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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 1-12551
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CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value per share The New York Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 22, 2005 was $87,220,338.
As of February 22, 2005 the Registrant had 48,711,979 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part II (Item 5) and Part III of this
form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by
reference from the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A with respect to the Registrant's Annual Meeting of
Stockholders to be held on or about April 27, 2005.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
The Company................................................. 1
Commercial.................................................. 1
Resale...................................................... 1
Our Industries.............................................. 1
Our Products................................................ 1
Our Services................................................ 2
Our Marketing, Distribution and Customers................... 3
Printing and Manufacturing.................................. 4
Raw Materials............................................... 4
Patents, Trademarks and Brand Names......................... 4
Competition................................................. 5
Backlog..................................................... 5
Employees................................................... 5
Environmental............................................... 5
Available Information....................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 57
Item 9A. Controls and Procedures..................................... 57
Item 9B. Other Information........................................... 57
PART III
Item 10. Directors and Executive Officers of Registrant.............. 58
Item 11. Executive Compensation...................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 61
Item 13. Certain Relationships and Related Transactions.............. 61
Item 14. Principal Accountant Fees and Services...................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 62
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cenveo is one of North America's largest providers of visual
communication solutions delivered through print and electronic media. Our
products include offset and digital printing, custom and stock envelopes,
and business documents and labels. We also provide communications
consulting, end-to-end project management and eServices. Our operational
footprint spans North America with 84 production facilities and five
fulfillment and distribution centers strategically located in or near major
urban centers throughout North America.
COMMERCIAL
Our commercial business had sales of $1.33 billion in 2004. This
business segment operates 64 manufacturing facilities and specializes in
the printing of annual reports, car brochures, brand marketing collateral,
financial communications, general commercial printing and the manufacturing
and printing of customized envelopes for billing and remittance and direct
mail advertising. In addition, we operate five distribution and fulfillment
centers and provide our customers with other value added services such as
eCommerce.
RESALE
Our resale business had sales of $413 million in 2004. This business
segment operates 20 manufacturing facilities and produces business forms
and labels, custom and stock envelopes and specialty packaging and mailers
generally sold to third-party dealers such as print distributors, forms
suppliers and office-products retail chains.
Refer to Note 19 of our consolidated financial statements included
elsewhere in this report for additional information concerning our
operating and geographic segments.
OUR INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated sales of $157 billion
in 2003 generated by more than 44,500 companies, according to Printing
Industries of America, Inc. The printing industry includes general
commercial printing, financial and legal printing, greeting cards, labels
and wrappers, magazines, newspapers, books, other specialty and quick
printing and related services such as prepress and finishing. We estimate
that the market in which we primarily compete has total annual sales of
approximately $49 billion serviced by over 20,000 printing businesses.
Envelope printing and manufacturing combined constitutes an estimated
$3.6 billion market in North America according to the Envelope
Manufacturer's Association. Products in the envelope industry include
customized envelopes for direct mail, transactional envelopes, non-custom
envelopes for resale, and specialty envelopes and filing products.
Printed office products constitutes an estimated $15 billion market,
with the short-run indirect segment of the market in which we compete
estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets
and the growing market for visual communications products and services
other than print. Our general commercial printing markets are: (1) high end
color printed materials, such as annual reports and car brochures, which
are longer run premium products for major national and regional companies
and (2) general commercial printing products such as advertising and
promotional materials for local markets. Our printing products also include
advertising literature, corporate identity materials, calendars, greeting
cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. We also offer our
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customers services such as design, fulfillment, eCommerce, inventory
management and other enterprise solutions for companies seeking strategic
partners for their branding and other communications priorities.
Envelopes. We serve two primary markets: (1) customized envelopes and
packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (2) envelopes and other products sold to wholesalers,
paper merchants, printers, contract stationers, independent retailers and
office products superstores. In the customized envelope market, we offer
printed customized conventional envelopes for billing and remittance,
direct mail marketers, catalog orders and other end users, such as banks,
brokerage firms and credit card companies. In the wholesale envelope
market, we manufacture and print a broad line of stock and custom envelopes
that are featured in national catalogs for the office products market or
offered through office products retailers and contract stationers.
Business Forms and Labels. We print a diverse line of custom products
for small and mid-size businesses including both traditional and specialty
forms and labels for use with desktop PCs and laser printers. Our printed
office products include business documents, specialty documents produced
through VersaSeal(R), Hi-Reply(TM) and Pro-card(TM) brands and short-run
secondary labels, which are made of paper or film affixed with pressure
sensitive adhesive and are used for mailing, messaging, bar coding and
other applications. These products are generally sold through independent
value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products and assist them in using digital
technologies to improve the effectiveness of their visual communications.
Among our services are:
Cenveo ColorScience(TM). Cenveo ColorScience is our remote customer
proofing solution. It is the first supply chain end-to-end process control
solution that measures and controls color quality throughout the printing
process from digital file creation to printed output. ColorScience offers
the digital delivery of a hardcopy contract proof at the customer's
location.
Delivery Systems. We offer a flexible "just-in-time" delivery program
which allows customers to receive their products just prior to when they
are needed.
Digital Archiving. We offer customers the option to store digitally
rendered artwork on our file servers. The artwork can then be accessed and
retrieved at any time for use by any authorized design or production group
via high speed transmission links.
Direct-to-Plate and Direct Imaging Technology. We have both
direct-to-plate and direct imaging technologies, which eliminate labor and
material costs in the prepress stage of a printing job. Both technologies
support a completely digital workflow, providing a better printed product,
faster turnaround and in the case of direct imaging, reduced inventory,
capability to print on demand and lower distribution costs.
eCENergy(TM). eCENergy is the Cenveo web portal providing access to a
suite of eSolutions designed to automate and streamline transactions with
customers. Current applications include an online ordering and fulfillment
system called eCatalog, soft and remote proofing and digital asset
management.
Electronic Prepress. We offer fully automated electronic prepress
services that allow the customer to submit artwork and other data in
hardcopy or digitally either on disk, CD or via high speed transmission
line. Hardcopy artwork is digitally scanned and mastered to create a file
for use either in direct-to-plate or direct-to-press applications. We also
provide traditional prepress services to customers who require graphics and
artwork to be photographed, composed and incorporated into files for plate
or direct-to-press applications.
2
Enterprise Solutions. Large national organizations looking for
integrated, managed supply chain solutions can avail themselves of flexible
solutions that connect them to their internal departments and external
customers and suppliers. We have the supply chain management processes,
techniques, systems and resources to manage, produce and deliver their
products from our facilities strategically located across the U.S.
Fulfillment. We have full-service fulfillment centers with on-line
order assembly and bar coding strategically located throughout the U.S.
Many of these centers have digital presses to reduce the costs of inventory
and obsolescence.
Inventory Management Systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU), available warehouse supply and
summary billing.
Warehousing Services. For customers who prefer to outsource the
management of their printed product, storage and distribution we have the
expertise and capacity to store finished product and drop ship in bulk or
ship on an "as needed" basis.
OUR MARKETING, DISTRIBUTION AND CUSTOMERS
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the diversity in customer needs and
preferences, we market most of our general commercial printing and
envelopes locally and regionally. Given the project-oriented nature of
these markets, sales to particular customers may vary significantly from
year to year depending upon the number and size of their communications
plans. Our customer supply agreements are typically on an order-by-order
basis or for a specified period of time. Our sales team is supported by a
technical service team that provides customers with highly customized
printing solutions. Most of our facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
Our marketing efforts for commercial printing differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. We
utilize a team approach to customer service relationships that we believe
is unique in the printing industry.
We believe our commercial segment has one of the largest sales forces
in the industry, with approximately 700 sales representatives as of
December 31, 2004. Most of our commercial printing and envelope products
are sold through sales representatives who work directly with customers
from the initial concept through prepress, proofing, production and
delivery. Because our sales representatives are our primary contacts with
our customers, our goal is to attract, train and retain an experienced,
qualified sales force in each of our businesses. Sales representatives
typically are compensated by commission, which generally depends on order
size and type, prepress work, reruns or rework and overall profitability of
the job. For our growing list of enterprise customers we have account
teams, some members of which are located on the customer's premises.
Through our "Strategic Sales" initiative, we offer customers our full
spectrum of products and services such as design, fulfillment, eCommerce
and inventory management. Our Strategic Sales team is organized to focus on
vertical markets including travel and leisure, health services, financial
services and technology and to offer customers in these markets customized
solutions to their visual communications needs.
In our resale segment, our products are marketed under "Quality Park".
The resale segment sells most of its products through 5 major channels;
independent solution providers, commercial printers, ad specialty dealers,
quick printers and office products distributors. Our resale segment sells
its products
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primarily through catalogs, telemarketing and the Internet to over 22,000
value-added resellers who distribute our products to end users.
We coordinate sales efforts among geographic regions within our
operating segments, and among the operating businesses themselves, in order
to compete for national account business, enhance the internal
dissemination of successful new product ideas, efficiently allocate our
production equipment, share technical expertise and increase company-wide
selling of specialty products manufactured at selected facilities.
Our direct customer base totals approximately 30,000. The customers of
our commercial segment include Fortune 500 companies, graphic designers and
advertising agencies, regional and local businesses, insurance and finance
companies, government agencies and not-for-profit organizations. The
customers of our resale segment total over 22,000 distributors and office
products retail businesses as well as the U.S. Postal Service. None of our
customers accounted for more than 5% of revenue in 2004.
PRINTING AND MANUFACTURING
Our commercial segment operates 64 manufacturing facilities throughout
the United States and Canada. Our 36 commercial printing plants combine
advanced prepress technology with high-quality web and sheet-fed
lithographic presses, digital presses and extensive binding and finishing
operations. Our 28 envelope plants produce envelopes from either flat sheets
which are die-cut into pre-shaped blanks or rolls of paper which are run on
our web machines. The paper is folded into an envelope and is glued at the
seams and on the flap. Flat sheets are often printed before the envelope is
produced. Printing can also occur during the folding process or after the
envelope is produced. Web machines are typically used for larger runs with
multiple colors and numerous features. Die cut machines, which require a
preliminary step to provide die cut envelope blanks from paper sheets, are
used primarily for smaller orders typically including customized value-added
features. The manufacturing process used is dependent upon the size of a
particular order, custom features required, machine availability and
delivery requirements. Some of our commercial facilities operate seven days
a week, 24 hours a day to meet customer requirements.
In our resale segment, we operate 20 facilities in the United States.
We design and print business forms and labels and envelopes for a wide
range of businesses. A majority of the orders for these products are sent
to us electronically. We perform prepress and plate making functions and
print on proprietary presses. Six of our resale facilities manufacture
stock envelopes that are sold to paper merchants and office products retail
chains.
RAW MATERIALS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers provide all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at competitive prices due to our volume
leverage.
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our businesses,
which expire at various times through 2012. Our sales do not materially
depend upon any single or group of related patents.
4
COMPETITION
Commercial printing is highly competitive and fragmented. We compete
against a diminishing number of large, diversified and financially strong
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although there are a significant number of buyers who are price
sensitive, we also believe that customer service and high quality products
are important competitive factors, especially to companies seeking
enterprise solutions and high impact color products. We believe we provide
premium quality and superior customer service while maintaining competitive
prices through stringent cost control efforts. The main competitive factors
in our markets are customer service, product quality, reliability,
flexibility, technical capability and price. We believe we compete
effectively in each of these areas.
In selling our envelope products, we compete with a few multi-plant and
many single-plant companies that primarily service regional and local
markets. We also face competition from alternative sources of communication
and information transfer such as electronic mail, the Internet, interactive
videodisks, interactive television, electronic retailing and facsimile
machines. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (1) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (2) the ability
of our direct mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the
U.S. Postal Service and the Canada Post Corporation and (3) the ability of
our direct mail customers to include return materials in their mail-outs.
Principal competitive factors in the envelope business are quality, service
and price. Although all three are equally important, various customers may
emphasize one or more over the others. We believe we compete effectively in
each of these areas.
In selling our printed business forms and labels products, we compete
with other document and labels print facilities with nationwide
manufacturing locations and regional and local printers, which typically
sell within a 100- to 300-mile radius of their plants. We compete mainly on
quick turn customization of products and unparalled service levels.
BACKLOG
At December 31, 2004 and 2003, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $127.0 million
and $113.0 million, respectively.
EMPLOYEES
We employed approximately 10,000 people as of December 31, 2004, and
approximately 1,800 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. Collective bargaining agreements, each of
which cover the workers at a particular facility, expire from time to time
and are negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
We are committed to employee development and increased organizational
effectiveness. We operate Cenveo University, our in-house training program,
which provides courses in process improvement, quality control, supervisory
and management skills and increasing employee empowerment. Complementing
our in-house initiatives, Cenveo contracts leading industry experts to
provide skill-building courses to our sales representatives and managers.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we
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operate in compliance with the applicable laws and regulations governing
environmental protection. Our policy is that management at all levels be
aware of the environmental impact of operations and direct such operations
in compliance with applicable standards. We believe that we are in
substantial compliance with applicable laws and regulations relating to
environmental protection. We do not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations. However, there can be no assurance that
newly discovered conditions or new or stricter interpretations of existing
laws and regulations will not result in material expenses.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission. In addition,
our earnings conference calls are archived for replay on our website and
presentations to securities analysts are also included on our website.
ITEM 2. PROPERTIES
We occupy 84 printing and manufacturing facilities in the United States
and Canada and five print fulfillment and distribution centers, of which 36
are owned and 53 are leased. In addition to on-site storage at these
facilities, we store products in 19 warehouses, of which four are owned,
and we lease 21 sales offices. We also lease 47,153 square feet of office
space in Englewood, Colorado for our corporate headquarters. We believe
that we have adequate facilities for the conduct of our current and future
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CVO." At February 22, 2005, there were approximately 458
shareholders of record and, as of that date, we estimate that there were
more than 7,534 beneficial owners holding stock in nominee or "street"
name. The following table sets forth, for the periods indicated, the range
of the high and low sales prices for our common stock as reported by the
NYSE:
2004 HIGH LOW
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First Quarter........................................... $5.00 $3.53
Second Quarter.......................................... $4.52 $2.60
Third Quarter........................................... $3.70 $2.40
Fourth Quarter.......................................... $3.70 $2.60
2003 HIGH LOW
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First Quarter........................................... $2.55 $1.85
Second Quarter.......................................... $3.13 $2.05
Third Quarter........................................... $3.60 $2.76
Fourth Quarter.......................................... $4.61 $3.58
We have not paid a dividend on common stock since our incorporation and
do not anticipate paying dividends in the foreseeable future because our
senior secured credit facility, senior notes and senior subordinated notes
limit our ability to pay common stock dividends.
No purchases of our common stock were made by or on behalf of the
Company or any affiliated purchaser during the fourth quarter of 2004.
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Equity
Compensation Plan Information" appearing in the Company's Proxy Statement
filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting
of Stockholders is incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
results of acquisitions have been included in the income statement data of
the Company from their respective acquisition dates in accordance with
purchase method accounting for acquisitions. The data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements and the related notes included elsewhere herein.
YEAR ENDED DECEMBER 31
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2004 2003(1) 2002(2) 2001(3) 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................ $1,742,914 $1,671,664 $1,728,705 $1,868,768 $2,044,350
Income (loss) from continuing
operations..................... $ (20,938) $ 3,924 $ (73,488) $ (45,213) $ 36,193
Income (loss) per diluted share
from continuing operations..... $ (0.44) $ 0.08 $ (1.54) $ (0.95) $ 0.73
Total assets..................... $1,174,747 $1,111,446 $1,107,367 $1,476,867 $1,683,592
Total long-term debt, including
current maturities............. $ 769,769 $ 748,961 $ 763,899 $ 855,221 $ 922,351
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(1) In 2003, reported net income was $5.2 million, or earnings of $0.11 per
share, which included a $0.3 million charge for a cumulative effect of
change in accounting principle and a $1.5 million gain on a disposal of
discontinued operations.
(2) In 2002, reported net loss was $202.1 million, or a loss of $4.24
per share, which included a charge of $111.7 million for a cumulative
effect of change in accounting principle and a $16.9 million for the
loss on a disposal of discontinued operations.
(3) In 2001, reported net loss was $136.2 million, or a loss of $2.86
per share, which included a charge of $91.0 million for the loss on a
disposal of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Cenveo is one of North America's largest providers of visual
communication solutions delivered through print and electronic media. Our
products include offset and digital printing, custom and stock envelopes
and business documents and labels. We also provide communications
consulting, end-to-end project management and eServices. We have production
facilities and fulfillment and distribution centers strategically located
throughout North America. We are organized into two business segments--
commercial and resale.
Our commercial segment specializes in printing annual reports, car
brochures, brand marketing collateral, financial communications and general
commercial printing and in the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. The
commercial segment also offers services such as design, fulfillment,
eCommerce and inventory management. These products and services are
provided directly to national and local customers. Our commercial segment
consists of 36 printing plants, 28 envelope plants and five distribution
and fulfillment centers.
Our resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through print distributors, business forms suppliers, office products
retail chains and the Internet. The resale segment operates 20
manufacturing facilities.
REVIEW OF RESULTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes an overview of our consolidated results from
2002 through 2004 followed by a discussion of the results of each of our
business segments for the same period.
8
It is important to consider the economic environment for the printing
industry when evaluating our results from 2002 to 2004. The recession that
began in 2001 was more severe in the printing industry than in the general
economy and many of our markets lagged the overall economy in recovering
from the recession. In 2004, most of our markets had not yet returned to
pre-recession growth rates. Excess capacity in concert with declining or
weak volume growth in many of our markets resulted in extreme competitive
pricing pressures. In addition, the cost of paper, film and other raw
materials increased significantly in 2004. The cost of uncoated paper,
which is the primary raw material used in manufacturing envelopes, declined
slightly in 2002 and 2003 and increased approximately 17% in 2004. Our
paper suppliers also increased uncoated paper prices approximately 9% in
early 2005. The prices of coated paper, the primary raw material used by
our commercial printing operations, were relatively stable in 2002 and
2003. Certain grades of coated paper increased as much as 18% in 2004. Our
paper suppliers have not announced increases in the prices of coated papers
in 2005.
In our commercial segment, approximately 50% of our commercial printing
sales and approximately 40% of our custom envelope sales are related to
advertising and direct mail promotions. Spending by our customers on
printed advertising materials and direct mail promotions has increased over
the last three years; however, our customers are not spending as they did
prior to the recession.
In our resale segment, the demand for traditional business forms,
especially continuous and multi-part forms, has declined significantly over
the last several years as businesses have acquired laser-printing
capabilities. Many of our customers have consolidated and pricing has been
extremely competitive.
To meet the challenges presented by the economic environment in which we
operate and the markets we serve, we have taken significant actions. We do
not expect our markets to return to pre-recession growth rates over the next
several years. We believe that our success in this environment will be
dependent on offering products and services that provide customers with
solutions to reduce cycle time and total cost of ownership. We believe that
if we offer our customers "one-stop shopping" with efficiency and quality,
we will succeed by growing market share. In 2003, we reorganized Cenveo to
operate as one company and to make it easier for customers to purchase our
products and services. As we are now organized, we offer customers products
and services and production capabilities that clearly differentiate us from
our competition. In addition, we have created a strategic sales team to
service those customers that purchase a broader range of multiple products
and services and utilize our national manufacturing capabilities. In 2004,
sales managed by this team increased $43 million. In 2002, we expanded our
service offering by acquiring an operation with national distribution and
fulfillment capabilities. In 2004, we strengthened our market position in
two key local markets by acquiring Valco Graphics in Seattle, Washington and
Waller Press in San Francisco, California.
To compete effectively in an environment of excess capacity and rising
costs, we have focused on improving productivity and creating operating
leverage. In late 2000, we began aligning our capacity and costs with the
demands of our customers, and we consolidated 12 envelope facilities, 8
printing operations and 6 business forms plants. Over the last three years
we replaced 13 offset presses with 6 newer, more productive presses without
reducing our revenue generating capacity. These actions enabled us to
mitigate much of the impact of lower margins due to lower selling prices
and increased costs. The announced 2005 price increase of uncoated paper
will increase our costs by approximately $10.0 million. Our margins in 2005
will be reduced to the extent we are unable to recover this cost through
higher selling prices or other cost reduction measures.
We are defending our share of the business forms market by improving
customer service, on-time deliveries and quality. We began to see success
from this strategy in 2004. The sales of our documents division declined
only 4% in 2004 compared to a decline of 7% in 2003.
In 2003, sales of office products to our wholesale customers and office
products superstores were 7% lower than in 2002. Much of this sales decline
was due to a shift by consumers to the office products superstores where our
market position was weak. Our strategy in 2004 was to strengthen our
position with key office products superstores and regain our share of the
office products market. We
9
have been successful executing this strategy. Our sales in this channel were
13% higher in 2004 than in 2003.
In 2001, we recognized the need to reduce and restructure our debt. We
sold our prime label business and our office products distribution business
in 2002. We sold the filing products division of our resale segment and the
photo envelope business of our commercial segment in 2002. We also sold
certain digital graphics operations of our commercial segment in 2003. The
net proceeds from these divestitures, which totaled $122.3 million, were
applied to our outstanding debt. In 2002, we replaced bank term debt with
$350 million of 9 5/8% senior notes due 2012. In 2004, we refinanced our
8 3/4% senior subordinated notes due 2008 with 7 7/8% senior subordinated
notes due 2013 and extended our senior secured credit facility to 2008.
Other than our credit agreement which expires in 2008, we have no
significant liquidity events before 2012.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income as well
as the net sales and operating income of our business segments used
internally to assess operating performance. Division sales exclude sales of
divested operations and division operating income excludes unallocated
corporate expenses, restructuring, impairment and other charges, the profits
of divested operations and charges related to divestitures. Our fiscal year
ends on the Saturday closest to the last day of the calendar year, and as a
result, 2004 was a 53-week year. Because our business tends to be slow
during the holiday season, we do not believe that 53rd week had a
significant impact, unless otherwise noted, on the comparability of our
results in 2004 with 2003 and 2002 which were 52-week years.
DECEMBER 31
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Division net sales................................. $1,742,914 $1,668,792 $1,672,260
Divested operations........................... -- 2,872 56,445
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
Division operating income.......................... $ 97,797 $ 104,770 $ 93,042
Unallocated corporate expenses................. (19,655) (17,979) (18,970)
Restructuring, impairment and other charges.... (5,407) (6,860) (74,551)
Divested operations............................ -- 167 3,301
Gain (loss) on operations held for sale........ -- 117 (19,278)
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (16,456)
Interest expense............................... 73,125 71,891 70,461
Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other non-operating expenses................... 2,459 1,819 1,754
---------- ---------- ----------
Income (loss) before income taxes.................. (20,597) 6,505 (105,134)
Income tax expense (benefit)................... 341 2,581 (31,646)
---------- ---------- ----------
Income (loss) from continuing operations........... (20,938) 3,924 (73,488)
Gain (loss) on disposal of discontinued
operations................................... 1,230 1,548 (16,868)
Cumulative effect of change in accounting
principle.................................... -- (322) (111,748)
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104)
========== ========== ==========
Earnings (loss) per share--basic and diluted....... $ (0.41) $ 0.11 $ (4.24)
========== ========== ==========
NET SALES
Net sales increased 4% in 2004 reflecting growth in the national
accounts of our commercial segment and higher sales of office products in
our resale segment. Net sales decreased 3% in 2003.
10
Sales in 2002 included sales of $42.3 million for the filing products
division of our resale segment that was sold in August 2002 and sales of
$14.1 million for the digital graphics operations of our commercial segment
that were sold in February 2003.
OPERATING INCOME
Operating income in 2004 declined $7.5 million, or 9%. This decline was
due to lower operating performance of our two business segments which was
7% lower in 2004 than 2003. In 2003, operating income improved
significantly over results in 2002 which included significant restructuring
and impairment charges. The operating performance of our two business
segments increased 13% in 2003.
UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include
the costs of our corporate headquarters and certain expenses not allocated
to our segments. The increase in unallocated corporate expenses in 2004 was
due, in part, to an increase of $0.6 million in the cost of workers'
compensation claims incurred prior to 2004. Over the last three years, it
has been our practice to allocate the cost of current year claims to our
segments but not to allocate the cost of changes in the development of
claims incurred in prior years. The other major increase in unallocated
corporate expenses was our cost to comply with the Sarbanes- Oxley Act of
2002. Our out-of-pocket cost of compliance was approximately $0.8 million.
Unallocated corporate expenses were lower in 2003 than 2002 due to lower
workers' compensation expense on claims incurred in prior years partially
offset by the costs associated with training programs initiated in 2003 to
actively involve our employees in improving service, quality, efficiency and
innovation.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. We continually evaluate
our operations for opportunities to optimize capacity and reduce costs.
Since 2000, we have rationalized and realigned capacity to operate fewer
facilities without sacrificing revenue capability. We have taken other
actions to reduce the cost structures of our operations to mitigate the
impact of lower margins. This process is ongoing as our industry and
markets continue to evolve. We anticipate additional restructuring charges
in 2005.
2004: During 2004, restructuring and impairment charges totaled $5.4
million. We closed our envelope plant in Bensalem, Pennsylvania and moved
most of its equipment into our printing operation in Philadelphia. The cost
of this plant closure was $1.2 million, net of a $1.4 million gain on the
sale of the plant building and inclusive of impairment charges of $1.0
million.
We acquired printing operations in Seattle, Washington and San
Francisco, California during 2004. A key aspect of our strategy in
acquiring these operations was to consolidate our existing operations in
these two cities with the newly acquired operations. The cost incurred
during 2004 to merge these operations was $1.1 million, including asset
impairment charges of $0.8 million.
In December 2004, we negotiated the termination of a lease on a
building in New York City that had been used by an operation that was
closed in 2002. The cost to terminate the lease and write off the
unamortized value of leasehold improvements was $1.2 million.
During the development of our operating plans for 2005, we made a
decision to close a small printing operation in the first quarter of 2005
and consolidate its production into another facility. Accordingly, we
recorded an impairment charge of $1.4 million on the equipment that will be
taken out of service and $0.1 million of lease termination fees. We expect
to incur expenses of approximately $0.8 million to complete this closure in
2005.
Other asset impairments recorded in 2004 totaled $0.4 million.
2003: In 2003, restructuring and other charges totaled $6.9 million. We
closed our web printing operation in Indianapolis, Indiana and redeployed
its two web presses and related equipment to our facilities in St. Louis,
Missouri and Baltimore, Maryland. The cost to move this equipment was $1.1
million. We also incurred employee separation expenses of $1.5 million in
connection with workforce reductions across most of our operations.
11
The 2003 restructuring charge included credits of $1.0 million for the
reversals of reserves recorded in 2001 and 2002 that were no longer
required.
We recorded a charge of $5.3 million in 2003 to cover the cost of
settling a lawsuit after an unfavorable award was granted by a jury in Los
Angeles County, California to an ex-employee who had contested his
termination. We elected to settle this dispute in order to avoid the
expense and risk of further litigation and appeals.
2002: During 2002, restructuring, impairment and other charges totaled
$74.6 million. In 2001, we began a major consolidation of the envelope
manufacturing facilities in our commercial segment to reduce excess
internal capacity and improve the utilization of the equipment and
resources at our other envelope plants in the United States and Canada.
This consolidation was completed in 2002 and the cost incurred in 2002
totaled $26.6 million.
We closed a commercial printing operation in New York City at a cost of
$4.2 million; business forms plants in Clearwater, Florida and Denver,
Colorado at a cost of $2.0 million; and an envelope operation of our resale
segment in Hattiesburg, Mississippi at a cost of $2.4 million. In addition,
we began the realignment of our web presses in Indianapolis that was
completed in 2003. The cost incurred in 2002 was $3.1 million.
Other charges include $21.9 million incurred in connection with the
refinancing of an operating lease, consulting fees of $4.4 million incurred
in connection with business improvement initiatives, severance expenses of
$4.8 million, asset impairments of $3.6 million and $1.6 million for other
restructuring activities including the reversal of a $0.5 million excess
accrual.
A further discussion of restructuring, impairment and other charges
can be found in Note 14 to the consolidated financial statements.
GAIN (LOSS) ON OPERATIONS HELD FOR SALE
The table below summarizes charges we recorded in 2003 and 2002 related
to operations that had been held for sale.
2003 2002
---- --------
(IN THOUSANDS)
Gain (loss) on assets held for sale......................... $117 $ (6,436)
Impairment on operations formerly held for sale............. -- (12,842)
---- --------
$117 $(19,278)
==== ========
IMPAIRMENT LOSS ON ASSETS HELD FOR SALE. In 2002, we completed the sale
of the filing products division. We incurred a $6.1 million loss in
connection with this divestiture. We also reduced the value of the digital
graphics assets held for sale at the end of 2002 by $0.3 million. These
assets were sold in 2003.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. In 2001, an operation
that is now an important part of our resale segment was held for sale. In
2002, we made the decision not to sell this business. Accordingly, we
reversed the tax benefit of $11.5 million expected to be realized upon the
sale that had been recorded in 2001 and expenses of $1.1 million that had
been accrued but not incurred. We also discontinued our efforts to sell one
of the digital graphics operations that had been held for sale at the end
of 2001 and recorded an impairment charge of $2.4 million.
12
INTEREST EXPENSE
Interest expense in 2004, 2003 and 2002 was as follows:
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Total interest expense..................................... $73,125 $71,891 $76,031
Less: Allocated to discontinued operations................. -- -- (5,570)
------- ------- -------
Reported interest expense.................................. $73,125 $71,891 $70,461
======= ======= =======
Interest expense increased $1.2 million in 2004 compared to 2003. In
2004, interest expense reflected our average outstanding debt of $811.4
million during the year and a weighted average interest rate of 8.2%
compared to our average outstanding debt of $792.7 million in 2003 and a
weighted average interest rate of 8.4% for 2003. Our average outstanding
debt and weighted average interest rate in 2004 reflect the issuance in
January of $320 million of 7 7/8% senior subordinated notes due 2013, the
proceeds of which were used to redeem the $300 million of 8 3/4% senior
subordinated notes due in 2008. The increase in interest expense in 2004
was due primarily to an extra week of interest.
Interest expense in 2002 excluded the interest expense that was
allocated to discontinued operations. Total interest expense declined 5.4%
in 2003 compared to 2002. In 2003, total interest expense reflected our
average outstanding debt of $792.7 million during the year and a weighted
average interest rate of 8.4% compared to our average outstanding debt of
$890.6 million and a weighted average interest rate of 7.9% for 2002. The
average outstanding debt decreased in 2003 primarily due to the application
of the proceeds from our divestitures to the repayment of debt. Our
weighted average interest rate increased in 2003 as a result of the
issuance of $350 million of 9 5/8% senior notes in March 2002, the proceeds
of which were used primarily to repay bank debt that accrued interest at a
lower variable rate. In November 2002, we redeemed our 5% convertible
subordinated notes.
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT
In January 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds from the sale of these notes were used to
redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to
redeem the 8 3/4% notes and the unamortized debt issuance costs on the
8 3/4% notes, which were written off, totaled $17.7 million.
In 2002, we wrote off $16.5 million of unamortized debt issuance costs
related to the bank credit facility that was refinanced.
INCOME TAXES
2004 2003 2002
-------- ------- --------
(IN THOUSANDS)
Income tax benefit for U.S. operations.................... $(12,302) $(8,890) $(42,171)
Income tax expense for foreign operations................. 12,643 11,471 10,525
-------- ------- --------
Income tax expense (benefit)............................ $ 341 $ 2,581 $(31,646)
======== ======= ========
Effective income tax rate............................... (1.7)% 39.7% 30.1%
======== ======= ========
The income tax expense reported in 2004 on the loss before income taxes
was primarily the result of establishing valuation allowances on certain
deferred tax assets and the tax expense recorded for foreign operations
that generated taxable income in 2004.
13
The effective tax rate in 2003 approximates the statutory effective tax
rate considering the tax jurisdictions in which we operate. In 2002, the
low effective tax rate was the result of significant nondeductible charges
included in income from continuing operations before income taxes.
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS
In September 2000, we sold the extrusion coating and laminating
business segment of American Business Products, Inc., a company we acquired
in February 2000. The consideration received for this business included an
unsecured note which was fully reserved at the time of the sale. This note
was redeemed by the issuer in 2004 for $2.0 million. The proceeds, net of
tax, have been recorded as a gain on disposal of discontinued operations in
2004.
The gain on the disposal of discontinued operations recorded in 2003
was primarily the result of adjustments made to the tax impact of the sale
of our prime label business in 2002.
The loss on the disposal of discontinued operations recorded in 2002
reflects the additional loss on the divestitures of the two businesses
reported as discontinued operations in 2001 and sold in 2002.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In 2003, we adopted Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("FIN 46"). The implementation of FIN 46
required us to consolidate a trust that is leasing equipment to us under an
operating lease. In addition to the equipment and the debt of the trust, we
recorded an after-tax charge of $0.3 million as the effect of this
accounting change in 2003.
We adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"), on January 1, 2002. SFAS No.
142 required an impairment test of the goodwill recorded for each of our
reporting units as of that date. We determined that $111.7 million of the
goodwill associated with our commercial printing operations (formerly the
commercial printing segment) was impaired. This impairment loss was
reported as the effect of a change in accounting principle in 2002.
SEGMENT OPERATIONS
Our chief executive officer monitors the performance of the ongoing
operations of each of our business segments. We assess performance based on
division net sales and division operating income. The summaries of sales
and operating income of our two segments have been presented to show each
segment without the sales of divested operations ("Division net sales") and
to show the operating income of each segment without the results of
divested operations and excluding restructuring, impairment and other
charges ("Division operating income"). Sales and operating income of
operations divested and restructuring, impairment and other charges are
included in the tables below to reconcile segment sales and operating
income reported in Note 19 to our consolidated financial statements to
division net sales and division operating income on which our segments are
evaluated.
14
COMMERCIAL
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Segment sales...................................... $1,329,778 $1,272,525 $1,268,367
Divested operations............................ -- (2,872) (14,105)
---------- ---------- ----------
Division net sales................................. $1,329,778 $1,269,653 $1,254,262
========== ========== ==========
Segment operating income........................... $ 50,538 $ 58,704 $ 1,513
Restructuring, impairment and other charges.... 4,158 1,198 44,894
Divested operations............................ -- (167) (598)
---------- ---------- ----------
Division operating income.......................... $ 54,696 $ 59,735 $ 45,809
========== ========== ==========
Division operating income margin................... 4% 5% 4%
Division net sales of our commercial segment increased $60.1 million,
or 5%, in 2004 compared to net sales in 2003. This increase was due to the
following:
* Sales to the customers managed by our strategic sales team increased
$42.7 million, or 28%. Sales in our local markets declined $11.2
million in 2004.
* In 2004, our newly acquired operations in Seattle and San Francisco
contributed sales of $15.6 million including $1.9 million of sales
managed by our strategic sales team.
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $14.2 million.
Division operating income of our commercial segment declined $5.0
million, or 8%, in 2004 compared to 2003. Excluding the impact of
acquisitions and foreign currency, gross profit increased $11.0 million as
a result of the increase in sales and lower fixed manufacturing expenses.
The increase in gross profit, however, was offset by the following:
* Selling expenses increased $9.9 million. In 2003, we formed a
strategic sales team to build sales with large customers that
purchase multiple products and services from multiple facilities. The
incremental cost of this team in 2004 was approximately $4.9 million.
Increased expenses associated with our local market sales were
approximately $5.0 million.
* Administrative expenses increased $6.9 million. Included in this
increase were higher information technology costs of $3.5 million and
expenses of $1.2 million associated with changing our name to Cenveo.
* In 2004, we recorded the remaining contingent purchase price of $14.2
million for an acquisition we completed in 2002. This contingent
purchase price was recorded as a customer-related intangible asset
that is being amortized over the remaining four-year life of a service
agreement. As a result, amortization expense increased $3.6 million
in 2004.
Division operating income in 2004 increased $4.4 million as a result of
the foreign currency impact of the strength of the Canadian dollar, the
results of our acquisitions and lower losses on dispositions of assets.
Division net sales of our commercial segment increased $15.4 million in
2003 compared to net sales in 2002. This increase was due to the following:
* Accounts designated as strategic sales accounts increased $42.2
million in 2003. Most of this increase was due to the acquisition in
August 2002 of the in-house printing and fulfillment operations of
American Express Company.
* Sales in our local markets declined $47.3 million. Lower average
selling prices for our envelope products contributed significantly to
this decline.
15
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $20.5 million.
Division operating income of the commercial segment increased $13.9
million, or 30%, in 2003 compared to 2002. The increase in operating income
was due to the following:
* Excluding the impact of acquisitions and foreign currency, gross
profit declined $7.8 million. This was due primarily to lower volume
in our local markets and lower selling prices of our envelope
products partially offset by lower manufacturing overhead.
* Selling and administrative expenses were $15.5 million lower in 2003.
These reductions were the result of lower sales, the closure of our
printing operation in New York City in the fourth quarter of 2002,
the closure of our web printing operation in Indianapolis in the
first quarter of 2003 and other initiatives to reduce costs.
* The favorable impact on operating income of the strength of the
Canadian dollar and the results of the acquisition completed in 2002
totaled approximately $6.2 million.
RESALE
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Segment sales........................................... $413,136 $399,139 $460,338
Divested operations................................. -- -- (42,340)
-------- -------- --------
Division net sales...................................... $413,136 $399,139 $417,998
======== ======== ========
Segment operating income................................ $ 43,102 $ 44,703 $ 43,298
Restructuring, impairment and other charges......... -- 332 6,639
Divested operations................................. -- -- (2,703)
-------- -------- --------
Division operating income............................... $ 43,102 $ 45,035 $ 47,234
======== ======== ========
Division operating income margin........................ 10% 11% 11%
Division net sales of our resale segment increased $14.0 million, or 4%,
in 2004 compared to 2003. Sales of office products to our retail, wholesale
and trade customers were up 13% from the prior year. Lower net pricing,
however, reduced our overall revenue growth from these customers to 4%.
Sales of business forms, labels and envelopes to our distribution customers
increased 4%. This increase was driven by strong sales of business labels
which were up 12%.
Division operating income of our resale segment declined $1.9 million,
or 4%, in 2004 compared to 2003. Gross profit declined $4.8 million driven
by lower selling prices of office products, and higher paper costs and
higher manufacturing overhead. Lower selling, general and administrative
expenses partially offset the decline in gross profit.
Division net sales in 2003 decreased $18.9 million, or 5%, compared to
2002. Sales of office products to our wholesale and trade customers
declined 7% in 2003. Sales of business forms, labels and envelopes sold to
distributors in 2003 were 3% lower than 2002. A 7% decrease in sales of
business forms drove this decline.
Division operating income declined $2.2 million, or 5%, in 2003
compared to 2002. Because of the decline in sales, gross profit was $3.8
million lower than in 2003. Lower administrative expenses in 2003 partially
offset the impact of the decline in gross profit.
16
LIQUIDITY AND CAPITAL RESOURCES
Our cash flows from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, are summarized as
follows:
2004 2003 2002
-------- -------- ---------
(IN THOUSANDS)
Cash provided by (used in):
Operating activities................................ $ 37,991 $ 59,459 $ 22,971
Investing activities................................ (35,597) (29,856) 100,819
Financing activities................................ (1,749) (33,256) (110,222)
Effect of exchange rate changes on cash............. (156) 1,310 (985)
Discontinued operations............................. -- -- (10,827)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... $ 489 $ (2,343) $ 1,756
======== ======== =========
OPERATING ACTIVITIES. In 2004, cash provided by our operations was
$21.5 million lower than cash provided in 2003. This decrease was due
primarily to our loss from continuing operations and the increase in
working capital of $11.0 million compared to the $12.9 million decrease in
working capital in 2003.
In 2003, cash provided by our operations increased $36.5 million. This
increase was due primarily to income from continuing operations and
reductions in working capital in 2003 compared to 2002.
INVESTING ACTIVITIES. Acquisition spending was $13.2 million in 2004,
$2.8 million in 2003 and $2.6 million in 2002. In 2004, we purchased Valco
Graphics in Seattle and Waller Press in San Francisco. In 2002, we
purchased the in-house printing and fulfillment operations of American
Express Company. Acquisition spending includes contingent purchase price of
$3.2 million in 2004 and $2.8 million in 2003 paid to American Express
Company.
Capital expenditures were $27.4 million in 2004, $31.6 million in 2003
and $30.9 million in 2002. We anticipate spending $20.0 million to $25.0
million on capital investments in 2005.
In 2004, the purchaser of a business we sold in 2000 redeemed a note
issued in connection with the sale for $2.0 million. In 2003, we received
net proceeds of $3.9 million from the sale of certain digital graphics
operations of our commercial segment. In 2002, we received net proceeds of
$31.5 million from the sale of our filing products division, $67.0 million
from the sale of our prime label business, $20.5 million from the sale of
Curtis 1000 and $3.3 million from the sale of our photo envelope business.
Proceeds from the sales of property and equipment were $3.0 million in
2004, $0.7 million in 2003 and $12.0 million in 2002.
FINANCING ACTIVITIES. At December 31, 2004, our outstanding debt was
$769.8 million, an increase of $20.8 million from December 31, 2003. In
January 2004, we sold $320 million of 7 7/8% senior subordinated notes due
2013. The proceeds of these notes were used to purchase the $300 million of
8 3/4% senior subordinated notes due 2008. The redemption premiums incurred
to purchase the 8 3/4% notes totaled $13.5 million. The cost incurred to
issue the new notes was $7.2 million. In March 2004, we amended our $300
million senior secured credit facility to extend its term to June 2008. The
cost of this amendment was $1.9 million.
At December 31, 2003, our outstanding debt was $749.0 million which
included the $17.0 million of debt held by a trust that was consolidated in
accordance the requirements of FIN 46. In 2003, we used $32.8 million of
our cash flow to reduce outstanding debt.
17
In 2002, we reduced outstanding debt by $91.6 million using proceeds
from divestitures. We incurred debt issuance cost of $18.6 million in
connection with the sale of our 9 5/8% senior notes due 2012 and the
refinancing of our senior secured credit facility.
At December 31, 2004, we had outstanding letters of credit of
approximately $25.2 million related to performance and payment guarantees.
In addition, we had outstanding letters of credit of $1.0 million issued as
credit enhancements in conjunction with other debt. Based on our experience
with these arrangements, we do not believe that any obligations that may
arise will be significant.
Our current credit ratings are as follows:
SENIOR SENIOR
SECURED CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITY NOTES NOTES LAST CHANGE
------------- -------------- ------ ------------ -------------
Standard & Poor's.................. BB- B+ B- December 2004
Moody's............................ Ba3 B1 B3 April 2004
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
We expect internally generated cash flow and the financing available
under our senior secured credit facility will be sufficient to fund our
working capital needs and long-term growth; however, this cannot be
assured. Based on the certificate filed January 21, 2005, we had $110.8
million of unused credit available under our senior secured credit
facility.
CONTRACTUAL OBLIGATIONS AND PROBABLE LIABILITY PAYMENTS. The following
table is a summary of our significant contractual obligations and probable
liability payments at December 31, 2004 (in thousands):
OTHER
LONG- LONG- PURCHASE
TERM OPERATING TERM COMMITMENTS TOTAL CASH
PAYMENTS DUE DEBT LEASES LIABILITIES AND OTHER OBLIGATIONS
------------ --------- --------- ----------- ----------- -----------
2005........................ $ 2,270 $ 33,765 $ -- $35,353 $ 71,388
2006........................ 2,325 27,931 8,449 4,200 42,905
2007........................ 13,530 23,902 6,793 3,700 47,925
2008........................ 79,402 15,395 6,248 1,483 102,528
2009........................ 1,022 8,958 2,225 -- 12,205
Thereafter.................. 671,220 4,189 16,854 -- 692,263
-------- -------- ------- ------- --------
Total....................... $769,769 $114,140 $40,569 $44,736 $969,214
======== ======== ======= ======= ========
Purchase commitments and other consists primarily of payments for
equipment that has been ordered but not received, obligations to be paid
pursuant to an employment agreement, required pension contributions and
incentive payments to customers.
OFF-BALANCE SHEET ARRANGEMENTS. It is not our business practice to
enter into off-balance sheet arrangements.
GUARANTEES. In conjunction with the sale of the prime label business in
May 2002, we guaranteed a certain lease obligation. At December 31, 2004,
the contingent liability under the guarantee was $5.5 million. We have not
made, nor do we expect to make any payments under this guarantee.
In connection with the disposition of certain operations, we have
indemnified the purchasers for certain contingencies as of the date of
disposition. We have accrued the estimated probable cost of these
contingencies.
18
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements, we are required to
make estimates based on assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate
these estimates on an ongoing basis. We base our estimates on historical
experience and various other assumptions that are considered reasonable in
view of relevant facts and circumstances.
The accounting estimates and assumptions discussed in this section are
those that inherently involve significant judgments and the most
uncertainty. The nature of these accounting estimates and assumptions are
important to understanding our financial statements. Because future events
rarely develop exactly as anticipated, even the best estimates routinely
require adjustment.
ALLOWANCE FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based on the expected collectibility of accounts receivable. The
allowance includes an estimate of accounts that may become uncollectible
based on the age of amounts due and specific amounts for customer
collection issues that we have identified. The valuation allowance provided
for potentially uncollectible accounts receivable at December 31, 2004 was
$4.7 million. In 2004, 2003 and 2002, our actual loss experience was in
line with our expectations. We wrote off uncollectible accounts, net of
recoveries, of $2.0 million in 2004, $3.3 million in 2003 and $4.5 million
in 2002. While credit losses have historically been within our
expectations, we cannot guarantee that our credit losses will be consistent
with those in the past. These estimates may prove to be inaccurate, in
which case we may have overstated or understated the allowance for losses
required for uncollectible accounts receivable.
IMPAIRMENT OF LONG-LIVED ASSETS. We evaluate long-lived assets,
including property, plant and equipment and intangible assets other than
goodwill, for impairment whenever events or changes in circumstances
indicate that the carrying amounts of specific assets or group of assets
may not be recoverable. When an evaluation is required, we estimate the
future undiscounted cash flows associated with the specific asset or group
of assets. If the cost of the asset or group of assets cannot be recovered
by these undiscounted cash flows, then an impairment exists. Our estimates
of future cash flows are based on experience and our internal business
plans. Our internal business plans require judgments regarding future
economic conditions, product demand and pricing. Although we believe our
estimates are appropriate, significant differences in the actual
performance of the asset or group of assets may materially affect our
evaluation of the recoverability of the asset values currently recorded.
Additional impairment charges may be necessary in future years.
GOODWILL. We evaluate the carrying value of our goodwill in the fourth
quarter each year and whenever events or circumstances make it more likely
than not that an impairment may have occurred. Determining whether an
impairment has occurred requires the valuation of each of our reporting
units, which we estimate using a discounted cash flow methodology. In
addition, we use comparative market multiples to corroborate the discounted
cash flow results. In preparing projected future cash flows, we use our
judgment in projecting the profitability of our reporting units, their
growth in future years, investment and working capital requirements and the
selection of an appropriate discount rate. In our comparisons to market
multiples of other similar companies, we use judgment in the selection of
the companies included in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future discounted cash flows
prove to be inaccurate, an impairment charge could be necessary in future
years.
SELF-INSURANCE. We are self-insured for the majority of our workers'
compensation costs and group health insurance costs, subject to specific
retention levels. We rely on claims experience and the advice of consulting
actuaries and administrators in determining an adequate liability for
self-insurance claims. Our self-insurance workers' compensation liability
is estimated based on reserves for claims that are established by a
third-party administrator. The estimate of these reserves is increased to
reflect the estimated future development of the claims. Our liability for
workers' compensation claims is the estimated total cost of the claims on a
fully-developed basis discounted based on anticipated payment patterns. The
undiscounted liability at December 31, 2004 was $11.4 million. The
discounted liability
19
was $9.9 million determined using a 4% discount rate. Workers' compensation
expense for claims incurred in 2004 was $4.8 million and was based on an
actuarial estimate. In 2004, we recorded $2.4 million of additional expense
due to the negative development of claims incurred prior to 2004. In 2003,
we recorded additional expense of $1.8 million due to the negative
development of claims incurred prior to 2003.
Our self-insurance healthcare liability represents our estimate of
claims that have been incurred but not reported as of December 31, 2004.
This liability, which totaled $7.4 million at December 31, 2004, was
estimated based on our claims experience. We determine the actual average
daily claims cost and the number of days between the incurrence of a claim
and the date it is paid. The estimate of our liability for employee
healthcare represents 72 days of unreported claims.
While we believe that the estimates of our self-insurance liabilities
are reasonable, significant differences in our experience or a significant
change in any of our assumptions could materially affect the amount of
workers' compensation and healthcare expenses we have recorded.
ACCOUNTING FOR INCOME TAXES. We are required to estimate our income
taxes in each jurisdiction in which we operate. This process involves
estimating our actual current tax exposure, together with assessing
temporary differences resulting from differing treatment of items for tax
and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax
liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in our tax return in future years for which we
have already recorded the expense in our financial statements. Deferred tax
liabilities generally represent tax items that have been deducted for tax
purposes, but have not yet been recorded as expenses in our financial
statements.
At December 31, 2004, our net deferred tax asset, the future tax benefit
arising from net deductible differences and tax carryforwards from U.S.
operations, was $35.6 million. Our net deferred tax liability of $11.0
million reflects our deferred foreign tax liabilities. We are required by
generally accepted accounting principles to assess the likelihood that the
future tax benefit represented by our net deferred tax asset will be
realized. To the extent we believe that the use of the future tax asset in
any jurisdiction is not likely, we must establish a valuation allowance. In
assessing the need for a valuation allowance, we consider all available
positive and negative evidence, including estimates of taxable income in
each jurisdiction in which we operate, tax planning strategies and the
period over which our deferred tax assets will be recoverable. In
circumstances where there is sufficient negative evidence with respect to
the realizability of deferred tax assets, establishment of a valuation
allowance must be considered. Under provisions of SFAS No. 109, Accounting
for Income Taxes, the substantial losses we have incurred in our U.S.
operations over the most recent three-year period represent sufficient
negative evidence with respect to the realizability of the U.S. deferred tax
asset recorded as a result of our operating losses. Accordingly, a portion
of the U.S. deferred tax asset arising from these operating losses is
potentially impaired. In addition, we believe that it is not likely that we
will be able to use all of our U.S. capital loss carryforwards. To provide
for these impairments, we have recorded a valuation allowance of $26.8
million against the U.S. net deferred tax asset. This valuation allowance
was increased $20.3 million in 2004 primarily due to the generation of
additional U.S. net operating losses and foreign tax credits.
We believe our remaining deferred tax assets will be realized through
the reversal of our existing temporary differences and the execution of
available tax planning strategies. Additional valuation allowances may be
required if we are unable to execute our tax planning strategies or
generate future taxable income. The valuation allowance that has been
established will be maintained until there is sufficient positive evidence
to conclude that it is more likely than not that our deferred tax assets
will be realized. When sufficient positive evidence occurs, our income tax
expense will be reduced to the extent we decrease the amount of our
valuation allowance. The increase or reversal of all or a portion of our
tax valuation allowance could have a significant negative or positive
impact on future earnings.
20
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43 Chapter
4. This statement requires abnormal production costs such as idle facility
expense, excessive spoilage, rehandling costs and abnormal freight to be
excluded from inventory costing and treated as period expenses. In
addition, this standard requires the allocation of fixed production
overhead to be based on normal capacity of the production facility. We do
not expect the adoption of this standard in 2005 to have a significant
effect on our results.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment: an amendment of FASB Statements No. 123 and 95 ("SFAS
No. 123R"). SFAS No. 123R requires all share-based payments to employees,
including grants of stock options, to be recognized in the financial
statements based on their fair value. We expect to implement SFAS 123R in
the third quarter of 2005 and use the modified-prospective transition
method of implementation. Under the modified-prospective transition method,
we will recognize compensation expense in the financial statements issued
subsequent to the date of adoption, which will be July 1, 2005, for all
share-based payments granted, modified or settled after July 1, 2005 as
well as for any awards that were granted prior to July 1, 2005 for which
the requisite service has not been provided as of July 1, 2005. We will
recognize compensation expense on awards granted subsequent to July 1, 2005
using the fair values determined by a valuation model prescribed by SFAS
123R. The compensation expense on awards granted prior to July 1, 2005 will
be recognized using the fair values determined for use in our pro forma
disclosures on stock-based compensation. The amount of compensation expense
that will be recognized on awards granted prior to July 1, 2005 that have
not fully vested will exclude the compensation expense cumulatively
recognized in our pro forma disclosures on stock-based compensation. Our
preliminary estimate of the compensation expense that will be recorded in
2005 on unvested awards at July 1, 2005 will be approximately $2.0 million.
CAUTIONARY STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. We believe these
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of Cenveo. All such statements involve risks and
uncertainties, and as a result, actual results could differ materially from
those projected, anticipated or implied by these statements. Such
forward-looking statements involve known and unknown risks, including but
not limited to, general economic, business and labor conditions; the ability
to implement our strategic initiatives; the ability to be profitable on a
consistent basis; dependence on sales that are not subject to long-term
contracts; dependence on suppliers; the ability to recover the rising cost
of key raw materials in markets that are highly price competitive; the
ability to meet customer demand for additional value-added products and
services; the ability to timely or adequately respond to technological
changes in the industry; the impact of the Internet and other electronic
media on the demand for envelopes and printed material; postage rates; the
ability to manage operating expenses; the ability to manage financing costs
and interest rate risk; a decline in business volume and profitability could
result in a further impairment of goodwill; the ability to retain key
management personnel; the ability to identify, manage or integrate future
acquisitions; the costs associated with and the outcome of outstanding and
future litigation; and changes in government regulations.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest rate fluctuations and changes
in foreign currency exchange rates are managed through normal operating and
financing activities. We do not utilize derivatives for speculative
purposes, nor do we hedge interest rate exposure through the use of swaps
and options or foreign exchange exposure through the use of forward
contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2004, we had variable rate debt outstanding of $93.4 million. A 1%
increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which was $314.9 million, would increase our interest
expense and reduce our net income by approximately $3.1 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. In 2004,
a uniform 10% strengthening of the U.S. dollar relative to the Canadian
dollar would have resulted in a decrease in sales and net income of
approximately $21.0 million and $2.8 million, respectively. The effects of
foreign currency exchange rates on future results would also be impacted by
changes in sales levels or local currency prices.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Cenveo, Inc.
We have audited the accompanying consolidated balance sheets of Cenveo,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2004. Our audits also included the financial statement schedules for each
of the three years in the period ended December 31, 2004 listed in the
Index at Item 15(a)(2). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cenveo, Inc. and subsidiaries at December 31, 2004 and 2003,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Cenveo, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 28, 2005
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Cenveo, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Cenveo, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cenveo, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Cenveo, Inc. maintained
effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Cenveo, Inc. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2004 of Cenveo, Inc. and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 28, 2005
24
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control
over financial reporting is a process designed under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company's financial statements for external
reporting purposes in accordance with accounting principles generally
accepted in the United States.
Management has conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the framework
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2004 is effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of
assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited
by Ernst and Young LLP, an independent registered public accounting firm,
as stated in their report appearing on page 24.
25
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 796 $ 307
Accounts receivable, net................................ 252,711 223,541
Inventories, net........................................ 112,219 91,402
Deferred income taxes................................... 15,911 18,652
Prepaids and other current assets....................... 30,108 29,483
---------- ----------
TOTAL CURRENT ASSETS................................ 411,745 363,385
Property, plant and equipment, net.......................... 367,260 388,240
Goodwill.................................................... 308,938 299,392
Other intangible assets, net................................ 28,788 19,687
Deferred income taxes....................................... 19,730 4,053
Other assets, net........................................... 38,286 36,689
---------- ----------
TOTAL ASSETS............................................ $1,174,747 $1,111,446
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 172,731 $ 140,468
Accrued compensation and related liabilities............ 58,639 53,209
Other current liabilities............................... 64,714 64,360
Current maturities of long-term debt.................... 2,270 2,575
---------- ----------
TOTAL CURRENT LIABILITIES........................... 298,354 260,612
Long-term debt.............................................. 767,499 746,386
Deferred income taxes....................................... 10,971 10,770
Other liabilities........................................... 40,569 25,659
---------- ----------
TOTAL LIABILITIES....................................... 1,117,393 1,043,427
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued............................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,702,832 and 48,380,457 shares issued
and outstanding as of December 31, 2004 and 2003,
respectively.......................................... 487 484
Paid-in capital......................................... 214,902 213,850
Retained deficit........................................ (170,039) (150,331)
Deferred compensation................................... (2,003) (1,714)
Accumulated other comprehensive income.................. 14,007 5,730
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 57,354 68,019
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,174,747 $1,111,446
========== ==========
See notes to consolidated financial statements.
26
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705
Cost of sales...................................... 1,393,521 1,337,118 1,385,361
---------- ---------- ----------
Gross profit....................................... 349,393 334,546 343,344
Operating expenses:
Selling, general and administrative............ 265,870 245,689 263,734
Amortization of intangibles.................... 5,381 1,899 2,237
Loss (gain) on assets held for sale............ -- (117) 6,436
Impairment on operations formerly held for
sale......................................... -- -- 12,842
Restructuring, impairment and other charges.... 5,407 6,860 74,551
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (16,456)
Other expenses:
Interest expense............................... 73,125 71,891 70,461
Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other.......................................... 2,459 1,819 1,754
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle............................. (20,597) 6,505 (105,134)
Income tax expense (benefit)....................... 341 2,581 (31,646)
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................ (20,938) 3,924 (73,488)
Gain (loss) on disposal of discontinued
operations....................................... 1,230 1,548 (16,868)
Cumulative effect of change in accounting
principle........................................ -- (322) (111,748)
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104)
========== ========== ==========
Earnings (loss) per share--basic and diluted:
Continuing operations.......................... $ (0.44) $ 0.08 $ (1.54)
Discontinued operations........................ 0.03 0.04 (0.35)
Cumulative effect of change in accounting
principle.................................... -- (0.01) (2.35)
---------- ---------- ----------
Earnings (loss) per share--basic and diluted... $ (0.41) $ 0.11 $ (4.24)
========== ========== ==========
Weighted average shares--basic................. 47,750 47,687 47,665
Weighted average shares--diluted............... 47,750 48,315 47,665
See notes to consolidated financial statements.
27
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations................. $ (20,938) $ 3,924 $ (73,488)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation........................................ 47,602 46,069 47,818
Amortization (including amortization of deferred
financing fees included in interest)............. 9,959 5,883 7,635
Debt refinancing costs.............................. 17,748 -- 16,463
Non-cash portion of restructuring, impairment and
other charges.................................... 3,228 -- 42,282
Loss on assets held for sale........................ -- -- 6,436
Deferred income tax benefit......................... (12,536) (10,854) (27,726)
Loss on disposal of assets.......................... 686 1,221 346
Other non-cash expenses, net........................ 198 435 91
Changes in operating assets and liabilities, excluding
the effects of acquired businesses:
Accounts receivable................................. (23,283) 3,414 12,756
Inventories......................................... (18,122) 14,647 8,906
Accounts payable and accrued compensation........... 32,784 (15,417) (11,036)
Income taxes payable................................ (1,663) 12,212 4,193
Other working capital changes....................... (711) (1,952) (7,130)
Other, net.......................................... 3,039 (123) (4,575)
----------- ----------- -----------
Net cash provided by operating activities.......... 37,991 59,459 22,971
Cash flows from investing activities:
Acquisitions, net of cash acquired.................. (13,174) (2,800) (2,610)
Capital expenditures................................ (27,435) (31,602) (30,896)
Proceeds from divestitures, net..................... 2,000 3,864 122,330
Proceeds from sales of property, plant and
equipment.......................................... 3,012 682 11,995
----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... (35,597) (29,856) 100,819
Cash flows from financing activities:
Proceeds from exercise of stock options............. 48 75 18
Proceeds from issuance of long-term debt............ 2,724,655 1,915,452 1,635,102
Repayments of long-term debt........................ (2,703,847) (1,948,299) (1,726,718)
Payment of redemption premiums...................... (13,528) -- --
Debt issuance costs................................. (9,077) (484) (18,624)
----------- ----------- -----------
Net cash used in financing activities.............. (1,749) (33,256) (110,222)
Effect of exchange rate changes on cash and cash
equivalents............................................... (156) 1,310 (985)
Cash flows used in discontinued operations................. -- -- (10,827)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 489 (2,343) 1,756
Cash and cash equivalents at beginning of year............. 307 2,650 894
----------- ----------- -----------
Cash and cash equivalents at end of year................... $ 796 $ 307 $ 2,650
=========== =========== ===========
See notes to consolidated financial statements.
28
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREH