cost of borrowing
under the Term Loan of the Credit Facilities. We do not believe that our
current ratings will impact our ability to raise additional capital, should
such funds be needed.
We expect internally generated cash flow and the financing available under
our Credit Facilities will be sufficient to fund our working capital needs and
future growth, including certain acquisitions; however, this cannot be
assured. If we were to execute a significant acquisition, we may be required
to raise additional funds through the capital markets.
RX LABEL ACQUISITION. On July 12, 2006, we completed the acquisition of
all of the common stock of Rx Label Technology Corporation ("Rx
Technology"), a portfolio company of Pfingsten Partners, LLC and Hilco
Equity Partners, L.P., for approximately $50 million in cash which was
funded through our Credit Facilities. This new subsidiary of ours will
operate under the name Rx Technology Corporation. Rx Technology operates
from a facility built in 2004 located in Joplin, MO. Rx Technology's
results of operations and cash flows will be included in our consolidated
results of operations and cash flows from the July 12, 2006 acquisition
date.
SEASONALITY AND ENVIRONMENT
Our commercial printing plants experience seasonal variations. Revenues
from annual reports are generally concentrated from February through April.
Revenues associated with holiday catalogs and automobile brochures tend to
be concentrated from July through October. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
In addition, several envelope market segments and certain segments of
the direct mail market experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
Seasonality is offset by the diversity of our other products and
markets, which are not materially affected by seasonal conditions.
24
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
NEW ACCOUNTING PRONOUNCEMENTS
We are required to adopt certain new accounting pronouncements. See
Notes 1 and 2 to our condensed consolidated financial statements included
herein.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. We make available free of
charge through our website our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after such documents are
filed electronically with the Securities and Exchange Commission. In
addition, our earnings conference calls are archived for replay on our
website and presentations to securities analysts are also included on our
website.
LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and can be
estimated. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of our
operations and our financial position. Risks from interest and foreign
currency exchange rate fluctuations are managed through normal operating
and financing activities. We do not utilize derivatives for speculative
purposes.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is LIBOR plus a margin. At June 30, 2006, we had variable rate debt
outstanding of approximately $111 million, of which the interest rate was
not fixed through cash flow hedges. A 1% increase in LIBOR on debt
outstanding subject to variable interest rates would increase our interest
expense and reduce our net income by approximately $1.1 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. In the
three months ended June 30, 2006, a uniform 10% strengthening of the U.S.
dollar relative to the Canadian dollar would have resulted in a decrease in
sales and operating income of approximately $1.5 million and $0.1 million,
respectively. In the six months ended June 30, 2006, a uniform 10%
strengthening of the U.S. dollar relative to the Canadian dollar would have
resulted in a decrease in sales and operating income of approximately $6.8
million and $0.9 million, respectively. The effects of foreign currency
exchange rates on future results would also be impacted by changes in sales
levels or local currency prices.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and our Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer
have
25
concluded that, as of the end of such period, our disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under
the Exchange Act was recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
made during our most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
There are inherent limitations in the effectiveness of any control
system, including the potential for human error and the circumvention or
overriding of the controls and procedures. Additionally, judgments in
decision-making can be faulty and breakdowns can occur because of simple
error or mistake. An effective control system can provide only reasonable,
not absolute, assurance that the control objectives of the system are
adequately met. Accordingly, our management, including our Chairman and
Chief Executive Officer and our Chief Financial Officer, does not expect
that our control system can prevent or detect all error or fraud. Finally,
projections of any evaluation or assessment of effectiveness of a control
system to future periods are subject to the risks that, over time, controls
may become inadequate because of changes in an entity's operating
environment or deterioration in the degree of compliance with policies or
procedures.
26
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31,
2005, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 5, 2006, the Company held its Annual Meeting of Sharholders, at
which the following matters were voted upon:
Election of Directors - The following individuals were re-elected to
the board of Directors by the following vote:
-----------------------------------------------------------------------------------------------------
NAME FOR WITHHELD
-----------------------------------------------------------------------------------------------------
Robert G. Burton, Sr. 42,544,498 6,236,000
-----------------------------------------------------------------------------------------------------
Patrice M. Daniels 42,223,504 6,556,994
-----------------------------------------------------------------------------------------------------
Leonard C. Green 42,223,604 6,556,894
-----------------------------------------------------------------------------------------------------
Mark J. Griffin 42,223,604 6,556,894
-----------------------------------------------------------------------------------------------------
Robert T. Kittel 42,140,421 6,640,077
-----------------------------------------------------------------------------------------------------
Robert B. Obernier 47,904,525 875,973
-----------------------------------------------------------------------------------------------------
Thomas W. Oliva 42,544,873 6,235,625
-----------------------------------------------------------------------------------------------------
Selection of Auditors - The selection by the Audit Committee of Ernst &
Young LLP as independent auditors of the Company for the fiscal year ending
December 31, 2006 was ratified by the following vote: 47,948,719 For;
440,102 Against; 391,678 Abstentions.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Acquisition Agreement, dated as of March 17, 2006, among Supremex
Income Fund, Cenveo Corporation and Cenveo, Inc.--incorporated by
reference to Exhibit 2.1 to registrant's quarterly report on Form
10-Q for the quarter ended March 31, 2006.
3.1 Articles of Incorporation--incorporated by reference to Exhibit
3(i) of the registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1997.
3.2 Articles of Amendment to the Articles of Incorporation dated May
17, 2004--incorporated by reference to Exhibit 3.2 to registrant's
quarterly report on Form 10-Q for the quarter ended June 30, 2004.
3.3 Amendment to Articles of Incorporation and Certificate of
Designations of Series A Junior Participating Preferred Stock of
the Company dated April 20, 2005--incorporated by reference to
Exhibit 3.1 to Cenveo Inc.'s current report on Form 8-K filed with
the SEC on April 21, 2005.
27
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.4 Bylaws as amended and restated effective April 17,
2005--incorporated by reference to Exhibit 3.2 to registrant's
current report on Form 8-K filed with the SEC on April 18, 2005.
4.1 Indenture dated as of March 13, 2002 between Mail-Well I
Corporation and State Street Bank and Trust Company, as Trustee
relating to Mail-Well I Corporation's $350,000,000 aggregate
principal amount of 9 5/8% Senior Notes due 2012--incorporated by
reference to Exhibit 10.30 to registrant's quarterly report on Form
10-Q for the quarter ended March 31, 2002.
4.2 Form of Senior Note and Guarantee relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of
9 5/8% Senior Notes due 2012--incorporated by reference to
Exhibit 10.31 to registrant's quarterly report on Form 10-Q
for the quarter ended March 31, 2002.
4.3 Second Supplemental Indenture, dated June 1, 2006, by and
among Cenveo Corporation, the Guarantors named therein and
US Bank National Association, as trustee, to the Indenture
dated as of March 13, 2002 relating to the 9 5/8% Senior
Notes due 2012--incorporated by reference to Exhibit 4.1 to
registrant's current report on Form 8-K dated (date of
earliest event reported) June 1, 2006 and filed with the SEC
on June 2, 2006.
4.4 Indenture dated as of February 4, 2004 between Mail-Well I
Corporation and U.S. Bank National Association, as Trustee,
and Form of Senior Subordinated Note and Guarantee relating
to Mail-Well I Corporation's $320,000,000 aggregate
principal amount of 7 7/8% Senior Subordinated Notes due
2013--incorporated by reference to Exhibit 4.5 to
registrant's annual report on Form 10-K for the year ended
December 31, 2003.
4.5 Registration Rights Agreement dated February 4, 2004,
between Mail-Well I Corporation and Credit Suisse First
Boston, as Initial Purchaser, relating to Mail-Well I
Corporation's $320,000,000 aggregate principal amount of
7 7/8% Senior Subordinated Notes due 2013--incorporated by
reference to Exhibit 4.6 to registrant's annual report on
Form 10-K for the year ended December 31, 2003.
4.6 Supplemental Indenture, dated as of June 21, 2006 among
Cenveo Corporation, the Guarantors named therein and U.S.
Bank National Association, as Trustee, to the Indenture
dated as of February 4, 2004 relating to the 7 7/8% Senior
Subordinated Notes due 2013--incorporated by reference to
Exhibit 4.2 to registrant's current report on Form 8-K dated
(date of earliest event reported) June 21, 2006 and filed
with the SEC on June 27, 2006.
10.1 Underwriting Agreement dated March 17, 2006, among TD
Securities Inc., CIBC World Markets Inc. and the other
Underwriters signatory thereto, Supremex Income Fund,
Supremex Inc., Cenveo Corporation and Cenveo,
Inc.--incorporated by reference to Exhibit 10.30 to
registrant's quarterly report on Form 10-Q for the quarter
ended March 31, 2006.
10.2 Form of Indemnity Agreement between Mail-Well, Inc. and each
of its officers and directors--incorporated by reference
from Exhibit 10.17 of Mail-Well, Inc.'s Registration
Statement on Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. 401(k) Savings Retirement
Plan--incorporated by reference from Exhibit 10.20 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.4+ Form of M-W Corp. Employee Stock Ownership Plan effective as
of February 23, 1994 and related Employee Stock Ownership
Plan Trust Agreement--incorporated by reference from Exhibit
10.19 of Mail-Well, Inc.'s Registration Statement on Form
S-1 dated March 25, 1994.
28
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.5+ Form of Mail-Well, Inc. Incentive Stock Option
Agreement--incorporated by reference from Exhibit 10.22 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.6+ Form of Mail-Well, Inc. Nonqualified Stock Option
Agreement--incorporated by reference from Exhibit 10.23 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.7+ 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s quarterly
report on Form 10-Q for the quarter ended March 31, 1997.
10.8+ Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive
Stock Option Agreement--incorporated by reference from
Exhibit 10.59 to Mail-Well, Inc.'s quarterly report on Form
10-Q for the quarter ended March 31, 1998.
10.9+ Mail-Well, Inc. 2001 Long-Term Equity Incentive
Plan--incorporated by reference from the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2001.
10.10+ Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from Mail-Well, Inc.'s quarterly report on Form 10-Q for the
quarter ended June 30, 2001.
10.11+ Form of Incentive Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from Mail-Well, Inc.'s quarterly report on Form 10-Q for the
quarter ended June 30, 2001.
10.12+ Form of Restricted Stock Award Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from Mail-Well, Inc.'s quarterly report on Form 10-Q for the
quarter ended June 30, 2001.
10.13+ Form of Restricted Share Unit Award Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
to Exhibit 10.13 of registrant's annual report on Form 10-K
filed for the year ended December 31, 2005.
10.14+ Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as
amended--incorporated by reference to Exhibit 10.24 to
registrant's quarterly report on Form 10-Q for the quarter
ended June 30, 2004.
10.15+ Form of Executive Severance Agreement entered into between
the Company and certain of its executive
officers--incorporated by reference to Exhibit 10.27 of
registrant's annual report on Form 10-K filed the year ended
December, 2002.
10.16+ Form of Amended and Restated Severance Agreement between the
registrant and certain of its executives--incorporated by
reference to Exhibit 10.2 to the registrant's current report
on Form 8-K dated (date of earliest event reported)
September 9, 2005 and filed with the SEC on September 15,
2005.
10.17 Settlement and Governance Agreement by and among the
registrant, Burton Capital Management and Robert G. Burton,
Sr., dated September 9, 2005--incorporated by reference to
Exhibit 10.1 to the registrant's current report on Form 8-K
dated (date of earliest event reported) September 9, 2005
and filed with the SEC on September 12, 2005.
10.18+ Employment Agreement dated as of October 27, 2005 between
the registrant and Robert G. Burton, Sr.--incorporated by
reference to Exhibit 10.29 of registrant's annual report on
Form 10-K filed for the year ended December 31, 2005.
10.19+* Employment Agreement dated as of June 22, 2006 between the
registrant and Thomas Oliva.
29
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.20+* Employment Agreement dated as of June 22, 2006 between the
registrant and Sean Sullivan.
10.21+* Employment Agreement dated as of June 22, 2006 between the
registrant and Harry Vinson.
10.22+* Employment Agreement dated as of June 22, 2006 between the
registrant and Timothy Davis.
10.23 Credit Agreement dated as of June 21, 2006 among Cenveo
Corporation, Cenveo, Inc., Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, and
the other lenders party thereto--incorporated by reference
to Exhibit 4.2 to registrant's current report on Form 8-K
dated (date of earliest event reported) June 21, 2006 and
filed with the SEC on June 27, 2006.
31.1* Certification by Robert G. Burton, Sr., Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2* Certification by Sean S. Sullivan, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished as an exhibit to this
report on Form 10-Q.
-------------
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Englewood, state of Colorado, on August 9, 2006.
CENVEO, INC.
By: /s/ ROBERT G. BURTON, SR.
---------------------------------
Robert G. Burton, Sr.
Chairman and Chief Executive
Officer (Principal Executive
Officer)
By: /s/ SEAN S. SULLIVAN
---------------------------------
Sean S. Sullivan
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
31