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LABL > SEC Filings for LABL > Form 10-K on 31-May-2016All Recent SEC Filings

Show all filings for MULTI COLOR CORP

Form 10-K for MULTI COLOR CORP


31-May-2016

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
                                                         2016           2015          2014
Net revenues                                               100.0 %       100.0 %       100.0 %
Cost of revenues                                            79.1 %        78.6 %        81.3 %

Gross profit                                                20.9 %        21.4 %        18.7 %
Selling, general and administrative expenses                 9.4 %         8.4 %         8.1 %
Facility closure expenses                                    0.6 %         0.9 %         0.2 %
Goodwill impairment                                          0.0 %         0.1 %         1.9 %

Operating income                                            10.9 %        12.0 %         8.5 %
Interest expense                                             3.0 %         3.3 %         3.1 %
Other expense (income), net                                  0.2 %         0.0 %        (0.9 %)

Income before income taxes                                   7.7 %         8.7 %         6.3 %
Income tax expense                                           2.2 %         3.1 %         2.3 %

Net income attributable to Multi-Color Corporation           5.5 %         5.6 %         4.0 %

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 2016, the Company had net revenues of $870,825 compared to $810,772 in the prior year, an increase of 7% or $60,053. Acquisitions occurring after the beginning of fiscal 2015 accounted for an 11% increase in revenue. Organic revenues increased 1%. Foreign exchange rates, primarily driven by the depreciation of the Australian dollar and the Euro, led to a decrease of 5% in revenues year over year.

Gross profit increased $8,352 or 5% compared to the prior year. Acquisitions occurring after the beginning of fiscal 2015 contributed $17,925 to the gross profit increase. Gross margins were 21% in fiscal 2016 and fiscal 2015.

The label markets we serve exist in a competitive environment amidst 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.

Operating income decreased $2,484 or 3% compared to the prior year primarily due to operating inefficiencies in core markets, increased compliance costs and unfavorable foreign exchange. Acquisitions occurring after the beginning of fiscal 2015 contributed $6,190 to operating income in fiscal 2016. Operating income in fiscal 2016 includes $5,200 of expenses primarily related to the consolidation of our manufacturing facilities located in Greensboro, North Carolina, Norway, Michigan and Watertown, Wisconsin into our other North American facilities, as well as consolidation of our Dublin, Ireland and Glasgow, Scotland facilities. Operating income in fiscal 2015 includes $7,399 of expenses primarily related to the consolidation of our manufacturing facilities in Norway, Michigan and Watertown, Wisconsin.

Other expense was $1,867 compared to income of $346 in the prior year primarily related to unfavorable foreign exchange resulting from re-measurement of equipment and other payables from certain currencies into functional currencies in Latin America.


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During 2016, 2015 and 2014, sales to major customers (those exceeding 10% of the Company's net revenues in one or more of the periods presented) approximated 17%, 18% and 17%, respectively, of the Company's consolidated net revenues. All of these sales were made to The Procter & Gamble Company.

Our vision is global leadership in premium label solutions. We currently serve customers located throughout North, Central and South America, Europe, Australia, New Zealand, South Africa, China and Southeast Asia. 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 2017 is to continue to improve organic growth rates for both revenue and earnings. We expect growth to come from improved performance in our operations and the finalization of integration of our recent acquisitions in Europe and Southeast Asia. We continue to invest in additional and more productive capacity throughout our business to support operational efficiency and organic growth.

COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2016 AND MARCH 31, 2015

Net Revenues

$ %
2016 2015 Change Change
Net revenues $ 870,825 $ 810,772 $ 60,053 7 %

Net revenues increased 7% to $870,825 from $810,772 in the prior year. Acquisitions occurring after the beginning of fiscal 2015 accounted for an 11% increase in revenue and organic revenues increased 1%. Foreign exchange rates, primarily driven by the depreciation of the Australian dollar and the Euro, led to a 5% decrease in revenues year over year.

Cost of Revenues and Gross Profit



                                                                $            %
                                 2016           2015          Change      Change
           Cost of revenues    $ 689,199      $ 637,498      $ 51,701           8 %
           % of Net revenues        79.1 %         78.6 %
           Gross profit        $ 181,626      $ 173,274      $  8,352           5 %
           % of Net revenues        20.9 %         21.4 %

Cost of revenues increased 8% or $51,701 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2015 contributed $73,435 or 12%, partially offset by the favorable impact of foreign exchange rates.

Gross profit increased $8,352 or 5% compared to the prior year. Acquisitions occurring after the beginning of fiscal 2015 contributed $17,925 to gross profit. Operating inefficiencies offset organic margin improvements resulting in a $4,010 reduction in gross margin. Unfavorable foreign exchange rates of $5,563 also reduced gross profit during the year. Gross margins were 20.9% of net revenues for the current year compared to 21.4% in the prior year. Operating inefficiencies in our core markets globally and the impact of foreign exchange rates led to a 0.4% reduction in gross margin. The remaining reduction in gross margin is primarily due to recent acquisitions which have lower margins than the Company as a whole.

Selling, General and Administrative (SG&A) Expenses and Facility Closure
Expenses




                                                                                 $              %
                                                  2016           2015          Change         Change
Selling, general and administrative expenses    $ 81,998       $ 68,012       $ 13,986             21 %
% of Net revenues                                    9.4 %          8.4 %
Facility closure expenses                       $  5,200       $  7,399       $ (2,199 )          (30 %)
% of Net revenues                                    0.6 %          0.9 %

SG&A expenses increased $13,986 or 21% compared to the prior year. Acquisitions occurring after the beginning of fiscal 2015 contributed $11,736 to the increase, partially offset by a decrease of $3,183 due to the favorable impact of foreign exchange rates. In


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the current year, the Company incurred $3,683 of acquisition and integration expenses, compared to $1,787 in the prior year. The remaining increase relates to professional fees year over year, including an incremental $4,051 for compliance costs. The majority of the compliance costs relate to consulting expenses incurred for remediation measures to strengthen our internal control environment and remediation of material weaknesses. See Item 9A.

Facility closure expenses were $5,200 in the current year compared to $7,399 in the prior year. These expenses relate to consolidation of facilities in certain locations into other existing facilities, including the consolidation of the Norway, Michigan and Watertown, Wisconsin ($632), Greensboro, North Carolina ($2,247), and Sonoma, California ($220) facilities into existing facilities. Additionally, the Company is consolidating its manufacturing facilities in Dublin, Ireland ($1,476) into a single location and the manufacturing facilities in Glasgow, Scotland ($597) into a single location and closed a sales office in Montreal, Canada ($28). In the prior year facility closure expenses related to Norway, Michigan and Watertown, Wisconsin ($7,271) and El Dorado Hills, California ($128).

Goodwill Impairment

$ %
2016 2015 Change Change
Goodwill impairment $ - $ 951 $ (951 ) (100 %)

In 2015, we recorded an impairment charge of $951 related to the finalization of the fiscal 2014 impairment analysis for the Latin America Wine & Spirit reporting unit. See further details in the Critical Accounting Policies and Estimates section below.

Interest Expense and Other Income, net




                                                                                     $                   %
                                            2016               2015               Change              Change
Interest expense                        $      25,751      $      26,386       $        (635 )                (2 %)
Other expense (income), net             $       1,867      $        (346 )     $       2,213                 640 %

Interest expense decreased $635 or 2% compared to the prior year, due to the write-off of $2,001 of deferred financing fees related to refinancing debt in fiscal 2015. The decrease was offset by an increase in debt borrowings throughout the year to finance acquisitions.

Other expense was $1,867 compared to income of $346 in the prior year primarily related to unfavorable foreign exchange resulting from re-measurement of equipment and other payables from certain currencies into functional currencies in Latin America.

Income Tax Expense

$ %
2016 2015 Change Change
Income tax expense $ 18,981 $ 25,156 $ (6,175 ) (25 %)

The Company's effective tax rate decreased to 28% in fiscal 2016 from 35% in the prior year primarily due to the mix of income in some of our foreign jurisdictions, the impact of tax rate changes in certain foreign jurisdictions enacted during the period and other discrete items recognized during the current year that reduced tax expense.

COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2015 AND MARCH 31, 2014

Net Revenues

$ %
2015 2014 Change Change
Net revenues $ 810,772 $ 706,432 $ 104,340 15 %

Net revenues increased 15% to $810,772 from $706,432 in the prior year. Acquisitions occurring after the beginning of fiscal 2014 accounted for a 13% increase in revenue. Organic revenues increased 3% in volume and 1% due to the favorable impact of sales mix and pricing. Foreign exchange rates, primarily driven by the depreciation of the Australian dollar, the Euro and Latin American currencies, led to a 2% decrease in revenues year over year.


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Cost of Revenues and Gross Profit




                                                                  $                 %
                          2015               2014              Change            Change
  Cost of revenues    $     637,498      $     574,375      $      63,123                11 %
  % of Net revenues            78.6 %             81.3 %
  Gross profit        $     173,274      $     132,057      $      41,217                31 %
  % of Net revenues            21.4 %             18.7 %

Cost of revenues increased 11% or $63,123 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2014 accounted for a 13% increase in cost of sales. These increases were offset by improved operating efficiencies in North America, South America, and Asia Pacific.

Gross profit increased $41,217 or 31% compared to the prior year. Acquisitions occurring after the beginning of fiscal 2014 contributed $19,932 to the increase. Gross margins increased to 21.4% of sales revenues for fiscal 2015 compared to 18.7% in the prior year primarily due to improved operating efficiencies in North America, South America, and Asia Pacific.

Selling, General and Administrative (SG&A) Expenses and Facility Closure
Expenses




                                                                                      $                  %
                                            2015                2014               Change             Change
Selling, general and administrative
expenses                                $      68,012       $      57,293       $      10,719                 19 %
% of Net revenues                                 8.4 %               8.1 %
Facility closure expenses               $       7,399       $       1,166       $       6,233                535 %
% of Net revenues                                 0.9 %               0.2 %

SG&A expenses increased $10,791 or 19% compared to the prior year. SG&A increased $7,481 primarily due to the impact of acquisitions occurring after the beginning of fiscal 2014, partially offset by a decrease of $1,525 due to the favorable impact of foreign exchange rates, primarily driven by depreciation in the Australian dollar and the Euro. The remaining increase in SG&A primarily relates to acquisition fees, professional fees and compensation expenses. SG&A increased as a percentage of sales to 8.4% in fiscal 2015 from 8.1% in fiscal 2014.

In November 2014, the Company announced plans to consolidate our manufacturing facilities located in Norway, Michigan and Watertown, Wisconsin into its other existing facilities. During fiscal 2015, the Company recorded facility closure expense of $7,399, primarily related to these closures, including a non-cash impairment charge of $5,208.

In October 2013, the Company announced plans to consolidate our manufacturing facility located in El Dorado Hills, California into the Napa, California facility. In fiscal 2014, the Company recorded charges of $1,166 in connection with the closure of the El Dorado Hills facility for employee termination benefits, including severance and relocation and other costs.

Goodwill Impairment

$ %
2015 2014 Change Change
Goodwill impairment $ 951 $ 13,475 $ (12,524 ) (93 %)

After conducting our annual impairment testing, we recorded an impairment charge of $13,475 in fiscal 2014 to reduce the carrying value of the goodwill of our Latin America Wine & Spirit reporting unit to fair value. In the second quarter of fiscal 2015, we recorded an impairment charge of $951 related to the finalization of the fiscal 2014 impairment analysis for the same reporting unit. See further details in the Critical Accounting Policies and Estimates section below.


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Interest Expense and Other Income, net



                                                                $           %
                                   2015          2014        Change      Change
             Interest expense    $ 26,386      $ 21,776      $ 4,610          21 %
             Other income, net   $   (346 )    $ (5,910 )    $ 5,564          94 %

Interest expense increased $4,610 or 21% compared to the prior year, including the write-off of $2,001 of deferred financing fees as a result of debt refinancing in fiscal 2015. The remaining increase was primarily due to an increase in debt borrowings throughout the year to finance fiscal 2014 acquisitions.

Other income was $346 compared to $5,910 in the prior year. Other income in fiscal 2014 included supplemental purchase price adjustments for businesses acquired in fiscal 2013 and 2014 for $2,451 and income of $3,800 related to settlement of a legal claim. See Note 3 to the Company's consolidated financial statements.

Income Tax Expense

$ %
2015 2014 Change Change
Income tax expense $ 25,156 $ 16,033 $ 9,123 57 %

The Company's effective tax rate was 35% in fiscal 2015 compared to 36% in the prior year.

Liquidity and Capital Resources

Summary of Cash Flows

Net cash provided by operating activities was $99,401 in 2016 and $106,975 in 2015. Net income adjusted for non-cash expenses consisting primarily of depreciation and amortization, goodwill impairment, facility closure expenses related to impairment loss on fixed assets and changes in deferred taxes was $98,936 in 2016 compared to $104,316 in 2015. This decrease is primarily driven by decreased operating income primarily due to operating inefficiencies in core markets, increased compliance costs and unfavorable foreign exchange, partially offset by increased sales and operating income from acquisitions. Our net source from operating assets and liabilities of $465 in 2016 decreased from $2,659 in 2015.

Net cash provided by operating activities was $106,975 in 2015 and $80,617 in 2014. Net income adjusted for non-cash expenses consisting primarily of depreciation and amortization, goodwill impairment, facility closure expenses related to impairment loss on fixed assets and changes in deferred taxes was $104,316 in 2015 compared to $85,644 in 2014 primarily driven by increased sales and operating income from acquisitions. Our net source from operating assets and liabilities of $2,659 in 2015 increased from a use of $5,027 in 2014.

Net cash used in investing activities was $135,032 in 2016, $59,922 in 2015 and $153,375 in 2014 of which $103,245, $31,240 and $133,499 was used for acquisitions in those years, respectively. The remaining net usage of $31,787 in 2016, $28,682 in 2015 and $19,876 in 2014 were capital expenditure related, primarily for the purchase of presses net of various sales or lease-back proceeds. Capital expenditures were primarily funded by cash flows from operations.

Net cash provided by financing activities in fiscal 2016 was $45,200, which included $44,997 of net debt borrowings (primarily used to finance acquisitions) and $4,713 of proceeds from various stock transactions, offset by $1,141 in deferred payments related to the Monroe Etiquette and Multiprint acquisitions and dividends paid of $3,351.

Net cash used in financing activities was $37,371 in 2015, which consisted of $19,895 of net debt payments, contingent consideration payments of $10,916 related to the John Watson and Labelgraphics acquisitions, debt issuance costs of $7,921 and dividends paid of $3,302 offset by $4,663 of net proceeds from various stock transactions. Financing activities in 2015 include $250,000 in long-term debt borrowings related to the issuance of the 6.125% Senior Notes due 2022 (the "Notes") in the third quarter of fiscal 2015 and $341,625 in payments to pay off the Term Loan under the prior credit agreement. The $7,921 in debt issuance costs were paid in conjunction with the issuance of the Notes and entry into the Amended and Restated Credit Agreement (the "Credit Agreement").

Net cash provided by financing activities was $67,480 in 2014, which consisted of $73,224 of net debt borrowings (primarily used to finance acquisitions) and $2,025 of net proceeds from various stock transactions offset by dividends paid of $3,276, debt issuance costs of $1,364, and a $3,129 deferred payment related to the York acquisition.

Capital Resources

On November 21, 2014, the Company issued $250,000 aggregate principal amount of 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


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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. In connection with the issuance of the Notes, the Company incurred debt issuance costs of $5,413 during 2015, which are being deferred and amortized over the eight year term of the Notes.

Concurrent with the issuance and sale of the Notes, the Company amended and restated its 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").

Upon issuance of the Notes, the Company was required to repay in full the Term Loan Facility under the terms of its prior credit agreement. On November 21, 2014, the Company repaid the outstanding balance of $341,625 on the Term Loan Facility using the net proceeds from the Notes and borrowings on the U.S. Revolving Credit Facility. The repayment of the Term Loan Facility was treated primarily as an extinguishment of debt. As a result, $2,001 in unamortized deferred financing fees were recorded to interest expense during 2015 as a loss on the extinguishment of debt. The remaining unamortized fees of $2,275 and new debt issuance costs of $2,526, which were incurred during 2015 in conjunction with the Credit Agreement, were deferred and are being amortized over the five year term of the Credit Agreement.

The Credit Agreement may be used for working capital, capital expenditures and other corporate purposes and to fund permitted acquisitions (as defined in the Credit Agreement). Loans under the Credit Agreement bear interest at variable rates plus a margin, based on the Company's consolidated senior secured leverage ratio at the time of the borrowing. The weighted average interest rate on borrowings under the U.S. Revolving Credit Facility was 2.33% and 2.02% at March 31, 2016 and 2015, respectively, and on borrowings under the Australian Revolving Sub-Facility was 3.89% and 4.01% at March 31, 2016 and 2015, 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 March 31, 2016, the Company was in compliance with the covenants in the Credit Agreement and the Indenture.

In the fourth quarter of fiscal 2014, the Company incurred $1,364 in debt issuance costs related to the debt modification that occurred as a result of the seventh amendment to the prior credit agreement. We analyzed the new loan costs and the existing unamortized loan costs related to the prior agreement allocated to the amended revolving line of credit and 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 $99 to selling, general and administrative expenses in fiscal 2014 to expense certain third-party fees related to the modification of the term loan. The remaining new and unamortized deferred loan costs were deferred and are being amortized over the term of the modified agreement.

The Company recorded $1,692, $2,200 and $2,057 in interest expense in 2016, 2015 and 2014, respectively, in the consolidated statements of income to amortize deferred financing costs.

. . .

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