Document
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 October 1, 2016
Commission file number 1-12551
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
|
| | |
COLORADO | | 84-1250533 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
200 FIRST STAMFORD PLACE | | |
STAMFORD, CT | | 06902 |
(Address of principal executive offices) | | (Zip Code) |
| | |
203-595-3000 |
(Registrant’s telephone number, including area code) |
| N/A | |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of November 2, 2016, the registrant had 8,551,968 shares of common stock, par value $0.01 per share, outstanding.
CENVEO, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended October 1, 2016
|
| | |
| | |
| | Page No. |
| PART I. FINANCIAL INFORMATION | |
Item 1: | Financial Statements (unaudited) | |
| | |
| | |
| | |
| | |
Item 2: | | |
Item 3: | | |
Item 4: | | |
| | |
| PART II. OTHER INFORMATION | |
Item 1: | | |
Item 1A: | | |
Item 2: | | |
Item 6: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) |
| | | | | | | |
| |
| October 1, 2016 | | January 2, 2016 |
| (unaudited) | | |
Assets | | | |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 4,894 |
| | $ | 7,785 |
|
Accounts receivable, net | 222,668 |
| | 254,042 |
|
Inventories, net | 111,797 |
| | 121,615 |
|
Prepaid and other current assets | 39,318 |
| | 46,731 |
|
Assets of discontinued operations - current | — |
| | 48,566 |
|
Total current assets | 378,677 |
| | 478,739 |
|
| | | |
Property, plant and equipment, net | 208,710 |
| | 210,578 |
|
Goodwill | 175,304 |
| | 175,338 |
|
Other intangible assets, net | 126,184 |
| | 130,450 |
|
Other assets, net | 23,362 |
| | 24,070 |
|
Assets of discontinued operations - long-term | — |
| | 62,851 |
|
Total assets | $ | 912,237 |
| | $ | 1,082,026 |
|
Liabilities and Shareholders’ Deficit | |
| | |
|
Current liabilities: | |
| | |
|
Current maturities of long-term debt | $ | 57,132 |
| | $ | 5,373 |
|
Accounts payable | 172,272 |
| | 200,120 |
|
Accrued compensation and related liabilities | 23,027 |
| | 31,961 |
|
Other current liabilities | 61,580 |
| | 88,814 |
|
Liabilities of discontinued operations - current | 280 |
| | 22,268 |
|
Total current liabilities | 314,291 |
| | 348,536 |
|
| | | |
Long-term debt | 986,955 |
| | 1,203,250 |
|
Other liabilities | 193,232 |
| | 198,926 |
|
Liabilities of discontinued operations - long-term | — |
| | 1,153 |
|
Commitments and contingencies |
|
| |
|
|
Shareholders’ deficit: | |
| | |
|
Preferred stock | — |
| | — |
|
Common stock | 86 |
| | 85 |
|
Paid-in capital | 382,038 |
| | 372,240 |
|
Retained deficit | (868,044 | ) | | (936,234 | ) |
Accumulated other comprehensive loss | (96,321 | ) | | (105,930 | ) |
Total shareholders’ deficit | (582,241 | ) | | (669,839 | ) |
Total liabilities and shareholders’ deficit | $ | 912,237 |
| | $ | 1,082,026 |
|
See notes to condensed consolidated financial statements.
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands, except per share data) (unaudited) |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
Net sales | | $ | 405,955 |
| | $ | 419,783 |
| | $ | 1,242,757 |
| | $ | 1,262,819 |
|
Cost of sales | | 335,733 |
| | 347,409 |
| | 1,033,122 |
| | 1,050,004 |
|
Selling, general and administrative expenses | | 45,560 |
| | 45,394 |
| | 137,533 |
| | 136,559 |
|
Amortization of intangible assets | | 1,375 |
| | 1,981 |
| | 4,361 |
| | 5,756 |
|
Restructuring and other charges | | 2,414 |
| | 5,483 |
| | 8,284 |
| | 11,529 |
|
Operating income | | 20,873 |
| | 19,516 |
| | 59,457 |
| | 58,971 |
|
Interest expense, net | | 20,318 |
| | 25,095 |
| | 65,925 |
| | 76,001 |
|
(Gain) loss on early extinguishment of debt, net | | (7,442 | ) | | — |
| | (80,328 | ) | | 559 |
|
Other income, net | | (1,735 | ) | | (1,332 | ) | | (2,825 | ) | | (773 | ) |
Income (loss) from continuing operations before income taxes | | 9,732 |
| | (4,247 | ) | | 76,685 |
| | (16,816 | ) |
Income tax expense (benefit) | | 987 |
| | (685 | ) | | 4,060 |
| | (1,720 | ) |
Income (loss) from continuing operations | | 8,745 |
| | (3,562 | ) | | 72,625 |
| | (15,096 | ) |
Income (loss) from discontinued operations, net of taxes | | 686 |
| | 319 |
| | (4,435 | ) | | 1,769 |
|
Net income (loss) | | 9,431 |
| | (3,243 | ) | | 68,190 |
| | (13,327 | ) |
Other comprehensive income (loss): | | | | | | | | |
Changes in pension and other employee benefit accounts, net of taxes | | 2,507 |
| | 1,433 |
| | 7,467 |
| | 4,117 |
|
Currency translation adjustment, net | | 557 |
| | (1,893 | ) | | 2,142 |
| | (3,132 | ) |
Total other comprehensive income | | 3,064 |
| | (460 | ) | | 9,609 |
| | 985 |
|
Comprehensive income (loss) | | $ | 12,495 |
| | $ | (3,703 | ) | | $ | 77,799 |
| | $ | (12,342 | ) |
| | | | | | | | |
Income (loss) per share – basic: | | | | | | | | |
Continuing operations | | $ | 1.02 |
| | $ | (0.42 | ) | | $ | 8.53 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.52 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.10 |
| | $ | (0.38 | ) | | $ | 8.01 |
| | $ | (1.57 | ) |
| | | | | | | | |
Income (loss) per share – diluted: | | | | | | | | |
Continuing operations | | $ | 1.00 |
| | $ | (0.42 | ) | | $ | 7.61 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.46 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.08 |
| | $ | (0.38 | ) | | $ | 7.15 |
| | $ | (1.57 | ) |
| | | | | | | | |
Weighted average shares outstanding: | | |
| | |
| | |
| | |
|
Basic | | 8,552 |
| | 8,484 |
| | 8,518 |
| | 8,477 |
|
Diluted | | 8,967 |
| | 8,484 |
| | 9,745 |
| | 8,477 |
|
See notes to condensed consolidated financial statements.
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
|
| | | | | | | |
| For the Nine Months Ended |
| October 1, 2016 | | September 26, 2015 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 68,190 |
| | $ | (13,327 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | |
|
Loss on sale of discontinued operations, net of taxes | 1,948 |
| | — |
|
Loss (income) from discontinued operations, net of taxes | 2,487 |
| | (1,769 | ) |
Depreciation and amortization, excluding non-cash interest expense | 35,545 |
| | 35,633 |
|
Non-cash interest expense, net | 6,963 |
| | 7,532 |
|
Deferred income taxes | 1,068 |
| | (2,962 | ) |
Gain on sale of assets | (4,468 | ) | | (2,323 | ) |
Non-cash restructuring and other charges, net | 3,450 |
| | 6,050 |
|
(Gain) loss on early extinguishment of debt, net | (80,328 | ) | | 559 |
|
Stock-based compensation provision | 1,230 |
| | 1,481 |
|
Other non-cash charges | 3,491 |
| | 3,711 |
|
Changes in operating assets and liabilities: | |
| | |
|
Accounts receivable | 29,491 |
| | 5,243 |
|
Inventories | 8,186 |
| | (12,530 | ) |
Accounts payable and accrued compensation and related liabilities | (39,004 | ) | | (3,790 | ) |
Other working capital changes | (24,952 | ) | | (12,037 | ) |
Other, net | 108 |
| | (9,971 | ) |
Net cash provided by operating activities of continuing operations | 13,405 |
| | 1,500 |
|
Net cash (used in) provided by operating activities of discontinued operations | (7,739 | ) | | 13,345 |
|
Net cash provided by operating activities | 5,666 |
| | 14,845 |
|
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (31,173 | ) | | (19,245 | ) |
Cost of business acquisitions | — |
| | (1,996 | ) |
Proceeds from sale of property, plant and equipment | 8,272 |
| | 1,471 |
|
Proceeds from sale of assets | 2,000 |
| | 2,180 |
|
Net cash used in investing activities of continuing operations | (20,901 | ) | | (17,590 | ) |
Net cash provided by (used in) investing activities of discontinued operations | 94,364 |
| | (1,864 | ) |
Net cash provided by (used in) investing activities | 73,463 |
| | (19,454 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from issuance of 4% secured notes due 2021 | 50,000 |
| | — |
|
Payment of financing-related costs and expenses and debt issuance discounts | (9,967 | ) | | (1,309 | ) |
Repayments of other long-term debt | (4,115 | ) | | (3,345 | ) |
Repayment of 11.5% senior notes due 2017 | (4,725 | ) | | (22,720 | ) |
Repayment of 7% senior exchangeable notes | (40,207 | ) | | — |
|
Purchase and retirement of common stock upon vesting of RSUs | (341 | ) | | (218 | ) |
Proceeds from exercise of stock options | — |
| | 2 |
|
Borrowings under ABL Facility due 2021 | 368,600 |
| | 358,900 |
|
Repayments under ABL Facility due 2021 | (441,700 | ) | | (328,500 | ) |
Net cash (used in) provided by financing activities of continuing operations | (82,455 | ) | | 2,810 |
|
Net cash used in financing activities of discontinued operations | (8 | ) | | (352 | ) |
Net cash (used in) provided by financing activities | (82,463 | ) | | 2,458 |
|
Effect of exchange rate changes on cash and cash equivalents | 443 |
| | (536 | ) |
Net decrease in cash and cash equivalents | (2,891 | ) | | (2,687 | ) |
Cash and cash equivalents at beginning of period | 7,785 |
| | 14,593 |
|
Cash and cash equivalents at end of period | 4,894 |
| | 11,906 |
|
Less cash and cash equivalents of discontinued operations | — |
| | (2,332 | ) |
Cash and cash equivalents of continuing operations at end of period | $ | 4,894 |
| | $ | 9,574 |
|
See notes to condensed consolidated financial statements.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements ("financial statements") of Cenveo, Inc. and its subsidiaries (collectively, "Cenveo" or the "Company") have been prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission ("SEC") and, in the Company’s opinion, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of financial position as of October 1, 2016, and the results of operations for the three and nine months ended October 1, 2016, and September 26, 2015, and cash flows for the nine months ended October 1, 2016, and September 26, 2015. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to SEC rules. The results of operations for the three and nine months ended October 1, 2016, are generally not indicative of the results to be expected for any interim period or for the full year, primarily due to restructuring, acquisition and debt-related activities or transactions. The January 2, 2016 consolidated balance sheet has been derived from the audited consolidated financial statements at that date. 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 January 2, 2016, filed with the SEC. Certain amounts in the January 2, 2016 condensed consolidated balance sheet have been reclassified to conform to the current year presentation. The reporting periods for the three and nine months ended October 1, 2016, and September 26, 2015, each consisted of 13 and 39 weeks, respectively.
As a result of exploring opportunities to divest certain non-strategic or underperforming businesses within its manufacturing platform, during the first quarter of 2016 the Company completed the sale of its folded carton and shrink sleeve packaging businesses, along with its one top-sheet lithographic print operation (collectively, the "Packaging Business"). See Note 3 for information regarding the completion of the sale of the Packaging Business. As a result, the financial results of the Packaging Business have been accounted for as discontinued operations. The Company's historical condensed consolidated financial statements have been retroactively adjusted to give recognition to the discontinued operations for all periods presented.
On July 8, 2016, the Company announced a reverse split of its common stock, par value $0.01 per share (the "Common Stock"), at a ratio of 1-for-8, effective July 13, 2016 (the "Reverse Stock Split"). The Common Stock began trading on a split-adjusted basis on July 14, 2016. The Reverse Stock Split was approved by the Company’s stockholders at the annual meeting of the stockholders held on May 26, 2016. As a result of the Reverse Stock Split, each eight pre-split shares of Common Stock outstanding were automatically combined into one new share of Common Stock without any action on the part of the respective holders, and the number of outstanding common shares on the date of the split was reduced from approximately 68.5 million shares to approximately 8.5 million shares. The Reverse Stock Split also applied to Common Stock issuable upon the exchange of the Company’s outstanding 7% senior exchangeable notes due 2017 (the "7% Notes") and upon the exercise of the Company’s outstanding warrants and the Company's outstanding stock options, restricted share units ("RSUs"), and performance share units ("PSUs"), (collectively, the "Equity Awards"). In addition, the authorized Common Stock was initially increased from 100 million to 120 million shares and then adjusted in the Reverse Stock Split from 120 million to 15 million shares. The Company's historical condensed consolidated financial statements have been retroactively adjusted to give recognition to the Reverse Stock Split for all periods presented.
New Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company expects that the future adoption of ASU 2014-09 will not have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 340): Simplifying the Measurement of Inventory." Under ASU 2015-11, companies utilizing the first-in, first-out or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The Company expects that the future adoption of ASU 2015-11 will not have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes to require that deferred tax assets and liabilities be classified as non-current
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2016. As of October 1, 2016, the Company had $2.0 million of current deferred tax assets that would be reclassified from prepaid and other current assets to other assets, net in the Company's condensed consolidated balance sheet.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the timing and impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The new standard simplifies various aspects related to how share-based payments are accounted for and presented in the consolidated financial statements. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective in the first quarter of fiscal 2017 and early adoption is permitted if all amendments are adopted in the same period. The Company expects that the future adoption of ASU 2016-09 will not have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 reduces the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. The Company expects that the future adoption of ASU 2016-15 will not have a material impact on its consolidated financial statements.
2. Acquisitions
The Company accounts for business combinations under the provisions of ASC 805 "Business Combination". Acquisitions are accounted for by the acquisition method, and accordingly, the assets and liabilities of the acquired businesses have been recorded at their estimated fair values on the acquisition date with the excess of the purchase price over their estimated fair values recorded as goodwill. In the event the estimated fair values of the assets and liabilities acquired exceed the purchase price paid, a bargain purchase gain is recorded in the statements of operations.
Acquisition-related costs are expensed as incurred. Acquisition-related costs, including integration costs, included in selling, general and administrative expenses in the Company’s statements of operations were zero for both the three and nine months ended October 1, 2016, and were $0.7 million and $1.0 million for the three and nine months ended September 26, 2015, respectively.
Asendia
On August 7, 2015, the Company acquired certain assets of Asendia USA, Inc. ("Asendia"). The acquired assets provide letter shop, data processing, bindery and digital printing offerings and had approximately 40 employees. The total purchase price of approximately $2.0 million was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values at the acquisition date, and was assigned to the Company's print segment. The acquired identifiable intangible assets relate to customer relationships of $0.1 million.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchase Price Allocation
The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed in the Asendia acquisition (in thousands):
|
| | | | |
Accounts receivable, net | | $ | 145 |
|
Inventories | | 46 |
|
Prepaid and other current assets | | 10 |
|
Property, plant and equipment | | 1,662 |
|
Other intangible assets | | 133 |
|
Total assets acquired | | $ | 1,996 |
|
The results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from August 7, 2015. Pro forma results for the three and nine months ended September 26, 2015, assuming the acquisition had been made on December 29, 2013, are not presented, as the effect would not be material.
3. Discontinued Operations
On January 19, 2016, the Company completed the sale of the Packaging Business. The Company received total cash proceeds of approximately $88.1 million, net of transaction costs of approximately $6.3 million. This resulted in the recognition of a total loss of $5.1 million, of which a gain of $1.2 million and a loss of $0.1 million were recorded during the three and nine months ended October 1, 2016, respectively. In the fourth quarter of 2015, the Company recorded a non-cash loss on the sale of $5.0 million. The loss was based on the executed purchase agreement and the net assets of the Packaging Business. During the fourth quarter of 2015, the Company recorded a non-cash goodwill impairment charge of $9.9 million related to this transaction. In addition to the proceeds, $5.0 million of purchase price consideration has been held in escrow (the "Holdback Amount") and will be paid to the Company subject to the satisfaction of certain conditions. Any amount received from the Holdback Amount will be recognized as income when received.
The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company's condensed consolidated balance sheets as of October 1, 2016, and January 2, 2016 (in thousands):
|
| | | | | | | | |
| | October 1, 2016 | | January 2, 2016 |
Accounts receivable, net | | $ | — |
| | $ | 23,244 |
|
Inventories | | — |
| | 18,603 |
|
Other current assets | | — |
| | 6,719 |
|
Assets of discontinued operations - current | | — |
| | 48,566 |
|
Property, plant and equipment, net | | — |
| | 48,244 |
|
Goodwill and other long-term assets | | — |
| | 14,607 |
|
Assets of discontinued operations - long-term | | — |
| | 62,851 |
|
Accounts payable | | — |
| | 17,917 |
|
Other current liabilities | | 280 |
| | 4,351 |
|
Liabilities of discontinued operations - current | | 280 |
| | 22,268 |
|
Long-term debt and other liabilities | | — |
| | 1,153 |
|
Liabilities of discontinued operations - long-term | | — |
| | 1,153 |
|
Net (liabilities) assets of discontinued operations | | $ | (280 | ) | | $ | 87,996 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes certain statement of operations information for discontinued operations (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
Net sales | | $ | — |
| | $ | 44,166 |
| | $ | 6,637 |
| | $ | 137,092 |
|
Cost of sales | | — |
| | 37,679 |
| | 6,625 |
| | 117,110 |
|
Selling, general and administrative expenses | | — |
| | 5,187 |
| | 2,242 |
| | 15,321 |
|
Amortization of intangible assets | | — |
| | 539 |
| | — |
| | 1,617 |
|
Restructuring and other charges | | — |
| | 31 |
| | 1 |
| | 379 |
|
Interest expense, net | | — |
| | 28 |
| | 7 |
| | 92 |
|
Other expense (income), net | | 490 |
| | (149 | ) | | 728 |
| | (578 | ) |
(Loss) income from discontinued operations | | (490 | ) | | 851 |
| | (2,966 | ) | | 3,151 |
|
Gain (loss) on sale of discontinued operations | | 1,176 |
| | — |
| | (97 | ) | | — |
|
Income (loss) from discontinued operations before income taxes | | 686 |
| | 851 |
| | (3,063 | ) | | 3,151 |
|
Income tax expense | | — |
| | 532 |
| | 1,372 |
| | 1,382 |
|
Income (loss) from discontinued operations, net of taxes | | $ | 686 |
| | $ | 319 |
| | $ | (4,435 | ) | | $ | 1,769 |
|
Income (loss) per share - basic | | $ | 0.08 |
| | $ | 0.04 |
| | $ | (0.52 | ) | | $ | 0.21 |
|
Income (loss) per share - diluted | | $ | 0.08 |
| | $ | 0.04 |
| | $ | (0.46 | ) | | $ | 0.21 |
|
4. Inventories
Inventories by major category are as follows (in thousands):
|
| | | | | | | | |
| | October 1, 2016 | | January 2, 2016 |
Raw materials | | $ | 32,717 |
| | $ | 40,938 |
|
Work in process | | 15,007 |
| | 14,696 |
|
Finished goods | | 64,073 |
| | 65,981 |
|
| | $ | 111,797 |
| | $ | 121,615 |
|
5. Property, Plant and Equipment
Property, plant and equipment are as follows (in thousands):
|
| | | | | | | | |
| | October 1, 2016 | | January 2, 2016 |
Land and land improvements | | $ | 8,537 |
| | $ | 9,194 |
|
Buildings and building improvements | | 79,443 |
| | 82,206 |
|
Machinery and equipment | | 536,224 |
| | 525,914 |
|
Furniture and fixtures | | 9,463 |
| | 8,696 |
|
Construction in progress | | 15,920 |
| | 10,181 |
|
| | 649,587 |
| | 636,191 |
|
Accumulated depreciation | | (440,877 | ) | | (425,613 | ) |
| | $ | 208,710 |
| | $ | 210,578 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sale-Leaseback Transaction
On June 30, 2016, the Company sold the real estate used by one manufacturing facility related to its envelope segment for net proceeds of $7.9 million and entered into a five year operating lease for the same facility, with options to renew for up to two additional five year periods. In connection with the sale, the Company maintained continuing involvement in one capital improvement project which, under ASC 840 "Leases," resulted in the deferral of sale-leaseback accounting. During the three months ended October 1, 2016, the Company no longer maintained any continuing involvement obligations and accordingly the transaction qualified for sales-leaseback accounting. As a result, the Company recorded a gain of approximately $2.1 million in other income, net in the condensed consolidated statement of operations and a deferred gain of approximately $2.8 million which will be recognized ratably over the original five year lease.
6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill as of October 1, 2016, by reportable segment are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Envelope | | Print | | Label | | Total |
Balance as of January 2, 2016 | | $ | 23,433 |
| | $ | 42,628 |
| | $ | 109,277 |
| | $ | 175,338 |
|
Foreign currency translation | | — |
| | (34 | ) | | — |
| | (34 | ) |
Balance as of October 1, 2016 | | $ | 23,433 |
| | $ | 42,594 |
| | $ | 109,277 |
| | $ | 175,304 |
|
Other intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | October 1, 2016 | | January 2, 2016 |
| | Weighted Average Remaining Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Impairment Charges | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Impairment Charges | | Accumulated Amortization | | Net Carrying Amount |
Intangible assets with definite lives: | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Customer relationships | | 7 | | $ | 114,329 |
| | $ | (27,234 | ) | | $ | (58,896 | ) | | $ | 28,199 |
| | $ | 114,345 |
| | $ | (27,234 | ) | | $ | (55,209 | ) | | $ | 31,902 |
|
Trademarks and trade names | | 22 | | 64,538 |
| | (46,493 | ) | | (9,015 | ) | | 9,030 |
| | 64,540 |
| | (46,493 | ) | | (8,649 | ) | | 9,398 |
|
Leasehold interest | | 17 | | 4,430 |
| | — |
| | (686 | ) | | 3,744 |
| | 4,430 |
| | — |
| | (516 | ) | | 3,914 |
|
Patents | | 9 | | 3,528 |
| | — |
| | (3,217 | ) | | 311 |
| | 3,528 |
| | — |
| | (3,192 | ) | | 336 |
|
Subtotal | | 11 | | 186,825 |
| | (73,727 | ) | | (71,814 | ) | | 41,284 |
| | 186,843 |
| | (73,727 | ) | | (67,566 | ) | | 45,550 |
|
| | | | | | | | | | | | | | | | | | |
Intangible assets with indefinite lives: | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Trade names | | | | 84,900 |
| | — |
| | — |
| | 84,900 |
| | 84,900 |
| | — |
| | — |
| | 84,900 |
|
Total | | | | $ | 271,725 |
| | $ | (73,727 | ) | | $ | (71,814 | ) | | $ | 126,184 |
| | $ | 271,743 |
| | $ | (73,727 | ) | | $ | (67,566 | ) | | $ | 130,450 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Annual amortization expense of intangible assets for the next five years is estimated to be as follows (in thousands):
|
| | | | |
| | Annual Estimated Expense |
Remainder of 2016 | | $ | 1,359 |
|
2017 | | 5,272 |
|
2018 | | 5,003 |
|
2019 | | 4,885 |
|
2020 | | 4,885 |
|
2021 | | 4,731 |
|
Thereafter | | 15,149 |
|
Total | | $ | 41,284 |
|
Asset Impairments
There were no goodwill or intangible asset impairments recorded in the three and nine months ended October 1, 2016, or September 26, 2015, respectively.
7. Long-Term Debt
Long-term debt is as follows (in thousands):
|
| | | | | | | | |
| | October 1, 2016 | | January 2, 2016 |
ABL Facility due 2021 (1) | | $ | 75,100 |
| | $ | 148,200 |
|
4.0% secured notes due 2021 ($50 million and $0 outstanding principal amount as of October 1, 2016, and January 2, 2016, respectively) | | 49,883 |
| | — |
|
8.500% junior priority secured notes due 2022 ($248.0 million outstanding principal amount as of October 1, 2016, and January 2, 2016) | | 241,300 |
| | 240,533 |
|
6.000% senior priority secured notes due 2019 ($540.0 million outstanding principal amount as of October 1, 2016, and January 2, 2016) | | 529,252 |
| | 526,533 |
|
6.000% senior unsecured notes due 2024 ($104.5 million and $0 outstanding principal amount as of October 1, 2016, and January 2, 2016, respectively) | | 85,063 |
| | — |
|
11.5% senior notes due 2017 ($40.5 million and $199.7 million outstanding principal amount as of October 1, 2016, and January 2, 2016, respectively) | | 40,120 |
| | 195,846 |
|
7% senior exchangeable notes due 2017 ($11.2 million and $83.3 million outstanding principal amount as of October 1, 2016, and January 2, 2016, respectively) | | 11,171 |
| | 82,430 |
|
Other debt including capital leases | | 12,198 |
| | 15,081 |
|
| | 1,044,087 |
| | 1,208,623 |
|
Less current maturities | | (57,132 | ) | | (5,373 | ) |
Long-term debt | | $ | 986,955 |
| | $ | 1,203,250 |
|
__________________________
(1) The weighted average interest rate outstanding for the ABL Facility was 3.6% and 2.8% as of October 1, 2016, and January 2, 2016, respectively.
The estimated fair value of the Company’s outstanding indebtedness was approximately $937.8 million and $895.7 million as of October 1, 2016, and January 2, 2016, respectively. The fair value was determined by the Company to be Level 2 under the fair value hierarchy, and was based upon review of observable pricing in secondary markets for each debt instrument.
As of October 1, 2016, the Company was in compliance with all covenants under its long-term debt.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Exchange Offer
On June 10, 2016, the Company's wholly-owned subsidiary, Cenveo Corporation (the "Subsidiary Issuer") closed its exchange offer (the "Exchange Offer") whereby $149.3 million, or approximately 80%, of its outstanding 11.5% senior notes due 2017 (the "11.5% Notes") were exchanged for $104.5 million of newly issued 6.000% senior unsecured notes due 2024 (the "6.000% Unsecured Notes") and warrants (the "Warrants") to purchase shares of Common Stock, representing in the aggregate 16.6% of the outstanding Common Stock as of June 10, 2016. Subsequent to the Exchange Offer, $40.5 million of 11.5% Notes remained outstanding as of October 1, 2016. Included in the total amount exchanged was $4.2 million of 11.5% Notes owned by affiliated noteholders, whose notes were exchanged for 6.000% Unsecured Notes and Warrants pursuant to a simultaneous and separately negotiated securities exchange agreement. In connection with the Exchange Offer, the Company capitalized debt issuance costs of $7.4 million, all of which will be amortized over the life of the 6.000% Unsecured Notes, and of which $7.3 million is unamortized at October 1, 2016.
For accounting purposes, the Exchange Offer was treated as an extinguishment of the 11.5% Notes and the issuance of the new 6.000% Unsecured Notes. Upon extinguishment, the net carrying amount of the 11.5% Notes was written off and the 6.000% Unsecured Notes were recorded at fair value based on market comparable transactions at the time of the Exchange Offer. The fair value of the 6.000% Unsecured Notes was based on market value pricing, using observable market-based data for similar issuances (Level 2). The Company estimates the fair value of the 6.000% Unsecured Notes on the date of issuance was $92.0 million. The discount of $12.5 million was recorded as a component of the gain on early extinguishment of debt, net, and will be amortized over the life of the 6.000% Unsecured Notes using the effective interest method.
The 6.000% Unsecured Notes were issued pursuant to an Indenture, dated as of June 10, 2016 (the "Indenture"), among the Company, Subsidiary Issuer, the other guarantors party thereto and The Bank of New York Mellon ("BNY Mellon"), as trustee. The 6.000% Unsecured Notes will mature on May 15, 2024. Interest on the 6.000% Unsecured Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing November 15, 2016. The 6.000% Unsecured Notes and the related guarantees are the Subsidiary Issuer's and the guarantors’ senior unsecured obligations. The 6.000% Unsecured Notes are fully and unconditionally guaranteed on a senior basis by the Company and by certain of its existing and future U.S. subsidiaries (other than the Subsidiary Issuer) and, under certain circumstances, certain of its future Canadian subsidiaries. As such, the 6.000% Unsecured Notes rank pari passu with the Subsidiary Issuer's and the guarantors’ existing and future senior indebtedness, senior to the Subsidiary Issuer's and the guarantors’ future indebtedness that is expressly subordinated to the 6.000% Unsecured Notes, effectively junior to the Subsidiary Issuer's and the guarantors’ existing and future indebtedness that is secured by liens to the extent of the value of the collateral securing such indebtedness and structurally subordinated to all of the existing and future liabilities, including trade payables, of the Company’s subsidiaries that do not guarantee the 6.000% Unsecured Notes. The Indenture contains a number of covenants which, among other things, restrict, subject to certain exceptions, the Company's ability and the ability of the Subsidiary Issuer and the other subsidiaries of the Company to incur additional indebtedness; declare or pay dividends, redeem stock or make other distributions to shareholders; purchase or prepay subordinated indebtedness; make investments; create liens or use assets as security in other transactions; merge or consolidate, or sell, transfer, lease or dispose of assets; and engage in transactions with affiliates. The Indenture also contains certain customary affirmative covenants and events of default.
The Warrants were issued pursuant to a Warrant Agreement, dated as of June 10, 2016 (the "Warrant Agreement"), between the Company and Computershare Trust Company, N.A., as warrant agent. Each Warrant is currently exercisable for 0.125 shares of Common Stock at $12.00 per share as adjusted as a result of the Company’s recent Reverse Stock Split, subject to mandatory cashless exercise provisions. The number of shares for which a Warrant may be exercised and the exercise price are subject to adjustment in certain events. The Warrants will be exercisable at any time prior to their expiration on June 10, 2024. The Company used the Black-Scholes-Merton option-pricing model, which resulted in a fair value of $6.3 million for the Warrants. The Company recorded the fair value in paid-in capital in the Company's condensed consolidated balance sheet.
In connection with the issuance of the Warrants, the Company and Allianz Global Investors U.S. LLC ("Allianz") entered into a Warrant Registration Rights Agreement, dated as of June 10, 2016 (the "Registration Rights Agreement"), pursuant to which the Company has agreed to file a shelf registration statement covering the resale of the Warrants and the shares of Common Stock to be issued upon exercise of the Warrants. Under the Registration Rights Agreement, the Company is obligated to cause to be filed such shelf registration agreement on or prior to November 21, 2016 and to use its commercially reasonable efforts to have such registration statement declared effective within 60 days after the initial date of filing thereof, and to keep such shelf registration statement effective until the earlier of (i) the fifth anniversary of the effective date of the shelf registration statement and (ii) the date all transfer restricted securities covered by the shelf registration statement have been sold as contemplated in the shelf registration statement. If the Company fails to satisfy its obligations under the Registration Rights Agreement, it will be required to pay liquidated damages to the holders of the Warrants under certain circumstances.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ABL Amendment
Concurrent with the Exchange Offer, the Company and Subsidiary Issuer entered into Amendment No. 4, dated as of June 10, 2016 (the "ABL Amendment No. 4"), to the Subsidiary Issuer's asset-based revolving credit facility (the "ABL Facility"), which, among other things, extends the term of the ABL Facility through 2021 and reduces the commitments thereunder by $50 million to $190 million. The ABL Facility now matures in June 2021, with a springing maturity of May 2019 ahead of the Subsidiary Issuer's existing 6.000% senior priority secured notes due 2019 (the "6.000% Secured Notes") in the event that more than $10.0 million of the 6.000% Secured Notes remain outstanding at such time. In connection with this amendment, the Company capitalized debt issuance costs of $2.3 million.
Indenture and Note Purchase Agreement
Concurrent with the Exchange Offer, the Company and Subsidiary Issuer also entered into a secured Indenture and Note Purchase Agreement, dated as of June 10, 2016 (the "Indenture and Note Purchase Agreement"), with certain affiliates of or funds managed by Allianz (collectively, the "Purchasers"), pursuant to which Subsidiary Issuer issued 4% secured notes to the Purchasers in an aggregate principal amount of $50.0 million (the "4% Secured Notes") at par, the proceeds of which were applied to reduce the outstanding principal amount under the ABL Facility. The 4% Secured Notes mature in December 2021, with a springing maturity of May 2019 ahead of the 6.000% Secured Notes. The 4% Secured Notes bear interest at 4% per annum, payable quarterly in arrears on the last day of March, June, September and December in each year, commencing September 30, 2016, and are secured by the same collateral that secures the ABL Facility, the 6.000% Secured Notes and the Subsidiary Issuer's existing 8.500% junior priority secured notes due 2022 (the "8.500% Notes"). With respect to the ABL Facility, the 4% Secured Notes rank junior with respect to all collateral up to a certain maximum principal amount of the ABL Facility. With respect to the 6.000% Secured Notes, the 4% Secured Notes rank junior with respect to notes priority collateral and senior with respect to ABL Facility priority collateral. With respect to the 8.500% Notes, the 4% Secured Notes rank senior with respect to all collateral. Such ranking of the 4% Secured Notes with respect to the 6.000% Secured Notes and the 8.500% Notes is the same ranking that the ABL Facility has with such notes. The Indenture and Note Purchase Agreement contains a number of covenants which, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of the Subsidiary Issuer and the other subsidiaries of the Company to incur additional indebtedness; declare or pay dividends, redeem stock or make other distributions to shareholders; purchase or prepay certain specified indebtedness; dispose of assets; make investments; grant liens on assets; merge or consolidate or transfer certain assets; and engage in transactions with affiliates. The Indenture and Note Purchase Agreement also contains certain customary affirmative covenants. In connection with the issuance of the 4% Secured Notes, the Company capitalized debt issuance costs of $0.1 million.
7% Note Purchase Agreement
In addition, on July 18, 2016, the Company, Subsidiary Issuer and Allianz completed the last transactions contemplated by the Support Agreement, dated as of May 10, 2016, among the Company, Subsidiary Issuer and Allianz, pursuant to which Allianz agreed to, among other things, tender and sell to Subsidiary Issuer all of its 7% Notes owned by Allianz in the aggregate principal amount of $37.5 million in exchange for: (a) payment in cash in an amount equal to (i) the aggregate principal amount of such 7% Notes multiplied by 0.6 plus (ii) an amount of interest on the amount payable pursuant to the immediately preceding clause (i) at an annual interest rate of 7% per annum, such interest accruing from June 10, 2016 until (and including) the closings of the purchases and computed based on a year of 360 days; (b) payment in cash of interest that accrued in respect of such 7% Notes in accordance with the indenture relating to such 7% Notes but remained unpaid at the closings of the purchases; and (c) delivery to Allianz of Warrants to purchase Common Stock, representing in the aggregate 3.3% of the outstanding Common Stock as of June 10, 2016.
In connection with such agreement, during the second quarter of 2016, the Subsidiary Issuer repurchased an aggregate of $16.5 million of its 7% Notes for $10.1 million and issued an aggregate of 984,342 Warrants. Additionally, during the third quarter of 2016, the Subsidiary Issuer repurchased (the "July 2016 Repurchase") an aggregate of $21.0 million of its 7% Notes for $13.0 million and issued an aggregate of 1,255,485 Warrants.
Extinguishments
In the third quarter of 2016, the Company recorded a gain on early extinguishment of debt of $7.4 million related to the July 2016 Repurchase, of which $8.4 million related to a discount on the purchase price, partially offset by the fair value of the Warrants issued of $0.7 million, a write off of unamortized debt issuance costs of $0.2 million, and $0.1 million of transaction fees and expenses. The fair value of the Warrants was determined using the Black-Scholes-Merton option-pricing model.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the second quarter of 2016, the Company recorded a gain on early extinguishment of debt of $46.1 million related to the Exchange Offer, of which $49.6 million related to a discount on the difference of the net carrying value of the extinguished 11.5% Notes and the fair value of the new 6.000% Unsecured Notes, partially offset by a write-off of unamortized debt issuance costs of $0.8 million, a write-off of original issuance discount of $1.2 million and $1.5 million of transaction fees and expenses. Additionally, $1.2 million of gain on early extinguishment of debt related to the $4.2 million exchange by affiliated noteholders was recorded as a component of paid-in capital, all of which related to a discount on the Exchange Offer.
In the second quarter of 2016, the Company recorded a gain on early extinguishment of debt of $5.4 million related to the repurchase of $16.5 million of its 7% Notes, of which $6.0 million related to a discount on the purchase price, partially offset by $0.5 million in fees paid to lenders, and a write off of unamortized debt issuance costs of $0.1 million. Additionally, during the second quarter of 2016, in connection with ABL Amendment No. 4, the Company recorded a loss on early extinguishment of debt of $0.2 million related to the write off of unamortized debt issuance costs.
In the first quarter of 2016, the Company recorded a gain on early extinguishment of debt of $16.5 million related to the repurchase of $34.5 million of its 7% Notes, of which $16.8 million related to a discount on the purchase price, partially offset by a write-off of unamortized debt issuance costs of $0.3 million. Additionally, the Company recorded a gain on early extinguishment of debt of $5.1 million related to the repurchase of $10.0 million of its 11.5% Notes, of which $5.3 million related to a discount on the purchase, partially offset by a write-off of unamortized debt issuance costs of $0.1 million and a write-off of original issuance discount of $0.1 million.
In the second quarter of 2015, the Company recorded a loss on early extinguishment of debt of $0.1 million related to the repurchase of $6.8 million of its 11.5% Notes.
In the first quarter of 2015, the Company recorded a loss on early extinguishment of debt of $0.4 million related to the repurchase of $15.8 million of its 11.5% Notes, of which $0.2 million related to the write-off of unamortized debt issuance costs, and $0.2 million related to the write-off of original issuance discount.
The Company recognized a total gain on early extinguishment of debt of $7.4 million and $80.3 million during the three and nine months ended October 1, 2016, respectively, and a total loss on early extinguishment of debt of zero and $0.6 million during the three and nine months ended September 26, 2015, respectively.
Subsequent Event
During the fourth quarter of 2016, the Company extinguished $5.7 million of its 7% Notes. In connection with these retirements, the Company recorded a loss on early extinguishment of debt of less than $0.1 million, primarily related to the write-off unamortized debt issuance costs.
During the fourth quarter of 2016, the Company announced it has commenced the process of redeeming $20.0 million of its 11.5% Notes at a call price of par. This process is anticipated to be complete by the end of 2016.
8. Commitments and Contingencies
The Company is party to various legal actions that are ordinary and incidental to its business. While the outcome of pending legal actions cannot be predicted with certainty, management believes the outcome of these various proceedings will not have a material effect on the Company’s financial statements. In the second quarter of 2016, the Company reached confidential agreements to settle controversies and disputes in connection with certain product warranty litigations. Total expense related to the litigation and associated accruals, recognized in selling, general and administrative expenses in the condensed consolidated statement of operations was $1.5 million for the nine months ended October 1, 2016.
The Company is involved in certain environmental matters and has been designated as a potentially responsible party for certain hazardous waste sites. There have been no material changes related to these environmental matters and, based on information currently available, the Company believes that remediation of these environmental matters will not have a material effect on the Company’s financial statements.
The Company’s income, sales and use, and other tax returns are routinely subject to audit by various authorities. The Company is currently under audit related to unclaimed property, which is being led by the state of Delaware and includes other states as well. The Company believes that the resolution of any matters raised during such audits will not have a material effect on the Company’s consolidated financial position or its results of operations.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company participates in a number of multi-employer pension plans for union employees ("Multi-Employer Pension Plans") and is exposed to significant risks and uncertainties arising from its participation in these Multi-Employer Pension Plans. These risks and uncertainties, including changes in future contributions due to partial or full withdrawal of the Company and other participating employers from these Multi-Employer Pension Plans, could significantly increase the Company’s future contributions or the underfunded status of these Multi-Employer Pension Plans. Two of the Multi-Employer Pension Plans are in mass withdrawal status. While it is not possible to quantify the potential impact of future actions of the Company or other participating employers in these Multi-Employer Pension Plans, continued participation in or withdrawal from these Multi-Employer Pension Plans could have a material effect on the Company’s financial statements.
9. Fair Value Measurements
Certain assets and liabilities of the Company are required to be recorded at fair value on either a recurring or nonrecurring basis. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. There were no assets or liabilities recorded at fair value on a recurring or nonrecurring basis as of October 1, 2016. On an annual basis, the Company records its pension plan assets at fair value. No additional assets or liabilities were recorded at fair value on a recurring or nonrecurring basis as of January 2, 2016.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, net, long-term debt and accounts payable. The carrying values of cash and cash equivalents, accounts receivable, net, and accounts payable are reasonable estimates of their fair values as of October 1, 2016, and January 2, 2016, due to the short-term nature of these instruments. See Note 7 for fair value of the Company’s long-term debt. Additionally, the Company records the assets acquired and liabilities assumed in its acquisitions (Note 2) at fair value.
10. Retirement Plans
The components of the net periodic expense for the Company’s pension plans, supplemental executive retirement plans ("SERP") and other postretirement benefit plans ("OPEB") are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
Service cost | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | | 3,555 |
| | 3,505 |
| | 10,645 |
| | 10,553 |
|
Expected return on plan assets | | (4,775 | ) | | (5,280 | ) | | (14,326 | ) | | (15,732 | ) |
Net amortization and deferral | | 1 |
| | — |
| | 3 |
| | — |
|
Recognized net actuarial loss | | 2,507 |
| | 2,339 |
| | 7,467 |
| | 6,651 |
|
Net periodic expense | | $ | 1,288 |
| | $ | 564 |
| | $ | 3,790 |
| | $ | 1,473 |
|
Interest cost on the projected benefit obligation includes $0.2 million related to the Company’s SERP and OPEB plans in each of the three months ended October 1, 2016 and September 26, 2015, and $0.5 million for both the nine months ended October 1, 2016, and September 26, 2015.
For the nine months ended October 1, 2016, the Company made total contributions of $0.8 million to its pension, SERP and OPEB plans. The Company expects to contribute approximately $1.4 million to its pension, SERP and OPEB plans for the remainder of 2016.
11. Stock-Based Compensation
Total stock-based compensation expense recognized in selling, general and administrative expenses in the Company’s statements of operations was $0.2 million and $1.0 million for the three months ended October 1, 2016, and September 26, 2015, respectively, and $1.2 million and $1.5 million for the nine months ended October 1, 2016 and September 26, 2015, respectively.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of October 1, 2016, there was approximately $1.6 million of total unrecognized compensation cost related to unvested stock-based compensation grants, which is expected to be amortized over a weighted average period of 2.3 years.
Stock Options
A summary of the Company’s outstanding stock options as of and for the nine months ended October 1, 2016, is as follows:
|
| | | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 2, 2016 | | 190,250 |
| | $ | 34.56 |
| | 3.0 | | $ | — |
|
Granted | | — |
| | — |
| | | | |
Exercised | | — |
| | — |
| | | | $ | — |
|
Forfeited/expired | | (58,573 | ) | | 53.12 |
| | | | |
Outstanding at October 1, 2016 | | 131,677 |
| | $ | 26.31 |
| | 3.1 | | $ | — |
|
Exercisable at October 1, 2016 | | 70,732 |
| | $ | 32.74 |
| | 1.9 | | $ | — |
|
RSUs
A summary of the Company’s non-vested RSUs as of and for the nine months ended October 1, 2016, is as follows:
|
| | | | | | | |
| | RSUs | | Weighted Average Grant Date Fair Value |
Unvested at January 2, 2016 | | 105,087 |
| | $ | 18.43 |
|
Granted | | 20,961 |
| | 9.66 |
|
Vested | | (43,084 | ) | | 18.29 |
|
Forfeited | | — |
| | — |
|
Unvested at October 1, 2016 | | 82,964 |
| | $ | 16.28 |
|
The total fair value of RSUs which vested during the three and nine months ended October 1, 2016, was $0.3 million.
On July 28, 2016, a total of 20,961 RSUs, which vest one year from the date of issuance, were issued to the independent members of the Company's Board of Directors. The fair value of these awards was determined based on the Company's stock price on the date of issuance.
PSUs
A summary of the Company's non-vested PSUs as of and for the nine months ended October 1, 2016 is as follows:
|
| | | | | | | |
| | PSUs | | Weighted Average Grant Date Fair Value |
Unvested at January 2, 2016 | | 70,625 |
| | $ | 19.04 |
|
Granted | | — |
| | — |
|
Vested | | (70,625 | ) | | 19.04 |
|
Forfeited | | — |
| | — |
|
Unvested at October 1, 2016 | | — |
| | $ | — |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Restructuring and Other Charges
The Company currently has two active cost savings, restructuring and integration plans, related to the implementation of cost savings initiatives focused on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities (the "2016 Plan" and the "2015 Plan").
2016 Plan
During the first quarter of 2016, the Company began implementing the 2016 Plan, which primarily focuses on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities. The Company expects to be substantially complete with the 2016 Plan during the 2017 fiscal year.
2015 Plan
During the first quarter of 2015, the Company began implementing the 2015 Plan, which primarily focuses on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities. The Company expects to be substantially complete with the 2015 Plan during the 2016 fiscal year.
Acquisition Integration Plans
Upon the completion of the acquisition of certain assets of National Envelope Corporation ("National"), the Company developed and began implementing a plan related to the integration of certain assets of National into existing envelope operations (the "National Plan"). The Company completed the National Plan in 2015, which included the closure and consolidation of nine manufacturing facilities into existing envelope operations and two new facilities.
Residual Plans
The Company currently has certain residual cost savings, restructuring and integration plans (the "Residual Plans"). As a result of these cost savings actions over the last several years, the Company has closed or consolidated a significant amount of manufacturing facilities and has had a significant number of headcount reductions.
The Company does not anticipate any significant future expenses related to the Residual Plans other than modifications to current assumptions for lease terminations, multi-employer pension withdrawal liabilities and ongoing expenses related to maintaining restructured assets.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables present the details of the expenses recognized as a result of these plans.
2016 Activity
Restructuring and other charges for the three months ended October 1, 2016 were as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Employee Separation Costs | | Asset Charges Net of Gain on Sale | | Equipment Moving Expenses | | Lease Termination Expenses | | Multi-Employer Pension Withdrawal Expenses | | Building Clean-up & Other Expenses | | Total |
Envelope | | | | | | | | | | | | | | |
| 2016 Plan | | $ | 384 |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 66 |
| | $ | 472 |
|
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Acquisition Integration Plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | 19 |
|
Total Envelope | | 384 |
| | — |
| | 22 |
| | — |
| | — |
| | 90 |
| | 496 |
|
Print | | | | | | | | | | | | | | |
| 2016 Plan | | 92 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 92 |
|
| 2015 Plan | | — |
| | — |
| | — |
| | — |
| | — |
| | 162 |
| | 162 |
|
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | 203 |
| | 20 |
| | 223 |
|
Total Print | | 92 |
| | — |
| | — |
| | — |
| | 203 |
| | 182 |
| | 477 |
|
Label | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2016 Plan | | 158 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 162 |
|
| 2015 Plan | | (45 | ) | | — |
| | — |
| | — |
| | — |
| | (81 | ) | | (126 | ) |
Total Label | | 113 |
| | — |
| | — |
| | — |
| | — |
| | (77 | ) | | 36 |
|
Corporate | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2016 Plan | | 1,448 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,448 |
|
| 2015 Plan | | (54 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (54 | ) |
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Total Corporate | | 1,394 |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 1,405 |
|
Total Restructuring and Other Charges | | $ | 1,983 |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | 203 |
| | $ | 206 |
| | $ | 2,414 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restructuring and other charges for the nine months ended October 1, 2016 were as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Employee Separation Costs | | Asset Charges Net of Gain on Sale | | Equipment Moving Expenses | | Lease Termination Expenses | | Multi-Employer Pension Withdrawal Expenses | | Building Clean-up & Other Expenses | | Total |
Envelope | | | | | | | | | | | | | | |
| 2016 Plan | | $ | 481 |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 66 |
| | $ | 569 |
|
| 2015 Plan | | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
|
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | 54 |
| | 7 |
| | 61 |
|
| Acquisition Integration Plans | | — |
| | 146 |
| | 276 |
| | — |
| | — |
| | 137 |
| | 559 |
|
Total Envelope | | 494 |
| | 146 |
| | 298 |
| | — |
| | 54 |
| | 210 |
| | 1,202 |
|
Print | | | | | | | | | | | | | | |
| 2016 Plan | | 107 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 107 |
|
| 2015 Plan | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | 283 |
| | 280 |
|
| Residual Plans | | 1 |
| | — |
| | — |
| | 113 |
| | 715 |
| | 58 |
| | 887 |
|
| Acquisition Integration Plans | | — |
| | — |
| | — |
| | 45 |
| | — |
| | — |
| | 45 |
|
Total Print | | 105 |
| | — |
| | — |
| | 158 |
| | 715 |
| | 341 |
| | 1,319 |
|
Label | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2016 Plan | | 191 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 196 |
|
| 2015 Plan | | 558 |
| | — |
| | — |
| | — |
| | — |
| | 1,078 |
| | 1,636 |
|
| Asset Impairments | | — |
| | 2,300 |
| | — |
| | — |
| | — |
| | — |
| | 2,300 |
|
Total Label | | 749 |
| | 2,300 |
| | — |
| | — |
| | — |
| | 1,083 |
| | 4,132 |
|
Corporate | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2016 Plan | | 1,655 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 1,658 |
|
| 2015 Plan | | (54 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (54 | ) |
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | 27 |
|
Total Corporate | | 1,601 |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | 1,631 |
|
Total Restructuring and Other Charges | | $ | 2,949 |
| | $ | 2,446 |
| | $ | 298 |
| | $ | 158 |
| | $ | 769 |
| | $ | 1,664 |
| | $ | 8,284 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2015 Activity
Restructuring and other charges for the three months ended September 26, 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Employee Separation Costs | | Asset Charges Net of Gain on Sale | | Equipment Moving Expenses | | Lease Termination Expenses | | Multi-Employer Pension Withdrawal Expenses | | Building Clean-up & Other Expenses | | Total |
Envelope | | | | | | | | | | | | | | |
| 2015 Plan | | $ | 61 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 61 |
|
| Residual Plans | | (18 | ) | | — |
| | — |
| | — |
| | 44 |
| | 5 |
| | 31 |
|
| Acquisition Integration Plans | | — |
| | — |
| | 5 |
| | — |
| | — |
| | 84 |
| | 89 |
|
Total Envelope | | 43 |
| | — |
| | 5 |
| | — |
| | 44 |
| | 89 |
| | 181 |
|
Print | | | | | | | | | | | | | | |
| 2015 Plan | | 172 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 172 |
|
| Residual Plans | | 10 |
| | — |
| | 4 |
| | 36 |
| | 4,160 |
| | 91 |
| | 4,301 |
|
Total Print | | 182 |
| | — |
| | 4 |
| | 36 |
| | 4,160 |
| | 91 |
| | 4,473 |
|
Label | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2015 Plan | | (6 | ) | | — |
| | 116 |
| | — |
| | — |
| | 170 |
| | 280 |
|
| Residual Plans | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Total Label | | (5 | ) | | — |
| | 116 |
| | — |
| | — |
| | 170 |
| | 281 |
|
Corporate | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2015 Plan | | 503 |
| | — |
| | — |
| | — |
| | — |
| | 45 |
| | 548 |
|
Total Corporate | | 503 |
| | — |
| | — |
| | — |
| | — |
| | 45 |
| | 548 |
|
Total Restructuring and Other Charges | | $ | 723 |
| | $ | — |
| | $ | 125 |
| | $ | 36 |
| | $ | 4,204 |
| | $ | 395 |
| | $ | 5,483 |
|
Restructuring and other charges for the nine months ended September 26, 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Employee Separation Costs | | Asset Charges Net of Gain on Sale | | Equipment Moving Expenses | | Lease Termination Expenses | | Multi-Employer Pension Withdrawal Expenses | | Building Clean-up & Other Expenses | | Total |
Envelope | | | | | | | | | | | | | | |
| 2015 Plan | | $ | 147 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 147 |
|
| Residual Plans | | 252 |
| | — |
| | — |
| | (22 | ) | | 126 |
| | 62 |
| | 418 |
|
| Acquisition Integration Plans | | 45 |
| | 1,895 |
| | 33 |
| | 286 |
| | — |
| | 494 |
| | 2,753 |
|
Total Envelope | | 444 |
| | 1,895 |
| | 33 |
| | 264 |
| | 126 |
| | 556 |
| | 3,318 |
|
Print | | | | | | | | | | | | | | |
| 2015 Plan | | 384 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 384 |
|
| Residual Plans | | 72 |
| | 181 |
| | 39 |
| | 127 |
| | 4,448 |
| | 1,089 |
| | 5,956 |
|
Total Print | | 456 |
| | 181 |
| | 39 |
| | 127 |
| | 4,448 |
| | 1,089 |
| | 6,340 |
|
Label | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2015 Plan | | 20 |
| | — |
| | 133 |
| | — |
| | — |
| | 197 |
| | 350 |
|
| Residual Plans | | 129 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 129 |
|
Total Label | | 149 |
| | — |
| | 133 |
| | — |
| | — |
| | 197 |
| | 479 |
|
Corporate | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| 2015 Plan | | 1,309 |
| | — |
| | — |
| | — |
| | — |
| | 69 |
| | 1,378 |
|
| Residual Plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Total Corporate | | 1,309 |
| | — |
| | — |
| | — |
| | — |
| | 83 |
| | 1,392 |
|
Total Restructuring and Other Charges | | $ | 2,358 |
| | $ | 2,076 |
| | $ | 205 |
| | $ | 391 |
| | $ | 4,574 |
| | $ | 1,925 |
| | $ | 11,529 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the activity related to the restructuring liabilities for all the cost savings, restructuring and integration initiatives were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Employee Separation Costs | | Lease Termination Expenses | | Multi-Employer Pension Withdrawal Expenses | | Building Clean-up, Equipment Moving and Other Expenses | | Total |
2016 Plan | | | | | | | | | | |
Balance as of January 2, 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Accruals, net | | 2,434 |
| | — |
| | — |
| | 96 |
| | 2,530 |
|
Payments | | (837 | ) | | — |
| | — |
| | (96 | ) | | (933 | ) |
Balance as of October 1, 2016 | | $ | 1,597 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,597 |
|
| | | | | | | | | | |
2015 Plan | | | | | | | | | | |
Balance as of January 2, 2016 | | $ | 276 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 276 |
|
Accruals, net | | 514 |
| | — |
| | — |
| | 1,361 |
| | 1,875 |
|
Payments | | (493 | ) | | — |
| | — |
| | (1,102 | ) | | (1,595 | ) |
Balance as of October 1, 2016 | | $ | 297 |
| | $ | — |
| | $ | — |
| | $ | 259 |
| | $ | 556 |
|
| | | | | | | | | | |
Residual Plans | | | | | | | | | | |
Balance as of January 2, 2016 | | $ | 3 |
| | $ | 411 |
| | $ | 19,842 |
| | $ | — |
| | $ | 20,256 |
|
Accruals, net | | 1 |
| | 113 |
| | 769 |
| | 92 |
| | 975 |
|
Payments | | (4 | ) | | (524 | ) | | (2,542 | ) | | (92 | ) | | (3,162 | ) |
Balance as of October 1, 2016 | | $ | — |
| | $ | — |
| | $ | 18,069 |
| | $ | — |
| | $ | 18,069 |
|
| | | | | | | | | | |
Acquisition Integration Plans | | | | | | | | | | |
Balance as of January 2, 2016 | | $ | — |
| | $ | 392 |
| | $ | — |
| | $ | — |
| | $ | 392 |
|
Accruals, net | | — |
| | 45 |
| | — |
| | 413 |
| | 458 |
|
Payments | | — |
| | (437 | ) | | — |
| | (413 | ) | | (850 | ) |
Balance as of October 1, 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Total Restructuring Liability | | $ | 1,894 |
| | $ | — |
| | $ | 18,069 |
| | $ | 259 |
| | $ | 20,222 |
|
As of October 1, 2016, the total restructuring liability was $20.2 million, of which $4.3 million is included in other current liabilities and $15.9 million is included in other liabilities in the Company's condensed consolidated balance sheet.
13. Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the balances of each component of accumulated other comprehensive income (loss) ("AOCI"), net of tax (in thousands):
|
| | | | | | | | | | | | | |
| | | Foreign Currency Translation | | Pension and Other Postretirement Benefits | | Total |
Balance as of January 2, 2016 | | $ | (7,200 | ) | | $ | (98,730 | ) | | $ | (105,930 | ) |
| Other comprehensive loss before reclassifications | | (196 | ) | | — |
| | (196 | ) |
| Amounts reclassified from AOCI | | 2,338 |
| | 7,467 |
| | 9,805 |
|
| Other comprehensive income | | 2,142 |
| | 7,467 |
| | 9,609 |
|
Balance as of October 1, 2016 | | $ | (5,058 | ) | | $ | (91,263 | ) | | $ | (96,321 | ) |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications from AOCI
|
| | | | | | | | | | | | | | | | | | | |
AOCI Components (in thousands) | | Amounts Reclassified from AOCI | | Amounts Reclassified from AOCI | | Income Statement Line Item |
| | | For the Three Months Ended | | For the Nine Months Ended | | |
| | | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 | | |
Changes in Foreign Currency Translation | | | | | | | | | | |
| Loss on foreign exchange | | $ | 393 |
| | $ | — |
| | $ | 2,338 |
| | $ | — |
| | Income (loss) from discontinued operations, net of taxes |
Changes in pension and other employee benefit accounts: | | | | | | | | | | |
| Net actuarial losses | | 2,507 |
| | 2,339 |
| | 7,467 |
| | 6,651 |
| | Cost of sales |
| | | 2,900 |
| | 2,339 |
| | 9,805 |
| | 6,651 |
| | Total before tax |
Taxes | | — |
| | (906 | ) | | — |
| | (2,534 | ) | | Income tax expense (benefit) |
Total reclassifications for the period | | $ | 2,900 |
| | $ | 1,433 |
| | $ | 9,805 |
| | $ | 4,117 |
| | Net of tax |
14. Income (Loss) per Share
On July 8, 2016, the Company announced a Reverse Stock Split of its Common Stock at a ratio of 1-for-8, effective July 13, 2016. The Common Stock began trading on a split-adjusted basis on July 14, 2016. As a result of the Reverse Stock Split, each eight pre-split shares of Common Stock outstanding were automatically combined into one new share of Common Stock without any action on the part of the respective holders. The Reverse Stock Split also applied to Common Stock issuable upon the exchange of the Company’s outstanding 7% Notes and upon the exercise of the Company’s outstanding warrants and Equity Awards. The share and per share amounts below have been retroactively adjusted to give recognition to the Reverse Stock Split for all periods presented.
Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding for the period. When applicable, diluted income (loss) per share is calculated using two approaches. The first approach, the treasury stock method, reflects the potential dilution that could occur if the Equity Awards to issue Common Stock were exercised. The second approach, the if converted method, reflects the potential dilution of the Equity Awards, the 7% Notes and the Warrants being exchanged for Common Stock. Under this method, interest expense associated with the 7% Notes, net of tax, if any, is added back to income from continuing operations and the shares outstanding are increased by the underlying 7% Notes equivalent.
As of September 26, 2015, the effect of approximately 2.5 million shares related to the exchange of the 7% Notes for Common Stock were excluded from the calculation of diluted income (loss) per share, as the effect would be anti-dilutive.
As of October 1, 2016, and September 26, 2015, the effect of approximately 218,000 and 374,000 shares, respectively, related to the issuance of Common Stock upon exercise of Equity Awards were excluded from the calculation of diluted income (loss) per share, as the effect would be anti-dilutive.
As of October 1, 2016, and September 26, 2015, the effect of approximately 1.7 million and zero shares, respectively, related to the issuance of Common Stock upon exercise of Warrants were excluded from the calculation of diluted income (loss) per share, as the effect would be anti-dilutive.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted income (loss) per share for the three and nine months ended October 1, 2016, and September 26, 2015 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
Numerator for basic and diluted income (loss) per share: | | | | | | | | |
Income (loss) from continuing operations | | $ | 8,745 |
| | $ | (3,562 | ) | | $ | 72,625 |
| | $ | (15,096 | ) |
Income (loss) from discontinued operations, net of taxes | | 686 |
| | 319 |
| | (4,435 | ) | | 1,769 |
|
Net income (loss) | | $ | 9,431 |
| | $ | (3,243 | ) | | $ | 68,190 |
| | $ | (13,327 | ) |
Numerator for diluted income (loss) per share: | | | | | | | | |
Income (loss) from continuing operations - as reported | | $ | 8,745 |
| | $ | (3,562 | ) | | $ | 72,625 |
| | $ | (15,096 | ) |
Interest expense on 7% Notes, net of taxes | | 211 |
| | — |
| | 1,521 |
| | — |
|
Income (loss) from continuing operations - after assumed conversions of dilutive shares | | 8,956 |
| | (3,562 | ) | | 74,146 |
| | (15,096 | ) |
Income (loss) from discontinued operations, net of taxes | | 686 |
| | 319 |
| | (4,435 | ) | | 1,769 |
|
Net income (loss) for diluted loss per share - after assumed conversions of dilutive shares | | $ | 9,642 |
| | $ | (3,243 | ) | | $ | 69,711 |
| | $ | (13,327 | ) |
Denominator for weighted average common shares outstanding: | | |
| | |
| | |
| | |
|
Basic shares | | 8,552 |
| | 8,484 |
| | 8,518 |
| | 8,477 |
|
Dilutive effect of 7% Notes | | 415 |
| | — |
| | 1,227 |
| | — |
|
Dilutive effect of Equity Awards | | — |
| | — |
| | — |
| | — |
|
Dilutive effect of Warrants | | — |
| | — |
| | — |
| | — |
|
Diluted shares | | 8,967 |
| | 8,484 |
| | 9,745 |
| | 8,477 |
|
| | | | | | | | |
Income (loss) per share – basic: | | | |
| | | | |
Continuing operations | | $ | 1.02 |
| | $ | (0.42 | ) | | $ | 8.53 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.52 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.10 |
| | $ | (0.38 | ) | | $ | 8.01 |
| | $ | (1.57 | ) |
| | | | | | | | |
Income (loss) per share – diluted: | | | | | | | | |
Continuing operations | | $ | 1.00 |
| | $ | (0.42 | ) | | $ | 7.61 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.46 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.08 |
| | $ | (0.38 | ) | | $ | 7.15 |
| | $ | (1.57 | ) |
15. Segment Information
The Company operates three operating and reportable segments: envelope, print and label. The envelope segment provides direct mail offerings and transactional and stock envelopes. The print segment provides a wide array of print offerings such as high-end printed materials including car brochures, advertising literature, corporate identity and brand marketing material, digital printing and content management. The label segment specializes in the design, manufacturing and printing of labels such as custom labels, overnight packaging labels and pressure-sensitive prescription labels.
Prior to the disposition of the Packaging Business, the Company operated four operating segments: envelope, print, label and packaging. Based upon similar economic characteristics and management reporting, the Company previously aggregated the label and packaging operating segments to have a total of three reportable segments: envelope, print and label and packaging.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating income (loss) of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses including stock-based compensation.
Corporate identifiable assets primarily consist of cash and cash equivalents, miscellaneous receivables, deferred financing fees, deferred tax assets and other assets. Assets of discontinued operations primarily consist of assets of the Packaging Business.
The following tables present certain segment information (in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
Net sales: | | | | | | | | |
Envelope | | $ | 212,578 |
| | $ | 218,454 |
| | $ | 654,115 |
| | $ | 664,003 |
|
Print | | 121,739 |
| | 123,875 |
| | 360,879 |
| | 360,520 |
|
Label | | 71,638 |
| | 77,454 |
| | 227,763 |
| | 238,296 |
|
Total | | $ | 405,955 |
| | $ | 419,783 |
| | $ | 1,242,757 |
| | $ | 1,262,819 |
|
Operating income (loss): | | |
| | |
| | |
| | |
|
Envelope | | $ | 16,832 |
| | $ | 17,746 |
| | $ | 51,604 |
| | $ | 49,297 |
|
Print | | 5,446 |
| | 1,541 |
| | 10,756 |
| | 6,207 |
|
Label | | 6,764 |
| | 10,146 |
| | 23,373 |
| | 31,000 |
|
Corporate | | (8,169 | ) | | (9,917 | ) | | (26,276 | ) | | (27,533 | ) |
Total | | $ | 20,873 |
| | $ | 19,516 |
| | $ | 59,457 |
| | $ | 58,971 |
|
Restructuring and other charges: | | |
| | |
| | |
| | |
|
Envelope | | $ | 496 |
| | $ | 181 |
| | $ | 1,202 |
| | $ | 3,318 |
|
Print | | 477 |
| | 4,473 |
| | 1,319 |
| | 6,340 |
|
Label | | 36 |
| | 281 |
| | 4,132 |
| | 479 |
|
Corporate | | 1,405 |
| | 548 |
| | 1,631 |
| | 1,392 |
|
Total | | $ | 2,414 |
| | $ | 5,483 |
| | $ | 8,284 |
| | $ | 11,529 |
|
Depreciation and intangible asset amortization: | | |
| | |
| | |
| | |
|
Envelope | | $ | 4,717 |
| | $ | 4,775 |
| | $ | 14,299 |
| | $ | 14,608 |
|
Print | | 4,443 |
| | 4,137 |
| | 13,505 |
| | 12,573 |
|
Label | | 1,572 |
| | 2,006 |
| | 5,360 |
| | 6,000 |
|
Corporate | | 957 |
| | 717 |
| | 2,381 |
| | 2,452 |
|
Total | | $ | 11,689 |
| | $ | 11,635 |
| | $ | 35,545 |
| | $ | 35,633 |
|
Intercompany sales: | | |
| | |
| | |
| | |
|
Envelope | | $ | 1,843 |
| | $ | 1,531 |
| | $ | 5,259 |
| | $ | 4,674 |
|
Print | | 5,674 |
| | 4,611 |
| | 15,939 |
| | 12,535 |
|
Label | | 716 |
| | 1,342 |
| | 2,306 |
| | 3,010 |
|
Total | | $ | 8,233 |
| | $ | 7,484 |
| | $ | 23,504 |
| | $ | 20,219 |
|
|
| | | | | | | | |
| | October 1, 2016 | | January 2, 2016 |
Total assets: | | | | |
Envelope | | $ | 406,538 |
| | $ | 445,443 |
|
Print | | 257,705 |
| | 266,074 |
|
Label | | 214,320 |
| | 223,534 |
|
Corporate | | 33,674 |
| | 35,558 |
|
Assets of discontinued operations | | — |
| | 111,417 |
|
Total | | $ | 912,237 |
| | $ | 1,082,026 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information
Cenveo, Inc. is a holding company (the "Parent Company"), which is the ultimate parent of all Cenveo subsidiaries. The Parent Company’s wholly-owned subsidiary, Cenveo Corporation (the "Subsidiary Issuer"), issued the 6.000% Secured Notes, the 8.500% Notes, the 6.000% Unsecured Notes, the 8.875% senior second lien notes due 2018, the 7% Notes, and the 11.5% Notes (collectively, the "Subsidiary Issuer Notes"), which are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and substantially all of its wholly-owned domestic subsidiaries, other than the Subsidiary Issuer (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and the Parent Company's subsidiaries other than the Subsidiary Issuer and the Guarantor Subsidiaries (the "Non-Guarantor Subsidiaries") as of October 1, 2016, and January 2, 2016, and for the three and nine months ended October 1, 2016, and September 26, 2015. The condensed consolidating financial information has been presented to show the financial position, results of operations and cash flows of the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, assuming the guarantee structure of the Subsidiary Issuer Notes was in effect at the beginning of the periods presented.
The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries using the equity method of accounting. The Parent Company’s primary transactions with its subsidiaries, other than the investment account and related equity in net income (loss) of subsidiaries, are the intercompany payables and receivables between its subsidiaries.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET October 1, 2016 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Assets | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 4,564 |
| | $ | 211 |
| | $ | 119 |
| | $ | — |
| | $ | 4,894 |
|
Accounts receivable, net | — |
| | 114,029 |
| | 108,639 |
| | — |
| | — |
| | 222,668 |
|
Inventories, net | — |
| | 70,582 |
| | 41,215 |
| | — |
| | — |
| | 111,797 |
|
Intercompany receivable | — |
| | — |
| | 1,739,710 |
| | 604 |
| | (1,740,314 | ) | | — |
|
Notes receivable from subsidiaries | — |
| | 36,938 |
| | 3,245 |
| | — |
| | (40,183 | ) | | — |
|
Prepaid and other current assets | — |
| | 35,175 |
| | 2,672 |
| | 2,365 |
| | (894 | ) | | 39,318 |
|
Total current assets | — |
| | 261,288 |
| | 1,895,692 |
| | 3,088 |
| | (1,781,391 | ) | | 378,677 |
|
| | | | | | | | | | | |
Investment in subsidiaries | (582,241 | ) | | 2,088,004 |
| | 5,347 |
| | 7,829 |
| | (1,518,939 | ) | | — |
|
Property, plant and equipment, net | — |
| | 110,066 |
| | 97,670 |
| | 974 |
| | — |
| | 208,710 |
|
Goodwill | — |
| | 25,540 |
| | 144,810 |
| | 4,954 |
| | — |
| | 175,304 |
|
Other intangible assets, net | — |
| | 9,926 |
| | 116,030 |
| | 228 |
| | — |
| | 126,184 |
|
Other assets, net | — |
| | 19,576 |
| | 3,197 |
| | 589 |
| | — |
| | 23,362 |
|
Total assets | $ | (582,241 | ) | | $ | 2,514,400 |
| | $ | 2,262,746 |
| | $ | 17,662 |
| | $ | (3,300,330 | ) | | $ | 912,237 |
|
| | | | | | | | | | | |
Liabilities and Shareholders’ (Deficit) Equity | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt | $ | — |
| | $ | 56,061 |
| | $ | 1,071 |
| | $ | — |
| | $ | — |
| | $ | 57,132 |
|
Accounts payable | — |
| | 107,482 |
| | 64,559 |
| | 231 |
| | — |
| | 172,272 |
|
Accrued compensation and related liabilities | — |
| | 18,948 |
| | 3,736 |
| | 343 |
| | — |
| | 23,027 |
|
Other current liabilities | — |
| | 49,292 |
| | 11,621 |
| | 667 |
| | — |
| | 61,580 |
|
Liabilities of discontinued operations - current | — |
| | — |
| | 280 |
| | — |
| | — |
| | 280 |
|
Intercompany payable | — |
| | 1,740,314 |
| | — |
| | — |
| | (1,740,314 | ) | | — |
|
Notes payable to issuer | — |
| | — |
| | 36,938 |
| | 3,245 |
| | (40,183 | ) | | — |
|
Total current liabilities | — |
| | 1,972,097 |
| | 118,205 |
| | 4,486 |
| | (1,780,497 | ) | | 314,291 |
|
| | | | | | | | | | | |
Long-term debt | — |
| | 984,684 |
| | 2,271 |
| | — |
| | — |
| | 986,955 |
|
Other liabilities | — |
| | 139,860 |
| | 54,266 |
| | — |
| | (894 | ) | | 193,232 |
|
Shareholders’ (deficit) equity | (582,241 | ) | | (582,241 | ) | | 2,088,004 |
| | 13,176 |
| | (1,518,939 | ) | | (582,241 | ) |
Total liabilities and shareholders’ (deficit) equity | $ | (582,241 | ) | | $ | 2,514,400 |
| | $ | 2,262,746 |
| | $ | 17,662 |
| | $ | (3,300,330 | ) | | $ | 912,237 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the three months ended October 1, 2016 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net sales | $ | — |
| | $ | 211,525 |
| | $ | 193,945 |
| | $ | 485 |
| | $ | — |
| | $ | 405,955 |
|
Cost of sales | — |
| | 184,466 |
| | 151,267 |
| | — |
| | — |
| | 335,733 |
|
Selling, general and administrative expenses | — |
| | 27,855 |
| | 17,526 |
| | 179 |
| | — |
| | 45,560 |
|
Amortization of intangible assets | — |
| | 148 |
| | 1,116 |
| | 111 |
| | — |
| | 1,375 |
|
Restructuring and other charges | — |
| | 2,581 |
| | (167 | ) | | — |
| | — |
| | 2,414 |
|
Operating (loss) income | — |
| | (3,525 | ) | | 24,203 |
| | 195 |
| | — |
| | 20,873 |
|
Interest expense, net | — |
| | 20,272 |
| | 46 |
| | — |
| | — |
| | 20,318 |
|
Intercompany interest (income) expense | — |
| | (249 | ) | | 249 |
| | — |
| | — |
| | — |
|
Gain on early extinguishment of debt, net | — |
| | (7,442 | ) | | — |
| | — |
| | — |
| | (7,442 | ) |
Other (income) expense, net | — |
| | (1,877 | ) | | 100 |
| | 42 |
| | — |
| | (1,735 | ) |
(Loss) income from continuing operations before income taxes and equity in income (loss) of subsidiaries | — |
| | (14,229 | ) | | 23,808 |
| | 153 |
| | — |
| | 9,732 |
|
Income tax expense | — |
| | 774 |
| | 160 |
| | 53 |
| | — |
| | 987 |
|
(Loss) income from continuing operations before equity in income (loss) of subsidiaries | — |
| | (15,003 | ) | | 23,648 |
| | 100 |
| | — |
| | 8,745 |
|
Equity in income (loss) of subsidiaries | 9,431 |
| | 24,927 |
| | 163 |
| | — |
| | (34,521 | ) | | — |
|
Income (loss) from continuing operations | 9,431 |
| | 9,924 |
| | 23,811 |
| | 100 |
| | (34,521 | ) | | 8,745 |
|
(Loss) income from discontinued operations, net of taxes | — |
| | (493 | ) | | 1,116 |
| | 63 |
| | — |
| | 686 |
|
Net income (loss) | 9,431 |
| | 9,431 |
| | 24,927 |
| | 163 |
| | (34,521 | ) | | 9,431 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Other comprehensive income (loss) of subsidiaries | 3,064 |
| | 363 |
| | 213 |
| | — |
| | (3,640 | ) | | — |
|
Changes in pension and other employee benefit accounts, net of taxes | — |
| | 2,701 |
| | (194 | ) | | — |
| | — |
| | 2,507 |
|
Currency translation adjustment, net | — |
| | — |
| | 344 |
| | 213 |
| | — |
| | 557 |
|
Total other comprehensive income (loss) | 3,064 |
| | 3,064 |
| | 363 |
| | 213 |
| | (3,640 | ) | | 3,064 |
|
Comprehensive income (loss) | $ | 12,495 |
| | $ | 12,495 |
| | $ | 25,290 |
| | $ | 376 |
| | $ | (38,161 | ) | | $ | 12,495 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the nine months ended October 1, 2016 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net sales | $ | — |
| | $ | 654,350 |
| | $ | 587,116 |
| | $ | 1,291 |
| | $ | — |
| | $ | 1,242,757 |
|
Cost of sales | — |
| | 575,709 |
| | 457,413 |
| | — |
| | — |
| | 1,033,122 |
|
Selling, general and administrative expenses | — |
| | 85,229 |
| | 51,747 |
| | 557 |
| | — |
| | 137,533 |
|
Amortization of intangible assets | — |
| | 452 |
| | 3,576 |
| | 333 |
| | — |
| | 4,361 |
|
Restructuring and other charges | — |
| | 6,358 |
| | 1,926 |
| | — |
| | — |
| | 8,284 |
|
Operating (loss) income | — |
| | (13,398 | ) | | 72,454 |
| | 401 |
| | — |
| | 59,457 |
|
Interest expense, net | — |
| | 65,779 |
| | 146 |
| | — |
| | — |
| | 65,925 |
|
Intercompany interest (income) expense | — |
| | (740 | ) | | 740 |
| | — |
| | — |
| | — |
|
Gain on early extinguishment of debt, net | — |
| | (80,328 | ) | | — |
| | — |
| | — |
| | (80,328 | ) |
Other income, net | — |
| | (877 | ) | | (1,848 | ) | | (100 | ) | | — |
| | (2,825 | ) |
Income from continuing operations before income taxes and equity in income (loss) of subsidiaries | — |
| | 2,768 |
| | 73,416 |
| | 501 |
| | — |
| | 76,685 |
|
Income tax expense | — |
| | 2,827 |
| | 402 |
| | 831 |
| | — |
| | 4,060 |
|
(Loss) income from continuing operations before equity in income (loss) of subsidiaries | — |
| | (59 | ) | | 73,014 |
| | (330 | ) | | — |
| | 72,625 |
|
Equity in income (loss) of subsidiaries | 68,190 |
| | 70,889 |
| | 715 |
| | — |
| | (139,794 | ) | | — |
|
Income (loss) from continuing operations | 68,190 |
| | 70,830 |
| | 73,729 |
| | (330 | ) | | (139,794 | ) | | 72,625 |
|
(Loss) income from discontinued operations, net of taxes | — |
| | (2,640 | ) | | (2,840 | ) | | 1,045 |
| | — |
| | (4,435 | ) |
Net income (loss) | 68,190 |
| | 68,190 |
| | 70,889 |
| | 715 |
| | (139,794 | ) | | 68,190 |
|
Other comprehensive income (loss): | | | | | | | | | | | |
Other comprehensive income (loss) of subsidiaries | 9,609 |
| | 2,401 |
| | 140 |
| | — |
| | (12,150 | ) | | — |
|
Changes in pension and other employee benefit accounts, net of taxes | — |
| | 7,208 |
| | 259 |
| | — |
| | — |
| | 7,467 |
|
Currency translation adjustment, net | — |
| | — |
| | 2,002 |
| | 140 |
| | — |
| | 2,142 |
|
Total other comprehensive income (loss) | 9,609 |
| | 9,609 |
| | 2,401 |
| | 140 |
| | (12,150 | ) | | 9,609 |
|
Comprehensive income (loss) | $ | 77,799 |
| | $ | 77,799 |
| | $ | 73,290 |
| | $ | 855 |
| | $ | (151,944 | ) | | $ | 77,799 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the nine months ended October 1, 2016 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | | | | | |
Net cash provided by (used in) operating activities of continuing operations | $ | 1,230 |
| | $ | (81,724 | ) | | $ | 92,403 |
| | $ | 1,496 |
| | $ | — |
| | $ | 13,405 |
|
Net cash used in operating activities of discontinued operations | — |
| | — |
| | (7,301 | ) | | (438 | ) | | — |
| | (7,739 | ) |
Net cash provided by (used in) operating activities | 1,230 |
| | (81,724 | ) | | 85,102 |
| | 1,058 |
| | — |
| | 5,666 |
|
Cash flows from investing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | — |
| | (14,317 | ) | | (16,255 | ) | | (601 | ) | | — |
| | (31,173 | ) |
Proceeds from sale of property, plant and equipment | — |
| | 8,131 |
| | 141 |
| | — |
| | — |
| | 8,272 |
|
Proceeds from sale of assets | — |
| | — |
| | 2,000 |
| | — |
| | — |
| | 2,000 |
|
Net cash used in investing activities of continuing operations | — |
| | (6,186 | ) | | (14,114 | ) | | (601 | ) | | — |
| | (20,901 | ) |
Net cash provided by investing activities of discontinued operations | — |
| | — |
| | 87,877 |
| | 6,487 |
| | — |
| | 94,364 |
|
Net cash (used in) provided by investing activities | — |
| | (6,186 | ) | | 73,763 |
| | 5,886 |
| | — |
| | 73,463 |
|
Cash flows from financing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Proceeds from issuance of 4% secured notes due 2021 | — |
| | 50,000 |
| | — |
| | — |
| | — |
| | 50,000 |
|
Payment of financing-related costs and expenses and debt issuance discounts | — |
| | (9,967 | ) | | — |
| | — |
| | — |
| | (9,967 | ) |
Repayments of other long-term debt | — |
| | (4,136 | ) | | 21 |
| | — |
| | — |
| | (4,115 | ) |
Repayment of 11.5% senior notes due 2017 | — |
| | (4,725 | ) | | — |
| | — |
| | — |
| | (4,725 | ) |
Repayment of 7% senior exchangeable notes | — |
| | (40,207 | ) | | — |
| | — |
| | — |
| | (40,207 | ) |
Purchase and retirement of common stock upon vesting of RSUs | (341 | ) | | — |
| | — |
| | — |
| | — |
| | (341 | ) |
Borrowings under ABL Facility due 2021 | — |
| | 368,600 |
| | — |
| | — |
| | — |
| | 368,600 |
|
Repayments under ABL Facility due 2021 | — |
| | (441,700 | ) | | — |
| | — |
| | — |
| | (441,700 | ) |
Intercompany advances | (889 | ) | | 169,051 |
| | (159,218 | ) | | (8,944 | ) | | — |
| | — |
|
Net cash (used in) provided by financing activities of continuing operations | (1,230 | ) | | 86,916 |
| | (159,197 | ) | | (8,944 | ) | | — |
| | (82,455 | ) |
Net cash used in financing activities of discontinued operations | — |
| | — |
| | (8 | ) | | — |
| | — |
| | (8 | ) |
Net cash (used in) provided by financing activities | (1,230 | ) | | 86,916 |
| | (159,205 | ) | | (8,944 | ) | | — |
| | (82,463 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 316 |
| | 127 |
| | — |
| | 443 |
|
Net decrease in cash and cash equivalents | — |
| | (994 | ) | | (24 | ) | | (1,873 | ) | | — |
| | (2,891 | ) |
Cash and cash equivalents at beginning of period | — |
| | 5,558 |
| | 235 |
| | 1,992 |
| | — |
| | 7,785 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 4,564 |
| | $ | 211 |
| | $ | 119 |
| | $ | — |
| | $ | 4,894 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET January 2, 2016 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Assets | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 5,558 |
| | $ | 235 |
| | $ | 1,992 |
| | $ | — |
| | $ | 7,785 |
|
Accounts receivable, net | — |
| | 133,232 |
| | 120,810 |
| | — |
| | — |
| | 254,042 |
|
Inventories, net | — |
| | 74,116 |
| | 47,499 |
| | — |
| | — |
| | 121,615 |
|
Intercompany receivable | — |
| | — |
| | 1,580,492 |
| | — |
| | (1,580,492 | ) | | — |
|
Notes receivable from subsidiaries | — |
| | 36,938 |
| | 3,245 |
| | — |
| | (40,183 | ) | | — |
|
Prepaid and other current assets | — |
| | 43,349 |
| | 1,807 |
| | 1,575 |
| | — |
| | 46,731 |
|
Assets of discontinued operations - current | — |
| | — |
| | 41,821 |
| | 6,745 |
| | — |
| | 48,566 |
|
Total current assets | — |
| | 293,193 |
| | 1,795,909 |
| | 10,312 |
| | (1,620,675 | ) | | 478,739 |
|
| | | | | | | | | | | |
Investment in subsidiaries | (669,839 | ) | | 2,014,972 |
| | 4,492 |
| | 7,829 |
| | (1,357,454 | ) | | — |
|
Property, plant and equipment, net | — |
| | 113,608 |
| | 96,262 |
| | 708 |
| | — |
| | 210,578 |
|
Goodwill | — |
| | 22,940 |
| | 147,409 |
| | 4,989 |
| | — |
| | 175,338 |
|
Other intangible assets, net | — |
| | 9,533 |
| | 120,451 |
| | 466 |
| | — |
| | 130,450 |
|
Other assets, net | — |
| | 20,327 |
| | 3,154 |
| | 1,477 |
| | (888 | ) | | 24,070 |
|
Assets of discontinued operations - long-term | — |
| | 1,226 |
| | 62,184 |
| | — |
| | (559 | ) | | 62,851 |
|
Total assets | $ | (669,839 | ) | | $ | 2,475,799 |
| | $ | 2,229,861 |
| | $ | 25,781 |
| | $ | (2,979,576 | ) | | $ | 1,082,026 |
|
| | | | | | | | | | | |
Liabilities and Shareholders’ (Deficit) Equity | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt | $ | — |
| | $ | 4,454 |
| | $ | 919 |
| | $ | — |
| | $ | — |
| | $ | 5,373 |
|
Accounts payable | — |
| | 126,384 |
| | 73,601 |
| | 135 |
| | — |
| | 200,120 |
|
Accrued compensation and related liabilities | — |
| | 26,812 |
| | 4,846 |
| | 303 |
| | — |
| | 31,961 |
|
Other current liabilities | — |
| | 71,365 |
| | 16,737 |
| | 712 |
| | — |
| | 88,814 |
|
Liabilities of discontinued operations - current | — |
| | — |
| | 21,543 |
| | 725 |
| | — |
| | 22,268 |
|
Intercompany payable | — |
| | 1,572,152 |
| | — |
| | 8,340 |
| | (1,580,492 | ) | | — |
|
Notes payable to issuer | — |
| | — |
| | 36,938 |
| | 3,245 |
| | (40,183 | ) | | — |
|
Total current liabilities | — |
| | 1,801,167 |
| | 154,584 |
| | 13,460 |
| | (1,620,675 | ) | | 348,536 |
|
| | | | | | | | | | | |
Long-term debt | — |
| | 1,200,848 |
| | 2,402 |
| | — |
| | — |
| | 1,203,250 |
|
Other liabilities | — |
| | 143,623 |
| | 56,191 |
| | — |
| | (888 | ) | | 198,926 |
|
Liabilities of discontinued operations - long-term | — |
| | — |
| | 1,712 |
| | — |
| | (559 | ) | | 1,153 |
|
Shareholders’ (deficit) equity | (669,839 | ) | | (669,839 | ) | | 2,014,972 |
| | 12,321 |
| | (1,357,454 | ) | | (669,839 | ) |
Total liabilities and shareholders’ (deficit) equity | $ | (669,839 | ) | | $ | 2,475,799 |
| | $ | 2,229,861 |
| | $ | 25,781 |
| | $ | (2,979,576 | ) | | $ | 1,082,026 |
|
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the three months ended September 26, 2015 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net sales | $ | — |
| | $ | 218,392 |
| | $ | 200,548 |
| | $ | 843 |
| | $ | — |
| | $ | 419,783 |
|
Cost of sales | — |
| | 187,614 |
| | 159,795 |
| | — |
| | — |
| | 347,409 |
|
Selling, general and administrative expenses | — |
| | 29,511 |
| | 15,707 |
| | 176 |
| | — |
| | 45,394 |
|
Amortization of intangible assets | — |
| | 239 |
| | 1,622 |
| | 120 |
| | — |
| | 1,981 |
|
Restructuring and other charges | — |
| | 4,875 |
| | 608 |
| | — |
| | — |
| | 5,483 |
|
Operating (loss) income | — |
| | (3,847 | ) | | 22,816 |
| | 547 |
| | — |
| | 19,516 |
|
Interest expense, net | — |
| | 25,046 |
| | 49 |
| | — |
| | — |
| | 25,095 |
|
Intercompany interest (income) expense | — |
| | (214 | ) | | 214 |
| | — |
| | — |
| | — |
|
Other (income) expense, net | — |
| | (1,228 | ) | | 64 |
| | (168 | ) | | — |
| | (1,332 | ) |
(Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries | — |
| | (27,451 | ) | | 22,489 |
| | 715 |
| | — |
| | (4,247 | ) |
Income tax (benefit) expense | — |
| | (1,597 | ) | | 666 |
| | 246 |
| | — |
| | (685 | ) |
(Loss) income from continuing operations before equity in (loss) income of subsidiaries | — |
| | (25,854 | ) | | 21,823 |
| | 469 |
| | — |
| | (3,562 | ) |
Equity in (loss) income of subsidiaries | (3,243 | ) | | 22,810 |
| | 441 |
| | — |
| | (20,008 | ) | | — |
|
(Loss) income from continuing operations | (3,243 | ) | | (3,044 | ) | | 22,264 |
| | 469 |
| | (20,008 | ) | | (3,562 | ) |
(Loss) income from discontinued operations, net of taxes | — |
| | (199 | ) | | 546 |
| | (28 | ) | | — |
| | 319 |
|
Net (loss) income | (3,243 | ) | | (3,243 | ) | | 22,810 |
| | 441 |
| | (20,008 | ) | | (3,243 | ) |
Other comprehensive (loss) income: | | | | | | | | | | | |
Other comprehensive (loss) income of subsidiaries | (460 | ) | | (1,641 | ) | | (872 | ) | | — |
| | 2,973 |
| | — |
|
Changes in pension and other employee benefit accounts, net of taxes | — |
| | 1,181 |
| | 252 |
| | — |
| | — |
| | 1,433 |
|
Currency translation adjustment, net | — |
| | — |
| | (1,021 | ) | | (872 | ) | | — |
| | (1,893 | ) |
Total other comprehensive (loss) income | (460 | ) | | (460 | ) | | (1,641 | ) | | (872 | ) | | 2,973 |
| | (460 | ) |
Comprehensive (loss) income | $ | (3,703 | ) | | $ | (3,703 | ) | | $ | 21,169 |
| | $ | (431 | ) | | $ | (17,035 | ) | | $ | (3,703 | ) |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the nine months ended September 26, 2015 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net sales | $ | — |
| | $ | 653,778 |
| | $ | 605,967 |
| | $ | 3,074 |
| | $ | — |
| | $ | 1,262,819 |
|
Cost of sales | — |
| | 561,734 |
| | 487,539 |
| | 731 |
| | — |
| | 1,050,004 |
|
Selling, general and administrative expenses | — |
| | 87,595 |
| | 48,424 |
| | 540 |
| | — |
| | 136,559 |
|
Amortization of intangible assets | — |
| | 543 |
| | 4,865 |
| | 348 |
| | — |
| | 5,756 |
|
Restructuring and other charges | — |
| | 9,842 |
| | 1,687 |
| | — |
| | — |
| | 11,529 |
|
Operating (loss) income | — |
| | (5,936 | ) | | 63,452 |
| | 1,455 |
| | — |
| | 58,971 |
|
Interest expense, net | — |
| | 75,833 |
| | 168 |
| | — |
| | — |
| | 76,001 |
|
Intercompany interest (income) expense | — |
| | (765 | ) | | 765 |
| | — |
| | — |
| | — |
|
Loss on early extinguishment of debt, net | — |
| | 559 |
| | — |
| | — |
| | — |
| | 559 |
|
Other expense (income), net | — |
| | (435 | ) | | (106 | ) | | (232 | ) | | — |
| | (773 | ) |
(Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries | — |
| | (81,128 | ) | | 62,625 |
| | 1,687 |
| | — |
| | (16,816 | ) |
Income tax (benefit) expense | — |
| | (4,194 | ) | | 1,976 |
| | 498 |
| | — |
| | (1,720 | ) |
(Loss) income from continuing operations before equity in (loss) income of subsidiaries | — |
| | (76,934 | ) | | 60,649 |
| | 1,189 |
| | — |
| | (15,096 | ) |
Equity in (loss) income of subsidiaries | (13,327 | ) | | 63,807 |
| | 982 |
| | — |
| | (51,462 | ) | | — |
|
(Loss) income from continuing operations | (13,327 | ) | | (13,127 | ) | | 61,631 |
| | 1,189 |
| | (51,462 | ) | | (15,096 | ) |
(Loss) income from discontinued operations, net of taxes | — |
| | (200 | ) | | 2,176 |
| | (207 | ) | | — |
| | 1,769 |
|
Net (loss) income | (13,327 | ) | | (13,327 | ) | | 63,807 |
| | 982 |
| | (51,462 | ) | | (13,327 | ) |
Other comprehensive income (loss): | | | | | | | | | | | |
Other comprehensive income (loss) of subsidiaries | 985 |
| | (2,880 | ) | | (890 | ) | | — |
| | 2,785 |
| | — |
|
Changes in pension and other employee benefit accounts, net of taxes | — |
| | 3,865 |
| | 252 |
| | — |
| | — |
| | 4,117 |
|
Currency translation adjustment, net | — |
| | — |
| | (2,242 | ) | | (890 | ) | | — |
| | (3,132 | ) |
Total other comprehensive income (loss) | 985 |
| | 985 |
| | (2,880 | ) | | (890 | ) | | 2,785 |
| | 985 |
|
Comprehensive (loss) income | $ | (12,342 | ) | | $ | (12,342 | ) | | $ | 60,927 |
| | $ | 92 |
| | $ | (48,677 | ) | | $ | (12,342 | ) |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the nine months ended September 26, 2015 (in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Issuer | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | | | | | |
Net cash provided by (used in) operating activities of continuing operations | $ | 1,481 |
| | $ | 86,182 |
| | $ | (85,589 | ) | | $ | (574 | ) | | $ | — |
| | $ | 1,500 |
|
Net cash provided by operating activities of discontinued operations | — |
| | — |
| | 13,039 |
| | 306 |
| | — |
| | 13,345 |
|
Net cash provided by (used in) operating activities | 1,481 |
| | 86,182 |
| | (72,550 | ) | | (268 | ) | | — |
| | 14,845 |
|
Cash flows from investing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | — |
| | (14,315 | ) | | (4,693 | ) | | (237 | ) | | — |
| | (19,245 | ) |
Cost of business acquisitions, net of cash acquired | — |
| | (1,996 | ) | | — |
| | — |
| | — |
| | (1,996 | ) |
Proceeds from sale of property, plant and equipment | — |
| | 586 |
| | 885 |
| | — |
| | — |
| | 1,471 |
|
Proceeds from sale of assets | — |
| | — |
| | 2,180 |
| | — |
| | — |
| | 2,180 |
|
Net cash used in investing activities of continuing operations | — |
| | (15,725 | ) | | (1,628 | ) | | (237 | ) | | — |
| | (17,590 | ) |
Net cash used in investing activities of discontinued operations | — |
| | — |
| | (1,864 | ) | | — |
| | — |
| | (1,864 | ) |
Net cash used in investing activities | — |
| | (15,725 | ) | | (3,492 | ) | | (237 | ) | | — |
| | (19,454 | ) |
Cash flows from financing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Payment of financing-related costs and expenses and debt issuance discounts | — |
| | (1,309 | ) | | — |
| | — |
| | — |
| | (1,309 | ) |
Repayments of other long-term debt | — |
| | (4,763 | ) | | 1,418 |
| | — |
| | — |
| | (3,345 | ) |
Repayment of 11.5% senior notes due 2017 | — |
| | (22,720 | ) | | — |
| | — |
| | — |
| | (22,720 | ) |
Purchase and retirement of common stock upon vesting of RSUs | (218 | ) | | — |
| | — |
| | — |
| | — |
| | (218 | ) |
Proceeds from exercise of stock options | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Borrowings under ABL Facility due 2021 | — |
| | 358,900 |
| | — |
| | — |
| | — |
| | 358,900 |
|
Repayments under ABL Facility due 2021 | — |
| | (328,500 | ) | | — |
| | — |
| | — |
| | (328,500 | ) |
Intercompany advances | (1,265 | ) | | (76,014 | ) | | 75,440 |
| | 1,839 |
| | — |
| | — |
|
Net cash (used in) provided by financing activities of continuing operations | (1,481 | ) | | (74,406 | ) | | 76,858 |
| | 1,839 |
| | — |
| | 2,810 |
|
Net cash used in financing activities of discontinued operations | — |
| | — |
| | (352 | ) | | — |
| | — |
| | (352 | ) |
Net cash (used in) provided by financing activities | (1,481 | ) | | (74,406 | ) | | 76,506 |
| | 1,839 |
| | — |
| | 2,458 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (866 | ) | | 330 |
| | — |
| | (536 | ) |
Net (decrease) increase in cash and cash equivalents | — |
| | (3,949 | ) | | (402 | ) | | 1,664 |
| | — |
| | (2,687 | ) |
Cash and cash equivalents at beginning of period | — |
| | 10,965 |
| | 844 |
| | 2,784 |
| | — |
| | 14,593 |
|
Cash and cash equivalents at end of period | — |
| | 7,016 |
| | 442 |
| | 4,448 |
| | — |
| | 11,906 |
|
Less cash and cash equivalents of discontinued operations | — |
| | — |
| | (82 | ) | | (2,250 | ) | | — |
| | (2,332 | ) |
Cash and cash equivalents of continuing operations at end of period | $ | — |
| | $ | 7,016 |
| | $ | 360 |
| | $ | 2,198 |
| | $ | — |
| | $ | 9,574 |
|
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, which we refer to as MD&A, 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 January 2, 2016, which we refer to as our 2015 Form 10-K. Item 7 of our 2015 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of October 1, 2016. Cenveo, Inc. and its subsidiaries are referred to herein as "Cenveo," the "Company," "we," "our," or "us."
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," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe" or "continue" and similar expressions, or as other statements which 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 which could cause actual results to differ materially from management’s expectations include, without limitation: (i) United States and global economic conditions could adversely affect us; (ii) our substantial level of indebtedness could materially adversely affect our financial condition, liquidity and ability to service or refinance our debt, and prevent us from fulfilling our business obligations; (iii) our ability to pay the principal of, or to reduce or refinance, our outstanding indebtedness; (iv) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (v) additional borrowings available to us which could further exacerbate our risk exposure from debt; (vi) our ability to meet the New York Stock Exchange's, which we refer to as the NYSE, continued listing standards which could result in the NYSE delisting our common shares, which would have an adverse impact on the trading volume, liquidity and market price of our common shares; (vii) our ability to successfully integrate acquired businesses with our business; (viii) a decline in our consolidated profitability or profitability within one of our individual reporting units could result in the impairment of our assets, including goodwill and other long-lived assets; (ix) the industries in which we operate our business are highly competitive and extremely fragmented; (x) a general absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (xi) factors affecting the United States postal services impacting demand for our products; (xii) the availability of the Internet and other electronic media adversely affecting our business; (xiii) increases in paper costs and decreases in the availability of raw materials; (xiv) our labor relations; (xv) our compliance with environmental laws; (xvi) our dependence on key management personnel; (xvii) any failure, interruption or security lapse of our information technology systems; and (xviii) statutory requirements that share repurchases are subject to certain asset sufficiency standards. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. Additional information regarding these and other factors can be found elsewhere in this report, and in our other filings with the Securities and Exchange Commission, which we refer to as the SEC.
Business Overview
We are a diversified manufacturing company focused on print-related products. Our broad portfolio of products primarily includes envelope converting, commercial printing and label manufacturing. We operate a global network of strategically located manufacturing facilities, serving a diverse base of customers. Generally, print-related industries are highly fragmented and extremely competitive due to over-capacity and pricing pressures. We believe these factors will continue to impact our results of operations in the future; however, we believe our focus on our diverse product offerings, our improved cost structure and efforts to improve our capital structure will allow for us to return value to our shareholders.
Our business strategy has been, and continues to be, focused on improving our operating margins, improving our capital structure and providing quality product offerings to our customers. We also are continuing to review options for our non-strategic assets and product lines. We also continue to make strategic investments and focused capital expenditures. The strategic investments focus on improving our e-commerce customer experience and reinvesting into our equipment base. We believe this strategy has allowed us to diversify our revenue base, maintain our low cost structure and deliver quality product offerings to our customers.
We operate our business in three complementary reportable segments: the envelope segment, the print segment and the label segment.
Envelope. We are the largest envelope manufacturer in North America. Our envelope segment represented approximately 52.4% and 52.6% of our net sales for the three and nine months ended October 1, 2016, respectively.
Our envelope segment offers direct mail products used for customer solicitations and transactional envelopes used for billing and remittance by end users including financial institutions, insurance companies and telecommunications companies. We also produce a broad line of specialty and stock envelopes which are sold through wholesalers, distributors and national catalogs for the office product markets and office product superstores.
Print. We are one of the leading commercial printers in North America. On August 7, 2015, we added to our print operations by acquiring certain assets of Asendia USA, Inc., which we refer to as Asendia. The acquired assets provide letter shop, data processing, bindery and digital printing offerings. Our print segment represented approximately 30.0% and 29.0% of our net sales for the three and nine months ended October 1, 2016, respectively.
Our print segment primarily caters to the consumer products, automotive, travel and leisure and telecommunications industries. We provide a wide array of print offerings to our customers including electronic prepress, digital asset archiving, direct-to-plate technology, high-quality color printing on web and sheet-fed presses, digital printing and content management. The broad selection of print products we produce includes car brochures, annual reports, direct mail products, advertising literature, corporate identity materials and brand marketing materials. Our content management business offers complete solutions, including: editing, content processing, content management, electronic peer review, production, distribution and reprint marketing.
Label. We are a leading label manufacturer and one of the largest North American prescription label manufacturers for retail pharmacy chains. Our label segment represented approximately 17.6% and 18.4% of our net sales for the three and nine months ended October 1, 2016, respectively.
Our label segment produces a diverse line of custom labels for a broad range of industries including manufacturing, warehousing, packaging, food and beverage, and health and beauty, which we sell through extensive networks of distributors or within similar resale channels. We provide direct mail and overnight packaging labels, food and beverage labels, and shelf and scale labels for national and regional customers. We produce pressure-sensitive prescription labels for the retail pharmacy chain market.
Consolidated Operating Results
This MD&A includes an overview of our condensed consolidated results of operations for the three and nine months ended October 1, 2016, and September 26, 2015, followed by a discussion of the results of operations of each of our reportable segments for the same periods.
2016 Overview
Generally, print-related industries remain highly fragmented and extremely competitive due to over-capacity and pricing pressures. We believe these factors, combined with uncertain economic conditions in the United States, will continue to impact our results of operations. However, we believe the diversification of our revenue and operating income along with the market dynamics that exist within certain markets in which we operate, such as envelope converting, are not as fragmented or competitive as commercial print markets. As such, we believe that our position in specific niche print markets will provide an opportunity for us to have operating trends that perform better than certain other print dynamic markets.
Our current management focus is on the following areas:
Improving Operating Margins
In 2014, we substantially completed our integration of certain assets of National Envelope Corporation, which we refer to as National, which allowed us to focus on profitability improvement and other cost reduction actions in our envelope platform throughout 2015 and into 2016. We believe the accelerated integration plan we completed during 2014 has provided meaningful improvements in our envelope segment's operating results during 2015 and 2016, as we realized significant increases in gross profit and operating income, as compared to 2014 and prior years.
During the last two years, we have completed select downsizing and consolidation of our commercial print assets; activities that we believe will allow us to continue to serve a broad range of customers in targeted geographic locations, as well as with our
national customer base. These consolidations have also allowed us to lower our fixed cost infrastructure within our print operations while expanding our customer experience.
We also continue to make strategic investments and focused capital expenditures within our labels operations. The strategic investments focus on improving our e-commerce customer experience and reinvesting into our equipment base. The initiation of a multi-phased, multi-year plan to reinvest into state-of-the-art labeling equipment should significantly increase our capabilities, minimize machine downtime and allow for further margin expansion within our label operations.
Strategic Asset Review
During 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets. As a result of this strategic review, during the first quarter of 2016, we completed the sale of our folded carton and shrink sleeve packaging businesses, along with our one top-sheet lithographic print operation, which we refer to as the Packaging Business.
During 2015, we also completed two small strategic transactions, which we refer to as the 2015 Label Transactions, which helped facilitate the exit of two non-core product lines reported within our label operating segment. Additionally, on May 2, 2016, in connection with our plan to exit our coating operation that we announced in the third quarter of 2015, we entered into an agreement with a customer to sell certain proprietary rights and specific production equipment used to produce this customer’s specific products. As a result, we recognized a gain of approximately $2.0 million associated with the sale of the proprietary rights and equipment, which was recorded in other income, net in our condensed consolidated statement of operations during the second quarter of 2016. As part of this transaction, we also earned production incentives of $3.0 million during the second quarter of 2016 associated with incremental production and delivery targets with this customer, which were recorded in net sales in our condensed consolidated statement of operations. We refer to this transaction as the 2016 Label Transaction.
We believe there continues to be opportunities for further transactions of various magnitudes given our desire to tighten our management focus and minimize non-core product lines and monetize assets opportunistically.
Improving our Capital Structure
Since the beginning of 2012, we have been focused on improving our capital structure through a number of initiatives including working capital improvements, exiting underperforming or non-strategic businesses, and taking advantage of attractive leveraged loan and high yield debt market conditions. In connection with these activities, through the end of 2015, we successfully reduced our outstanding debt and weighted average interest rate, which resulted in annual cash interest savings of approximately $20 million. We have been able to accomplish this while reinvesting cash into our businesses via four acquisitions and focused capital expenditures.
The sale of the Packaging Business, as well as our continued operational improvements, provided us greater flexibility to address our higher interest rate debt instruments in 2016. During the first quarter of 2016, we extinguished $34.5 million of our 7% senior exchangeable notes due 2017, which we refer to as the 7% Notes, and $10.0 million of our 11.5% senior notes due 2017, which we refer to as the 11.5% Notes.
During the second quarter of 2016, we closed on an exchange offer, which we refer to as the Exchange Offer, whereby approximately 80% of our 11.5% Notes were exchanged for newly issued 6.000% senior notes due 2024, which we refer to as the 6.000% Unsecured Notes, and warrants, which we refer to as the Warrants, to purchase shares of common stock, par value $0.01 per share, of Cenveo, Inc., which we refer to as the Common Stock, representing 16.6% of our outstanding Common Stock as of June 10, 2016. Each Warrant is currently exercisable for 0.125 shares of Common Stock (as adjusted as a result of the Company’s recent reverse stock split). For each $1,000 principal amount of 11.5% Notes exchanged, the holder received $700 aggregate principal amount of 6.000% Unsecured Notes and Warrants to purchase 9.25 shares of Common Stock. The retired 11.5% Notes represented approximately 80% of all such notes outstanding at the commencement of the Exchange Offer. Upon closing the Exchange Offer, we emerged with lower overall debt, stronger cash flow due to significantly lower future interest expense, and no significant scheduled debt maturities until August 2019.
During the third quarter of 2016, we completed the last transactions contemplated by the Support Agreement, dated as of May 10, 2016, which we refer to as the Support Agreement, pursuant to which Allianz Global Investors U.S. LLC, which we refer to as Allianz, agreed to, among other things, tender and sell to us all of the 7% Notes owned by Allianz, which we refer to as the 7% Note Purchases, in the aggregate principal amount of $37.5 million in exchange for: (a) payment in cash in an amount equal to (i) the aggregate principal amount of such 7% Notes multiplied by 0.6 plus (ii) an amount of interest on the amount payable pursuant to the immediately preceding clause (i) at an annual interest rate of 7% per annum, such interest accruing from
June 10, 2016 until (and including) the closings of the purchases and computed based on a year of 360 days; (b) payment in cash of interest that shall have accrued in respect of such 7% Notes in accordance with the indenture relating to such 7% Notes but remained unpaid at the closings of the purchases; and (c) delivery to Allianz of Warrants to purchase Common Stock, representing in the aggregate 3.3% of the outstanding Common Stock as of June 10, 2016.
In connection with such agreement, during the second quarter of 2016, we repurchased an aggregate of $16.5 million of 7% Notes for $10.1 million and issued an aggregate of 984,342 Warrants. During the third quarter of 2016, we repurchased an aggregate of $21.0 million of 7% Notes, which we refer to as the July 2016 Repurchase, for $13.0 million and issued an aggregate of 1,255,485 Warrants.
Concurrent with the above transactions, we amended our asset-based revolving credit facility, which we refer to as the ABL Facility, to, among other things, extend its term through 2021 and reduce the commitments thereunder by $50 million to $190 million, which we refer to as the ABL Amendment No. 4. The ABL Facility now matures in June 2021, with a springing maturity of May 2019 ahead of our existing 6.000% senior priority secured notes due 2019, which we refer to as the 6.000% Secured Notes, in the event that more than $10 million of the 6.000% Secured Notes remain outstanding at such time. On the same date, we entered into a secured indenture and note purchase agreement with Allianz pursuant to which we issued new secured notes in an aggregate principal amount of $50.0 million bearing interest at 4% per annum, which we refer to as the 4% Secured Notes. We applied the proceeds to reduce the outstanding principal amount under the ABL Facility. The 4% Secured Notes mature in December 2021.
During the fourth quarter of 2016, we extinguished $5.7 million of our 7% Notes at par. After these transactions, approximately $5.5 million aggregate principal amount of our 7% Notes remain outstanding.
As a result of the above transactions, we expect to realize additional annualized cash interest savings in excess of $20 million in 2017 as compared to 2015.
Provide Quality Product Offerings
We conduct regular reviews of our product offerings, manufacturing processes and distribution methods to ensure that they meet the changing needs of our customers. We have recently made, and expect to continue to make, technology investments that enhance our sales organization's ability to offer our customers a product that allows them to manage their programs from content through distribution. We believe our multi-product offerings along with the advancement of our current technology platform will allow us to penetrate deeper into our customer’s supply chains. Additionally, with the acquisition of Asendia on August 7, 2015, we added letter shop, data processing, bindery and digital print offerings to our commercial printing operations, all of which are areas we believe add value to our capabilities of serving our customer’s needs in-house. Lastly, we are also investing in digital and variable technology as we have seen increased customer demand for these technologies. By expanding our product offerings, we intend to increase cross-selling opportunities to our existing customer base and mitigate the impact of any decline in a given market or product.
Discontinued Operations
During 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets. As a result of this strategic review, during the first quarter of 2016, we completed the sale of our Packaging Business. The financial results of the Packaging Business have been accounted for as discontinued operations. Our historical, condensed consolidated financial statements have been retroactively adjusted to give recognition to the discontinued operations for all periods presented. See Note 3 to our condensed consolidated financial statements for further discussion regarding our discontinued operations.
Reportable Segments
We operate three complementary reportable segments: envelope, print and label. Prior to the disposition of the Packaging Business, we operated four operating segments: envelope, print, label and packaging. Based upon similar economic characteristics and management reporting, prior to the disposition of the Packaging Business, we previously aggregated the label and packaging operating segments to have a total of three reportable segments: envelope, print, and label and packaging.
See below for a summary of net sales and operating income (loss) for our reportable segments that we use internally to assess our operating performance. Our three and nine month reporting periods each consisted of 13 and 39 weeks, respectively, and ended on October 1, 2016, and September 26, 2015.
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
| | (in thousands, except per share amounts) | | (in thousands, except per share amounts) |
Net sales | | $ | 405,955 |
| | $ | 419,783 |
| | $ | 1,242,757 |
| | $ | 1,262,819 |
|
Operating income (loss): | | |
| | |
| | |
| | |
Envelope | | $ | 16,832 |
| | $ | 17,746 |
| | $ | 51,604 |
| | $ | 49,297 |
|
Print | | 5,446 |
| | 1,541 |
| | 10,756 |
| | 6,207 |
|
Label | | 6,764 |
| | 10,146 |
| | 23,373 |
| | 31,000 |
|
Corporate | | (8,169 | ) | | (9,917 | ) | | (26,276 | ) | | (27,533 | ) |
Total operating income | | 20,873 |
| | 19,516 |
| | 59,457 |
| | 58,971 |
|
Interest expense, net | | 20,318 |
| | 25,095 |
| | 65,925 |
| | 76,001 |
|
(Gain) loss on early extinguishment of debt, net | | (7,442 | ) | | — |
| | (80,328 | ) | | 559 |
|
Other income, net | | (1,735 | ) | | (1,332 | ) | | (2,825 | ) | | (773 | ) |
Income (loss) from continuing operations before income taxes | | 9,732 |
| | (4,247 | ) | | 76,685 |
| | (16,816 | ) |
Income tax expense (benefit) | | 987 |
| | (685 | ) | | 4,060 |
| | (1,720 | ) |
Income (loss) from continuing operations | | 8,745 |
| | (3,562 | ) | | 72,625 |
| | (15,096 | ) |
Income (loss) from discontinued operations, net of taxes | | 686 |
| | 319 |
| | (4,435 | ) | | 1,769 |
|
Net income (loss) | | $ | 9,431 |
| | $ | (3,243 | ) | | $ | 68,190 |
| | $ | (13,327 | ) |
Income (loss) per share – basic: | | |
| | |
| | |
| | |
Continuing operations | | $ | 1.02 |
| | $ | (0.42 | ) | | $ | 8.53 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.52 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.10 |
| | $ | (0.38 | ) | | $ | 8.01 |
| | $ | (1.57 | ) |
| | | | | | | | |
Income (loss) per share – diluted: | | | | | | |
| | |
|
Continuing operations | | $ | 1.00 |
| | $ | (0.42 | ) | | $ | 7.61 |
| | $ | (1.78 | ) |
Discontinued operations | | 0.08 |
| | 0.04 |
| | (0.46 | ) | | 0.21 |
|
Net income (loss) | | $ | 1.08 |
| | $ | (0.38 | ) | | $ | 7.15 |
| | $ | (1.57 | ) |
Net Sales
Net sales decreased $13.8 million, or 3.3%, in the third quarter of 2016, as compared to the third quarter of 2015. Sales in our envelope segment decreased $5.9 million, sales in our label segment decreased $5.8 million and sales in our print segment decreased $2.1 million.
Net sales decreased $20.1 million, or 1.6%, in the first nine months of 2016, as compared to the first nine months of 2015. Sales in our label segment decreased $10.5 million and sales in our envelope segment decreased $9.9 million, partially offset by increased sales in our print segment of $0.4 million.
See Segment Operations below for a detailed discussion of the primary factors affecting the change in our net sales by reportable segment.
Operating Income
Operating income increased $1.4 million, or 7.0%, in the third quarter of 2016, as compared to the third quarter of 2015. This increase was due to an increase in operating income of $3.9 million from our print segment and a decrease in corporate expenses of $1.7 million. These increases in operating income were partially offset by a decrease in operating income from our label segment of $3.4 million and a decrease in operating income from our envelope segment of $0.9 million.
Operating income increased $0.5 million, or 0.8%, in the first nine months of 2016, as compared to the first nine months of 2015. This increase was due to an increase in operating income of $4.5 million from our print segment, an increase in operating income from our envelope segment of $2.3 million and a decrease in corporate expenses of $1.3 million, partially offset by a decrease in operating income from our label segment of $7.6 million.
See Segment Operations below for a more detailed discussion of the primary factors for the changes in operating income by reportable segment.
Interest Expense
Interest expense decreased $4.8 million to $20.3 million in the third quarter of 2016, as compared to $25.1 million in the third quarter of 2015. The decrease was primarily due to the Exchange Offer; the partial retirement of our 11.5% Notes during 2015 and 2016 and the partial retirement of our 7% Notes during 2016. Interest expense in the third quarter of 2016 reflected average outstanding debt of approximately $1.1 billion and a weighted average interest rate of 6.6%. This compares to average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.3% in the third quarter of 2015.
Interest expense decreased $10.1 million to $65.9 million in the first nine months of 2016, as compared to $76.0 million in the first nine months of 2015. The decrease was primarily due to the Exchange Offer, the partial retirement of our 11.5% Notes during 2015 and 2016 and the partial retirement of our 7% Notes during 2016. Interest expense in the first nine months of 2016 reflected average outstanding debt of approximately $1.1 billion and a weighted average interest rate of 6.9%. This compares to average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.3% in the first nine months of 2015.
We expect interest expense for the remainder of 2016 will be lower than the same period in 2015, primarily due to the Exchange Offer and the partial retirement of our 11.5% Notes and our 7% Notes.
(Gain) Loss on Early Extinguishment of Debt
In the third quarter of 2016, we recorded a gain on early extinguishment of debt of $7.4 million related to the July 2016 Repurchase, of which $8.4 million related to a discount on the purchase price, partially offset by the fair value of the Warrants issued of $0.7 million, a write off of unamortized debt issuance costs of $0.2 million, and $0.1 million of transaction fees and expenses. The fair value of the Warrants was determined using the Black-Scholes-Merton option-pricing model.
In the second quarter of 2016, we recorded a gain on early extinguishment of debt of $46.1 million related to the Exchange Offer, of which $49.6 million related to a discount on the difference of the net carrying value of the extinguished 11.5% Notes and the fair value of the new 6.000% Unsecured Notes, partially offset by a write-off of unamortized debt issuance costs of $0.8 million, a write-off of original issuance discount of $1.2 million and $1.5 million of transaction fees and expenses.
Additionally, during the second quarter of 2016, we recorded a gain on early extinguishment of debt of $5.4 million related to the repurchase of $16.5 million of our 7% Notes, of which $6.0 million related to a discount on the purchase price, partially offset by $0.5 million in fees paid to lenders, and a write off of unamortized debt issuance costs of $0.1 million.
Lastly, during the second quarter of 2016, in connection with ABL Amendment No. 4, we recorded a loss on early extinguishment of debt of $0.2 million related to the write off of unamortized debt issuance costs.
In the first quarter of 2016, we recorded a gain on early extinguishment of debt of $16.5 million related to the repurchase of $34.5 million of our 7% Notes, of which $16.8 million related to a discount on the purchase price, partially offset by a write-off of unamortized debt issuance costs of $0.3 million. Additionally, we recorded a gain on early extinguishment of debt of $5.1 million related to the repurchase of $10.0 million of our 11.5% Notes, of which $5.3 million related to a discount on the purchase, partially offset by a write-off of unamortized debt issuance costs of $0.1 million and a write-off of original issuance discount of $0.1 million.
In the second quarter of 2015, we recorded a loss on early extinguishment of debt of $0.1 million related to the repurchase of $6.8 million of our 11.5% Notes.
In the first quarter of 2015, we recorded a loss on early extinguishment of debt of $0.4 million related to the repurchase of $15.8 million of our 11.5% Notes, of which $0.2 million related to the write-off of unamortized debt issuance costs, and $0.2 million related to the write-off of original issuance discount.
We recognized a total gain on early extinguishment of debt of $7.4 million and $80.3 million during the three and nine months ended October 1, 2016, respectively, and a total loss on early extinguishment of debt of zero and $0.6 million during the three and nine months ended September 26, 2015, respectively.
Other Income, Net
During the three and nine months ended October 1, 2016, we recognized other income, net, of $1.7 million and $2.8 million, respectively. This is primarily comprised of a gain of approximately $2.1 million recognized in connection with a sale of a manufacturing facility within our envelope segment during the third quarter of 2016 and a gain of approximately $2.0 million during the second quarter of 2016 in connection with the 2016 Label Transaction, partially offset by non-operating expenses.
During the three and nine months ended September 26, 2015, we recognized other income, net, of $1.3 million and $0.8 million, respectively. Other income, net, for both periods in 2015 is primarily related to cash proceeds of $2.2 million received during the third quarter of 2015 related to the 2015 Label Transactions.
Income Taxes
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
| | (in thousands) | | (in thousands) |
Income tax expense (benefit) from U.S. operations | | $ | 934 |
| | $ | (931 | ) | | $ | 3,229 |
| | $ | (2,218 | ) |
Income tax expense from foreign operations | | 53 |
| | 246 |
| | 831 |
| | 498 |
|
Income tax expense (benefit) | | $ | 987 |
| | $ | (685 | ) | | $ | 4,060 |
| | $ | (1,720 | ) |
Effective income tax rate | | 10.1 | % | | 16.1 | % | | 5.3 | % | | 10.2 | % |
Income Tax Expense
In the third quarter of 2016, we had an income tax expense of $1.0 million, compared to an income tax benefit of $0.7 million in the third quarter of 2015. The tax expense for the third quarter of 2016 and the tax benefit for the third quarter of 2015 primarily related to income taxes on our domestic operations.
In the first nine months of 2016, we had an income tax expense of $4.1 million, compared to an income tax benefit of $1.7 million in the first nine months of 2015. The tax expense for the first nine months of 2016 and the tax benefit for the first nine months of 2015 primarily related to income taxes on our domestic operations.
Our effective tax rate for the three and nine months ended 2016 and 2015 differed from the federal statutory rate, primarily as a result of having a full valuation allowance related to our net deferred tax assets in the U.S. We do not believe our unrecognized tax benefits will change significantly for the remainder of 2016. Our federal tax loss carryforward at the end of the third quarter 2016 was $207.2 million after utilization of $125.3 million during the first nine months of 2016, primarily due to the gain on early extinguishment of debt and the sale of our Packaging Business.
Valuation Allowance
We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowances, on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. The factors considered in our determination of the probability of the realization of the deferred tax assets include, but are not limited to: recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, the duration of statutory carryforward periods and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences as a measure of our cumulative results in recent years. In the United States, our analysis indicates that we have cumulative three year historical losses on this basis. While there are significant impairment, restructuring and refinancing charges driving our cumulative three year loss, this is considered significant negative evidence which is objective and verifiable and, therefore, difficult to overcome. However, the three year loss position is not solely determinative and accordingly, we consider all other available positive and negative evidence in our analysis. During the current year, we have recorded significant taxable income as a result of our debt refinancing and repurchases during the first nine months of 2016, as well as the sale of our Packaging Business in the first quarter of 2016. Although significant taxable income will be realized during the current year related to these transactions, we considered our remaining operations to currently not rise to the level needed in order to overcome the negative evidence from the recent prior years to merit the reversal of the valuation allowance completely. Based upon our analysis, we believe it is more likely than not that the net deferred tax assets in the United States will not be fully realized in the future. Accordingly, we have a valuation allowance related to those net deferred tax assets of $131.6 million as of October 1, 2016. Our valuation allowance declined $31.6 million from January 2, 2016, primarily due to the gain on early extinguishment of debt and the sale of our Packaging Business. We will continue to closely monitor our position with respect to the full realization of our net deferred tax assets and the corresponding valuation allowances on those assets and make adjustments as needed in the future as our facts and circumstances dictate.
There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. We intend to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve on a sustained basis, or if certain tax planning strategies are implemented, our conclusions regarding the need for valuation allowances could change, resulting in the reversal of some or all of the valuation allowances in the future, which could have a significant impact on income tax expense or benefit in the period recognized and subsequent periods.
Income (Loss) from Discontinued Operations, Net of Taxes
On January 19, 2016, we completed the sale of our Packaging Business. We received total cash proceeds of approximately $88.1 million, net of transaction costs of $6.3 million. This resulted in the recognition of a total pre-tax loss of $5.1 million, of which a gain of $1.2 million and a loss of $0.1 million were recorded during the three and nine months ended October 1, 2016,
respectively. In the fourth quarter of 2015, we recorded a non-cash loss on the sale of discontinued operations of $5.0 million. The loss was based on the executed purchase agreement and the net assets of the Packaging Business. During the fourth quarter of 2015, we recorded a non-cash goodwill impairment charge of $9.9 million related to this transaction. In addition to the proceeds, $5.0 million of purchase price consideration has been held in escrow and will be paid to us subject to the satisfaction of certain conditions.
In the third quarter of 2016, income from discontinued operations was $0.7 million, primarily attributable to the receipt of a portion of the purchase price consideration held in escrow.
In the first nine months of 2016, loss from discontinued operations was $4.4 million, primarily comprised of: (i) a loss from operations of $3.0 million primarily from our Packaging Business; (ii) a loss on sale of our Packaging Business of $0.1 million; and (iii) tax expense of $1.4 million.
In the third quarter of 2015, income from discontinued operations was $0.3 million, primarily comprised of income from operations of our Packaging Business of $0.9 million and tax expense of $0.5 million.
In the first nine months of 2015, income from discontinued operations was $1.8 million, primarily comprised of income from operations of our Packaging Business of $3.2 million and tax expense of $1.4 million.
Segment Operations
Our Chief Executive Officer monitors the performance of the ongoing operations of our three reportable segments. We assess performance based on net sales and operating income.
Envelope
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
| | (in thousands) | | (in thousands) |
Segment net sales | | $ | 212,578 |
| | $ | 218,454 |
| | $ | 654,115 |
| | $ | 664,003 |
|
Segment operating income | | $ | 16,832 |
| | $ | 17,746 |
| | $ | 51,604 |
| | $ | 49,297 |
|
Operating income margin | | 7.9 | % | | 8.1 | % | | 7.9 | % | | 7.4 | % |
Restructuring and other charges | | $ | 496 |
| | $ | 181 |
| | $ | 1,202 |
| | $ | 3,318 |
|
Segment Net Sales
Segment net sales for our envelope segment decreased $5.9 million, or 2.7%, in the third quarter of 2016, as compared to the third quarter of 2015, and decreased $9.9 million, or 1.5%, in the first nine months of 2016, as compared to the first nine months of 2015. These decreases were primarily due to: (i) lower sales volumes in our office products business line, primarily due to marketplace trends and certain customer inventory rationalization programs resulting in lower demand; and (ii) lower sales volumes from our wholesale and generic transactional envelope products. These decreases were partially offset by increased sales volumes within our direct mail platform, primarily driven by financial institutions.
Segment Operating Income
Segment operating income for our envelope segment decreased $0.9 million, or 5.2%, in the third quarter of 2016, as compared to the third quarter of 2015. The decrease was primarily due to: (i) lower gross margin of $1.0 million primarily due to lower sales volumes from office products, wholesale and generic transactional products partially offset by higher sales volumes from direct mail products; and (ii) higher restructuring and other charges of $0.3 million due to overhead cost eliminations implemented during the third quarter of 2016. These decreases were partially offset by lower selling, general and administrative expenses of $0.4 million primarily due to cost reduction initiatives and lower commission expense due to lower sales volumes.
Segment operating income for our envelope segment increased $2.3 million, or 4.7%, in the first nine months of 2016, as compared to the first nine months of 2015. The increase was primarily due to (i) lower restructuring and other charges of $2.1 million, primarily related to charges associated with the integration of certain assets of National with our operations in 2015; and (ii) lower selling, general and administrative expenses of $0.6 million primarily due to cost reduction initiatives and lower sales volumes. These increases were partially offset by lower gross margin of $0.4 million primarily due to lower sales volumes.
Print
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
| | (in thousands) | | (in thousands) |
Segment net sales | | $ | 121,739 |
| | $ | 123,875 |
| | $ | 360,879 |
| | $ | 360,520 |
|
Segment operating income | | $ | 5,446 |
| | $ | 1,541 |
| | $ | 10,756 |
| | $ | 6,207 |
|
Operating income margin | | 4.5 | % | | 1.2 | % | | 3.0 | % | | 1.7 | % |
Restructuring and other charges | | $ | 477 |
| | $ | 4,473 |
| | $ | 1,319 |
| | $ | 6,340 |
|
Segment Net Sales
Segment net sales for our print segment decreased $2.1 million, or 1.7%, in the third quarter of 2016, as compared to the third quarter of 2015, primarily due to: (i) lower sales volumes in our commercial print group, primarily driven by consumer products and educational customers and our publisher services group; and (ii) continued pricing pressures. These decreases were partially offset by: (i) higher sales volumes with our financial institution customers; and (ii) net sales generated from Asendia, as Asendia was only included in our 2015 results beginning on August 7, 2015, the date of acquisition.
Segment net sales for our print segment increased $0.4 million, or 0.1%, in the first nine months of 2016, as compared to the first nine months of 2015. These increases were primarily due to: (i) increased sales volume within our commercial print group, primarily driven by financial institutions; and (ii) net sales generated from Asendia, as Asendia was only included in our 2015 results beginning on August 7, 2015, the date of acquisition. These increases were partially offset by decreased sales volumes in our publisher services group and continued pricing pressures.
Segment Operating Income
Segment operating income for our print segment increased $3.9 million, or 253.4%, in the third quarter of 2016, as compared to the third quarter of 2015. The increase was primarily due to: (i) lower restructuring and other charges of $4.0 million due to the closure of a print facility during 2015; and (ii) higher gross margin of $0.6 million. These increases were partially offset by higher selling, general and administrative expenses of $0.7 million.
Segment operating income for our print segment increased $4.5 million, or 73.3%, in the first nine months of 2016, as compared to the first nine months of 2015. The increase was primarily due to lower restructuring and other charges of $5.0 million due to the closure of a print facility during 2015, partially offset by higher selling, general and administrative expenses of $0.7 million. Gross margin remained relatively flat.
Label
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 1, 2016 | | September 26, 2015 | | October 1, 2016 | | September 26, 2015 |
| | (in thousands) | | (in thousands) |
Segment net sales | | $ | 71,638 |
| | $ | 77,454 |
| | $ | 227,763 |
| | $ | 238,296 |
|
Segment operating income | | $ | 6,764 |
| | $ | 10,146 |
| | $ | 23,373 |
| | $ | 31,000 |
|
Operating income margin | | 9.4 | % | | 13.1 | % | | 10.3 | % | | 13.0 | % |
Restructuring and other charges | | $ | 36 |
| | $ | 281 |
| | $ | 4,132 |
| | $ | 479 |
|
Segment Net Sales
Segment net sales for our label segment decreased $5.8 million, or 7.5%, in the third quarter of 2016, as compared to the third quarter of 2015, primarily due to: (i) lower sales of $4.7 million related to the exit of our coating operation; and (ii) volume declines within certain of our existing long run label customers due to item rationalization.
Segment net sales for our label segment decreased $10.5 million, or 4.4%, in the first nine months of 2016, as compared to the first nine months of 2015, primarily due to: (i) lower sales of $6.5 million related to the exit of our coating operation; and (ii) volume declines within certain of our existing long run label customers, partially offset by: (i) increased volume within our custom label business, primarily due to our e-commerce initiatives; and (ii) one-time production incentives of $3.0 million related to the exit of our coating operation.
Segment Operating Income
Segment operating income for our label segment decreased $3.4 million, or 33.3%, in the third quarter of 2016, as compared to the third quarter of 2015. This decrease was primarily due to: (i) lower gross margin of $2.8 million primarily due to the exit of our coating operation and lower sales volumes; and (ii) higher selling, general and administrative expenses of $1.4 million primarily due to higher information technology depreciation and advertising expenses related to our e-commerce initiatives. These decreases were partially offset by lower amortization expense of $0.5 million due to an intangible asset being fully amortized during 2016.
Segment operating income for our label segment decreased $7.6 million, or 24.6%, in the first nine months of 2016, as compared to the first nine months of 2015. This decrease was primarily due to: (i) higher restructuring and other charges of $3.7 million related to our plans to exit our coating operation and the write down of an investment; (ii) higher selling, general and administrative expenses of $2.2 million, primarily due to higher information technology depreciation expense related to our e-commerce initiatives; and (iii) the impact on our gross margin due to the exit of our coating operation and lower sales volumes. These decreases were partially offset by: (i) production incentives of $3.0 million related to the exit of our coating operation; and (ii) decreased amortization expense of $1.3 million due to an intangible asset being fully amortized during 2016.
Corporate Expenses
Corporate expenses decreased $1.7 million in the third quarter of 2016, as compared to the third quarter of 2015, and decreased $1.3 million in the first nine months of 2016, as compared to the first nine months of 2015. These decreases were primarily due to: (i) lower selling, general and administrative expenses due to cost reduction initiatives; and (ii) income generated from our transition services agreement in connection with the sale of our Packaging Business. The decreases in corporate expenses were partially offset by increased restructuring and other charges due to overhead cost eliminations implemented during the third quarter of 2016.
Restructuring and Other Charges
Restructuring
We currently have two active cost savings, restructuring and integration plans, which are related to the implementation of cost savings initiatives focused on overhead cost eliminations, including headcount reductions and the closure of certain manufacturing facilities. We refer to these plans as the 2016 Plan and the 2015 Plan. During the first quarter of 2016, we began implementing the 2016 Plan and continued the 2015 Plan.
During 2015, we integrated certain assets of National, which we refer to as the National Plan, by completing the closure and consolidation of nine manufacturing facilities into our existing envelope operations and two new facilities.
We also currently have certain residual cost savings, restructuring and integration plans, which we refer to as the Residual Plans. As a result of these cost savings actions, over the last several years we have closed or consolidated a significant amount of manufacturing facilities and have had a significant number of headcount reductions. We do not anticipate any significant future expenses related to the Residual Plans, other than modifications to current assumptions for lease terminations, multi-employer pension withdrawal liabilities and ongoing expenses related to maintaining restructured assets.
During the third quarter of 2016, as a result of our restructuring and integration activities, we incurred $2.4 million of restructuring and other charges, which included $2.0 million of employee separation costs, multi-employer pension withdrawal expenses of $0.2 million, and building clean-up and other expenses of $0.2 million.
During the first nine months of 2016, as a result of our restructuring and integration activities, we incurred $8.3 million of restructuring and other charges, which included $2.9 million of employee separation costs, $2.4 million of net non-cash charges on long-lived assets, $0.3 million of equipment moving expenses, $0.2 million of lease termination expenses, multi-employer pension withdrawal expenses of $0.8 million, and building clean-up and other expenses of $1.7 million.
During the third quarter of 2015, as a result of our restructuring and integration activities, we incurred $5.5 million of restructuring and other charges, which included $0.7 million of employee separation costs, $0.1 million of equipment moving expenses, multi-employer pension withdrawal expenses of $4.2 million, and building clean-up and other expenses of $0.4 million.
During the first nine months of 2015, as a result of our restructuring and integration activities, we incurred $11.5 million of restructuring and other charges, which included $2.4 million of employee separation costs, $2.1 million of net non-cash charges on long-lived assets, $0.2 million of equipment moving expenses, $0.4 million of lease termination expenses, multi-employer pension withdrawal expenses of $4.6 million, and building clean-up and other expenses of $1.9 million.
As of October 1, 2016, our total restructuring liability was $20.2 million, of which $4.3 million is included in other current liabilities and $15.9 million, which is expected to be paid through 2032, is included in other liabilities in our condensed consolidated balance sheet. Our multi-employer pension withdrawal liabilities are $18.1 million of our remaining restructuring liabilities. We believe these liabilities represent our anticipated ultimate withdrawal liabilities; however, we are exposed to significant risks and uncertainties arising from our participation in these multi-employer pension plans. While it is not possible to quantify the potential impact of our future actions or the future actions of other participating employers from the multi-employer pension plans for which we have exited, our anticipated ultimate withdrawal liabilities may be significantly impacted in the future due to lower future contributions or increased withdrawals from other participating employers.
Goodwill and Intangible Asset Impairments
There were no goodwill or intangible asset impairments recorded in the three and nine months ended October 1, 2016, or September 26, 2015.
Liquidity and Capital Resources
Net Cash Provided By Operating Activities of Continuing Operations. Net cash provided by operating activities of continuing operations was $13.4 million in the first nine months of 2016, primarily due to: (i) a source of cash from accounts receivables due to the timing of collections from and sales to our customers; (ii) lower inventories as a result of our inventory management programs and (iii) our net income of $68.2 million adjusted for non-cash items of $28.6 million, primarily our gain on early extinguishment of debt of $80.3 million, offset by depreciation and amortization expense of $35.5 million. These inflows were partially offset by a use of cash of $64.0 million from (i) accounts payable primarily resulting from the timing of vendor payments due to lower volumes and (ii) other working capital changes, primarily resulting from the timing of customer related liabilities and lower freight activity due to lower volumes.
Net cash provided by operating activities of continuing operations was $1.5 million in the first nine months of 2015, primarily due to our net loss of $13.3 million adjusted for non-cash items of $47.9 million, partially offset by: (i) a use of cash of $23.1 million from working capital; and (ii) pension and other postretirement plan contributions of $5.6 million. The use of cash from working capital primarily resulted from: (i) a use of cash from inventory, due to the timing of orders from our customers; and (ii) the timing of interest payments on our long-term debt and timing of payments to our vendors, partially offset by a source of cash from accounts receivables due to the timing of collections from and sales to our customers.
Cash provided by operating activities is generally sufficient to meet daily disbursement needs. On days when our cash receipts exceed disbursements, we reduce our credit facility balance or place excess funds in conservative, short-term investments until there is an opportunity to pay down debt. On days when our cash disbursements exceed cash receipts, we use invested cash balances and/or our credit facility to fund the difference. As a result, our daily credit facility balance fluctuates depending on working capital needs. Regardless, at all times we believe we have sufficient liquidity available to us to fund our cash needs.
Net Cash (Used In) Provided By Operating Activities of Discontinued Operations. Represents the net cash used in or provided by operating activities of our Discontinued Operations.
Net Cash Used In Investing Activities of Continuing Operations. Net cash used in investing activities of continuing operations was $20.9 million in the first nine months of 2016, primarily due to capital expenditures of $31.2 million, offset by
proceeds of $8.3 million from the sale of property, plant and equipment and proceeds of $2.0 million related to the 2016 Label Transactions.
Net cash used in investing activities of continuing operations was $17.6 million in the first nine months of 2015, primarily resulting from capital expenditures of $19.2 million and $2.0 million of cash used in the acquisition of Asendia during the third quarter of 2015. This was partially offset by cash proceeds from the 2015 Label Transactions of $2.2 million, and the sale of property, plant and equipment of $1.5 million.
We estimate that we will spend approximately $35.0 to $45.0 million on capital expenditures in 2016, after considering proceeds from the sale of property, plant and equipment. Our primary sources for our capital expenditures are cash generated from operations, proceeds from the sale of property, plant and equipment, and financing capacity within our current debt arrangements. We plan to make additional investments in the business of our Company during 2016 using proceeds from the sale of our Packaging Business.
Net Cash Provided By (Used In) Investing Activities of Discontinued Operations. Represents the net cash used in or provided by our Discontinued Operations related to investing activities. In the first nine months of 2016, the cash provided by discontinued investing activities of $94.4 million is comprised of gross cash proceeds received related to the sale of our Packaging Business.
In the first nine months of 2015, the cash used in discontinued investing activities of $1.9 million is comprised of capital expenditures made by our Packaging Business.
Net Cash (Used In) Provided By Financing Activities. Net cash used by financing activities of continuing operations was $82.5 million in the first nine months of 2016 primarily due to: (i) net repayments of $73.1 million under our ABL Facility; (ii) cash paid of $40.2 million related to the extinguishment of $72.1 million of our 7% Notes; (iii) financing-related costs and expenses of $10.0 million, primarily related to the Exchange Offer; (iv) cash paid of $4.7 million related to the extinguishment of $10.0 million of our 11.5% Notes; and (iv) various repayments on other long-term debt totaling $4.1 million, partially offset by proceeds of $50.0 million from the 4% Secured Notes during the second quarter of 2016.
Net cash provided by financing activities of continuing operations was $2.8 million in the first nine months of 2015 primarily due to net borrowings of $30.4 million under our ABL Facility, partially offset by: (i) the extinguishment of $22.6 million of our 11.5% Notes; (ii) various repayments on other long-term debt totaling $3.3 million; and (iii) the payment of $1.3 million of financing-related costs and expenses.
Net Cash Used In Financing Activities of Discontinued Operations. Represents the net cash used in financing activities of our Discontinued Operations.
Long-Term Debt. Our total outstanding long-term debt, including current maturities, was approximately $1.0 billion as of October 1, 2016, a decrease of $164.5 million from January 2, 2016. The decrease was primarily due to: (i) the Exchange Offer, which resulted in a decrease of $62.6 million in debt, net of capitalized debt issuance costs and original issuance discount; (ii) net repayments of $73.1 million under our ABL Facility during the first nine months of 2016; (iii) the extinguishment of $72.1 million of our 7% Notes during the first nine months of 2016; and (iv) the first quarter extinguishment of $10.0 million of our 11.5% Notes, all of which is partially offset by the issuance of our 4% Secured Notes. As of October 1, 2016, approximately 93% of our debt outstanding was subject to fixed interest rates. As of October 31, 2016, we had approximately $91.7 million of borrowing availability under our ABL Facility. From time to time, we may seek to refinance our debt obligations, or purchase our outstanding notes in open market purchases, privately negotiated transactions or other means. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Letters of Credit
As of October 1, 2016, we had outstanding letters of credit of approximately $17.7 million 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.
Credit Ratings
Our current credit ratings are as follows:
|
| | | | | | | | | | | | | | |
Rating Agency | | Corporate Rating | | 6.000% Secured Notes | | 8.500% Notes | | 11.5% Notes | | 6.000% Unsecured Notes | | Outlook | | Last Update |
Moody’s | | Caa1 | | B3 | | Caa2 | | Caa3 | | NR | | Stable | | June 2016 |
Standard & Poor’s | | CCC+ | | B- | | CCC | | NR | | CCC- | | Negative | | July 2016 |
In June 2016, Moody's Investors Services, which we refer to as Moody's, upgraded our Corporate Rating and the ratings on our 6.000% Secured Notes and 8.500% Notes. Additionally, Moody's affirmed the ratings on our 11.5% Notes. In July 2016, Standard & Poor's Ratings Services, which we refer to as Standard & Poor's, upgraded our Corporate Rating, rated our 6.000% Unsecured Notes for the first time and withdrew the rating on our 11.5% Notes. Additionally, the ratings on our 6.000% Notes and 8.500% Notes remained unchanged. The detail of all current ratings has been provided in the table above.
The terms of our existing debt do not have any rating triggers that impact our funding availability or influence our daily operations, including planned capital expenditures. We do not believe that our current ratings will unduly influence our ability to raise additional capital if and/or when needed. Some of our constituents closely track rating agency actions and would note any raising or lowering of our credit ratings; however, we believe that along with reviewing our credit ratings, additional quantitative and qualitative analysis must be performed to accurately judge our financial condition.
As of October 1, 2016, we were in compliance with all covenants under our long-term debt.
We expect that our internally generated cash flows and financing available under our ABL Facility will be sufficient to fund our working capital needs for the next twelve months; however, this cannot be assured.
Seasonality
Our envelope market and certain segments of the direct mail market have historically experienced seasonality with a higher percentage of volume of products sold to these markets during the third and fourth quarters of the year, primarily related to back-to-school campaigns and holiday purchases.
Our print plants experience seasonal variations. 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 scholastic market and promotional materials tend to decline in the summer. As a result of these seasonal variations, some of our print operations operate at or near capacity at certain times throughout the year.
Our custom label business has historically experienced a seasonal increase in net sales during the first and second quarters of the year, primarily resulting from the release of our product catalogs to the trade channel customers and our customers’ spring advertising campaigns. Our prescription label business has historically experienced seasonality in net sales due to cold and flu seasons, generally concentrated in the fourth and first quarters of the year. As a result of these seasonal variations, some of our label operations operate at or near capacity at certain times throughout the year.
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 SEC. In addition, our earnings conference calls are archived for replay on our website.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect our results of operations and financial position.
As of October 1, 2016, we had variable rate debt outstanding of $75.1 million. A change of 1% to the current London Interbank Offered Rate would have a minimal impact to our interest expense.
Our changes in foreign currency exchange rates are managed through normal operating and financing activities. Subsequent to the sale of the Packaging Business on January 19, 2016, we have minimal exposure to market risk for changes in foreign currency exchange rates. For the three and nine months ended October 1, 2016, a uniform 10% strengthening of the United States dollar relative to the local currency of our foreign operations would have had a minimal impact to our sales and operating income.
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 ("Exchange Act")) as of October 1, 2016. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 1, 2016, in order to provide reasonable assurance that information required to be disclosed in our filings 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 (as defined in the Exchange Act Rule 13a-15(f) and 15d-15(f)) during the quarter ended October 1, 2016, that have 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 errors 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 1. Legal Proceedings
From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material effect on our consolidated financial statements.
In the case of administrative proceedings related to environmental matters involving governmental authorities, we do not believe that any imposition of monetary damages or fines would be material.
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 January 2, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
As disclosed in prior filings, during the third quarter of 2016 the Company’s wholly-owned subsidiary, Cenveo Corporation, repurchased an aggregate of $21.0 million of its 7% senior exchangeable notes due 2017 for an aggregate price of $13.0 million and warrants to purchase 1,255,485 shares of common stock, each such warrant being currently exercisable for 0.125 shares of Common Stock at $12.00 per share.
|
| | |
Item 6. Exhibits |
| | |
Exhibit Number | Description |
| | |
2.1 | | Stock Purchase Agreement dated as of July 17, 2007, among Cenveo Corporation, Commercial Envelope Manufacturing Co. Inc. and its shareholders—incorporated by reference to Exhibit 2.1 to registrant’s current report on Form 8-K filed July 20, 2007. |
| | |
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, filed August 14, 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, filed August 2, 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 March 31, 2014—incorporated by reference to Exhibit 3.2 to registrant’s current report on Form 8-K, filed April 4, 2014. |
| | |
4.1 | | Indenture, dated as of March 28, 2012, among the Company, Cenveo Corporation, the other guarantors named therein and U.S. Bank National Association, as Trustee, relating to the 11.5% Notes—incorporated by reference to Exhibit 4.3 to registrant's current report on Form 8-K filed March 30, 2012. |
| | |
4.2 | | Form of Guarantee issued by the Company and the other guarantors named therein relating to the 11.5% Notes—incorporated by reference to Exhibit 4.4 to registrant's current report on Form 8-K filed March 30, 2012. |
| | |
4.3 | | Registration Rights Agreement, dated as of March 28, 2012, among the Company, Cenveo Corporation, the other guarantors named therein and the initial purchasers named therein relating to the 11.5% Notes—incorporated by reference to Exhibit 4.7 to registrant's current report on Form 8-K filed March 30, 2012. |
| | |
|
| | |
Item 6. Exhibits |
4.4 | | Indenture, dated as of March 28, 2012, by and among the Company, Cenveo Corporation, the other guarantors named therein and U.S. Bank National Association, as Trustee, relating to the 7% Notes—incorporated by reference to Exhibit 4.5 to registrant's current report on Form 8-K filed March 30, 2012. |
| | |
4.5 | | Form of Guarantee issued by the Company and the other guarantors named therein relating to the 7% Notes—incorporated by reference to Exhibit 4.6 to registrant's current report on Form 8-K filed March 30, 2012. |
| | |
4.6 | | Indenture, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein and The Bank of New York Mellon, as Trustee and Collateral Agent, relating to the 6.000% Senior Priority Secured Notes due 2019--incorporated by reference to Exhibit 4.1 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.7 | | Form of Guarantee issued by Cenveo, Inc. and the other guarantors named therein relating to the 6.000% Senior Priority Secured Notes due 2019--incorporated by reference to Exhibit 4.2 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.8 | | Indenture, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein and The Bank of New York Mellon, as Trustee and Collateral Agent, relating to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.3 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.9 | | Form of Guarantee issued by Cenveo, Inc. and the other guarantors named therein relating to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.4 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.10 | | Intercreditor Agreement, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein, Bank of America, N.A., as ABL Agent, and The Bank of New York Mellon, as Collateral Agent with respect to the 6.000% Senior Priority Notes due 2019--incorporated by reference to Exhibit 4.5 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.11 | | Intercreditor Agreement, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein, Bank of America, N.A., as ABL Agent, The Bank of New York Mellon, as Collateral Agent with respect to the 6.000% Senior Priority Notes due 2019, and The Bank of New York Mellon, as Collateral Agent with respect to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.6 to registrant's current report on Form 8-K filed July 1, 2014. |
| | |
4.12
| | Indenture, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., the other guarantors party thereto and The Bank of New York Mellon, as trustee, relating to the 6.000% Senior Notes due 2024--incorporated by reference to Exhibit 4.1 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.13
| | Form of Guarantee issued by Cenveo, Inc. and the other guarantors named therein relating to the 6.000% Senior Notes due 2024--incorporated by reference to Exhibit 4.2 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.14
| | Warrant Agreement, dated as of June 10, 2016, between Cenveo, Inc. and Computershare Trust Company, N.A., as warrant agent--incorporated by reference to Exhibit 4.3 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.15
| | Warrant Registration Rights Agreement, dated as of June 10, 2016, between Cenveo, Inc. and Allianz Global Investors U.S. LLC--incorporated by reference to Exhibit 4.4 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.16
| | Indenture and Note Purchase Agreement, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., the other guarantors party thereto, AllianzGI US High Yield Fund and Allianz Income and Growth Fund, as purchasers, each other noteholder from time to time party thereto and The Bank of New York Mellon, as trustee and collateral agent, relating to the 4.000% Senior Secured Notes due 2021--incorporated by reference to Exhibit 4.5 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.17
| | Intercreditor Agreement, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., certain other subsidiaries of Cenveo, Inc. that become party thereto from time to time as guarantors, Bank of America, N.A., as administrative agent for the holders of the senior priority obligations, and The Bank of New York Mellon, as collateral agent for the holders of the junior priority obligations--incorporated by reference to Exhibit 4.6 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
|
| | |
Item 6. Exhibits |
4.18
| | Amendment No. 1 to the Intercreditor Agreement, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., certain other subsidiaries of Cenveo, Inc. as guarantors, Bank of America, N.A., as administrative agent for the holders of the revolving credit obligations, The Bank of New York Mellon, as collateral agent for the holders of the 2016 secured notes obligations, and The Bank of New York Mellon, as collateral agent for the holders of the fixed asset obligations--incorporated by reference to Exhibit 4.7 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
4.19
| | Amendment No. 1 to the Intercreditor Agreement, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., certain other subsidiaries of Cenveo, Inc. as guarantors, Bank of America, N.A., as administrative agent for the holders of the revolving credit obligations, The Bank of New York Mellon, as collateral agent for the holders of the 2016 secured notes obligations, The Bank of New York Mellon, as collateral agent for the holders of the senior priority fixed asset obligations, and The Bank of New York Mellon, as collateral agent for the holders of the junior priority obligations--incorporated by reference to Exhibit 4.8 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
10.1 | | Support Agreement, dated May 10, 2016, by and among Cenveo, Inc., Cenveo Corporation and Allianz Global Investors U.S. LLC--incorporated by reference to Exhibit 99.2 to registrant's current report on Form 8-K filed May 11, 2016. |
| | |
10.2
| | Amendment No. 4 to the Credit Agreement, dated as of June 10, 2016, among Cenveo Corporation, Cenveo, Inc., the lenders party thereto, Bank of America, N.A., as issuing bank and swingline lender, and each of the other loan parties thereto, and acknowledged by Bank of America, N.A., as administrative agent--incorporated by reference to Exhibit 10.1 to registrant's current report on Form 8-K filed June 16, 2016. |
| | |
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 Scott J. Goodwin, 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. |
| | |
101.INS* | | XBRL Instance Document. |
| | |
101.SCH* | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
_________________________
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado, on November 3, 2016.
|
| | |
| CENVEO, INC. |
| | |
| By: | /s/ Robert G. Burton, Sr. |
| | Robert G. Burton, Sr. |
| | Chairman and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
| By: | /s/ Scott J. Goodwin |
| | Scott J. Goodwin |
| | Chief Financial Officer |
| | (Principal Financial Officer and |
| | Principal Accounting Officer) |