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TMCNet:  CENVEO, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[May 07, 2014]

CENVEO, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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 28, 2013, which we refer to as our 2013 Form 10-K. Item 7 of our 2013 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of March 29, 2014.


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 industries, 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; and (xvi) any failure, interruption or security lapse of our information technology systems. 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 includes envelope converting, commercial printing, label manufacturing and specialty packaging. We operate a global network of strategically located manufacturing facilities, serving a diverse base of over 100,000 customers.

Our business strategy has been, and continues to be, focused on improving sales performance, pursuing and integrating strategic acquisitions, improving our cost and 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 and packaging segment. During the fourth quarter of 2013, we completed a realignment of our segments as a result of a change in management reporting and strategy. Previously, we reported our segments as the print and envelope segment and the label and packaging segment.

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 49.3% of our net sales for the three months ended March 29, 2014.

28 -------------------------------------------------------------------------------- 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 distributors.

Print. We are one of the leading commercial printers in North America. Our print segment represented approximately 26.2% of our net sales for the three months ended March 29, 2014.

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 and Packaging. We are a leading label manufacturer and the largest North American prescription label manufacturer for retail pharmacy chains. On December 31, 2012, we added to our label business with the acquisition of Express Label Company, which we refer to as Express Label. Our specialty packaging business currently focuses on specialty folded carton packaging and shrink-sleeve packaging. Our label and packaging segment represented approximately 24.5% of our net sales for the three months ended March 29, 2014.

Our label and packaging 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 within the 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. We produce premium, high-quality promotional packaging offerings including folded carton and full body shrink sleeves. Our primary customers for our specialty packaging products are pharmaceutical, apparel, neutraceutical and other large, multinational consumer product companies.

Consolidated Operating Results This MD&A includes an overview of our condensed consolidated results of operations for the three months ended March 29, 2014, and March 30, 2013, followed by a discussion of the results of operations of each of our reportable segments for the same periods. Our results for the three months ended March 29, 2014, include the operating results of National. Our results for the three months ended March 30, 2013, do not include the operating results of National.

2014 Outlook The print-related industries are highly fragmented and extremely competitive due to over-capacity and pricing pressures. We believe these factors, combined with a slow general economic recovery, will continue to impact our results of operations in 2014.

Our current management focus is on the following areas: Improving Sales Performance Our sales focus has been, and will continue to be, on our customers' experience across each of our businesses, ensuring we meet our customers' demands. We seek to expand our relationship with them through cross-selling initiatives available within our platform. During 2013, we implemented a customer relationship management tool across our entire sales platform, and we focused on our e-commerce platform through both capital investments and incremental headcount.

We have been successful in our recruiting efforts focusing on attracting not only talented individuals with experience in our current business lines, but also individuals with experience in complementary industry channels. We expect these focus points, along with our expanded geographic presence from the acquisition of certain assets of National, will allow us to experience modest sales growth despite operating in challenging industries and an uncertain economy.

In addition, the uncoated freesheet paper market, which is the primary input for our envelope and certain other products, experienced supply reductions beginning in the fourth quarter of 2013, and into the first quarter of 2014. As a result, our suppliers announced price increases which became effective for us during our fourth quarter of 2013. We began to pass along these increases, 29 -------------------------------------------------------------------------------- as well as other ancillary raw material costs, which we have not been able to pass along to our envelope customers over the past two years, in the fourth quarter of 2013. Additionally, during the first quarter of 2014, our paper suppliers announced a second round of price increases. While we have had early success passing along price increases, we cannot be assured we will be successful in every effort. Moreover, any increase in price may have an adverse impact on the product volume levels our customers have ordered previously.

Integrating Certain Assets of National We believe our acquisition of certain assets of National will provide much needed capacity reductions within the envelope industry. We developed and began implementing our plan to integrate those assets with our existing envelope operations in the third quarter of 2013. At this time, we expect this integration to take in excess of a year to complete due to the condition of National's operating platform and asset base at the time of acquiring these assets out of bankruptcy. To date, we have completed the consolidation of our west coast operations, which included the consolidation of three envelope facilities into one facility. Additionally, we have announced the consolidation of six additional envelope facilities into three facilities.

Improving our Cost Structure We continue to monitor our cost structure as marketplace conditions warrant, and expect to further reduce costs as necessary. In 2013 and through the first quarter of 2014, as a result of continued margin pressures from rising input costs and price pressures experienced within our envelope and print segments, we initiated plans to further reduce our cost structure. With the facility consolidations related to integrating National with our existing operations and select downsizing of certain commercial print assets, we believe our fixed costs will be reduced significantly as we exit 2014. We also continue to focus on strategic investments, capital expenditures and acquisitions in areas that we believe will strengthen our manufacturing platform and product offerings. We continue to review strategic alternatives for business lines we believe are underperforming or non-strategic to our future operations.

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 leverage loan and high yield debt market conditions.

Since we began this initiative, we have substantially 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 $57 million in transaction costs associated with the improvement of our capital structure. In December of 2013, primarily due to our acquisition of certain assets of National, we increased our borrowing capacity on our asset-based revolving credit facility, which we refer to as the ABL Facility, to $230 million from $200 million, supported by over $60 million of suppressed capacity underlying our ABL Facility. The accordion feature within our ABL Facility will, subject to the satisfaction of customary conditions, permit us to borrow up to an additional $20 million to further enhance our capital structure by using this lower interest rate vehicle to address our higher interest rate debt currently outstanding. In February of 2014, we amended the covenant requirements under our $360 million secured term loan facility, which we refer to as the Term Loan Facility, to eliminate the maximum consolidated leverage ratio and replace it with a maximum consolidated first lien leverage ratio, providing us additional financial flexibility in 2014. We believe the leverage loan and high yield debt markets remain robust. As such, we may pursue additional refinancing of our current outstanding debt to achieve any one of or a combination of: (i) reductions in future cash interest expense; (ii) extension of our existing maturities; or (iii) greater flexibility to address our subordinated debt instruments as they become callable in the future.

Discontinued Operations In September 2013, we completed the sale of our custom envelope business, which we refer to as Custom Envelope, within our envelope segment. To date, we have received net proceeds of $45.8 million, of which $1.0 million was received in the first quarter of 2014. In addition to these proceeds, $1.2 million of additional purchase price consideration has been held in escrow and will be paid subject to certain financial adjustments. The operating results of this divestiture are reported in discontinued operations in our condensed consolidated financial statements for all periods presented.

During the second quarter of 2013, we decided to exit the San Francisco market and closed a manufacturing facility within our print segment. The operating results of this manufacturing facility are reported in discontinued operations in our condensed consolidated financial statements for all periods presented.

Collectively, we refer to these businesses as the Discontinued Operations.

30 -------------------------------------------------------------------------------- Reportable Segments We operate three complementary reportable segments: the envelope segment, the print segment and the label and packaging segment.

See below for a summary of net sales and operating income for our reportable segments that we use internally to assess our operating performance. Our fiscal quarters end on the Saturday closest to the last day of the calendar month. Our three month reporting periods consisted of 13 weeks and ended on March 29, 2014, and March 30, 2013.

For the Three Months Ended March 29, 2014 March 30, 2013 (in thousands, except per share amounts) Net sales $ 490,119 $ 418,614 Operating income (loss): Envelope $ 9,806 $ 9,010 Print 1,240 1,007 Label and Packaging 10,193 11,544 Corporate (11,167 ) (9,883 ) Total operating income 10,072 11,678 Interest expense, net 27,910 29,575 Loss on early extinguishment of debt, net 18 127 Other (income) expense, net (509 ) 296 Loss from continuing operations before income taxes (17,347 ) (18,320 ) Income tax (benefit) expense (560 ) 2,170 Loss from continuing operations (16,787 ) (20,490 ) Income from discontinued operations, net of taxes 953 1,345 Net loss $ (15,834 ) $ (19,145 ) (Loss) income per share - basic: Continuing operations $ (0.25 ) $ (0.32 ) Discontinued operations 0.01 0.02 Net loss $ (0.24 ) $ (0.30 ) (Loss) income per share - diluted: Continuing operations $ (0.25 ) $ (0.32 ) Discontinued operations 0.01 0.02 Net loss $ (0.24 ) $ (0.30 ) 31-------------------------------------------------------------------------------- Net Sales Net sales increased $71.5 million, or 17.1%, in the first quarter of 2014, as compared to the first quarter of 2013. Sales in our envelope segment increased $75.2 million and sales in our print segment increased $1.2 million, which was partially offset by decreased sales of $4.9 million in our label and packaging segment.

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 decreased $1.6 million, or 13.8%, in the first quarter of 2014, as compared to the first quarter of 2013. This decrease was primarily due to a decrease in operating income from our label and packaging segment of $1.4 million and an increase in corporate expenses of $1.3 million, partially offset by increases in operating income from our envelope segment of $0.8 million and from our print segment of $0.2 million.

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 $1.7 million to $27.9 million in the first quarter of 2014, as compared to $29.6 million in the first quarter of 2013. The decrease was primarily due to: (i) principal repayments made on our Term Loan Facility, and our unsecured $50.0 million aggregate principal amount term loan due 2017, which we refer to as the Unsecured Term Loan, since the first quarter of 2013 using cash flow from operations and proceeds from the sale of Custom Envelope; and (ii) lower interest rates as a result of our debt refinancing in the second quarter of 2013. Interest expense in the first quarter of 2014 reflected average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 7.8%. This compares to average outstanding debt of approximately $1.2 billion and a weighted average interest rate of 8.7% in the first quarter of 2013.

We expect interest expense for the remainder of 2014 will be lower than the same period in 2013, which primarily relates to the refinancing completed in the second quarter of 2013.

Loss on Early Extinguishment of Debt In the first quarter of 2013, in connection with refinancing activities, we incurred a loss on early extinguishment of debt of $0.1 million, which related to unamortized debt issuance costs associated with the extinguishment of our 7.875% senior subordinated notes due 2013, which we refer to as the 7.875% Notes.

Income Taxes For the Three Months Ended March 29, 2014 March 30, 2013 (in thousands) Income tax (benefit) expense from U.S. operations $ (690 ) $ 2,044 Income tax expense from foreign operations 130 126 Income tax (benefit) expense $ (560 ) $ 2,170 Effective income tax rate 3.2 % (11.8 )% 32-------------------------------------------------------------------------------- Income Tax Expense In the first quarter of 2014, we had an income tax benefit of $0.6 million, compared to an income tax expense of $2.2 million in the first quarter of 2013.

The tax benefit for the first quarter of 2014 and the tax expense for the first quarter of 2013 primarily related to income taxes on our domestic operations.

Our effective tax rate in the first quarter of 2014 was lower than the federal statutory rate, primarily due to recording a valuation allowance charge of $4.7 million during the quarter against deferred tax assets generated in the quarter, primarily from pre-tax operating losses. Our effective tax rate in the first quarter of 2013 was lower than the federal statutory rate primarily due to non-deductible expenses and state income taxes.

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.

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 increased our valuation allowance related to those net deferred tax assets by $4.7 million to $108.0 million in the first three months of 2014. 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 first three months of 2014, our valuation allowance related to these deferred tax assets was unchanged at $7.4 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 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.

Income from Discontinued Operations, Net of Taxes As a result of exploring opportunities to divest certain non-strategic or underperforming businesses within our manufacturing platform, we decided to exit the San Francisco market and closed a manufacturing facility within the print segment in the second quarter of 2013. Additionally, in the third quarter of 2013, we completed the sale of Custom Envelope within the envelope segment. The results of operations and cash flows of these businesses are reflected within discontinued operations for all periods presented herein, including the related tax effects.

In the first quarter of 2014, income from Discontinued Operations was $1.0 million, which includes: (i) a gain recognized related to the sale of Custom Envelope of $0.8 million, net of tax expense of $0.5 million; and (ii) income from the operations of our Discontinued Operations of $0.2 million, net of tax expense of $0.1 million.

In the first quarter of 2013, income from Discontinued Operations was $1.3 million, which includes income from the operations of our Discontinued Operations of $1.3 million, net of tax expense of $0.9 million.

33 -------------------------------------------------------------------------------- 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 March 29, 2014 March 30, 2013 (in thousands) Segment net sales $ 241,671 $ 166,453 Segment operating income $ 9,806 $ 9,010 Operating income margin 4.1 % 5.4 %Restructuring and other charges $ 3,017 $ 1,140 Segment Net Sales Segment net sales for our envelope segment increased $75.2 million, or 45.2%, in the first quarter of 2014, as compared to the first quarter of 2013, primarily due to: (i) sales generated from the integration of certain assets of National with our operations, including the impact of work transitioned from our existing operations to National, as National was not included in our results in the first quarter of 2013; and (ii) higher sales revenues due to product mix changes and our ability to pass along paper price increases to certain customers. We anticipate continued improvement of net sales throughout 2014 mainly due to the integration of National with our existing operations and the pass-through of announced paper price increases to our customer base.

Segment Operating Income Segment operating income for our envelope segment increased $0.8 million, or 8.8%, in the first quarter of 2014, as compared to the first quarter of 2013.

The increase was primarily due to higher gross margin of $6.9 million, primarily due to increased sales volumes from the integration of certain assets of National with our operations, including the impact of work transitioned from our existing operations to National, as National was not included in our results in the first quarter of 2013. The increase was partially offset by: (i) higher selling, general and administrative expenses of $4.2 million in the first quarter of 2014, primarily due to higher commission expense from increased sales, expenses related to the integration of certain assets of National with our operations, and incremental expenses of National, as National was not included in our results in the first quarter of 2013; (ii) higher restructuring and other charges of $1.9 million due to the closure and consolidation of two envelope plants related to the integration of National with our existing operations; and (iii) disruption and increased energy costs due to weather-related issues.

Print For the Three Months Ended March 29, 2014 March 30, 2013 (in thousands) Segment net sales $ 128,397 $ 127,245 Segment operating income $ 1,240 $ 1,007 Operating income margin 1.0 % 0.8 % Restructuring and other charges $ 2,006 $ 981 Segment Net Sales Segment net sales for our print segment increased $1.2 million, or 0.9%, in the first quarter of 2014, as compared to the first quarter of 2013, primarily due to increased sales volumes from new account wins and from changes in product mix, partially 34 -------------------------------------------------------------------------------- offset by sales declines due to the closure of one print facility in the first quarter of 2014 and one print facility during the fourth quarter of 2013.

Segment Operating Income Segment operating income for our print segment increased $0.2 million, or 23.1%, in the first quarter of 2014, as compared to the first quarter of 2013. This increase was primarily due to higher gross margin of $2.0 million, primarily related to higher sales volumes and cost reduction actions. These increases were partially offset by: (i) higher restructuring and other charges of $1.0 million, primarily related to the closure of a print facility; and (ii) higher amortization expense on intangible assets of $0.8 million related to the accelerated retirement of certain trade names.

Label and Packaging For the Three Months Ended March 29, 2014 March 30, 2013 (in thousands) Segment net sales $ 120,051 $ 124,916 Segment operating income $ 10,193 $ 11,544 Operating income margin 8.5 % 9.2 %Restructuring and other charges $ 291 $ 275 Segment Net Sales Segment net sales for our label and packaging segment decreased $4.9 million, or 3.9%, in the first quarter of 2014, as compared to the first quarter of 2013.

Net sales from our label operations declined $6.7 million, primarily due to lower sales volumes from our specialty and custom products business, due to lower customer demand and weather-related issues. Net sales from our packaging operations increased $1.8 million, primarily due to increased sales volume from new account wins, partially offset by lower pricing due to product mix.

Segment Operating Income Segment operating income for our label and packaging segment decreased $1.4 million, or 11.7%, in the first quarter of 2014, as compared to the first quarter of 2013. The decrease was primarily due to higher selling, general and administrative expenses of $1.0 million in 2014, primarily due to our investments in e-commerce and information technology related to these businesses, and lower sales volumes in our label operations.

Corporate Expenses Corporate expenses include the costs of running our corporate headquarters.

Corporate expenses increased $1.3 million in the first quarter of 2014, as compared to the first quarter of 2013, primarily due to costs related to the integration of National.

Restructuring and Other Charges During the first three months of 2014, we implemented a cost savings initiative, which we refer to as the 2014 Plan, primarily focused on overhead cost eliminations, including headcount reductions and the potential closure of certain manufacturing facilities. Additionally, during the first three months of 2014, we continued implementing a cost savings initiative, which we refer to as the 2013 Plan, primarily focused on overhead cost eliminations, including headcount reductions and the potential closure of certain manufacturing facilities. We also continued implementing our plan to integrate certain assets of National, acquired in the third quarter of 2013, by consolidating two manufacturing facilities and a warehouse with our envelope platform.

During the first quarter of 2014, as a result of our restructuring and integration activities, we incurred $5.9 million of restructuring and other charges, which included $1.4 million of employee separation costs, $0.6 million of net non-cash charges on long-lived assets, equipment moving expenses of $0.6 million, lease termination expenses of $1.3 million, multi-employer pension withdrawal expenses of $0.7 million and building clean-up and other expenses of $1.3 million.

35 -------------------------------------------------------------------------------- During the first quarter of 2013, as a result of our restructuring and integration activities, we incurred $4.2 million of restructuring and other charges, which included $3.2 million of employee separation costs, $0.1 million of net non-cash charges on long-lived assets, equipment moving expenses of $0.3 million, lease termination expenses of $0.1 million, multi-employer pension withdrawal expenses of $0.1 million and building clean-up and other expenses of $0.4 million.

As of March 29, 2014, our total restructuring liability was $25.9 million, of which $5.9 million is included in other current liabilities and $20.1 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.

There were no goodwill or intangible asset impairments recorded in the three months ended March 29, 2014, and March 30, 2013.

Liquidity and Capital Resources Net Cash (Used In) Provided By Operating Activities of Continuing Operations.

Net cash used in operating activities of continuing operations was $3.4 million in the first three months of 2014, primarily due to: (i) a use of cash of $3.1 million from working capital; and (ii) pension and postretirement plan contributions of $3.3 million. The use of working capital primarily resulted from an increase of inventory to ensure minimal disruption as we integrate and consolidate our envelope platform, as well as the procurement of specific paper grades in advance of announced price increases. We also experienced a use of cash related to a vendor arrangement in connection with the acquisition of certain assets of National. This use of cash was partially offset by our net loss adjusted for non-cash items of $5.0 million.

Net cash provided by operating activities of continuing operations was $1.8 million in the first quarter of 2013, which was primarily due to our net loss adjusted for non-cash items of $2.1 million, and a source of cash of $3.1 million from working capital, primarily offset by pension and postretirement plan contributions, net of pension expense, of $2.6 million. The source of working capital primarily resulted from: (i) a source of cash from accounts receivables due to the timing of collections from and sales to our customers; and (ii) a source of cash from other working capital changes primarily due to the timing of interest payments on our outstanding debt. These sources of cash were offset in part by: (i) a use of cash from inventory; and (ii) a use of cash from accounts payable due to the timing of vendor payments.

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 (Used In) Provided By Operating Activities of Discontinued Operations.

Represents the net cash (used in)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 $10.8 million in the first three months of 2014, primarily resulting from: (i) capital expenditures of $9.0 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 $0.2 million.

Net cash used in investing activities of continuing operations was $11.0 million in the first quarter of 2013, primarily due to: (i) capital expenditures of $10.1 million; (ii) $5.1 million of cash consideration for the acquisition of Express Label; and (iii) the purchase of an investment of $1.7 million. These uses of cash were offset in part by proceeds received from the sale of property, plant and equipment of $5.9 million.

Our debt agreements limit capital expenditures to $45.0 million in 2014 plus any proceeds received from the sale of property, plant and equipment and, if certain conditions are satisfied, any unused permitted amounts from 2013. We estimate that we will spend approximately $30.0 million on capital expenditures in 2014, before 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 36 -------------------------------------------------------------------------------- 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 Provided By (Used In) Investing Activities of Discontinued Operations.

Represents the net cash provided by (used in) our Discontinued Operations related to investing activities. In the first three months of 2014, the cash provided by discontinued investing activities of $1.0 million is comprised of net cash proceeds received in 2014 related to the sale of Custom Envelope.

In the first three months of 2013, the cash used in discontinued investing activities of $0.2 million relates primarily to capital expenditures of our Discontinued Operations.

Net Cash Provided By Financing Activities of Continuing Operations. Net cash provided by financing activities of continuing operations was $15.1 million in the first three months of 2014, primarily due to net borrowings of $20.8 million under our ABL Facility, partially offset by: (i) various repayments on long-term debt totaling $3.1 million; and (ii) the payment of $2.3 million of financing-related costs and expenses.

Net cash provided by financing activities of continuing operations was $10.3 million in the first quarter of 2013, primarily due to: (i) proceeds from the issuance of our Unsecured Term Loan of $50.0 million; and (ii) borrowings under our $170 million revolving credit facility due 2014, which we refer to as the Revolving Credit Facility. These sources of cash were offset by: (i) the repayment of our 7.875% Notes of $67.8 million; (ii) the repayment of our Unsecured Term Loan of $7.0 million; (iii) the payment of $5.1 million of financing-related costs and expenses including an original issuance discount of $2.5 million on the issuance of our Unsecured Term Loan; (iv) repayment of our Term Loan B due 2016; and (v) repayment of other long-term debt.

Long-Term Debt. Our total outstanding long-term debt, including current maturities, was approximately $1.2 billion as of March 29, 2014, an increase of $17.0 million from December 28, 2013. This increase was primarily due to net borrowings of $20.8 million under our ABL Facility. As of March 29, 2014, approximately 60% of our debt outstanding was subject to fixed interest rates.

As of April 29, 2014, we had approximately $37.0 million of borrowing availability under our ABL Facility. From time to time, we may refinance our debt obligations as business needs and market conditions warrant.

In February 2014, we entered into an amendment to adjust, among other things, our covenant requirements under our Term Loan Facility. This amendment eliminated the maximum consolidated leverage ratio and replaced it with a maximum consolidated first lien leverage ratio, providing us additional financial flexibility. In connection with this amendment, we capitalized $1.5 million related to original issuance discount.

In the first quarter of 2013, we extinguished all of our 7.875% Notes. In connection with the extinguishment, we recorded a loss on early extinguishment of debt of approximately $0.1 million, all of which relates to the write-off of unamortized debt issuance costs.

Letters of Credit As of March 29, 2014, we had outstanding letters of credit of approximately $21.2 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: Term Corporate Loan 8.875% 11.5% Rating Agency Rating Facility Notes Notes Outlook Last Update Moody's Caa1 B2 Caa1 Caa3 Stable November 2013 Standard & Poor's B- B+ CCC+ CCC Stable February 2014 In November 2013, Moody's Investors Services, which we refer to as Moody's, lowered our Corporate Rating and the ratings on our Term Loan Facility, our 8.875% senior second lien notes due 2018, which we refer to as our 8.875% Notes and our 11.5% senior notes due 2017, which we refer to as the 11.5% Notes, one level. In February 2014, Standard & Poor's Ratings Services, which we refer to as Standard & Poor's, revised its ratings outlook to stable. The detail of all current ratings has been provided in the table above.

37 -------------------------------------------------------------------------------- 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 March 29, 2014, we were in compliance with all debt agreement covenants.

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 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.

Our packaging business has not historically experienced seasonal variations.

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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