Cadmus Communications Corporation (NASDAQ: CDMS) announced a 21% increase in operating income for the third quarter compared to 2003 third quarter. Operating income was $9.1 million with net income of $3.5 million. Earnings per share were $0.38. The company experienced both top and bottom line performance improvement.

Raine Analyst Notes: It is clear Cadmus understands the business model of the future and is executing upon it. This is the fifth consecutive quarter of improved results. Bruce Thomas, President and CEO, and his team are redefining what the future of the classic printing industry will look like. They understand that content will reign supreme and the methods to deliver it may vary according to demand. They have also positioned themselves in the specialty packaging market segment that is providing consistent cash flow with little quarter-to-quarter fluctuation. Their move to reduce debt is another point of admiration. This company could be a textbook case for how to execute a successful turnaround. Every printer trying to understand how to survive, should take some time to study the Cadmus Strategic model, it is impressive.

Topics of this summary:

  • Third Quarter Performance
  • Business Update
  • Q & A

Third Quarter Performance

Cadmus continues to deliver increased revenues and earnings in all markets they serve except magazine printing. Some of the highlights from the earnings call are as follows:

  • Net sales rose slightly under 1% in quarter to $113.6 million from $113.4 in the corresponding quarter of 2003.
  • Content services experienced double digit growth.
  • Operating income rose 7% from last years third quarter to $9.2 million and operating margins increased 8.1%.
  • Specialty packaging revenue increased 6% to $16.4 million from $15.5 million. Operating margins in specialty packaging increased 10.4% from 5.1% in Q3 2003.
  • The company on May 3 rd , 2004 redeemed $6.4 million in a high cost 11.5% subordinated promissory note using a lower cost credit facility. It was also announced that a tender offer would be redeemed; $125 million in 9.75% senior subordinated notes. Overall reduced debt in quarter by $9.4 million

Business Update

Cadmus' President and Chief Executive Officer, Mr. Bruce Thomas, received accolades from all the analysts on the call for his businesses outstanding performance. The company's new services like ArticleWorks and its workflow automation tools, will continue to distinguish amongst the many organizations vying for fewer publishing revenue dollars. It also announced plans to ask out of underperforming magazine contracts. While Thomas noted that there has been some evidence of an uptick in the number of magazine pages being printed, magazines are still seeing tough times. He sees no major gains in this revenue area. This has overshadowed many of the significant gains realized in the content services and specialty packaging segments. Cadmus expects to realize a 5 to 10% growth range for coming fiscal year.

Q & A

  1. The double digit gains in content management services exclude print.
  2. Capital spending for the next fiscal year should be in line with this year's $14-$17 million expenditures.
  3. Cadmus' executives are very optimistic about the recent entry into educational publishing market. The company has many core competencies that can be readily applied to this segment.
  4. STM growth was largely built on the nature of business plus the move to more color pages as well as additional service offerings like ArticleWorks.
  5. Specialty packaging has a very solid future with little quarter-to-quarter revenue fluctuations. This is a very sustainable business model.
  6. Margins in special interest magazines are very difficult with eroding profits. Cadmus has witnessed 37 consecutive down months. This is due mainly to excess industry capacity, lower page counts and pricing. The recent paper increases may compound this problem even further.
  7. The company believes increased profit improvements will be realized because they are not chasing the wrong accounts and are marrying the right projects with the right equipment and technologies.
  8. The company believes building on past successes will drive even higher profits.
  9. The company is still under-funded in pension contributions but has made great strides to bring it to proper level. Executives believe they should be able to continue the catch up process in next fiscal year.