Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CVO > SEC Filings for CVO > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for CENVEO, INC

Form 10-Q for CENVEO, INC


6-Nov-2013

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 29, 2012, which we refer to as our 2012 Form 10-K. Item 7 of our 2012 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of September 28, 2013.

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 a diversified manufacturing company focused on print related products. 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 has been and continues to be focused on pursuing strategic acquisitions, improving our cost structure, providing a diverse quality product offering portfolio to our customers and maintaining reasonable levels of financial flexibility. We believe this strategy has allowed us to diversify our revenue base, maintain our low cost producer focus and deliver quality product offerings to our customers.

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 and the largest envelope manufacturer in North America. On September 16, 2013, we enhanced our manufacturing capabilities and reduced capacity in the envelope industry with the acquisition of certain assets of National Envelope Corporation, which we refer to as National. Our print and envelope segment represented approximately 74.7% and 73.6% of our net sales for the three and nine months ended September 28, 2013, 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. On December 31, 2012, we added to our label business with the acquisition of Express Label Company, which we refer to as Express Label. Our specialty packaging business currently focuses on specialty folded carton packaging and shrink-sleeve packaging. Our label and packaging segment represented approximately 25.3% and 26.4% of our net sales for the three and nine months ended September 28, 2013, respectively.

Our label and packaging segment serves customers ranging from multinational, national, middle market and small companies serving niche markets and resale customers. We produce 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 28, 2013 and September 29, 2012 followed by a discussion of the results of operations of each of our reportable segments for the same periods. Our results for the three and nine months ended September 28, 2013 include the operating results of Express Label. National's results of operations are included in our operating results from September 16, 2013. Our results for the three and nine months ended September 29, 2012 do not include the operating results of National or Express Label.
2013 Overview
We believe that the mild recovery of the general economy experienced in 2012 has continued in 2013. We believe our efforts to reduce our operating cost structure, which we began implementing at the beginning of the economic downturn, allowed us to mitigate significant impacts to our operating performance and to our business over the past three years. The print-related industries are highly fragmented and extremely competitive due to over capacity and pricing pressures. We believe these factors combined with a slow general economic recovery will continue to impact our results of operations throughout the remainder of 2013 and potentially into 2014.

Our current management focus is on the following areas:


Improving Sales Performance

Our sales focus has been and will continue to be on our customer experience across each of our businesses ensuring we meet our customer demands and work to expand our relationship with them through cross-selling initiatives available within our platform. During 2013, we implemented a customer relationship management tool across our entire sales platform. We have focused on our e-commerce platform in 2013 by investing in both capital investments and incremental headcount to support this platform. We have also begun a series of recruiting efforts with a focus on attracting not only talented individuals with experience in our current business lines, but also on individuals with experience in industry channels that we believe print related products will grow or have minimal secular decline in the future. In addition, the uncoated freesheet paper market, which is the primary input for our envelope and certain other products, will experience supply reduction beginning in the fourth quarter of 2013 through the first quarter of 2014. As a result, suppliers have announced price increases that are effective during our fourth quarter of 2013. We believe that we will be able to pass along these announced increases as well as other ancillary raw material costs, which we have not been able to pass along to our envelope customers over the past two years, onto our envelope customers beginning in our fourth quarter of 2013. As a result, we believe we will experience sales and margin improvements for a portion of our fourth quarter of 2013 and into 2014. We expect these focus points, along with our expanded geographic presence from the acquisition of certain assets of National, will allow us to experience modest sales growth despite operating in challenging industries and an uncertain economy.

Maintain Cost Structure

We continue to monitor our cost structure as marketplace conditions warrant and expect to further reduce our cost structure, as necessary. In the first quarter of 2013, as a result of margin pressures from rising input costs and price pressures experienced within our print and envelope segment, we initiated a plan to further reduce our cost structure. We also continue to focus on strategic investments, capital expenditures and acquisitions in areas that we believe will strengthen our manufacturing platform and product offerings and review strategic alternatives for business lines we believe are underperforming or non-strategic to our future operations.

Integration of Certain Assets of National

We believe our acquisition of certain assets of National will provide much needed capacity reductions within the envelope industry. We have developed and begun implementing our preliminary plan to integrate those assets into our existing envelope operations in the third quarter of 2013. At this time, we expect this integration to take in excess of a year to complete due to the condition of National's operating platform and asset base at the time of acquiring these assets out of bankruptcy.

Improving our Capital Structure

Since the beginning of 2011, we have been focused on improving our capital structure through a number of initiatives including working capital improvements, exiting underperforming or non-strategic assets, and taking advantage of attractive leverage loan and high yield debt market conditions. Since we began this initiative, we have reduced our outstanding debt by over $105 million, despite our continued reinvestments of cash into our businesses via three acquisitions and focused capital expenditures and paying over $55 million in transaction costs to assist us in improving our capital structure. At the beginning of 2013, we addressed a near term maturity that was coming due at the end of 2013 by entering into the Unsecured Term Loan for $50 million. As of November 5, 2013, there is $20 million remaining on the Unsecured Term Loan and we fully expect to repay the remaining $20 million in the next few months. During the second quarter of 2013, we refinanced our first lien debt, which extended our next sizable debt maturity until 2017 and resulted in increased cash flows via lower cash interest upon the completion of the refinancing. As part of the refinancing, we transitioned from a cash flow revolving credit facility to an asset-based revolving credit facility, which we refer to as our ABL facility, to further reduce interest expense. As of the end of September 2013, primarily due to our acquisition of certain assets of National, we now have approximately $47.0 million of suppressed capacity underlying our ABL facility and we may utilize our accordion feature within the ABL facility to borrow up to an additional $50 million to further enhance our capital structure by using this lower interest rate vehicle to address our higher interest rate debt currently outstanding.

Discontinued Operations

In September of 2013, we completed the sale of our custom envelope business, which we refer to as Custom Envelope, within our print and envelope segment and received net proceeds of $42.3 million. In addition to these proceeds, $4.9 million of additional purchase price consideration has been held in escrow and will be paid subject to certain financial adjustments, of which we received $2.5 million during the fourth quarter of 2013. The operating results of this divestiture are reported in discontinued operations in our condensed consolidated financial statements for all periods presented.


During the second quarter of 2013, we decided to exit the San Francisco market and closed a manufacturing facility within our print and envelope segment. The operating results of this manufacturing facility are reported in discontinued operations in our condensed consolidated financial statements for all periods presented.

In February of 2012, we completed the sale of our documents and forms business within our label and packaging segment. Net cash proceeds were approximately $35.5 million. In January of 2012, we completed the sale of our wide-format papers business and received proceeds of approximately $4.7 million. The operating results of these divestitures are reported in discontinued operations in our condensed consolidated financial statements for all periods presented.

Reportable Segments

We operate two complementary reportable segments: the print and envelope segment and the label and packaging segment.

See below for a summary of net sales and operating income for 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 three and nine month reporting periods consisted of 13 weeks and 39 weeks, respectively, and ended on September 28, 2013 and September 29, 2012.

                                             For the Three Months Ended                     For the Nine Months Ended
                                     September 28, 2013      September 29, 2012     September 28, 2013     September 29, 2012
                                               (in thousands, except                          (in thousands, except
                                                 per share amounts)                            per share amounts)
Net sales                           $         442,781       $          437,168     $        1,267,935     $        1,300,593
Operating income/(loss):
Print and envelope                  $          15,184       $           27,170     $           38,298     $           55,286
Label and packaging                             9,053                   12,472                 32,547                 37,343
Corporate                                      (7,713 )                 (7,360 )              (25,801 )              (23,094 )
Total operating income                         16,524                   32,282                 45,044                 69,535
Gain on bargain purchase                      (12,435 )                      -                (12,435 )                    -
Interest expense, net                          27,611                   28,926                 85,421                 85,574
Loss on early extinguishment of
debt, net                                       1,593                       25                  9,440                 11,439
Other expense/(income), net                       595                      491                 (1,400 )                 (327 )
(Loss)/income from continuing
operations before income taxes                   (840 )                  2,840                (35,982 )              (27,151 )
Income tax benefit                            (11,331 )                   (182 )               (6,987 )               (4,012 )
Income/(loss) from continuing
operations                                     10,491                    3,022                (28,995 )              (23,139 )
Income/(loss) from discontinued
operations, net of taxes                       13,492                    1,453                 14,950                     (5 )
Net income/(loss)                   $          23,983       $            4,475     $          (14,045 )   $          (23,144 )
Income/(loss) per share - basic:
Continuing operations               $            0.16       $             0.05     $            (0.45 )   $            (0.36 )
Discontinued operations                          0.21                     0.02                   0.23                      -
Net income/(loss)                   $            0.37       $             0.07     $            (0.22 )   $            (0.36 )

Income/(loss) per share -
diluted:
Continuing operations               $            0.13       $             0.04     $            (0.45 )   $            (0.36 )
Discontinued operations                          0.16                     0.02                   0.23                      -
Net income/(loss)                   $            0.29       $             0.06     $            (0.22 )   $            (0.36 )


Net Sales

Net sales increased $5.6 million, or 1.3%, in the third quarter of 2013, as compared to the third quarter of 2012. Sales in our label and packaging segment increased $3.9 million, and in our print and envelope segment $1.7 million.

Net sales decreased $32.7 million, or 2.5%, in the first nine months of 2013, as compared to the first nine months of 2012, due to lower sales from our print and envelope segment of $38.2 million, offset slightly by higher sales from our label and packaging segment of $5.6 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 decreased $15.8 million, or 48.8%, in the third quarter of 2013, as compared to the third quarter of 2012. This decrease was primarily due to a decrease in operating income from our print and envelope segment of $12.0 million and a decrease in operating income from our label and packaging segment of $3.4 million.

Operating income decreased $24.5 million, or 35.2%, in the first nine months of 2013, as compared to the first nine months of 2012. This decrease was due to:
(i) a decrease in operating income from our print and envelope segment of $17.0 million; (ii) a decrease in operating income from our label and packaging segment of $4.8 million; and (iii) higher corporate expenses of $2.7 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 the first nine months of 2013, in connection with the acquisition of certain assets of National, we recognized a preliminary bargain purchase gain of approximately $12.4 million.

Interest Expense

Interest expense decreased $1.3 million to $27.6 million in the third quarter of 2013, as compared to $28.9 million in the third quarter of 2012. The decrease was primarily due to: (i) lower average outstanding debt balances primarily as a result of debt repayments using cash flow from operations and proceeds from the sale of Custom Envelope; and (ii) lower interest rates related to our refinancing of debt in the second quarter of 2013. Interest expense in the third quarter of 2013 reflected average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 8.0%. This compares to average outstanding debt of $1.3 billion and a weighted average interest rate of 8.2% in the third quarter of 2012.

Interest expense decreased $0.2 million to $85.4 million in the first nine months of 2013, as compared to $85.6 million in the first nine months of 2012. The decrease was primarily due to lower average outstanding debt balances primarily as a result of debt repayments using cash flow from operations and the proceeds from the sale of Custom Envelope. These decreases were offset in part by higher interest rates prior to our refinancing of debt in the second quarter of 2013. Interest expense in the first nine months of 2013, reflected average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 8.3%, as compared to average outstanding debt of $1.3 billion and a weighted average interest rate of 8.1%, in the first nine months of 2012.

We expect interest expense for the remainder of 2013 will be lower than the same period in 2012. This relates primarily to the refinancing completed in the second quarter of 2013.

Loss on Early Extinguishment of Debt

During the third quarter of 2013, we incurred an aggregate loss on early extinguishment of debt of $1.6 million, primarily related to the write-off of unamortized debt issuance costs and the write-off of original issuance discount related to the pay down of $15.0 million of our 15% unsecured term loan due 2017, which we refer to as our Unsecured Term Loan.

During the first nine months of 2013, we incurred an aggregate loss on early extinguishment of debt of $9.4 million, of which $6.4 million related to consent fees paid to consenting lenders, the write-off of unamortized debt issuance costs and the


write-off of original issuance discount associated with the refinancing of our term loan and revolving credit facilities. Additionally, $2.9 million related to the write-off of unamortized debt issuance costs and the write-off of original issuance discount related to the pay down of $30.0 million of our Unsecured Term Loan.

During the first nine months of 2012, we incurred an aggregate loss on early extinguishment of debt of $11.4 million. 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 and $3.3 million relates to the write-off of previously unamortized debt issuance costs. The loss on early extinguishment was 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% senior subordinated notes due 2013, which we refer to as the 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
                                           For the Three Months Ended                     For the Nine Months Ended
                                  September 28, 2013       September 29, 2012     September 28, 2013      September 29, 2012
                                                (in thousands)                                  (in thousands)
Income tax benefit from U.S.
operations                       $          (11,308 )     $          (1,090 )    $          (6,997 )     $           (5,353 )
Income tax (benefit) expense
from foreign operations                         (23 )                   908                     10                    1,341
Income tax benefit               $          (11,331 )     $            (182 )    $          (6,987 )     $           (4,012 )
Effective income tax rate                   1,348.9 %                  (6.4 )%                19.4 %                   14.8 %

Effective Tax Rate

Our effective tax rate is calculated based upon a full-year forecast of income or loss. Consideration is given to permanent tax return items that impact our taxable income or loss relative to our results of operations and never reverse as a temporary book-tax timing item. These permanent type items, along with an estimate for state taxes, are the reason our effective tax rate is different from the federal statutory rate. The type of permanent adjustments that we generally incur cause our effective tax rate to be higher than the statutory federal rate when we forecast income for the full-year and lower than the statutory federal rate when we forecast a loss for the full-year. In our case, these permanent book-tax differences would increase taxable income or reduce a taxable loss, and in some instances, would generate taxable income where a book loss is forecasted for the year.

The expected annual effective tax rate is applied on year-to-date results of continuing operations and, together with discrete tax adjustments comprise our income tax expense or benefit for year-to-date continuing operations. As a result, the level of income tax expense or benefit recorded for the current quarter will include an adjustment for prior quarters due to the change in the projected annual effective tax rate and the impact the change in the rate has on prior quarter's recorded tax expense or benefit. Our annual effective tax rate was negative for the six months ended June 29, 2013 resulting in tax expense being recorded against a pre-tax loss from continuing operations. Our expected annual effective tax rate was positive for the nine months ended September 28, 2013. As a result, the tax benefit recorded during the third quarter of 2013 was increased to reflect the changes made to the annual effective tax rate as that change impacted the calculation of taxes recorded during the first six months of the year.

In the third quarter of 2013, we had an income tax benefit of $11.3 million, compared to an income tax benefit of $0.2 million in the third quarter of 2012. The tax benefit for the third quarter of 2013 and 2012 primarily relates to . . .

  Add CVO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CVO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.