Attached files
file | filename |
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EX-32.2 - EX-32.2 - MULTI COLOR Corp | d409517dex322.htm |
EX-32.1 - EX-32.1 - MULTI COLOR Corp | d409517dex321.htm |
EX-31.2 - EX-31.2 - MULTI COLOR Corp | d409517dex312.htm |
EX-31.1 - EX-31.1 - MULTI COLOR Corp | d409517dex311.htm |
EX-10.1 - EX-10.1 - MULTI COLOR Corp | d409517dex101.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
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 0-16148
Multi-Color Corporation
(Exact name of Registrant as specified in its charter)
OHIO | 31-1125853 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
4053 Clough Woods Dr.
Batavia, Ohio 45103
(Address of Principal Executive Offices)
Registrants Telephone Number (513) 381-1480
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 ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated Filer | ☒ | Accelerated Filer | ☐ | |||||
Non-accelerated Filer | ☐ | Smaller reporting company | ☐ | |||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
Common shares, no par value 17,045,456 (as of July 31, 2017)
Table of Contents
FORM 10-Q
CONTENTS
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Forward-Looking Statements
This report contains certain statements that are not historical facts that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that are intended to be covered by the safe harbors created by that Act. All statements contained in this Form 10-Q other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words may, continue, estimate, intend, plan, will, believe, project, expect, anticipate and similar expressions (as well as the negative versions thereof) may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Such forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which they are made.
Statements concerning expected financial performance, on-going business strategies, and possible future actions which the Company intends to pursue in order to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors. Factors which could cause actual performance by the Company to differ materially from these forward-looking statements include, without limitation: factors discussed in conjunction with a forward-looking statement; changes in global economic and business conditions; changes in business strategies or plans; raw material cost pressures; availability of raw materials; availability to pass raw material cost increases to our customers; interruption of business operations; changes in, or the failure to comply with, government regulations, legal proceedings and developments; acceptance of new product offerings, services and technologies; new developments in packaging; our ability to effectively manage our growth and execute our long-term strategy; our ability to manage foreign operations and the risks involved with them, including compliance with applicable anti-corruption laws; currency exchange rate fluctuations; our ability to manage global political uncertainty; terrorism and political unrest; increases in general interest rate levels and credit market volatility affecting our interest costs; competition within our industry; our ability to consummate and successfully integrate acquisitions; our ability to recognize the benefits of acquisitions, including potential synergies and cost savings; failure of an acquisition or acquired company to achieve its plans and objectives generally; risk that proposed or consummated acquisitions may disrupt operations or pose difficulties in employee retention or otherwise affect financial or operating results; risk that some of our goodwill may be or later become impaired; the success and financial condition of our significant customers; dependence on information technology; our ability to market new products; our ability to maintain an effective system of internal control; ongoing claims, lawsuits and governmental proceedings, including environmental proceedings; availability, terms and developments of capital and credit; dependence on key personnel; quality of management; our ability to protect our intellectual property and the potential for intellectual property litigation; employee benefit costs; and risk associated with significant leverage. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition to the factors described in this paragraph, Part I, Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2017 contains a list and description of uncertainties, risks and other matters that may affect the Company.
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Item 1. | Condensed Consolidated Financial Statements (unaudited) |
MULTI-COLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Ended | ||||||||
June 30, 2017 | June 30, 2016 | |||||||
Net revenues |
$ | 242,440 | $ | 236,494 | ||||
Cost of revenues |
192,983 | 184,401 | ||||||
|
|
|
|
|||||
Gross profit |
49,457 | 52,093 | ||||||
Selling, general and administrative expenses |
23,589 | 22,654 | ||||||
Facility closure expenses |
34 | 157 | ||||||
|
|
|
|
|||||
Operating income |
25,834 | 29,282 | ||||||
Interest expense |
6,335 | 6,456 | ||||||
Other (income) expense, net |
1,199 | (270 | ) | |||||
|
|
|
|
|||||
Income before income taxes |
18,300 | 23,096 | ||||||
Income tax expense |
4,158 | 7,186 | ||||||
|
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|
|||||
Net income |
14,142 | 15,910 | ||||||
Less: Net income attributable to noncontrolling interests |
36 | 105 | ||||||
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|
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Net income attributable to Multi-Color Corporation |
$ | 14,106 | $ | 15,805 | ||||
|
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Weighted average shares and equivalents outstanding: |
||||||||
Basic |
16,943 | 16,799 | ||||||
Diluted |
17,152 | 16,961 | ||||||
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|
|
|||||
Basic earnings per common share |
$ | 0.83 | $ | 0.94 | ||||
Diluted earnings per common share |
$ | 0.82 | $ | 0.93 | ||||
Dividends per common share |
$ | 0.05 | $ | 0.05 | ||||
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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MULTI-COLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
Three Months Ended | ||||||||
June 30, 2017 | June 30, 2016 | |||||||
Net income |
$ | 14,142 | $ | 15,910 | ||||
Other comprehensive income (loss): |
||||||||
Unrealized foreign currency translation gain (loss) (1) |
19,064 | (13,373 | ) | |||||
Unrealized gain on interest rate swaps, net of tax (2) |
| 165 | ||||||
|
|
|
|
|||||
Total other comprehensive income (loss) |
19,064 | (13,208 | ) | |||||
|
|
|
|
|||||
Comprehensive income |
33,206 | 2,702 | ||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests |
(30 | ) | 40 | |||||
|
|
|
|
|||||
Comprehensive income attributable to Multi-Color Corporation |
$ | 33,236 | $ | 2,662 | ||||
|
|
|
|
(1) | The amount for the three months ended June 30, 2017 and 2016 includes a tax impact of $(284) and $229, respectively, related to the settlement of foreign currency denominated intercompany loans. |
(2) | Amount is net of tax of $(32) for the three months ended June 30, 2016. |
See accompanying Notes to Condensed Consolidated Financial Statements.
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MULTI-COLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
June 30, 2017 | March 31, 2017 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 25,891 | $ | 25,229 | ||||
Accounts receivable, net of allowance of $2,586 and $2,273 at June 30, 2017 and March 31, 2017, respectively |
144,759 | 141,211 | ||||||
Other receivables |
8,144 | 7,871 | ||||||
Inventories, net |
70,418 | 63,995 | ||||||
Prepaid expenses |
11,507 | 12,187 | ||||||
Other current assets |
2,032 | 3,253 | ||||||
|
|
|
|
|||||
Total current assets |
262,751 | 253,746 | ||||||
Property, plant and equipment, net of accumulated depreciation of $203,293 and $190,915 at June 30, 2017 and March 31, 2017, respectively |
256,060 | 247,261 | ||||||
Goodwill |
420,406 | 412,550 | ||||||
Intangible assets, net |
170,244 | 169,220 | ||||||
Other non-current assets |
5,674 | 6,365 | ||||||
Deferred income tax assets |
2,859 | 2,848 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,117,994 | $ | 1,091,990 | ||||
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|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 2,530 | $ | 2,093 | ||||
Accounts payable |
87,933 | 88,475 | ||||||
Accrued expenses and other liabilities |
49,086 | 53,758 | ||||||
|
|
|
|
|||||
Total current liabilities |
139,549 | 144,326 | ||||||
Long-term debt |
474,659 | 479,408 | ||||||
Deferred income tax liabilities |
67,473 | 65,761 | ||||||
Other liabilities |
20,433 | 20,675 | ||||||
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|
|
|
|||||
Total liabilities |
702,114 | 710,170 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, no par value, 1,000 shares authorized, no shares outstanding |
| | ||||||
Common stock, no par value, stated value of $0.10 per share; 40,000 shares authorized, 17,306 and 17,254 shares issued at June 30, 2017 and March 31, 2017, respectively |
1,059 | 1,054 | ||||||
Paid-in capital |
160,629 | 158,399 | ||||||
Treasury stock, 305 and 302 shares at cost at June 30, 2017 and March 31, 2017, respectively |
(11,420 | ) | (11,168 | ) | ||||
Retained earnings |
329,717 | 316,461 | ||||||
Accumulated other comprehensive loss |
(66,665 | ) | (85,795 | ) | ||||
|
|
|
|
|||||
Total stockholders equity attributable to Multi-Color Corporation |
413,320 | 378,951 | ||||||
Noncontrolling interests |
2,560 | 2,869 | ||||||
|
|
|
|
|||||
Total stockholders equity |
415,880 | 381,820 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 1,117,994 | $ | 1,091,990 | ||||
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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MULTI-COLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
(in thousands)
Accumulated Other Comprehensive Loss |
||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares Issued |
Amount | Paid-In Capital |
Treasury Stock |
Retained Earnings |
Noncontrolling Interests |
Total | ||||||||||||||||||||||||||
March 31, 2017 |
17,254 | $ | 1,054 | $ | 158,399 | $ | (11,168 | ) | $ | 316,461 | $ | (85,795 | ) | $ | 2,869 | $ | 381,820 | |||||||||||||||
Net income |
14,106 | 36 | 14,142 | |||||||||||||||||||||||||||||
Other comprehensive income (loss) |
19,130 | (66 | ) | 19,064 | ||||||||||||||||||||||||||||
Issuance of common stock |
47 | 5 | 1,320 | 1,325 | ||||||||||||||||||||||||||||
Restricted stock grant |
5 | | ||||||||||||||||||||||||||||||
Stock-based compensation |
910 | 910 | ||||||||||||||||||||||||||||||
Shares acquired under employee plans |
(252 | ) | (252 | ) | ||||||||||||||||||||||||||||
Common stock dividends |
(850 | ) | (850 | ) | ||||||||||||||||||||||||||||
Dividends paid to noncontrolling interests |
(279 | ) | (279 | ) | ||||||||||||||||||||||||||||
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June 30, 2017 |
17,306 | $ | 1,059 | $ | 160,629 | $ | (11,420 | ) | $ | 329,717 | $ | (66,665 | ) | $ | 2,560 | $ | 415,880 | |||||||||||||||
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See accompanying Notes to Condensed Consolidated Financial Statements.
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MULTI-COLOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended | ||||||||
June 30, 2017 | June 30, 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 14,142 | $ | 15,910 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
8,492 | 8,416 | ||||||
Amortization of intangible assets |
3,604 | 3,460 | ||||||
Amortization of deferred financing costs |
404 | 423 | ||||||
Net loss on disposal of property, plant and equipment |
223 | 29 | ||||||
Net gain on interest rate swaps |
| (28 | ) | |||||
Stock-based compensation expense |
910 | 919 | ||||||
Excess tax benefit from stock-based compensation |
| (318 | ) | |||||
Deferred income taxes, net |
191 | 27 | ||||||
Changes in assets and liabilities, net of acquisitions: |
||||||||
Accounts receivable |
239 | (4,410 | ) | |||||
Inventories |
(5,053 | ) | (4,262 | ) | ||||
Prepaid expenses and other assets |
3,049 | 5,766 | ||||||
Accounts payable |
(4,092 | ) | (3,404 | ) | ||||
Accrued expenses and other liabilities |
(6,964 | ) | (4,242 | ) | ||||
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Net cash provided by operating activities |
15,145 | 18,286 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(10,272 | ) | (10,021 | ) | ||||
Investment in acquisitions, net of cash acquired |
| (3,123 | ) | |||||
Proceeds from sale of property, plant and equipment |
195 | 32 | ||||||
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Net cash used in investing activities |
(10,077 | ) | (13,112 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings under revolving lines of credit |
58,539 | 69,355 | ||||||
Payments under revolving lines of credit |
(63,279 | ) | (72,425 | ) | ||||
Repayments of long-term debt |
(706 | ) | (357 | ) | ||||
Payment of acquisition related deferred payment |
| (188 | ) | |||||
Proceeds from issuance of common stock |
1,080 | 1,012 | ||||||
Excess tax benefit from stock-based compensation |
| 318 | ||||||
Dividends paid |
(1,126 | ) | (1,337 | ) | ||||
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|||||
Net cash used in financing activities |
(5,492 | ) | (3,622 | ) | ||||
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Effect of foreign exchange rate changes on cash |
1,086 | (912 | ) | |||||
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Net increase in cash and cash equivalents |
662 | 640 | ||||||
Cash and cash equivalents, beginning of period |
25,229 | 27,709 | ||||||
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Cash and cash equivalents, end of period |
$ | 25,891 | $ | 28,349 | ||||
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See accompanying Notes to Condensed Consolidated Financial Statements.
See Note 14 for supplemental cash flow disclosures.
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MULTI-COLOR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except for statistical, per share data and percentages)
1. Description of Business and Significant Accounting Policies
The Company
Multi-Color Corporation (Multi-Color, MCC, we, us, our or the Company), headquartered near Cincinnati, Ohio, is a leader in global label solutions supporting a number of the worlds most prominent brands including leading producers of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products. MCC serves international brand owners in North, Central and South America, Europe, China, Southeast Asia, Australia, New Zealand and South Africa with a comprehensive range of the latest label technologies in Pressure Sensitive, Glue-Applied (Cut and Stack), In-Mold, Shrink Sleeve and Heat Transfer.
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading. A description of the Companys significant accounting policies is included in the Companys Annual Report on Form 10-K for the year ended March 31, 2017 (the 2017 10-K). These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the 2017 10-K.
The information furnished in these condensed consolidated financial statements reflects all estimates and adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods reported.
The condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments. This update removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, which for the Company is any annual or interim goodwill impairment tests performed after April 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which revises the definition of a business. The FASBs new framework will assist entities in evaluating whether a set (integrated set of assets and activities) should be accounted for as an acquisition of a business or a group of assets. The framework adds an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this update on its consolidated financial statements, but it is not expected to have a material impact on the Companys consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The specific issues addressed include debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and separately identifiable cash flows and application of the predominance principle. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2018. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several areas of accounting for employee share-based payments, including the accounting for income taxes, forfeitures, and the classification on the statement of cash flows. This update is effective prospectively for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this standard on April 1, 2017 and recognized excess tax benefits of $655 in income tax
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expense as a discrete item during the three months ended June 30, 2017. This amount may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to April 1, 2017, excess tax benefits were recognized in additional paid-in capital. Additionally, excess tax benefits are now included in net operating cash flows rather than net financing cash flows in the Companys consolidated statements of cash flows. The treatment of forfeitures has not changed, as the Company is electing to continue the current process of estimating forfeitures at the time of grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires that lessees recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, leases will be classified as either finance leases or operating leases. This update is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2019. This update should be applied at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this standard on its consolidated financial statements, which will include an increase in both assets and liabilities relating to its leasing activities.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. This update does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. Prior to issuance of this ASU, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value less normal profit margin). For inventory within the scope of the new guidance, entities will be required to compare the cost of inventory to only its net realizable value, and not to the three measures required by current guidance. This update was effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for the Company was the fiscal year beginning April 1, 2017. This update was applied prospectively to all lower of cost and net realizable value assessments performed by the Company after the effective date. The adoption did not have a material impact on the Companys consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provides revised guidance for revenue recognition. The standards core principle is that an entity should recognize revenue for transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance provides five steps that should be applied to achieve that core principle. In July 2015, the FASB deferred the effective date of this standard by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which for the Company is the fiscal year beginning April 1, 2018. In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations for Topic 606. In April 2016, the FASB issued ASU 2016-10, which clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In December 2016, the FASB issued ASU 2016-20, which further clarifies and removes inconsistencies in ASU 2014-09 guidance. These updates can be applied retrospectively to each period presented or as a cumulative-effect adjustment (modified retrospective) as of the date of adoption. The Company has begun its process for implementing this guidance, including a review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company plans to adopt the new revenue guidance and these updates for the fiscal year beginning April 1, 2018 using the modified retrospective approach and is currently evaluating the impact of this update on its consolidated financial statements.
No other new accounting pronouncement issued or effective during the three months ended June 30, 2017 had or is expected to have a material impact on the consolidated financial statements.
Supply Chain Financing
The Company has entered into supply chain financing agreements with certain customers. The receivables for the agreements are sold without recourse to the customers banks and are accounted for as sales of accounts receivable. Gains and losses on the sale of these receivables are included in selling, general and administrative expenses in the condensed consolidated statements of income, and losses of $235 and $116 were recorded for the three months ended June 30, 2017 and 2016, respectively.
2. Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income attributable to Multi-Color Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to Multi-Color Corporation by the sum of the weighted average number of common shares outstanding during the period plus, if dilutive, potential common shares outstanding during the period. Potential common shares outstanding during the period consist of restricted shares, restricted share units, and the incremental common shares issuable upon the exercise of stock options and are reflected in diluted EPS by application of the treasury stock method.
The following is a reconciliation of the number of shares used in the basic EPS and diluted EPS computations:
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Three Months Ended | ||||||||||||||||
June 30, 2017 | June 30, 2016 | |||||||||||||||
Shares | Per Share Amount |
Shares | Per Share Amount |
|||||||||||||
Basic EPS |
16,943 | $ | 0.83 | 16,799 | $ | 0.94 | ||||||||||
Effect of dilutive securities |
209 | (0.01 | ) | 162 | (0.01 | ) | ||||||||||
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Diluted EPS |
17,152 | $ | 0.82 | 16,961 | $ | 0.93 | ||||||||||
|
|
|
|
|
|
|
|
The Company excluded 21 and 159 options to purchase shares in the three months ended June 30, 2017 and 2016, respectively, from the computation of diluted EPS because these shares would have an anti-dilutive effect.
3. Inventories
The Companys inventories consisted of the following:
June 30, 2017 | March 31, 2017 | |||||||
Finished goods |
$ | 39,439 | $ | 35,204 | ||||
Work-in-process |
8,236 | 8,933 | ||||||
Raw materials |
30,667 | 26,862 | ||||||
|
|
|
|
|||||
Total inventories, gross |
78,342 | 70,999 | ||||||
Inventory reserves |
(7,924 | ) | (7,004 | ) | ||||
|
|
|
|
|||||
Total inventories, net |
$ | 70,418 | $ | 63,995 | ||||
|
|
|
|
4. Debt
The components of the Companys debt consisted of the following:
June 30, 2017 | March 31, 2017 | |||||||||||||||||||||||
Principal | Unamortized Debt Issuance Costs |
Debt Less Unamortized Debt Issuance Costs |
Principal | Unamortized Debt Issuance Costs |
Debt Less Unamortized Debt Issuance Costs |
|||||||||||||||||||
6.125% Senior Notes (1) |
$ |
250,000 |
|
$ | (3,654 | ) | $ | 246,346 | $ | 250,000 | $ | (3,822 | ) | $ | 246,178 | |||||||||
U.S. Revolving Credit Facility (2) |
189,270 | (2,116 | ) | 187,154 | 198,100 | (2,335 | ) | 195,765 | ||||||||||||||||
Australian Revolving Sub-Facility (2) |
35,869 | (161 | ) | 35,708 | 31,965 | (178 | ) | 31,787 | ||||||||||||||||
Capital leases |
7,186 | | 7,186 | 7,412 | | 7,412 | ||||||||||||||||||
Other subsidiary debt |
795 | | 795 | 359 | | 359 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total debt |
483,120 | (5,931 | ) | 477,189 | 487,836 | (6,335 | ) | 481,501 | ||||||||||||||||
Less current portion of debt |
(2,530 | ) | | (2,530 | ) | (2,093 | ) | | (2,093 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 480,590 | $ | (5,931 | ) | $ | 474,659 | $ | 485,743 | $ | (6,335 | ) | $ | 479,408 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The 6.125% Senior Notes are due on December 1, 2022. |
(2) | Borrowings under the U.S. Revolving Credit Facility and Australian Revolving Sub-Facility mature on November 21, 2019. |
The following is a schedule of future annual principal payments as of June 30, 2017:
Debt | Capital Leases | Total | ||||||||||
July 2017 - June 2018 |
$ | 606 | $ | 1,924 | $ | 2,530 | ||||||
July 2018 - June 2019 |
71 | 1,942 | 2,013 | |||||||||
July 2019 - June 2020 |
225,177 | 1,775 | 226,952 | |||||||||
July 2020 - June 2021 |
40 | 1,249 | 1,289 | |||||||||
July 2021 - June 2022 |
29 | 296 | 325 | |||||||||
Thereafter |
250,011 | | 250,011 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 475,934 | $ | 7,186 | $ | 483,120 | ||||||
|
|
|
|
|
|
11
Table of Contents
On November 21, 2014, the Company issued $250,000 aggregate principal amount of 6.125% Senior Notes due 2022 (the Notes). The Notes are unsecured senior obligations of the Company. Interest is payable on June 1st and December 1st of each year beginning June 1, 2015 until the maturity date of December 1, 2022. The Companys obligations under the Notes are guaranteed by certain of the Companys existing direct and indirect wholly-owned domestic subsidiaries that are guarantors under the Credit Agreement (defined below).
Concurrent with the issuance and sale of the Notes, the Company amended and restated its credit agreement. The Amended and Restated Credit Agreement (the Credit Agreement) provides for revolving loans of up to $500,000 for a five year term expiring on November 21, 2019. The aggregate commitment amount is comprised of the following: (i) a $460,000 revolving credit facility (the U.S. Revolving Credit Facility) and (ii) an Australian dollar equivalent of a $40,000 revolving credit facility (the Australian Revolving Sub-Facility).
The Credit Agreement may be used for working capital, capital expenditures and other corporate purposes and to fund permitted acquisitions (as defined in the Credit Agreement). Loans under the Credit Agreement bear interest at variable rates plus a margin, based on the Companys consolidated senior secured leverage ratio at the time of the borrowing. The weighted average interest rate on borrowings under the U.S. Revolving Credit Facility was 2.97% and 2.72% at June 30, 2017 and March 31, 2017, respectively, and on borrowings under the Australian Revolving Sub-Facility was 3.42% and 3.43% at June 30, 2017 and March 31, 2017, respectively.
The Credit Agreement contains customary representations and warranties as well as customary negative and affirmative covenants which require the Company to maintain the following financial covenants at the end of each quarter: (i) a maximum consolidated senior secured leverage ratio of no more than 3.50 to 1.00; (ii) a maximum consolidated leverage ratio of no more than 4.50 to 1.00; and (iii) a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00. The Credit Agreement contains customary mandatory and optional prepayment provisions and customary events of default. The U.S. Revolving Credit Facility and the Australian Revolving Sub-Facility are secured by the capital stock of subsidiaries, substantially all of the assets of each of our domestic subsidiaries, but excluding existing and non-material real property, and intercompany debt. The Australian Revolving Sub-Facility is also secured by substantially all of the assets of the Australian borrower and its direct and indirect subsidiaries.
The Credit Agreement and the indenture governing the Notes (the Indenture) limit the Companys ability to incur additional indebtedness. Additional covenants contained in the Credit Agreement and the Indenture, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, make restricted payments, create liens, make equity or debt investments, engage in mergers, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Under the Credit Agreement and the Indenture, certain changes in control of the Company could result in the occurrence of an Event of Default. In addition, the Credit Agreement limits the ability of the Company to modify terms of the Indenture. As of June 30, 2017, the Company was in compliance with the covenants in the Credit Agreement and the Indenture.
The Company recorded $404 and $423 in interest expense for the three months ended June 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs.
Available borrowings under the Credit Agreement at June 30, 2017 consisted of $265,217 under the U.S. Revolving Credit Facility and $4,131 under the Australian Revolving Sub-Facility. The Company also has various other uncommitted lines of credit available at June 30, 2017 in the aggregate amount of $10,198.
The carrying value of debt approximates fair value. The fair value of long-term debt is based on observable inputs, including quoted market prices (Level 2). The fair value of the Notes was approximately $260,000 as of June 30, 2017.
Capital Leases
The present value of the net minimum payments on the capitalized leases is as follows:
June 30, 2017 | March 31, 2017 | |||||||
Total minimum lease payments |
$ |
8,038 |
|
$ | 8,327 | |||
Less amount representing interest |
(852 | ) | (915 | ) | ||||
|
|
|
|
|||||
Present value of net minimum lease payments |
7,186 | 7,412 | ||||||
Current portion |
(1,924 | ) | (1,964 | ) | ||||
|
|
|
|
|||||
Capitalized lease obligations, less current portion |
$ |
5,262 |
|
$ | 5,448 | |||
|
|
|
|
The capitalized leases carry interest rates from 2.32% to 10.11% and mature from fiscal 2018 to fiscal 2022.
5. Major Customers
During the three months ended June 30, 2017 and 2016, sales to major customers (those exceeding 10% of the Companys net revenues in one or more of the periods presented) approximated 17% and 15%, respectively, of the Companys consolidated net revenues. All of these sales were made to The Procter & Gamble Company.
12
Table of Contents
In addition, accounts receivable balances from The Procter & Gamble Company approximated 3% and 4% of the Companys total accounts receivable balance at June 30, 2017 and March 31, 2017, respectively. The loss or substantial reduction of the business of this major customer could have a material adverse impact on the Companys results of operations and cash flows.
6. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, various foreign jurisdictions and various state and local jurisdictions where the statutes of limitations generally range from three to five years. At June 30, 2017, the Company is no longer subject to U.S. federal examinations by tax authorities for years before fiscal 2014. The Company is no longer subject to state and local examinations by tax authorities for years before fiscal 2012. In foreign jurisdictions, the Company is no longer subject to examinations by tax authorities for years before fiscal 1999.
Effective April 1, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. As part of the adoption, the Company recognizes excess tax benefits or detriments for share-based payments as a reduction of or add-back to income tax expense. As of June 30, 2017, the Company recognized a $655 discrete benefit in income tax expense related to share-based compensation. Due to the nature of share-based payment exercise patterns, the Company will not know all the potential impacts of the update until the end of each quarter.
The benefits of tax positions are not recorded unless it is more likely than not the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50% likelihood of being realized.
As of June 30, 2017 and March 31, 2017, the Company had liabilities of $4,846 and $5,665, respectively, recorded for unrecognized tax benefits for U.S. federal, state and foreign tax jurisdictions. During the three months ended June 30, 2017 and 2016, the Company recognized $(56) and $109, respectively, of interest and penalties in income tax expense in the condensed consolidated statements of income. The liability for the gross amount of interest and penalties at June 30, 2017 and March 31, 2017 was $1,918 and $1,892, respectively. The liability for unrecognized tax benefits is classified in other noncurrent liabilities on the condensed consolidated balance sheets for the portion of the liability where payment of cash is not anticipated within one year of the balance sheet date. During the three months ended June 30, 2017 the Company released $1,320 of reserves, including interest and penalties, related to uncertain tax positions for which the statutes of limitations have lapsed or there was a reduction in the tax position related to a prior year. The Company believes that it is reasonably possible that $509 of unrecognized tax benefits as of June 30, 2017 could be released within the next 12 months due to the lapse of statute of limitations and settlements of certain foreign and domestic income tax matters. The unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate are $4,203.
7. Financial Instruments
Interest Rate Swaps
The Company used interest rate swap agreements (the Swaps) to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Swaps involve the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the underlying notional amounts between the two parties.
The Company had three forward starting non-amortizing Swaps with a total notional amount of $125,000 to convert variable rate debt to fixed rate debt. The Swaps became effective October 2012 and expired in August 2016. The Swaps resulted in interest payments based on an average fixed rate of 1.396% plus the applicable margin per the requirements in the Credit Agreement.
Upon inception, the Swaps were designated as a cash flow hedge, with the effective portion of gains and losses, net of tax, measured on an ongoing basis, recorded in accumulated other comprehensive income (loss). If the hedge or a portion thereof were determined to be ineffective, any gains and losses would be recorded in interest expense in the condensed consolidated statements of income.
In conjunction with entering into the Credit Agreement on November 21, 2014 (see Note 4), the Company de-designated the Swaps as a cash flow hedge. The cumulative loss on the Swaps recorded in accumulated other comprehensive income (AOCI) at the time of de-designation was reclassified into interest expense in the same periods during which the originally hedged transactions affected earnings, as these transactions were still probable of occurring. Subsequent to November 21, 2014, changes in the fair value of the de-designated Swaps were immediately recognized in interest expense.
The gains (losses) on the interest rate swaps recognized were as follows:
Three Months Ended | ||||
June 30, 2016 | ||||
Interest rate swaps not designated as hedging instruments: |
||||
Loss reclassified from AOCI into earnings |
$ | (197 | ) | |
Gain recognized in earnings |
225 |
13
Table of Contents
Foreign Currency Forward Contracts
Foreign currency exchange risk arises from our international operations in Australia, Europe, South America, Mexico, Canada, China, Southeast Asia and South Africa as well as from transactions with customers or suppliers denominated in currencies other than the U.S. dollar. The functional currency of each of the Companys subsidiaries is generally the currency of the country in which the subsidiary operates. At times, the Company uses foreign currency forward contracts to minimize the impact of fluctuations in currency exchange rates.
The Company periodically enters into foreign currency forward contracts to fix the purchase price of foreign currency denominated firm commitments. In addition, the Company periodically enters into short-term foreign currency forward contracts to fix the U.S. dollar value of certain intercompany loan payments, which settle in the following quarter. During the three months ended June 30, 2017 and 2016, the Companys forward contracts were not designated as hedging instruments; therefore, changes in the fair value of the contracts were immediately recognized in other income and expense in the condensed consolidated statements of income.
The amount of gain (loss) on the foreign currency forward contracts recognized in the condensed consolidated statements of income was as follows:
Three Months Ended | ||||||||
June 30, 2017 | June 30, 2016 | |||||||
Foreign currency forward contracts |
||||||||
Gain (loss) on foreign currency forward contracts |
$ | (367 | ) | $ | 92 | |||
Gain (loss) on related hedged items |
376 | (50 | ) |
8. Accrued Expenses and Other Liabilities
The Companys accrued expenses and other liabilities consisted of the following:
June 30, 2017 | March 31, 2017 | |||||||
Accrued payroll and benefits |
$ | 23,142 | $ | 24,286 | ||||
Accrued income taxes |
8,180 | 5,604 | ||||||
Professional fees |
690 | 500 | ||||||
Accrued taxes other than income taxes |
1,572 | 1,616 | ||||||
Deferred lease incentive |
214 | 209 | ||||||
Accrued interest |
1,365 | 5,178 | ||||||
Accrued severance |
61 | 47 | ||||||
Customer rebates |
2,892 | 2,672 | ||||||
Exit and disposal costs related to facility closures |
63 | 123 | ||||||
Deferred payments |
1,109 | 1,068 | ||||||
Deferred revenue |
6,548 | 7,076 | ||||||
Other |
3,250 | 5,379 | ||||||
|
|
|
|
|||||
Total accrued expenses and other liabilities |
$ | 49,086 | $ | 53,758 | ||||
|
|
|
|
9. Acquisitions
Super Enterprise Holdings Berhad (Super Label) Summary
On August 11, 2015, the Company acquired 90% of the shares of Super Label based in Kuala Lumpur, Malaysia, which was publicly listed on the Malaysian stock exchange. During the second and third quarters of fiscal 2016, the Company acquired the remaining shares and delisted Super Label. Super Label has operations in Malaysia, Indonesia, the Philippines, Thailand and China and produces home & personal care, food and beverage and specialty consumer products labels. This acquisition expanded our presence in China and gave us access to new label markets in Southeast Asia.
The acquisition included an 80% controlling interest in the label operations in Indonesia and a 60% controlling interest in certain legal entities in Malaysia and China. During the third quarter of fiscal 2017, the Company acquired the remaining shares of the label operations in Indonesia for $514. The results of Super Labels operations were included in the Companys condensed consolidated financial statements beginning on August 11, 2015.
14
Table of Contents
The purchase price for Super Label consisted of the following:
Cash from proceeds of borrowings |
$ | 39,782 | ||
Net cash acquired |
(6,035 | ) | ||
|
|
|||
Total purchase price |
$ | 33,747 | ||
|
|
The cash portion of the purchase price was funded through borrowings under our Credit Agreement (see Note 4). Net cash acquired included $8,152 of cash acquired less $2,117 of bank debt assumed. The Company spent $1,434 in acquisition expenses related to the Super Label acquisition. These expenses were recorded in selling, general and administrative expenses in the condensed consolidated statements of income as follows: $7 in the first quarter of fiscal 2017, $1 in the fourth quarter of fiscal 2016, $105 in the third quarter of fiscal 2016, $390 in the second quarter of fiscal 2016 and $931 in the first quarter of fiscal 2016.
Barat Group (Barat) Summary
On May 4, 2015, the Company acquired 100% of Barat based in Bordeaux, France. Barat operates four manufacturing facilities in Bordeaux and Burgundy, France, and the acquisition gives the Company access to the label market in the Bordeaux wine region and expands our presence in Burgundy. The acquisition included a 30% minority interest in Gironde Imprimerie Publicité (GIP), which was accounted for under the cost method based upon Multi-Colors inability to exercise significant influence over the business. The results of Barats operations were included in the Companys condensed consolidated financial statements beginning on May 4, 2015.
The purchase price for Barat consisted of the following:
Cash from proceeds of borrowings |
$ | 47,813 | ||
Deferred payment |
2,160 | |||
|
|
|||
Purchase price, before cash acquired |
49,973 | |||
Net cash acquired |
(746 | ) | ||
|
|
|||
Total purchase price |
$ | 49,227 | ||
|
|
The cash portion of the purchase price was funded through the Credit Agreement (see Note 4). The purchase price included $2,160 due to the seller, which was paid during the three months ended September 30, 2015. Net cash acquired included $4,444 of cash acquired less $3,698 of bank debt assumed related to capital leases. The Company spent $1,500 in acquisition expenses related to the Barat acquisition. These expenses were recorded in selling, general and administrative expenses in the condensed consolidated statements of income as follows: $8 in the second quarter of fiscal 2017, $4 in the first quarter of fiscal 2017, $65 in the second quarter of fiscal 2016, $751 in the first quarter of fiscal 2016, $467 in the fourth quarter of fiscal 2015 and $205 in the third quarter of fiscal 2015.
In conjunction with the acquisition of Barat, the Company recorded an indemnification asset of $1,115, which represents the sellers obligation under the purchase agreement to indemnify Multi-Color for the outcome of potential contingent liabilities relating to uncertain tax positions.
Purchase Price Allocation and Other Items
Based on fair value estimates, the purchase prices for Super Label and Barat have been allocated to individual assets acquired and liabilities assumed as follows:
15
Table of Contents
Super Label | Barat | |||||||
Assets Acquired: |
||||||||
Net cash acquired |
$ | 6,035 | $ | 746 | ||||
Accounts receivable |
8,479 | 8,489 | ||||||
Inventories |
4,276 | 2,863 | ||||||
Property, plant and equipment |
22,002 | 8,356 | ||||||
Intangible assets |
2,437 | 21,852 | ||||||
Goodwill |
8,668 | 23,391 | ||||||
Other assets |
1,984 | 2,794 | ||||||
|
|
|
|
|||||
Total assets acquired |
53,881 | 68,491 | ||||||
|
|
|
|
|||||
Liabilities Assumed: |
||||||||
Accounts payable |
5,087 | 3,049 | ||||||
Accrued income taxes payable |
936 | 355 | ||||||
Accrued expenses and other liabilities |
1,725 | 7,043 | ||||||
Deferred tax liabilities |
2,874 | 8,071 | ||||||
|
|
|
|
|||||
Total liabilities assumed |
10,622 | 18,518 | ||||||
|
|
|
|
|||||
Net assets acquired |
43,259 | 49,973 | ||||||
|
|
|
|
|||||
Noncontrolling interests: |
(3,477 | ) | | |||||
|
|
|
|
|||||
Net assets acquired attributable to Multi-Color Corporation |
$ | 39,782 | $ | 49,973 | ||||
|
|
|
|
The fair value of the noncontrolling interests for Super Label were estimated based on market valuations performed by an independent third party using a combination of: (i) an income approach based on expected future discounted cash flows; and (ii) an asset approach.
The estimated fair value of identifiable intangible assets acquired and their estimated useful lives are as follows:
Super Label | Barat | |||||||||||||||
Fair Value |
Useful Lives |
Fair Value |
Useful Lives |
|||||||||||||
Customer relationships |
$ | 2,437 | 15 years | $ | 20,849 | 20 years | ||||||||||
Non-compete agreements |
| | 780 | 2 years | ||||||||||||
Trademarks |
| | 223 | 1 year | ||||||||||||
|
|
|
|
|||||||||||||
Total identifiable intangible assets |
$ | 2,437 | $ | 21,852 | ||||||||||||
|
|
|
|
Identifiable intangible assets are amortized over their useful lives based upon a number of assumptions including the estimated period of economic benefit and utilization. The weighted-average amortization period for identifiable intangible assets acquired in the Barat acquisition is 19 years.
The goodwill for Super Label is attributable to access to the label markets in Malaysia, Indonesia, the Philippines and Thailand and the acquired workforce. The goodwill for Barat is attributable to access to the label market in the Bordeaux wine region and the acquired workforce. Goodwill arising from the Super Label and Barat acquisitions is not deductible for income tax purposes.
Below is a roll forward of the goodwill acquired from the acquisition date to June 30, 2017:
Super Label | Barat | |||||||
Balance at acquisition date |
$ | 8,668 | $ | 23,391 | ||||
Foreign exchange impact |
(527 | ) | 583 | |||||
|
|
|
|
|||||
Balance at June 30, 2017 |
$ | 8,141 | $ | 23,974 | ||||
|
|
|
|
The accounts receivable acquired as part of the Super Label acquisition had a fair value of $8,479 at the acquisition date. The gross contractual value of the receivables prior to any adjustments was $8,809 and the estimated contractual cash flows not expected to be collected are $330. The accounts receivable acquired as part of the Barat acquisition had a fair value of $8,489 at the acquisition date. The
16
Table of Contents
gross contractual value of the receivables prior to any adjustments was $8,679 and the estimated contractual cash flows that are not expected to be collected are $190.
Other Acquisition Activity
On January 3, 2017, the Company acquired 100% of Graphix Labels and Packaging Pty Ltd. (Graphix) for $17,261. The purchase price included $1,631 that is deferred for two years after the closing date. Graphix is located in Melbourne, Victoria, Australia and specializes in producing labels for both the food & beverage and wine & spirits markets. In January 2017, the Company acquired an additional 67.6% of the common shares of Gironde Imprimerie Publicité (GIP) for $2,084 plus net debt assumed of $862. The purchase price included $208 that is deferred for one year after the closing date. The Company acquired 30% of GIP as part of the Barat acquisition in fiscal 2016, which included a fair value equity interest in GIP of $771. Immediately prior to obtaining a controlling interest in GIP, the Company recognized a gain of $690 as a result of re-measuring the fair value of the equity interest based on the most recent share activity. GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market. On July 1, 2016, the Company acquired 100% of Italstereo Resin Labels S.r.l. (Italstereo) for $3,342 less net cash acquired of $181. The purchase price included $201 and $133 that are deferred for one and two years, respectively, after the closing date. Italstereo is located near Lucca, Italy and specializes in producing pressure sensitive adhesive resin coated labels, seals and emblems. On July 6, 2016, the Company acquired 100% of Industria Litografica Alessandrina S.r.l. (I.L.A.) for $6,301 plus net debt assumed of $3,547. The purchase price includes $819 that is deferred for three years after the closing date. I.L.A. is located in the Piedmont region of Italy and specializes in production of premium self-adhesive and wet glue labels primarily for the wine & spirits market and also services the food industry. The results of operations of these acquired businesses have been included in the condensed consolidated financial statements since the respective dates of acquisition and have been determined to be immaterial for purposes of additional disclosure.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed is incomplete for Graphix, GIP, Italstereo and I.L.A. The purchase price allocations may change in future periods as the fair value estimates of assets and liabilities (including, but not limited to, accounts receivable, inventory, property, plant and equipment, intangibles and debt) and the valuation of the related tax assets and liabilities are completed.
On January 4, 2016, the Company acquired 100% of Cashin Print for $17,487 less net cash acquired of $135 and 100% of System Label for $11,665 less net cash acquired of $2,025. Cashin Print and System Label are located in Castlebar, Ireland and Roscommon, Ireland, respectively. The purchase prices for Cashin Print and System Label included $1,411 and $1,571, respectively, for purchase price adjustments, which were paid to the seller during the three months ended June 30, 2016. In addition, the purchase prices for Cashin Print and System Label include deferred payments of $3,317 and $1,011, respectively. These deferred payments may be paid during the fourth quarter of fiscal 2019. During the third quarter of fiscal 2017, the long-term liabilities related to these deferred payments were reduced based on managements current estimate of the future payout and $887 was recorded in other income in the condensed consolidated statements of income. The acquired businesses supply multinational customers in Ireland, the United Kingdom and Continental Europe and provide Multi-Color with the opportunity to supply a broader product range to a larger customer base, especially in the healthcare market. On October 1, 2015, the Company acquired 100% of Supa Stik Labels (Supa Stik) for $6,787 less net cash acquired of $977. Supa Stik is located in Perth, West Australia and services the local wine, food & beverage and healthcare label markets. The purchase price included $622 that is deferred for two years after the closing date. On May 1, 2015, the Company acquired 100% of Mr. Labels in Brisbane, Queensland Australia for $2,110. The purchase price included $196 that was deferred until the first anniversary of the closing date, which was paid during the first quarter of fiscal 2017. Mr. Labels provides labels primarily to food and beverage customers. The results of operations of these acquired businesses have been included in the condensed consolidated financial statements since the respective dates of acquisition and have been determined to be immaterial for purposes of additional disclosure.
10. Accumulated Other Comprehensive Loss
The changes in the Companys accumulated other comprehensive loss by component consisted of the following:
Foreign | Defined benefit | |||||||||||
currency | pension | |||||||||||
items | items | Total | ||||||||||
Balance at March 31, 2017 |
$ | (85,593 | ) | $ | (202 | ) | $ | (85,795 | ) | |||
OCI before reclassifications |
19,130 | | 19,130 | |||||||||
Amounts reclassified from AOCI |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net current period OCI |
19,130 | | 19,130 | |||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2017 |
$ | (66,463 | ) | $ | (202 | ) | $ | (66,665 | ) | |||
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive loss consisted of the following:
17
Table of Contents
Three Months Ended | ||||
June 30, 2016 | ||||
Loss on cash flow hedges: |
||||
Interest rate swaps (1) |
$ | 197 | ||
Tax |
(32 | ) | ||
|
|
|||
Net of tax |
$ | 165 | ||
|
|
(1) | Reclassified from AOCI into interest expense in the condensed consolidated statements of income. See Note 7. |
11. Goodwill and Intangible Assets
The changes in the Companys goodwill consisted of the following:
Balance at March 31, 2017: |
||||
Goodwill, gross |
$ | 424,941 | ||
Accumulated impairment losses |
(12,391 | ) | ||
|
|
|||
Goodwill, net |
412,550 | |||
Activity during the year: |
||||
Adjustments to prior year acquisitions |
(58 | ) | ||
Currency translation |
7,914 | |||
|
|
|||
Balance at June 30, 2017: |
||||
Goodwill, gross |
432,724 | |||
Accumulated impairment losses |
(12,318 | ) | ||
|
|
|||
Goodwill, net |
$ | 420,406 | ||
|
|
The Companys intangible assets consisted of the following:
June 30, 2017 | March 31, 2017 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Customer relationships |
$ | 234,239 | $ | (66,071 | ) | $ | 168,168 | $ | 228,518 | $ | (61,546 | ) | $ | 166,972 | ||||||||||
Technologies |
1,687 | (1,411 | ) | 276 | 1,658 | (1,368 | ) | 290 | ||||||||||||||||
Trademarks |
1,078 | (1,078 | ) | | 1,013 | (1,013 | ) | | ||||||||||||||||
Licensing intangible |
2,099 | (2,099 | ) | | 1,958 | (1,958 | ) | | ||||||||||||||||
Non-compete agreements |
5,149 | (3,349 | ) | 1,800 | 5,063 | (3,116 | ) | 1,947 | ||||||||||||||||
Lease intangible |
| | | 128 | (117 | ) | 11 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 244,252 | $ | (74,008 | ) | $ | 170,244 | $ | 238,338 | $ | (69,118 | ) | $ | 169,220 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense of intangible assets for the three months ended June 30, 2017 and 2016 was $3,604 and $3,460, respectively.
12. Facility Closures
Dormans, France
During the three months ended June 30, 2017, the Company announced plans to close our manufacturing facility located in Dormans, France. Production at the facility is expected to cease during the three months ended September 30, 2017.
Below is a summary of the exit and disposal costs related to the closure of the Dormans facility:
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Total costs expected to be incurred |
Total costs incurred | Cumulative costs incurred as of June 30, 2017 |
||||||||||
Three Months Ended June 30, 2017 |
||||||||||||
Severance and other termination benefits |
$ | 100 | $ | 34 | $ | 34 | ||||||
Other associated costs |
100-150 | | |
Below is a reconciliation of the beginning and ending liability balances related to the exit and disposal costs:
Balance at March 31, 2017 |
Amounts Expensed |
Amounts Paid |
Balance at June 30, 2017 |
|||||||||||||
Severance and other termination benefits |
$ | | 34 | (34 | ) | $ | |
Sonoma, California
On January 19, 2016, the Company announced plans to consolidate our manufacturing facility located in Sonoma, California into our existing facility in Napa, California. The transition was substantially completed in the third quarter of fiscal 2017.
Below is a summary of the exit and disposal costs related to the closure of the Sonoma facility:
Total costs expected to be incurred |
Cumulative costs incurred as of June 30, 2017 |
|||||||
Severance and other termination benefits |
$ | 6 | $ | 6 | ||||
Other associated costs |
91 | 91 |
Below is a reconciliation of the beginning and ending liability balances related to the exit and disposal costs:
Balance at March 31, 2017 |
Amounts Expensed |
Amounts Paid |
Balance at June 30, 2017 |
|||||||||||||
Other associated costs |
$ | 24 | | | $ | 24 |
Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved from Sonoma to Napa.
The cumulative costs incurred in conjunction with the closure as of June 30, 2017 are $272, which were recorded in facility closure expenses in the condensed consolidated statements of income. The cumulative costs incurred include the exit and disposal costs above as well as non-cash impairment charges of $220 related to property, plant and equipment at the Sonoma facility, which were recorded in facility closure expenses during the three months ended March 31, 2016.
In addition, the Company recorded a net gain on the sale of property, plant and equipment on $185 related to assets in Sonoma that were not transferred to Napa and were sold and wrote-off $140 in property, plant and equipment that was not transferred to Napa and was abandoned, which were recorded in facility closure expenses during the three months ended December 31, 2016.
Glasgow, Scotland
During the three months ended March 31, 2016, the Company began the process to consolidate our two manufacturing facilities located in Glasgow, Scotland into one facility. The transition was substantially completed in the fourth quarter of fiscal 2017.
Below is a summary of the exit and disposal costs related to the closure of the Glasgow facility:
Total costs expected to be incurred |
Cumulative costs incurred as of June 30, 2017 |
|||||||
Severance and other termination benefits |
$ | 479 | $ | 479 | ||||
Other associated costs |
642-700 | 642 |
Below is a reconciliation of the beginning and ending liability balances related to the exit and disposal costs:
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Balance at March 31, 2017 |
Amounts Paid |
Balance at June 30, 2017 |
||||||||||
Other associated costs |
$ | 99 | (60 | ) | $ | 39 |
Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved in order to consolidate our two manufacturing facilities located in Glasgow into one facility.
The cumulative costs incurred in conjunction with the closure as of June 30, 2017 are $859, which were recorded in facility closure expenses in the condensed consolidated statements of income. The cumulative costs incurred include the exit and disposal costs above as well as non-cash impairment charges of $115 related to property, plant and equipment at the closing Glasgow facility, which were recorded in facility closure expenses during the three months ended March 31, 2016. In addition, the Company recorded a net gain on the sale of property, plant and equipment of $377 related to assets that were not transferred to other locations and were sold, which was recorded in facility closure expenses during the three months ended March 31, 2017.
Greensboro, North Carolina
On October 5, 2015, the Company announced plans to consolidate our manufacturing facility located in Greensboro, North Carolina into other North American facilities. The transition was substantially completed in the fourth quarter of fiscal 2016.
Below is a summary of the exit and disposal costs related to the closure of the Greensboro facility:
Total costs | Total costs incurred | Cumulative costs | ||||||||||
expected to be incurred |
Three Months Ended June 30, 2016 |
incurred as of June 30, 2017 |
||||||||||
Severance and other termination benefits |
$ | 651 | $ | | $ | 651 | ||||||
Contract termination costs |
| (66 | ) | | ||||||||
Other associated costs |
844 | 176 | 844 |
Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved from the Greensboro facility to other North American facilities and costs to return the facility to its original leased condition.
The cumulative costs incurred in conjunction with the closure as of June 30, 2017 are $2,366, which were recorded in facility closure expenses in the condensed consolidated statements of income. The cumulative costs incurred include the exit and disposal costs above as well as non-cash impairment charges related to property, plant and equipment at the Greensboro facility of $742 and $44, which were recorded during the three months ended September 30 and December 31, 2015, respectively. In addition, $85 related to the write off of fixed assets that were not transferred to other facilities and were disposed of in conjunction with the final facility clean-up was recorded in facility closure expenses during the three months ended March 31, 2016.
Dublin, Ireland
During the three months ended December 31, 2015, the Company began the process to consolidate our manufacturing facility located in Dublin, Ireland into our existing facility in Drogheda, Ireland. The consolidation was substantially completed in the first quarter of fiscal 2017.
Below is a summary of the exit and disposal costs related to the closure of the Dublin facility:
Total costs | Total costs incurred | Cumulative costs | ||||||||||
expected to be incurred |
Three Months Ended June 30, 2016 |
incurred as of June 30, 2017 |
||||||||||
Severance and other termination benefits |
$ | 765 | $ | 43 | $ | 765 | ||||||
Contract termination costs |
177 | | 177 | |||||||||
Other associated costs |
670 | 4 | 670 |
Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved from Dublin to Drogheda and costs to relocate employees.
The cumulative costs incurred in conjunction with the closure as of June 30, 2017 are $1,831, which were recorded in facility closure expenses in the condensed consolidated statements of income. The cumulative costs incurred include the exit and disposal costs above
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as well as non-cash impairment charges related to property, plant and equipment at the Dublin facility of $54 and $165, which were recorded in facility closure expenses during the three months ended December 31, 2015 and March 31, 2016, respectively.
13. Commitments and Contingencies
Litigation
The Company is subject to various legal claims and contingencies that arise out of the normal course of business, including claims related to commercial transactions, product liability, health and safety, taxes, environmental matters, employee matters and other matters. Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on our financial condition, results of operations and cash flows.
14. | Supplemental Cash Flow Disclosures |
Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:
Three Months Ended | ||||||||
June 30, 2017 | June 30, 2016 | |||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest paid |
$ | 9,801 | $ | 10,012 | ||||
Income taxes paid, net of refunds |
2,083 | 1,487 | ||||||
Supplemental Disclosures of Non-Cash Activities: |
||||||||
Capital expenditures incurred but not yet paid |
$ | 1,715 | $ | 817 | ||||
Capital lease obligations incurred |
| 820 | ||||||
Change in interest rate swap fair value |
| 225 | ||||||
Business combinations accounted for as a purchase: |
||||||||
Assets acquired (excluding cash) |
$ | (22 | ) | $ | (128 | ) | ||
Liabilities assumed |
22 | 143 | ||||||
Liabilities for contingent / deferred payments |
| 3,108 | ||||||
|
|
|
|
|||||
Net cash paid |
$ | | $ | 3,123 | ||||
|
|
|
|
15. Subsequent Events
On July 3, 2017, the Company sold its 60% interest in its durables business located in Southeast Asia to its minority shareholders.
On July 16, 2017, the Company entered into a Sale and Purchase Agreement with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, Constantia Flexibles) to acquire 100% of the Labels Division of Constantia Flexibles (Constantia Labels) for approximately $1,300,000, payable in cash and approximately 3,400 shares of Multi-Color stock (which shall not exceed 19.9% of current stock outstanding). The acquisition is expected to close in the third quarter of fiscal 2018 and is subject to closing conditions.
In connection with the execution of the Sale and Purchase Agreement, the Company entered into a commitment letter (the Commitment Letter) on July 16, 2017 with Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. (collectively, the Commitment Parties). The Commitment Letter provides that the Commitment Parties will commit to provide to the Company (i) (A) a $250,000 senior secured term loan A facility (the TLA Facility), (B) a $400,000 senior secured term loan B facility (the TLB Facility) and (C) a $400,000 senior secured revolving facility (the Revolving Facility, and collectively with the TLA Facility and the TLB Facility, the Senior Secured Credit Facilities), which Senior Secured Credit Facilities will be secured on a first priority basis by substantially all of the Companys assets, and (ii) up to a 400,000 senior unsecured bridge facility (the Bridge Facility). The Bridge Facility availability is subject to reduction in equivalent amounts upon any incurrence by the Company of term loans and/or the issuance of notes in a public offering or private placement prior to the consummation of the acquisition and upon other specified events, subject to certain exceptions set forth in the Commitment Letter. The Commitment Parties obligation to provide the financing is subject to the satisfaction of specified conditions and the accuracy of specified representations that are customarily required for similar financings. Proceeds from the Senior Secured Credit Facilities and the Bridge Facility will be used to refinance the Companys existing revolving credit facility, pay the cash portion of the consideration for the acquisition, pay fees and expenses incurred in connection with the acquisition and
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finance ongoing working capital and other general corporate needs of the Company. The Commitment Parties have also committed to provide interim facilities in the event that the Senior Secured Credit Facilities and the Bridge Facility are not available at the closing of the acquisition, upon customary terms and conditions for similar interim facilities. The documentation governing the Senior Secured Credit Facilities has not been finalized and accordingly the actual terms may differ from the description of such terms in the foregoing summary of the Commitment Letter.
Constantia Labels, headquartered in Vienna, Austria, is a leader in label solutions serving the food, beverage and consumer packaging goods industries. Constantia Labels has approximately 2,800 employees globally, with 23 production plants across 14 countries, with major operations across Europe, Asia and North America.
On August 3, 2017, the Company acquired 100% of GEWA Etiketten GmbH, located in Bingen am Rhein, Germany, which will complement our existing wine & spirits operations in Europe.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Information included in this Quarterly Report on Form 10-Q contains certain forward-looking statements that involve potential risks and uncertainties. Multi-Color Corporations future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and those discussed in Part I, Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2017 (the 2017 10-K). Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof. Results for interim periods may not be indicative of annual results.
Refer to Forward-Looking Statements following the index in this Form 10-Q. In the discussion that follows, all amounts are in thousands (both tables and text), except statistical and per share data and percentages.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the Companys financial condition and results of operations:
Executive Overview
We are a leader in global label solutions supporting a number of the worlds most prominent brands including leading producers of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products. MCC serves international brand owners in North, Central and South America, Europe, China, Southeast Asia, Australia, New Zealand and South Africa with a comprehensive range of the latest label technologies in Pressure Sensitive, Glue-Applied (Cut and Stack), In-Mold, Shrink Sleeve and Heat Transfer.
Results of Operations
Three Months Ended June 30, 2017 compared to the Three Months Ended June 30, 2016:
Net Revenues
$ | % | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Net revenues |
$ | 242,440 | $ | 236,494 | $ | 5,946 | 3 | % |
Net revenues increased 3% to $242,440 compared to $236,494 in the prior year quarter. Acquisitions occurring after the beginning of fiscal 2017 accounted for a 3% increase in revenues. Increased revenues in North America and Latin America contributed to an organic revenue increase of 1%. Foreign exchange rates, primarily driven by depreciation of the British pound and the Euro, led to a 1% decrease in revenues quarter over quarter.
Cost of Revenues and Gross Profit
$ | % | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Cost of revenues |
$ | 192,983 | $ | 184,401 | $ | 8,582 | 5 | % | ||||||||
% of Net revenues |
79.6 | % | 78.0 | % | ||||||||||||
Gross profit |
$ | 49,457 | $ | 52,093 | $ | (2,636 | ) | (5 | %) | |||||||
% of Net revenues |
20.4 | % | 22.0 | % |
Cost of revenues increased 5% or $8,582 compared to the prior year quarter. Acquisitions occurring after the beginning of fiscal 2017 contributed 3% or $5,274, partially offset by the favorable impact of foreign exchange rates of 1% or $2,555. Organic revenue growth and operating inefficiencies increased cost of revenues by 3% or $5,863.
Gross profit decreased 5% or $2,636 compared to the prior year quarter. Acquisitions occurring after the beginning of fiscal 2017 contributed 2% or $1,119 to gross profit, partially offset by the effect of unfavorable foreign exchange rates of 1% or $420. Operating inefficiencies, primarily in North America, led to an organic gross profit decrease of 6% or $3,335. Gross margins were 20.4% of net revenues for the current year quarter compared to 22.0% in the prior year quarter.
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Selling, General and Administrative Expenses and Facility Closure Expenses
2017 | 2016 | $ Change |
% Change |
|||||||||||||
Selling, general and administrative expenses |
$ | 23,589 | $ | 22,654 | $ | 935 | 4 | % | ||||||||
% of Net revenues |
9.7 | % | 9.6 | % | ||||||||||||
Facility closure expenses |
$ | 34 | $ | 157 | $ | (123 | ) | (78 | %) | |||||||
% of Net revenues |
0.0 | % | 0.1 | % |
Selling, general and administrative expenses increased 4% or $935 compared to the prior year quarter. Acquisitions occurring after the beginning of fiscal 2017 contributed an increase of $844, partially offset by a decrease of $244 due to the favorable impact of foreign exchange rates. In the current year quarter, the Company incurred $906 of acquisition and integration expenses compared to $166 in the prior year quarter. The remaining decrease primarily relates to a reduction in external compliance costs.
Facility closure expenses were $34 in the current year quarter compared to $157 in the prior year quarter. The current quarter expenses primarily related to the closure of our manufacturing facility in Dormans, France. Expenses in the prior year quarter related to consolidation of manufacturing facilities in Greensboro, North Carolina into existing facilities, as well as the consolidation of our manufacturing facilities in Dublin, Ireland into a single location.
Interest Expense and Other (Income) Expense, Net
$ | % | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Interest expense |
$ | 6,335 | $ | 6,456 | $ | (121 | ) | (2 | %) | |||||||
Other (income) expense, net |
$ | 1,199 | $ | (270 | ) | $ | 1,469 | 544 | % |
Interest expense decreased $121 or 2% compared to the prior year quarter.
Other expense was $1,199 in the current year quarter compared to income of $270 in the prior year quarter. This was primarily related to the unfavorable impact of the release of a $1,124 foreign indemnification receivable in the current year quarter, for which an offsetting tax liability was also relieved reducing the current quarter effective tax rate. The remaining change in other (income) expense primarily relates to gains and losses on foreign exchange.
Income Tax Expense
$ | % | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Income tax expense |
$ | 4,158 | $ | 7,186 | $ | (3,028 | ) | (42 | %) |
Our effective tax rate decreased to 23% in the current year quarter from 31% in the prior year quarter primarily due to the impact of certain discrete items recognized in the current year quarter that decreased tax expense compared to the prior year quarter, including the release of a tax liability related to a foreign indemnification receivable related to previous acquisitions for $1,124. Additionally, MCC adopted FASB ASU 2016-09, Improvements to Share-Based Payment Accounting, during the current year quarter, which decreased our effective tax rate by 4% compared to the prior year quarter.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
Through the three months ended June 30, 2017, net cash provided by operating activities was $15,145 compared to $18,286 in the same period of the prior year. Net income adjusted for non-cash expenses consisting primarily of depreciation and amortization was $27,966 in the current year compared to $28,838 in the same period of the prior year. Our use of operating assets and liabilities of $12,821 in the current year increased from a use of $10,552 in the prior year.
Through the three months ended June 30, 2017, net cash used in investing activities was $10,077 compared to $13,112 in the same period of the prior year. Capital expenditures, primarily funded by cash flows from operations totaled $10,272 in the current year compared to
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$10,021 in the same period of the prior year. Proceeds from the sale of property, plant and equipment totaled $195 in the current year compared to $32 in the same period of the prior year. The Company used $3,123 for acquisitions in the prior year period.
Through the three months ended June 30, 2017, net cash used in financing activities was $5,492, which included $5,446 of net debt payments and dividends paid of $1,126, offset by $1,080 of proceeds from the issuance of common stock. Dividends paid includes $847 to shareholders of Multi-Color Corporation and $279 to the minority shareholders of our 60% owned legal entity in Malaysia.
Through the three months ended June 30, 2016, net cash used in financing activities was $3,622, which included $3,427 of net debt payments, a $188 deferred payment related to the fiscal 2016 Mr. Labels acquisition and dividends paid of $1,337, offset by $1,330 of proceeds from various stock transactions. Dividends paid includes $839 to shareholders of Multi-Color Corporation and $498 to the minority shareholders of our 60% owned legal entity in Malaysia.
Capital Resources
On November 21, 2014, the Company issued $250,000 aggregate principal amount of 6.125% Senior Notes due 2022 (the Notes). The Notes are unsecured senior obligations of the Company. Interest is payable on June 1st and December 1st of each year beginning June 1, 2015 until the maturity date of December 1, 2022. The Companys obligations under the Notes are guaranteed by certain of the Companys existing direct and indirect wholly-owned domestic subsidiaries that are guarantors under the Credit Agreement (defined below).
Concurrent with the issuance and sale of the Notes, the Company amended and restated its credit agreement. The Amended and Restated Credit Agreement (the Credit Agreement) provides for revolving loans of up to $500,000 for a five year term expiring on November 21, 2019. The aggregate commitment amount is comprised of the following: (i) a $460,000 revolving credit facility (the U.S. Revolving Credit Facility) and (ii) an Australian dollar equivalent of a $40,000 revolving credit facility (the Australian Revolving Sub-Facility).
The Credit Agreement may be used for working capital, capital expenditures and other corporate purposes and to fund permitted acquisitions (as defined in the Credit Agreement). Loans under the Credit Agreement bear interest at variable rates plus a margin, based on the Companys consolidated senior secured leverage ratio at the time of the borrowing. The weighted average interest rate on borrowings under the U.S. Revolving Credit Facility was 2.97% and 2.72% at June 30, 2017 and March 31, 2017, respectively, and on borrowings under the Australian Revolving Sub-Facility was 3.42% and 3.43% at June 30, 2017 and March 31, 2017, respectively.
The Credit Agreement contains customary representations and warranties as well as customary negative and affirmative covenants which require the Company to maintain the following financial covenants at the end of each quarter: (i) a maximum consolidated senior secured leverage ratio of no more than 3.50 to 1.00; (ii) a maximum consolidated leverage ratio of no more than 4.50 to 1.00; and (iii) a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00. The Credit Agreement contains customary mandatory and optional prepayment provisions and customary events of default. The U.S. Revolving Credit Facility and the Australian Revolving Sub-Facility are secured by the capital stock of subsidiaries, substantially all of the assets of each of our domestic subsidiaries, but excluding existing and non-material real property, and intercompany debt. The Australian Revolving Sub-Facility is also secured by substantially all of the assets of the Australian borrower and its direct and indirect subsidiaries.
The Credit Agreement and the indenture governing the Notes (the Indenture) limit the Companys ability to incur additional indebtedness. Additional covenants contained in the Credit Agreement and the Indenture, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, make restricted payments, create liens, make equity or debt investments, engage in mergers, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Under the Credit Agreement and the Indenture, certain changes in control of the Company could result in the occurrence of an Event of Default. In addition, the Credit Agreement limits the ability of the Company to modify terms of the Indenture. As of June 30, 2017, the Company was in compliance with the covenants in the Credit Agreement and the Indenture.
The Company recorded $404 and $423 in interest expense for the three months ended June 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs.
Available borrowings under the Credit Agreement at June 30, 2017 consisted of $265,217 under the U.S. Revolving Credit Facility and $4,131 under the Australian Revolving Sub-Facility. The Company also has various other uncommitted lines of credit available at June 30, 2017 in the aggregate amount of $10,198.
Cash flows provided by operating activities and borrowings have historically supplied us with a significant source of liquidity. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We had a net working capital position of $123,202 and $109,420 at June 30, 2017 and March 31, 2017, respectively, and were in compliance with our loan covenants and current in our principal and interest payments on all debt.
On July 16, 2017, the Company entered into a Sale and Purchase Agreement with Constantia Flexibles GmbH (Constantia Flexibles) to acquire 100% of the Labels Division of Constantia Flexibles (Constantia Labels). In connection with the execution of the Sale and Purchase Agreement, the Company entered into a commitment letter (the Commitment Letter) on July 16, 2017 with Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. (collectively, the Commitment Parties). The Commitment Letter provides that the Commitment Parties will commit to provide to the Company (i) (A) a $250,000 senior secured term
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loan A facility (the TLA Facility), (B) a $400,000 senior secured term loan B facility (the TLB Facility) and (C) a $400,000 senior secured revolving facility (the Revolving Facility, and collectively with the TLA Facility and the TLB Facility, the Senior Secured Credit Facilities), which Senior Secured Credit Facilities will be secured on a first priority basis by substantially all of the Companys assets, and (ii) up to a 400,000 senior unsecured bridge facility (the Bridge Facility). The Bridge Facility availability is subject to reduction in equivalent amounts upon any incurrence by the Company of term loans and/or the issuance of notes in a public offering or private placement prior to the consummation of the acquisition and upon other specified events, subject to certain exceptions set forth in the Commitment Letter. The Commitment Parties obligation to provide the financing is subject to the satisfaction of specified conditions and the accuracy of specified representations that are customarily required for similar financings. Proceeds from the Senior Secured Credit Facilities and the Bridge Facility will be used to refinance the Companys existing revolving credit facility, pay the cash portion of the consideration for the acquisition, pay fees and expenses incurred in connection with the acquisition and finance ongoing working capital and other general corporate needs of the Company. The Commitment Parties have also committed to provide interim facilities in the event that the Senior Secured Credit Facilities and the Bridge Facility are not available at the closing of the acquisition, upon customary terms and conditions for similar interim facilities. The documentation governing the Senior Secured Credit Facilities has not been finalized and accordingly the actual terms may differ from the description of such terms in the foregoing summary of the Commitment Letter.
Contractual Obligations
The following table summarizes the Companys contractual obligations as of June 30, 2017:
Total | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | More than 5 years |
||||||||||||||||||||||
Long-term debt |
$ | 475,934 | $ | 606 | $ | 71 | $ | 225,177 | $ | 40 | $ | 29 | $ | 250,011 | ||||||||||||||
Capital leases |
7,186 | 1,924 | 1,942 | 1,775 | 1,249 | 296 | | |||||||||||||||||||||
Interest on long-term debt (1) |
107,875 | 23,405 | 22,301 | 20,778 | 19,071 | 15,940 | 6,380 | |||||||||||||||||||||
Rent due under operating leases |
58,500 | 12,740 | 10,584 | 9,165 | 7,772 | 6,371 | 11,868 | |||||||||||||||||||||
Unconditional purchase obligations |
18,139 | 17,871 | 239 | 14 | 14 | 1 | | |||||||||||||||||||||
Pension and post retirement obligations |
439 | 6 | 15 | 22 | 30 | 40 | 326 | |||||||||||||||||||||
Unrecognized tax benefits (2) |
| | | | | | | |||||||||||||||||||||
Deferred purchase price |
7,910 | 1,115 | 5,952 | 843 | | | | |||||||||||||||||||||
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|
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|
|
|
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Total contractual obligations |
$ | 675,983 | $ | 57,667 | $ | 41,104 | $ | 257,774 | $ | 28,176 | $ | 22,677 | $ | 268,585 | ||||||||||||||
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|
|
|
(1) | Interest on floating rate debt was estimated using projected forward London Interbank Offered Rate (LIBOR) and Bank Bill Swap Bid Rates (BBSY) as of June 30, 2017. |
(2) | The table excludes $4,846 of liabilities related to unrecognized tax benefits as the timing and extent of such payments are not determinable. |
Recent Acquisitions
On January 3, 2017, the Company acquired 100% of Graphix Labels and Packaging Pty Ltd. (Graphix) for $17,261. The purchase price included $1,631 that is deferred for two years after the closing date. Graphix is located in Melbourne, Victoria, Australia and specializes in producing labels for both the food & beverage and wine & spirits markets. In January 2017, the Company acquired an additional 67.6% of the common shares of Gironde Imprimerie Publicité (GIP) for $2,084 plus net debt assumed of $862. The purchase price included $208 that is deferred for one year after the closing date. The Company acquired 30% of GIP as part of the Barat acquisition in fiscal 2016. GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market.
On July 1, 2016, the Company acquired 100% of Italstereo Resin Labels S.r.l. (Italstereo) for $3,342 less net cash acquired of $181. The purchase price includes $201 and $133 that are deferred for one and two years, respectively, after the closing date. Italstereo is located near Lucca, Italy and specializes in producing pressure sensitive adhesive resin coated labels, seals and emblems. On July 6, 2016, the Company acquired 100% of Industria Litografica Alessandrina S.r.l. (I.L.A.) for $6,301 plus net debt assumed of $3,547. The purchase price includes $819 that is deferred for three years after the closing date. I.L.A. is located in the Piedmont region of Italy and specializes in producing premium self-adhesive and wet glue labels primarily for the wine & spirits market and also services the food industry.
On January 4, 2016, the Company acquired 100% of Cashin Print for $17,487 less net cash acquired of $135 and 100% of System Label for $11,665 less net cash acquired of $2,025. Cashin Print and System Label are located in Castlebar, Ireland and Roscommon, Ireland, respectively. The purchase prices for Cashin Print and System Label include deferred payments of $3,317 and $1,011, respectively. These deferred payments may be paid out in the fourth quarter of fiscal 2019. During the third quarter of fiscal 2017, the long-term liabilities related to these deferred payments were reduced based on managements current estimate of the future payout and $887 was recorded in other income in the condensed consolidated statements of income. The acquired businesses supply multinational customers in Ireland, the United Kingdom and Continental Europe and provide Multi-Color with the opportunity to supply a broader product range to a larger customer base, especially in the healthcare market.
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On October 1, 2015, the Company acquired 100% of Supa Stik Labels (Supa Stik) for $6,787 less net cash acquired of $977. Supa Stik is located in Perth, West Australia and services the local wine, food & beverage and healthcare label markets. The purchase price includes $622 that is deferred for two years after the closing date.
On August 11, 2015, the Company acquired 90% of the shares of Super Label based in Kuala Lumpur, Malaysia, which was publicly listed on the Malaysian stock exchange. During the second and third quarters of fiscal 2016, the Company acquired the remaining shares and delisted Super Label. The total purchase price was $39,782 less net cash acquired of $6,035. Super Label has operations in Malaysia, Indonesia, the Philippines, Thailand and China and produces home & personal care, food & beverage and specialty consumer products labels. This acquisition expands our presence in China and gives us access to new label markets in Southeast Asia.
On May 4, 2015, the Company acquired 100% of Barat Group (Barat) based in Bordeaux, France for $49,973 less net cash acquired of $746. Barat operates four manufacturing facilities in Bordeaux and Burgundy, France, and the acquisition gives the Company access to the label market in the Bordeaux wine region and expands our presence in Burgundy.
On May 1, 2015, the Company acquired 100% of Mr. Labels in Brisbane, Queensland Australia for $2,110. The purchase price includes $196 that was deferred until the first anniversary of the closing date, which was paid during the first quarter of fiscal 2017. Mr. Labels provides labels primarily to food and beverage customers.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We continually evaluate our estimates, including, but not limited to, those related to revenue recognition, bad debts, inventories and any related reserves, income taxes, fixed assets, goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies and estimates are discussed in the Critical Accounting Policies and Estimates section of Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2017 10-K. In addition, our significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements included in our 2017 10-K.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company has no material changes to the disclosures made in the Companys Annual Report on Form 10-K for the year ended March 31, 2017.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Companys disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective as of June 30, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1A. | Risk Factors |
The Company had no material changes to the Risk Factors disclosed in the Companys Annual Report on Form 10-K for the year ended March 31, 2017.
Item 6. | Exhibits |
10.1 | Multi-Color Corporation Amended and Restated 2012 Stock Incentive Plan | |
31.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 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.DEF | XBRL Taxonomy Extension Definition 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.
Multi-Color Corporation | ||||||
(Registrant) | ||||||
Date: August 9, 2017 |
By: | /s/ Sharon E. Birkett | ||||
Sharon E. Birkett | ||||||
Vice President, Chief Financial Officer, Secretary |
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