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CHMP > SEC Filings for CHMP > Form 10-Q on 15-Mar-2013All Recent SEC Filings

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Form 10-Q for CHAMPION INDUSTRIES INC


15-Mar-2013

Quarterly Report


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

Results of Operations

The following table sets forth, for the periods indicated, information derived
from the Consolidated Statements of Operations as a percentage of total
revenues.

                                                           Three Months Ended January 31,
                                                         2013                          2012
Revenues:
   Printing                                  $  11,849,039         52.4 %   $  14,462,005       54.5 %
   Office products and office furniture          7,209,019         31.9         8,190,600       30.9
   Newspaper                                     3,552,242         15.7         3,873,046       14.6
Total revenues                                  22,610,300        100.0        26,525,651      100.0
Cost of sales and newspaper operating
costs:
   Printing                                      8,850,546         39.1        10,540,552       39.8
   Office products and office furniture          4,943,946         21.9         5,742,113       21.6
Newspaper cost of sales and operating
costs                                            2,120,017          9.4         2,168,033        8.2
Total cost of sales and newspaper
operating costs                                 15,914,509         70.4        18,450,698       69.6
   Gross profit                                  6,695,791         29.6         8,074,953       30.4
Selling, general and administrative
expenses                                         6,168,893         27.3         7,430,207       28.0
Goodwill impairment                              2,226,837          9.8                 -        0.0
(Loss) income from operations                   (1,699,939 )       (7.5 )         644,746        2.4
Interest expense - related party                   (20,764 )       (0.1 )          (6,139 )      0.0
Interest expense                                (1,539,542 )       (6.8 )        (792,396 )     (3.0 )
Other income                                         9,623          0.0             4,131        0.0
(Loss) before taxes                             (3,250,622 )      (14.4 )        (149,658 )     (0.6 )
Income tax benefit                                       -            -            66,692        0.3
Net (loss) continuing operations                (3,250,622 )      (14.4 )         (82,966 )     (0.3 )
Discontinued operations                           (291,255 )       (1.3 )          (3,022 )     (0.0 )
Net (loss)                                   $  (3,541,877 )      (15.7 )%  $     (85,988 )     (0.3 )%


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012 (Continuing Operations)

Revenues

Total revenues decreased 14.8% in the first quarter of 2013 compared to the same period in 2012, to $22.6 million from $26.5 million. Printing revenue decreased $2.6 million or 18.1% when compared to the first quarter of 2012. The printing revenue reduction was primarily reflective of decreases at the Company's Merten division in Cincinnati, Ohio. This resulted as part of the Company's restructuring effects in the third quarter of 2012. The Company also had revenue decreases at several of its West Virginia operations which appear to be related to both softness in the West Virginia market and certain specific customer attrition. Office products and office furniture revenue decreased 12.0% in the first quarter of 2013 to $7.2 million from $8.2 million in the first quarter of 2012. Office products and office furniture sales decreased in the first quarter of 2013 when compared to the first quarter of 2012 due to lower office furniture sales and a reduction in office products related sales. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.6 million, consisting of advertising revenue of approximately $2.8 million and $0.8 million in circulation revenues for the three months ended January 31, 2013. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.9 million, consisting of advertising revenue of approximately $3.0 million and $0.9 million in circulation revenues for the three months ended January 31, 2012. The decrease in newspaper revenue is primarily associated with decreases in both advertising and circulation revenues, reflective of macro industry dynamics.

Cost of Sales

Total cost of sales decreased 13.7% in the first quarter of 2013, to $15.9 million from $18.5 million in the first quarter of 2012. Printing cost of sales in the first quarter of 2013 decreased over the prior year but increased as a percentage of printing sales from 72.9% in 2012 to 74.7% in 2013. The printing gross margin dollars decreased when compared to the comparable period in the prior year due to lower sales coupled with gross margin percent compression. Office products and office furniture cost of sales decreased in 2013 from 2012 levels due to lower sales and lower cost of goods sold as a percentage of office products and office furniture sales of 70.1% in 2012 to 68.6% in 2013, thus representing gross margin percent improvement in the office products and office furniture segment. Newspaper cost of sales and operating costs as a percent of newspaper sales were 59.7% and 56.0% for the three months ended January 31, 2013 and 2012.

Operating Expenses

In the first quarter of 2013, selling, general and administrative (SG&A) expenses decreased on a gross dollar basis to $6.2 million from $7.4 million in 2012, a decrease of $1.3 million or 17.0%. As a percentage of total sales, the selling, general and administrative expenses decreased on a quarter to quarter basis in 2013 to 27.3% from 28.0% in 2012. The decrease in SG&A in total and as a percent of sales was primarily reflective of lower personnel and related expenses associated in part with various restructuring initiatives implemented by the Company.

During the second quarter of 2013 as part of a process of addressing the Company's debt status with its secured lenders as well as first quarter 2013 performance to budget, the Company performed a comprehensive reassessment of its initial fiscal year 2013 budget. The Company as part of this process identified at least one customer in the printing segment from which it anticipated a substantial revenue decline in the second quarter of 2013 and beyond and associated profitability declines in 2013 and beyond. As a result of this process, it was determined that an impairment test between annual impairment tests was warranted for the printing segment as a result of the potential near term challenges facing the Company, anticipated customer specific revenue decreases and softness in the Company's core West Virginia market. The Company performed Step 1 of the Goodwill impairment test for the printing segment with the assistance of a third party valuation specialist using the income approach and the testing indicated a value less than the carrying value of the segment at January 31, 2013.

As a result of the Step 1 test, the Company determined it was required to proceed to Step 2 of Goodwill Impairment testing for the printing segment. The Company believes that an impairment loss is probable and based on a preliminary estimate after consultation with a third party valuation specialist, the Company recognized an impairment charge of the remaining goodwill of $2.2 million associated with the printing segment. This measurement of impairment loss is an estimate as of January 31, 2013 and upon completion of the measurement of the impairment in accordance with the Step 2 requirements, the initial charge may reflect a modification of the initial impairment estimate upon completion of testing of the measurement of the impairment loss in the subsequent reporting period. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is recognized, in accordance with applicable standards.


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Segment Operating (Loss)Income

The printing segment reported an operating loss in the first quarter of 2013 of $(2.4) million compared to an operating loss of $(0.6) million in the first quarter of 2012. The increase in operating loss was primarily attributable to preliminary pre-tax goodwill impairment charges of $2.2 million. This is based on a preliminary estimate of expected results based on Step 2 of goodwill impairment testing. Upon completion of the full Step 2 analysis, the Company may have adjustments associated with this process and such adjustments may be material to the Consolidated Financial Statements. The increase in operating loss was partially offset by lower SG&A expenses which were primarily reflective of lower personnel and related expenses associated in part with various restructuring initiatives implemented by the Company.

The office products and office furniture segment reported operating profits of $0.2 million in the first quarter of 2013 compared to $0.6 million in the first quarter of 2012. This represented a decrease in profitability of approximately $0.3 million. This decrease is primarily the result of lower gross profit contribution on reduced sales and higher selling, general and administrative expenses in the first quarter of 2013, when compared to the comparable period of the prior year, resulting in part from a realignment of personnel and other expenses and divisional responsibilities between the printing segments and office products and office furniture, resulting in an increase in SG&A expenses of $0.1 million associated with these actions.

The newspaper segment reported operating income of approximately $0.5 million, in the first quarter of 2013 compared to $0.7 million in the first quarter of 2012. The results reflected gross profit dollar contraction due to lower sales and margin percent compression partially offset by a reduction in SG&A expenses.

(Loss) income from Operations

The loss from operations in the first quarter of 2013 was $(1.7) million compared to income from operations of $0.6 million in the first quarter of 2012. This change is primarily the result of a $2.2 million goodwill impairment charge in the printing segment and operating income contribution reductions at the office products and office furniture segment and newspaper segment.

Other Income (expense)

Other (expense), net increased approximately $0.8 million, primarily due to higher interest expense in the first quarter of 2013 due to higher interest rates and the amortization of debt discount.

Income Taxes

The Company's effective tax rate for the three months ended January 31, 2013 and 2012 was 0% and a benefit of 44.6%. The primary difference in tax rates between 2013 and 2012 is a tax benefit in 2012 from continuing operations resulting from the loss from continuing operations coupled with interim implications of intraperiod tax allocations for discontinued operations when there is a loss from continuing operations to maintain financial statement neutrality and to recognize the tax components between continuing operations and discontinued operations on a discrete basis. There is no incremental income tax for continuing operations or discontinued operations in 2013 due to losses in each component and the Company's total current year expected income tax provision of zero. The Company intends to maintain a full valuation allowance for deferred tax assets as further described herein. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate and may be impacted by increases or decreases in the valuation allowance for deferred tax assets.


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers a multitude of factors in assessing the utilization of its deferred tax assets, including the reversal of deferred tax liabilities, projected future taxable income and other assessments, which may have an impact on financial results. The Company had previously determined, primarily as a result of its inability to enter into an amended credit facility upon the expiration of the Limited Forbearance Agreement on April 30, 2012, as well as the potential for a subsequent increase in interest rates coupled with the uncertainty regarding future rate increases that the secured lenders may impose on the Company that a full valuation allowance is necessary to measure the portion of the deferred tax asset that more likely than not will not be realized. The Company currently intends to maintain a full valuation allowance on our deferred tax assets until sufficient positive evidence related to our sources of future taxable income exists and the Company is better able to identify a longer term solution to our current credit situation with our secured lenders. Therefore, the amount of deferred tax asset considered realizable could be adjusted in future periods based on a multitude of factors including but not limited to a refinancing of the Company's existing credit agreement with our secured lenders.

Net (loss)

Net (loss) for the first quarter of 2013 was $(3.3) million compared to a net loss of $(0.1) million in the first quarter of 2012. Basic and diluted
(loss) per share for the three months ended January 31, 2013 and 2012 were a loss of $(0.29) and of $(0.01).

Discontinued Operations

The Company reported net loss from discontinued operations of $(0.3) million and $(3,000) for the three months ended January 31, 2013 and 2012. The 2013 results were impacted by various restructuring charges of approximately $144,000 associated with the sale of substantially all of the property, plant and equipment of Donihe Graphics Inc. and the associated costs to cease production at this facility including the liquidation of certain inventory.


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Inflation and Economic Conditions

Management believes that the effect of inflation on the Company's operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term contracts; therefore, to the extent permitted by competition, it has the ability to pass through to its customers most cost increases resulting from inflation, if any. In addition, the Company is not particularly energy dependent; therefore, an increase in energy costs should not have a significant impact on the Company.

Our operating results depend on the relative strength of the economy on both a regional and national basis. Recessionary conditions applicable to the economy as a whole and specifically to our core business segments have had a significant adverse impact on the Company's business. A continuing or a deepening of the recessionary conditions we are experiencing could significantly affect our revenue categories and associated profitability.

Seasonality

Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company's fourth quarter. The global economic crisis as well as other macro-economic factors and customer demand has impacted this general trend in recent years. In addition, recent restructuring initiatives, asset disposals and other actions may have an impact on historical trends due to product mix and operational charges. The Company is unable to predict if this trend has fundamentally shifted until such time a more stable economic climate is present and the Company's continuing operations are assessed in light of its restructuring initiatives.

Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis, The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter included heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources

Statement of Cash Flows (Continuing Operations)

Net cash provided by operations for the three months ended January 31, 2013, was $2.9 million compared to net cash provided by operations of $2.1 million during the same period in 2012. This change in net cash from operations is due primarily to timing changes in assets and liabilities partially offset by a higher loss from continuing operations in 2013.

Net cash provided by (used in) investing activities for the three months ended January 31, 2013 was $0.8 million compared to $(0.2) million during the same period in 2012. The net cash used in investing activities during the first three months of 2012 primarily related to the purchase of equipment and vehicles. The net cash provided by investing activities in the first three months of 2013 was primarily related to the sale of equipment at the Company's Merten division.

Net cash (used in) financing activities for the three months ended January 31, 2013 was $(1.8) million compared to $(2.5) million during the same period in 2012. In 2012, the net cash used in financing activities primarily related to scheduled payments of long term debt and a reduction in negative book cash balances. In 2013, the net cash used in financing activities primarily related to payments made on Bullet Loan A resulting from certain assets sales as well as scheduled payments of long term debt.

Statement of Cash Flows (Discontinued Operations)

The Company has reported cash flows from discontinued operations as discrete single items of operating, investing and financing activities. The Company believes the resulting effect of these transactions should improve overall credit metrics, however, the allocation of proceeds may negatively impact overall liquidity due primarily to a reduction in borrowing base capacity.

Net cash provided by operating activities of discontinued operations were $0.1 million, and $0.7 million in 2013 and 2012. The decrease in cash from operating activities was primarily attributable to higher operating losses in 2013 when compared to 2012 and timing changes from assets and liabilities being higher in 2012.

Net cash provided by (used in) investing activities of discontinued operations were $0.4 million and $(58,000) in 2013 and 2012. In 2013, the Company sold certain assets at its Donihe division for approximately $0.4 million which were used to pay debt.

Net cash (used in) financing activities of discontinued operations was $(0.4) million and $0 for 2013 and 2012. The net cash used in financing activities represented debt payments from the sale of various assets of Donihe.

Liquidity and Capital Resources

The Company incurred substantial indebtedness as a result of the acquisition of The Herald-Dispatch in September of 2007. The country entered a recession in December of 2007 and the residual effects of the recession have continued within the newspaper and printing segments of the Company. The debt was structured as a cash flow credit, which typically indicates that the primary repayment source for debt will be income from operations in lieu of a collateral based loan. The Company has continued to service its debt and has made every scheduled payment of principal and interest, including during various periods, default interest. The Company does not believe it will achieve its transaction oriented Bullet Note A payment due March 31, 2013 of $2.1 million. In addition, the Company has paid substantial sums for fees to the secured lenders as well as to various advisors pursuant to applicable credit and credit related agreements. The Company has paid approximately $49.7 million in principal through January 31, 2013. Thus, the Company has demonstrated the ability to generate cash flow and has continued to service its debt commitments under the most difficult conditions in recent history.


Champion Industries, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company is currently operating under the provisions of a Restated Credit Agreement as defined herein which expires June 30, 2013. The Restated Credit Agreement requires the Company to achieve a multitude of targeted goals and covenants to remain in compliance. Many of these requirements are beyond the control of the Company although at the date of the agreement, the Company determined there was at least a reasonable possibility of achieving compliance through the June 30, 2013 contractual maturity date. The Company currently believes there is a high probability of a default under its Restated Credit Agreement prior to contractual maturity and perhaps on or before March 31, 2013 due in part to the Company's inability to complete various transactions necessary to comply with the Bullet Note A repayment provisions as well as the Company's inability to complete the designated transaction under terms agreed upon and the potential for financial covenant defaults. The Company is also required, under the terms of the Restated Credit Agreement, to comply with various financial covenants, many of which are non-GAAP financial measures. The Company has calculated such covenants under its interpretation of the Restated Credit Agreement and believes it is in compliance with such covenants. However, a nominal change in these covenant calculations may result in default due to a limited clearance threshold of compliance at January 31, 2013. As a result of our current credit situation there is significant uncertainty about our ability to operate as a going concern. In recent years, the Company has continued to operate for extended periods both in default and under forbearance agreements as it navigates its way through the continued challenges and residual effects of the global economic crisis. The Company believes that there has been a fundamental shift in the way in which financial institutions, in general, evaluate cash flow credits and that the amount of leverage in which the financial institutions are willing to lend has decreased generally over the last several years. In addition, two of the Company's operating segments, specifically the printing and newspaper segments, have declined both internally and on a macro basis both during the recession and post-recession. Therefore, even though the Company has reduced its borrowings in accordance with contractually scheduled amortizations, the secured lenders have expressed a desire to have lower leverage associated with various earnings measures related to funded indebtedness. Therefore, three primary dynamics have faced the Company: lower earnings, two operating segments that have faced secular hurdles and what the Company believes to be a changed credit culture regarding cash flow type loans.

The Company is unable to definitively predict the course of action which the Company's secured lenders will take to address its pending maturities. This is due in part to the fact the Company's secured lenders are composed of six different lenders who may have different agendas, metrics and requirements and as such there may be in certain cases six different points of view as to the direction of the Company's credit. The Company is able to affirmatively state that it has: (1) made every scheduled payment of principal and interest pursuant to applicable agreements in place from time to time; (the Company believes it will be unable to achieve the March 31, 2013 Bullet Note A payment) (2) exhibited an ability to operate under difficult credit environments and shown a history of negotiating mutually acceptable resolutions to the Credit Agreement in recent years; (3) shown an ability to maintain positive cash flow from operating activities in recent years; (4) shown an ability to scale down its operating model to adapt to a changing economic landscape; (5) shown an ability to implement its plans and initiatives and to receive guidance from nationally recognized advisors; (6) received $5.5 million in funds from the Company's CEO;
(7) implemented substantial cost savings initiatives, including but not limited to facility consolidations, personnel reductions, employee benefit reductions and numerous other cost savings initiatives. In short, the Company believes it has exhibited numerous positive attributes and resilience in working through these difficult conditions.

In the event the Company's secured lenders determine that they will not renew or extend the Company's Restated Credit Agreement under terms that are mutually acceptable to the Lenders and the Company, then the secured lenders under the provisions of the Restated Credit Agreement would have the right to enforce their liens, which could result in a sale of the Company's assets, including a liquidation or change in control of the Company. The Company believes that due to the fact that its operations and prospects are dependent in a large part on the continued efforts of Marshall T. Reynolds, a sale of such assets in whole or in part may not yield a full return of the debt principal to the secured lenders due to the cash flow nature of the loan from inception to date. The Company is working in good faith with its investment bankers to identify reasonably acceptable options and alternatives that include transaction alternatives, which would make reasonable sense for all parties. These alternatives include various restructuring initiatives including asset, segment, division and subsidiary sales as well as a sale of the Company in whole or in part, debt refinancing initiatives and other capitalization options. If the secured lenders ultimately feel that they could maximize their returns by foreclosing on the Company's assets, which the Company does not believe have adequate collateral coverage, then it would be the prerogative of the secured lenders to do so, in the event the Company is unable to identify an alternative financing source or other solution acceptable to the secured lenders, which may be challenging in the current economic climate. The Company issued to the secured lenders warrants to purchase common stock as a result of the Restated Credit Agreement and additional shareholder dilution is possible in the event the Company is able to identify a longer term financing solution with its current lenders or a new lender. The Company ultimately believes the best course of action is for the Company to continue to negotiate in good faith with the secured lenders and work . . .

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