RICHMOND, Va., April 28 -- Cadmus Communications Corporation today announced net sales of $113.2 million for the third quarter of its fiscal year 2005, essentially flat with $113.6 million in last year's third quarter. Operating income was $8.9 million and net income was $7.1 million, or $0.77 per share, for the third quarter of fiscal 2005, compared to operating income of $9.1 million and net income of $3.5 million, or $0.38 per share, in the third quarter of fiscal 2004. Included in the results for the third quarter of fiscal 2005 are (i) a federal tax benefit of approximately $5.0 million, or $0.54 per share(1), as more fully described below, (ii) a loss from discontinued operations of approximately $1.5 million, or $0.16 per share, for certain lease guaranty and other costs relating to a former subsidiary,(2) and (iii) $0.3 million of restructuring and other charges related to expenses incurred in connection with the tax item mentioned above. Excluding these items, operating income was $9.2 million for the third quarter of fiscal 2005, flat with the prior year, and income from continuing operations was $3.8 million, or $0.41 per share, compared to $3.6 million, or $0.39 per share, in the third quarter of fiscal 2004, adjusted as described below.(3) Operating highlights for the third quarter(3) were as follows: * Net sales in both business segments and on a consolidated basis improved sequentially over the fiscal second quarter (Publisher Services up 3%, Specialty Packaging up 6%, and consolidated net sales up 4%); * Consolidated net sales were essentially flat compared to last year's third quarter, as continued double-digit growth in the Specialty Packaging segment was offset by lower sales in the Publisher Services segment and lower revenues from freight and postage, which are pass through costs for Cadmus; * Specialty Packaging net sales increased 32% to $21.6 million and operating margins expanded to 12.3% from 10.4% last year; * Consolidated operating margins, as adjusted, held steady at 8.1% of net sales compared to the prior year(4); * EBITDA rose to $14.2 million from $14.1 million and EBITDA margins rose to 12.5% from 12.4% last year; and * Total debt decreased by $6.0 million (excluding the fair market value of interest rate swap agreements) and our total debt to EBITDA ratio(5) on a trailing 12-month basis declined to approximately 2.9 to 1.0, which will result in a lower spread on interest rates under the Company's senior bank credit facility. Bruce V. Thomas, president and chief executive officer, remarked, "I am pleased with the progress we made this quarter. Clearly, the highlight was the strong growth and impressive margin expansion that we achieved in our Specialty Packaging segment. However, we are also pleased that we achieved sequential improvement in both sales and operating income in our Publisher Services segment and on a consolidated basis, despite incurring over $0.5 million in severance and certain one-time costs relating to our profit improvement initiatives. In addition, we reduced our debt significantly, even after giving effect to higher capital spending and our stock repurchase program, and further improved our total debt to EBITDA ratio. Even as we work to regain the kind of top-line momentum that we would like, we are gratified that we can deliver this sort of solid financial performance." Continuing, Mr. Thomas stated, "As I said last quarter, our plan for this year was to build on the momentum that we have had in our Specialty Packaging business and, in our Publisher Services business, to invest in, create capacity for, and capitalize upon growth opportunities available to us in the educational and other professional publishing markets. We have clearly sustained momentum in our Specialty Packaging business. In our Publisher Services business, we are making steady progress. We have successfully entered the educational market -- both on the print and the content side -- and our business in this market is growing. In addition, we have continued to both acquire and create new technology-related products that are driving growth and giving us access to new publishing markets. These changes and investments, we are increasingly confident, will permit us to not only grow our business, but also to expand our mission to serve education, science, and health." Paul K. Suijk, senior vice president and chief financial officer, noted, "We are pleased with our cash flow and debt reduction of $6.0 million for the quarter, bringing our total reduction to $12.3 million for the year. Our capital spending was up from the prior year period as we continue to invest to support our growth initiatives. Also during the quarter, we repurchased approximately 63,000 shares of our common stock under our previously announced stock repurchase program, which resulted in a net cash outflow of approximately $0.3 million for the quarter. Importantly, this performance permitted us to reduce our total debt to EBITDA ratio(5) to approximately 2.9 to 1.0, securing for us a lower spread on interest rates under our senior bank credit facility." Commenting on the federal income tax benefit recorded in the quarter, Mr. Suijk said, "During the third quarter, Cadmus executed a transaction related to one of its subsidiaries, Mack Printing Company. As a result of executing this transaction, Cadmus is entitled to a tax benefit. We recognized a net tax benefit of approximately $5.0 million on the income statement in the third quarter, based on applying certain assumptions to the range of possible outcomes in accordance with accounting requirements. The actual benefit realized, however, could be substantially larger, up to $37 million. The tax benefit ultimately received, which is anticipated to occur over the next 18 to 24 months, will also be a cash benefit to the Company." Third Quarter and Year-to-Date Operating Results Review Net sales for the third quarter totaled $113.2 million compared with $113.6 million last year, a decrease of less than 1%. Specialty Packaging segment net sales were $21.6 million, an increase of 32% from $16.4 million last year. Publisher Services segment net sales were $91.6 million, a decrease of 6% from $97.3 million last year, as a result of (i) lower freight and postage (which are pass through costs for the Company), (ii) continued pricing pressures in certain markets, and (iii) management's plan to manage capacity, improve business mix, and generally drive for higher margins in the special interest magazine plants. Operating income for the quarter was $9.2 million or 8.1% of net sales in the third quarter, compared to $9.2 million, or 8.1% of net sales last year, adjusted as described below.(6) Specialty Packaging operating income rose 56% 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 13% to $8.8 million and operating income margins declined to 9.6% from 10.4% last year due to (i) severance and related costs incurred in connection with content-related capacity rationalization, (ii) costs incurred to support our educational and emerging solutions initiatives, and (iii) continued pricing pressures in certain markets. Income from continuing operations for the third quarter totaled $3.8 million, or $0.41 per share, compared to $3.6 million, or $0.39 per share, in last year's third quarter, adjusted as described below.(7) Cash generated from operations resulted in a decrease in total debt of $6.0 million for the quarter, excluding the fair market value of interest rate swap agreements. The Company repurchased approximately 63,000 shares of its common stock during the third quarter under our previously announced stock repurchase program, which resulted in a net cash outflow of approximately $0.3 million for the quarter. Net sales for the first nine months of fiscal 2005 totaled $325.3 million compared with $335.8 million last year, a decrease of 3%. Specialty Packaging segment net sales were $58.4 million, an increase of 19% from $49.0 million last year. Publisher Services segment net sales were $266.9 million, down 7% from $286.9 million last year. For the nine months ended March 31, 2005, operating income was $26.0 million, or 8.0% of net sales, compared to $25.2 million, or 7.5% of net sales last year, adjusted as described below.(8) The results for the first nine 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 $25.0 million, or 7.7% of net sales. For the first nine months, Specialty Packaging operating income rose 90% 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 6% to $27.0 million and operating margins rose to 10.1% from 10.0% last year. Adjusted for the insurance recovery, operating income for the Publisher Services segment declined 9% and operating margins declined to 9.7% from 10.0% last year.(9) Income from continuing operations for the nine months ended March 31, 2005 totaled $10.4 million, or $1.12 per share, compared to $8.9 million, or $0.96 per share, last year, adjusted as described below.(10) Adjusted for the insurance recovery, income from continuing operations on a comparable basis was $9.8 million, or $1.05 per share for the nine months ended March 31, 2005. Cash generated from operations resulted in a decrease in total debt of $12.3 million for the nine months ended March 31, 2005, excluding the fair market value of interest rate swap agreements. The Company has repurchased approximately 215,000 shares of its common stock during the first nine months of fiscal 2005 under our previously announced stock repurchase program, which resulted in a net cash outflow of approximately $1.0 million for the first nine months of fiscal 2005. Outlook for Fiscal 2005 Commenting on the Company's outlook for the balance of fiscal 2005, Mr. Thomas stated, "Obviously, the tax benefit that we have recorded represents a significant and positive change to our outlook for fiscal 2005. On a pure operating basis, we expect to continue to show steady progress. In our Specialty Packaging business, we expect continued momentum, although perhaps not quite at the pace we saw this quarter. In our Publisher Services segment, we remain focused on both cost reduction (with our paper and capacity rationalization projects) and our revenue-related (global content and print and educational market) initiatives, and we are making good progress on both. We continue to expect that consolidated revenues for fiscal 2005 will be down slightly from fiscal 2004. However, we remain optimistic that operating margins will expand, as we expect to see a decline in severance and certain one-time costs in our fiscal fourth quarter. These results should permit us to continue our year-long trend of year over year improvement in earnings per share."