Cenveo Reports Q1 Net Sales of $432.8M, Plans to Address 2017 Unsecured Debt
STAMFORD, Conn. — May 12, 2016 — Cenveo Inc. (NYSE: CVO) has announced results for the three months ended April 2, 2016, and earlier announced the launch of an exchange offer for all 11.5% unsecured notes maturing 2017 along with other capital structure solutions. The reported results for all periods presented exclude the operating results of its Packaging operating segment as well as its one top-sheet lithographic print operation, collectively referred to as the Packaging Business, as it has been classified in Cenveo's condensed consolidated financial statements as discontinued operations.
Robert Burton Sr., chairman and CEO, states, "We are very pleased with our performance during the first quarter, in which we achieved organic revenue and Adjusted EBITDA growth compared to last year. Our envelope business continued to deliver margin expansion, and direct mail volumes remained strong. We also saw growth in our print business as our diversified product offerings drove year-over-year growth. We are also pleased with the significant progress that we have made in addressing our capital structure as evidenced by the extinguishment of over $44 million in debt during the recent quarter and the exchange offer announced this morning. We believe the closing of the exchange offer, combined with other capital structure solutions, will help achieve several of our short-term objectives. Those goals included extending our 2017 unsecured notes and ABL maturities, reducing our leverage and meaningfully improving our cash flow by reducing interest expense, all while maintaining or enhancing our liquidity and current operating performance."
Results of Operations Overview
The Company generated net sales of $432.8 million for the three months ended April 2, 2016, compared to $429.7 million for the same period last year, an increase of 0.7%. The increase in net sales was driven by higher sales from direct mail envelope and commercial print products, partially offset by lower sales from our label operations.
Operating income was $17.0 million for the three months ended April 2, 2016, compared to operating income of $17.8 million for the same period last year, a decline of 4.4%. The decline was primarily due to restructuring charges related to our plans to exit our coating operations and the write down of an investment in our label segment, which were meaningfully offset by our improved operating performance within our envelope and commercial print businesses. Non-GAAP operating income was $23.5 million for the three months ended April 2, 2016, compared to income of $22.7 million for the same period last year. A reconciliation of operating income to non-GAAP operating income is presented in the attached tables.
For the three months ended April 2, 2016, the Company had income from continuing operations of $13.0 million, or $0.17 per diluted share, compared to a loss of $8.2 million, or $0.12 per diluted share, for the same period last year, on a GAAP basis. Income from continuing operations in 2016 was primarily driven by a $21.6 million gain recognized upon the extinguishment of $34.5 million of our 7% senior exchangeable notes due 2017 (the "7% Notes") and $10.0 million of our 11.5% senior notes due 2017 (the "11.5% Notes") during the quarter. Non-GAAP loss from continuing operations was $1.7 million, or $0.03 per diluted share, for the three months ended April 2, 2016, compared to a loss of $3.2 million, or $0.05 per diluted share, for the same period last year. A reconciliation of income (loss) from continuing operations to non-GAAP loss from continuing operations is presented in the attached tables.
Adjusted EBITDA was $35.0 million and $34.5 million for the three months ended April 2, 2016 and March 28, 2015, respectively. The increase over the prior year is primarily attributable to operating improvements in our envelope and print operations given higher sales volumes and prior year consolidation plans and cost actions. A reconciliation of net loss to Adjusted EBITDA is presented in the attached tables.
Cash flow used in operating activities of continuing operations for the three months ended April 2, 2016 was $11.4 million, compared to a use of cash of $15.5 million for the same period last year. During the first quarter of 2016, this was primarily due to a use of cash of $24.2 million from working capital, resulting from 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, our operating performance and inventory management initiatives.
During the first quarter of 2016, we also completed the sale of Cenveo's Packaging Business for cash proceeds of $94.6 million. Additionally, in the first quarter of 2016, we continued to address the capital structure by repurchasing a significant portion of its higher interest rate debt instruments. During the quarter, Cenveo repurchased $34.5 million of our 7% Notes, and $10.0 million of our 11.5% Notes. As a result of these repurchases, the firm recorded a total gain on early extinguishment of debt of $21.6 million. In addition, as a result of these strategic transactions, Cenveo utilized over $42.0 million of its federal net operating loss carryforwards.
Plans to Address our 2017 Maturities
On May 11, 2016, Cenveo announced a series of transactions that, if consummated, the firm believes will ultimately address its 2017 unsecured notes maturities, while amending and extending its current ABL facility. Additionally, these transactions will significantly improve Cenveo's capital structure by extending its May 2017 unsecured notes maturities, lowering its annual cash interest payments, and reducing its overall debt leverage. These transactions include:
- An offer to exchange its outstanding 11.5% unsecured notes for newly issued 6.000% Senior Unsecured Notes due 2024 (the "New Notes") and warrants (the "Warrants") to purchase shares of its common stock at $1.50 per share for a total number of shares equivalent to 16.6% of its currently outstanding shares. To date, Cenveo has entered into support agreements with holders and affiliated holders of approximately 80% aggregate principal amount of the 11.5% Notes. For each $1,000 principal amount of 11.5% Notes validly tendered, holders will receive $700 aggregate principal amount of the New Notes and a proportionate number of Warrants.
- An agreement pursuant to which Cenveo would repurchase from a single seller no later than January 31, 2017, $37.5 million of its 7.0% senior exchangeable notes due 2017 against payment in cash of $600, along with accrued and unpaid interest, for each $1,000 principal amount thereof and warrants to purchase 3.3% of its currently outstanding shares.
- An amendment and extension of its ABL facility ("ABL Amendment"), which would include a reduction in commitments from $240 million to $190 million and an extension of maturity to 2021.
- An agreement to sell to a single purchaser at face value a new $50 million secured note with a 5.5 year maturity (with a springing maturity of May 2019 ahead of its 6.000% senior priority secured notes due 2019 under certain circumstances), bearing interest at 4.0% annually. Such new secured note would be junior to the ABL facility.
These announced transactions remain subject to, and conditional upon, the satisfaction or waiver of certain conditions. Please refer to Cenveo's press release issued earlier for additional details.
Burton concludes, "As we enter the second quarter, we are encouraged by our operational results and progress over the last five quarters and also with our potential capital structure solutions. We will continue to look to improve our margins and cash flow generation as the year progresses. Our efforts to date this year put us in a position to achieve our 2016 financial goals and we reiterate our 2016 full year guidance. I look forward to updating our investors on our conference call tomorrow."