RICHMOND, Va., Oct. 27 -- Cadmus Communications Corporation today announced net sales of $107.2 million for the first quarter of fiscal 2006, an increase of 4% from $103.0 million in last year's first quarter. Operating income was $6.9 million and net income was $2.2 million, or $0.23 per share, for the first quarter of fiscal 2006, compared to operating income of $8.2 million and net income of $3.2 million, or $0.34 per share, in the first quarter of fiscal 2005.
Included in the results for the first quarter of fiscal 2006 are restructuring and other charges of $0.7 million, or $0.05 per share net of taxes, related to severance expenses, costs to consolidate and reorganize facilities, and impairment of assets to be replaced, which are part of the Company's previously announced equipment upgrade plan. Results for the first quarter of fiscal 2005 include $1.0 million, or $0.07 per share net of taxes, of other income from a previously disclosed insurance recovery.(1)
Adjusted for the impact of the items noted above(2), operating income was $7.7 million for the first quarter of fiscal 2006, an increase of 6% from last year's $7.2 million, and income was $2.7 million, or $0.28 per share, compared to $2.6 million, or $0.27 per share, in the first quarter of fiscal 2005, adjusted as described above.
Operating highlights for the first quarter were as follows:
* Net sales and operating income and earnings per share, as adjusted, were all higher than any first quarter for Cadmus in the last four years;
* Net sales increased 4% to $107.2 million;
* Specialty Packaging net sales increased 38% to $22.6 million and operating margins expanded to 10.8% from 7.4% last year;
* Scientific, technical and medical ("STM") revenues increased 1%; however in the Company's Publisher Services segment this increase was offset by lower freight and postage revenues (down $0.9 million, or 12%, from last year) and by a 6% decline in special interest magazine revenues;
* Consolidated operating margins, as adjusted, increased to 7.2% of net sales compared to 7.0% in the prior year;
* Earnings per share, as adjusted, rose to $0.28 from $0.27 last year; and
* Total debt increased by $2.5 million (excluding the fair market value of interest rate swap agreements) as the Company incurred $8.6 million in capital expenditures primarily in connection with its previously announced equipment upgrade plan.
Bruce V. Thomas, president and chief executive officer, remarked, "We are pleased with our performance this quarter. Net sales and operating income and earnings per share, as adjusted, were all higher than any first quarter for Cadmus in the last four years. We are even more pleased with the current pace of business activity in our core segments. Our Specialty Packaging business had a truly outstanding quarter, as they delivered 38% top-line growth and improved their profitability by 340 basis points, to 10.8% of net sales. In our Publisher Services segment, we were pleased to see that we achieved top- line growth in our STM business. Margins for that market also were solid, despite additional costs that we incurred from the floods in India, which temporarily disabled our Mumbai, India facility, and from customer workflow changes that impacted our efficiencies. However, our special interest magazine plants did not perform as well as we had expected. Volumes in these plants were particularly light in July, and while August and September were better, both net sales and margins never fully recovered from the slow start. Therefore, while this was a solid quarter for Cadmus, it was not the record quarter it might have been."
Continuing, Mr. Thomas stated, "We also are pleased with the progress we made on our growth-oriented initiatives. During the quarter, we (i) obtained qualified vendor status for additional educational publishers and continued to both increase customers and revenues in this important market, (ii) completed the development of, and introduced into the market, a new product in our fast- growing Emerging Solutions suite of technology products, (iii) launched a new business unit to provide content-related services to the security and defense industry -- a market we see as providing strong growth potential for Cadmus, and (iv) relocated and expanded our Dominican Republic operation and added several new healthcare and other customers at this facility. These initiatives put additional pressure on our margins during the quarter. However, they also are strong drivers for growth. In fact, these achievements, combined with several recent large renewals, significant new business wins, and an overall much higher level of quote activity, suggest that we can sustain and even accelerate our top-line growth."
Commenting on the Company's equipment upgrade plan, Paul K. Suijk, senior vice president and chief financial officer, noted, "We are well underway and remain on schedule with our equipment upgrade plan. Reactions from both customers and employees have been quite positive, facility renovations are well underway in several locations, and equipment has begun to arrive. We still expect all of the equipment at our Lancaster, Pennsylvania facility to be fully operational by calendar year end and all of the web equipment to be operational by late Spring 2006. Most importantly, we still feel highly confident in our ability to achieve at least the $12-15 million of savings that we outlined previously."
Commenting further on the upgrade plan, Mr. Suijk said, "For the first quarter, our overall debt increased by $2.5 million, as we incurred approximately $8.6 million in capital expenditures primarily related to our equipment upgrade plan. This represents a $6.6 million increase in capital spending over last year's first quarter. We should note that we have been successful in obtaining very attractive financing for a large portion of the equipment we are purchasing. In September, we arranged German export financing that will permit us to borrow, on an unsecured basis, up to 85% of the purchase price of the German-manufactured equipment at an all-in spread of approximately 75 basis points over LIBOR. We will continue our efforts both to keep the overall cost of the equipment upgrade plan as low as possible and also to use our strong operating cash flows to repay debt as quickly and as cost-effectively as possible."
First Quarter Operating Results Review
Net sales for the first quarter totaled $107.2 million compared with $103.0 million last year, an increase of 4%. Specialty Packaging segment net sales were $22.6 million, an increase of 38% from $16.4 million last year, as the Company continued to benefit from its unique Global Packaging Solutions network and also from its investment in prior years in new manufacturing equipment such as the Company's Gallus in-line folding carton system. Publisher Services segment net sales were $84.7 million, a decrease of 2% from $86.6 million last year, as growth in revenues at facilities serving the STM market was more than offset by a decline in freight and postage and in revenues at facilities primarily serving the special interest magazine market.
Operating income, adjusted as described above,(3) for the quarter was $7.7 million or 7.2% of net sales in the first quarter, compared to $7.2 million, or 7.0% of net sales last year. Specialty Packaging operating income doubled to $2.4 million and operating income margins increased to 10.8% of net sales from 7.4% last year as the business continued to benefit from higher overall volume, improved business mix, and efficiencies derived from new and more efficient technology and global work flows. Publisher Services operating income declined to $6.6 million from $8.5 million last year, adjusted as described above, and operating income margins declined to 7.8% of net sales from 9.8% last year(4) due to (i) additional costs incurred during the quarter at the Company's content processing facilities when the Company's facility in Mumbai, India was non-operational due to severe flooding in India, (ii) costs incurred in connection with the Company's growth-oriented initiatives outlined above, including continued expansion into the educational market, and (iii) excess capacity at the Company's special interest magazine facilities, particularly during the month of July.
Income for the first quarter totaled $2.7 million, or $0.28 per share, compared to $2.6 million, or $0.27 per share, in last year's first quarter, adjusted as described above.(5) Cash generated from operations, offset by the $8.6 million on capital expenditures related primarily to our equipment upgrade plan resulted in an increase in total debt of $2.5 million for the quarter, excluding the fair market value of interest rate swap agreements.
Commenting on the Company's outlook for fiscal 2006 and fiscal 2007, Mr. Thomas stated, "For fiscal 2006, we should continue to build momentum throughout the year. Our Specialty Packaging business is off to a great start, has been growing strongly, and we expect that solid growth to continue. In our Publisher Services segment, we are seeing the kind of new business development activity and growth that is required for us to achieve our top- line targets. Our task will be to operate our sites as efficiently as possible and drive margin improvement throughout the year. At this point, published estimates for Cadmus remain $1.62 per share for fiscal 2006, and $2.33 per share for fiscal 2007. We remain comfortable with those earnings per share(6) estimates for both periods. And again, please note that in this guidance, the potential additional tax benefit of $32 million (for a cumulative total of up to $37 million) that we have discussed previously has not been taken into consideration and would represent upside to our guidance."
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