By Trevor Shackelford February 15, 2006 -- Cadmus Communications Corporation (NASDAQ: CDMS) recently announced their second quarter results. The company’s revenue was $114.2 million, 5% higher than the $109.1 million reported for the second quarter last year. Operating income was $5.2 million and net income was $1.1 million, or $0.12 per share, for the second quarter of fiscal 2006, compared to operating income of $8.6 million and net income of $3.5 million, or $0.37 per share, in the second quarter of fiscal 2005. These results include restructuring and other charges of $1.5 million, or $0.09 per share net of taxes. Adjusted for the impact of restructuring and other charges, operating income was $6.7 million and net income was $2.0 million, or $0.21 per share, compared to operating income of $8.6 million and net income of $3.5 million, or $0.37 per share, in the same period last year. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • In the second quarter, John Miller has joined the organization as Senior Vice President, Sales. • The company announced that the American Chemical Society (ACS) has decided to outsource all of its content processing to Cadmus, effective April 1, 2006. The company will begin processing all 235,000 pages that are published in the ACS journals. • On a GAAP basis, operating income of $5.2 million was 4.6% of net sales for the second quarter, compared to $8.6 million or 7.9% of net sales reported for the second quarter of fiscal 2005. • Total debt increased by $21.1 million from September 30, 2005. • The company incurred $19.2 million in capital expenditures primarily in connection with its previously announced equipment replacement and consolidation plan • EBITDA for the second quarter was $11.5 million, or 10.1% of net sales. • Total debt to EBITDA ratio on a trailing 12-month basis was approximately 3.5 to 1. • DSO for the quarter was 44 days. • During the quarter, SG&A declined to 9% of total revenue. Segment Performance Publishing Services Segment Second quarter revenue for the segment was $92.2 million, up 4% from $88.7 million, reported for the second quarter of fiscal 2005. The company experienced strong page and revenue growth from the scientific, technical and medical (SMT) market, continued growth in its emerging solutions technology offering, and better revenue trends in its printing plants serving the special interest magazine market. Operating income for the second quarter was $6.5 million, compared to $8.7 million reported for the same period in last year. Operating margins declined to 7.1% of net sales from 9.8% last year, primarily due to higher costs from operational inefficiencies and capacity constraints relating to the equipment replacement and consolidation plan. In addition, margins were adversely affected by substantially higher energy costs, lower overall pricing, costs incurred from the company’s growth initiatives in the educational and government markets, and the company’s emerging solutions technology products. Specialty Packaging Segment Revenue for the segment was $22.0 million, up 8% from $20.4 million reported for the same period last year as the company continues to benefit from its investment in operational efficiencies. Operating income for the second quarter was essentially flat at $1.9 million. This segment continues to benefit from higher overall volume and efficiencies derived from new and more efficient technology and global work flows which offset pricing pressures from certain larger customers. Guidance The company posted no specific earnings guidance for the company’s upcoming fiscal third quarter. However, it does believe that both of its segments are positioned well for growth. The company expects that its equipment replacement and consolidation plan, once fully implemented, will generate $12 - $15 million of annual EBITDA savings. Those savings should begin to be realized in fiscal fourth quarter of 2006, and should be fully implemented on an annual run-rate basis by the middle of fiscal 2007. Raine Radar What would have been a great quarter is mired by operational difficulties and troubles in completing its equipment replacement and consolidation program. The company experienced top-line gains in both segments, which is an improvement from last quarter. If the company can combine its sales success with some improvement in operations, Cadmus should see some much better income numbers. Judging from its limited guidance, it appears that may not happen for another six months. Q & A 1. Profitability was hurt during the quarter by capacity constraint issues where work was run on less than optimal equipment. 2. The company believes page growth was strong in the fourth quarter of fiscal 2006 and is excited about the benefit from the additional pages of the ACS. 3. An increase in time sensitive volumes of scholastic prep materials was one of the reasons its consolidation plans were disrupted. 4. Cadmus said that delays and disruptions in consolidation will have an impact on the third quarter as well. As soon as the company gets the consolidation complete the company believes it will see the cost savings and efficiencies. 5. In the second quarter, the company completed the relocation of its Dominican Republic facility and starting up its Honduras operation. Both of these negatively affected margins in the second quarter. 6. The company said that December was a terrific quarter in terms of demand. 7. CAPEX will be approximately $55 million for the year. 8. The company wrote off approximately $11.5 million related to acquisition related activities. 9. The company expects that SG&A as a percentage of sales will be a little bit higher in the Q3 and Q4. 10. ACS itself has done all of the content processing work in-house that Cadmus has won. The company expects competition to be fierce.