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EX-31.1 - EXHIBIT 31.1 - CENVEO, INCcvo-20150926xex311.htm
EX-32.1 - EXHIBIT 32.1 - CENVEO, INCcvo-20150926xex321.htm
EX-31.2 - EXHIBIT 31.2 - CENVEO, INCcvo-20150926xex312.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2015
Commission file number 1-12551

 

CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO
 
84-1250533
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
200 FIRST STAMFORD PLACE
 
 
STAMFORD, CT
 
06902
(Address of principal executive offices)
 
(Zip Code)
 
 
 
203-595-3000
(Registrant’s telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
 

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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer ý Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of November 17, 2015, the registrant had 67,873,560 shares of common stock, par value $0.01 per share, outstanding.
 



CENVEO, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 26, 2015

 
 
 
 
 
Page No.
 
PART I. FINANCIAL INFORMATION
 
Item 1:
Financial Statements (unaudited)
 
 
 
 
 
Item 2:
Item 3:
Item 4:
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1:
Item 1A:
Item 6:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1



PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements
 
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
September 26,
2015
 
December 27,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
9,574

 
$
12,572

Accounts receivable, net
245,203

 
252,555

Inventories
129,877

 
118,891

Prepaid and other current assets
46,863

 
47,328

Assets of discontinued operations - current
56,381

 
52,569

Total current assets
487,898

 
483,915

 
 
 
 
Property, plant and equipment, net
219,563

 
227,823

Goodwill
175,338

 
175,542

Other intangible assets, net
132,444

 
138,019

Other assets, net
42,503

 
45,979

Assets of discontinued operations - long-term
77,969

 
86,613

Total assets
$
1,135,715

 
$
1,157,891

Liabilities and Shareholders’ Deficit
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
3,989

 
$
3,880

Accounts payable
210,735

 
213,040

Accrued compensation and related liabilities
33,982

 
35,055

Other current liabilities
74,387

 
84,777

Liabilities of discontinued operations - current
26,878

 
24,203

Total current liabilities
349,971

 
360,955

 
 
 
 
Long-term debt
1,237,988

 
1,228,670

Other liabilities
189,494

 
197,421

Liabilities of discontinued operations - long-term
2,014

 
3,520

Commitments and contingencies


 


Shareholders’ deficit:
 

 
 

Preferred stock

 

Common stock
679

 
677

Paid-in capital
371,491

 
370,228

Retained deficit
(918,710
)
 
(905,383
)
Accumulated other comprehensive loss
(97,212
)
 
(98,197
)
Total shareholders’ deficit
(643,752
)
 
(632,675
)
Total liabilities and shareholders’ deficit
$
1,135,715

 
$
1,157,891

 
See notes to condensed consolidated financial statements.

2



CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Net sales
 
$
419,783

 
$
435,595

 
$
1,262,819

 
$
1,307,793

Cost of sales
 
347,409

 
369,959

 
1,050,004

 
1,102,630

Selling, general and administrative expenses
 
45,394

 
48,094

 
136,559

 
148,183

Amortization of intangible assets
 
1,981

 
1,913

 
5,756

 
7,299

Restructuring and other charges
 
5,483

 
5,396

 
11,529

 
18,138

Operating income
 
19,516

 
10,233

 
58,971

 
31,543

Interest expense, net
 
25,095

 
26,001

 
76,001

 
80,540

Loss on early extinguishment of debt, net
 

 
1,280

 
559

 
27,778

Other income, net
 
(1,332
)
 
(771
)
 
(773
)
 
(712
)
Loss from continuing operations before income taxes
 
(4,247
)
 
(16,277
)
 
(16,816
)
 
(76,063
)
Income tax benefit
 
(685
)
 
(2,247
)
 
(1,720
)
 
(4,408
)
Loss from continuing operations
 
(3,562
)
 
(14,030
)
 
(15,096
)
 
(71,655
)
Income from discontinued operations, net of taxes
 
319

 
3,137

 
1,769

 
6,291

Net loss
 
(3,243
)
 
(10,893
)
 
(13,327
)
 
(65,364
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Changes in pension and other employee benefit accounts, net of taxes
 
1,433

 
480

 
4,117

 
1,440

Currency translation adjustment
 
(1,893
)
 
(1,067
)
 
(3,132
)
 
(334
)
Comprehensive loss
 
$
(3,703
)
 
$
(11,480
)
 
$
(12,342
)
 
$
(64,258
)
 
 
 
 
 
 
 
 
 
(Loss) income per share – basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)
 
 
 
 
 
 
 
 
 
(Loss) income per share – diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
67,874

 
67,296

 
67,817

 
66,709

Diluted
 
67,874

 
67,296

 
67,817

 
66,709

 
 
See notes to condensed consolidated financial statements.

3


CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 
For the Nine Months Ended
 
September 26, 2015
 
September 27, 2014
Cash flows from operating activities:
 
 
 
Net loss
$
(13,327
)
 
$
(65,364
)
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Gain on sale of discontinued operations, net of taxes

 
(1,559
)
Income from discontinued operations, net of taxes
(1,769
)
 
(4,732
)
Depreciation and amortization, excluding non-cash interest expense
35,633

 
40,545

Non-cash interest expense, net
7,532

 
7,380

Deferred income taxes
(2,962
)
 
(6,761
)
(Gain) loss on sale of assets
(2,323
)
 
260

Non-cash restructuring and other charges, net
6,050

 
4,067

Loss on early extinguishment of debt, net
559

 
27,778

Stock-based compensation provision
1,481

 
1,971

Other non-cash charges
3,711

 
6,330

Changes in operating assets and liabilities, excluding the effects of acquired businesses:
 

 
 

Accounts receivable
5,243

 
(502
)
Inventories
(12,530
)
 
1,787

Accounts payable and accrued compensation and related liabilities
(3,790
)
 
1,819

Other working capital changes
(12,037
)
 
(9,377
)
Other, net
(9,971
)
 
(16,683
)
Net cash provided by (used in) operating activities of continuing operations
1,500

 
(13,041
)
Net cash provided by operating activities of discontinued operations
13,345

 
5,780

Net cash provided by (used in) operating activities
14,845

 
(7,261
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(19,245
)
 
(22,333
)
Cost of business acquisitions
(1,996
)
 

Purchase of investment

 
(2,000
)
Proceeds from sale of property, plant and equipment
1,471

 
1,835

Proceeds from sale of assets
2,180

 

Net cash used in investing activities of continuing operations
(17,590
)
 
(22,498
)
Net cash used in investing activities of discontinued operations
(1,864
)
 
(3,313
)
Net cash used in investing activities
(19,454
)
 
(25,811
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of 6.000% senior secured priority notes due 2019

 
540,000

Proceeds from issuance of 8.500% junior secured priority notes due 2022

 
250,000

Payment of financing-related costs and expenses and debt issuance discounts
(1,309
)
 
(35,721
)
Repayments of other long-term debt
(3,345
)
 
(6,144
)
Repayment of 11.5% senior notes due 2017
(22,720
)
 
(1,430
)
Purchase and retirement of common stock upon vesting of RSUs
(218
)
 
(562
)
Proceeds from exercise of stock options
2

 

Repayment of 15% Unsecured Term Loan due 2017

 
(10,000
)
Repayment of Term Loan Facility due 2017

 
(329,100
)
Repayment of 8.875% senior second lien notes due 2018

 
(400,000
)
Borrowings under ABL Facility due 2017
358,900

 
389,600

Repayments under ABL Facility due 2017
(328,500
)
 
(363,500
)
Net cash provided by financing activities of continuing operations
2,810

 
33,143

Net cash used in financing activities of discontinued operations
(352
)
 
(365
)
Net cash provided by financing activities
2,458

 
32,778

Effect of exchange rate changes on cash and cash equivalents
(536
)
 
13

Net decrease in cash and cash equivalents
(2,687
)
 
(281
)
Cash and cash equivalents at beginning of period
14,593

 
11,329

Cash and cash equivalents at end of period
11,906

 
11,048

Less cash and equivalents of discontinued operations
(2,332
)
 
(810
)
Cash and cash equivalents of continuing operations at end of period
$
9,574

 
$
10,238


See notes to condensed consolidated financial statements.

4

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements ("financial statements") of Cenveo, Inc. and its subsidiaries (collectively, "Cenveo" or the "Company") have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission ("SEC") and, in the Company’s opinion, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of financial position as of September 26, 2015, and the results of operations for the three and nine months ended September 26, 2015, and September 27, 2014, and cash flows for the nine months ended September 26, 2015, and September 27, 2014. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to SEC rules. The results of operations for the three and nine months ended September 26, 2015, are generally not indicative of the results to be expected for any interim period or for the full year, primarily due to restructuring, acquisition and debt-related activities or transactions. The December 27, 2014 consolidated balance sheet has been derived from the audited consolidated financial statements at that date. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014, filed with the SEC. The reporting periods for the three and nine months ended September 26, 2015, and September 27, 2014, each consisted of 13 weeks and 39 weeks, respectively.

Over the course of the second and third quarters of 2015, the Company has been actively marketing for sale its folded carton and shrink sleeve packaging businesses along with its one top-sheet lithographic print operation (collectively, the "Packaging Business"), to multiple strategic parties. As of the end of the third quarter, management has been given the appropriate authority to move forward with these strategic parties on a potential sale of the Packaging Business. In accordance with the guidance in Accounting Standards Codification ("ASC") 205-20 Presentation of Financial Statements - Discontinued Operations and ASC 360 Property, Plant & Equipment, the Company has classified the assets, liabilities, operations and cash flows of the Packaging Business as discontinued operations for all periods presented.
New Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The amendments in the ASU change the criteria for reporting discontinued operations while enhancing related disclosures. The amendments in the ASU were effective in the first quarter of 2015. The Company adopted this new guidance effective January 1, 2015. The new guidance was only applied prospectively to new disposals and new classifications of disposal groups held for sale after such date. As a result, this guidance did not have any impact on the Company's previously reported financial statements or related disclosures upon adoption.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized.  The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendment to the Consolidation Analysis." This revised standard improves targeted areas of the consolidation guidance and reduces the number of consolidation models. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. As of September 26, 2015, the Company had $18.2 million of debt issuance costs that would be reclassified from a long-term asset to a reduction in the carrying amount of its debt.


5

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Acquisitions

The Company accounts for business combinations under the provisions of the Business Combination Topic of the FASB’s ASC 805.  Acquisitions are accounted for by the purchase method, and accordingly, the assets and liabilities of the acquired businesses have been recorded at their estimated fair values on the acquisition date with the excess of the purchase price over their estimated fair values recorded as goodwill. In the event the estimated fair values of the assets and liabilities acquired exceed the purchase price paid, a bargain purchase gain is recorded in the statements of operations.

Acquisition-related costs are expensed as incurred. Acquisition-related costs, including integration costs, are included in selling, general and administrative expenses in the Company’s statements of operations and were $0.7 million and $0.9 million for the three months ended September 26, 2015, and September 27, 2014, respectively, and $1.0 million and $5.2 million for the nine months ended September 26, 2015, and September 27, 2014, respectively.

Asendia

On August 7, 2015, the Company acquired certain assets of Asendia USA, Inc. ("Asendia"). The acquired assets provide letter shop, data processing, bindery and digital printing offerings and had approximately 40 employees. The total purchase price of approximately $2.0 million was preliminarily allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values at the acquisition date, and was assigned to the Company's print segment. The acquired identifiable intangible assets relate to customer relationships of $0.1 million.

Purchase Price Allocation

The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed in the Asendia acquisition (in thousands):

Accounts receivable, net
 
$
145

Inventories
 
46

Prepaid and other current assets
 
10

Property, plant and equipment
 
1,662

Other intangible assets
 
133

   Total assets acquired
 
$
1,996


The results of operations and cash flows are included in the Company’s statements of operations and cash flows from August 7, 2015. Pro forma results for the three and nine months ended September 26, 2015 or September 27, 2014, assuming the acquisition had been made on December 29, 2013, are not presented, as the effect would not be material.

3. Discontinued Operations

Over the course of the second and third quarters of 2015, the Company has been actively marketing for sale its Packaging Business to multiple strategic parties. As of the end of the third quarter, management has been given the appropriate authority to move forward with these strategic parties on a potential sale of the Packaging Business and believes the net assets of the Packaging Business approximates fair value of the consideration it will ultimately receive, subject to final working capital settlements. In accordance with the guidance in ASC 205-20 Presentation of Financial Statements - Discontinued Operations and ASC 360 Property, Plant & Equipment, the Company has classified the assets, liabilities, operations and cash flows of the Packaging Business as discontinued operations for all periods presented.
The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company's condensed consolidated balance sheets as of September 26, 2015, and December 27, 2014 (in thousands):

6

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


 
 
September 26,
2015
 
December 27,
2014
Accounts receivable, net
 
$
28,649

 
$
29,344

Inventories
 
21,017

 
18,119

Other current assets
 
6,715

 
5,106

Assets of discontinued operations - current
 
56,381

 
52,569

Property, plant and equipment, net
 
48,786

 
54,585

Goodwill and other long-term assets
 
29,183

 
32,028

Assets of discontinued operations - long-term
 
77,969

 
86,613

Accounts payable
 
22,008

 
19,145

Other current liabilities
 
4,870

 
5,058

Liabilities of discontinued operations - current
 
26,878

 
24,203

Long-term debt and other liabilities
 
2,014

 
3,520

Liabilities of discontinued operations - long-term
 
2,014

 
3,520

Net assets of discontinued operations
 
$
105,458

 
$
111,459


The following table summarizes certain statement of operations information for discontinued operations (in thousands, except per share data):
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Income from discontinued operations before income taxes
 
$
846

 
$
5,167

 
$
3,151

 
$
7,687

Income tax expense on discontinued operations
 
527

 
2,030

 
1,382

 
2,955

Gain on sale of discontinued operations (1)
 

 

 

 
1,559

Income from discontinued operations, net of taxes
 
$
319

 
$
3,137

 
$
1,769

 
$
6,291

Income per share - basic
 
$

 
$
0.05

 
$
0.02

 
$
0.09

Income per share - diluted
 
$

 
$
0.05

 
$
0.02

 
$
0.09

 __________________________
(1)
The gain on the sale of discontinued operations is shown net of taxes of $1.0 million for the nine months ended September 27, 2014, and relates to a 2013 divestiture.

4. Inventories
 
Inventories by major category are as follows (in thousands):
 
 
 
September 26,
2015
 
December 27,
2014
Raw materials
 
$
38,512

 
$
35,288

Work in process
 
19,302

 
17,429

Finished goods
 
72,063

 
66,174

 
 
$
129,877

 
$
118,891



7

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Property, Plant and Equipment
 
Property, plant and equipment are as follows (in thousands):
 
 
 
September 26,
2015
 
December 27,
2014
Land and land improvements
 
$
10,585

 
$
10,585

Buildings and building improvements
 
84,552

 
82,142

Machinery and equipment
 
514,161

 
516,443

Furniture and fixtures
 
8,170

 
8,570

Construction in progress
 
19,446

 
11,106

 
 
636,914

 
628,846

Accumulated depreciation
 
(417,351
)
 
(401,023
)
 
 
$
219,563

 
$
227,823


6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill as of September 26, 2015, by reportable segment are as follows (in thousands):

 
 
Envelope
 
Print
 
Label
 
Total
Balance as of December 27, 2014
 
$
23,433

 
$
42,832

 
$
109,277

 
$
175,542

Foreign currency translation
 

 
(204
)
 

 
(204
)
Balance as of September 26, 2015
 
$
23,433

 
$
42,628

 
$
109,277

 
$
175,338


Other intangible assets are as follows (in thousands):
 
 
 
 
 
September 26, 2015
 
December 27, 2014
 
 
Weighted Average Remaining Amortization Period (Years)
 
Gross
Carrying
Amount
 
Accumulated Impairment Charges
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated Impairment Charges
 
Accumulated
Amortization
 
Net
Carrying
Amount
Intangible
assets with
definite
lives:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Customer relationships
 
7
 
$
114,345

 
$
(27,234
)
 
$
(53,409
)
 
$
33,702

 
$
114,301

 
$
(27,234
)
 
$
(48,356
)
 
$
38,711

Trademarks and trade names
 
23
 
64,540

 
(46,493
)
 
(8,519
)
 
9,528

 
64,550

 
(46,493
)
 
(8,157
)
 
9,900

Leasehold interest
 
18
 
4,430

 

 
(460
)
 
3,970

 
4,430

 

 
(291
)
 
4,139

Patents
 
10
 
3,528

 

 
(3,184
)
 
344

 
3,528

 

 
(3,159
)
 
369

Subtotal
 
11
 
186,843

 
(73,727
)
 
(65,572
)
 
47,544

 
186,809

 
(73,727
)
 
(59,963
)
 
53,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible
assets with
indefinite
lives:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trademarks
 
 
 
84,900

 

 

 
84,900

 
84,900

 

 

 
84,900

Total
 
 
 
$
271,743

 
$
(73,727
)
 
$
(65,572
)
 
$
132,444

 
$
271,709

 
$
(73,727
)
 
$
(59,963
)
 
$
138,019

 

8

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Annual amortization expense of intangible assets for the next five years is estimated to be as follows (in thousands):
 
 
 
Annual Estimated
 Expense
Remainder of 2015
 
$
1,904

2016
 
5,708

2017
 
5,279

2018
 
5,003

2019
 
4,885

2020
 
4,885

Thereafter
 
19,880

Total
 
$
47,544


Asset Impairments
 
There were no goodwill or intangible asset impairments recorded in the three and nine months ended September 26, 2015, and September 27, 2014


7. Long-Term Debt
 
Long-term debt is as follows (in thousands): 
 
 
September 26,
2015
 
December 27,
2014
ABL Facility due 2017
 
$
165,100

 
$
134,700

8.500% junior priority secured notes due 2022 ($248.0 million outstanding principal amount as of September 26, 2015, and December 27, 2014)
 
245,568

 
245,384

6.000% senior priority secured notes due 2019 ($540.0 million outstanding principal amount as of September 26, 2015, and December 27, 2014)
 
535,324

 
534,552

11.5% senior notes due 2017 ($199.7 million and $222.3 million outstanding principal amount as of September 26, 2015, and December 27, 2014, respectively)
 
196,914

 
218,011

7% senior exchangeable notes due 2017
 
83,250

 
83,250

Other debt including capital leases
 
15,821

 
16,653

 
 
1,241,977

 
1,232,550

Less current maturities
 
(3,989
)
 
(3,880
)
Long-term debt
 
$
1,237,988

 
$
1,228,670


The estimated fair value of the Company’s long-term debt was approximately $1.1 billion as of September 26, 2015, and December 27, 2014. The fair value was determined by the Company to be Level 2 under the fair value hierarchy, and was based upon review of observable pricing in secondary markets for each debt instrument.

As of September 26, 2015, the Company was in compliance with all covenants under its long-term debt.

Amendment to ABL Facility
    
On January 30, 2015, the Company entered into Amendment No. 3 ("ABL Amendment No. 3") to the $230 million asset-based revolving credit facility (the "ABL Facility"), and an accompanying Increasing Lender Agreement on February 4, 2015, pursuant to which the revolving commitments were increased by $10.0 million. Among other things, ABL Amendment No. 3 increased the Company's flexibility to use the proceeds of any future asset sales to prepay its other indebtedness. The amendment also generally increased the Company's flexibility to prepay outstanding indebtedness, make acquisitions and other investments, and pay dividends, subject to the satisfaction of certain conditions. In connection with this amendment, the Company capitalized debt issuance costs of $1.3 million.


9

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Extinguishments

During the nine months ended September 26, 2015, the Company recorded a loss on early extinguishment of debt of $0.6 million related to the repurchase of $22.6 million of its 11.5% Notes, of which $0.2 million related to the write-off of unamortized debt issuance costs, $0.2 million related to the write-off of original issuance discount, and $0.2 million related to a premium paid over the principal amount upon repurchase.

In the third quarter of 2014, the Company extinguished $1.4 million of its 11.5% Notes. In connection with the extinguishment, the Company recorded a loss on early extinguishment of debt of $0.1 million, all of which is related to the write-off of original issuance discount. Additionally, in connection with the exchange of $3.0 million of its 7% Notes completed in the third quarter of 2014, the Company incurred a non-cash induced conversion expense of $1.1 million, which has been recorded in loss on early extinguishment of debt, net.

In the second quarter of 2014, the Company extinguished its $360 million secured term loan facility (the "Term Loan Facility") and its 8.875% senior second lien notes due 2018 (the "8.875% Notes"). In connection with this extinguishment, the Company recorded a loss on early extinguishment of debt of approximately $9.0 million, of which $5.8 million related to the write-off of unamortized debt issuance costs, and $3.2 million related to the write-off of original issuance discount. Additionally, in connection with the issuance of $540.0 million aggregate principal amount of 6.000% senior priority secured notes due 2019 (the "6.000% Notes") and $250.0 million aggregate principal amount of 8.500% junior priority secured notes due 2022 (the "8.500% Notes") in the second quarter of 2014, the Company expensed debt issuance costs of $16.5 million, of which $1.6 million related to fees paid to third parties. The Company also used cash on hand of $9.4 million to repay in full the remaining principal balance on the unsecured $50.0 million aggregate principal amount term loan due 2017 (the "Unsecured Term Loan"). In connection with the extinguishment of the Unsecured Term Loan, the Company recorded a loss on early extinguishment of debt of approximately $1.0 million, of which $0.6 million related to the write-off of unamortized debt issuance costs, and $0.4 million related to the write-off of original issuance discount.

Subsequent Event

On September 30, 2015, the Company entered into an equipment loan in the aggregate amount of $12.5 million, secured by certain machinery and equipment of the Company. Interest on the equipment loan accrues at 8.25% per year and is payable monthly in arrears beginning on November 1, 2015, through February 1, 2019. If the Company elects to prepay the loan in full before the maturity date, a prepayment fee of 3% will apply if such payment is made during the first year following closing of the equipment loan, 2% if such prepayment is made during the second year following such closing, and 1% if such prepayment is made during the third year following such closing or thereafter.

Net proceeds from the equipment loan were used to repay in full the equipment loan entered into in connection with the acquisition of certain assets of National Envelope Corporation ("National") on September 16, 2013. At the time of the payment, the loan had a remaining principal balance of $12.3 million. In connection with the extinguishment, the Company incurred costs of $0.2 million.


8. Commitments and Contingencies

The Company is party to various legal actions that are ordinary and incidental to its business. While the outcome of pending legal actions cannot be predicted with certainty, management believes the outcome of these various proceedings will not have a material effect on the Company’s financial statements.
 
The Company is involved in certain environmental matters and has been designated as a potentially responsible party for certain hazardous waste sites. There have been no material changes related to these environmental matters and, based on information currently available, the Company believes that remediation of these environmental matters will not have a material effect on the Company’s financial statements.

The Company’s income, sales and use and other tax returns are routinely subject to audit by various authorities. The Company believes that the resolution of any matters raised during such audits will not have a material effect on the Company’s financial statements.

The Company participates in a number of multi-employer pension plans for union employees ("Multi-Employer Pension Plans") and is exposed to significant risks and uncertainties arising from its participation in these Multi-Employer Pension Plans. These risks and uncertainties, including changes in future contributions due to partial or full withdrawal of the Company and other

10

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

participating employers from these Multi-Employer Pension Plans, could significantly increase the Company’s future contributions or the underfunded status of these Multi-Employer Pension Plans. Two of the Multi-Employer Pension Plans are in mass withdrawal status. While it is not possible to quantify the potential impact of future actions of the Company or other participating employers in these Multi-Employer Pension Plans, continued participation in or withdrawal from these Multi-Employer Pension Plans could have a material effect on the Company’s financial statements.

9. Fair Value Measurements
 
Certain assets and liabilities of the Company are required to be recorded at fair value on either a recurring or nonrecurring basis. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. There were no assets or liabilities recorded at fair value on a recurring or nonrecurring basis as of September 26, 2015. On an annual basis, the Company records its pension plan assets at fair value. No additional assets or liabilities were recorded at fair value on a recurring or nonrecurring basis as of December 27, 2014.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, net, long-term debt and accounts payable. The carrying values of cash and cash equivalents, accounts receivable, net, current maturities of long-term debt and accounts payable are reasonable estimates of their fair values as of September 26, 2015, and December 27, 2014, due to the short-term nature of these instruments. See Note 7 for fair value of the Company’s long-term debt. Additionally, the Company records the assets acquired and liabilities assumed in its acquisitions (Note 2) at fair value.


10. Retirement Plans

The components of the net periodic expense (benefit) for the Company’s pension plans, supplemental executive retirement plans ("SERP") and other postretirement benefit plans ("OPEB") are as follows (in thousands):

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Service cost
 
$

 
$

 
$
1

 
$
1

Interest cost
 
3,505

 
3,707

 
10,553

 
11,120

Expected return on plan assets
 
(5,280
)
 
(5,206
)
 
(15,732
)
 
(15,618
)
Net amortization and deferral
 

 

 

 

Recognized net actuarial loss
 
2,339

 
794

 
6,651

 
2,381

Net periodic expense (benefit)
 
$
564

 
$
(705
)
 
$
1,473

 
$
(2,116
)

Interest cost on the projected benefit obligation includes $0.2 million related to the Company’s SERP and OPEB plans in each of the three months ended September 26, 2015, and September 27, 2014. During the nine month periods ended September 26, 2015 and September 27, 2014, interest cost on the projected benefit obligation related to the Company's SERP and OPEB plans was $0.5 million and $0.6 million, respectively.

For the nine months ended September 26, 2015, the Company made total contributions of $5.6 million to its pension, SERP and OPEB plans. The Company expects to contribute approximately $1.2 million to its pension, SERP and OPEB plans for the remainder of 2015.

11. Stock-Based Compensation

Total stock-based compensation expense recognized in selling, general and administrative expenses in the Company’s statements of operations was $1.0 million and $0.3 million for the three months ended September 26, 2015, and September 27, 2014, respectively, and $1.5 million and $2.0 million for the nine months ended September 26, 2015, and September 27, 2014, respectively.
 
As of September 26, 2015, there was approximately $3.0 million of total unrecognized compensation cost related to unvested stock-based compensation grants, which is expected to be amortized over a weighted average period of 2.4 years.

11

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Stock Options
A summary of the Company’s outstanding stock options as of and for the nine months ended September 26, 2015, is as follows:
 
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(In Years)
 
Aggregate
Intrinsic
Value (in thousands)
Outstanding at December 27, 2014
 
1,670,500

 
$
5.18

 
1.4
 
$
29

Granted                                                       
 
685,500

 
2.38

 
 
 
 
Exercised                                                       
 

 

 
 
 
$

Forfeited/expired                                               
 
(786,000
)
 
4.36

 
 
 
 
Outstanding at September 26, 2015
 
1,570,000

 
$
4.34

 
3.2
 
$

Exercisable at September 26, 2015
 
822,250

 
$
6.16

 
1.2
 
$

The weighted average grant date fair value of stock options granted during the nine months ended September 26, 2015, were at exercise prices equal to the market price of the stock on the grant dates, as calculated under the Black-Scholes model with the weighted average assumptions as follows:
Weighted average fair value of option grants during the year
 
$
0.86

Assumptions:
 
 
Expected option life in years                                                                                     
 
4.25

Risk-free interest rate                                                                                     
 
1.24
%
Expected volatility                                                                                     
 
43.0
%
Expected dividend yield                                                                                     
 
0.0
%
The risk-free interest rate represents the United States Treasury Bond constant maturity yield approximating the expected option life of stock options granted during the period. The expected option life represents the period of time that the stock options granted during the period are expected to be outstanding, based on the mid-point between the vesting date and contractual expiration date of the option. The expected volatility is based on the historical market price volatility of the Company’s common stock for the expected term of the options, adjusted for expected mean reversion.
There were no stock options granted during the nine months ended September 27, 2014.
RSUs
A summary of the Company’s non-vested restricted share units ("RSUs") as of and for the nine months ended September 26, 2015, is as follows:

 
 
RSUs
 
Weighted Average
Grant Date
Fair Value
Unvested at December 27, 2014
 
512,861

 
$
3.22

Granted                                               
 
695,944

 
2.38

Vested                                               
 
(326,861
)
 
3.92

Forfeited                                               
 
(26,250
)
 
2.25

Unvested at September 26, 2015
 
855,694

 
$
2.30


On May 20, 2015, 582,500 RSUs were issued to certain employees of the Company, which vest ratably over four years. Additionally, 113,444 RSUs were issued to certain members of the Company's Board of Directors, which vest one year from the date of issuance. The fair value of these awards was determined based on the Company's stock price on the dates of issuance.

12

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The total fair value of RSUs which vested during the nine months ended September 26, 2015, was $0.6 million.

PSUs
    
A summary of the Company's non-vested performance share units ("PSUs") as of and for the nine months ended September 26, 2015 is as follows:

 
 
PSUs
 
Weighted Average
Grant Date
Fair Value
Unvested at December 27, 2014
 

 
$

Granted                                               
 
590,000

 
2.38

Vested                                               
 

 

Forfeited                                               
 
(25,000
)
 

Unvested at September 26, 2015
 
565,000

 
$
2.38

On May 20, 2015, 590,000 PSUs were granted to certain employees, with each award representing the right to receive one share of the Company's common stock upon the achievement of certain established performance targets and service conditions. The performance period for the awards is December 28, 2014 through January 2, 2016. Distributions under these awards are payable on the one year anniversary of the grant date provided the grantee's employment has not ceased prior to such date.
The fair value of these awards was determined based on the Company's stock price on the grant date. These awards are subject to forfeiture upon termination of employment prior to vesting.
    

12. Restructuring and Other Charges

The Company currently has two active cost savings, restructuring and integration plans, related to the implementation of cost savings initiatives focused on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities (the "2015 Plan" and the "2014 Plan").
2015 Plan
During the first quarter of 2015, the Company began implementing the 2015 Plan, which primarily focuses on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities. The Company expects to be substantially complete with the 2015 Plan during the 2016 fiscal year.
2014 Plan
During the first quarter of 2014, the Company began implementing the 2014 Plan, which primarily focuses on overhead cost eliminations, including headcount reductions, and the potential closure of certain manufacturing facilities. The Company substantially completed the 2014 Plan during the 2015 fiscal year.

Acquisition Integration Plans

Upon the completion of the acquisition of certain assets of National, the Company developed and began implementing a plan related to the integration of certain assets of National into existing envelope operations (the "National Plan"). The Company completed the National Plan in 2015, which included the closure and consolidation of nine manufacturing facilities into existing envelope operations and two new facilities.

Residual Plans

The Company currently has certain residual cost savings, restructuring and integration plans (the "Residual Plans"). As a result of these cost savings actions over the last several years, the Company has closed or consolidated a significant amount of manufacturing facilities and has had a significant number of headcount reductions.


13

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company does not anticipate any significant future expenses related to the Residual Plans other than modifications to current assumptions for lease terminations, multi-employer pension withdrawal liabilities and ongoing expenses related to maintaining restructured assets.
The following tables present the details of the expenses recognized as a result of these plans.

2015 Activity

Restructuring and other charges for the three months ended September 26, 2015 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee
Separation
Costs
 
Asset Charges Net of Gain on Sale
 
Equipment
Moving
Expenses
 
Lease
Termination
Expenses
 
Multi-Employer Pension
Withdrawal Expenses
 
Building
Clean-up &
Other
Expenses
 
Total
Envelope
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Plan
 
$
61

 
$

 
$

 
$

 
$

 
$

 
$
61

 
2014 Plan
 
(18
)
 

 

 

 

 

 
(18
)
 
Residual Plans
 

 

 

 

 
44

 
5

 
49

 
Acquisition Integration Plans
 

 

 
5

 

 

 
84

 
89

Total Envelope
 
43

 

 
5

 

 
44

 
89

 
181

Print
 

 

 

 

 

 

 

 
2015 Plan
 
172

 

 

 

 

 

 
172

 
2014 Plan
 
10

 

 
4

 

 
3,977

 
38

 
4,029

 
Residual Plans
 

 

 

 
36

 
183

 
53

 
272

Total Print
 
182

 

 
4

 
36

 
4,160

 
91

 
4,473

Label
 


 
 

 
 

 
 

 
 

 
 

 
 

 
2015 Plan
 
(6
)
 

 
116

 

 

 
170

 
280

 
2014 Plan
 
1

 

 

 

 

 

 
1

Total Label
 
(5
)
 

 
116

 

 

 
170

 
281

Corporate
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2015 Plan
 
503

 

 

 

 

 
45

 
548

Total Corporate
 
503

 

 

 

 

 
45

 
548

Total Restructuring and Other Charges
 
$
723

 
$

 
$
125

 
$
36

 
$
4,204

 
$
395

 
$
5,483




14

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restructuring and other charges for the nine months ended September 26, 2015 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee
Separation
Costs
 
Asset Charges Net of Gain on Sale
 
Equipment
Moving
Expenses
 
Lease
Termination
Expenses
 
Multi-Employer Pension
Withdrawal Expenses
 
Building
Clean-up &
Other
Expenses
 
Total
Envelope
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Plan
 
$
147

 
$

 
$

 
$

 
$

 
$

 
$
147

 
2014 Plan
 
252

 

 

 

 

 

 
252

 
Residual Plans
 

 

 

 
(22
)
 
126

 
62

 
166

 
Acquisition Integration Plans
 
45

 
1,895

 
33

 
286

 

 
494

 
2,753

Total Envelope
 
444

 
1,895

 
33

 
264

 
126

 
556

 
3,318

Print
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Plan
 
384

 

 

 

 

 

 
384

 
2014 Plan
 
126

 
116

 
39

 

 
3,977

 
980

 
5,238

 
Residual Plans
 
(54
)
 
65

 

 
127

 
471

 
109

 
718

Total Print
 
456

 
181

 
39

 
127

 
4,448

 
1,089

 
6,340

Label
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2015 Plan
 
20

 

 
133

 

 

 
197

 
350

 
2014 Plan
 
129

 

 

 

 

 

 
129

Total Label
 
149

 

 
133

 

 

 
197

 
479

Corporate
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2015 Plan
 
1,309

 

 

 

 

 
69

 
1,378

 
Residual Plans
 

 

 

 

 

 
14

 
14

Total Corporate
 
1,309

 

 

 

 

 
83

 
1,392

Total Restructuring and Other Charges
 
$
2,358

 
$
2,076

 
$
205

 
$
391

 
$
4,574

 
$
1,925

 
$
11,529



2014 Activity

Restructuring and other charges for the three months ended September 27, 2014 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee
Separation
Costs
 
Asset Charges Net of Gain on Sale
 
Equipment
Moving
Expenses
 
Lease
Termination
Expenses
 
Multi-Employer Pension
Withdrawal Expenses
 
Building
Clean-up &
Other
Expenses
 
Total
Envelope
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Plan
 
$
31

 
$

 
$

 
$

 
$

 
$

 
$
31

 
Residual Plans
 

 

 

 

 
36

 
33

 
69

 
Acquisition Integration Plans
 
370

 
(28
)
 
1,203

 
280

 

 
1,515

 
3,340

Total Envelope
 
401

 
(28
)
 
1,203

 
280

 
36

 
1,548

 
3,440

Print
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Plan
 
210

 
(699
)
 

 

 

 
92

 
(397
)
 
Residual Plans
 

 

 

 
43

 
135

 
98

 
276

Total Print
 
210

 
(699
)
 

 
43

 
135

 
190

 
(121
)
Label
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2014 Plan
 
45

 

 

 

 

 

 
45

Total Label
 
45

 

 

 

 

 

 
45

Corporate
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2014 Plan
 
2,017

 

 

 

 

 

 
2,017

 
Residual Plans
 

 

 

 

 

 
15

 
15

Total Corporate
 
2,017

 

 

 

 

 
15

 
2,032

Total Restructuring and Other Charges
 
$
2,673

 
$
(727
)
 
$
1,203

 
$
323

 
$
171

 
$
1,753

 
$
5,396



15

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Restructuring and other charges for the nine months ended September 27, 2014 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee
Separation
Costs
 
Asset Charges Net of Gain on Sale
 
Equipment
Moving
Expenses
 
Lease
Termination
Expenses
 
Multi-Employer Pension
Withdrawal Expenses
 
Building
Clean-up &
Other
Expenses
 
Total
Envelope
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Plan
 
$
112

 
$

 
$

 
$

 
$

 
$

 
$
112

 
Residual Plans
 
(1
)
 

 

 
(198
)
 
102

 
88

 
(9
)
 
Acquisition Integration Plans
 
2,095

 
2,186

 
2,821

 
1,884

 

 
2,986

 
11,972

Total Envelope
 
2,206

 
2,186

 
2,821

 
1,686

 
102

 
3,074

 
12,075

Print
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Plan
 
362

 
(699
)
 

 

 

 
193

 
(144
)
 
Residual Plans
 
299

 
(41
)
 

 
335

 
973

 
1,061

 
2,627

Total Print
 
661

 
(740
)
 

 
335

 
973

 
1,254

 
2,483

Label
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2014 Plan
 
102

 

 

 

 

 

 
102

 
Residual Plans
 
27

 

 

 

 

 

 
27

Total Label
 
129

 

 

 

 

 

 
129

Corporate
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2014 Plan
 
3,390

 

 

 

 

 
46

 
3,436

 
Residual Plans
 

 

 

 

 

 
15

 
15

Total Corporate
 
3,390

 

 

 

 

 
61

 
3,451

Total Restructuring and Other Charges
 
$
6,386

 
$
1,446

 
$
2,821

 
$
2,021

 
$
1,075

 
$
4,389

 
$
18,138






16

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the activity related to the restructuring liabilities for all the cost savings, restructuring and integration initiatives were as follows (in thousands):

 
 
Employee Separation Costs
 
Lease Termination Expenses
 
Multi-Employer Pension
Withdrawal Expenses
 
Building Clean-up,
Equipment Moving and Other Expenses
 
Total
2015 Plan
 
 
 
 
 
 
 
 
 
 
Balance as of December 27, 2014
 
$

 
$

 
$

 
$

 
$

Accruals, net
 
1,859

 

 

 
400

 
2,259

Payments
 
(1,341
)
 

 

 
(400
)
 
(1,741
)
Balance as of September 26, 2015
 
$
518

 
$

 
$

 
$

 
$
518

 
 
 
 
 
 
 
 
 
 
 
2014 Plan
 
 
 
 
 
 
 
 
 
 
Balance as of December 27, 2014
 
$
1,506

 
$

 
$

 
$

 
$
1,506

Accruals, net
 
507

 

 
3,977

 
1,019

 
5,503

Payments
 
(1,960
)
 

 

 
(1,019
)
 
(2,979
)
Balance as of September 26, 2015
 
$
53

 
$

 
$
3,977

 
$

 
$
4,030

 
 
 
 
 
 
 
 
 
 
 
Residual Plans
 
 
 
 
 
 
 
 
 
 
Balance as of December 27, 2014
 
$
54

 
$
677

 
$
18,700

 
$

 
$
19,431

Accruals, net
 
(54
)
 
105

 
597

 
185

 
833

Payments
 

 
(320
)
 
(2,547
)
 
(185
)
 
(3,052
)
Balance as of September 26, 2015
 
$

 
$
462

 
$
16,750

 
$

 
$
17,212

 
 
 
 
 
 
 
 
 
 
 
Acquisition Integration Plans
 
 
 
 
 
 
 
 
 
 
Balance as of December 27, 2014
 
$
77

 
$
1,136

 
$

 
$

 
$
1,213

Accruals, net
 
45

 
286

 

 
527

 
858

Payments
 
(122
)
 
(862
)
 

 
(527
)
 
(1,511
)
Balance as of September 26, 2015
 
$

 
$
560

 
$

 
$

 
$
560

 
 
 
 
 
 
 
 
 
 
 
Total Restructuring Liability
 
$
571

 
$
1,022

 
$
20,727

 
$

 
$
22,320


13. Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the balances of each component of accumulated other comprehensive income ("AOCI"), net of tax (in thousands):
 
 
 
Foreign Currency Translation
 
Pension and Other Postretirement Benefits
 
Total
Balance as of December 27, 2014
 
$
(2,905
)
 
$
(95,292
)
 
$
(98,197
)
 
Other comprehensive loss before reclassifications
 
(3,132
)
 

 
(3,132
)
 
Amounts reclassified from AOCI
 

 
4,117

 
4,117

 
Other comprehensive (loss) income
 
(3,132
)
 
4,117

 
985

Balance as of September 26, 2015
 
$
(6,037
)
 
$
(91,175
)
 
$
(97,212
)


17

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Reclassifications from AOCI

AOCI Components (in thousands)
 
Amounts Reclassified from AOCI
 
Amounts Reclassified from AOCI
 
Income Statement Line Item
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
Changes in pension and other employee benefit accounts:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial losses
 
$
2,339

 
$
794

 
$
6,651

 
$
2,381

 
Selling, general and administrative expenses
 
 
 
2,339

 
794

 
6,651

 
2,381

 
Total before tax
Taxes
 
(906
)
 
(314
)
 
(2,534
)
 
(941
)
 
Income tax benefit
Total reclassifications for the period
 
$
1,433

 
$
480

 
$
4,117

 
$
1,440

 
Net of tax

14.  Income (Loss) per Share

Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding for the period. When applicable, diluted income (loss) per share is calculated using two approaches. The first approach, the treasury stock method, reflects the potential dilution that could occur if the stock options, RSUs and, PSUs (collectively with the stock options and RSUs, the "Equity Awards") to issue common stock were exercised. The second approach, the if converted method, reflects the potential dilution of the Equity Awards and the senior exchangeable notes due 2017 (the "7% Notes") being exchanged for common stock. Under this method, interest expense associated with the 7% Notes, net of tax, is added back to income from continuing operations and the shares outstanding are increased by the underlying 7% Notes equivalent.

For the nine months ended September 26, 2015, and September 27, 2014, the effect of approximately 20.1 million and 20.3 million shares, respectively, related to the exchange of the 7% Notes for common stock and the issuance of common stock upon exercise of the Equity Awards, were excluded from the calculation of diluted income (loss) per share, as the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted income (loss) per share for the three and nine months ended September 26, 2015, and September 27, 2014 (in thousands, except per share data): 

18

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Numerator for basic and diluted (loss) income per share:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(3,562
)
 
$
(14,030
)
 
$
(15,096
)
 
$
(71,655
)
Income from discontinued operations, net of taxes
 
319

 
3,137

 
1,769

 
6,291

Net loss
 
$
(3,243
)
 
$
(10,893
)
 
$
(13,327
)
 
$
(65,364
)
Denominator for weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic shares
 
67,874

 
67,296

 
67,817

 
66,709

Dilutive effect of 7% Notes
 

 

 

 

Dilutive effect of Equity Awards
 

 

 

 

Diluted shares
 
67,874

 
67,296

 
67,817

 
66,709

 
 
 
 
 
 
 
 
 
(Loss) income per share – basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)
 
 
 
 
 
 
 
 
 
(Loss) income per share – diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)

15. Segment Information

The Company operates three operating and reportable segments: envelope, print and label. The envelope segment provides direct mail offerings and transactional and stock envelopes. The print segment provides a wide array of print offerings such as high-end printed materials including car brochures, advertising literature, corporate identity and brand marketing material, digital printing and content management. The label segment specializes in the design, manufacturing and printing of labels such as custom labels, overnight packaging labels and pressure-sensitive prescription labels.
Operating income (loss) of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses including stock-based compensation.

Corporate identifiable assets primarily consist of cash and cash equivalents, miscellaneous receivables, deferred financing fees, deferred tax assets and other assets. Assets of discontinued operations primarily consist of assets of the Packaging Business.

The following tables present certain segment information (in thousands):

19

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Net sales:
 
 
 
 
 
 
 
 
Envelope
 
$
218,454

 
$
227,069

 
$
664,003

 
$
698,333

Print
 
123,875

 
127,034

 
360,520

 
366,807

Label
 
77,454

 
81,492

 
238,296

 
242,653

Total
 
$
419,783

 
$
435,595

 
$
1,262,819

 
$
1,307,793

Operating income (loss):
 
 

 
 

 
 

 
 

Envelope
 
$
17,746

 
$
4,328

 
$
49,297

 
$
23,466

Print
 
1,541

 
6,340

 
6,207

 
11,079

Label
 
10,146

 
9,691

 
31,000

 
30,065

Corporate
 
(9,917
)
 
(10,126
)
 
(27,533
)
 
(33,067
)
Total
 
$
19,516

 
$
10,233

 
$
58,971

 
$
31,543

Restructuring and other charges:
 
 

 
 

 
 

 
 

Envelope
 
$
181

 
$
3,440

 
$
3,318

 
$
12,075

Print
 
4,473

 
(121
)
 
6,340

 
2,483

Label
 
281

 
45

 
479

 
129

Corporate
 
548

 
2,032

 
1,392

 
3,451

Total
 
$
5,483

 
$
5,396

 
$
11,529

 
$
18,138

Depreciation and intangible asset amortization:
 
 

 
 

 
 

 
 

Envelope
 
$
4,775

 
$
4,556

 
$
14,608

 
$
14,844

Print
 
4,137

 
5,166

 
12,573

 
16,506

Label
 
2,006

 
1,837

 
6,000

 
5,485

Corporate
 
717

 
1,180

 
2,452

 
3,710

Total
 
$
11,635

 
$
12,739

 
$
35,633

 
$
40,545

Intercompany sales:
 
 

 
 

 
 

 
 

Envelope
 
$
1,531

 
$
1,966

 
$
4,674

 
$
4,725

Print
 
4,611

 
3,669

 
12,535

 
11,334

Label
 
1,342

 
907

 
3,010

 
3,163

Total
 
$
7,484

 
$
6,542

 
$
20,219

 
$
19,222

 
 
September 26,
2015
 
December 27,
2014
Total assets:
 
 
 
 
Envelope
 
$
439,897

 
$
449,819

Print
 
276,683

 
277,564

Label
 
229,302

 
230,806

Corporate
 
55,483

 
60,520

Assets of discontinued operations
 
134,350

 
139,182

Total
 
$
1,135,715

 
$
1,157,891


20

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. Related Party Transactions

Horizon Paper Co., Inc. (“Horizon”), whose Chairman was a member of the Company’s Board of Directors through September 10, 2015, has supplied raw materials to the Company. For the three and nine months ended September 26, 2015, purchases of raw materials from Horizon made by the Company were $0.6 million and $0.8 million, respectively. There were no transactions between Horizon and the Company during the three and nine months ended September 27, 2014. As of September 26, 2015 and December 27, 2014, the balance due to Horizon was $0.5 million and less than $0.1 million, respectively. Balances due to Horizon are generally settled in cash within 75 days of each transaction.
17. Condensed Consolidating Financial Information

Cenveo, Inc. is a holding company (the "Parent Company"), which is the ultimate parent of all Cenveo subsidiaries. The Parent Company’s wholly-owned subsidiary, Cenveo Corporation (the "Subsidiary Issuer"), issued the 6.000% Notes, the 8.500% Notes, the 7.875% senior subordinated notes due 2013 (the "7.875% Notes"), the 8.875% Notes, the 7% Notes, and the 11.5% Notes (collectively with the 6.000% Notes, the 8.500% Notes, the 7.875% Notes, the 8.875% Notes, and the 7% Notes, the "Subsidiary Issuer Notes"), which are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and substantially all of its wholly owned North American subsidiaries, other than the Subsidiary Issuer (the "Guarantor Subsidiaries").

Presented below is condensed consolidating financial information for the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and the Parent Company's subsidiaries other than the Subsidiary Issuer and the Guarantor Subsidiaries (the "Non-Guarantor Subsidiaries") as of September 26, 2015, and December 27, 2014, and for the three and nine months ended September 26, 2015, and September 27, 2014.  The condensed consolidating financial information has been presented to show the financial position, results of operations and cash flows of the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, assuming the guarantee structure of the Subsidiary Issuer Notes was in effect at the beginning of the periods presented.

The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries using the equity method of accounting. The Parent Company’s primary transactions with its subsidiaries, other than the investment account and related equity in net income (loss) of subsidiaries, are the intercompany payables and receivables between its subsidiaries.


21

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
September 26, 2015
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
7,016

 
$
360

 
$
2,198

 
$

 
$
9,574

Accounts receivable, net

 
125,776

 
119,427

 

 

 
245,203

Inventories

 
78,776

 
51,101

 

 

 
129,877

Notes receivable from subsidiaries

 
36,938

 
3,245

 

 
(40,183
)
 

Prepaid and other current assets

 
43,478

 
2,117

 
1,268

 

 
46,863

Assets of discontinued operations - current

 

 
50,208

 
6,173

 

 
56,381

Total current assets

 
291,984

 
226,458

 
9,639

 
(40,183
)
 
487,898

 
 
 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
(643,752
)
 
2,006,378

 
3,700

 
7,829

 
(1,374,155
)
 

Property, plant and equipment, net

 
119,381

 
99,562

 
620

 

 
219,563

Goodwill

 
22,940

 
147,411

 
4,987

 

 
175,338

Other intangible assets, net

 
9,701

 
122,192

 
551

 

 
132,444

Other assets, net

 
38,890

 
3,148

 
465

 

 
42,503

Assets of discontinued operations - long-term

 

 
77,969

 

 

 
77,969

Total assets
$
(643,752
)
 
$
2,489,274

 
$
680,440

 
$
24,091

 
$
(1,414,338
)
 
$
1,135,715

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 

 
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
$

 
$
3,000

 
$
989

 
$

 
$

 
$
3,989

Accounts payable

 
135,137

 
75,299

 
299

 

 
210,735

Accrued compensation and related liabilities

 
28,212

 
4,844

 
926

 

 
33,982

Other current liabilities

 
60,847

 
12,686

 
854

 

 
74,387

Liabilities of discontinued operations - current

 

 
26,316

 
562

 

 
26,878

Intercompany payable (receivable)

 
1,516,994

 
(1,524,859
)
 
7,865

 

 

Notes payable to issuer

 

 
36,938

 
3,245

 
(40,183
)
 

Total current liabilities

 
1,744,190

 
(1,367,787
)
 
13,751

 
(40,183
)
 
349,971

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
1,235,406

 
2,582

 

 

 
1,237,988

Other liabilities

 
153,430

 
37,253

 
(1,189
)
 

 
189,494

Liabilities of discontinued operations - long-term

 

 
2,014

 

 

 
2,014

Shareholders’ (deficit) equity
(643,752
)
 
(643,752
)
 
2,006,378

 
11,529

 
(1,374,155
)
 
(643,752
)
Total liabilities and shareholders’ (deficit) equity
$
(643,752
)
 
$
2,489,274

 
$
680,440

 
$
24,091

 
$
(1,414,338
)
 
$
1,135,715



22

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the three months ended September 26, 2015
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
218,392

 
$
200,548

 
$
843

 
$

 
$
419,783

Cost of sales

 
187,614

 
159,795

 

 

 
347,409

Selling, general and administrative expenses

 
29,511

 
15,707

 
176

 

 
45,394

Amortization of intangible assets

 
239

 
1,622

 
120

 

 
1,981

Restructuring and other charges

 
4,875

 
608

 

 

 
5,483

Operating (loss) income

 
(3,847
)
 
22,816

 
547

 

 
19,516

Interest expense, net

 
25,046

 
49

 

 

 
25,095

Intercompany interest (income) expense

 
(214
)
 
214

 

 

 

Other (income) expense, net

 
(1,228
)
 
64

 
(168
)
 

 
(1,332
)
  (Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries

 
(27,451
)
 
22,489

 
715

 

 
(4,247
)
Income tax (benefit) expense

 
(1,597
)
 
666

 
246

 

 
(685
)
  (Loss) income from continuing operations before equity in (loss) income of subsidiaries

 
(25,854
)
 
21,823

 
469

 

 
(3,562
)
Equity in (loss) income of subsidiaries
(3,243
)
 
22,810

 
441

 

 
(20,008
)
 

(Loss) income from continuing operations
(3,243
)
 
(3,044
)
 
22,264

 
469

 
(20,008
)
 
(3,562
)
(Loss) income from discontinued operations, net of taxes

 
(199
)
 
546

 
(28
)
 

 
319

Net (loss) income
(3,243
)
 
(3,243
)
 
22,810

 
441

 
(20,008
)
 
(3,243
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income of subsidiaries
(460
)
 
(1,641
)
 
(872
)
 

 
2,973

 

Changes in pension and other employee benefit accounts, net of taxes

 
1,181

 
252

 

 

 
1,433

Currency translation adjustment

 

 
(1,021
)
 
(872
)
 

 
(1,893
)
Comprehensive (loss) income
$
(3,703
)
 
$
(3,703
)
 
$
21,169

 
$
(431
)
 
$
(17,035
)
 
$
(3,703
)

23

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 26, 2015
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
653,778

 
$
605,967

 
$
3,074

 
$

 
$
1,262,819

Cost of sales

 
561,734

 
487,539

 
731

 

 
1,050,004

Selling, general and administrative expenses

 
87,595

 
48,424

 
540

 

 
136,559

Amortization of intangible assets

 
543

 
4,865

 
348

 

 
5,756

Restructuring and other charges

 
9,842

 
1,687

 

 

 
11,529

Operating (loss) income

 
(5,936
)
 
63,452

 
1,455

 

 
58,971

Interest expense, net

 
75,833

 
168

 

 

 
76,001

Intercompany interest (income) expense

 
(765
)
 
765

 

 

 

Loss on early extinguishment of debt, net

 
559

 

 

 

 
559

Other expense (income), net

 
(435
)
 
(106
)
 
(232
)
 

 
(773
)
(Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries

 
(81,128
)
 
62,625

 
1,687

 

 
(16,816
)
Income tax (benefit) expense

 
(4,194
)
 
1,976

 
498

 

 
(1,720
)
(Loss) income from continuing operations before equity in (loss) income of subsidiaries

 
(76,934
)
 
60,649

 
1,189

 

 
(15,096
)
Equity in (loss) income of subsidiaries
(13,327
)
 
63,807

 
982

 

 
(51,462
)
 

(Loss) income from continuing operations
(13,327
)
 
(13,127
)
 
61,631

 
1,189

 
(51,462
)
 
(15,096
)
Loss (income) from discontinued operations, net of taxes

 
(200
)
 
2,176

 
(207
)
 

 
1,769

Net (loss) income
(13,327
)
 
(13,327
)
 
63,807

 
982

 
(51,462
)
 
(13,327
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) of subsidiaries
985

 
(2,880
)
 
(890
)
 

 
2,785

 

Changes in pension and other employee benefit accounts, net of taxes

 
3,865

 
252

 

 

 
4,117

Currency translation adjustment

 

 
(2,242
)
 
(890
)
 

 
(3,132
)
Comprehensive (loss) income
$
(12,342
)
 
$
(12,342
)
 
$
60,927

 
$
92

 
$
(48,677
)
 
$
(12,342
)


24

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 26, 2015
 (in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities of continuing operations
$
1,481

 
$
86,182

 
$
(85,589
)
 
$
(574
)
 
$

 
$
1,500

Net cash provided by operating activities of discontinued operations

 

 
13,039

 
306

 

 
13,345

Net cash provided by (used in) operating activities
1,481

 
86,182

 
(72,550
)
 
(268
)
 

 
14,845

Cash flows from investing activities:
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures

 
(14,315
)
 
(4,693
)
 
(237
)
 

 
(19,245
)
Cost of business acquisitions

 
(1,996
)
 

 

 

 
(1,996
)
Proceeds from sale of property, plant and equipment

 
586

 
885

 

 

 
1,471

Proceeds from sale of assets

 

 
2,180

 

 

 
2,180

Net cash used in investing activities of continuing operations

 
(15,725
)
 
(1,628
)
 
(237
)
 

 
(17,590
)
Net cash used in investing activities of discontinued operations

 

 
(1,864
)
 

 

 
(1,864
)
Net cash used in investing activities

 
(15,725
)
 
(3,492
)
 
(237
)
 

 
(19,454
)
Cash flows from financing activities:
 

 
 

 
 

 
 

 
 

 
 

Payment of financing-related costs and expenses and debt issuance discounts

 
(1,309
)
 

 

 

 
(1,309
)
Repayments of other long-term debt

 
(4,763
)
 
1,418

 

 

 
(3,345
)
Repayment of 11.5% senior notes due 2017

 
(22,720
)
 

 

 

 
(22,720
)
Purchase and retirement of common stock upon vesting of RSUs
(218
)
 

 

 

 

 
(218
)
Proceeds from exercise of stock options
2

 

 

 

 

 
2

Borrowings under ABL Facility due 2017

 
358,900

 

 

 

 
358,900

Repayments under ABL Facility due 2017

 
(328,500
)
 

 

 

 
(328,500
)
Intercompany advances
(1,265
)
 
(76,014
)
 
75,440

 
1,839

 

 

Net cash (used in) provided by financing activities of continuing operations
(1,481
)
 
(74,406
)
 
76,858

 
1,839

 

 
2,810

Net cash used in financing activities of discontinued operations

 

 
(352
)
 

 

 
(352
)
Net cash (used in) provided by financing activities
(1,481
)
 
(74,406
)
 
76,506

 
1,839

 

 
2,458

Effect of exchange rate changes on cash and cash equivalents

 

 
(866
)
 
330

 

 
(536
)
Net (decrease) increase in cash and cash equivalents

 
(3,949
)
 
(402
)
 
1,664

 

 
(2,687
)
Cash and cash equivalents at beginning of period

 
10,965

 
844

 
2,784

 

 
14,593

Cash and cash equivalents at end of period

 
7,016

 
442

 
4,448

 

 
11,906

Less cash and equivalents of discontinued operations

 

 
(82
)
 
(2,250
)
 

 
(2,332
)
Cash and cash equivalents of continuing operations at end of period
$

 
$
7,016

 
$
360

 
$
2,198

 
$

 
$
9,574



25

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 27, 2014
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
10,965

 
$
767

 
$
840

 
$

 
$
12,572

Accounts receivable, net

 
128,599

 
123,956

 

 

 
252,555

Inventories

 
71,108

 
47,783

 

 

 
118,891

Notes receivable from subsidiaries

 
36,938

 
3,245

 

 
(40,183
)
 

Prepaid and other current assets

 
43,027

 
2,055

 
2,246

 

 
47,328

Assets of discontinued operations - current

 

 
44,673

 
7,896

 

 
52,569

Total current assets

 
290,637

 
222,479

 
10,982

 
(40,183
)
 
483,915

 
 
 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
(632,675
)
 
1,944,300

 
3,608

 
7,829

 
(1,323,062
)
 

Property, plant and equipment, net

 
120,949

 
106,318

 
556

 

 
227,823

Goodwill

 
25,540

 
144,811

 
5,191

 

 
175,542

Other intangible assets, net

 
10,011

 
127,158

 
850

 

 
138,019

Other assets, net

 
42,242

 
3,253

 
484

 

 
45,979

Assets of discontinued operations - long-term

 

 
86,613

 

 

 
86,613

Total assets
$
(632,675
)
 
$
2,433,679

 
$
694,240

 
$
25,892

 
$
(1,363,245
)
 
$
1,157,891

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 

 
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
$

 
$
3,000

 
$
880

 
$

 
$

 
$
3,880

Accounts payable

 
138,939

 
73,941

 
160

 

 
213,040

Accrued compensation and related liabilities

 
29,851

 
4,666

 
538

 

 
35,055

Other current liabilities

 
66,895

 
17,209

 
673

 

 
84,777

Liabilities of discontinued operations - current

 

 
22,671

 
1,532

 

 
24,203

Intercompany payable (receivable)

 
1,439,853

 
(1,449,613
)
 
9,760

 

 

Notes payable to issuer

 

 
36,938

 
3,245

 
(40,183
)
 

Total current liabilities

 
1,678,538

 
(1,293,308
)
 
15,908

 
(40,183
)
 
360,955

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
1,227,397

 
1,273

 

 

 
1,228,670

Other liabilities

 
160,419

 
38,455

 
(1,453
)
 

 
197,421

Liabilities of discontinued operations - long-term

 

 
3,520

 

 

 
3,520

Shareholders’ (deficit) equity
(632,675
)
 
(632,675
)
 
1,944,300

 
11,437

 
(1,323,062
)
 
(632,675
)
Total liabilities and shareholders’ (deficit) equity
$
(632,675
)
 
$
2,433,679

 
$
694,240

 
$
25,892

 
$
(1,363,245
)
 
$
1,157,891



26

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the three months ended September 27, 2014
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
230,496

 
$
204,416

 
$
683

 
$

 
$
435,595

Cost of sales

 
204,889

 
165,070

 

 

 
369,959

Selling, general and administrative expenses

 
30,705

 
17,201

 
188

 

 
48,094

Amortization of intangible assets

 
181

 
1,621

 
111

 

 
1,913

Restructuring and other charges

 
5,043

 
353

 

 

 
5,396

Operating (loss) income

 
(10,322
)
 
20,171

 
384

 

 
10,233

Interest expense, net

 
25,893

 
108

 

 

 
26,001

Intercompany interest (income) expense

 
(341
)
 
341

 

 

 

Loss on early extinguishment of debt, net

 
1,280

 

 

 

 
1,280

Other income, net

 
(674
)
 
(53
)
 
(44
)
 

 
(771
)
  (Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries

 
(36,480
)
 
19,775

 
428

 

 
(16,277
)
Income tax expense (benefit)

 
104

 
(2,351
)
 

 

 
(2,247
)
  (Loss) income from continuing operations before equity in (loss) income of subsidiaries

 
(36,584
)
 
22,126

 
428

 

 
(14,030
)
Equity in (loss) income of subsidiaries
(10,893
)
 
25,683

 
917

 

 
(15,707
)
 

(Loss) income from continuing operations
(10,893
)
 
(10,901
)
 
23,043

 
428

 
(15,707
)
 
(14,030
)
Income from discontinued operations, net of taxes

 
8

 
2,640

 
489

 

 
3,137

Net (loss) income
(10,893
)
 
(10,893
)
 
25,683

 
917

 
(15,707
)
 
(10,893
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income of subsidiaries
(587
)
 
(1,067
)
 
(293
)
 

 
1,947

 

Changes in pension and other employee benefit accounts, net of taxes

 
480

 

 

 

 
480

Currency translation adjustment

 

 
(774
)
 
(293
)
 

 
(1,067
)
Comprehensive (loss) income
$
(11,480
)
 
$
(11,480
)
 
$
24,616

 
$
624

 
$
(13,760
)
 
$
(11,480
)

27

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 27, 2014
(in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
699,188

 
$
603,544

 
$
5,061

 
$

 
$
1,307,793

Cost of sales

 
609,695

 
490,311

 
2,624

 

 
1,102,630

Selling, general and administrative expenses

 
98,211

 
49,416

 
556

 

 
148,183

Amortization of intangible assets

 
551

 
6,371

 
377

 

 
7,299

Restructuring and other charges

 
15,491

 
2,647

 

 

 
18,138

Operating (loss) income

 
(24,760
)
 
54,799

 
1,504

 

 
31,543

Interest expense, net

 
80,235

 
305

 

 

 
80,540

Intercompany interest (income) expense

 
(827
)
 
827

 

 

 

Loss on early extinguishment of debt, net

 
27,778

 

 

 

 
27,778

Other income, net

 
(448
)
 
(243
)
 
(21
)
 

 
(712
)
(Loss) income from continuing operations before income taxes and equity in (loss) income of subsidiaries

 
(131,498
)
 
53,910

 
1,525

 

 
(76,063
)
Income tax (benefit) expense

 
(1,873
)
 
(2,837
)
 
302

 

 
(4,408
)
(Loss) income from continuing operations before equity in (loss) income of subsidiaries

 
(129,625
)
 
56,747

 
1,223

 

 
(71,655
)
Equity in (loss) income of subsidiaries
(65,364
)
 
64,072

 
1,477

 

 
(185
)
 

(Loss) income from continuing operations
(65,364
)
 
(65,553
)
 
58,224

 
1,223

 
(185
)
 
(71,655
)
Income from discontinued operations, net of taxes

 
189

 
5,848

 
254

 

 
6,291

Net (loss) income
(65,364
)
 
(65,364
)
 
64,072

 
1,477

 
(185
)
 
(65,364
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) of subsidiaries
1,106

 
(334
)
 
289

 

 
(1,061
)
 

Changes in pension and other employee benefit accounts, net of taxes

 
1,440

 

 

 

 
1,440

Currency translation adjustment

 

 
(623
)
 
289

 

 
(334
)
Comprehensive (loss) income
$
(64,258
)
 
$
(64,258
)
 
$
63,738

 
$
1,766

 
$
(1,246
)
 
$
(64,258
)


28

CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 27, 2014
 (in thousands)
 
Parent
Company
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities of continuing operations
$
1,971

 
$
(92,447
)
 
$
81,262

 
$
(3,827
)
 
$

 
$
(13,041
)
Net cash provided by (used in) operating activities of discontinued operations

 
(846
)
 
6,897

 
(271
)
 

 
5,780

Net cash provided by (used in) operating activities
1,971

 
(93,293
)
 
88,159

 
(4,098
)
 

 
(7,261
)
Cash flows from investing activities:
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures

 
(16,515
)
 
(5,771
)
 
(47
)
 

 
(22,333
)
Purchase of investment

 
(2,000
)
 

 

 

 
(2,000
)
Proceeds from sale of property, plant and equipment

 
1,533

 
302

 

 

 
1,835

Net cash used in investing activities of continuing operations

 
(16,982
)
 
(5,469
)
 
(47
)
 

 
(22,498
)
Net cash provided by (used in) investing activities of discontinued operations

 
1,033

 
(4,346
)
 

 

 
(3,313
)
Net cash used in investing activities

 
(15,949
)
 
(9,815
)
 
(47
)
 

 
(25,811
)
Cash flows from financing activities:
 

 
 

 
 

 
 

 
 

 
 

Proceeds from issuance of 6.000% senior secured priority notes due 2019

 
540,000

 

 

 

 
540,000

Proceeds from issuance of 8.500% junior secured priority notes due 2022

 
250,000

 

 

 

 
250,000

Payment of financing-related costs and expenses and debt issuance discounts

 
(35,721
)
 

 

 

 
(35,721
)
Repayments of other long-term debt

 
(4,477
)
 
(1,667
)
 

 

 
(6,144
)
Repayment of 11.5% senior notes due 2017

 
(1,430
)
 

 

 

 
(1,430
)
Purchase and retirement of common stock upon vesting of RSUs
(562
)
 

 

 

 

 
(562
)
Repayment of 15% Unsecured Term Loan due 2017

 
(10,000
)
 

 

 

 
(10,000
)
Repayment of Term Loan Facility due 2017

 
(329,100
)
 

 

 

 
(329,100
)
Repayment of 8.875% senior second lien notes due 2018

 
(400,000
)
 

 

 

 
(400,000
)
Borrowings under ABL Facility due 2017

 
389,600

 

 

 

 
389,600

Repayments under ABL Facility due 2017

 
(363,500
)
 

 

 

 
(363,500
)
Intercompany advances
(1,409
)
 
73,578

 
(76,035
)
 
3,866

 

 

Net cash (used in) provided by financing activities of continuing operations
(1,971
)
 
108,950

 
(77,702
)
 
3,866

 

 
33,143

Net cash used in financing activities of discontinued operations

 

 
(365
)
 

 

 
(365
)
Net cash (used in) provided by financing activities
(1,971
)
 
108,950

 
(78,067
)
 
3,866

 

 
32,778

Effect of exchange rate changes on cash and cash equivalents

 

 
4

 
9

 

 
13

Net (decrease) increase in cash and cash equivalents

 
(292
)
 
281

 
(270
)
 

 
(281
)
Cash and cash equivalents at beginning of period

 
9,504

 

 
1,825

 

 
11,329

Cash and cash equivalents at end of period

 
9,212

 
281

 
1,555

 

 
11,048

Less cash and equivalents of discontinued operations

 

 
(82
)
 
(728
)
 

 
(810
)
Cash and cash equivalents of continuing operations at end of period
$

 
$
9,212

 
$
199

 
$
827

 
$

 
$
10,238



29


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as MD&A, of Cenveo, Inc. and its subsidiaries, which we refer to as Cenveo, should be read in conjunction with the accompanying condensed consolidated financial statements and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014, which we refer to as our 2014 Form 10-K. Item 7 of our 2014 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of September 26, 2015. Cenveo, Inc. and its subsidiaries are referred to herein as "Cenveo," the "Company," "we," "our," or "us."

Forward-Looking Statements
 
Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of terminology such as "may," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe" or "continue" and similar expressions, or as other statements which do not relate solely to historical facts. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that could cause actual results to differ materially from what is expressed or forecasted in these forward-looking statements. In view of such uncertainties, investors should not place undue reliance on our forward-looking statements. Such statements speak only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors which could cause actual results to differ materially from management’s expectations include, without limitation: (i) recent United States and global economic conditions have adversely affected us and could continue to do so; (ii) our substantial level of indebtedness could impair our financial condition and prevent us from fulfilling our business obligations; (iii) our ability to service or refinance our debt; (iv) the terms of our indebtedness imposing significant restrictions on our operating and financial flexibility; (v) additional borrowings available to us which could further exacerbate our risk exposure from debt; (vi) our ability to successfully integrate acquired businesses with our business; (vii) a decline in our consolidated profitability or profitability within one of our individual reporting units could result in the impairment of our assets, including goodwill and other long-lived assets; (viii) the industries in which we operate our business are highly competitive and extremely fragmented; (ix) a general absence of long-term customer agreements in our industry, subjecting our business to quarterly and cyclical fluctuations; (x) factors affecting the United States postal services impacting demand for our products; (xi) the availability of the Internet and other electronic media adversely affecting our business; (xii) increases in paper costs and decreases in the availability of raw materials; (xiii) our labor relations; (xiv) our compliance with environmental laws; (xv) our dependence on key management personnel; (xvi) any failure, interruption or security lapse of our information technology systems; and (xvii) statutory requirements that share repurchases are subject to certain asset sufficiency standards. This list of factors is not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. Additional information regarding these and other factors can be found elsewhere in this report, and in our other filings with the Securities and Exchange Commission, which we refer to as the SEC.

Business Overview
We are a diversified manufacturing company focused on print-related products. Our broad portfolio of products primarily includes envelope converting, commercial printing and label manufacturing. We operate a global network of strategically located manufacturing facilities, serving a diverse base of over 100,000 customers. Generally, print-related industries are highly fragmented and extremely competitive due to over-capacity and pricing pressures. We believe these factors will continue to impact our results of operations in the future; however, we believe our focus on our diverse product offerings, our improved cost structure and efforts to improve our capital structure will allow for us to return value to our shareholders.
Our business strategy has been, and continues to be, focused on improving our sales and operating income performance, pursuing and integrating strategic acquisitions, improving our capital structure, and maintaining reasonable levels of financial flexibility. We believe this strategy has allowed us to diversify our revenue base, maintain our low cost structure and deliver quality product offerings to our customers.

We operate our business in three complementary reportable segments: the envelope segment, the print segment and the label segment.




30



Envelope. We are the largest envelope manufacturer in North America. On September 16, 2013, we enhanced our manufacturing capabilities and reduced capacity in the envelope industry with the acquisition of certain assets of National Envelope Corporation, which we refer to as National. Our envelope segment represented approximately 52.0% and 52.6% of our net sales for the three and nine months ended September 26, 2015, respectively.

Our envelope segment offers direct mail products used for customer solicitations and transactional envelopes used for billing and remittance by end users including financial institutions, insurance companies and telecommunications companies. We also produce a broad line of specialty and stock envelopes which are sold through wholesalers, and to the office product market through direct customer relationships or distributor channels.

Print. We are one of the leading commercial printers in North America. On August 10, 2015, we added to our print operations by acquiring certain assets of Asendia USA, Inc., which we refer to as Asendia. The acquired assets provide letter shop, data processing, bindery and digital printing offerings. Our print segment represented approximately 29.5% and 28.5% of our net sales for the three and nine months ended September 26, 2015, respectively.

Our print segment primarily caters to the consumer products, automotive, travel and leisure and telecommunications industries. We provide a wide array of print offerings to our customers including electronic prepress, digital asset archiving, direct-to-plate technology, high-quality color printing on web and sheet-fed presses, digital printing and content management. The broad selection of print products we produce includes car brochures, annual reports, direct mail products, advertising literature, corporate identity materials and brand marketing materials.  Our content management business offers complete solutions, including: editing, content processing, content management, electronic peer review, production, distribution and reprint marketing.

Label.  We are a leading label manufacturer and the largest North American prescription label manufacturer for retail pharmacy chains. Our label segment represented approximately 18.5% and 18.9% of our net sales for the three and nine months ended September 26, 2015, respectively.

Our label segment produces a diverse line of custom labels for a broad range of industries including manufacturing, warehousing, packaging, food and beverage, and health and beauty, which we sell through extensive networks of distributors or within similar resale channels. We provide direct mail and overnight packaging labels, food and beverage labels, and shelf and scale labels for national and regional customers. We produce pressure-sensitive prescription labels for the retail pharmacy chain market.

Consolidated Operating Results

This MD&A includes an overview of our condensed consolidated results of operations for the three and nine months ended September 26, 2015, and September 27, 2014, followed by a discussion of the results of operations of each of our reportable segments for the same periods.
2015 Overview
Our strategic focus for 2015 has been to continue to improve our operating margins subsequent to the completion of our integration of National, which was substantially complete as we exited 2014, through profitability improvement and cost reduction actions as well as reviewing options for our non-strategic assets or product lines, while maintaining focus on improving our capital structure.

Improving Operating Margins

We believe the accelerated integration plan we completed during 2014 to integrate National has begun to provide meaningful improvements in our envelope segment's operating results with gross profit increasing $13.8 million and operating income increasing $25.8 million for the first nine months of 2015.

Over the last two years, we have completed select downsizing and consolidation of our commercial print assets, activities that we believe will allow us to continue to serve a broad range of customers in targeted geographic locations, as well as with our national customer base. These consolidations have also allowed us to lower our fixed cost infrastructure within our print operations.

We also continue to focus on strategic investments, capital expenditures and acquisitions in areas we believe will strengthen our manufacturing platform, improve our operating margin performance or provide additional product offerings.


31


Strategic Asset Review

During the second quarter of the 2015, we began actively moving forward with our plan to review and potentially divest certain non-strategic assets. We believe there are certain product lines within our operating segments that do not align with our long-term strategic plan, and could potentially be better suited with other organizations.

During the third quarter of 2015, we completed two small strategic transactions, which we refer to as the Label transactions, which will help facilitate the exit of two non-core product lines reported within our label operating segment. As a result of these transactions, we received $2.2 million in cash proceeds, primarily from selling customer lists.

Over the course of the second and third quarters of 2015, we have been actively marketing for sale our folded carton and shrink sleeve packaging businesses along with our one top-sheet lithographic print operation, which together we refer to as the Packaging Business, to multiple strategic parties. As of the end of the third quarter, management has been given the appropriate authority to move forward with these strategic parties on a potential sale of the Packaging Business; therefore, the assets, liabilities, operations and cash flows of the Packaging Business have been reclassified as discontinued operations for all periods presented. While there can be no assurance that we will ultimately reach an agreement with any of the strategic parties or the timing of reaching such agreement, we believe that we will do so within a reasonable period of time, not to exceed one year.

Improving our Capital Structure

Since the beginning of 2011, we have been focused on improving our capital structure through a number of initiatives including working capital improvements, exiting underperforming or non-strategic businesses, and taking advantage of attractive leveraged loan and high yield debt market conditions. Since we began this initiative, we have reduced our outstanding debt and weighted average interest rate, despite our continued reinvestments of cash into our businesses via four acquisitions, focused capital expenditures, and incurring over $95 million in transaction costs associated with the improvement of our capital structure.

On June 26, 2014, we issued $540.0 million aggregate principal amount of 6.000% senior priority secured notes due 2019, which we refer to as the 6.000% Notes, and $250.0 million aggregate principal amount of 8.500% junior priority secured notes due 2022, which we refer to as the 8.500% Notes. Net proceeds from the 6.000% Notes and 8.500% Notes were used to refinance: (i) the $360 million secured term loan facility, which we refer to as the Term Loan Facility, which at the time had a remaining principal balance of $327.3 million; and (ii) the 8.875% senior second lien notes due 2018, which we refer to as the 8.875% Notes, which at the time had a remaining principal balance of $400.0 million. Additionally, in June 2014, we used cash on hand of $9.4 million to repay in full the remaining principal balance on our unsecured $50.0 million aggregate principal amount term loan due 2017, which we refer to as the Unsecured Term Loan. These transactions resulted in reductions in future cash interest expense, elimination of maintenance covenants within our capital structure and a significant extension of our existing maturities.

The June 2014 refinancing had provided us greater flexibility to address our higher interest rate debt instruments. Since the completion of the refinancing, we have: (i) extinguished $25.3 million of our 11.5% senior notes due 2017, which we refer to as our 11.5% Notes, during 2014 and 2015; (ii) exchanged $3.0 million of our $86.3 million 7% senior exchangeable notes due 2017, which we refer to as our 7% Notes, for approximately one million shares of our common stock; and (iii) extinguished $2.0 million of our 8.500% Notes. During the remainder of 2015, we will use cash flow generated from operations and any proceeds from non-strategic asset sales, to the extent allowable by our indentures, to continue to address our highest interest rate debt instruments.

On January 30, 2015, we entered into Amendment No. 3 to the $230 million asset-based revolving credit facility, which we refer to as the ABL Facility, and an accompanying Increasing Lender Agreement on February 4, 2015, pursuant to which the borrowing capacity was increased by $10 million to $240 million. Among other things, this amendment increased our flexibility to use the proceeds of any future asset sales to prepay our other indebtedness. The amendment also generally increased our flexibility to prepay outstanding indebtedness, make acquisitions and other investments, and pay dividends, subject to the satisfaction of certain conditions.

Reportable Segments

We operate three complementary reportable segments: the envelope segment, the print segment and the label segment.

See below for a summary of net sales and operating income (loss) for our reportable segments that we use internally to assess our operating performance. Our three and nine month reporting periods each consisted of 13 weeks and 39 weeks, respectively, and ended on September 26, 2015, and September 27, 2014.

32



 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
(in thousands, except
per share amounts)
 
(in thousands, except
per share amounts)
Net sales
 
$
419,783

 
$
435,595

 
$
1,262,819

 
$
1,307,793

Operating income (loss):
 
 

 
 

 
 

 
 
Envelope
 
$
17,746

 
$
4,328

 
$
49,297

 
$
23,466

Print
 
1,541

 
6,340

 
6,207

 
11,079

Label
 
10,146

 
9,691

 
31,000

 
30,065

Corporate
 
(9,917
)
 
(10,126
)
 
(27,533
)
 
(33,067
)
Total operating income
 
19,516

 
10,233

 
58,971

 
31,543

Interest expense, net
 
25,095

 
26,001

 
76,001

 
80,540

Loss on early extinguishment of debt, net
 

 
1,280

 
559

 
27,778

Other income, net
 
(1,332
)
 
(771
)
 
(773
)
 
(712
)
Loss from continuing operations before income taxes
 
(4,247
)
 
(16,277
)
 
(16,816
)
 
(76,063
)
Income tax benefit
 
(685
)
 
(2,247
)
 
(1,720
)
 
(4,408
)
Loss from continuing operations
 
(3,562
)
 
(14,030
)
 
(15,096
)
 
(71,655
)
Income from discontinued operations, net of taxes
 
319

 
3,137

 
1,769

 
6,291

Net loss
 
$
(3,243
)
 
$
(10,893
)
 
$
(13,327
)
 
$
(65,364
)
(Loss) income per share – basic:
 
 

 
 

 
 

 
 
Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)
 
 
 
 
 
 
 
 
 
(Loss) income per share – diluted:
 
 
 
 
 
 

 
 

Continuing operations
 
$
(0.05
)
 
$
(0.21
)
 
$
(0.22
)
 
$
(1.07
)
Discontinued operations
 

 
0.05

 
0.02

 
0.09

Net loss
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.98
)

33


Net Sales
 
Net sales decreased $15.8 million, or 3.6%, in the third quarter of 2015, as compared to the third quarter of 2014. Sales in our envelope segment decreased $8.6 million, sales in our label segment decreased $4.0 million and sales in our print segment decreased $3.2 million.

Net sales decreased $45.0 million, or 3.4%, in the first nine months of 2015, as compared to the first nine months of 2014. Sales in our envelope segment decreased $34.3 million, sales in our print segment decreased $6.3 million and sales in our label segment decreased $4.4 million.

See Segment Operations below for a detailed discussion of the primary factors affecting the change in our net sales by reportable segment.

Operating Income

Operating income increased $9.3 million, or 90.7%, in the third quarter of 2015, as compared to the third quarter of 2014. This increase was due to: (i) an increase in operating income from our envelope segment of $13.4 million; (ii) an increase in operating income from our label segment of $0.5 million; and (iii) a reduction in corporate expenses of $0.2 million, partially offset by a decline in operating income of $4.8 million from our print segment.

Operating income increased $27.4 million, or 87.0%, in the first nine months of 2015, as compared to the first nine months of 2014. This increase was due to: (i) increased operating income from our envelope segment of $25.8 million; (ii) a reduction in corporate expenses of $5.5 million; and (iii) an increase in operating income from our label segment of $0.9 million, partially offset by a decline in operating income of $4.9 million from our print segment.

See Segment Operations below for a more detailed discussion of the primary factors for the changes in operating income by reportable segment.

Interest Expense

Interest expense decreased $0.9 million to $25.1 million in the third quarter of 2015, as compared to $26.0 million in the third quarter of 2014. The decrease was primarily due to principal repayments made on our 11.5% Notes earlier in 2015. Interest expense in the third quarter of 2015 reflected average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.3%. This compares to average outstanding debt of approximately $1.3 billion and a weighted average interest rate of 7.3% in the third quarter of 2014.

Interest expense decreased $4.5 million to $76.0 million in the first nine months of 2015, as compared to $80.5 million in the first nine months of 2014. The decrease was primarily due to: (i) a lower weighted average interest rate as a result of the debt refinancing in the second quarter of 2014; and (ii) principal repayments made on our 11.5% Notes. Interest expense in the first nine months of 2015 reflected average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.3%. This compares to average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.6% in the first nine months of 2014.

We expect interest expense in the fourth quarter of 2015 will be lower than the same period in 2014, primarily due to principal repayments made on our 11.5% Notes.

Loss on Early Extinguishment of Debt

During the nine months ended September 26, 2015, we recorded a loss on early extinguishment of debt of $0.6 million related to the repurchase of $22.6 million of our 11.5% Notes, of which $0.2 million related to the write-off of unamortized debt issuance costs, $0.2 million related to the write-off of original issuance discount, and $0.2 million related to a premium paid over the principal amount upon repurchase.

In the third quarter of 2014, we extinguished $1.4 million of our 11.5% Notes. In connection with the extinguishment, we recorded a loss on early extinguishment of debt of $0.1 million, all of which is related to the write-off of original issuance discount.


34


Additionally, during the third quarter of 2014, we exchanged $3.0 million of our 7% senior exchangeable notes due 2017, which we refer to as the 7% Notes, for approximately one million shares of our common stock. In connection with this transaction, we incurred a non-cash induced conversion expense of $1.1 million, which has been recorded in loss on early extinguishment of debt, net.

In the second quarter of 2014, we extinguished our Term Loan Facility and 8.875% Notes. In connection with this extinguishment, we recorded a loss on early extinguishment of debt of approximately $9.0 million, of which $5.8 million related to the write-off of unamortized debt issuance costs, and $3.2 million related to the write-off of original issuance discount. Additionally, in connection with the issuance of our 6.000% Notes and 8.500% Notes in the second quarter of 2014, we expensed debt issuance costs of $16.5 million, of which $1.6 million related to fees paid to third parties. We also used cash on hand of $9.4 million in the second quarter of 2014 to repay in full the remaining principal balance on the Unsecured Term Loan. In connection with the extinguishment of the Unsecured Term Loan, we recorded a loss on early extinguishment of debt of approximately $1.0 million, of which $0.6 million related to the write-off of unamortized debt issuance costs, and $0.4 million related to the write-off of original issuance discount.

Other Income

During the third quarter and the first nine months of 2015, we recognized other income, net, of $1.3 million and $0.8 million, respectively. Other income, net, for both periods in 2015 is primarily related to cash proceeds of $2.2 million received during the third quarter of 2015 related to the Label transactions.

Income Taxes
 
 
  For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
(in thousands)
 
(in thousands)
Income tax benefit from U.S. operations
 
$
(931
)
 
$
(2,316
)
 
$
(2,218
)
 
$
(4,712
)
Income tax expense from foreign operations
 
246

 
69

 
498

 
304

Income tax benefit
 
$
(685
)
 
$
(2,247
)
 
$
(1,720
)
 
$
(4,408
)
Effective income tax rate
 
16.1
%
 
13.8
%
 
10.2
%
 
5.8
%

Income Tax Expense

In the third quarter of 2015, we had an income tax benefit of $0.7 million, compared to an income tax benefit of $2.2 million in the third quarter of 2014. The tax benefit for the third quarter of 2015 and the tax benefit for the third quarter of 2014 primarily related to income taxes on our domestic operations.

In the first nine months of 2015, we had an income tax benefit of $1.7 million, compared to an income tax benefit of $4.4 million in the first nine months of 2014. The tax benefit for the first nine months of 2015 and the tax benefit for the first nine months of 2014 primarily related to income taxes on our domestic operations.

Our effective tax rate for the three and nine months ended 2015 and 2014 differed from the federal statutory rate, primarily as a result of having a full valuation allowance related to our net deferred tax assets in the U.S. We do not believe our unrecognized tax benefits will change significantly for the remainder of 2015.

Valuation Allowance

We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowances, on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. The factors considered in our determination of the probability of the realization of the deferred tax assets include, but are not limited to: recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, the duration of statutory carryforward periods and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.


35


Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences as a measure of our cumulative results in recent years. In the United States, our analysis indicates that we have cumulative three year historical losses on this basis. While there are significant impairment, restructuring and refinancing charges driving our cumulative three year loss, this is considered significant negative evidence which is objective and verifiable and, therefore, difficult to overcome. However, the three year loss position is not solely determinative and accordingly, we consider all other available positive and negative evidence in our analysis. Based upon our analysis, we believe it is more likely than not that the net deferred tax assets in the United States will not be fully realized in the future. Accordingly, we have a valuation allowance related to those net deferred tax assets of $150.5 million as of September 26, 2015. Deferred tax assets related to foreign tax credit carryforwards also did not reach the more likely than not realizability criteria and accordingly, were subject to a valuation allowance. During the nine months ended September 26, 2015, our valuation allowance related to these deferred tax assets was unchanged at $7.0 million.

    There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. We intend to maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized. If operating results improve on a sustained basis, or if certain tax planning strategies are implemented, our conclusions regarding the need for valuation allowances could change, resulting in the reversal of some or all of the valuation allowances in the future, which could have a significant impact on income tax expense or benefit in the period recognized and subsequent periods.

(Loss) Income from Discontinued Operations, Net of Taxes
Over the course of the second and third quarters of 2015, we have been actively marketing for sale our folded carton and shrink sleeve packaging businesses along with our one top-sheet lithographic print operation, which together we refer to as the Packaging Business, to multiple strategic parties. As of the end of the third quarter, management has been given the appropriate authority to move forward with these strategic parties on a potential sale of the Packaging Business We have classified the assets, liabilities, operations and cash flows of the Packaging Business as discontinued operations for all periods presented.
In the third quarter of 2015, income from discontinued operations was $0.3 million, primarily comprised of income related to the Packaging Business, net of tax expense of $0.5 million.
In the first nine months of 2015, income from discontinued operations was $1.8 million, primarily comprised of income related to the Packaging Business, net of tax expense of $1.4 million.
In the third quarter of 2014, income from discontinued operations was $3.1 million, primarily comprised of income related to the Packaging Business, net of tax expense of $2.0 million.
In the first nine months of 2014, income from discontinued operations was $6.3 million, primarily comprised of income related to the Packaging Business, net of tax expense of $4.0 million. Included in income from discontinued operations, we recognized a $1.6 million gain related to a 2013 divestiture, net of tax expense of $1.0 million.


Segment Operations
 
Our Chief Executive Officer monitors the performance of the ongoing operations of our three reportable segments. We assess performance based on net sales and operating income.

Envelope
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
  (in thousands)
 
  (in thousands)
Segment net sales
 
$
218,454

 
$
227,069

 
$
664,003

 
$
698,333

Segment operating income
 
$
17,746

 
$
4,328

 
$
49,297

 
$
23,466

Operating income margin
 
8.1
%
 
1.9
%
 
7.4
%
 
3.4
%
Restructuring and other charges
 
$
181

 
$
3,440

 
$
3,318

 
$
12,075


36



Segment Net Sales
 
Segment net sales for our envelope segment decreased $8.6 million, or 3.8%, in the third quarter of 2015, as compared to the third quarter of 2014. Segment net sales for our envelope segment decreased $34.3 million, or 4.9%, in the first nine months of 2015, as compared to the first nine months of 2014. These decreases were primarily due to volume declines resulting from the closure and consolidation of several envelope facilities related to the integration of National with our existing operations and two new facilities over the course of 2014, partially offset by product mix and our ability to increase prices to certain customers.

Segment Operating Income

Segment operating income for our envelope segment increased $13.4 million, or 310.0%, in the third quarter of 2015, as compared to the third quarter of 2014. The increase was primarily due to: (i) higher gross margin of $8.8 million, primarily due to our ability to increase prices to certain customers and lower fixed costs resulting from the integration of National with our existing operations; (ii) lower restructuring and other charges of $3.3 million; and (iii) lower selling, general and administrative expenses of $1.3 million, primarily resulting from lower integration costs related to the integration of National with our existing operations.

Segment operating income for our envelope segment increased $25.8 million, or 110.1%, in the first nine months of 2015, as compared to the first nine months of 2014. The increase was primarily due to: (i) higher gross margin of $13.8 million, primarily due to our ability to increase prices to certain customers and lower fixed costs resulting from the integration of National with our existing operations; (ii) lower restructuring and other charges of $8.8 million; and (iii) lower selling, general and administrative expenses of $3.2 million, primarily resulting from lower integration costs related to the integration of National with our existing operations.

Print
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
  (in thousands)
 
  (in thousands)
Segment net sales
 
$
123,875

 
$
127,034

 
$
360,520

 
$
366,807

Segment operating income
 
$
1,541

 
$
6,340

 
$
6,207

 
$
11,079

Operating income margin
 
1.2
%
 
5.0
%
 
1.7
%
 
3.0
%
Restructuring and other charges
 
$
4,473

 
$
(121
)
 
$
6,340

 
$
2,483


Segment Net Sales

Segment net sales for our print segment decreased $3.2 million, or 2.5%, in the third quarter of 2015, as compared to the third quarter of 2014. This decrease was primarily due to sales declines resulting from the closure of a print facility during the first quarter of 2015, as well as continued pricing pressure and volume declines within our commercial print products, which was partially offset by increased volumes and new account wins within our publisher services products.

Segment net sales for our print segment decreased $6.3 million, or 1.7%, in the first nine months of 2015, as compared to the first nine months of 2014. This decrease was primarily due to sales declines resulting from the closure of a print facility during the first quarter of 2015 and two print facilities during the first quarter of 2014 as well as continued pricing pressure and volume declines within our commercial print products. These declines were partially offset by increased volumes and new account wins within our publisher services products.

Segment Operating Income

Segment operating income for our print segment decreased $4.8 million, or 75.7%, in the third quarter of 2015, as compared to the third quarter of 2014. The decrease was primarily due to: (i) higher restructuring and other charges of $4.6 million; and (ii) lower gross margin of $1.9 million during the quarter, primarily due to pricing pressures and product mix. These decreases were partially offset by lower selling, general and administrative expenses of $1.8 million due to lower selling expenses and cost reduction initiatives.


37


Segment operating income for our print segment decreased $4.9 million, or 44.0%, in the first nine months of 2015, as compared to the first nine months of 2014. The decrease was primarily due to: (i) lower gross margin of $5.9 million during the quarter, primarily due to pricing pressures and product mix; and (ii) higher restructuring and other charges of $3.9 million partially offset by: i) lower selling, general and administrative expenses of $3.5 million due to lower selling expenses and cost reduction initiatives; and ii) lower amortization expense of $1.4 million related to the accelerated retirement of a trade name in the first half of 2014.

Label
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
(in thousands)
 
(in thousands)
Segment net sales
 
$
77,454

 
$
81,492

 
$
238,296

 
$
242,653

Segment operating income
 
$
10,146

 
$
9,691

 
$
31,000

 
$
30,065

Operating income margin
 
13.1
%
 
11.9
%
 
13.0
%
 
12.4
%
Restructuring and other charges
 
$
281

 
$
45

 
$
479

 
$
129


Segment Net Sales

Segment net sales for our label segment decreased $4.0 million, or 5.0%, in the third quarter of 2015, as compared to the third quarter of 2014, primarily due to decreased volume from certain retail customers as well as volume declines in our coated labels business, partially offset by favorable pricing mix in our prescription label business.

Segment net sales for our label segment decreased $4.4 million, or 1.8%, in the first nine months of 2015, as compared to the first nine months of 2014. This decrease was primarily due to decreased volume from certain retail customers as well as volume declines in our coated labels business, partially offset by favorable pricing mix in our prescription label business and increased volumes in our custom labels business.

Segment Operating Income
 
Segment operating income for our label segment increased $0.5 million, or 4.7%, in the third quarter of 2015, as compared to the third quarter of 2014. This increase was primarily due to lower selling, general and administrative expenses of $0.7 million due to e-commerce and information technology initiatives in 2014 as well as other cost reduction initiatives in both 2014 and 2015, partially offset by higher restructuring and other charges of $0.2 million due to activities under 2015 restructuring and cost savings plans.

Segment operating income for our label segment increased $0.9 million, or 3.1%, in the first nine months of 2015, as compared to the first nine months of 2014. The increase was primarily due to lower selling, general and administrative expenses of $1.8 million due to e-commerce and information technology initiatives in 2014 as well as other cost reduction initiatives in both 2014 and 2015 partially offset by: (i) lower gross margin of $0.5 million, primarily due to a decline in sales; and (ii) higher restructuring and other charges of $0.4 million due to the elimination of duplicative headcount.


Corporate Expenses

Corporate expenses include the costs of running our corporate headquarters. Corporate expenses decreased $0.2 million in the third quarter of 2015, as compared to the third quarter of 2014, primarily due to costs related to the integration of certain assets of National incurred during 2014, partially offset by higher stock compensation expense of $0.7 million in 2015.

Corporate expenses decreased $5.5 million in the first nine months of 2015, as compared to the first nine months of 2014, primarily due to lower restructuring and other charges of $2.1 million in 2015, costs related to the integration of certain assets of National incurred during 2014, lower depreciation expense of $1.3 million, and lower stock-based compensation expense of $0.5 million.


38


Restructuring and Other Charges

Restructuring

We currently have two active cost savings, restructuring and integration plans, which are related to the implementation of cost savings initiatives focused on overhead cost eliminations, including headcount reductions and the closure of certain manufacturing facilities. We refer to these plans as the 2015 Plan and the 2014 Plan.

During the first nine months of 2015, we implemented the 2015 Plan and completed the 2014 Plan. We also completed our plan to integrate certain assets of National, which we refer to as the National Plan, by completing the closure and consolidation of nine manufacturing facilities into our existing envelope operations and two new facilities. We expect restructuring and other charges in 2015 to be substantially less than those incurred in 2014 primarily due to the nature and extent of the National Plan, which was implemented in the third quarter of 2013 and substantially completed in the fourth quarter of 2014.

We also currently have certain residual cost savings, restructuring and integration plans, which we refer to as the Residual Plans. As a result of these cost savings actions, over the last several years we have closed or consolidated a significant amount of manufacturing facilities and have had a significant number of headcount reductions. We do not anticipate any significant future expenses related to the Residual Plans, other than modifications to current assumptions for lease terminations, multi-employer pension withdrawal liabilities and ongoing expenses related to maintaining restructured assets.

During the third quarter of 2015, as a result of our restructuring and integration activities, we incurred $5.5 million of restructuring and other charges, which included multi-employer pension withdrawal expenses of $4.2 million, $0.7 million of employee separation costs, building clean-up and other expenses of $0.4 million, and equipment moving expenses of $0.1 million.

During the first nine months of 2015, as a result of our restructuring and integration activities, we incurred $11.5 million of restructuring and other charges, which included multi-employer pension withdrawal expenses of $4.6 million, $2.4 million of employee separation costs, $2.1 million of net non-cash charges on long-lived assets, building clean-up and other expenses of $1.9 million, lease termination expenses of $0.4 million, and equipment moving expenses of $0.2 million.
 
During the third quarter of 2014, as a result of our restructuring and integration activities, we incurred $5.4 million of restructuring and other charges, which included $2.7 million of employee separation costs, building clean-up and other expenses of $1.8 million, equipment moving expenses of $1.2 million, lease termination expenses of $0.3 million, and multi-employer pension withdrawal expenses of $0.2 million. Additionally, we recognized income of $0.7 million related to the sale of a closed facility within our print segment.

During the first nine months of 2014, as a result of our restructuring and integration activities, we incurred $18.1 million of restructuring and other charges, which included $6.4 million of employee separation costs, building clean-up and other expenses of $4.4 million, equipment moving expenses of $2.8 million, lease termination expenses of $2.0 million, $1.4 million of net non-cash charges on long-lived assets, and multi-employer pension withdrawal expenses of $1.1 million.

As of September 26, 2015, our total restructuring liability was $22.3 million, of which $3.7 million is included in other current liabilities and $18.6 million, which is expected to be paid through 2032, is included in other liabilities in our condensed consolidated balance sheet. Our multi-employer pension withdrawal liabilities are $20.7 million of our remaining restructuring liabilities. We believe these liabilities represent our anticipated ultimate withdrawal liabilities; however, we are exposed to significant risks and uncertainties arising from our participation in these multi-employer pension plans. While it is not possible to quantify the potential impact of our future actions or the future actions of other participating employers from the multi-employer pension plans for which we have exited, our anticipated ultimate withdrawal liabilities may be significantly impacted in the future due to lower future contributions or increased withdrawals from other participating employers.
 
Goodwill and Intangible Asset Impairments

There were no goodwill or intangible asset impairments recorded in the three and nine months ended September 26, 2015, and September 27, 2014

Liquidity and Capital Resources

Net Cash Provided By (Used In) Operating Activities of Continuing Operations. Net cash provided by operating activities of continuing operations was $1.5 million in the first nine months of 2015, primarily due to our net loss adjusted for non-cash items of $34.6 million, partially offset by: (i) a use of cash of $23.1 million from working capital; and (ii) pension and

39


other postretirement plan contributions of $5.6 million. The use of cash from working capital primarily resulted from: (i) a use of cash from inventory, due to the timing of orders from our customers; and (ii) the timing of interest payments on our long-term debt and timing of payments to our vendors, partially offset by a source of cash from accounts receivables due to the timing of collections from and sales to our customers.

Net cash used in operating activities of continuing operations was $13.0 million in the first nine months of 2014, primarily due to: (i) a use of cash of $6.3 million from working capital; (ii) pension and postretirement plan contributions of $11.5 million; and (iii) cash payments made related to restructuring plans, net of cash restructuring expense, of $5.8 million. The use of working capital primarily resulted from: (i) a use of cash from other working capital changes primarily due to certain vendor arrangements; and (ii) a use of cash from accounts receivables due to the timing of collections from and sales to our customers. This use of cash was partially offset by our net loss adjusted for non-cash items of $9.9 million.

Cash provided by operating activities is generally sufficient to meet daily disbursement needs. On days when our cash receipts exceed disbursements, we reduce our revolving credit balance or place excess funds in conservative, short-term investments until there is an opportunity to pay down debt. On days when our cash disbursements exceed cash receipts, we use invested cash balances and/or our revolving credit to fund the difference. As a result, our daily revolving credit balance fluctuates depending on working capital needs. Regardless, at all times we believe we have sufficient liquidity available to us to fund our cash needs.

Net Cash Provided By Operating Activities of Discontinued Operations. Represents the net cash provided by operating activities of our Discontinued Operations.

Net Cash Used In Investing Activities of Continuing Operations. Net cash used in investing activities of continuing operations was $17.6 million in the first nine months of 2015, primarily resulting from capital expenditures of $19.2 million, and $2.0 million of cash used in the acquisition of Asendia during the third quarter. This was partially offset by cash proceeds from the Label transactions of $2.2 million, and the sale of property, plant and equipment of $1.5 million.

Net cash used in investing activities of continuing operations was $22.5 million in the first nine months of 2014, primarily resulting from: (i) capital expenditures of $22.3 million; and (ii) the purchase of an investment of $2.0 million. These uses of cash were offset in part by proceeds received from the sale of property, plant and equipment of $1.8 million.

Our debt agreements limit capital expenditures to $45.0 million in 2015 plus any proceeds received from the sale of property, plant and equipment and, if certain conditions are satisfied, any unused permitted amounts from 2014. We estimate that we will spend approximately $5.0 million on capital expenditures for the remainder of 2015, after considering proceeds from the sale of property, plant and equipment. Our primary sources for our capital expenditures are cash generated from operations, proceeds from the sale of property, plant and equipment, and financing capacity within our current debt arrangements. These sources of funding are consistent with prior years’ funding of our capital expenditures.
Net Cash Used In Investing Activities of Discontinued Operations. Represents the net cash used in our Discontinued Operations related to investing activities. In the first nine months of 2014, the cash provided by discontinued investing activities of $3.3 million is comprised of net cash proceeds received in 2014 related to the sale of Custom Envelope, as well as capital expenditures made by our Packaging Business.

Net Cash Provided By Financing Activities. Net cash provided by financing activities of continuing operations was $2.8 million in the first nine months of 2015, primarily due to net borrowings of $30.4 million under our ABL Facility, partially offset by: (i) the extinguishment of $22.6 million of our 11.5% Notes; (ii) various repayments on other long-term debt totaling $3.3 million; and (iii) the payment of $1.3 million of financing-related costs and expenses.

Net cash provided by financing activities of continuing operations was $33.1 million in the first nine months of 2014, primarily due to: (i) net borrowings of $26.1 million under our ABL Facility; and (ii) net cash proceeds from the 6.000% Notes and 8.500% Notes and the related refinancing of the Term Loan Facility and 8.875% Notes, after payment of financing-related costs and expenses. These sources of cash were partially offset by: (i) the repayment in full of our Unsecured Term Loan of $10.0 million; (ii) the payment of other long-term debt of $6.1 million; and (iii) the extinguishment of $1.4 million of our 11.5% Notes.

Net Cash Used In Financing Activities of Discontinued Operations. Represents the net cash used in financing activities of our Discontinued Operations.


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Long-Term Debt. Our total outstanding long-term debt, including current maturities, was approximately $1.2 billion as of September 26, 2015, an increase of $9.4 million from December 27, 2014. This increase was primarily due to net borrowings of $30.4 million under our ABL Facility during the first nine months of 2015, partially offset by the repayment of $22.6 million of our 11.5% Notes. As of September 26, 2015, approximately 86% of our debt outstanding was subject to fixed interest rates. As of October 26, 2015, we had approximately $51.4 million of borrowing availability under our ABL Facility. From time to time, we may seek to refinance our debt obligations as business needs and market conditions warrant.

Note Repurchases

We may from time to time seek to purchase our outstanding notes in open market purchases, privately negotiated transactions or other means. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

During the nine months ended September 26, 2015, we extinguished $22.6 million of our 11.5% Notes.

Letters of Credit
 
As of September 26, 2015, we had outstanding letters of credit of approximately $19.2 million related to performance and payment guarantees. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant.

Credit Ratings

Our current credit ratings are as follows:
Rating Agency
 
Corporate
Rating
 
6.000% Notes
 
8.500% Notes
 
11.5%
Notes
 
Outlook
 
Last Update
Moody’s
 
Caa1
 
B3
 
Caa2
 
Caa3
 
Stable
 
June 2014
Standard & Poor’s
 
B-
 
B
 
CCC
 
CCC
 
Stable
 
June 2014
In June 2014, Moody's Investors Services, which we refer to as Moody's, affirmed our Corporate Rating and the ratings on our 11.5% Notes. Additionally, they rated the 6.000% Notes and 8.500% Notes for the first time. In June 2014, Standard & Poor's Ratings Services, which we refer to as Standard & Poor's, affirmed our Corporate Rating and the ratings on our 11.5% Notes. Additionally, they rated the 6.000% Notes and the 8.500% Notes for the first time. The detail of all current ratings has been provided in the table above.
The terms of our existing debt do not have any rating triggers that impact our funding availability or influence our daily operations, including planned capital expenditures. We do not believe that our current ratings will unduly influence our ability to raise additional capital if and/or when needed. Some of our constituents closely track rating agency actions and would note any raising or lowering of our credit ratings; however, we believe that along with reviewing our credit ratings, additional quantitative and qualitative analysis must be performed to accurately judge our financial condition.
    
As of September 26, 2015, we were in compliance with all covenants under our long-term debt.

We expect that our internally generated cash flows and financing available under our ABL Facility will be sufficient to fund our working capital needs for the next twelve months; however, this cannot be assured.

Seasonality 
Our envelope market and certain segments of the direct mail market have historically experienced seasonality with a higher percentage of volume of products sold to these markets during the fourth quarter of the year, primarily related to holiday purchases. Our office product envelope business historically has experienced seasonality during the late summer months in advance of back to school campaigns.
Our print plants experience seasonal variations. Revenues associated with consumer publications, such as holiday catalogs and automobile brochures tend to be concentrated from July through October. Revenues from annual reports are generally concentrated from February through April. Revenues associated with the educational and scholastic market and promotional

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materials tend to decline in the summer. As a result of these seasonal variations, some of our print operations operate at or near capacity at certain times throughout the year.
Our general label business has historically experienced a seasonal increase in net sales during the first and second quarters of the year, primarily resulting from the release of our product catalogs to the trade channel customers and our customers’ spring advertising campaigns. Our prescription label business has historically experienced seasonality in net sales due to cold and flu seasons, generally concentrated in the fourth and first quarters of the year. As a result of these seasonal variations, some of our label operations operate at or near capacity at certain times throughout the year.

New Accounting Pronouncements
 
We are required to adopt certain new accounting pronouncements. See Note 1 to our condensed consolidated financial statements included herein.
 
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 Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the SEC. In addition, our earnings conference calls are archived for replay on our website.


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Item 3. 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 our results of operations and financial position.

As of September 26, 2015, we had variable rate debt outstanding of $177.4 million. A change of 1% to the current London Interbank Offered Rate, which we refer to as LIBOR, would have a minimal impact to our interest expense.

Our changes in foreign currency exchange rates are managed through normal operating and financing activities. We are exposed to market risk for changes in foreign currency exchange rates, primarily the Indian rupee. For the three and nine months ended September 26, 2015, a uniform 10% strengthening of the United States dollar relative to the local currency of our foreign operations would have had a minimal impact to our sales and operating income.

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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of September 26, 2015. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 26, 2015, in order to provide reasonable assurance that information required to be disclosed in our filings under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
 
Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in the Exchange Act Rule 13a-15(f) and 15d-15(f)) during the quarter ended September 26, 2015, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.


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PART II. OTHER INFORMATION

Item 1. 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 effect on our consolidated financial statements.

In the case of administrative proceedings related to environmental matters involving governmental authorities, we do not believe that any imposition of monetary damages or fines would be material.

Item 1A. Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk factors" in our Annual Report on Form 10-K for the year ended December 27, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. 


Item 6. Exhibits
 
 
 
Exhibit Number
Description
 
 
 
2.1
 
Stock Purchase Agreement dated as of July 17, 2007, among Cenveo Corporation, Commercial Envelope Manufacturing Co. Inc. and its shareholders—incorporated by reference to Exhibit 2.1 to registrant’s current report on Form 8-K filed July 20, 2007.
 
 
 
3.1
 
Articles of Incorporation—incorporated by reference to Exhibit 3(i) of the registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 1997, filed August 14, 1997.
 
 
 
3.2
 
Articles of Amendment to the Articles of Incorporation dated May 17, 2004—incorporated by reference to Exhibit 3.2 to registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2004, filed August 2, 2004.
 
 
 
3.3
 
Amendment to Articles of Incorporation and Certificate of Designations of Series A Junior Participating Preferred Stock of the registrant dated April 20, 2005—incorporated by reference to Exhibit 3.1 to registrant’s current report on Form 8-K, filed April 21, 2005.
 
 
 
3.4
 
Bylaws as amended and restated effective March 31, 2014—incorporated by reference to Exhibit 3.2 to registrant’s current report on Form 8-K, filed April 4, 2014.
 
 
 
4.1
 
Indenture, dated as of March 28, 2012, among the Company, Cenveo Corporation, the other guarantors named therein and U.S. Bank National Association, as Trustee, relating to the 11.5% Notes—incorporated by reference to Exhibit 4.3 to registrant's current report on Form 8-K filed March 30, 2012.
 
 
 
4.2
 
Form of Guarantee issued by the Company and the other guarantors named therein relating to the 11.5% Notes—incorporated by reference to Exhibit 4.4 to registrant's current report on Form 8-K filed March 30, 2012.
 
 
 
4.3
 
Registration Rights Agreement, dated as of March 28, 2012, among the Company, Cenveo Corporation, the other guarantors named therein and the initial purchasers named therein relating to the 11.5% Notes—incorporated by reference to Exhibit 4.7 to registrant's current report on Form 8-K filed March 30, 2012.
 
 
 
4.4
 
Indenture, dated as of March 28, 2012, by and among the Company, Cenveo Corporation, the other guarantors named therein and U.S. Bank National Association, as Trustee, relating to the 7% Notes—incorporated by reference to Exhibit 4.5 to registrant's current report on Form 8-K filed March 30, 2012.
 
 
 
4.5
 
Form of Guarantee issued by the Company and the other guarantors named therein relating to the 7% Notes—incorporated by reference to Exhibit 4.6 to registrant's current report on Form 8-K filed March 30, 2012.
 
 
 

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Item 6. Exhibits
4.6
 
Indenture, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein and The Bank of New York Mellon, as Trustee and Collateral Agent, relating to the 6.000% Senior Priority Secured Notes due 2019--incorporated by reference to Exhibit 4.1 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
4.7
 
Form of Guarantee issued by Cenveo, Inc. and the other guarantors named therein relating to the 6.000% Senior Priority Secured Notes due 2019--incorporated by reference to Exhibit 4.2 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
4.8
 
Indenture, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein and The Bank of New York Mellon, as Trustee and Collateral Agent, relating to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.3 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
4.9
 
Form of Guarantee issued by Cenveo, Inc. and the other guarantors named therein relating to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.4 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
4.10
 
Intercreditor Agreement, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein, Bank of America, N.A., as ABL Agent, and The Bank of New York Mellon, as Collateral Agent with respect to the 6.000% Senior Priority Notes due 2019--incorporated by reference to Exhibit 4.5 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
4.11
 
Intercreditor Agreement, dated as of June 26, 2014, by and among Cenveo, Inc., Cenveo Corporation, the other guarantors named therein, Bank of America, N.A., as ABL Agent, The Bank of New York Mellon, as Collateral Agent with respect to the 6.000% Senior Priority Notes due 2019, and The Bank of New York Mellon, as Collateral Agent with respect to the 8.500% Junior Priority Secured Notes due 2022--incorporated by reference to Exhibit 4.6 to registrant's current report on Form 8-K filed July 1, 2014.
 
 
 
31.1*
 
Certification by Robert G. Burton, Sr., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
 
Certification by Scott J. Goodwin, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1**
 
Certification of the Chief Executive Officer and of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS*
 
XBRL Instance Document.
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
__________________________
*
Filed herewith.
**
Furnished herewith.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado, on November 18, 2015.
 

 
CENVEO, INC.
 
 
 
 
 
 
By:
/s/ Robert G. Burton, Sr.
 
 
Robert G. Burton, Sr.
 
 
Chairman and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
/s/ Scott J. Goodwin
 
 
Scott J. Goodwin
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and
 
 
Principal Accounting Officer)


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