RICHMOND, Va., Feb. 2 -- Cadmus Communications Corporation today announced net sales of $114.2 million for the second quarter of fiscal 2006, an increase of 5% from $109.1 million in last year's second quarter. Operating income was $5.2 million and net income was $1.1 million, or $0.12 per share, for the second quarter of fiscal 2006, compared to operating income of $8.6 million and net income of $3.5 million, or $0.37 per share, in the second quarter of fiscal 2005. Included in the results for the second quarter of fiscal 2006 are restructuring and other charges of $1.5 million, or $0.09 per share net of taxes, related primarily to (i) severance expenses, costs to consolidate and reorganize manufacturing facilities, and impairment of assets to be replaced, all of which are part of the Company's previously announced equipment replacement and consolidation plan, and (ii) certain costs related to merger and acquisition activities. Adjusted for the impact of these items(1), operating income was $6.7 million for the second quarter of fiscal 2006, compared to $8.6 million in the second quarter of fiscal 2005, and income was $2.0 million, or $0.21 per share, compared to $3.5 million, or $0.37 per share, last year. Operating highlights for the second quarter were as follows: * Net sales increased 5% on a consolidated basis from the second quarter of last year. Specialty Packaging net sales were up 8%. Publisher Services net sales increased 4%; * Consolidated operating margins, as adjusted, decreased to 5.9% of net sales compared to 7.9% in the prior year. Specialty Packaging operating margins were 8.6% of net sales, while Publisher Services operating margins were 7.1% of net sales; * Earnings per share, as adjusted, declined to $0.21 from $0.37 last year; * Total debt increased by $21.1 million (excluding the fair market value of interest rate swap agreements) from September 30, 2005, as the Company incurred $19.2 million in capital expenditures primarily in connection with its previously announced equipment replacement and consolidation plan and paid the $5.2 million semi-annual payment of interest on the Company's senior subordinated notes; and * EBITDA(2) for the quarter ended December 31, 2005, was $11.5 million, or 10.1% of net sales, and the total debt to EBITDA ratio(3) on a trailing 12-month basis was approximately 3.5 to 1. Bruce V. Thomas, president and chief executive officer, remarked, "As we stated in our pre-release last week, we are pleased with the continued solid performance of our Specialty Packaging segment which is performing in line with our business plan. However, in our Publisher Services segment, results have been adversely affected by equipment and other delays in our previously announced consolidation of our Lancaster and Science Press operations. These delays have substantially reduced both our available capacity and our operating efficiencies at those sites. In addition, we experienced a significant increase in volume at year end that was both unexpected and disruptive. This combination of reduced capacity and unexpectedly high year- end volume resulted in high levels of overtime, offloading (both within Cadmus and to outside printers) and much reduced efficiencies in nearly all of our printing plants." Continuing, Mr. Thomas said, "Despite the operating challenges we experienced in November and December, we are pleased that we were able to meet the year-end scheduling requirements of nearly all of our customers. We have a detailed plan in place to address the delays in our equipment and consolidation plan and to get back on schedule as quickly as possible. At this point, we are approximately four months behind schedule. Until we get all equipment installed and operational and Lancaster and Science Press fully consolidated we will continue to experience capacity issues and related inefficiencies. However, despite its effect on our results, we believe that this equipment replacement and consolidation plan, once fully implemented, will enhance our overall competitiveness, generate the $12-15 million of annual EBITDA savings we had originally planned, and create significant long- term value for our shareholders." Paul K. Suijk, senior vice president and chief financial officer, commenting on the Company's equipment replacement and consolidation plan, noted, "For the second quarter, our overall debt increased by $21.1 million, as we incurred approximately $19.2 million in capital expenditures primarily related to our equipment replacement and consolidation plan. We did use approximately $10.1 million of the debt arranged through German export financing that permits us to borrow, on an unsecured basis, up to 85% of the purchase price of the German-manufactured equipment at rates and on terms that are more attractive than our senior bank credit facility. We will continue our efforts both to keep the overall cost of our equipment replacement and consolidation plan as low as possible and also to use our operating cash flows to reduce debt levels as quickly and as cost-effectively as possible." Second Quarter and Year-to-Date Operating Results Review Net sales for the second quarter totaled $114.2 million compared with $109.1 million last year, an increase of 5%. Specialty Packaging segment net sales were $22.0 million, an increase of 8% from $20.4 million last year, as the Company continued to benefit from its unique Global Packaging Solutions network and also from its investment in new and highly efficient manufacturing equipment. Publisher Services segment net sales were $92.2 million, an increase of 4% from $88.7 million last year, as the Company experienced strong page and revenue growth from the scientific, technical and medical ("STM") market, continued growth in its Emerging Solutions technology offering, and better revenue trends in its printing plants serving the special interest magazine market. Operating income, adjusted as described above,(4) for the quarter was $6.7 million or 5.9% of net sales in the second quarter, compared to $8.6 million, or 7.9% of net sales last year. Specialty Packaging operating income was essentially flat at $1.9 million. This segment continues to benefit from higher overall volume and efficiencies derived from new and more efficient technology and global work flows, which offset pricing pressures from certain larger customers. Publisher Services operating income declined to $6.5 million from $8.7 million last year and operating income margins declined to 7.1% of net sales from 9.8% last year primarily due to higher costs from operational inefficiencies and capacity constraints relating to the equipment replacement and consolidation plan. In addition, margins were adversely affected by (i) substantially higher energy costs, (ii) lower overall pricing and negative change in overall work mix at the Company's special interest magazine facilities, and (iii) costs incurred in connection with the Company's growth initiatives in the educational and government markets and in the Company's Emerging Solutions technology products. Income for the second quarter, adjusted as described above,(5) totaled $2.0 million, or $0.21 per share, compared to $3.5 million, or $0.37 per share, in last year's second quarter. Capital spending of $19.2 million related primarily to the Company's previously announced equipment replacement and consolidation plan and the $5.2 million semi-annual interest payment on the Company's senior subordinated notes, offset partially from cash flow from operations, resulted in an increase in total debt of $21.1 million for the quarter, excluding the fair market value of interest rate swap agreements. The Company borrowed approximately $10.1 million of debt under the senior term loan agreements arranged for the purchase of certain equipment manufactured in Germany at rates and on terms that are more attractive than our senior bank credit facility. Net sales for the first six months of fiscal 2006 totaled $221.4 million compared with $212.1 million last year, an increase of 4%. Specialty Packaging segment net sales were $44.5 million, an increase of 21% from $36.8 million last year. Publisher Services segment net sales were $176.9 million, essentially flat with $175.3 million last year. For the six months ended December 31, 2005, operating income, adjusted as described below,(6) was $14.4 million, or 6.5% of net sales, compared to $15.8 million, or 7.4% of net sales last year. Income for the six months ended December 31, 2005, adjusted as described below,(7) totaled $4.7 million, or $0.49 per share, compared with income of $6.0 million, or $0.64 per share, last year. The adjusted results for the first six months of fiscal 2005 exclude 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.(8) For the first six months, Specialty Packaging operating income rose 38% to $4.3 million, while Publisher Services operating income declined 28% to $13.2 million from $18.2 million last year, including the insurance recovery. Excluding the insurance recovery, operating income for the Publisher Services segment declined 23% from $17.2 million last year. The capital expenditures of $27.8 million primarily related to the equipment replacement and consolidation plan resulted in an increase in total debt of $23.6 million for the six months ended December 31, 2005, excluding the fair market value of interest rate swap agreements. Outlook Commenting on the Company's outlook for fiscal 2006 and fiscal 2007, Mr. Thomas stated, "Our Specialty Packaging business continues to perform well, remains well positioned, and has solid momentum as it enters the second half. In addition, in our Publisher Services segment, we are seeing the kind of page growth and new business development activity that is required for us to achieve our top-line targets in both content and in print. However, as we have previously discussed, we are approximately four months behind schedule in our equipment replacement and consolidation plan. As a result, we expect to experience higher costs and reduced efficiencies at several of our plants throughout this current quarter. These inefficiencies, combined with higher interest expense, will impact earnings per share in our third quarter. For our fiscal fourth quarter, we should begin to see improved efficiencies and lower costs as we complete the consolidation of our Lancaster and Science Press operations and we look for both margins and earnings to improve in that quarter." Continuing, Mr. Thomas stated, "Looking forward, we believe that our equipment replacement and consolidation plan, once fully implemented, will enhance our overall competitiveness and should generate the $12-15 million of annual EBITDA savings we had originally planned. Those savings should begin to be realized in our fiscal fourth quarter of 2006, and should be fully implemented on an annual run-rate basis by the middle of fiscal 2007. 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."