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TMCNet:  VISANT CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[August 12, 2014]

VISANT CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements including, without limitation, statements concerning the conditions in our industry, expectations with respect to future cost savings, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts. These forward-looking statements are not historical facts, but rather predictions and generally can be identified by use of statements that include such words as "may", "might", "will", "should", "estimate", "project", "plan", "anticipate", "expect", "intend", "outlook", "believe" and other similar expressions that are intended to identify forward-looking statements and information. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. Actual results may differ materially from current expectations depending upon a number of factors affecting our businesses and the risks associated with the successful execution of the proposed Arcade Transaction and the proposed refinancing of our senior secured credit facilities. These factors include, without limitation, successful completion of the proposed transactions in the time period anticipated or at all, which is dependent on the parties' ability to satisfy certain closing conditions, and the ability to implement the refinancing in the time period anticipated or at all and on favorable terms, and, those identified under, Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 28, 2013, in addition to those discussed elsewhere in this report.


The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements: • our substantial indebtedness and our ability to service the indebtedness; • our ability to implement our business strategy in a timely and effective manner; • competitive factors and pressures; • our ability to consummate acquisitions and dispositions on acceptable terms and to integrate acquisitions successfully and to achieve anticipated synergies; • global market and economic conditions; • levels of customers' advertising and marketing spending, including as may be impacted by economic factors and general market conditions; • fluctuations in raw material prices; • our reliance on a limited number of suppliers; • the seasonality of our businesses; • developments in technology and related changes in consumer behavior; • the loss of significant customers or customer relationships; • Jostens' reliance on independent sales representatives; • our reliance on numerous complex information systems and associated security risks; • the amount of capital expenditures required at our businesses; • risks associated with doing business outside the United States; • the reliance of our businesses on limited production facilities; • actions taken by the U.S. Postal Service and changes in postal standards and their effect on our marketing services business, including as such changes may impact competition for our sampling systems; • labor disturbances; • environmental obligations and liabilities; • adverse outcome of pending or threatened litigation; • the enforcement of intellectual property rights; • the impact of changes in applicable law and regulations, including tax legislation; 28 -------------------------------------------------------------------------------- Table of Contents • the application of privacy laws and other related obligations and liabilities for our business; • control by our stockholders; • changes in market value of the securities held in our pension plans; and • our dependence on members of senior management.

We caution you not to place undue reliance on these forward-looking statements, and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. All forward-looking statements speak only as of the date they are made, are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements in light of new information, future events or otherwise, except as required by law. Comparisons of results for current and prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

GENERAL We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. Our parent company was created in October 2004 when affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") and affiliates of DLJ Merchant Banking Partners III, L.P. ("DLJMBP III" and, together with KKR, the "Sponsors") completed a series of transactions that combined Jostens, Von Hoffmann Corporation ("Von Hoffmann") and Arcade (the "Transactions"). Visant was formed to create a platform of businesses with leading positions in attractive end market segments and to establish a highly experienced management team that could leverage a shared services infrastructure and capitalize on margin and growth opportunities. Since 2004, we have developed a unified marketing and publishing services organization with a leading and differentiated approach in each of our segments. Our management team has created and integrated central services and management functions and has reshaped the business to focus on the most attractive and highest growth market opportunities.

We sell our products and services to end customers through several different sales channels, including independent sales representatives and dedicated employed sales forces. Our sales and results of operations are impacted by a number of factors, including general economic conditions, seasonality, cost of raw materials, school population trends, the availability of school funding, product and service offerings and quality and price. Visant (formerly known as Jostens IH Corp.) was originally incorporated in Delaware in 2003.

Our business has expanded through a number of acquisitions. These acquisitions have most recently included the acquisition of the capital stock of SAS Carestia ("Carestia") by Arcade on July 1, 2013. Headquartered in Grasse, France, Carestia is a producer of blotter cards, which are constructed for sampling fragrances, and other fragrance marketing solutions, as well as decorated packaging solutions.

We have demonstrated our ability over the last nine years since our inception to execute acquisitions and dispositions that have allowed us to complement and expand our core capabilities, accelerate into market segment adjacencies, as well as enabled us to divest non-core businesses and deleverage. We anticipate that we will continue to pursue this strategy of consummating complementary acquisitions to support expansion of our product offerings and services, including to address marketplace dynamics, developments in technology and changing consumer behaviors, broaden our geographic reach and capture opportunities for synergies, as well as availing ourselves of strategic opportunities and market conditions for transacting businesses in the Visant portfolio.

Recent Developments On July 15, 2014, we announced that we had sold substantially all of the assets of our The Lehigh Press LLC ("Lehigh") subsidiary for $22.0 million. We applied the net proceeds from the sale to repayment of outstanding indebtedness under the Term Loan Credit Facility. As a result of the transaction Lehigh's obligation to make contributions under a multi-employer pension plan ceased, triggering an obligation by Lehigh to pay a withdrawal liability under the plan.

The amount and terms of payment have not been determined at this time.

On July 25, 2014, we announced that we had entered into a definitive agreement to combine our Arcade Marketing business with the Bioplan business of OCM Luxembourg Ileos Holdings S.à.r.l. to form a new strategic venture (the "Arcade Transaction"). The Arcade Transaction, which is subject to customary closing conditions and regulatory review, is expected to close by the beginning of the fourth quarter 2014. We expect to receive cash proceeds of approximately $325.0 million, which we intend to use for repayment of our outstanding indebtedness.

29 -------------------------------------------------------------------------------- Table of Contents Also on July 25, 2014, we announced that in connection with the expected delevering as a result of the proposed Arcade Transaction and in order to extend the current maturities of our senior secured credit facilities, we were launching a process to refinance our senior secured facilities, including our existing senior term loan and revolving credit facilities.

Our Segments Our three reportable segments as of June 28, 2014 consisted of: • Scholastic-provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions; • Memory Book-provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and • Marketing and Publishing Services-provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments.

We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in these businesses during the third and fourth quarters, including based on the timing of customers' advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Net sales of textbook components are impacted seasonally by state and local schoolbook purchasing schedules, which commence in the spring and peak in the summer months preceding the start of the school year. The seasonality of each of our businesses requires us to allocate our resources to manage our manufacturing capacity, which often operates at full or near full capacity during peak seasonal demand periods. Based on the seasonality of our cash flow, we traditionally borrow under our revolving credit facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers' advertising campaigns in anticipation of the holiday season generally increase.

Our net sales include sales to certain customers for whom we purchase paper. The price of paper, a primary material across most of our products and services, has been volatile over time and may cause swings in our net sales and cost of sales.

We generally are able to pass on increases in the cost of paper to our customers across most of our product lines at the time we are impacted by such increases.

The price of gold and other precious metals has been highly volatile since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. The volatility of metal prices has impacted, and could further impact, our jewelry sales metal mix. We have seen a continuing shift in jewelry metal mix from gold to lesser priced metals over the past several years, which we believe is in part attributable to the impact of significantly higher precious metal costs on our jewelry prices. To mitigate any continued volatility of precious metal costs and the impact on our manufacturing costs, we have entered into purchase commitments for gold which we believe will cover our needs for gold for the remainder of fiscal 2014 and a portion of 2015.

The continued uncertainty in market conditions and excess capacity that exists in the print and related services industry, as well as the variety of other advertising media with which we compete, have amplified competitive and pricing pressures, which we anticipate will continue for the foreseeable future. We continue to see the impact of restrictions on school budgets, which affects spending at the state and local levels, resulting in reduced spending for our Memory Book, Scholastic and elementary/high school publishing services products and services and heightened pricing pressure on our core Memory Book 30-------------------------------------------------------------------------------- Table of Contents products and services. The continued cautious consumer spending environment also contributes to more constrained levels of spending on purchases in our Memory Book and Scholastic segments made directly by the student and parent. Funding constraints have impacted textbook adoption cycles, which are being extended in many states due to fiscal pressures, continuing to affect orders being placed by our Publishing Services customers and volume in our elementary/high school publishing services products and services. Trade book publishing has been impacted by the shift towards digital books, which has negatively impacted our publishing services business in terms of fewer printed copies of books as well as shorter print runs. However, we believe that this trend has stabilized over the last 12 months. To address changes in technology, consumer behavior and user preferences, we have continued to diversify, expand and improve our product and service offerings and the manner in which we sell our products and services, including through improved e-commerce tools.

We seek to distinguish ourselves based on our capabilities, innovative service offerings to our customers, quality and organizational and financial strength.

In addition, to address the dynamics impacting our businesses, we have continued to implement efforts to reduce costs and drive operating efficiencies, including through the restructuring and integration of our operations and the rationalization of sales, administrative and support functions. We expect to initiate additional efforts focused on cost reduction and containment to address continued challenging marketplace conditions as well as competitive and pricing pressures demanding innovation and a lower cost structure.

For additional financial and other information about our operating segments, see Note 16, Business Segments, to our condensed consolidated financial statements included elsewhere herein.

Company Background On October 4, 2004, an affiliate of KKR and affiliates of DLJMBP III completed the Transactions, which created a marketing and publishing services enterprise through the consolidation of Jostens, Von Hoffmann and Arcade. The Transactions were accounted for as a combination of interests under common control.

As of August 5, 2014, affiliates of KKR and DLJMBP III held approximately 49.3% and 41.1%, respectively, of Holdco's voting interest, while each held approximately 44.8% of Holdco's economic interest. As of August 5, 2014, the other co-investors held approximately 8.4% of the voting interest and approximately 9.1% of the economic interest of Holdco, and members of management held approximately 1.2% of the voting interest and approximately 1.3% of the economic interest of Holdco (exclusive of exercisable options). Visant is an indirect wholly-owned subsidiary of Holdco.

CRITICAL ACCOUNTING POLICIES The preparation of interim financial statements involves the use of certain estimates that differ from those used in the preparation of annual financial statements, the most significant of which relate to income taxes. For purposes of preparing our interim financial statements, we utilize an estimated annual effective tax rate based on estimates of the components that impact the tax rate. Those components are re-evaluated each interim period, and, if changes in our estimates are significant, we modify our estimate of the annual effective tax rate and make any required adjustments in the interim period.

There have been no material changes to our critical accounting policies and estimates as described in Part I, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Recently Adopted Accounting Pronouncements On January 31, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-01 ("ASU 2013-01"), which clarifies the scope of the offsetting disclosure requirements. Under ASU 2013-01, the disclosure requirements would apply to derivative instruments accounted for in accordance with Accounting Standards Codification 815, Derivatives and Hedging ("ASC 815"), including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 became effective for interim and annual periods beginning on or after January 1, 2013.

Retrospective application is required for all comparative periods presented. Our adoption of this guidance did not have a material impact on our financial statements.

On February 5, 2013, the FASB issued Accounting Standards Update 2013-02 ("ASU 2013-02"), which amends existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. ASU 2013-02 became effective for interim and annual periods beginning on or after December 15, 2012, to be applied on a prospective basis. Our adoption of this guidance did not have a material impact on our financial statements.

31 -------------------------------------------------------------------------------- Table of Contents On February 28, 2013, the FASB issued Accounting Standards Update 2013-04 ("ASU 2013-04"), which requires entities to measure obligations resulting from joint and several liability arrangements, for which the total amount of the obligation is fixed at the reporting date, as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint and several arrangement and the total outstanding amount of the obligation for all joint parties. ASU 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity's fiscal year of adoption, with early adoption permitted. Our adoption of this guidance did not have a material impact on our financial statements.

On March 4, 2013, the FASB issued Accounting Standards Update 2013-05 ("ASU 2013-05"), which indicates that the entire amount of a cumulative translation adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been (1) the sale of a subsidiary or group of net assets within a foreign entity, and the sale represents the substantially complete liquidation of the investment in the foreign entity, (2) a loss of controlling financial interest in an investment in a foreign entity or (3) a step acquisition for a foreign entity. ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. Our adoption of this guidance did not have a material impact on our financial statements.

On July 17, 2013, the FASB issued Accounting Standards Update 2013-10 ("ASU 2013-10"), which amends ASC 815 to allow entities to use the federal funds effective swap rate, in addition to U.S. Treasury rates and LIBOR, as a benchmark interest rate in accounting for fair value and cash flow hedges in the United States. ASU 2013-10 also eliminates the provision in ASC 815 which prohibited the use of different benchmark rates for similar hedges except in rare and justifiable circumstances. ASU 2013-10 is effective prospectively for qualifying new hedging relationships entered into on or after July 17, 2013 and for hedging relationships redesignated on or after that date. Our adoption of this guidance did not have a material impact on our financial statements.

On July 18, 2013, the FASB issued Accounting Standards Update 2013-11 ("ASU 2013-11"), which provides guidance on the financial statement presentation of unrecognized tax benefits ("UTB") when a net operating loss ("NOL") carryforward, a similar tax loss or a tax credit carryforward exists. Under ASU 2013-11, an entity must present a UTB, or a portion of a UTB, in its financial statements as a reduction to a deferred tax asset ("DTA") for a NOL carryforward, a similar tax loss or a tax credit carryforward, except when (1) a NOL carryforward, a similar tax loss or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (2) the entity does not intend to use the DTA for this purpose. If either of these conditions exists, an entity should present a UTB in the financial statements as a liability and should not net the UTB with a DTA. This guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted.

The amendment should be applied to all UTBs that exist as of the effective date.

Entities may choose to apply the amendments retrospectively to each prior reporting period presented. Our adoption of this guidance did not have a material impact on our financial statements.

On April 10, 2014, the FASB issued Accounting Standards Update 2014-08 ("ASU 2014-08"), which amends the definition of a discontinued operation in ASC 205-20, Discontinued Operations ("ASC 205-20"), and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. ASU 2014-08 limits classification of a discontinued operation to a component or group of components disposed of or classified as held for sale which represents a strategic shift that has or will have a major impact on an entity's operations or financial results. ASU 2014-08 also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position. Before these amendments, ASC 205-20 neither required nor prohibited such presentation. ASU 2014-08 is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. We are currently evaluating the impact and disclosure under this guidance on our financial statements.

On May 28, 2014, the FASB issued Accounting Standards Update 2014-09 ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 applies to all contracts with 32-------------------------------------------------------------------------------- Table of Contents customers except those that are within the scope of other topics in the FASB codification. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016 for public entities. Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance of ASU 2014-09. We are currently evaluating the impact and disclosure under this guidance on our financial statements.

On June 19, 2014, the FASB issued Accounting Standards Update 2014-12 ("ASU 2014-12"), which clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity's satisfaction of a performance target until it becomes probable that the performance target will be met. ASU 2014-12 is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, with early adoption permitted. All entities will have the option of applying the guidance either prospectively (i.e., only to awards granted or modified on or after the effective date of ASU 2014-12) or retrospectively. We are currently evaluating the impact and disclosure under this guidance on our financial statements.

RESULTS OF OPERATIONS Three Months Ended June 28, 2014 Compared to the Three Months Ended June 29, 2013 The following table sets forth selected information derived from our Condensed Consolidated Statements of Operations and Comprehensive Income for the three-month periods ended June 28, 2014 and June 29, 2013. In the text below, amounts and percentages have been rounded and are based on the amounts in our condensed consolidated financial statements.

Three months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Net sales $ 444,325 $ 448,536 $ (4,211 ) (0.9 %) Cost of products sold 185,543 189,614 (4,071 ) (2.1 %) Gross profit 258,782 258,922 (140 ) (0.1 %) % of net sales 58.2 % 57.7 % Selling and administrative expenses 110,612 118,952 (8,340 ) (7.0 %) % of net sales 24.9 % 26.5 % (Gain) loss on disposal of fixed assets (144 ) 4 (148 ) NM Special charges 4,253 2,673 1,580 NM Operating income 144,061 137,293 6,768 4.9 % % of net sales 32.4 % 30.6 % Interest expense, net 38,644 38,394 250 0.7 % Income before income taxes 105,417 98,899 6,518 Provision for income taxes 41,276 42,179 (903 ) (2.1 %) Net income $ 64,141 $ 56,720 $ 7,421 13.1 % NM = Not meaningful Our business is managed on the basis of three reportable segments: Scholastic, Memory Book and Marketing and Publishing Services. The following table sets forth selected segment information derived from our Condensed Consolidated Statements of Operations and Comprehensive Income for the three-month periods ended June 28, 2014 and June 29, 2013. For additional financial information about our operating segments, see Note 16, Business Segments, to the condensed consolidated financial statements.

33-------------------------------------------------------------------------------- Table of Contents Three months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Net sales Scholastic $ 127,152 $ 127,149 $ 3 0.0 % Memory Book 240,241 247,785 (7,544 ) (3.0 %) Marketing and Publishing Services 77,179 73,673 3,506 4.8 % Inter-segment eliminations (247 ) (71 ) (176 ) NM Net sales $ 444,325 $ 448,536 $ (4,211 ) (0.9 %) Operating income Scholastic $ 23,434 $ 22,880 $ 554 2.4 % Memory Book 117,884 112,358 5,526 4.9 % Marketing and Publishing Services 2,743 2,055 688 33.5 % Operating income $ 144,061 $ 137,293 $ 6,768 4.9 % Depreciation and amortization Scholastic $ 2,882 $ 6,866 $ (3,984 ) (58.0 %) Memory Book 6,523 11,156 (4,633 ) (41.5 %) Marketing and Publishing Services 7,357 7,799 (442 ) (5.7 %) Depreciation and amortization $ 16,762 $ 25,821 $ (9,059 ) (35.1 %) NM = Not meaningful Net Sales. Consolidated net sales decreased $4.2 million, or 0.9%, to $444.3 million for the second fiscal quarter ended June 28, 2014 compared to $448.5 million for the second fiscal quarter ended June 29, 2013.

Net sales for the Scholastic segment were $127.2 million for the second fiscal quarter of 2014 compared to $127.1 million for the second fiscal quarter of 2013. This slight increase was primarily attributable to higher revenue from our professional championship products offset by lower volume in our base jewelry and announcement products.

Net sales for the Memory Book segment were $240.2 million for the second fiscal quarter of 2014 compared to $247.8 million for the second fiscal quarter of 2013. This decrease was primarily attributable to lower volume. Approximately $2.0 million of sales in the quarter was due to a shift in the timing of shipments from July 2014 into the second quarter of 2014.

Net sales for the Marketing and Publishing Services segment for the second fiscal quarter of 2014 increased $3.5 million to $77.2 million from $73.7 million for the second fiscal quarter of 2013. This increase included sales attributable to the Company's acquisition of SAS Carestia ("Carestia"), a leader in fragrance sampling in Europe, which closed on July 1, 2013. Excluding the impact attributable to the acquisition of Carestia, sales decreased compared to the second fiscal quarter of 2013, primarily due to lower revenue in our direct mail operations, offset by higher revenues from our international base sampling operations.

Gross Profit. Consolidated gross profit decreased $0.1 million, or 0.1%, to $258.8 million for the three months ended June 28, 2014 from $258.9 million for the three months ended June 29, 2013. As a percentage of net sales, gross profit margin for the three months ended June 28, 2014 increased to 58.2% from 57.7% for the comparative period in 2013 primarily due to the impact of cost saving initiatives and other manufacturing efficiencies in the Memory Book segment.

Selling and Administrative Expenses. Selling and administrative expenses decreased $8.4 million, or 7.0%, to $110.6 million for the three months ended June 28, 2014 from $119.0 million for the comparative period in 2013. This decrease was primarily due to lower depreciation and amortization expense of approximately $8.4 million in the second fiscal quarter of 2014 compared to the prior year comparable period. Excluding the impact of the lower depreciation and amortization, selling and administrative expenses for the three months ended June 28, 2014 were $119.0 million, unchanged as compared to the three months ended June 29, 2013.

34 -------------------------------------------------------------------------------- Table of Contents Special Charges. For the three months ended June 28, 2014, we recorded $2.2 million and $0.5 million of restructuring costs in the Scholastic and Memory Book segments, respectively. These restructuring costs were comprised of severance and related benefits associated with reductions in force. Also included in other special charges for the three months ended June 28, 2014 were $1.6 million of non-cash asset impairment charges associated with facility consolidations in the Scholastic segment. The associated employee headcount reductions related to the above actions were 122 and four in the Scholastic and Memory Book segments, respectively.

For the three months ended June 29, 2013, we recorded $1.6 million, $0.3 million and $0.1 million of restructuring costs in the Scholastic, Memory Book and Marketing and Publishing Services segments, respectively. These restructuring costs were comprised of severance and related benefits associated with reductions in force. Also included in other special charges for the second fiscal quarter ended June 29, 2013 was approximately $0.7 million of non-cash asset impairment charges in the Memory Book segment associated with the consolidation of our Topeka, Kansas facility, which was substantially completed in early 2013. The associated employee headcount reductions related to the above actions were 96, six and four in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.

Operating Income. As a result of the foregoing, consolidated operating income increased $6.8 million to $144.1 million for the three months ended June 28, 2014 compared to $137.3 million for the comparable period in 2013. As a percentage of net sales, operating income increased to 32.4% for the second fiscal quarter of 2014 from 30.6% for the same period in 2013.

Net Interest Expense. Net interest expense was comprised of the following: Three months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Interest expense $ 35,285 $ 35,250 $ 35 0.1 % Amortization of debt discount, premium and deferred financing costs 3,388 3,173 215 6.8 % Interest income (29 ) (29 ) - NM Interest expense, net $ 38,644 $ 38,394 $ 250 0.7 % NM = Not meaningful Net interest expense increased $0.2 million to $38.6 million for the three months ended June 28, 2014 compared to $38.4 million for the comparative 2013 period. This slight increase in interest expense was primarily due to higher non-cash amortization for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013.

Income Taxes. We recorded an income tax provision for the three months ended June 28, 2014 based on our best estimate of the consolidated effective tax rate applicable for the entire 2014 fiscal year and giving effect to tax adjustments considered a period expense or benefit. The effective tax rates for the three months ended June 28, 2014 and June 29, 2013 were 39.2% and 42.6%, respectively.

The decrease in tax rate for the second quarter of 2014 compared to the second quarter of 2013 was due primarily to the favorable effect of the domestic manufacturing deduction, which is expected to become available to the Company in 2014 because the Company anticipates that the remaining net operating loss from 2011 will be fully utilized during 2014.

Net Income. As a result of the aforementioned items, we reported net income of $64.1 million for the three months ended June 28, 2014 compared to net income of $56.7 million for the three months ended June 29, 2013.

Six Months Ended June 28, 2014 Compared to the Six Months Ended June 29, 2013 The following table sets forth selected information derived from our Condensed Consolidated Statements of Operations and Comprehensive Income for the six-month periods ended June 28, 2014 and June 29, 2013. In the text below, amounts and percentages have been rounded and are based on the amounts in our condensed consolidated financial statements.

35-------------------------------------------------------------------------------- Table of Contents Six months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Net sales $ 687,919 $ 693,472 $ (5,553 ) (0.8 %) Cost of products sold 307,564 310,506 (2,942 ) (0.9 %) Gross profit 380,355 382,966 (2,611 ) (0.7 %) % of net sales 55.3 % 55.2 % Selling and administrative expenses 207,754 229,049 (21,295 ) (9.3 %) % of net sales 30.2 % 33.0 % (Gain) loss on disposal of fixed assets (347 ) 27 (374 ) NM Special charges 6,000 3,530 2,470 NM Operating income 166,948 150,360 16,588 11.0 % % of net sales 24.3 % 21.7 % Interest expense, net 77,439 77,774 (335 ) (0.4 %) Income before income taxes 89,509 72,586 16,923 23.3 % Provision for income taxes 35,269 30,801 4,468 14.5 % Net income $ 54,240 $ 41,785 $ 12,455 29.8 % NM = Not meaningful Our business is managed on the basis of three reportable segments: Scholastic, Memory Book and Marketing and Publishing Services. The following table sets forth selected segment information derived from our Condensed Consolidated Statements of Operations and Comprehensive Income for the six-month periods ended June 28, 2014 and June 29, 2013. For additional financial information about our operating segments, see Note 16, Business Segments, to the condensed consolidated financial statements.

Six months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Net sales Scholastic $ 266,265 $ 272,723 $ (6,458 ) (2.4 %) Memory Book 245,624 253,419 (7,795 ) (3.1 %) Marketing and Publishing Services 176,521 167,565 8,956 5.3 % Inter-segment eliminations (491 ) (235 ) (256 ) NM Net sales $ 687,919 $ 693,472 $ (5,553 ) (0.8 %) Operating income Scholastic $ 43,065 $ 43,800 $ (735 ) (1.7 %) Memory Book 108,917 97,696 11,221 11.5 %Marketing and Publishing Services 14,966 8,864 6,102 68.8 % Operating income $ 166,948 $ 150,360 $ 16,588 11.0 % Depreciation and amortization Scholastic $ 8,888 $ 16,420 $ (7,532 ) (45.9 %) Memory Book 9,713 19,417 (9,704 ) (50.0 %) Marketing and Publishing Services 14,970 16,139 (1,169 ) (7.2 %) Depreciation and amortization $ 33,571 $ 51,976 $ (18,405 ) (35.4 %) NM = Not meaningful 36 -------------------------------------------------------------------------------- Table of Contents Net Sales. Consolidated net sales decreased $5.6 million, or 0.8%, to $687.9 million for the six months ended June 28, 2014 compared to $693.5 million for the prior year comparable period.

Net sales for the Scholastic segment for the six months ended June 28, 2014 decreased by $6.4 million to $266.3 million compared to $272.7 million for the six months ended June 29, 2013. This decrease was primarily attributable to lower volume in our base jewelry and announcement products.

Net sales for the Memory Book segment were $245.6 million for the six-month period ended June 28, 2014 compared to $253.4 million for the six-month period ended June 29, 2013. This decrease was primarily attributable to lower volume.

Net sales for the Marketing and Publishing Services segment increased to $176.5 million for the first six months of fiscal 2014 compared to $167.6 million during the first six months of fiscal 2013. Excluding the impact attributable to the acquisition of Carestia, sales decreased approximately $2.6 million compared to the six months ended June 29, 2013, primarily due to lower revenue in our direct mail operations, partially offset by higher revenues from our sampling and publishing services operations.

Gross Profit. Consolidated gross profit decreased $2.6 million, or 0.7%, to $380.4 million for the six months ended June 28, 2014 from $383.0 million for the six-month period ended June 29, 2013. This decrease was primarily due to lower sales volumes in our Scholastic segment. As a percentage of net sales, gross profit margin increased slightly to 55.3% for the six months ended June 28, 2014 from 55.2% for the comparative period in 2013.

Selling and Administrative Expenses. Selling and administrative expenses decreased $21.2 million, or 9.3%, to $207.8 million for the six months ended June 28, 2014 from $229.0 million for the corresponding period in 2013. This decrease was primarily due to lower depreciation and amortization expense of approximately $17.1 million for the six months ended June 28, 2014 compared to the prior year comparable period. Additionally, included in the first half of 2013 was an aggregate $6.3 million of non-recurring employment expense related to certain executive transitions. Excluding the impact of the lower depreciation and amortization and non-recurring employment expense, selling and administrative expenses for the six months ended June 28, 2014 increased approximately $2.1 million compared to the six months ended June 29, 2013, primarily due to non-recurring acquisition related costs.

Special Charges. During the six-month period ended June 28, 2014, we recorded $3.0 million, $0.6 million and $0.5 million of restructuring costs in the Scholastic, Memory Book and Marketing and Publishing Services segments, respectively. These restructuring costs were comprised of severance and related benefits associated with reductions in force. Also included in other special charges for the six months ended June 28, 2014 were $1.9 million of non-cash asset impairment charges associated with facility consolidations in the Scholastic segment. The associated employee headcount reductions related to the above actions were 185, 22 and six in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.

During the six-month period ended June 29, 2013, we recorded $1.8 million, $0.8 million and $0.2 million of restructuring costs in the Scholastic, Memory Book and Marketing and Publishing Services segments, respectively. These restructuring costs were comprised of severance and related benefits associated with reductions in force. Also included in other special charges for the six months ended June 29, 2013 was approximately $0.7 million of non-cash asset impairment charges in the Memory Book segment associated with the consolidation of our Topeka, Kansas facility. The associated employee headcount reductions related to the above actions were 103, 17 and seven in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.

Operating Income. As a result of the foregoing, consolidated operating income increased $16.5 million to $166.9 million for the six months ended June 28, 2014 compared to $150.4 million for the comparable period in 2013. As a percentage of net sales, operating income was 24.3% and 21.7% for the six-month periods ended June 28, 2014 and June 29, 2013, respectively.

37-------------------------------------------------------------------------------- Table of Contents Net Interest Expense. Net interest expense was comprised of the following: Six months ended June 28, June 29, In thousands 2014 2013 $ Change % Change Interest expense $ 70,817 $ 71,065 $ (248 ) (0.3 %) Amortization of debt discount, premium and deferred financing costs 6,690 6,743 (53 ) (0.8 %) Interest income (68 ) (34 ) (34 ) NM Interest expense, net $ 77,439 $ 77,774 $ (335 ) (0.4 %) NM = Not meaningful Net interest expense decreased $0.4 million to $77.4 million for the six months ended June 28, 2014 compared to $77.8 million for the comparative prior year period. This decrease in interest expense was primarily due to lower overall borrowings in the six months ended June 28, 2014 compared to the six months ended June 29, 2013.

Income Taxes. We recorded an income tax provision for the six months ended June 28, 2014 based on our best estimate of the consolidated effective tax rate applicable for the entire 2014 fiscal year and giving effect to tax adjustments considered a period expense or benefit. The effective tax rates for the six months ended June 28, 2014 and June 29, 2013 were 39.4% and 42.4%, respectively.

The decrease in the tax rate for the six-month period ended June 28, 2014 was due primarily to the favorable effect of the domestic manufacturing deduction, which is expected to become available to the Company in 2014 because the Company anticipates that the remaining net operating loss from 2011 will be fully utilized during 2014.

Net Income. As a result of the above, net income increased $12.4 million to $54.2 million for the six months ended June 28, 2014 compared to net income of $41.8 million for the six months ended June 29, 2013.

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