RICHMOND, Va., April 29 -- Cadmus Communications Corporation today announced net sales of $113.6 million for the third quarter of its fiscal year 2004, a slight increase from $113.4 million in last year's third quarter. Operating income was $9.1 million and net income was $3.5 million, or $0.38 per share, for the third quarter of fiscal 2004, compared to operating income of $7.5 million and net income of $2.2 million, or $0.24 per share, in the third quarter of fiscal 2003. Adjusted as described below,(1) operating income for the third quarter of fiscal 2004 was $9.2 million, an increase from $8.6 million in the prior year period, and income was $3.6 million, or $0.39 per share, for the third quarter of fiscal 2004, an increase from $2.9 million(2), or $0.32 per share, in last year's third quarter. The results for the third quarter of fiscal 2004 also include a reversal of a valuation allowance for certain deferred tax assets. The resulting positive change in income tax rate, which resulted in a lower year-to-date effective tax rate that the Company believes is sustainable, accounted for $0.03 per share of the increase in net income per share for the third quarter of fiscal 2004. Highlights for the third quarter were as follows: * Net sales rose slightly from last year's third quarter to $113.6 million as double-digit growth in STM content services and continued growth in overall STM services and specialty packaging services offset lower special interest magazine revenues; * Operating income rose 7% from last year's third quarter to $9.2 million and operating income margins increased to 8.1%; * Operating margins in specialty packaging increased to 10.4% from 5.1% last year; * EBITDA rose 6% from last year's third quarter to $14.1 million and EBITDA margins rose to 12.4%; and * Total debt (including securitization) decreased by $9.4 million during the quarter, bringing our total debt to EBITDA ratio(3) on a trailing 12-month basis to less than 3.1 to 1. Bruce V. Thomas, president and chief executive officer, remarked, "We are pleased with this quarter's performance. In addition to double-digit earnings per share growth, we also reduced debt significantly, delivered steady improvement in EBITDA, and achieved higher operating margins -- both sequentially and year-over-year. Two portions of our business had particularly strong quarters. First, our STM content services had another strong quarter, registering a double-digit increase in revenues. This increase was a result of an overall growth in pages in the STM market generally, volume growth in our India-based KnowledgeWorks Global Limited(4) venture, and growing acceptance of our digital rights management and reprint marketing service offerings. Second, our specialty packaging business continued to show improved sales and an impressive increase in operating margins. Both the growth and the improved profitability are the result of increased volume from our healthcare and consumer products customers and growth from our Global Packaging Solutions division. These two portions of our business have had solid performance all year long and appear well- positioned going forward." Continuing, Mr. Thomas stated, "We had another challenging quarter for our special interest magazine business, as we continue to experience pricing pressures in this market. However, we began to see improvements this quarter in operating results as a result of the actions we have taken to manage cost and volume more effectively. While we are certainly not where we want to be long-term, our efforts are having a positive impact on the operations. We are also encouraged by the success we are having in this market with our MediaWorks(TM) suite of digital asset and workflow management tools(5). While still relatively embryonic, this service offering has potential to shift our services/print mix in this market." Paul K. Suijk, senior vice president and chief financial officer, added, "We are extremely pleased with our cash flow and $9.4 million reduction in debt for this quarter. We have continued to focus on working capital initiatives to further de-leverage the Company. This quarter we reduced our overall gross receivables due to strong collections, we experienced reduced capital spending needs, and we accelerated certain payments to some of our larger vendors, thereby reducing our accounts payable. This combination of lower debt and improved EBITDA has reduced our total debt to EBITDA ratio on a trailing 12-month basis to less than 3.1 to 1." Suijk continued, "As part of our on-going focus to improve our capital structure, we have taken several actions to improve our flexibility, reduce our cost of capital and improve shareholder value. As previously announced, we will redeem our $6.4 million, 11.5% subordinated promissory notes on May 3, 2004 using availability under our senior bank credit facility, which was refinanced in January. In addition, we announced today our tender offer to redeem our $125 million, 9.75% senior subordinated notes. We believe these efforts will reduce our annual interest expense going forward, provide sufficient liquidity to meet our operating requirements for working capital and capital expenditures, and support accelerated, yet disciplined, growth and entry into new content-rich markets." Third Quarter and Year-to-Date Operating Results Review Net sales for the fiscal third quarter totaled $113.6 million compared with $113.4 million last year, an increase of less than 1%. Publisher Services segment sales were $97.3 million, a decrease of less than 1% from $98.0 million last year, as a result of continued pricing pressures in the special interest magazine business offset by continued growth in STM services. Specialty Packaging segment sales were $16.4 million, an increase of 6% from $15.5 million, as this division continued to gain new projects from existing healthcare and consumer products customers and completed several one-time projects from other customers. Operating income, adjusted as described below, was $9.2 million or 8.1% of net sales in the third quarter, compared to $8.6 million or 7.6% of net sales last year.(6) Income, adjusted as described below, totaled $3.6 million, or $0.39 per share, for the fiscal third quarter compared with $2.9 million, or $0.32 per share, in last year's third quarter. Cash generated from operations resulted in a decrease in total debt (including securitization) of $9.4 million for the quarter. As a result of terminating our accounts receivable securitization program in January in connection with our new senior bank credit facility, our balance sheet this quarter reflects the impact of repurchasing those receivables previously sold. Net sales for the first nine months of fiscal 2004 totaled $335.8 million compared with $332.6 million last year, an increase of 1%. Publisher Services segment sales were $286.9 million, a decrease of less than 1% from $289.3 million last year. Specialty Packaging segment sales were $49.0 million, an increase of 13% from $43.3 million last year. For the nine months ended March 31, 2004, operating income, adjusted as described below, was $25.2 million, or 7.5% of net sales, compared to $24.1 million, or $7.2% of net sales last year.(7) Income for the first nine months, adjusted as described below, totaled $8.9 million, or $0.96 per share, compared to $7.6 million, or $0.84 per share, last year.(8) Cash flows generated from operations, offset by the $7.8 million cash contribution to the frozen defined benefit pension plan in the first quarter of fiscal 2004, were used to reduce total debt (including securitization) by $10.0 million during the first nine months of fiscal 2004. Outlook for Fiscal 2004 Commenting on the Company's outlook for the remainder of fiscal 2004, Mr. Thomas stated, "We believe that we are in a position to sustain our track record of year-over-year improved earnings throughout fiscal 2004 and, assuming that industry and economic conditions do not deteriorate and we continue to obtain the expected benefits from our key initiatives, our target for fiscal 2004 remains unchanged. We expect total debt reduction for the fiscal year to be in the $10-12 million range, even after giving effect to the first quarter pension contribution of $7.8 million."