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EX-31.1 - EXHIBIT 31.1 - SHERIDAN GROUP INCex31_1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10–Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

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

FOR THE TRANSITION PERIOD FROM                TO

COMMISSION FILE NUMBER 333–110441

THE SHERIDAN GROUP, INC.
(Exact name of registrant as specified in its charter)

Maryland
 
52–1659314
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
11311 McCormick Road, Suite 260
   
Hunt Valley, Maryland
 
21031–1437
(Address of principal executive offices)
 
(Zip Code)

410–785–7277
(Registrant’s telephone number, including area code)

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

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

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

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

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

There was 1 share of Common Stock outstanding as of May 11, 2012.



 
 

 
 
The Sheridan Group, Inc. and Subsidiaries
Quarterly Report
For the Quarter Ended March 31, 2012


 
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Item 3.
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Item 5.
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2

 
PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
March 31,
2012
   
December 31,
2011
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 662,079     $ 475,324  
Accounts receivable, net of allowance for doubtful accounts of $1,149,094 and $1,173,194, respectively
    26,944,861       25,504,733  
Inventories, net
    15,570,358       15,343,487  
Other current assets
    4,500,845       5,826,708  
Refundable income taxes
    -       109,387  
Total current assets
    47,678,143       47,259,639  
                 
Property, plant and equipment, net
    97,181,137       98,835,957  
Intangibles, net
    28,429,242       28,850,705  
Goodwill
    33,978,641       33,978,641  
Deferred financing costs, net
    4,020,854       4,818,024  
Other assets
    1,076,284       1,090,681  
Total assets
  $ 212,364,301     $ 214,833,647  
                 
Liabilities
               
Current liabilities
               
Accounts payable
  $ 14,644,136     $ 14,842,454  
Accrued expenses
    20,063,386       13,019,152  
Total current liabilities
    34,707,522       27,861,606  
                 
Notes payable and working capital facility
    126,999,334       135,864,880  
Deferred income taxes and other liabilities
    21,653,808       21,937,844  
Total liabilities
    183,360,664       185,664,330  
                 
Stockholder's Equity
               
Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding
    -       -  
Additional paid-in capital
    42,106,557       42,106,557  
Accumulated deficit
    (13,102,920 )     (12,937,240 )
Total stockholder's equity
    29,003,637       29,169,317  
                 
Total liabilities and stockholder's equity
  $ 212,364,301     $ 214,833,647  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
3


THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
  (Unaudited)

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Net sales
  $ 69,942,258     $ 68,188,990  
                 
Cost of sales
    56,256,698       56,603,052  
 
   
 
         
Gross profit
    13,685,560       11,585,938  
                 
Selling and administrative expenses
    8,502,834       9,955,602  
Loss on disposition of fixed assets
    4,076       23,991  
Restructuring costs
    4,764       377,229  
Amortization of intangibles
    421,463       1,120,876  
                 
Total operating expenses
    8,933,137       11,477,698  
                 
Operating income
    4,752,423       108,240  
                 
Other (income) expense:
               
Interest expense
    5,506,470       3,929,619  
Interest income
    (4,892 )     (890 )
Gain on repurchase of notes payable
    (417,950 )     -  
Other, net
    (2,435 )     (9,916 )
                 
Total other expense
    5,081,193       3,918,813  
                 
Loss before income taxes
    (328,770 )     (3,810,573 )
                 
Income tax benefit
    (163,090 )     (1,447,877 )
                 
Net loss
  $ (165,680 )   $ (2,362,696 )
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
4


THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
(Unaudited)

   
March 31,
2012
   
March 31,
2011
 
Cash flows provided by (used in) operating actvities:
           
Net loss
  $ (165,680 )   $ (2,362,696 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
               
Depreciation
    4,172,510       5,684,472  
Amortization of intangible assets
    421,463       1,120,876  
Provision for doubtful accounts
    (19,669 )     183,673  
Provision for inventory realizability
    46,700       25,906  
Stock-based compensation
    -       7,129  
Amortization of deferred financing costs and original issue discount, included in interest expense
    1,233,370       227,727  
Deferred income tax benefit
    (231,382 )     (398,641 )
Gain on repurchase of notes payable
    (417,950 )     -  
Loss on disposition of fixed assets
    4,076       23,991  
Changes in operating assets and liabilities
               
Accounts receivable
    (1,420,459 )     (2,247,469 )
Inventories
    (273,571 )     (128,398 )
Other current assets
    1,321,352       958,883  
Refundable income taxes
    109,387       -  
Other assets
    14,397       369,120  
Accounts payable
    (254,225 )     (496,367 )
Accrued expenses
    7,044,234       (2,015,248 )
Due to parent, net
    -       (1,064,049 )
Other liabilities
    (48,143 )     (502,368 )
Net cash provided by (used in) operating activities
    11,536,410       (613,459 )
                 
Cash flows used in investing activities:
               
Purchases of property, plant and equipment
    (2,464,874 )     (7,806,204 )
Proceeds from sale of fixed assets, net of disposal costs
    (985 )     6,767  
Net cash used in investing activities
    (2,465,859 )     (7,799,437 )
                 
Cash flows used in financing activities:
               
Borrowing of working capital facility
    23,968,135       -  
Repayment of working capital facility
    (27,800,000 )     -  
Repayment of long term debt
    (5,051,931 )     -  
Net cash used in financing activities
    (8,883,796 )     -  
                 
Net increase (decrease) in cash and cash equivalents
    186,755       (8,412,896 )
                 
Cash and cash equivalents at beginning of period
    475,324       13,717,082  
                 
Cash and cash equivalents at end of period
  $ 662,079     $ 5,304,186  
                 
Non-cash investing and financing activities
               
Asset additions in accounts payable and accrued expenses
  $ 636,750     $ 709,345  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
5


THE SHERIDAN GROUP, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.
Company Information and Significant Accounting Policies

The accompanying unaudited financial statements of The Sheridan Group, Inc. and Subsidiaries (together, the “Company”) have been prepared by us pursuant to the rules of the Securities and Exchange Commission (the “SEC”). In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, our financial position as of March 31, 2012 and our results of operations and our cash flows for the three month periods ended March 31, 2012 and 2011. All such adjustments are deemed to be of a normal and recurring nature and all material intercompany balances and transactions have been eliminated. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto of The Sheridan Group, Inc. and Subsidiaries included in our Annual Report on Form 10-K for the year ended December 31, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year.

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

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

New Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The amendment should be applied retrospectively. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.

In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative tests become optional. The guidance is effective for annual and interim impairment tests performed in fiscal years beginning after December 15, 2011, and earlier adoption is permitted. The adoption of this guidance did not have an impact on our financial statements.

In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity.  This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not have any elements of other comprehensive income; therefore, the adoption of this guidance did not have an impact on our financial statements.

In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us beginning in the first quarter of 2012. The adoption of this guidance did not have an impact on our financial statements, other than additional disclosures.
 
 
6


2.
Inventory

Components of net inventories at March 31, 2012 and December 31, 2011 were as follows:
 
   
March 31,
2012
   
December 31,
2011
 
Work-in-process
  $ 6,044,477     $ 6,160,151  
Raw materials (principally paper)
    9,803,023       9,460,478  
      15,847,500       15,620,629  
Excess of current cost over LIFO inventory value
    (277,142 )     (277,142 )
Total
  $ 15,570,358     $ 15,343,487  
 
3.
Notes Payable and Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”).  The 2011 Notes, which were issued by The Sheridan Group, Inc. under an indenture (the “Indenture”), will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes will be payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. Proceeds of the offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our 10.25% senior secured notes that were due to mature on August 15, 2011 (the “2003 and 2004 Notes”) and to pay approximately $6.5 million in professional fees and expenses incurred in connection with the issuance of the 2011 Notes. These fees and expenses were capitalized as deferred financing costs and will be amortized to interest expense using the effective interest rate method over the term of the 2011 Notes. We recognized a loss on the repurchase of the 2003 and 2004 Notes of approximately $1.2 million as a result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs.

During the fourth quarter of 2011, we repurchased in the open market 2011 Notes with a face value of $8.2 million for $7.1 million, which included $0.1 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.7 million. As a result of the repurchases, we recognized a net gain of $0.5 million.
 
On November 23, 2011, we sold the Ashburn, Virginia facility. Per the terms of the Indenture, on December 16, 2011, we used the net proceeds from this sale of $3.9 million to repurchase 2011 Notes at 100% of their face value plus $0.1 million of accrued interest. We recognized a loss on the repurchase of $0.3 million as the result of the write-off of deferred financing costs and unamortized debt discount.

During the first quarter of 2012, we repurchased in the open market 2011 Notes with a face value of $5.9 million for $5.3 million, which included $0.2 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.4 million. As a result of the repurchases, we recognized a net gain of $0.4 million.
 
The carrying value of the 2011 Notes was $126.3 million as of March 31, 2012.
 
Concurrent with the private debt offering, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%.

We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding. In addition, we paid an upfront fee of $0.3 million at closing and approximately $0.4 million of professional fees, which were capitalized as deferred financing costs and will be amortized to interest expense on a straight-line basis over the term of the working capital facility. As of March 31, 2012, we had $0.7 million outstanding under the working capital facility, $1.3 million in letters of credit outstanding and unused amounts available of $13.0 million.

 
7

 
The Indenture and the working capital facility require us to maintain certain minimum Consolidated EBITDA (as defined in the underlying agreements) levels for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for each fiscal year. In addition, the Indenture and the working capital facility contain affirmative and negative covenants, representations and warranties, borrowing conditions, events of default and remedies for the holders and lenders. We have complied with all of the restrictive covenants as of March 31, 2012.
 
Prior to April 15, 2011, we had a working capital facility agreement that allowed for revolving debt of up to $20.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. We had no borrowings under this working capital facility during 2011. We paid an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we paid an annual fee of 3.875% on all letters of credit outstanding.

4.
Accrued Expenses

Accrued expenses as of March 31, 2012 and December 31, 2011 consisted of the following:

   
March 31,
2012
   
December 31,
2011
 
Payroll and related expenses
  $ 5,173,575     $ 3,076,803  
Accrued interest
    7,584,555       3,611,240  
Customer prepayments
    4,042,933       3,181,217  
Self-insured health and workers' compensation accrual
    1,408,189       1,406,556  
Other
    1,854,134       1,743,336  
Total
  $ 20,063,386     $ 13,019,152  

5.
Business Segments

We are a specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We operate in three business segments: “Publications,” “Specialty Catalogs” and “Books.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing and Dartmouth Journal Services. On July 1, 2011, we ceased operations at United Litho, which was part of our Publications segment, and consolidated the printing of specialty magazines at Dartmouth Printing. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

The accounting policies of the operating segments are the same as those described in Note 2 “Summary of Significant Accounting Policies” in the consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2011. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate depreciation, technology development costs, corporate restructuring costs and certain professional fees are not allocated to the segments and are shown as Corporate in the table below. Our customer base resides in the continental United States, and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.

We had no customer that accounted for 10.0% or more of our net sales for the three month periods ended March 31, 2012 and 2011.
 
 
8


The following table provides segment information as of March 31, 2012 and 2011 and for the three month periods then ended:

   
Three months ended March 31,
 
   
2012
   
2011
 
(in thousands)
           
             
Net sales
           
Publications
  $ 37,462     $ 36,198  
Specialty catalogs
    18,455       18,276  
Books
    14,035       13,793  
Intersegment sales elimination
    (10 )     (78 )
Consolidated total
  $ 69,942     $ 68,189  
                 
Operating income
               
Publications
  $ 4,619     $ 492  
Specialty catalogs
    (7 )     (221 )
Books
    556       691  
Corporate expenses
    (416 )     (854 )
Consolidated total
  $ 4,752     $ 108  
             
   
March 31,
2012
   
December 31,
2011
 
Assets
               
Publications
  $ 122,981     $ 124,886  
Specialty catalogs
    46,674       47,119  
Books
    40,715       39,429  
Corporate
    1,994       3,400  
Consolidated total
  $ 212,364     $ 214,834  
 
A reconciliation of total segment operating income to consolidated loss before income taxes is as follows:

   
Three months ended March 31,
 
(in thousands)
 
2012
   
2011
 
             
Total operating income (as shown above)
  $ 4,752     $ 108  
                 
Interest expense
    (5,507 )     (3,930 )
Interest income
    5       1  
Gain on repurchase of notes payable
    418       -  
Other, net
    3       10  
                 
Loss before income taxes
  $ (329 )   $ (3,811 )
 
6.
Income Taxes

We recorded income tax benefit during the three months ended March 31, 2012 based on an estimated effective income tax rate for the year ended December 31, 2012 of approximately 56%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 50%. The impact of the permanent differences (primarily tax deductible goodwill) in relation to our projected pre-tax loss for 2012 increased the forecasted effective tax rate. We recorded income tax expense during the three months ended March 31, 2011 based on an estimated effective income tax rate of approximately 40%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 38%.

We file consolidated tax returns with TSG Holdings Corp. (“Holdings”), our parent company, for Federal and certain state jurisdictions. As of March 31, 2012, we generated a $0.2 million income tax benefit as the result of current net operating losses (NOLs). Due to operating loss carryforwards generated by us and Holdings, we will not realize a current benefit from our NOLs. Therefore, the current benefit has been reclassified as a non-current deferred tax asset and is netted against non-current deferred tax liabilities on the consolidated balance sheet, as it will be available to reduce taxable income in future periods.
 
 
9


7.
Fair Value Measurements

Certain of our assets and liabilities must be recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:

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

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

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

Our financial instruments consist of long-term investments in marketable securities (held in trust for payment of non-qualified deferred compensation) and long-term debt. We are permitted to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities, including long-term debt, at fair value which were not previously required to be measured at fair value. We classify the investments in marketable securities within level 1 of the hierarchy since they are invested in publicly traded mutual funds with quoted market prices that are available in active markets.
 
The estimated fair value of our publicly traded debt, based on level 2 inputs, was approximately $112.6 million and $121.4 million as of March 31, 2012 and December 31, 2011, respectively.
 
8.
Related Party Transactions

Under the terms of a management agreement with our principal equity sponsors, we paid an annual management fee equal to the greater of $500,000 or 2% of EBITDA (as defined in the management agreement) plus reasonable out-of-pocket expenses. We expensed $0.5 million in such fees for the three month period ended March 31, 2011. On April 15, 2011, the management agreement was terminated, and there were no amounts expensed in connection with the management agreement subsequent to the three month period ended March 31, 2011.

9.
Contingencies

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

10.
Restructuring and Other Exit Costs

Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our United Litho, Inc. (“ULI”) facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at Dartmouth Printing Company (“DPC”) in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the consolidation. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds from the sale of the facility were $3.9 million.

In connection with this consolidation, we recorded $0.4 million of restructuring charges during the three months ended March 31, 2011, including $0.3 million of charges related to severance and other personnel costs and $0.1 million of other exit costs. Restructuring charges recorded during the three months ended March 31, 2012 were minimal. We had a negligible liability related to this restructuring outstanding as of March 31, 2012.

During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during the third quarter of 2011. These costs related primarily to guaranteed severance payments and employee health benefits. There were no restructuring costs recorded during the three months ended March 31, 2012, and we do not believe any other costs will be expensed in the future in connection with this action. We had a liability of $0.2 million related to this restructuring outstanding as of March 31, 2012.
 
 
10


The table below shows our restructuring activity and our restructuring accrual balance as of March 31, 2012 (in thousands):
 
   
ULI/DPC
consolidation
   
Workforce
reduction
   
Total
 
Restructuring accrual at December 31, 2011
  $ 168     $ 282     $ 450  
Restructuring costs expensed
    5       -       5  
Restructuring costs paid
    (155 )     (65 )     (220 )
Restructuring accrual at March 31, 2012
  $ 18     $ 217     $ 235  
 
We recorded a non-cash charge of $0.7 million during the three months ended March 31, 2011 associated with the accelerated amortization of the ULI trade name based on updated estimates of useful life. We also recorded a non-cash charge of approximately $1.3 million during the three months ended March 31, 2011 associated with the accelerated depreciation of ULI’s equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell. There were no such non-cash charges in connection with the shutdown of ULI recorded during the three months ended March 31, 2012 and no additional non-cash charges will be recorded in the future.

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

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our historical consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011. References to the “Company” refer to The Sheridan Group, Inc. The terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of the Company and all of its subsidiaries.

Forward-Looking Statements

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

 
·
our liquidity and capital resources, including our expected level of capital expenditures and our ability to refinance our debt;

 
·
competitive pressures and trends in the printing industry;

 
·
prevailing interest rates;

 
·
legal proceedings and regulatory matters;

 
·
general economic conditions;

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

 
·
predictions of net sales, expenses or other financial items;

 
·
future operations, financial condition and prospects; and

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

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements, may cause us to modify our plans or objectives, may affect our ability to pay timely amounts due under our outstanding notes and/or may affect the value of our outstanding notes. New risk factors can emerge from time to time. It is not possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements. Given these risks and uncertainties, actual future results may be materially different from what we plan or expect. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. We will not update these forward-looking statements even if our situation changes in the future.
 
 
11


Overview

Company Background

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We provide a wide range of printing services and value-added support services that supplement the core printing operations such as page composition, electronic copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution, custom publishing and back issue fulfillment. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company.

2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”).  The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. On the same date, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses.

Restructuring costs and facility shutdown

Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our United Litho, Inc. (“ULI”) facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at Dartmouth Printing Company (“DPC”) in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the closure. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds from the sale of the facility were $3.9 million.

In connection with this consolidation, we recorded $0.4 million of restructuring charges during the three months ended March 31, 2011, including $0.3 million of charges related to severance and other personnel costs and $0.1 million of other exit costs. Restructuring charges recorded during the three months ended March 31, 2012 were minimal. We had a negligible liability related to this restructuring outstanding as of March 31, 2012.

During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during the third quarter of 2011. These costs related primarily to guaranteed severance payments and employee health benefits. There were no restructuring costs recorded during the three months ended March 31, 2012, and we do not believe any other costs will be expensed in the future in connection with this action. We had a liability of $0.2 million related to this restructuring outstanding as of March 31, 2012.

The table below shows our restructuring activity and our restructuring accrual balance as of March 31, 2012 (in thousands):
 
   
ULI/DPC consolidation
   
Workforce reduction
   
Total
 
Restructuring accrual at December 31, 2011
  $ 168     $ 282     $ 450  
Restructuring costs expensed
    5       -       5  
Restructuring costs paid
    (155 )     (65 )     (220 )
Restructuring accrual at March 31, 2012
  $ 18     $ 217     $ 235  
 
We recorded a non-cash charge of $0.7 million during the three months ended March 31, 2011 associated with the accelerated amortization of the ULI trade name based on updated estimates of useful life. We also recorded a non-cash charge of approximately $1.3 million during the three months ended March 31, 2011 associated with the accelerated depreciation of ULI’s equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell. There were no such non-cash charges in connection with the shutdown of ULI recorded during the three months ended March 31, 2012 and no additional non-cash charges will be recorded in the future.

 
12

 
Critical Accounting Estimates

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. We believe the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2011, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our accounting for allowances for doubtful accounts, impairment of goodwill and other identifiable intangibles, income taxes and self-insurance. These policies require us to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition.

Results of Operations

Our business includes three reportable segments comprised of “Publications,” “Specialty Catalogs” and “Books.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing and Dartmouth Journal Services. On July 1, 2011, we ceased operations at United Litho, which was part of our Publications segment, and consolidated the printing of specialty magazines at Dartmouth Printing. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

The following table sets forth, for the periods indicated, information derived from our condensed consolidated statements of operations, the relative percentage that those amounts represent to total net sales (unless otherwise indicated), and the percentage change in those amounts from period to period. This table should be read in conjunction with the commentary that follows it.
 
 
13


         
Percent of revenue
 
   
Three months ended March 31,
   
Increase (decrease)
   
Three months ended March 31,
 
(in thousands)
 
2012
   
2011
   
Dollars
   
Percentage
   
2012
   
2011
 
                                     
Net sales
                                   
Publications
  $ 37,462     $ 36,198     $ 1,264     3.5 %     53.5 %     53.1 %
Specialty catalogs
    18,455       18,276       179     1.0 %     26.4 %     26.8 %
Books
    14,035       13,793       242     1.8 %     20.1 %     20.2 %
Intersegment sales elimination
    (10 )     (78 )     68    
nm
      -       (0.1 %)
Total net sales
    69,942       68,189       1,753     2.6 %     100.0 %     100.0 %
                                               
Cost of sales
    56,257       56,603       (346 )   (0.6 %)     80.4 %     83.0 %
                                               
Gross profit
    13,685       11,586       2,099     18.1 %     19.6 %     17.0 %
                                               
Selling and administrative expenses
    8,503       9,956       (1,453 )   (14.6 %)     12.2 %     14.6 %
Loss on disposition of fixed assets
    4       24       (20 )   (83.3 %)     -       -  
Restructuring costs
    5       377       (372 )   (98.7 %)     -       0.6 %
Amortization of intangibles
    421       1,121       (700 )   (62.4 %)     0.6 %     1.6 %
Total operating expenses
    8,933       11,478       (2,545 )   (22.2 %)     12.8 %     16.8 %
                                               
Operating income
                                             
Publications
    4,619       492       4,127    
nm
      12.3 %     1.4 %
Specialty catalogs
    (7 )     (221 )     214    
nm
      -       (1.2 %)
Books
    556       691       (135 )   (19.5 %)     4.0 %     5.0 %
Corporate expenses
    (416 )     (854 )     438     51.3 %  
nm
   
nm
 
Total operating income
    4,752       108       4,644    
nm
      6.8 %     0.2 %
                                               
Other (income) expense
                                             
Interest expense
    5,507       3,930       1,577     40.1 %     7.9 %     5.8 %
Interest income
    (5 )     (1 )     (4 )  
nm
      -       -  
Gain on repurchase of notes payable
    (418 )     -       (418 )  
nm
      (0.6 %)     -  
Other, net
    (3 )     (10 )     7     (70.0 %)     -       -  
Total other expense
    5,081       3,919       1,162     29.7 %     7.3 %     5.8 %
                                               
Loss before income taxes
    (329 )     (3,811 )     3,482    
nm
      (0.5 %)     (5.6 %)
                                               
Income tax benefit
    (163 )     (1,448 )     1,285    
nm
      (0.2 %)     (2.1 %)
                                               
Net loss
  $ (166 )   $ (2,363 )   $ 2,197    
nm
      (0.3 %)     (3.5 %)

nm - not meaningful

Commentary:

Our sales for the first quarter of 2012 increased $1.8 million or 2.6% versus the first quarter of 2011with the majority of the increase attributable to increased volume from new and existing customers. Net sales for the Publications segment increased $1.3 million or 3.5% in the first quarter of 2012 compared to the same period a year ago due primarily to work from new and existing journal customers partially offset by sales declines in magazines. Net sales for the Specialty Catalogs segment increased $0.2 million or 1.0% in the first quarter of 2012 compared with the same period a year ago with the majority of the increase due to increases in paper pass through costs. Net sales for the Books segment increased $0.2 million or 1.8% in the first quarter of 2012 compared with the same period a year ago as publishers began to replenish inventories depleted during 2011.

Gross profit for the first quarter of 2012 increased by $2.1 million or 18.1% compared to the first quarter of 2011. Gross margin of 19.6% of net sales for the first quarter of 2012 reflected a 2.6 margin point increase versus the first quarter of 2011. The increases in our gross profit and margin were due principally to an increase in sales coupled with the absence in the first quarter of 2012 of the acceleration of depreciation expense in connection with the shutdown of ULI that was recorded in the first quarter of 2011. Additionally, lower people-related costs, including healthcare claims, as well as lower operating lease costs were partially offset by lower recycling revenue.
 
 
14


Selling and administrative expenses decreased $1.5 million or 14.6% in the first quarter of 2012 as compared to the first quarter of 2011. The decrease was due primarily to lower people-related costs, including health care claims, lower costs related to travel, professional fees and bad debt expense as well as the absence in the first quarter of 2012 of the fee paid to our principal equity sponsors pursuant to an agreement that was terminated subsequent to the first quarter of 2011.

Restructuring costs were $0.4 million lower in the first quarter of 2012 as compared to the same period last year. The costs recorded during the first quarter of 2011 were related to the shutdown of ULI which was effectively completed by the end of 2011.

Amortization expense was $0.7 million lower in the first quarter of 2012 as compared to the same period last year due to the absence in 2012 of the accelerated amortization of the ULI trade name recorded in the first quarter of 2011 in connection with the shutdown of ULI.

Operating income of $4.8 million for the first quarter of 2012 represented an increase of $4.7 million as compared to the first quarter of 2011. The increase in operating income was due primarily to the impact of higher sales and lower people-related costs, including healthcare claims, coupled with the absence in the first quarter of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI as well as the absence of the fee paid to our principal equity sponsors. Publications operating income increased by $4.1 million in the first quarter of 2012 compared to the first quarter of 2011 due principally to the impact of higher sales and the absence in the first quarter of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI incurred during the first quarter of 2011. Publications operating income also benefitted from reductions in operating lease costs, bad debt expense and people-related costs, including healthcare claims partially offset by lower recycling revenue. Specialty Catalogs had a negligible operating loss in the first quarter of 2012 as compared to an operating loss of $0.2 million in the first quarter of 2011, an improvement of $0.2 million. This improvement was primarily due to lower healthcare claims. Operating income for the Books segment was virtually unchanged in the first quarter of 2012 as compared with the same period last year as slightly higher sales were more than offset by increases in people-related costs, including healthcare claims, and lower recycling revenue. A decrease in corporate expenses increased operating income by $0.4 million in the first quarter of 2012 as compared with the same period last year due primarily to the absence in the first quarter of 2012 of the fee paid to our principal equity sponsors pursuant to an agreement that was terminated subsequent to the first quarter of 2011.

Interest expense of $5.5 million in the first quarter of 2012 represented a $1.6 million increase as compared to the first quarter of 2011 due to our refinancing in April 2011, whereby we replaced our 2003 and 2004 Notes (with an interest rate of 10.25%) with our 2011 Notes (with an interest rate of 12.5%). Additionally, the amortization of the deferred financing costs paid and the original issue discount (both in connection with the 2011 Notes) resulted in higher interest charges in the first quarter of 2012 as compared to the same period last year.

During the first quarter of 2012, we repurchased in the open market 2011 Notes with a face value of $5.9 million for $5.3 million, which included $0.2 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.4 million. As a result of the repurchases, we recognized a net gain of $0.4 million.

The loss before income taxes of $0.3 million for the first quarter of 2012 represented a $3.5 million improvement as compared to the $3.8 million loss before income taxes for the same period last year. The improvement was due primarily to the higher sales and lower costs mentioned previously.

We recorded income tax benefit during the three months ended March 31, 2012 based on an estimated effective income tax rate for the year ended December 31, 2012 of approximately 56%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 50%. The impact of the permanent differences (primarily tax deductible goodwill) in relation to our projected pre-tax loss for 2012 increased the forecasted effective tax rate. We recorded income tax benefit during the three months ended March 31, 2011 based on an estimated effective income tax rate of approximately 40%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 38%.

Net loss of $0.2 million for the first quarter of 2012 represented a $2.2 million improvement as compared to net loss of $2.4 million for the first quarter of 2011 due to the factors mentioned previously.

Liquidity and Capital Resources

As further described below under “Indebtedness,” on April 15, 2011, we completed the 2011 Notes offering and entered into an agreement to amend and restate our working capital facility. Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses.

 
15

 
Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to pay interest on our debt, finance capital expenditures and provide working capital. We estimate that our capital expenditures for the remainder of 2012 will total about $8.5 million. The actual amount of our 2012 capital expenditures may vary materially depending on several factors including, among others, whether, when and to what extent any capital projects not yet planned, including those currently under senior-level review and any others, are approved, commenced and completed in 2012, the performance of our business and economic and market conditions. We may from time to time seek to purchase or retire our 2011 Notes through cash purchases, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to Holdings in accordance with the limitations outlined in the indenture governing our 2011 Notes and our working capital facility.

Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowings under our working capital facility will be adequate to meet our liquidity needs for at least the next twelve months, but external sources would be necessary to repay at maturity or refinance our 2011 Notes (due April 2014).

We had cash of $0.7 million as of March 31, 2012 compared to $0.5 million as of December 31, 2011. During the first three months of 2012, we utilized cash on hand to fund operations, make investments in new plant and equipment and repurchase some of our 2011 Notes.

Operating Activities

Net cash provided by operating activities was $11.5 million for the first three months of 2012 compared to cash used in operating activities of $0.6 million for the first three months of 2011. This $12.1 million improvement was primarily due to an increase in net income of $2.2 million which was partially offset by a decrease in net non-cash expenses of $1.7 million coupled with favorable changes in working capital and other assets and liabilities that totaled $11.6 million. The major balance sheet changes included:

 
·
a favorable change of $9.1 million from accrued expenses due primarily to the timing and amount of payments for interest on the 2011 Notes as compared to the 2003 and 2004 Notes;
 
 
·
a favorable change of $1.1 million from the amount due to parent, net which represents a tax asset as the result of net operating losses generated by us which was used to offset tax liabilities;

 
·
a favorable change of $0.8 million from accounts receivable due primarily to improved collections in the first quarter of 2012 as compared to the first quarter of 2011;

 
·
a favorable change of $0.4 million from other current assets primarily as the result of the return of a deposit from an insurance provider in the first quarter of 2012 partially offset by the timing of the receipt of supplier rebates.

Investing Activities

Net cash used in investing activities was $2.5 million for the first three months of 2012 compared to $7.8 million for the first three months of 2011. This $5.3 million decrease in cash used was primarily the result of lower capital spending in the first quarter of 2012 as compared to the same period last year.  The first quarter of 2011 included capital spending in connection with the expansion of Dartmouth Printing Company as part of the United Litho consolidation plan.

Financing Activities

Net cash used in financing activities was $8.9 million for the first three months of 2012 and consisted of $5.1 million used to repurchase 2011 Notes and $3.8 million to repay borrowings under our working capital facility. There was no financing activity in the first three months of 2011.

Indebtedness
 
 
16


2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed the offering of the 2011 Notes pursuant to an indenture, by and among the Company, the subsidiaries of the Company named on the signature pages thereto, as guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”).  The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes will be payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. The 2011 Notes are fully and unconditionally guaranteed on a senior secured basis by all of our current subsidiaries.

The Indenture requires that we maintain certain minimum Consolidated EBITDA levels (as discussed further below) for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for each fiscal year. In addition, the Indenture contains covenants that, subject to a number of important exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness; make certain investments; create liens; agree to restrictions on the payment of dividends; consolidate or merge; sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries; enter into transactions with our affiliates; designate our subsidiaries as unrestricted subsidiaries; use the proceeds of permitted sales of our assets; and change business lines. If an event of default, as specified in the Indenture, shall occur and be continuing, either the trustee or the holders of a specified percentage of the 2011 Notes may accelerate the maturity of all the 2011 Notes.

On April 15, 2011, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%.  We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding. In addition, we paid an upfront fee of $0.3 million at closing.

Both the 2011 Notes and the related guarantees and our and the guarantors’ obligations under the working capital facility are secured by a lien in substantially all of our and the guarantors’ assets. Pursuant to an intercreditor agreement between the trustee under the Indenture and the lender under the working capital facility, (1) in the case of real property, fixtures and equipment that secure the 2011 Notes and guarantees, the lien securing the notes and the guarantees will be senior to the lien securing borrowings, other credit extensions and guarantees under the working capital facility and (2) in the case of the other assets of the Company and the guarantors (including the shares of stock of the Company and the guarantors) that secure the 2011 Notes and guarantees, the lien securing the 2011 Notes and the related guarantees is contractually subordinated to the lien thereon securing borrowings, other credit extensions and guarantees under the working capital facility. Consequently, the 2011 Notes and the related guarantees are effectively subordinated to the borrowings, other credit extensions and guarantees under the working capital facility to the extent of the value of such other assets.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under the working capital facility were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses.  We have significant interest payments due on the 2011 Notes as well as interest payments due on borrowings under our working capital facility. Total cash interest payments related to our working capital facility and the 2011 Notes are expected to be in excess of $16.5 million on an annual basis.

Each of the Indenture and the working capital facility agreement requires that we maintain certain minimum consolidated EBITDA (“Consolidated EBITDA”) amounts for any period of four consecutive quarters, taken as one accounting period, as follows:

Period
 
Amount
April 15, 2011 to March 31, 2012
 
$32.00 million
April 1, 2012 to March 31, 2013
 
$34.00 million
April 1, 2013 and thereafter
 
$35.00 million

Consolidated EBITDA has the same meaning under each of the Indenture and the working capital facility agreement and generally consists of net income (loss) before interest expense, income taxes, depreciation, amortization, restructuring charges and certain other non-cash items. Failure to satisfy the minimum Consolidated EBITDA amounts will constitute a default under each of the Indenture and the working capital facility agreement.  For the twelve months ended March 31, 2012, our Consolidated EBITDA was $36.2 million.

 
17

 
Consolidated EBITDA is used for purposes of calculating our compliance with the minimum Consolidated EBITDA covenants in each of the Indenture and the working capital facility agreement and to evaluate our operating performance and determine management incentive payments. Consolidated EBITDA is not an indicator of financial performance or liquidity under generally accepted accounting principles and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income before income taxes, cash flows from operating activities or other traditional indicators of operating performance.

The following table provides a reconciliation of Consolidated EBITDA to cash flows from operating activities for the three month periods ended March 31, 2012 and 2011 (in thousands). The Consolidated EBITDA covenants under each of the Indenture and the working capital facility agreement are based upon a rolling twelve months. Therefore, Consolidated EBITDA for the twelve months ended March 31, 2012 includes the amounts presented in the following table as well as the amounts from the second, third and fourth quarters of 2011.

   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Net cash provided by (used in) operating activities
  $ 11,536     $ (613 )
                 
Accounts receivable
    1,420       2,248  
Inventories
    274       128  
Other current assets
    (1,321 )     (959 )
Refundable income taxes
    (109 )     -  
Other assets
    (14 )     (369 )
Accounts payable
    254       496  
Accrued expenses
    (7,044 )     2,015  
Due to parent, net
    -       1,064  
Other liabilities
    48       502  
Provision for doubtful accounts
    20       (184 )
Deferred income tax benefit
    231       399  
Provision for inventory realizability
    (47 )     (26 )
Loss on disposition of fixed assets, net
    (4 )     (24 )
Income tax benefit
    (163 )     (1,448 )
Cash interest expense
    4,273       3,702  
Management fees
    -       491  
Non cash adjustments:
               
Increase in market value of investments
    (4 )     (3 )
Loss on disposition of fixed assets
    3       31  
Interest income
    (5 )     -  
Restructuring costs
    5       377  
Non capitalizable debt costs
    -       101  
                 
Consolidated EBITDA
  $ 9,353     $ 7,928  

 
18

 
Contractual Obligations

The following table summarizes the Company’s future minimum non-cancellable obligations as of March 31, 2012. The information presented in the table below reflects management’s estimates of the contractual maturities of our obligations. These maturities may differ significantly from the actual maturities of these obligations:

   
Remaining Payments Due by Period
 
               
2013 to
   
2015 to
   
2017 and
 
   
Total
   
2012
   
2014
   
2016
   
beyond
 
(in thousands)
                             
                               
Long term debt, including interest (1)
  $ 173,313     $ 16,506     $ 156,807     $ -     $ -  
Operating leases
    4,841       1,400       2,420       1,021       -  
Purchase obligations (2)
    8,784       6,108       2,671       5       -  
Other long-term obligations (3)
    126       113       13       -       -  
                                         
Total (4)
  $ 187,064     $ 24,127     $ 161,911     $ 1,026     $ -  
__________________________________
(1)
Includes the $132.0 million aggregate principal amount due on the 2011 Notes plus interest at 12.5% payable semi-annually through April 15, 2014.
 
(2)
Represents payments due under purchase agreements for consumable raw materials and commitments for construction projects and equipment acquisitions.
 
(3)
Represents payments due under a non-compete arrangement with our former Chairman of the Board.
 
(4)
At March 31, 2012, we have recognized $1.7 million of liabilities for unrecognized tax benefits. There is a high degree of uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits because they are dependent on various matters including tax examinations, changes in tax laws or interpretation of those laws, expiration of statutes of limitation, etc. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Off Balance Sheet Arrangements

At March 31, 2012 and December 31, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We therefore are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The amendment should be applied retrospectively. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.

In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative tests become optional. The guidance is effective for annual and interim impairment tests performed in fiscal years beginning after December 15, 2011, and earlier adoption is permitted. The adoption of this guidance did not have an impact on our financial statements.

In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity.  This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not have any elements of other comprehensive income; therefore, the adoption of this guidance did not have an impact on our financial statements.
 
 
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In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us beginning in the first quarter of 2012. The adoption of this guidance did not have an impact on our financial statements, other than additional disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Exchange Rate Market Risk

We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in the three months ended March 31, 2012 and 2011 were denominated in U.S. dollars. Therefore, foreign currency fluctuations had a negligible impact on our financial results in those periods.

Interest Rate Market Risk

We are exposed to changes in interest rates because our working capital facility is variable rate debt. Interest rate changes generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. During the first quarter of 2012, we had borrowings under our working capital facility, and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the three months ended March 31, 2012. We do not currently utilize derivative financial instruments to hedge changes in interest rates. All of our other debt carries fixed interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits
 
Exhibits
 
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John A. Saxton, President and Chief Executive Officer of The Sheridan Group, Inc. and Robert M. Jakobe, Chief Financial Officer of The Sheridan Group, Inc.
 
101.1
The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.  In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
 
 
21



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
The Sheridan Group, Inc.
 
Registrant
     
 
By:
/s/ Robert M. Jakobe
   
Robert M. Jakobe
   
Executive Vice President and Chief Financial Officer
     
Date:
May 11, 2012
     
 
 
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