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CVO > SEC Filings for CVO > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for CENVEO, INC

Form 10-Q for CENVEO, INC


7-Nov-2012

Quarterly Report


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, which we refer to as MD&A, of Cenveo, Inc. and its subsidiaries, which we refer to as Cenveo, should be read in conjunction with the accompanying condensed consolidated financial statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which we refer to as our 2011 Form 10-K. Item 7 of our 2011 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of September 29, 2012.

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) recent United States and global economic conditions have adversely affected us and could continue to do so; (ii) our substantial level of indebtedness could impair our financial condition and prevent us from fulfilling our business obligations; (iii) our ability to service or refinance our debt; (iv) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (v) additional borrowings are available to us that could further exacerbate our risk exposure from debt; (vi) our ability to successfully integrate acquired businesses into our business; (vii) a decline in our consolidated profitability or profitability within one of our individual reporting units could result in the impairment of our assets, including goodwill, other long-lived assets and deferred tax assets; (viii) intense competition and fragmentation in our industry; (ix) the general absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (x) factors affecting the United States postal services impacting demand for our products; (xi) the availability of the Internet and other electronic media adversely affecting our business; (xii) increases in paper costs and decreases in the availability of raw materials; (xiii) our labor relations; (xiv) our compliance with environmental laws; (xv) our dependence on key management personnel; (xvi) our dependence upon information technology systems; and (xvii) our international operations and the risks associated with operating outside of the United States. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. Additional information regarding these and other factors can be found elsewhere in this report and in our other filings with the 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, according to the December 2011 Printing Impressions 400 report. Our broad portfolio of products includes commercial printing, envelope converting, label manufacturing and specialty packaging. We operate a global network of strategically located manufacturing facilities, serving a diverse base of over 100,000 customers. Our business strategy focuses on providing our customers with quality product offerings, improving our cost structure and profitability, and pursuing strategic acquisitions that either expand our current product offerings or allow us to enter into niche businesses that are highly complementary to our current product offering.

We operate our business in two complementary reportable segments: print and envelope and label and packaging.

Print and Envelope. We are one of the leading commercial printers in North America and the largest envelope manufacturer. In August 2011, we added to our print and envelope business with the acquisition of Nesbitt Graphics, Inc., which we refer to as Nesbitt. In February 2011, we added to our print and envelope business with the acquisition of MeadWestvaco Corporation's Envelope Product Group, which we refer to as EPG. Our print and envelope segment represents approximately 76.0% and 75.5% of our net sales for the three and nine months ended September 29, 2012, respectively.

Our print and envelope segment serves customers ranging from Fortune 50 companies to middle market and small companies operating in niche markets. This segment primarily caters to the consumer products, financial services, travel and leisure and telecommunications industries. We offer direct mail products used for customer solicitations and custom envelopes used for billing and remittance by end users including banks, brokerage firms and insurance and credit card companies. We produce


a broad line of specialty and stock envelopes that are sold through wholesalers, distributors, contract stationers, national catalogs for the office product markets and office product superstores. We provide a wide array of print offerings to our customers including electronic prepress, digital asset archiving, direct-to-plate technology, high-quality color printing on web and sheet-fed presses, digital printing and content management. The broad selection of print products we produce includes annual reports, car brochures, direct mail products, advertising literature, corporate identity materials and brand marketing materials. Our content management business offers complete solutions, including editing, content processing, content management, electronic peer review, production, distribution and reprint marketing.

Label and Packaging. We are a leading label manufacturer and the largest North American prescription label manufacturer for retail pharmacy chains. Our specialty packaging business currently focuses on specialty folded carton packaging and shrink-sleeve packaging. Our label and packaging segment represented approximately 24.0% and 24.5% of our net sales for the three and nine months ended September 29, 2012, respectively.

Our label and packaging segment serves customers ranging from multinational, national, middle market and small companies serving niche markets and resale customers. We print a diverse line of custom labels for a broad range of industries including manufacturing, warehousing, packaging, food and beverage, and health and beauty, which we sell through extensive networks within the resale channels. We also provide direct mail and overnight packaging labels, food and beverage labels, and shelf and scale labels for national and regional customer accounts. We also produce pressure-sensitive prescription labels for the retail pharmacy chain market. We produce premium high quality promotional packaging offerings including, folded carton, and full body shrink sleeves. Our primary customers for our specialty packaging products are pharmaceutical, apparel, tobacco, neutraceutical and other large multinational consumer product companies.

Consolidated Operating Results

This MD&A includes an overview of our condensed consolidated results of operations for the three and nine months ended September 29, 2012 and October 1, 2011 followed by a discussion of the results of operations of each of our reportable segments for the same periods. Our results for the three months ended October 1, 2011 include the operating results of Nesbitt for less than a full three months. Our results for the nine months ended October 1, 2011 include the operating results of EPG and Nesbitt for less than a full nine months.

Market Conditions

The overall printing industry is highly fragmented which creates overcapacity and price sensitivity in many of our businesses. The uncertainty that remains with the current United States and global economic conditions most likely will continue to affect our results of operations and financial position. These uncertainties about future economic conditions in a challenging operating environment make it difficult for us to forecast our future operating results. We believe our efforts to reduce our operating cost structure, which we implemented at the beginning of the economic downturn, allowed us to mitigate significant impacts to our operating performance and to our business over the past two years. Therefore, we continue to pursue additional cost savings opportunities in an effort to mitigate any further potential impact on our operations from the remaining uncertainty surrounding the current economic conditions.

2012 Overview

During the first nine months of 2012, our print and envelope operations have focused on completing the integration of EPG into our existing operations, mitigating the decline in direct mail sales due to our financial institution customers decreased demand for customer solicitations and mitigating the decline in our publisher services group revenue due to the decline in the circulation of journals and periodicals. We believe we will complete the integration of EPG into our existing operations by the end of 2012 and our efforts to mitigate sales declines have resulted in sales opportunities that should partly offset the decline in sales volumes attributable to direct mail and journals and periodicals.

During the first nine months of 2012, our label and packaging operations have focused on enhancing our e-commerce customer solutions, enhancing our long-run labels business with a focus on prime label capabilities and aligning our operating platform subsequent to the divestiture of two product lines in early 2012. We believe these efforts will provide greater sales opportunities for these businesses and provide focus on our growth business lines.

In addition to the operations focus noted above, we have been focused on our 2013 debt maturity. We began the year with a planned approach to eliminate this debt maturity and, to date, we have executed certain steps within that plan. To date, we have refinanced or paid down approximately 73% of this tranche and, most recently, we announced that we have been evaluating several


alternatives to address the 2013 maturity by the end of 2012, including an unsecured loan. We expect to announce a solution shortly in regards to completing one of these alternative methods. For further discussion related our capital structure and activities taken in 2012 to address our 2013 debt maturity, see the Long-Term Debt section below.

Discontinued Operations
In 2011, we began exploring our opportunities to divest certain non-strategic or underperforming businesses within our manufacturing platform. As a result, in the fourth quarter of 2011, the financial results of our documents and forms business as well as our wide-format papers business were accounted for as discontinued operations, which we refer to collectively as the Discontinued Operations, resulting in our historical consolidated balance sheets, statement of operations and comprehensive income (loss) and statement of cash flows being reclassified to reflect these discontinued operations separately from our continuing operations.

In February of 2012, we completed the sale of our documents and forms business, which we refer to as the Documents Group. Net cash proceeds were approximately $35.5 million. The original sale price of $40.0 million was subject to working capital settlement negotiations, which were completed during the three months ended September 29, 2012, pursuant to the purchase and sale agreement. In January of 2012, we completed the sale of our wide-format papers business and received proceeds of $4.7 million.

Reportable Segments

In the first quarter of 2012, we realigned our reportable segments as a result of the sale of the Discontinued Operations combined with the realignment of management responsibilities and strategy. Previously, we reported our segments as envelopes, forms and labels and commercial printing. Beginning January 1, 2012, we realigned our segments into two complementary reportable segments: the print and envelope segment and the label and packaging segment.


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. Our reporting periods for the three and nine month periods ended September 29, 2012 and October 1, 2011 each consisted of 13 weeks and 39 weeks, respectively.

                                                 Three Months Ended                          Nine Months Ended
                                       September 29, 2012     October 1, 2011     September 29, 2012     October 1, 2011
                                               (in thousands, except                       (in thousands, except
                                                 per share amounts)                         per share amounts)
Net sales                             $         451,274      $       475,835     $        1,345,764     $      1,422,705
Operating income:
Print and envelope                    $          29,876      $        29,888     $           63,951     $         75,262
Label and packaging                              12,472               12,882                 37,343               36,174
Corporate                                        (7,360 )             (9,545 )              (23,094 )            (32,674 )
Total operating income                           34,988               33,225                 78,200               78,762
Gain on bargain purchase                              -                 (641 )                    -              (11,720 )
Interest expense, net                            28,926               28,435                 85,574               88,064
Loss on early extinguishment of
debt, net                                            25                    -                 11,439                    -
Other expense (income), net                         491                 (904 )                 (327 )               (567 )
Income (loss) from continuing
operations before income taxes                    5,546                6,335                (18,486 )              2,985
Income tax expense (benefit)                        888                5,061                   (598 )              2,250
Income (loss) income from
continuing operations                             4,658                1,274                (17,888 )                735
(Loss) income from discontinued
operations, net of taxes                           (183 )              1,531                 (5,256 )              5,228
Net income (loss)                     $           4,475      $         2,805     $          (23,144 )   $          5,963
Income (loss) per share-basic:
Continuing operations                 $            0.07      $          0.02     $            (0.28 )   $           0.01
Discontinued operations                               -                 0.02                  (0.08 )               0.08
Net income (loss)                     $            0.07      $          0.04     $            (0.36 )   $           0.09
Income (loss) per share - diluted:
Continuing operations                 $            0.06      $          0.02     $            (0.28 )   $           0.01
Discontinued operations                               -                 0.02                  (0.08 )               0.08
Net income (loss)                     $            0.06      $          0.04     $            (0.36 )   $           0.09


Net Sales

Net sales decreased $24.6 million, or 5.2%, in the third quarter of 2012, as compared to the third quarter of 2011, primarily due to lower sales from our print and envelope segment of $24.4 million. See Segment Operations below for a detailed discussion of the primary factors affecting the change in our net sales by reportable segment.

Net sales decreased $76.9 million, or 5.4%, in the first nine months of 2012, as compared to the first nine months of 2011, due to lower sales from our print and envelope segment of $74.7 million and our label and packaging segment of $2.3 million. See Segment Operations below for a detailed discussion of the primary factors affecting the change in our net sales by reportable segment.

Operating Income

Operating income increased $1.8 million, or 5.3%, in the third quarter of 2012, as compared to the third quarter of 2011. This increase was primarily due to lower corporate expenses of $2.2 million. See Segment Operations below for a more detailed discussion of the primary factors for the changes in operating income by reportable segment.

Operating income decreased $0.6 million, or 0.7%, in the first nine months of 2012, as compared to the first nine months of 2011. This decrease was primarily due to decreases from our print and envelope segment of $11.3 million, partially offset by lower corporate expenses of $9.6 million and increases in operating income from our label and packaging segment of $1.2 million. See Segment Operations below for a more detailed discussion of the primary factors for the changes in operating income by reportable segment.

Gain on Bargain Purchase

During the third quarter and first nine months of 2011, in connection with the acquisition of EPG, we recognized a preliminary bargain purchase gain of approximately $0.6 million and $11.7 million, respectively.

Interest Expense

Interest expense increased $0.5 million to $28.9 million in the third quarter of 2012, as compared to $28.4 million in the third quarter of 2011. The increase is primarily due to an increase in weighted average interest rates due to our refinancing activities in 2012, offset by lower average outstanding debt balances as a result of debt repayments using cash flow from operations. Interest expense in the third quarter of 2012 reflected average outstanding debt of approximately $1.3 billion and a weighted average interest rate of 8.2%, as compared to average outstanding debt of $1.4 billion and a weighted average interest rate of 7.9% in the third quarter of 2011.

Interest expense decreased $2.5 million to $85.6 million in the first nine months of 2012, as compared to $88.1 million in the first nine months of 2011. The decrease is primarily due to the lower average outstanding debt balances primarily as a result of debt repayments using cash flow from operations and the proceeds from the sale of the Discontinued Operations, offset in part by higher interest expense as a result of our refinancing activities in 2012. Interest expense in the first nine months of 2012 reflected average outstanding debt of approximately $1.3 billion and a weighted average interest rate of 8.1%, as compared to average outstanding debt of $1.4 billion and a weighted average interest rate of 8.0% in the first nine months of 2011.

Loss on Early Extinguishment of Debt

During the first nine months of 2012, in connection with refinancing activities, we incurred a loss on early extinguishment of debt of $13.8 million, of which $10.7 million relates to tender and consent fees paid to consenting lenders, $3.3 million relates to the write-off of previously unamortized debt issuance costs. The loss on early extinguishment is partially offset by the gains on early extinguishment of debt of $2.4 million related to the repurchase of $198.3 million of our 7.875% Notes, $170.0 million of our 10.5% senior notes due 2016, which we refer to as the 10.5% Notes, and $25.4 million of our 8.375% senior subordinated notes due 2014, which we refer to as the 8.375% Notes plus accrued and unpaid interest thereon.


Income Taxes

                                                  Three Months Ended                         Nine Months Ended
                                       September 29, 2012      October 1, 2011     September 29, 2012     October 1, 2011
                                                   (in thousands)                              (in thousands)
Income tax expense (benefit) from
U.S. operations                       $           (20 )       $         4,620     $          (1,939 )    $           633
Income tax expense from foreign
operations                                        908                     441                 1,341                1,617
Income tax expense (benefit)          $           888         $         5,061     $            (598 )    $         2,250
Effective income tax rate                        16.0 %                  79.9 %                 3.2 %               75.4 %

In the third quarter of 2012, we had an income tax expense of $0.9 million, compared to an income tax expense of $5.1 million in the third quarter of 2011. The tax expense for the third quarter of 2012 primarily relates to income tax on our foreign operations. The tax expense for the third quarter of 2011 primarily relates to income taxes on our domestic operations. Our effective tax rate in the third quarter of 2012 was lower than the federal statutory rate, primarily due to non-deductible expenses and state income taxes. Our effective tax rate in the quarter ended October 1, 2011 was higher than the federal statutory rate, primarily due to non-deductible expenses and state income taxes.

In the first nine months of 2012, we had an income tax benefit of $0.6 million, compared to an income tax expense of $2.3 million in the first nine months of 2011. The tax benefit for the first nine months of 2012 primarily relates to income taxes on our domestic operations. The income tax expense for the first nine months of 2011, primarily relates to income taxes on our foreign operations. Our effective tax rate in the first nine months of 2012 was lower than the federal statutory rate, primarily due to non-deductible expenses and state income taxes. The income tax expense for the first nine months of 2011 includes income tax expense of $4.3 million related to our bargain purchase gain in connection with the acquisition of EPG. Our effective tax rate in the nine months ended October 1, 2011 was higher than the federal statutory rate, primarily due to non-deductible expenses and state income taxes.

We assess the recoverability of our deferred tax assets and, to the extent recoverability does not satisfy the "more likely than not" recognition criteria, record a valuation allowance against our deferred tax assets. We consider all positive and negative evidence in evaluating our ability to realize our net deferred tax assets, including our operating results, ongoing tax planning, and forecast of future taxable income, on a jurisdiction by jurisdiction basis. Significant judgment is required with respect to the determination of whether or not a valuation allowance is required for certain of our deferred tax assets. As of September 29, 2012, the total valuation allowance on our net U.S. deferred tax assets was approximately $21.5 million.

(Loss) Income from Discontinued Operations, net of taxes
(Loss) income from discontinued operations represents the results of operations, including tax effects of our Discontinued Operations. The results for the third quarter of 2012 include the loss on sale of our Discontinued Operations of $0.2 million, net of a tax benefit of $0.1 million. Loss from discontinued operations was $0.2 million, net of a tax benefit of $0.1 million for the third quarter of 2012. The results for the first nine months of 2012 include the loss on sale of our Discontinued Operations of $5.4 million, net of a tax benefit of $3.4 million. Income from discontinued operations of $0.3 million, net of taxes of $0.1 million for the first nine months of 2012, include the reduction of a liability of $1.8 million, net of tax expense of $1.2 million, due to the expiration of certain statutes of limitations related to a previous divestiture.

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.


Print and Envelope

                                                 Three Months Ended                          Nine Months Ended
                                       September 29, 2012     October 1, 2011     September 29, 2012     October 1, 2011
                                                    (in thousands)                             (in thousands)
Segment net sales                     $         343,012      $       367,454     $        1,016,332     $      1,090,999
Segment operating income              $          29,876      $        29,888     $           63,951     $         75,262
Operating income margin                             8.7 %                8.1 %                  6.3 %                6.9 %
Restructuring, impairment and other
charges                               $           3,490      $         4,223     $           21,247     $         12,554

Segment Net Sales

Segment net sales for our print and envelope segment decreased $24.4 million, or 6.7%, in the third quarter of 2012, as compared to the third quarter of 2011. Net sales for our envelope operations decreased $19.2 million primarily due to:
(i) lower sales volumes from our direct mail customers, primarily financial institutions, related to lower demand for customer solicitations and (ii) lower sales volumes from our office product customers due to our decision to exit lower margin business. Net sales for our commercial printing operations declined $5.2 million, primarily due to: (i) lower sales volumes due to the closure and consolidation of a print plant into our existing operations and continued declines in the circulation of journals and periodicals, and (ii) lower sales due to price pressures that continue to exist within the print industry, offset slightly by higher sales from the integration of Nesbitt into our operations, as Nesbitt was not included in our results for a full three months in the third quarter of 2011.

Segment net sales for our print and envelope segment decreased $74.7 million, or 6.8%, in the first nine months of 2012, as compared to the first nine months of 2011. Net sales for our commercial printing operations declined $39.4 million, primarily due to: (i) lower sales volumes due to the closure and consolidation of a print plant into our existing operations, customer product launches that occurred in the first nine months of 2011, but did not repeat in the first nine months of 2012 and continued declines in the circulation of journals and periodicals, and (ii) lower sales due to price pressures that continue to exist within the print industry, offset slightly by higher sales from the integration . . .

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