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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 September 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 – 20,440,602 (as of October 31, 2017)

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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 and Six Months Ended September 30, 2017 and 2016			4
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2017 and 2016			5
		Condensed Consolidated Balance Sheets at September  30, 2017 and March 31, 2017			6
		Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended September 30, 2017			7
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 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			25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			31
Item 4.		Controls and Procedures			31
PART II.		OTHER INFORMATION
Item 1A.		Risk Factors			32
Item 6.		Exhibits			32
Signatures					33

 

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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								Six Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Net revenues		$	256,034			$	232,140			$	498,474			$	468,634
Cost of revenues			204,260				182,187				397,243				366,588
Gross profit			51,774				49,953				101,231				102,046
Selling, general and administrative expenses			25,200				19,736				48,789				42,390
Facility closure expenses			95				57				129				214
Operating income			26,479				30,160				52,313				59,442
Interest expense			6,669				6,521				13,004				12,977
Other income, net			(2,676	)			(290	)			(1,477	)			(560	)
Income before income taxes			22,486				23,929				40,786				47,025
Income tax expense			7,296				7,395				11,454				14,581
Net income			15,190				16,534				29,332				32,444
Less: Net income attributable to noncontrolling interests			—				191				36				296
Net income attributable to Multi-Color Corporation		$	15,190			$	16,343			$	29,296			$	32,148
Weighted average shares and equivalents outstanding:
Basic			17,015				16,867				16,983				16,836
Diluted			17,177				17,008				17,168				16,988
Basic earnings per common share		$	0.89			$	0.97			$	1.73			$	1.91
Diluted earnings per common share		$	0.88			$	0.96			$	1.71			$	1.89
Dividends per common share		$	0.05			$	0.05			$	0.10			$	0.10

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								Six Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Net income		$	15,190			$	16,534			$	29,332			$	32,444
Other comprehensive income (loss):
Unrealized foreign currency translation gain (loss) (1)			10,950				1,160				30,014				(12,213	)
Unrealized gain (loss) on derivative contracts, net of tax (2)			(4,556	)			31				(4,556	)			196
Total other comprehensive income (loss)			6,394				1,191				25,458				(12,017	)
Comprehensive income			21,584				17,725				54,790				20,427
Less: Comprehensive income (loss) attributable to noncontrolling interests			—				146				(30	)			186
Comprehensive income attributable to Multi-Color Corporation		$	21,584			$	17,579			$	54,820			$	20,241

 

(1)

The amounts for the three months ended September 30, 2017 and 2016 include tax impacts of $(168) and $17, respectively, related to the settlement of foreign currency denominated intercompany loans. The amounts for the six months ended September 30, 2017 and 2016 include tax impacts of $(452) and $246, respectively, related to the settlement of foreign currency denominated intercompany loans.

 

(2)	Amounts are net of tax of $2,858 and $(101) for the three months ended September 30, 2017 and 2016, respectively, and $2,858 and $(133) for the six months ended September 30, 2017 and 2016, respectively.

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)

 

		September 30, 2017				March 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	35,628			$	25,229
Accounts receivable, net of allowance of $2,925 and $2,273 at September 30, 2017 and March 31, 2017, respectively			152,363				141,211
Other receivables			11,345				7,871
Inventories, net			74,147				63,995
Prepaid expenses			15,565				12,187
Other current assets			15,514				3,253
Total current assets			304,562				253,746
Property, plant and equipment, net of accumulated depreciation of $212,823 and $190,915 at September 30, 2017 and March 31, 2017, respectively			264,248				247,261
Goodwill			434,725				412,550
Intangible assets, net			179,300				169,220
Other non-current assets			5,948				6,365
Deferred income tax assets			2,913				2,848
Total assets		$	1,191,696			$	1,091,990
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	4,076			$	2,093
Accounts payable			95,900				88,475
Accrued expenses and other liabilities			55,275				53,758
Total current liabilities			155,251				144,326
Long-term debt			494,473				479,408
Deferred income tax liabilities			66,609				65,761
Other liabilities			39,309				20,675
Total liabilities			755,642				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, 17,361 and 17,254 shares issued at September 30, 2017 and March 31, 2017, respectively			1,064				1,054
Paid-in capital			162,904				158,399
Treasury stock, 306 and 302 shares at cost at September 30, 2017 and March 31, 2017, respectively			(11,471	)			(11,168	)
Retained earnings			344,052				316,461
Accumulated other comprehensive loss			(60,495	)			(85,795	)
Total stockholders’ equity attributable to Multi-Color Corporation			436,054				378,951
Noncontrolling interests			—				2,869
Total stockholders’ equity			436,054				381,820
Total liabilities and stockholders’ equity		$	1,191,696			$	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																			29,296								36				29,332
Other comprehensive income (loss)																							25,524				(66	)			25,458
Issuance of common stock			104				10				2,708																				2,718
Restricted stock grant			5																												—
Restricted stock forfeitures			(2	)																											—
Stock-based compensation											1,797																				1,797
Shares acquired under employee plans															(303	)															(303	)
Common stock dividends																			(1,705	)											(1,705	)
Sale of Southeast Asian durables business																							(231	)			(2,484	)			(2,715	)
Acquisition of noncontrolling interest																							7				(76	)			(69	)
Dividends paid to noncontrolling interests																											(279	)			(279	)
September 30, 2017			17,361			$	1,064			$	162,904			$	(11,471	)		$	344,052			$	(60,495	)		$	—			$	436,054

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)

 

		Six Months Ended
		September 30, 2017				September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	29,332			$	32,444
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			17,406				16,617
Amortization of intangible assets			7,435				7,377
Loss on sale of Southeast Asian durables business			512				—
Amortization of deferred financing costs			808				846
Net (gain)/loss on disposal of property, plant and equipment			349				(278	)
Net (gain)/loss on derivative contracts			(3,011	)			104
Stock-based compensation expense			1,797				1,682
Excess tax benefit from stock-based compensation			—				(1,126	)
Deferred income taxes, net			2,199				(35	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			(4,664	)			1,901
Inventories			(2,067	)			(1,388	)
Prepaid expenses and other assets			(219	)			1,086
Accounts payable			4,349				(9,992	)
Accrued expenses and other liabilities			(10,012	)			(10	)
Net cash provided by operating activities			44,214				49,228
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(26,262	)			(18,112	)
Investment in acquisitions, net of cash acquired			(21,383	)			(11,369	)
Net proceeds from sale of Southeast Asian durables business			3,620				—
Proceeds from sale of property, plant and equipment			253				678
Net cash used in investing activities			(43,772	)			(28,803	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving lines of credit			140,021				156,487
Payments under revolving lines of credit			(128,844	)			(170,660	)
Borrowings of long-term debt			—				38
Repayment of long-term debt			(1,478	)			(4,596	)
Payment of acquisition related deferred payments			(206	)			(1,784	)
Proceeds from issuance of common stock			2,432				2,275
Excess tax benefit from stock-based compensation			—				1,126
Debt issuance costs			(1,636	)			—
Dividends paid			(1,977	)			(2,181	)
Net cash (used in)/provided by financing activities			8,312				(19,295	)
Effect of foreign exchange rate changes on cash			1,645				(1,089	)
Net increase in cash and cash equivalents			10,399				41
Cash and cash equivalents, beginning of period			25,229				27,709
Cash and cash equivalents, end of period		$	35,628			$	27,750

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 data, 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 August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which improves the hedge accounting model to facilitate financial reporting that more closely reflects a company’s risk management activities. The FASB’s new guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2019. Early adoption is permitted in any interim period after issuance of the update. The Company elected to early adopt this update in the second quarter of fiscal 2018. See Note 7 for additional information on the Company’s derivative and hedging activities.

In January 2017, the 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

 

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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, but it is not expected to have a material impact on the Company’s condensed 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. As a result of this adoption, the Company recorded $893 and $1,548 of excess tax benefits from share-based payments in income tax expense as a discrete item for the three and six months ended September 30, 2017, respectively. These amounts 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 condensed consolidated statements of cash flows. The treatment of forfeitures has not changed, as the Company elected 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 six months ended September 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. Losses of $230 and $134 were recorded for the three months ended September 30, 2017 and 2016, respectively, and losses of $465 and $250 were recorded for the six months ended September 30, 2017 and 2016, respectively.

 

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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:

 

		Three Months Ended																Six Months Ended
		September 30, 2017								September 30, 2016								September 30, 2017								September 30, 2016
		Shares				Per Share Amount				Shares				Per Share Amount				Shares				Per Share Amount				Shares				Per Share Amount
Basic EPS			17,015			$	0.89				16,867			$	0.97				16,983			$	1.73				16,836			$	1.91
Effect of dilutive securities			162				(0.01	)			141				(0.01	)			185				(0.02	)			152				(0.02	)
Diluted EPS			17,177			$	0.88				17,008			$	0.96				17,168			$	1.71				16,988			$	1.89

The Company excluded 114 and 179 options to purchase shares in the three months ended September 30, 2017 and 2016, respectively, from the computation of diluted EPS because these shares would have an anti-dilutive effect. The Company excluded 69 and 169 options to purchase shares in the six months ended September 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:

 

		September 30, 2017				March 31, 2017
Finished goods		$	44,152			$	35,204
Work-in-process			9,138				8,933
Raw materials			29,848				26,862
Total inventories, gross			83,138				70,999
Inventory reserves			(8,991	)			(7,004	)
Total inventories, net		$	74,147			$	63,995

4.    Debt

The components of the Company’s debt consisted of the following:

 

		September 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			$	(3,485	)		$	246,515			$	250,000			$	(3,822	)		$	246,178
U.S. Revolving Credit Facility (2)			204,600				(1,897	)			202,703				198,100				(2,335	)			195,765
Australian Revolving Sub-Facility (2)			37,677				(145	)			37,532				31,965				(178	)			31,787
Capital leases			9,976				—				9,976				7,412				—				7,412
Other subsidiary debt			1,823				—				1,823				359				—				359
Total debt			504,076				(5,527	)			498,549				487,836				(6,335	)			481,501
Less current portion of debt			(4,076	)			—				(4,076	)			(2,093	)			—				(2,093	)
Total long-term debt		$	500,000			$	(5,527	)		$	494,473			$	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.

 

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The following is a schedule of future annual principal payments as of September 30, 2017:

 

		Debt				Capital Leases				Total
October 2017 - September 2018		$	1,101			$	2,975			$	4,076
October 2018 - September 2019			230				3,010				3,240
October 2019 - September 2020			242,462				2,119				244,581
October 2020 - September 2021			170				1,639				1,809
October 2021 - September 2022			120				233				353
Thereafter			250,017				—				250,017
Total		$	494,100			$	9,976			$	504,076

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 3.08% and 2.72% at September 30, 2017 and March 31, 2017, respectively, and on borrowings under the Australian Revolving Sub-Facility was 3.40% and 3.43% at September 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 September 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 September 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs. The Company recorded $808 and $846 in interest expense for the six months ended September 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs.

Available borrowings under the Credit Agreement at September 30, 2017 consisted of $249,887 under the U.S. Revolving Credit Facility and $2,323 under the Australian Revolving Sub-Facility. The Company also has various other uncommitted lines of credit available at September 30, 2017 in the aggregate amount of $11,378.

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 $262,500 as of September 30, 2017.

 

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In conjunction with the Constantia Labels acquisition, the Company entered into a credit agreement with various lenders, which replaces the Company’s existing Credit Agreement. In addition, on October 4, 2017, Multi-Color Escrow Issuer, LLC, a wholly-owned subsidiary of the Company, issued $600,000 aggregate principal amount of 4.875% Senior Notes due 2025. See Note 15 for additional discussion.

Capital Leases

The present value of the net minimum payments on the capitalized leases is as follows:

 

		September 30, 2017				March 31, 2017
Total minimum lease payments		$	10,827			$	8,327
Less amount representing interest			(851	)			(915	)
Present value of net minimum lease payments			9,976				7,412
Current portion			(2,975	)			(1,964	)
Capitalized lease obligations, less current portion		$	7,001			$	5,448

The capitalized leases carry interest rates from 0.03% to 10.11% and mature from fiscal 2018 to fiscal 2022.

5.    Major Customers

During the three months ended September 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 18%, respectively, of the Company’s consolidated net revenues. All of these sales were made to The Procter & Gamble Company.

During the six months ended September 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% of the Company’s consolidated net revenues. All of these sales were made to The Procter & Gamble Company.

In addition, accounts receivable balances from The Procter & Gamble Company approximated 4% of the Company’s total accounts receivable balance at September 30, 2017 and March 31, 2017. 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 September 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. For the three and six months ended September 30, 2017, the Company recognized $893 and $1,548, respectively, as discrete benefits 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 September 30, 2017 and March 31, 2017, the Company had liabilities of $4,977 and $5,665, respectively, recorded for unrecognized tax benefits for U.S. federal, state and foreign tax jurisdictions. During the three months ended September 30, 2017 and 2016, the Company recognized $117 and $130, respectively, of interest and penalties in income tax expense in the condensed consolidated statements of income. During the six months ended September 30, 2017 and 2016, the Company recognized $62 and $239, 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 September 30, 2017 and March 31, 2017 was $2,038 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 and six months ended September 30, 2017 the Company released $0 and $1,320, respectively, 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 $519 of unrecognized tax benefits as of September 30, 2017 could be released within the next 12 months due to the lapse of statutes 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 $4,329.

 

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7.    Risk Management Activities and Financial Instruments

The Company is exposed to market risks, both directly and indirectly, such as currency fluctuations and interest rate movement. To the extent the Company deems it to be appropriate, derivative instruments and hedging activities are used as a risk management tool to mitigate the potential impact of certain risks, primarily foreign currency exchange risk and interest rate risk.

The Company uses various types of derivative instruments including, but not limited to, forward contracts and swaps. The Company formally assesses, designates, and documents as a hedge of an underlying exposure each qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, the Company assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transactions are effective at offsetting changes in either the fair values or cash flows of the underlying exposures.

Interest Rate Risk Management

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 have been 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.

Foreign Currency Risk Management

Foreign currency exchange risk arises from our international operations 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.

In July 2017, the Company entered into a foreign currency forward contract to fix the Euro cash component of the Constantia Labels purchase price. See additional discussion in Note 15. The notional amount of the foreign currency forward contract is €495,600 with a maturity date of November 2017. The foreign currency forward contract is not designated as a hedging instrument, and all changes in the fair value of the contract are reported in current period earnings. The fair value of the foreign currency forward contract is determined using forward exchange market rates at the balance sheet date.

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 typically settle in the following quarter. During the six months ended September 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.

Net Investment Hedging

In September 2017, as a means of managing foreign currency risk related to our significant operations in Europe, the Company executed four fixed-for-fixed cross currency swaps, in which the Company will pay Euros and receive U.S. Dollars with a combined notional amount of €400,000, which have a maturity date of November 2025. This will effectively convert U.S. Dollar denominated debt to Euro denominated debt.    The Company designated €205,000 of swap notional as a net investment hedge of the Company’s net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges.    The changes in fair values of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized in AOCI to offset the changes in the values of the net investments being hedged.

The remaining €195,000 of swap notional is not designated in an accounting hedge. Therefore, changes in fair value of the derivative instruments are recognized in other income and expense in the condensed consolidated statements of income.

 

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Disclosures about Derivative Instruments

All of the Company’s derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. The Company determines the fair values of its derivatives based on valuation models which project future cash flows and discount the future amounts to a present value using market based observable inputs including interest rate curves, foreign currency rates, futures and basis point spreads, as applicable. The fair values of qualifying and non-qualifying instruments used in hedging transactions as of September 30, 2017 and March 31, 2017 are as follows:

 

				Fair Value
Derivatives Designated as Hedging Instruments		Balance Sheet Location		September 30, 2017				March 31, 2017
Assets:
Cross currency swaps (Net investment hedges)		Other current assets		$	2,336			$	—
Liabilities:
Cross currency swaps (Net investment hedges)		Other long-term liabilities		$	9,750			$	—

 

				Fair Value
Derivatives Not Designated as Hedging Instruments		Balance Sheet Location		September 30, 2017				March 31, 2017
Assets:
Cross currency swaps		Other current assets		$	2,315			$	—
Foreign currency contract-Constantia purchase price		Other current assets		$	8,822			$	—
Liabilities:
Cross currency swaps		Other long-term liabilities		$	8,126			$	—

The amounts of gains and (losses) recognized in OCI during the three and six months ended September 30, 2017 and 2016 are as follows:

 

		Three Months Ended								Six Months Ended
Derivatives Designated as Hedging Instruments		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Cross currency swaps (Net investment hedges) (1)		$	(4,556	)		$	—			$	(4,556	)		$	—

 

(1)	The net loss of $(4,556) recognized in OCI during the three and six months ended September 30, 2017 is comprised of an excluded component loss of $(7,660) and an undiscounted spot gain of $246, net of tax of $2,858.

The amounts of gains and (losses) reclassified from AOCI into earnings for the three and six months ended September 30, 2017 and 2016 are as follows:

 

		Three Months Ended								Six Months Ended
Derivatives in Cash Flow Hedging Relationships		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Interest rate swaps		$	—			$	(132	)		$	—			$	(329	)

The amounts of gains and (losses) included in earnings from qualifying and non-qualifying financial instruments used in hedging transactions for the three and six months ended September 30, 2017 and 2016 are as follows:

 

				Three Months Ended								Six Months Ended
Derivatives Not Designated as Hedging Instruments		Statement of Income Location		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Interest rate swaps		Interest expense		$	—			$	—			$	—			$	225
Foreign currency contract-Constantia purchase price		Other income (expense), net			8,822				—				8,822				—
Foreign currency contracts-Other		Other income (expense), net			(83	)			(67	)			284				25
Gain (loss) on underlying hedged items		Other income (expense), net			100				(25	)			(275	)			(75	)
Cross currency swaps		Other income (expense), net			(5,811	)			—				(5,811	)			—

 

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8. Accrued Expenses and Other Liabilities

The Company’s accrued expenses and other liabilities consisted of the following:

 

		September 30, 2017				March 31, 2017
Accrued payroll and benefits		$	24,502			$	24,286
Accrued income taxes			3,326				5,604
Professional fees			1,297				500
Accrued taxes other than income taxes			1,716				1,616
Deferred lease incentive			219				209
Accrued interest			5,297				5,178
Accrued severance			96				47
Customer rebates			2,221				2,672
Exit and disposal costs related to facility closures			39				123
Deferred payments			1,066				1,068
Deferred revenue			10,672				7,076
Other			4,824				5,379
Total accrued expenses and other liabilities		$	55,275			$	53,758

9. Acquisitions and Divestitures

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 (the Southeast Asian durables business). 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.

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.

Sale of Southeast Asian durables business

On July 3, 2017, the Company sold its 60% controlling interest in its Southeast Asian durables business to its minority shareholders for $3,620 in net cash proceeds. The Company recognized a loss of $512 on the sale of the business, which was recognized in other income, net in the condensed consolidated statements of income.

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

 

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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. This asset was released during the six months ended September 30, 2017.

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:

 

		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.

 

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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.

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 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 August 3, 2017, the Company acquired 100% of GEWA Etiketten GmbH (GEWA), including the remaining 2.4% of the common shares of GIP (see below), for $21,846 plus net debt assumed of $5,150. Upon closing, $2,185 of the purchase price was deposited into an escrow account and is to be released to the seller on the 18-month anniversary of the closing date in accordance with the purchase agreement. The escrow amount is to fund certain potential indemnification obligations of the seller with respect to the transaction. GEWA is located in Bingen am Rhein, Germany and specializes in producing pressure sensitive labels for the wine and spirits market.

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 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. In August 2017, the Company acquired the remaining 2.4% of the common shares of GIP in conjunction with the GEWA acquisition (see above). GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market.

The determination of the final purchase price allocation to specific assets acquired and liabilities assumed is incomplete for GEWA, Graphix, and GIP. 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 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 a deferred payment of $201 that was paid in the three months ended September 30, 2017 and a deferred payment of $133 that is due two years 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 included $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.

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

 

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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 the acquisitions described above within this “Other Acquisitions Activity” section 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.

See Note 15 for discussion of the Constantia Labels acquisition on October 31, 2017.

10. Accumulated Other Comprehensive Loss

The changes in the Company’s accumulated other comprehensive loss by component consisted of the following:

 

		Foreign				Gains and (losses)				Acquisitions				Defined benefit
		currency				on derivative				and				pension
		items				contracts				Divestitures				items				Total
Balance at March 31, 2017		$	(85,593	)		$	—			$	—			$	(202	)		$	(85,795	)
OCI before reclassifications			30,080				(4,556	)			—				—				25,524
Amounts reclassified from AOCI			—				—				(224	)			—				(224	)
Net current period OCI			30,080				(4,556	)			(224	)			—				25,300
Balance at September 30, 2017		$	(55,513	)		$	(4,556	)		$	(224	)		$	(202	)		$	(60,495	)

Reclassifications out of accumulated other comprehensive loss consisted of the following:

 

		Three Months Ended				Six Months Ended
		September 30, 2016				September 30, 2016
Gains and losses on cash flow hedges:
Interest rate swaps (1)		$	132			$	329
Tax			(101	)			(133	)
Net of tax		$	31			$	196

 

(1)	Reclassified from AOCI into interest expense in the condensed consolidated statements of income. See Note 7.

 

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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:
Acquisitions			10,195
Adjustments to prior year acquisitions			(598	)
Currency translation			13,105
Sale of Southeast Asian durables business			(527	)
Balance at September 30, 2017:
Goodwill, gross			447,501
Accumulated impairment losses			(12,776	)
Goodwill, net		$	434,725

The Company’s intangible assets consisted of the following:

 

		September 30, 2017												March 31, 2017
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Customer relationships		$	247,956			$	(70,562	)		$	177,394			$	228,518			$	(61,546	)		$	166,972
Technologies			1,709				(1,456	)			253				1,658				(1,368	)			290
Trademarks			876				(876	)			—				1,013				(1,013	)			—
Licensing intangible			2,170				(2,170	)			—				1,958				(1,958	)			—
Non-compete agreements			4,377				(2,724	)			1,653				5,063				(3,116	)			1,947
Lease intangible			—				—				—				128				(117	)			11
Total		$	257,088			$	(77,788	)		$	179,300			$	238,338			$	(69,118	)		$	169,220

The amortization expense of intangible assets for the three months ended September 30, 2017 and 2016 was $3,831 and $3,917, respectively. The amortization expense of intangible assets for the six months ended September 30, 2017 and 2016 was $7,435 and $7,377, respectively.

12. Facility Closures

Merignac, France

During the three months ended September 30, 2017, the Company announced plans to consolidate our manufacturing facility located in Merignac, France into our existing facility in Libourne, France. The transition is expected to be substantially completed in the third quarter of fiscal 2018.

 

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Below is a summary of the total contractual termination benefits and exit and disposal costs expected to be incurred in conjunction with the closure of the Merignac facility:

 

		Total costs expected to be incurred
Severance and other termination benefits		$	300-450
Other associated costs			250-350

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 ceased during the first quarter of fiscal 2018.

Below is a summary of the exit and disposal costs related to the closure of the Dormans facility:

 

		Total costs expected to be incurred				Total costs incurred								Cumulative costs incurred as of September 30, 2017
						Three Months Ended September 30, 2017				Six Months Ended September 30, 2017
Severance and other termination benefits		$	106			$	72			$	106			$	106
Other associated costs			75-100				23				23				23

Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved to other manufacturing facilities.

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 September 30, 2017
Severance and other termination benefits		$	—				106				(106	)		$	—
Other associated costs			—				23				(23	)			—

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				Total costs incurred								Cumulative costs incurred as of September 30, 2017
						Three Months Ended September 30, 2016				Six Months Ended September 30, 2016
Severance and other termination benefits		$	6			$	6			$	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 September 30, 2017
Severance and other termination benefits		$	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 September 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.

 

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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				Cumulative costs
		expected to be incurred				incurred as of September 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:

 

		Balance at March 31, 2017				Amounts Paid				Balance at September 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 September 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. During the three and six months ended September 30, 2016, the Company recognized $(61) and $49, respectively, in exit and disposal costs related to the closure of the Greensboro facility in facility closure expenses in the condensed consolidated statements of income.

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 (near Dublin). The consolidation was substantially completed in the first quarter of fiscal 2017. During the three and six months ended September 30, 2016, the Company recognized $112 and $159, respectively, in exit and disposal costs related to the closure of the Dublin facility in facility closure expenses in the condensed consolidated statements of income.

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.    

 

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14. Supplemental Cash Flow Disclosures

Supplemental disclosures with respect to cash flow information and non-cash operating, investing and financing activities are as follows:

 

		Six Months Ended
		September 30, 2017				September 30, 2016
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	12,027			$	12,211
Income taxes paid, net of refunds			17,413				10,385
Supplemental Disclosures of Non-Cash Activities:
Capital expenditures incurred but not yet paid		$	2,354			$	1,059
Capital lease obligations incurred			—				820
Change in derivative contract fair value - asset position			13,473				—
Change in derivative contract fair value - liability position			(17,876	)			225
Business combinations accounted for as a purchase:
Assets acquired (excluding cash)		$	40,425			$	20,591
Liabilities assumed			(19,042	)			(11,303	)
Liabilities for contingent / deferred payments			—				2,081
Net cash paid		$	21,383			$	11,369

15. Subsequent Events

On October 31, 2017, the Company completed its previously announced acquisition pursuant to the Sale and Purchase Agreement (as amended) with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, “Constantia Flexibles”), acquiring 100% of the Labels Division of Constantia Flexibles (“Constantia Labels”) for approximately $1,300,000, in cash, with the remainder payable in approximately 3,400 Multi-Color shares (equal to 19.9% of outstanding shares), subject to certain post-closing adjustments. The Company believes the Constantia Labels acquisition will create a company with significant scale and geographic, end-market, customer and product diversification. Given the timing of this acquisition, the initial accounting for this business combination is incomplete. Accordingly, all requisite business combination disclosures required under the FASB Accounting Standards Codification Topic 805, “Business Combinations,” cannot be made as of the financial statements issuance date.

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 and 23 production plants across 14 countries, with

major operations across Europe, Asia and North America.

In conjunction with the Constantia Labels acquisition, effective October 31, 2017 the Company entered into a credit agreement (the “New Credit Agreement”) with various lenders. The New Credit Agreement replaces the Company’s existing Credit Agreement and consists of (i) a senior secured first lien term loan A facility in an aggregate principal amount of $150,000 with a five year maturity, (ii) a senior secured first lien term loan B facility in an aggregate principal amount of $500,000 with a seven year maturity, and (iii) a revolving credit facility in an aggregate principal amount up to $400,000 with a five year maturity, consisting of a $360,000 U.S. revolving subfacility and a $40,000 Australian dollar revolving subfacility.

The Credit Agreement’s term loan A facility, term loan B facility and U.S. revolving subfacility (together the “U.S. facilities”) are guaranteed by substantially all of MCC’s direct and indirect wholly owned domestic subsidiaries, and such guarantors will pledge substantially all their assets as collateral to secure the U.S. facilities.

On October 4, 2017, Multi-Color Escrow Issuer, LLC (the “Escrow Issuer”), a wholly owned subsidiary of the Company, issued $600,000 aggregate principal amount of 4.875% Senior Notes due 2025 (the “New Notes”). The Company formed the Escrow Issuer for the purpose of acting as escrow issuer for the offering of the New Notes pending the completion of the Company’s acquisition of the Labels Division of Constantia Flexibles. The terms and conditions of the New Notes and related matters are set forth in the Indenture, dated as of October 4, 2017 (the “New Indenture”), between the Escrow Issuer and U. S. Bank National Association, as trustee (the “Trustee”). The Escrow Issuer, the Company and the Trustee also entered into an Escrow and Security Agreement dated as of October 4, 2017 (the “Escrow Agreement”) pursuant to which the gross proceeds from the offering of the New Notes, together with amounts necessary to redeem the New Notes at a price equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest, if any, from the issue date to, but not including, January 19, 2018, were deposited into a segregated escrow account with the Trustee who was serving as escrow agent. The Escrow Issuer granted to the Trustee, as escrow agent, for its benefit and the benefit of the holders of the New Notes, a first-priority security interest in the escrow account to secure the obligations under the New Notes pending disbursement of the escrowed funds.

 

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Effective October 31, 2017, in connection with the completion of the acquisition and pursuant to a supplemental indenture (the “Supplemental Indenture”), the Company agreed to assume all of the obligations of the Escrow Issuer under the New Indenture governing the New Notes. The New Notes are guaranteed by MCC’s direct and indirect wholly owned domestic subsidiaries that are borrowers or guarantors under MCC’s new senior secured credit facilities, or that guarantee certain of MCC’s other indebtedness.

On October 11, 2017, the Company acquired 100% of T.P. Label Limited, located in Dar es Salaam, Tanzania, and T.P. Kenya Limited, a sale and distribution center in Kenya (collectively Tanzania Printers). This acquisition complements our food and beverage label business, supporting a number of Constantia Labels’ largest customers.

In October 2017, a series of wildfires spread across Northern California, including Napa and Sonoma counties. As a result of the wildfires, the Company’s plant in Napa was closed or operated at reduced shifts for several days. The impact of these wildfires on the Company’s future financial results of operations and cash flows is unknown.

 

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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 data, 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 September 30, 2017 compared to the Three Months Ended September 30, 2016:

Net Revenues

 

										$				%
		2017				2016				Change				Change
Net revenues		$	256,034			$	232,140			$	23,894				10	%

Net revenues increased 10% to $256,034 compared to $232,140 in the prior year quarter. Acquisitions occurring after the beginning of the second quarter of fiscal 2017 accounted for a 4% increase in revenues. Organic revenue increased 6% and foreign exchange rates, primarily driven by appreciation of the Euro, led to a 1% increase in revenues quarter over quarter. During the quarter, the Company sold its Southeast Asian durables business, which resulted in a 1% decrease in revenues compared to the prior year quarter.

Cost of Revenues and Gross Profit

 

										$				%
		2017				2016				Change				Change
Cost of revenues		$	204,260			$	182,187			$	22,073				12	%
% of Net revenues			79.8	%			78.5	%
Gross profit		$	51,774			$	49,953			$	1,821				4	%
% of Net revenues			20.2	%			21.5	%

Cost of revenues increased 12% or $22,073 compared to the prior year quarter. Acquisitions occurring after the beginning of the second quarter of fiscal 2017 contributed 5% or $8,697. Organic revenue growth and operating inefficiencies increased cost of revenues by 7% or $12,894. The sale of the Southeast Asian durables business during the current year quarter accounted for a 1% or $2,173 decrease in cost of sales compared to the prior year quarter. The remaining increase of 1% or $2,655 related to the unfavorable effects of foreign exchange.

Gross profit increased 4% or $1,821 compared to the prior year quarter. Acquisitions occurring after the beginning of the second quarter of fiscal 2017 contributed 2% or $768 to gross profit. Improved operating performance in Asia Pacific, the United Kingdom, and Latin America was partially offset by operating inefficiencies in North America for an organic gross profit increase of 2% or $1,057. The sale of the Southeast Asian durables business during the current year quarter accounted for a 1% or $631 decrease in gross profit compared to the prior year quarter. The remaining increase of 1% or $627 related to the favorable effects of foreign exchange. Gross margins were 20.2% of net revenues for the current year quarter compared to 21.5% 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		$	25,200			$	19,736			$	5,464				28	%
% of Net revenues			9.8	%			8.5	%
Facility closure expenses		$	95			$	57			$	38				67	%
% of Net revenues			0.0	%			0.0	%

Selling, general and administrative expenses increased 28% or $5,464 compared to the prior year quarter. Acquisitions occurring after the beginning of the second quarter of fiscal 2017, net of divestitures, and unfavorable foreign exchange contributed $730 and $279, respectively, to the increase. In the current year quarter, the Company incurred $4,087 of acquisition expenses compared to $268 in the prior year quarter. Acquisition expenses in the current year quarter included $3,544 related to the announced Constantia Labels acquisition. The remaining increase of $636 primarily related to the timing of audit and compliance expenses.

Facility closure expenses were $95 in the current year quarter compared to $57 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 our manufacturing facilities in Dublin, Ireland into a single location.

Interest Expense and Other Income, Net

 

		2017				2016				$ Change				% Change
Interest expense		$	6,669			$	6,521			$	148				2	%
Other income, net		$	(2,676	)		$	(290	)		$	(2,386	)			823	%

Interest expense increased 2% or $148 compared to the prior year quarter, primarily due to the funding of acquisitions.

Other income was $2,676 in the current year quarter compared to $290 in the prior year quarter. This was primarily related to the unrealized gain of $8,822 on a forward contract to fix the exchange rate between the U.S. Dollar and the Euro for the announced acquisition of Constantia Labels, expected to close in the third quarter of fiscal 2018. These gains were partially offset by non-cash charges related to cross currency swaps of $5,811, initiated in anticipation of the closing of the acquisition. Additionally, the Company sold the Southeast Asian durables business for a loss of $512. The remaining change in other income primarily related to gains and losses on foreign exchange.

Income Tax Expense

 

		2017				2016				$ Change				% Change
Income tax expense		$	7,296			$	7,395			$	(99	)			(1	%)

Our effective tax rate increased to 32% in the current year quarter from 31% in the prior year quarter due to higher non-deductible acquisition costs.

Six Months Ended September 30, 2017 compared to the Six Months Ended September 30, 2016:

Net Revenues

 

		2017				2016				$ Change				% Change
Net revenues		$	498,474			$	468,634			$	29,840				6	%

Net revenues increased 6% to $498,474 compared to $468,634 in the six months ended September 30, 2016. Acquisitions occurring after the beginning of fiscal 2017 accounted for a 3% increase in revenues. Increased revenues in North America and Latin America contributed

 

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to an organic revenue increase of 4%. The sale of the Southeast Asian durables business during the current year period accounted for a 1% decrease in revenues compared to the prior year period.

Cost of Revenues and Gross Profit

 

		2017				2016				$ Change				% Change
Cost of revenues		$	397,243			$	366,588			$	30,655				8	%
% of Net revenues			79.7	%			78.2	%
Gross profit		$	101,231			$	102,046			$	(815	)			(1	%)
% of Net revenues			20.3	%			21.8	%

Cost of revenues increased 8% or $30,655 compared to the six months ended September 30, 2016. Acquisitions occurring after the beginning of fiscal 2017 contributed 4% or $13,970, organic revenue growth and operating inefficiencies increased cost of revenues by 5% or $18,550, and the unfavorable impact of foreign exchange rates contributed $308. The sale of the Southeast Asian durables business during the current year period accounted for a 1% or $2,173 decrease in cost of sales compared to the prior year period.

Gross profit decreased 1% or $815 compared to the six months ended September 30, 2016. Acquisitions occurring after the beginning of fiscal 2017 contributed 2% or $1,887 to gross profit. Operating inefficiencies, primarily in North America, led to an organic gross profit decrease of 2% or $2,293. The sale of the Southeast Asian durables business during the current year period accounted for a 1% or $631 decrease in gross profit compared to the prior year period. The remaining increase of $222 related to the favorable effects of foreign exchange. Gross margins were 20.3% of net revenues for the six months ended September 30, 2017 compared to 21.8% in the six months ended September 30, 2016.

Selling, General and Administrative Expenses and Facility Closure Expenses

 

		2017				2016				$ Change				% Change
Selling, general and administrative expenses		$	48,789			$	42,390			$	6,399				15	%
% of Net revenues			9.8	%			9.0	%
Facility closure expenses		$	129			$	214			$	(85	)			(40	%)
% of Net revenues			0.0	%			0.0	%

Selling, general and administrative expenses increased 15% or $6,399 compared to the six months ended September 30, 2016. Acquisitions occurring after the beginning of fiscal 2017, net of divestitures, contributed an increase of $1,574 and foreign exchange increased $42. In the six months ended September 30, 2017, the Company incurred $4,993 of acquisition expenses compared to $434 in the six months ended September 30, 2016. Acquisition expenses in the current year period included $4,288 related to the announced Constantia Labels acquisition. The remaining increase of $224 primarily related to compensation expenses.

Facility closure expenses were $129 in the six months ended September 30, 2017 compared to $214 in the six months ended September 30, 2016. The current period expenses primarily related to the closure of our manufacturing facility in Dormans, France. Expenses in the prior year period related to consolidation of our manufacturing facilities in Dublin, Ireland into a single location.

Interest Expense and Other Income, Net

 

		2017				2016				$ Change				% Change
Interest expense		$	13,004			$	12,977			$	27				0	%
Other income, net		$	(1,477	)		$	(560	)		$	(917	)			164	%

Interest expense increased $27 compared to the six months ended September 30, 2016.

Other income was $1,477 in the six months ended September 30, 2017 compared to $560 in the six months ended September 30, 2016. This was primarily related to related to the unrealized gain of $8,822 on a forward contract to fix the exchange rate between the U.S. Dollar

 

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and the Euro for the acquisition of Constantia Labels, partially offset by non-cash charges related to cross currency swaps of $5,811, initiated in anticipation of the closing of the acquisition of Constantia Labels. The Company also recorded the unfavorable impact of the release of a $1,124 foreign indemnification receivable in the current year period, for which an offsetting tax liability was also relieved reducing the current year effective tax rate. Additionally, the Company sold the Southeast Asian durables business for a loss of $512. The remaining change in other income primarily relates to gains and losses on foreign exchange gains and losses on foreign exchange.

Income Tax Expense

 

		2017				2016				$ Change				% Change
Income tax expense		$	11,454			$	14,581			$	(3,127	)			(21	%)

Our effective tax rate decreased to 28% in the six months ended September 30, 2017 from 31% in the six months ended September 30, 2016 primarily due to the impact of certain discrete items recognized in the current period that decreased tax expense compared to the prior year period, including the release of a tax liability related to a foreign indemnification receivable related to previous acquisitions for $1,124. Additionally, MCC adopted a new accounting standard to simplify share based payments during the current period, which decreased our tax expense $1,548 compared to the six months ended September 30, 2016.

Liquidity and Capital Resources    

Comparative Cash Flow Analysis

Through the six months ended September 30, 2017, net cash provided by operating activities was $44,214 compared to $49,228 in the same period of the prior year. Net income adjusted for non-cash expenses consisting primarily of depreciation and amortization was $56,827 in the current year compared to $57,631 in the same period of the prior year. Our use of operating assets and liabilities of $12,613 in the current year increased from a use of $8,403 in the prior year.

Through the six months ended September 30, 2017, net cash used in investing activities was $43,772 compared to $28,803 in the same period of the prior year. Capital expenditures, primarily funded by cash flows from operations totaled $26,262 in the current year compared to $18,112 in the same period of the prior year. Proceeds from the sale of property, plant and equipment totaled $253 in the current year compared to $678 in the same period of the prior year. The Company used $21,383 for acquisitions in the current year compared to $11,369 in the same period of the prior year. The Company received net cash proceeds of $3,620 from the sales of its Southeast Asian durables business.

Through the six months ended September 30, 2017, net cash used in financing activities was $8,312, which included $9,699 of net debt payments and dividends paid of $1,977, offset by $2,432 of proceeds from the issuance of common stock. Dividends paid included $1,698 to shareholders of Multi-Color Corporation and $279 to the minority shareholders of our 60% owned legal entity in Malaysia. Cash used in financing activities also included $206 in deferred payments related to the Italstereo acquisition and $1,636 in debt issuance costs

Through the six months ended September 30, 2016, net cash used in financing activities was $19,295, which included $18,731 of net debt payments, $1,784 in deferred payments related to the Flexo Print and Mr. Labels acquisitions and dividends paid of $2,181, offset by $3,401 of proceeds from various stock transactions. Dividends paid included $1,683 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 3.08% and 2.72% at September 30, 2017 and March 31, 2017, respectively, and on borrowings under the Australian Revolving Sub-Facility was 3.40% and 3.43% at September 30, 2017 and March 31, 2017, respectively.

 

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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 September 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 September 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs. The Company recorded $808 and $846 in interest expense for the six months ended September 30, 2017 and 2016, respectively, in the condensed consolidated statements of income to amortize deferred financing costs.

Available borrowings under the Credit Agreement at September 30, 2017 consisted of $249,887 under the U.S. Revolving Credit Facility and $2,323 under the Australian Revolving Sub-Facility. The Company also has various other uncommitted lines of credit available at September 30, 2017 in the aggregate amount of $11,378.

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 $149,311 and $109,420 at September 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 October 31, 2017, the Company completed its previously announced acquisition of Constantia Labels. In conjunction with this acquisition, effective October 31, 2017 the Company entered into a credit agreement (the “New Credit Agreement”) with various lenders. The New Credit Agreement replaces the Company’s existing Credit Agreement and consists of (i) a senior secured first lien term loan A facility in an aggregate principal amount of $150,000 with a five year maturity, (ii) a senior secured first lien term loan B facility in an aggregate principal amount of $500,000 with a seven year maturity, and (iii) a revolving credit facility in an aggregate principal amount up to $400,000 with a five year maturity, consisting of a $360,000 U.S. revolving subfacility and a $40,000 Australian dollar revolving subfacility.

The Credit Agreement’s term loan A facility, term loan B facility and U.S. revolving subfacility (together the “U.S. facilities”) are guaranteed by substantially all of MCC’s direct and indirect wholly owned domestic subsidiaries, and such guarantors will pledge substantially all their assets as collateral to secure the U.S. facilities.

On October 4, 2017, Multi-Color Escrow Issuer, LLC (the “Escrow Issuer”), a wholly owned subsidiary of the Company, issued $600,000 aggregate principal amount of 4.875% Senior Notes due 2025 (the “New Notes”). The Company formed the Escrow Issuer for the purpose of acting as escrow issuer for the offering of the New Notes pending the completion of the Company’s acquisition of the Labels Division of Constantia Flexibles. The terms and conditions of the New Notes and related matters are set forth in the Indenture, dated as of October 4, 2017 (the “New Indenture”), between the Escrow Issuer and U. S. Bank National Association, as trustee (the “Trustee”). The Escrow Issuer, the Company and the Trustee also entered into an Escrow and Security Agreement dated as of October 4, 2017 (the “Escrow Agreement”) pursuant to which the gross proceeds from the offering of the New Notes, together with amounts necessary to redeem the New Notes at a price equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest, if any, from the issue date to, but not including, January 19, 2018, were deposited into a segregated escrow account with the Trustee who was serving as escrow agent. The Escrow Issuer granted to the Trustee, as escrow agent, for its benefit and the benefit of the holders of the New Notes, a first-priority security interest in the escrow account to secure the obligations under the New Notes pending disbursement of the escrowed funds.

Effective October 31, 2017, in connection with the completion of the acquisition and pursuant to a supplemental indenture (the “Supplemental Indenture”), the Company agreed to assume all of the obligations of the Escrow Issuer under the New Indenture governing the New Notes. The New Notes are guaranteed by MCC’s direct and indirect wholly owned domestic subsidiaries that are borrowers or guarantors under MCC’s new senior secured credit facilities, or that guarantee certain of MCC’s other indebtedness.

 

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Contractual Obligations

The following table summarizes the Company’s contractual obligations as of September 30, 2017:

 

		Total				Year 1				Year 2				Year 3				Year 4				Year 5				More than 5 years
Long-term debt		$	494,100			$	1,101			$	230			$	242,462			$	170			$	120			$	250,017
Capital leases			9,976				2,975				3,010				2,119				1,639				233				—
Interest on long-term debt (1)			111,896				24,686				23,611				22,087				20,438				18,522				2,552
Rent due under operating leases			58,796				13,152				11,118				9,340				7,767				6,111				11,308
Unconditional purchase obligations			18,546				18,159				196				96				89				6				—
Pension and post retirement obligations			439				6				15				22				30				40				326
Unrecognized tax benefits (2)			—				—				—				—				—				—				—
Deferred purchase price			7,904				1,072				6,832				—				—				—				—
Total contractual obligations		$	701,657			$	61,151			$	45,012			$	276,126			$	30,133			$	25,032			$	264,203

 

(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 September 30, 2017.

 

(2)	The table excludes $4,977 of liabilities related to unrecognized tax benefits as the timing and extent of such payments are not determinable.

 

(3)

In conjunction with the Constantia Labels acquisition, the Company entered into a credit agreement with various lenders, which replaces the Company’s existing Credit Agreement. In addition, on October 4, 2017, Multi-Color Escrow Issuer, LLC, a wholly-owned subsidiary of the Company, issued $600,000 aggregate principal amount of 4.875% Senior Notes due 2025. See Note 15 for additional discussion. The Long-term debt and Interest on long-term debt amounts included in the table above reflect the Company’s debt borrowings under the existing Credit Agreement as of September 30, 2017.

 

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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

In July 2017, the Company entered into a foreign currency forward contract to fix the Euro cash component of the Constantia Labels purchase price. The notional amount of the foreign currency forward contract is €495,600 with a maturity date of November 2017. In September 2017, as a means of managing foreign currency risk related to our significant operations in Europe, the Company executed four fixed-for-fixed cross currency swaps, in which the Company will pay Euros and receive U.S. Dollars with a combined notional amount of €400,000, which have a maturity date of November 2025. See Note 7 for additional details.

There are no other material changes to the market risk 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 September 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 September 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 September 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		Sale and Purchase Agreement dated July  16, 2017 by and among Multi-Color Corporation as Purchaser and Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V., as Sellers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 16, 2017 and incorporated herein by reference).
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: November 9, 2017				By:		/s/ Sharon E. Birkett
						Sharon E. Birkett
						Vice President, Chief Financial Officer, Secretary

 

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