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, 200727, 2008
Commission file number 1-12551
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO | 84-1250533 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
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ONE CANTERBURY GREEN 201 BROAD STREET | |
STAMFORD, CT | 06901 |
(Address of principal executive offices) | (Zip Code) |
| |
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203-595-3000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the Registrant (1)registrant (i) 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)(ii) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “accelerated filer and large“large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer xo Accelerated filer ox Non-accelerated filero Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 1, 20073, 2008 the registrant had 53,800,44854,191,897 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
| Item 1. Financial Statements |
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
| | September 30, 2007 | | December 31, 2006 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 11,712 | | $ | 10,558 | |
Accounts receivable, net | | | 345,858 | | | 230,098 | |
Inventories | | | 175,329 | | | 92,406 | |
Assets held for sale | | | 4,278 | | | 51,966 | |
Prepaid and other current assets | | | 48,384 | | | 41,413 | |
Total current assets | | | 585,561 | | | 426,441 | |
| | | | | | | |
Property, plant and equipment, net | | | 438,270 | | | 251,103 | |
Goodwill | | | 685,173 | | | 258,136 | |
Other intangible assets, net | | | 273,790 | | | 31,985 | |
Other assets, net | | | 42,993 | | | 34,285 | |
Total assets | | $ | 2,025,787 | | $ | 1,001,950 | |
| | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
Current maturities of long-term debt | | $ | 17,937 | | $ | 7,513 | |
Accounts payable | | | 169,846 | | | 116,067 | |
Accrued compensation and related liabilities | | | 58,603 | | | 40,242 | |
Other current liabilities | | | 88,054 | | | 63,609 | |
Total current liabilities | | | 334,440 | | | 227,431 | |
| | | | | | | |
Long-term debt | | | 1,447,472 | | | 667,782 | |
Deferred income taxes | | | 59,193 | | | 4,356 | |
Other liabilities | | | 97,208 | | | 40,640 | |
Commitments and contingencies Shareholders’ equity: | | | | | | | |
Preferred stock | | | — | | | — | |
Common stock | | | 538 | | | 535 | |
Paid-in capital | | | 251,055 | | | 244,894 | |
Retained deficit | | | (161,938 | ) | | (186,436 | ) |
Accumulated other comprehensive (loss) income | | | (2,181 | ) | | 2,748 | |
Total shareholders’ equity | | | 87,474 | | | 61,741 | |
Total liabilities and shareholders’ equity | | $ | 2,025,787 | | $ | 1,001,950 | |
| | September 27, 2008 | | | December 29, 2007 | |
Assets | | (Unaudited) | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 13,819 | | | $ | 15,882 | |
Accounts receivable, net | | | 309,327 | | | | 344,634 | |
Inventories | | | 165,916 | | | | 162,908 | |
Prepaid and other current assets | | | 62,250 | | | | 73,358 | |
Total current assets | | | 551,312 | | | | 596,782 | |
| | | | | | | | |
Property, plant and equipment, net | | | 433,358 | | | | 428,341 | |
Goodwill | | | 681,972 | | | | 669,802 | |
Other intangible assets, net | | | 279,205 | | | | 270,622 | |
Other assets, net | | | 29,557 | | | | 37,175 | |
Total assets | | $ | 1,975,404 | | | $ | 2,002,722 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | $ | 16,477 | | | $ | 18,752 | |
Accounts payable | | | 181,716 | | | | 165,458 | |
Accrued compensation and related liabilities | | | 43,334 | | | | 47,153 | |
Other current liabilities | | | 90,061 | | | | 79,554 | |
Total current liabilities | | | 331,588 | | | | 310,917 | |
| | | | | | | | |
Long-term debt | | | 1,359,522 | | | | 1,425,885 | |
Deferred income taxes | | | 62,470 | | | | 55,181 | |
Other liabilities | | | 100,855 | | | | 111,413 | |
Commitments and contingencies | | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred stock | | | — | | | | — | |
Common stock | | | 541 | | | | 537 | |
Paid-in capital | | | 267,126 | | | | 254,241 | |
Retained deficit | | | (137,343 | ) | | | (148,939 | ) |
Accumulated other comprehensive loss | | | (9,355 | ) | | | (6,513 | ) |
Total shareholders’ equity | | | 120,969 | | | | 99,326 | |
Total liabilities and shareholders’ equity | | $ | 1,975,404 | | | $ | 2,002,722 | |
See notes to condensed consolidated financial statements.
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| | | Three Months Ended | | | Nine Months Ended | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | | | | As Restated | | | | | | As Restated | |
Net sales | $ | 550,601 | | $ | 383,868 | | $ | 1,462,275 | | $ | 1,127,049 | | | $ | 522,705 | | | $ | 550,601 | | | $ | 1,581,534 | | | $ | 1,462,275 | |
Cost of sales | | 433,774 | | 307,013 | | 1,166,483 | | 901,233 | | | | 406,908 | | | | 436,109 | | | | 1,260,612 | | | | 1,170,862 | |
Selling, general and administrative | | 63,650 | | 45,703 | | 168,173 | | 145,874 | | | | 58,455 | | | | 63,650 | | | | 184,821 | | | | 168,173 | |
Amortization of intangible assets | | 2,819 | | 1,422 | | 7,245 | | 3,984 | | | | 2,293 | | | | 2,819 | | | | 6,747 | | | | 7,245 | |
Restructuring and impairment charges | | 20,312 | | | 4,702 | | | 32,094 | | | 35,390 | | |
Restructuring, impairment and other charges | | | | 6,873 | | | | 20,312 | | | | 22,047 | | | | 32,094 | |
Operating income | | 30,046 | | 25,028 | | 88,280 | | 40,568 | | | | 48,176 | | | | 27,711 | | | | 107,307 | | | | 83,901 | |
(Gain) loss on sale of non-strategic businesses | | (189 | ) | | — | | (189 | ) | | 1,849 | | |
Gain on sale of non-strategic business | | | | — | | | | (189 | ) | | | — | | | | (189 | ) |
Interest expense, net | | 25,283 | | 13,939 | | 63,091 | | 47,013 | | | | 26,795 | | | | 25,283 | | | | 79,948 | | | | 63,091 | |
Loss on early extinguishment of debt | | 51 | | — | | 9,256 | | 32,744 | | |
Loss (gain) on early extinguishment of debt | | | | (371 | ) | | | 51 | | | | 3,871 | | | | 9,256 | |
Other expense (income), net | | 899 | | | 102 | | | 2,068 | | | (382 | ) | | | (695 | ) | | | 899 | | | | 429 | | | | 2,065 | |
Income (loss) from continuing operations before income taxes | | 4,002 | | 10,987 | | 14,054 | | (40,656 | ) | |
Income tax expense | | 160 | | | 1,697 | | | 4,698 | | | 4,704 | | |
Income (loss) from continuing operations | | 3,842 | | 9,290 | | 9,356 | | (45,360 | ) | |
Income (loss) from discontinued operations, net of taxes | | (810 | ) | | 2,326 | | | 15,142 | | | 136,083 | | |
Income from continuing operations before income taxes | | | | 22,447 | | | | 1,667 | | | | 23,059 | | | | 9,678 | |
Income tax expense (benefit) | | | | 10,060 | | | | (844 | ) | | | 10,349 | | | | 2,818 | |
Income from continuing operations | | | | 12,387 | | | | 2,511 | | | | 12,710 | | | | 6,860 | |
(Loss) income from discontinued operations, net of taxes | | | | (59 | ) | | | (810 | ) | | | (1,114 | ) | | | 15,142 | |
Net income | $ | 3,032 | | $ | 11,616 | | $ | 24,498 | | $ | 90,723 | | | $ | 12,328 | | | $ | 1,701 | | | $ | 11,596 | | | $ | 22,002 | |
Income (loss) per share - basic: | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | $ | 0.07 | | $ | 0.18 | | $ | 0.18 | | $ | (0.85 | ) | | $ | 0.23 | | | $ | 0.04 | | | $ | 0.24 | | | $ | 0.13 | |
Discontinued operations | | (0.01 | ) | | 0.04 | | | 0.28 | | | 2.55 | | | | — | | | | (0.01 | ) | | | (0.02 | ) | | | 0.28 | |
Net income | $ | 0.06 | | $ | 0.22 | | $ | 0.46 | | $ | 1.70 | | | $ | 0.23 | | | $ | 0.03 | | | $ | 0.22 | | | $ | 0.41 | |
Income (loss) per share - diluted: | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | $ | 0.07 | | $ | 0.17 | | $ | 0.17 | | $ | (0.85 | ) | | $ | 0.23 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.12 | |
Discontinued operations | | (0.01 | ) | | 0.04 | | | 0.28 | | | 2.55 | | | | — | | | | (0.01 | ) | | | (0.02 | ) | | | 0.28 | |
Net income | $ | 0.06 | | $ | 0.21 | | $ | 0.45 | | $ | 1.70 | | | $ | 0.23 | | | $ | 0.03 | | | $ | 0.21 | | | $ | 0.40 | |
Weighted average shares: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | 53,572 | | 53,342 | | 53,545 | | 53,237 | | | | 53,897 | | | | 53,572 | | | | 53,796 | | | | 53,545 | |
Diluted | | 54,531 | | 54,189 | | 54,614 | | 53,237 | | | | 54,174 | | | | 54,531 | | | | 53,994 | | | | 54,614 | |
See notes to condensed consolidated financial statements.
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | Nine Months Ended | |
| | Nine Months Ended September 30, | | | September 27, 2008 | | | September 29, 2007 | |
| | 2007 | | 2006 | | | | | | As Restated | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 24,498 | | $ | 90,723 | | | $ | 11,596 | | | $ | 22,002 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Gain on sale of discontinued operations, net of taxes | | (15,962 | ) | | (126,353 | ) | | | — | | | | (15,962 | ) |
(Income) loss from discontinued operations, net of taxes | | 820 | | | (9,730 | ) | |
Loss from discontinued operations, net of taxes | | | | 1,114 | | | | 820 | |
Depreciation and amortization, excluding non-cash interest expense | | 46,427 | | | 30,487 | | | | 55,515 | | | | 46,427 | |
Non-cash interest expense, net | | 1,044 | | | 1,353 | | | | 1,305 | | | | 1,044 | |
Loss on early extinguishment of debt | | 9,256 | | | 32,744 | | | | 3,871 | | | | 9,256 | |
Stock-based compensation provision | | 7,166 | | | 3,363 | | | | 12,940 | | | | 7,166 | |
Non-cash restructuring and impairment charges | | 17,153 | | | 6,244 | | |
Non-cash restructuring, impairment and other charges | | | | 5,124 | | | | 17,153 | |
Deferred income taxes | | 4,082 | | | — | | | | 6,709 | | | | 4,082 | |
(Gain) loss on sale of non-strategic businesses | | (189 | ) | | 1,849 | | |
Gain on sale of non-strategic business | | | | — | | | | (189 | ) |
Gain on sale of assets | | | | (4,378 | ) | | | (383 | ) |
Other non-cash charges, net | | 5,817 | | | 2,959 | | | | 6,599 | | | | 6,200 | |
Changes in operating assets and liabilities, excluding the effects of acquired businesses: | | | | | | | | | | | | | | |
Accounts receivable | | (5,542 | ) | | 4,416 | | | | 35,590 | | | | (5,049 | ) |
Inventories | | (16,845 | ) | | (2,006 | ) | | | (125 | ) | | | (14,890 | ) |
Accounts payable and accrued compensation and related liabilities | | (2,276 | ) | | (35,576 | ) | | | 5,718 | | | | (378 | ) |
Other working capital changes | | (10,502 | ) | | (11,181 | ) | | | 13,351 | | | | (13,156 | ) |
Other, net | | | (4,941 | ) | | (5,832 | ) | | | (5,515 | ) | | | (4,941 | ) |
Net cash provided by (used in) continuing operating activities | | 60,006 | | | (16,540 | ) | |
Net cash provided by continuing operating activities | | | | 149,414 | | | | 59,202 | |
Net cash provided by discontinued operating activities | | | 1,394 | | | 6,424 | | | | — | | | | 2,198 | |
Net cash provided by (used in) operating activities | | 61,400 | | | (10,116 | ) | |
Net cash provided by operating activities | | | | 149,414 | | | | 61,400 | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Cost of business acquisitions, net of cash acquired | | (627,116 | ) | | (49,425 | ) | | | (47,151 | ) | | | (627,116 | ) |
Capital expenditures | | (25,181 | ) | | (15,744 | ) | | | (37,782 | ) | | | (25,181 | ) |
Acquisition payments | | (3,653 | ) | | (4,653 | ) | | | (3,653 | ) | | | (3,653 | ) |
Proceeds from sale of property, plant and equipment | | 4,851 | | | 6,025 | | | | 18,258 | | | | 4,851 | |
Proceeds from divestitures, net | | | 226 | | | 1,575 | | | | — | | | | 226 | |
Net cash used in investing activities of continuing operations | | (650,873 | ) | | (62,222 | ) | | | (70,328 | ) | | | (650,873 | ) |
Proceeds from the sale of discontinued operations | | 73,628 | | | 211,529 | | | | — | | | | 73,628 | |
Capital expenditures for discontinued operations | | | — | | | (632 | ) | |
Net cash provided by investing activities of discontinued operations | | | 73,628 | | | 210,897 | | |
Net cash (used in) provided by investing activities | | (577,245 | ) | | 148,675 | | |
Net cash used in investing activities | | | | (70,328 | ) | | | (577,245 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from issuance of Term Loans | | 720,000 | | | 325,000 | | |
Proceeds from Unsecured Loan | | 175,000 | | | — | | |
Borrowings under Revolving Credit Facility, net | | 92,500 | | | 40,000 | | |
Repayment of senior unsecured loan | | | | (175,000 | ) | | | — | |
(Repayments) borrowings under revolving credit facility, net | | | | (65,200 | ) | | | 92,500 | |
Repayment of term loans | | | | (5,400 | ) | | | (3,100 | ) |
Repayment of term loan B | | | | — | | | | (324,188 | ) |
Repayment of Cadmus revolving senior bank credit facility | | | | — | | | | (70,100 | ) |
Repayment of 8⅜% senior subordinated notes | | | | — | | | | (20,880 | ) |
Repayment of 9⅝% senior notes | | | | — | | | | (10,498 | ) |
Repayments of other long-term debt | | | | (16,535 | ) | | | (26,962 | ) |
Payment of debt issuance costs | | | | (5,297 | ) | | | (5,906 | ) |
Payment of refinancing fees, redemption premiums and expenses | | | | — | | | | (8,045 | ) |
Purchase and retirement of common stock upon vesting of RSUs | | | | (1,055 | ) | | | (1,302 | ) |
Tax liability from stock-based compensation | | | | (873 | ) | | | — | |
Proceeds from issuance of 10½% senior notes | | | | 175,000 | | | | — | |
Proceeds from issuance of term loans | | | | — | | | | 720,000 | |
Proceeds from senior unsecured loan | | | | — | | | | 175,000 | |
Proceeds from issuance of other long-term debt | | | | 11,338 | | | | — | |
Proceeds from exercise of stock options | | 300 | | | 1,860 | | | | 1,873 | | | | 300 | |
Repayment of Term Loan B | | (324,188 | ) | | — | | |
Repayment of Cadmus revolving senior bank credit facility | | (70,100 | ) | | — | | |
Repayment of 8⅜% Senior Subordinated Notes | | (20,880 | ) | | — | | |
Repayment of 9⅝% Senior Notes | | (10,498 | ) | | (339,502 | ) | |
Repayment of Term Loans | | (3,100 | ) | | — | | |
Repayments of senior secured revolving credit facility | | — | | | (123,931 | ) | |
Repayments of other long-term debt | | (26,962 | ) | | (12,265 | ) | |
Payment of refinancing fees, redemption premiums and expenses | | (8,045 | ) | | (26,142 | ) | |
Payment of debt issuance costs | | (5,906 | ) | | (3,770 | ) | |
Purchase and retirement of common stock upon vesting of RSUs | | | (1,302 | ) | | — | | |
Net cash provided by (used in) financing activities | | 516,819 | | | (138,750 | ) | |
Net cash (used in) provided by financing activities | | | | (81,149 | ) | | | 516,819 | |
Effect of exchange rate changes on cash and cash equivalents of continuing operations | | | 180 | | | (2 | ) | | — | | | | 180 | |
Net increase (decrease) in cash and cash equivalents | | 1,154 | | | (193 | ) | |
Cash and cash equivalents at beginning of year | | | 10,558 | | | 1,035 | | |
Cash and cash equivalents at end of quarter | | $ | 11,712 | | $ | 842 | | |
Net (decrease) increase in cash and cash equivalents | | | | (2,063 | ) | | | 1,154 | |
Cash and cash equivalents at beginning of period | | | | 15,882 | | | | 10,558 | |
Cash and cash equivalents at end of period | | | $ | 13,819 | | | $ | 11,712 | |
See notes to condensed consolidated financial statements.
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, results of operations and cash flows as of and for the three and nine month periods ended September 30, 2007.27, 2008. The results of operations for the three and nine month periods ended September 30, 200727, 2008 are generally not indicative of the results to be expected for the full year, primarily due to the Company’s acquisition of Cadmus Communications Corporation (“Cadmus”) and PC Ink Corp. (“Printegra”) in the first quarter of 2007 and of Madison/Graham ColorGraphics, Inc. (“ColorGraphics”) and Commercial Envelope Manufacturing Co., Inc. (“Commercial Envelope”) in the third quarter of 2007 (Note 3), the increase in the Company’s outstanding debt as a result of such acquisitions (Note 9), and seasonality.year. 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, 200629, 2007 (the “Form 10-K”).
It is the Company’s practice to close its quarters on the Saturday closest to the last day of the calendar quarter so that each quarter has the same number of days and 13 full weeks. The Financial Statements and other financial information in this report are presented using a calendar convention. The reporting periods whichending on September 27, 2008 and September 29, 2007 consist of 13 weeks ended on September 29, 2007 and September 30, 2006, areweeks. Prior to fiscal 2008, the Company reported its results as ending on September 30, 2007 and 2006, respectively, since the effect of a reporting period not ending on these dates is not material.calendar quarter end.
Beginning in the fourth quarter of 2006, the financial results of Supremex, Inc. and certain other assets (“Supremex”) sold were accounted for as a discontinued operation, resulting in the Company’s historical condensed consolidated statements of operations and statements of cash flows being reclassified to reflect such discontinued operation separately from continuing operations (Notes 4 and 12).New Accounting Pronouncements
New Accounting PronouncementsSFAS 157
FIN 48
Effective January 1, 2007,In September 2006, the Company adopted Financial Accounting Standards Board (“FASB”(the “FASB”) issued Statement of Financial InterpretationAccounting Standard (“SFAS”) No. 48, Accounting157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) (“FIN 48”). FIN 48 clarifies themeasuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition thresholdpronouncements that require or permit fair value measurements and measurement attributewas effective for the financial statement recognitionCompany on December 30, 2007. However, the FASB deferred the effective date of SFAS 157 until the beginning of the Company’s 2009 fiscal year, as it relates to fair value measurement requirements for nonfinancial assets and measurement of a tax position taken or expected to be takenliabilities that are not remeasured at fair value on a tax return. As a result of therecurring basis. These include goodwill, other nonamortizable intangible assets and unallocated purchase price for recent acquisitions. The Company’s adoption of FIN 48, the CompanySFAS 157 on December 30, 2007 did not record an adjustment to its liability for unrecognized income tax benefits or retained deficit. As of January 1, 2007, the Company had approximately $10.8 million of unrecognized tax benefits, of which approximately $0.4 million will reduce its effective tax rate if recognized. As of September 30, 2007, the Company had approximately $18.2 million of unrecognized tax benefits. The Company does not believe that it is reasonably possible that its unrecognized tax benefits will change significantly in the next twelve months. The Company has elected to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the Company had approximately $4.7 million of accrued interest and penalties related to uncertain tax positions.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (Continued)
The Internal Revenue Service (“IRS”) has reviewed the Company’s federal income tax returns through 2002. The Company’s federal income tax returns for tax years after 2003 remain subject to examination by the IRS. The various states in which the Company is subject to income tax are generally open for the tax years after 2003. In Canada, the Company remains subject to audit for tax years after 2002. The Company does not believe that the outcome of any examination will have a material impact on its condensed consolidated financial statements.
EITF 06-3
Effective JanuaryThe fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 2007,provides the Company adopted Emerging Issues Task Force Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities should be Presented in the Income Statement - That is, Gross versus Net Presentation (“EITF 06-3”). The task force concluded that either method is acceptable; however, if taxes are reported on a gross basis (included in sales) a company should disclose those amounts, if significant. The Company records sales netmost reliable measure of applicable sales tax. The adoptionfair value, whereas Level 3 generally requires significant management judgment. As of EITF 06-3 did not have a significant effect onSeptember 27, 2008, the Company’s condensed consolidated statementsonly fair valued financial item under the scope of operations.
SFAS 157
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS 157 is effectiveits liability for interest rate swaps, which are based on LIBOR index inputs and are categorized as Level 2. The Company’s interest rate swaps are valued using discounted cash flows, as no quoted market prices exist for the Company beginning on January 1, 2008.specific instruments. The Company is currently evaluatingprimary inputs to the potential effect SFAS 157 may have on its condensed consolidated financial statements.valuation are maturity and interest rate yield curves, specifically three-month LIBOR, using commercially available market sources.
SFAS 159
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 iswas effective for the Company on December 30, 2007. The Company did not elect the fair value option for existing eligible items; therefore, SFAS 159 had no impact on the Company’s condensed consolidated financial statements as of December 30, 2007.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (Continued)
SFAS 141R
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R establishes revised principles and requirements for how the Company will recognize and measure assets and liabilities acquired in a business combination. SFAS 141R is effective for business combinations completed on or after the beginning of the Company’s 2009 fiscal year. The Company will adopt SFAS 141R at the beginning of its 2009 fiscal year, as required, and is currently evaluating the impact of such adoption on January 1, 2008.its financial statements.
SFAS 160
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective at the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the potential effectimpact of adopting SFAS 159 may have on160.
SFAS 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities and is effective at the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact of adopting SFAS 161.
2. Restatement
During the fourth quarter of 2007, senior management became aware of unsupported accounting entries that were recorded by a plant controller who had responsibility for two of the Company’s envelope plants. As a result, the Company’s audit committee initiated an internal review conducted by outside counsel under the direction of the audit committee that was completed prior to the Form 10-K filing in March 2008 (Note 10). The review concluded that the accounting irregularities were isolated to those two envelope plants and were committed solely by that former plant controller. The accounting irregularities included the recording of unsupported journal entries to enhance the plants’ financial results through a reduction of cost of sales and increases to accounts receivable and inventories and decreases to accounts payable and other current liabilities. As a result, the Company recorded adjustments to restate its historical condensed consolidated financial statements.statements for the three and nine month periods ended September 29, 2007, that decreased operating income by approximately $2.3 million and $4.4 million, respectively. As part of this restatement, the Company made an adjustment for an immaterial error in its statement of cash flows.
2. Stock-Based Compensation
The Company’s 2007 Long-Term Equity Incentive Plan (the “2007 Plan”) was approved in May 2007 and authorizesfollowing tables summarize the issuance of 2,000,000 shareseffects of the Company’s common stock, no more than 1,500,000restatement on the line items included in the balance sheet, statements of which may be issued with respect to restricted shares, restricted share units ("RSUs") or other stock-based awards. Any shares not used for these awards may be used for awards of stock optionsoperations and stock appreciation rights. In addition, the plan authorizes cash performance awards. Upon approval of the 2007 Plan, the Company ceased making awards under its prior equity plans, includingflows in the Company’s 2001 Long-Term Equity Incentive Plan. Unused shares previously authorized under prior plans have been rolled over intoForm 10-Q for the 2007 Plan and increase the total number of shares authorized for issuance under the 2007 Plan.quarter ended September 29, 2007.
The Company’s outstanding unvested 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 marketCondensed consolidated balance sheet line items (in thousands): | |
| | | |
| | September 29, 2007 | |
| | As Reported | | | As Restated | |
Accounts receivable, net | | $ | 345,858 | | | $ | 344,179 | |
Inventories | | | 175,329 | | | | 172,502 | |
Prepaid and other current assets | | | 48,384 | | | | 49,388 | |
Total current assets | | | 585,561 | | | | 582,059 | |
Total assets | | | 2,025,787 | | | | 2,022,285 | |
| | | | | | | | |
Accounts payable | | | 169,846 | | | | 171,857 | |
Other current liabilities | | | 88,054 | | | | 87,413 | |
Total current liabilities | | | 334,440 | | | | 335,810 | |
Other liabilities | | | 97,208 | | | | 98,118 | |
Retained deficit | | | (161,938 | ) | | | (167,720 | ) |
Total shareholders' equity | | | 87,474 | | | | 81,692 | |
Total liabilities and shareholders' equity | | | 2,025,787 | | | | 2,022,285 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Stock-Based CompensationRestatement (Continued)
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 RSUs principally vest ratably over four years. Upon vesting, RSUs convert into shares of the Company’s common stock.Condensed consolidated statements of operations line items (in thousands, except per share data): | |
| | | | | | |
| | Three Months Ended September 29, 2007 | | | Nine Months Ended September 29, 2007 | |
| | As Reported | | | As Restated | | | As Reported | | | As Restated | |
Cost of sales | | $ | 433,774 | | | $ | 436,109 | | | $ | 1,166,483 | | | $ | 1,170,862 | |
Operating income | | | 30,046 | | | | 27,711 | | | | 88,280 | | | | 83,901 | |
Income from continuing operations before taxes | | | 4,002 | | | | 1,667 | | | | 14,054 | | | | 9,678 | |
Income tax expense (benefit) | | | 160 | | | | (844 | ) | | | 4,698 | | | | 2,818 | |
Income from continuing operations | | | 3,842 | | | | 2,511 | | | | 9,356 | | | | 6,860 | |
Net income | | | 3,032 | | | | 1,701 | | | | 24,498 | | | | 22,002 | |
Income per share – basic: | | | | | | | | | | | | | | | | |
Continuing operations | | | 0.07 | | | | 0.04 | | | | 0.18 | | | | 0.13 | |
Net income | | | 0.06 | | | | 0.03 | | | | 0.46 | | | | 0.41 | |
Income per share – diluted: | | | | | | | | | | | | | | | | |
Continuing operations | | | 0.07 | | | | 0.04 | | | | 0.17 | | | | 0.12 | |
Net income | | | 0.06 | | | | 0.03 | | | | 0.45 | | | | 0.40 | |
Condensed consolidated statement of cash flows line items (in thousands): | |
| | | |
| | Nine Months Ended | |
| | September 29, 2007 | |
| | As Reported | | | As Restated | |
Net income | | $ | 24,498 | | | $ | 22,002 | |
Accounts receivable | | | (5,542 | ) | | | (5,049 | ) |
Inventories | | | (16,845 | ) | | | (14,890 | ) |
Accounts payable and accrued compensation and related liabilities | | | (2,276 | ) | | | (378 | ) |
Other working capital changes | | | (10,502 | ) | | | (13,156 | ) |
Net cash provided by continuing operating activities | | | 60,006 | | | | 59,202 | |
Net cash provided by discontinued operating activities | | | 1,394 | | | | 2,198 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Stock-Based Compensation
Total share-based compensation expense recognized in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations was $2.5$6.0 million and $1.4$12.9 million for the three months ended September 30, 2007 and 2006, respectively, and $7.2 million and $3.4 million for the nine months ended September 30,27, 2008, respectively, and $2.5 million and $7.2 million for the three and nine months ended September 29, 2007, and 2006, respectively.
As of September 30, 2007,27, 2008, there was approximately $40.3$35.4 million of total unrecognized compensation cost related to unvested share-based compensation grants, which is expected to be amortized over a weighted-average period of 1.91.8 years.
A summary of the Company’s outstanding stock options as of and for the nine-monthnine month period ended September 30, 200727, 2008 is as follows:
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value(a) (In Thousands) | | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value(a) (In Thousands) | |
Outstanding at January 1, 2007 | | | 3,326,780 | | $ | 14.71 | | | | | | | | |
Outstanding at December 29, 2007 | | | | 3,849,980 | | $ | 15.14 | | | | | | | |
Granted | | | 780,000 | | | 17.89 | | | | | | | | | — | | | — | | | | | | |
Exercised | | | (32,925) | | | 9.10 | | | | $ | 439 | | | | (209,880 | ) | | 8.93 | | | | $ | 516 | |
Forfeited | | | (80,000) | | | 20.55 | | | | | | | | | (474,125 | ) | | 17.50 | | | | | | |
Outstanding at September 30, 2007 | | | 3,993,855 | | | 15.26 | | 5.2 | | $ | 25,435 | | |
Exercisable at September 30, 2007 | | | 1,246,355 | | | 12.91 | | 5.0 | | $ | 10,875 | | |
Outstanding at September 27, 2008 | | | | 3,165,975 | | | 15.19 | | 4.2 | | $ | 136 | |
Exercisable at September 27, 2008 | | | | 1,727,225 | | | 13.98 | | 4.1 | | $ | 136 | |
A summary of the Company’s outstanding stock options as of and for the nine-month period ended September 30, 2006 is as follows:
| | | | Options | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value(a) (In 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 30,27, 2008 or, if exercised, the exercise dates, exceeds the exercise prices of the respective options.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Stock-Based Compensation (Continued)
A summary of the Company’s outstanding stock options as of and for the nine month period ended September 29, 2007 is as follows:
| | | | Options | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value(a) (In Thousands) | |
Outstanding at January 1, 2007 | | | | 3,326,780 | | $ | 14.71 | | | | | | | |
Granted | | | | 780,000 | | | 17.89 | | | | | | | |
Exercised | | | | (32,925 | ) | | 9.10 | | | | | $ | 439 | |
Forfeited | | | | (80,000 | ) | | 20.55 | | | | | | | |
Outstanding at September 29, 2007 | | | | 3,993,855 | | | 15.26 | | | 5.2 | | $ | 25,435 | |
Exercisable at September 29, 2007 | | | | 1,246,355 | | | 12.91 | | | 5.0 | | $ | 10,875 | |
__________________
(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 29, 2007 or, if exercised, the exercise dates, exceeds the exercise prices of the respective options.
The weighted-average grant date fair value of stock options granted during the nine-month period ended September 30, 2007, at exercise prices equal to the market price of the stock on the grant date,
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
3. Stock-Based Compensation (Continued)
was $6.31 calculated under the Black-Scholes Model with the weighted-average assumptions set forth as follows:
Risk-free interest rate | | 4.05 | % |
Expected option life in years | | 4.25 | |
Expected volatility | | 0.363 | |
Expected dividend yield | | 0.0 | % |
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 date, 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 | | 0.516 | |
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 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 unvested restricted shares and RSUs as of and for the nine-monthnine month period ended September 30, 200727, 2008 is as follows:
| | | | Restricted Shares | | | RSUs | | | Restricted Shares | | | RSUs | |
| | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | |
Unvested at January 1, 2007 | | | | 150,000 | | $ | 9.52 | | | 607,150 | | $ | 19.19 | | |
Unvested at December 29, 2007 | | | | 100,000 | | | $ | 9.52 | | | | 1,132,150 | | | $ | 18.36 | |
Granted | | | | — | | | — | | | 761,750 | | | 17.89 | | | | — | | | | — | | | | 1,930,410 | | | | 9.77 | |
Vested | | | | (50,000 | ) | | — | | | (173,900 | ) | | 20.55 | | | | (50,000 | ) | | | 9.52 | | | | (292,400 | ) | | | 18.02 | |
Forfeited | | | | — | | | — | | | — | | | — | | | | — | | | | — | | | | (113,750 | ) | | | 19.03 | |
Unvested at September 30, 2007 | | | | 100,000 | | | 9.52 | | | 1,195,000 | | | 18.78 | | |
Unvested at September 27, 2008 | | | | 50,000 | | | | 9.52 | | | | 2,656,410 | | | | 12.13 | |
A summary of the Company’s unvested restricted shares and RSUs as of and for the nine-monthnine month period ended September 30, 200629, 2007 is as follows:
| | | | Restricted Shares | | | RSUs | | | Restricted Shares | | | RSUs | |
| | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | | | Shares | | | Grant Date Fair Value | |
Unvested at January 1, 2006 | | | | 200,000 | | $ | 9.52 | | | 236,600 | | $ | 9.61 | | |
Unvested at January 1, 2007 | | | | 150,000 | | | $ | 9.52 | | | | 607,150 | | | $ | 19.19 | |
Granted | | | | — | | | — | | | 532,150 | | | 20.55 | | | | — | | | | — | | | | 761,750 | | | | 17.89 | |
Vested | | | | (50,000 | ) | | 9.52 | | | (25,000 | ) | | 9.52 | | | | (50,000 | ) | | | 9.52 | | | | (173,900 | ) | | | 20.55 | |
Forfeited | | | | — | | | — | | | (20,000 | ) | | 9.52 | | | | — | | | | — | | | | — | | | | — | |
Unvested at September 30, 2006 | | | | 150,000 | | | 9.52 | | | 723,750 | | | 16.28 | | |
Unvested at September 29, 2007 | | | | 100,000 | | | | 9.52 | | | | 1,195,000 | | | | 18.78 | |
The total fair value of restricted shares and RSUs which vested during the nine-monthnine month period ended September 30, 200727, 2008 was $0.9$0.5 million and $3.1$2.8 million, respectively, as of the respective vesting
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Stock-Based Compensation (Continued)
dates. The total fair value of restricted shares and RSUs which vested during the nine-monthnine month period ended September 30, 200629, 2007 was $1.0$0.9 million and $0.5$3.1 million, respectively, as of the respective vesting dates.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 parameters, such as stock price volatility that must be estimated from historical data. The Company’s stock option awards to employees have characteristics significantly different from those of traded options and differences in parameter estimation methodologies can materially affect fair value estimates.
4. Acquisitions
3. Business AcquisitionsRex
Commercial EnvelopeOn March 31, 2008, the Company acquired all of the stock of Rex Corporation and its manufacturing facility (“Rex”). Rex was an independent manufacturer of premium and high-quality packaging solutions, with annual sales of approximately $40 million prior to its acquisition by the Company. The total cash consideration in connection with the Rex acquisition, excluding assumed debt of approximately $7.4 million, was approximately $43.1 million, including approximately $1.0 million of related expenses. The fair values of property, plant and equipment and other intangible assets were based on preliminary appraisals. The Rex acquisition preliminarily resulted in $8.2 million of goodwill, all of which is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. The acquired identifiable intangible assets, aggregating $13.8 million, include: (i) the Rex trademark of $9.3 million, which has been assigned an indefinite useful life due to the Company’s intention to continue using the Rex name, Rex’s long operating history and existing customer base and (ii) customer relationships of $4.5 million, which are being amortized over their estimated weighted average useful lives of 13 years. Rex’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from March 31, 2008. Pro forma results for the three and nine month periods ended September 27, 2008 and September 29, 2007, assuming the acquisition of Rex had been made on December 31, 2006, have not been presented since the effect would not be material.
Commercial Envelope
On August 30, 2007, the Company acquired of all of the stock of Commercial Envelope. Commercial Envelope iswas one of the largest envelope manufacturers in the United States, with approximately $160 million in annual revenues.revenues prior to its acquisition by the Company. The total cash consideration in connection with the Commercial Envelope acquisition, excluding assumed debt of approximately $20.3 million, was approximately $218.0$213.3 million, including approximately $3.8 million of related expenses. The Company financed the acquisition of Commercial Envelope with a new $175 million senior unsecured loan and borrowings under its existing credit facilities (Note 9).
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Purchase Price Allocation
The following table summarizes on a preliminary basis, the final allocation of the purchase price of Commercial Envelope to the assets acquired and liabilities assumed in the acquisition and remains subject to finalization (in thousands):
Preliminary Purchase Price Allocation
| | As of August 30, 2007 | | |
| | | | | | As of August 30, 2007 | |
Current assets | | $ | 42,796 | | | $ | 42,008 | |
Property, plant and equipment | | | 36,757 | | | 36,757 | |
Goodwill | | | 101,831 | | | 99,719 | |
Other intangible assets | | | 87,770 | | | 87,770 | |
Other assets | | | 929 | | | | 884 | |
Total assets acquired | | | 270,083 | | | 267,138 | |
Current liabilities, excluding current portion of long-term debt | | | 9,357 | | | 11,195 | |
Long-term debt, including current maturities | | | 20,277 | | | 20,277 | |
Deferred income taxes | | | 21,329 | | | | 21,255 | |
Total liabilities assumed | | | 50,963 | | | 52,727 | |
Net assets acquired | | | 219,120 | | | 214,411 | |
Less cash acquired | | | (1,114 | ) | | | (1,114 | ) |
Cost of Commercial Envelope acquisition, less cash acquired | | $ | 218,006 | | | $ | 213,297 | |
The Commercial Envelope acquisition preliminarily resulted in $101.8$99.7 million of goodwill, (Note 8), none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s envelopes, forms and labels segment. Such goodwill reflects the substantial value of Commercial Envelope’s historical envelope business. Goodwill also reflects the Company’s expectation
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
of being able to grow the Commercial Envelope business and improve its operating efficiencies through economies of scale. The acquired identifiable intangible assets, aggregating $87.8 million, include: (1) the Commercial Envelope trademark of $51.4 million, which has been assigned an indefinite life due to its strong brand recognition, the Company’s intention to continue using the Commercial Envelope name, including rebranding our existing commercial envelope operations with the Commercial Envelope name, the long operating history of Commercial Envelope, its existing customer base and its significant market position; (2) customer relationships of $36.0 million, which are being amortized over their estimated weighted average useful lives of 15 years; and (3) covenants not to compete of $0.4 million are amortizable over their estimated useful lives of five years (Note 8). The Company also acquired favorable leases of $0.5 million, which are being amortized as an increase to rent expense over their weighted average useful term of approximately five years. Each of the above amounts, including the amounts in the above table, represents the estimated fair value of the respective property, plant and equipment and other intangible assets, as determined in accordance with a preliminary independent appraisal. Commercial Envelope’s results of operations and cash flows have beenare included in the Company’s condensed consolidated statements of operations and cash flows from the August 30, 2007 acquisition date, and are not included for the three and nine months ended September 30, 2006.2007.
Pro Forma Operating Data
The following supplemental pro forma condensed consolidated summary operating data of the Company for each of the three and nine month periods presented hereinended September 29, 2007 has been prepared by adjusting the historical data as set forth in the accompanying condensed consolidated statements of operations to give effect to the Commercial Envelope acquisition as if it had been consummated as of the beginning of each respective yearDecember 31, 2006 (in thousands, except per share amounts):
| | Three Months Ended September 30, | | |
| | 2007 | | 2006 | | | Three Months Ended September 29, 2007 | | | Nine Months Ended September 29, 2007 | |
| | As Reported | | Pro Forma | | As Reported | | Pro Forma | | | As Restated | | | Pro Forma | | | As Restated | | | Pro Forma | |
Net sales | | $ | 550,601 | | $ | 576,148 | | $ | 383,868 | | $ | 424,533 | | | $ | 550,601 | | | $ | 575,830 | | | $ | 1,462,275 | | | $ | 1,563,927 | |
Operating income | | | 30,046 | | | 33,143 | | | 25,028 | | | 30,619 | | | | 27,711 | | | | 28,400 | | | | 83,901 | | | | 96,522 | |
Income from continuing operations | | | 3,842 | | | 3,531 | | | 9,290 | | | 9,565 | | |
Net income | | | 3,032 | | | 2,721 | | | 11,616 | | | 11,891 | | |
Income (loss) from continuing operations | | | | 2,511 | | | | (1,968 | ) | | | 6,860 | | | | 6,596 | |
Net income (loss) | | | | 1,701 | | | | (2,777 | ) | | | 22,002 | | | | 21,738 | |
Income (loss) per share – basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | $ | 0.06 | | $ | 0.18 | | $ | 0.18 | | | | 0.04 | | | | (0.04 | ) | | | 0.13 | | | | 0.13 | |
Discontinued operations | | | (0.01 | ) | | (0.01 | ) | | 0.04 | | | 0.04 | | |
Net income | | $ | 0.06 | | $ | 0.05 | | $ | 0.22 | | $ | 0.22 | | |
Net income (loss) | | | | 0.03 | | | | (0.05 | ) | | | 0.41 | | | | 0.41 | |
Income (loss) per share – diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | $ | 0.06 | | $ | 0.17 | | $ | 0.18 | | | | 0.04 | | | | (0.04 | ) | | | 0.12 | | | | 0.12 | |
Discontinued operations | | | (0.01 | ) | | (0.01 | ) | | 0.04 | | | 0.04 | | |
Net income | | $ | 0.06 | | $ | 0.05 | | $ | 0.21 | | $ | 0.22 | | |
Net income (loss) | | | | 0.03 | | | | (0.05 | ) | | | 0.40 | | | | 0.40 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
| | Nine Months Ended September 30, | |
| | 2007 | | 2006 | |
| | As Reported | | Pro Forma | | As Reported | | Pro Forma | |
Net sales | | $ | 1,462,275 | | $ | 1,566,875 | | $ | 1,127,049 | | $ | 1,246,359 | |
Operating income | | | 88,280 | | | 100,872 | | | 40,568 | | | 54,319 | |
Income (loss) from continuing operations | | | 9,356 | | | 8,685 | | | (45,360 | ) | | (46,182 | ) |
Net income | | | 24,498 | | | 23,826 | | | 90,723 | | | 89,901 | |
Income (loss) per share – basic: | | | | | | | | | | | | | |
Continuing operations | | $ | 0.18 | | $ | 0.16 | | $ | (0.85 | ) | $ | (0.86 | ) |
Discontinued operations | | | 0.28 | | | 0.28 | | | 2.55 | | | 2.55 | |
Net income | | $ | 0.46 | | $ | 0.44 | | $ | 1.70 | | $ | 1.69 | |
Income (loss) per share – diluted: | | | | | | | | | | | | | |
Continuing operations | | $ | 0.17 | | $ | 0.16 | | $ | (0.85 | ) | $ | (0.86 | ) |
Discontinued operations | | | 0.28 | | | 0.28 | | | 2.55 | | | 2.55 | |
Net income | | $ | 0.45 | | $ | 0.44 | | $ | 1.70 | | $ | 1.69 | |
The pro forma information is presented for comparative purposes only and does not purport to be indicative of the Company’s actual condensed consolidated results of operations had the Commercial Envelope acquisition actually been consummated as of the beginning of each of the respective periods noted above,December 31, 2006, or of the Company’s expected future results of operations.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
ColorGraphics
On July 9, 2007, the Company acquired all of the stock of ColorGraphics. ColorGraphics iswas one of the largest commercial printers in the western United States, with annual revenues of approximately $170 million in annual revenues.prior to its acquisition by the Company. ColorGraphics produces high qualityprints annual reports, car books, catalogsbooklets, brochures, advertising inserts, direct mail and other corporate communication materials. The total cash consideration in connection with the ColorGraphics acquisition, excluding assumed debt of approximately $28.6 million, was approximately $71.7 million, including approximately $0.9 million of related expenses. The fair values of property, plant and equipment and other intangible assets were determined in accordance with a preliminary independent appraisal. The ColorGraphics acquisition preliminarily resulted in $38.9$38.7 million of goodwill, of which approximately $2.1 million is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. The acquired identifiable intangible assets, aggregating $22.0 million, include: (1) customer relationships of $2.6 million, which are being amortized over their estimated weighted average useful lives of 11 years; (2) the ColorGraphics trademark of $18.8 million, which has been assigned an indefinite useful life due to the Company’s intention to continue using the ColorGraphics name, and the long operating history, existing customer base and significant market position of ColorGraphics; and (3) a non-compete agreement of $0.6 million which is amortizable over its estimated useful life of 3 years (Note 8). The Company financed the acquisition of ColorGraphics with its existing credit facilities (Note 9).
ColorGraphics’ results of operations and cash flows have beenare included in the accompanyingCompany’s condensed consolidated statements of operations and cash flows from July 1, 2007, and are not included for the three and nine months ended September 30, 2006.2007. Pro forma results for the nine month period ended September 30, 2007 and the three and nine month periods ended September 30, 2006,29, 2007, assuming the acquisition of ColorGraphics had been made on January 1,December 31, 2006, have not been presented since the effect waswould not be material.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
Cadmus
On March 7, 2007, the Company acquired all of the stock of Cadmus for $24.75 per share, by merging an indirect wholly owned subsidiary of Cenveo with and into Cadmus. As a result, Cadmus became an indirect wholly owned subsidiary of Cenveo. Following the merger, Cadmus was merged into Cenveo Corporation, a direct wholly owned subsidiary of the Company. Cadmus is one of the world’s largest providers of content management and print offerings to scientific, technical and medical journal publishers, one of the largest periodicals printers in North America, and a leading provider of specialty packaging and promotional printing products, with annual sales of approximately $450.0 million.$450 million prior to its acquisition by the Company. The total cash consideration in connection with the Cadmus acquisition, excluding assumed debt of approximately $210.1 million, was approximately $249.3$248.7 million, consisting of: (1)(i) $228.9 million inof cash for all of the common stock of Cadmus, (2)(ii) payments of $18.3$17.7 million for vested stock options and restricted shares of Cadmus and for change in control provisions in Cadmus’ incentive plans and (3)(iii) $2.1 million of related expenses.
The common stock of Cadmus, which traded on the NASDAQ Global Market under the symbol “CDMS”, ceased trading and was delisted following the acquisition.
In connection with the Cadmus acquisition, the Company refinanced its existing indebtedness and $70.1 million of Cadmus debt (Note 9).Purchase Price Allocation
The following table summarizes on a preliminary basis, the final allocation of the purchase price of Cadmus to the assets acquired and liabilities assumed in the acquisition and remains subject to finalization (in thousands):
Preliminary Purchase Price Allocation | | As of March 7, 2007 | |
Current assets | | $ | 96,942 | |
Property, plant and equipment | | | 136,268 | |
Goodwill | | | 229,450 | |
Other intangible assets | | | 111,600 | |
Other assets | | | 6,856 | |
Total assets acquired | | | 581,116 | |
Current liabilities, excluding current portion of long-term debt | | | 56,868 | |
Long-term debt, including current maturities | | | 210,063 | |
Deferred income taxes | | | 7,277 | |
Other liabilities | | | 58,201 | |
Total liabilities assumed | | | 332,409 | |
Net assets acquired | | | 248,707 | |
Less cash acquired | | | — | |
Cost of Cadmus acquisition, less cash acquired | | $ | 248,707 | |
| | As of March 7, 2007 | |
| | | | |
Current assets | | $ | 92,504 | |
Property, plant and equipment | | | 135,194 | |
Goodwill | | | 246,136 | |
Other intangible assets | | | 111,600 | |
Other assets | | | 6,235 | |
Total assets acquired | | | 591,669 | |
Current liabilities, excluding current portion of long-term debt | | | 67,626 | |
Long-term debt, including current maturities | | | 210,063 | |
Deferred income taxes | | | 20,134 | |
Other liabilities | | | 44,528 | |
Total liabilities assumed | | | 342,351 | |
Net assets acquired | | | 249,318 | |
Less cash acquired | | | — | |
Cost of Cadmus acquisition, less cash acquired | | $ | 249,318 | |
The Cadmus acquisition preliminarily resulted in $246.1$229.5 million of goodwill, (Note 8), none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. Such goodwill reflects the substantial value of Cadmus’ historically profitable journal, periodicals and specialty packaging printing business. Goodwill also reflects the Company’s expectation of being able to grow Cadmus’ business and improve its operating efficiencies through economies of scale. The acquired identifiable intangible assets, aggregating $111.6 million,
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
include: (1) the Cadmus trademark of $48.0 million, which has been assigned an indefinite life due to its strong brand recognition, the Company’s intention to continue using the Cadmus name, the long operating history of Cadmus, its existing customer base and its significant market position, and (2) customer relationships of $63.6 million, which are being amortized. The Company also acquired unfavorable leases of $3.2 million, which are being amortized as a reduction to rent expense. Each of the above amounts, including the amounts in the above table, represents the estimated fair value of the respective property, plant and equipment and other intangible assets, as determined in accordance with a preliminary independent appraisal. The acquired customer relationships have an estimated weighted average amortization period of approximately 20 years, and the unfavorable leases have an estimated weighted average amortization period of approximately 11 years (Note 8).
Cadmus’ results of operations and cash flows have beenare included in the Company’s condensed consolidated statements of operations and cash flows from the March 7, 2007 acquisition date and are not included for the three and nine months ended September 30, 2006.2007.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Pro Forma Operating Data
The following supplemental pro forma condensed consolidated summary operating data of the Company for each of the periods presented hereinnine month period ended September 29, 2007 has been prepared by adjusting the historical data as set forth in the accompanying condensed consolidated statements of operations to give effect to the Cadmus acquisition as if it had been consummated as of the beginning of each respective yearDecember 31, 2006 (in thousands, except per share amounts):
| | Nine Months Ended September 30, 2007 |
| | As Reported | | Pro Forma |
Net sales | | $ | 1,462,275 | | $ | 1,544,092 |
Operating income | | | 88,280 | | | 89,671 |
Income from continuing operations | | | 9,356 | | | 3,918 |
Net income | | | 24,498 | | | 19,060 |
Income per share – basic: | | | | | | |
Continuing operations | | $ | 0.18 | | $ | 0.08 |
Discontinued operations | | | 0.28 | | | 0.28 |
Net income | | $ | 0.46 | | $ | 0.36 |
Income per share – diluted: | | | | | | |
Continuing operations | | $ | 0.17 | | $ | 0.07 |
Discontinued operations | | | 0.28 | | | 0.28 |
Net income | | $ | 0.45 | | $ | 0.35 |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
| | | Nine Months Ended | |
| | Three Months Ended September 30, 2006 | | Nine Months Ended September 30, 2006 | | | September 29, 2007 | |
| | As Reported | | Pro Forma | | As Reported | | Pro Forma | | | As Restated | | | Pro Forma | |
Net sales | | $ | 383,868 | | $ | 491,176 | | $ | 1,127,049 | | $ | 1,464,175 | | | $ | 1,462,275 | | | $ | 1,544,092 | |
Operating income | | | 25,028 | | | 29,367 | | | 40,568 | | | 42,928 | | | | 83,901 | | | | 87,226 | |
Income (loss) from continuing operations | | | 9,290 | | | 6,779 | | | (45,360 | ) | | (50,506 | ) | |
Income from continuing operations | | | | 6,860 | | | | 1,904 | |
Net income | | | 11,616 | | | 9,170 | | | 90,723 | | | 85,642 | | | | 22,002 | | | | 17,046 | |
Income (loss) per share – basic: | | | | | | | | | | | | | | |
Income per share – basic: | | | | | | | | | |
Continuing operations | | $ | 0.18 | | $ | 0.13 | | $ | (0.85 | ) | $ | (0.94 | ) | | | 0.13 | | | | 0.04 | |
Discontinued operations | | | 0.04 | | | 0.04 | | | 2.55 | | | 2.55 | | |
Net income | | $ | 0.22 | | $ | 0.17 | | $ | 1.70 | | $ | 1.61 | | | | 0.41 | | | | 0.32 | |
Income (loss) per share – diluted: | | | | | | | | | | | | | | |
Income per share – diluted: | | | | | | | | | |
Continuing operations | | $ | 0.17 | | $ | 0.13 | | $ | (0.85 | ) | $ | (0.94 | ) | | | 0.12 | | | | 0.03 | |
Discontinued operations | | | 0.04 | | | 0.04 | | | 2.55 | | | 2.55 | | |
Net income | | $ | 0.21 | | $ | 0.17 | | $ | 1.70 | | $ | 1.61 | | | | 0.40 | | | | 0.31 | |
The pro forma information is presented for comparative purposes only and does not purport to be indicative of the Company’s actual condensed consolidated results of operations had the Cadmus acquisition actually been consummated as of the beginning of each of the respective periods noted above,December 31, 2006, or of the Company’s expected future results of operations.
Printegra
On February 12, 2007, the Company acquired of all of the stock of Printegra, with annual sales of approximately $90 million.million prior to its acquisition by the Company. Printegra produces printed business communication documents regularly consumed by small and large businesses, including laser cut sheets, envelopes, business forms, security documents and labels. The final aggregate purchase price for Printegra was approximately $78.1 million, which includedincluding $0.5 million of related fees. The fair values of property, plant and equipment and other intangible assets were determined in accordance with a preliminary independent appraisal. The Printegra acquisition preliminarily resulted in $37.7 million of goodwill, of which approximately $4.4 million is deductible for income tax purposes, and which was assigned entirely to the Company’s envelopes, forms and labels segment. The acquired identifiable intangible assets, aggregating $27.7 million, include: (1) customer relationships of $21.7 million, which are being amortized over their estimated weighted average useful lives of 25 years; and (2) trademarks of $6.0 million, which are being amortized over their estimated weighted average useful lives of approximately 17 years (Note 8).
expenses. Printegra’s results of operations and cash flows have beenare included in the accompanyingCompany’s condensed consolidated statements of operations and cash flows from the February 12, 2007 acquisition date, and are not included for the three and nine months ended September 30, 2006.2007. Pro forma results for the three and nine month periodsperiod ended September 30,29, 2007, and 2006, assuming the acquisition of Printegra had been made on January 1,December 31, 2006, have not been presented since the effect waswould not be material.
Deferred Taxes
In connection with the acquisition of Commercial Envelope, the Company recorded a net deferred tax liability of $21.3$20.3 million relating to indefinite lived intangible assets, after considering the release of $22.4$21.5 million of existing valuation allowances against goodwill recorded. In connection with the acquisition of ColorGraphics and Cadmus, the Company recorded a net deferred tax liability of $7.0 million. The acquisition of Cadmus resulted in an increase to the Company’s deferred tax liabilities of
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Business Acquisitions (Continued)
approximately $20.1$6.4 million relating to indefinite lived intangible assets.and $1.5 million, respectively. In connection with the acquisition of Printegra, the Company recorded a net deferred tax liability of $8.6$7.4 million and released existing valuation allowances of a like amount against goodwill recorded in accordance with SFAS No. 109, Accounting for Income Taxes.goodwill.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Liabilities Related to Exit Activities
In connection with the above acquisitions, theThe Company recorded liabilities in the purchase price allocation in connection with its preliminary planplans to exit certain activities.activities of the above acquisitions. A summary of the activity recorded for these liabilities is as follows (in thousands):
| | | Lease Termination Costs | | Employee Separation Costs | | Other Exit Costs | | Total | |
| Liabilities recorded at January 1, 2007 | | $ | — | | $ | — | | $ | — | | $ | — | |
| Accruals, net | | | 5,479 | | | 6,856 | | | 1,360 | | | 13,695 | |
| Payments | | | (653 | ) | | (5,871 | ) | | (1,360 | ) | | (7,884 | ) |
| Balance at September 30, 2007 | | $ | 4,826 | | $ | 985 | | $ | — | | $ | 5,811 | |
| | | | | | | | | | | | | | |
| | Lease Termination Costs | | | Employee Separation Costs | | | Other Exit Costs | | | Total | |
Liabilities recorded at December 29, 2007 | | $ | 3,453 | | | $ | 495 | | | $ | 351 | | | $ | 4,299 | |
Accruals, net | | | 62 | | | | 1,049 | | | | 149 | | | | 1,260 | |
Payments | | | (883 | ) | | | (1,280 | ) | | | (430 | ) | | | (2,593 | ) |
Balance at September 27, 2008 | | $ | 2,632 | | | $ | 264 | | | $ | 70 | | | $ | 2,966 | |
Operating Lease Commitments
In connection with the above acquisitions, the Company’s obligation for future minimum rental payments for non-cancelable operating leases, as set forth in the Form 10-K, increased by approximately $83.3 million, which are estimated to be payable over the five years ending September 30, 2012 and thereafter as follows: $12.4 million, $12.0 million, $10.9 million, $8.5 million, $7.5 million and thereafter $32.0 million.
4.5. Discontinued Operations
On March 31, 2006, the Company sold to the Supremex Income Fund (the “Fund”) its entire interest in Supremex, retained a 36.5% economic and voting interest in the Fund and recorded a $124.1 million pre-tax gain. The acquisition agreement pursuant to which the Company sold Supremex on March 31, 2006 to the Fund contains representations and warranties regarding the business that was sold that are customary for transactions of this nature. The acquisition agreement also required the Company to provide specified indemnities (subject to agreed-upon limitations) including, without limitation: (i) an indemnity in the event that its representations and warranties in the acquisition agreement were inaccurate: (ii) an indemnity regarding certain inquiries by the Canadian Competition Bureau: and (iii) an indemnity for certain contingencies. The Company does not believe that the foregoing representations, warranties and related indemnities will result in the Company making any material payments to the Fund.
During the second quarter of 2006, the Company sold 2.5 million units in the Fund relating to the underwriter’s exercise of an over-allotment option and recorded a pre-tax gain of $9.3 million, and recorded a pre-tax gain of $1.4 million relating to the collection of a receivable on the above March 31, 2006 sale. Income from discontinued operations includes the results of operations of Supremex from January 1, 2006 to March 31, 2006. Other income from discontinued operations represents equity income related to the Company’s retained interest in the Fund.
On March 13, 2007, the Company sold its remaining 28.6% economic and voting interest in the Supremex Index Fund (the “Fund”) for net proceeds of $67.2 million and recorded a pre-tax gain of approximately $26.3$25.6 million. Income from discontinued operations for the nine months ended September 30,29, 2007 also includes
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Discontinued Operations (Continued)
equity income of $1.5$2.2 million related to the Company’s retained interest in the Fund from January 1, 2007 through the March 13, 2007 date of sale.
The following table summarizes certain statement of operations data for discontinued operations (in thousands):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2007 | | | 2006 | | 2007 | | 2006 | |
Net sales | | $ | — | | $ | — | | $ | — | | $ | 41,391 | |
Operating income | | | — | | | — | | | — | | | 8,838 | |
Other income | | | — | | | 2,623 | | | 1,475 | | | 4,911 | |
Income tax expense | | | 810 | | | 297 | | | 2,295 | | | 4,097 | |
Gain on sale of discontinued operations, net of taxes of $10,196 and $8,420 in the nine-months ended September 30, 2007 and 2006, respectively | | | — | | | — | | | 15,962 | | | 126,353 | |
Income (loss) from discontinued operations, net of taxes | | | (810 | ) | | 2,326 | | | 15,142 | | | 136,083 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | $ | — | | | $ | — | | | $ | (468 | ) | | $ | 2,373 | |
| | | 59 | | | | 810 | | | | 646 | | | | 2,295 | |
| | | | | | | | | | | | | | | | |
Gain on sale of discontinued operations, net of taxes of $10,196, in the nine months ended September 29, 2007 | | | — | | | | — | | | | — | | | | 15,064 | |
(Loss) income from discontinued operations, net of taxes | | | (59 | ) | | | (810 | ) | | | (1,114 | ) | | | 15,142 | |
5. Other Divestitures
During the first quarter of 2006, the Company sold a small non-strategic commercial printing business in Bloomfield Hills, Michigan and recorded a loss on sale of non-strategic business of $0.7 million.
During the second quarter of 2006, the Company sold a small non-strategic business located in Somerville, Massachusetts for proceeds of $2.6 million and recorded a loss on sale of $1.1 million. From October 1, 2006 through December 31, 2006, the Company sold one small non-strategic commercial printing business located in Memphis, Tennessee.
The following table summarizes the net sales and operating income of all of the businesses that were sold during 2006, which are included in the condensed consolidated statements of operations (in thousands):
| | Three Months Ended September 30, 2006 | | | | Nine Months Ended September 30, 2006 | |
Net sales | | $ | 1,398 | | | | $ | 8,550 | |
Operating income (loss) | | | 53 | | | | | (1,316 | ) |
The dispositions of these non-strategic businesses were not accounted for as discontinued operations in the condensed consolidated financial statements because the Company has continuing involvement with these entities, migration of cash flows to other Cenveo locations has occurred, or the operations are not material.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Inventories
Inventories by major category are as follows (in thousands):
| | September 30, 2007 | | December 31, 2006 | | | September 27, 2008 | | | December 29, 2007 | |
Raw materials | | $ | 70,664 | | $ | 28,247 | | | $ | 67,702 | | | $ | 71,075 | |
Work in process | | 44,208 | | | 21,638 | | | | 32,241 | | | | 34,875 | |
Finished goods | | | 60,457 | | | 42,521 | | | | 65,973 | | | | 56,958 | |
| | $ | 175,329 | | $ | 92,406 | | | $ | 165,916 | | | $ | 162,908 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Property, Plant and Equipment
Property, plant and equipment are as follows (in thousands): | Property, plant and equipment are as follows (in thousands): |
| | September 30, 2007 | | December 31, 2006 | | | September 27, 2008 | | | December 29, 2007 | |
Land and land improvements | | $ | 22,513 | | $ | 13,562 | | | $ | 21,567 | | | $ | 23,734 | |
Buildings and building improvements | | 106,809 | | | 80,740 | | |
Building and building improvements | | | | 110,790 | | | | 109,673 | |
Machinery and equipment | | 572,915 | | | 437,910 | | | | 627,243 | | | | 577,763 | |
Furniture and fixtures | | 12,452 | | | 10,771 | | | | 12,666 | | | | 12,430 | |
Construction in progress | | | 17,736 | | | 6,974 | | | | 13,032 | | | | 18,664 | |
| | 732,425 | | | 549,957 | | | | 785,298 | | | | 742,264 | |
Accumulated depreciation | | | (294,155 | ) | | (298,854 | ) | | | (351,940 | ) | | | (313,923 | ) |
Property, plant and equipment, net | | $ | 438,270 | | $ | 251,103 | | |
| | | $ | 433,358 | | | $ | 428,341 | |
In the third quarter of 2008, the Company sold a property for net proceeds of approximately $6.2 million and recorded a gain of approximately $1.9 million, which is included in selling, general and administrative. In the second quarter of 2008, the Company sold one of its envelope facilities for net proceeds of $11.5 million and entered into an operating lease for the same facility. In connection with the sale, the Company recorded a gain of $7.8 million, of which $2.3 million is included in cost of sales. The remaining gain was deferred and is being amortized on a straight-line basis over the seven year term of the lease as a reduction to rent expense in cost of sales.
8. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by reportable segment (Note 14) are as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Total | |
| | | | | | | | | | |
Balance as of December 31, 2006 | | $ | 165,672 | | $ | 92,464 | | $ | 258,136 | |
Acquisitions | | | 139,545 | | | 286,513 | | | 426,058 | |
Foreign currency translation | | | — | | | 979 | | | 979 | |
Balance as of September 30, 2007 | | $ | 305,217 | | $ | 379,956 | | $ | 685,173 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Goodwill and Other Intangible Assets (Continued) | | Envelopes, Forms and Labels | | | Commercial Printing | | | Total | |
Balance as of December 29, 2007 | | $ | 305,025 | | | $ | 364,777 | | | $ | 669,802 | |
Acquisitions | | | 5,859 | | | | 6,683 | | | | 12,542 | |
Foreign currency translation | | | — | | | | (372 | ) | | | (372 | ) |
Balance as of September 27, 2008 | | $ | 310,884 | | | $ | 371,088 | | | $ | 681,972 | |
Other intangible assets are as follows (in thousands):
| | September 30, 2007 | | December 31, 2006 | | | September 27, 2008 | | | December 29, 2007 | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Intangible assets with determinable lives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 153,806 | | $ | (19,415 | ) | $ | 134,391 | | $ | 29,906 | | $ | (13,001 | ) | $ | 16,905 | | | $ | 159,206 | | | $ | (27,995 | ) | | $ | 131,211 | | | $ | 153,806 | | | $ | (22,303 | ) | | $ | 131,503 | |
Trademarks and tradenames | | 20,521 | | | (3,039 | ) | | 17,482 | | | 14,551 | | | (2,487 | ) | | 12,064 | | | | 21,011 | | | | (3,863 | ) | | | 17,148 | | | | 20,521 | | | | (3,251 | ) | | | 17,270 | |
Patents | | 3,028 | | | (1,419 | ) | | 1,609 | | | 3,028 | | | (1,218 | ) | | 1,810 | | | | 3,028 | | | | (1,688 | ) | | | 1,340 | | | | 3,028 | | | | (1,487 | ) | | | 1,541 | |
Non-compete agreements | | 2,620 | | | (1,640 | ) | | 980 | | | 1,640 | | | (1,591 | ) | | 49 | | | | 2,456 | | | | (1,552 | ) | | | 904 | | | | 2,316 | | | | (1,336 | ) | | | 980 | |
Other | | | 768 | | | (360 | ) | | 408 | | | 768 | | | (331 | ) | | 437 | | | | 768 | | | | (386 | ) | | | 382 | | | | 768 | | | | (360 | ) | | | 408 | |
| | 180,743 | | | (25,873 | ) | | 154,870 | | | 49,893 | | | (18,628 | ) | | 31,265 | | | | 186,469 | | | | (35,484 | ) | | | 150,985 | | | | 180,439 | | | | (28,737 | ) | | | 151,702 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible assets with indefinite lives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trademarks | | 118,200 | | | — | | | 118,200 | | | — | | | — | | | — | | | | 127,500 | | | | — | | | | 127,500 | | | | 118,200 | | | | — | | | | 118,200 | |
Pollution credits | | | 720 | | | — | | | 720 | | | 720 | | | — | | | 720 | | | | 720 | | | | — | | | | 720 | | | | 720 | | | | — | | | | 720 | |
| | | 118,920 | | | — | | | 118,920 | | | 720 | | | — | | | 720 | | |
Total | | $ | 299,663 | | $ | (25,873 | ) | $ | 273,790 | | $ | 50,613 | | $ | (18,628 | ) | $ | 31,985 | | | $ | 314,689 | | | $ | (35,484 | ) | | $ | 279,205 | | | $ | 299,359 | | | $ | (28,737 | ) | | $ | 270,622 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Goodwill and Other Intangible Assets (Continued)
As of September 30, 2007,27, 2008, the weighted average remaining amortization period for customer relationships was 1918 years, trademarks and tradenames was 2725 years, patents was sixfive years, non-compete agreements was fourthree years and other was 27 years.
Total pre-tax amortization expense for the five years ending September 30, 201227, 2013 is estimated to be as follows: $9.9$9.5 million, $8.8$9.5 million, $8.8$9.3 million, $8.6$9.2 million and $8.5$9.0 million, respectively.
9. Long-Term Debt
Long-term debt iswas as follows (in thousands):
| | September 30, 2007 | | December 31, 2006 | |
Term Loans due 2013 | | $ | 716,900 | | $ | 324,188 | |
7⅞% Senior Subordinated Notes due 2013 | | | 320,000 | | | 320,000 | |
8⅜% Senior Subordinated Notes due 2014 ($104.1 million outstanding principal amount) | | | 106,301 | | | — | |
Senior Unsecured Loan due 2015 | | | 175,000 | | | — | |
9⅝% Senior Notes due 2012 | | | — | | | 10,498 | |
Revolving Credit Facility due 2012 | | | 108,000 | | | 15,500 | |
Other | | | 39,208 | | | 5,109 | |
| | | 1,465,409 | | | 675,295 | |
Less current maturities | | | (17,937 | ) | | (7,513 | ) |
Long-term debt | | $ | 1,447,472 | | $ | 667,782 | |
| | September 27, 2008 | | | December 29, 2007 | |
Term loan, due 2013 | | $ | 709,700 | | | $ | 715,100 | |
7⅞% senior subordinated notes, due 2013 | | | 320,000 | | | | 320,000 | |
8⅜% senior subordinated notes, due 2014 ($104.1 million outstanding principal amount) | | | 105,978 | | | | 106,220 | |
10½% senior notes, due 2016 | | | 175,000 | | | | — | |
Senior unsecured loan, due 2015 | | | — | | | | 175,000 | |
Revolving credit facility, due 2012 | | | 26,000 | | | | 91,200 | |
Other | | | 39,321 | | | | 37,117 | |
| | | 1,375,999 | | | | 1,444,637 | |
Less current maturities | | | (16,477 | ) | | | (18,752 | ) |
Long-term debt | | $ | 1,359,522 | | | $ | 1,425,885 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Debt (Continued)
Senior Unsecured Loan
On August 30, 2007,June 13, 2008, the Company borrowedissued $175.0 million under a new eight-yearaggregate principal amount of 10½% senior notes due 2016 (“10½% Notes”). The 10½% Notes were issued to Lehman Brothers Commercial Paper, Inc. upon the conversion of the Company’s $175.0 million senior unsecured loan facilitydue 2015 (the “Senior Unsecured Loan”). The 10½% Notes were then sold to qualified institutional buyers in accordance with Rule 144A, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act of 1933. The Company did not receive any net proceeds as a groupresult of lenders. Proceeds fromthis transaction.
The 10½% Notes were issued pursuant to an indenture among the Senior Unsecured Loan along with borrowings fromCompany, certain guarantors and U.S. Bank National Association, as trustee. The 10½% Notes pay interest semi-annually on February 15 and August 15, commencing August 15, 2008. The 10½% Notes have no required principal payments prior to their maturity on August 15, 2016, constitute senior unsecured obligations and are guaranteed by the Company and substantially all of the Company’s $200.0 million six-year revolving credit facility (the “Revolving Credit Facility”)North American subsidiaries. The Company can redeem the 10½% Notes, in whole or in part, on or after August 15, 2012, at redemption prices ranging from 100% to 105¼%, plus accrued and available cash were usedunpaid interest. In addition, at any time prior to fundAugust 15, 2011, the acquisitionCompany may redeem up to 35% of Commercial Envelope (Note 3), including retiring certain acquired debtthe aggregate principal amount of the notes originally issued at a redemption price of 110½% of the principal amount thereof, plus accrued and to pay certain fees and expenses incurred in connectionunpaid interest with the acquisition. The Senior Unsecured Loan has a floating interest rate based on LIBOR plus 4.5%, which was 9.6% on September 30, 2007. The interest rate increases by 0.5% quarterly beginning on January 1, 2008 up to a maximum interest ratenet cash proceeds of 11.5%. The Senior Unsecured Loan provides for the conversion by the lenders into senior or senior subordinated exchange notes (the “Exchange Notes”)certain public equity offerings. Each holder of the 10½% Notes has the right to require the Company similar to repurchase such notes at a purchase price of 101% of the existing indenture relating toprincipal amount, plus accrued and unpaid interest thereon, upon the Company’s $320.0 million 7⅞occurrence of certain events constituting a change in control of the Company. The 10½% Senior Subordinated Notes due 2013 (the “7⅞% Notes”) or a substantially similar indenture. If the Senior Unsecured Loan is converted, the Exchange Notes will bear a fixed rate of interest based on market conditions at the time of conversion. The Senior Unsecured Loan containscontain covenants, representations, and warranties substantially similar to the Company’s existing $925.0 million7⅞% senior subordinated notes, due 2013 (“7⅞% Notes”) and 8⅜% senior subordinated notes, due 2014 (“8⅜% Notes”), and also include a senior secured credit facilities (the “Amended Credit Facilities”)debt to consolidated cash flow covenant.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Debt (Continued)
Upon the issuance of the 10½% Notes and includes provisions for an underwriting/purchase agreement andthe conversion of the Senior Unsecured Loan, the Company incurred a registration rights agreement relatingloss on early extinguishment of debt of $4.2 million, related to the resale of the Exchange Notes.previously unamortized debt issuance costs. The Company capitalized debt issuance costs of approximately $4.6$5.3 million, which are being amortized over the remaining life of the Senior Unsecured Loan.10½% Notes.
Term LoansSupplemental Indentures
On July 9, 2007,The Company entered into supplemental indentures, dated April 16, 2008 and August 20, 2008 to the indenture dated June 15, 2004, among Cadmus, each of the subsidiary guarantors (as defined therein) and U.S. Bank National Association (as successor trustee to Wachovia Bank, National Association), as trustee, pursuant to which the 8⅜% Notes were issued. Simultaneously, the Company increasedentered into supplemental indentures, dated April 16, 2008 and August 20, 2008 to the then outstanding balance of its seven-year term loan facility due 2013 (the “Term Loan C”) and the delayed-draw term loan facility (collectively with the Term Loan C, the “Term Loans”) that are part of the Amended Credit Facilities by borrowing an incremental $100.0 million on the existing financial terms and financial covenants. Proceeds from this borrowing along with available cash were used to fund the acquisition of ColorGraphics (Note 3), including retiring certain acquired debt and to pay certain fees and expenses incurred in connection with the acquisition. The Company capitalized debt issuance costs of approximately $0.3 million, which are being amortized over the remaining life of the Term Loans.
2007 Debt Amendment and Refinancing
On March 7, 2007, in connection with the Cadmus acquisition (Note 3),indenture dated February 4, 2004 among the Company, amendedthe guarantors named therein and refinanced its $525.0 million senior secured credit facilities (the “Credit Facilities”). The Credit Facilities, established in June 2006,U.S. Bank National Association, as trustee, pursuant to which the Company’s 7⅞% Notes were comprised of the Revolving Credit Facility and a $325.0 million seven-year term loan facility (the “Term Loan B”). The Credit Facilities were amended by increasing the overall borrowing availability from $525.0 million to $925.0 million to create the Amended Credit Facilities, allowingissued. Additionally, on August 20, 2008 the Company to: (1) retireentered into a supplemental indenture among the Term Loan B, (2) acquire Cadmus, including retiringCompany, the guarantors named therein and extinguishingU.S. Bank National Association, as trustee, pursuant to which the Cadmus revolving senior bank credit facility, which had an outstanding balance of $70.1 million, using the Revolving Credit Facility and $600.0 million Term Loan C, and (3) retire any and/or all of the Cadmus 8⅜10½% senior subordinated notes due 2014 (the “8⅜% Notes”) using a $125.0 million delayed-draw term loan facility. Several customary financial covenants within the Amended Credit Facilities, including maximum consolidated leverage ratio and minimum consolidated interest coverage ratio,Notes were modified toissued. These supplemental indentures provide for the incremental funded debt levels and larger company operations. The Amended Credit Facilities are secured by substantially alladdition of acquisition subsidiaries as guarantors of the Company’s assets. The Company capitalized debt issuance costs of approximately $0.9 million, which are being amortized over the remaining life of the Amended Credit Facilities. In connection with the Amended Credit Facilities, the Company recorded a loss on early extinguishment of debt of $8.4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)As of September 27, 2008, the Company was in compliance with all covenants under its debt agreements.
9. Long-Term Debt (Continued)Interest Rate Swaps
million, which includes $6.7 million of related fees and the write-off of $1.7 million of unamortized debt issuance costs.
Interest Rate Swaps
In March and July 2007, theThe Company enteredenters into interest rate swap agreements to hedge interest rate exposure of an additional $125.0 million and $200.0 million, respectively, notional amounts of its floating rate debt, increasingdebt. As of September 27, 2008 and December 29, 2007, the Company’s total hedgeCompany had $595.0 million of itssuch interest rate exposure of notional floating rate debt to $545.0 million.swaps. The Company’s hedges of interest rate risk were designated and documented at inception as cash flow hedges and are evaluated for effectiveness at least quarterly. Effectiveness of the hedges is calculated by comparing the fair value of the derivatives to hypothetical derivatives that would be a perfect hedge of floating rate debt. The accounting for gains and losses associated with changes in the fair value of cash flow hedges and the effect on the Company’s condensed consolidated financial statements will depend on whether the hedge is highly effective in achieving offsetting changes in fair value of cash flows of the liability hedged. As of September 30, 2007,27, 2008, the Company does not anticipate reclassifying any ineffectiveness into its results of operations for the next twelve months.
Cadmus Debt10. Restructuring, Impairment and Other Charges
On March 5, 2007, the Company commenced a cash tender offer and consent solicitation (the “Cadmus Tender Offer”) for any and all of the outstanding 8⅜% Notes at total consideration equal to 101.5% of outstanding principal plus any accrued and unpaid interest thereon for 8⅜% Notes validly tendered and not withdrawn by March 16, 2007. Interest on the 8⅜% Notes is payable semi-annually on June 15 and December 15 with no required principal payments prior to maturity on June 15, 2014. In connection with the acquisition of Cadmus, the Company recorded a $2.8 million increase to the value of the 8⅜% Notes to record them at their fair value (Note 3), which is being amortized over the life of the 8⅜% Notes.
On March 19, 2007, the Company accepted for purchase and paid approximately $20.9 million for the 8⅜% Notes tendered in the Cadmus Tender Offer, using $20.0 million of delayed-draw term loan funding under the Amended Credit Facilities and cash on hand. In connection with the 8⅜% Notes tendered, the Company recorded a loss on early extinguishment of debt of approximately $0.3 million, which included $0.8 million of tender premiums and tender-related expenses and the write-off of $0.5 million of the fair value increase to the 8⅜% Notes recorded in connection with the Cadmus acquisition. The merger of Cadmus into Cenveo was a “change of control” of Cadmus under the 8⅜% Notes indenture. On March 23, 2007 and in connection with the foregoing change of control, the Company extended the scheduled expiration of the Cadmus Tender Offer until April 18, 2007, modified the offer to purchase each 8⅜% Note tendered for a price equal to 101.0% of outstanding principal plus any accrued and unpaid interest, and waived certain consent-related conditions (the “Change of Control Offer”). On April 23, 2007, the Company settled payment on all 8⅜% Notes tendered under the Change of Control Offer, and terminated the remaining amount of the delayed-draw term loan facility under the Amended Credit Facilities.
Supplemental Indentures
The Company entered into supplemental indentures, dated March 7, 2007, July 9, 2007 and August 30, 2007 to the indenture dated June 15, 2004, among Cadmus, each of the subsidiary guarantors (as defined therein) and U.S. Bank National Association (as successor trustee to Wachovia Bank, National Association), as trustee, pursuant to which the 8⅜% Notes were issued. These supplemental indentures provide for, among other things, the assumption by the Company of the obligations of Cadmus under the 8⅜% Notes and such indenture and the addition of: (1) other U.S. subsidiaries of
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Debt (Continued)
the Company, (2) ColorGraphics and its subsidiary and (3) Commercial Envelope and its subsidiaries as guarantors of these notes. Simultaneously, the Company entered into supplemental indentures, dated March 7, 2007, July 9, 2007 and August 30, 2007 to the indenture dated February 4, 2004 among the Company, the guarantors named therein and U.S. Bank National Association, as trustee, pursuant to which the Company’s 7⅞% Notes were issued. These supplemental indentures provide for, among other things, the addition of: (1) the U.S. subsidiaries of Cadmus, (2) ColorGraphics and its subsidiary and (3) Commercial Envelope and its subsidiaries as guarantors of the 7⅞% Notes.
Other Debt
Other debt includes approximately $37.2 million of equipment loans assumed in the acquisition of Cadmus, ColorGraphics and Commercial Envelope of which $24.0 million have variable interest rates with an average interest rate of 6.4% and $13.2 million with an average fixed rate of 4.9%, as of September 30, 2007.
9⅝% Senior Notes
On May 4, 2007, the Company retired the remaining $10.5 million of its 9⅝% Senior Notes due 2012 for 104.813% of the principal amount plus accrued interest, which was funded with its Revolving Credit Facility. In connection with the retirement of the 9⅝% Senior Notes, the Company recorded a loss on early extinguishment of debt of $0.5 million, representing premiums paid.
As of September 30, 2007, the Company was in compliance with all covenants under its debt agreements.
10. Restructuring and Impairment Charges
The Company has two cost savings plans, the 2007 Cost Savings and Integration Plan and the 2005 Cost Savings and Restructuring Plan.
2007 Cost Savings and Integration Plan
TheIn 2007, the Company has formulated its preliminary cost savings and integration plan related to its acquisition of Commercial Envelope, ColorGraphics, Cadmus and Printegra. In connection with the implementation of this plan, during the third quarter of 2007, the Company closed its envelope plant in O’Fallon, Missouri, its forms plant in Girard, Kansas and closed commercial printing plants in San Francisco, California, and Seattle, Washington, and Philadelphia, Pennsylvania and integrated these operations into acquired and other Company operations. In the second quarterfirst nine months of 20072008, the Company closedcontinued the implementation of cost savings initiatives throughout its forms plant in Girard, Kansasoperations and closed its Philadelphia, Pennsylvaniaa commercial printing plant in St. Louis, Missouri. The Company anticipates further headcount reductions and integrated these operations into acquired and other Company operations.plant closures. The following tables and discussion present the details of the expenses recognized in the three and nine months ended September 30,27, 2008 and September 29, 2007 as a result of this plan.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and ImpairmentOther Charges (Continued)
Three Months Endedmonths ended September 30, 200727, 2008
Restructuring and impairment charges for the three months ended September 30, 200727, 2008 were as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Total | | | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 1,513 | | $ | 1,293 | | $ | 2,806 | | | $ | 881 | | | $ | 2,939 | | | $ | 60 | | | $ | 3,880 | |
Asset impairments | | 1,139 | | 2,721 | | 3,860 | | | | 591 | | | | 220 | | | | — | | | | 811 | |
Equipment moving expenses | | 386 | | 670 | | 1,056 | | | | 160 | | | | 156 | | | | — | | | | 316 | |
Lease termination expenses | | 21 | | 4,710 | | 4,731 | | | | 196 | | | | 210 | | | | 63 | | | | 469 | |
Multi-employer pension withdrawal liability | | | | — | | | | (236 | ) | | | — | | | | (236 | ) |
Building clean-up and other expenses | | | 406 | | | 846 | | | 1,252 | | | | 218 | | | | 712 | | | | — | | | | 930 | |
Total restructuring and impairment charges | | $ | 3,465 | | $ | 10,240 | | $ | 13,705 | | | $ | 2,046 | | | $ | 4,001 | | | $ | 123 | | | $ | 6,170 | |
Envelopes, Forms and Labels. The envelopes, forms and labels segment closed an envelope plant in O’Fallon, Missouri during the third quarter of 2007 in connection with the integration of Commercial Envelope. As a result of this closure and the Girard, Kansas plant closure in the second quarter of 2007, the segment recorded employee separation costs of $1.5 million related to workforce reductions, asset impairment charges of $1.1 million related to equipment taken out of service, equipment moving expenses of $0.4 million for the redeployment of equipment, and building clean-up and other related expenses of $0.4 million.
Commercial Printing. The commercial printing segment closed plants in Seattle, Washington and in San Francisco, California during the third quarter of 2007, in connection with the integration of ColorGraphics. As a result of these closures and the Philadelphia, Pennsylvania closure in the second quarter of 2007, the segment recorded employee separation costs of $1.3 million related to workforce reductions, asset impairment charges of $2.7 million related to equipment taken out of service, equipment moving expenses of $0.7 million for the redeployment of equipment, lease termination expenses of $4.7 million, and building clean-up and other related expenses of $0.8 million.
Nine Months Endedmonths ended September 30, 200727, 2008
Restructuring and impairment charges for the nine months ended September 30, 2007 are27, 2008 were as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Total | | | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 2,106 | | $ | 2,203 | | $ | 4,309 | | | $ | 1,824 | | | $ | 5,604 | | | $ | 290 | | | $ | 7,718 | |
Asset impairments | | 3,834 | | 3,758 | | 7,592 | | |
Asset impairments, net of gain on sale | | | | 1,103 | | | | 653 | | | | — | | | | 1,756 | |
Equipment moving expenses | | 603 | | 670 | | 1,273 | | | | 232 | | | | 241 | | | | — | | | | 473 | |
Lease termination expenses | | 21 | | 4,710 | | 4,731 | | | | 617 | | | | 1,026 | | | | 63 | | | | 1,706 | |
Multi-employer pension withdrawal liability | | — | | 1,800 | | 1,800 | | | | — | | | | (236 | ) | | | — | | | | (236 | ) |
Building clean-up and other expenses | | | 620 | | | 859 | | | 1,479 | | | | 612 | | | | 1,340 | | | | — | | | | 1,952 | |
Total restructuring and impairment charges | | $ | 7,184 | | $ | 14,000 | | $ | 21,184 | | | $ | 4,388 | | | $ | 8,628 | | | $ | 353 | | | $ | 13,369 | |
Three Months Ended September 29, 2007
Restructuring and impairment charges for the three months ended September 29, 2007 were as follows (in thousands):
| | Envelopes, Forms and Labels | | | Commercial Printing | | | Total | |
Employee separation costs | | $ | 1,513 | | | $ | 1,293 | | | $ | 2,806 | |
Asset impairments | | | 1,139 | | | | 2,721 | | | | 3,860 | |
Equipment moving expenses | | | 386 | | | | 670 | | | | 1,056 | |
Lease termination expenses | | | 21 | | | | 4,710 | | | | 4,731 | |
Building clean-up and other expenses | | | 406 | | | | 846 | | | | 1,252 | |
Total restructuring and impairment charges | | $ | 3,465 | | | $ | 10,240 | | | $ | 13,705 | |
Envelopes, Forms and Labels. As a result of the above closures, the envelopes, forms and labels segment recorded employee separation costs of $2.1 million related to workforce reductions, asset impairment charges of $3.8 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 related expenses of $0.6 million.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and ImpairmentOther Charges (Continued)
Nine Months Ended September 29, 2007
Restructuring and impairment charges for the nine months ended September 29, 2007 were as follows (in thousands):
Commercial Printing. As a result of the above closures, the commercial printing segment recorded employee separation costs of $2.2 million related to workforce reductions, asset impairment charges of $3.8 million related to equipment taken out of service, equipment moving expenses of $0.7 million for the redeployment of equipment, lease termination expenses of $4.7 million, a pension withdrawal liability of $1.8 million and building clean-up and other related expenses of $0.9 million. | | Envelopes, Forms and Labels | | | Commercial Printing | | | Total | |
Employee separation costs | | $ | 2,106 | | | $ | 2,203 | | | $ | 4,309 | |
Asset impairments | | | 3,834 | | | | 3,758 | | | | 7,592 | |
Equipment moving expenses | | | 603 | | | | 670 | | | | 1,273 | |
Lease termination expenses | | | 21 | | | | 4,710 | | | | 4,731 | |
Multi-employer pension withdrawal liability | | | — | | | | 1,800 | | | | 1,800 | |
Building clean-up and other expenses | | | 620 | | | | 859 | | | | 1,479 | |
Total restructuring and impairment charges | | $ | 7,184 | | | $ | 14,000 | | | $ | 21,184 | |
A summary of the activity charged to the restructuring liabilities as a result of the 2007 cost savingsCost Savings and integration planIntegration Plan is as follows (in thousands):
| | | Lease Termination Costs | | Employee Separation Costs | | Pension Withdrawal Liabilities | | Total | |
| Balance at December 31, 2006 | | $ | — | | $ | — | | $ | — | | $ | — | |
| Accruals, net | | | 4,731 | | | 4,309 | | | 1,800 | | | 10,840 | |
| Payments | | | (99 | ) | | (2,771 | ) | | — | | | (2,870 | ) |
| Balance at September 30, 2007 | | $ | 4,632 | | $ | 1,538 | | $ | 1,800 | | $ | 7,970 | |
| | Lease Termination Costs | | | Employee Separation Costs | | | Pension Withdrawal Liabilities | | | Total | |
Balance at December 29, 2007 | | $ | 3,582 | | | $ | 541 | | | $ | 2,092 | | | $ | 6,215 | |
Accruals, net | | | 1,706 | | | | 7,718 | | | | (236 | ) | | | 9,188 | |
Payments | | | (1,344 | ) | | | (4,942 | ) | | | — | | | | (6,286 | ) |
Balance at September 27, 2008 | | $ | 3,944 | | | $ | 3,317 | | | $ | 1,856 | | | $ | 9,117 | |
2005 Cost Savings and Restructuring Plan
In September 2005,the fourth quarter of 2007, the senior management team of Cenveo implemented a cost savingscompleted the implementation of its 2005 Cost Savings and restructuring planRestructuring Plan that includedit initiated in September 2005, including the consolidation of the Company’s purchasing activities and manufacturing platform, corporate and field human resources reductions, streamlining information technology infrastructure and eliminating all discretionary spending. The following tables and discussion present the details of the expenses recognized in the three and nine months ended September 30,27, 2008 and September 29, 2007, and 2006, as a result of this plan.
Three Months Endedmonths ended September 30, 200727, 2008
Restructuring and impairment charges for the three months ended September 30, 200727, 2008 were as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Corporate | | Total | | | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 441 | | $ | 1,171 | | $ | 87 | | $ | 1,699 | | | $ | 9 | | | $ | (18 | ) | | $ | 19 | | | $ | 10 | |
Asset impairments, net of gain on sale | | 157 | | | 3,028 | | — | | | 3,185 | | |
Asset impairments | | | | — | | | | 26 | | | | — | | | | 26 | |
Equipment moving expenses | | — | | | 2 | | — | | | 2 | | | | — | | | | 48 | | | | — | | | | 48 | |
Lease termination expenses | | 23 | | | 414 | | 31 | | | 468 | | | | (35 | ) | | | 144 | | | | 68 | | | | 177 | |
Building clean-up and other expenses | | | 48 | | | 1,141 | | | 64 | | | 1,253 | | | | 224 | | | | 194 | | | | 24 | | | | 442 | |
Total restructuring and impairment charges | | $ | 669 | | $ | 5,756 | | $ | 182 | | $ | 6,607 | | | $ | 198 | | | $ | 394 | | | $ | 111 | | | $ | 703 | |
Envelopes, Forms and Labels. The envelopes, forms and labels segment incurred employee separation costs of $0.4 million related to workforce reductions and asset impairment charges of $0.2 million related to equipment taken out of service in connection with the Company’s cost savings programs.
Commercial Printing. The commercial printing segment closed plants in Houston, Texas and Indianapolis, Indiana during the third quarter of 2007. As a result of these closures, the segment recorded employee separation costs of $1.2 million related to workforce reductions, asset impairment charges of $3.0 million related to equipment taken out of service, lease termination expenses of $0.4 million and building clean-up and other expenses of $1.1 million.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and ImpairmentOther Charges (Continued)
Nine Months Endedmonths ended September 30, 200727, 2008
Restructuring and impairment charges for the nine months ended September 30, 200727, 2008 were as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Corporate | | Total | | | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 1,790 | | $ | 2,163 | | $ | 188 | | $ | 4,141 | | | $ | 36 | | | $ | 132 | | | $ | 35 | | | $ | 203 | |
Asset impairments, net of gain on sale | | (341 | ) | | 3,041 | | — | | 2,700 | | | | — | | | | (226 | ) | | | — | | | | (226 | ) |
Equipment moving expenses | | 761 | | 140 | | — | | 901 | | | | — | | | | 510 | | | | — | | | | 510 | |
Lease termination expenses | | 79 | | 163 | | 88 | | 330 | | |
Lease termination (income) expenses | | | | (38 | ) | | | 144 | | | | 149 | | | | 255 | |
Building clean-up and other expenses | | | 335 | | | 2,415 | | | 88 | | | 2,838 | | | | 380 | | | | 894 | | | | 24 | | | | 1,298 | |
Total restructuring and impairment charges | | $ | 2,624 | | $ | 7,922 | | $ | 364 | | $ | 10,910 | | | $ | 378 | | | $ | 1,454 | | | $ | 208 | | | $ | 2,040 | |
Envelopes, Forms and Labels. The envelopes, forms and labels segment incurred employee separation costs of $1.8 million related to workforce reductions, asset impairment charges related to equipment taken out of service, net of gain on sale, of $(0.3) million, equipment moving expenses of $0.8 million for the redeployment of equipment, lease termination expenses of $0.1 million and building clean-up and other expenses of $0.3 million related to locations that were closed in 2006.
Commercial Printing. As a result of plant closures in 2007, the commercial printing segment incurred employee separation costs of $2.2 million related to workforce reductions, asset impairment charges of $3.0 million related to equipment taken out of service, equipment moving expenses of $0.1 million, lease termination expenses of $0.2 million and building clean-up and other expenses of $2.4 million.
Three Months Ended September 30, 200629, 2007
Restructuring and impairment charges for the three months ended September 30, 200629, 2007 were as follows (in thousands):
| | Envelopes, Forms and Labels | | Commercial Printing | | Corporate | | Total | | | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 955 | | $ | 1,430 | | $ | 99 | | $ | 2,484 | | | $ | 441 | | | $ | 1,171 | | | $ | 87 | | | $ | 1,699 | |
Asset impairments, net of gain on sale | | (1,665 | ) | | 703 | | — | | (962 | ) | | | 157 | | | | 3,028 | | | | — | | | | 3,185 | |
Equipment moving expenses | | 1,216 | | 244 | | — | | 1,460 | | | | — | | | | 2 | | | | — | | | | 2 | |
Lease termination (income) expense | | — | | (156 | ) | | 33 | | (123 | ) | |
Lease termination expenses | | | | 23 | | | | 414 | | | | 31 | | | | 468 | |
Building clean-up and other expenses | | | 498 | | | 1,445 | | | (100 | ) | | 1,843 | | | | 48 | | | | 1,141 | | | | 64 | | | | 1,253 | |
Total restructuring and impairment charges | | $ | 1,004 | | $ | 3,666 | | $ | 32 | | $ | 4,702 | | | $ | 669 | | | $ | 5,756 | | | $ | 182 | | | $ | 6,607 | |
Envelopes, Forms and Labels. The envelopes, forms and labels segment incurred employee separation costs of $1.0 million related to workforce reductions, asset impairment charges related to equipment taken out of service, net of gain on sale, of $(1.7) million, 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 and from cost savings initiatives at other locations.
Commercial Printing. In connection with five plant closures during the first nine months of 2006 and from cost savings initiatives at other locations, the commercial print segment incurred employee
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring and Impairment Charges (Continued)
separation costs of $1.4 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, lease termination income of $(0.2) million and $1.4 million of building clean-up and other expenses.
Nine Months Ended September 30, 200629, 2007
Restructuring and impairment charges for the nine months ended September 30, 200629, 2007 were as follows (in thousands):
| Envelopes, Forms and Labels | | Commercial Printing | | Corporate | | Total | |
Employee separation costs | $ | 5,897 | | $ | 11,042 | | $ | 1,201 | | $ | 18,140 | |
Asset impairments, net of gain on sale | | 2,215 | | | 1,259 | | | — | | | 3,474 | |
Equipment moving expenses | | 3,823 | | | 1,304 | | | — | | | 5,127 | |
Lease termination expenses | | 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, locations closed in the fourth quarter of 2005 and cost savings initiatives at other locations, the segment recorded employee separation costs of $5.9 million related to workforce reductions, asset impairment charges related to equipment taken out of service of $2.2 million, net of the gain on sale of a facility of $1.9 million, and equipment moving expenses of $3.8 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 $1.0 million.
Commercial Printing. In connection with the commercial printing segment’s five plant closures during the first nine months of 2006, locations closed in the fourth quarter of 2005 and cost savings initiatives at other locations, the segment recorded employee separation costs of $11.0 million related to workforce reductions, asset impairment charges of $1.3 million related to equipment taken out of service, equipment moving expenses of $1.3 million, 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 leased facilities no longer in use and building clean-up and other expenses of $4.3 million.
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.
| | Envelopes, Forms and Labels | | | Commercial Printing | | | Corporate | | | Total | |
Employee separation costs | | $ | 1,790 | | | $ | 2,163 | | | $ | 188 | | | $ | 4,141 | |
Asset impairments, net of gain on sale | | | (341 | ) | | | 3,041 | | | | — | | | | 2,700 | |
Equipment moving expenses | | | 761 | | | | 140 | | | | — | | | | 901 | |
Lease termination expenses | | | 79 | | | | 163 | | | | 88 | | | | 330 | |
Building clean-up and other expenses | | | 335 | | | | 2,415 | | | | 88 | | | | 2,838 | |
Total restructuring and impairment charges | | $ | 2,624 | | | $ | 7,922 | | | $ | 364 | | | $ | 10,910 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring and Impairment Charges (Continued)
A summary of the activity charged to the restructuring liabilities as a result of the 2005 cost savingsCost Savings and restructuring planRestructuring Plan is as follows (in thousands):
| | Lease Termination Costs | | Employee Separation Costs | | Pension Withdrawal Liabilities | | Total | | | Lease Termination Costs | | | Employee Separation Costs | | | Pension Withdrawal Liabilities | | | Total | |
Balance at December 31, 2006 | | $ | 5,541 | | $ | 1,427 | | $ | 642 | | $ | 7,610 | | |
Balance at December 29, 2007 | | | $ | 4,793 | | | $ | 1,163 | | | $ | 297 | | | $ | 6,253 | |
Accruals, net | | 330 | | 4,141 | | — | | 4,471 | | | | 255 | | | | 203 | | | | — | | | | 458 | |
Payments | | | (1,477 | ) | | (4,095 | ) | | (282 | ) | | (5,854 | ) | | | (985 | ) | | | (1,302 | ) | | | (59 | ) | | | (2,346 | ) |
Balance at September 30, 2007 | | $ | 4,394 | | $ | 1,473 | | $ | 360 | | $ | 6,227 | | |
Balance at September 27, 2008 | | | $ | 4,063 | | | $ | 64 | | | $ | 238 | | | $ | 4,365 | |
Other Charges
In connection with the internal review conducted by outside counsel under the direction of the Company’s audit committee, the Company incurred a non-recurring charge in the first quarter of 2008 of approximately $6.7 million for professional fees.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Pension Plans
The components of the net periodic pension expense for the Company’s pension plans and other postretirement benefit plans are as follows (in thousands):
| | | | | | | | | | |
| | Pension Plans Three Months Ended September 30, | | Postretirement Plans Three Months Ended September 30, | | | | | | | | |
| | | 2007 | | | 2006 | | 2007 | | | | | | | |
| Service cost | $ | 119 | | $ | 42 | | $ | — | | | | | | | |
| Interest cost | | 2,679 | | | 317 | | | 39 | | | | | | | |
| Expected return on plan assets | | (2,584 | ) | | (176 | ) | | — | | | | | | | |
| Net amortization and deferral | | 5 | | | 69 | | | — | | | | | | | |
| Contributions to multi-employer plans | | — | | | — | | | — | | | | | | | |
| Net periodic pension expense | $ | 219 | | $ | 252 | | $ | 39 | | | | | | | |
| | | | | | | | | | | | | | |
| | Pension Plans Nine Months Ended September 30, | | Postretirement Plans Nine Months Ended September 30, | | | | | | | | |
| | | 2007 | | | 2006 | | 2007 | | |
| Service cost | $ | 300 | | $ | 126 | | $ | — | | |
| Interest cost | | 6,335 | | | 909 | | | 88 | | |
| Expected return on plan assets | | (5,954 | ) | | (528 | ) | | — | | |
| Net amortization and deferral | | 56 | | | 207 | | | — | | |
| Contributions to multi-employer plans | | 389 | | | — | | | — | | |
| Net periodic pension expense | $ | 1,126 | | $ | 714 | | $ | 88 | | |
| | Pension Plans | | | Postretirement Plans | |
| | Three Months Ended | | | Three Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Service cost | | $ | 120 | | | $ | 119 | | | $ | — | | | $ | — | |
Interest cost | | | 2,257 | | | | 2,480 | | | | 222 | | | | 287 | |
Expected return on plan assets | | | (2,656 | ) | | | (2,584 | ) | | | — | | | | — | |
Net amortization and deferral | | | 2 | | | | 5 | | | | — | | | | — | |
Recognized net actuarial loss | | | 55 | | | | — | | | | — | | | | — | |
Net periodic pension (income) expense | | $ | (222 | ) | | $ | 20 | | | $ | 222 | | | $ | 287 | |
| | Pension Plans | | | Postretirement Plans | |
| | Nine Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Service cost | | $ | 360 | | | $ | 300 | | | $ | — | | | $ | — | |
Interest cost | | | 6,773 | | | | 5,621 | | | | 665 | | | | 802 | |
Expected return on plan assets | | | (7,969 | ) | | | (5,954 | ) | | | — | | | | — | |
Net amortization and deferral | | | 6 | | | | 56 | | | | — | | | | — | |
Recognized net actuarial loss | | | 166 | | | | 389 | | | | — | | | | — | |
Net periodic pension (income) expense | | $ | (664 | ) | | $ | 412 | | | $ | 665 | | | $ | 802 | |
For the nine months ended September 30, 2007,27, 2008, the Company made contributions of $8.6$6.0 million to its pension plans and postretirement plans. The Company expects to contribute $0.3approximately $1.2 million to its pension plans and postretirement plans for the remainder of 2007.2008.
12. Commitments and Contingencies
The Company is party to various legal actions that are ordinary and incidental to its business. While the outcome of pending legal actions cannot be predicted with certainty, management believes the outcome of these various proceedings will not have a material adverse effect on the Company’s consolidated financial condition or results of operations. See Note 15 in the Form 10-K.
Cadmus Pension and Other Postretirement Plans
In connection with the acquisition of Cadmus, the Company assumed certain defined benefit pension plans, including participation in one multi-employer retirement plan that provides defined benefits to associates covered by two collective bargaining agreements. The Company also assumed certain nonqualified, nonfunded supplemental pension plans for certain key executives. For these supplemental plans, the Company maintains certain life insurance policies on former key executives, which are intended to defray costs and obligations under such plans. All such defined benefit plans provide benefit payments using formulas based on an associate’s compensation and length of service, or stated amounts for each year of service. Prior to the Company’s acquisition of Cadmus, the benefits
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Pension Plans (Continued)
under the Cadmus pension plans, except for one plan, were frozen to mitigate the volatility in pension expense and required cash contributions expected in future years. The Cadmus pension plans were under-funded by approximately $34.1 million as of the acquisition date (Note 3).
Cadmus also maintained separate postretirement benefit plans (medical and life insurance) for certain of its former associates. Certain Cadmus associates are eligible for retiree medical coverage for themselves and their spouses if they retire on or after reaching age 55 with ten or more years of service. Benefits differ depending upon the date of retirement. The Cadmus postretirement plans were under-funded by approximately $2.7 million as of the acquisition date (Note 3).
12.13. Comprehensive Income (Loss)
A summary of comprehensive income (loss) is as follows (in thousands):
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
| Net income | $ | 3,032 | | $ | 11,616 | | $ | 24,498 | | $ | 90,723 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Minimum pension liability adjustment | | — | | | — | | | — | | | 6,004 | |
| Unrealized losses on cash flow hedges | | (8,890 | ) | | (3,373 | ) | | (4,960 | ) | | (3,598 | ) |
| Currency translation adjustment | | 2,318 | | | (198 | ) | | 31 | | | (15,060 | ) |
| Comprehensive income (loss) | $ | (3,540 | ) | $ | 8,045 | | $ | 19,569 | | $ | 78,069 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Net income | | $ | 12,328 | | | $ | 1,701 | | | $ | 11,596 | | | $ | 22,002 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Unrealized gain (loss) on cash flow hedges, net of taxes | | | 480 | | | | (8,890 | ) | | | 9 | | | | (4,960 | ) |
Currency translation adjustment | | | (1,361 | ) | | | 2,318 | | | | (2,851 | ) | | | 31 | |
Comprehensive income (loss) | | $ | 11,447 | | | $ | (4,871 | ) | | $ | 8,754 | | | $ | 17,073 | |
As of September 27, 2008, the Company had a $15.7 million liability relating to unrealized losses on cash flow hedges which is included in other liabilities in its condensed consolidated balance sheet. In connection with the sale of its remaining investment in the Fund on March 13, 2007, (Note 4), the Company reclassified $5.5 million of currency translation adjustment into discontinued operations from other comprehensive income. In connection with the sale of Supremex, the Company reclassified into discontinued operations from other comprehensive income $6.0 million of a minimum pension liability adjustment and $14.3 million of currency translation adjustment in the first quarter of 2006 and $1.7 million of currency translation adjustment in connection with the sale of units in the Fund relating to the underwriter’s exercise of an over-allotment option in the second quarter of 2006 (Note 4).
13.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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 stock options, restricted stock and RSUs to issue common stock were exercised under the treasury stock method. The only Company securities as of September 30, 200727, 2008 that could dilute basic income per share for periods subsequent to September 30, 2007 are: (1)27, 2008, that were not included in the computation of diluted earnings per share for the three and nine months ended September 27, 2008 are (i) outstanding stock options, which are exercisable into 3,993,8553,144,758 and 3,102,157 shares, respectively, of the Company’s common stock and (2) 1,295,000(ii) 2,450,880 and 2,572,048 shares, respectively, of restricted stock and RSUs.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income (Loss) per Share (Continued)
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | | 2006 | | 2007 | | 2006 | |
| Numerator for basic and diluted income (loss) per share: | | | | | | | | | | | | |
| Income (loss) from continuing operations | $ | 3,842 | | $ | 9,290 | | $ | 9,356 | | $ | (45,360 | ) |
| Income (loss) from discontinued operations, net of taxes | | (810 | ) | | 2,326 | | | 15,142 | | | 136,083 | |
| Net income | $ | 3,032 | | $ | 11,616 | | $ | 24,498 | | $ | 90,723 | |
| | | | | | | | | | | | | |
| Denominator weighted average common shares outstanding: | | | | | | | | | | | | |
| Basic shares | | 53,572 | | | 53,342 | | | 53,545 | | | 53,237 | |
| Dilutive effect of stock options and RSUs | | 959 | | | 847 | | | 1,069 | | | — | |
| Diluted shares | | 54,531 | | | 54,189 | | | 54,614 | | | 53,237 | |
| | | | | | | | | | | | | |
| Income (loss) per share - basic: | | | | | | | | | | | | |
| Continuing operations | $ | 0.07 | | $ | 0.18 | | $ | 0.18 | | $ | (0.85 | ) |
| Discontinued operations | | (0.01 | ) | | 0.04 | | | 0.28 | | | 2.55 | |
| Net income | $ | 0.06 | | $ | 0.22 | | $ | 0.46 | | $ | 1.70 | |
| | | | | | | | | | | | | |
| Income (loss) per share - diluted: | | | | | | | | | | | | |
| Continuing operations | $ | 0.07 | | $ | 0.17 | | $ | 0.17 | | $ | (0.85 | ) |
| Discontinued operations | | (0.01 | ) | | 0.04 | | | 0.28 | | | 2.55 | |
| Net income | $ | 0.06 | | $ | 0.21 | | $ | 0.45 | | $ | 1.70 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Numerator for basic and diluted income per share | | | | | | | | | | | | |
Income from continuing operations | | $ | 12,387 | | | $ | 2,511 | | | $ | 12,710 | | | $ | 6,860 | |
(Loss) income from discontinued operations, net of taxes | | | (59 | ) | | | (810 | ) | | | (1,114 | ) | | | 15,142 | |
Net income | | $ | 12,328 | | | $ | 1,701 | | | $ | 11,596 | | | $ | 22,002 | |
| | | | | | | | | | | | | | | | |
Denominator weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
Basic shares | | | 53,897 | | | | 53,572 | | | | 53,796 | | | | 53,545 | |
Dilutive effect of stock options and RSUs | | | 277 | | | | 959 | | | | 198 | | | | 1,069 | |
Diluted shares | | | 54,174 | | | | 54,531 | | | | 53,994 | | | | 54,614 | |
Share Repurchase Plan
Cenveo’s Board of Directors authorized a $15 million share repurchase program of the Company’s common stock (the “Share Repurchase Plan”). The Share Repurchase Plan is effective for 12 months and may be limited or terminated at any time without prior notice. Share repurchases under the Share Repurchase Plan may be made through open-market and privately negotiated transactions within the governing limits of the Company’s credit agreement and bond indentures. The timing and actual number of shares, if any, the Company actually repurchase will depend on a variety of factors including price, Company and/or regulatory requirements, and market conditions.
15. Segment Information
14. Segment Information
The Company operates in two segments: the envelope,envelopes, forms and labels segment and the commercial printing segment. printing. The envelopes, forms and labels segment specializes in the design, manufacturing, printing and fulfillment of: (1)(i) custom and direct mail envelopes developed for the advertising, billing and remittance needs of a variety of customers, including financial services companies; (2)(ii) custom labels and specialty forms sold through an extensive network of resale distributors for industries including food and beverage, manufacturing and pharmacy chains; and (3)(iii) stock envelopes, labels and business forms generally sold to independent distributors, office-productsoffice-product suppliers and office-productsoffice-product retail chains. The commercial printing segment provides print, design, content management, fulfillment and distribution offerings, including: (1)(i) high-end printed materials, which includes a wide range of premium products for major national and regional customers; (2)(ii) general commercial printing products for regional and local customers; (3)(iii) scientific, technical and medical journals and special interest and trade magazines for non-profit organizations, educational institutions and specialty publishers; and (4)(iv) specialty packaging and high quality promotional materials for multinational consumer productsproduct companies.
Operating income of each segment includes substantially all costs and expenses directly relating to the segment’ssegment’s operations. Corporate expenses include general and administrative expenses (Note 2)3).
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.15. Segment Information (Continued)
The following tables present certain segment information (in thousands):
| | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | 2007 | | | 2006 | | 2007 | | 2006 | |
| | | | | | | | | | | | | |
| Net sales: | | | | | | | | | | | | |
| Envelopes, forms and labels | $ | 222,671 | | $ | 198,804 | | $ | 647,074 | | $ | 578,559 | |
| Commercial printing | | 327,930 | | | 185,064 | | | 815,201 | | | 548,490 | |
| Total | $ | 550,601 | | $ | 383,868 | | $ | 1,462,275 | | $ | 1,127,049 | |
| | | | | 38 | | | | 85,1 | | | | |
| Operating income (loss): | | | | | | | | | | | | |
| Envelopes, forms and labels | $ | 32,560 | | $ | 25,774 | | $ | 85,091 | | $ | 59,525 | |
| Commercial printing | | 7,605 | | | 6,583 | | | 31,189 | | | 789 | |
| Corporate | | (10,119 | ) | | (7,329 | ) | | (28,000 | ) | | (19,746 | ) |
| Total | $ | 30,046 | | $ | 25,028 | | $ | 88,280 | | $ | 40,568 | |
| | | | | | | | | | | | | |
| Restructuring and impairment charges: | | | | | | | | | | | | |
| Envelopes, forms and labels | $ | 4,134 | | $ | 1,004 | | $ | 9,808 | | $ | 15,002 | |
| Commercial printing | | 15,996 | | | 3,666 | | | 21,922 | | | 19,593 | |
| Corporate | | 182 | | | 32 | | | 364 | | | 795 | |
| Total | $ | 20,312 | | $ | 4,702 | | $ | 32,094 | | $ | 35,390 | |
| | | 150 | | | | | | | | | | |
| Net sales by product line: | | | | | | | | | | | | |
| Envelopes | $ | 149,203 | | $ | 145,463 | | $ | 429,737 | | $ | 434,306 | |
| Commercial printing | | 231,792 | | | 184,319 | | | 595,316 | | | 546,423 | |
| Journals and periodicals | | 95,762 | | | — | | | 218,150 | | | — | |
| Labels and business forms | | 73,844 | | | 54,086 | | | 219,072 | | | 146,320 | |
| Total | $ | 550,601 | | $ | 383,868 | | $ | 1,462,275 | | $ | 1,127,049 | |
| Intercompany sales: | | | | | | | | | | | | |
| Envelopes, forms and labels to commercial printing | $ | 2,779 | | $ | 3,067 | | $ | 8,196 | | $ | 9,462 | |
| Commercial printing to envelopes, forms and labels | | 755 | | | 3,219 | | | 6,045 | | | 11,117 | |
| Total | $ | 3,534 | | $ | 6,286 | | $ | 14,241 | | $ | 20,579 | |
| | | | | | | | | | | | | |
| | September 30, 2007 | | December 31, 2006 | | | | | | | |
| | | | | | | | | | | | | |
| Identifiable assets: | | | | | | | | | | | | |
| Envelopes, forms and labels | $ | 827,494 | | $ | 496,379 | | | | | | | |
| Commercial printing | | 1,129,189 | | | 393,954 | | | | | | | |
| Corporate | | 69,104 | | | 111,617 | | | | | | | |
| Total | $ | 2,025,787 | | $ | 1,001,950 | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Net sales: | | | | | | | | | | | | | | | | |
Envelopes, forms and labels | | $ | 224,616 | | | $ | 222,671 | | | $ | 690,630 | | | $ | 647,074 | |
Commercial printing | | | 298,089 | | | | 327,930 | | | | 890,904 | | | | 815,201 | |
Total | | $ | 522,705 | | | $ | 550,601 | | | $ | 1,581,534 | | | $ | 1,462,275 | |
| | | | | | | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | | | | |
Envelopes, forms and labels | | $ | 35,947 | | | $ | 30,225 | | | $ | 93,807 | | | $ | 80,712 | |
Commercial printing | | | 23,056 | | | | 7,605 | | | | 47,598 | | | | 31,189 | |
Corporate | | | (10,827 | ) | | | (10,119 | ) | | | (34,098 | ) | | | (28,000 | ) |
Total | | $ | 48,176 | | | $ | 27,711 | | | $ | 107,307 | | | $ | 83,901 | |
| | | | | | | | | | | | | | | | |
Restructuring, impairment and other charges: | | | | | | | | | | | | | | | | |
Envelopes, forms and labels | | $ | 2,244 | | | $ | 4,134 | | | $ | 4,766 | | | $ | 9,808 | |
Commercial printing | | | 4,395 | | | | 15,996 | | | | 10,082 | | | | 21,922 | |
Corporate | | | 234 | | | | 182 | | | | 7,199 | | | | 364 | |
Total | | $ | 6,873 | | | $ | 20,312 | | | $ | 22,047 | | | $ | 32,094 | |
| | | | | | | | | | | | | | | | |
Net sales by product line: | | | | | | | | | | | | | | | | |
Envelopes | | $ | 154,232 | | | $ | 149,203 | | | $ | 474,876 | | | $ | 429,737 | |
Commercial printing | | | 210,737 | | | | 231,792 | | | | 622,255 | | | | 595,316 | |
Journals and periodicals | | | 87,026 | | | | 95,762 | | | | 267,664 | | | | 218,150 | |
Labels and business forms | | | 70,710 | | | | 73,844 | | | | 216,739 | | | | 219,072 | |
Total | | $ | 522,705 | | | $ | 550,601 | | | $ | 1,581,534 | | | $ | 1,462,275 | |
| | | | | | | | | | | | | | | | |
Intercompany sales: | | | | | | | | | | | | | | | | |
Envelopes, forms and labels to commercial printing | | $ | 1,691 | | | $ | 2,779 | | | $ | 4,369 | | | $ | 8,196 | |
Commercial printing to envelopes, forms and labels | | | 538 | | | | 755 | | | | 2,856 | | | | 6,045 | |
Total | | $ | 2,229 | | | $ | 3,534 | | | $ | 7,225 | | | $ | 14,241 | |
| | September 27, 2008 | | | December 29, 2007 | |
Identifiable assets: | | | | | | |
Envelopes, forms and labels | | $ | 809,840 | | | $ | 833,337 | |
Commercial printing | | | 1,109,746 | | | | 1,105,832 | |
Corporate | | | 55,818 | | | | 63,553 | |
Total | | $ | 1,975,404 | | | $ | 2,002,722 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information
Cenveo is a holding company (“Parent Company”) and is the ultimate parent of all Cenveo subsidiaries. In January 2004, the Company’s wholly-owned subsidiary, Cenveo Corporation (the “Subsidiary Issuer”), issued 7⅞% Notes and, in connection with the acquisition of Cadmus, assumed Cadmus’ 8⅜% Notes (collectively the “Subsidiary Issuer Notes”), which are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and substantially all of its wholly-owned subsidiaries (the “Guarantor Subsidiaries”). The limited numbers of remaining subsidiaries (the “Non-Guarantor Subsidiaries”) are primarily non-U.S., indirect wholly-owned subsidiaries of the Parent Company.
Presented below is condensed consolidating information for the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and Non-Guarantor Subsidiaries for the three and nine months ended September 27, 2008 and September 29, 2007. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and Non-Guarantor Subsidiaries, assuming the guarantee structure of the Subsidiary Issuer Notes was in effect at the beginning of the periods presented.
The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Subsidiary Issuer, the Guarantor Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. The Company’s primary transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the intercompany payables and receivables between its subsidiaries.
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
September 27, 2008
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non-Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | 8,596 | | | $ | 678 | | | $ | 4,545 | | | $ | — | | | $ | 13,819 | |
Accounts receivable, net | | | — | | | | 146,014 | | | | 158,314 | | | | 4,999 | | | | — | | | | 309,327 | |
Inventories | | | — | | | | 89,642 | | | | 75,186 | | | | 1,088 | | | | — | | | | 165,916 | |
Notes receivable from subsidiaries | | | — | | | | 38,194 | | | | — | | | | — | | | | (38,194 | ) | | | — | |
Prepaid and other current assets | | | — | | | | 50,545 | | | | 10,666 | | | | 1,039 | | | | — | | | | 62,250 | |
Total current assets | | | — | | | | 332,991 | | | | 244,844 | | | | 11,671 | | | | (38,194 | ) | | | 551,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment in subsidiaries | | | 120,969 | | | | 1,607,175 | | | | 4,969 | | | | — | | | | (1,733,113 | ) | | | — | |
Property, plant and equipment, net | | | — | | | | 166,155 | | | | 266,724 | | | | 479 | | | | — | | | | 433,358 | |
Goodwill | | | — | | | | 175,234 | | | | 506,738 | | | | — | | | | — | | | | 681,972 | |
Other intangible assets, net | | | — | | | | 9,197 | | | | 270,008 | | | | — | | | | — | | | | 279,205 | |
Other assets, net | | | — | | | | 22,719 | | | | 6,488 | | | | 350 | | | | — | | | | 29,557 | |
Total assets | | $ | 120,969 | | | $ | 2,313,471 | | | $ | 1,299,771 | | | $ | 12,500 | | | $ | (1,771,307 | ) | | $ | 1,975,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | — | | | $ | 7,894 | | | $ | 8,583 | | | $ | — | | | $ | — | | | $ | 16,477 | |
Accounts payable | | | — | | | | 112,156 | | | | 66,935 | | | | 2,625 | | | | — | | | | 181,716 | |
Accrued compensation and related liabilities | | | — | | | | 25,954 | | | | 17,380 | | | | — | | | | — | | | | 43,334 | |
Other current liabilities | | | — | | | | 72,680 | | | | 15,707 | | | | 1,674 | | | | — | | | | 90,061 | |
Intercompany payable (receivable) | | | — | | | | 575,363 | | | | (578,839 | ) | | | 3,476 | | | | — | | | | — | |
Notes payable to subsidiary issuer | | | — | | | | — | | | | 38,194 | | | | — | | | | (38,194 | ) | | | — | |
Total current liabilities | | | — | | | | 794,047 | | | | (432,040 | ) | | | 7,775 | | | | (38,194 | ) | | | 331,588 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | — | | | | 1,334,504 | | | | 25,018 | | | | — | | | | — | | | | 1,359,522 | |
Deferred income tax liability (asset) | | | — | | | | (3,403 | ) | | | 66,117 | | | | (244 | ) | | | — | | | | 62,470 | |
Other liabilities | | | — | | | | 67,354 | | | | 33,501 | | | | — | | | | — | | | | 100,855 | |
Shareholders’ equity | | | 120,969 | | | | 120,969 | | | | 1,607,175 | | | | 4,969 | | | | (1,733,113 | ) | | | 120,969 | |
Total liabilities and shareholders’ equity | | $ | 120,969 | | | $ | 2,313,471 | | | $ | 1,299,771 | | | $ | 12,500 | | | $ | (1,771,307 | ) | | $ | 1,975,404 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three months ended September 27, 2008
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 245,712 | | | $ | 271,514 | | | $ | 5,479 | | | $ | — | | | $ | 522,705 | |
Cost of sales | | | — | | | | 196,471 | | | | 206,761 | | | | 3,676 | | | | — | | | | 406,908 | |
Selling, general and administrative | | | — | | | | 35,292 | | | | 23,056 | | | | 107 | | | | — | | | | 58,455 | |
Amortization of intangible assets | | | — | | | | 120 | | | | 2,173 | | | | — | | | | — | | | | 2,293 | |
Restructuring and impairment charges | | | — | | | | 5,316 | | | | 1,557 | | | | — | | | | — | | | | 6,873 | |
Operating income | | | — | | | | 8,513 | | | | 37,967 | | | | 1,696 | | | | — | | | | 48,176 | |
Interest expense (income), net | | | — | | | | 26,429 | | | | 403 | | | | (37 | ) | | | — | | | | 26,795 | |
Intercompany interest expense (income) | | | — | | | | (615 | ) | | | 615 | | | | — | | | | — | | | | — | |
Gain on early extinguishment of debt | | | — | | | | (371 | ) | | | — | | | | — | | | | — | | | | (371 | ) |
Other income, net | | | — | | | | (442 | ) | | | (253 | ) | | | — | | | | — | | | | (695 | ) |
Income (loss) from continuing operations before income taxes and equity in income of unconsolidated subsidiaries | | | — | | | | (16,488 | ) | | | 37,202 | | | | 1,733 | | | | — | | | | 22,447 | |
Income tax expense (benefit) | | | — | | | | 10,451 | | | | (391 | ) | | | — | | | | — | | | | 10,060 | |
Income (loss) from continuing operations before equity in income of unconsolidated subsidiaries | | | — | | | | (26,939 | ) | | | 37,593 | | | | 1,733 | | | | — | | | | 12,387 | |
Equity in income of unconsolidated subsidiaries | | | 12,328 | | | | 39,326 | | | | 1,733 | | | | — | | | | (53,387 | ) | | | — | |
Income (loss) from continuing operations | | | 12,328 | | | | 12,387 | | | | 39,326 | | | | 1,733 | | | | (53,387 | ) | | | 12,387 | |
Loss from discontinued operations, net of taxes | | | — | | | | (59 | ) | | | — | | | | — | | | | — | | | | (59 | ) |
Net income (loss) | | $ | 12,328 | | | $ | 12,328 | | | $ | 39,326 | | | $ | 1,733 | | | $ | (53,387 | ) | | $ | 12,328 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine months ended September 27, 2008
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 748,907 | | | $ | 817,585 | | | $ | 15,042 | | | $ | — | | | $ | 1,581,534 | |
Cost of sales | | | — | | | | 612,897 | | | | 637,027 | | | | 10,688 | | | | — | | | | 1,260,612 | |
Selling, general and administrative | | | — | | | | 107,988 | | | | 76,380 | | | | 453 | | | | — | | | | 184,821 | |
Amortization of intangible assets | | | — | | | | 343 | | | | 6,404 | | | | — | | | | — | | | | 6,747 | |
Restructuring, impairment and other charges | | | — | | | | 19,767 | | | | 2,280 | | | | — | | | | — | | | | 22,047 | |
Operating income | | | — | | | | 7,912 | | | | 95,494 | | | | 3,901 | | | | — | | | | 107,307 | |
Interest expense (income), net | | | — | | | | 78,679 | | | | 1,331 | | | | (62 | ) | | | — | | | | 79,948 | |
Intercompany interest expense (income) | | | — | | | | (1,712 | ) | | | 1,712 | | | | — | | | | — | | | | — | |
Loss on early extinguishment of debt | | | — | | | | 3,871 | | | | — | | | | — | | | | — | | | | 3,871 | |
Other expense, net | | | — | | | | 140 | | | | 289 | | | | — | | | | — | | | | 429 | |
Income (loss) from continuing operations before income taxes and equity in income of unconsolidated subsidiaries | | | — | | | | (73,066 | ) | | | 92,162 | | | | 3,963 | | | | — | | | | 23,059 | |
Income tax expense | | | — | | | | 6,241 | | | | 4,108 | | | | — | | | | — | | | | 10,349 | |
Income (loss) from continuing operations before equity in income of unconsolidated subsidiaries | | | — | | | | (79,307 | ) | | | 88,054 | | | | 3,963 | | | | — | | | | 12,710 | |
Equity in income of unconsolidated subsidiaries | | | 11,596 | | | | 92,017 | | | | 3,963 | | | | — | | | | (107,576 | ) | | | — | |
Income (loss) from continuing operations | | | 11,596 | | | | 12,710 | | | | 92,017 | | | | 3,963 | | | | (107,576 | ) | | | 12,710 | |
Loss from discontinued operations, net of taxes | | | — | | | | (1,114 | ) | | | — | | | | — | | | | — | | | | (1,114 | ) |
Net income (loss) | | $ | 11,596 | | | $ | 11,596 | | | $ | 92,017 | | | $ | 3,963 | | | $ | (107,576 | ) | | $ | 11,596 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 27, 2008
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 12,940 | | | $ | 5,114 | | | $ | 128,873 | | | $ | 2,487 | | | $ | — | | | $ | 149,414 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of business acquisitions, net of cash acquired | | | — | | | | (47,151 | ) | | | — | | | | — | | | | — | | | | (47,151 | ) |
Capital expenditures | | | — | | | | (18,172 | ) | | | (19,610 | ) | | | — | | | | — | | | | (37,782 | ) |
Acquisition payments | | | — | | | | (3,653 | ) | | | — | | | | — | | | | — | | | | (3,653 | ) |
Proceeds from sale of property, plant and equipment | | | — | | | | 17,944 | | | | 314 | | | | — | | | | — | | | | 18,258 | |
Intercompany note | | | — | | | | 1,914 | | | | — | | | | — | | | | (1,914 | ) | | | — | |
Net cash used in investing activities of continuing operations | | | — | | | | (49,118 | ) | | | (19,296 | ) | | | — | | | | (1,914 | ) | | | (70,328 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Repayment of senior unsecured loan | | | — | | | | (175,000 | ) | | | — | | | | — | | | | — | | | | (175,000 | ) |
Repayments under revolving credit facility, net | | | — | | | | (65,200 | ) | | | — | | | | — | | | | — | | | | (65,200 | ) |
Repayment of term loans | | | — | | | | (5,400 | ) | | | — | | | | — | | | | — | | | | (5,400 | ) |
Repayments of other long-term debt | | | — | | | | (1,710 | ) | | | (14,825 | ) | | | — | | | | — | | | | (16,535 | ) |
Payment of debt issuance costs | | | — | | | | (5,297 | ) | | | — | | | | — | | | | — | | | | (5,297 | ) |
Purchase and retirement of common stock upon vesting of RSUs | | | (1,055 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,055 | ) |
Tax liability from stock compensation | | | (873 | ) | | | — | | | | — | | | | — | | | | — | | | | (873 | ) |
Proceeds from issuance of 10½% senior notes | | | — | | | | 175,000 | | | | — | | | | — | | | | — | | | | 175,000 | |
Proceeds from issuance of other long-term debt | | | — | | | | 5,338 | | | | 6,000 | | | | — | | | | — | | | | 11,338 | |
Proceeds from exercise of stock options | | | 1,873 | | | | — | | | | — | | | | — | | | | — | | | | 1,873 | |
Intercompany note | | | — | | | | — | | | | (1,914 | ) | | | — | | | | 1,914 | | | | — | |
Intercompany advances | | | (12,885 | ) | | | 111,778 | | | | (99,042 | ) | | | 149 | | | | — | | | | — | |
Net cash (used in) provided by financing activities | | | (12,940 | ) | | | 39,509 | | | | (109,781 | ) | | | 149 | | | | 1,914 | | | | (81,149 | ) |
Effect of exchange rate changes on cash and cash equivalents of continuing operations | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Net (decrease) increase in cash and cash equivalents | | | — | | | | (4,495 | ) | | | (204 | ) | | | 2,636 | | | | — | | | | (2,063 | ) |
Cash and cash equivalents at beginning of period | | | — | | | | 13,091 | | | | 882 | | | | 1,909 | | | | — | | | | 15,882 | |
Cash and cash equivalents at end of period | | $ | — | | | $ | 8,596 | | | $ | 678 | | | $ | 4,545 | | | $ | — | | | $ | 13,819 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 29, 2007
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non-Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | 13,091 | | | $ | 882 | | | $ | 1,909 | | | $ | — | | | $ | 15,882 | |
Accounts receivable, net | | | — | | | | 164,815 | | | | 175,746 | | | | 4,073 | | | | — | | | | 344,634 | |
Inventories | | | — | | | | 89,259 | | | | 72,782 | | | | 867 | | | | — | | | | 162,908 | |
Notes receivable from subsidiaries | | | — | | | | 40,108 | | | | — | | | | — | | | | (40,108 | ) | | | — | |
Prepaid and other current assets | | | — | | | | 57,484 | | | | 15,160 | | | | 714 | | | | — | | | | 73,358 | |
Total current assets | | | — | | | | 364,757 | | | | 264,570 | | | | 7,563 | | | | (40,108 | ) | | | 596,782 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment in subsidiaries | | | 99,326 | | | | 1,461,662 | | | | 2,058 | | | | — | | | | (1,563,046 | ) | | | — | |
Property, plant and equipment, net | | | — | | | | 173,103 | | | | 254,378 | | | | 860 | | | | — | | | | 428,341 | |
Goodwill | | | — | | | | 175,220 | | | | 494,582 | | | | — | | | | — | | | | 669,802 | |
Other intangible assets, net | | | — | | | | 9,512 | | | | 261,110 | | | | — | | | | — | | | | 270,622 | |
Other assets, net | | | — | | | | 22,949 | | | | 13,833 | | | | 393 | | | | — | | | | 37,175 | |
Total assets | | $ | 99,326 | | | $ | 2,207,203 | | | $ | 1,290,531 | | | $ | 8,816 | | | $ | (1,603,154 | ) | | $ | 2,002,722 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | — | | | $ | 8,769 | | | $ | 9,983 | | | $ | — | | | $ | — | | | $ | 18,752 | |
Accounts payable | | | — | | | | 98,111 | | | | 65,130 | | | | 2,217 | | | | — | | | | 165,458 | |
Accrued compensation and related liabilities | | | — | | | | 23,792 | | | | 23,361 | | | | — | | | | — | | | | 47,153 | |
Other current liabilities | | | — | | | | 57,845 | | | | 20,495 | | | | 1,214 | | | | — | | | | 79,554 | |
Intercompany payable (receivable) | | | — | | | | 479,191 | | | | (482,518 | ) | | | 3,327 | | | | — | | | | — | |
Notes payable to subsidiary issuer | | | — | | | | — | | | | 40,108 | | | | — | | | | (40,108 | ) | | | — | |
Total current liabilities | | | — | | | | 667,708 | | | | (323,441 | ) | | | 6,758 | | | | (40,108 | ) | | | 310,917 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | — | | | | 1,400,620 | | | | 25,265 | | | | — | | | | — | | | | 1,425,885 | |
Deferred income tax liability (asset) | | | — | | | | (17,162 | ) | | | 72,343 | | | | — | | | | — | | | | 55,181 | |
Other liabilities | | | — | | | | 56,711 | | | | 54,702 | | | | — | | | | — | | | | 111,413 | |
Shareholders’ equity | | | 99,326 | | | | 99,326 | | | | 1,461,662 | | | | 2,058 | | | | (1,563,046 | ) | | | 99,326 | |
Total liabilities and shareholders’ equity | | $ | 99,326 | | | $ | 2,207,203 | | | $ | 1,290,531 | | | $ | 8,816 | | | $ | (1,603,154 | ) | | $ | 2,002,722 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three months ended September 29, 2007
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 288,397 | | | $ | 258,643 | | | $ | 3,561 | | | $ | — | | | $ | 550,601 | |
Cost of sales | | | — | | | | 235,897 | | | | 197,456 | | | | 2,756 | | | | — | | | | 436,109 | |
Selling, general and administrative | | | — | | | | 39,385 | | | | 24,138 | | | | 127 | | | | — | | | | 63,650 | |
Amortization of intangible assets | | | — | | | | 1,194 | | | | 1,625 | | | | — | | | | — | | | | 2,819 | |
Restructuring and impairment charges | | | — | | | | 20,252 | | | | 60 | | | | — | | | | — | | | | 20,312 | |
Operating income (loss) | | | — | | | | (8,331 | ) | | | 35,364 | | | | 678 | | | | — | | | | 27,711 | |
Gain on sale of business | | | — | | | | (189 | ) | | | — | | | | — | | | | — | | | | (189 | ) |
Interest expense (income), net | | | — | | | | 24,830 | | | | 454 | | | | (1 | ) | | | — | | | | 25,283 | |
Intercompany interest expense (income) | | | — | | | | (687 | ) | | | 687 | | | | — | | | | — | | | | — | |
Loss on early extinguishment of debt | | | — | | | | — | | | | 51 | | | | — | | | | — | | | | 51 | |
Other expense, net | | | — | | | | 244 | | | | 539 | | | | 116 | | | | — | | | | 899 | |
Income (loss) from continuing operations before income taxes and equity in income of unconsolidated subsidiaries | | | — | | | | (32,529 | ) | | | 33,633 | | | | 563 | | | | — | | | | 1,667 | |
Income tax (benefit) expense | | | — | | | | (1,458 | ) | | | 614 | | | | — | | | | — | | | | (844 | ) |
Income (loss) from continuing operations before equity in income of unconsolidated subsidiaries | | | — | | | | (31,071 | ) | | | 33,019 | | | | 563 | | | | — | | | | 2,511 | |
Equity in income of unconsolidated subsidiaries | | | 1,701 | | | | 33,582 | | | | 563 | | | | — | | | | (35,846 | ) | | | — | |
Income (loss) from continuing operations | | | 1,701 | | | | 2,511 | | | | 33,582 | | | | 563 | | | | (35,846 | ) | | | 2,511 | |
Loss from discontinued operations, net of taxes | | | — | | | | (810 | ) | | | — | | | | — | | | | — | | | | (810 | ) |
Net income (loss) | | $ | 1,701 | | | $ | 1,701 | | | $ | 33,582 | | | $ | 563 | | | $ | (35,846 | ) | | $ | 1,701 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine months ended September 29, 2007
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 887,015 | | | $ | 567,667 | | | $ | 7,593 | | | $ | — | | | $ | 1,462,275 | |
Cost of sales | | | — | | | | 726,897 | | | | 437,981 | | | | 5,984 | | | | — | | | | 1,170,862 | |
Selling, general and administrative | | | — | | | | 119,363 | | | | 48,508 | | | | 302 | | | | — | | | | 168,173 | |
Amortization of intangible assets | | | — | | | | 3,633 | | | | 3,612 | | | | — | | | | — | | | | 7,245 | |
Restructuring and impairment charges | | | — | | | | 32,019 | | | | 75 | | | | — | | | | — | | | | 32,094 | |
Operating income | | | — | | | | 5,103 | | | | 77,491 | | | | 1,307 | | | | — | | | | 83,901 | |
Gain on sale of business | | | — | | | | (189 | ) | | | — | | | | — | | | | — | | | | (189 | ) |
Interest expense (income), net | | | — | | | | 61,997 | | | | 1,096 | | | | (2 | ) | | | — | | | | 63,091 | |
Intercompany interest expense (income) | | | — | | | | (2,061 | ) | | | 2,061 | | | | — | | | | — | | | | — | |
Loss on early extinguishment of debt | | | — | | | | 9,186 | | | | 70 | | | | — | | | | — | | | | 9,256 | |
Other expense, net | | | — | | | | 898 | | | | 969 | | | | 198 | | | | — | | | | 2,065 | |
Income (loss) from continuing operations before income taxes and equity in income of unconsolidated subsidiaries | | | — | | | | (64,728 | ) | | | 73,295 | | | | 1,111 | | | | — | | | | 9,678 | |
Income tax expense | | | — | | | | 213 | | | | 2,605 | | | | — | | | | — | | | | 2,818 | |
Income (loss) from continuing operations before equity in income of unconsolidated subsidiaries | | | — | | | | (64,941 | ) | | | 70,690 | | | | 1,111 | | | | — | | | | 6,860 | |
Equity in income of unconsolidated subsidiaries | | | 22,002 | | | | 71,801 | | | | 1,111 | | | | — | | | | (94,914 | ) | | | — | |
Income (loss) from continuing operations | | | 22,002 | | | | 6,860 | | | | 71,801 | | | | 1,111 | | | | (94,914 | ) | | | 6,860 | |
Income from discontinued operations, net of taxes | | | — | | | | 15,142 | | | | — | | | | — | | | | — | | | | 15,142 | |
Net income (loss) | | $ | 22,002 | | | $ | 22,002 | | | $ | 71,801 | | | $ | 1,111 | | | $ | (94,914 | ) | | $ | 22,002 | |
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Condensed Consolidating Financial Information (Continued)
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 29, 2007
(in thousands)
| | Parent | | | Subsidiary | | | Guarantor | | | Non- Guarantor | | | | | | | |
| | Company | | | Issuer | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing operating activities | | $ | 7,166 | | | $ | 13,428 | | | $ | 36,149 | | | $ | 2,459 | | | $ | — | | | $ | 59,202 | |
Net cash provided by discontinued operating activities | | | — | | | | 2,198 | | | | — | | | | — | | | | — | | | | 2,198 | |
Net cash provided by (used in) operating activities | | | 7,166 | | | | 15,626 | | | | 36,149 | | | | 2,459 | | | | — | | | | 61,400 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of business acquisitions, net of cash acquired | | | — | | | | (627,116 | ) | | | — | | | | — | | | | — | | | | (627,116 | ) |
Capital expenditures | | | — | | | | (12,195 | ) | | | (12,986 | ) | | | — | | | | — | | | | (25,181 | ) |
Intercompany note | | | — | | | | 1,902 | | | | — | | | | — | | | | (1,902 | ) | | | — | |
Acquisition payments | | | — | | | | (3,653 | ) | | | — | | | | — | | | | — | | | | (3,653 | ) |
Proceeds from sale of property, plant and equipment | | | — | | | | 4,844 | | | | 7 | | | | — | | | | — | | | | 4,851 | |
Proceeds from divestitures, net | | | — | | | | 226 | | | | — | | | | — | | | | — | | | | 226 | |
Net cash used in investing activities of continuing operations | | | — | | | | (635,992 | ) | | | (12,979 | ) | | | — | | | | (1,902 | ) | | | (650,873 | ) |
Proceeds from the sale of discontinued operations | | | — | | | | 73,628 | | | | — | | | | — | | | | — | | | | 73,628 | |
Net cash used in investing activities | | | — | | | | (562,364 | ) | | | (12,979 | ) | | | — | | | | (1,902 | ) | | | (577,245 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings under revolving credit facility, net | | | — | | | | 92,500 | | | | — | | | | — | | | | — | | | | 92,500 | |
Repayment of term loans | | | — | | | | (3,100 | ) | | | — | | | | — | | | | — | | | | (3,100 | ) |
Repayment of term loan B | | | — | | | | (324,188 | ) | | | — | | | | — | | | | — | | | | (324,188 | ) |
Repayment of Cadmus revolving senior bank credit facility | | | — | | | | (70,100 | ) | | | — | | | | — | | | | — | | | | (70,100 | ) |
Repayment of 8⅜% senior subordinated notes | | | — | | | | (20,880 | ) | | | — | | | | — | | | | — | | | | (20,880 | ) |
Repayment of 9⅝% senior notes | | | — | | | | (10,498 | ) | | | — | | | | — | | | | — | | | | (10,498 | ) |
Repayments of other long-term debt | | | — | | | | (3,320 | ) | | | (23,642 | ) | | | — | | | | — | | | | (26,962 | ) |
Payment of debt issuance costs | | | — | | | | (5,906 | ) | | | — | | | | — | | | | — | | | | (5,906 | ) |
Payment of refinancing fees, redemption premiums and expenses | | | — | | | | (8,045 | ) | | | — | | | | — | | | | — | | | | (8,045 | ) |
Proceeds from issuance of term loans | | | — | | | | 720,000 | | | | — | | | | — | | | | — | | | | 720,000 | |
Proceeds from senior unsecured loan | | | — | | | | 175,000 | | | | — | | | | — | | | | — | | | | 175,000 | |
Proceeds from exercise of stock options | | | 300 | | | | — | | | | — | | | | — | | | | — | | | | 300 | |
Purchase and retirement of common stock upon vesting of RSUs | | | (1,302 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,302 | ) |
Intercompany note | | | — | | | | — | | | | (1,902 | ) | | | — | | | | 1,902 | | | | — | |
Intercompany advances | | | (6,164 | ) | | | 6,954 | | | | 611 | | | | (1,401 | ) | | | — | | | | — | |
Net cash provided by (used in) financing activities | | | (7,166 | ) | | | 548,417 | | | | (24,933 | ) | | | (1,401 | ) | | | 1,902 | | | | 516,819 | |
Effect of exchange rate changes on cash and cash equivalents of continuing operations | | | — | | | | — | | | | 180 | | | | — | | | | — | | | | 180 | |
Net increase (decrease) in cash and cash equivalents | | | — | | | | 1,679 | | | | (1,583 | ) | | | 1,058 | | | | — | | | | 1,154 | |
Cash and cash equivalents at beginning of period | | | — | | | | 8,655 | | | | 1,903 | | | | — | | | | — | | | | 10,558 | |
Cash and cash equivalents at end of period | | $ | — | | | $ | 10,334 | | | $ | 320 | | | $ | 1,058 | | | $ | — | | | $ | 11,712 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations of Cenveo, Inc. and its subsidiaries, which we refer to as Cenveo, should be read in conjunction with the accompanying condensed consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.29, 2007. Item 7 of our 20062007 Annual Report on Form 10-K, which we refer to as our Form 10-K, describes the application of our critical accounting policies, for which there have been no significant changes as of September 30, 2007. During the first quarter of 2007, we acquired PC Ink Corp., which we refer to as Printegra, and Cadmus Communications Corporation, which we refer to as Cadmus. During the third quarter of 2007, we acquired Madison/Graham ColorGraphics, Inc., which we refer to as ColorGraphics, and Commercial Envelope Manufacturing Co., Inc., which we refer to as Commercial Envelope. See “Acquisitions” and “Long-Term Debt” below.27, 2008.
Forward-Looking Statements
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of terminology such as “may,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “continue” and similar expressions, or as other statements that do not relate solely to historical facts. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that could cause actual results to differ materially from what is expressed or forecasted in these forward-looking statements. In view of such uncertainties, investors should not place undue reliance on our forward-looking statements. Such statements speak only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from management’s expectations include, without limitation: (1)(i) our substantial indebtedness impairingcould impair our financial condition and limitingprevent us from fulfilling our business obligations; (ii) our ability to incur additionalservice or refinance our debt; (2)(iii) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (3) the potential(iv) limitations on additional borrowings that are available to incur additional indebtedness,us that could further exacerbating the above factors; (4) cross default provisions inexacerbate our indebtedness, which could cause all of our debt to become due and payable as a result of a default under an unrelated debt instrument; (5)risk exposure from debt; (v) our ability to successfully integrate acquisitions; (6)(vi) intense competition in our industry; (7)(vii) the absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (8)(viii) factors affecting the U.S. postal services impacting demand for our products; (9) increases in paper costs and decreases in its availability; (10) our history of losses from continuing operations and the ability to return to consistent profitability; (11)(ix) the availability of the Internet and other electronic media affecting demand for our products; (12)(x) increases in paper costs and decreases in its availability; (xi) our labor relations; (13)(xii) compliance with environmental rules and regulations; (14)and (xiii) dependence on key management personnel; and (15) general economic, business and labor conditions.personnel. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact the Company’s business. Additional information regarding these and other factors can be found elsewhere in this report and in our other filings with the U.S. Securities and Exchange Commission, which we refer to as the SEC.
Business Overview
We are a leading provider of print and visual communications and are currently the third largest diversified printing company in North America.
Acquisitions. On February 12, 2007, we acquired Printegra, a leading producer of printed business communication documents, labels and envelopes regularly used by small and large businesses. With the acquisition of Printegra, we have expanded our product offerings to our existing base of
customers to include short-run documents, labels and envelope products. Additionally, Printegra’s customer base is now able to access our broad offering of products. Printegra’s results of operations are included within our envelopes, forms and labels segment results since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included herein.
On March 7, 2007, we acquired Cadmus, one of the world’s largest providers of content management and printing to scientific, technical and medical journal publishers; one of the largest periodicals printersdiversified printing companies in North America and a leading provider of specialty packaging and promotional printing. This acquisition is resulting in significant economies of scale from our increased volume of business that enables us to purchase raw materials, primarily paper, ink and other supplies, on more favorable terms and helps ensure better availability of these materials in tight markets. The results of operations of Cadmus are included within our commercial printing segment results since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included herein.
We acquired ColorGraphics on July 9, 2007. ColorGraphics produces printed annual reports, booklets, brochures, advertising inserts, direct mail and other corporate communication materials. ColorGraphics’ four strategically-located commercial printing facilities on the West Coast of the United States are being integrated with our existing West Coast operations to form what we believe is the premier West Coast commercial printer. ColorGraphics’ results of operations from July 1, 2007 are included within our commercial printing segment results. See Note 3 to the condensed consolidated financial statements included herein.
On August 30, 2007, we acquired Commercial Envelope, one of the largest envelope manufacturers in the United States. Commercial Envelope operates five strategically-located manufacturing facilities, which produces over 45 million envelopes per day. The acquisition of Commercial Envelope has increased our market share in the U.S. envelope market and is creating operating efficiencies as we integrate our envelope operations. Commercial Envelope’s results of operations are included within our envelopes, forms and labels business since the date of acquisition. See Note 3 to the condensed consolidated financial statements included herein.
Business Segments. We operate our businesses in two complementary reportable segments: envelopes, forms and labels and commercial printing.America. Our broad portfolio of product offerings is provided throughproducts includes envelope, form, and label manufacturing, commercial printing and packaging and publisher offerings. We operate from a global network of over 70 production, fulfillmentapproximately 78 printing and manufacturing, content management and distribution facilities, which we refer to as manufacturing facilities, primarily throughout North America.serving a diverse base of customers.
We operate our business in two complementary segments: envelopes, forms and labels and commercial printing.
Envelopes, Forms and Labels.Labels
Our envelopes, forms and labels segment operates approximately 38 manufacturing facilities, primarily in North America, and primarily specializes in the design, manufacturing, printing and fulfillment of: (1)(i) custom and direct mail envelopes developed for the advertising, billing and remittance needs of a variety of customers, including financial services companies; (2)(ii) custom labels and specialty forms sold through an extensive network of resale distributors for industries including food and beverage, manufacturing and pharmacy chains; and (3)(iii) stock envelopes, labels and business forms generally sold to independent distributors, office-productsoffice-product suppliers and office-productsoffice-product retail chains. In 2007 we grew our envelopes, forms and labels business with the acquisition of Commercial Envelope Manufacturing Co. Inc., which we refer to as Commercial Envelope, and PC Ink Corp., which we refer to as Printegra.
On August 30, 2007, we acquired all of the stock of Commercial Printing.Envelope, one of the largest envelope manufacturers in the United States. Prior to our acquisition, Commercial Envelope had annual revenues of approximately $160 million. The acquisition of Commercial Envelope increased our market share in the U.S. envelope market.
On February 12, 2007, we acquired all of the stock of Printegra, a leading producer of printed business communication documents, labels and envelopes regularly used by small and large businesses. Prior to our acquisition, Printegra had annual revenues of approximately $90 million. With the acquisition of Printegra, we expanded our offerings of short-run documents, labels and envelope products. Additionally, the acquisition facilitates access for Printegra’s historical customer base to our extensive product offerings.
Commercial Printing
Our commercial printing segment providesoperates approximately 40 manufacturing facilities in the United States, Canada, the Caribbean Basin and Asia and primarily offers print, design, content management, fulfillment and distribution offerings, including: (1)(i) high-end printed materials, which includescolor printing of a wide range of premium products for major national and regional customers; (2)(ii) general commercial printing products for regional and local customers; (3)(iii) scientific, technical and medical, which we refer to as STM, journals and special interest and trade magazines for non-profit organizations, educational institutions and specialty publishers; and (4)(iv) specialty packaging and high quality promotional materials for multinational consumer products companies. In the second quarter of 2008, we grew our commercial printing business with the acquisition of Rex Corporation and its manufacturing facility, which we refer to as Rex. In 2007, we completed two commercial printing acquisitions: Madison/Graham ColorGraphics, Inc., which we refer to as ColorGraphics, and Cadmus Communications Corporation, which we refer to as Cadmus.
On March 31, 2008, we acquired all of the stock of Rex, an independent manufacturer of premium and high-quality packaging solutions. Prior to our acquisition, Rex had annual revenues of approximately $40 million.
On July 9, 2007, we acquired all of the stock of ColorGraphics, which was one of the largest commercial printers in the western United States. Prior to our acquisition, ColorGraphics had annual revenues of approximately $170 million. ColorGraphics produces printed annual reports, booklets, brochures, advertising inserts, direct mail and other corporate communication materials.
On March 7, 2007, we acquired all of the stock of Cadmus. Cadmus is one of the world’s largest providers of content management and printing to STM journal publishers, one of the largest periodicals printers in North America and a leading provider of specialty packaging and promotional printing products. Prior to our acquisition, Cadmus had annual revenues of approximately $450 million.
Consolidated Operating Results
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes an overview of our condensed consolidated results for the three and nine month periods ended September 30,
2007,27, 2008 followed by a discussion of the results of each of our businessreportable segments for the same period.periods. See Note 2 of our condensed consolidated financial statements included herein. Our results for the three and nine month periods ended September 30,27, 2008 include the operating results of Rex from March 31, 2008. Our results for the three and nine month periods ended September 29, 2007 include the operating results of Printegra, Cadmus, ColorGraphics and Commercial Envelope, which we refer to as the 2007 Acquisitions, subsequent to their respective acquisition dates, except for ColorGraphics, which is included in our operating results from July 1, 2007. Since Commercial Envelope’s results are not included forthese acquisitions occurred during the full quarter ended September 30,first and third quarters of 2007, and the 2007 Acquisitionstheir results are not included for a full nine month period in 2007, we expect that2007. In addition, Commercial Envelope is included in our net sales and operating income in future quarters and next year will increase. See Note 3 to the condensed consolidated financial statements included herein.
Beginning in the fourth quarter of 2006, the financial results of Supremex Inc.,operations for only a portion of the three months ended September 29, 2007 and certain other assets, which we refer to as Supremex, have been accounted for as a discontinued operation, resultingRex is not included in our historical condensed consolidated statementsresults of operations and statements of cash flows being reclassified to reflect such discontinued operations separately from continuing operations. On March 13, 2007, we completed the sale of our remaining 28.6% economic and voting interest in the Supremex Income Fund, which we refer to as the Fund. See Note 4 to the condensed consolidated financial statements included herein.2007.
A summary of our condensed consolidated statements of operations is presented below. The summary presents reported net sales and operating income. See Segment Operations below for a summary of net sales and operating income of our reportable segments that we use internally to assess our operating performance. Division net sales excludes sales of divested operations. Our fiscal quarters end on the Saturday closest to the last day of the calendar month so that each quarter has the same number of days and 13 full weeks. The financial statements and other financial information in this report are presented using a calendar convention. The reporting periods whichending on September 27, 2008 and September 29, 2007 consist of 13 weeks ended on September 29, 2007 and September 30, 2006, are reported as ending on September 30, 2007 and 2006, respectively, since the effect of a reporting period not ending on these dates is not material.weeks.
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
| | | | | | | | | | | | |
Division net sales | | $ | 550,601 | | | $ | 382,470 | | | $ | 1,462,275 | | | $ | 1,118,499 | |
Divested operations | | | — | | | | 1,398 | | | | — | | | | 8,550 | |
Net sales | | $ | 550,601 | | | $ | 383,868 | | | $ | 1,462,275 | | | $ | 1,127,049 | |
Operating income (expense): | | | | | | | | | | | | | | | | |
Envelopes, forms and labels | | $ | 32,560 | | | $ | 25,774 | | | $ | 85,091 | | | $ | 59,525 | |
Commercial printing | | | 7,605 | | | | 6,583 | | | | 31,189 | | | | 789 | |
Corporate | | | (10,119 | ) | | | (7,329 | ) | | | (28,000 | ) | | | (19,746 | ) |
Total operating income | | | 30,046 | | | | 25,028 | | | | 88,280 | | | | 40,568 | |
(Gain) loss on sale of non-strategic businesses | | | (189 | ) | | | — | | | | (189 | ) | | | 1,849 | |
Interest expense, net | | | 25,283 | | | | 13,939 | | | | 63,091 | | | | 47,013 | |
Loss on early extinguishment of debt | | | 51 | | | | — | | | | 9,256 | | | | 32,744 | |
Other (income) expense, net | | | 899 | | | | 102 | | | | 2,068 | | | | (382 | ) |
Income (loss) from continuing operations before income taxes | | | 4,002 | | | | 10,987 | | | | 14,054 | | | | (40,656 | ) |
Income tax expense | | | 160 | | | | 1,697 | | | | 4,698 | | | | 4,704 | |
Income (loss) from continuing operations | | | 3,842 | | | | 9,290 | | | | 9,356 | | | | (45,360 | ) |
Income (loss) from discontinued operations, net of taxes | | | (810 | ) | | | 2,326 | | | | 15,142 | | | | 136,083 | |
Net income | | $ | 3,032 | | | $ | 11,616 | | | $ | 24,498 | | | $ | 90,723 | |
Income (loss) per share - basic: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | | $ | 0.18 | | | $ | 0.18 | | | $ | (0.85 | ) |
Discontinued operations | | | (0.01 | ) | | | 0.04 | | | | 0.28 | | | | 2.55 | |
Net income | | $ | 0.06 | | | $ | 0.22 | | | $ | 0.46 | | | $ | 1.70 | |
Income (loss) per share - diluted: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | | $ | 0.17 | | | $ | 0.17 | | | $ | (0.85 | ) |
Discontinued operations | | | (0.01 | ) | | | 0.04 | | | | 0.28 | | | | 2.55 | |
Net income | | $ | 0.06 | | | $ | 0.21 | | | $ | 0.45 | | | $ | 1.70 | |
34
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
Net sales | | $ | 522,705 | | | $ | 550,601 | | | $ | 1,581,534 | | | $ | 1,462,275 | |
Operating income (loss): | | | | | | | | | | | | | | | | |
Envelopes, forms and labels | | | 35,947 | | | | 30,225 | | | | 93,807 | | | | 80,712 | |
Commercial printing | | | 23,056 | | | | 7,605 | | | | 47,598 | | | | 31,189 | |
Corporate | | | (10,827 | ) | | | (10,119 | ) | | | (34,098 | ) | | | (28,000 | ) |
Total operating income | | | 48,176 | | | | 27,711 | | | | 107,307 | | | | 83,901 | |
Gain on sale of non-strategic business | | | — | | | | (189 | ) | | | — | | | | (189 | ) |
Interest expense, net | | | 26,795 | | | | 25,283 | | | | 79,948 | | | | 63,091 | |
Loss (gain) on early extinguishment of debt | | | (371 | ) | | | 51 | | | | 3,871 | | | | 9,256 | |
Other expense (income), net | | | (695 | ) | | | 899 | | | | 429 | | | | 2,065 | |
Income from continuing operations before income taxes | | | 22,447 | | | | 1,667 | | | | 23,059 | | | | 9,678 | |
Income tax expense (benefit) | | | 10,060 | | | | (844 | ) | | | 10,349 | | | | 2,818 | |
Income from continuing operations | | | 12,387 | | | | 2,511 | | | | 12,710 | | | | 6,860 | |
(Loss) income from discontinued operations, net of taxes | | | (59 | ) | | | (810 | ) | | | (1,114 | ) | | | 15,142 | |
Net income | | $ | 12,328 | | | $ | 1,701 | | | $ | 11,596 | | | $ | 22,002 | |
Income (loss) per share—basic: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.23 | | | $ | 0.04 | | | $ | 0.24 | | | $ | 0.13 | |
Discontinued operations | | | — | | | | (0.01 | ) | | | (0.02 | ) | | | 0.28 | |
Net income | | $ | 0.23 | | | $ | 0.03 | | | $ | 0.22 | | | $ | 0.41 | |
| | | | | | | | | | | | | | | | |
Income (loss) per share—diluted: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.23 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.12 | |
Discontinued operations | | | — | | | | (0.01 | ) | | | (0.02 | ) | | | 0.28 | |
Net income | | $ | 0.23 | | | $ | 0.03 | | | $ | 0.21 | | | $ | 0.40 | |
Net Sales
Net sales increased $166.7decreased $27.9 million in the third quarter of 2007,2008, as compared to the third quarter of 2006.2007. This increasedecrease was primarily due to the $195.5 million of sales generated by the 2007 Acquisitions in the third quarter of 2007, which includes the impact of sales changes for work transitioned primarily from the two plants that we closed as a result of the ColorGraphics acquisition, with no corresponding amounts in the third quarter of 2006. This increase was offset in part by lower sales from our envelopes, forms and labels segment of $13.1 million and from $15.6 million of lower sales from our commercial printing segment. See Segment Operations below forsegment of $29.8 million, primarily as a detailed discussionresult of lower volumes due to general economic conditions and plant closures, partially offset by price increases net of changes in product mix and the primary factors affecting$7.7 million of sales generated from the changeintegration of Rex, which was not included in our net sales by reportable segment.
results in the third quarter of 2007. Net sales for the nine months ended September 30, 200727, 2008 increased $335.2$119.3 million, as compared to the nine months ended September 30, 2006.29, 2007. This increase was primarily due to the $406.0$239.7 million of sales generated byfrom the integration of Rex and the 2007 Acquisitions into our operations, for which Rex was not included in our results in the first nine months of 2007 with no corresponding amounts in the first nine months of 2006 and the additional sales generated by Rx Label Technology Corporation, which we refer to as Rx, in 2007 since it was notAcquisitions were included in our results for less than a full nine month period in 2006.2007. This increase was partially offset in part by lower sales from our commercial printing segment of $42.0 million and lower sales from our envelopes, forms and labels segmentsegments of $28.8 million.$87.7 million and $32.7 million, respectively, primarily due to plant closures and lower volumes due to general economic conditions, partially offset by price increases net of changes in product mix. See Segment Operations below for a more detailed discussion of the primary factors affecting the change in our net sales by reportable segment.
Operating Income
Operating income increased $5.0$20.5 million in the third quarter of 2007,2008, as compared to the third quarter of 2006.2007. This increase was primarily due to $13.6(i) decreased restructuring and impairment charges of $13.4 million, (ii) lower selling, general and administrative expenses of operating income generated by$5.2 million primarily due to our cost savings programs and (iii) increased gross margins of $1.3 million primarily due to the 2007 Acquisitionsacquisition of Rex, which was not included in our results in the third quarter of 2007 and their integration intoCommercial Envelope, which was included in our operations, with no corresponding amounts inresults for only a portion of the third quarter of 2006,2007 and $9.8 million of increased operating income primarily resulting from our cost savings initiatives. Theseprograms, offset in part by higher manufacturing costs primarily due to material price increases and higher distribution costs and lower gross margins due to plant closures.
Operating income for the nine months ended September 27, 2008 increased $23.4 million, as compared to the nine months ended September 29, 2007. This increase was primarily due to (i) increased gross margins of $29.5 million primarily due to the acquisition of Rex and the 2007 Acquisitions, for which Rex, was not included in our results in 2007 and for which the 2007 Acquisitions were included in our results for less than a full nine month period in 2007 and our cost savings programs, offset in part by higher manufacturing costs primarily due to material price increases and higher distribution costs and lower gross margins due to plant closures, and (ii) decreased restructuring, impairment and other charges of $10.0 million. This increase was partially offset by increased restructuringhigher selling, general and impairment chargesadministrative expenses of $15.6$16.6 million primarily relateddue to the integrationacquisition of Rex and the 2007 Acquisitions, for which Rex, was not included in our results in 2007 and plant closures.for which the 2007 Acquisitions were included in our results for less than a full nine month period in 2007, offset in part by our cost savings programs. See Segment Operations below for a more detailed discussion of the primary factors for our changes in operating income by reportable segment.
Operating income for the nine months ended September 30, 2007 increased $47.7 million, as compared to the nine months ended September 30, 2006. This increase was primarily due to $27.6 million of operating income generated by the 2007 Acquisitions in the nine months ended of 2007 with no corresponding amounts in the first nine months of 2006, and the additional operating income generated by Rx since it was not included in our results for a full nine month period in 2006, $25.1 million of increased operating income primarily resulting from our cost savings initiatives. See Segment Operations below for a more detailed discussion of the primary factors for our changes in operating income by reportable segment.
Loss on Sale of Non-Strategic Businesses. During the nine months ended September 30, 2006, we sold two small non-strategic commercial printing businesses and recorded a $1.8 million loss on sale.
Interest Expense, Net.Expense. Interest expense increased $11.3$1.5 million to $26.8 million in the third quarter of 2008, as compared to $25.3 million in the third quarter of 2007, as compared to $13.9 million in the third quarter of 2006, primarily due to the additional debt we incurred to finance the 2007 Acquisitions. This increase wasRex and Commercial Envelope acquisitions, partially offset in part by lower interest expense resulting from reduced interest rates from amending and refinancing our senior credit facilities in March 2007.rates. Interest expense in the third quarter of 2007 reflects2008 reflected average outstanding debt of approximately $1.4 billion and a weighted average interest rate of 7.3%, as compared to average outstanding debt of approximately $1.3 billion and a weighted average interest rate of 7.5%, as compared to average outstanding debt of $706.5 million and a weighted average interest rate of 7.7% in the third quarter of 2006.2007.
Interest expense increased $16.1$16.9 million to $63.1$79.9 million during the first nine months of 2007, as compared to $47.02008, from $63.1 million in the first nine months of 2006,2007, primarily due to the additional debt we incurred to finance the 2007 Acquisitions. This increase wasacquisitions, offset in part by lower interest expense resulting from reduced interest rates amending and refinancing our senior credit facilities in March 2007.rates. Interest expense in the first nine months of 2007 reflects2008 reflected average outstanding debt of approximately $1.4 billion and a weighted average interest rate of 7.2%, compared to the average outstanding debt of approximately $1.1 billion and a weighted average interest rate of 7.5%, compared to the average outstanding debt of $733.7 million and a weighted average interest rate of 8.3% during the first nine months of 2006.
We expect higher interest expense for the remainder of 2007 due to our increased debt level resulting from the 2007 Acquisitions. See Long-Term Debt below and Note 9 to the condensed consolidated financial statements included herein.
2007.
Loss on Early Extinguishment of Debt. In May 2007, We incurred a loss on the early extinguishment of debt of $3.9 million in the first nine months of 2008. This loss primarily resulted from the conversion of the $175.0 million senior unsecured loan due 2015, which we retiredrefer to as the Senior Unsecured Loan, and the issuance of the $175.0 million 10½% senior notes, due 2016, which we refer to as the 10½% Notes in the second quarter of 2008.
We recorded a loss on early extinguishment of debt of approximately $9.3 million in the first nine months of 2007. This loss resulted from retiring our remaining 9⅝% Senior Notessenior notes due 2012, which we refer to as the 9⅝% Senior Notes in the second quarter of 2007 and incurred a loss on early extinguishment of debt of approximately $0.5 million. On March 7, 2007, in connection with the Cadmus acquisition and
the refinancing of our existing $525 million senior secured credit facilities, which we refer to as the Amended Credit Facilities we incurred a loss on early extinguishment of debt of approximately $8.4 million. In addition,and as a result of the tender offer for and repayment on March 19, 2007 of $20.9 million of Cadmus’ 8⅜% Senior Subordinated Notes due 2014, which we refer to as the 8⅜% Notes we recorded a loss on early extinguishmentin the first quarter of debt of approximately $0.3 million. See Long-Term Debt below and Note 9 to the condensed consolidated financial statements included herein.2007.
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 9 to the condensed consolidated financial statements included herein.Income Taxes
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | (in thousands) | | | (in thousands) | |
Income tax expense (benefit) for U.S. operations | | $ | 9,955 | | | $ | (628 | ) | | $ | 9,959 | | | $ | 2,337 | |
Income tax expense (benefit) for foreign operations | | | 105 | | | | (216 | ) | | | 390 | | | | 481 | |
Income tax expense (benefit) | | $ | 10,060 | | | $ | (844 | ) | | $ | 10,349 | | | $ | 2,818 | |
Effective income tax rate | | | 44.8 | % | | | (50.6) | % | | | 44.9 | % | | | 29.1 | % |
| | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2006 | | | 2007 | | 2006 | |
| | (in thousands) | | | | (in thousands) | |
| | | | | | | | | | | | | |
Income tax expense for U.S. operations | $ | 376 | | $ | 1,680 | | | $ | 4,217 | | $ | 4,638 | |
Income tax expense for foreign operations | | (216 | ) | | 17 | | | | 481 | | | 66 | |
Income tax expense | $ | 160 | | $ | 1,697 | | | $ | 4,698 | | $ | 4,704 | |
Effective income tax rate | | 4.0 | % | | 15.4 | % | | | 33.4 | % | | (11.6 | )% |
In the third quarter of 2007 and 2006, we hadOur income tax expense of $0.2 million and $1.7 million, respectively, which primarily relates to taxes on our domestic operations. Our effective tax rate for all periods in the third quarter of2008 and 2007 was lowerhigher than the federal statutory rate, primarily due to the decrease in income tax expense resulting from the finalization of our 2006 income tax returns.
In each of the nine month periods ended September 30, 2007state taxes and 2006, we had income tax expense of $4.7 million which primarily relates to taxes on our domestic operations. Our effective tax rate in the nine months ended September 30, 2007, was lower than the statutory rate primarily due to the decrease in income tax expense resulting from the finalization of our 2006 income tax returns.other permanent items.
We assess the recoverability of our deferred tax assets and, based upon this assessment, record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the more“more likely than notnot” recognition criteria in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We consider our recent operating results and anticipated future taxable income in assessing the need for aour valuation allowance. As of September 30, 2007,27, 2008, the total valuation allowance on our net U.S. deferred tax assets was approximately $63.2$30.8 million. There is a reasonable possibility that within the next twelve months we may decrease our liability for uncertain tax positions by approximately $6.8 million due to the expiration of certain statute of limitations.
Income (Loss) from Discontinued Operations, Net of Taxes. Income from discontinued operations, fornet of taxes, in the nine months ended September 30,29, 2007 includes the $16.0included a $15.1 million gain, net of taxes of $10.2 million, on the sale of our remaining interest in the Supremex Index Fund, which we refer to as the Fund, on March 13, 2007 and equity income related to our retained interest inof the Fund from January 1, 2007 through March 13, 2007. Income from discontinued operations for the quarter ended September 30, 2006 includes equity income pertaining to our retained interest in the Fund. Discontinued operations for the nine months ended September 30, 2006 primarily represents the revenues and expenses of Supremex and certain other assets sold to the Fund on March 31, 2006 and does not include an allocation of interest expense on our debt. The 2006 nine month results include the gain on the sale of Supremex and certain other assets of $126.4 million. In 2006, the results of discontinued operations are for the period from January 1, 2006 to March 31, 2006, the date of the sale, and include equity income from April 1, 2006 through September 30, 2006 pertaining to our retained interest. See Note 4 to the condensed consolidated financial statements included herein.
Segment Operations
Our Chief Executive Officer monitors the performance of the ongoing operations of our two reportable segments. We assess performance based on division net sales and operating income. The summaries of net sales and operating income of our two reportable segments are presented to show each segment without thebelow.
Envelopes, Forms and Labels
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | (in thousands) | | | (in thousands) | |
| | $ | 224,616 | | | $ | 222,671 | | | $ | 690,630 | | | $ | 647,074 | |
| | $ | 35,947 | | | $ | 30,225 | | | $ | 93,807 | | | $ | 80,712 | |
| | | 16.0 | % | | | 13.6 | % | | | 13.6 | % | | | 12.5 | % |
Restructuring and impairment charges | | $ | 2,244 | | | $ | 4,134 | | | $ | 4,766 | | | $ | 9,808 | |
Segment Net Sales
Segment net sales for our envelopes, forms and labels segment increased $1.9 million, or 0.9%, in the third quarter of 2008, as compared to the third quarter of 2007. This increase was primarily due to (i) the $12.8 million of sales generated from the integration of Commercial Envelope into our operations in 2008, including the impact of sales changes for work transitioned in from other legacy plants, as Commercial Envelope was included in our results for only a portion of the third quarter of 2007, and (ii) higher sales of approximately $10.7 million, primarily due to price increases, including material price increases that are generally passed onto our envelope customers, net of changes in product mix. This increase was offset in part by lower sales volume of approximately $21.6 million, primarily due to general economic conditions which have had a significant impact on the high color direct mail envelope business and the closing of plants in connection with the integration of Printegra into our operations.
Segment net sales for our envelopes, forms and labels segment increased $43.6 million, or 6.7%, for the first nine months of 2008, as compared to the first nine months of 2007. This increase was primarily due to (i) the $76.4 million of sales generated from the integration of Commercial Envelope and Printegra into our operations in 2008, including the impact of sales changes for work transitioned into these acquired operations from other legacy plants, as Printegra and Commercial Envelope were included in our results for less than a full nine month period in 2007 and (ii) higher sales of approximately $28.3 million, primarily due to price increases, including material price increases that are generally passed onto our envelope customers, net of changes in product mix. This increase was offset in part by lower sales volume of approximately $61.1 million, primarily due to general economic conditions which have had a significant impact on the high color direct mail envelope business and the closing of plants in connection with the integration of Printegra and Commercial Envelope into our operations.
Segment Operating Income
Segment operating income for our envelopes, forms and labels segment increased $5.7 million, or 18.9%, in the third quarter of 2008, as compared to the third quarter of 2007. This increase was primarily due to (i) increased gross margins of $3.5 million, primarily due to the Commercial Envelope acquisition, which was included for only a portion of the third quarter of 2007 and our cost savings programs, offset in part by higher material costs primarily due to material price increases and higher distribution costs, (ii) decreased restructuring and impairment charges of $1.9 million and lower selling, general and administrative expenses of $0.9 million primarily due to our cost reduction programs, offset in part by the Commercial Envelope acquisition, which was included in our results for less than a full three month period in 2007. This increase was partially offset by higher amortization expense of $0.6 million primarily due to the Commercial Envelope acquisition.
Segment operating income for our envelopes, forms and labels segment increased $13.1 million, or 16.2%, for the first nine months of 2008, as compared to the first nine months of 2007. This increase was primarily due to
(i) increased gross margins of divested$16.8 million primarily due to the acquisition of Commercial Envelope and Printegra, which were included in our results for less than a full nine month period in 2007 and our cost savings programs, offset in part by higher material costs primarily due to material price increases and higher distribution costs and (ii) decreased restructuring and impairment charges of $5.0 million. This increase was partially offset by (i) higher selling, general and administrative expenses of $6.8 million primarily due to the acquisition of Commercial Envelope and Printegra, which were included in our results for less than a nine month period in 2007, offset in part by our cost reduction programs and (ii) higher amortization expense of $1.9 million primarily due to the acquisition of Commercial Envelope and Printegra.
Commercial Printing
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | (in thousands) | | | (in thousands) | |
| | $ | 298,089 | | | $ | 327,930 | | | $ | 890,904 | | | $ | 815,201 | |
| | $ | 23,056 | | | $ | 7,605 | | | $ | 47,598 | | | $ | 31,189 | |
| | | | % | | | | % | | | | % | | | 3.8 | % |
Restructuring and impairment charges | | $ | 4,395 | | | $ | 15,996 | | | $ | 10,082 | | | $ | | |
Segment Net SalesSegment net sales for our commercial printing segment decreased $29.8 million, or 9.1%, in the third quarter of 2008, as compared to the third quarter of 2007. This decrease was primarily due to lower sales (i) of approximately $11.5 million resulting from plant closures in 2007 and (ii) of approximately $26.0 million from pricing pressures, volume declines and changes in product mix, primarily due to general economic conditions, offset in part by higher sales due to material price increases. This decrease was partially offset by $7.7 million of sales generated from the integration of Rex into our operations in 2008, as applicable,Rex was not included in our results in the third quarter of 2007.
Segment net sales for our commercial printing segment increased $75.7 million, or 9.3%, in the first nine months of 2008, as compared to the first nine months of 2007. This increase was primarily due to the $163.4 million of sales generated from the integration of Rex, ColorGraphics and Cadmus into our operations in 2008, including the impact of sales changes for work transitioned into these acquired operations from other legacy plants, including two plants we closed in 2007, as Rex was not included in our results in the first nine months of 2007 and Cadmus and ColorGraphics were included in our results for less than a full nine month period in 2007. This increase was partially offset by lower sales (i) of approximately $39.8 million resulting from other plant closures in 2007 and (ii) of approximately $47.9 million from pricing pressures, volume declines and changes in product mix, primarily due to show thegeneral economic conditions, offset in part by higher sales due to material price increases and foreign currency fluctuations.
Segment Operating Income
Segment operating income for our commercial printing segment increased $15.5 million, or 203.2%, in the third quarter of each reportable segment. See Note 142008, as compared to the condensed consolidated financial statementsthird quarter of 2007. This increase was primarily due to (i) decreased restructuring and impairment charges of $11.6 million (ii) lower selling, general and administrative expenses of $6.0 million, primarily due to our cost savings programs, offset in part by the Rex acquisition, which was not included herein.in our results in the third quarter of 2007 and (iii) lower amortization expense of $1.1 million. This increase was offset in part by decreased gross margins of $3.2 million, primarily due to higher manufacturing costs due to material price increases and higher distribution costs and lower gross margins due to plant closures, offset in part by gross margins generated by Rex, as Rex was not included in our results in the third quarter of 2007.
Segment operating income for our commercial printing segment increased $16.4 million, or 52.6%, in the first nine months of 2008, as compared to the first nine months of 2007. This increase was primarily due to (i) lower restructuring and impairment charges of $11.8 million, (ii) increased gross margins of $9.1 million, primarily due to the acquisition of Rex, ColorGraphics and Cadmus, as Rex was not included in our results in the first nine months of 2007 and for which Cadmus and ColorGraphics were included in our results for less than a full nine month period in 2007, offset in part by higher manufacturing costs due to material price increases and higher distribution costs and lower gross margins due to plant closures and (iii) lower amortization expense of $2.4 million. This increase was offset in part by higher selling, general and administrative expenses of $6.9 million, primarily due to the acquisition of Rex, ColorGraphics and Cadmus, as Rex was not included in our results in the first nine months of 2007 and for which Cadmus and ColorGraphics were included in our results for less than a full nine month period in 2007, offset in part by our cost savings programs.
Corporate Expenses. Corporate expenses include the costs of running our corporate headquarters. Corporate expenses in the third quarter of 2008 were slightly higher than the third quarter of 2007. Corporate expenses were higher in the nine months ended September 27, 2008, as compared to the nine months ended September 29, 2007, primarily due to the $6.7 million non-recurring charge incurred for professional fees in connection with the internal review conducted by our audit committee.
Restructuring, Impairment and ImpairmentOther Charges. We continue to execute on In the fourth quarter of 2007, we completed our cost savings and restructuring plan initiated in September 2005, including the consolidation of purchasing activities, the rationalization of our manufacturing platform, corporate and field human resources reductions, implementation of company-wide purchasing initiatives and streamlining of information technology infrastructure. In addition, in 2007 we are implementingimplemented cost savings and integration initiatives related to the 2007 Acquisitions and anticipate substantially completing the integration of those operations by early 2008. See Note 10 to the condensed consolidated financial statements included herein.in 2009. As of September 30, 2007,27, 2008, our total restructuring liability was $20.0$16.4 million.
In the third quarter of 2008, we incurred $6.9 million of restructuring and impairment charges, which included $3.9 million of employee separation costs, asset impairment charges of $0.8 million, equipment moving expenses of $0.4 million, lease termination expenses of $0.6 million, the decrease of a pension withdrawal liability of $(0.2) million and building clean-up and other expenses of $1.4 million. During the threenine months ended September 30,27, 2008, we incurred $22.0 million of restructuring, impairment and other charges, which included a $6.7 million non-recurring charge for professional fees related to the internal review initiated by our audit committee, $7.9 million of employee separation costs, asset impairment charges, net of $1.5 million, equipment moving expenses of $1.0 million, lease termination expenses of $2.0 million, the decrease of a pension withdrawal liability of $(0.2) million and building clean-up and other expenses of $3.2 million.
In the third quarter of 2007, we incurred $20.3 million of restructuring and impairment charges, which included $4.5 million of employee separation costs, $7.0 million of asset impairment charges, net of $7.0 million, equipment moving expenses of $1.1 million, lease termination expenses of $5.2 million, and building clean-up and other exit costsexpenses of $2.5 million. During the nine months ended September 30,29, 2007, we incurred $32.2$32.1 million of restructuring and impairment charges, which included $8.5 million of employee separation costs, $10.3 million of asset impairment charges, net of $10.3 million, equipment moving expenses of $2.2 million, lease termination expenses of $5.1 million, a pension withdrawal liability of $1.8 million lease terminationand building clean-up and other expenses of $5.1 million, and other exit costs of $4.3 million. We anticipate additional restructuring and impairment charges in the fourth quarter of 2007.
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 expenses of $3.5 million and other exit costs of $5.2 million.
Envelopes, Forms and Labels
| | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2007 | | 2006 | | | 2007 | | 2006 | |
| | (in thousands) | | | | (in thousands) | |
| | | | | | | | | | | | | |
Segment net sales | $ | 222,671 | | $ | 198,804 | | | $ | 647,074 | | $ | 578,559 | |
Segment operating income | $ | 32,560 | | $ | 25,774 | | | $ | 85,091 | | $ | 59,525 | |
Operating income margin | | 14.6 | % | | 13.0 | % | | | 13.2 | % | | 10.3 | % |
Restructuring and impairment charges | $ | 4,134 | | $ | 1,004 | | | $ | 9,808 | | $ | 15,002 | |
Segment Net Sales
Segment net sales for our envelopes, forms and labels segment increased $23.9 million, or 12.0%, in the third quarter of 2007, as compared to the same period in 2006. This increase was primarily due to the $37.0 million of sales generated by Commercial Envelope and Printegra in 2007, with no corresponding amounts in the third quarter of 2006. This increase was offset in part by: (1) lower sales volume of approximately $7.0 million primarily from our envelope operations due to the reorganization and closing of operations and the retirement of older less efficient assets to maximize profitability, a decline in the overall market due in part to the U.S. Postal Service’s rate increases in the middle of the second quarter of 2007, the closure of a forms plant in connection with the integration of Printegra’s operations, and an overall decline in traditional documents business, mainly as a result of customers’ improved ability to print high quality documents on their own, offset in part by higher sales volume from the office product retail superstore market due to a shift toward generic products from custom products and (2) lower pricing and product mix of approximately $6.1 million, primarily from the office product retail superstore market due to a shift toward generic products from custom products.
Segment net sales for our envelopes, forms and labels segment increased $68.5 million, or 11.8%, in the first nine months of 2007, as compared to the same period in 2006. This increase was primarily due to $97.3 million of sales generated by Commercial Envelope and Printegra in 2007, with no corresponding amounts in the first nine months of 2006 and additional sales generated by Rx, which was not included in our results for a full nine month period in 2006. This increase was offset in part by: (1) lower sales volume of approximately $21.2 million, primarily from our envelope operations due to the reorganization and closing of operations and the retirement of less efficient assets to maximize profitability, a decline in the overall market due in part to the U.S. Postal Service’s rate increases in the middle of the second quarter of 2007, the closure of a forms plant in connection with the integration of Printegra’s operations, and an overall decline in the traditional documents business, mainly as a result of customers’ improved ability to print high quality documents on their own, offset in part by higher sales volume from the office product retail superstore market due to a shift toward generic products from custom products, and (2) lower pricing and product mix of approximately $7.6 million, primarily from our envelope operations and the office product retail superstore market due to a shift toward generic products, offset in part by improvement in the product mix from our documents operation to higher value added products.
Segment Operating Income
Segment operating income for our envelopes, forms and labels segment increased $6.8 million, or 26.3%, in the third quarter of 2007, as compared to 2006. This increase was primarily due to $4.0 million of operating income generated by Commercial Envelope and Printegra in 2007, with no corresponding amounts in the third quarter of 2006, a $4.0 million increase in gross margin and reduced selling, general and administrative expenses of $1.9 million from plant consolidations and other cost reduction programs. These increases were partially offset by increased restructuring and impairment charges of $3.1 million primarily due to the costs of two plant closures during 2007 resulting from the integration of the Commercial Envelope and Printegra acquisitions.
Segment operating income for our envelopes, forms and labels segment increased $25.6 million, or 43.0%, in the first nine months of 2007, as compared to 2006. This increase was primarily due to $10.6 million of operating income generated by Commercial Envelope and Printegra in 2007, with no corresponding amounts in the first nine months of 2006 and additional operating income generated by Rx since it was not included in our results for a full nine month period in 2006, reduced selling, general and administrative expenses of $9.1 million and increased gross margins of $0.7 million from plant consolidations and other cost reduction programs and reduced restructuring and impairment charges of $5.2 million.
Commercial Printing
| Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2007 | | 2006 | | | 2007 | | 2006 | |
| | (in thousands) | | | | (in thousands) | |
| | | | | | | | | | | | | |
Segment net sales | $ | 327,930 | | $ | 185,064 | | | $ | 815,201 | | $ | 548,490 | |
Divested operations | | — | | | (1,398 | ) | | | — | | | (8,550 | ) |
Division net sales | $ | 327,930 | | $ | 183,666 | | | $ | 815,201 | | $ | 539,940 | |
Segment operating income | $ | 7,605 | | $ | 6,583 | | | $ | 31,189 | | $ | 789 | |
Operating income margin | | 2.3 | % | | 3.6 | % | | | 3.8 | % | | 0.1 | % |
Restructuring and impairment charges | $ | 15,996 | | $ | 3,666 | | | $ | 21,922 | | $ | 19,593 | |
Operating income (loss) from divested operations | $ | — | | $ | 53 | | | $ | — | | $ | (1,316 | ) |
Division Net Sales
Division net sales for our commercial printing segment increased $144.3 million, or 78.5%, in the third quarter of 2007, as compared to 2006. This increase was primarily due to the $158.5 million of
sales generated by ColorGraphics and Cadmus in 2007, including the impact of sales changes for work transitioned primarily from two plants that we closed as a result of the ColorGraphics acquisition, with no corresponding amounts in the third quarter of 2006. This increase was offset by the impact of closed plants in 2007 and 2006 of approximately $7.4 million and lower sales due to pricing and product mix, partially offset by increased sales volume, paper price increases and foreign currency fluctuations.
Division net sales for our commercial print segment increased $275.3 million, or 51.0%, in the first nine months of 2007, as compared to 2006. This increase was primarily due to the $308.7 million of sales generated by ColorGraphics and Cadmus in 2007, including the impact of sales changes for work transitioned primarily from two plants that we closed as a result of the ColorGraphics acquisition, with no corresponding amounts in the first nine months of 2006. This increase was offset by the impact of closed plants in 2007 and 2006 of approximately $26.6 million and lower sales due to pricing and product mix and lower sales volume, partially offset by paper price increases and foreign currency fluctuations.
Segment Operating Income
Segment operating income for our commercial printing segment increased $1.0 million, or 15.5%, in the third quarter of 2007, as compared to 2006. This increase was primarily due to $9.6 million of operating income generated by ColorGraphics and Cadmus during 2007, with no corresponding amounts in 2006 and improved gross margins of approximately $2.0 million and reduced selling, general and administrative expenses of approximately $1.7 million from our cost reduction programs. These increases were offset in part by higher restructuring and impairment charges of $12.3 million, primarily from the closure of four commercial printing plants during the third quarter of 2007, substantially due to the integration of the ColorGraphics and Cadmus acquisitions.
Segment operating income for our commercial printing segment increased $30.4 million, or 3,853% in the first nine months of 2007, as compared to the same period in 2006. This increase was primarily due to: (1) $17.0 million of operating income generated by ColorGraphics and Cadmus during 2007, with no corresponding amounts in 2006, (2) improved gross margins of approximately $7.3 million and reduced selling, general and administrative expenses of $4.6 million from our cost reduction programs at our ongoing operations, and (3) reduced costs of approximately $3.8 million from plants we closed or divested in 2006. These increases were partially offset by increased restructuring and impairment charges of $2.3 million.
Corporate Expenses
Corporate expenses include the costs of running our corporate headquarters. Corporate expenses were higher for the three and nine months ended September 30, 2007, as compared to the three and nine months ended September 30, 2006, primarily due to increased compensation expense, including the expense recorded under Statement of Financial Accounting Standards No. 123(R), Share-Based Payment and the increased cost of certain back-office functions due in part to our recent acquisitions. See Note 2 to the condensed consolidated financial statements included herein.
Liquidity and Capital Resources
Net Cash Provided by (Used in) Continuing Operating Activities. Net cash provided by continuing operating activities was $60.0$149.4 million in the first nine months of 2008, which was primarily due to net income adjusted for non-cash items of $100.4 million and a decrease in our working capital of $54.5 million. The decrease in our working capital primarily resulted from a decrease in receivables primarily due to the timing of sales and collections from our customers, the timing of interest payments on our debt and an increase in accounts payable primarily due to the timing of payments to our vendors, offset in part by lower accrued compensation and other related liabilities due to headcount reductions.
Net cash provided by continuing operating activities was $59.2 million in the first nine months of 2007, which was primarily due to net income adjusted for non-cash items of $100.1$97.6 million, offset in part by an increase in our working capital of $35.2$33.5 million. The increase in our working capital primarily resulted from an increase in inventories primarily due to the timing of work performed for our customers, an increase in receivables primarily due to the timing of collections and a decrease in amounts owed to customers primarily due to the timing of payments, partially offset by the timing of interest payments on our debt.
Net Cash Provided by Discontinued Operating Activities. Represents the net cash dividends from the Fund through March 13, 2007.
Net Cash Used in Investing Activities.Net cash used in continuing operatinginvesting activities was $16.5$70.3 million in the first nine months of 2006, which was2008, primarily due to an increase in our workingresulting from the cost of business acquisitions of $47.2 million, primarily for Rex and capital expenditures of $44.3$37.8 million, offset in part by net income adjusted for non-cash items$18.3 million of $33.6 million. The increase in our working capital primarily resultedcash proceeds from the timingsale of payments to our vendors.
Net Cash Provided by Discontinued Operating Activities. Represents the net cash provided from the cash dividends received from the Fundproperty, plant and the operations of Supremex through March 31, 2006.equipment.
Net Cash (Used in) Provided by Investing Activities.Net cash used in investing activities was $577.2 million in the first nine months of 2007, primarily resulting from the $627.1 million cost of the 2007 Acquisitions and capital expenditures of $25.2 million, offset in part by $73.6 million of cash proceeds from the sale of our remaining interest in the Fund.
Net Cash (Used in) Provided by Financing Activities.Net cash provided by investingused in financing activities was $148.7$81.1 million in the first nine months of 2006,2008, primarily resulting from the cash proceeds of $211.5 million from the saleconversion of our majority interest in Supremex,$175.0 million Senior Unsecured Loan, net repayments of our revolving credit facility of $65.2 million, payments of our other long-term debt of $16.5 million, our term loans of $5.4 million and $5.3 million for debt issuance costs on the issuance of our 10½% Notes, which was offset in part by the $49.4proceeds from the issuance of our $175.0 million acquisition cost10½% Notes and $11.3 million of Rx and capital expendituresborrowings of $15.7 million.our other long-term debt.
Net Cash Provided by (Used in) Financing Activities.Net cash provided by financing activities was $516.8 million in the first nine months of 2007, primarily due to our debt-financed acquisitions of Cadmus, ColorGraphics and Commercial Envelope and our refinancing (see Long-Term Debt below) using proceeds from our Term Loansterm loans of $720.0 million, a $175.0 million Senior Unsecured Loansenior unsecured loan and net borrowings under our Revolving Credit Facilityrevolving credit facility of $92.5 million, offset in part by the repayment of: (i) our Term Loanterm loan B of $324.2 million, (ii) the Cadmus revolving senior bank credit facility of $70.1 million, (iii) $20.9 million of our 8⅜% Notes,notes, (iv) $10.5 million of our 9⅝% Senior Notes,senior notes, (v) $3.1 million of Term Loans,term loans, and (vi) $27.0 million of other long-term debt and $8.0 million of payments of refinancing fees, redemption premiums and expenses on the extinguishment of debt and $5.9 million of debt issuance cost payments in connection with our debt refinancing and the issuance of debt.
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 9⅝% 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 the issuance of our Term Loans of $325.0 million and (iii) net borrowings under our Revolving Credit Facility of $40.0 million, which was used to fund our acquisition of Rx.
Long-Term Debt. Our total outstanding long-term debt, including current maturities, was approximately $1.47$1.4 billion at September 30, 2007, an increase27, 2008, a decrease of $790.1$68.6 million from December 31, 2006.29, 2007. This increasedecrease was primarily due to cash flows provided by operating activities and proceeds from the debt-financed 2007 Acquisitions.sale of assets. As of September 30, 2007,27, 2008, approximately 67%89% of our outstanding debt was subject to fixed interest rates. See the remainderFrom time to time we may seek to retire our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. As of this Long-Term Debt section below and NotesNovember 3, and 9 to the condensed consolidated financial statements included herein.2008, we had approximately $102.6 million of borrowing availability under our revolving credit facility.
10½% Notes
On June 13, 2008, we issued $175.0 million 10½% Notes to Lehman Brothers Commercial Paper, Inc. upon the conversion of our $175.0 million Senior Unsecured Loan
On August 30, 2007, we borrowed $175.0 million under a new eight-year unsecured term loan facility, which we referLoan. The 10½% Notes were then sold to as the Senior Unsecured Loan,qualified institutional buyers in accordance with a group of lenders. Proceeds from the Senior Unsecured Loan along with borrowings from the $200.0 million six-year revolving credit facility, which we refer to as the Revolving Credit Facility, and available cash were used to fund the acquisition of Commercial Envelope, including retiring certain acquired debt,Rule 144A, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act of 1933. We did not receive any net proceeds as a result of this transaction.
The 10½% Notes were issued pursuant to an indenture among us, certain guarantors and U.S. Bank National Association, as trustee. The 10½% Notes pay certain feesinterest semi-annually on February 15 and expenses incurredAugust 15, commencing August 15, 2008. The 10½% Notes have no required principal payments prior to their maturity on August 15, 2016. The 10½% Notes constitute senior unsecured obligations and are guaranteed by us and substantially all of our North American subsidiaries. We can redeem the 10½% Notes, in connectionwhole or in part, on or after August 15, 2012, at redemption prices ranging from 100% to 105¼%, plus accrued and unpaid interest. In addition, at any time prior to August 15, 2011, we may redeem up to 35% of the aggregate principal amount of the notes originally issued at a redemption price of 110½% of the principal amount thereof, plus accrued and unpaid interest with the acquisition.net cash proceeds of certain public equity offerings. Each holder of the 10½% Notes has the right to require us to repurchase such notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest thereon, upon the occurrence of certain events constituting a change in control. The Senior Unsecured Loan has a floating interest rate based on LIBOR plus 4.5%, which was 9.6% on September 30, 2007. The interest rate increases 0.5% quarterly beginning January 2008 up to a maximum interest rate of 11.5%. The Senior Unsecured Loan provides for the conversion by the lenders into senior or senior subordinated exchange notes, which we refer to as the Exchange10½% Notes contains covenants, representations, and warranties substantially similar to theour existing indenture relating to the Company’s
$320.0 million 7⅞% Senior Subordinated Notes, due 2013, which we refer to as the 7⅞% Notes, orand our 8⅜% Notes, and also include a substantially similar indenture. If the Senior Unsecured Loan is converted, the Exchange Notes will bear a fixed rate of interest based on market conditions at the time of conversion. The Senior Unsecured Loan contains covenants, representations, and warranties substantially similar to our existing $925.0 million senior secured credit facilities, which we referdebt to as the Amended Credit Facilities, and includes provisions for an underwriting/purchase agreement and a registration rights agreement relating to the resale of the Exchange Notes.consolidated cash flow covenant.
Term Loans
On July 9, 2007, we increased our then outstanding balance of our seven-year term loan facility due 2013, which we refer to as the Term Loan C, and the delayed-draw term loan facility (collectively with the Term Loan C, which we refer to as the Term Loans), that are part of the Amended Credit Facilities by borrowing an incremental $100.0 million on the existing financial terms and financial covenants. Proceeds from this borrowing along with available cash were used to fund the acquisition of ColorGraphics, including retiring certain acquired debt, and to pay certain fees and expenses incurred in connection with the acquisition.
2007 Debt Amendment and Refinancing
On March 7, 2007, in connection with the Cadmus acquisition, we amended and refinanced our $525.0 million senior secured credit facilities, which we refer to as the Credit Facilities. The Credit Facilities, established in September 2006, were comprised of the Revolving Credit Facility, and a $325.0 million seven-year term loan facility, which we refer to as the Term Loan B. The Credit Facilities were amended by increasing the overall borrowing availability from $525.0 million to $925.0 million to create the Amended Credit Facilities, allowing us to: (1) retire the Term Loan B, (2) acquire Cadmus, including retiring and extinguishing the Cadmus revolving senior bank credit facility which had an outstanding balance of $70.1 million, using the Revolving Credit Facility and a $600.0 million, Term Loan C, and (3) retire any and/or all of the Cadmus 8⅜% senior subordinated notes due 2014, which we refer to as the 8⅜% Notes, tendered to us using a $125.0 million delayed-draw term loan facility. Several of the customary financial covenants within the Amended Credit Facilities, including maximum consolidated leverage ratio and minimum consolidated interest coverage ratio, were modified to provide for the incremental funded debt levels and larger company operations. The Amended Credit Facilities are secured by substantially all of our assets.
Interest Rate Swaps
In March and July 2007, we entered into interest rate swap agreements to hedge interest rate exposure of an additional $125.0 million and $200.0 million, respectively, notional amounts of floating rate debt, increasing our total hedge of our interest rate exposure of notional floating rate debt to $545.0 million. Our hedges of interest rate risk were designated and documented at inception as cash flow hedges and are evaluated for effectiveness at least quarterly. Effectiveness of the hedges is calculated by comparing the fair value of the derivatives to hypothetical derivatives that would be a perfect hedge of floating rate debt. The accounting for gains and losses associated with changes in the fair value of cash flow hedges and the effect on our 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, 2007, we do not anticipate reclassifying any ineffectiveness into our results of operations for the next twelve months.
Cadmus Debt
On March 5, 2007, we commenced a cash tender offer and consent solicitation, which we refer to as the Cadmus Tender Offer, for any and all of the outstanding 8⅜% Notes at total consideration equal to 101.5% of outstanding principal plus any accrued and unpaid interest thereon for 8⅜% Notes validly tendered and not withdrawn by March 16, 2007. Interest on the 8⅜% Notes is payable semi-annually on June 15 and December 15 with no required principal payments prior to maturity on June 15, 2014. In connection with the acquisition of Cadmus, we recorded a $2.8 million increase to the
value of the 8⅜% Notes to record them at their fair value, which is being amortized over the life of the 8⅜% Notes.
On March 19, 2007, we accepted for purchase and paid approximately $20.9 million for the 8⅜% Notes tendered in the Cadmus Tender Offer, using $20.0 million of delayed-draw term loan funding under the Amended Credit Facilities and cash on hand. The merger of Cadmus into Cenveo was a “change of control” of Cadmus under the 8⅜% Notes indenture. On March 23, 2007 and in connection with the foregoing change of control, we extended the scheduled expiration of the Cadmus Tender Offer until April 18, 2007, modified the offer to purchase each 8⅜% Note tendered for a price equal to 101.0% of outstanding principal plus any accrued and unpaid interest, and waived certain consent-related conditions, which we refer to as the Change of Control Offer. On April 23, 2007, we settled payment on all 8⅜% Notes tendered under the Change of Control Offer, and terminated the remaining amount of the delayed-draw term loan facility under the Amended Credit Facilities.
Supplemental Indentures
We entered into supplemental indentures, dated March 7, 2007, July 9, 2007April 16, 2008 and August 30, 200720, 2008 to the indenture dated June 15, 2004, among Cadmus, each of the subsidiary guarantors (as defined therein) and U.S. Bank National Association (as successor trustee to Wachovia Bank, National Association), as trustee, pursuant to which the 8⅜% Notes were issued. These supplemental indentures provide for, among other things, the assumption by us of the obligations of Cadmus under the 8⅜% Notes and such indenture and the addition of: (1) other U.S. subsidiaries of ours, (2) ColorGraphics and its subsidiary and (3) Commercial Envelope and its subsidiaries as guarantors of these notes. Simultaneously, we entered into supplemental indentures, dated March 7, 2007, July 9, 2007April 16, 2008 and August 30, 2007,20, 2008 to the indenture dated February 4, 2004 among us, the guarantors named therein and U.S. Bank National Association, as trustee, pursuant to which our 7⅞% Notes were issued. Additionally, on August 20, 2008 we entered into a supplemental indenture among us, the guarantors named therein and U.S. Bank National Association, as trustee, pursuant to which the 10½% Notes were issued. These supplemental indentures provide for among other things, the addition of: (1) the U.S. subsidiaries of Cadmus, (2) ColorGraphics and its subsidiary and (3) Commercial Envelope and itsacquisition subsidiaries as guarantors of the 8⅜%, 7⅞% and 10½% Notes.
Other DebtInterest Rate Swaps
Other debt included approximately $37.2 million of equipment loans assumed in the acquisition of Cadmus, ColorGraphics and Commercial Envelope of which $24.0 millionWe currently have variable interest rates with an average interest rate swap agreements to hedge interest rate exposure of 6.4% and $13.2 million with an average fixed rate of 4.9%, as of September 30, 2007.
9⅝% Senior Notes
On May 4, 2007, we retired the remaining $10.5$595.0 million of our 9⅝% Senior Notes due 2012 for 104.813% of the principal amount plus accrued interest, which was funded with our Revolving Credit Facility. In connection with the retirement of the 9⅝% Senior Notes, we recorded a loss on early extinguishment of debt of $0.5 million, representing premiums paid.notional floating rate debt.
As of September 30, 2007,27, 2008, we were in compliance with all covenants under our debt agreements.
OnAs of September 30, 200727, 2008, we had outstanding letters of credit of approximately $25.4$18.4 million and a de minimis amount of surety bonds related to performance and payment guarantees. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant. We extinguished an outstanding letter of credit of approximately $0.8 million in connection with the debt we retired on April 2, 2007.
Our current credit ratings are as follows:
| | | | Amended | | | | | | Amended8⅜%
Credit FacilitiesNotes
| | | | | | |
Standard & Poor’s | | B+BB- | | BBBB+ | | B-BB- | | B-B | | September 2007B | | October 2008 |
Moody’s | | B1 | | Ba2 | | B2 | | B3 | | B3 | | September 2007June 2008 |
The terms of our existing debt do not have any rating triggers that impact our funding. In connection with our acquisition of Commercial Envelope, and after their review of financing details related to the acquisition, the rating agencies increased the ratings of the Credit Facilities by one level. We do not believe that our current ratings will impact our ability to raise additional capital, should such funds be needed.capital. We expect that internally generated cash flows and the financing available under our Amended Credit Facilitiesamended credit facilities will be sufficient to fund our working capital needs and short-term growth;growth for the next 12 months; however, this cannot be assured.
Contractual Obligations. Contractual obligations disclosed in our Form 10-K increased by approximately $1.29 billion asShare Repurchase Plan. Our Board of Directors authorized a result$15 million share repurchase program of our acquisitionscommon stock, which we refer to as the Share Repurchase Plan. The Share Repurchase Plan is effective for 12 months and may be limited or terminated at any time without prior notice. Share repurchases under the Share Repurchase Plan may be made through open-market and privately negotiated transactions within the governing limits of Printegra, Cadmus, ColorGraphicsour credit agreement and Commercial Envelope as follows: outstanding long-term debt approximately $787.9 million, expected future cash interest paymentsbond indentures. The timing and actual number of shares, if any, that we actually repurchase will depend on the long-term debt approximately $341.1 milliona variety of factors including price, Cenveo and/or regulatory requirements, and additional lease commitments by approximately $83.3 million. See Notes 3 and 9 to the condensed consolidated financial statements included herein.market conditions.
Off-Balance Sheet Arrangements. It is not our business practice to enter into off-balance sheet arrangements. Accordingly, as of September 30, 2007,27, 2008, we do not have any off-balance sheet arrangements.
Guarantees. In connection with the disposition of certain operations, we have indemnified the purchasers for certain contingencies as of the date of disposition. We have accrued the estimated probable cost of these contingencies.
Seasonality
Our commercial printing plants experience seasonal variations. Revenues from annual reports are generally concentrated from February through April. Revenues associated with consumer publications, such as holiday catalogs and automobile brochures,brochures; tend to be concentrated from July through October. Revenues associated with the educational and scholarly market and promotional materials tend to decline in the summer. As a result of these seasonal variations, some of our commercial printing operations operate at or near capacity at certain times throughout the year.
In addition, several envelope market segments and certain segments of the direct mail market experiencehave historically experienced seasonality with a higher percentage of volume of products sold to these markets occurring during the fourth quarter of the calendar year. This seasonality is due to the increase in sales to the direct mail market related to holiday purchases. As a result of these seasonal variations, some of our operations operate at or near capacity at certain times throughout the year.
New Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 1 to our condensed consolidated financial statements included herein.
Available Information
Our Internet address is: www.cenveo.com. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission.SEC. In addition, our earnings conference calls are archived for replay on our website and presentations to securities analysts are also included on our website.
Legal Proceedings
From time to time, we are involved in litigation that we consider to be ordinary and incidental to our business. While the outcome of pending legal actions cannot be predicted with certainty, we believe the outcome of these proceedings will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
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 rate fluctuations and changes in foreign currency exchange rates are managed
through normal operating and financing activities. We do not utilize derivatives for speculative purposes.
Exposure to market risk from changes in interest rates relates primarily to our variable rate debt obligations. The interest rate on suchthis debt is based on the London Interbank Offered Rate or LIBOR plus a margin. At September 30, 2007,27, 2008, we had variable rate debt outstanding of approximately $478.9$156.5 million, for which theafter considering our interest rate was not fixed through a cash flow hedge.swaps. A 1% increase in LIBOR on debt outstanding subject to variable interest rates would increase our annual interest expense and reduce our pre-tax income by approximately $4.8$1.6 million.
We have foreign operations, primarily in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates. For the three months ended September 27, 2008, a uniform 10% strengthening of the U.S. dollar relative to the local currency of our foreign operations would have resulted in a decrease in sales and operating income of approximately $2.1 million and $0.1 million, respectively. For the nine months ended September 27, 2008, a uniform 10% strengthening of the U.S. dollar relative to the local currency of our foreign operations would have resulted in a decrease in sales and operating income of approximately $6.5 million and $0.4 million, respectively. The effects of foreign currency exchange rates on future results would also be impacted by changes in sales levels or local currency prices.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of such period, our disclosure controls and procedures were effective as of September 27, 2008 in order to provide reasonable assurance that information required to be disclosed by usthe Company in the reports that we file or submitits filings under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting made during our most recent fiscalthe quarter ended September 27, 2008 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errorerrors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errorerrors or mistake.mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006,29, 2007, 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.
Exhibit Number | | | Description | |
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2.1 | Agreement of Merger dated as of December 26, 2006 among Cenveo, Inc., Mouse Acquisition Corp. and Cadmus Communications Corporation—incorporated by reference to Exhibit 2.1 to registrant’s current report on Form 8-K filed December 27, 2006. |
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2.2 | Stock Purchase Agreement dated as of July 17, 2007 among Cenveo Corporation, Commercial Envelope Manufacturing Co., Inc. and its shareholders—incorporated by reference to Exhibit 2.1 to registrant’s current report on Form 8-K filed July 20, 2007. |
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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 September 30,March 31, 1997. |
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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 September 30,March 31, 2004. |
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3.3 | Amendment to Articles of Incorporation and Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 20, 2005—incorporated by reference to Exhibit 3.1 to registrant’s current report on Form 8-K filed April 21, 2005. |
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3.4 | Bylaws as amended and restated effective February 22, 2007—incorporated by reference to Exhibit 3.2 to registrant’s current report on Form 8-K filed August 30, 2007. |
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3.5* | Registration Statement on Form S-8 dated September 11, 2008 registering shares under the Cenveo, Inc. 2007 Long-Term Equity Incentive Plan, and filed with the Securities & Exchange Commission on September 11, 2008. |
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3.6* | Registration Statement on Form S-8 dated September 11, 2008 de-registering shares under the Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, and filed with the Securities & Exchange Commission on September 11, 2008. |
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4.1 | 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 7⅞% 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. |
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4.2 | 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 7⅞% 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. |
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4.3 | Supplemental Indenture, dated as of June 21, 2006 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% Senior Subordinated Notes due 2013—incorporated by reference to Exhibit 4.2 to registrant’s current report on Form 8-K filed June 27, 2006. |
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4.4 | Third Supplemental Indenture, dated as of March 7, 2007 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% |
Exhibit
Number
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| Senior Subordinated Notes due 2013—incorporated by reference to Exhibit 4.7 to registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2007. |
Exhibit Number | Description |
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4.5 | Fourth Supplemental Indenture, dated as of July 9, 2007 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% Senior Subordinated Notes due 2013—incorporated by reference to Exhibit 4.8 to registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2007. |
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4.6*4.6 | Fifth Supplemental Indenture, dated as of August 30, 2007 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% Senior Subordinated Notes due 2013—incorporated by reference to Exhibit 4.6 to registrant’s quarterly report on Form 10-Q for the quarter ended September 29, 2007. |
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4.7 | Sixth Supplemental Indenture, dated as of April 16, 2008 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% Senior Subordinated Notes due 2013—incorporated by reference to Exhibit 4.7 to registrant’s quarterly report on Form 10-Q for the quarter ended June 28, 2008. |
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4.8* | Seventh Supplemental Indenture, dated as of August 20, 2008 among Cenveo Corporation (f/k/a Mail-Well I Corporation), the Guarantors named therein and U.S. Bank National Association, as Trustee, to the Indenture dated as of February 4, 2004 relating to the 7⅞% Senior Subordinated Notes due 2013. |
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4.74.9 | Indenture, dated as of June 15, 2004, among Cadmus Communications Corporation, the Guarantors named therein and Wachovia Bank, National Association, as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.9 to Cadmus Communications Corporation’s registration statement on Form S-4 filed August 24, 2004. |
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4.84.10 | Registration Rights Agreement, dated June 15, 2004, among Cadmus Communications Corporation, the Guarantors named therein and Wachovia Capital Markets, LLC and Banc of America Securities LLC on behalf of the Initial Purchasers, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.10 to Cadmus Communications Corporation’s registration statement on Form S-4 filed August 24, 2004. |
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4.94.11 | First Supplemental Indenture, dated as of March 1, 2005, to the Indenture dated as of June 15, 2004, among Cadmus Communications Corporation, the Guarantors named therein and Wachovia Bank, National Association, as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.9.1 to Cadmus Communications Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2005, filed May 13, 2005. |
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4.104.12 | Second Supplemental Indenture, dated as of May 19, 2006, to the Indenture dated as of June 15, 2004, among Cadmus Communications Corporation, the Guarantors named therein and U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.9.2 to Cadmus Communications Corporation’s annual report on Form 10-K for the year ended June 30, 2006, filed September 13, 2006. |
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4.114.13 | Third Supplemental Indenture, dated as of March 7, 2007, to the Indenture dated as of June 15, 2004, among Cenveo Corporation (as successor to Cadmus Communications Corporation), the Guarantors named therein and U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.11 to registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2007. |
4.124.14 | Fourth Supplemental Indenture, dated as of July 9, 2007, to the Indenture dated as of June 15, 2004, among Cenveo Corporation (as successor to Cadmus Communications Corporation), the Guarantors named therein and U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.13 to registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2007. |
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Exhibit
Number
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4.13*4.15 | Fifth Supplemental Indenture, dated as of August 30, 2007, to the Indenture dated as of June 15, 2004, among Cenveo Corporation (as successor to Cadmus Communications Corporation), the Guarantors named therein and U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014.2014—incorporated by reference to Exhibit 4.13 to registrant’s quarterly report on Form 10-Q for the quarter ended September 29, 2007. |
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10.14.16 | Credit Agreement Supplement,Sixth Supplemental Indenture, dated as of July 9,November 7, 2007, to Credit Agreementthe Indenture dated as of June 21, 2006,15, 2004, among Cenveo Corporation Cenveo, Inc.(as successor to Cadmus Communications Corporation), the Guarantors named therein and U.S. Bank of America, N.A.National Association (successor to Wachovia Bank, National Association), as Administrative Agent, andTrustee, relating to the other lenders party thereto—8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 10.24.12 to registrant’s annual report on Form 10-K for the year ended December 29, 2007. |
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4.17 | Seventh Supplemental Indenture, dated as of April 16, 2008, to the Indenture dated as of June 15, 2004, among Cenveo Corporation (as successor to Cadmus Communications Corporation), the Guarantors named therein and U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014—incorporated by reference to Exhibit 4.16 to registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2007.28, 2008. |
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10.2*4.18* | Employment Agreement,Eighth Supplemental Indenture, dated as of July 11, 2007, betweenAugust 20, 2008, to the registrantIndenture dated as of June 15, 2004, among Cenveo Corporation (as successor to Cadmus Communications Corporation), the Guarantors named therein and Mark Hiltwein.U.S. Bank National Association (successor to Wachovia Bank, National Association), as Trustee, relating to the 8⅜% Senior Subordinated Notes due 2014. |
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10.3*4.19 | Loan Agreement,Indenture, dated as of June 13, 2008, between Cenveo Corporation and U.S. Bank National Association, as Trustee, relating to the 10½% Notes of Cenveo Corporation—incorporated by reference to Exhibit 4.1 to registrant’s current report on Form 8-K dated (date of earliest event reported) June 9, 2008, filed June 13, 2008. |
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4.20 | Guarantee by Cenveo, Inc. and the other guarantors named therein relating to the 10½% Notes of Cenveo Corporation—incorporated by reference to Exhibit 4.2 to registrant’s current report on Form 8-K dated (date of earliest event reported) June 9, 2008, filed June 13, 2008. |
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4.21* | First Supplemental Indenture, dated as of August 30, 2007,20, 2008, to the Indenture of June 13, 2008 between Cenveo Corporation and U.S. Bank National Association, as Trustee, relating to the 10½% Notes of Cenveo Corporation. |
4.22 | Registration Rights Agreement dated as June 13, 2008, among Cenveo Corporation, Cenveo Inc., Lehman Commercial Paper Inc., as Administrative Agent, the lenders party theretoother guarantors named therein and Lehman Brothers Inc., as Sole Lead Arranger and Sole Book Manager.—incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K dated (date of earliest event reported) June 9, 2008, filed June 13, 2008. |
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31.1* | Certification by Robert G. Burton, Sr., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | Certification by Mark S. Hiltwein, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Exhibit Number | Description |
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32.1* | Certification of the Chief Executive Officer and of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this report on Form 10-Q. |
________________________*Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on November 8, 2007.5, 2008.
| CENVEO, INC. |
| | |
| By: | /s/ ROBERTRobert G. BURTON, SR. Burton, Sr. |
| | Robert G. Burton, Sr. |
| | Chairman and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
| By: | /s/ MARKMark S. HILTWEIN Hiltwein |
| | Mark S. Hiltwein |
| | Chief Financial Officer |
| | (Principal Financial Officer and |
| | Principal Accounting Officer) |
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