SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
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(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________to_________
Commission File Number 0-12954
CADMUS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1274108
- -------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6620 West Broad Street, Suite 240
Richmond, Virginia 23230
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code:
(804) 287-5680
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1998.
Class Outstanding at October 31, 1998
----- -------------------------------
Common Stock, $.50 Par Value 7,888,751
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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
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Page Number
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- 3
September 30, 1998 (unaudited) and June 30, 1998
Condensed Consolidated Statements of Income (unaudited) -- 4
Three Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows (unaudited) -- 5
Three Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 895 $ --
Accounts receivable, less allowance for doubtful accounts 74,290 70,571
Inventories 27,794 25,610
Deferred income taxes 3,093 3,832
Prepaid expenses and other 4,328 4,107
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Total current assets 110,400 104,120
Property, plant, and equipment (net of accumulated depreciation
of $108,226 at September 30, 1998, and $107,269 at June 30, 1998) 129,858 133,836
Goodwill and other intangibles, net 49,639 48,158
Other assets 3,800 5,638
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TOTAL ASSETS $ 293,697 $ 291,752
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,000 $ 2,100
Current maturities of long-term debt 6,090 6,431
Accounts payable 35,912 41,981
Accrued expenses 13,540 18,293
Restructuring reserve 2,114 4,378
------------- -----------
Total current liabilities 58,656 73,183
Long-term debt, less current maturities 106,962 93,224
Other long-term liabilities 9,491 8,867
Deferred income taxes 6,770 6,662
Shareholders' equity:
Common stock ($.50 par value; authorized shares-16,000,000
shares; issued and outstanding shares-7,915,000 at
September 30, 1998, and 7,921,000 at June 30, 1998) 3,957 3,961
Capital in excess of par value 53,403 53,532
Retained earnings 54,458 52,323
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Total shareholders' equity 111,818 109,816
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 293,697 $ 291,752
============= ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1998 1997
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<S> <C> <C>
Net sales $ 99,784 $ 92,362
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Operating expenses:
Cost of sales 79,119 71,814
Selling and administrative 14,063 14,858
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93,182 86,672
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Operating income 6,602 5,690
Interest and other expenses:
Interest 2,143 1,933
Other, net 343 392
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2,486 2,325
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Income before income taxes 4,116 3,365
Income tax expense 1,585 1,329
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Net income $ 2,531 $ 2,036
========== =========
Earnings per share - basic:
Net income per share $ .32 $ .26
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Weighted-average common shares
outstanding 7,914 7,829
========== =========
Earnings per share - diluted:
Net income per share $ .31 $ .25
========== =========
Weighted-average common shares
outstanding 8,206 8,109
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Cash dividends per common share $ .05 $ .05
========== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
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<S> <C> <C>
Operating Activities
Net income $ 2,531 $ 2,036
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,873 4,480
Other, net 1,119 1,259
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8,523 7,775
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Changes in assets and liabilities, excluding debt and effects
of acquisitions and dispositions:
Accounts receivable, net (2,854) (1,569)
Inventories (2,184) (2,094)
Accounts payable and accrued expenses (11,100) 2,781
Restructure reserve (due to cash payments) (508) (2,220)
Payment to fund pension plan -- (1,148)
Other, net (383) (108)
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(17,029) (4,358)
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Net cash provided by (used in) operating activities (8,506) 3,417
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Investing Activities
Purchases of property, plant, and equipment (2,367) (4,074)
Other, net -- (4)
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Net cash used in investing activities (2,367) (4,078)
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Financing Activities
Proceeds from (repayment of) short-term borrowings (1,100) 3,430
Repayment of long-term borrowings (1,603) (43)
Proceeds from (repayment of) long term revolving credit facility 15,000 (2,500)
Dividends paid (396) (391)
Repurchase and retirement of common stock (2,119) (118)
Issuance of stock 1,986 --
Proceeds from exercise of stock options -- 99
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Net cash provided by financing activities 11,768 477
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Increase (decrease) in cash and cash equivalents 895 (184)
Cash and cash equivalents at beginning of period -- 184
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Cash and cash equivalents at end of period $ 895 $ --
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements of
Cadmus Communications Corporation have been prepared in accordance with
generally accepted accounting principles for interim financial reporting,
and with applicable quarterly reporting regulations of the Securities and
Exchange Commission. They do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and, accordingly, should be read in conjunction with
the consolidated financial statements and related footnotes included in the
Company's annual report on Form 10-K for the fiscal year ended June 30,
1998.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
interim financial information have been included. The results of operations
for the period ended September 30, 1998, are not necessarily indicative of
results for the entire fiscal year.
2. Basic earnings per share is computed on the basis of weighted-average
common shares outstanding from the date of issue. Diluted earnings per
share is computed on the basis of weighted-average common shares
outstanding plus common shares contingently issuable upon exercise of
dilutive stock options. Incremental shares for dilutive stock options,
computed under the treasury stock method, were 292,000 and 280,000 for the
quarter ended September 30, 1998 and 1997, respectively.
3. In August 1998, the Board of Directors approved an extension to August 31,
1999, of its fiscal 1997 stock repurchase plan. Under the plan, the Company
is authorized to repurchase up to 750,000 shares of its common stock. As of
September 30, 1998, approximately 196,000 shares have been repurchased
under this plan.
4. On April 1, 1998, the Company acquired Germersheim, Inc., an Atlanta-based
national point of purchase marketing service provider for $13.7 million. Of
$11 million in cash payments made during fiscal 1998, $2 million was held
in escrow at June 30, 1998, as contingent consideration only to be released
if specified performance levels are met during each of the next two years.
On August 31, 1998, the Company, the seller and the Escrow Agent amended
certain terms and conditions of the purchase and escrow agreements related
to this acquisition. Pursuant to these amendments, the Company issued, in
the name of the seller, 93,500 shares of the Company's common stock, at an
aggregate market value of $2 million, and delivered these shares to the
Escrow Agent in exchange for the $2 million of cash held in escrow. These
"Escrow Shares" are subject to certain terms and restrictions, as outlined
in the amended purchase and escrow agreements, and are held in escrow as of
September 30, 1998, as contingent consideration, to be released only if
specified performance levels are met during each of the next two years.
6
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5. Components of net inventories at September 30, 1998 and June 30, 1998 were
as follows (in thousands): September 30, June 30,
1998 1998
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Raw materials and supplies $ 5,389 $ 4,841
Work in process:
Materials 7,109 6,567
Other manufacturing costs 12,710 11,331
Finished Goods 2,586 2,871
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Inventories $ 27,794 $ 25,610
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7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cadmus Communications Corporation provides customers with integrated, end-to-end
information and communications solutions. These end-to-end solutions involve a
full range of creative, production and distribution services. The Company is
organized around two business sectors: Professional Communications, serving
customers who publish information and Marketing Communications, serving
customers who convey marketing messages. Headquartered in Richmond, Virginia,
Cadmus is the 22nd largest graphic communications company in North America.
ORGANIZATIONAL STRUCTURE
The Company's current organizational structure was effected during fiscal 1997,
when it announced a major restructuring plan designed to exit or reshape those
businesses that were not performing or were not core to its strategy, and to
create a more efficient and cost effective organizational structure. In
conjunction with the restructuring, the Company reorganized its organizational
and operational structure to form Cadmus Marketing Communications and Cadmus
Professional Communications. The Company's previous organizational structure
consisted of the Periodicals, Graphic Communications, Marketing, and Publishing
groups.
Cadmus Professional Communications provides a full range of composition,
editorial, production, distribution, and related services for publishers of
scientific, technical, and medical journals, magazines, trade association
publications and commercial publications. Cadmus Marketing Communications
provides commercial printing, graphic solutions, print and broadcast
advertising, direct marketing, catalog and collateral design, publication
development, financial communication, point of purchase, specialty packaging and
promotional printing, software duplication and distribution, and interactive
services to customers who convey marketing messages.
RESULTS OF OPERATIONS
The following table presents the major components from the Consolidated
Statements of Income as a percent of net sales for the three months ended
September 30, 1998 and 1997:
Three Months Ended
September 30,
-------------
1998 1997
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Net sales 100.0% 100.0%
Cost of sales 79.3 77.8
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Gross profit 20.7 22.2
Selling and administrative expenses 14.1 16.1
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Operating income 6.6 6.1
Interest expense 2.1 2.1
Other expenses, net 0.4 0.4
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Income before income taxes 4.1 3.6
Income taxes 1.6 1.4
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Net income 2.5% 2.2%
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8
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RESULTS OF OPERATIONS (continued)
Sales
Sales for the first quarter of fiscal 1999 were $99.8 million, an 8% increase
from sales of $92.4 million in the first quarter of fiscal 1998. The increase in
sales was driven by double-digit sales growth from the packaging/promotional and
graphic solutions businesses, and the inclusion of Germersheim point of purchase
sales this year. Adjusted for the acquisition of Germersheim, Inc., sales growth
was 4% in the quarter.
The Marketing Communications sector recorded sales of $49.8 million in the first
quarter of fiscal 1999, compared to $42.1 million in the first quarter of fiscal
1998, representing an increase of 18%. These higher sales resulted primarily
from the packaging and promotional printing group, which recorded a 15% increase
in sales, the graphic solutions group, which also recorded a 15% sales growth
for the quarter, and the point of purchase group, which recorded a 95% increase
in sales. The increase in the packaging and promotional group is attributable to
the addition of new clients and increased work from existing clients, made
possible by increased manufacturing and sales capacity. The addition of several
major clients as well as growth from existing clients contributed to higher
sales in the graphic solutions group. The increase in the point of purchase
group was attributable to the impact of the Germersheim acquisition and internal
sales growth. Adjusting for the acquisition of Germersheim, sales for the
Marketing Communications sector increased by 10%.
Sales for the Professional Communications sector were $50.7 million in the first
quarter of fiscal 1999, up 1% from $50.2 million in the first quarter of fiscal
1998. Adjusting for the effect of lower paper prices, sales increased by 3% for
this sector. This increase in sales was primarily attributable to internal sales
growth from journal services. Magazine sales were essentially flat compared to
the prior year.
Operating Expenses
Cost of sales for the first quarter of fiscal 1999 increased 10% to $79.1
million from $71.8 million last year, representing a decline in gross margins to
20.7% this year from 22.2% last year. The decrease in margins was primarily
attributable to two factors: (i) the negative impact due to the lower financial
transactional volume this year, and (ii) added costs and certain production
inefficiencies associated with the integration of the Company's POP business.
Partially offsetting these factors was continued gross margin improvement in the
professional communications sector resulting from restructuring-related savings
and continued manufacturing productivity improvements, as well as improved
margins in the tactical marketing group due to an improved business mix.
Selling and administrative expenses for the first quarter decreased 5% to $14.1
million from $14.9 million in the prior year, representing a 200 basis point
improvement as a percentage of sales. This improvement was largely attributable
to better overall cost management, lower selling costs in the financial
communications group, lower costs in the tactical marketing group, and lower
selling and administrative expenses in the point of purchase operation as a
result of the integration of Germersheim into that business.
Despite lower gross margins, operating income rose 16% in the first quarter to
$6.6 million, and the operating margin improved further to 6.6% of sales, up
from 6.1% last year.
9
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Interest and Other Expenses and Income Taxes
Interest expense for the first quarter of fiscal 1999 was $2.1 million compared
to $1.9 million for the same period of fiscal 1998, representing an increase of
11%. The increase in interest expense was primarily the result of higher debt
levels due to the acquisition of Germersheim in late fiscal 1998. Total debt as
of the end of the first quarter of fiscal 1999 was $114.1 million compared to
$97.0 million as of the end of the first quarter of fiscal 1998.
The effective income tax rate decreased from 39.5% in the first quarter of
fiscal 1998 to 38.5% in the first quarter of fiscal 1999, consistent with the
38.5% annual rate the company experienced for fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company has the financial resources and access to
capital necessary to fund internal growth and acquisitions. The Company's major
demands on capital are investments in property, plant and equipment, working
capital, and acquisitions.
Net cash used in operating activities totaled $8.5 million for the first quarter
of fiscal 1999, representing an $11.9 million reduction from $3.4 million
provided by operating activities in the prior year first quarter. The change was
primarily attributable to the final payments made during the first quarter of
fiscal 1999 for certain production equipment purchased in late fiscal 1998, and
to payment of fiscal year 1998 sales and management incentives. Seasonal
increases in receivables and inventory levels contributed towards higher working
capital demands in the first quarter of fiscal 1999. The increases in cash used
in operating activities were partially offset by a reduction in cash outflows
related to the Company's restructure plans announced in the fourth quarters of
fiscal years 1998 and 1997, and by a decrease in the required cash contribution
to fund the Company's pension plan.
Net cash used in investing activities totaled $2.4 million for the first quarter
of fiscal 1999, which primarily included investments in new presses and new
business and manufacturing systems.
Net cash provided by financing activities was $11.8 million for the first
quarter of fiscal 1999 compared to $.5 million in the same period of the prior
year. The Company increased borrowing by $12.3 million in the first quarter of
fiscal 1999 versus $.9 million in the first quarter of 1998. This increase was
used primarily to fund the working capital requirements described above.
Dividend payments remained unchanged from the first quarter of fiscal 1998 at
$.4 million.
Total debt at September 30, 1998, was $114.1 million, up from $101.8 million at
June 30, 1998 due to seasonal working capital requirements described above. As a
result of the increased debt level, the Company's debt to total capital ratio
increased to 50.5% at September 31, 1998, from 48.1% at June 30, 1998.
YEAR 2000 ISSUE
Information on the Year 2000 Issue as it relates to the Company is presented
under the caption "Management's Discussion and Analysis" in the Company's 1998
Annual Report to Shareholders and incorporated by reference into the Company's
Form 10-K for the fiscal year ended June 30, 1998. As of September 30, 1998,
there were no material changes in Year 2000 risks, plans and costs as described
in the 1998 Annual Report to Shareholders.
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the information concerning the Company's
"Quantitative and Qualitative Disclosures about Market Risk" as previously
reported in the Company's Report on Form 10-K for the year ended June 30, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K:
On July 31, 1998, the Company filed a Form 8-K, which included
the press release dated July 30, 1998 regarding fiscal 1998
fourth quarter and year-end financial results, as well as a
copy of the prepared remarks made on a conference call to
analysts on the same date.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADMUS COMMUNICATIONS CORPORATION
Date: November 12, 1998
/s/ C. Stephenson Gillispie, Jr.
------------------------------------------------
C. Stephenson Gillispie, Jr.
Chairman, President, and Chief Executive Officer
Date: November 12, 1998
/s/ Bruce V. Thomas
------------------------------------------------
Bruce V. Thomas
Senior Vice President and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Cadmus
Communications Corporation's Consolidated Balance Sheets and Consolidated
Statements of Income and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 895
<SECURITIES> 0
<RECEIVABLES> 76,532
<ALLOWANCES> 2,242
<INVENTORY> 27,794
<CURRENT-ASSETS> 110,400
<PP&E> 238,084
<DEPRECIATION> 108,226
<TOTAL-ASSETS> 293,697
<CURRENT-LIABILITIES> 58,656
<BONDS> 106,962
3,957
0
<COMMON> 0
<OTHER-SE> 107,861
<TOTAL-LIABILITY-AND-EQUITY> 293,697
<SALES> 99,784
<TOTAL-REVENUES> 99,784
<CGS> 79,119
<TOTAL-COSTS> 93,182
<OTHER-EXPENSES> 343
<LOSS-PROVISION> 138
<INTEREST-EXPENSE> 2,143
<INCOME-PRETAX> 4,116
<INCOME-TAX> 1,585
<INCOME-CONTINUING> 2,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,531
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
