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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)

Registrant’s 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 registrant’s 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

MULTI-COLOR CORPORATION

FORM 10-Q

CONTENTS

 

         Page  

PART I.

  FINANCIAL INFORMATION   

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

  
 

Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2017 and 2016

     4  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2017 and 2016

     5  
 

Condensed Consolidated Balance Sheets at June 30, 2017 and March 31, 2017

     6  
 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended June 30, 2017

     7  
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2017 and 2016

     8  
 

Notes to Condensed Consolidated Financial Statements

     9  

Item 2.

 

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

     23  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     27  

Item 4.

 

Controls and Procedures

     27  

PART II.

 

OTHER INFORMATION

  

Item 1A.

 

Risk Factors

     28  

Item 6.

 

Exhibits

     28  

Signatures

       29  

 

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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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PART I. FINANCIAL INFORMATION

 

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  
  

 

 

    

 

 

 

Net income

     14,142        15,910  

Less: Net income attributable to noncontrolling interests

     36        105  
  

 

 

    

 

 

 

Net income attributable to Multi-Color Corporation

   $ 14,106      $ 15,805  
  

 

 

    

 

 

 

Weighted average shares and equivalents outstanding:

     

Basic

     16,943        16,799  

Diluted

     17,152        16,961  
  

 

 

    

 

 

 

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  
  

 

 

   

 

 

 

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  
  

 

 

   

 

 

 

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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2017

    17,306     $ 1,059     $ 160,629     $ (11,420   $ 329,717     $ (66,665   $ 2,560     $ 415,880  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,145       18,286  
  

 

 

   

 

 

 

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  
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,077     (13,112
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,492     (3,622
  

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash

     1,086       (912
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     662       640  

Cash and cash equivalents, beginning of period

     25,229       27,709  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 25,891     $ 28,349  
  

 

 

   

 

 

 

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 world’s 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 Company’s significant accounting policies is included in the Company’s 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 unit’s 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 FASB’s 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 Company’s 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 Company’s 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 Company’s 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 standard’s 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
  

 

 

    

 

 

    

 

 

    

 

 

 

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 Company’s 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 Company’s 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  
  

 

 

    

 

 

    

 

 

 

 

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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 Company’s obligations under the Notes are guaranteed by certain of the Company’s 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 Company’s 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 Company’s 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 Company’s net revenues in one or more of the periods presented) approximated 17% and 15%, respectively, of the Company’s consolidated net revenues. All of these sales were made to The Procter & Gamble Company.

 

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In addition, accounts receivable balances from The Procter & Gamble Company approximated 3% and 4% of the Company’s 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 Company’s 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  

 

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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 Company’s 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 Company’s 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
not designated as hedging instruments:

     

Gain (loss) on foreign currency forward contracts

   $ (367    $ 92  

Gain (loss) on related hedged items

     376        (50

8.     Accrued Expenses and Other Liabilities

The Company’s 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 Label’s operations were included in the Company’s condensed consolidated financial statements beginning on August 11, 2015.

 

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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-Color’s inability to exercise significant influence over the business. The results of Barat’s operations were included in the Company’s 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 seller’s 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:

 

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     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

 

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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 management’s 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 Company’s 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:

 

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     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 Company’s 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 Company’s 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 Company’s 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 Company’s 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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Table of Contents
Item 2. Management’s 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 Corporation’s 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 Company’s 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 Company’s financial condition and results of operations:

Executive Overview

We are a leader in global label solutions supporting a number of the world’s 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 Company’s obligations under the Notes are guaranteed by certain of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 675,983      $ 57,667      $ 41,104      $ 257,774      $ 28,176      $ 22,677      $ 268,585  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 management’s 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 “Management’s 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 Company’s 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 Company’s management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Company’s 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 Company’s 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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PART II. OTHER INFORMATION

 

Item 1A. Risk Factors

The Company had no material changes to the Risk Factors disclosed in the Company’s 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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    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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