RICHMOND, Va., May 2 -- Cadmus Communications Corporation today announced results for its third quarter of fiscal 2006. Net sales were $116.5 million on a consolidated basis, an increase of 3% from $113.2 million in last year's third quarter, operating loss was $2.0 million, and net income was $4.7 million, or $0.50 per share. During the third quarter of fiscal 2006, the Company reached a resolution with the Internal Revenue Service ("IRS") on the tax treatment of a transaction executed in fiscal 2005 related to its Mack Printing Company subsidiary. As a result of the transaction and the agreement reached with the IRS, the Company will generate a total net cash benefit of $37.4 million. The Company already received $11.8 million in cash in April 2006, will receive approximately $2.9 million in early fiscal 2007, and will utilize the balance in future years as a reduction to income taxes otherwise payable on future income earned. In addition, the Company has recorded a cumulative income statement benefit of approximately $13.5 million, of which approximately $8.5 million, or $0.90 per share, was recorded in the third quarter of fiscal 2006 as a net reduction in income tax expense. This $8.5 million benefit is incremental to the $5.0 million, or $0.54 per share, benefit recorded in last year's third quarter. Commenting on this favorable tax benefit, Paul K. Suijk, senior vice president and chief financial officer, stated, "We are extremely pleased to have reached a favorable resolution with the IRS on the tax treatment of the transaction executed last year. More important than the positive impact on earnings per share, the cash benefits we have received to date and will receive in the future permit us to deliver significant and immediate shareholder value by reducing debt and using these inflows to partially offset the cash outflows in connection with our capital upgrade plan." Net Sales Growth. For the quarter, net sales were $116.5 million on a consolidated basis, an increase of 3% from $113.2 million in last year's third quarter. On a segment basis, Specialty Packaging segment net sales were up 7% to $23.1 million and Publisher Services segment net sales increased 2% to $93.3 million. This represents the fourth consecutive quarter in which the Company reported an increase in year over year net sales on a consolidated basis and a second quarter of increased year over year net sales in each of its segments. In addition, the revenue growth was broad-based, as the Company reported net sales growth in each of its content (in both domestic and India-based operations), emerging solutions, and print/distribution services units. Commenting on this growth, Bruce V. Thomas, president and chief executive officer stated, "We are pleased with our revenue growth this quarter, particularly as it was achieved despite significant capacity and efficiency issues in connection with our Lancaster integration. We are particularly pleased with the growth in our content business. In this business unit, pricing pressures have moderated, pages are increasing, and we have won new work. In addition, we are benefiting from a steady ramp up in our content- related work for educational publishers and in both classified and non- classified content processing for governmental agencies." Continuing, Mr. Thomas stated, "Our Specialty Packaging segment has continued to sustain its momentum, again delivering year over year improvement in net sales and achieving a solid operating margin of 8.2% of net sales. We are continuing to invest in the Specialty Packaging operation and are having continued success in expanding and enhancing the Global Packaging Solutions operations to serve the needs of our customers for offshore production and distribution." Lancaster and Other Manufacturing Inefficiencies. During the quarter, the Company continued to experience significant operational inefficiencies and capacity constraints in connection with the integration of its Lancaster and Science Press sites. These issues led to dramatically reduced profitability year over year at Lancaster, impacted efficiencies at other sites as a result of offloads and other work transfers to meet customer schedules, and drove higher spoilage, overtime, and other costs. The impact on efficiencies and overall financial performance of the print/distribution unit was significant. For the Lancaster and Science Press sites alone, operating results for the quarter were approximately $3.6 million lower than last year's third quarter. In addition, the Company incurred approximately $0.9 million in added costs and inefficiencies at other sites producing work offloaded from Lancaster. Excluding these added costs, profitability at the Company's other print sites was essentially flat year over year. Mr. Thomas remarked, "We are disappointed that we continued to experience integration and operational inefficiencies in connection with the integration of our Lancaster and Science Press sites. The impact of these issues on our financial performance this quarter was profound. However, our strategy was to do whatever it took to get the sites integrated in the third quarter and to ensure that no business was lost. We were successful in that strategy, and we are quite pleased that we have not lost any customers during this difficult period." Continuing, Mr. Thomas said, "Looking forward, we believe that the majority of the Lancaster-related disruption is behind us. During the quarter, we completed the consolidation of all equipment and personnel, augmented our leadership team at the site, enhanced manufacturing and scheduling systems and processes, and completed much needed training for both account management and manufacturing personnel. Based on these and other improvements, we are seeing, and expect to see going forward, a steady increase in efficiencies and a similarly steady return to more traditional levels of profitability at Lancaster and other print sites. In addition, and importantly, we continue to believe that we will ultimately obtain the $12-15 million of annualized EBITDA(1) savings originally planned in connection with the equipment replacement and consolidation plan." Restructuring and Other Charges. In the quarter ended March 31, 2006, the Company incurred restructuring and other charges of approximately $4.7 million, or $0.31 per share net of taxes, related primarily to (a) severance expenses, costs to consolidate and reorganize manufacturing facilities, and impairment of assets to be replaced, all of which are part of the Company's previously announced equipment replacement and consolidation plan, (b) costs associated with management changes and related organizational changes within the Publisher Services segment, and (c) expenses incurred in connection with the tax item mentioned above. Debt Levels and Capital Spending. For the third quarter, overall debt increased by $15.8 million (excluding the fair market value of interest rate swap agreements) as the Company incurred approximately $18.4 million in capital expenditures primarily related to its equipment replacement and consolidation plan. Of the additional debt incurred during the quarter, the Company borrowed another $3.8 million of debt arranged through German export financing that permits the Company to borrow, on an unsecured basis, up to 85% of the purchase price of the Company's German-manufactured equipment at rates and on terms that are more attractive than the Company's senior bank credit facility. Also during the quarter, the Company repurchased approximately 108,600 shares of common stock under its previously announced stock repurchase program. These repurchases resulted in a net cash outflow of approximately $1.5 million for the quarter. Commenting on these cash and debt-related matters, Mr. Suijk stated, "We will continue our efforts to keep the overall cost of our equipment replacement and consolidation plan as low as possible. We will also use our operating cash flows and the substantial cash benefit from the Mack transaction -- nearly $12 million of which has already been received in April -- to reduce debt levels as quickly and as cost-effectively as possible." Third Quarter and Year-to-Date Operating Results Review(2) Net sales for the third quarter totaled $116.5 million compared with $113.2 million last year, an increase of 3%. Specialty Packaging segment net sales were $23.1 million, an increase of 7% from $21.6 million last year, as the Company continued to benefit from its strategic Global Packaging Solutions network and also from its investment in new and highly efficient manufacturing equipment. Publisher Services segment net sales were $93.3 million, an increase of 2% from $91.6 million last year, as the Company experienced solid page and revenue growth from the scientific, technical and medical ("STM") market, improved revenues from its content-related initiatives in the educational and government services markets, continued growth in its emerging solutions technology offerings, and better revenue trends in its printing plants. Adjusted operating income(3) for the quarter was $2.7 million or 2.3% of net sales in the third quarter, compared to $9.2 million, or 8.1% of net sales last year. Specialty Packaging operating income of $1.9 million, or 8.2% of net sales, was down from $2.7 million, or 12.3% of net sales primarily due to a reduction this year in certain high margin project work. This segment, however, continues to benefit from higher overall volume and efficiencies derived from new and more efficient technology and enhancements and expansions to its global capacity and work flows. These positive trends continue to offset pricing pressures from certain larger customers. Publisher Services operating income declined to $2.8 million from $8.8 million last year and operating income margins declined to 2.9% of net sales from 9.6% last year. As detailed above, this decline was primarily due to much higher costs from operational inefficiencies and capacity constraints from the Lancaster and Science Press integration activities and additional costs incurred at other sites to produce offloaded work from Lancaster to meet customer schedules. In addition, margins were adversely affected by (i) higher energy costs, (ii) a negative change in overall work mix at the Company's special interest magazine facilities, and (iii) costs incurred in connection with the Company's growth initiatives in the educational and government services markets. In connection with the favorable tax resolution, the Company recorded a cumulative total benefit of $13.5 million, or $1.44 per share, as a net reduction in income tax expense, with $8.5 million of the benefit, or $0.90 per share, recorded in the third quarter of fiscal 2006. The Company will generate a total net cash benefit of $37.4 million as a result of the transaction and the agreement reached with the IRS. The cash benefit expected to be realized in future years will be utilized as a reduction to income taxes otherwise payable on future income earned. The difference between the $37.4 million net cash benefit expected to be realized and the cumulative $13.5 million recorded benefit primarily represents certain temporary book-tax balance sheet differences in accordance with accounting requirements. Capital spending of $18.4 million, related primarily to the Company's previously announced equipment replacement and consolidation plan, and the net cash outflow of $1.5 million for the repurchase of approximately 108,600 shares of its common stock under the previously announced stock repurchase program, offset partially from cash flow from operations, resulted in an increase in total debt of $15.8 million for the quarter, excluding the fair market value of interest rate swap agreements. During the quarter, the Company borrowed approximately $3.8 million of debt under the German export financing arranged for the purchase of certain equipment manufactured in Germany at rates and on terms that are more attractive than the Company's senior bank credit facility. Net sales for the first nine months of fiscal 2006 totaled $337.9 million compared with $325.3 million last year, an increase of 4%. Specialty Packaging segment net sales were $67.7 million, an increase of 16% from $58.4 million last year. Publisher Services segment net sales were $270.2 million, an increase of 1% from $266.9 million last year. For the nine months ended March 31, 2006, adjusted operating income(4) was $17.0 million, or 5.0% of net sales, compared to $25.0 million, or 7.7% of net sales last year. Capital expenditures of $46.2 million primarily related to the equipment replacement and consolidation plan resulted in an increase in total debt of $39.4 million for the nine months ended March 31, 2006, excluding the fair market value of interest rate swap agreements. Outlook Commenting on the Company's outlook for the fourth quarter of fiscal 2006, Mr. Thomas stated, "Our Specialty Packaging business continues to perform well, remains well positioned, and has solid momentum. In addition, in our Publisher Services segment, we are seeing the kind of page growth and new business development activity that is required for us to achieve our top-line targets in both content and in print. The key for us in the near term is to improve our manufacturing performance, both at Lancaster and our other print sites. We believe at this point that the majority of the Lancaster-related disruption is behind us and we expect to see, beginning with this current quarter, a steady return to more traditional levels of profitability. Looking forward, we continue to believe that our equipment replacement and consolidation plan, once fully implemented, will enhance our overall competitiveness and should deliver, beginning in fiscal 2007, the $12-15 million of annualized EBITDA savings we had originally planned."