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 27, 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.) |
ONE CANTERBURY GREEN 201 BROAD STREET | |
STAMFORD, CT | 06901 |
(Address of principal executive offices) | (Zip Code) |
203-595-3000 | |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (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 (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 smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o 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 3, 2008 the registrant had 54,191,897 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements |
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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.
1
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
As Restated | As Restated | |||||||||||||||
Net sales | $ | 522,705 | $ | 550,601 | $ | 1,581,534 | $ | 1,462,275 | ||||||||
Cost of sales | 406,908 | 436,109 | 1,260,612 | 1,170,862 | ||||||||||||
Selling, general and administrative | 58,455 | 63,650 | 184,821 | 168,173 | ||||||||||||
Amortization of intangible assets | 2,293 | 2,819 | 6,747 | 7,245 | ||||||||||||
Restructuring, impairment and other charges | 6,873 | 20,312 | 22,047 | 32,094 | ||||||||||||
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 | ||||||||
Weighted average shares: | ||||||||||||||||
Basic | 53,897 | 53,572 | 53,796 | 53,545 | ||||||||||||
Diluted | 54,174 | 54,531 | 53,994 | 54,614 |
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 27, 2008 | September 29, 2007 | |||||||
As Restated | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 11,596 | $ | 22,002 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Gain on sale of discontinued operations, net of taxes | — | (15,962 | ) | |||||
Loss from discontinued operations, net of taxes | 1,114 | 820 | ||||||
Depreciation and amortization, excluding non-cash interest expense | 55,515 | 46,427 | ||||||
Non-cash interest expense, net | 1,305 | 1,044 | ||||||
Loss on early extinguishment of debt | 3,871 | 9,256 | ||||||
Stock-based compensation provision | 12,940 | 7,166 | ||||||
Non-cash restructuring, impairment and other charges | 5,124 | 17,153 | ||||||
Deferred income taxes | 6,709 | 4,082 | ||||||
Gain on sale of non-strategic business | — | (189 | ) | |||||
Gain on sale of assets | (4,378 | ) | (383 | ) | ||||
Other non-cash charges, net | 6,599 | 6,200 | ||||||
Changes in operating assets and liabilities, excluding the effects of acquired businesses: | ||||||||
Accounts receivable | 35,590 | (5,049 | ) | |||||
Inventories | (125 | ) | (14,890 | ) | ||||
Accounts payable and accrued compensation and related liabilities | 5,718 | (378 | ) | |||||
Other working capital changes | 13,351 | (13,156 | ) | |||||
Other, net | (5,515 | ) | (4,941 | ) | ||||
Net cash provided by continuing operating activities | 149,414 | 59,202 | ||||||
Net cash provided by discontinued operating activities | — | 2,198 | ||||||
Net cash provided by operating activities | 149,414 | 61,400 | ||||||
Cash flows from investing activities: | ||||||||
Cost of business acquisitions, net of cash acquired | (47,151 | ) | (627,116 | ) | ||||
Capital expenditures | (37,782 | ) | (25,181 | ) | ||||
Acquisition payments | (3,653 | ) | (3,653 | ) | ||||
Proceeds from sale of property, plant and equipment | 18,258 | 4,851 | ||||||
Proceeds from divestitures, net | — | 226 | ||||||
Net cash used in investing activities of continuing operations | (70,328 | ) | (650,873 | ) | ||||
Proceeds from the sale of discontinued operations | — | 73,628 | ||||||
Net cash used in investing activities | (70,328 | ) | (577,245 | ) | ||||
Cash flows from financing activities: | ||||||||
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 | 1,873 | 300 | ||||||
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 | ||||||
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.
3
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of Cenveo, Inc. and subsidiaries (collectively, “Cenveo” or the “Company”) have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of the Company, however, the Financial Statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows as of and for the three and nine month periods ended September 27, 2008. The results of operations for the three and nine month periods ended September 27, 2008 are generally not indicative of the results to be expected for the full 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 29, 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 reporting periods ending on September 27, 2008 and September 29, 2007 consist of 13 weeks. Prior to fiscal 2008, the Company reported its results as ending on the calendar quarter end.
New Accounting Pronouncements
SFAS 157
In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and was effective for the Company 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 liabilities that are not remeasured at fair value on a recurring basis. These include goodwill, other nonamortizable intangible assets and unallocated purchase price for recent acquisitions. The Company’s adoption of SFAS 157 on December 30, 2007 did not have a material impact on its condensed consolidated financial statements.
The 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 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. As of September 27, 2008, the Company’s only fair valued financial item under the scope of SFAS 157 is its 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 specific instruments. The primary inputs to the 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”), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was 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.
4
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 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 impact of adopting SFAS 160.
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 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.
The following tables summarize the effects of the restatement on the line items included in the balance sheet, statements of operations and cash flows in the Company’s Form 10-Q for the quarter ended September 29, 2007.
Condensed 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 |
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Restatement (Continued)
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 |
6
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 $6.0 million and $12.9 million for the three and nine months ended September 27, 2008, respectively, and $2.5 million and $7.2 million for the three and nine months ended September 29, 2007, respectively.
As of September 27, 2008, there was approximately $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 1.8 years.
A summary of the Company’s outstanding stock options as of and for the nine month period ended September 27, 2008 is as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value(a) (In Thousands) | |||||||||||
Outstanding at December 29, 2007 | 3,849,980 | $ | 15.14 | |||||||||||
Granted | — | — | ||||||||||||
Exercised | (209,880 | ) | 8.93 | $ | 516 | |||||||||
Forfeited | (474,125 | ) | 17.50 | |||||||||||
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) 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 27, 2008 or, if exercised, the exercise dates, exceeds the exercise prices of the respective options.
7
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.
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Stock-Based Compensation (Continued)
A summary of the Company’s unvested restricted shares and RSUs as of and for the nine month period ended September 27, 2008 is as follows:
Restricted Shares | RSUs | |||||||||||||||
Shares | Grant Date Fair Value | Shares | Grant Date Fair Value | |||||||||||||
Unvested at December 29, 2007 | 100,000 | $ | 9.52 | 1,132,150 | $ | 18.36 | ||||||||||
Granted | — | — | 1,930,410 | 9.77 | ||||||||||||
Vested | (50,000 | ) | 9.52 | (292,400 | ) | 18.02 | ||||||||||
Forfeited | — | — | (113,750 | ) | 19.03 | |||||||||||
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 month period ended September 29, 2007 is as follows:
Restricted Shares | RSUs | |||||||||||||||
Shares | Grant Date Fair Value | Shares | Grant Date Fair Value | |||||||||||||
Unvested at January 1, 2007 | 150,000 | $ | 9.52 | 607,150 | $ | 19.19 | ||||||||||
Granted | — | — | 761,750 | 17.89 | ||||||||||||
Vested | (50,000 | ) | 9.52 | (173,900 | ) | 20.55 | ||||||||||
Forfeited | — | — | — | — | ||||||||||||
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 month period ended September 27, 2008 was $0.5 million and $2.8 million, respectively, as of the respective vesting dates. The total fair value of restricted shares and RSUs which vested during the nine month period ended September 29, 2007 was $0.9 million and $3.1 million, respectively, as of the respective vesting dates.
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions
Rex
On 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 all of the stock of Commercial Envelope. Commercial Envelope was one of the largest envelope manufacturers in the United States, with approximately $160 million in annual 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 $213.3 million, including approximately $3.8 million of related expenses.
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Purchase Price Allocation
The following table summarizes the final allocation of the purchase price of Commercial Envelope to the assets acquired and liabilities assumed in the acquisition (in thousands):
As of August 30, 2007 | ||||
Current assets | $ | 42,008 | ||
Property, plant and equipment | 36,757 | |||
Goodwill | 99,719 | |||
Other intangible assets | 87,770 | |||
Other assets | 884 | |||
Total assets acquired | 267,138 | |||
Current liabilities, excluding current portion of long-term debt | 11,195 | |||
Long-term debt, including current maturities | 20,277 | |||
Deferred income taxes | 21,255 | |||
Total liabilities assumed | 52,727 | |||
Net assets acquired | 214,411 | |||
Less cash acquired | (1,114 | ) | ||
Cost of Commercial Envelope acquisition, less cash acquired | $ | 213,297 |
The Commercial Envelope acquisition resulted in $99.7 million of goodwill, none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s envelopes, forms and labels segment. Commercial Envelope’s results of operations and cash flows are included in the Company’s consolidated statements of operations and cash flows from August 30, 2007.
Pro Forma Operating Data
The following supplemental pro forma consolidated summary operating data of the Company for the three and nine month periods 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 Commercial Envelope acquisition as if it had been consummated as of December 31, 2006 (in thousands, except per share amounts):
Three Months Ended September 29, 2007 | Nine Months Ended September 29, 2007 | |||||||||||||||
As Restated | Pro Forma | As Restated | Pro Forma | |||||||||||||
Net sales | $ | 550,601 | $ | 575,830 | $ | 1,462,275 | $ | 1,563,927 | ||||||||
Operating income | 27,711 | 28,400 | 83,901 | 96,522 | ||||||||||||
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 | 0.04 | (0.04 | ) | 0.13 | 0.13 | |||||||||||
Net income (loss) | 0.03 | (0.05 | ) | 0.41 | 0.41 | |||||||||||
Income (loss) per share – diluted: | ||||||||||||||||
Continuing operations | 0.04 | (0.04 | ) | 0.12 | 0.12 | |||||||||||
Net income (loss) | 0.03 | (0.05 | ) | 0.40 | 0.40 |
The pro forma information is presented for comparative purposes only and does not purport to be indicative of the Company’s actual consolidated results of operations had the Commercial Envelope acquisition actually been consummated as of December 31, 2006, or of the Company’s expected future results of operations.
11
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 was one of the largest commercial printers in the western United States, with annual revenues of approximately $170 million prior to its acquisition by the Company. ColorGraphics prints annual reports, booklets, 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 ColorGraphics acquisition resulted in $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. ColorGraphics’ results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from July 1, 2007. Pro forma results for the three and nine month periods ended September 29, 2007, assuming the acquisition of ColorGraphics had been made on December 31, 2006, have not been presented since the effect would not be material.
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 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 $248.7 million, consisting of: (i) $228.9 million of cash for all of the common stock of Cadmus, (ii) payments of $17.7 million for vested stock options and restricted shares of Cadmus and for change in control provisions in Cadmus’ incentive plans and (iii) $2.1 million of related expenses.
Purchase Price Allocation
The following table summarizes the final allocation of the purchase price of Cadmus to the assets acquired and liabilities assumed in the acquisition (in thousands):
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 |
The Cadmus acquisition resulted in $229.5 million of goodwill, none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. Cadmus’ results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from March 7, 2007.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Pro Forma Operating Data
The following supplemental pro forma consolidated summary operating data of the Company for the nine 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 December 31, 2006 (in thousands, except per share amounts):
Nine Months Ended | ||||||||
September 29, 2007 | ||||||||
As Restated | Pro Forma | |||||||
Net sales | $ | 1,462,275 | $ | 1,544,092 | ||||
Operating income | 83,901 | 87,226 | ||||||
Income from continuing operations | 6,860 | 1,904 | ||||||
Net income | 22,002 | 17,046 | ||||||
Income per share – basic: | ||||||||
Continuing operations | 0.13 | 0.04 | ||||||
Net income | 0.41 | 0.32 | ||||||
Income per share – diluted: | ||||||||
Continuing operations | 0.12 | 0.03 | ||||||
Net income | 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 consolidated results of operations had the Cadmus acquisition actually been consummated as of December 31, 2006, or of the Company’s expected future results of operations.
Printegra
On February 12, 2007, the Company acquired all of the stock of Printegra, with annual sales of approximately $90 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, including $0.5 million of related expenses. Printegra’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from February 12, 2007. Pro forma results for the nine month period ended September 29, 2007, assuming the acquisition of Printegra had been made on December 31, 2006, have not been presented since the effect would not be material.
Deferred Taxes
In connection with the acquisition of Commercial Envelope, the Company recorded a net deferred tax liability of $20.3 million relating to indefinite lived intangible assets, after considering the release of $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 $6.4 million and $1.5 million, respectively. In connection with the acquisition of Printegra, the Company recorded a net deferred tax liability of $7.4 million and released existing valuation allowances of a like amount against recorded goodwill.
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions (Continued)
Liabilities Related to Exit Activities
The Company recorded liabilities in the purchase price allocation in connection with its plans to exit certain 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 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 |
5. Discontinued Operations
On March 13, 2007, the Company sold its remaining 28.6% economic and voting interest in the Supremex Index Fund (the “Fund”) for $67.2 million and recorded a pre-tax gain of approximately $25.6 million. Income from discontinued operations for the nine months ended September 29, 2007 includes equity income of $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 | Nine Months Ended | |||||||||||||||
September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
Other (expense) income | $ | — | $ | — | $ | (468 | ) | $ | 2,373 | |||||||
Income tax expense | 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 |
6. Inventories
Inventories by major category are as follows (in thousands):
September 27, 2008 | December 29, 2007 | |||||||
Raw materials | $ | 67,702 | $ | 71,075 | ||||
Work in process | 32,241 | 34,875 | ||||||
Finished goods | 65,973 | 56,958 | ||||||
$ | 165,916 | $ | 162,908 |
14
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):
September 27, 2008 | December 29, 2007 | |||||||
Land and land improvements | $ | 21,567 | $ | 23,734 | ||||
Building and building improvements | 110,790 | 109,673 | ||||||
Machinery and equipment | 627,243 | 577,763 | ||||||
Furniture and fixtures | 12,666 | 12,430 | ||||||
Construction in progress | 13,032 | 18,664 | ||||||
785,298 | 742,264 | |||||||
Accumulated depreciation | (351,940 | ) | (313,923 | ) | ||||
$ | 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 are as follows (in thousands):
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 27, 2008 | December 29, 2007 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Intangible assets with determinable lives: | ||||||||||||||||||||||||
Customer relationships | $ | 159,206 | $ | (27,995 | ) | $ | 131,211 | $ | 153,806 | $ | (22,303 | ) | $ | 131,503 | ||||||||||
Trademarks and tradenames | 21,011 | (3,863 | ) | 17,148 | 20,521 | (3,251 | ) | 17,270 | ||||||||||||||||
Patents | 3,028 | (1,688 | ) | 1,340 | 3,028 | (1,487 | ) | 1,541 | ||||||||||||||||
Non-compete agreements | 2,456 | (1,552 | ) | 904 | 2,316 | (1,336 | ) | 980 | ||||||||||||||||
Other | 768 | (386 | ) | 382 | 768 | (360 | ) | 408 | ||||||||||||||||
186,469 | (35,484 | ) | 150,985 | 180,439 | (28,737 | ) | 151,702 | |||||||||||||||||
Intangible assets with indefinite lives: | ||||||||||||||||||||||||
Trademarks | 127,500 | — | 127,500 | 118,200 | — | 118,200 | ||||||||||||||||||
Pollution credits | 720 | — | 720 | 720 | — | 720 | ||||||||||||||||||
Total | $ | 314,689 | $ | (35,484 | ) | $ | 279,205 | $ | 299,359 | $ | (28,737 | ) | $ | 270,622 |
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Goodwill and Other Intangible Assets (Continued)
As of September 27, 2008, the weighted average remaining amortization period for customer relationships was 18 years, trademarks and tradenames was 25 years, patents was five years, non-compete agreements was three years and other was 27 years.
Total pre-tax amortization expense for the five years ending September 27, 2013 is estimated to be as follows: $9.5 million, $9.5 million, $9.3 million, $9.2 million and $9.0 million, respectively.
9. Long-Term Debt
Long-term debt was as follows (in thousands):
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 |
10½% Notes
On June 13, 2008, the Company issued $175.0 million aggregate 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 due 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 result of this transaction.
The 10½% Notes were issued pursuant to an indenture among the Company, 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 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 unpaid interest. In addition, at any time prior to August 15, 2011, the Company 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 net cash proceeds of certain public equity offerings. Each holder of the 10½% Notes has the right to require the Company 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 of the Company. The 10½% Notes contain covenants, representations, and warranties substantially similar to the Company’s existing 7⅞% senior subordinated notes, due 2013 (“7⅞% Notes”) and 8⅜% senior subordinated notes, due 2014 (“8⅜% Notes”), and also include a senior secured debt to consolidated cash flow covenant.
16
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Debt (Continued)
Upon the issuance of the 10½% Notes and the conversion of the Senior Unsecured Loan, the Company incurred a loss on early extinguishment of debt of $4.2 million, related to the previously unamortized debt issuance costs. The Company capitalized debt issuance costs of approximately $5.3 million, which are being amortized over the remaining life of the 10½% Notes.
Supplemental Indentures
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 entered into supplemental indentures, dated April 16, 2008 and August 20, 2008 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. Additionally, on August 20, 2008 the Company entered into a supplemental indenture among the Company, 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 the addition of acquisition subsidiaries as guarantors of the 8⅜%, 7⅞% and 10½% Notes.
As of September 27, 2008, the Company was in compliance with all covenants under its debt agreements.
Interest Rate Swaps
The Company enters into interest rate swap agreements to hedge interest rate exposure of notional amounts of its floating rate debt. As of September 27, 2008 and December 29, 2007, the Company had $595.0 million of such interest rate 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 27, 2008, the Company does not anticipate reclassifying any ineffectiveness into its results of operations for the next twelve months.
10. Restructuring, Impairment and Other 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
In 2007, the Company 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 2007, the Company closed its envelope plant in O’Fallon, Missouri, its forms plant in Girard, Kansas and commercial printing plants in San Francisco, California, Seattle, Washington, and Philadelphia, Pennsylvania and integrated these operations into acquired and other operations. In the first nine months of 2008, the Company continued the implementation of cost savings initiatives throughout its operations and closed a commercial printing plant in St. Louis, Missouri. The Company anticipates further headcount reductions and plant closures. The following tables and discussion present the details of the expenses recognized in the three and nine months ended September 27, 2008 and September 29, 2007 as a result of this plan.
17
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and Other Charges (Continued)
Three months ended September 27, 2008
Restructuring and impairment charges for the three months ended September 27, 2008 were as follows (in thousands):
Envelopes, Forms and Labels | Commercial Printing | Corporate | Total | |||||||||||||
Employee separation costs | $ | 881 | $ | 2,939 | $ | 60 | $ | 3,880 | ||||||||
Asset impairments | 591 | 220 | — | 811 | ||||||||||||
Equipment moving expenses | 160 | 156 | — | 316 | ||||||||||||
Lease termination expenses | 196 | 210 | 63 | 469 | ||||||||||||
Multi-employer pension withdrawal liability | — | (236 | ) | — | (236 | ) | ||||||||||
Building clean-up and other expenses | 218 | 712 | — | 930 | ||||||||||||
Total restructuring and impairment charges | $ | 2,046 | $ | 4,001 | $ | 123 | $ | 6,170 |
Nine months ended September 27, 2008
Restructuring and impairment charges for the nine months ended September 27, 2008 were as follows (in thousands):
Envelopes, Forms and Labels | Commercial Printing | Corporate | Total | |||||||||||||
Employee separation costs | $ | 1,824 | $ | 5,604 | $ | 290 | $ | 7,718 | ||||||||
Asset impairments, net of gain on sale | 1,103 | 653 | — | 1,756 | ||||||||||||
Equipment moving expenses | 232 | 241 | — | 473 | ||||||||||||
Lease termination expenses | 617 | 1,026 | 63 | 1,706 | ||||||||||||
Multi-employer pension withdrawal liability | — | (236 | ) | — | (236 | ) | ||||||||||
Building clean-up and other expenses | 612 | 1,340 | — | 1,952 | ||||||||||||
Total restructuring and impairment charges | $ | 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 |
18
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and Other 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):
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 Savings and Integration Plan is as follows (in thousands):
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 the fourth quarter of 2007, the senior management team of Cenveo completed the implementation of its 2005 Cost Savings and Restructuring Plan that it 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 27, 2008 and September 29, 2007, as a result of this plan.
Three months ended September 27, 2008
Restructuring and impairment charges for the three months ended September 27, 2008 were as follows (in thousands):
Envelopes, Forms and Labels | Commercial Printing | Corporate | Total | |||||||||||||
Employee separation costs | $ | 9 | $ | (18 | ) | $ | 19 | $ | 10 | |||||||
Asset impairments | — | 26 | — | 26 | ||||||||||||
Equipment moving expenses | — | 48 | — | 48 | ||||||||||||
Lease termination expenses | (35 | ) | 144 | 68 | 177 | |||||||||||
Building clean-up and other expenses | 224 | 194 | 24 | 442 | ||||||||||||
Total restructuring and impairment charges | $ | 198 | $ | 394 | $ | 111 | $ | 703 |
19
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Restructuring, Impairment and Other Charges (Continued)
Nine months ended September 27, 2008
Restructuring and impairment charges for the nine months ended September 27, 2008 were as follows (in thousands):
Envelopes, Forms and Labels | Commercial Printing | Corporate | Total | |||||||||||||
Employee separation costs | $ | 36 | $ | 132 | $ | 35 | $ | 203 | ||||||||
Asset impairments, net of gain on sale | — | (226 | ) | — | (226 | ) | ||||||||||
Equipment moving expenses | — | 510 | — | 510 | ||||||||||||
Lease termination (income) expenses | (38 | ) | 144 | 149 | 255 | |||||||||||
Building clean-up and other expenses | 380 | 894 | 24 | 1,298 | ||||||||||||
Total restructuring and impairment charges | $ | 378 | $ | 1,454 | $ | 208 | $ | 2,040 |
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 | Corporate | Total | |||||||||||||
Employee separation costs | $ | 441 | $ | 1,171 | $ | 87 | $ | 1,699 | ||||||||
Asset impairments, net of gain on sale | 157 | 3,028 | — | 3,185 | ||||||||||||
Equipment moving expenses | — | 2 | — | 2 | ||||||||||||
Lease termination expenses | 23 | 414 | 31 | 468 | ||||||||||||
Building clean-up and other expenses | 48 | 1,141 | 64 | 1,253 | ||||||||||||
Total restructuring and impairment charges | $ | 669 | $ | 5,756 | $ | 182 | $ | 6,607 |
Nine Months Ended September 29, 2007
Restructuring and impairment charges for the nine months ended September 29, 2007 were as follows (in thousands):
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 |
A summary of the activity charged to the restructuring liabilities as a result of the 2005 Cost Savings and Restructuring Plan is as follows (in thousands):
Lease Termination Costs | Employee Separation Costs | Pension Withdrawal Liabilities | Total | |||||||||||||
Balance at December 29, 2007 | $ | 4,793 | $ | 1,163 | $ | 297 | $ | 6,253 | ||||||||
Accruals, net | 255 | 203 | — | 458 | ||||||||||||
Payments | (985 | ) | (1,302 | ) | (59 | ) | (2,346 | ) | ||||||||
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.
20
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 | 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 27, 2008, the Company made contributions of $6.0 million to its pension plans and postretirement plans. The Company expects to contribute approximately $1.2 million to its pension plans and postretirement plans for the remainder of 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.
13. Comprehensive Income (Loss)
A summary of comprehensive income (loss) is as follows (in thousands):
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, the Company reclassified $5.5 million of currency translation adjustment into discontinued operations from other comprehensive income.
21
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income per Share
Basic income per share is computed based upon the weighted average number of common shares outstanding for the period. Diluted income 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 27, 2008 that could dilute basic income per share for periods subsequent to September 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 3,144,758 and 3,102,157 shares, respectively, of the Company’s common stock and (ii) 2,450,880 and 2,572,048 shares, respectively, of restricted stock and RSUs.
The following table sets forth the computation of basic and diluted income per share (in thousands, except per share data):
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
The Company operates in two segments: envelopes, forms and labels and commercial printing. The envelopes, forms and labels segment specializes in the design, manufacturing, printing and fulfillment of: (i) custom and direct mail envelopes developed for the advertising, billing and remittance needs of a variety of customers, including financial services companies; (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 (iii) stock envelopes, labels and business forms generally sold to independent distributors, office-product suppliers and office-product retail chains. The commercial printing segment provides print, design, content management, fulfillment and distribution offerings, including: (i) high-end printed materials, which includes a wide range of premium products for major national and regional customers; (ii) general commercial printing products for regional and local customers; (iii) scientific, technical and medical journals and special interest and trade magazines for non-profit organizations, educational institutions and specialty publishers; and (iv) specialty packaging and high quality promotional materials for multinational consumer product companies.
Operating income of each segment includes substantially all costs and expenses directly relating to the segment’s operations. Corporate expenses include general and administrative expenses (Note 3).
22
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Segment Information (Continued)
The following tables present certain segment information (in thousands):
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 |
23
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.
24
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 |
25
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 |
26
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 |
27
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 |
28
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 |
29
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 |
30
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 |
31
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 |
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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 29, 2007. Item 7 of our 2007 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 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: (i) our substantial indebtedness could impair our financial condition and prevent us from fulfilling our business obligations; (ii) our ability to service or refinance our debt; (iii) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (iv) limitations on additional borrowings that are available to us that could further exacerbate our risk exposure from debt; (v) our ability to successfully integrate acquisitions; (vi) intense competition in our industry; (vii) the absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (viii) factors affecting the U.S. postal services impacting demand for our products; (ix) the availability of the Internet and other electronic media affecting demand for our products; (x) increases in paper costs and decreases in its availability; (xi) our labor relations; (xii) compliance with environmental rules and regulations; and (xiii) dependence on key management 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 one of the largest diversified printing companies in North America. Our broad portfolio of products includes envelope, form, and label manufacturing, commercial printing and packaging and publisher offerings. We operate from a global network of approximately 78 printing and manufacturing, content management and distribution facilities, which we refer to as manufacturing facilities, 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
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: (i) custom and direct mail envelopes developed for the advertising, billing and remittance needs of a variety of customers, including financial services companies; (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 (iii) stock envelopes, labels and business forms generally sold to independent distributors, office-product suppliers and office-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 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.
33
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 operates 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: (i) high-end color printing of a wide range of premium products for major national and regional customers; (ii) general commercial products for regional and local customers; (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 (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 27, 2008 followed by a discussion of the results of each of our reportable segments for the same periods. See Note 2 of our condensed consolidated financial statements included herein. Our results for the three and nine month periods ended September 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 these acquisitions occurred during the first and third quarters of 2007, their results are not included for a full nine month period in 2007. In addition, Commercial Envelope is included in our results of operations for only a portion of the three months ended September 29, 2007 and Rex is not included in our results of operations in 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. 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 reporting periods ending on September 27, 2008 and September 29, 2007 consist of 13 weeks.
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 decreased $27.9 million in the third quarter of 2008, as compared to the third quarter of 2007. This decrease was primarily due to lower sales from our commercial printing segment of $29.8 million, primarily as a result of lower volumes due to general economic conditions and plant closures, partially offset by price increases net of changes in product mix and the $7.7 million of sales generated from the integration of Rex, which was not included in our results in the third quarter of 2007. Net sales for the nine months ended September 27, 2008 increased $119.3 million, as compared to the nine months ended September 29, 2007. This increase was primarily due to the $239.7 million of sales generated from 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 and the 2007 Acquisitions were included in our results for less than a full nine month period in 2007. This increase was partially offset by lower sales from our commercial printing and envelopes, forms and labels segments of $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 $20.5 million in the third quarter of 2008, as compared to the third quarter of 2007. This increase was primarily due to (i) decreased restructuring and impairment charges of $13.4 million, (ii) lower selling, general and administrative expenses of $5.2 million primarily due to our cost savings programs and (iii) increased gross margins of $1.3 million primarily due to the acquisition of Rex, which was not included in our results in the third quarter of 2007 and Commercial Envelope, which was included in our results for only a portion of the third quarter of 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.
35
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 higher selling, general and administrative expenses of $16.6 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, 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.
Interest Expense. Interest expense increased $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, primarily due to the additional debt we incurred to finance the Rex and Commercial Envelope acquisitions, partially offset by lower interest rates. Interest expense in the third quarter of 2008 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% in the third quarter of 2007.
Interest expense increased $16.9 million to $79.9 million during the first nine months of 2008, from $63.1 million in the first nine months of 2007, primarily due to additional debt incurred to finance acquisitions, offset in part by lower interest rates. Interest expense in the first nine months of 2008 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% during the first nine months of 2007.
Loss on Early Extinguishment of Debt. 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 refer 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 notes due 2012, which we refer to as the 9⅝% Notes in the second quarter of 2007 and the refinancing of our existing $525 million senior secured credit facilities, which we refer to as the Credit Facilities and as a result of the tender offer for and repayment of $20.9 million of Cadmus’ 8⅜% Senior Subordinated Notes due 2014, which we refer to as the 8⅜% Notes in the first quarter of 2007.
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 | % |
Our income tax expense primarily relates to our domestic operations. Our effective tax rate for all periods in 2008 and 2007 was higher than the federal statutory rate, primarily due to state taxes and other permanent items.
We assess the recoverability of our deferred tax assets and, based upon this assessment, record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the “more likely than not” recognition criteria in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We consider our recent operating results and anticipated future taxable income in assessing the need for our valuation allowance. As of September 27, 2008, the total valuation allowance on our net U.S. deferred tax assets was approximately $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.
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Income (Loss) from Discontinued Operations, Net of Taxes. Income from discontinued operations, net of taxes, in the nine months ended September 29, 2007 included 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 of the Fund from January 1, 2007 through March 13, 2007.
Segment Operations
Our Chief Executive Officer monitors the performance of the ongoing operations of our two reportable segments. We assess performance based on net sales and operating income. The summaries of net sales and operating income of our two reportable segments are presented below.
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) | |||||||||||||||
Segment net sales | $ | 224,616 | $ | 222,671 | $ | 690,630 | $ | 647,074 | ||||||||
Segment operating income | $ | 35,947 | $ | 30,225 | $ | 93,807 | $ | 80,712 | ||||||||
Operating income margin | 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
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(i) increased gross margins of $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) | |||||||||||||||
Segment net sales | $ | 298,089 | $ | 327,930 | $ | 890,904 | $ | 815,201 | ||||||||
Segment operating income | $ | 23,056 | $ | 7,605 | $ | 47,598 | $ | 31,189 | ||||||||
Operating income margin | 7.7 | % | 2.3 | % | 5.3 | % | 3.8 | % | ||||||||
Restructuring and impairment charges | $ | 4,395 | $ | 15,996 | $ | 10,082 | $ | 21,922 |
Segment Net Sales
Segment 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 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 general 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 2008, as compared to the third 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 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.
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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 Other Charges. 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 implemented cost savings and integration initiatives related to the 2007 Acquisitions and anticipate substantially completing the integration of those operations in 2009. As of September 27, 2008, our total restructuring liability was $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 nine months ended September 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, 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 expenses of $2.5 million. During the nine months ended September 29, 2007, we incurred $32.1 million of restructuring and impairment charges, which included $8.5 million of employee separation costs, 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 and building clean-up and other expenses of $4.3 million.
Liquidity and Capital Resources
Net Cash Provided by Continuing Operating Activities. Net cash provided by continuing operating activities was $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 $97.6 million, offset in part by an increase in our working capital of $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 investing activities was $70.3 million in the first nine months of 2008, primarily resulting from the cost of business acquisitions of $47.2 million, primarily for Rex and capital expenditures of $37.8 million, offset in part by $18.3 million of cash proceeds from the sale of property, plant and equipment.
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.
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Net Cash (Used in) Provided by Financing Activities. Net cash used in financing activities was $81.1 million in the first nine months of 2008, primarily resulting from the conversion of our $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 proceeds from the issuance of our $175.0 million 10½% Notes and $11.3 million of borrowings of our other long-term debt.
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 using proceeds from our term loans of $720.0 million, a $175.0 million senior unsecured loan and net borrowings under our revolving credit facility of $92.5 million, offset in part by the repayment of: (i) our term loan B of $324.2 million, (ii) the Cadmus revolving senior bank credit facility of $70.1 million, (iii) $20.9 million of our 8⅜% notes, (iv) $10.5 million of our 9⅝% senior notes, (v) $3.1 million of 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.
Long-Term Debt. Our total outstanding long-term debt, including current maturities, was approximately $1.4 billion at September 27, 2008, a decrease of $68.6 million from December 29, 2007. This decrease was primarily due to cash flows provided by operating activities and proceeds from the sale of assets. As of September 27, 2008, approximately 89% of our outstanding debt was subject to fixed interest rates. From 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 November 3, 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. 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. 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 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. 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 whole 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 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 10½% Notes contains covenants, representations, and warranties substantially similar to our existing 7⅞% Senior Subordinated Notes, due 2013, which we refer to as the 7⅞% Notes, and our 8⅜% Notes, and also include a senior secured debt to consolidated cash flow covenant.
Supplemental Indentures
We 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, we entered into supplemental indentures, dated April 16, 2008 and August 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 the addition of acquisition subsidiaries as guarantors of the 8⅜%, 7⅞% and 10½% Notes.
Interest Rate Swaps
We currently have interest rate swap agreements to hedge interest rate exposure of $595.0 million of our notional floating rate debt.
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As of September 27, 2008, we were in compliance with all covenants under our debt agreements.
As of September 27, 2008, we had outstanding letters of credit of approximately $18.4 million related to performance and payment guarantees. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant.
Our current credit ratings are as follows:
Rating Agency | Corporate Rating | Amended Credit Facilities | 10½% Notes | 7⅞% Notes | 8⅜% Notes | Last Update | ||||||
Standard & Poor’s | BB- | BB+ | BB- | B | B | October 2008 | ||||||
Moody’s | B1 | Ba2 | B2 | B3 | B3 | June 2008 |
The terms of our existing debt do not have any rating triggers that impact our funding. We do not believe that our current ratings will impact our ability to raise additional capital. We expect that internally generated cash flows and the financing available under our amended credit facilities will be sufficient to fund our working capital needs and short-term growth for the next 12 months; however, this cannot be assured.
Share Repurchase Plan. Our Board of Directors authorized a $15 million share repurchase program of our common 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 our credit agreement and bond indentures. The timing and actual number of shares, if any, that we actually repurchase will depend on a variety of factors including price, Cenveo and/or regulatory requirements, and market conditions.
Off-Balance Sheet Arrangements. It is not our business practice to enter into off-balance sheet arrangements. Accordingly, as of September 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; 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. In addition, several envelope market segments and certain segments of the direct mail market have 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 Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the SEC. In addition, our earnings conference calls are archived for replay on our website 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.
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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 operations and 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 on this debt is LIBOR plus a margin. At September 27, 2008, we had variable rate debt outstanding of $156.5 million, after considering our interest rate swaps. A 1% increase in LIBOR on debt outstanding subject to variable interest rates would increase our annual interest expense by approximately $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 concluded that 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 the Company in its 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 during the 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 errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or 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 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.
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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 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.
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Item 6. Exhibits
Exhibit Number | Description | ||||
2.1 | Agreement of Merger dated as of December 26, 2006 among Cenveo, Inc., Mouse Acquisition Corp. and Cadmus Communications Corporation—incorporated by reference to Exhibit 2.1 to registrant’s current report on Form 8-K filed December 27, 2006. | ||||
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. | ||||
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 March 31, 1997. | ||||
3.2 | Articles of Amendment to the Articles of Incorporation dated May 17, 2004—incorporated by reference to Exhibit 3.2 to registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004. | ||||
3.3 | Amendment to Articles of Incorporation and Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 20, 2005—incorporated by reference to Exhibit 3.1 to registrant’s current report on Form 8-K filed April 21, 2005. | ||||
3.4 | Bylaws as amended and restated effective February 22, 2007—incorporated by reference to Exhibit 3.2 to registrant’s current report on Form 8-K filed August 30, 2007. | ||||
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. | ||||
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. | ||||
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. | ||||
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. | ||||
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. | ||||
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% 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. |
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Exhibit Number | Description | |
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. | |
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. | |
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. | |
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. | |
4.9 | 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. | |
4.10 | 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. | |
4.11 | 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. | |
4.12 | 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. | |
4.13 | 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. |
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Exhibit Number | Description |
4.14 | 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. |
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—incorporated by reference to Exhibit 4.13 to registrant’s quarterly report on Form 10-Q for the quarter ended September 29, 2007. |
4.16 | Sixth Supplemental Indenture, dated as of November 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 4.12 to registrant’s annual report on Form 10-K for the year ended December 29, 2007. |
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 28, 2008. |
4.18* | Eighth Supplemental Indenture, dated as of August 20, 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. |
4.19 | 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. |
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. |
4.21* | First Supplemental Indenture, dated as of August 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., the other guarantors named therein and Lehman Brothers Inc.—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. | |
31.1* | Certification by Robert G. Burton, Sr., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification by Mark S. Hiltwein, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit Number | Description | |
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.
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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 5, 2008.
CENVEO, INC. | ||
By: | /s/ Robert G. Burton, Sr. | |
Robert G. Burton, Sr. | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Mark S. Hiltwein | |
Mark S. Hiltwein | ||
Chief Financial Officer | ||
(Principal Financial Officer and | ||
Principal Accounting Officer) |
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