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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 September 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

incorporation or organization)

 

(I.R.S. Employer

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 October 31, 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

     27   

Item 4.

 

Controls and Procedures

     28   

PART II - OTHER INFORMATION

     28   

Item 1.

 

Legal Proceedings

     28   

Item 1A.

 

Risk Factors

     28   

Item 6.

 

Exhibits

     29   

SIGNATURES

     31   

 

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
September 30,
2011
    Three Months
Ended
September 30,
2010
 

NET SALES

   $ 93,314      $ 87,282   

COSTS OF OPERATIONS:

    

Cost of goods sold (exclusive of depreciation)

     57,873        53,400   

Selling, general, and administrative expenses

     19,393        12,865   

Depreciation and amortization

     6,175        5,961   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     9,873        15,056   
  

 

 

   

 

 

 

NON-OPERATING EXPENSES:

    

Interest expense, net

     6,592        6,569   

Other income, net

     (387     (294
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     3,668        8,781   

PROVISION FOR INCOME TAXES

     1,087        3,443   
  

 

 

   

 

 

 

NET INCOME

   $ 2,581      $ 5,338   
  

 

 

   

 

 

 

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)

 

 

 

     Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

NET SALES

   $ 284,207      $ 267,770   

COSTS OF OPERATIONS:

    

Cost of goods sold (exclusive of depreciation)

     172,115        157,696   

Selling, general, and administrative expenses

     50,521        40,278   

Depreciation and amortization

     17,968        17,645   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     43,603        52,151   
  

 

 

   

 

 

 

NON-OPERATING EXPENSES:

    

Interest expense, net

     19,796        19,958   

Other (income) expense, net

     (165     292   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     23,972        31,901   

PROVISION FOR INCOME TAXES

     5,818        12,390   
  

 

 

   

 

 

 

NET INCOME

   $ 18,154      $ 19,511   
  

 

 

   

 

 

 

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)

 

 

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 6,715      $ 9,513   

Receivables from customers, less allowances of $1,850 and $1,563 at September 30, 2011 and December 31, 2010, respectively

     75,031        65,153   

Inventories

     11,468        9,753   

Income taxes receivable

     2,222        —     

Deferred income taxes

     4,303        1,300   

Prepaid expenses and other current assets

     3,866        3,283   
  

 

 

   

 

 

 

Total current assets

     103,605        89,002   

Properties, plants and equipment, net

     47,104        44,195   

Goodwill

     189,938        185,067   

Other intangible assets, net

     164,096        159,578   

Deferred financing costs, net

     2,600        3,535   

Other assets

     2,272        1,842   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 509,615      $ 483,219   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Current liabilities:

    

Accounts payable, trade

   $ 13,127      $ 16,519   

Accrued expenses

     20,995        19,341   

Accrued income taxes

     1,266        199   

Accrued interest

     6,118        884   

Current portion of long-term obligations

     10,139        5,139   
  

 

 

   

 

 

 

Total current liabilities

     51,645        42,082   

Long-term obligations, net of current portion

     257,326        261,413   

Non-current liabilities

     3,391        2,814   

Deferred income taxes

     41,262        34,858   
  

 

 

   

 

 

 

Total liabilities

     353,624        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 (loss) - unrealized translation adjustments, net of tax

     (1,736     2,479   

Retained earnings

     50,727        32,573   
  

 

 

   

 

 

 

Total stockholder’s equity

     155,991        142,052   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

   $ 509,615      $ 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)

 

 

 

     Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

CASH FLOWS FROM OPERATING ACTIVITIES

   $ 28,376      $ 38,210   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of properties, plants and equipment

     (10,566     (7,043

Proceeds from sales of equipment

     9        10   

Business acquisitions, net of cash acquired

     (21,779     (2,047
  

 

 

   

 

 

 

Net cash used in investing activities

     (32,336     (9,080
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings on revolving credit facility

     8,000        —     

Payments on revolving credit facility

     (3,000     —     

Payments on senior term loan and acquisition facility

     (3,758     (11,870

Payments on other long-term debt

     (95     (480
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,147        (12,350
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     15        47   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (2,798     16,827   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     9,513        10,710   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 6,715      $ 27,537   
  

 

 

   

 

 

 

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. These subsidiaries also include SGS Argentina S.R.L. since July 2011.

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:

 

     September 30,
2011
     December 31,
2010
 

Raw materials

   $ 3,065       $ 3,180   

Work-in-process

     8,403         6,573   
  

 

 

    

 

 

 

Total

   $ 11,468       $ 9,753   
  

 

 

    

 

 

 

 

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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 September 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other.” ASU 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under ASU 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company adopted ASU 2011-08 effective October 1, 2011. The adoption of ASU 2011-08 did not have a material impact on the Company’s results of operations or financial position.

 

B. Acquisitions

During the nine months ended September 30, 2011, the Company completed four acquisitions with an aggregate estimated purchase price of $24,107. 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. On September 16, 2011, Southern Graphic Systems, Inc. acquired the assets of an Ohio-based gravure engraving/imaging business.

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 $2,569 of the estimated aggregate purchase price has been deferred until subsequent periods. The deferred purchase price consists of $1,819 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

   $ 988   

Properties, plants and equipment

     2,230   

Goodwill

     7,064   

Customer relationships

     14,233   

Liabilities assumed

     (408
  

 

 

 

Estimated aggregate acquisition price

   $ 24,107   
  

 

 

 

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:

 

     September 30,
2011
    December 31,
2010
 

Goodwill, cost

   $ 189,938      $ 185,067   
  

 

 

   

 

 

 

Customer relationships, cost

   $ 190,465      $ 177,616   

Customer relationships, accumulated amortization

     (48,226     (41,654

Other intangible assets, cost

     30,630        31,008   

Other intangible assets, accumulated amortization

     (8,773     (7,392
  

 

 

   

 

 

 

Total

   $ 164,096      $ 159,578   
  

 

 

   

 

 

 

The change in goodwill, customer relationships (cost) and other intangible assets (cost) during the nine months ended September 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

     7,064        14,233        —     

Changes due to foreign currency fluctuations

     (2,193     (1,384     (378
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 189,938      $ 190,465      $ 30,630   
  

 

 

   

 

 

   

 

 

 

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 $624 and $528 for the nine months ended September 30, 2011 and September 30, 2010, respectively. Amortization of $208 was recorded in each of the quarters ended September 30, 2011 and September 30, 2010.

 

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Table of Contents
D. Interest Expense, net

Interest expense, net consists of the following:

 

     Three Months
Ended
September 30,
2011
     Three Months
Ended
September 30,
2010
 

Interest on senior term loan

   $ 603       $ 627   

Interest on borrowings on acquisition facility

     285         286   

Interest on senior subordinated notes

     5,235         5,235   

Interest on revolving loan facility

     55         —     

Amortization of deferred financing costs

     310         355   

Commitment fees on senior credit facility

     91         53   

Other

     13         13   
  

 

 

    

 

 

 

Total

   $ 6,592       $ 6,569   
  

 

 

    

 

 

 
     Nine Months
Ended
September 30,
2011
     Nine Months
Ended
September 30,
2010
 

Interest on senior term loan

   $ 1,860       $ 2,026   

Interest on borrowings on acquisition facility

     884         848   

Interest on senior subordinated notes

     15,705         15,705   

Interest on revolving loan facility

     72         —     

Amortization of deferred financing costs

     935         1,181   

Commitment fees on senior credit facility

     289         159   

Other

     51         39   
  

 

 

    

 

 

 

Total

   $ 19,796       $ 19,958   
  

 

 

    

 

 

 

 

E. Comprehensive Income (Loss)

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

 

     Three Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2010
 

Net income

   $ 2,581      $ 5,338   

Cumulative translation adjustments, net

     (8,272     3,559   
  

 

 

   

 

 

 

Total

   $ (5,691   $ 8,897   
  

 

 

   

 

 

 
     Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

Net income

   $ 18,154      $ 19,511   

Cumulative translation adjustments, net

     (4,215     486   
  

 

 

   

 

 

 

Total

   $ 13,939      $ 19,997   
  

 

 

   

 

 

 

 

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 September 30, 2011 on the Company’s balance sheet, and the input categories associated with those assets:

 

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

Deferred compensation plan assets (a)

   $ 1,778       $ 1,778   

 

(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 $175,608 at September 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 September 1, 2011 and October 31, 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. As discussed below in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company entered into a confidential settlement of a legal proceeding in the third quarter of 2011.

 

H. Income Taxes

The effective tax rate for the nine months ended September 30, 2011 was 24.3% compared to 38.8% for the nine months ended September 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 nine months ended September 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 nine months ended September 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. As a result of these items, we currently expect our effective tax rate for the year ended December 31, 2011 to be approximately 27%.

The effective tax rate for the quarter ended September 30, 2011 was 29.6% compared to 39.2% for the quarter ended September 30, 2010. This decrease in the effective tax rate was due to revised management estimates based on differences between amounts recorded in our financial statement compared to our final 2010 tax return, combined with an overall lower blended state and federal tax rate in the United States.

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

 

11


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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 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 September 30, 2011, undistributed earnings of international subsidiaries considered permanently reinvested were approximately $10,577. 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.

 

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 nine months ended September 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.

 

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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

September 30, 2011

 

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

Assets

             

Current assets

             

Cash and cash equivalents

   $ 86       $ 1,560       $ 5,069       $ —        $ 6,715   

Receivables from customers, less allowances

     —           46,643         28,388         —          75,031   

Intercompany receivables

     249,356         630         4,305         (254,291     —     

Inventories

     —           8,042         3,426         —          11,468   

Income taxes receivable

     —           4,777         43         (2,598     2,222   

Deferred income taxes

     319         3,920         64         —          4,303   

Prepaid expenses and other current assets

     47         2,307         1,512         —          3,866   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     249,808         67,879         42,807         (256,889     103,605   

Investment in subsidiaries

     170,064         29,021         36,567         (235,652     —     

Properties, plants and equipment, net

     —           37,904         9,200         —          47,104   

Goodwill

     —           127,001         62,937         —          189,938   

Other intangible assets, net

     —           121,965         42,131         —          164,096   

Deferred financing costs, net

     2,600         —           —           —          2,600   

Other assets

     —           1,927         345         —          2,272   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 422,472       $ 385,697       $ 193,987       $ (492,541   $ 509,615   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Current liabilities

             

Accounts payable, trade

   $ 443       $ 7,980       $ 4,704       $ —        $ 13,127   

Intercompany payables

     —           223,802         30,489         (254,291     —     

Accrued expenses

     —           14,848         6,147         —          20,995   

Accrued income taxes

     2,598         —           1,266         (2,598     1,266   

Accrued interest

     5         6,112         1         —          6,118   

Current portion of long-term obligations

     9,579         49         511         —          10,139   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     12,625         252,791         43,118         (256,889     51,645   

Non-current liabilities

             

Long-term obligations, net of current portion

     250,068         71         7,187         —          257,326   

Non-current liabilities

     —           3,391         —           —          3,391   

Deferred income taxes

     3,575         29,267         8,420         —          41,262   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     266,268         285,520         58,725         (256,889     353,624   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contingencies and commitments

             

Stockholder’s equity

             

Common stock

     —           —           —           —          —     

Other stockholder’s equity

     156,204         100,177         135,262         (235,652     155,991   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholder’s equity

     156,204         100,177         135,262         (235,652     155,991   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 422,472       $ 385,697       $ 193,987       $ (492,541   $ 509,615   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 September 30, 2011

 

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

Net sales:

          

Sales

   $ —        $ 65,972      $ 27,342      $ —        $ 93,314   

Intercompany sales

     —          821        2,106        (2,927     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     —          66,793        29,448        (2,927     93,314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of operations:

          

Cost of goods sold (exclusive of depreciation)

     —          41,224        19,576        (2,927     57,873   

Selling, general and administrative expenses

     (704     15,008        5,089        —          19,393   

Depreciation and amortization

     —          4,620        1,555        —          6,175   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     704        5,941        3,228        —          9,873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     455        5,685        452        —          6,592   

Other expense (income), net

     (61     1        (327     —          (387
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in net income from subsidiaries

     310        255        3,103        —          3,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in net income of subsidiaries

     235        —          —          (235     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     545        255        3,103        (235     3,668   

Provision (benefit) for income taxes

     (2,036     2,138        985        —          1,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,581      $ (1,883   $ 2,118      $ (235   $ 2,581   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 30, 2010

 

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

Net sales:

           

Sales

   $ —        $ 62,218      $ 25,064       $ —        $ 87,282   

Intercompany sales

     —          710        1,530         (2,240     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total net sales

     —          62,928        26,594         (2,240     87,282   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Costs of operations:

           

Cost of goods sold (exclusive of depreciation)

     —          37,880        17,760         (2,240     53,400   

Selling, general and administrative expenses

     453        7,838        4,574         —          12,865   

Depreciation and amortization

     —          4,292        1,669         —          5,961   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (453     12,918        2,591         —          15,056   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense, net

     147        5,693        729         —          6,569   

Other (income) expense, net

     145        (558     119         —          (294
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (745     7,783        1,743         —          8,781   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity in net income of subsidiaries

     6,145        —          —           (6,145     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     5,400        7,783        1,743         (6,145     8,781   

Provision for income taxes

     62        2,635        746         —          3,443   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,338      $ 5,148      $ 997       $ (6,145   $ 5,338   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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 Nine Months Ended September 30, 2011

 

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

Net sales:

          

Sales

   $ —        $ 199,041      $ 85,166      $ —        $ 284,207   

Intercompany sales

     —          2,096        6,011        (8,107     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     —          201,137        91,177        (8,107     284,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of operations:

          

Cost of goods sold (exclusive of depreciation)

     —          121,848        58,374        (8,107     172,115   

Selling, general and administrative expenses

     178        34,899        15,444        —          50,521   

Depreciation and amortization

     —          13,323        4,645        —          17,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (178     31,067        12,714        —          43,603   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     993        17,101        1,702        —          19,796   

Other expense (income), net

     80        (144     (101     —          (165
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (1,251     14,110        11,113        —          23,972   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in net income of subsidiaries

     24,733        —          —          (24,733     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     23,482        14,110        11,113        (24,733     23,972   

Provision (benefit) for income taxes

     5,328        8,959        (8,469     —          5,818   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 18,154      $ 5,151      $ 19,582      $ (24,733   $ 18,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Nine Months Ended September 30, 2010

 

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

Net sales:

           

Sales

   $ —        $ 189,305      $ 78,465       $ —        $ 267,770   

Intercompany sales

     —          2,240        4,826         (7,066     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total net sales

     —          191,545        83,291         (7,066     267,770   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Costs of operations:

           

Cost of goods sold (exclusive of depreciation)

     —          112,911        51,851         (7,066     157,696   

Selling, general and administrative expenses

     1,354        25,297        13,627         —          40,278   

Depreciation and amortization

     —          12,884        4,761         —          17,645   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (1,354     40,453        13,052         —          52,151   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense, net

     657        17,167        2,134         —          19,958   

Other (income) expense, net

     (74     (440     806         —          292   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in net income from subsidiaries

     (1,937     23,726        10,112         —          31,901   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity in net income of subsidiaries

     20,933        —          —           (20,933     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     18,996        23,726        10,112         (20,933     31,901   

Provision (benefit) for income taxes

     (515     9,061        3,844         —          12,390   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 19,511      $ 14,665      $ 6,268       $ (20,933   $ 19,511   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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 Nine Months Ended September 30, 2011

 

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

Net cash provided by (used in) operations

   $ (1,592   $ 24,998      $ 4,970      $ —         $ 28,376   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (7,799     (2,767     —           (10,566

Proceeds from sales of equipment

     —          1        8        —           9   

Business acquisitions, net of cash acquired

     —          (19,761     (2,018     —           (21,779
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (27,559     (4,777     —           (32,336
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Borrowings on revolving credit facility

     8,000        —          —          —           8,000   

Payments on revolving credit facility

     (3,000     —          —          —           (3,000

Payments on senior term loan and acquisition facility

     (3,476     —          (282     —           (3,758

Payments on other long-term debt

     —          (39     (56     —           (95
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     1,524        (39     (338     —           1,147   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash

     —          —          15        —           15   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Decrease in cash and cash equivalents

     (68     (2,600     (130     —           (2,798

Cash and cash equivalents, beginning of period

     154        4,160        5,199        —           9,513   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 86      $ 1,560      $ 5,069      $ —         $ 6,715   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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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 Nine Months Ended September 30, 2010

 

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

Net cash provided by operations

   $ 20,611      $ 8,856      $ 8,743      $ —         $ 38,210   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (5,303     (1,740     —           (7,043

Proceeds from sales of equipment

     —          9        1        —           10   

Business acquisitions, net of cash acquired

     —          (337     (1,710     —           (2,047
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (5,631     (3,449     —           (9,080
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Payments on senior term loan and acquisition facility

     (9,711     —          (2,159     —           (11,870

Payments on other long-term debt

     —          (480     —          —           (480
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (9,711     (480     (2,159     —           (12,350
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash

     —          —          47        —           47   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     10,900        2,745        3,182        —           16,827   

Cash and cash equivalents, beginning of period

     237        3,005        7,468        —           10,710   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 11,137      $ 5,750      $ 10,650      $ —         $ 27,537   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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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 nine months ended September 30, 2011 increased 6.1%, or $16.4 million, to $284.2 million from sales of $267.8 million for the nine months ended September 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) 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 $4.5 million for the nine months ended September 30, 2011. Furthermore, acquired business generated $4.5 million of incremental sales during the nine months ended September 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 increases our capacity to offer our customers short run reproduction services and sales samples or packaging mock-ups.

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.

In September 2011, we acquired the assets of an Ohio-based gravure engraving/imaging business. This acquisition further strengthens our position as the leading engraver of gravure cylinders in North America.

In October 2011, we acquired a photo studio in Chicago, Illinois, which expands our capabilities within this market. We will continue to pursue attractive acquisition opportunities in the future.

Income from operations decreased to $43.6 million, or 15.3% of sales, for the nine months ended September 30, 2011 compared to $52.2 million, or 19.5% of sales, for the nine months ended September 30, 2010. This reduction in income from operations is due to a combination of factors, including a one-time final confidential settlement of a legal proceeding for an amount under $5.0 million recorded during the nine months ended September 30, 2011. In addition, the first nine months of 2010 was an unusually profitable period as we were operating above capacity and achieving profit margins that were not sustainable in the long-term. As a result, cost of goods sold expressed as a percentage of sales was 58.9% for the nine months ended September 30, 2010, compared to 62.7% for fiscal year 2009 and 65.6% for fiscal 2008. We made investments to increase our capacity, including an increase in headcount to support our higher sales volumes causing our margin to decline from the levels achieved in 2010 to a more sustainable level in 2011. 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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Table of Contents
     Quarter
Ended
    Quarter
Ended
 
   September 30,
2011
    September 30,
2010
 

Net sales

   $ 93,314      $ 87,282   

Cost of goods sold (exclusive of depreciation)

     57,873        53,400   

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

     62.0     61.2
  

 

 

   

 

 

 

Selling and marketing expenses

     10,201        9,196   

General and administrative expenses, including litigation settlement expense

     9,192        3,669   
  

 

 

   

 

 

 

Total selling, general, and administrative expenses

     19,393        12,865   

Selling and marketing expenses, as a percentage of net sales

     10.9     10.5
  

 

 

   

 

 

 

General and administrative expenses, as a percentage of net sales

     9.9     4.2
  

 

 

   

 

 

 
     Nine Months
Ended
    Nine Months
Ended
 
   September 30,
2011
    September 30,
2010
 

Net sales

   $ 284,207      $ 267,770   

Cost of goods sold (exclusive of depreciation)

     172,115        157,696   

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

     60.6     58.9
  

 

 

   

 

 

 

Selling and marketing expenses

     31,856        27,409   

General and administrative expenses, including litigation settlement expense

     18,665        12,869   
  

 

 

   

 

 

 

Total selling, general, and administrative expenses

     50,521        40,278   

Selling and marketing expenses, as a percentage of net sales

     11.2     10.2
  

 

 

   

 

 

 

General and administrative expenses, as a percentage of net sales

     6.6     4.8
  

 

 

   

 

 

 

The increased sales level during the first nine months of 2011 demonstrates that the benefits of these investments to increase capacity and stimulate additional organic sales growth are now being realized. Excluding the one-time litigation settlement, we believe the profit margins realized during the first nine months of 2011 are a more realistic measure of sustainable profitability.

 

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RESULTS OF OPERATIONS

The information presented below for the quarters and nine months ended September 30, 2011 and September 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 September 30, 2011 compared to quarter ended September 30, 2010

 

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

Net sales

   $ 93,314      $ 87,282      $ 6,032        6.9

Cost of goods sold (exclusive of depreciation)

     57,873        53,400        4,473        8.4

Selling, general, and administrative expenses

     19,393        12,865        6,528        50.7

Depreciation and amortization

     6,175        5,961        214        3.6
  

 

 

   

 

 

   

 

 

   

Income from operations

     9,873        15,056        (5,183     (34.4 %) 
  

 

 

   

 

 

   

 

 

   

Interest expense

     6,592        6,569        23        0.4

Other income, net

     (387     (294     (93     31.6
  

 

 

   

 

 

   

 

 

   

Income before income taxes

     3,668        8,781        (5,113     (58.2 %) 

Provision for income taxes

     1,087        3,443        (2,356     (68.4 %) 
  

 

 

   

 

 

   

 

 

   

Net income

   $ 2,581      $ 5,338      $ (2,757     (51.6 %) 
  

 

 

   

 

 

   

 

 

   

Net Sales. Sales for the quarter ended September 30, 2011 increased 6.9%, or $6.0 million, to $93.3 million from $87.3 million for the quarter ended September 30, 2010. This increase in sales was driven largely by volume growth across our customer base, most notably with large CPGs, in the United States and Europe. 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 $1.0 million and $0.3 million, respectively. Acquisitions contributed $3.2 million in incremental sales for the quarter.

Sales in the United States increased by $3.8 million for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010 and included incremental sales of $0.3 million and $2.2 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 September 30, 2011 compared to the quarter ended September 30, 2010 increased approximately $0.6 million. The impact of these sales increases were offset by a reduction in sales in Canada. Excluding the impact of $0.7 million in incremental sales from the acquisition in Canada and foreign currency fluctuations of $1.0 million, sales in Canada decreased $0.7 million. The residual sales increase of $0.3 million was due to our operations in Asia and Mexico.

Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2011 increased 8.4%, or $4.5 million, to $57.9 million from $53.4 million for the quarter ended September 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, British pound, and other currencies resulted in a combined increase in cost of goods sold of $0.9 million.

Cost of goods sold expressed as a percentage of sales increased to 62.0% for the quarter ended September 30, 2011 compared to 61.2% for the quarter ended September 30, 2010. This increase was primarily due to the investments to increase capacity as previously discussed.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended September 30, 2011 increased 50.7%, or $6.5 million, to $19.4 million from $12.9 million for the quarter ended

 

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September 30, 2010. This increase was primarily due to a one-time final confidential settlement of a legal proceeding for an amount under $5.0 million. In addition, selling and marketing expenses increased $1.0 million for the quarter as a result of investments to stimulate future organic sales growth. Furthermore, 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 $0.2 million for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the quarter ended September 30, 2011 increased 3.6%, or $0.2 million, to $6.2 million from $6.0 million for the quarter ended September 30, 2010.

Interest Expense. Interest expense for both the quarter ended September 30, 2011 and the quarter ended September 30, 2010 was $6.6 million. The interest savings associated with the Company’s principal repayments on the senior term loan and acquisition facilities during fiscal 2010 and the first half of 2011 were essentially offset by a slight increase in interest rates on the senior term loan and acquisition facilities. The increase in interest rates was due to the terms associated with refinancing of our senior credit facility in the fourth quarter of 2010.

Other Income. Other income increased by $0.1 million to $0.4 million of income for the quarter ended September 30, 2011 as compared to $0.3 million of income for the quarter ended September 30, 2010. Other income primarily consists of realized (gains) losses on foreign exchange.

Provision for Income Taxes. The effective tax rate for the quarter ended September 30, 2011 was 29.6%, compared to 39.2% for the quarter ended September 30, 2010. This decrease in the effective tax rate was due to revised management estimates based on differences between amounts recorded in our financial statement compared to our final 2010 tax return, combined with an overall lower blended state and federal tax rate in the United States.

Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

 

     Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
     $ Change     Percentage
Change
 
     (unaudited)     (unaudited)               

Net sales

   $ 284,207      $ 267,770       $ 16,437        6.1

Cost of goods sold (exclusive of depreciation)

     172,115        157,696         14,419        9.1

Selling, general, and administrative expenses

     50,521        40,278         10,243        25.4

Depreciation and amortization

     17,968        17,645         323        1.8
  

 

 

   

 

 

    

 

 

   

Income from operations

     43,603        52,151         (8,548     (16.4 %) 
  

 

 

   

 

 

    

 

 

   

Interest expense

     19,796        19,958         (162     (0.8 %) 

Other expense (income), net

     (165     292         (457     (156.5 %) 
  

 

 

   

 

 

    

 

 

   

Income before income taxes

     23,972        31,901         (7,929     (24.9 %) 

Provision for income taxes

     5,818        12,390         (6,572     (53.0 %) 
  

 

 

   

 

 

    

 

 

   

Net income

   $ 18,154      $ 19,511       $ (1,357     (7.0 %) 
  

 

 

   

 

 

    

 

 

   

Net Sales. Sales for the nine months ended September 30, 2011 increased 6.1%, or $16.4 million, to $284.2 million from $267.8 million for the nine months ended September 30, 2010. This increase in sales was driven primarily by volume growth across our customer base, most notably with large CPGs, in the United States and Europe. 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 $2.9 million and $1.3 million, respectively. The weakening of the United States dollar as compared to other currencies positively impacted sales by an additional $0.3 million. Acquisitions contributed $4.5 million in incremental sales for the period.

Sales in the United States increased by $9.7 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 and included incremental sales of $1.0 million and $2.5 million associated with the acquisitions in Dallas and Tampa, respectively. After excluding the impact of foreign currency fluctuations, sales in Europe for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 increased approximately $2.1 million. Excluding the impact of $1.0 million in incremental sales from the acquisition in Canada and

 

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foreign currency fluctuations of $2.9 million, sales in Canada decreased $1.2 million. This decrease was primarily due to the timing of orders in Canada which resulted in particularly strong sales during the first nine months of 2010 when compared to the same period of 2011. The residual sales increase was due to our operations in Asia.

Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2011 increased 9.1%, or $14.4 million, to $172.1 million from $157.7 million for the nine months ended September 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, British pound, and other currencies resulted in a combined increase in cost of goods sold of $2.7 million.

Cost of goods sold expressed as a percentage of sales increased to 60.6% for the nine months ended September 30, 2011 compared to 58.9% for the nine months ended September 30, 2010. This increase was primarily due to the investments to increase capacity. As previously discussed, the high profit margins for the nine months ended September 30, 2010 were not sustainable and the profit margins realized during the nine months ended September 30, 2011 are more indicative of sustainable profit margins.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2011 increased 25.4%, or $10.2 million, to $50.5 million from $40.3 million for the nine months ended September 30, 2010. This increase was primarily due to the third quarter 2011 settlement of a legal proceeding referred to above, as well as a $4.4 million increase in selling and marketing expenses. This investment in selling and marketing expenses is 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 $0.6 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the nine months ended September 30, 2011 increased 1.8%, or $0.3 million, to $17.9 million from $17.6 million for the nine months ended September 30, 2010.

Interest Expense. Interest expense for the nine months ended September 30, 2011 decreased 0.8%, or $0.2 million, to $19.8 million from $20.0 million for the nine months ended September 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 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 $0.9 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. These interest expense savings were partially offset by a $0.7 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.

Other Expense (Income), net. Other expense (income), net fluctuated by $0.5 million to $0.2 million of income for the nine months ended September 30, 2011 from $0.3 million of expense for the nine months ended September 30, 2010. Other expense (income), net primarily consists of realized (gains) losses on foreign exchange. The fluctuation in other expense (income), net was due to the combined impact of a gain of $0.2 million on the exchange of an investment for fixed assets during the nine months ended September 30, 2011 and slightly more favorable fluctuations in foreign currency exchange rates for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Provision for Income Taxes. The effective tax rate for the nine months ended September 30, 2011 was 24.3%, compared to 38.8% for the nine months ended September 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 nine months ended September 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 nine months ended September 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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Table of Contents

Liquidity and Capital Resources

At September 30, 2011, we had $6.7 million in cash and $52.0 million in working capital compared with $9.5 million in cash and $46.9 million in working capital at December 31, 2010. The $2.8 million decrease in cash resulted from $21.8 million in net cash paid for acquisitions, $10.6 million in capital expenditures, and $3.8 million in principal repayments of long-term debt, partially offset by $28.4 million in cash provided by operations and $5.0 million in net cash borrowed on the revolving credit facility. The $5.1 million increase in working capital is primarily due to the combination of the increase in accounts receivable and the decrease in accounts payable. These items were partially offset by increases in accrued interest and the current portion of long-term debt.

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 subsequently made principal repayments of $3.0 million and $5.0 million on the Revolver in July 2011 and October 2011, respectively. We had $35.0 million of additional borrowing availability on the Revolver at September 30, 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 September 30, 2011 was $267.5 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 September 30, 2011, we were in compliance with all covenants. Below are the required financial covenant levels and the actual levels as of September 30, 2011:

 

     Required     Actual  

Maximum leverage ratio

     5.00        3.08   

Minimum interest coverage ratio

     1.80        3.48   

Maximum capital expenditures for fiscal 2011

   not to exceed $ 18.1 million (1)    $ 10.6 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.

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. Cash payments for income taxes are $3.1 million for the nine months ended September 30, 2011 compared to less than $0.1 million for the nine months ended September 30, 2010.

 

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Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

Cash flows from operating activities. Net cash provided by operating activities was $28.4 million for the nine months ended September 30, 2011 as compared to $38.2 million for the nine months ended September 30, 2010. The primary reasons for this decrease are a $8.5 million decrease in income from operations for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 and $3.1 million in cash paid for income taxes during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Partially offsetting these items are a $4.2 million use of cash in the nine months ended September 30, 2010 for the purchase of an exclusive supply agreement. The residual decrease in net cash provided by operating activities is primarily due to fluctuations within accounts payable and accrued expenses.

Cash flows from investing activities. Net cash used for investing activities was $32.3 million for the nine months ended September 30, 2011 as compared to $9.1 million for the nine months ended September 30, 2010. The increase in cash used for investing activities is due to an increase in net cash paid for acquisitions of $19.7 million and an increase in capital expenditures of $3.5 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Cash flows from financing activities. Net cash provided by financing activities was $1.1 million for the nine months ended September 30, 2011 as compared to cash used in financing activities of $12.4 million for the nine months ended September 30, 2010. This fluctuation is the result of utilizing available cash for acquisitions during the nine months ended September 30, 2011 as opposed to utilizing available cash to make additional principal repayments on long-term obligations during the nine months ended September 30, 2010. In addition, net borrowings of $5.0 million were made on the Revolver during the nine months ended September 30, 2011 in connection with funding acquisitions.

Contractual Obligations

At September 30, 2011, there were no material changes in our December 31, 2010 contractual obligations, other than the $8.0 million borrowing on the Revolver in June 2011, which was subsequently repaid in installments of $3.0 million and $5.0 million in July 2011 and October 2011, respectively.

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 September 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other.” ASU 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under ASU 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company adopted ASU 2011-08 effective October 1, 2011. The adoption of ASU 2011-08 did 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 September 30, 2011, there were no material changes in our December 31, 2010 market risks relating to interest and foreign exchange rates.

 

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-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 September 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 September 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 September 30, 2011 did not include the internal controls of the Tampa acquisition, which is included in the Company’s consolidated financial statements as of September 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 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. As discussed above in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company entered into a confidential settlement of a legal proceeding in the third quarter of 2011.

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.

 

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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
  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

 

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  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
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
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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: November 9, 2011     By:  

/s/ Henry R. Baughman

      Henry R. Baughman
      President, Chief Executive Officer and Director
      (Principal Executive Officer)
Date: November 9, 2011     By:  

/s/ James M. Dahmus

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

 

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