SHERIDAN GROUP INC - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - SHERIDAN GROUP INC	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - SHERIDAN GROUP INC	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - SHERIDAN GROUP INC	ex32_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10–Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333–110441

THE SHERIDAN GROUP, INC.

(Exact name of registrant as specified in its charter)

Maryland	52–1659314
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11311 McCormick Road, Suite 260
Hunt Valley, Maryland	21031–1437
(Address of principal executive offices)	(Zip Code)

410–785–7277

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x

There was 1 share of Common Stock outstanding as of November 12, 2009.

The Sheridan Group, Inc. and Subsidiaries

Quarterly Report

For the Quarter Ended September 30, 2009

INDEX

		Page
PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)	4
	Condensed Consolidated Statement of Changes in Stockholder’s Equity for the nine months ended September 30, 2009 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4T.	Controls and Procedures	21

PART II — OTHER INFORMATION		21

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Submission of Matters to a Vote of Security Holders	22

Item 5.	Other Information	22

Item 6.	Exhibits	22

SIGNATURE		23

Index

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
ASSETS	2009		2008

Current assets:
Cash and cash equivalents	$	397,694	$	16,396,628
Accounts receivable, net of allowance for doubtful accounts of $1,319,199 and $1,080,208, respectively		31,483,848		34,266,288
Due from parent company		270,054		73,488
Due from affiliated companies		-		588,724
Inventories, net		13,398,978		17,803,085
Other current assets		7,196,093		5,123,210
Refundable income taxes		-		2,894,829
Total current assets		52,746,667		77,146,252

Property, plant and equipment, net		118,314,484		127,063,798
Intangibles, net		33,916,039		35,004,531
Goodwill		40,979,426		40,979,426
Deferred financing costs, net		1,739,640		2,604,547
Due from parent - non current		2,020,375		-
Due from affiliated companies - non current		-		554,357
Other assets		1,812,383		1,743,828
Total assets	$	251,529,014	$	285,096,739

LIABILITIES

Current liabilities:
Accounts payable	$	15,259,555	$	23,291,403
Accrued expenses		14,421,466		21,880,095
Income taxes payable		982,609		-
Total current liabilities		30,663,630		45,171,498

Notes payable and revolving credit facility		148,680,879		164,946,468
Deferred income taxes and other liabilities		30,123,990		30,096,364
Total liabilities		209,468,499		240,214,330

STOCKHOLDER'S EQUITY

Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding at September 30, 2009 and December 31, 2008		-		-
Additional paid-in capital		42,043,537		51,135,564
Retained earnings (accumulated deficit)		16,978		(6,253,155	)
Total stockholder's equity		42,060,515		44,882,409

Total liabilities and stockholder's equity	$	251,529,014	$	285,096,739

The accompanying notes are an integral part of the consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net sales	$	73,340,611		$	86,768,330		$	221,018,395		$	261,882,261
Cost of sales		57,753,708			69,783,746			176,676,605			211,864,902
Gross profit		15,586,903			16,984,584			44,341,790			50,017,359
Selling and administrative expenses		9,074,061			10,136,166			27,861,953			31,423,142
(Gain) loss on disposition of fixed assets		(11,149	)		(18,646	)		2,450			141,830
Related party guaranty		-			3,550,000			-			3,550,000
Restructuring costs		-			-			154,908			-
Amortization of intangibles		349,504			424,402			1,088,349			1,293,564
Total operating expenses		9,412,416			14,091,922			29,107,660			36,408,536
Operating income		6,174,487			2,892,662			15,234,130			13,608,823
Other (income) expense:
Interest expense		4,178,743			4,592,838			13,265,081			13,824,479
Interest income		(18,949	)		(34,551	)		(51,392	)		(165,591	)
Gain on redemption of notes payable		(5,410,811	)		-			(7,193,906	)		-
Other, net		(218,518	)		268,454			(397,436	)		679,877
Total other (income) expense		(1,469,535	)		4,826,741			5,622,347			14,338,765
Income (loss) before income taxes		7,644,022			(1,934,079	)		9,611,783			(729,942	)
Income tax provision (benefit)		2,437,457			(1,851,323	)		3,341,650			(1,317,153	)
Net income (loss)	$	5,206,565		$	(82,756	)	$	6,270,133		$	587,211

The accompanying notes are an integral part of the consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(Unaudited)

								(Accumulated
					Additional			Deficit) /			Total
	Common Stock				Paid-In			Retained			Stockholder's
	Shares		Amount		Capital			Earnings			Equity
Balance as of December 31, 2008		1		-	$	51,135,564		$	(6,253,155	)	$	44,882,409
Cash dividend		-		-		(9,105,227	)		-			(9,105,227	)
Share-based compensation		-		-		13,200			-			13,200
Net income		-		-		-			6,270,133			6,270,133
Balance as of September 30, 2009		1		-	$	42,043,537		$	16,978		$	42,060,515

The accompanying notes are an integral part of these consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

(Unaudited)

	September 30,			September 30,
	2009			2008
Cash flows provided by operating activities:
Net income	$	6,270,133		$	587,211
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		12,920,045			12,400,208
Amortization of intangible assets		1,088,349			1,293,564
Provision for doubtful accounts		322,711			96,815
Provision for inventory realizability and LIFO value		78,712			16,630
Stock-based compensation		13,200			9,000
Amortization of deferred financing costs and debt discount, included in interest expense		606,515			996,119
Deferred income tax (benefit) provision		(35,877	)		822,917
Gain on redemption of notes payable		(7,193,906	)		-
Loss on disposition of fixed assets		2,450			141,830
Changes in operating assets and liabilities
Accounts receivable		2,459,729			(1,141,147	)
Inventories		4,325,395			(1,272,524	)
Other current assets		(682,387	)		(480,232	)
Refundable income taxes		2,934,809			(3,788,409	)
Other assets		151,459			1,138,850
Accounts payable		(6,565,260	)		(3,657,629	)
Accrued expenses		(2,967,808	)		1,084,684
Accrued interest		(4,490,821	)		(4,228,424	)
Income taxes payable		982,609			(72,513	)
Other liabilities		(164,687	)		(568,268	)
Net cash provided by operating activities		10,055,370			3,378,682

Cash flows used in investing activities:
Purchases of property, plant and equipment		(5,673,470	)		(13,516,779	)
Proceeds from sale of fixed assets		14,476			97,080
Advances paid to former affiliated company, net		-			(832,529	)
Advances paid to parent company, net		(2,216,941	)		(183,003	)
Net cash used in investing activities		(7,875,935	)		(14,435,231	)

Cash flows (used in) provided by financing activities:
Borrowing of working capital facility		39,657,209			-
Repayment of working capital facility		(33,931,000	)		-
Repayment of long term debt		(14,539,500	)		-
Payment of deferred financing costs in connection with long term debt		(259,851	)		-
Proceeds from capital contribution from parent company		-			5,400
Dividends paid		(9,105,227	)		-
Net cash (used in) provided by financing activities		(18,178,369	)		5,400

Net decrease in cash and cash equivalents		(15,998,934	)		(11,051,149	)

Cash and cash equivalents at beginning of period		16,396,628			20,517,198

Cash and cash equivalents at end of period	$	397,694		$	9,466,049

Non-cash investing and financing activities
Asset additions in accounts payable	$	215,412		$	601,711

The accompanying notes are an integral part of the consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Company Information

The accompanying unaudited interim financial statements of The Sheridan Group, Inc. and Subsidiaries (together, the “Company”) have been prepared by us pursuant to the rules of the Securities and Exchange Commission (the “SEC”). In our opinion, the accompanying unaudited condensed consolidated interim financial statements contain all adjustments necessary to present fairly, in all material respects, our financial position as of September 30, 2009 and our results of operations for the three and nine month periods ended September 30, 2009 and 2008 and our cash flows for the nine month periods ended September 30, 2009 and 2008. All such adjustments are deemed to be of a normal and recurring nature and all material intercompany balances and transactions have been eliminated. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto of the Company included in its Annual Report on Form 10–K for the year ended December 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full fiscal year.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain previously reported amounts have been reclassified to conform to the current year presentation.

New Accounting Standards

On July 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” ASC 105-10 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. The adoption of this standard had no impact on our consolidated financial statements.

The following recently issued but not yet enacted accounting standards have not yet been codified by the FASB, as described in the previous paragraph.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140” (“SFAS 166”). The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS 166 will be effective for us beginning January 1, 2010. We are currently evaluating the impact of adopting SFAS 166 on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)” (“SFAS 167”). This Statement carries forward the scope of Interpretation 46(R), with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in SFAS 166. SFAS 167 will be effective for us beginning January 1, 2010. We are currently evaluating the impact of adopting SFAS 167 on our consolidated financial statements.

Index

Inventory

Components of net inventories at September 30, 2009 and December 31, 2008 were as follows:

(in thousands)	September 30,			December 31,
	2009			2008
Work-in-process	$	6,788		$	8,243
Raw materials (principally paper)		6,871			9,820
		13,659			18,063
Excess of current costs over LIFO inventory value		(260	)		(260	)
Net inventory	$	13,399		$	17,803

3.	Notes Payable and Working Capital Facility

On August 21, 2003, we completed a private debt offering of 10.25% senior secured notes totaling $105.0 million, priced to yield 10.50%, that mature August 15, 2011 (the “2003 Notes”). On May 25, 2004, we completed a private debt offering of 10.25% senior secured notes totaling $60.0 million, priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms to the 2003 Notes. The carrying value of the notes was $143.0 million as of September 30, 2009 and $164.9 million as of December 31, 2008.

The indenture governing the 2003 Notes and the 2004 Notes contains various restrictive covenants. It, among other things: (i) limits our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of preferred stock, incur liens and enter into certain transactions with affiliates; (ii) places restrictions on our ability to pay dividends or make certain other restricted payments; and (iii) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets.

The 2003 Notes and the 2004 Notes are collateralized by security interests in substantially all of the assets of the Company and our subsidiaries, subject to permitted liens. The capital stock, securities and other payment rights of our subsidiaries will constitute collateral for the 2003 Notes and the 2004 Notes only to the extent that Rule 3–10 and Rule 3–16 of Regulation S–X under the Securities Act do not require separate financial statements of a subsidiary to be filed with the SEC. Payment obligations under the 2003 Notes and the 2004 Notes are guaranteed jointly and severally, fully and unconditionally, by all of our subsidiaries. The Sheridan Group, Inc. owns 100% of the outstanding stock of all of its subsidiaries and has no material independent assets or operations. There are no restrictions on the ability of The Sheridan Group, Inc. to obtain funds by dividend, advance or loan from its subsidiaries.

In an event of default, the holders of at least 25% in aggregate principal amount of the 2003 Notes and the 2004 Notes, may declare the principal, premium, if any, and accrued and unpaid interest on the 2003 Notes and the 2004 Notes to be due and payable immediately.

During the first nine months of 2009, we paid $15.0 million, which included $0.5 million of accrued interest, to redeem senior secured notes with a face value of $22.1 million. Deferred financing costs and unamortized debt discount attributable to these notes, along with commission fees, totaled $0.3 million and $0.4 million during the three and nine months ended September 30, 2009, respectively. As a result of the redemptions, we recognized a net gain of $5.4 million and $7.2 million during the three and nine months ended September 30, 2009, respectively.

Concurrent with the offering of the 2003 Notes, we entered into a working capital facility agreement. The working capital facility was amended concurrently with the offering of the 2004 Notes. Terms of the working capital facility allowed for revolving debt of up to $30.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Borrowings under the working capital facility bore interest at the bank’s base rate or the LIBOR rate plus a margin of 1.75% at our option. We agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.35%. In addition, we agreed to pay an annual fee of 1.875% on all letters of credit outstanding.

On June 16, 2009, we executed an agreement to amend our working capital facility. Terms of the working capital facility allow for revolving debt of up to $20.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. The interest rate on borrowings under the working capital facility is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, or (c) the LIBOR rate plus a margin of 3.75%. At our option, we can elect a LIBOR option for a specified period. Any such borrowings bear interest at the specified LIBOR rate plus a margin of 3.75%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we have agreed to pay an annual fee of 3.875% on all letters of credit outstanding. The working capital facility is scheduled to mature on March 25, 2011. As of September 30, 2009, we had $5.7 million outstanding under the working capital facility, had unused amounts available of $12.8 million and had $1.4 million in outstanding letters of credit. As of December 31, 2008, we had no borrowings outstanding under the working capital facility, had unused amounts available of $28.6 million and had $1.4 million in outstanding letters of credit.

Index

Borrowings under the working capital facility are collateralized by the assets of the Company and our subsidiaries, subject to permitted liens. The working capital facility contains various covenants including provisions that restrict our ability to incur or prepay indebtedness, including the 2003 Notes and the 2004 Notes, or pay dividends. It also requires us to satisfy financial tests, such as an interest coverage ratio and the maintenance of a minimum amount of earnings before interest, taxes, depreciation and amortization (as defined in the working capital facility agreement). We have complied with all of the restrictive covenants as of September 30, 2009.

In an event of default, all principal and interest due under the working capital facility may become immediately due and payable.

4.	Accrued Expenses

Accrued expenses as of September 30, 2009 and December 31, 2008 consisted of the following:

	September 30,		December 31,
	2009		2008
Payroll and related expenses	$	3,940,636	$	3,963,599
Profit sharing accrual		425,172		2,123,887
Accrued interest		1,883,827		6,374,647
Customer prepayments		2,574,857		2,984,787
Deferred revenue		1,210,670		1,298,435
Self-insured health and workers' compensation accrual		1,974,294		2,298,030
Other		2,412,010		2,836,710
	$	14,421,466	$	21,880,095

5.	Business Segments

We are a specialty printer in the United States offering a full range of printing and value–added support services for the journal, magazine, book, catalog and article reprint markets. Our business includes three operating segments comprised of “Publications,” “Books” and “Specialty Catalogs.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, Dartmouth Journal Services and United Litho. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.

The accounting policies of the operating segments are the same as those described in Note 2 “Summary of Significant Accounting Policies” in the consolidated financial statements in our most recent Annual Report on Form 10–K for the year ended December 31, 2008. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate profit sharing and bonuses and the amortization of a non–compete agreement with our former Chairman of the Board, are not allocated to the segments. Our customer base resides in the continental United States and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.

We had no customers which accounted for 10% or more of our total net sales for the three and nine month periods ended September 30, 2009 and 2008.

Index

The following table provides segment information as of September 30, 2009 and 2008 and for the three and nine month periods then ended:

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
(in thousands)

Net sales
Publications	$	40,326		$	46,911		$	126,588		$	141,176
Specialty catalogs		17,770			22,899			51,841			72,054
Books		15,259			17,088			42,604			48,839
Intersegment sales elimination		(14	)		(130	)		(15	)		(187	)
Consolidated total	$	73,341		$	86,768		$	221,018		$	261,882

Operating income
Publications	$	4,712		$	4,509		$	13,528		$	13,393
Specialty catalogs		524			330			695			435
Books		1,620			1,893			2,532			4,521
Corporate expenses		(682	)		(3,839	)		(1,521	)		(4,740	)
Consolidated total	$	6,174		$	2,893		$	15,234		$	13,609

	September 30,			December 31,
	2009			2008
Assets
Publications	$	144,547		$	165,194
Specialty catalogs		56,238			65,403
Books		45,303			51,386
Corporate		5,441			3,114
Consolidated total	$	251,529		$	285,097

A reconciliation of total segment operating income to consolidated income before income taxes is as follows:

	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2009			2008			2009			2008

Total operating income (as shown above)	$	6,174		$	2,893		$	15,234		$	13,609

Interest expense		(4,179	)		(4,593	)		(13,265	)		(13,824	)
Interest income		19			35			51			165
Gain on redemption of notes payable		5,411			-			7,194			-
Other, net		219			(269	)		398			(680	)

Income (loss) before income taxes	$	7,644		$	(1,934	)	$	9,612		$	(730	)

6.	Income Taxes

Our effective income tax rate was 31.9% and 95.7% for the third quarter 2009 and 2008, respectively, and 34.8% and 180.4% for the first nine months of 2009 and 2008, respectively. The effective income tax rate was higher in the three and nine months ended September 30, 2008 because the impact of the permanent differences in relation to the projected income before income taxes for the year ended December 31, 2008, was more significant than compared to 2009. The significant permanent differences related primarily to the increase in uncertain tax positions, including penalties and interest.

7.	Fair Value Measurements

We adopted the new guidance on fair value measurements for financial assets and liabilities as of January 1, 2008. The new guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). It also outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

Index

Our financial instruments consist of long-term investments in marketable securities (held in trust for payment of non-qualified deferred compensation) and long-term debt. The new guidance permits an entity to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities, including long-term debt, at fair value which were not previously required to be measured at fair value. We classify the investments in marketable securities within level 1 of the hierarchy since quoted market prices are available in active markets.

We believe that the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximate their fair values due to the short maturity of these instruments. The estimated fair value of our publicly traded debt, based on quoted market prices, was approximately $120.0 million and $115.7 million as of September 30, 2009 and December 31, 2008, respectively.

8.	Related Party Transactions

On January 5, 2009, we executed a waiver to our previous working capital facility. The waiver allowed us to pay dividends and make loans to our parent company, TSG Holdings Corp. (“Parent”), which is not a registrant with the SEC, in the aggregate amount of up to $14.0 million, provided that our Parent used the entire cash proceeds of such dividend and loan solely to purchase capital stock issued by our Parent (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. (“Giraffe”) and to pay related expenses in connection therewith. During the first quarter of 2009, we paid a dividend in the aggregate amount of $9.1 million and made a loan in the principal amount of $2.0 million to our Parent. The loan will mature on January 4, 2012 and will accrue interest at the rate of 1.36% per year payable in cash or in kind on February 15 and August 15 each year. In connection with the Stock Purchase, Euradius Acquisition Co., a wholly owned subsidiary of our Parent, sold all of the outstanding stock of Euradius International Dutch Bidco B.V. (“Euradius”) to Giraffe. This resulted in our Parent fully divesting its interest in Euradius, which was our Parent's only investment other than The Sheridan Group, Inc. Neither Euradius nor its subsidiaries were guarantors of the 2003 or 2004 Notes. Neither Euradius nor its subsidiaries were subsidiaries of ours and their financial results were not included in our consolidated financial statements.

We engaged in transactions with affiliates of our Parent, in the normal course of business, prior to the Stock Purchase. These transactions primarily involved administrative costs and management fees paid on behalf of the affiliates. In connection with the Stock Purchase, our Parent ceased to have an ownership interest in an affiliate that owed us approximately $1.1 million as of September 30, 2009 and December 31, 2008. As such, we reclassified this amount from due from affiliated companies to other current assets, effective on the date of the Stock Purchase. The amount owed by the former affiliate is to be paid in full by January 9, 2010.

We have a 10–year management agreement with our principal equity sponsors, expiring in August of 2013, under which an annual management fee is payable equal to the greater of $500,000 or 2% of EBITDA (as defined in the management agreement) plus reasonable out–of–pocket expenses. We expensed $0.2 million and $0.7 million in such fees for the three and nine month periods ended September 30, 2009, respectively, and $0.2 million and $0.6 million for the three and nine month periods ended September 30, 2008, respectively.

9.	Contingencies

We are party to legal actions as a result of various claims arising in the normal course of business. We believe that the disposition of these matters will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

10.	Restructuring and Other Exit Costs

In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded a minimal amount and $0.2 million of restructuring costs during the three and nine month periods ended September 30, 2009, respectively. The costs relate primarily to guaranteed severance payments and employee health benefits. We do not expect to record any additional expenses in connection with this consolidation.

11.	Subsequent Events

Subsequent events have been evaluated through November 12, 2009, which is the date the financial statements were issued.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our historical consolidated financial statements and related notes included in the Annual Report on Form 10–K for the fiscal year ended December 31, 2008. References to the “Company” refer to The Sheridan Group, Inc. The terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of the Company and all of its subsidiaries.

Index

Forward–Looking Statements

This Quarterly Report on Form 10–Q includes “forward–looking statements.” Forward–looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would” or words or phrases of similar meaning. They may relate to, among other things:

our liquidity and capital resources, including our ability to refinance our debt;

competitive pressures and trends in the printing industry;

prevailing interest rates;

legal proceedings and regulatory matters;

general economic conditions;

the liquidity and capital resources of our customers and potential customers;

predictions of net sales, expenses or other financial items;

future operations, financial condition and prospects; and

our plans, objectives, strategies and expectations for the future.

Forward–looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward–looking statements, might cause us to modify our plans or objectives, may affect our ability to pay timely amounts due under our outstanding notes and/or may affect the value of our outstanding notes. New risk factors can emerge from time to time. It is not possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward–looking statements. Given these risks and uncertainties, actual future results may be materially different from what we plan or expect. We caution you that any forward–looking statement reflects only our belief at the time the statement is made. We will not update these forward–looking statements even if our situation changes in the future.

Overview

Company Background

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine, book and article reprint markets. The services we offer include: digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company.

The Notes

On August 21, 2003, we completed a private debt offering of 10.25% senior secured notes totaling $105 million, priced to yield 10.50%, that mature August 15, 2011 (the “2003 Notes”). On May 25, 2004, we completed a private debt offering of 10.25% senior secured notes totaling $60 million, priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms to the 2003 Notes.

The 2003 Notes and the 2004 Notes are collateralized by security interests in substantially all of the assets of the Company and our subsidiaries, subject to permitted liens. The capital stock, securities and other payment rights of the Company’s subsidiaries will constitute collateral for the 2003 Notes and the 2004 Notes only to the extent that Rule 3-10 and Rule 3-16 of Regulation S-X under the Securities Act do not require separate financial statements of a subsidiary to be filed with the SEC. Payment obligations under the 2003 Notes and the 2004 Notes are guaranteed jointly and severally, fully and unconditionally, by all of the Company’s subsidiaries. The Sheridan Group, Inc. owns 100% of the outstanding stock of all of our subsidiaries and has no material independent assets or operations. There are no restrictions on the ability of The Sheridan Group, Inc. to obtain funds by dividend, advance or loan from its subsidiaries.

In the event of default, the holders of at least 25% in aggregate principal amount of the 2003 Notes and the 2004 Notes, may declare the principal, premium, if any, and accrued and unpaid interest on the 2003 Notes and the 2004 Notes to be due and payable immediately.

Index

Critical Accounting Estimates

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. We believe the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” included in our most recent Annual Report on Form 10–K for the year ended December 31, 2008, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our accounting for allowances for doubtful accounts, impairment of goodwill and other identifiable intangibles, income taxes and self–insurance. These policies require us to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition.

Results of Operations

Our business includes three reportable segments comprised of “Publications,” “Specialty Catalogs” and “Books.” The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, Dartmouth Journal Services and United Litho. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.

The following tables set forth, for the periods indicated, information derived from our condensed consolidated statements of operations, the relative percentage that those amounts represent to total net sales (unless otherwise indicated), and the percentage change in those amounts from period to period. These tables should be read in conjunction with the commentary that follows them.

Index

Three months ended September 30:

													Percent of revenue
	Three months ended September 30,						Increase (decrease)						Three months ended September 30,
(in thousands)	2009			2008			Dollars			Percentage			2009			2008

Net sales
Publications	$	40,326		$	46,911		$	(6,585	)		(14.0	%)		55.0	%		54.1	%
Specialty catalogs		17,770			22,899			(5,129	)		(22.4	%)		24.2	%		26.4	%
Books		15,259			17,088			(1,829	)		(10.7	%)		20.8	%		19.7	%
Intersegment sales elimination		(14	)		(130	)		116		nm				-			(0.2	%)
Total net sales	$	73,341		$	86,768		$	(13,427	)		(15.5	%)		100.0	%		100.0	%

Cost of sales		57,754			69,784			(12,030	)		(17.2	%)		78.7	%		80.4	%

Gross profit	$	15,587		$	16,984		$	(1,397	)		(8.2	%)		21.3	%		19.6	%

Selling and administrative expenses	$	9,074		$	10,136		$	(1,062	)		(10.5	%)		12.4	%		11.7	%
Loss (gain) on sale of fixed assets		(11	)		(19	)		8			(42.1	%)		-			-
Related party guaranty		-			3,550			(3,550	)	nm				-			4.1	%
Restructuring costs		-			-			-		nm				-			-
Amortization of intangibles		350			424			(74	)		(17.5	%)		0.5	%		0.4	%
Total operating expenses	$	9,413		$	14,091		$	(4,678	)		(33.2	%)		12.9	%		16.2	%

Operating income
Publications	$	4,712		$	4,509		$	203			4.5	%		11.7	%		9.6	%
Specialty catalogs		524			330			194			58.8	%		2.9	%		1.4	%
Books		1,620			1,893			(273	)		(14.4	%)		10.6	%		11.1	%
Corporate expenses		(682	)		(3,839	)		3,157			82.2	%	nm			nm
Total operating income	$	6,174		$	2,893		$	3,281			113.4	%		8.4	%		3.4	%

Other (income) expense
Interest expense	$	4,179		$	4,593		$	(414	)		(9.0	%)		5.7	%		5.3	%
Interest income		(19	)		(35	)		16			(45.7	%)		-			-
Gain on redemption of notes payable		(5,411	)		-			(5,411	)	nm				(7.4	%)		-
Other, net		(219	)		269			(488	)	nm				(0.3	%)		0.3	%
Total other (income) expense	$	(1,470	)	$	4,827		$	(6,297	)	nm				(2.0	%)		5.6	%

Income (loss) before income taxes		7,644			(1,934	)		9,578		nm				10.4	%		(2.2	%)

Income tax provision (benefit)		2,437			(1,851	)		4,288		nm				3.3	%		(2.1	%)

Net income (loss)	$	5,207		$	(83	)	$	5,290		nm				7.1	%		(0.1	%)

_____________________

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Commentary:

Net sales for the third quarter of 2009 decreased $13.4 million or 15.5% versus the third quarter of 2008, due primarily to reductions in print run lengths resulting from the ongoing economic recession coupled with decreases in paper and shipping costs, which are passed on to our customers. Net sales for the Publications segment decreased $6.6 million or 14.0% compared to the same period a year ago principally due to lower paper and freight costs as well as sales declines in magazines as reductions in print advertising have led our customers to reduce run lengths, page counts and frequency of publication. Net sales for the Specialty Catalogs segment decreased $5.1 million or 22.4% compared with the same period a year ago as sales in this segment continue to be adversely impacted by lower paper and freight costs combined with a reduction in print run lengths for catalogs reflecting reduced consumer spending. Net sales for the Books segment decreased $1.8 million or 10.7% in the third quarter of 2009 as compared with the year ago period due primarily to fewer titles being produced as book publishers deal with the economic recession. Lower paper and freight costs also contributed to the dollar sales decline in Books.

Index

Gross profit for the third quarter of 2009 decreased by $1.4 million or 8.2% compared to the third quarter of 2008. The gross profit decrease was attributable primarily to the reduction in sales mentioned previously coupled with lower revenue from recyclable materials partially offset by lower variable costs, reductions in healthcare and utility costs, and cost reductions pertaining to staffing, benefits and discretionary spending. Additionally, the non-recurrence of 2008 start-up costs associated with the new digital product offering in the Publications segment also helped partially offset the adverse impact of the decline in sales and recyclables revenue. Gross margin of 21.3% of net sales for the third quarter of 2009 reflected a 1.7 margin point increase versus the third quarter of 2008. The gross margin increase was due principally to reductions in pass through costs of freight and paper as well as the reductions in health care, utility and variable costs combined with cost reduction efforts.

Operating income of $6.2 million for the third quarter of 2009 represented an increase of $3.3 million or 113.4 % as compared to operating income of $2.9 million for the third quarter of 2008. This increase was primarily attributable to the non-recurrence of 2008 related party guaranty costs to satisfy obligations in connection with the shutdown of GPN Asia, a former affiliate of our parent company. In the Publications segment, operating income increased by $0.2 million during the third quarter of 2009 as compared to the year ago period due to reductions in staffing, employee benefit plans and discretionary spending coupled with lower healthcare claims, lower material and utility costs, and the absence of start-up costs associated with the new digital product offering which more than offset the adverse impact of lower sales volume and lower revenue from recyclable materials. In the Specialty Catalogs segments, operating income increased by $0.2 million as a result of reductions in staffing and discretionary spending coupled with lower utility costs which offset the impact of lower sales volume and the lower revenue from recyclable materials compared to the same period year ago. Operating income in the Books segment decreased $0.3 million in the third quarter of 2009 as compared to the third quarter of 2008 due primarily to the decline in sales volume and lower revenue from recyclable materials. These adverse impacts were partially offset by significant reductions in staffing and employee benefits in the Books segment.

During the third quarter of 2009, we recorded gains on the redemption of notes payable of $5.4 million. There were no comparable transactions during the third quarter of 2008. The redemption of notes payable was the primary reason our interest expense decreased $0.4 million during the third quarter of 2009 as compared to the same period last year.

Other income was $0.2 million for the third quarter of 2009 as compared to other expense of $0.3 million during the same period last year. This increase was due primarily to the increase in the market value of investments held in the deferred compensation plan during the quarter. The market value of these investments decreased during the same period in 2008.

Income before income taxes of $7.6 million for the third quarter of 2009 represented a $9.6 million increase as compared to the same period last year. The increase was due primarily to the gains on the redemptions of notes payable, the non-recurrence of related party guaranty costs in connection with the shutdown of GPN Asia and the increase in the market value of investments held in the deferred compensation plan during the quarter.

Our effective income tax rate was 31.9% for the third quarter of 2009 compared to 95.7% for the same period in 2008. The effective income tax rate was higher in the three months ended September 30, 2008 because the impact of the permanent differences in relation to the projected income before income taxes for the year ended December 31, 2008, was more significant than compared to 2009. The significant permanent differences related primarily to the increase in uncertain tax positions, including penalties and interest.

Net income of $5.2 million for the third quarter of 2009 represented a $5.3 million increase as compared to a net loss of $0.1 million for the third quarter of 2008 due to the factors mentioned previously.

Index

Nine months ended September 30:

													Percent of revenue
	Nine months ended September 30,						Increase (decrease)						Nine months ended September 30,
(in thousands)	2009			2008			Dollars			Percentage			2009			2008

Net sales
Publications	$	126,588		$	141,176		$	(14,588	)		(10.3	%)		57.3	%		53.9	%
Specialty catalogs		51,841			72,054			(20,213	)		(28.1	%)		23.4	%		27.5	%
Books		42,604			48,839			(6,235	)		(12.8	%)		19.3	%		18.6	%
Intersegment sales elimination		(15	)		(187	)		172		nm				-			-
Total net sales	$	221,018		$	261,882		$	(40,864	)		(15.6	%)		100.0	%		100.0	%

Cost of sales		176,676			211,865			(35,189	)		(16.6	%)		79.9	%		80.9	%

Gross profit	$	44,342		$	50,017		$	(5,675	)		(11.3	%)		20.1	%		19.1	%

Selling and administrative expenses	$	27,862		$	31,423		$	(3,561	)		(11.3	%)		12.6	%		12.0	%
Loss on sale of fixed assets		2			142			(140	)	nm				-			0.1	%
Related party guaranty		-			3,550			(3,550	)	nm				-			1.3	%
Restructuring costs		155			-			155		nm				0.1	%		-
Amortization of intangibles		1,089			1,293			(204	)		(15.8	%)		0.5	%		0.5	%
Total operating expenses	$	29,108		$	36,408		$	(7,300	)		(20.1	%)		13.2	%		13.9	%

Operating income
Publications	$	13,528		$	13,393		$	135			1.0	%		10.7	%		9.5	%
Specialty catalogs		695			435			260			59.8	%		1.3	%		0.6	%
Books		2,532			4,521			(1,989	)		(44.0	%)		5.9	%		9.3	%
Corporate expenses		(1,521	)		(4,740	)		3,219			67.9	%	nm			nm
Total operating income	$	15,234		$	13,609		$	1,625			11.9	%		6.9	%		5.2	%

Other (income) expense
Interest expense	$	13,265		$	13,824		$	(559	)		(4.0	%)		6.0	%		5.3	%
Interest income		(51	)		(165	)		114			(69.1	%)		-			(0.1	%)
Gain on redemption of notes payable		(7,194	)		-			(7,194	)	nm				(3.2	%)		-
Other, net		(398	)		680			(1,078	)	nm				(0.2	%)		0.3	%
Total other expense	$	5,622		$	14,339		$	(8,717	)		(60.8	%)		2.6	%		5.5	%

Income (loss) before income taxes		9,612			(730	)		10,342		nm				4.3	%		(0.3	%)

Income tax provision (benefit)		3,342			(1,317	)		4,659		nm				1.5	%		(0.5	%)

Net income	$	6,270		$	587		$	5,683		nm				2.8	%		0.2	%

______________________

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Commentary:

Net sales for the first nine months of 2009 decreased $40.9 million or 15.6% versus the first nine months of 2008, due primarily to reductions in print run lengths resulting from the ongoing economic recession coupled with decreases in paper and shipping costs, which are passed on to our customers, as well as decreases in paper costs resulting from the largest customer in Specialty Catalogs buying their own paper rather than having us supply it. Net sales for the Publications segment decreased $14.6 million or 10.3% compared to the same period a year ago principally due to sales declines in magazines as reductions in print advertising have led our customers to reduce run lengths, page counts and frequency of publication. Lower paper and freight costs also contributed to the decline in Publications sales. Net sales for the Specialty Catalogs segment decreased $20.2 million or 28.1% compared with the same period a year ago with approximately 40% of the decrease due to our largest customer supplying their own paper, beginning in the second quarter of 2008, instead of purchasing it through us. Specialty Catalogs sales continue to be adversely impacted by a reduction in print run lengths for catalogs reflecting reduced consumer spending and the impact of lower paper and freight costs. Net sales for the Books segment decreased $6.2 million or 12.8% in the first nine months due primarily to fewer titles being produced as book publishers deal with the economic recession.

Index

Gross profit for the first nine months of 2009 decreased by $5.7 million or 11.3% compared to the first nine months of 2008. The gross profit decrease was attributable primarily to the reduction in sales mentioned previously coupled with lower revenue from recyclable materials partially offset by lower variable costs, lower utility and healthcare costs, and cost reductions in staffing, employee benefit plans, and discretionary spending. The absence of start-up costs associated with a digital product offering in Publications also helped partially offset the adverse volume impact. Gross margin of 20.1% of net sales for the first nine months of 2009 reflected a 1.0 margin point increase versus the first nine months of 2008. The gross margin increase was due principally to reductions in pass through costs of freight and paper as well as other costs as described previously which offset the margin impact of the decrease in sales.

Operating income of $15.2 million for the first nine months of 2009 represented an increase of $1.6 million or 11.9% as compared to operating income of $13.6 million for the first nine months of 2008. This increase was primarily attributable to the non-recurrence of 2008 related party guaranty costs to satisfy obligations in connection with the shutdown of GPN Asia (a former affiliate of our parent company), reductions in selling and administrative costs due to cost management of staffing, employee benefits and discretionary costs coupled with lower administrative costs associated with the new digital product initiative, partially offset by gross profit reductions discussed previously. Operating income in the Publications segment during the first nine months of 2009 increased slightly as compared to the same period in 2008 as decreases in sales and lower revenues from recyclables were fully offset by cost management of staffing, benefits and discretionary spending as well as lower utility, material and healthcare costs and the non-recurrence of the 2008 start-up costs of the new digital product offering. Operating income in the Specialty Catalogs segment increased $0.3 million during the first nine months of 2009 as compared to the same period in 2008 as decreases in sales and lower revenues from recyclables were more than offset by reductions in staffing as well as lower material, utility, discretionary and legal costs. Operating income in the Books segment decreased $2.0 million in the first nine months of 2009 compared to the year ago period due principally to the lower sales volume coupled with the lower revenue from recyclable materials. Reductions in Books staffing and employee benefits, as well as lower material costs, partially offset the adverse sales volume and recyclables revenue impact.

During the first nine months of 2009, we recorded gains on the redemption of notes payable of $7.2 million. There were no comparable transactions during the first nine months of 2008. The redemption of notes payable was the primary reason our interest expense decreased $0.6 million during the first nine months of 2009 as compared to the same period last year.

Other income was $0.4 million for the first nine months of 2009 as compared to other expense of $0.7 million during the same period last year. This increase was due primarily to the increase in the market value of investments held in the deferred compensation plan during the first nine months of 2009. The market value of these investments decreased during the first nine months of 2008.

Income before income taxes of $9.6 million for the first nine months of 2009 represented a $10.3 million increase as compared to the same period last year. The increase was due primarily to the gains on the redemption of notes payable, the non-recurrence of related party guaranty costs in connection with the shutdown of GPN Asia and the increase in the market value of investments held in the deferred compensation plan partially offset by the net impact of lower sales and the cost reductions mentioned previously.

Our effective income tax rate was 34.8% for the first nine months of 2009 compared to 180.4% for the same period in 2008. The effective income tax rate was higher in the nine months ended September 30, 2008 because the impact of the permanent differences in relation to the projected income before income taxes for the year ended December 31, 2008, was more significant than compared to 2009. The significant permanent differences related primarily to the increase in uncertain tax positions, including penalties and interest.

Net income of $6.3 million for the first nine months of 2009 represented a $5.7 million increase as compared to net income of $0.6 million for the first nine months of 2008 due to the factors mentioned previously.

Liquidity and Capital Resources

We had cash of $0.4 million as of September 30, 2009 compared to $16.4 million as of December 31, 2008. For the nine months ended September 30, 2009, we utilized cash on hand to fund operations, make investments in new plant and equipment, make the semi-annual interest payments on the senior secured notes, repurchase our senior secured notes and pay a cash dividend and make a loan to our parent company.

Operating Activities

Net cash provided by operating activities was $10.1 million for the first nine months of 2009 compared to $3.4 million for the first nine months of 2008. This $6.7 million improvement was primarily the result of an increase in net income of $5.7 million coupled with favorable working capital changes of $9.0 million offset by a net increase in non-cash income of $8.0 million. The primary non-cash income was the $7.2 million gain on the redemption of notes payable during the first nine months of 2009. The working capital changes included:

Index

a decrease in accounts receivable in the first nine months of 2009 as compared to the first nine months of 2008 due primarily to lower sales volume;

inventory levels at the end of the third quarter of 2009 were significantly lower as compared to the end of 2008 and the third quarter of 2008 due primarily to efforts to reduce inventory balances in line with our lower production and sales levels; additionally, inventory levels had risen at the end of the third quarter of 2008 due to the impact of the temporary build-up of paper inventories in the Specialty Catalogs segment to ensure production supply;

an increase in refundable income taxes during the first nine months of 2008 due to the payment of estimated income taxes and the income tax benefit recorded in anticipation of a taxable loss in 2008 as compared to the decrease in refundable income taxes during the first nine months of 2009 due to the receipt of income tax refunds and the income tax provision recorded in anticipation of taxable income in 2009.

These sources of cash were partially offset by reductions in accounts payable and accrued expenses. The accounts payable reduction was primarily due to the lower production levels brought on by lower sales and the timing of certain vendor payments during the third quarter of 2009 as compared to the third quarter of 2008 and the end of 2008. The accrued expense reduction was primarily due to the payments made to satisfy the guaranty costs in connection with the shutdown of GPN Asia.

Investing Activities

Net cash used in investing activities was $7.9 million for the first nine months of 2009 compared to $14.4 million for the first nine months of 2008. This $6.5 million decrease in cash used was primarily the result of lower capital spending and the non-recurrence of advances made in 2008 to former affiliates in the first nine months of 2009 as compared to the same period last year. These decreases were partially offset by an increase in cash we advanced to our parent company (the majority of which was used to repurchase its capital stock resulting in the complete divestiture of its interest in Euradius International Dutch Bidco, B.V.) in the first nine months of 2009 as compared to the same period last year.

Financing Activities

Cash used in financing activities was $18.2 million for the first nine months of 2009 and was minimal for the first nine months of 2008. The $18.2 million increase in cash used was primarily the result of the $14.5 million we paid to repurchase our senior secured notes, the $9.1 million dividend paid to our parent company to enable it to repurchase its capital stock resulting in the complete divestiture of its interest in Euradius, and the $0.3 million in deferred financing costs we paid in connection with the amendment to our working capital facility, offset by the $5.7 million net borrowings under our working capital facility.

We expect our principal sources of liquidity will be cash flow generated from operations and borrowings under our working capital facility. We expect our principal uses of cash will be to meet debt service requirements, finance our capital expenditures and provide working capital. We may from time to time seek to purchase or retire our outstanding debt, including the 2003 Notes and 2004 Notes, through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. We estimate that our capital expenditures for the remainder of 2009 will total about $5.2 million. Based on our current level of operations, we believe that our cash flow from operations and available cash will be adequate to meet our future short–term and long–term liquidity needs. Our future operating performance and ability to extend or refinance our indebtedness will be dependent on future economic conditions and financial, business and other factors that may be beyond our control.

Indebtedness

As of September 30, 2009, we had total indebtedness of $148.7 million comprised of $143.0 million due under the 2003 Notes and the 2004 Notes, with a scheduled maturity of August 2011, and $5.7 million due under our working capital facility which matures in March 2011. We will have significant interest payments due on the outstanding notes as well as interest payments due on any borrowings under our working capital facility. Total cash interest payments related to our working capital facility and the 2003 Notes and the 2004 Notes are expected to be in excess of $14.6 million on an annual basis.

The terms of our working capital facility, as amended, are substantially as set forth below. Revolving advances are available from the lender in an aggregate principal amount of up to $20.0 million, subject to a borrowing base test. We are able to repay and reborrow such advances until the March 2011 maturity date. As of September 30, 2009, we had unused amounts available of $12.8 million and had $1.4 million in outstanding letters of credit.

Index

Working Capital Facility and Indenture

Our working capital facility and the indenture governing the 2003 Notes and the 2004 Notes contain various covenants which limit our discretion in the operation of our businesses. Among other things, our working capital facility restricts our ability to prepay other indebtedness, including the 2003 Notes and the 2004 Notes, incur other indebtedness or pay dividends. We amended our working capital facility on June 16, 2009. The amended agreement prohibits us from repurchasing the 2003 Notes and the 2004 Notes unless certain conditions are met, including that the amount expended for note repurchases after May 25, 2009 may not exceed $20.0 million in the aggregate, and that immediately after each note repurchase, there must be at least $5.0 million available under the working capital facility. The working capital facility also requires us to satisfy certain financial tests including an interest coverage ratio and to maintain a minimum EBITDA (as defined in and calculated pursuant to our working capital facility, such EBITDA being referred to hereinafter as “WCF EBITDA”), both calculated for the period consisting of the four preceding consecutive fiscal quarters. WCF EBITDA is defined in and calculated pursuant to our working capital facility and is used below solely for purposes of calculating our compliance with the covenants in our working capital facility. Failure to satisfy the financial tests in our working capital facility would constitute a default under our working capital facility. The required interest coverage ratio is at least 1.80 to 1.00 and the minimum WCF EBITDA requirement (calculated on a rolling twelve months) is $33.0 million. (Prior to the amendment the required interest coverage ratio was at least 2.00 to 1.00 and the minimum WCF EBITDA requirement was $36.0 million, both calculated on the same basis as the amended working capital facility.) For the twelve months ended September 30, 2009, our interest coverage ratio was 2.45 to 1.00 and our WCF EBITDA for purposes of our working capital facility was $40.8 million. In addition, our working capital facility prohibits us from making any payments with respect to the 2003 Notes and the 2004 Notes if we fail to perform our obligations under, or fail to meet the conditions of, our working capital facility or if payment creates a default under our working capital facility.

WCF EBITDA calculated pursuant to the working capital facility is defined as net income (loss) before interest expense, income taxes, depreciation, amortization, management fees (as defined in the management agreement) and other non–cash charges and non-recurring items (including all fees and costs relating to the transactions contemplated by the working capital facility) as defined in the working capital facility. WCF EBITDA calculated pursuant to the working capital facility is a non-GAAP measure and not an indicator of financial performance or liquidity under generally accepted accounting principles and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income before income taxes, cash flows from operating activities or other traditional indicators of operating performance or liquidity.

The following table provides a reconciliation of WCF EBITDA to cash flows from operating activities for the nine month periods ended September 30, 2009 and 2008 (in thousands). The financial covenants under our working capital facility, as noted above, are based upon a rolling twelve months. Therefore, WCF EBITDA for the twelve months ended September 30, 2009 includes the amounts presented in the following table as well as the amounts from the third and fourth quarters of 2008.

	Nine Months Ended September 30,
	2009			2008

Net cash used in operating activities	$	10,055		$	3,379

Accounts receivable		(2,460	)		1,141
Inventories		(4,325	)		1,273
Other current assets		682			480
Refundable income taxes		(2,935	)		3,789
Other assets		(151	)		(1,139	)
Accounts payable		6,565			3,658
Accrued expenses		2,968			(1,085	)
Accrued interest		4,491			4,229
Income taxes payable		(983	)		73
Other liabilities		165			568
Provision for doubtful accounts		(323	)		(97	)
Deferred income tax provision		36			(823	)
Provision for inventory realizability and LIFO value		(79	)		(17	)
Loss on disposition of fixed assets, net		(2	)		(142	)
Income tax provision (benefit)		3,342			(1,317	)
Cash interest expense		12,658			12,828
Management fees		673			558
Non cash adjustments:
(Increase) decrease in market value of investments		(73	)		226
Amortization of prepaid lease costs		65			68
Loss on disposition of fixed assets		15			227
Interest income		(51	)		-
Related party guaranty		-			3,550
Restructuring costs		155			-
Bank fees for abandoned line of credit renewal		308			-

Working Capital Facility EBITDA	$	30,796		$	31,427

Index

The indenture governing the 2003 Notes and the 2004 Notes also contains various restrictive covenants. It, among other things: (i) limits our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of preferred stock, incur liens and enter into certain transactions with affiliates; (ii) places restrictions on our ability to pay dividends or make certain other restricted payments; and (iii) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets.

Contractual Obligations

The following table summarizes the Company’s future minimum non-cancellable contractual obligations as of September 30, 2009:

	Remaining Payments Due by Period
					2010 to		2012 to		2014 and
	Total		2009		2011		2013		beyond
(in thousands)

Long term debt, including interest (1)	$	166,702	$	-	$	166,702	$	-	$	-
Operating leases		6,799		965		5,360		465		9
Purchase obligations (2)		4,554		1,368		2,874		312		-
Other long-term obligations (3)		504		38		302		164		-

Total (4)	$	178,559	$	2,371	$	175,238	$	941	$	9

__________________________

(1)	Includes the $142.9 million aggregate principal amount due on the senior secured notes plus interest at 10.25% payable semi-annually through August 15, 2011.

(2)	Represents payments due under purchase agreements for consumable raw materials and commitments for construction projects and equipment acquisitions.

(3)	Represents payments due under non-compete arrangements with our former Chairman of the Board.

(4)

At September 30, 2009, we have recognized approximately $2.0 million of liabilities for unrecognized tax benefits. There is a high degree of uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits because they are dependent on various matters including, among others, tax examinations, changes in tax laws or interpretation of those laws and expiration of statutes of limitation. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Off Balance Sheet Arrangements

At September 30, 2009 and December 31, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off–balance sheet arrangements or other contractually narrow or limited purposes. We therefore are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standards

The following recently issued but not yet enacted accounting standards have not yet been codified by the FASB, as described in the previous paragraph.

Index

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non–derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products and services to foreign customers and changes in interest rates on our long–term debt.

Foreign Exchange Rate Market Risk

We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in the three and nine months ended September 30, 2009 and 2008 were denominated in U.S. dollars. Therefore, foreign currency fluctuations had a negligible impact on our financial results in those periods.

Interest Rate Market Risk

We could be exposed to changes in interest rates. Our working capital facility is variable rate debt. Interest rate changes, therefore, generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. During the first nine months of 2009, we had borrowings under our working capital facility and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the nine months ended September 30, 2009. All of our other debt carries fixed interest rates.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), of the design and operation of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to various legal actions in the ordinary course of our business. In our opinion, these matters are not expected to have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Index

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, executed by John A. Saxton, President and Chief Executive Officer of The Sheridan Group, Inc. and Robert M. Jakobe, Chief Financial Officer of The Sheridan Group, Inc.

Index

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Sheridan Group, Inc.
	Registrant


	By:	/s/ John A. Saxton
		John A. Saxton
		President and Chief Executive Officer

Date: November 12, 2009

SHERIDAN GROUP INC - FORM 10-Q - November 12, 2009

Attached files

SHERIDAN GROUP INC Reports