By Steven Schnoll May 5, 2005 -- Cadmus Communications Corporation (NASDAQ: CDMS) announced flat third quarter revenue for fiscal year 2005 from the same quarter in 2004. The company reported quarterly sales as $113.2 million versus $113.6 in last fiscal years third quarter. Operating income was $8.9 million compared to $9.1 million, with net income rising to $7.1 million from $3.5 million due to a special tax benefit of $5.0 million relating to a special transaction at its Mack Printing operating division. The company was vague on the exact details as this tax benefit could spire up to as high as $37 million. Topics of this summary: Company Performance Overview Guidance Raine’s Radar Q & A Company Performance On a sequential quarter-to-quarter basis net sales for both operating segments, Publisher Services and Specialty Packaging improved. Publisher Services was up 3% over the third quarter and Specialty Packaging grew by 6%. Compared to the third quarter of 2004 net sales were essentially flat. Specialty packaging, while representing only approximately 15% of overall company, volume increased by 32% to $21.6 million from $16.4 million in the third quarter of 2004; with operating margins rising to 12.3% from 10.4%. As Brice Thomas, President and CEO remarked, “Clearly the highlight was the strong growth and impressive margin expansion that we achieved in our Specialty Packaging segment.” The company continued to struggle with balance in the Publisher Services segment where sales declined from $97.3 million in 2004 to $91.6 million in the current quarter a decrease of 6%. While some of this decline is planned as the company continues to weed out under performing contracts and the ongoing pricing conundrum, it still has not realized its full potential in the expanding educational book market. The company continues to successfully reduce debt levels by $6.0 million. The company also repurchased approximately 63,000 shares in the quarter. Guidance The company offered no specific outlook guidance for the fourth quarter or year end. Cadmus believes it has a great deal of momentum in the Specialty Packaging arena but may have a flat Q4. The company remains optimistic in sequential improvements but when comparing fiscal years revenues; overall revenues should be slightly down and operating margins will expand. Raine’s Radar The Cadmus strategic plan to migrate away from a dependency on the volatility of the publication marketplace seems sound. The higher margin packaging and educational markets are already reaffirming this paradigm shift. This diversification should reap many benefits once Cadmus can kick start the educational book market. During the call the company discussed that many of the journal publications have book divisions but these people often don’t communicate with their journal counterparts. It seems a primary flaw in the company strategy is, branding. Cadmus is not quite a household word amongst the astute buyers in the educational book marketplace. They have forged an extremely functional offshore operation in India. To achieve a strategic advantage in this educational content tailored facility once must be aware of the wide array of services namely, project management, editorial, composition and print services. One other area that Cadmus seems to have overlooked is the move to more personalized delivery of relevant content. Possibly better differentiation can be found by mobilizing some of their resources by offering on demand content delivery. Q & A Company still needs to prove to book community the value proposition and capabilities of our offshore site. Starting to get some professional book assignments from several non-profit journal customers. Company is probably through the worst of the pricing challenges but market is still cost conscious. Capital investments have been reduced but nothing has been strategically compromised or eliminated. Specialty magazine reduction is being replaced with educational products. No major trend changes. High interest from customers to move work offshore. Strategic cost reductions should impact 2006. Some but not all savings will go to bottom line. Some dollars will go to future investments. Chenai dedicated to education market and will lose $500,000 in year. Large educational publishers are very fragmented in buying. Journal business impacted by government insisting on publishing to Internet. Pricing pressure still strong in magazines from large competitors also seeking business.