Cenveo Reports A Net Loss in Third Quarter of 2017

STAMFORD, Conn. - November 9, 2017 - Cenveo, Inc. reported financial results for the three and nine months ended September 30, 2017.  The reported results exclude the operating results of our Quality Park office product envelope business, which we refer to as the Office Products Business, that was sold in the fourth quarter of 2017, and our packaging operating segment as well as our top-sheet lithographic print operation, collectively referred to as our Packaging Business, which was sold during the first quarter of 2016. Both businesses have been classified in our consolidated financial statements as discontinued operations.

Third Quarter 2017 Versus Third Quarter 2016 Overview

• Net sales of $329.5 million compared to $382.7 million.
• Net loss of $28.1 million compared to net income of $9.4 million.
• Adjusted EBITDA₍₁₎ of $24.3 million compared to $37.8 million.
• Net cash used in operating activities of continuing operations of $5.1 million compared to cash provided by operating activities of less than $0.1 million.

(1) Adjusted EBITDA is a Non-GAAP Measure. See Use of Non-GAAP Measures and the tables that follow for a reconciliation of GAAP to Non-GAAP Measures.

Management Commentary

Robert Burton Sr.

"The operating environment we experienced during the first half of the year continued throughout the third quarter. We were again impacted by weakness in our direct mail business driven by softness from our financial institution customers due to lower customer acquisition related mailings," says Robert G. Burton, Sr., chairman and CEO of Cenveo. These results were partially offset by the positive effects of our 2017 Profitability Improvement Plan. We are very pleased with the implementation progress and we are on pace to achieve our $65 million target that we announced earlier this year. We are currently working to address our capital structure, particularly our August 2019 maturity, and we look forward to sharing our plans with our investors at the appropriate time."

Burton continues, "We are also very pleased to announce that Cenveo has been awarded the 2020 U.S. Census printing and mailing contract. This multi-year, $61 million contract is one of the largest printing and mailing contracts ever awarded by the U.S. Government Publishing Office. We are excited and committed to partner with the U.S. Census team and we are confident in our ability to deliver this significant and unique program."

Sale of Office Products Business

Over the course of the second and third quarters of 2017, we have been actively marketing the sale our Office Products Business. On November 8, 2017, we sold our Office Products Business, which we had expected to generate approximately $120 million of net sales and approximately $9 million of Adjusted EBITDA in our 2017 initial guidance. As a result of the sale, the financial results of the Office Products Business are accounted for as discontinued operations. Our historical financial statements have been retroactively adjusted to give recognition to the discontinued operations for all periods presented.

Financial Results

Net sales in the third quarter of 2017 were $329.5 million compared to $382.7 million in the same period last year, a decline of 13.9%. The Company generated net sales of $1.01 billion for the nine months ended September 30, 2017, compared to $1.16 billion for the same period last year, a decline of 13.1%. The sales decline for both the three and nine month periods was primarily driven by: (i) lower sales in the envelope segment, primarily due to lower direct mail demand primarily from our financial institution customers and lower demand in our wholesale and generic transactional envelope product lines primarily due to marketplace trends; (ii) lower sales volumes in the commercial print group and the publisher services group, primarily driven by lower customer demand and continued pricing pressures; and (iii) lower sales in the label segment, primarily due to the decision to exit our coating operation which was completed in the second quarter of 2016, and lower sales driven by customer demand and product mix changes.

Operating loss was $0.5 million for the three months ended September 30, 2017, compared to operating income of $20.2 million in the same period last year. Operating income was $22.6 million for the nine months ended September 30, 2017, compared to operating income of $51.9 million for the same period last year, a decline of 56.5%. The decline during the three months ended September 30, 2017 was primarily due to lower gross profit resulting from lower sales volumes and intangible asset impairments of $7.7 million driven by our current and expected future operating results for certain product lines.

The declines in the nine months ended September 30, 2017 were primarily due to lower gross profit resulting from lower sales volumes, the impact of the decision to exit the coating operation, intangible asset impairments of $7.7 million driven by our current and expected future operating results for certain product lines, and higher restructuring and other charges resulting from the 2017 Profitability Improvement Plan. The declines in both periods are partially offset by the benefit of lower selling, general and administrative expenses due to our cost reduction initiatives in connection with the 2017 Profitability Improvement Plan and lower commission expense due to lower sales volumes.

Non-GAAP operating income was $12.9 million for the three months ended September 30, 2017, compared to non-GAAP operating income of $24.8 million for the same period last year. Non-GAAP operating income was $50.0 million for the nine months ended September 30, 2017, compared to $65.4 million for the same period last year. A reconciliation of all non-GAAP figures are reported in the tables below.

For the three months ended September 30, 2017, the Company had a loss from continuing operations of $19.4 million, or $2.27 per diluted share, compared to income of $8.1 million, or $0.92 per diluted share, for the same period last year. For the nine months ended September 30, 2017, the Company had a loss from continuing operations of $28.9 million, or $3.38 per diluted share, compared to income of $65.1 million, or $6.84 per diluted share, for the same period last year.

Income during our 2016 reported periods was primarily driven by gains on the early extinguishment of debt of $7.4 million and $80.3 million during the three and nine months ended October 1, 2016, respectively, offset partially by the changes noted above to our operating (loss) income. Non-GAAP loss from continuing operations was $7.0 million, or $0.82 per diluted share, for the three months ended September 30, 2017, compared to income of $5.2 million, or $0.58 per diluted share, for the same period last year. Non-GAAP loss from continuing operations was $8.9 million, or $1.04 per diluted share, for the nine months ended September 30, 2017, compared to a loss of $1.5 million, or $0.18 per diluted share, in the same period last year. A reconciliation of (loss) income from continuing operations to non-GAAP (loss) income from continuing operations is presented in the attached tables.

Net loss was $28.1 million for the three months ended September 30, 2017, compared to net income of $9.4 million for the same period last year. For the nine months ended September 30, 2017, net loss was $38.6 million, compared to net income of $68.2 million for the same period last year. Adjusted EBITDA was $24.3 million for the three months ended September 30, 2017, compared to $37.8 million for the same period last year. Adjusted EBITDA was $84.6 million for the nine months ended September 30, 2017, compared to $102.5 million for the same period last year.

The significant changes in our Adjusted EBITDA were due to lower gross profit resulting from lower sales volumes and the exit of our coating operation accounting for a reduction of approximately $20.0 million and $37.9 million for the three and nine months ended September 30, 2017, respectively. The declines were partially offset by our profit improvement initiatives, which accounted for an increase of approximately $6.9 million and $18.0 million for the three and nine months ended September 30, 2017, respectively, primarily driven by our operational efficiency projects and position reductions across our operating platform.

Cash flow used in operating activities of continuing operations for the third quarter 2017 was $5.1 million, compared to less than $0.1 million provided by operating activities of continuing operations for the same period last year. Cash flow used in operating activities of continuing operations for the nine months ended September 30, 2017, was $6.2 million, compared to $3.3 million provided by operating activities of continuing operations for the same period last year. The declines in both periods were primarily due to changes in working capital, particularly the timing of payments to vendors and higher inventories due to inventory needs during plant consolidations, partially offset by sales to and collections from our customers.

At September 30, 2017, cash and cash equivalents totaled $6.3 million, compared to $5.5 million at December 31, 2016. Total outstanding long-term debt, including current maturities, was approximately $1.1 billion as of September 30, 2017, an increase of $40.4 million from December 31, 2016, primarily due to net borrowings on our asset-based revolving credit facility, as well as the initiation of certain equipment financing arrangements.

2017 Outlook

"While we are disappointed with our operating results for the first nine months of the year, we remain committed to our longer term strategy of cost containment, growing our market share, and addressing our capital structure," Burton notes. "After considering the sale of our Office Product Business, our operating results through the first nine months, and our current view of the fourth quarter, we believe we will achieve Net sales of $1.315 billion to $1.330 billion and Adjusted EBITDA of $110 million to $115 million for the full year 2017."

Burton concludes, "Despite the lower guidance, we believe we will still generate positive Adjusted Free Cash Flow for the full year 2017. Lastly, we currently have liquidity of over $40 million, which we anticipate will improve during the remainder of the year given the fourth quarter is expected to be our heaviest cash flow generation quarter of our year, along with the net proceeds from the sale of our Office Product Business. We look forward to discussing our outlook for the remainder of 2017 and an initial view into our expectations for 2018 on our call tomorrow morning."

Source: Cenveo.