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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 June 30, 2011

OR

 

¨ 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 333-133825

 

 

SGS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-3939981
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

626 West Main Street,

Suite 500

Louisville, Kentucky

  40202
(Address of principal executive offices)   (Zip Code)

(502) 637-5443

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

As of July 29, 2011 there were 100 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION      3   
 

Item 1.

   Financial Statements      3   
     Condensed Consolidated Statements of Income      3   
     Condensed Consolidated Balance Sheets      5   
     Condensed Consolidated Statements of Cash Flows      6   
     Notes to Condensed Consolidated Financial Statements      7   
 

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   
 

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      28   
 

Item 4.

   Controls and Procedures      28   
PART II - OTHER INFORMATION      28   
 

Item 1.

   Legal Proceedings      28   
 

Item 1A.

   Risk Factors      29   
 

Item 6.

   Exhibits      29   
SIGNATURES      32   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in thousands of dollars)

 

 

     Three Months Ended
June 30, 2011
    Three Months Ended
June 30, 2010
 

NET SALES

   $ 99,254      $ 94,201   

COSTS OF OPERATIONS:

    

Cost of goods sold (exclusive of depreciation)

     59,779        53,526   

Selling, general, and administrative expenses

     16,093        13,752   

Depreciation and amortization

     6,045        5,837   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     17,337        21,086   
  

 

 

   

 

 

 

NON-OPERATING EXPENSES:

    

Interest expense, net

     6,626        6,711   

Other (income) expense, net

     (67     20   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     10,778        14,355   

PROVISION FOR INCOME TAXES

     2,764        5,713   
  

 

 

   

 

 

 

NET INCOME

   $ 8,014      $ 8,642   
  

 

 

   

 

 

 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010, are an integral part of the financial statements.

 

3


Table of Contents

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in thousands of dollars)

 

 

     Six Months Ended
June 30, 2011
     Six Months Ended
June 30, 2010
 

NET SALES

   $ 190,893       $ 180,488   

COSTS OF OPERATIONS:

     

Cost of goods sold (exclusive of depreciation)

     114,242         104,296   

Selling, general, and administrative expenses

     31,128         27,413   

Depreciation and amortization

     11,793         11,684   
  

 

 

    

 

 

 

INCOME FROM OPERATIONS

     33,730         37,095   
  

 

 

    

 

 

 

NON-OPERATING EXPENSES:

     

Interest expense, net

     13,204         13,389   

Other expense, net

     222         586   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     20,304         23,120   

PROVISION FOR INCOME TAXES

     4,731         8,947   
  

 

 

    

 

 

 

NET INCOME

   $ 15,573       $ 14,173   
  

 

 

    

 

 

 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010, are an integral part of the financial statements.

 

4


Table of Contents

SGS International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands of dollars, except share and per share data)

 

 

     June 30, 2011      December 31, 2010  
     (unaudited)         

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 5,544       $ 9,513   

Receivables from customers, less allowances of $2,123 and $1,563 at June 30, 2011 and December 31, 2010, respectively

     79,138         65,153   

Inventories

     10,758         9,753   

Income taxes receivable

     2,332         —     

Deferred income taxes

     2,748         1,300   

Prepaid expenses and other current assets

     3,381         3,283   
  

 

 

    

 

 

 

Total current assets

     103,901         89,002   

Properties, plants and equipment, net

     45,602         44,195   

Goodwill

     192,374         185,067   

Other intangible assets, net

     169,724         159,578   

Deferred financing costs, net

     2,911         3,535   

Other assets

     2,272         1,842   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 516,784       $ 483,219   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

     

Current liabilities:

     

Accounts payable, trade

   $ 14,627       $ 16,519   

Accrued expenses

     22,755         19,341   

Accrued income taxes

     1,596         199   

Accrued interest

     884         884   

Current portion of long-term obligations

     13,142         5,139   
  

 

 

    

 

 

 

Total current liabilities

     53,004         42,082   

Long-term obligations, net of current portion

     259,361         261,413   

Non-current liabilities

     3,263         2,814   

Deferred income taxes

     39,474         34,858   
  

 

 

    

 

 

 

Total liabilities

     355,102         341,167   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholder’s equity:

     

Common stock, $.01 par value, 1,000 shares authorized and 100 shares outstanding

     —           —     

Additional capital

     107,000         107,000   

Accumulated other comprehensive income - unrealized translation adjustments, net of tax

     6,536         2,479   

Retained earnings

     48,146         32,573   
  

 

 

    

 

 

 

Total stockholder’s equity

     161,682         142,052   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

   $ 516,784       $ 483,219   
  

 

 

    

 

 

 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010, are an integral part of the financial statements.

 

5


Table of Contents

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands of dollars)

 

 

     Six Months Ended
June 30, 2011
    Six Months Ended
June 30, 2010
 

CASH FLOWS FROM OPERATING ACTIVITIES

   $ 14,242      $ 17,822   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of properties, plants and equipment

     (6,492     (4,977

Proceeds from sales of equipment

     8        10   

Business acquisitions, net of cash acquired

     (17,402     (1,659
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,886     (6,626
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings on revolving credit facility

     8,000        —     

Payments on senior term loan and acquisition facility

     (2,506     (11,773

Payments on other long-term debt

     (64     (343
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     5,430        (12,116
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     245        (252
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (3,969     (1,172

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     9,513        10,710   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,544      $ 9,538   
  

 

 

   

 

 

 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010, are an integral part of the financial statements.

 

6


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(all amounts in thousands of dollars, unless otherwise stated)

 

A. Summary of Significant Accounting Policies

General Nature of Business

SGS International, Inc. (“the Company” or “the Registrant”), headquartered in Louisville, Kentucky, operates in one operating business segment, pre-press graphic services. The Company provides a variety of services that include the preparatory steps that precede the actual printing of an image onto packaging material. The Company supplies photographic images, digital images, flexographic printing plates and rotogravure cylinders for the packaging printing industry. The Company has 39 locations in the United States, Canada, Mexico, the United Kingdom, the Netherlands, Hong Kong, and the Philippines.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and related footnotes that would normally be required by accounting principles generally accepted in the United States for complete financial reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements for the year ended December 31, 2010 in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). The December 31, 2010 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.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of a normal and recurring nature) that management considers necessary for a fair statement of financial information for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2011.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of SGS International, Inc., its wholly owned subsidiaries and companies more than fifty percent owned. These subsidiaries include Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphic Systems-Canada, Co., Southern Graphic Systems Mexico, S. De R.L. De C.V, SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, The Box Room Limited, SGS Packaging Netherlands B.V., McGurk Studios Limited, Thames McGurk Limited, and SGS Asia Pacific Limited.

Inventories and Cost of Goods Sold

Raw materials inventory is valued at the lower of cost or market with cost determined using the first-in, first-out (“FIFO”) method. Work-in-process inventory is valued at the lower of cost or net realizable value. There is no finished goods inventory since all products are shipped upon completion. Raw materials inventory and work-in-process inventory are as follows:

 

     June 30,      December 31,  
     2011      2010  

Raw materials

   $ 3,013       $ 3,180   

Work-in-process

     7,745         6,573   
  

 

 

    

 

 

 

Total

   $ 10,758       $ 9,753   
  

 

 

    

 

 

 

 

7


Table of Contents

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and require management to make certain estimates and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They may also affect the reported amounts of revenues and expenses during the reporting period. Areas that require significant judgments, estimates and assumptions include revenue recognition, accounts receivable and the allowance for doubtful accounts, work-in-process inventory, impairment of goodwill, other intangible assets and long-lived assets, accrued health and welfare benefits, and tax matters. Management uses historical experience and all available information to make these judgments and actual results could differ from those estimates upon subsequent resolution of some matters.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires companies to retrospectively present comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and eliminates the current option of presenting components of comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 also will require companies to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. ASU 2011-05 will be effective for the Company on January 1, 2012 although early adoption is permitted. The adoption of ASU 2011-05 will not have a material impact on the Company’s results of operations or financial position.

 

B. Acquisitions

During the six months ended June 30, 2011, the Company completed three acquisitions with an aggregate estimated purchase price of $21,857. On February 11, 2011, Southern Graphic Systems, Inc. acquired the assets of a digital print company in Dallas, Texas. On April 29, 2011, Southern Graphic Systems-Canada, Co. acquired the assets of a Canadian provider of packaging and retail graphics services. On June 20, 2011, Southern Graphic Systems, Inc. acquired the assets of a company in Tampa, Florida that provide the Company with expanded capabilities in the areas of metal decorating and image carriers for beverage can printing.

The aggregate purchase price for the acquisitions is estimated since a component of the purchase price for the Tampa acquisition is contingent upon profit measures not yet finalized. The aggregate purchase price may change significantly depending on the final determination of these profit measures. In addition, the payment of approximately $4,697 of the estimated aggregate purchase price has been deferred until subsequent periods. The deferred purchase price consists of $3,947 presented as accrued expenses and $750 presented as non-current liabilities in the accompanying condensed consolidated balance sheet.

The preliminary purchase price allocation for these acquisitions in aggregate is provided below. This allocation, particularly as it relates to amounts allocated to goodwill and customer relationships, may change significantly based on final purchase price adjustments and completion of valuation analyses.

 

Allocation of purchase price:

  

Current assets

   $ 955   

Properties, plants and equipment

     1,860   

Goodwill

     5,100   

Customer relationships

     14,233   

Liabilities assumed

     (291
  

 

 

 

Estimated aggregate acquisition price

   $ 21,857   
  

 

 

 

Results of operations of the acquisitions are included in the condensed consolidated statements of operations from the date of each acquisition. Pro forma results of the Company, assuming the acquisitions had been made at the beginning of each period presented, would not have been materially different from the results reported.

 

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Table of Contents
C. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of the following:

 

     June 30,
2011
    December 31,
2010
 

Goodwill, cost

   $ 192,374      $ 185,067   
  

 

 

   

 

 

 

Customer relationships, cost

   $ 193,630      $ 177,616   

Customer relationships, accumulated amortization

     (46,574     (41,654

Other intangible assets, cost

     30,997        31,008   

Other intangible assets, accumulated amortization

     (8,329     (7,392
  

 

 

   

 

 

 

Total

   $ 169,724      $ 159,578   
  

 

 

   

 

 

 

The change in goodwill, customer relationships (cost) and other intangible assets (cost) during the six months ended June 30, 2011 is due to the following:

 

     Goodwill      Customer
relationships (cost)
     Other intangible
assets (cost)
 

Balance at December 31, 2010

   $ 185,067       $ 177,616       $ 31,008   

Acquisitions

     5,100         14,233         —     

Changes due to foreign currency fluctuations

     2,207         1,781         (11
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2011

   $ 192,374       $ 193,630       $ 30,997   
  

 

 

    

 

 

    

 

 

 

Amortization of customer relationships and other intangible assets is estimated to be between $10,500 and $11,500 in total per year from 2011 through 2015.

Amortization of the payment for an exclusive supply agreement is recorded as a reduction in net sales. Such amortization is expected to be $833 annually, and amounted to $416 and $320 for the six months ended June 30, 2011 and June 30, 2010, respectively. Amortization of $208 was recorded in each of the quarters ended June 30, 2011 and June 30, 2010.

 

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Table of Contents
D. Interest Expense, net

Interest expense, net consists of the following:

 

     Three Months Ended
June  30,

2011
     Three Months Ended
June  30,

2010
 

Interest on senior term loan

   $ 632       $ 701   

Interest on borrowings on acquisition facility

     299         284   

Interest on senior subordinated notes

     5,235         5,235   

Interest on revolving loan facility

     17         —     

Amortization of deferred financing costs

     312         434   

Commitment fees on senior credit facility

     98         53   

Other

     33         4   
  

 

 

    

 

 

 

Total

   $ 6,626       $ 6,711   
  

 

 

    

 

 

 
     Six Months Ended
June 30,

2011
     Six Months Ended
June 30,

2010
 

Interest on senior term loan

   $ 1,257       $ 1,399   

Interest on borrowings on acquisition facility

     599         562   

Interest on senior subordinated notes

     10,470         10,470   

Interest on revolving loan facility

     17         —     

Amortization of deferred financing costs

     625         826   

Commitment fees on senior credit facility

     198         106   

Other

     38         26   
  

 

 

    

 

 

 

Total

   $ 13,204       $ 13,389   
  

 

 

    

 

 

 

 

E. Comprehensive Income

The following table sets forth comprehensive income for the quarters and six months ended June 30, 2011 and 2010:

 

     Three Months Ended
June  30,

2011
     Three Months Ended
June  30,

2010
 

Net income

   $ 8,014       $ 8,642   

Cumulative translation adjustments, net

     476         (3,783
  

 

 

    

 

 

 

Total

   $ 8,490       $ 4,859   
  

 

 

    

 

 

 
     Six Months Ended
June 30,

2011
     Six Months Ended
June 30,

2010
 

Net income

   $ 15,573       $ 14,173   

Cumulative translation adjustments, net

     4,057         (3,073
  

 

 

    

 

 

 

Total

   $ 19,630       $ 11,100   
  

 

 

    

 

 

 

 

F. Fair Value Measurements

Fair value is defined as the exit 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. Assets and liabilities recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their values. These categories include (in descending order of priority): Level 1 inputs are observable inputs such as quoted

 

10


Table of Contents

prices in active markets; Level 2 inputs are inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The estimated fair value of the Company’s investments in the non-qualified Southern Graphic Systems, Inc. Deferred Compensation Plan and the related offsetting liability are presented at fair value in the Company’s balance sheets. Investments in the Southern Graphic Systems, Inc. Deferred Compensation Plan are included in other assets and the offsetting liability is included in non-current liabilities on the Company’s consolidated balance sheets.

The following table shows assets measured at fair value as of June 30, 2011 on the Company’s balance sheet, and the input categories associated with those assets:

 

     Total Fair Value
at June 30, 2011
     Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active Markets
 

Deferred compensation plan assets (a)

   $ 1,797       $ 1,797   

 

(a)

The Company also has an offsetting liability related to the Deferred Compensation Plan, which is not disclosed in the table above as it is not independently measured at fair value.

The Company’s Notes have a carrying value of $174,500 and an estimated fair value of $178,675 at June 30, 2011. The estimated fair value of the Company’s Notes is determined using quoted prices in markets that are not active and is based on the average price of the Notes either traded or purchased by third parties between June 1, 2011 and July 29, 2011.

The Company’s capability to repurchase the senior subordinated debt at fair value is limited due to the terms of the Company’s senior secured credit facility.

 

G. Commitments and Contingencies

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

 

H. Income Taxes

The effective tax rate for the six months ended June 30, 2011 was 23.3% compared to 38.7% for the six months ended June 30, 2010. The significant decrease in the effective tax rate was primarily due to two items. First, an income tax benefit of approximately $1,600 was recorded during the six months ended June 30, 2011 associated with the reversal of withholding taxes on intercompany interest accrued but unpaid. This is discussed in more detail below. Furthermore, an additional income tax benefit of approximately $1,200 was recorded during the six months ended June 30, 2011 related to a revision in the calculation of estimated state tax liabilities expected in the United States. This tax benefit was primarily related to aligning our tax accounts with an election made in the first quarter of 2011 and resulted from a reduction in the deferred state tax liability and the associated expense for intercompany interest income repatriated from foreign subsidiaries

The effective tax rate for the quarter ended June 30, 2011 was 25.6% compared to 39.8% for the quarter ended June 30, 2010. The significant decrease in the effective tax rate was due to the previously discussed income tax benefit of approximately $1,200 primarily related to revised management estimates used in the calculation of deferred state tax liabilities.

On December 15, 2008 the United States and Canada exchanged instruments of ratification to place in force the Fifth Protocol of the U.S.-Canada Tax Treaty (Fifth Protocol). Included in the Fifth Protocol were provisions that affected certain hybrid entities that receive or pay cross border payments. The hybrid provisions in the Fifth Protocol became effective January 1, 2010. To minimize the overall tax impact of the Fifth Protocol, SGS filed

 

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Table of Contents

an election to essentially repatriate $23,342 of intercompany interest back to the United States for tax purposes and reduce the withholding tax rate on all future intercompany interest, including amounts previously accrued but unpaid from 25% to 0%. As of December 31, 2010, the Company recorded income tax expense and a corresponding net deferred tax liability and associated withholding tax expenses totaling $1,594 on intercompany interest accrued but unpaid. Due to the rate change from the tax election, this tax expense was reversed in the first quarter of 2011 when the election the Company filed became effective.

The Company has not recorded a deferred tax liability for undistributed earnings of certain international subsidiaries because such earnings are considered permanently invested in foreign countries. As of June 30, 2011, undistributed earnings of international subsidiaries considered permanently reinvested were approximately $9,271. The unrecognized deferred tax liability is dependent on many factors, including withholding taxes under current tax treaties and foreign tax credits. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. The Company does not consider undistributed earnings from certain other international operations to be permanently reinvested. A portion of the estimated tax liabilities upon repatriation of earnings from these international operations is expected to be offset with foreign tax credits.

 

I. Supplemental Guarantor Information

The Company’s debt includes the senior credit facility and the Notes. The U.S. borrowings under the senior credit facility have been guaranteed by Southern Graphics Inc. (the parent of SGS International, Inc.), Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. The Canadian borrowings under the senior credit facility have been guaranteed by SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, Southern Graphic Systems Mexico, S. De R.L. De C.V., The Box Room Limited, SGS Packaging Netherlands, B.V., McGurk Studios Limited, Thames McGurk Limited, SGS Asia Pacific Limited, Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphics Inc., and SGS International, Inc. The Notes are general unsecured obligations and are guaranteed on a senior subordinated basis by the Company’s domestic subsidiaries and rank secondary to the Company’s senior credit facility. Guarantor subsidiaries for the Notes include Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. Non-guarantor subsidiaries for the Notes include the direct and indirect foreign subsidiaries. The subsidiary guarantors are 100% owned by SGS International, Inc., the guarantees are full and unconditional, and the guarantees are joint and several.

Following are condensed consolidating financial statements of the Company. Investments in subsidiaries are either consolidated or accounted for under the equity method of accounting. Intercompany balances and transactions have been eliminated.

The relationships between the provision (benefit) for income taxes and the income before income taxes in the following condensed consolidating income statements for the three months ended and six months ended June 30, 2011 are impacted by transferring certain previously recognized income tax expense associated with certain intercompany interest income between entities. The previously recognized income tax expense associated with the intercompany interest earned by Project Dove Manitoba, L.P. was transferred 90% to SGS International, Inc. and 10% to Project Dove Holdco, Inc. based on the percentage ownership interest each partner has in Project Dove Manitoba, L.P. As this intercompany interest income is being repatriated from Project Dove Manitoba, L.P. to SGS International, Inc. and Project Dove Holdco, Inc., and based on our election to treat Project Dove Manitoba, L.P. as a flow through entity for tax purposes, the related income tax expense is then transferred to SGS International, Inc. and Project Dove Holdco, Inc.

 

12


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Balance Sheet

June 30, 2011

 

     Parent /
Issuer
     Consolidated
Guarantor
Subsidiaries
    

Consolidated Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

Assets

             

Current assets

             

Cash and cash equivalents

   $ 65       $ 2,191       $ 3,288       $ —        $ 5,544   

Receivables from customers, less allowances

     —           48,383         30,755         —          79,138   

Intercompany receivables

     253,265         428         1,903         (255,596     —     

Inventories

     —           7,219         3,539         —          10,758   

Income taxes receivable

     —           6,756         41         (4,465     2,332   

Deferred income taxes

     —           2,630         118         —          2,748   

Prepaid expenses and other current assets

     70         1,867         1,444         —          3,381   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     253,400         69,474         41,088         (260,061     103,901   

Investment in subsidiaries

     178,101         29,021         36,567         (243,689     —     

Properties, plants and equipment, net

     —           36,113         9,489         —          45,602   

Goodwill

     —           125,037         67,337         —          192,374   

Other intangible assets, net

     —           124,198         45,526         —          169,724   

Deferred financing costs, net

     2,911         —           —           —          2,911   

Other assets

     —           1,932         340         —          2,272   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 434,412       $ 385,775       $ 200,347       $ (503,750   $ 516,784   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Current liabilities

             

Accounts payable, trade

   $ 642       $ 8,873       $ 5,112       $ —        $ 14,627   

Intercompany payables

     —           225,289         30,307         (255,596     —     

Accrued expenses

     —           17,376         5,379         —          22,755   

Accrued income taxes

     4,465         —           1,596         (4,465     1,596   

Accrued interest

     6         877         1         —          884   

Current portion of long-term obligations

     12,551         50         541         —          13,142   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     17,664         252,465         42,936         (260,061     53,004   

Non-current liabilities

             

Long-term obligations, net of current portion

     251,427         81         7,853         —          259,361   

Non-current liabilities

     —           3,263         —           —          3,263   

Deferred income taxes

     3,426         27,962         8,086         —          39,474   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     272,517         283,771         58,875         (260,061     355,102   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contingencies and commitments

             

Stockholder’s equity

             

Common stock

     —           —           —           —          —     

Other stockholder’s equity

     161,895         102,004         141,472         (243,689     161,682   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholder’s equity

     161,895         102,004         141,472         (243,689     161,682   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 434,412       $ 385,775       $ 200,347       $ (503,750   $ 516,784   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

13


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Balance Sheet

December 31, 2010

 

     Parent /
Issuer
     Consolidated
Guarantor
Subsidiaries
    

Consolidated Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 154       $ 4,160       $ 5,199      $ —        $ 9,513   

Receivables from customers, less allowances

     —           42,896         22,257        —          65,153   

Intercompany receivables

     245,954         445         2,810        (249,209     —     

Inventories

     —           6,850         2,903        —          9,753   

Deferred income taxes

     4,777         5,667         (9,144     —          1,300   

Prepaid expenses and other current assets

     80         1,969         1,234        —          3,283   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     250,965         61,987         25,259        (249,209     89,002   

Investment in subsidiaries

     151,585         29,226         —          (180,811     —     

Properties, plants and equipment, net

     —           35,572         8,623        —          44,195   

Goodwill

     —           119,970         65,097        —          185,067   

Other intangible assets, net

     —           115,552         44,026        —          159,578   

Deferred financing costs, net

     3,535         —           —          —          3,535   

Other assets

     —           1,494         348        —          1,842   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 406,085       $ 363,801       $ 143,353      $ (430,020   $ 483,219   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities

            

Current liabilities

            

Accounts payable, trade

   $ 554       $ 11,261       $ 4,704      $ —        $ 16,519   

Intercompany payables

     —           219,458         29,751        (249,209     —     

Accrued expenses

     99         13,920         5,322        —          19,341   

Accrued income taxes

     —           —           199        —          199   

Accrued interest

     5         878         1        —          884   

Current portion of long-term obligations

     4,626         50         463        —          5,139   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     5,284         245,567         40,440        (249,209     42,082   

Non-current liabilities

            

Long-term obligations, net of current portion

     253,445         86         7,882        —          261,413   

Non-current liabilities

     —           2,814         —          —          2,814   

Deferred income taxes

     5,304         20,148         9,406        —          34,858   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     264,033         268,615         57,728        (249,209     341,167   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Contingencies and commitments

            

Stockholder’s equity:

            

Common stock

     —           —           —          —          —     

Other stockholder’s equity

     142,052         95,186         85,625        (180,811     142,052   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     142,052         95,186         85,625        (180,811     142,052   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 406,085       $ 363,801       $ 143,353      $ (430,020   $ 483,219   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2011

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
   

Consolidated Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

Net sales:

          

Sales

   $ —        $ 68,935      $ 30,319      $ —        $ 99,254   

Intercompany sales

     —          719        2,297        (3,016     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     —          69,654        32,616        (3,016     99,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of operations:

          

Cost of goods sold (exclusive of depreciation)

     —          42,119        20,676        (3,016     59,779   

Selling, general and administrative expenses

     555        10,109        5,429        —          16,093   

Depreciation and amortization

     —          4,468        1,577        —          6,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (555     12,958        4,934        —          17,337   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     337        5,712        577        —          6,626   

Other expense (income), net

     (21     (128     82        —          (67
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (871     7,374        4,275        —          10,778   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in net income of subsidiaries

     16,050        —          —          (16,050     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,179        7,374        4,275        (16,050     10,778   

Provision (benefit) for income taxes

     7,165        4,129        (8,530     —          2,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,014      $ 3,245      $ 12,805      $ (16,050   $ 8,014   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2010

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
    

Consolidated Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

Net sales:

            

Sales

   $ —        $ 65,907       $ 28,294       $ —        $ 94,201   

Intercompany sales

     —          781         2,083         (2,864     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total net sales

     —          66,688         30,377         (2,864     94,201   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Costs of operations:

            

Cost of goods sold (exclusive of depreciation)

     —          38,721         17,669         (2,864     53,526   

Selling, general and administrative expenses

     359        8,886         4,507         —          13,752   

Depreciation and amortization

     —          4,314         1,523         —          5,837   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (359     14,767         6,678         —          21,086   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Interest expense, net

     305        5,733         673         —          6,711   

Other (income) expense, net

     (41     13         48         —          20   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (623     9,021         5,957         —          14,355   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Equity in net income of subsidiaries

     9,392        —           —           (9,392     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     8,769        9,021         5,957         (9,392     14,355   

Provision for income taxes

     127        3,641         1,945         —          5,713   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 8,642      $ 5,380       $ 4,012       $ (9,392   $ 8,642   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

16


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2011

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
   

Consolidated Non-

Guarantor
Subsidiaries

    Eliminations     Consolidated  

Net sales:

          

Sales

   $ —        $ 133,069      $ 57,824      $ —        $ 190,893   

Intercompany sales

     —          1,275        3,905        (5,180     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     —          134,344        61,729        (5,180     190,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of operations:

          

Cost of goods sold (exclusive of depreciation)

     —          80,624        38,798        (5,180     114,242   

Selling, general and administrative expenses

     882        19,891        10,355        —          31,128   

Depreciation and amortization

     —          8,703        3,090        —          11,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (882     25,126        9,486        —          33,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     538        11,416        1,250        —          13,204   

Other expense (income), net

     141        (145     226        —          222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (1,561     13,855        8,010        —          20,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in net income of subsidiaries

     24,498        —          —          (24,498     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22,937        13,855        8,010        (24,498     20,304   

Provision (benefit) for income taxes

     7,364        6,821        (9,454     —          4,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,573      $ 7,034      $ 17,464      $ (24,498   $ 15,573   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2010

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
    

Consolidated Non-

Guarantor
Subsidiaries

     Eliminations     Consolidated  

Net sales:

            

Sales

   $ —        $ 127,087       $ 53,401       $ —        $ 180,488   

Intercompany sales

     —          1,530         3,296         (4,826     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total net sales

     —          128,617         56,697         (4,826     180,488   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Costs of operations:

            

Cost of goods sold (exclusive of depreciation)

     —          75,031         34,091         (4,826     104,296   

Selling, general and administrative expenses

     901        17,459         9,053         —          27,413   

Depreciation and amortization

     —          8,592         3,092         —          11,684   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (901     27,535         10,461         —          37,095   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Interest expense, net

     510        11,474         1,405         —          13,389   

Other (income) expense, net

     (219     118         687         —          586   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (1,192     15,943         8,369         —          23,120   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Equity in net income of subsidiaries

     14,788        —           —           (14,788     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     13,596        15,943         8,369         (14,788     23,120   

Provision (benefit) for income taxes

     (577     6,426         3,098         —          8,947   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 14,173      $ 9,517       $ 5,271       $ (14,788   $ 14,173   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2011

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operations

   $ (5,773   $ 18,053      $ 1,962      $ —         $ 14,242   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (4,611     (1,881     —           (6,492

Proceeds from sales of equipment

     —          —          8        —           8   

Business acquisitions, net of cash acquired

     —          (15,384     (2,018     —           (17,402
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (19,995     (3,891     —           (23,886
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Borrowings on revolving credit facility

     8,000        —          —          —           8,000   

Payments on senior term loan and acquisition facility

     (2,316     —          (190     —           (2,506

Payments on other long-term debt

     —          (27     (37     —           (64
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     5,684        (27     (227     —           5,430   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash

     —          —          245        —           245   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     (89     (1,969     (1,911     —           (3,969

Cash and cash equivalents, beginning of period

     154        4,160        5,199        —           9,513   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 65      $ 2,191      $ 3,288      $ —         $ 5,544   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2010

 

     Parent /
Issuer
    Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operations

   $ 9,415      $ 2,940      $ 5,467      $ —         $ 17,822   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (3,695     (1,282     —           (4,977

Proceeds from sales of equipment

     —          9        1        —           10   

Business acquisitions, net of cash acquired

     —          —          (1,659     —           (1,659
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (3,686     (2,940     —           (6,626
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Payments on senior term loan and acquisition facility

     (9,614     —          (2,159     —           (11,773

Payments on other long-term debt

     —          (343     —          —           (343
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (9,614     (343     (2,159     —           (12,116
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash

     —          —          (252     —           (252
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     (199     (1,089     116        —           (1,172

Cash and cash equivalents, beginning of period

     237        3,005        7,468        —           10,710   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 38      $ 1,916      $ 7,584      $ —         $ 9,538   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1, “ Financial Statements” in Part I of this quarterly report on Form 10-Q.

The statements in the discussion and analysis regarding our expectations regarding the performance of our business, our liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. Our actual results may differ materially from those contained in or implied by any of these forward-looking statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this report.

Overview

We are a global leader in the digital imaging industry, offering design-to-print graphic services to the international consumer products packaging market in North America, Europe and Asia. Our global service platform and financial capability provide a distinct competitive advantage over the majority of companies in our industry. We offer a full spectrum of innovative digital solutions that streamline the capture, management, execution, and distribution of graphics information. Our brand development, creative design, prepress, image carriers and print support services are utilized in each of the three main printing processes: flexography, gravure and lithography. Our customers, many of which we have served for over 20 years, include large branded consumer products companies, mass merchant retailers and the printers and converters that service them. Our services ensure that our customers are able to obtain or produce consistent, high quality packaging materials often on short turnaround times.

Net sales for the six months ended June 30, 2011 increased 5.8%, or $10.4 million, to $190.9 million from sales of 180.5 million for the six months ended June 30, 2010. This increase in sales was primarily driven by volume growth across our customer base, most notably with large consumer packaged goods companies (CPGs). This sales increase was due to our growth in the United States and Europe. In addition, foreign currency fluctuations, most notably the weakening of the United States dollar compared to the Canadian dollar and British pound, positively impacted sales by $3.1 million for the six months ended June 30, 2011. Furthermore, acquired business generated $1.3 million of incremental sales during the six months ended June 30, 2011.

In February 2011, we acquired the assets of a digital print company in Dallas, Texas that include label printers and other equipment associated with digital printing. This acquisition broadens our digital printing capabilities and service offerings. We now have a larger capacity to offer our customers short run reproduction services and sales samples or packaging mock-ups (product packaging samples that may or may not be filled with actual product). Since such services are generally requested more by our customers’ marketing departments than their procurement departments with whom we typically have the most contact, this expanded service offering allows us to develop additional relationships within our customers’ operations to better understand their needs and help deliver the most consistent and cost-effective solutions.

In April 2011, we acquired the assets of a Canadian provider of packaging and retail graphics services. This acquisition will enable us to obtain additional sales volumes and expand our customer base.

In June 2011, we expanded our service offerings in the area of metal decorating and image carriers for beverage can printing with the acquisition of the assets of a company based in Tampa, Florida. We believe our expanded capabilities will lead to additional opportunities with our existing customers and allow us to further expand our customer base. We will continue to pursue attractive acquisition opportunities in the future.

Income from operations decreased to $33.7 million, or 17.7% of sales, for the six months ended June 30, 2011 compared to $37.1 million, or 20.6% of sales, for the six months ended June 30, 2010. This reduction in income from operations is primarily due to the comparison against the first six months of 2010, which was an unusually profitable period. During the first six months of 2010, and particularly during the quarter ended June 30, 2010, we were operating at capacity and achieving profit margins that were not sustainable in the long-term. Accordingly, we made investments to increase our capacity, including an increase in headcount to support our higher sales volumes. In addition, we expanded our investment in selling and marketing activities to stimulate further organic sales growth. The chart below provides cost of goods sold (exclusive of depreciation), selling and marketing expenses, and general and administrative expenses, each expressed as a percentage of sales.

 

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     Quarter Ended     Quarter Ended  
   June 30, 2011     June 30, 2010  

Net sales

   $ 99,254      $ 94,201   

Cost of goods sold (exclusive of depreciation)

     59,779        53,526   

Cost of goods sold (exclusive of depreciation), as a percentage of net sales

     60.2     56.8
  

 

 

   

 

 

 

Selling and marketing expenses

     11,035        9,203   

General and administrative expenses

     5,058        4,549   
  

 

 

   

 

 

 

Total selling, general, and administrative expenses

     16,093        13,752   

Selling and marketing expenses, as a percentage of net sales

     11.1     9.8
  

 

 

   

 

 

 

General and administrative expenses, as a percentage of net sales

     5.1     4.8
  

 

 

   

 

 

 
     Six Months Ended     Six Months Ended  
   June 30, 2011     June 30, 2010  

Net sales

   $ 190,893      $ 180,488   

Cost of goods sold (exclusive of depreciation)

     114,242        104,296   

Cost of goods sold (exclusive of depreciation), as a percentage of net sales

     59.8     57.8
  

 

 

   

 

 

 

Selling and marketing expenses

     21,655        18,213   

General and administrative expenses

     9,473        9,200   
  

 

 

   

 

 

 

Total selling, general, and administrative expenses

     31,128        27,413   

Selling and marketing expenses, as a percentage of net sales

     11.3     10.1
  

 

 

   

 

 

 

General and administrative expenses, as a percentage of net sales

     5.0     5.1
  

 

 

   

 

 

 

The increased sales level during the first six months of 2011 demonstrates that the benefits of these investments to increase capacity and to stimulate additional organic sales growth are now being realized. We believe the profit margins realized during the first six months of 2011 are a more realistic measure of sustainable profitability. In the future, we will strive to continue to increase sales and income from operations, while maintaining profit margins similar to those achieved in the first six months of 2011.

During the six months ended June 30, 2011, our operations generated cash flows of $14.2 million compared to cash generated from operations of $17.8 million for the six months ended June 30, 2010. The cash generated from operations for the six months ended June 30, 2010 included a use of cash of $4.2 million for the purchase of an exclusive supply agreement. We plan to use the cash generated from our operations to either fund future acquisitions or to strengthen our balance sheet through principal repayments on our outstanding long-term debt obligations. Consistent with our strategy, we used $17.4 million of cash for acquisitions and also made principal repayments of $2.5 million on our senior credit facility during the six months ended June 30, 2011. In connection with the Tampa acquisition, we borrowed $8.0 million on our revolving credit facility during June 2011. In July 2011, we made $3.0 million in principal repayments on the revolving credit facility.

 

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RESULTS OF OPERATIONS

The information presented below for the quarters and six months ended June 30, 2011 and June 30, 2010 was prepared by management and is unaudited. In the opinion of management, all adjustments necessary for a fair statement of our financial position and operating results for such quarters and as of such dates have been included. (Dollar amounts in the table below are in thousands.)

Quarter ended June 30, 2011 compared to quarter ended June 30, 2010

 

     Quarter Ended     Quarter Ended      $     Percentage  
   June 30, 2011     June 30, 2010      Change     Change  
     (unaudited)     (unaudited)               

Net sales

   $ 99,254      $ 94,201       $ 5,053        5.4

Cost of goods sold (exclusive of depreciation)

     59,779        53,526         6,253        11.7

Selling, general, and administrative expenses

     16,093        13,752         2,341        17.0

Depreciation and amortization

     6,045        5,837         208        3.6
  

 

 

   

 

 

    

 

 

   

Income from operations

     17,337        21,086         (3,749     (17.8 %) 
  

 

 

   

 

 

    

 

 

   

Interest expense

     6,626        6,711         (85     (1.3 %) 

Other expense (income), net

     (67     20         (87     (435.0 %) 
  

 

 

   

 

 

    

 

 

   

Income before income taxes

     10,778        14,355         (3,577     (24.9 %) 

Provision for income taxes

     2,764        5,713         (2,949     (51.6 %) 
  

 

 

   

 

 

    

 

 

   

Net income

   $ 8,014      $ 8,642       $ (628     (7.3 %) 
  

 

 

   

 

 

    

 

 

   

Net Sales. Sales for the quarter ended June 30, 2011 increased 5.4%, or $5.1 million, to $99.3 million from $94.2 million for the quarter ended June 30, 2010. This increase in sales was driven largely by volume growth across our customer base, most notably with large CPGs. In addition, sales were positively impacted by fluctuations in foreign currency exchange rates and acquisitions. The weakening of the United States dollar, as compared to the Canadian dollar and British pound, positively impacted sales by $1.1 million and $0.8 million, respectively. Acquisitions contributed $1.1 million in incremental sales for the quarter.

Sales in the United States increased by $3.0 million for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 and included incremental sales of $0.4 million and $0.3 million associated with the acquisitions in Dallas and Tampa, respectively. After excluding the impact of foreign currency fluctuations, sales in Europe for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 increased approximately $0.5 million. The impact of these sales increases were offset by a reduction in sales in Canada. Excluding the impact of $0.4 million in incremental sales from the acquisition in Canada and foreign currency fluctuations of $1.1 million, sales in Canada decreased $0.6 million. This decrease was primarily due to the timing of orders in Canada which resulted in particularly strong sales in the quarter ended June 30, 2010. The small residual sales decrease was due to our operations in Mexico and Asia.

Cost of Goods Sold. Cost of goods sold for the quarter ended June 30, 2011 increased 11.7%, or $6.3 million, to $59.8 million from $53.5 million for the quarter ended June 30, 2010. The increase in cost of goods sold was due to a combination of the increase in sales, incremental costs of goods sold associated with acquisitions, and the aforementioned investments to increase capacity to support higher sales volumes. In addition, the weakening of the United States dollar as compared to the Canadian dollar and British pound resulted in increases in cost of goods sold of $0.6 million and $0.5 million, respectively.

Cost of goods sold expressed as a percentage of sales increased to 60.2% for the quarter ended June 30, 2011 compared to 56.8% for the quarter ended June 30, 2010. As previously discussed, the high profit margins for the quarter ended June 30, 2010 were not sustainable and the profit margins realized during the quarter ended June 30, 2011 are more indicative of sustainable profit margins.

 

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Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended June 30, 2011 increased 17.0%, or $2.3 million, to $16.1 million from $13.8 million for the quarter ended June 30, 2010. This increase was due to investments in selling and marketing expenses in order to stimulate future organic sales growth. In addition, the weakening of the United States dollar as compared to the British pound and Canadian dollar resulted in a combined increase of selling, general and administrative expenses of $0.3 million for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the quarter ended June 30, 2011 increased 3.6%, or $0.2 million, to $6.0 million from $5.8 million for the quarter ended June 30, 2010.

Interest Expense. Interest expense for the quarter ended June 30, 2011 decreased 1.3%, or $0.1 million, to $6.6 million from $6.7 million for the quarter ended June 30, 2010. This minor decrease resulted from the interest savings associated with the Company’s debt reduction efforts essentially being offset by an increase in interest rates. The significant principal repayments on the senior term loan and acquisition facilities during fiscal 2010 and the first half of 2011 resulted in a combined reduction in interest expense of $0.3 million for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. These interest expense savings were partially offset by a $0.2 million increase in interest expense stemming from an increase in interest rates on the senior term loan and acquisition facilities due to the refinancing of our senior credit facility in the fourth quarter of 2010. The weighted average interest rates on the senior term and acquisition loan facilities were 3.9% and 2.9% for the quarters ended June 30, 2011 and June 30, 2010, respectively.

Other Expense (Income), net. Other expense (income), net fluctuated by $0.1 million to $0.1 million of income for the quarter ended June 30, 2011 as compared to less than $0.1 million of expense for the quarter ended June 30, 2010. Other expense (income), net, primarily consists of realized (gains) losses on foreign exchange.

Provision for Income Taxes. The effective tax rate for the quarter ended June 30, 2011 was 25.6%, compared to 39.8% for the quarter ended June 30, 2010. The significant decrease in the effective tax rate was due to an income tax benefit of $1.2 million recorded during the quarter ended June 30, 2011 associated with a revision in the calculation of estimated state tax liabilities expected in the United States. This tax benefit was primarily related to aligning our tax accounts with an election made in the first quarter of 2011 and resulted from a reduction in the deferred state tax liability and the associated expense for intercompany interest income repatriated from foreign subsidiaries.

Six months ended June 30, 2011 compared to six months ended June 30, 2010

 

     Six Months Ended      Six Months Ended      $     Percentage  
   June 30, 2011      June 30, 2010      Change     Change  
     (unaudited)      (unaudited)               

Net sales

   $ 190,893       $ 180,488       $ 10,405        5.8

Cost of goods sold (exclusive of depreciation)

     114,242         104,296         9,946        9.5

Selling, general, and administrative expenses

     31,128         27,413         3,715        13.6

Depreciation and amortization

     11,793         11,684         109        0.9
  

 

 

    

 

 

    

 

 

   

Income from operations

     33,730         37,095         (3,365     (9.1 %) 
  

 

 

    

 

 

    

 

 

   

Interest expense

     13,204         13,389         (185     (1.4 %) 

Other expense (income), net

     222         586         (364     (62.1 %) 
  

 

 

    

 

 

    

 

 

   

Income before income taxes

     20,304         23,120         (2,816     (12.2 %) 

Provision for income taxes

     4,731         8,947         (4,216     (47.1 %) 
  

 

 

    

 

 

    

 

 

   

Net income

   $ 15,573       $ 14,173       $ 1,400        9.9
  

 

 

    

 

 

    

 

 

   

Net Sales. Sales for the six months ended June 30, 2011 increased 5.8%, or $10.4 million, to $190.9 million from $180.5 million for the six months ended June 30, 2010. This increase in sales was driven primarily by volume growth across our customer base, most notably with large CPGs. In addition, sales were positively impacted by fluctuations in foreign currency exchange rates and acquisitions. The weakening of the United States dollar, as compared to the Canadian dollar and British pound, positively impacted sales by $1.9 million and $1.0 million, respectively. Acquisitions contributed $1.3 million in incremental sales for the period.

 

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Sales in the United States increased by $6.0 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 and included incremental sales of $0.7 million and $0.3 million associated with the acquisitions in Dallas and Tampa, respectively. After excluding the impact of foreign currency fluctuations, sales in Europe for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 increased approximately $1.5 million. Excluding the impact of $0.4 million in incremental sales from the acquisition in Canada and foreign currency fluctuations of $1.9 million, sales in Canada decreased $0.5 million. This decrease was primarily due to the timing of orders in Canada which resulted in particularly strong sales during the first half of 2010 when compared to the same period of 2011. The small residual sales increase was due to our operations in Asia.

Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2011 increased 9.5%, or $9.9 million, to $114.2 million from $104.3 million for the six months ended June 30, 2010. The increase in cost of goods sold was due to a combination of the increase in sales, incremental costs of goods sold associated with acquisitions, and the aforementioned investments to increase capacity to support higher sales volumes. In addition, the weakening of the United States dollar as compared to the Canadian dollar and British pound resulted in an increase in cost of goods sold of $1.1 million and $0.6 million, respectively.

Cost of goods sold expressed as a percentage of sales increased to 59.8% for the six months ended June 30, 2011 compared to 57.8% for the six months ended June 30, 2010. As previously discussed, the high profit margins for the six months ended June 30, 2010 were not sustainable and the profit margins realized during the six months ended June 30, 2011 are more indicative of sustainable profit margins.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2011 increased 13.6%, or $3.7 million, to $31.1 million from $27.4 million for the six months ended June 30, 2010. This increase was due to investments in selling and marketing expenses in order to stimulate future organic sales growth. In addition, the weakening of the United States dollar as compared to the British pound and Canadian dollar resulted in a combined increase of selling, general and administrative expenses of $0.4 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the six months ended June 30, 2011 increased 0.9%, or $0.1 million, to $11.8 million from $11.7 million for the six months ended June 30, 2010.

Interest Expense. Interest expense for the six months ended June 30, 2011 decreased 1.4%, or $0.2 million, to $13.2 million from $13.4 million for the six months ended June 30, 2010. This minor decrease resulted from the interest savings associated with the Company’s debt reduction efforts during fiscal 2010 essentially being offset by an increase in interest rates. The significant principal repayments on the senior term loan and acquisition facilities during fiscal 2010 and the first half of 2011 resulted in a combined reduction in interest expense of $0.6 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. These interest expense savings were partially offset by a $0.5 million increase in interest expense stemming from an increase in interest rates on the senior term loan and acquisition facilities due to the refinancing of our senior credit facility in the fourth quarter of 2010. The weighted average interest rates on the senior term and acquisition loan facilities were 3.9% and 2.9% for the six months ended June 30, 2011 and June 30, 2010, respectively.

Other Expense (Income), net. Other expense (income), net decreased by $0.4 million to $0.2 million of expense for the six months ended June 30, 2011 from $0.6 million of expense for the six months ended June 30, 2010. Other expense (income), net, primarily consists of realized (gains) losses on foreign exchange. The fluctuation in other expense (income), net for the six months ended June 30, 2011 from the six months ended June 30, 2010 was due to the combined impact of a gain of $0.2 million on the exchange of an investment for fixed assets and slightly more favorable fluctuations in foreign currency exchange rates for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Provision for Income Taxes. The effective tax rate for the six months ended June 30, 2011 was 23.3%, compared to 38.7% for the six months ended June 30, 2010. The significant decrease in the effective tax rate was primarily due to two items. First, an income tax benefit of $1.6 million was recorded during the six months ended June 30, 2011 associated with the reversal of withholding taxes on intercompany interest accrued but unpaid. This reversal is the result of the Company’s election to repatriate intercompany interest back to the United States for tax purposes and a corresponding reduction of the withholding rate from 25% to 0% on the intercompany interest accrued but unpaid. Furthermore, an additional income tax benefit of $1.2 million was recorded during the six months ended June 30, 2011 related to a revision in the calculation of estimated state tax liabilities expected in the United States. This tax benefit was primarily related to aligning our tax accounts with an election made in the first quarter of 2011 and resulted from a reduction in the deferred state tax liability and the associated expense for intercompany interest income repatriated from foreign subsidiaries.

 

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Liquidity and Capital Resources

At June 30, 2011, we had $5.5 million in cash and $50.9 million in working capital compared with $9.5 million in cash and $46.9 million in working capital at December 31, 2010. The $4.0 million decrease in cash resulted from $17.4 million in net cash paid for acquisitions, $6.5 million in capital expenditures, and $2.6 million in principal repayments of long-term debt, partially offset by $14.2 million in cash provided by operations and $8.0 million in cash borrowed on the revolving credit facility. The $4.0 million increase in working capital is primarily due to the combination of increases in accounts receivable, inventories, income taxes receivable, and deferred income taxes, as well as a decrease in accounts payable, partially offset by increases in the current portion of long-term debt, accrued expenses, and accrued income taxes, as well as a decrease in cash.

Our revolving credit facility (the “Revolver”) under our senior secured credit facility provides for $40.0 million of borrowing availability. We borrowed $8.0 million on the Revolver in June 2011 in connection with the Tampa acquisition and had $32.0 million of additional borrowing availability on the Revolver at June 30, 2011. We subsequently made principal repayments of $3.0 million on the Revolver in July 2011. The Revolver is available through September 30, 2013. We expect that cash generated from operating activities and availability under the Revolver will be our principal sources of liquidity. Based on our current level of operations, we believe our cash flow from operations and availability under the Revolver will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us under our Revolver in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs.

We are highly leveraged and our aggregate indebtedness at June 30, 2011 was $272.5 million. In 2013, our debt service requirements will substantially increase as a result of the September 30, 2013 maturity of the loans under the Amended and Restated Credit Agreement and the December 15, 2013 maturity of the 12% Senior Subordinated Notes (“Notes”). Our ability to operate our business, service our debt requirements and reduce our total debt will depend upon our future operating performance.

Our senior secured credit facility contains customary financial and other covenants, including a maximum leverage ratio and a minimum interest coverage ratio, as defined in the Amended and Restated Credit Agreement. Our senior secured credit facility also places certain restrictions on our ability to make capital expenditures. As of June 30, 2011, we were in compliance with all covenants. Below are the required financial covenant levels and the actual levels as of June 30, 2011:

 

    Required     Actual  

Maximum leverage ratio

    5.00        2.97   

Minimum interest coverage ratio

    1.80        3.68   

Maximum capital expenditures for fiscal 2011

  not to exceed $ 18.1 million (1)    $ 6.5 million   

 

(1) 

The maximum annual capital expenditures consists of $15.0 million plus $3.1 million of allowed carry over from the fiscal year ended December 31, 2010.

 

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We believe that our financing arrangements provide us with sufficient financial flexibility to fund our operations, debt service requirements and other committed obligations. Our ability to access additional capital in the long-term depends on the availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time-to-time, we review our long-term financing and capital structure. We may periodically explore alternatives to our current financing prior to the maturity of the Amended and Restated Credit Agreement and Notes. These alternatives may include the issuance of additional long-term debt, refinancing our credit facility and other restructurings or financings. In addition, we may from time to time seek to retire our outstanding Notes in open market purchases, privately negotiated transactions, through calling the Notes or otherwise. These repurchases, if any, will depend on prevailing market conditions based on our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our Notes may be material and may involve significant amounts of cash and/or financing availability.

Income taxes

Based on the changes noted in Note H “Income Taxes” included in the condensed consolidated financial statements and on our recent results, we expect that our cash payments for income taxes will be significantly greater in 2011 than in 2010 and prior years.

Six months ended June 30, 2011 compared to six months ended June 30, 2010

Cash flows from operating activities. Net cash provided by operating activities was $14.2 million for the six months ended June 30, 2011 as compared to $17.8 million for the six months ended June 30, 2010. The primary reasons for this decrease are a $3.4 million decrease in income from operations for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 and more significant increases in the accounts receivable, prepaid expenses and other current assets during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Partially offsetting these items are a use of cash in the six months ended June 30, 2010 of $4.2 million for the purchase of an exclusive supply agreement.

Cash flows from investing activities. Net cash used for investing activities was $23.9 million for the six months ended June 30, 2011 as compared to $6.6 million for the six months ended June 30, 2010. The increase in cash used for investing activities is due to an increase in net cash paid for acquisitions of $15.7 million and capital expenditures of $1.5 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Cash flows from financing activities. Net cash provided by financing activities was $5.4 million for the six months ended June 30, 2011 as compared to cash used in financing activities of $12.1 million for the six months ended June 30, 2010. This fluctuation is the result of utilizing available cash for acquisitions during the six months ended June 30, 2011 as opposed to utilizing available cash to make additional principal repayments on long-term obligations during the six months ended June 30, 2010. In addition, borrowings of $8.0 million were made on the Revolver during the six months ended June 30, 2011 in connection with funding acquisitions.

Contractual Obligations

At June 30, 2011, there were no material changes in our December 31, 2010 contractual obligations, other than the previously discussed $8.0 borrowing on the Revolver in June 2011. As previously discussed, $3.0 million of principal repayments on the Revolver were made in July 2011.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires companies to retrospectively present comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and eliminates the current option of presenting components of comprehensive income as part of the statement of changes

 

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in stockholders’ equity. ASU 2011-05 also will require companies to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. ASU 2011-05 will be effective for the Company on January 1, 2012 although early adoption is permitted. The adoption of ASU 2011-05 will not have a material impact on the Company’s results of operations or financial position.

There have been no recently issued accounting standards expected to have a material impact on our condensed consolidated financial statements.

There have been no other material changes to our critical accounting policies since December 31, 2010.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At June 30, 2011, there were no material changes in our December 31, 2010 market risks relating to interest and foreign exchange rates.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2011. Based on this evaluation, which excluded an assessment of internal control of the operations acquired in Tampa, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011, at the reasonable assurance level.

The Company completed the Tampa acquisition effective June 20, 2011. As permitted by the SEC, management’s assessment as of June 30, 2011 did not include the internal controls of the Tampa acquisition, which is included in the Company’s consolidated financial statements as of June 30, 2011.

Changes in Internal Control Over Financial Reporting

The Company is in the process of implementing the Order to Cash module in its enterprise resource planning system for most of its U.S. and Canadian locations. This implementation is being performed in stages and will result in certain changes to business processes and internal controls impacting financial reporting. Management is taking the necessary steps to monitor and maintain appropriate internal controls during this period of change. The Company also continues to integrate recent acquisitions into corporate processes. No potential internal control changes due to recent acquisitions would be considered material to, or are reasonably likely to materially affect, our internal control over financial reporting. The Tampa acquisition is expected to be fully integrated into corporate processes by the end of the second quarter of 2012.

Except as discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

 

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Item 1A. Risk Factors

There have been no material changes to the risk factors included in the Registrant’s Form 10-K for the year ended December 31, 2010.

 

Item 6. Exhibits

 

EXHIBIT
NUMBER

 

DESCRIPTION

  3.   CERTIFICATE OF INCORPORATION AND BY-LAWS
  3.1   Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on November 8, 2005, incorporated by reference to exhibit 3.1 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  3.2   By-Laws of the Registrant adopted on November 8, 2005, incorporated by reference to exhibit 3.2 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.   INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
  4.1   Certificate of Incorporation. See Exhibit 3.1
  4.2   By-laws. See Exhibit 3.2
  4.3   Indenture dated as of December 30, 2005, by and between the Registrant and Wells Fargo Bank National Association, as trustee, relating to the 12% Senior Subordinated Notes due 2013, incorporated by reference to exhibit 4.3 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.4   Form of Global 12% Notes due 2013 (included in Exhibit 4.3)
  4.5   Form of Regulation S Temporary Global 12% Notes due 2013 (included in Exhibit 4.3)
  4.6   Supplemental Indenture, dated April 25, 2006, by and among the Registrant, Southern Graphic Systems, Inc., Project Dove Holdco, Inc. and Wells Fargo Bank, N.A., as trustee, incorporated by reference to exhibit 4.6 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.7   Registration Rights Agreement, dated as of December 30, 2005, by and between the Registrant, certain of its subsidiaries as Guarantors, and UBS Securities LLC and Lehman Brothers Inc. as Initial Purchasers, incorporated by reference to exhibit 4.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.8   Credit Agreement, dated as of December 30, 2005, among the Registrant and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, UBS Securities LLC and Lehman Brothers Inc., as joint arrangers and joint bookmanagers, UBS AG, Stamford Branch, as issuing bank, US administrative agent, US collateral agent and Canadian collateral agent, Lehman Brothers Inc., as syndication agent, CIT Lending Services Corporation, as documentation agent, National City Bank, as Canadian administrative agent, UBS Loan Finance LLC, as swingline lender, and the lenders referred to therein, incorporated by reference to exhibit 10.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.9   First Amendment to Credit Agreement by and among the Registrant and Southern Graphic Systems - Canada, Co., as borrowers, certain affiliates of the borrowers, as guarantors, and the lenders party to the Credit Agreement as described therein, incorporated by reference to exhibit 10.8 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.10   Security Agreement, dated as of December 30, 2005, by the Registrant, as borrower, certain of the Registrant’s subsidiaries, as guarantors, and UBS AG, Stamford Branch, as US collateral agent, incorporated by reference to exhibit 10.9 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825

 

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  4.11   Canadian Security Agreement, dated as of December 30, 2005, by certain of the Registrant’s subsidiaries, as pledgors, and UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.10 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.12   Debenture dated as of December 30, 2005, from SGS-UK Holdings Limited and others, as chargors, in favour of UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.11 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
  4.13   Limited Waiver and Consent to Credit Agreement dated as of April 11, 2007 among SGS International, Inc. and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, the lenders signatory thereto, UBS AG, Stamford Branch, as US administrative agent, US collateral agent and Canadian collateral agent, and National City Bank, as Canadian administrative agent, incorporated by reference to Exhibit 4.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed May 15, 2007, File No. 333-133825
  4.14   Amendment Agreement, dated as of October 25, 2010, to the Credit Agreement dated as of December 30, 2005, by and among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern-Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”), the guarantors from time to time party thereto, the lending institutions from time to time party thereto, UBS Securities LLC and Lehman Brothers Inc., as joint lead arrangers, UBS Securities LLC, as syndication agent, CIT Lending Services Corporation, as documentation agent, UBS Loan Finance LLC, as swingline lender, UBS AG, Stamford Branch, as issuing bank, as US administrative agent, as US collateral agent and as Canadian collateral agent, and PNC Bank, National Association, as Successor to National City Bank, as Canadian administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
  4.15   Amended and Restated Credit Agreement dated as of October 25, 2010, among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern – Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”, and together with Canadian Borrower, the “Borrowers”), certain affiliates of the Borrowers as guarantors, the Lenders thereto, UBS Securities LLC and Fifth Third Bank, as joint lead arrangers, UBS Securities LLC, as syndication agent, JPMorgan Chase Bank, N.A., as documentation agent, UBS Loan Finance LLC, as swingline lender, and UBS AG, Stamford Branch, as issuing bank, as US administrative agent, as Canadian administrative agent, as US collateral agent and as Canadian collateral agent, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
  4.16   Omnibus Acknowledgement, Reaffirmation and Amendment to Security Documents made as of October 25, 2010, by and among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern – Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”), the Guarantors party thereto and UBS AG, Stamford Branch, as US administrative agent, as US collateral agent, as Canadian administrative agent and as Canadian collateral agent, incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
  4.17   Supplemental Debenture [not dated] between SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited and UBS, AG, Stamford Branch, incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
31.   CERTIFICATIONS
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

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32.   CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES OXLEY ACT OF 2002
32.1   Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

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.

 

    SGS INTERNATIONAL, INC.
Date: August 15, 2011   By:  

/s/ Henry R. Baughman

   

Henry R. Baughman

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date: August 15, 2011   By:  

/s/ James M. Dahmus

    James M. Dahmus
    Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)

 

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