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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
COMMISSION FILE NUMBER 1-12551
------------------------
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE CANTERBURY GREEN
201 BROAD STREET
STAMFORD, CT 06901
(Address of principal executive offices) (Zip Code)
203-595-3000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. Large accelerated filer / / Accelerated filer /X/
Non-accelerated filer / /
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of October 31, 2006 the registrant had 53,427,050 shares of common
stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, 2006 DECEMBER 31, 2005(A)
------------------ --------------------
(UNAUDITED)
-----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 842 $ 1,035
Accounts receivable, net......................... 226,378 247,277
Inventories...................................... 98,706 108,704
Other current assets............................. 31,701 25,767
--------- ----------
Total current assets......................... 357,627 382,783
Property, plant and equipment, net................... 268,795 317,606
Goodwill............................................. 258,139 311,146
Investment in affiliate.............................. 48,839 --
Other assets......................................... 59,206 68,029
--------- ----------
Total assets................................. $ 992,606 $1,079,564
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt............. $ 4,109 $ 2,791
Accounts payable................................. 93,261 124,901
Accrued compensation and related liabilities..... 43,323 53,765
Other current liabilities........................ 76,678 79,051
--------- ----------
Total current liabilities.................... 217,371 260,508
Long-term debt....................................... 697,329 809,345
Deferred income taxes................................ 4,879 10,045
Other liabilities.................................... 39,253 49,216
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock.................................. -- --
Common stock..................................... 534 530
Paid-in capital.................................. 242,859 239,432
Retained deficit................................. (214,369) (305,091)
Unearned compensation............................ -- (1,825)
Accumulated other comprehensive income........... 4,750 17,404
--------- ----------
Total shareholders' equity (deficit)......... 33,774 (49,550)
--------- ----------
Total liabilities and shareholders' equity
(deficit).......................................... $ 992,606 $1,079,564
========= ==========
(A) Derived from the audited consolidated financial statements as of December 31, 2005.
See notes to condensed consolidated financial statements.
1
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net sales................................ $ 383,868 $ 430,823 $1,168,440 $1,302,161
Cost of sales............................ 307,013 350,485 928,462 1,057,857
Selling, general and administrative...... 45,703 59,740 151,197 188,769
Amortization of intangible assets........ 1,422 1,272 3,985 3,878
Restructuring, impairment and other
charges................................ 4,702 24,378 35,390 39,467
--------- --------- ---------- ----------
Operating income (loss).............. 25,028 (5,052) 49,406 12,190
(Gain) loss on sale of non-strategic
businesses............................. -- 759 (132,925) 2,019
Interest expense, net.................... 13,939 18,079 46,936 55,074
Loss on early extinguishment of debt..... -- -- 32,744 --
Other (income) expense, net.............. (2,521) 768 (5,293) 1,203
--------- --------- ---------- ----------
Income (loss) before income taxes.... 13,610 (24,658) 107,944 (46,106)
Income tax expense....................... 1,994 39,420 17,221 51,140
--------- --------- ---------- ----------
Net income (loss).................... $ 11,616 $ (64,078) $ 90,723 $ (97,246)
========= ========= ========== ==========
Income (loss) per share:
Income (loss) per share--basic... $ 0.22 $ (1.28) $ 1.70 $ (1.99)
========= ========= ========== ==========
Income (loss) per
share--diluted................. $ 0.21 $ (1.28) $ 1.68 $ (1.99)
========= ========= ========== ==========
Weighted average shares--basic... 53,342 50,212 53,237 48,932
Weighted average
shares--diluted................ 54,189 50,212 53,993 48,932
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2006 2005
--------- --------
Cash flows from operating activities:
Net income (loss)........................................... $ 90,723 $(97,246)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization, excluding
amortization of deferred financing costs.......... 31,434 38,778
Amortization of deferred financing costs............ 1,353 2,869
Loss on early extinguishment of debt................ 32,744 --
Deferred income taxes............................... 3,991 35,970
Non-cash restructuring and impairment charges, net.. 6,244 9,801
Other non-cash charges.............................. 6,321 3,247
(Gain) loss on sale of non-strategic businesses..... (132,925) 2,019
Equity income in affiliate, net..................... (769) --
Changes in operating assets and liabilities:
Accounts receivable................................. 4,894 (5,423)
Inventories......................................... (2,853) (11,861)
Accounts payable and accrued compensation and
related liabilities............................... (42,497) (1,336)
Other working capital changes....................... (8,407) 1,354
Other, net.......................................... (369) (5,473)
--------- --------
Net cash used in operating activities............. (10,116) (27,301)
Cash flows from investing activities:
Proceeds from divestitures, net....................... 213,104 6,514
Cost of business acquisition, net of cash
acquired............................................ (49,425) --
Capital expenditures.................................. (16,376) (19,698)
Acquisition payments.................................. (4,653) (3,980)
Proceeds from sale of property, plant and
equipment........................................... 6,025 724
--------- --------
Net cash provided by (used in) investing
activities...................................... 148,675 (16,440)
Cash flows from financing activities:
Repayment of 9 5/8% senior notes...................... (339,502) --
(Repayments) borrowings under senior secured
revolving credit facility, net...................... (123,931) 25,200
Repayments of other long-term debt.................... (12,265) (2,535)
Payment of redemption premiums and expenses........... (26,142) --
Payment of debt issuance costs........................ (3,770) --
Proceeds from issuance of term loan................... 325,000 --
Borrowings under new revolving credit facility,
net................................................. 40,000 --
Proceeds from exercise of stock options............... 1,860 21,087
--------- --------
Net cash provided by (used in) financing
activities...................................... (138,750) 43,752
Effect of exchange rate changes on cash and cash
equivalents................................................. (2) 76
--------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (193) 87
Cash and cash equivalents at beginning of year................ 1,035 796
--------- --------
Cash and cash equivalents at end of quarter................... $ 842 $ 883
========= ========
See notes to condensed consolidated financial statements.
3
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
(the "Financial Statements") of Cenveo, Inc. and subsidiaries
(collectively, "Cenveo" or the "Company") have been prepared in accordance
with Rule 10-01 of Regulation S-X promulgated by the Securities and
Exchange Commission (the "SEC") and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of the Company, however, the Financial Statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position and results of
operations and its cash flows as of and for the three and nine month
periods ended September 30, 2006. The results of operations for the three
and nine month periods ended September 30, 2006 are not indicative of the
results to be expected for the full year, primarily due to the effect of
the March 31, 2006 sale of Supremex, Inc. and certain other assets (see
Notes 4, 7 and 10), the Company's debt refinancing in June 2006 (see Note
8) and seasonality (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Seasonality"). These
Financial Statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005 (the "Form 10-K").
It has been the Company's practice to close its quarters on the
Saturday closest to the last day of the calendar quarter so that each
quarter has the same number of days and 13 full weeks. The financial
statements and other financial information in this report are presented
using a calendar convention. The reporting periods, which consist of 13 and
39 weeks ended on September 30, 2006 and October 1, 2005, are reported as
ending on September 30, 2006 and 2005, respectively, since the effect is
not material.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109) ("FIN 48"), which is effective
for the Company on January 1, 2007. FIN 48 was issued to clarify the
accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company is currently
evaluating the potential impact of this interpretation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines
fair value and establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about
fair value measurement. SFAS 157 is effective for the Company beginning on
January 1, 2008. The Company does not believe the adoption of SFAS 157 will
have a material impact on its consolidated results of operations and
financial condition.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans--An Amendment of
FASB Statements No. 87, 88, 106 and 132R ("SFAS 158"). This standard
requires an employer to: (i) recognize in its statement of financial
position an asset for a plan's overfunded status or a liability for a
plan's underfunded status; (ii) measure a plan's assets and its obligations
that determine its funded status as of the end of the employer's fiscal
year (with limited exceptions); and (iii) recognize changes in the funded
status of a defined benefit postretirement plan in the year in which the
changes occur. These changes will be reported in comprehensive income. For
the Company, the requirement to recognize the funded status
4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
of its benefit plans and the disclosure requirements are effective as of
December 31, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end statement of
financial position is effective for the Company as of December 31, 2008.
The Company does not expect the adoption of SFAS 158 to have a material
impact on its consolidated results of operations and financial condition.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. SHARE-BASED COMPENSATION
The Company's 2001 Long-Term Incentive Plan (the "Plan") provides for
the grant of stock options, restricted shares and stock appreciation rights
of the Company's common stock and restricted share units based on the
Company's common stock to certain officers, other key employees, non-
employee directors and consultants.
The Company's outstanding nonvested stock options have maximum
contractual terms of up to ten years, principally vest ratably over four
years and were granted at exercise prices equal to the market price of the
Company's common stock on the date of grant. The Company's outstanding
stock options are exercisable into shares of the Company's common stock.
The Company's outstanding restricted shares vest ratably over four years.
The Company has no outstanding stock appreciation rights. The Company's
outstanding restricted share units principally vest ratably over four
years. Upon vesting the restricted share units are convertible into shares
of the Company's common stock.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123(R)"), which revised SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As a result, the Company now measures the cost
of employee services received in exchange for an award of equity
instruments, including grants of employee stock options, restricted stock
and restricted share units, based on the fair value of the award at the
date of grant rather than its intrinsic value, the method the Company
previously used. The Company is using the modified prospective application
method under SFAS 123(R) and has elected not to use the retrospective
application method. Thus, amortization of the fair value of all nonvested
grants as of January 1, 2006, as determined under the previous pro forma
disclosure provisions of SFAS 123, except as adjusted for estimated
forfeitures, is included in the Company's results of operations commencing
January 1, 2006, and prior periods have not been restated. As required
under SFAS 123(R), the Company has reversed the "Unearned compensation"
component of "Shareholders' equity" with an equal offsetting reduction of
"Paid-in capital" as of January 1, 2006 and is now increasing "Paid-in
capital" for share-based compensation costs recognized during the period.
Additionally, effective with the adoption of SFAS 123(R), the Company
recognizes share-based compensation expense net of estimated forfeitures,
rather than as forfeitures occur as presented under the previous pro forma
disclosure provisions of SFAS 123 subsequently set forth in this footnote.
Employee stock compensation grants or grants modified, repurchased or
cancelled on or after January 1, 2006 are valued in accordance with SFAS
123(R). Under SFAS 123(R), the Company has chosen (1) the
Black-Scholes-Merton option pricing model (the "Black-Scholes Model") for
purposes of determining the fair value of stock options granted commencing
January 1, 2006 and (2) to continue recognizing compensation costs ratably
over the requisite service period for each separately vesting portion of
the award.
Total share-based compensation expense recognized in "Selling, general
and administrative" expenses in the Company's condensed consolidated
statements of operations was $1.4 million and $0.2
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SHARE-BASED COMPENSATION (CONTINUED)
million for the three months ended September 30, 2006 and 2005,
respectively, and $3.4 million and $0.5 million for the nine months ended
September 30, 2006 and 2005, respectively. Total share-based compensation
expense recognized in "Restructuring, impairment and other charges" in the
Company's condensed consolidated statements of operations was $2.7 million
and $1.6 million for the three and nine months ended September 30, 2005,
respectively.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the three and nine-month
periods ended September 30, 2006 are $0.7 million and $1.8 million lower,
respectively, than if it had continued to account for share based
compensation under Accounting Principles Board Opinion 25 ("APB 25"). Basic
and diluted income per share for the three months ended September 30, 2006
are $.01 lower and for the nine months ended September 30, 2006 are $.03
lower, than if the Company had to account for share-based compensation
under APB 25. Net cash used in operating and financing activities for the
nine months ended September 30, 2006, were the same if the Company had
continued to account for share-based compensation under APB 25.
As of September 30, 2006, there was approximately $32.6 million of
total unrecognized compensation cost related to nonvested share-based
compensation grants which is expected to be amortized over a
weighted-average period of 2.0 years.
A summary of the Company's outstanding stock options as of and for the
nine-month period ended September 30, 2006 is as follows:
WEIGHTED
AVERAGE AGGREGATE
WEIGHTED REMAINING INTRINSIC
AVERAGE CONTRACTUAL VALUE(a)
EXERCISE TERM (IN (IN
OPTIONS PRICE YEARS) THOUSANDS)
--------- --------- ----------- ----------
Outstanding at January 1, 2006...... 2,365,961 $ 8.97
Granted............................. 1,570,000 20.55
Exercised........................... (310,147) 5.99 $ 3,217
=========
Forfeited........................... (278,367) 9.21
---------
Outstanding at September 30, 2006... 3,347,447 14.66 6.0 $ 16,668
========= =========
Exercisable at September 30, 2006... 481,197 8.98 5.3 $ 4,752
========= =========
(a) Intrinsic value for purposes of this table represents the amount by which the fair value of the
underlying stock, based on the respective market prices at September 30, 2006 or, if exercised, the
exercise dates, exceeds the exercise prices of the respective options which, for outstanding options,
represents only those expected to vest.
The weighted-average grant date fair value of stock options granted
during the nine-month period ended September 30, 2006, at exercise prices
equal to the market price of the stock on the grant dates, was $9.56
calculated under the Black-Scholes Model with the weighted-average
assumptions set forth as follows:
Risk-free interest rate..................................... 4.75%
Expected option life in years............................... 4.27
Expected volatility......................................... 51.6%
Expected dividend yield..................................... 0.0%
The risk-free interest rate represents the U.S. Treasury Bond constant
maturity yield approximating the expected option life of stock options
granted during the period. The expected option life represents the period
of time that the stock options granted during the period are expected
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SHARE-BASED COMPENSATION (CONTINUED)
to be outstanding, based on the mid-point between the vesting date and
contractual expiration date of the option. The expected volatility is based
on the historical market price volatility of the Company's common stock for
the expected term of the options, adjusted for expected mean reversion.
A summary of the Company's nonvested restricted shares and restricted
share units as of and for the nine-month period ended September 30, 2006 is
as follows:
RESTRICTED SHARES RESTRICTED SHARE UNITS
----------------- ----------------------
GRANT DATE GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE
---------- ---------- ---------- ----------
Nonvested at January 1, 2006......... 200,000 $9.52 236,600 $ 9.61
Granted.............................. -- -- 532,150 20.55
Vested............................... (50,000) 9.52 (25,000) 9.52
Forfeited............................ -- -- (20,000) 9.52
--------- ---------
Nonvested at September 30, 2006...... 150,000 9.52 723,750 16.28
========= =========
The total fair value of restricted shares and restricted share units
which vested during the nine-month period ended September 30, 2006 was $1.0
million and $0.5 million, respectively, as of the respective vesting dates.
The accompanying condensed consolidated statements of operations for
the three and nine-month periods ended September 30, 2005 were not restated
since the Company elected not to use the retrospective application method
under SFAS 123(R). A summary of the effect on net loss and net loss per
share for the three and nine-months ended September 30, 2005 as if the
Company had applied the fair value recognition provisions of SFAS 123 to
share-based compensation for all outstanding and nonvested stock options
(calculated using the Black-Scholes Model) and restricted shares is as
follows (in thousands except per share data):
THREE MONTHS NINE MONTHS
------------ -----------
Net loss as reported................................... $(64,078) $ (97,246)
Reversal of share-based compensation expense
determined under the intrinsic value method
included in net loss............................ 2,885 2,138
Recognition of share-based compensation expense
determined under the fair value method.......... (8,853) (10,233)
-------- ---------
Pro forma net loss...................................... $(70,046) $(105,341)
======== =========
Net loss per share--basic and diluted:
As reported....................................... $ (1.28) $ (1.99)
======== =========
Pro forma......................................... $ (1.40) $ (2.15)
======== =========
During the nine-month period ended September 30, 2005, the Company
granted 478,000 stock options under the Plan at exercise prices equal to
the market price of the stock on the grant dates. The weighted-average
grant date fair values of these stock options were $4.23, calculated under
the Black-Scholes Model with the weighted average assumptions set forth as
follows:
Risk-free interest rate..................................... 4.34%
Expected option life in years............................... 6.25
Expected volatility......................................... 63.7%
Expected dividend yield..................................... 0.0%
Under the Plan, the change in the Company's board of directors on
September 12, 2005, triggered the change of control provision of the Plan.
Accordingly, all outstanding stock options and restricted
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SHARE-BASED COMPENSATION (CONTINUED)
stock vested on September 12, 2005. The amount of stock-based compensation
expense reflected in the pro forma calculation of net loss per share for
the three and nine months ended September 30, 2005 is primarily the result
of the acceleration in the vesting of the outstanding stock options and
restricted stock.
The Black-Scholes Model has limitations on its effectiveness including
that it was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable and
that the model requires the use of highly subjective assumptions including
expected stock price volatility. The Company's stock option awards to
employees have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially
affect the fair value estimates.
In November 2005, the FASB issued FASB Staff Position ("FSP"), No. 123
(R)-3, Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. FSP No. 123 (R)-3 provides an elective
alternative method that establishes a computational component to arrive at
the beginning balance of the paid-in capital pool related to employee
compensation and a simplified method to determine the subsequent impact on
the paid-in capital pool of employee awards that are fully vested and
outstanding upon the adoption of SFAS No. 123(R). This election is not
available for adoption until January 1, 2007. The Company is currently
evaluating this transition method.
3. BUSINESS ACQUISITION
Rx Technology
On July 12, 2006, the Company completed the acquisition of all of the
common stock of Rx Label Technology Corporation. This new subsidiary of the
Company will operate under the name Rx Technology Corporation ("Rx
Technology"). Rx Technology specializes in providing pharmacists with
labels used to dispense prescription drugs to consumers. The aggregate
purchase price paid for Rx Technology by the Company was approximately
$49.4 million, which included $0.4 million of fees and expenses. The fair
values of property, plant and equipment and other intangible assets were
determined in accordance with independent appraisals. The Rx Technology
acquisition has preliminarily resulted in $28.9 million of goodwill, of
which approximately $8.9 million is deductible for income tax purposes (see
Note 6). The other identifiable intangible assets determined by the
independent appraisal were $12.9 million of customer relationships which is
being amortized over their estimated weighted average useful life of 19
years and $0.6 million of patent technology which is being amortized over
six years (Note 6).
Rx Technology's results of operations and cash flows have been included
in the accompanying condensed consolidated statements of operations and
cash flows from the July 12, 2006 acquisition date, within the Company's
envelope, forms and labels segment results. Pro forma results for the three
and nine months ended September 30, 2006 and 2005, assuming the acquisition
of Rx Technology had been made on January 1, 2005, have not been presented
since they would not be materially different from the Company's reported
results.
4. SALE OF NON-STRATEGIC BUSINESSES
Supremex
On March 31, 2006, the Company sold to Supremex Income Fund, a new
open-ended trust formed under the laws of the Province of Quebec (the
"Fund"), all of the shares of Supremex Inc. ("Supremex"), a Canadian
subsidiary of the Company, and certain other assets of the envelope, forms
and labels segment. At closing, the Company received proceeds of
approximately $187 million, net of
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SALE OF NON-STRATEGIC BUSINESSES (CONTINUED)
transaction expenses and subject to the finalization of a working capital
adjustment, and approximately 11.4 million units of the Fund, valued at
approximately $98 million based upon the Fund's initial public offering
share price of $10.00 Canadian dollars per unit ($8.56 US per unit). The
units in the Fund owned by the Company at March 31, 2006 represented a
36.5% economic and voting interest in the Fund. The March 31, 2006 sale
resulted in a pre-tax gain of approximately $124 million in the first
quarter of 2006, after the allocation of $55.8 million of goodwill to the
business as required by Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142").
On April 20, 2006, in connection with the receipt of approximately
$71.1 million of proceeds relating to the March 31, 2006 sale, the Company
recorded a pre-tax gain of approximately $1.4 million as a result of the
Canadian dollar strengthening against the U.S. dollar.
On April 28, 2006, the Company sold 2.5 million units in the Fund
relating to an over-allotment option to the underwriters for approximately
$21 million, which reduced the Company's economic and voting interest in
the Fund to 28.6%. In connection with the sale, the Company recorded a
pre-tax gain of approximately $9.3 million in the second quarter of 2006.
The Company's investment in the Fund was $48.8 million as of September
30, 2006, which includes $20.4 million of goodwill associated with its
retained interest. Beginning on April 1, 2006, the Company's ownership
interest in the Fund is being accounted for under the equity method. During
the three and nine months ended September 30, 2006, the Company recorded
$2.3 million and $4.6 million, respectively, of equity income relating to
its investment in the fund and has received $1.5 million and $3.8 million,
respectively, of cash distributions from the Fund.
Other
On April 21, 2006, the Company sold a small non-strategic business for
proceeds of $2.6 million and recorded a loss on sale of $1.1 million.
During the three months ended September 30, 2005, the Company sold a
small non-strategic business for $2.3 million and recorded a loss on sale
of $0.8 million. During the nine months ended September 30, 2005, the
Company sold certain small non-strategic businesses for $6.5 million, and
recognized losses on such sales of $2.0 million. From October 1, 2005
through December 31, 2005, the Company sold one additional small
non-strategic business.
The following table summarizes the net sales and operating income
(loss) of the businesses that were sold during 2005 and the first nine
months of 2006, which are included in the condensed consolidated statements
of operations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2006 2005 2006 2005
------- ------- ------- -------
Net sales................................... $ -- $46,693 $46,440 $148,348
Operating income (loss)..................... $ -- $ 7,331 $ 7,264 $ 23,402
The dispositions of these non-strategic businesses have not been
accounted for as discontinued operations in the condensed consolidated
financial statements, because either the Company has continuing involvement
with these entities or the operations are not material.
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Land and land improvements............................. $ 15,660 $ 18,460
Buildings and improvements............................. 91,441 108,229
Machinery and equipment................................ 448,644 500,535
Furniture and fixtures................................. 9,973 11,579
Construction in progress............................... 8,094 14,532
--------- ---------
573,812 653,335
Accumulated depreciation............................... (305,017) (335,729)
--------- ---------
Property, plant and equipment, net..................... $ 268,795 $ 317,606
========= =========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for 2006 by reportable
segment (Note 12) are as follows (in thousands):
ENVELOPES, FORMS COMMERCIAL
AND LABELS PRINTING TOTAL
---------------- --------- ---------
Balance as of December 31, 2005............... $218,038 $93,108 $311,146
Acquisitions.............................. 28,857 -- 28,857
Dispositions.............................. (55,764) (734) (56,498)
Reclassified to investment in affiliate
(Note 4)................................ (25,724) -- (25,724)
Foreign currency translation.............. -- 358 358
-------- -------- --------
Balance as of September 30, 2006.............. $165,407 $92,732 $258,139
======== ======= ========
Other intangible assets are included in "Other assets" on the
accompanying condensed consolidated balance sheets and are as follows (in
thousands):
SEPTEMBER 30, 2006 DECEMBER 31, 2005
---------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
Intangible assets with determinable
lives:
Customer relationships......... $29,906 $(11,723) $18,183 $17,006 $ (8,336) $ 8,670
Trademarks and tradenames...... 14,551 (2,394) 12,157 14,551 (2,092) 12,459
Patents........................ 3,028 (1,151) 1,877 2,428 (1,004) 1,424
Non-compete agreements......... 1,640 (1,552) 88 2,415 (2,196) 219
Other.......................... 768 (322) 446 768 (299) 469
------- -------- ------- ------- -------- -------
49,893 (17,142) 32,751 37,168 (13,927) 23,241
Intangible assets with indefinite
lives:
Pollution credits.............. 720 -- 720 720 -- 720
------- -------- ------- ------- -------- -------
Total...................... $50,613 $(17,142) $33,471 $37,888 $(13,927) $23,961
======= ======== ======= ======= ======== =======
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
As of September 30, 2006, the weighted average remaining amortization
period for customer relationships was 13 years, trademarks and tradenames
was 33 years, patents was seven years and other was 27 years.
Total pre-tax amortization expense for the five years ending September
30, 2011 is estimated to be as follows: $5.8 million, $1.4 million, $1.4
million, $1.4 million and $1.4 million, respectively.
7. COMPREHENSIVE INCOME (LOSS)
A summary of comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net income (loss).................... $ 11,616 $(64,078) $ 90,723 $(97,246)
Other comprehensive income (loss):
Minimum pension liability
adjustment..................... -- -- 6,004 --
Unrealized loss on cash flow
hedges......................... (3,373) -- (3,598) --
Currency translation
adjustment..................... (198) 8,961 (15,060) 4,520
-------- -------- -------- --------
Comprehensive income (loss).......... $ 8,045 $(55,117) $ 78,069 $(92,726)
======== ======== ======== ========
In connection with the sale of Supremex and certain other assets, the
Company reclassified into the gain on sale of non-strategic businesses from
other comprehensive income $6.0 million of a minimum pension liability
adjustment and $14.3 million of currency translation adjustment relating to
the business sold during the first quarter of 2006 and $1.7 million of
currency translation adjustment in connection with the sale of 2.5 million
units in the Fund relating to an over-allotment option in the second
quarter of 2006 (Notes 4 and 10).
8. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Term Loan, due 2013..................................... $325,000 $ --
7 7/8% Senior Subordinated Notes, due 2013.............. 320,000 320,000
9 5/8% Senior Notes, due 2012........................... 10,498 350,000
Revolving Credit Facility, due 2012..................... 40,000 --
Senior Secured Credit Facility.......................... -- 123,931
Other................................................... 5,940 18,205
-------- --------
701,438 812,136
Less current maturities................................. (4,109) (2,791)
-------- --------
Long-term debt.......................................... $697,329 $809,345
======== ========
Debt Refinancing
On June 23, 2006, the Company completed a tender offer and consent
solicitation (the "Tender Offer") for any and all of its 9 5/8% Senior
Notes due 2012 and extinguished approximately $339.5
11
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
million in aggregate principal amount of its 9 5/8% Senior Notes
(approximately 97% of the outstanding amount) that were tendered and
accepted for purchase under the terms of the Tender Offer.
On June 21, 2006, the Company entered into a credit agreement that
provides for $525 million of senior secured credit facilities with a
syndicate of lenders (the "Credit Facilities"). The Credit Facilities
consist of a $200 million six-year revolving credit facility ("Revolving
Credit Facility") and a $325 million seven-year term loan facility ("Term
Loan"). The Credit Facilities contain customary financial covenants,
including maintenance of a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. Borrowing rates under the
Credit Facilities are determined at the Company's option at the time of
each borrowing and are based on the London Interbank Offered Rate ("LIBOR")
or the prime rate publicly announced from time to time, in each case plus a
specified interest rate margin (see "Interest rate swaps"). The Credit
Facilities are secured by substantially all of the Company's assets.
Proceeds from the Credit Facilities and other available cash were used to
fund the Tender Offer, to retire the Company's existing Senior Secured
Credit Facility due 2008 (which had no amounts outstanding), and for $3.8
million of debt issuance costs, which are being amortized over the
maturities of the Credit Facilities.
As of September 30, 2006, the Company was in compliance with all
covenants under its debt agreements.
Loss on early extinguishment of debt
In connection with the debt refinancing in June 2006, the Company
incurred a $32.7 million loss on early extinguishment of debt related to
the Tender Offer and the retirement of the Senior Secured Credit Facility,
which consisted of the following (in thousands):
Tender Offer premiums................................... $25,212
Write-off of previously unamortized deferred financing
costs................................................. 6,602
Tender Offer expenses................................... 930
-------
$32,744
=======
Interest rate swaps
During June 2006, the Company entered into interest rate swap
agreements to hedge interest rate exposure for $220 million notional amount
of floating rate debt. This hedge of interest rate risk was designated and
documented at inception as a cash flow hedge and is evaluated for
effectiveness at least quarterly. Effectiveness of this hedge is calculated
by comparing the fair value of the derivative to a hypothetical derivative
that would be a perfect hedge of floating rate debt. There was no
ineffectiveness from this hedge through September 30, 2006. At September
30, 2006, the Company has recorded a liability of $3.4 million, which
represents the decrease in the current fair value of floating rate cash
inflows that are less than the fixed cash outflows over the remaining term
of the hedges. The decrease of cash inflows largely reflects the decrease
in LIBOR as of September 30, 2006 as compared to LIBOR at the time that the
Company entered into the swap agreements. The liability is included in
"Other liabilities" and the offsetting amount is included in "Accumulated
other comprehensive income" in the Company's condensed consolidated balance
sheet as of September 30, 2006. The accounting for gains and losses
associated with changes in the fair value of cash flow hedges and the
effect on the Company's condensed consolidated financial statements will
depend on whether the hedge is highly effective in achieving offsetting
changes in fair value of cash flows of the liability hedged. As of
September 30, 2006, the Company does not anticipate reclassifying any
ineffectiveness into its results of operations for the next twelve months.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Three Months Ended September 30, 2006
Restructuring and impairment charges for the three months ended
September 30, 2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- ---------- ----------
Employee separation costs............... $ 955 $ 1,430 $ 99 $2,484
Asset impairments (gains on sale)....... (1,665) 703 -- (962)
Equipment moving expenses............... 1,216 244 -- 1,460
Lease termination (income) expenses..... -- (156) 33 (123)
Building clean-up and other expenses.... 498 1,445 (100) 1,843
------- ------- ----- ------
Total restructuring and impairment
charges........................... $ 1,004 $ 3,666 $ 32 $4,702
======= ======= ===== ======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
incurred employee separation costs of $0.8 million related to workforce
reductions, equipment moving expenses of $1.2 million for the redeployment
of equipment and building clean-up and other expenses of $0.5 million
related to the four locations that were closed in the second quarter of
2006. The segment recorded a gain on sale of a facility of $1.9 million that
was closed in June 2006.
The segment incurred employee separation costs of $0.2 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. In connection with five plant closures during the
first nine months of 2006, the commercial print segment incurred employee
separation costs of $0.9 million related to workforce reductions, asset
impairment charges of $0.7 million for equipment taken out of service,
equipment moving expenses of $0.2 million for the redeployment of equipment
and $1.4 million of building clean-up and other expenses.
The segment incurred employee separation costs of $0.5 million related
to workforce reductions at other locations relating to the Company's cost
savings initiatives.
Nine Months Ended September 30, 2006
Restructuring and impairment charges for the nine months ended
September 30, 2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- ----------
Employee separation costs.............. $ 5,897 $11,042 $ 1,201 $18,140
Asset impairments, net of gains on
sale................................. 2,215 1,259 -- 3,474
Equipment moving expenses.............. 3,823 1,304 -- 5,127
Lease termination expense (income)..... 2,032 1,725 (306) 3,451
Building clean-up and other expenses... 1,035 4,263 (100) 5,198
------- ------- ------- -------
Total restructuring and impairment
charges.......................... $15,002 $19,593 $ 795 $35,390
======= ======= ======= =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed six manufacturing plants and an office location during the first
nine months of 2006. As a result of these closures, the segment recorded
employee separation costs of $4.4 million related to workforce reductions,
impairment charges of $1.3 million, net of the gain on sale of a facility
of $1.9 million, and equipment
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
moving expenses of $3.2 million. In addition, the segment recorded lease
termination expenses of $2.0 million, representing the net present value of
costs that are not expected to be recovered over the remaining terms of
three leased facilities no longer in use and building clean-up and other
expenses of $0.7 million.
The segment incurred impairment charges of $0.9 million related to
equipment taken out of service, equipment moving expenses of $0.6 million
for the redeployment of equipment, and building clean-up and other expenses
of $0.3 million related to locations closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $1.5 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. In connection with the commercial print segment's
five plant closures during the first nine months of 2006, it recorded
employee separation costs of $3.9 million related to workforce reductions,
asset impairment charges of $1.3 million related to equipment taken out of
service at these locations, equipment moving expenses of $1.0 million,
building clean-up and other expenses of $2.7 million and lease termination
expenses of $1.7 million representing the net present value of costs that
are not expected to be recovered over the remaining terms of two leased
facilities no longer in use.
The segment incurred employee separation costs of $2.4 million related
to workforce reductions, equipment moving expenses of $0.3 million, and
building clean-up and other expenses of $1.5 million for three plants
closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $4.7 million related
to workforce reductions at other locations relating to the Company's cost
savings initiatives.
CORPORATE. The Company incurred employee separation costs of $1.2
million and recorded lease termination income of $0.3 million resulting
from adjusting its estimate of the net present value of the cost of the
lease that is not expected to be recovered over its remaining life, upon
subleasing its former corporate headquarters.
Three Months Ended September 30, 2005
Restructuring, impairment and other charges for the three months ended
September 30, 2005 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -----------
Employee separation costs.............. $ 1,246 $ 3,278 $ 7,917 $12,441
Asset impairments...................... 1,822 289 -- 2,111
Building clean-up and other expenses... -- 17 -- 17
------- ------- ------- -------
Total restructuring charges............ 3,068 3,584 7,917 14,569
Other charges.......................... -- -- 9,809 9,809
------- ------- ------- -------
Total restructuring, impairment and
other charges.................... $ 3,068 $ 3,584 $17,726 $24,378
======= ======= ======= =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
recorded employee separation costs of $1.2 million related to a
corporate-wide initiative to reduce selling, general and administrative
expenses and asset impairment charges of $1.8 million related to equipment
taken out of service.
14
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
COMMERCIAL PRINTING. The commercial printing segment recorded employee
separation costs of $3.3 million related to a corporate-wide initiative to
reduce selling, general and administrative expenses and asset impairment
charges of $0.3 million related to equipment taken out of service.
CORPORATE. In September 30, 2005, as a result of significant changes in
senior management and personnel reductions in the Company's former
corporate office, the Company recorded employee separation costs of $7.9
million. The Company incurred other charges of $9.8 million which included
the following:
* In April 2005, the Company engaged an investment banking firm as a
financial advisor to assist the then current board of directors in
its evaluation of the Company's strategic alternatives. The fees
incurred were $2.7 million.
* Legal and other fees incurred in connection with the special
meeting of shareholders totaled $4.5 million.
* Under the Plan, the change in the board of directors in September
2005 constituted a change of control and accelerated the vesting
of the restricted stock issued to certain executives. The
compensation expense recognized by the Company as a result of the
vesting of this restricted stock totaled $2.6 million.
Nine Months Ended September 30, 2005
Restructuring, impairment and other charges for the nine months ended
September 30, 2005 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -----------
Employee separation costs.............. $ 3,081 $ 5,464 $ 8,153 $16,698
Asset impairments...................... 2,374 7,426 -- 9,800
Building clean-up and other expenses... (14) 488 -- 474
------- ------- ------- -------
Total restructuring charges............ 5,441 13,378 8,153 26,972
Other charges.......................... -- -- 12,495 12,495
------- ------- ------- -------
Total restructuring, impairment and
other charges.................... $ 5,441 $13,378 $20,648 $39,467
======= ======= ======= =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
recorded employee separation costs of $3.1 million related to a
corporate-wide initiative to reduce selling, general and administrative
expenses and asset impairment charges of $2.4 million related to equipment
taken out of service.
COMMERCIAL PRINTING. The commercial printing segment recorded employee
separation costs of $4.6 million related to a corporate-wide initiative to
reduce selling, general and administrative expenses. The segment closed a
small printing operation located in Phoenix, Arizona, closed one of its
printing operations in Atlanta, Georgia and completed the consolidation of
its printing operations in Seattle, Washington and San Francisco,
California. In connection with these plant consolidations, the segment
incurred employee separation costs of $0.9 million, asset impairment
charges of $7.4 million for equipment taken out of service and other
expenses of $0.5 million.
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
CORPORATE. In September 30, 2005, primarily as a result of significant
changes in senior management and personnel reductions in the Company's
former corporate office, the Company recorded employee separation costs of
$8.2 million. The Company incurred other charges of $12.5 million which
included the following:
* In April 2005, the Company engaged an investment banking firm as a
financial advisor to assist the then current board of directors in
its evaluation of the Company's strategic alternatives. The fees
incurred were $3.2 million.
* Legal and other fees incurred in connection with the special
meeting of shareholders totaled $4.5 million.
* In January 2005, the Company's Chief Executive Officer resigned.
The cost incurred as a result of this resignation was $2.1
million.
* Under the Plan, the change in the board of directors in September
2005 constituted a change of control and accelerated the vesting
of the restricted stock issued to certain executives. The
compensation expense recognized by the Company as a result of the
vesting of this restricted stock totaled $2.6 million.
A summary of the activity charged to the restructuring liabilities is
as follows (in thousands):
LEASE EMPLOYEE PENSION
TERMINATION SEPARATION WITHDRAWAL
COSTS COSTS LIABILITIES TOTAL
----------- ---------- ----------- -----------
Balance at December 31, 2005.......... $ 6,067 $ 3,734 $ 950 $ 10,751
Accruals, net..................... 3,451 18,140 -- 21,591
Payments.......................... (3,341) (20,119) (248) (23,708)
------- -------- ----- --------
Balance at September 30, 2006......... $ 6,177 $ 1,755 $ 702 $ 8,634
======= ======== ===== ========
10. PENSION PLANS
The components of the net periodic pension expense for the Company's
pension plans and supplemental executive retirement plans are as follows
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Service cost............................... $ 42 $ 522 $ 798 $ 1,833
Interest cost.............................. 317 894 1,479 2,612
Expected return on plan assets............. (176) (968) (1,529) (2,866)
Net amortization and deferral.............. 69 160 347 459
----- ----- ------- -------
Net periodic pension expense............... $ 252 $ 608 $ 1,095 $ 2,038
===== ===== ======= =======
The Company expects to contribute $1.1 million to its pension plans in
2006. As of September 30, 2006, the Company had made contributions of $1.0
million. In connection with the sale of Supremex on March 31, 2006 (Notes 4
and 7), the Company has no further obligation relating to Supremex's
pension plans.
16
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based upon the weighted
average number of common shares outstanding for the period. Diluted income
(loss) per share reflects the potential dilution that could occur if
options, restricted stock and restricted stock units to issue common stock
were exercised computed using the treasury stock method. The only Company
securities as of September 30, 2006 that could dilute basic income per
share for periods subsequent to September 30, 2006 are: (1) outstanding
stock options which are exercisable into 3,347,447 shares of the Company's
common stock and (2) 873,750 shares of restricted stock and restricted
share units ("Restricted Stock") of the Company's common stock.
The following table sets forth the computation of basic and diluted
income (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2006 2005 2006 2005
------- -------- ------- --------
Numerator for basic and diluted income
(loss) per share:
Net income (loss)..................... $11,616 $(64,078) $90,723 $(97,246)
======= ======== ======= ========
Denominator weighted average common shares
outstanding:
Basic shares.......................... 53,342 50,212 53,237 48,932
Dilutive effect of stock options
and Restricted Stock............ 847 -- 756 --
------- -------- ------- --------
Diluted shares........................ 54,189 50,212 53,993 48,932
======= ======== ======= ========
Basic income (loss) per share............. $ 0.22 $ (1.28) $ 1.70 $ (1.99)
======= ======== ======= ========
Diluted income (loss) per share........... $ 0.21 $ (1.28) $ 1.68 $ (1.99)
======= ======== ======= ========
12. SEGMENT INFORMATION
The Company operates in two segments--the envelopes, forms and labels
segment and the commercial printing segment. The envelopes, forms and labels
segment is in the business of manufacturing customized envelopes and
packaging products, stock envelopes, traditional and specialty business
forms, and labels used for such applications as prescription drugs,
mailing, messaging and bar coding. The commercial printing segment is in
the business of designing, manufacturing and distributing printed products
that include advertising literature, corporate identity materials,
financial printing, calendars, greeting cards, brand marketing materials,
catalogs, maps, CD packaging and direct mail.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses. Intercompany sales from the
commercial printing segment to the envelopes, forms and labels segment were
$3.2 million and $4.8 million for the three months ended and $11.1 million
and $13.9 million for the nine months ended September 30, 2006 and 2005,
respectively. Intercompany sales from the envelopes, forms and labels
segment to the commercial printing segment were $3.1 million and $5.8 million
for the three months ended, and $9.5 million and $22.3 million for the nine
months ended September 30, 2006 and 2005, respectively.
17
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
The following tables present certain segment information (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales:
Envelopes, forms and
labels...................... $ 198,804 $ 228,023 $ 619,950 $ 688,918
Commercial printing......... 185,064 202,800 548,490 613,243
---------- ---------- ---------- ----------
Total....................... $ 383,868 $ 430,823 $1,168,440 $1,302,161
========== ========== ========== ==========
Operating income (loss):
Envelopes, forms and
labels.................... $ 25,774 $ 19,867 $ 68,363 $ 60,000
Commercial printing......... 6,583 (2,664) 789 (13,297)
Corporate................... (7,329) (22,255) (19,746) (34,513)
---------- ---------- ---------- ----------
Total....................... $ 25,028 $ (5,052) $ 49,406 $ 12,190
========== ========== ========== ==========
Restructuring, impairment and
other charges:
Envelopes, forms and
labels.................... $ 1,004 $ 3,068 $ 15,002 $ 5,440
Commercial printing......... 3,666 3,584 19,593 13,379
Corporate................... 32 17,726 795 20,648
---------- ---------- ---------- ----------
Total....................... $ 4,702 $ 24,378 $ 35,390 $ 39,467
========== ========== ========== ==========
Net sales by product line:
Envelopes................... $ 145,463 $ 185,072 $ 475,697 $ 555,484
Commercial printing......... 184,319 198,484 546,423 603,019
Business forms and labels... 54,086 47,267 146,320 143,658
---------- ---------- ---------- ----------
Total....................... $ 383,868 $ 430,823 $1,168,440 $1,302,161
========== ========== ========== ==========
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cenveo, Inc. and its subsidiaries, which we refer
to as Cenveo, should be read in conjunction with the accompanying
consolidated financial statements and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2005. Item 7 of
our 2005 Form 10-K describes our contractual obligations and the
application of our critical accounting policies. There have been no
significant changes as of September 30, 2006 pertaining to these topics,
other than the repayment of all amounts outstanding of our senior secured
credit facility and our debt refinancing completed in June of 2006. See
"Gain on Sale of Non-Strategic Businesses" and "Long-Term Debt" below.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. We believe these
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of Cenveo. All such statements involve risks and
uncertainties, and as a result, actual results could differ materially from
those projected, anticipated or implied by these statements. Such
forward-looking statements involve known and unknown risks. See Item 1A.
"Risk Factors" under Part II of this report.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
BUSINESS OVERVIEW
We are a leading provider of print and visual communications, with
one-stop services from design through fulfillment. Our broad portfolio of
services and products include commercial printing, envelopes, labels,
packaging and business documents delivered through a network of production,
fulfillment and distribution facilities throughout North America. In
September 2005, we initiated a major restructuring program that we expect
to continue throughout 2006. We operate in two segments: envelopes, forms
and labels and commercial printing.
ENVELOPES, FORMS AND LABELS. Our envelopes, forms and labels segment
specializes in the manufacturing and printing of customized envelopes for
billing and remittance and direct mail advertising. This segment also
produces business forms and labels, custom and stock envelopes and mailers
sold to third-party dealers such as print distributors, office products
suppliers and office-products retail chains.
COMMERCIAL PRINTING. Our commercial printing segment specializes in the
printing of annual reports, car brochures, brand marketing collateral,
financial communications, specialty packaging and general commercial
printing.
CONSOLIDATED OPERATING RESULTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes an overview of our consolidated results for the
three and nine month periods ended September 30, 2006, accompanied by a
discussion of the results of each of our business segments for the same
periods.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income (loss)
as well as the net sales and operating income (loss) of our operating
segments that we use internally to assess our operating performance.
Division sales exclude sales of divested operations and division operating
income (loss) excludes corporate
19
expenses, restructuring, impairment and other charges and the results of
divested operations. It has been our practice to close our quarters on the
Saturday closest to the last day of the calendar month so that each quarter
has the same number of days and 13 full weeks. The financial statements and
other financial information in this report are presented using a calendar
convention. The reporting periods, which consist of 13 and 39 week periods
ending on September 30, 2006 and October 1, 2005, are reported as ending on
September 30, 2006 and 2005, respectively, since the effect is not
material.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005 2006 2005
---------------------------------------- ---------- ---------- ---------- ----------
Division net sales....................... $ 383,868 $ 384,130 $1,122,000 $1,153,813
Divested operations.................. -- 46,693 46,440 148,348
---------- ---------- ---------- ----------
Net sales................................ $ 383,868 $ 430,823 $1,168,440 $1,302,161
========== ========== ========== ==========
Division operating income................ $ 37,027 $ 16,524 $ 96,483 $ 42,120
Corporate expenses................... 7,297 4,529 18,951 13,865
Restructuring, impairment and other
charges............................ 4,702 24,378 35,390 39,467
Divested operations.................. -- (7,331) (7,264) (23,402)
---------- ---------- ---------- ----------
Operating income (loss).................. 25,028 (5,052) 49,406 12,190
(Gain) loss on sale of non-strategic
businesses......................... -- 759 (132,925) 2,019
Interest expense, net................ 13,939 18,079 46,936 55,074
Loss on early extinguishment of
debt............................... -- -- 32,744 --
Other (income) expense, net.......... (2,521) 768 (5,293) 1,203
---------- ---------- ---------- ----------
Income (loss) before income taxes........ 13,610 (24,658) 107,944 (46,106)
Income tax expense................... 1,994 39,420 17,221 51,140
---------- ---------- ---------- ----------
Net income (loss)........................ $ 11,616 $ (64,078) $ 90,723 $ (97,246)
========== ========== ========== ==========
Income (loss) per share--basic........... $ 0.22 $ (1.28) $ 1.70 $ (1.99)
========== ========== ========== ==========
Income (loss) per share--diluted......... $ 0.21 $ (1.28) $ 1.68 $ (1.99)
========== ========== ========== ==========
NET SALES
Net sales declined $47.0 million in the third quarter of 2006, as
compared to the third quarter of 2005, reflecting lower sales for our
envelopes, forms and labels segment of $29.2 million and $17.7 million for
our commercial printing segment. Net sales for the nine months ended
September 30, 2006 declined $133.7 million, as compared to the nine months
ended September 30, 2005, reflecting lower sales for our envelopes, forms
and labels segment of $69.0 million and $64.8 million for our commercial
printing segment. As a result of the sale of Supremex on March 31, 2006,
net sales for our envelopes, forms and labels segment were lower in the
three and nine months ended September 30, 2006.
Division net sales, which exclude sales from operations that have been
divested, were fairly consistent in the third quarter of 2006, as compared
to the third quarter of 2005, reflecting lower commercial printing sales of
$10.9 million, primarily offset by higher envelopes, forms and labels sales
of $10.7 million. Division net sales for the nine months ended September
30, 2006 declined $31.8 million, primarily due to lower sales from our
commercial printing segment of $44.8 million, partially offset by increased
sales from our envelops, forms and labels segment of $13.0 million. See
"Segment Operations" below for a more detailed discussion of the primary
factors for the change in our net sales for our segments.
20
OPERATING INCOME
Operating income increased $30.1 million in the third quarter of 2006,
as compared to the third quarter of 2005. This increase primarily resulted
from lower restructuring, impairment and other charges and increased
operating income from our commercial printing segment.
Operating income increased $37.2 million in the nine months ended
September 30, 2006, as compared to the nine months ended September 30,
2005. This increase primarily resulted from increased operating income from
our commercial printing segment and our envelopes, forms and labels
segment.
Division operating income, which excludes restructuring, impairment and
other charges and operating income of divested operations, increased $20.5
million in the third quarter of 2006, as compared to the third quarter of
2005 and increased $54.4 million for the nine months ended September 30, 2006,
as compared to the nine months ended September 30, 2005. These results
reflect the benefits of our strategy of reducing fixed costs, improving the
procurement of raw materials, improving productivity through plant
consolidations and divesting or closing underperforming operations. See
"Segment Operations" below for a more detailed discussion of the primary
factors for the change in our operating income for our segments.
CORPORATE EXPENSES. Corporate expenses include the costs of our
corporate headquarters. These costs were higher for the three and nine
months ended September 30, 2006, as compared to the three and nine months
ended September 30, 2005, primarily due to certain functions being assumed
by the corporate office in Stamford, Connecticut and from increased
compensation expense, including the expense recorded under Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment. See Note 2
to our condensed consolidated financial statements included herein.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. In September 2005, a new
senior management team implemented significant cost savings programs
including the consolidation of purchasing activities, the rationalization
of our manufacturing platform, corporate and field human resources
reductions, implementation of company-wide purchasing initiatives and
streamlining of our information technology infrastructure. As of September
30, 2006, our total liability for restructuring was approximately $8.6
million. See Note 9 to the condensed consolidated financial statements
included herein.
During the three months ended September 30, 2006, we incurred $4.7
million of restructuring and impairment charges, which included $2.5
million of employee separation costs, $1.0 million of income related to
asset impairments primarily resulting from the gain on sale of a facility
of $1.9 million, equipment moving expenses of $1.5 million, and other exit
costs of $1.7 million. During the nine months ended September 30, 2006, we
incurred $35.4 million of restructuring and impairment charges, which
included $18.1 million of employee separation costs, $3.5 million of asset
impairments net of the gain on sale of a facility of $1.9 million,
equipment moving expenses of $5.1 million, lease termination costs of $3.5
million and other exit costs of $5.2 million. We anticipate additional
restructuring and impairment charges during the fourth quarter of 2006.
During the three months ended September 30, 2005, we incurred $24.4
million of restructuring, impairment and other charges, which included
$12.4 million of employee separation costs, $2.1 million of asset
impairments and $9.8 million of other charges. During the nine months ended
September 30, 2005, we incurred $39.5 million of restructuring, impairment
and other charges, which included $16.7 million of employee separation
costs, $9.8 million of asset impairments, $0.5 million of building clean-up
and other expenses and $12.5 million of other charges.
GAIN ON SALE OF NON-STRATEGIC BUSINESSES. On March 31, 2006, we recorded
a pre-tax gain of approximately $124 million on the sale of all of the
shares of Supremex, Inc. ("Supremex"), a former Canadian subsidiary of ours,
and certain other assets to Supremex Income Fund, a new open-ended trust
formed under the laws of the Province of Quebec, (the "Fund"). At closing,
we received proceeds of approximately $187 million and 11.4 million units in
the Fund, which represented a 36.5% economic and voting interest in the
Fund. See Note 4 to the condensed consolidated financial statements included
herein.
21
On April 20, 2006, in connection with the receipt of approximately
$71.1 million of proceeds relating to the March 31, 2006 sale, we recorded
a pre-tax gain of approximately $1.4 million as a result of the Canadian
dollar strengthening against the U.S. dollar.
On April 28, 2006, we sold 2.5 million units in the Fund relating to an
over-allotment option to the underwriters for approximately $21 million,
which reduced our economic and voting interest in the Fund to 28.6%. In
connection with the sale, we recorded a pre-tax gain on sale of
non-strategic business of approximately $9.3 million in the second quarter
of 2006.
On April 21, 2006, we sold a small non-strategic business and recorded
a loss on sale of $1.1 million.
During the three and nine months ended September 30, 2005, we sold
certain small non-strategic businesses and recognized losses on the sales
of $0.8 million and $2.0 million, respectively.
INTEREST EXPENSE, NET. Interest expense decreased approximately $4.1
million to $13.9 million in the third quarter of 2006 from $18.1 million in
the third quarter of 2005, primarily due to lower average debt balances
outstanding and lower interest rates resulting from our debt refinancing in
June 2006. Interest expense in the third quarter of 2006 reflects average
outstanding debt of $706.5 million and a weighted average interest rate of
7.7%, compared to average outstanding debt of $812.5 million and a weighted
average interest rate of 8.4% during the third quarter of 2005.
Interest expense decreased approximately $8.1 million to $46.9 million
during the first nine months of 2006 from $55.1 million in the first nine
months of 2005, primarily due to lower average debt balances outstanding.
Interest expense during the first nine months of 2006 reflects average
outstanding debt of $733.7 million and a weighted average interest rate of
approximately 8.3%, compared to the average outstanding debt of $819.5
million and a weighted average interest rate of 8.3% during the first nine
months of 2005.
As a result of our debt refinancing in June 2006, we expect lower
interest expense in the fourth quarter of 2006 as compared to 2005. See
Long-Term Debt below and Note 8 to the condensed consolidated financial
statements included herein.
LOSS ON EARLY EXTINGUISHMENT OF DEBT. In June 2006, we incurred a $32.7
million loss on early extinguishment of debt related to our debt
refinancing. See Long-Term Debt below and Note 8 to the condensed
consolidated financial statements included herein.
OTHER INCOME, NET. During the three and nine months ended September 30,
2006, the Company recorded equity income of $2.3 million and $4.6 million,
respectively, relating to its investment in the Fund. See Note 4 to the
condensed consolidated financial statements included herein.
INCOME TAXES. Income tax expense for the three months ended September
30, 2006 was $2.0 million, which included $1.1 million of taxes relating to
the deconsolidation of the Company's U.S. income tax group in connection with
the sale of Supremex and related assets, $0.6 million of a valuation
allowance against foreign tax credits and $0.2 million of state and local
taxes. Income tax expense for the three months ended September 30, 2005 was
$39.4 million primarily resulting from increasing our valuation allowance
by $35.3 million against our remaining U.S. net deferred tax assets to 100%
in accordance with SFAS No. 109, Accounting for Income Taxes.
Income tax expense for the nine months ended September 30, 2006 was
$17.2 million, which included $3.2 million of taxes on our Canadian
operations, income taxes of $8.4 million on the gain on sale of Supremex,
$2.8 million of taxes relating to the deconsolidation of the Company's U.S.
income tax group, $2.0 million of a valuation allowance against foreign tax
credits and $0.7 million of state and local taxes. During the nine months
ended September 30, 2006, we provided income taxes for our Canadian
operations at an effective rate of approximately 34%, as these operations
are expected to generate taxable income in 2006. Income tax expense for the
nine months ended September 30, 2005 was $51.1 million primarily resulting
from the increase of our valuation allowance by $38.3 million on our net
U.S. deferred tax assets and $8.6 million of tax expense for our foreign
operations that generated taxable income.
22
The Company recognized a $220 million gain for U.S. income tax purposes
on the sale of Supremex and the related assets. The utilization of our net
operating and capital losses allowed the release of valuation allowances
for deferred tax assets of $84.6 million in the nine months ended September
30, 2006, which offset the tax expense on the gain on sale of Supremex,
except for $8.4 million which was primarily alternative minimum tax.
We released valuation allowances of $6.7 million for the three months
ended September 30, 2006. We increased our valuation allowance by $18.0
million against our domestic operations, alternative minimum tax credits
and foreign tax credits generated in the nine months ended September 30,
2006, including $4.4 million relating to the gain on sale of Supremex.
SEGMENT OPERATIONS
Our Chief Executive Officer monitors the performance of the ongoing
operations of our two operating segments. We assess performance based on
division net sales and division operating income. The summaries of sales
and operating income of our two segments have been presented to show each
segment without the sales of divested operations and to show the operating
income of each segment without the results of divested operations and
excluding restructuring, impairment and other charges. Sales and operating
income of operations divested and restructuring, impairment and other
charges are included in the tables below to reconcile segment sales and
operating income reported in Note 12 to the condensed consolidated
financial statements to division net sales and division operating income on
which our segments are evaluated.
ENVELOPES, FORMS AND LABELS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(IN THOUSANDS) 2006 2005 2006 2005
-------------- ---------- ---------- ---------- ----------
Segment net sales......................... $ 198,804 $ 228,023 $ 619,950 $ 688,918
Divested operations................... -- (39,901) (41,391) (123,307)
---------- ---------- ---------- ----------
Division net sales........................ $ 198,804 $ 188,122 $ 578,559 $ 565,611
========== ========== ========== ==========
Segment operating income.................. $ 25,774 $ 19,867 $ 68,363 $ 60,000
Restructuring and impairment
charges............................... 1,004 3,068 15,002 5,440
Divested operations................... -- (7,195) (8,839) (23,189)
---------- ---------- ---------- ----------
Division operating income................. $ 26,778 $ 15,740 $ 74,526 $ 42,251
========== ========== ========== ==========
Division operating income margin.......... 13% 8% 13% 7%
DIVISION NET SALES
Division net sales for our envelopes, forms and labels segment
increased $10.7 million in the third quarter of 2006, as compared to the
third quarter of 2005.
* Sales of label products increased $9.2 million, primarily as a
result of our acquisition of Rx Technology in July of 2006.
* Sales of envelopes and other products to the office products
retail customers increased approximately $3.6 million, which was
primarily due to increased unit volume.
* Sales of business forms, envelopes and labels to our distributor
channel declined approximately $2.2 million, primarily due to the
decline in our traditional documents business as a result of
customers' capabilities to print high quality documents, due to
the closure of two plants in the second half of 2005 and the
decision not to retain certain low margin business.
23
For the nine months ended September 30, 2006, as compared to the nine
months ended September 30, 2005, division net sales for envelopes, forms
and labels increased $12.9 million.
* Sales of label products increased $8.8 million primarily as a
result of our acquisition of Rx Technology in July of 2006.
* Sales of envelopes and other products to the office products
retail customers increased approximately $5.0 million, which was
primarily due to increased unit volume.
* Sales of envelopes to our direct mail customers increased $3.4
million.
* Sales of business forms, envelopes and labels to our distributor
channel declined approximately $5.9 million, primarily due to the
decline in our traditional documents business as a result of
customers' capabilities to print high quality documents, due to
the closure of two plants in the second half of 2005 and the
decision not to retain certain low margin business.
DIVISION OPERATING INCOME
Division operating income of our envelopes, forms and labels segment
increased $11.0 million in the third quarter of 2006, as compared to the
third quarter of 2005. This increase was primarily due to improved margins
and lower selling, general and administrative expenses. Margins improved
approximately $8.1 million, primarily due to increased sales and reduced
manufacturing costs. Plant consolidations and aggressive cost reduction
programs reduced selling, general and administrative expenses by
approximately $2.9 million.
Division operating income of the segment increased $32.3 million during
the nine months ended September 30, 2006, as compared to the nine months
ended September 30, 2005. This increase was primarily due to improved
margins and lower selling, general and administrative expenses. Margins
improved approximately $22.4 million, primarily due to increased sales and
reduced manufacturing costs. Plant consolidations and other cost reduction
programs have also lowered selling, general and administrative expenses by
approximately $9.9 million.
COMMERCIAL PRINTING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(IN THOUSANDS) 2006 2005 2006 2005
-------------- ---------- ---------- ---------- ----------
Segment net sales......................... $ 185,064 $ 202,800 $ 548,490 $ 613,243
Divested operations................... -- (6,792) (5,049) (25,041)
---------- ---------- ---------- ----------
Division net sales........................ $ 185,064 $ 196,008 $ 543,441 $ 588,202
========== ========== ========== ==========
Segment operating income (loss)........... $ 6,583 $ (2,664) $ 789 $ (13,297)
Restructuring and impairment
charges............................. 3,666 3,584 19,593 13,379
Divested operations................... -- (136) 1,575 (213)
---------- ---------- ---------- ----------
Division operating income................. $ 10,249 $ 784 $ 21,957 $ (131)
========== ========== ========== ==========
Division operating income margin.......... 6% 0% 4% 0%
DIVISION NET SALES
Division net sales of the commercial printing segment declined $10.9
million in the third quarter of 2006, as compared to the third quarter of
2005. This decline was due primarily to the loss of sales at the plants that
were closed during 2005 and the nine months ended September 30, 2006. Since
the fourth quarter of 2005, we have closed seven commercial printing plants
that had weak market positions and eroding sales. Division net sales at our
ongoing commercial printing plants increased by approximately $5.6 million
during the third quarter of 2006, as compared to the third quarter of 2005,
due in part to higher sales supporting our direct mail customers.
24
Division net sales declined $44.8 million for the nine months ended
September 30, 2006, as compared to the corresponding period of 2005. This
decline was due primarily to the loss of sales at the plants that were
closed in 2005 and during the nine months ended September 30, 2006.
DIVISION OPERATING INCOME
Division operating income for our commercial printing segment increased
$9.5 million in the third quarter of 2006, as compared to the third quarter
of 2005. This increase was primarily due to improved margins of $3.1
million and lower selling, general and administrative expenses of $3.4
million from our ongoing printing operations and net cost savings of $3.0
million from plants that we closed. At our ongoing printing operations,
margins improved primarily due to increased sales and reduced manufacturing
costs and we significantly reduced the cost structure of this segment
through headcount reductions and lower expenses.
Division operating income of the segment increased $22.1 million during
the nine months ended September 30, 2006, as compared to the same period in
2005. This increase was primarily due to improved margins of $3.4 million
and lower selling, general and administrative expenses of $12.7 million
from our ongoing printing operations and net cost savings of $6.0 million
from plants that we closed. At our ongoing printing operations, margins
improved primarily due to increased sales and reduced manufacturing costs
and we significantly reduced the cost structure of this segment through
headcount reductions and lower expenses.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities was $10.1 million in the first nine months of 2006, which was
primarily due to the increase in our working capital of $48.9 million,
offset in part by the net income adjusted for non-cash items of $39.1
million. The increase in our working capital primarily resulted from the
timing of payments to our vendors.
Net cash used in operating activities was $27.3 million in the first
nine months of 2005, which was primarily due to a decrease in our working
capital of $17.3 million and net income adjusted for non-cash items of $4.6
million. The increase in our working capital was primarily due to increased
inventory levels due to timing of work performed.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash provided
by investing activities was $148.7 million in the first nine months of
2006, primarily reflecting cash proceeds of $213.1 million from the sale of
Supremex and certain other assets and of $6.0 million from the sale of
property, plant and equipment. These proceeds were offset in part by the
acquisition cost of Rx Technology of $49.4 million, capital expenditures of
$16.4 million and deferred payments relating to acquisitions of $4.7
million.
Net cash used in investing activities was $16.4 million in the first
nine months of 2005, primarily reflecting capital expenditures of $19.7
million and deferred payments relating to acquisitions of $4.0 million,
offset in part by the proceeds from the sale of non-strategic businesses of
$6.5 million and from the sale of property, plant and equipment of $0.7
million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash used in
financing activities was $138.8 million in the first nine months of 2006,
primarily resulting from: (i) the repayment of $123.9 million of our senior
secured credit facility and other debt of $12.1 million with proceeds from
the sale of Supremex and other assets, (ii) the repayment of $339.5 million
of our 9 5/8% senior notes and the payment of $26.1 million of redemption
premiums and expenses and $3.8 million of debt issuance costs in connection
with our debt refinancing, which were offset in part by the proceeds from
issuance of our term loan of $325 million, see "Debt Refinancing" below,
and (iii) net borrowings under our new revolving credit facility of $40
million. Our acquisition of Rx Technology was funded through borrowings
under our new revolving credit facility.
Net cash provided by financing activities was $43.8 million in the
first nine months of 2005, primarily resulting from the increase in
borrowings under our senior secured credit facility of $25.2
25
million and proceeds from the exercise of stock options of $21.1 million,
slightly offset by the repayment of other debt of $2.5 million.
LONG-TERM DEBT. Our total outstanding debt was $701.4 million at
September 30, 2006, a decrease of $110.7 million from December 31, 2005.
This decrease was primarily due to the repayment of all amounts outstanding
under our senior secured credit facility and another credit facility
primarily with proceeds received from the sale of Supremex and from our
debt refinancing in June 2006, offset in part by an increase in our new
revolving credit facility which was used to fund the Rx Technology
acquisition in July 2006, see Note 3 to the condensed consolidated
financial statements included herein. As of September 30, 2006,
approximately 79% of our outstanding debt was subject to fixed interest
rates. See Note 8 to the condensed consolidated financial statements
included herein. As of October 31, 2006, we had $32.5 million outstanding
under our new revolving credit facility.
Debt Refinancing
On June 23, 2006, we completed a tender offer and consent solicitation
(the "Tender Offer"), for any and all of our 9 5/8% Senior Notes due 2012
and extinguished approximately $339.5 million in aggregate principal amount
of our 9 5/8% Senior Notes (approximately 97% of the outstanding amount)
that were tendered and accepted for purchase under the terms of the Tender
Offer.
On June 21, 2006, we entered into a credit agreement that provides for
$525 million of senior secured credit facilities with a syndicate of
lenders (the "Credit Facilities"). The Credit Facilities consist of a $200
million six-year revolving credit facility (the "Revolving Credit
Facility"), and a $325 million seven-year term loan facility (the "Term
Loan"). The Credit Facilities contain customary financial covenants,
including maintenance of a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. Borrowing rates under the
Credit Facilities are determined at our option at the time of each
borrowing and are based on the London Interbank Offered Rate ("LIBOR") or
the prime rate publicly announced from time to time, in each case plus a
specified interest rate margin. The Credit Facilities are secured by
substantially all of our assets. We used proceeds from the Credit
Facilities and other available cash to fund the Tender Offer, to retire our
existing Senior Secured Credit Facility due 2008 (which had no amounts
outstanding), and for $3.8 million of debt issuance costs.
During June 2006, we entered into interest rate swap agreements to
hedge interest rate exposure for $220 million notional amount of our
floating rate debt. This hedge of the interest rate risk was designated and
documented at inception as a cash flow hedge. These interest rate swap
agreements provide a fixed interest rate of 7.56% on $220 million notional
amount of our floating rate debt.
On September 30, 2006 we had outstanding letters of credit of
approximately $26.3 million and $0.5 million surety bonds related to
performance and payment guarantees. In addition, we had an outstanding
letter of credit of $0.8 million issued in support of other debt. Based on
our experience with these arrangements, we do not believe that any
obligations that may arise will be significant. Our current credit ratings
are as follows:
SENIOR
CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITIES NOTES NOTES LAST UPDATE
--------------------------------------- ---------- -------- ------------ --------------
Standard & Poor's...................... BB- B+ B- November 2006
Moody's................................ Ba3 B2 B3 September 2006
The terms of our existing debt do not have any rating triggers that
impact our funding other than potentially lowering our cost of borrowing
under the Term Loan of the Credit Facilities. We do not believe that our
current ratings will impact our ability to raise additional capital, should
such funds be needed.
26
We expect internally generated cash flow and the financing available
under our Credit Facilities will be sufficient to fund our working capital
needs and long-term growth; however, this cannot be assured.
SEASONALITY
Our commercial printing plants experience seasonal variations. Revenues
from annual reports are generally concentrated from February through April.
Revenues associated with holiday catalogs and automobile brochures tend to
be concentrated from July through October. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
In addition, several envelope market segments and certain segments of
the direct mail market experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
Seasonality is offset by the diversity of our other products and
markets, which are not materially affected by seasonal conditions.
ENVIRONMENTAL MATTERS
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
NEW ACCOUNTING PRONOUNCEMENTS
We are required to adopt certain new accounting pronouncements. See
Notes 1 and 2 to our condensed consolidated financial statements included
herein.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. We make available free of
charge through our website our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after such documents are
filed electronically with the Securities and Exchange Commission. In
addition, our earnings conference calls are archived for replay on our
website and presentations to securities analysts are also included on our
website.
LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and can be
estimated. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of our
operations and our financial position. Risks from interest and foreign
currency exchange rate fluctuations are managed through normal operating
and financing activities. We do not utilize derivatives for speculative
purposes.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is LIBOR plus a margin. At September 30, 2006, we had variable rate debt
outstanding of approximately $145.8 million, of which the interest rate was
not fixed through
27
a cash flow hedge. A 1% increase in LIBOR on debt outstanding subject to
variable interest rates would increase our interest expense and reduce our
net income by approximately $1.5 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. In the
three months ended September 30, 2006, a uniform 10% strengthening of the
U.S. dollar relative to the Canadian dollar would have resulted in a
decrease in sales and operating income of approximately $1.5 million and
$0.1 million, respectively. In the nine months ended September 30, 2006, a
uniform 10% strengthening of the U.S. dollar relative to the Canadian
dollar would have resulted in a decrease in sales and operating income of
approximately $8.5 million and $1.1 million, respectively. As a result of
the sale of Supremex on March 31, 2006, our risk to changes in foreign
currency rates of the Canadian dollar has been significantly reduced. The
effects of foreign currency exchange rates on future results would also be
impacted by changes in sales levels or local currency prices.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and our Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that, as of the end of such period, our disclosure controls
and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or
submit under the Exchange Act was recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
made during our most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
There are inherent limitations in the effectiveness of any control
system, including the potential for human error and the circumvention or
overriding of the controls and procedures. Additionally, judgments in
decision-making can be faulty and breakdowns can occur because of simple
error or mistake. An effective control system can provide only reasonable,
not absolute, assurance that the control objectives of the system are
adequately met. Accordingly, our management, including our Chairman and
Chief Executive Officer and our Chief Financial Officer, does not expect
that our control system can prevent or detect all error or fraud. Finally,
projections of any evaluation or assessment of effectiveness of a control
system to future periods are subject to the risks that, over time, controls
may become inadequate because of changes in an entity's operating
environment or deterioration in the degree of compliance with policies or
procedures.
28
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31,
2005, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or
operating results.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Acquisition Agreement, dated as of March 17, 2006, among Supremex
Income Fund, Cenveo Corporation and Cenveo, Inc.--incorporated by
reference to Exhibit 2.1 to registrant's quarterly report on Form
10-Q for the quarter ended March 31, 2006.
3.1 Articles of Incorporation--incorporated by reference to Exhibit
3(i) of the registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1997.
3.2 Articles of Amendment to the Articles of Incorporation dated May
17, 2004--incorporated by reference to Exhibit 3.2 to registrant's
quarterly report on Form 10-Q for the quarter ended June 30, 2004.
3.3 Amendment to Articles of Incorporation and Certificate of
Designations of Series A Junior Participating Preferred Stock of
the Company dated April 20, 2005--incorporated by reference to
Exhibit 3.1 to Cenveo Inc.'s current report on Form 8-K filed with
the SEC on April 21, 2005.
3.4 Bylaws as amended and restated effective April 17,
2005--incorporated by reference to Exhibit 3.2 to registrant's
current report on Form 8-K filed with the SEC on April 18, 2005.
4.1 Indenture dated as of March 13, 2002 between Mail-Well I
Corporation and State Street Bank and Trust Company, as Trustee
relating to Mail-Well I Corporation's $350,000,000 aggregate
principal amount of 9 5/8% Senior Notes due 2012--incorporated by
reference to Exhibit 10.30 to registrant's quarterly report on Form
10-Q for the quarter ended March 31, 2002.
4.2 Form of Senior Note and Guarantee relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of 9 5/8%
Senior Notes due 2012--incorporated by reference to Exhibit 10.31
to registrant's quarterly report on Form 10-Q for the quarter ended
March 31, 2002.
4.3 Second Supplemental Indenture, dated June 1, 2006, by and among
Cenveo Corporation, the Guarantors named therein and US Bank
National Association, as trustee, to the Indenture dated as of
March 13, 2002 relating to the 9 5/8% Senior Notes due
2012--incorporated by reference to Exhibit 4.1 to registrant's
current report on Form 8-K dated (date of earliest event reported)
June 1, 2006 and filed with the SEC on June 2, 2006.
4.4 Indenture dated as of February 4, 2004 between Mail-Well I
Corporation and U.S. Bank National Association, as Trustee, and
Form of Senior Subordinated Note and Guarantee relating to
Mail-Well I Corporation's $320,000,000 aggregate principal amount
of 7 7/8% Senior Subordinated Notes due 2013--incorporated by
reference to Exhibit 4.5 to registrant's annual report on Form 10-K
for the year ended December 31, 2003.
29
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.5 Registration Rights Agreement dated February 4, 2004, between
Mail-Well I Corporation and Credit Suisse First Boston, as Initial
Purchaser, relating to Mail-Well I Corporation's $320,000,000
aggregate principal amount of 7 7/8% Senior Subordinated Notes due
2013--incorporated by reference to Exhibit 4.6 to registrant's
annual report on Form 10-K for the year ended December 31, 2003.
4.6 Supplemental Indenture, dated as of June 21, 2006 among Cenveo
Corporation, the Guarantors named therein and U.S. Bank National
Association, as Trustee, to the Indenture dated as of February 4,
2004 relating to the 7 7/8% Senior Subordinated Notes due
2013--incorporated by reference to Exhibit 4.2 to registrant's
current report on Form 8-K dated (date of earliest event reported)
June 21, 2006 and filed with the SEC on June 27, 2006.
10.1 Underwriting Agreement dated March 17, 2006, among TD Securities
Inc., CIBC World Markets Inc. and the other Underwriters signatory
thereto, Supremex Income Fund, Supremex Inc., Cenveo Corporation
and Cenveo, Inc.--incorporated by reference to Exhibit 10.30 to
registrant's quarterly report on Form 10-Q for the quarter ended
March 31, 2006.
10.2 Form of Indemnity Agreement between Mail-Well, Inc. and each of its
officers and directors--incorporated by reference from Exhibit
10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.3 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by
reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration
Statement on Form S-1 dated March 25, 1994.
10.4+ Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan Trust
Agreement--incorporated by reference from Exhibit 10.19 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated March
25, 1994.
10.5+ Form of Mail-Well, Inc. Incentive Stock Option
Agreement--incorporated by reference from Exhibit 10.22 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated March
25, 1994.
10.6+ Form of Mail-Well, Inc. Nonqualified Stock Option
Agreement--incorporated by reference from Exhibit 10.23 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated March
25, 1994.
10.7+ 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s quarterly report
on Form 10-Q for the quarter ended March 31, 1997.
10.8+ Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive Stock
Option Agreement--incorporated by reference from Exhibit 10.59 to
Mail-Well, Inc.'s quarterly report on Form 10-Q for the quarter
ended March 31, 1998.
10.9+ Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--incorporated
by reference from the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 2001.
10.10+ Form of Non-Qualified Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from Mail-Well,
Inc.'s quarterly report on Form 10-Q for the quarter ended June 30,
2001.
10.11+ Form of Incentive Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from Mail-Well,
Inc.'s quarterly report on Form 10-Q for the quarter ended June 30,
2001.
30
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.12+ Form of Restricted Stock Award Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from Mail-Well,
Inc.'s quarterly report on Form 10-Q for the quarter ended June 30,
2001.
10.13+ Form of Restricted Share Unit Award Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
to Exhibit 10.13 of registrant's annual report on Form 10-K
filed for the year ended December 31, 2005.
10.14+ Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as
amended--incorporated by reference to Exhibit 10.24 to
registrant's quarterly report on Form 10-Q for the quarter
ended June 30, 2004.
10.15+ Form of Executive Severance Agreement entered into between
the Company and certain of its executive
officers--incorporated by reference to Exhibit 10.27 of
registrant's annual report on Form 10-K filed the year ended
December, 2002.
10.16+ Form of Amended and Restated Severance Agreement between the
registrant and certain of its executives--incorporated by
reference to Exhibit 10.2 to the registrant's current report
on Form 8-K dated (date of earliest event reported)
September 9, 2005 and filed with the SEC on September 15,
2005.
10.17 Settlement and Governance Agreement by and among the
registrant, Burton Capital Management and Robert G. Burton,
Sr., dated September 9, 2005--incorporated by reference to
Exhibit 10.1 to the registrant's current report on Form 8-K
dated (date of earliest event reported) September 9, 2005
and filed with the SEC on September 12, 2005.
10.18+ Employment Agreement dated as of October 27, 2005 between
the registrant and Robert G. Burton, Sr.--incorporated by
reference to Exhibit 10.29 of registrant's annual report on
Form 10-K filed for the year ended December 31, 2005.
10.19+ Employment Agreement dated as of June 22, 2006 between the
registrant and Thomas Oliva--incorporated by reference to
Exhibit 10.19 to registrant's quarterly report on Form 10-Q
for the quarter ended June 30, 2006.
10.20+ Employment Agreement dated as of June 22, 2006 between the
registrant and Sean Sullivan--incorporated by reference to
Exhibit 10.20 to registrant's quarterly report on Form 10-Q
for the quarter ended June 30, 2006.
10.21+ Employment Agreement dated as of June 22, 2006 between the
registrant and Harry Vinson--incorporated by reference to
Exhibit 10.21 to registrant's quarterly report on Form 10-Q
for the quarter ended June 30, 2006.
10.22+ Employment Agreement dated as of June 22, 2006 between the
registrant and Timothy Davis--incorporated by reference to
Exhibit 10.22 to registrant's quarterly report on Form 10-Q
for the quarter ended June 30, 2006.
10.23 Credit Agreement dated as of June 21, 2006 among Cenveo
Corporation, Cenveo, Inc., Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, and
the other lenders party thereto--incorporated by reference
to Exhibit 4.2 to registrant's current report on Form 8-K
dated (date of earliest event reported) June 21, 2006 and
filed with the SEC on June 27, 2006.
31.1* Certification by Robert G. Burton, Sr., Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31
EXHIBIT
NUMBER DESCRIPTION
------- -----------
31.2* Certification by Sean S. Sullivan, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished as an exhibit to this
report on Form 10-Q.
----------------
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
32
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 8, 2006.
CENVEO, INC.
By: /s/ ROBERT G. BURTON, SR.
--------------------------------
Robert G. Burton, Sr.
Chairman and Chief Executive
(Principal Executive Officer)
By: /s/ SEAN S. SULLIVAN
--------------------------------
Sean S. Sullivan
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
33