By Steven Schnoll February 9, 2005 -- Cadmus Communications Corporation (NASDAQ: CDMS) announced a decline in second quarter sales for fiscal year 2005 from last year of 5% to $109.1 million from $115.3 million. The designed decrease in marginal specialty magazine print work was not offset to date by its highly regarded Publishers Services segment. However, its strategic initiative “to rationalize and balance capacity and cost structure among our domestic and India-based content sites” is working according to Bruce Thomas, president and CEO. Net income rose 13% to $3.5 million from $3.1 million and earnings per share increased 12% to $.37 a share from $.33 last year. Topics of this summary: Company Performance Overview Guidance Raine’s Radar Q & A Company Performance Cadmus continues to create a balanced portfolio of content services. Its attempt to become less reliant on the ruthlessly competitive magazine sector is showing profound results. The double digit growth experienced in the Specialty Packaging segment is very impressive and highlights the successful diversification effort. Specialty Packaging net sales increased 13% to $20.4 million and operating margins expanded to 9.4% from 5.5% Operating margins improved to 7.9% of net sales an increase over the same period in 2004 of 7.6%. The major hit in the revenue column came from a 70% reduction in the Specialty Magazine sector. The company has been carefully trimming the magazine accounts weeding out the unprofitable or marginally profitable publications hoping to put its efforts into the higher margin offerings of content management. The big disappointment to date is the education market. Even though the potential revenue has not materialized the company has not lost faith in this lucrative market, particularly with some major states undergoing curriculum reviews, which generate substantial printing of new textbooks. The company has successfully reduced debt levels this quarter by $.2 million. Management is disappointed in its European sales efforts. They have not received much attention from European publishers and hope to remedy that by hiring some indigenous natives to remedy. The company continues it efforts to drive margin improvement by implementing some significant projects: Rebalance workload at content facilities to minimize overtime costs which should amount to $2 to $3 million in savings. Shared Service Initiative: consolidate 2 sites savings potential $400,000 to $500,000. Paper Program, company purchases over 90,000 tons of paper a year, and achieving a 1% savings is real money. Guidance The company revised its revenue forecast for fiscal year 2005 downward due to slower than expected growth in the educational market. Operating margins will continue to expand derived from the cost improvements and efficiency efforts currently underway. Year end guidance should be at low end of range. Raine’s Radar Once again Cadmus proved that margins on smaller revenue can be achieved with the proper implementation of a lean manufacturing model. Their emphasis on cross media services is gaining market momentum and should start to manifest profitable revenue to offset the declining magazine work. Cadmus is much more than just another printing company it is a digital content marketing provider presenting high value alternatives to delivering relevant information in a timely manner. The company’s India operation is leading edge and should start to reap real value for global enterprise organizations if they can successfully get the message out. The challenge will be getting the right mix of marketing strategists and sales personnel in place to clearly illuminate the value proposition to potential clients. Q & A Specialty magazines represent 28% of total volume down from 34%. Journal business still experiencing pricing pressure but page count is up from the lows of the last few years. Richmond has two 48 page web presses that have been used for specialty magazines in the past, but lend themselves to efficient utilization for the education market. These presses should provide some competitive cost advantages. Specialty packaging business numbers are very sustainable. Business has momentum with a strong backlog. Flexo areas particularly vibrant. Cadmus is working very hard on margin improvement initiatives, with no opportunity untouched. Executives do not see any revenue turnaround in next few quarters. Seeking out a few new tax strategies, and they don’t want to pay any taxes which can be legitimately reduced. Educational marketplace still largely untapped. Customers still seeking cost savings and price reductions. Constant search for finding news ways to save and pass these savings on. Always need to be prepared for pricing discussions. Many delays in educational vendor certification process due to overseas sites. No other supplier has the complement of front end content capability coupled with the traditional print support. This has taken some time to sink in with potential new customers. Not a “me to” vendor. Spending heavily marketing capabilities in education sector. Most of these costs should be gone as 2006 fiscal year comes into play.