Nashua (NSHA) 10-Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-05492

NASHUA CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts	02-0170100
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

11 Trafalgar Square, Suite 201, Nashua, New Hampshire 03063

(Address of principal executive offices)                                                       (Zip Code)

Registrant’s telephone number, including area code(603) 880-2323

Former name, former address and former fiscal year, if changed since last report:N/A

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes:   þ          No:   o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes: o          No: þ

     The number of shares outstanding of the registrant’s common stock, as of May 6, 2008:

Class	Number of Shares
Common Stock, $1.00 par value	5,766,186

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Note 1: Basis of Presentation
	Note 2: Acquired Intangible Assets
	Note 3: Pension and Postretirement Benefits
	Note 4: Discontinued Operations
	Note 5: Segment and Related Information
	Note 6: Contingencies
	Note 7: Fair Value Measurements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 4T. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 6. EXHIBITS
SIGNATURES
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 28, 2008			December 31,
	(Unaudited)			2007
	(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents	$	3,740		$	7,388
Accounts receivable		28,593			29,375
Inventories:
Raw materials		11,102			9,079
Work in process		2,983			2,565
Finished goods		8,789			8,354
		22,874			19,998
Other current assets		2,977			2,828
Total current assets		58,184			59,589
Plant and equipment		71,600			71,096
Accumulated depreciation		(48,810	)		(47,805	)
		22,790			23,291
Goodwill		31,516			31,516
Intangibles, net of amortization		306			331
Other assets		13,204			12,975
Total assets	$	126,000		$	127,702
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	14,852		$	14,432
Accrued expenses		6,824			9,185
Current maturities of long-term debt		1,875			1,875
Current maturities of notes payable to related parties		31			31
Total current liabilities		23,582			25,523
Long-term debt		10,925			10,925
Notes payable to related parties		13			18
Other long-term liabilities		30,196			29,728
Total long-term liabilities		41,134			40,671
Commitments and contingencies (see Note 6)
Shareholders’ equity:
Common stock		5,644			5,641
Additional paid-in capital		14,688			14,562
Retained earnings		59,295			59,648
Accumulated other comprehensive loss:
Minimum pension liability adjustment, net of tax		(18,343	)		(18,343	)
Total shareholders’ equity		61,284			61,508
Total liabilities and shareholders’ equity	$	126,000		$	127,702

See accompanying notes.

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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended
	March 28,			March 30,
	2008			2007
	(In thousands, except per share data)
Net sales	$	63,926		$	65,169
Cost of products sold		54,068			53,718
Gross margin		9,858			11,451
Selling, distribution, general and administrative expenses		10,013			10,182
Research and development expenses		186			274
Loss from equity investments		37			71
Interest expense		163			84
Interest income		(48	)		(8	)
Change in fair value of interest rate swap		360			36
Other income		(264	)		(284	)
Income (loss) from continuing operations before income taxes		(589	)		1,096
Provision (benefit) for income taxes		(236	)		459
Income (loss) from continuing operations		(353	)		637
Income from discontinued operations, net of taxes (Note 4)		—			289
Net income (loss)	$	(353	)	$	926
Basic earnings per share:
Income (loss) per common share from continuing operations	$	(0.07	)	$	0.10
Income per common share from discontinued operations		—			0.05
Net income (loss) per common share	$	(0.07	)	$	0.15
Average common shares		5,396			6,140
Diluted earnings per share:
Income (loss) per common share from continuing operations assuming dilution	$	(0.07	)	$	0.10
Income per common share from discontinued operations assuming dilution		—			0.05
Net income (loss) per common share assuming dilution	$	(0.07	)	$	0.15
Dilutive effect of stock options		—			59
Average common and potential common shares		5,396			6,199

See accompanying notes.

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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended
	March 28,			March 30,
	2008			2007
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(353	)	$	926
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization		1,051			1,219
Amortization of deferred gain		(168	)		(168	)
Change in fair value of interest rate swap		360			36
Stock based compensation		98			26
Excess tax benefit from exercised stock based compensation		(4	)		(11	)
Equity in loss from unconsolidated joint ventures		37			71
Contributions to pension plans		(11	)		—
Change in operating assets and liabilities		(4,159	)		846
Cash (used in) provided by operating activities		(3,149	)		2,945
Cash flows from investing activities:
Investment in plant and equipment		(525	)		(278	)
Cash used in investing activities		(525	)		(278	)
Cash flows from financing activities:
Net repayments on proceeds from revolving portion of long-term debt		—			(950	)
Repayment of notes payable to related parties		(5	)		(21	)
Proceeds from shares exercised under stock option plans		27			77
Excess tax benefit from exercised stock based compensation		4			11
Stock repurchase		—			(803	)
Cash provided by (used in) financing activities		26			(1,686	)
(Decrease) increase in cash and cash equivalents		(3,648	)		981
Cash and cash equivalents at beginning of period		7,388			289
Cash and cash equivalents at end of period	$	3,740		$	1,270
Supplemental disclosures of cash flow information:
Interest paid	$	164		$	128
Income taxes paid, net	$	21		$	143

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The accompanying financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. Certain prior year data have been reclassified to conform to the 2008 presentation.

Note 2: Acquired Intangible Assets

Details of acquired intangible assets are as follows:

	As of March 28, 2008
					Weighted
	Gross				Average
	Carrying		Accumulated		Amortization
(In thousands)	Amount		Amortization		Period
Trademarks and tradenames	$	211	$	92	15 years
Customer relationships and lists		829		642	12 years
	$	1,040	$	734
Amortization Expense:
For the three months ended March 28, 2008			$	25
Estimated for the year ending December 31, 2008			$	71
Estimated for the year ending December 31, 2009			$	47
Estimated for the year ending December 31, 2010			$	39
Estimated for the year ending December 31, 2011			$	34
Estimated for the year ending December 31, 2012			$	31
Estimated for the year ending December 31, 2013			$	30
Estimated for the year ending December 31, 2014 and thereafter			$	79

The gross carrying amount, accumulated amortization and weighted average amortization period has been adjusted to remove fully amortized intangible assets as of March 28, 2008.

Note 3: Pension and Postretirement Benefits

Net periodic pension and postretirement benefit costs for the quarters ended March 28, 2008 and March 30, 2007 for the plans include the following components:

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	Pension Benefits for the							Postretirement Benefits for
	three months ended							the three months ended
	March 28,				March 30,			March 28,			March 30,
	2008				2007			2008			2007
	(In thousands)
Components of net periodic (income) cost
Service cost	$	125			$	131		$	—		$	—
Interest cost		1,480				1,440			7			11
Expected return on plan assets		(1,634	)			(1,615	)		—			—
Amortization of prior service cost		1				1			(17	)		(17	)
Recognized net actuarial (gain)/loss		343				430			(21	)		(19	)
Net periodic (income) cost	$	315		��	$	387		$	(31	)	$	(25	)

We funded the pension plans $10,850 in the first quarter of 2008 and we could make a total contribution of $7.9 million to our pension plans in 2008.

Note 4: Discontinued Operations

Discontinued operations include reimbursement of $.5 million from our insurance provider for the reimbursement of legal fees related to the Cerion litigation which was dismissed by the courts, in the quarter ended March 30, 2007 as follows:

	March 28,		March 30,
	2008		2007
	(In thousands)
Income before income taxes	$	—	$	500
Income taxes		—		211
Income from discontinued operations	$	—	$	289

Note 5: Segment and Related Information

The following table presents information about our reportable segments.

	Net Sales						Gross Margin
	Three Months Ended						Three Months Ended
	March 28,			March 30,			March 28,			March 30,
	2008			2007			2008			2007
	(In thousands)
Label Products	$	26,026		$	28,219		$	3,805		$	5,053
Specialty Paper Products		38,588			38,037			5,893			6,326
All other		1,093			908			166			110
Reconciling items:
Eliminations		(1,781	)		(1,995	)		(6	)		(38	)
Consolidated	$	63,926		$	65,169		$	9,858		$	11,451

Note 6: Contingencies

Environmental

We are involved in certain environmental matters and have been designated by the Environmental Protection Agency, referred to as the EPA, as a potentially responsible party for certain hazardous waste sites. In addition, we have been notified by certain state environmental agencies that some of our sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, our ultimate cost of remediation is difficult to estimate. Accordingly, estimates could either increase or decrease in the future due to changes in such factors. At March 28, 2008, based on the facts currently known and our prior experience with these matters, we have concluded that it is probable that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.9 million to $1.6 million

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for continuing operations. These estimates could increase if other potentially responsible parties or our insurance carriers are unable or unwilling to bear their allocated share and cannot be compelled to do so. At March 28, 2008, our accrual balances relating to environmental matters were $1.0 million for continuing operations. Based on information currently available, we believe that it is probable that the major potentially responsible parties will fully pay the costs apportioned to them. We believe that our remediation expense is not likely to have a material adverse effect on our consolidated financial position or results of operations.

State Street Bank and Trust

On October 24, 2007, we filed a Class Action Complaint with the United States District Court for the District of Massachusetts, against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. On January 14, 2008, the Nashua Pension Plan Committee filed a revised Complaint with the United States District Court for the District of New York, against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. The Complaint alleges that the defendants violated their obligation as fiduciaries under the Employment Retirement Income Securities Act of 1974. On March 14, 2008, the Complaint was amended consolidating the Nashua Pension Plan Committee complaint with other complaints. The process of discovery commenced as of March 2008.

Other

We are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of our business. In the opinion of our management, the resolution of these matters will not materially affect us.

Note 7: Fair Value Measurements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (FAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. FAS 157 defines fair value based upon an exit price model.

Relative to FAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 amends FAS 157 to exclude FAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of FAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis.

We adopted FAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities as permitted. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of FAS 157 include those measured at fair value in goodwill impairment testing and indefinite lived intangible assets measured at fair value for impairment testing.

FAS 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FAS 157 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that we use to measure fair value.

Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table sets forth the financial liability as of March 28, 2008 that we measured at fair value on a recurring basis by level within the fair value hierarchy. As required by FAS 157, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

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			Fair Value Measurements at March 28, 2008 Using
					Significant other		Significant
	Total Carrying		Quoted prices in		observable		unobservable
	Value at		active markets		inputs		inputs
(in thousands of dollars)	March 28, 2008		(Level 1)		(Level 2)		(Level 3)
Interest rate swap liability	$	609	$	—	$	609	$	—

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, (FAS 159). This standard allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to fair value will be recognized in earnings. FAS 159 also established additional disclosure requirements. The requirements for FAS 159 were effective for our fiscal year beginning January 1, 2008. We have adopted FAS 159 and have elected not to measure any additional financial instruments and other items at fair value. The adoption of FAS 159 had no impact on our financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read along with our 2007 Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.

Results of Operations For the First Quarter of 2008 Compared to the First Quarter of 2007

	First Quarter			First Quarter
	2008			2007
	(in millions)
Net sales	$	63.9		$	65.2
Gross margin %		15.4	%		17.6	%
Distribution expenses	$	3.4		$	2.7
Selling expenses	$	2.9		$	2.9
General and administrative expenses	$	3.8		$	4.5
Research and development expenses	$	.2		$	.3
Interest expense, net	$	.5		$	.1
Other income	$	(.3	)	$	(.3	)
Income (loss) from continuing operations before income taxes	$	(.6	)	$	1.1
Income (loss) from continuing operations	$	(.4	)	$	.6
Depreciation and amortization	$	1.1		$	1.2
Investment in plant and equipment	$	.5		$	.3

Our net sales decreased $1.3 million, or 2.0 percent, to $63.9 million for the first quarter of 2008 compared to $65.2 million for the first quarter of 2007. The decrease was due to decreased sales in our Label Products segment which more than offset increased sales in our Specialty Paper Products segment.

Our gross margin percentage decreased to 15.4 percent for the first quarter of 2008 compared to 17.6 percent for the first quarter of 2007. The decrease was due to decreased margin percentages in both our Label Products and Specialty Paper Products segments. Gross margin decreased $1.6 million to $9.9 million for the first quarter of 2008 compared to $11.5 million for the first quarter of 2007 which was primarily a result of lower sales volume in our Label Products segment.

Distribution expenses increased $.7 million to $3.4 million for the first quarter of 2008 compared to $2.7 million for the first quarter of 2007. The increase was primarily due to the conversion of our Cranbury, New Jersey plant from a manufacturing facility to a distribution facility in addition to increased freight rates partially due to higher fuel prices. As a percentage of sales, distribution expenses increased from 4.1 percent for the first quarter of 2007 to 5.3 percent for the first quarter of 2008.

Selling expenses remained unchanged at $2.9 million for the first quarters of 2008 and 2007. As a percentage of sales, selling expenses increased to 4.5 percent for the first quarter of 2008 compared to 4.4 percent for the first quarter of 2007.

General and administrative expenses decreased from $4.5 million for the first quarter of 2007 to $3.8 million for the first quarter of 2008. The decrease was primarily the result of non-recurring severance and environmental charges and management incentive plan expense in the first quarter of 2007 partially offset by higher salary and employee fringe benefit costs in the first quarter of 2008. As a percentage of sales, general and administrative expenses decreased from 6.9 percent in the first quarter of 2007 to 5.9 percent in the first quarter of 2008.

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Research and development expenses decreased $.1 million from $.3 million for the first quarter of 2007 to $.2 million for the first quarter of 2008.

Net interest expense increased $.4 million to $.5 million for the first quarter of 2008 compared to $.1 million for the first quarter of 2007. The increase was the result of an increase of $.1 million in interest expense and a $.3 million increase in the expense related to the decrease in fair value of our interest rate swap.

Other income remained unchanged at $.3 million for the first quarter of both 2008 and 2007. Other income for both years represents the recognition of deferred gain on the sale of our Merrimack, New Hampshire facility and royalty income related to our sale of toner formulations.

The estimated annual effective income tax rate for continuing operations was 40.1 percent (benefit) for the first quarter of 2008 and 41.8 percent for the first quarter of 2007. The estimated rates are higher than the U.S. statutory rate principally due to the impact of state income taxes.

Income from discontinued operations, net of taxes, was $.3 million for the first quarter of 2007. The income from discontinued operations for the first quarter of 2007 includes the reimbursement of an insurance deductible related to the Cerion litigation which was favorably concluded in the first quarter of 2007.

Our net loss for the first quarter of 2008 was $.4 million, or $0.07 per share, compared to net income of $.9 million, or $0.15 per share, for the first quarter of 2007.

Results of Operations by Reportable Segment For the First Quarter of 2008 Compared to the First Quarter of 2007

Label Products Segment

	First Quarter			First Quarter
	2008			2007
	(in millions)
Net sales	$	26.0		$	28.2
Gross margin %		14.6	%		17.9	%
Depreciation and amortization	$	.5		$	.5
Investment in plant and equipment	$	.1		$	.1

Net sales for our Label Products segment decreased $2.2 million, or 7.8 percent, to $26.0 million for the first quarter of 2008 compared to $28.2 million for the first quarter of 2007. The decrease was primarily attributable to decreases of $1.6 million in our automatic identification product line, $.3 million in our EDP product line and $.3 million in our retail shelf product line. The decrease in our automatic identification product line was primarily the result of lost business and an inventory adjustment by a major customer. The decrease in our EDP product line was mainly the result of market erosion as a result of changing technology and lower volumes and the decrease in our retail shelf product line was the result of lower volumes.

Gross margin for our Label Products segment decreased $1.2 million to $3.8 million for the first quarter of 2008 compared to $5.0 million for the first quarter of 2007. As a percentage of net sales, the gross margin percentage decreased from 17.9 percent for the first quarter of 2007 to 14.6 percent for the first quarter of 2008. The decrease in gross margin percent was primarily the result of the lower sales volume in our automatic identification product line and competitive pricing pressures across the majority of our product lines.

Specialty Paper Products Segment

	First Quarter			First Quarter
	2008			2007
	(in millions)
Net sales	$	38.6		$	38.0
Gross margin %		15.3	%		16.6	%
Depreciation and amortization	$	.5		$	.5
Investment in plant and equipment	$	.1		$	.2

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Net sales for our Specialty Paper Products segment increased $.6 million, or 1.6 percent, to $38.6 million for the first quarter of 2008 compared to $38.0 million for the first quarter of 2007. Increases of $2.4 million in our thermal point-of-sale product line and $.5 million in our security product line more than offset decreases of $.8 million in our thermal facesheet and ticket and tag product lines, $.5 million in our IBM branded product lines, $.5 million in our wide format product line, $.3 million in our bond product line and $.2 million in our carbonless product line. The increase in our thermal point-of-sale product line was primarily attributable to new business and increased business from existing customers. The increase in our security product line was the result of increased business from existing customers. The decrease in our thermal facesheet and ticket and tag product lines was mainly attributable to decreased demand from major customers. The decreases in our bond and carbonless product lines were primarily the result of overall market erosion for those products.

Gross margin for our Specialty Paper Products segment decreased $.4 million to $5.9 million for the first quarter of 2008 compared to $6.3 million for the first quarter of 2007. As a percentage of net sales, the gross margin percentage decreased from 16.6 percent for the first quarter of 2007 to 15.3 percent for the first quarter of 2008. The decrease is primarily due to lower margins in our coated business as a result of lower sales volume and higher oil and gas expenses in our manufacturing facilities. In addition, there were competitive pricing pressures in our point of sale thermal product line. The decrease was partially offset by increased margin percentage in our wide format product line primarily attributable to the conversion of our Cranbury, New Jersey facility from a manufacturing center to a distribution center.

Discontinued Operations

Discontinued operations include reimbursement of $.5 million from our insurance provider for the reimbursement of legal fees related to the Cerion litigation which was dismissed by the courts, in the quarter ended March 30, 2007 as follows:

	March 28,		March 30,
	2008		2007
	(In thousands)
Income before income taxes	$	—	$	500
Income taxes		—		211
Income from discontinued operations	$	—	$	289

Liquidity, Capital Resources and Financial Condition

Cash and cash equivalents decreased $3.6 million during the first quarter of 2008 to $3.7 million at March 28, 2008. Cash used in operations of $3.1 million and cash used in investing activities of $.5 million more than offset cash provided by financing activities of $26,000. Our cash flows from continuing and discontinued operations are combined in our consolidated statements of cash flows.

Cash flow used in operations of $3.1 million for the first quarter of 2008 resulted primarily from our net loss of $.4 million and changes in operating assets and liabilities of $4.1 million partially offset by $1.1 million of depreciation and amortization and $.1 million of stock based compensation. The changes in operating assets and liabilities of $4.1 million resulted primarily from a $2.9 million increase in inventories and a $2.4 million decrease in accrued expenses offset by a $.8 million decrease in accounts receivable and a $.4 million increase in accounts payable. The increase in inventory was primarily due to increases in both our Label Products and Specialty Paper Products segments partially due to increased raw material purchases prior to price increases from our vendors. The decrease in accrued expenses resulted primarily from the payment of 2007 incentive compensation.

Cash used in investing activities of $.5 million related to cash used for investments in fixed assets.

Future cash flows will be affected by our planned contribution to our pension plans of $7.9 million. We plan to fund this cash requirement through our revolving loan agreement.

Cautionary Note Regarding Forward-Looking Statements

Information we provide in this Form 10-Q may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports we file with the Securities and Exchange Commission, in materials we deliver to stockholders and in our press releases. In addition, our representatives may, from time to time, make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that is not directly related to historical or current fact. Words such as “estimates,” “can,” “may,” “could,” “planned” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, our future capital needs, stock market

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conditions, the price of our stock, fluctuations in customer demand, intensity of competition from other vendors, timing and acceptance of our new product introductions, general economic and industry conditions, delays or difficulties in programs designed to increase sales and improve profitability, the possibility of a final award of material damages in our pending litigation, goodwill impairment, and other risks detailed in this Form 10-Q in our filings with the Securities and Exchange Commission. The information set forth in this Form 10-Q should be read in light of such risks. We assume no obligation to update the information contained in this Form 10-Q or to revise our forward-looking statements.

ITEM 4T. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 28, 2008. The term “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”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 28, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 28, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Environmental

We are involved in certain environmental matters and have been designated by the Environmental Protection Agency, referred to as the EPA, as a potentially responsible party for certain hazardous waste sites. In addition, we have been notified by certain state environmental agencies that some of our sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, our ultimate cost of remediation is difficult to estimate. Accordingly, estimates could either increase or decrease in the future due to changes in such factors. At March 28, 2008, based on the facts currently known and our prior experience with these matters, we have concluded that it is probable that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.9 million to $1.6 million for continuing operations. These estimates could increase if other potentially responsible parties or our insurance carriers are unable or unwilling to bear their allocated share and cannot be compelled to do so. At March 28, 2008, our accrual balances relating to environmental matters were $1.0 million for continuing operations. Based on information currently available, we believe that it is probable that the major potentially responsible parties will fully pay the costs apportioned to them. We believe that our remediation expense is not likely to have a material adverse effect on our consolidated financial position or results of operations.

State Street Bank and Trust

On October 24, 2007, we filed a Class Action Complaint with the United States District Court for the District of Massachusetts, against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. On January 14, 2008, the Nashua Pension Plan Committee filed a revised Complaint with the United States District Court for the District of New York, against State Street Bank and Trust, State Street Global Advisors, Inc. and John Does 1-20. The Complaint alleges that the defendants violated their obligation as fiduciaries under the Employment Retirement Income Securities Act of 1974. On March 14, 2008, the Complaint was amended consolidating the Nashua Pension Plan Committee complaint with other complaints. The process of discovery commenced as of March 2008.

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Other

We are involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of our business. In the opinion of our management, the resolution of these matters will not materially affect us.

ITEM 1A. RISK FACTORS

The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time.

We face significant competition.

The markets for our products are highly competitive, and our ability to effectively compete in those markets is critical to our future success. Our future performance and market position depend on a number of factors, including our ability to react to competitive pricing pressures, our ability to hire qualified sales personnel, our ability to maintain manufacturing costs, our ability to introduce new value-added products and services to the market and our ability to react to the commoditization of products. Our performance could also be impacted by external factors, such as:

• increasing pricing pressures from competitors in the markets for our products;

• a faster decline than anticipated in the more mature, higher margin product lines, such as heat seal and dry- gum products, due to changing technologies;

• natural disasters such as hurricanes, floods, earthquakes and pandemic events, which could cause our customers to close a number or all of their stores or operations for an extended period of time causing our sales to be reduced during the period of closure;

• our ability to pass on raw material price increases to customers;

• our ability to pass on increased freight cost due to fuel price fluctuations; and

• our ability to pass on manufacturing cost increases.

Our Specialty Paper Products segment operates a manufacturing facility in New Hampshire, which has relatively higher operating costs compared to manufacturing locations in other parts of the United States where some of our competitors are located or operate. Some of our competitors may be larger in size or scope than we are, which may allow them to achieve greater economies of scale on a global basis or allow them to better withstand periods of declining prices and adverse operating conditions.

In addition, there has been an increasing trend among our customers towards consolidation. With fewer customers in the market for our products, the strength of our negotiating position with these customers could be weakened, which could have an adverse effect on our pricing, margins and profitability.

We have a wide diversity of customers but there are a number of individual customers that could impact our financial condition. The business risk associated with these customers relates to potential sales declines due to their individual business needs or loss of business to competitors and increased credit risk due to the concentration of these customers.

Increases in raw material costs or the unavailability of raw materials may adversely affect our profitability.

We depend on outside suppliers for most of the raw materials used in our business. Although we believe that adequate supplies of the raw materials we use are available, any significant decrease in supplies, any increase in costs or a greater increase in delivery costs for these materials could result in a decrease in our margins, which could harm our financial condition. Our Specialty Paper Products and Label Products segments are impacted by the economic conditions and the plant capacity dynamics within the paper and label industry. In general, the availability and pricing of commodity paper such as uncoated face sheet is affected by the capacity of the paper mills producing the products. Cost increases at paper manufacturers, or other producers of the raw materials which we use in our business, and capacity constraints in paper manufacturers’ operations could cause increases in the costs of raw materials, which could harm our financial condition if we are unable to recover the cost from our customers. Conversely, an excess supply of materials by manufacturers could result in lower selling prices and the risk of eroded margins.

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We have periodically been able to pass on significant raw material cost increases through price increases to our customers. Nonetheless, our results of operations for individual quarters can and have been negatively impacted by delays between the time of raw material cost increases and price increases for our products to customers. Additionally, we may be unable to increase our prices to offset higher raw material costs due to the failure of competitors to increase prices and customer resistance to price increases. Additionally, we rely on our suppliers for deliveries of raw materials. If any of our suppliers were unable to deliver raw materials to us for an extended period of time, there is no assurance that our raw material requirements would be met by other suppliers on acceptable terms, or at all, which could have a material adverse effect on our results of operation.

A decline in returns on the investment portfolio of our defined benefit plans, changes in mortality tables and interest rates could require us to increase cash contributions to the plans and negatively impact our financial statements.

Funding for the defined benefit pension plans we sponsor is determined based upon the funded status of the plans and a number of actuarial assumptions, including an expected long-term rate of return on plan assets and the discount rate utilized to compute pension liabilities. All of our defined benefit pension plan benefits are frozen. The defined benefit plans were underfunded as of December 31, 2007 by approximately $24.7 million after utilizing the actuarial methods and assumptions for purposes of Financial Accounting Standards (FAS) No. 87, Employers’ Accounting for Pensions and FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FAS Nos. 87, 88, 106 and 132(R). As a result, we expect to experience an increase in our future cash contributions to our defined benefit pension plans. We contributed $5.3 million in 2007 and we could make a total contribution of $7.9 million in 2008. In the event that actual results differ from the actuarial assumptions, the funded status of our defined benefit plans may change and any such resulting deficiency could result in additional charges to equity and against earnings and increase our required cash contributions.

We are dependent on key personnel and on the retention and recruiting of key personnel for our future success.

Our future success depends to a significant extent on the continued service of our key administrative, manufacturing, sales and senior management personnel. We do not have employment agreements with most of our executives and do not maintain key person life insurance on any of these executives. We do have an employment agreement with Thomas G. Brooker, who has served as our President and Chief Executive Officer since May 4, 2006. The loss of the services of one or more of our key employees could significantly delay or prevent the achievement of our business objectives and could harm our business. While we have entered into executive severance agreements with many of our key employees, there can be no assurance that the severance agreements will provide adequate incentives to retain these employees. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees for key positions. There is market competition for qualified employees. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future.

We have from time to time in the past experienced, and we expect to continue to experience from time to time, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for certain positions.

New technologies or changes in consumer preferences may affect our ability to compete successfully.

We believe that new technologies or novel processes may emerge and that existing technologies may be further developed in the fields in which we operate. These technologies or processes could have an impact on production methods or on product quality in these fields.

Unexpected rapid changes in employed technologies or the development of novel processes that affect our operations and product range could render the technologies we utilize, or the products we produce, obsolete or less competitive in the future. Difficulties in assessing new technologies may impede us from implementing them and competitive pressures may force us to implement these new technologies at a substantial cost. Any such development could materially and adversely impact our revenues or profitability, or both.

Additionally, the preferences of our customers may change as the result of the availability of alternative products or services, which could impact consumption of our products.

Any future litigation relating to our intellectual property rights could have an adverse impact on our business.

We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. Litigation may be necessary to enforce these rights, which could result in substantial costs to us and a substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors or other parties could use the intellectual

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property that we have developed to enhance their products or make products similar to ours and compete more efficiently with us, which could result in a decrease in our market share.

While we have attempted to ensure that our products and the operations of our business do not infringe on other parties’ patents and proprietary rights, our competitors and other parties may assert that our products and operations may be covered by patents held by them. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which may later result in issued patents upon which our products may infringe. If any of our products infringe a valid patent, we could be prevented from selling them unless we obtain a license or redesign the products to avoid infringement. A license may not always be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign any of our products to avoid infringement. Infringement and other intellectual property claims, regardless of merit or ultimate outcome, can be expensive and time-consuming and can divert management’s attention from our core business.

Our information systems are critical to our business, and a failure of those systems could materially harm us.

We depend on our ability to store, retrieve, process and manage a significant amount of information. If our information systems fail to perform as expected, or if we suffer an interruption, malfunction or loss of information processing capabilities, it could have a material adverse effect on our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional risks and expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and the NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention. In particular, our efforts to comply with Section 404 of Sarbanes-Oxley and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. We began complying with the Section 404 requirements for our fiscal year ending December 31, 2007. We expect our compliance efforts to require the continued commitment of significant resources. Additionally, if our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, our reputation may be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could adversely affect our business and the market price of our stock.

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ITEM 6. EXHIBITS

31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.
32.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.
32.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.

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SIGNATURES

Pursuant to the requirements 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.

	NASHUA CORPORATION
	(Registrant)
Date: May 9, 2008	By:	/s/ John L. Patenaude
		John L. Patenaude
		Vice President-Finance and Chief Financial Officer (principal financial and duly authorized officer)

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