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LABL > SEC Filings for LABL > Form 10-K on 14-Jun-2013All Recent SEC Filings

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Form 10-K for MULTI COLOR CORP


14-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information included in this Annual Report on Form 10-K 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 1, Item 1A "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof.

Refer to "Forward-Looking Statements" following the index in this Form 10-K. In the discussion that follows, all amounts are in thousands (both tables and text), except 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.

RESULTS OF OPERATIONS

The following table shows for the periods indicated, certain components of Multi-Color's consolidated statements of income as a percentage of net revenues.

                                                            Percentage of Net Revenues
                                                        2013           2012           2011
Net revenues                                             100.0 %        100.0 %        100.0 %
Cost of revenues                                          80.9 %         80.7 %         79.9 %

Gross profit                                              19.1 %         19.3 %         20.1 %
Selling, general and administrative expenses               8.2 %         10.1 %          9.9 %
Loss on legal settlement                                    -              -             0.8 %
Facility closure expense (income), net                     0.2 %          0.2 %         (0.1 %)

Operating income                                          10.7 %          9.0 %          9.5 %
Interest expense                                           3.4 %          2.9 %          2.1 %
Other (income) expense, net                               (0.1 %)        (0.1 %)        (0.1 %)

Income before income taxes                                 7.4 %          6.2 %          7.5 %
Income tax expense                                         2.8 %          2.3 %          2.1 %

Net income                                                 4.6 %          3.9 %          5.4 %
Loss attributable to non-controlling interests              -             0.0 %           -

Net income attributable to Multi-Color Corporation         4.6 %          3.9 %          5.4 %

EXECUTIVE SUMMARY

We provide a complete line of innovative decorative label solutions and offer a variety of technical and graphic services to our customers based on their specific needs and requirements. Our customers include a wide range of consumer product companies, and we supply labels for many of the world's best known brands and products, including home & personal care, wine & spirit, food & beverage, healthcare and specialty consumer products.

During fiscal 2013, the Company had net revenues of $659,815 compared to $510,247 in the prior year. Acquisitions occurring after the beginning of fiscal 2012 accounted for 27% of the 29% increase or $139,672. Of this acquisition-related revenue increase, $114,673 is attributable to the acquisition of York Label Group (York). The remaining increase was due to a 2% increase in sales volume, a 2% favorable impact of sales mix and a 2% unfavorable impact of foreign exchange rates primarily driven by the depreciation of the Euro.

Gross profit increased $28,067 or 29% compared to the prior year. Acquisitions occurring after the beginning of the fiscal 2012 contributed $18,999 to the gross profit increase. The remaining increase was due to the higher sales volumes and favorable sales mix impact. Gross margins remained consistent at 19% of net revenues compared to the prior year.

Operating income increased $21,154 or 55% compared to the prior year. Acquisitions occurring after the beginning of fiscal 2012 contributed $8,162 to the operating income increase. The remaining increase was due primarily to the impact of higher sales volumes, favorable sales mix impact, lower integration expenses and other cost decreases. Operating income in fiscal 2013 includes $1,531 of costs related to the consolidation of our manufacturing facilities located in Montreal, Canada and Kansas City, Missouri into other existing facilities.

The label markets we serve continue to experience a competitive environment and price pressures. We continually search for ways to reduce our costs through improved production and labor efficiencies, reduced substrate waste, new substrate options and lower substrate pricing.

We have continued to make progress in expanding our customer base and portfolio of products, services and manufacturing locations in order to address issues related to customer concentration. During 2013, 2012 and 2011, sales to major customers (those exceeding 10% of the Company's net revenues in one or more of the periods presented) approximated 15%, 14% and 16%, respectively, of the


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Company's consolidated net revenues. All of these sales were made to the Procter & Gamble Company. Since 2008, sales concentration with our major customers has been significantly reduced since we have added new customers and products with our acquisitions of Labelgraphics (Holdings) Ltd. (Labelgraphics), York Label Group, Warszawski Dom Handlowy (WDH), La Cromografica, Monroe Etiquette, Guidotti CentroStampa (CentroStampa) and Collotype International Holdings Pty. Ltd, which have manufacturing operations in the U.S., Canada, Chile, Poland, France, Italy, Scotland, Australia and South Africa.

Our vision is global leadership in premium label solutions. We currently serve customers located throughout North, Central and South America, Australia, South Africa, New Zealand, Europe and China. We continue to monitor and analyze new trends in the packaging and consumer products industries to ensure that we are providing appropriate services and products to our customers. Certain factors that influence our business include consumer spending, new product introductions, new packaging technologies and demographics.

Our primary objective for fiscal 2014 is to improve organic growth rates for both revenue and earnings. We expect the growth to come from improved operations due to the finalization of integration of our recent acquisitions in North and South America and from our start-ups in China and Argentina. We have invested in additional and more productive capacity throughout our locations to support organic growth. Furthermore, we expect higher earnings to support an increase in acquisition activity in fiscal 2014 compared to the prior year.

COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2013 AND MARCH 31, 2012

Net Revenues

$ %
2013 2012 Change Change
Net Revenues $ 659,815 $ 510,247 $ 149,568 29 %

Net revenues increased 29% to $659,815 from $510,247 in the prior year. Acquisitions occurring after the beginning of fiscal 2012 accounted for 27% of the 29% increase or $139,672. Of this acquisition-related revenue increase, $114,673 is attributable to the acquisition of York. The remaining increase was due to a 2% increase in sales volume, a 2% favorable impact of sales mix and a 2% unfavorable impact of foreign exchange rates primarily driven by the depreciation of the Euro.

Cost of Revenues and Gross Profit



                                                                 $            %
                                 2013           2012          Change       Change
           Cost of Revenues    $ 533,464      $ 411,963      $ 121,501          29 %
           % of Net Revenues        80.9 %         80.7 %
           Gross Profit        $ 126,351      $  98,284      $  28,067          29 %
           % of Net Revenues        19.1 %         19.3 %

Cost of revenues increased 29% or $121,501 compared to the prior year. The majority of the increase in cost of revenues was due to acquisitions occurring after the beginning of fiscal 2012, which contributed $121,912 to the cost of revenues increase. Included in the increase due to acquisitions is a charge of $458 for an adjustment related to the step-up of finished goods and work-in-process inventory in the purchase price accounting for Labelgraphics. The cost of revenues in the prior year was impacted by a one-time charge of $1,530 for an adjustment related to the step-up of finished goods and work-in-process inventory in the purchase price accounting for York.

Gross profit increased $28,067 or 29% compared to the prior year. Acquisitions occurring after the beginning of the fiscal 2012 contributed $18,999 to the gross profit increase. The remaining increase was due to the higher sales volumes and favorable sales mix impact. Gross margins remained consistent at 19% of net revenues compared to the prior year.

Selling, General and Administrative (SG&A) Expenses and Other Operating Items



                                                                                  $            %
                                                   2013           2012         Change       Change
Selling, General and Administrative Expenses     $ 54,115       $ 51,551       $ 2,564            5 %
% of Net Revenues                                     8.2 %         10.1 %
Facility Closure Expense (Income), net           $  1,531       $  1,182       $   349           30 %
% of Net Revenues                                     0.2 %          0.2 %


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SG&A expenses increased $2,564 or 5% compared to the prior year. SG&A increased $9,220 primarily due to the impact of acquisitions occurring after the beginning of fiscal 2012 partially offset by a decrease of $6,656 in integration and acquisition expenses related to the York acquisition compared to the prior year. SG&A expenses, as a percentage of net revenues, decreased from 10% to 8% compared to the prior year.

In January 2012, the Company announced plans to consolidate its manufacturing facility located in Kansas City, Missouri into our other existing facilities. In connection with the consolidation of the Kansas City facility, the Company incurred charges of $855 in fiscal 2013 and $1,182 in the fourth quarter of fiscal 2012 primarily for employee severance and other termination benefits, non-cash charges related to asset impairments and relocation and other costs. The transition from the Kansas City facility has been completed. In September 2012, the Kansas City facility was sold for net proceeds of $625.

In the third quarter of fiscal 2013, the Company consolidated the two operations located in Montreal, Canada into one manufacturing facility. The Company incurred charges of $676 in fiscal 2013 related to fixed asset write-offs and relocation costs in conjunction with the plant consolidation.

Interest Expense and Other (Income) Expense, Net



                                                                     $           %
                                        2013          2012        Change      Change
        Interest Expense              $ 22,237      $ 15,010      $ 7,227          48 %
        Other (Income) Expense, net   $   (219 )    $   (583 )    $   364          62 %

Interest expense increased $7,227 or 48% compared to the prior year due primarily to a full year of interest on the debt used to finance the acquisition of York.

Other income decreased $364 compared to the prior year primarily due to lower realized gains on foreign exchange in fiscal 2013.

Income Tax Expense

$ %
2013 2012 Change Change
Income Tax Expense $ 18,387 $ 11,456 $ 6,931 61 %

The Company's effective tax rate was 38% in fiscal 2013 compared to 37% in the prior year due primarily to a shift in the geographical mix of worldwide earnings between domestic and foreign jurisdictions. The Company expects its annual effective tax rate to be approximately 38% in fiscal year 2014 reflecting the higher percentage of income in the United States.

COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2012 AND MARCH 31, 2011

Net Revenues

$ %
2012 2011 Change Change
Net Revenues $ 510,247 $ 338,284 $ 171,963 51 %

Net revenues increased 51% to $510,247 from $338,284. The majority of the increase in revenues was due to acquisitions and start-ups that occurred after the beginning of fiscal 2011, which contributed $151,446 or 45% of the revenue increases. The remaining increase was due to a 2% increase in sales volume, a 2% favorable sales mix impact and a 2% favorable foreign exchange impact.


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Cost of Revenues and Gross Profit



                                                                 $            %
                                 2012           2011          Change       Change
           Cost of Revenues    $ 411,963      $ 270,306      $ 141,657          52 %
           % of Net Revenues        80.7 %         79.9 %
           Gross Profit        $  98,284      $  67,978      $  30,306          45 %
           % of Net Revenues        19.3 %         20.1 %

Cost of revenues increased 52% or $141,657. The majority of the increase in cost of revenues was due to acquisitions and start-ups that occurred after the beginning of fiscal 2011, which contributed 48% to the cost of revenues increase. The remaining increase was due to an increase in sales volume and the favorable impact of sales mix and foreign exchange rates.

Gross profit increased $30,306 or 45% compared to the prior year. The acquisitions and start-ups that occurred after the beginning of fiscal 2011 contributed 31% to the gross profit increase. The remaining increase was due to the impact of foreign exchange, higher sales volumes and favorable sales mix impacts. Gross margins decreased to 19% from 20% of sales revenues compared to the prior year due primarily to lower revenues and operational inefficiencies in the new Chilean operations acquired with York and the impact of the adjustment related to the step-up of finished goods and work-in-process inventory in the purchase price accounting for York.

Selling, General and Administrative (SG&A) Expenses and Other Operating Items



                                                                                   $              %
                                                  2012            2011           Change        Change
Selling, General and Administrative Expenses    $ 51,551        $ 33,176        $ 18,375            55 %
% of Net Revenues                                   10.1 %           9.9 %
Facility Closure Expense (Income), net          $  1,182        $   (258 )      $  1,440           558 %
% of Net Revenues                                    0.2 %          (0.1 %)
Loss on Legal Settlement                        $     -         $  2,800        $ (2,800 )        (100 %)
% of Net Revenues                                      - %           0.8 %

SG&A expenses increased $18,375 or 55% compared to the prior year due to the impact of acquisitions of $12,308, integration expenses related to the acquisition of York of $5,608, an increase in acquisition-related expenses of $1,180 and higher incentive compensation expense, partially offset by $1,658 of one-time severance and accelerated stock compensation charges in the prior year. The integration expenses consisted primarily of severance and other termination benefits and professional fees.

In January 2012, the Company announced plans to consolidate its manufacturing facility located in Kansas City, Missouri into our other existing facilities. In connection with the consolidation of the Kansas City facility, the Company incurred a charge of $1,182 in the fourth quarter of fiscal 2012 primarily for employee severance and other termination benefits, non-cash charges related to asset impairments and relocation and other costs.

In the fourth quarter of fiscal 2011, the Company recorded a charge of $2,800 related to the settlement of a legal dispute with the John Henry Company.

Interest Expense and Other (Income) Expense, Net



                                                                   $            %
                                       2012         2011        Change       Change
       Interest Expense              $ 15,010      $ 7,021      $ 7,989          114 %
       Other (Income) Expense, net   $   (583 )    $  (210 )    $  (373 )       (178 %)

Interest expense increased to $15,010 compared to $7,021 in the prior year due primarily to the increase in debt borrowings to finance acquisitions, primarily the York acquisition, the write-off of certain deferred financing fees in conjunction with the debt modification to the Company's Credit Facility related to the York acquisition and the impact of foreign exchange rates.

Other income increased $373 due primarily to higher realized gains on foreign exchange in fiscal 2012.


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Income Tax Expense

$ %
2012 2011 Change Change
Income Tax Expense $ 11,456 $ 7,038 $ 4,418 63 %

The Company's effective tax rate was 37% in fiscal 2012 compared to 28% in the prior year due primarily to a higher percentage of income in higher tax jurisdictions and an increase in valuation allowances recorded in certain foreign jurisdictions.

Liquidity and Capital Resources

Comparative Cash Flow Analysis

Net cash provided by operating activities was $69,713 in 2013 compared to $56,477 in 2012 and $37,083 in 2011. The cash provided by operating activities came from net income attributable to Multi-Color Corporation adjusted primarily for non-cash expenses of depreciation and amortization, stock-based compensation expense and changes in deferred taxes and working capital. The increase in cash provided by operating activities in 2013, compared to 2012, of $13,236 was primarily due to the impact of acquisitions since the beginning of the prior year period. The increase in cash provided by operating activities in 2012, compared to 2011, of $19,394 was primarily due to cash generated from earnings and changes in deferred taxes and working capital. Changes in working capital provided (used) cash from operating activities of $(8,001) in 2013, $1,426 in 2012 and $(2,660) in 2011.

Net cash used in investing activities was $42,649 in 2013 compared to $294,891 in 2012 and $55,497 in 2011. The investing activities in 2013 include capital expenditures of $28,638 and investments in acquisitions of $15,979, partially offset by proceeds from the sale the Kansas City facility of $625 and proceeds from the sale of other property, plant and equipment of $1,343. The investing activities in 2012 include capital expenditures of $23,008, investments in acquisitions of $275,872 and other items of $32, partially offset by proceeds from the sale of property, plant and equipment of $4,021. Investing activities include cash used for the acquisition of Labelgraphics in the first quarter of fiscal 2013 and the acquisition of York, La Cromografica, two label operations in Latin America and WDH in fiscal 2012. The investing activities in 2011 include capital expenditures of $13,102, investments in acquisitions of $43,092 and other items of $113, partially offset by proceeds from the sale of property, plant and equipment of $810.

Capital expenditures of $28,638 in 2013, $23,008 in 2012 and $13,102 in 2011 were funded primarily from cash flow from operations. Capital expenditures in fiscal 2013 were related primarily to the purchase of new presses. The projected amount of capital expenditures for 2014 is $31,000.

Net cash used in financing activities was $21,189 in 2013 compared to net cash provided by financing activities of $233,781 in 2012 and $23,875 in 2011. During 2013, net debt borrowings were $283, debt issuance costs were $0 and dividends paid were $3,237 compared to net debt borrowings of $255,883, debt issuance costs of $8,562 and dividends paid of $2,941 during 2012. Financing activities include net debt additions to finance the acquisition of Labelgraphics in the first quarter of fiscal 2013 and York in the third quarter of fiscal 2012. Net cash used in financing activities for 2013 includes deferred payments related to the Labelgraphics acquisition of $5,049 and the York acquisition of $14,380, which the Company paid on July 2, 2012 and April 1, 2012, respectively. Also in 2012, the Company paid $12,186 for contingent consideration related to the acquisitions of CentroStampa and WDH. During 2011, net debt borrowings were $28,195, debt issuance costs were $1,682 and dividends paid were $2,612.

Capital Resources

On February 29, 2008, the Company executed a five year $200,000 credit agreement with a consortium of bank lenders (Credit Facility) with an original expiration date in 2013. The Company completed the first amendment to the Credit Facility in June 2010 and the second amendment in March 2011. In August 2011, the Company executed the third amendment to the Credit Facility. The third amendment increased the aggregate principal amount to $500,000 with an additional $315,000 term loan to be made available to the Company in a single drawing. The third amendment extended the expiration date of the Credit Facility from April 2014 to August 2016, updated the financial covenants and increased the interest rate margins over the applicable Eurocurrency or Australian Bank Bill Swap Rate (BBSY) and increased the commitment fee. In October 2011, the Company drew down on the additional term loan in conjunction with the York Label Group acquisition (see Note 3). Upon drawing down on the additional term loan, the maximum leverage ratio permitted increased to 4.25 to 1.00 with scheduled step downs and the consolidated interest coverage ratio is not to be less than 4.00 to 1.00. The interest rate margins for loans based on LIBOR and BBSY range from 2.00% to 3.50%. The Credit Facility contains an election to increase the facility by up to an additional $100,000 subject to agreement by one or more lenders to increase its commitment. In September 2011, the Company entered into the fourth amendment to the Credit Facility. The fourth amendment excluded certain subsidiaries of the York Label Group from the requirements to become guarantors under the Credit Facility. In November 2012, the Company entered into the fifth amendment to the Credit Facility. The fifth amendment increased the maximum consolidated leverage ratio permitted to 4.50 to 1.00 for December 31, 2012 through March 31, 2013 with scheduled step downs.

At March 31, 2013, the aggregate principal amount of $479,375 under the Credit Facility is comprised of the following: (i) a $130,000 revolving Credit Facility that allows the Company to borrow in alternative currencies up to the equivalent of $50,000 (U.S. Revolving Credit Facility); (ii) the Australian dollar equivalent of a $40,000 revolving Credit Facility (Australian Sub-Facility); and (iii) a $309,375 term loan facility (Term Loan Facility) which amortizes quarterly based on an escalating percentage of the initial aggregate value of the Term Loan Facility. The Term Loan Facility amortizes quarterly based on the following schedule: (i) March 31, 2013 through December


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31, 2013-amortization of $4,125, (ii) March 31, 2014 through December 31, 2015-amortization of $8,250 and (iii) March 31, 2016 through June 30, 2016-amortization of $12,375, with the balance due at maturity.

The Company incurred $8,562 of debt issuance costs in fiscal 2012 related to the debt modification which are being deferred and amortized over the life of the amended Credit Facility. In conjunction with the modification to our debt in the third amendment to the Credit Facility, we analyzed the new loan costs related to the amended Credit Facility and the existing unamortized loan costs related to the prior agreement allocated to the revolving line of credit, prior term loan and amended term loan separately to determine the amount of costs to be capitalized and the amount to be expensed. As a result of the analysis, the Company recorded a charge to interest expense of $490 to write-off certain deferred financing fees, which were paid to originate the prior agreement, including the unamortized portion of the loan costs allocated to creditors no longer participating in the amended Credit Facility. The unamortized portion of loan costs allocated to creditors participating in both the original and amended Credit Facility are being amortized over the term of the modified agreement.

The Company recorded $1,979 and $1,474 in interest expense for the years ended March 31, 2013 and 2012, respectively, in the consolidated statements of income to amortize deferred financing costs.

The Credit Facility may be used for working capital, capital expenditures and other corporate purposes. Loans under the U.S. Revolving Credit Facility and Term Loan Facility bear interest either at: (i) base rate (as defined in the credit agreement) plus the applicable margin for such loans which ranges from 1.00% to 2.50%; or (ii) the applicable London interbank offered rate, plus the applicable margin for such loans which ranges from 2.00% to 3.50% based on the Company's leverage ratio at the time of the borrowing. Loans under the Australian Sub-Facility bear interest at the BBSY Rate plus the applicable margin for such loans, which ranges from 2.00% to 3.50% based on the Company's leverage ratio at the time of the borrowing.

Available borrowings under the Credit Facility at March 31, 2013 consisted of $41,875 under the U.S. Revolving Credit Facility and $40,000 under the Australian Sub-Facility. The Company also has various other uncommitted lines of credit available at March 31, 2013 in the amount of $8,645.

The Credit Facility contains customary representations and warranties as well as customary negative and affirmative covenants which require the Company to maintain the following financial covenants at March 31, 2013: (i) a minimum consolidated net worth; (ii) a maximum consolidated leverage ratio of 4.50 to 1.00 and (iii) a minimum consolidated interest charge coverage ratio of 4.00 to
1.00. The Credit Facility contains customary mandatory and optional prepayment provisions, customary events of default, and is secured by the capital stock of subsidiaries, intercompany debt and all of the Company's property and assets, but excluding real property. The Company is in compliance with all covenants under the Credit Facility as of March 31, 2013.

In April 2008, the Company entered into two Swaps, a $40,000 non-amortizing Swap and a $40,000 amortizing Swap, to convert variable interest rates on a portion of outstanding debt to fixed interest rates. The Swaps expired in February 2013 and resulted in interest payments based on fixed rates of 3.45% for the . . .

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