SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-12954
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CADMUS COMMUNICATIONS CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1274108
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 Bayberry Court, Suite 200
Richmond, Virginia 23226
(Address of principal executive offices including zip code)
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Registrant's telephone number, including area code:
(804) 287-5680
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 2002.
Class Outstanding at April 30, 2002
----- -----------------------------
Common Stock, $.50 Par Value 8,975,092
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- 3
March 31, 2002 (unaudited) and June 30, 2001
Condensed Consolidated Statements of Income (unaudited) -- 4
Three and Nine Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (unaudited) -- 5
Nine Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Shareholders' Equity --
March 31, 2002 (unaudited) and June 30, 2001 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, June 30,
2002 2001
----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,643 $ 3,130
Accounts receivable, net of allowance for doubtful accounts 30,034 33,662
Inventories 19,654 24,863
Deferred income taxes 3,641 5,690
Prepaid expenses and other 4,461 5,922
-------- --------
Total current assets 59,433 73,267
Property, plant, and equipment (net of accumulated depreciation
of $131,350 at March 31, 2002 and $129,663 at June 30, 2001) 126,088 138,002
Goodwill and other intangibles, net 168,804 172,436
Other assets 13,217 13,723
-------- --------
TOTAL ASSETS $367,542 $397,428
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 2,572
Accounts payable 36,293 28,021
Accrued expenses 29,392 32,580
Restructuring reserves 1,815 6,253
-------- --------
Total current liabilities 67,500 69,426
Long-term debt, less current maturities 153,108 180,415
Other long-term liabilities 28,845 29,823
Deferred income taxes 7,321 8,206
-------- --------
Total liabilities 256,774 287,870
-------- --------
Shareholders' equity:
Common stock ($.50 par value; authorized shares-16,000,000
shares; issued and outstanding shares-8,975,092 at
March 31, 2002 and 8,937,592 at June 30, 2001) 4,487 4,469
Capital in excess of par value 67,693 67,363
Retained earnings 39,181 38,319
Accumulated other comprehensive loss (593) (593)
-------- --------
Total shareholders' equity 110,768 109,558
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $367,542 $397,428
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $112,656 $132,423 $338,259 $392,355
-------- -------- -------- --------
Operating expenses:
Cost of sales 91,989 109,972 277,712 322,838
Selling and administrative 13,304 15,333 40,487 42,362
Restructuring and other charges 15,490 17,896
-------- -------- -------- --------
105,293 140,795 318,199 383,096
-------- -------- -------- --------
Operating income (loss) 7,363 (8,372) 20,060 9,259
-------- -------- -------- --------
Interest and other expenses:
Interest 3,773 4,754 12,107 14,752
Securitization costs 220 663 911 2,233
Other, net 72 (21) 230 (90)
-------- -------- -------- --------
4,065 5,396 13,248 16,895
-------- -------- -------- --------
Income (loss) from continuing operations before taxes 3,298 (13,768) 6,812 (7,636)
Income tax expense (benefit) 1,750 (4,317) 3,372 (1,794)
-------- -------- -------- --------
Income (loss) from continuing operations 1,548 (9,451) 3,440 (5,842)
Income (loss) from discontinued operations, net of tax (1,205) (93) (1,236) 409
-------- -------- -------- --------
Net income (loss) $ 343 $ (9,544) $ 2,204 $ (5,433)
======== ======== ======== ========
Earnings per share - basic:
Income (loss) from continuing operations .17 (1.06) .38 (.65)
Income (loss) from discontinued operations (.13) (.01) (.14) .04
-------- -------- -------- --------
Net income (loss) $ .04 $ (1.07) $ .24 $ (.61)
======== ======== ======== ========
Weighted-average common shares outstanding 8,960 8,938 8,953 8,938
======== ======== ======== ========
Earnings per share - diluted:
Income (loss) from continuing operations .17 (1.06) .38 (.65)
Income (loss) from discontinued operations (.13) (.01) (.14) .04
-------- -------- -------- --------
Net income (loss) $ .04 $ (1.07) $ .24 $ (.61)
======== ======== ======== ========
Weighted-average common shares outstanding 9,053 8,938 9,019 8,938
======== ======== ======== ========
Cash dividends per common share $ .05 $ .05 $ .15 $ .15
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
March 31,
--------------------
2002 2001
-------- --------
Operating Activities
Net income (loss) $ 2,204 $ (5,433)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 19,182 19,783
Loss on disposal of discontinued operations, net of tax 1,205 --
Restructuring and other charges -- 17,896
Other, net 682 (2,438)
-------- --------
23,273 29,808
-------- --------
Changes in operating assets and liabilities, excluding
acquisitions and dispositions:
Accounts receivable, net 4,620 (5,440)
Inventories 2,752 (748)
Accounts payable and accrued expenses 9,131 7,790
Restructuring reserves (due to cash payments) (3,928) (2,786)
Pension payments (141) (4,862)
Other, net 924 3,160
-------- --------
13,358 (2,886)
-------- --------
Net cash provided by operating activities 36,631 26,922
-------- --------
Investing Activities
Purchases of property, plant, and equipment (8,776) (13,704)
Proceeds from sales of property, plant, and equipment 3,691 3,174
Investment in unconsolidated business -- (3,080)
Net proceeds from divested operations 1,500 4,207
Other, net -- (1,484)
-------- --------
Net cash used in investing activities (3,585) (10,887)
-------- --------
Financing Activities
Net payments on receivables securitization program (4,567) (2,852)
Repayment of long-term revolving credit facility (26,400) (15,300)
Repayment of long-term borrowings (2,572) (109)
Dividends paid (1,342) (1,342)
Proceeds from exercise of stock options 348 --
-------- --------
Net cash used in financing activities (34,533) (19,603)
-------- --------
Decrease in cash and cash equivalents (1,487) (3,568)
Cash and cash equivalents at beginning of period 3,130 6,411
-------- --------
Cash and cash equivalents at end of period $ 1,643 $ 2,843
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
- ---------------------------------------------------------------------------------------------------------------
Accumulated
Capital in Other
Common Stock Excess of Retained Comprehensive
Shares Amount Par Value Earnings Income (Loss) Total
===============================================================================================================
Balance at June 30, 2000 8,938 $4,469 $67,363 $46,598 $(488) $117,942
--------
Net loss -- -- -- (6,490) -- (6,490)
Change in minimum pension liability (105) (105)
--------
Comprehensive loss (6,595)
--------
Cash dividends - $.20 per share -- -- -- (1,789) -- (1,789)
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 8,938 $4,469 $67,363 $38,319 $(593) $109,558
(the following data is unaudited)
Net income (and comprehensive income) 2,204 -- 2,204
Cash dividends - $.15 per share -- -- -- (1,342) -- (1,342)
Net shares issued upon exercise
of stock options 37 18 330 -- -- 348
- ---------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 8,975 $4,487 $67,693 $39,181 $(593) $110,768
===============================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
6
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements of
Cadmus Communications Corporation (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and with applicable quarterly reporting regulations of
the Securities and Exchange Commission. They do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements and, accordingly, should be
read in conjunction with the consolidated financial statements and related
footnotes included in the Company's annual report on Form 10-K for the
fiscal year ended June 30, 2001.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation of interim financial information have
been included. The results of operations for the period ended March 31,
2002, are not necessarily indicative of results for the entire fiscal year.
Certain previously reported amounts have been reclassified to conform to
the current-year presentation.
2. In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs." EITF 00-10 requires companies to
classify as revenues any shipping and handling fees billed to customers.
Previously, shipping and postage revenues and shipping and postage expenses
were included in cost of sales. All periods presented in the Condensed
Consolidated Statements of Income have been reclassified to conform to the
current year presentation. The adoption of this standard increased net
sales and cost of sales by approximately $10.1 million and $13.6 million
for the quarters ended March 31, 2002 and 2001, respectively, and $30.7
million and $40.6 million for the nine months ended March 31, 2002 and
2001, respectively.
3. In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" which addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. The
Company adopted SFAS No. 144 in the third quarter of fiscal 2002. On
January 24, 2002, the Company sold its Atlanta-based Cadmus Creative
Marketing division to Emergence, Inc., a strategic consultancy
headquartered in Richmond, Virginia. In connection with the sale, the
Company reported a $1.2 million loss on the sale of discontinued
operations, net of taxes. Under the new pronouncement, the Company
reclassified the results of its Cadmus Creative Marketing division as a
discontinued operation.
4. Basic earnings per share is computed on the basis of weighted-average
common shares outstanding from the date of issue. Diluted earnings per
share is computed on the basis of weighted-average common shares
outstanding plus common shares contingently issuable upon exercise of
dilutive stock options. Incremental shares for dilutive stock options
(computed under the treasury stock method) were 93,000 shares and 66,000
shares for the three and nine months ended March 31, 2002, respectively.
There were no incremental shares for dilutive stock options for either the
three or nine months ended March 31, 2001, respectively.
7
5. Components of net inventories at March 31, 2002 and June 30, 2001, were as
follows (in thousands):
March 31, June 30,
2002 2001
----------- --------
(Unaudited)
Raw materials and supplies $ 7,977 $ 9,772
Work in process 10,144 13,613
Finished goods 1,533 1,478
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$19,654 $24,863
======= =======
6. The Company is focused around its Publication Services segment which
provides products and services to both not-for-profit societies and
commercial publishers in three primary product lines: scientific, technical
and medical ("STM") journals, special interest and trade magazines, and
books and directories. Publication Services provides a full range of
content management, editorial, prepress, printing, warehousing and
distribution services under the division names of Cadmus Professional
Communications, CadmusMack, and Port City Press. In addition, the Company
provides high quality specialty packaging, assembly, fulfillment and
distribution services to consumer product and other customers.
The accounting policies for the segments are the same as those described in
Note 1 "Significant Accounting Policies" in the Company's annual report on
Form 10-K for the fiscal year ended June 30, 2001. The Company primarily
evaluates the performance of its operating segments based on operating
income, excluding amortization of goodwill, gains/losses on sales of
assets, and restructuring charges. Intergroup sales are not significant.
The Company manages income taxes on a consolidated basis.
Summarized group data is as follows:
-------------------------------------------------------------------------
Publication Specialty
(In thousands) Services Packaging Total
-------------------------------------------------------------------------
Three Months Ended March 31, 2002:
Net sales $ 98,203 $14,453 $112,656
Operating income 9,365 1,021 10,386
Three Months Ended March 31, 2001:
Net sales $115,162 $17,261 $132,423
Operating income 10,645 (338) 10,307
Nine Months Ended March 31, 2002:
Net sales $299,097 $39,162 $338,259
Operating income 29,298 1,264 30,562
Nine Months Ended March 31, 2001:
Net sales $345,371 $46,984 $392,355
Operating income 36,323 (841) 35,482
8
A reconciliation of group data to consolidated data is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- --------------------
(In thousands) 2002 2001 2002 2001
------- -------- -------- --------
Earnings from operations:
Reportable group operating income $10,386 $ 10,307 $ 30,562 $ 35,482
Unallocated shared services and other
expenses (1,835) (1,969) (6,525) (4,670)
Amortization of goodwill (1,174) (1,212) (3,551) (3,723)
Gain (loss) on sale of fixed assets (14) (8) (426) 66
Restructuring and other charges -- (15,490) -- (17,896)
Interest expense, net (3,773) (4,754) (12,107) (14,752)
Securitization costs (220) (663) (911) (2,233)
Other (72) 21 (230) 90
------- -------- -------- --------
Income (loss) from continuing operations
before income taxes $ 3,298 $(13,768) $ 6,812 $ (7,636)
======= ======== ======== ========
7. The Company recorded restructuring and other charges totaling $15.5 million
($10.0 million net of taxes) in the third quarter of fiscal 2001. These
charges related to the consolidation of the Company's Atlanta-based
packaging logistics operations, the consolidation of two Richmond-based
commercial and magazine printing operations and other actions to reduce
operating costs. Total restructuring and other costs in the third quarter
of fiscal 2001 consisted of asset write-downs of $5.0 million, the
write-off of intangible assets related primarily to the Company's
Atlanta-based packaging logistics operation totaling $4.0 million,
involuntary termination costs of $2.7 million, contract termination costs
of $3.3 million and other post-closure shutdown costs of $0.5 million.
Involuntary termination costs related to approximately 200 employees. Year
to date restructuring and other charges totaling $17.9 million for fiscal
2001 also included $2.7 million related to the final settlement of certain
post-closing contingencies and other facility closure costs associated with
the sale of the Company's Dynamic Diagrams subsidiary.
The $1.8 million restructuring reserve balance at March 31, 2002 resulted
from prior year restructuring activity: $0.8 million for involuntary
termination costs for approximately 50 associates, $0.8 million for
contract termination costs and $0.2 million for other post closure shutdown
costs. For the nine-month period ended March 31, 2002, the Company made
severance payments totaling $1.6 million to approximately 140 associates,
paid $1.7 million in contract termination costs and $0.6 million in other
post closure shutdown costs. Restructuring actions are expected to be
substantially completed by September 30, 2002.
8. In September 2001, the Company entered into a fixed interest rate to
floating interest rate swap agreement covering a notional amount of debt of
$35.0 million. This swap was entered into to convert $35.0 million of the
9.75% senior subordinated notes due in 2009 to floating rate debt. The
initial term of this swap agreement expires in 2009, and the counterparty
to the swap agreement has an option to terminate the agreement in fiscal
2004. The Company receives interest payments at a fixed rate of 9.75% and
pays a variable interest rate that is based on six-month LIBOR plus a
spread. The six-month LIBOR rate is reset each December 1 and June 1. The
Company's strategy to effectively convert fixed rate financing to variable
rate financing through the aforementioned swap agreement resulted in a
reduction of interest expense of $0.4 million and $0.6 million for the
three and nine-month periods ended March 31, 2002, respectively. Based on
the change in rates during the quarter, the interest rate swap agreement
had a fair market value to the Company of negative $0.9 million as of March
31, 2002 offset by an equal change in the market value of the underlying
debt. In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," this
swap
9
qualifies as a hedge against the debt. Therefore, its value is recorded in
other long-term liabilities with an equal offset in long-term debt on the
Condensed Consolidated Balance Sheets. The change in value of the swap has
no impact on earnings.
At July 1, 2000, the Company had two fixed-to-floating interest rate swap
agreements which, when adjusted to fair value, resulted in a gain of $1.5
million for the nine-month period ended March 31, 2001. The Company
terminated these interest rate swap agreements in the second quarter of
fiscal 2001.
9. The Company uses an accounts receivable securitization program to fund some
of its working capital requirements. At March 31, 2002 and 2001,
approximately $33.4 million and $41.4 million, respectively, of net
accounts receivable had been sold by the Company's wholly-owned,
bankruptcy-remote subsidiary to an unrelated third party purchaser under
the securitization program. The sales were reflected in the Condensed
Consolidated Balance Sheets as a reduction of accounts receivable with
proceeds used to repay a corresponding amount of borrowing under the
Company's senior bank facility.
10. On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets" which changed the accounting for goodwill and
intangible assets. SFAS No. 142 requires that goodwill no longer be
amortized. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value-based test. Annual
goodwill impairment losses will be classified as a component of income from
continuing operations.
The Company is required to adopt SFAS No. 142 on July 1, 2002 and perform a
fair market valuation analysis of goodwill as of the same date. The Company
expects to perform this valuation and identify whether an impairment exists
under this statement by the end of the first quarter of fiscal 2003.
Impairment losses, if any, as a result of the adoption, will be recognized
as a cumulative effect of a change in accounting principle.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Headquartered in Richmond, Virginia, Cadmus Communications Corporation ("Cadmus"
or the "Company") provides end-to-end, integrated graphic communications
services to professional publishers, not-for-profit societies and corporations.
Cadmus is the largest provider of content management and production services to
scientific, technical and medical ("STM") journal publishers in the world, the
fourth largest publications printer in North America, and a leading national
provider of specialty packaging products and services.
The Company is focused around its Publication Services segment which provides
products and services to both not-for-profit societies and commercial publishers
in three primary product lines: STM journals, special interest and trade
magazines, and books and directories. Publication Services provides a full range
of content management, editorial, prepress, printing, warehousing and
distribution services under the division names of Cadmus Professional
Communications ("CPC"), CadmusMack, and Port City Press. In addition, the
Company provides high quality specialty packaging, assembly, fulfillment and
distribution services to consumer product and other customers.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
In December 2001, the Securities and Exchange Commission issued Financial
Reporting Release No. 60 that requires all companies to include a discussion of
their critical accounting policies or methods used in the preparation of their
financial statements. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The Company considers the following
accounting policies to be critical policies which involve various estimation
processes:
... Allowance for doubtful accounts
... Valuation of intangible assets and goodwill
... Pension benefits
... Income taxes
Allowance for doubtful accounts. Cadmus' policy with respect to its trade and
notes receivable is to maintain an adequate allowance or reserve for doubtful
accounts for estimated losses from the inability of its customers or noteholders
to make required payments. The Company's policy to estimate the collectibility
of its trade accounts receivable balances consists of two steps. First, the
Company evaluates specific accounts for which it has information that the
customer may have an inability to meet its financial obligations (e.g.,
bankruptcy). In these cases, the Company uses its judgment, based on available
facts and circumstances, and records a specific allowance for that customer
against the receivable to reflect the amount it expects to ultimately collect.
Second, the Company then establishes a general reserve for all customers based
on a range of percentages applied to aging categories. The Company periodically
evaluates the adequacy of its reserves on notes receivable based on the
available facts and circumstances at the time. If the financial condition of
Cadmus' customers or noteholders were to deteriorate and result in an impairment
of their ability to make payments, additional allowances may be required.
Valuation of intangible assets and goodwill. In accordance with Financial
Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible
Assets," goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but, instead, will be subject to annual impairment tests.
The Company is required to adopt SFAS No. 142 on July 1, 2002 and perform a fair
market valuation analysis of goodwill as of the same date. The Company expects
to perform this valuation and identify whether impairment exists under this
statement by the end of the first quarter of
11
fiscal 2003. Impairment losses, if any, as a result of the adoption, will be
recognized as a cumulative effect of a change in accounting principle.
Subsequent to the initial test of impairment, the Company is subject to
financial statement risk to the extent that indefinite-lived intangible assets
and goodwill become impaired at some point in the future. At March 31, 2002, the
Company had $168.8 million in goodwill and other intangible assets.
Pension and other post retirement benefits. The Company sponsors pension and
other postretirement plans covering employees who meet eligibility requirements.
Several statistical and other factors which attempt to anticipate future events
are used to calculate the expense and liability related to the plans. These
factors include assumptions determined by the Company about the discount rate,
expected return on plan assets and rate of future compensation increases. In
addition, the Company's actuarial consultants use subjective factors such as
withdrawal and mortality rates to estimate expected future events. The actuarial
assumptions used by the Company may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. While the Company believes its
assumptions are appropriate, significant differences in actual experience or
significant changes in the Company's assumptions may materially affect its
pension and other postretirement obligations and its future expense.
Income Taxes. As part of the process of preparing the consolidated financial
statements, the Company is required to estimate income taxes in each of the
jurisdictions in which the Company operates. In addition to estimating the
actual current tax exposure, the Company must assess future tax effects of
temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, and operating
loss carryforwards. Such differences result in deferred tax assets and
liabilities, which are included within the Company's consolidated balance sheet.
Management then assesses the likelihood that deferred tax assets will be
recovered from future taxable income, and, to the extent recovery is not
considered likely, establishes a valuation allowance against those assets. The
valuation allowance is based on estimates of future taxable income by
jurisdictions in which the Company operates and the period over which the
deferred tax assets will be recoverable. Significant management judgment is
involved in determining the provision for income taxes, the deferred tax assets
and liabilities, and any valuation allowance recorded against the net deferred
tax assets.
In the event that actual results differ from management's estimates, new
information results in changes to estimates, or there is a material change in
the actual tax rates or time period within which the underlying temporary
differences become taxable or deductible, the Company may need to establish an
additional valuation allowance or adjust the effective tax rate which could
materially impact the financial position and results of operations.
RESULTS OF OPERATIONS
- ---------------------
Results of operations for the current and prior periods reflect the adoption of
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" as set forth
by the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board in July 2000. EITF 00-10 requires companies to classify as revenues any
shipping and handling fees billed to customers. Previously, shipping and postage
revenues and shipping and postage expenses were included in cost of sales.
Additionally, results of operations reflect the Company's sale of its
Atlanta-based Creative Marketing operation in January 2002, which has been
reported as a discontinued operation. All periods presented have been
reclassified to conform to the current-year presentation.
12
The following table presents the major components of the Condensed Consolidated
Statements of Income as a percent of net sales for the three and nine-month
periods ended March 31, 2002 and 2001, respectively.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2002 2001 2002 2001
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 81.7 83.0 82.1 82.3
----- ----- ----- -----
Gross profit 18.3 17.0 17.9 17.7
Selling and administrative expenses 11.8 11.6 12.0 10.8
Restructuring and other charges -- 11.7 -- 4.5
----- ----- ----- -----
Operating income 6.5 (6.3) 5.9 2.4
Interest expense 3.3 3.6 3.6 3.8
Securitization costs 0.2 0.5 0.2 0.6
Other, net 0.1 -- 0.1 --
----- ----- ----- -----
Income (loss) from continuing operations,
before taxes 2.9 (10.4) 2.0 (2.0)
Income tax expense (benefit) 1.5 (3.3) 1.0 (0.5)
----- ----- ----- -----
Income (loss) from continuing operations 1.4 (7.1) 1.0 (1.5)
Income (loss) from discontinued operations,
net of tax (1.1) (0.1) (0.4) 0.1
----- ----- ----- -----
Net income 0.3% (7.2)% 0.6% (1.4)%
===== ===== ===== =====
Net Sales
Net sales for the third quarter of fiscal 2002 were $112.7 million, compared to
$132.4 million in the same quarter last year. These amounts included shipping
and postage fees billed to customers totaling $10.1 million and $13.6 million
for the three months ended March 31, 2002 and 2001, respectively. Excluding the
impact of operations that were closed or divested in fiscal 2001, net sales
totaled $122.7 million for the third quarter of fiscal 2001. For the first nine
months of fiscal 2002, net sales totaled $338.3 million, compared to $392.4
million in the prior year. These amounts included shipping and postage fees
billed to customers totaling $30.7 million and $40.6 million for the nine months
ended March 31, 2002 and 2001, respectively. Adjusted for divested and closed
operations, net sales were $359.3 million for the nine months ended March 31,
2001.
Net sales in the Publication Services segment, which includes the STM journal
services, special interest magazines and books and directories divisions, were
$98.2 million in the third quarter of fiscal 2002 compared to $115.2 million in
the corresponding period of the prior year. These amounts included shipping and
postage fees billed to customers totaling $9.4 million and $12.4 million for the
three months ended March 31, 2002 and 2001, respectively. Excluding the impact
of operations that were divested or closed in fiscal 2001, net sales for the
Publication Services segment were $108.8 million in the third quarter of fiscal
2001. For the nine months ended March 31, 2002, net sales in the Publication
Services segment were $299.1 million compared to $345.4 million in the
corresponding period of fiscal 2001. These amounts included shipping and postage
fees billed to customers totaling $28.5 million and $37.4 million for the nine
months ended March 31, 2002 and 2001, respectively. Excluding the impact of
operations that were divested or closed in fiscal 2001, net sales for the
Publication Services segment totaled $321.8 million for the nine-month period
ended March 31, 2001. Within the Publication Services segment, net sales for CPC
declined for the three- and nine-month periods ended March 31, 2002 compared to
the prior year. The decline in CPC net sales was attributable to volume and
pricing pressures resulting from customer consolidation in the STM market and
lower paper prices. Net sales for CadmusMack declined for both the three- and
nine-month periods ended March 31, 2002, respectively, compared to fiscal 2001,
due to continued softness in advertising pages, lower paper prices and general
industry overcapacity in the special interest magazine market. Port City Press
also experienced a decline in net sales for the third quarter of fiscal 2002 and
for the nine months ended
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March 31, 2002 compared to the prior year, primarily as a result of competitive
pricing pressures, a temporary decline in sales to a major customer and lower
paper prices.
Specialty Packaging net sales were $14.5 million and $39.2 million for the three
and nine-month periods ended March 31, 2002, respectively, compared to $17.3
million and $47.0 million in the corresponding periods of the prior year.
Adjusted for operations that were closed in fiscal 2001, net sales for Specialty
Packaging totaled $13.9 million and $37.5 million for the three and nine-month
periods ended March 31, 2001. The 4% increase in Specialty Packaging sales for
both the three and nine-months periods ended March 31, 2002 compared to the
prior year was a result of new business wins and increased business from
existing accounts.
Gross Profit
Gross profit increased to 18.3% of net sales for the third quarter of fiscal
2002, compared to 17.0% of net sales for the third quarter of fiscal 2001, and
increased to 17.9% of net sales for the first nine months of fiscal 2002,
compared to 17.7% of net sales for the same period of fiscal 2001. The margin
improvement was attributable to company-wide cost reduction efforts, improvement
in facility efficiencies, improved offshore workflows within the Publication
Services segment and favorable product mix within the Specialty Packaging
division.
Selling and Administrative Expenses
Selling and administrative expenses were 11.8% of net sales for the third
quarter of fiscal 2002, compared to 11.6% for the same period of the prior year.
For the first nine months of fiscal 2002, selling and administrative expenses
were 12.0% of net sales compared to 10.8% of net sales in the corresponding
period of the prior year. The increased ratios reflected the impact of declining
sales in fiscal 2002 and the effects in fiscal 2001 of (i) a $1.5 million gain
recognized under Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" and (ii) a $0.7 million gain
resulting from the demutualization of one of the Company's insurance providers.
Excluding these special one-time gains, selling and administrative expenses
would have been 11.7% and 11.3% of net sales for the three and nine-month
periods ended March 31, 2001, respectively.
Restructuring and Other Charges
The Company recorded restructuring and other charges totaling $15.5 million
($10.0 million net of taxes) in the third quarter of fiscal 2001. These charges
related to the consolidation of the Company's Atlanta-based packaging logistics
operations, the consolidation of two Richmond-based commercial and magazine
printing operations and other actions to reduce operating costs. Total
restructuring and other costs in the third quarter of fiscal 2001 consisted of
asset write-downs of $5.0 million, the write-off of intangible assets related
primarily to the Company's Atlanta-based packaging logistics operation totaling
$4.0 million, involuntary termination costs of $2.7 million, contract
termination costs of $3.3 million and other post-closure shutdown costs of $0.5
million. Involuntary termination costs related to approximately 200 employees.
Year to date restructuring and other charges totaling $17.9 million for fiscal
2001 also included $2.7 million related to the final settlement of certain
post-closing contingencies and other facility closure costs associated with the
sale of the Company's Dynamic Diagrams subsidiary.
The $1.8 million restructuring reserve balance at March 31, 2002 resulted from
prior year restructuring activity: $0.8 million for involuntary termination
costs for approximately 50 associates, $0.8 million for contract termination
costs and $0.2 million for other post closure shutdown costs. For the nine-month
period ended March 31, 2002, the Company made severance payments totaling $1.6
million to approximately 140 associates, paid $1.7 million in contract
termination costs and $0.6 million in other post closure shutdown costs.
Restructuring actions are expected to be substantially completed by September
30, 2002.
Operating Income
The Company recorded operating income of $7.4 million for the third quarter of
fiscal 2002 compared to an operating loss of $8.4 million in the same quarter of
the prior year. Operating income for the first nine months of fiscal 2002 was
$20.1 million, compared to $9.3 million for the comparable period of fiscal
2001. Excluding restructuring and other charges in fiscal 2001, operating income
improved to
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6.5% of net sales for the third quarter of fiscal 2002 compared to 5.4% of net
sales for the corresponding period of the prior year. For the nine months ended
March 31, 2002, operating income totaled 5.9% of net sales compared to 6.9% in
fiscal 2001, excluding restructuring and other charges. Company-wide cost
reduction efforts and improved facility efficiencies led to improvements in
operating income for the quarter serving to offset continued reduction in
advertising pages and pricing pressures which negatively impacted year to date
results.
Interest and Other Expenses
Interest expense and securitization costs in the third quarter of fiscal 2002
declined to $4.0 million compared to $5.4 million in the prior year. For the
first nine months of fiscal 2002, interest expense and securitization costs
declined to $13.0 million from $17.0 million for the comparable period in the
prior year. The decrease in interest expense was due to lower debt levels and
lower year-over-year short-term interest rates.
Income Taxes
The Company recognized income tax expense (benefits) for the three and
nine-month periods of fiscal 2002 and 2001, respectively, at the effective tax
rates indicated below:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2002 2001 2002 2001
---- ----- ---- -----
Effective income tax expense (benefit) rate 53.1% (31.5)% 49.5% (23.5)%
The variation in rates from statutory rates was primarily attributable to the
impact of non-tax deductible goodwill amortization. The 53.1% tax rate for the
third quarter of fiscal 2002 was due to a cumulative adjustment to increase the
effective tax rate for the first nine months to a revised estimated tax rate of
49.5% for fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
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Operating Activities
Net cash provided by operating activities for the first nine months of fiscal
2002 totaled $36.6 million, compared to $26.9 million for the first nine months
of fiscal 2001. This $9.7 million increase was primarily attributable to reduced
working capital requirements as a result of inventory reduction initiatives,
collection efforts and lower net sales which reduced accounts receivable, a $4.7
million decrease in cash contributions to the Company's pension plan, and a $1.0
million Federal income tax refund. This increase was partially offset by a $1.1
million increase in restructuring payments made during fiscal 2002.
Investing Activities
Net cash used in investing activities was $3.6 million for the first nine months
of fiscal 2002 compared to $10.9 million in the prior year. Capital expenditures
for the first nine months of fiscal 2002 totaled $8.8 million compared to $13.7
million for the corresponding period of the prior year, and included investments
primarily in an 8-unit sheetfed press, digital prepress equipment, new business
and manufacturing systems, and building improvements. Reported capital
expenditures in fiscal 2002 do not reflect the impact of transferred and
redeployed production equipment as a result of the Company's consolidation of
its operations in fiscal 2001 and 2002. Proceeds from the sale of property,
plant and equipment in fiscal 2002 totaled $3.7 million, and related primarily
to the sale of a composition facility located in Akron, Pennsylvania, a press at
the Company's Charlotte facility, and a warehouse facility located in Lancaster,
Pennsylvania. Net proceeds from divested operations totaled $1.5 million and
related to the sale of the Company's Atlanta-based Creative Marketing division.
Proceeds from the sale of property, plant and equipment of $3.2 million in
fiscal 2001 related primarily to the sale of a press and building related to the
Company's former point of purchase division. Net proceeds from divested
operations totaled $4.2 million in fiscal 2001 and related to the sale of the
Company's Dynamic Diagrams division. The Company also made a strategic
investment
15
of $3.1 million in Xyvision Enterprise Solutions, Inc., a developer of XML
content management and publishing software, in fiscal 2001.
The Company estimates that capital expenditures for fiscal 2002 will be
approximately $15 million.
Financing Activities
Net cash used in financing activities was $34.5 million for the first nine
months of fiscal 2002 compared to $19.6 million for the first nine months of
fiscal 2001. Cash provided by operating activities was used to pay down $26.4
million on the Company's revolving credit facility, to pay off a $2.6 million
mortgage on the Company's Lancaster facility and to fund $1.3 million in
dividend payments. The Company also received $0.4 million in proceeds from the
exercise of stock options. Lower sales and funding rates at March 31, 2002
combined with the removal of receivables from the securitization program for
closed operations resulted in a reduction of $4.6 million in funding under the
Company's receivables securitization program.
In September 2001, the Company entered into a fixed interest rate to floating
interest rate swap agreement covering a notional amount of debt of $35.0
million. This swap was entered into to convert $35.0 million of the 9.75% senior
subordinated notes due in 2009 to floating rate debt. The initial term of this
swap agreement expires in 2009, and the counterparty to the swap agreement has
an option to terminate the agreement in fiscal 2004. The Company receives
interest payments at a fixed rate of 9.75% and pays a variable interest rate
that is based on six-month LIBOR plus a spread. The six-month LIBOR rate is
reset each December 1 and June 1. The Company's strategy to effectively convert
fixed rate financing to variable rate financing through the aforementioned swap
agreement resulted in a reduction of interest expense of $0.4 million and $0.6
million for the three and nine-month periods ended March 31, 2002, respectively.
Based on the change in rates during the quarter, the interest rate swap
agreement had a fair market value to the Company of negative $0.9 million as of
March 31, 2002 offset by an equal change in the market value of the underlying
debt. In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," this swap
qualifies as a hedge against the debt. Therefore, its value is recorded in other
liabilities with an equal offset in long-term debt on the Condensed Consolidated
Balance Sheets. The change in value of the swap has no impact on earnings.
For the nine months ended March 31, 2001, the Company utilized cash provided by
operations to pay down $15.3 million in debt and to fund $1.3 million in
dividend payments. At March 31, 2001 there was a reduction of $2.9 million in
funding under the Company's receivables securitization program.
Long-term debt at March 31, 2002, was $153.1 million, down $29.9 million from
$183.0 million at June 30, 2001. The Company's debt to capital ratio, defined as
long-term debt as a percentage of total long-term debt plus total shareholder's
equity, was 58.0% at March 31, 2002, down from 62.6% at June 30, 2001, primarily
due to the reduction in overall debt levels.
The Company uses an accounts receivable securitization program to fund some of
its working capital requirements. At March 31, 2002 and 2001, approximately
$33.4 million and $41.4 million, respectively, of net accounts receivable had
been sold by the Company's wholly-owned, bankruptcy-remote subsidiary to an
unrelated third party purchaser under the securitization program. The sales were
reflected in the Condensed Consolidated Balance Sheets as a reduction of
accounts receivable with proceeds used to repay a corresponding amount of
borrowing under the Company's senior bank facility.
The primary cash requirements of the Company are for debt service, capital
expenditures, and working capital. The primary sources of liquidity are cash
flow provided by operations and unused capacity under the Company's senior
credit and receivables securitization facilities. The future operating
performance and the ability to service or refinance the Company's debt depends
on the ability to implement the business strategy and on general economic,
financial, competitive, legislative, regulatory and other factors, many of which
are beyond the control of the Company. The Company believes that these sources
will provide sufficient liquidity and capital resources to meet its operating
requirements for capital expenditures and working capital requirements.
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Statements contained in this report relating to Cadmus' future prospects and
performance are "forward-looking statements" that are subject to risks and
uncertainties, both known and unknown, that could cause actual results to differ
materially from those expressed or implied by such statements. Factors that
could cause actual results to differ materially from management's projections,
forecasts, estimates and expectations may include factors that are beyond the
Company's ability to control or estimate precisely, such as estimates of future
market conditions and the behavior of other market participants. Other potential
risks and uncertainties include but are not limited to: (1) the overall economic
environment in North America, (2) our ability to develop and market new
capabilities and services to take advantage of technology changes in the
publishing process, especially for scientific, technical and medical journals,
(3) significant price pressure in the markets in which we compete, (4) the loss
of significant customers or the decrease in demand from customers, (5) our
ability to continue to obtain improved efficiencies and lower production costs,
(6) adverse changes in our product sales mix, (7) the impact of industry
consolidation among key customers, (8) our ability to successfully complete
certain consolidation initiatives and effect other restructuring actions, and
(9) our ability to operate profitably and effectively with high levels of
indebtedness. Other risk factors are detailed from time to time in our
Securities and Exchange Commission filings. The information provided in this
report is provided only as of the date of this report, and we undertake no
obligation to update any forward-looking statements made therein.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as noted below, there have been no material changes to the information
concerning the Company's "Quantitative and Qualitative Disclosures about Market
Risk" as previously reported in the Company's Report on Form 10-K for the year
ended June 30, 2001. Additional information concerning the Company's
quantitative and qualitative disclosures about market risk is included in Note 8
of the Notes to Condensed Consolidated Financial Statements and information
presented under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" of the
Company's report on Form 10-Q for the quarterly period ended March 31, 2002,
incorporated herein by reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, Cadmus and its subsidiaries are involved in
various legal proceedings. Management believes that the ultimate resolution of
these proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation of Cadmus Communications Corporation, as
amended. (1)
3.2 Bylaws of Cadmus Communications Corporation, as amended. (2)
10.1 Cadmus Non-Qualified Savings Plan, as adopted effective March 15, 2002. (3)
- ----------
1. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 (Commission File No. 0-12954).
2. Incorporated by reference to the Company's Current Report on Form 8-K dated
July 23, 2001 (Commission File No. 0-12954).
3. Incorporated by reference to the Company's Registration Statement on Form
S-8 dated March 15, 2002 (Commission File No. 333-84390).
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(b) Reports on Form 8-K:
On January 25, 2002, the Company filed a Form 8-K that included the January
24, 2002 press release regarding Fiscal 2002 second quarter financial
results, as well as a copy of the prepared notes used for remarks made
during a conference call to analysts on the same date.
On January 29, 2002, the Company filed a Form 8-K that included the January
25, 2002 press release announcing the Company's sale of its Atlanta-based
Cadmus Creative Marketing division to Emergence, Inc., a strategic
consultancy headquartered in Richmond, Virginia.
On February 4, 2002, the Company filed a Form 8-K that included the
December 17, 2001 and January 31, 2002 press releases announcing that
Edward B. Hutton and Keith Hamill were elected to the Company's board of
directors. The elections increased the number of directors to twelve.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADMUS COMMUNICATIONS CORPORATION
Date: May 14, 2002
/s/ Bruce V. Thomas
----------------------------------------------------
Bruce V. Thomas
President and Chief Executive Officer
Date: May 14, 2002
/s/ Stephen E. Hare
----------------------------------------------------
Stephen E. Hare
Executive Vice President and Chief Financial Officer
20