Attached files
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EX-31.2 - SECTION 302 CFO CERTIFICATION - SGS International, Inc. | d253252dex312.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - SGS International, Inc. | d253252dex311.htm |
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - SGS International, Inc. | d253252dex321.htm |
EXCEL - IDEA: XBRL DOCUMENT - SGS International, Inc. | Financial_Report.xls |
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
(Registrants 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 registrants common stock, $0.01 par value, outstanding.
Table of Contents
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Item 1. |
3 | |||||
3 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
21 | ||||
Item 3. |
27 | |||||
Item 4. |
28 | |||||
28 | ||||||
Item 1. |
28 | |||||
Item 1A. |
28 | |||||
Item 6. |
29 | |||||
31 |
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Table of Contents
FINANCIAL INFORMATION
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 | ||||||
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INCOME FROM OPERATIONS |
9,873 | 15,056 | ||||||
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NON-OPERATING EXPENSES: |
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Interest expense, net |
6,592 | 6,569 | ||||||
Other income, net |
(387 | ) | (294 | ) | ||||
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INCOME BEFORE INCOME TAXES |
3,668 | 8,781 | ||||||
PROVISION FOR INCOME TAXES |
1,087 | 3,443 | ||||||
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NET INCOME |
$ | 2,581 | $ | 5,338 | ||||
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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.
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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 | ||||||
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INCOME FROM OPERATIONS |
43,603 | 52,151 | ||||||
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NON-OPERATING EXPENSES: |
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Interest expense, net |
19,796 | 19,958 | ||||||
Other (income) expense, net |
(165 | ) | 292 | |||||
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INCOME BEFORE INCOME TAXES |
23,972 | 31,901 | ||||||
PROVISION FOR INCOME TAXES |
5,818 | 12,390 | ||||||
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NET INCOME |
$ | 18,154 | $ | 19,511 | ||||
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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.
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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 | ||||||
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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 | ||||||
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TOTAL ASSETS |
$ | 509,615 | $ | 483,219 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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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 | ||||||
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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 | ||||||
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Total liabilities |
353,624 | 341,167 | ||||||
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Commitments and contingencies |
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Stockholders 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 | ||||||
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Total stockholders equity |
155,991 | 142,052 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 509,615 | $ | 483,219 | ||||
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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.
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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 | ||||
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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 | ) | ||||
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Net cash used in investing activities |
(32,336 | ) | (9,080 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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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 | ) | ||||
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Net cash provided by (used in) financing activities |
1,147 | (12,350 | ) | |||||
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Effect of exchange rate changes on cash |
15 | 47 | ||||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS |
(2,798 | ) | 16,827 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
9,513 | 10,710 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 6,715 | $ | 27,537 | ||||
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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.
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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 Companys consolidated audited financial statements for the year ended December 31, 2010 in the Companys 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 |
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Raw materials |
$ | 3,065 | $ | 3,180 | ||||
Work-in-process |
8,403 | 6,573 | ||||||
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Total |
$ | 11,468 | $ | 9,753 | ||||
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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 Companys 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: |
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Current assets |
$ | 988 | ||
Properties, plants and equipment |
2,230 | |||
Goodwill |
7,064 | |||
Customer relationships |
14,233 | |||
Liabilities assumed |
(408 | ) | ||
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Estimated aggregate acquisition price |
$ | 24,107 | ||
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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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C. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets consist of the following:
September 30, 2011 |
December 31, 2010 |
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Goodwill, cost |
$ | 189,938 | $ | 185,067 | ||||
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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 | ) | ||||
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Total |
$ | 164,096 | $ | 159,578 | ||||
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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) |
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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 | ) | ||||||
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Balance at September 30, 2011 |
$ | 189,938 | $ | 190,465 | $ | 30,630 | ||||||
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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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D. | Interest Expense, net |
Interest expense, net consists of the following:
Three Months Ended September 30, 2011 |
Three Months Ended September 30, 2010 |
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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 | ||||||
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Total |
$ | 6,592 | $ | 6,569 | ||||
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Nine Months Ended September 30, 2011 |
Nine Months Ended September 30, 2010 |
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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 | ||||||
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Total |
$ | 19,796 | $ | 19,958 | ||||
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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 |
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Net income |
$ | 2,581 | $ | 5,338 | ||||
Cumulative translation adjustments, net |
(8,272 | ) | 3,559 | |||||
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Total |
$ | (5,691 | ) | $ | 8,897 | |||
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Nine Months Ended September 30, 2011 |
Nine Months Ended September 30, 2010 |
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Net income |
$ | 18,154 | $ | 19,511 | ||||
Cumulative translation adjustments, net |
(4,215 | ) | 486 | |||||
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Total |
$ | 13,939 | $ | 19,997 | ||||
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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
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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 Companys investments in the non-qualified Southern Graphic Systems, Inc. Deferred Compensation Plan and the related offsetting liability are presented at fair value in the Companys 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 Companys consolidated balance sheets.
The following table shows assets measured at fair value as of September 30, 2011 on the Companys 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 Companys 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 Companys 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 Companys capability to repurchase the senior subordinated debt at fair value is limited due to the terms of the Companys 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 Companys financial position, results of operations, and liquidity. As discussed below in Managements 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
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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 Companys 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 Companys domestic subsidiaries and rank secondary to the Companys 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.
12
Table of Contents
SGS International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited - continued)
(in thousands of dollars)
Supplemental Condensed Consolidating Balance Sheet
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 |
||||||||||||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
| | | | | |||||||||||||||
Other stockholders equity |
156,204 | 100,177 | 135,262 | (235,652 | ) | 155,991 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
156,204 | 100,177 | 135,262 | (235,652 | ) | 155,991 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 422,472 | $ | 385,697 | $ | 193,987 | $ | (492,541 | ) | $ | 509,615 | |||||||||
|
|
|
|
|
|
|
|
|
|
13
Table of Contents
SGS International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited - continued)
(in thousands of dollars)
Supplemental Condensed Consolidating Balance Sheet
December 31, 2010
Parent / Issuer |
Consolidated Guarantor Subsidiaries |
Consolidated Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 154 | $ | 4,160 | $ | 5,199 | $ | | $ | 9,513 | ||||||||||
Receivables from customers, less allowances |
| 42,896 | 22,257 | | 65,153 | |||||||||||||||
Intercompany receivables |
245,954 | 445 | 2,810 | (249,209 | ) | | ||||||||||||||
Inventories |
| 6,850 | 2,903 | | 9,753 | |||||||||||||||
Deferred income taxes |
4,777 | 5,667 | (9,144 | ) | | 1,300 | ||||||||||||||
Prepaid expenses and other current assets |
80 | 1,969 | 1,234 | | 3,283 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
250,965 | 61,987 | 25,259 | (249,209 | ) | 89,002 | ||||||||||||||
Investment in subsidiaries |
151,585 | 29,226 | | (180,811 | ) | | ||||||||||||||
Properties, plants and equipment, net |
| 35,572 | 8,623 | | 44,195 | |||||||||||||||
Goodwill |
| 119,970 | 65,097 | | 185,067 | |||||||||||||||
Other intangible assets, net |
| 115,552 | 44,026 | | 159,578 | |||||||||||||||
Deferred financing costs, net |
3,535 | | | | 3,535 | |||||||||||||||
Other assets |
| 1,494 | 348 | | 1,842 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 406,085 | $ | 363,801 | $ | 143,353 | $ | (430,020 | ) | $ | 483,219 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Accounts payable, trade |
$ | 554 | $ | 11,261 | $ | 4,704 | $ | | $ | 16,519 | ||||||||||
Intercompany payables |
| 219,458 | 29,751 | (249,209 | ) | | ||||||||||||||
Accrued expenses |
99 | 13,920 | 5,322 | | 19,341 | |||||||||||||||
Accrued income taxes |
| | 199 | | 199 | |||||||||||||||
Accrued interest |
5 | 878 | 1 | | 884 | |||||||||||||||
Current portion of long-term obligations |
4,626 | 50 | 463 | | 5,139 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
5,284 | 245,567 | 40,440 | (249,209 | ) | 42,082 | ||||||||||||||
Non-current liabilities |
||||||||||||||||||||
Long-term obligations, net of current portion |
253,445 | 86 | 7,882 | | 261,413 | |||||||||||||||
Non-current liabilities |
| 2,814 | | | 2,814 | |||||||||||||||
Deferred income taxes |
5,304 | 20,148 | 9,406 | | 34,858 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
264,033 | 268,615 | 57,728 | (249,209 | ) | 341,167 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contingencies and commitments |
||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
| | | | | |||||||||||||||
Other stockholders equity |
142,052 | 95,186 | 85,625 | (180,811 | ) | 142,052 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
142,052 | 95,186 | 85,625 | (180,811 | ) | 142,052 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders 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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|
|
|
|
|
|
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19
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, 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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20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements 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.
21
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.
22
Table of Contents
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
23
Table of Contents
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 Companys 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
24
Table of Contents
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 Companys 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 Companys 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.
25
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.
26
Table of Contents
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 Companys 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 SECs rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Companys 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 Companys 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 Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys 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, managements assessment as of September 30, 2011 did not include the internal controls of the Tampa acquisition, which is included in the Companys 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.
OTHER INFORMATION
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 Companys financial position, results of operations, and liquidity. As discussed above in Managements 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.
There have been no material changes to the risk factors included in the Registrants Form 10-K for the year ended December 31, 2010.
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EXHIBIT |
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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants subsidiaries, as guarantors, and UBS AG, Stamford Branch, as US collateral agent, incorporated by reference to exhibit 10.9 to the Registrants 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 Registrants subsidiaries, as pledgors, and UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.10 to the Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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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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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