RICHMOND, Va., Jan. 27 -- Cadmus Communications Corporation today announced net sales of $109.1 million for the second quarter of its fiscal year 2005, a decline of 5% from $115.3 million in last year's second quarter. Operating income was $8.6 million and net income was $3.5 million, or $0.37 per share, for the second quarter of fiscal 2005, compared to operating income of $8.8 million and net income of $3.1 million, or $0.33 per share, in the second quarter of fiscal 2004. Bruce V. Thomas, president and chief executive officer, remarked, "This quarter, we saw continued strong growth and impressive margin expansion in our Specialty Packaging segment. However, we failed to achieve the kind of top line growth we need for our Publisher Services segment. Despite these mixed revenue results, we are pleased that we were able to generate higher operating margins and EBITDA margins and deliver another quarter of double-digit improvement in net income and earnings per share. In addition, we continued to reduce our debt even after giving effect to the semi-annual interest payment on our senior subordinated notes, our option-related stock repurchase program, and slightly higher capital spending." Continuing, Mr. Thomas stated, "Our plan for this year was to build on the success that we have had in our Specialty Packaging business and, in our Publisher Services business, to invest in, create available capacity for, and capitalize upon growth opportunities that we saw as available to us in the educational market and in the proprietary technology products that we call our emerging solutions. We have sustained momentum in our packaging business and we have developed and are growing nicely our emerging solutions business. However, we have not made the kind of progress we had planned for in the educational market. We created print capacity to accommodate educational volume, we expanded our India operations, and we added project managers, copyeditors, and other staff to serve our educational publishing customers. We are making steady progress in the educational market -- both on the print and the content side. We are doing business with several prestigious customers and our business with them is growing nicely. However, it hasn't happened as rapidly as we had planned, and as a result, we have created both excess capacity and a revenue gap. In retrospect, we were overly optimistic in our timing assumptions about our ramp-up in the educational market. The good news, however, is that backlogs and volume are growing and we are confident in our ability to be successful in that market." Finally, Mr. Thomas noted, "We also are taking action to drive continued and more aggressive margin expansion in our business. First, we are conducting a comprehensive plan to rationalize and balance capacity and cost structure among our domestic and India-based content sites. Second, we are accelerating our shared service initiative, pursuant to which we are consolidating certain now decentralized finance-related functions in a single site. And finally, we are conducting a comprehensive review of our paper procurement and inventory management practices -- looking at all internal processes and all of our external mill and merchant relationships. We believe that these three initiatives will reduce our cost structure significantly, allowing us to be both more profitable and also more competitive in all of the markets that we serve." Paul K. Suijk, senior vice president and chief financial officer, added, "We are pleased with our cash flow and debt reduction of $0.2 million for the quarter, bringing our total reduction to $6.3 million for the year. Our capital spending was up slightly from the prior year period as we continue to invest to support our growth initiatives. Also during the quarter, we repurchased approximately 131,000 shares of our common stock under the previously announced stock repurchase program to minimize potential dilution relating to increased exercises of stock option grants, which resulted in a net cash outflow of approximately $0.9 million for the quarter." Second Quarter and Year-to-Date Operating Results Review Net sales for the second quarter totaled $109.1 million compared with $115.3 million last year, a decrease of 5%. Specialty Packaging segment net sales were $20.4 million, an increase of 13% from $18.0 million last year, as this segment continued to benefit from recurring projects from healthcare and consumer products customers and from improved revenues from its Global Packaging Solutions initiative. Publisher Services segment net sales were $88.7 million, a decrease of 9% from $97.3 million last year, as a result of (i) lower freight and postage (which are pass through costs for the Company), (ii) continuing pricing pressures from customers going out for bid, (iii) a slowdown in journal page growth, which appears to have been temporary, and (iv) management's plan to manage capacity, improve business mix, and generally drive for higher margins in the special interest magazine plants. Operating income was $8.6 million or 7.9% of net sales in the second quarter, compared to $8.8 million, or 7.6% of net sales last year. Net income for the second quarter totaled $3.5 million, or $0.37 per share, compared with income of $3.1 million, or $0.33 per share, in last year's second quarter. For the quarter, Specialty Packaging operating income rose 93% as the business continued to benefit from higher overall volume, improved business mix, and efficiencies derived from new and more efficient technology and work flows. Publisher Services operating income declined 11% to $8.7 million and operating margins declined to 9.8% from 10.0% last year due to continued pricing pressures and the investments made to support our educational and emerging solutions initiatives. Cash generated from operations resulted in a decrease in total debt of $0.2 million for the quarter, excluding the fair market value of interest rate swap agreements. The Company repurchased approximately 131,000 shares of its common stock during the second quarter under the previously announced stock repurchase program, which resulted in a net cash outflow of approximately $0.9 million for the quarter. Net sales for the first six months of fiscal 2005 totaled $212.1 million compared with $222.2 million last year, a decrease of 5%. Specialty Packaging segment net sales were $36.8 million, an increase of 13% from $32.6 million. Publisher Services segment net sales were $175.3 million, down 8% from $189.6 million. For the six months ended December 31, 2004, operating income was $16.8 million, or 7.9% of net sales, compared to $16.0 million, or 7.2% of net sales last year, adjusted as described below(2). Net income for the six months ended December 31, 2004 totaled $6.7 million, or $0.71 per share, compared with income, adjusted as described below(3), of $5.2 million, or $0.57 per share, last year. The results for the first six months of fiscal 2005 include a $1.0 million, or $0.07 per share net of taxes, insurance recovery related to a previously disclosed employee fraud in the Publisher Services segment recorded in the first quarter. Adjusted for this recovery, operating income was $15.8 million, or 7.5% of net sales, and net income was $6.0 million, or $0.64 per share. For the first six months, Specialty Packaging operating income rose 133% as the business continued to benefit from higher overall volume, improved business mix, and efficiencies derived from new and more efficient technology and work flows. Publisher Services operating income declined 2% to $18.2 million and operating margins rose to 10.4% from 9.7% last year. Adjusted for the insurance recovery, operating income for the Publisher Services segment declined 7% but operating margins rose to 9.8% from 9.7% last year(4). Cash generated from operations resulted in a decrease in total debt of $6.3 million for the six months ended December 31, 2004, excluding the fair market value of interest rate swap agreements. The Company has repurchased approximately 153,000 shares of its common stock during the first six months of fiscal 2005 under the previously announced stock repurchase program, which resulted in a net cash outflow of approximately $0.6 million for the first six months of fiscal 2005. Outlook for Fiscal 2005 Commenting on the Company's outlook for fiscal 2005, Mr. Thomas stated, "For the balance of fiscal 2005, we expect to have continued momentum in our Specialty Packaging segment and further growth from our Global Packaging Solutions initiative. However, we are working to regain revenue-related momentum in our Publisher Services segment due to the slower than expected volume growth in the educational market. We therefore expect that revenues for fiscal 2005 will be down slightly from fiscal 2004. Conversely, we believe that operating margins will continue to expand and that we will begin to benefit from the cost and efficiency-related initiatives we have underway. These improvements, combined with certain tax planning strategies that also could benefit our second half, should permit us to achieve earnings per share and EBITDA within, but at the lower end of, the range we previously had established."