RICHMOND, Va., Oct. 26 -- Cadmus Communications Corporation today announced results for its first quarter of fiscal 2007. Net sales were $107.3 million on a consolidated basis, essentially flat with $107.2 million in last year's first quarter. Operating income was $4.7 million, income from continuing operations was essentially at a breakeven level, and net income was $0.1 million, or $0.01 per share assuming dilution, for the first quarter of fiscal 2007, compared to operating income of $6.9 million, income from continuing operations of $2.2 million, and net income of $2.2 million, or $0.23 per share assuming dilution, in the first quarter of fiscal 2006. Results for the first quarter of fiscal 2007 were much improved over those reported in the fourth quarter of fiscal 2006. While net sales declined 5% from the fourth quarter of fiscal 2006 to the first quarter of fiscal 2007, reflecting the seasonal softness in the months of July and August, operating income and operating income margins increased across the board from the fourth to the first quarter. Publisher Services operating income more than doubled, as both content services and print services margins were much improved. Specialty Packaging operating income also increased, as operating income margins improved by nearly 200 basis points. On a consolidated basis, adjusted operating income(1) increased nearly 200% from $1.6 million in the fourth quarter of fiscal 2006 to $4.5 million in the first quarter of fiscal 2007.(2) Operating highlights for the first quarter of fiscal 2007 were as follows: * Net sales for the Publisher Services segment increased 5% to $89.1 million from $84.7 million in the prior year first quarter; * Content services sales within the Publisher Services segment rose 8% and print services sales within the Publisher Services segment rose 5% compared to prior year first quarter, reflecting improving trends in new business development activity; * Profitability at the Lancaster site was much improved, with gross profit more than doubling from the fourth quarter of fiscal 2006. This improved profitability was driven by steady improvement in machine efficiencies and lower overtime expense and spoilage; * Specialty Packaging net sales decreased 19% to $18.2 million and operating margins declined to 8.4% from 10.8% in last year's first quarter; * Total debt decreased by $8.2 million (excluding the fair market value of interest rate swap agreements) despite $5.9 million in capital expenditures primarily in connection with the equipment replacement and consolidation plan. Bruce V. Thomas, president and chief executive officer, remarked, "We are very pleased with the progress we made this quarter. This represents an important and sizeable step forward in our recovery plan. Particularly gratifying was the broad-based improvement we saw from our Publisher Services Group. In this segment, we sustained the top-line growth we have been seeing now for the past several quarters. Most encouraging, however was the significant improvement in the profitability of this group over recent quarters. The positive operating trends at our KnowledgeWorks Global Limited subsidiary in India are positively affecting content services profitability. Much improved performance at our Lancaster site is driving better financial performance there and also permitting our other sites to return to more traditional levels of profitability. As a result, at virtually every Publisher Services site, operating performance improved as did financial performance." Continuing, Mr. Thomas stated, "A significant contributing factor to the improving trends in our Publisher Services Group is the much more experienced leadership team we now have in place. In addition to Peter Hanson, who leads this group, and John Miller, who heads our sales efforts, we have recently added Andy Johnson to head up our manufacturing operations. These new additions, when combined with new and expanded roles for talented executives such as John Grinnell, who heads our content services division, and Atul Goel, who leads our operations in India, are clearly and positively impacting our day to day operating performance for our customers and our financial performance for our shareholders. There is still much work to do in our recovery, but this is clearly a very encouraging start by an increasingly talented team." Paul K. Suijk, senior vice president and chief financial officer, commented "We also are pleased with our debt reduction for the quarter. We reduced total debt by $8.2 million, which puts us slightly ahead in terms of the expected timing of our targeted $15 million in debt reduction for the entire year. Cadmus has long been a business that generates very strong cash flows and this management team has a solid track record of reducing debt. We have invested in our business and will continue to do so. However, we also can and will continue to manage capital spending, working capital and collections in order to achieve significant debt reduction in fiscal 2007. This $8.2 million reduction represents a very positive first step in that direction." First Quarter Operating Results Review Net sales for the first quarter totaled $107.3 million compared with $107.2 million last year. Specialty Packaging segment net sales were $18.2 million, a decrease of 19% from $22.6 million last year, as volume levels returned to more normal levels following an exceptionally strong first quarter in the prior year. Publisher Services segment net sales were $89.1 million, an increase of 5% from $84.7 million last year, as the Company experienced improved revenues from its content-related initiatives in all markets, continued growth in its emerging solutions offerings, and better revenue trends in its printing plants. Adjusted operating income(3) for the quarter was $4.5 million, or 4.1% of net sales in the first quarter, compared to $7.7 million, or 7.2% of net sales last year. Specialty Packaging operating income of $1.5 million, or 8.4% of net sales, was down from $2.4 million, or 10.8% of net sales primarily due to lower overall volume levels as well as increased investment in activities and initiatives in Asia. This segment, however, continues to benefit from higher overall international volume and efficiencies derived from new and more efficient technology and enhancements and expansions to its global capacity and work flows. Publisher Services operating income declined to $4.3 million from $6.6 million last year and operating income margins declined to 4.8% of net sales from 7.8% last year. However, operating income was, as previously discussed, much improved over the third and fourth quarters of fiscal 2006. The adjusted loss for the first quarter totaled ($0.2) million, or ($0.02) per share, compared to adjusted income of $2.7 million, or $0.28 per share, in last year's first quarter.(4) Cash generated from operations, a refund of $2.6 million from the Internal Revenue Service related to the Mack Printing Company transaction, and the sale of the Ephrata, Pennsylvania real estate following the consolidation into the Lancaster site, offset by the $5.9 million in capital expenditures related primarily to our equipment replacement and consolidation plan resulted in a decrease in total debt of $8.2 million for the quarter, excluding the fair market value of interest rate swap agreements. Outlook Commenting on the Company's outlook for fiscal 2007, Mr. Thomas stated, "We have established an aggressive recovery plan for this fiscal year -- a year in which we are working to deliver Adjusted EBITDA(5) in the range of $53 to $55 million. This first quarter is a big step, but only one step in that direction. If, however, we sustain solid top line growth, obtain the full benefit of the cost savings projected from our equipment replacement and consolidation plan by at least our third quarter, and continue to obtain improved operating performance at Lancaster and our other sites, that aggressive recovery plan remains achievable. We look forward to reporting on continued progress toward that goal in coming quarters."