By Trevor Shackelford May 24, 2006 -- Cadmus Communications Corporation (NASDAQ: CDMS) announced their third quarter results recently. The company’s revenue was $116.5 million, 3% higher than the $113.2 million reported for the third quarter last year. Adjusted operating income 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. Operating income was adjusted in this quarter due to the company using GAAP reporting methods that allow the company to exclude restructuring costs. In the third quarter, the company had earnings per share of $0.50 including a tax benefit of $37.4 million and positively impacted EPS by $.90 per share. Reported results also include restructuring and other charges of $4.7 million, or $0.31 per share. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • The company will receive a total net cash benefit of $37.4 million. $11.8 million was received in April, and $2.9 million is expected in early fiscal 2007. The balance is recoverable as a reduction in taxes. • Despite issues at Lancaster Press, the company says that no customers have been lost. Lancaster Press’s operating income fell from $4.5 million in Q3 2005 to $0.9 million this quarter. • Total restructuring costs were $4.7 million. Of that amount, $2.7 million was cash and $2.0 million was non-cash. • For the quarter, debt increased $15.8 million. • DSOs declined to 41 days, compared to 44 days the previous quarter. • The company did have growth in net sales of 3% on a consolidated basis and growth in net sales in all segments and business units. • Cash dividends remained flat compared to the same quarter last year at $0.0625 per common share. Segment Performance Publishing Services Segment Third quarter revenue for the segment was $93.3 million, up almost 2% from $91.6 million reported for the third quarter of fiscal 2005. The company experienced solid 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. Adjusted operating income for the third quarter declined to $2.8 million from $8.8 million last year and operating income margin declined to 2.9% of net sales from 9.6% of net sales last year. This was primarily due to higher costs from operational inefficiencies and capacity constraints relating to the equipment replacement and consolidation plan. Capital spending in this segment was $1.5 million and the YTD figure is $4.18 million. Specialty Packaging Segment Revenue for the segment was $23.1 million, up 7% from $21.6 million reported for the same period last year as the company continues to benefit from its strategic Global Packaging Solutions network and also its investment in efficient manufacturing equipment. Operating income for the third quarter was essentially flat from the prior period at $1.9 million or 8.2% of sales. This is down from the prior year Q3 of $2.7 million or 12.3% of net sales. This segment continues to benefit from higher overall volume and efficiencies derived from new and more efficient technology and global workflows, which offset pricing pressures from certain larger customers. Guidance The company posted no specific earnings guidance for the company’s upcoming fiscal third quarter. The company stated that the specialty packaging business continues to perform well and will continue to do so. The company also expressed concern from being behind schedule in their equipment replacement and consolidation plan. The company has approximately $45 million in planned investments in fiscal 2006. The company expects that its equipment replacement and consolidation plan, once fully implemented, will generate $12-$15 million of annual EBITDA savings. Raine Radar The company has seen very little change from the last quarter. The Q3 was 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, but lagging operations put a dent in the income numbers. There’s no reason to think that next quarter will see any dramatic improvements. Q & A 1. Once the Lancaster consolidation is complete, the company fully expects for CAPEX to steady back to a rate of $10-20 million per year. 2. Profitability was hurt during the quarter by capacity constraint issues where work was run on less than optimal equipment. 3. The company believes page growth was strong in the third quarter of fiscal 2006 and is excited about the benefit from the additional pages of the American Chemical Society. 4. The company strongly believes that Q4 will be the start of a “steady improvement” in profit. A complete recovery from the consolidation is not going to happen in Q4. 5. Biggest issues for Q4 are in their Lancaster Press operational inefficiencies. A reduction in capacity at the plant has led to very high levels of overtime and outsourcing. The outsourcing has led to a decrease in product quality. 6. Cadmus said that delays and disruptions in consolidation would have an impact on the fourth quarter as well. As soon as the company gets the consolidation complete the company believes it will see the cost savings and efficiencies. This will likely be seen in early FY 2007. 7. The company expects that SG&A as a percentage of sales will be a little bit higher in Q4.