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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 MARCH 31, 2007
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 /X/ Accelerated filer / / 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 May 1, 2007 the registrant had 53,685,107 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)
(UNAUDITED)
MARCH 31, 2007 DECEMBER 31, 2006
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 7,887 $ 10,558
Accounts receivable, net............................... 286,603 230,098
Inventories............................................ 135,485 92,406
Assets held for sale................................... 6,112 51,966
Prepaid and other current assets....................... 34,141 41,413
---------- ----------
Total current assets............................... 470,228 426,441
Property, plant and equipment, net......................... 382,598 251,103
Goodwill................................................... 538,587 258,136
Other intangible assets, net............................... 170,327 31,985
Other assets, net.......................................... 27,979 34,285
---------- ----------
Total assets........................................... $1,589,719 $1,001,950
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 10,818 $ 7,513
Accounts payable....................................... 145,321 116,067
Accrued compensation and related liabilities........... 64,159 40,242
Other current liabilities.............................. 82,729 63,609
---------- ----------
Total current liabilities.......................... 303,027 227,431
Long-term debt............................................. 1,108,141 667,782
Deferred income taxes...................................... 25,227 4,356
Other liabilities.......................................... 75,735 40,640
Commitments and contingencies (Notes 3, 9 and 11)
Shareholders' equity:
Preferred stock........................................ -- --
Common stock........................................... 535 535
Paid-in capital........................................ 247,345 244,894
Retained deficit....................................... (167,746) (186,436)
Accumulated other comprehensive (loss) income.......... (2,545) 2,748
---------- ----------
Total shareholders' equity......................... 77,589 61,741
---------- ----------
Total liabilities and shareholders' equity............. $1,589,719 $1,001,950
========== ==========
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
MARCH 31,
-----------------------
2007 2006
-------- --------
Net sales................................................... $414,714 $385,286
Cost of sales............................................... 331,490 309,644
Selling, general and administrative......................... 49,484 51,014
Amortization of intangible assets........................... 1,830 1,298
Restructuring and impairment charges........................ 2,625 13,476
-------- --------
Operating income........................................ 29,285 9,854
Loss on sale of non-strategic business...................... -- 706
Interest expense, net....................................... 16,282 18,114
Loss on early extinguishment of debt........................ 8,700 --
Other expense, net.......................................... 222 219
-------- --------
Income (loss) from continuing operations before income
taxes................................................. 4,081 (9,185)
Income tax expense (benefit)................................ 1,684 (337)
-------- --------
Income (loss) from continuing operations................ 2,397 (8,848)
Income from discontinued operations, net of taxes........... 16,293 121,050
-------- --------
Net income.............................................. $ 18,690 $112,202
======== ========
Income (loss) per share - basic:
Continuing operations............................... $ 0.04 $ (0.17)
Discontinued operations............................. 0.31 2.28
-------- --------
Net income.......................................... $ 0.35 $ 2.11
======== ========
Income (loss) per share - diluted:
Continuing operations............................... $ 0.04 $ (0.17)
Discontinued operations............................. 0.30 2.28
-------- --------
Net income.......................................... $ 0.34 $ 2.11
======== ========
Weighted average shares:
Basic............................................... 53,525 53,109
Diluted............................................. 54,572 53,109
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
--------- ---------
Cash flows from operating activities:
Net income.............................................. $ 18,690 $ 112,202
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of discontinued operations, net of
taxes............................................. (16,287) (115,637)
Income from discontinued operations, net of
taxes............................................. (6) (5,413)
Depreciation and amortization, excluding
amortization of deferred financing costs.......... 11,766 10,649
Amortization of deferred financing costs............ 379 618
Loss on early extinguishment of debt................ 8,700 --
Stock-based compensation provision.................. 2,265 1,140
Non-cash restructuring and impairment charges....... (473) 3,787
Loss on sale of non-strategic business.............. -- 706
Deferred income taxes............................... 1,621 --
Other non-cash charges, net......................... 1,431 1,233
Changes in operating assets and liabilities, excluding
the effects of acquired businesses:
Accounts receivable................................. 9,102 2,399
Inventories......................................... (4,868) (1,754)
Accounts payable and accrued compensation and
related liabilities............................... (1,545) 14,850
Other working capital changes....................... 4,201 (8,265)
Other, net.......................................... 3,312 (4,450)
--------- ---------
Net cash provided by continuing operating
activities.................................... 38,288 12,065
Net cash provided by discontinued operating
activities.................................... -- 2,617
--------- ---------
Net cash provided by operating activities....... 38,288 14,682
Cash flows from investing activities:
Cost of business acquisitions, net of cash
acquired.......................................... (329,300) --
Capital expenditures................................ (7,115) (5,502)
Acquisition payments................................ -- (4,653)
Proceeds from sale of property, plant and
equipment......................................... 2,347 326
--------- ---------
Net cash used in investing activities of
continuing operations......................... (334,068) (9,829)
Proceeds from the sale of discontinued operations... 67,228 119,380
Capital expenditures for discontinued operations.... -- (632)
--------- ---------
Net cash provided by investing activities of
discontinued operations....................... 67,228 118,748
--------- ---------
Net cash (used in) provided by investing
activities.................................... (266,840) 108,919
Cash flows from financing activities:
Repayment of Term Loan B............................ (324,188) --
Repayment of Cadmus revolving senior bank credit
facility.......................................... (70,100) --
Repayment of 8 3/8% senior subordinated notes....... (20,875) --
Repayments of senior secured revolving credit
facility.......................................... -- (123,931)
Repayments of other long-term debt.................. (166) (436)
Payment of refinancing fees, redemption premiums and
expenses.......................................... (7,489) --
Payment of debt issuance costs...................... (886) --
Proceeds from issuance of Term Loans................ 620,000 --
Borrowings under revolving credit facility, net..... 29,400 --
Proceeds from exercise of stock options............. 185 1,110
--------- ---------
Net cash provided by (used in) financing
activities.................................... 225,881 (123,257)
Effect of exchange rate changes on cash and cash equivalents
of discontinued operations................................ -- 15
--------- ---------
Net (decrease) increase in cash and cash
equivalents................................... (2,671) 359
Cash and cash equivalents at beginning of year.............. 10,558 1,035
--------- ---------
Cash and cash equivalents at end of quarter................. $ 7,887 $ 1,394
========= =========
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 month period ended
March 31, 2007. The results of operations for the three month period ended
March 31, 2007 are generally not indicative of the results to be expected
for the full year, primarily due to the Company's acquisition of Cadmus
Communications Corporation ("Cadmus") and of PC Ink Corp. ("Printegra") in
the first quarter of 2007 (Note 3), the increase in the Company's
outstanding debt as a result of such acquisitions (Note 9) 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, 2006 (the "Form 10-K").
It is 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 weeks ended on March
31, 2007 and April 1, 2006, are reported as ending on March 31, 2007 and
2006, respectively, since the effect of a reporting period not ending on
these dates is not material.
Beginning in the fourth quarter of 2006, the financial results of
Supremex and certain other assets ("Supremex") sold were accounted for as a
discontinued operation, resulting in the Company's historical condensed
consolidated statements of operations and statements of cash flows being
reclassified to reflect such discontinued operations separately from
continuing operations (Notes 4 and 12).
New Accounting Pronouncements
FIN 48
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)
("FIN 48"). FIN 48 clarifies 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. As a result of the adoption of FIN 48, the Company did not record
an adjustment to its liability for unrecognized income tax benefits or
retained deficit. As of January 1, 2007, the Company had approximately
$10.8 million of unrecognized tax benefits, of which approximately $0.4
million will reduce its effective tax rate if recognized. As of March 31,
2007, the Company had approximately $19.2 million of unrecognized tax
benefits. The Company has elected to recognize interest and penalties
related to uncertain tax positions in income tax expense. As of March 31,
2007, the Company had approximately $1.4 million of accrued interest and
penalties related to uncertain tax positions. The Company does not believe
that it is reasonably possible that its unrecognized tax benefits will
change significantly in the next twelve months.
The Internal Revenue Service ("IRS") has reviewed the Company's federal
income tax returns through 2002. The Company's federal income tax returns
for tax years after 2002 remain subject to
4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
examination by the IRS. The various states in which the Company is subject to
income tax are generally open for the tax years after 2002. In Canada, the
Company remains subject to audit for the tax years after 2002. The Company
does not believe that the outcome of any examination will have a material
impact on its condensed consolidated financial statements.
EITF 06-3
Effective January 1, 2007, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities should be Presented in the Income
Statement - That is, Gross versus Net Presentation ("EITF 06-3"). The task
force concluded that either method is acceptable; however, if taxes are
reported on a gross basis (included in sales) a company should disclose
those amounts, if significant. The Company records sales net of applicable
sales tax. The adoption of EITF 06-3 did not have a significant effect on
the Company's condensed consolidated statements of operations.
SFAS 157
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157
defines fair value and establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about
fair value measurement. SFAS 157 is effective for the Company beginning on
January 1, 2008. The Company is currently evaluating the potential effect
SFAS 157 will have on its condensed consolidated financial statements.
SFAS 159
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items of fair value.
The objective is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is expected to expand
the use of fair value measurement, which is consistent with the FASB's
long-term measurement objectives for accounting for financial instruments.
SFAS 159 is effective for the Company beginning on January 1, 2008. The
Company is currently evaluating the potential effect SFAS 159 will have on
its condensed consolidated financial statements.
2. STOCK-BASED COMPENSATION
The Company did not issue any form of stock-based compensation in the
first quarter of 2007. In addition, none of the Company's stock-based
compensation awards vested in the first quarter of 2007. The only change to
the Company's stock based compensation awards from the amounts presented as
of December 31, 2006, was the exercise of 19,925 stock options for shares
of the Company's common stock and the cancellation of 40,000 stock options.
See Notes 1 and 12 in the Form 10-K.
Total stock-based compensation expense recognized in selling, general
and administrative expenses in the Company's condensed consolidated
statements of operations was $2.3 million and $1.1 million for the three
months ended March 31, 2007 and 2006, respectively.
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS
Cadmus
On March 7, 2007, the Company completed the acquisition of all of the
common stock of Cadmus for $24.75 per share, by merging an indirect wholly
owned subsidiary of Cenveo with and into Cadmus. As a result, Cadmus became
an indirect wholly owned subsidiary of Cenveo. Following the merger, Cadmus
was merged into Cenveo Corporation, a wholly owned subsidiary of the Company.
Cadmus is one of the world's largest providers of content management and
production services to scientific, technical and medical journal publishers,
one of the largest periodicals printers in North America, and a leading
provider of specialty packaging and promotional printing services, with annual
sales of approximately $450 million. The total cash consideration in
connection with the Cadmus acquisition is estimated to be approximately $249.0
million, consisting of: (1) $228.9 million in cash for all of the common stock
of Cadmus, (2) payments of $17.6 million for the vested portion of stock
options and restricted shares of Cadmus stock and for change in control
provisions of Cadmus' incentive plans and (3) $2.5 million of related
expenses. The value of the vested portion of the options and restricted shares
of Cadmus represents the fair value of the total options and restricted shares
based on $24.75, less the intrinsic value of the nonvested portion of the
options and restricted shares related to future service of the employees.
The common stock of Cadmus, which traded under the symbol "CDMS",
ceased trading on, and was delisted from, the NASDAQ Global Market.
In connection with the Cadmus acquisition, the Company refinanced its
existing indebtedness and $70.1 million of Cadmus debt (Note 9).
The following table summarizes, on a preliminary basis, the allocation
of the purchase price of Cadmus to the assets acquired and liabilities
assumed in the Cadmus acquisition and remains subject to finalization due
to the recent date of the acquisition (in thousands):
Preliminary Purchase Price Allocation
AS OF
MARCH 7, 2007
-------------
Current assets........................................ $ 91,709
Property, plant and equipment......................... 132,922
Goodwill.............................................. 241,726
Other intangible assets............................... 112,700
Other assets.......................................... 5,224
--------
Total assets acquired............................. 584,281
Current liabilities, excluding current portion of
long-term debt...................................... 67,663
Long-term debt, including current maturities.......... 210,063
Deferred income taxes................................. 20,134
Other liabilities..................................... 37,459
--------
Total liabilities assumed......................... 335,319
Net assets acquired................................... 248,962
Less, cash acquired................................... --
--------
Cost of Cadmus acquisition, less cash acquired.... $248,962
========
The Cadmus acquisition has preliminarily resulted in $241.7 million of
goodwill (Note 8), none of which is deductible for income tax purposes, and
was assigned entirely to the Company's commercial printing segment. Such
goodwill reflects the substantial value of Cadmus' historically profitable
journal, periodicals and specialty packaging printing business and the
Company's expectation of being able to
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS (CONTINUED)
grow Cadmus' business and to improve operating efficiencies through economies
of scale. The acquired identifiable intangible assets, aggregating $112.7
million, include: (1) the Cadmus trademark of $48.0 million, which has been
assigned an indefinite life due to its strong brand recognition and the
Company's intention to continue using the Cadmus name, the long operating
history of Cadmus, its existing customer base and its significant market
position, (2) customer relationships of $64.7 million which are being
amortized, and (3) unfavorable leases of $3.2 million which are being
amortized as a reduction to rent expense. Each of the above amounts, including
the amounts in the above table, represents the fair value of the respective
plant, property and equipment and other intangible assets, as determined in
accordance with a preliminary independent appraisal. The acquired customer
relationships have a currently estimated weighted average amortization period
of approximately 20 years and the unfavorable leases have a currently
estimated weighted average amortization period of approximately 11 years
(Note 8).
Cadmus' results of operations and cash flows subsequent to the March 7,
2007 acquisition date have been included in the Company's condensed
consolidated statements of operations and cash flows for the three months
ended March 31, 2007, as applicable, but are not included for the three
months ended March 31, 2006. In this regard, net sales of Cadmus commencing
with the Company's acquisition on March 7, 2007 were $32.5 million for the
three months ended March 31, 2007.
Pro Forma Operating Data
The following supplemental pro forma condensed consolidated summary
operating data of the Company for each of the periods presented herein has
been prepared by adjusting the historical data as set forth in the
accompanying condensed consolidated statements of operations to give effect
to the Cadmus acquisition as if it had been consummated as of the beginning
of each respective year (in thousands except per share amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2007 MARCH 31, 2006
----------------------- -----------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- -------- -------- --------
Net sales.................................... $414,714 $496,531 $385,286 $501,754
Operating income............................. 29,285 30,311 9,854 6,921
Income (loss) from continuing operations..... 2,397 (3,588) (8,848) (7,698)
Net income................................... 18,690 12,705 112,202 113,352
Income (loss) per share - basic:
Continuing operations.................... $ 0.04 $ (0.07) $ (0.17) $ (0.15)
Discontinued operations.................. 0.31 0.31 2.28 2.28
-------- -------- -------- --------
Net income............................... $ 0.35 $ 0.24 $ 2.11 $ 2.13
======== ======== ======== ========
Income (loss) per share - diluted:
Continuing operations.................... $ 0.04 $ (0.07) $ (0.17) $ (0.15)
Discontinued operations.................. 0.30 0.31 2.28 2.28
-------- -------- -------- --------
Net income............................... $ 0.34 $ 0.24 $ 2.11 $ 2.13
======== ======== ======== ========
The pro forma information is presented for comparative purposes only
and does not purport to be indicative of the Company's actual condensed
consolidated results of operations had the Cadmus acquisition actually been
consummated as of the beginning of each of the respective years noted above
or of the Company's expected future results of operations.
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS (CONTINUED)
Printegra
On February 12, 2007, the Company completed the acquisition of all of
the common stock of Printegra, with annual sales of approximately $90
million. Printegra produces printed business communication documents,
including laser cut sheets, envelopes, business forms, security documents,
and labels, which are regularly consumed by small and large businesses. The
aggregate purchase price paid for Printegra by the Company was
approximately $78.5 million, which includes $0.7 million of related fees.
The fair values of property, plant and equipment and other intangible
assets were determined in accordance with a preliminary independent
appraisal. The Printegra acquisition has preliminarily resulted in $37.3
million of goodwill, of which approximately $4.4 million is deductible for
income tax purposes and was assigned entirely to the Company's envelopes,
forms and labels segment. The acquired identifiable intangible assets,
aggregating $27.5 million, include: (1) customer relationships of $21.5
million which are being amortized over their current estimated weighted
average useful lives of 25 years; and (2) trademarks of $6.0 million, which
are being amortized over their current estimated weighted average useful
lives of approximately 17 years (Note 8).
Printegra's results of operations and cash flows have been included in
the accompanying condensed consolidated statements of operations and cash
flows from the February 12, 2007 acquisition date, but are not included for
the three months ended March 31, 2006. Pro forma results for the three
month period ended March 31, 2007 and 2006, assuming the acquisition of
Printegra had been made on January 1, 2006, have not been presented since
the effect is not material.
Deferred Taxes
The Company's acquisition of Cadmus resulted in an increase to its
deferred tax liabilities of approximately $20.1 million relating to
indefinite lived intangible assets. In connection with the Company's
acquisition of Printegra, it recorded a net deferred tax liability of $8.1
million and released existing valuation allowances of a like amount against
goodwill recorded in accordance with SFAS No. 109, Accounting for Income
Taxes.
Liabilities Related to Exit Activities
In connection with the acquisition of Cadmus and Printegra, the Company
recorded approximately $6.5 million of liabilities to involuntary terminate
certain employees and for lease termination costs in connection with its
preliminary plan to exit certain activities (Note 10).
Operating Lease Commitments
In connection with the Cadmus and Printegra acquisitions, the Company's
obligation for future minimum rental payments for non-cancelable operating
leases, as set forth in the Form 10-K, increased by approximately $58
million, which are estimated to be payable over the five years ending March 31,
2012 and thereafter as follows: $8.8 million, $8.5 million, $7.0 million, $4.9
million, $4.7 million, thereafter-$24.4 million.
4. DISCONTINUED OPERATIONS
On March 13, 2007, the Company completed the sale of its remaining
28.6% economic and voting interest in the Supremex Income Fund (the "Fund")
for net proceeds of $67.2 million and recorded a pre-tax gain of
approximately $26.5 million. Income from discontinued operations for the
three months ended March 31, 2007 also includes equity income of $1.3
million related to the Company's retained interest in the Fund from January
1, 2007 through the March 13, 2007 date of sale.
On March 31, 2006, the Company sold to the Fund all of the shares of
Supremex and retained a 36.5% economic interest in the Fund. Income from
discontinued operations for the three months
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCONTINUED OPERATIONS (CONTINUED)
ended March 31, 2006 includes the $124.1 million pre-tax gain on the March
31, 2006 sale of Supremex to the Fund and the results of operations of
Supremex from January 1, 2006 to March 31, 2006, the date of sale.
The following table summarizes certain statement of operations data for
discontinued operations (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
------- --------
Net sales.................................... $ -- $ 41,391
Operating income............................. -- 8,838
Other income................................. 1,300 --
Income tax expense........................... 1,294 3,503
Gain on sale of discontinued operations, net
of taxes of $10,196 and $8,420 in 2007 and
2006, respectively......................... 16,287 115,637
Income from discontinued operations, net of
taxes...................................... 16,293 121,050
5. OTHER DIVESTITURES
During the first quarter of 2006, the Company sold a small
non-strategic commercial printing business in Bloomfield Hills, Michigan
and recorded a loss on sale of non-strategic business of $0.7 million on
its condensed consolidated statements of operations.
From April 1, 2006 through December 31, 2006, the Company sold two
other small non-strategic commercial printing businesses in Somerville,
Massachusetts and Memphis, Tennessee. The following table summarizes the
net sales and operating income of the three businesses that were sold
during 2006, which are included in the condensed consolidated statements of
operations (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
------- --------
Net sales.................................... $ -- $ 5,463
Operating income............................. -- 863
The dispositions of these non-strategic businesses have not been
accounted for as discontinued operations in the condensed consolidated
financial statements, since either the Company has continuing involvement
with these entities, migration of cash flows to other Cenveo locations has
occurred, or the operations are not material.
6. INVENTORIES
Inventories by major category are as follows (in thousands):
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Raw materials............................. $ 45,494 $ 28,247
Work in process........................... 38,229 21,638
Finished goods............................ 51,762 42,521
-------- --------
$135,485 $ 92,406
======== ========
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows (in thousands):
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Land and land improvements............................. $ 22,437 $ 13,562
Buildings and improvements............................. 105,703 80,740
Machinery and equipment................................ 514,499 437,910
Furniture and fixtures................................. 12,313 10,771
Construction in progress............................... 13,532 6,974
--------- ---------
668,484 549,957
Accumulated depreciation................................ (285,886) (298,854)
--------- ---------
Property, plant and equipment, net...................... $ 382,598 $ 251,103
========= =========
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reportable segment
(Note 14) are as follows (in thousands):
ENVELOPES, FORMS COMMERCIAL
AND LABELS PRINTING TOTAL
---------------- ---------- --------
Balance as of December 31, 2006............... $165,672 $ 92,464 $258,136
Acquisitions.............................. 37,292 243,130 280,422
Foreign currency translation.............. -- 29 29
-------- -------- --------
Balance as of March 31, 2007.................. $202,964 $335,623 $538,587
======== ======== ========
Other intangible assets are as follows (in thousands):
MARCH 31, 2007 DECEMBER 31, 2006
---------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
Intangible assets with
determinable lives:
Customer relationships........ $116,106 $(14,569) $101,537 $29,906 $(13,001) $16,905
Trademarks and tradenames..... 20,521 (2,635) 17,886 14,551 (2,487) 12,064
Patents....................... 3,028 (1,286) 1,742 3,028 (1,218) 1,810
Non-compete agreements........ 1,640 (1,628) 12 1,640 (1,591) 49
Other......................... 768 (338) 430 768 (331) 437
-------- -------- -------- ------- -------- -------
142,063 (20,456) 121,607 49,893 (18,628) 31,265
Intangible assets with indefinite
lives:
Trademarks.................... 48,000 -- 48,000 -- -- --
Pollution credits............. 720 -- 720 720 -- 720
-------- -------- -------- ------- -------- -------
Total..................... $190,783 $(20,456) $170,327 $50,613 $(18,628) $31,985
======== ======== ======== ======= ======== =======
As of March 31, 2007, the weighted average remaining amortization
period for customer relationships was 20 years, trademarks and tradenames
was 24 years, patents was seven years, and other was 27 years.
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Total pre-tax amortization expense for the five years ending March 31,
2012 is estimated to be as follows: $10.3 million, $5.9 million, $5.9
million, $5.9 million and $5.9 million, respectively.
9. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
MARCH 31, DECEMBER 31,
2007 2006
------------- ------------
Term Loans, due 2013................................... $ 620,000 $324,188
7 7/8% Senior Subordinated Notes, due 2013............. 320,000 320,000
8 3/8% Senior Subordinated Notes, due 2014 ($104.1
million outstanding principal amount)................ 106,468 --
9 5/8% Senior Notes, due 2012.......................... 10,498 10,498
Revolving Credit Facility, due 2012.................... 44,900 15,500
Other.................................................. 17,093 5,109
---------- --------
1,118,959 675,295
Less current maturities................................ (10,818) (7,513)
---------- --------
Long-term debt......................................... $1,108,141 $667,782
========== ========
Debt Amendment and Refinancing
On March 7, 2007, in connection with the Cadmus acquisition (Note 3),
the Company amended and refinanced its $525 million senior secured credit
facilities (the "Credit Facilities"). The Credit Facilities, established in
June 2006, were comprised of a $200 million six-year revolving credit
facility ("Revolving Credit Facility") and a $325 million seven-year term
loan facility ("Term Loan B"). The Credit Facilities were amended by
increasing the overall borrowing availability from $525 million to $925
million (the "Amended Credit Facilities"), providing for the Company to:
(1) retire the Term Loan B, (2) acquire Cadmus with a $600 million six-year
term loan facility ("Term Loan C"), including retiring and extinguishing
the Cadmus revolving senior bank credit facility which had an outstanding
balance of $70.1 million, and (3) retire any and/or all of Cadmus' $125
million 8 3/8% Senior Subordinated Notes, due 2014 ("8 3/8% Notes") using a
$125 million delayed-draw term loan facility (collectively with the Term
Loan C, the "Term Loans"). The Company also borrowed approximately $48
million from the Revolving Credit Facility to fund a portion of the Cadmus
acquisition. Several of the customary financial covenants within the
Amended Credit Facilities, including maximum consolidated leverage ratio
and minimum consolidated interest coverage ratio, were modified to provide
for the incremental funded debt levels and larger company operations. The
Amended Credit Facilities are secured by substantially all of the Company's
assets, including those of Cadmus. The Company capitalized debt issue costs
of approximately $0.9 million, which are being amortized over the remaining
life of the Amended Credit Facilities.
In connection with the Amended Credit Facilities, the Company recorded
a loss on early extinguishment of debt of $8.4 million, which includes $6.7
million of related fees and the write-off of $1.7 million of unamortized
debt issue costs.
Interest rate swaps
On March 21, 2007, the Company entered into interest rate swap
agreements to hedge interest rate exposure for an additional $125 million
notional amount of floating rate debt, bringing the Company's total hedge
of its interest rate exposure of notional floating rate debt to $345
million. The
11
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Company's hedges of interest rate risk were designated and documented at
inception as cash flow hedges and are evaluated for effectiveness at least
quarterly. Effectiveness of the hedges is calculated by comparing the fair
value of the derivatives to hypothetical derivatives that would be a
perfect hedge of floating rate debt. 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 March
31, 2007, the Company does not anticipate reclassifying any ineffectiveness
into its results of operations for the next twelve months.
Cadmus Debt
On March 5, 2007, the Company commenced a cash tender offer and consent
solicitation (the "Cadmus Tender Offer") for any and all of the outstanding
8 3/8% Notes at total consideration equal to 101.5% of outstanding
principal plus any accrued and unpaid interest thereon for 8 3/8% Notes
validly tendered and not withdrawn by March 16, 2007. Interest on the
8 3/8% Notes is payable semi-annually on June 15 and December 15 with no
required principal payments prior to maturity on June 15, 2014. In
connection with the acquisition of Cadmus, the Company recorded a $2.8
million increase to the value of the 8 3/8% Notes to record them at their
fair value (Note 3).
In connection with the acquisition of Cadmus, the Company entered into a
supplemental indenture, dated March 7, 2007, to the indenture of the 8 3/8%
Notes dated June 15, 2004, among Cadmus, each of the subsidiary guarantors (as
defined therein) and U.S. Bank National Association (as successor trustee to
Wachovia Bank, National Association), as trustee, pursuant to which the 8 3/8%
Notes were issued. This supplemental indenture provides for, among other
things, the assumption by the Company of the obligations of Cadmus under the 8
3/8% Notes and such indenture and the addition of other U.S. subsidiaries of
the Company as guarantors of these notes. Simultaneously, the Company entered
into a supplemental indenture, dated March 7, 2007, to the indenture dated
February 4, 2004 among the Company, the guarantors named therein and U.S. Bank
National Association, as trustee, pursuant to which the Company's 7 7/8%
Senior Subordinated Notes, due 2013 (the "7 7/8% Notes") were issued. This
supplemental indenture provides for, among other things, the addition of the
U.S. subsidiaries of Cadmus as guarantors of the 7 7/8% Notes.
On March 19, 2007, the Company accepted for purchase and paid
approximately $20.9 million for the 8 3/8% Notes tendered in the Cadmus
Tender Offer, using $20 million of delayed-draw term loan funding under the
Amended Credit Facilities and cash on hand. In connection with the 8 3/8%
Notes tendered, the Company recorded a loss on early extinguishment of debt
of approximately $0.3 million, which included $0.8 million of tender
premiums and tender-related expenses and the write-off of $0.5 million of
the fair value increase to the 8 3/8% Notes recorded in connection with the
Cadmus acquisition. The merger of Cadmus into Cenveo was a "change of
control" of Cadmus under the 8 3/8% Notes indenture. On March 23, 2007 and in
connection with the foregoing change of control, the Company extended the
scheduled expiration of the Cadmus Tender Offer until April 18, 2007, modified
the offer to purchase each 8 3/8% Note tendered for a price equal to 101% of
outstanding principal plus any accrued and unpaid interest, and waived the
consent-related conditions previously set forth (the "Change of Control
Offer"). On April 23, 2007, the Company settled payment on all 8 3/8% Notes
tendered under the Change of Control Offer, and terminated the remaining
amount of the delayed draw-term facility under the Amended Credit Facilities.
Other debt includes $12.2 million of equipment term loans assumed in
connection with the acquisition of Cadmus, which have variable interest
rates.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
9 5/8% Senior Notes
On May 4, 2007, the Company retired the remaining $10.5 million of its
9 5/8% Senior Notes due 2012 for 104.813% of the principal amount plus
accrued interest, which was funded with our Revolving Credit Facility.
As of March 31, 2007, the Company was in compliance with all covenants
under its debt agreements.
10. RESTRUCTURING AND IMPAIRMENT CHARGES
In September 2005, the senior management team of Cenveo implemented a
cost savings and restructuring plan that included the consolidation of the
Company's purchasing activities and manufacturing platform, corporate and
field human resources reductions, streamlining information technology
infrastructure and eliminating all discretionary spending. The following
tables and discussion present the details of the expenses recognized in the
first quarter of 2007 and 2006 as a result of this restructuring plan.
2007 ACTIVITY
Restructuring and impairment charges for the three months ended March
31, 2007 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
------- ------ ----- ------
Employee separation costs............... $ 702 $ 663 $ 18 $1,383
Asset impairments, net of gain on
sale.................................. (608) 135 -- (473)
Equipment moving expenses............... 536 112 -- 648
Lease termination expenses.............. 19 66 30 115
Building clean-up and other expenses.... 113 817 22 952
------- ------ ----- ------
Total restructuring and impairment
charges........................... $ 762 $1,793 $ 70 $2,625
======= ====== ===== ======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
incurred employee separation costs of $0.3 million related to workforce
reductions, asset impairments, net of $(0.6) million which primarily
relates to the gain on sale of a facility, equipment moving expenses of
$0.5 million for the redeployment of equipment and building clean-up and
other expenses of $0.1 million related to the locations that were closed
during 2006. The segment incurred employee separation costs of $0.4 million
related to workforce reductions at other locations relating to the
Company's cost savings initiatives.
COMMERCIAL PRINTING. The commercial printing segment incurred employee
separation costs of $0.3 million related to workforce reductions, asset
impairment charges of $0.1 million for equipment taken out of service,
equipment moving expenses of $0.1 million for the redeployment of equipment
and $0.8 million of building clean-up and other expenses related to
locations closed in 2006 and 2005. The segment incurred employee separation
costs of $0.4 million related to workforce reductions at other locations
relating to the Company's cost savings initiatives.
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RESTRUCTURING AND IMPAIRMENT CHARGES (CONTINUED)
2006 ACTIVITY
Restructuring and impairment charges for the three months ended March
31, 2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
------- ------- ------ -------
Employee separation costs.............. $ 2,238 $ 3,938 $ 555 $ 6,731
Asset impairments...................... 1,865 45 -- 1,910
Equipment moving expenses.............. 770 1,103 -- 1,873
Lease termination expenses............. 1,877 -- -- 1,877
Building clean-up and other expenses... 175 910 -- 1,085
------- ------- ------ -------
Total restructuring and impairment
charges.......................... $ 6,925 $ 5,996 $ 555 $13,476
======= ======= ====== =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed manufacturing plants in Denver, Colorado, and Kankakee, Illinois and
an office location in Chicago, Illinois in the first quarter of 2006. As a
result of these closures, the segment recorded impairment charges of $0.6
million related to equipment taken out of service at these locations,
employee separation costs of $1.3 million related to workforce reductions,
and equipment moving and other related expenses of $0.6 million. In
addition, the segment recorded lease termination expenses of $1.9 million
representing the net present value of the cost that are not expected to be
recovered over the remaining terms of three leased facilities no longer in
use.
The segment recorded impairment charges of $0.6 million related to
equipment to be taken out of service and incurred $0.1 million in equipment
moving expenses related to additional plant closures in 2006.
The segment incurred impairment charges of $0.7 million related to
equipment taken out of service and equipment moving and other expenses of
$0.2 million related to two plants closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $0.9 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. The commercial printing segment closed a plant in
Denver, Colorado and a plant in Phoenix, Arizona in the first quarter of
2006. In connection with the closures, the segment recorded employee
separation costs of $1.2 million, moving expenses of $0.2 million and
building clean-up and other expenses of $0.2 million.
The segment incurred employee separation costs of $1.3 million, moving
expenses of $0.9 million for the redeployment of equipment and building
clean-up and other expenses of $0.7 million for three plants closed in the
fourth quarter of 2005.
The segment incurred employee separation costs of $1.4 million 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. During the
first quarter of 2006, the Company incurred additional employee separation
costs of $0.6 million related to these changes.
14
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RESTRUCTURING AND IMPAIRMENT CHARGES (CONTINUED)
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, 2006........... $ 5,541 $ 1,427 $642 $ 7,610
Accruals, net...................... 3,998 4,019 -- 8,017
Payments........................... (1,157) (1,021) (30) (2,208)
------- ------- ---- -------
Balance at March 31, 2007.............. $ 8,382 $ 4,425 $612 $13,419
======= ======= ==== =======
11. PENSION PLANS
The components of the net periodic pension expense for the Company's
pension plans and other post retirement benefit plans (including those
assumed in connection with the Cadmus acquisition, see below) are as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2007 2006
------- -------
Service cost........................................... $ 69 $ 42
Interest cost.......................................... 1,111 317
Expected return on plan assets......................... (925) (176)
Net amortization and deferral.......................... 175 69
------- -------
Net periodic pension expense........................... $ 430 $ 252
======= =======
As of March 31, 2007, the Company had made contributions of $0.3
million to its pension plans. The Company expects to contribute $11.4
million to its pension plans and postretirement plans for the remainder of
2007.
Cadmus Pension and Other Postretirement Plans
In connection with the acquisition of Cadmus, the Company assumed
certain defined benefit pension plans including participating in one
multi-employer retirement plan that provides defined benefits to associates
covered under two collective bargaining agreements. The Company also
assumed certain nonqualified, nonfunded supplemental pension plans for
certain key executives. For these supplemental plans, the Company maintains
certain life insurance policies on former key executives which are intended
to defray costs and obligations under such plans. All such defined benefit
plans provide benefit payments using formulas based on an associate's
compensation and length of service, or stated amounts for each year of
service. Prior to the Company's acquisition of Cadmus, the benefits under
the Cadmus pension plans, except for one plan, were frozen to mitigate the
volatility in pension expense and required cash contributions expected in
future years. Based on preliminary actuarial data, the Cadmus pension plans
were under-funded by approximately $34.1 million, which liability is
included in the Company's March 31, 2007 condensed consolidated balance
sheet.
Cadmus also maintained separate postretirement benefit plans (medical
and life insurance) for certain of its former associates. Certain Cadmus
associates are eligible for retiree medical coverage for themselves and their
spouses if they retire on, or after attaining age 55 with ten or more years of
service. Benefits differ depending upon the date of retirement. Based on
preliminary actuarial data, the Cadmus postretirement plans were under-funded
by approximately $2.7 million, which liability is included in the Company's
March 31, 2007 condensed consolidated balance sheet.
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMPREHENSIVE INCOME
A summary of comprehensive income is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
2007 2006
------- --------
Net income............................................. $18,690 $112,202
Other comprehensive income (loss):
Minimum pension liability adjustment.............. -- 6,004
Unrealized gain on cash flow hedges............... 94 --
Currency translation adjustment................... (5,387) (15,422)
------- --------
Comprehensive income................................... $13,397 $102,784
======= ========
In connection with the sale of its remaining investment in the Fund on
March 13, 2007 (Note 4), the Company reclassified $5.5 million of currency
translation adjustment into discontinued operations from other
comprehensive income. In connection with the sale of Supremex to the Fund
in the first quarter of 2006 (Note 4), the Company reclassified $6.0
million of a minimum pension liability adjustment and $14.3 million of
currency translation adjustment relating to the business sold into
discontinued operations from other comprehensive income.
13. 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 under the treasury stock method. The only Company securities
as of March 31, 2007 that could dilute basic income per share for periods
subsequent to March 31, 2007 are: (1) outstanding stock options which are
exercisable into 3,266,855 shares of the Company's common stock and (2)
757,150 shares of restricted stock and restricted stock units ("RSU's").
16
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME (LOSS) PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
income (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
------- --------
Numerator for basic and diluted income (loss) per share
Income (loss) from continuing operations............ $ 2,397 $ (8,848)
Income from discontinued operations, net of taxes... 16,293 121,050
------- --------
Net income.......................................... $18,690 $112,202
======= ========
Denominator weighted average common shares outstanding:
Basic shares........................................ 53,525 53,109
Dilutive effect of stock options and RSU's...... 1,047 --
------- --------
Diluted shares...................................... 54,572 53,109
======= ========
Income (loss) per share - basic:
Continuing operations............................... $ 0.04 $ (0.17)
Discontinued operations............................. 0.31 2.28
------- --------
Net income (loss)................................... $ 0.35 $ 2.11
======= ========
Income (loss) per share - diluted:
Continuing operations............................... $ 0.04 $ (0.17)
Discontinued operations............................. 0.30 2.28
------- --------
Net income.......................................... $ 0.34 $ 2.11
======= ========
14. SEGMENT INFORMATION
The Company operates in two segments--the envelope, forms and labels
segment and the commercial printing segment. The 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 generally sold to third-party dealers such as print
distributors, office products suppliers, office-products retail chains and
the U.S. retail pharmacy market. The commercial printing segment is in the
business of designing, manufacturing and distributing printed products that
include advertising literature, corporate identity materials, financial
printing, journals, magazines, calendars, greeting cards, brand marketing
materials, catalogs, maps, specialty packaging and direct mail.
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 (Note 2).
17
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
The following tables present certain segment information (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2007 2006
---------- ------------
Net sales:
Envelopes, forms and labels......................... $ 211,470 $ 192,355
Commercial printing................................. 203,244 192,931
---------- ----------
Total............................................... $ 414,714 $ 385,286
========== ==========
Operating income (loss):
Envelopes, forms and labels......................... $ 28,435 $ 15,773
Commercial printing................................. 9,630 327
Corporate........................................... (8,780) (6,246)
---------- ----------
Total............................................... $ 29,285 $ 9,854
========== ==========
Restructuring, impairment and other charges:
Envelopes, forms and labels......................... $ 762 $ 6,925
Commercial printing................................. 1,793 5,996
Corporate........................................... 70 555
---------- ----------
Total............................................... $ 2,625 $ 13,476
========== ==========
Net sales by product line:
Envelopes........................................... $ 144,358 $ 146,539
Commercial printing................................. 176,040 191,893
Journals and magazines.............................. 26,431 --
Labels and business forms........................... 67,885 46,854
---------- ----------
Total............................................... $ 414,714 $ 385,286
========== ==========
Intercompany sales:
Envelopes, forms and labels to commercial
printing.......................................... $ 2,966 $ 3,522
Commercial printing to envelopes, forms and
labels............................................ 2,632 4,979
---------- ----------
Total............................................... $ 5,598 $ 8,501
========== ==========
MARCH 31, DECEMBER 31,
2007 2006
---------- -------------
Identifiable assets:
Envelopes, forms and labels......................... $ 573,250 $ 496,379
Commercial printing................................. 971,419 393,954
Corporate........................................... 45,050 111,617
---------- ----------
Total............................................... $1,589,719 $1,001,950
========== ==========
18
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 condensed
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, 2006. Item 7 of
our 2006 Annual Report on Form 10-K, which we refer to as our Form 10-K,
describes the application of our critical accounting policies for which
there have been no significant changes as of March 31, 2007. On March 7,
2007, we acquired Cadmus Communications Corporation, which we refer to as
Cadmus, and on February 12, 2007, we acquired PC Ink Corp., which we refer
to as Printegra. See "Acquisitions" and "Long-Term Debt" below.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements generally can be identified by the
use of terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate," "plan," "foresee," "believe" or "continue" and similar
expressions, or as other statements that do not relate solely to historical
facts. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that could cause actual
results to differ materially from what is expressed or forecasted in these
forward-looking statements. In view of such uncertainties, investors should
not place undue reliance on our forward-looking statements. Such statements
speak only as of the date they were made, and we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from
management's expectations include, without limitation: (1) our substantial
indebtedness impairing our financial condition and limiting our ability to
incur additional debt; (2) the terms of our indebtedness imposing
significant restrictions on our operating and financial flexibility; (3)
the potential to incur additional indebtedness, further exacerbating the
above factors; (4) cross default provisions in our indebtedness, which
could cause all of our debt to become due and payable as a result of a
default under an unrelated debt instrument; (5) our ability to successfully
integrate acquisitions; (6) intense competition in our industry; (7) the
absence of long-term customer agreements in our industry, subjecting our
business to fluctuations; (8) factors affecting the U.S. postal services
impacting demand for our products; (9) increases in paper costs and
decreases in its availability; (10) our history of losses from continuing
operations and the ability to return to consistent profitability; (11) the
availability of the Internet and other electronic media affecting demand
for our products; (12) our labor relations; (13) compliance with
environmental rules and regulations; (14) dependence on key management
personnel; and (15) general economic, business and labor conditions. This
list of factors is not exhaustive, and new factors may emerge or changes to
the foregoing factors may occur that would impact the Company's business.
Additional information regarding these and other factors can be found
elsewhere in this report and in our other filings with the SEC.
BUSINESS OVERVIEW
We are a leading provider of print and visual communications, with
one-stop services from design through fulfillment. According to Printing
Impressions, after the acquisition of Cadmus and Printegra, we are the
third largest diversified printing company in North America.
ACQUISITIONS. Printegra is a leading producer of printed business
communication documents, labels and envelopes regularly used by small and
large businesses. With the acquisition of Printegra, we have increased our
offering of products to our existing base of customers, by including
short-run documents, labels, and envelope products. At the same time,
customers of Printegra are now able to access our broad offering of
products and services. Printegra's operations are included within our
envelopes,
19
forms and labels segment results since the date of the acquisition. See
Note 3 to the condensed consolidated financial statements included herein.
Cadmus is one of the world's largest providers of content management
and print services to scientific, technical and medical journal publishers,
and one of the largest periodicals printer in North America, and a leading
provider of specialty packaging and promotional printing services. We
believe that when fully integrated, the addition of Cadmus will create
significant benefits for us. For example, we expect to realize significant
economies of scale resulting from our increased volume of business that
will enable us to purchase raw materials, primarily paper and ink and other
supplies, on more favorable terms and ensure better availability of these
materials in tight markets. The operations of Cadmus are included within
our commercial printing segment results since the date of the acquisition.
See Note 3 to the condensed consolidated financial statements included
herein.
BUSINESS SEGMENTS. We operate our businesses in two complimentary
reportable segments: envelopes, forms and labels and commercial printing.
Our broad portfolio of products and services includes envelopes, forms and
labels, specialty packaging, business documents, commercial printing,
journals and magazines, provided through a network of over 60 production,
fulfillment and distribution facilities, which we refer to as manufacturing
facilities, primarily throughout North America.
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 produces
business forms and labels, custom and stock envelopes and mailers generally
sold to third-party dealers such as print distributors, office-products
suppliers, office-products retail chains and the U.S. retail pharmacy
market.
COMMERCIAL PRINTING. Our commercial printing segment is in the business
of designing, manufacturing and distributing printed products that include
advertising literature, corporate identity materials, financial printing,
journals, magazines, calendars, greeting cards, brand marketing materials,
catalogs, maps, specialty packaging and direct mail.
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 month period ended March 31, 2007 followed by a discussion of the
results of each of our business segments for the same period. Our results
for the first quarter of 2007 include the operating results of both Cadmus
and Printegra subsequent to their respective acquisition dates. Since these
acquisitions occurred during the first quarter of 2007 and the results of
the acquisitions are not included for a full quarter, we expect that our
net sales and operating income in future quarters and for the year will
increase relating to these acquisitions. See Note 3 to the condensed
consolidated financial statements included herein. Beginning in the fourth
quarter of 2006, the financial results of Supremex Inc., and certain other
assets, which we refer to as Supremex, have been accounted for as a
discontinued operation, resulting in our historical 2006 condensed
consolidated statements of operations and statements of cash flows being
reclassified to reflect such discontinued operations separately from
continuing operations. On March 13, 2007, we completed the sale of our
remaining 28.6% economic and voting interest in the Supremex Income Fund,
which we refer to as the Fund. See Note 4 to the condensed consolidated
financial statements included herein.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income. See
Segment Operations below for a summary of net sales and operating income of
our reportable segments that we use internally to assess our operating
performance. Division net sales exclude sales of divested operations, and
division operating income excludes corporate expenses, restructuring and
impairment charges and the results of divested operations. Our fiscal
quarters end 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 weeks ended on March 31, 2007 and April 1, 2006, are reported as
ending on
20
March 31, 2007 and 2006, respectively, since the effect of a reporting
period not ending on these dates is not material.
THREE MONTHS ENDED
MARCH 31,
-----------------------
2007 2006
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
---------------------
Division net sales.......................................... $414,714 $379,823
Divested operations..................................... -- 5,463
-------- --------
Net sales................................................... $414,714 $385,286
======== ========
Division operating income................................... $ 40,620 $ 29,884
Corporate expenses...................................... 8,710 5,691
Restructuring and impairment charges.................... 2,625 13,476
Divested operations..................................... -- 863
-------- --------
Operating income............................................ 29,285 9,854
Loss on sale of non-strategic businesses................ -- 706
Interest expense, net................................... 16,282 18,114
Loss on early extinguishment of debt.................... 8,700 --
Other expense, net...................................... 222 219
-------- --------
Loss from continuing operations before income taxes......... 4,081 (9,185)
Income tax expense (benefit)............................ 1,684 (337)
-------- --------
Income (loss) from continuing operations.................... 2,397 (8,848)
Income from discontinued operations, net of taxes....... 16,293 121,050
-------- --------
Net income.................................................. $ 18,690 $112,202
======== ========
Income (loss) per share--basic:
Continuing operations................................... $ 0.04 $ (0.17)
Discontinued operations................................. 0.31 2.28
-------- --------
Net income.............................................. $ 0.35 $ 2.11
======== ========
Income (loss) per share--diluted:
Continuing operations................................... $ 0.04 $ (0.17)
Discontinued operations................................. 0.30 2.28
-------- --------
Net income.............................................. $ 0.34 $ 2.11
======== ========
NET SALES
Net sales increased $29.4 million in the first quarter of 2007, as
compared to the first quarter of 2006. This increase was primarily due to
the $57.6 million of sales resulting from the acquisition of Cadmus and
Printegra in the first quarter of 2007 and Rx Technology Corporation, which
we refer to as Rx, in July 2006, with no corresponding amounts in the first
quarter of 2006, offset in part by lower sales from our commercial printing
segment of $22.1 million, primarily due to plant closures, non-strategic
businesses sold in 2006, and lower sales at our ongoing plants and lower
sales from our envelopes, forms and labels segment of $6.1 million,
primarily due to lower volume. See Segment Operations below for a more
detailed discussion of the primary factors for our net sales changes.
21
OPERATING INCOME
Operating income increased $19.4 million in the first quarter of 2007,
as compared to the first quarter of 2006. This increase was primarily due
to decreased restructuring and impairment charges of $10.9 million and
operating income of $4.0 million in the first quarter of 2007 resulting
from the acquisition of Cadmus, Printegra and Rx, with no corresponding
amounts in the first quarter of 2006. See Segment Operations below for a
more detailed discussion of the primary factors for our operating income
changes for our segments.
CORPORATE EXPENSES. Corporate expenses include the costs of our
corporate headquarters. Corporate expenses were higher in the first quarter
of 2007, as compared to the first quarter of 2006, primarily due to certain
back-office functions moving to the corporate office in Stamford,
Connecticut, and increased compensation expense, including the expense
recorded under Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment. See Note 2 to the condensed consolidated financial
statements included herein.
RESTRUCTURING AND IMPAIRMENT CHARGES. We continue to execute on our
cost savings programs initiated in 2005, 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 information technology
infrastructure. See Note 10 to the consolidated financial statements
included herein. As of March 31, 2007, our total restructuring liability
was $13.4 million.
During the first quarter of 2007, we incurred $2.6 million of
restructuring and impairment charges, which include $1.4 million of
employee separation costs, asset impairments, net of $(0.5) million which
includes the gain on sale of a facility of $(0.6) million, equipment moving
expenses of $0.6 million, lease termination costs of $0.1 million and
building clean-up and other expenses of $1.0 million.
During the first quarter of 2006, we incurred $13.5 million of
restructuring and impairment charges, which included $6.7 million of
employee separation costs, $1.9 million of asset impairments, equipment
moving expenses of $1.9 million, lease termination costs of $1.9 million
and building clean-up and other expenses of $1.1 million.
LOSS ON SALE OF NON-STRATEGIC BUSINESSES. During the first quarter of
2006, we sold a small non-strategic commercial printing business and
recorded a loss on sale of non-strategic business of $0.7 million.
INTEREST EXPENSE, NET. Interest expense decreased approximately $1.8
million to $16.3 million in the first quarter of 2007, from $18.1 million
in the first quarter of 2006, primarily due to lower interest rates
resulting from our debt refinancing in June 2006. Interest expense in the
first quarter of 2007 reflects average outstanding debt of $817.1 million
and a weighted average interest rate of 7.6%, compared to average
outstanding debt of $815.9 million and a weighted average interest rate of
8.4% in the first quarter of 2006. We expect higher interest expense for
the remainder of 2007, as a result of our increased debt level resulting
from the acquisition of Cadmus and Printegra. See Long-Term Debt below and
Note 9 to the condensed consolidated financial statements included herein.
LOSS ON EARLY EXTINGUISHMENT OF DEBT. In connection with the Cadmus
acquisition and the refinancing of our existing credit facilities on March
7, 2007, we incurred a loss on early extinguishment of debt of
approximately $8.4 million. In addition, as a result of the tender offer
and repayment on March 19, 2007 of $20.9 million of Cadmus' 8 3/8% Senior
Subordinated Notes, due 2014, which we refer to as the 8 3/8% Notes, we
recorded a loss on early extinguishment of debt of approximately $0.3
million. See Long-Term Debt below and Note 9 to the condensed consolidated
financial statements included herein.
22
INCOME TAXES
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
------- -----
(IN THOUSANDS)
--------------
Income tax expense (benefit) for U.S. operations............ $ 1,424 $(337)
Income tax expense for foreign operations................... 260 --
------- -----
Income tax expense (benefit)................................ $ 1,684 $(337)
======= =====
Effective income tax rate................................... 41.26% 3.7%
======= =====
In the first quarter of 2007, we had income tax expense of $1.7
million, which primarily relates to $1.4 million of taxes on our domestic
operations. In the first quarter of 2006, we had an income tax benefit of
$0.3 million, which was primarily related to the loss from continuing
operations from our domestic operations. Our effective tax rate in the
first quarter of 2007 was higher than the first quarter of 2006, primarily
due to the release of valuation allowances during the first quarter of
2006. Our effective tax rate in the first quarter of 2007 was higher than
the statutory rate, primarily due to state taxes and other permanent items.
We assess the recoverability of our deferred tax assets and, based upon
this assessment, record a valuation allowance against the deferred tax
assets to the extent recoverability does not satisfy the "more likely than
not" recognition criteria in Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. We consider our recent operating
results and anticipated future taxable income in assessing the need for our
valuation allowance. As of March 31, 2007, the total valuation allowance on
our net U.S. deferred tax assets was approximately $75 million.
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES. Income from
discontinued operations, net of taxes, in the first quarter of 2007,
includes the $16.3 million gain on sale of our remaining interest in the
Fund, and equity income related to our retained interest of the Fund from
January 1, 2007 through March 13, 2007, the date of sale. Income from
discontinued operations, net of taxes, in the first quarter of 2006
includes the gain on the sale of our majority interest in Supremex on March
31, 2006 of $115.7 million, and Supremex's results of operations from
January 1, 2006 to March 31, 2006. See Note 4 to the condensed consolidated
financial statements included herein.
SEGMENT OPERATIONS
Our Chief Executive Officer monitors the performance of the ongoing
operations of our two reportable segments. We assess performance based on
division net sales and division operating income. The summaries of net
sales and operating income of our two segments have been presented to show
each segment without the net sales of divested operations, as applicable,
and to show the operating income of each segment without the results of
divested operations and excluding restructuring and impairment charges. Net
sales and operating income of operations divested and restructuring and
impairment charges are included in the tables below to reconcile segment
net sales and operating income reported in Note 14 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
MARCH 31,
-------------------------
2007 2006
-------- --------
(IN THOUSANDS)
--------------
Segment net sales........................................... $211,470 $192,355
======== ========
Segment operating income.................................... $ 28,435 $ 15,773
Restructuring and impairment charges.................... 762 6,925
-------- --------
Division operating income................................... $ 29,197 $ 22,698
======== ========
Division operating income margin............................ 13.8% 11.8%
23
SEGMENT NET SALES
Segment net sales for our envelopes, forms and labels segment increased
$19.1 million, or 9.9%, in the first quarter of 2007, as compared to 2006.
This increase was primarily due to $25.1 million of sales resulting from
the acquisition of Printegra and Rx, with no corresponding amounts in the
first quarter of 2006, and $3.8 million from increased sales volume to our
office product retail customers. These increases were offset in part by:
(1) lower sales volume from our envelope business of $6.1 million and (2)
lower sales from our traditional documents business of $3.1 million mainly
as a result of customers' improved capabilities to print high quality
documents on their own.
DIVISION OPERATING INCOME
Division operating income of the envelopes, forms and labels segment
increased $6.5 million, or 28.6%, in the first quarter of 2007, as compared
to 2006. This increase was primarily due to $2.9 million of operating
income resulting from the acquisition of Printegra and Rx and reduced
selling, general and administrative expenses of $3.1 million from plant
consolidations and other cost reduction programs.
COMMERCIAL PRINTING
THREE MONTHS ENDED
MARCH 31,
-----------------------
2007 2006
-------- --------
(IN THOUSANDS)
--------------
Segment net sales........................................... $203,244 $192,931
Divested operations..................................... -- (5,463)
-------- --------
Division net sales.......................................... $203,244 $187,468
======== ========
Segment operating income.................................... $ 9,630 $ 327
Restructuring and impairment charges.................... 1,793 5,996
Divested operations..................................... -- 863
-------- --------
Division operating income................................... $ 11,423 $ 7,186
======== ========
Division operating income margin............................ 5.6% 3.8%
DIVISION NET SALES
Division net sales of the commercial printing segment increased $15.8
million, or 8.4%, in the first quarter of 2007, as compared to 2006. This
increase was primarily due to the acquisition of Cadmus, which contributed
sales of $32.5 million subsequent to the acquisition date, offset in part
by lower sales of $10.7 million from plants that were closed in 2006 and a
decline in sales at our ongoing plants of $6.1 million primarily due to the
downsizing of one plant in 2006.
DIVISION OPERATING INCOME
Division operating income of the commercial printing segment increased
$4.2 million, or 59.0%, in the first quarter of 2007, as compared to 2006.
This increase was primarily due to: (1) $1.8 million of increased gross
margins from our ongoing printing operations, (2) $1.4 million of cost
savings from plants that we closed in 2006 along with other cost reduction
programs reducing selling, general and administrative expenses, and (3)
$1.0 million of operating income resulting from the Cadmus acquisition.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES. Net cash provided
by continuing operating activities was $38.3 million in the first quarter
of 2007, which was primarily due to net income adjusted for non-cash items
of $28.1 million and a decrease in our working capital of $6.9 million. The
decrease
24
in our working capital primarily resulted from increased cash collections
of accounts receivable from our customers, offset in part by an increase in
inventories due to the timing of work performed for our customers.
Net cash provided by continuing operating activities was $12.1 million
in the first quarter of 2006, which was primarily due to net income
adjusted for non-cash items of $9.3 million and a decrease in our working
capital of $7.2 million, primarily resulting from the timing of payments to
our vendors.
NET CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES. Represents the
net cash provided from the operations of Supremex.
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES. Net cash used in
investing activities was $266.8 million in the first quarter of 2007,
primarily resulting from the acquisition cost of Cadmus and Printegra of
$329.3 million and capital expenditures of $7.1 million, offset in part by
$67.2 million of cash proceeds from the sale of our remaining interest in
the Fund.
Net cash provided by investing activities was $108.9 million in the
first quarter of 2006, primarily resulting from the cash proceeds of $119.4
million from the sale of our majority interest in Supremex, offset in part
by capital expenditures of $6.1 million and deferred payments of $4.7
million related to acquisitions.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by
financing activities was $225.9 million in the first quarter of 2007,
primarily due to our debt financed acquisition of Cadmus (see Debt
Amendment and Refinancing below) with proceeds from our Term Loans of $620
million and net borrowings under our revolving credit facility of $29.4
million, offset in part by the repayment of: (i) our Term Loan B of $324.2
million, (ii) the Cadmus revolving senior bank credit facility of $70.1
million, and (iii) $20.9 million of 8 3/8% Notes.
Net cash used in financing activities was $123.3 million in the first
quarter of 2006, primarily resulting from the repayment of $123.9 million
of our senior secured credit facility with proceeds from the sale of
Supremex.
LONG-TERM DEBT. Our total outstanding long-term debt, including current
maturities, was $1.1 billion at March 31, 2007, an increase of $443.7
million from December 31, 2006. This increase was primarily due to the
acquisition of Cadmus and Printegra in the first quarter of 2007. See Debt
Amendment and Refinancing below and Notes 3 and 9 to the condensed
consolidated financial statements included herein. As of March 31, 2007,
approximately 70% of our outstanding debt was subject to fixed interest
rates. As of April 30, 2007, we had $61 million outstanding under our
revolving credit facility.
Debt Amendment and Refinancing
On March 7, 2007, in connection with the Cadmus acquisition, we amended
and refinanced our $525 million senior secured credit facilities, which we
refer to as the Credit Facilities. The Credit Facilities, established in
June 2006, were comprised of a $200 million six-year revolving credit
facility, which we refer to as the Revolving Credit Facility, and a $325
million seven-year term loan facility, which we refer to as the Term Loan
B. The Credit Facilities were amended by increasing the overall borrowing
availability from $525 million to $925 million, which we refer to as the
Amended Credit Facilities, provided that we: (1) retire the Term Loan B,
(2) acquire Cadmus with a $600 million six-year term loan facility, which
we refer to as the Term Loan C, including retiring and extinguishing the
Cadmus revolving senior bank credit facility which had an outstanding
balance of $70.1 million, and (3) retire any and/or all of Cadmus' $125
million 8 3/8% Notes using a $125 million delayed-draw term loan facility,
which, collectively with the Term Loan C, we refer to as the Term Loans. We
also borrowed approximately $48 million from the Revolving Credit Facility
to fund a portion of the Cadmus acquisition. Several of the customary
financial covenants within the Amended Credit Facilities, including maximum
consolidated leverage ratio and minimum consolidated interest coverage
ratio, were modified to provide for the incremental funded debt levels and
larger company operations. The Amended Credit Facilities are secured by
substantially all of our assets, including those of Cadmus.
25
Cadmus Debt
On March 5, 2007, we commenced a cash tender offer and consent
solicitation, which we refer to as the Cadmus Tender Offer, for any and all
of the outstanding 8 3/8% Notes at total consideration equal to 101.5% of
outstanding principal plus any accrued and unpaid interest thereon for
8 3/8% Notes validly tendered and not withdrawn by March 16, 2007. Interest on
the 8 3/8% Notes is payable semi-annually on June 15 and December 15 with no
required principal payments prior to maturity on June 15, 2014.
In connection with the acquisition of Cadmus, we entered into
a supplemental indenture, dated March 7, 2007, to the indenture of the
8 3/8% Notes dated June 15, 2004, among Cadmus, each of the subsidiary
guarantors (as defined therein) and U.S. Bank National Association (as
successor trustee to Wachovia Bank, National Association), as trustee,
pursuant to which the 8 3/8% Notes were issued. This supplemental indenture
provides for, among other things, the assumption by us of the obligations
of Cadmus under the 8 3/8% Notes and such indenture and the addition of
other U.S. subsidiaries of ours as guarantors of these notes.
Simultaneously, we entered into a supplemental indenture, dated March 7,
2007, to the indenture dated February 4, 2004 among us, the guarantors
named therein and U.S. Bank National Association, as trustee, pursuant to
which our 7 7/8% Senior Subordinated Notes, due 2013, which we refer to as
the 7 7/8% Notes, were issued. This supplemental indenture provides for,
among other things, the addition of the U.S. subsidiaries of Cadmus as
guarantors of the 7 7/8% Notes.
On March 19, 2007, we accepted for purchase and paid approximately
$20.9 million for the 8 3/8% Notes tendered in the Cadmus Tender Offer,
using $20 million of delayed-draw term loan funding under the Amended Credit
Facilities and cash on hand. The merger of Cadmus into Cenveo was a "change
of control" of Cadmus under the 8 3/8% Notes indenture. On March 23, 2007
and in connection with the foregoing change of control, we extended the
scheduled expiration of the Cadmus Tender Offer until April 18, 2007, modified
the offer to purchase each 8 3/8% Note tendered for a price equal to 101% of
outstanding principal plus any accrued and unpaid interest, and waived the
consent-related conditions previously set forth, which we refer to as the
Change of Control Offer. On April 23, 2007, we settled payment on all 8 3/8%
Notes tendered under the Change of Control Offer, and terminated the remaining
amount of the delayed-draw term loan facility under the Amended Credit
Facilities.
We also assumed $12.2 million of equipment term loans in connection
with the acquisition of Cadmus, which have variable interest rates.
9 5/8% Senior Notes
On May 4, 2007, we retired the remaining $10.5 million of our 9 5/8%
Senior Notes due 2012 for 104.813% of the principal amount plus accrued
interest, which was funded with our Revolving Credit Facility. As a result
of the retirement, the corresponding credit ratings were withdrawn.
As of March 31, 2007, we were in compliance with all covenants under
our debt agreements.
On March 31, 2007 we had outstanding letters of credit of approximately
$29.6 million and a de minimis amount of surety bonds related to
performance and payment guarantees. Based on our experience with these
arrangements, we do not believe that any obligations that may arise will be
significant. In addition, we had an outstanding letter of credit of $0.8
million issued in support of other debt, which debt we retired on April 2,
2007 and extinguished the letter of credit.
Our current credit ratings are as follows:
CORPORATE CREDIT 7 7/8% 8 3/8%
RATING AGENCY RATING FACILITIES NOTES NOTES LAST UPDATE
----------------------------------- ---------- ---------- ------ ------ -----------
Standard & Poor's.................. B+ B+ B- B- April 2007
Moody's............................ B1 Ba3 B3 B3 April 2007
The terms of our existing debt do not have any rating triggers that
impact our funding. Upon expiration of the Change of Control Offer and our
termination of the remaining funding availability
26
under the delayed-draw term loan facility under the Amended Credit Facilities,
the rating agencies lowered the ratings of the 8 3/8% Notes to rank pari passu
with the 7 7/8% Notes. We do not believe that our current ratings will impact
our ability to raise additional capital, should such funds be needed.
We expect that internally generated cash flow, including cash flow from
Cadmus and Printegra, and the financing available under our Amended Credit
Facilities will be sufficient to fund our working capital needs and
short-term growth; however, this cannot be assured.
CONTRACTUAL OBLIGATIONS. Contractual obligations previously disclosed in
our Form 10-K increased by approximately $757 million as a result of the
acquisition of Cadmus and Printegra, including an increase in our
outstanding long-term debt of approximately $441 million, expected future
cash interest payments on the long-term debt of approximately $258 million
and additional lease commitments of approximately $58 million. See Notes 3
and 9 to the condensed consolidated financial statements included herein.
OFF-BALANCE SHEET ARRANGEMENTS. It is not our business practice to enter
into off-balance sheet arrangements. Accordingly, as of March 31, 2007, we
do not have any off-balance sheet arrangements.
SEASONALITY
Our commercial printing plants experience seasonal variations. Revenues
from annual reports are generally concentrated from February through April.
Revenues associated with consumer publications, such as holiday catalogs
and automobile brochures, tend to be concentrated from July through
October. Revenues associated with the educational and scholarly market and
promotional materials tend to decline in the summer. As a result of these
seasonal variations, some of our commercial printing operations operate at
or near capacity at certain times throughout the year.
In addition, several envelope market segments and certain segments of
the direct mail market experience seasonality with a higher percentage of
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.
NEW ACCOUNTING PRONOUNCEMENTS
We are required to adopt certain new accounting pronouncements. See
Note 1 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 are involved in litigation that we consider to be
ordinary and incidental to our business. While the outcome of pending legal
actions cannot be predicted with certainty, we believe the outcome of these
proceedings will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest rates, which
may adversely affect results of our operations and our financial position.
Risks from interest 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 rate on this
debt is the London Interbank Offered Rate or LIBOR plus a margin. At March
31, 2007, we had variable rate debt outstanding of approximately $332.8
million, for which the interest rate was not fixed through a cash flow
hedge. A 1% increase in LIBOR on debt outstanding subject to variable
interest rates would increase our annual interest expense and reduce our
pre-tax income by approximately $3.3 million.
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 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
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error
and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls
is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Projections of any evaluation of controls effectiveness to future periods
are subject to risks. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with
policies or procedures.
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,
2006, 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.
28
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement of Merger dated as of December 26, 2006 among
Cenveo, Inc., Mouse Acquisition Corp. and Cadmus
Communications Corporation--incorporated by reference to
Exhibit 2.1 to registrant's current report on Form 8-K filed
December 27, 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 Registrant dated April 20, 2005--incorporated by
reference to Exhibit 3.1 to registrant's current report on
Form 8-K filed April 21, 2005.
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 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 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 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 as of June 1, 2006, by and
among Cenveo Corporation, the Guarantors named therein and
U.S. 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 filed 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 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 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 (f/k/a Mail-Well I 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 filed June 27, 2006.
4.7* Third Supplemental Indenture, dated as of March 7, 2007 among
Cenveo Corporation (f/k/a Mail-Well I 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--filed herewith.
29
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.8 Indenture, dated as of June 15, 2004, among Cadmus
Communications Corporation, the Guarantors named therein and
Wachovia Bank, National Association, as Trustee, relating to
the 8 3/8% Senior Subordinated Notes due 2014--incorporated
by reference to Exhibit 4.9 to Cadmus Communications
Corporation's registration statement on Form S-4 filed
August 24, 2004.
4.9 First Supplemental Indenture, dated as of March 1, 2005, to
the Indenture dated as of June 15, 2004, among Cadmus
Communications Corporation, the Guarantors named therein and
Wachovia Bank, National Association, as Trustee, relating to
the 8 3/8% Senior Subordinated Notes due 2014--incorporated
by reference to Exhibit 4.9.1 to Cadmus Communications
Corporation's quarterly report on Form 10-Q for the quarter
ended March 31, 2005, filed May 13, 2005.
4.10 Second Supplemental Indenture, dated as of May 19, 2006, to
the Indenture dated as of June 15, 2004, among Cadmus
Communications Corporation, the Guarantors named therein and
U.S. Bank National Association (successor to Wachovia Bank,
National Association), as Trustee, relating to the 8 3/8%
Senior Subordinated Notes due 2014--incorporated by
reference to Exhibit 4.9.2 to Cadmus Communications
Corporation's annual report on Form 10-K for the year ended
June 30, 2006, filed September 13, 2006.
4.11* Third Supplemental Indenture, dated as of March 7, 2007, to
the Indenture dated as of June 15, 2004, among Cenveo
Corporation (as successor to Cadmus Communications
Corporation), the Guarantors named therein and U.S. Bank
National Association (successor to Wachovia Bank, National
Association), as Trustee, relating to the 8 3/8% Senior
Subordinated Notes due 2014--filed herewith.
4.12 Registration Rights Agreement, dated June 15, 2004, among
Cadmus Communications Corporation, the guarantors named
therein and Wachovia Capital Markets, LLC and Banc of
America Securities LLC on behalf of the Initial Purchasers,
relating to the 8 3/8% Senior Subordinated Notes due
2014--incorporated by reference to Exhibit 4.10 to Cadmus
Communications Corporation's registration statement on Form
S-4 filed August 24, 2004.
10.1* First Amendment, dated as of March 7, 2007, to Credit
Agreement dated as of June 21, 2006, among Cenveo
Corporation, Cenveo, Inc., Bank of America, N.A., as
Administrative Agent, and the other lenders party
thereto--filed herewith.
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 of the
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.
----------------
* 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 Stamford, state of Connecticut, on May 9, 2007.
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