Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - SHERIDAN GROUP INC | ex31_1.htm |
EX-31.2 - EXHIBIT 31.2 - SHERIDAN GROUP INC | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - SHERIDAN GROUP INC | ex32_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM 10–Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010
o
|
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 333–110441
THE
SHERIDAN GROUP, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
52–1659314
|
(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
11311
McCormick Road, Suite 260
|
|
Hunt
Valley, Maryland
|
21031–1437
|
(Address
of principal executive offices)
|
(Zip
Code)
|
410–785–7277
(Registrant’s
telephone number, including area code)
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 o No x
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 or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
(Do not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes o No x
There was
1 share of Common Stock outstanding as of May 12, 2010.
1
The Sheridan Group, Inc. and Subsidiaries
Quarterly
Report
For the
Quarter Ended March 31, 2010
INDEX
Page
|
||
PART I
— FINANCIAL INFORMATION
|
3
|
|
Item 1.
|
3
|
|
3
|
||
4
|
||
5
|
||
6
|
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Item 2.
|
10
|
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Item 3.
|
16
|
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Item 4T.
|
16
|
|
PART II
— OTHER INFORMATION
|
17
|
|
Item 1.
|
17
|
|
Item
1A.
|
17
|
|
Item 2.
|
17
|
|
Item 3.
|
17
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|
Item 4.
|
17
|
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Item 5.
|
17
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Item 6.
|
17
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18
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PART I — FINANCIAL INFORMATION
Item 1. Financial
Statements.
THE
SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 4,503,507 | $ | 4,109,740 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $2,701,926 and
$2,055,569, respectively
|
28,880,712 | 29,382,142 | ||||||
Inventories,
net
|
14,746,928 | 13,989,631 | ||||||
Other
current assets
|
5,702,338 | 5,724,134 | ||||||
Refundable
income taxes
|
17,703 | 179,473 | ||||||
Total
current assets
|
53,851,188 | 53,385,120 | ||||||
Property,
plant and equipment, net
|
114,619,668 | 117,757,008 | ||||||
Intangibles,
net
|
33,217,031 | 33,566,535 | ||||||
Goodwill
|
40,979,426 | 40,979,426 | ||||||
Deferred
financing costs, net
|
1,233,133 | 1,483,423 | ||||||
Other
assets
|
1,726,326 | 1,828,173 | ||||||
Total
assets
|
$ | 245,626,772 | $ | 248,999,685 | ||||
Liabilities
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 14,305,225 | $ | 14,621,067 | ||||
Accrued
expenses
|
14,013,381 | 17,698,876 | ||||||
Due
to parent, net
|
560,985 | 121,044 | ||||||
Total
current liabilities
|
28,879,591 | 32,440,987 | ||||||
Notes
payable
|
142,942,530 | 142,948,652 | ||||||
Deferred
income taxes and other liabilities
|
28,246,633 | 29,598,477 | ||||||
Total
liabilities
|
200,068,754 | 204,988,116 | ||||||
Stockholder's
Equity
|
||||||||
Common
stock, $0.01 par value; 100 shares authorized; 1 share issued and
outstanding
|
- | - | ||||||
Additional
paid-in capital
|
42,047,938 | 42,047,938 | ||||||
Retained
earnings
|
3,510,080 | 1,963,631 | ||||||
Total
stockholder's equity
|
45,558,018 | 44,011,569 | ||||||
Total
liabilities and stockholder's equity
|
$ | 245,626,772 | $ | 248,999,685 |
The
accompanying notes are an integral part of the consolidated financial
statements.
THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009
(Unaudited)
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 68,298,350 | $ | 76,975,918 | ||||
Cost
of sales
|
53,524,116 | 63,049,054 | ||||||
Gross
profit
|
14,774,234 | 13,926,864 | ||||||
Selling
and administrative expenses
|
9,382,979 | 9,304,165 | ||||||
Loss
on disposition of fixed assets
|
33,343 | 6,536 | ||||||
Restructuring
costs
|
72,368 | 147,966 | ||||||
Amortization
of intangibles
|
349,504 | 373,406 | ||||||
Total
operating expenses
|
9,838,194 | 9,832,073 | ||||||
Operating
income
|
4,936,040 | 4,094,791 | ||||||
Other
(income) expense:
|
||||||||
Interest
expense
|
3,948,813 | 4,656,126 | ||||||
Interest
income
|
(12,862 | ) | (13,321 | ) | ||||
Other,
net
|
(37,320 | ) | 64,421 | |||||
Total
other expense
|
3,898,631 | 4,707,226 | ||||||
Income
(loss) before income taxes
|
1,037,409 | (612,435 | ) | |||||
Income
tax (benefit) provision
|
(509,040 | ) | 130,373 | |||||
Net
income (loss)
|
$ | 1,546,449 | $ | (742,808 | ) |
The
accompanying notes are an integral part of the consolidated financial
statements.
THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009
(Unaudited)
March
31,
|
March
31,
|
|||||||
2010
|
2009
|
|||||||
Cash
flows provided by (used in) operating actvities:
|
||||||||
Net
income (loss)
|
$ | 1,546,449 | $ | (742,808 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities
|
||||||||
Depreciation
|
4,351,882 | 4,358,601 | ||||||
Amortization
of intangible assets
|
349,504 | 373,406 | ||||||
Provision
for doubtful accounts
|
662,198 | 39,387 | ||||||
Provision
for inventory realizability and LIFO value
|
86,839 | 11,515 | ||||||
Stock-based
compensation
|
- | 4,400 | ||||||
Amortization
of deferred financing costs and debt discount, included in interest
expense
|
244,168 | 293,017 | ||||||
Deferred
income tax (benefit) provision
|
(1,080,092 | ) | 229,190 | |||||
Loss
on disposition of fixed assets
|
33,343 | 6,536 | ||||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(160,768 | ) | (910,321 | ) | ||||
Inventories
|
(844,136 | ) | 1,346,244 | |||||
Other
current assets
|
6,051 | (660,611 | ) | |||||
Refundable
income taxes
|
161,770 | (180,863 | ) | |||||
Other
assets
|
101,847 | 404,541 | ||||||
Accounts
payable
|
(430,462 | ) | (2,198,666 | ) | ||||
Accrued
expenses
|
(3,685,495 | ) | (5,953,441 | ) | ||||
Income
tax payable
|
439,941 | - | ||||||
Other
liabilities
|
(256,007 | ) | (423,242 | ) | ||||
Net
cash provided by (used in) operating activities
|
1,527,032 | (4,003,115 | ) | |||||
Cash
flows used in investing activities:
|
||||||||
Purchases
of property, plant and equipment
|
(1,163,740 | ) | (2,674,748 | ) | ||||
Proceeds
from sale of fixed assets
|
30,475 | 100 | ||||||
Advances
paid to parent company, net
|
- | (2,032,708 | ) | |||||
Net
cash used in investing activities
|
(1,133,265 | ) | (4,707,356 | ) | ||||
Cash
flows used in financing activities:
|
||||||||
Borrowing
of working capital facility
|
- | 15,308,211 | ||||||
Repayment
of working capital facility
|
- | (13,414,000 | ) | |||||
Dividends
paid
|
- | (9,105,227 | ) | |||||
Net
cash used in financing activities
|
- | (7,211,016 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
393,767 | (15,921,487 | ) | |||||
Cash
and cash equivalents at beginning of period
|
4,109,740 | 16,396,628 | ||||||
Cash
and cash equivalents at end of period
|
$ | 4,503,507 | $ | 475,141 | ||||
Non-cash
investing and financing activities
|
||||||||
Asset
additions in accounts payable
|
$ | 275,552 | $ | 463,746 |
The
accompanying notes are an integral part of the consolidated financial
statements.
THE SHERIDAN GROUP, INC. and SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1.
|
Company
Information and Significant Accounting
Policies
|
The
accompanying unaudited financial statements of The Sheridan Group, Inc. and
Subsidiaries (together, the “Company”) have been prepared by us pursuant to the
rules of the Securities and Exchange Commission (the “SEC”). In our
opinion, the accompanying unaudited condensed consolidated financial statements
contain all adjustments necessary to present fairly, in all material respects,
our financial position as of March 31, 2010 and our results of operations
for the three month periods ended March 31, 2010 and 2009 and our cash
flows for the three month periods ended March 31, 2010 and 2009. All such
adjustments are deemed to be of a normal and recurring nature and all material
intercompany balances and transactions have been eliminated. The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America.
These
condensed consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and the notes thereto of The
Sheridan Group, Inc. and Subsidiaries included in our Annual Report on
Form 10–K for the year ended December 31, 2009. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. The results of operations for the three
months ended March 31, 2010 are not necessarily indicative of the results
to be expected for the full fiscal year.
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain
previously reported amounts have been reclassified to conform to the current
year presentation.
New
Accounting Standards
Effective
January 1, 2010, we adopted authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) related to the accounting and disclosure
requirements for transfers of financial assets. This guidance requires greater
transparency and additional disclosures for transfers of financial assets and
the entity’s continuing involvement with them and changes the requirements for
derecognizing financial assets. In addition, the guidance eliminates the concept
of a qualifying special-purpose entity. The adoption of this guidance did not
have a material impact on our financial position, results of operations or cash
flows.
In June
2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated by the FASB to require an
enterprise to perform an analysis to determine whether the entity’s variable
interest or interests give it a controlling interest in a variable interest
entity. The adoption of this guidance by us on January 1, 2010, did not have a
material impact on our financial position, results of operations or cash
flows.
2.
|
Inventory
|
Components
of net inventories at March 31, 2010 and December 31, 2009 were as
follows:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Work-in-process
|
$ | 6,716,928 | $ | 7,367,236 | ||||
Raw
materials (principally paper)
|
8,302,884 | 6,895,279 | ||||||
15,019,812 | 14,262,515 | |||||||
Excess
of current cost over LIFO inventory value
|
(272,884 | ) | (272,884 | ) | ||||
$ | 14,746,928 | $ | 13,989,631 |
3.
|
Notes
Payable and Working Capital
Facility
|
On August
21, 2003, we completed a private debt offering of 10.25% senior secured notes
totaling $105.0 million, priced to yield 10.50%, that mature August 15, 2011
(the “2003 Notes”). On May 25, 2004, we completed a private debt offering of
10.25% senior secured notes totaling $60.0 million, priced to yield 9.86%, that
mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms
to the 2003 Notes. During the year ended December 31, 2009, we paid $15.0
million, which included $0.5 million of accrued interest, to repurchase 2003
Notes and 2004 Notes with a face value of $22.1 million. The carrying value of
the 2003 Notes and the 2004 Notes was $142.9 million as of March 31, 2010 and
December 31, 2009, respectively.
The 2003
Notes and the 2004 Notes are collateralized by security interests in
substantially all of our assets, subject to permitted liens. The capital stock,
securities and other payment rights of our subsidiaries will constitute
collateral for the 2003 Notes and the 2004 Notes only to the extent that Rule
3-10 and Rule 3-16 of Regulation S-X under the Securities Act do not require
separate financial statements of a subsidiary to be filed with the SEC. Payment
obligations under the 2003 Notes and the 2004 Notes are guaranteed jointly and
severally, fully and unconditionally, by all of our subsidiaries. The Sheridan
Group, Inc. (the stand-alone parent company) owns 100% of the outstanding stock
of all of its subsidiaries and has no material independent assets or operations.
There are no restrictions on the ability of The Sheridan Group, Inc. (the
stand-alone parent company) to obtain funds by dividend, advance or loan from
its subsidiaries.
In an
event of default, the holders of at least 25% in aggregate principal amount of
the 2003 Notes and the 2004 Notes, may declare the principal, premium, if any,
and accrued and unpaid interest on the 2003 Notes and the 2004 Notes to be due
and payable immediately.
Concurrent
with the offering of the 2003 Notes, we entered into a working capital facility
agreement. The working capital facility was amended concurrent with the
offering of the 2004 Notes. Terms of the working capital facility allowed for
revolving debt of up to $30.0 million, including letters of credit commitments
of up to $5.0 million, subject to a borrowing base test. Borrowings under the
working capital facility bore interest at the bank’s base rate or the LIBOR rate
plus a margin of 1.75% at our option and matured in June 2009. Interest was
payable monthly in arrears. We agreed to pay an annual commitment fee on the
unused portion of the working capital facility at a rate of 0.35%. In addition,
we agreed to pay an annual fee of 1.875% on all letters of credit
outstanding.
On June
16, 2009, we executed an agreement to amend our working capital facility. Terms
of the working capital facility allow for revolving debt of up to $20.0 million,
including letters of credit commitments of up to $5.0 million, subject to a
borrowing base test. The interest rate on borrowings under the working capital
facility is a fluctuating rate equal to the highest of (a) the Federal Funds
Rate plus 0.50%, (b) the bank’s prime rate, or (c) the LIBOR rate plus a margin
of 3.75%. At our option, we can elect a LIBOR option for a specified
period. Any such borrowings bear interest at the specified LIBOR rate plus a
margin of 3.75%. We have agreed to pay an annual commitment fee on the unused
portion of the working capital facility at a rate of 0.50%. In addition, we have
agreed to pay an annual fee of 3.875% on all letters of credit outstanding. The
working capital facility is scheduled to mature on March 25, 2011. As of March
31, 2010, we had no borrowings outstanding under the working capital facility,
had unused amounts available of $18.1 million and had $1.4 million in
outstanding letters of credit.
Borrowings
under the working capital facility are collateralized by the assets of the
Company and our subsidiaries, subject to permitted liens. The working capital
facility contains various covenants including provisions that restrict our
ability to incur or prepay indebtedness, including the 2003 Notes and the 2004
Notes, or pay dividends. It also requires us to satisfy financial tests, such as
an interest coverage ratio and the maintenance of a minimum amount of earnings
before interest, taxes, depreciation and amortization (as defined in the working
capital facility agreement). We have complied with all of the restrictive
covenants as of March 31, 2010. In an event of default, all principal and
interest due under the working capital facility may become immediately due and
payable.
4.
|
Accrued
Expenses
|
Accrued
expenses as of March 31, 2010 and December 31, 2009 consisted of the
following:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Payroll
and related expenses
|
$ | 4,087,183 | $ | 3,639,665 | ||||
Profit
sharing accrual
|
259,333 | 476,151 | ||||||
Accrued
interest
|
1,853,395 | 5,516,678 | ||||||
Customer
prepayments
|
3,883,563 | 3,727,548 | ||||||
Self-insured
health and workers' compensation accrual
|
1,994,793 | 1,933,529 | ||||||
Other
|
1,935,114 | 2,405,305 | ||||||
$ | 14,013,381 | $ | 17,698,876 |
5.
|
Business
Segments
|
We are a
specialty printer in the United States offering a full range of printing and
value–added support services for the journal, magazine, book, catalog and
article reprint markets. Our business includes three operating segments
comprised of “Publications,” “Books” and “Specialty Catalogs.” The Publications
segment is focused on the production of short-run journals, medium-run journals
and specialty magazines and is comprised of the assets and operations of The
Sheridan Press, Dartmouth Printing, United Litho and Dartmouth Journal Services.
Our Books segment is focused on the production of short-run books and is
comprised of the assets and operations of Sheridan Books. The Specialty Catalogs
segment, which is comprised of the assets and operations of The Dingley Press,
is focused on catalog merchants that require run lengths between 50,000 and
8,500,000 copies.
The
accounting policies of the operating segments are the same as those described in
Note 2 “Summary of Significant Accounting Policies” in the consolidated
financial statements in our most recent Annual Report on Form 10–K for the
year ended December 31, 2009. The results of each segment include certain
allocations for general, administrative and other shared costs. However, certain
costs, such as corporate profit sharing and bonuses and the amortization of a
non–compete agreement with our former Chairman of the Board, are not allocated
to the segments. Our customer base resides in the continental United States and
our manufacturing, warehouse and office facilities are located throughout the
East Coast and Midwest.
We had no
customer that accounted for 10.0% or more of our net sales for the three month
periods ended March 31, 2010 and 2009.
The
following table provides segment information as of March 31, 2010 and 2009
and for the three month periods then ended:
Three
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Net
sales
|
||||||||
Publications
|
$ | 37,766 | $ | 43,388 | ||||
Specialty
catalogs
|
17,032 | 18,646 | ||||||
Books
|
13,502 | 14,942 | ||||||
Intersegment
sales elimination
|
(2 | ) | - | |||||
Consolidated
total
|
$ | 68,298 | $ | 76,976 | ||||
Operating
income (loss)
|
||||||||
Publications
|
$ | 3,704 | $ | 3,614 | ||||
Specialty
catalogs
|
788 | 36 | ||||||
Books
|
892 | 590 | ||||||
Corporate
expenses
|
(448 | ) | (145 | ) | ||||
Consolidated
total
|
$ | 4,936 | $ | 4,095 |
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Publications
|
$ | 143,074 | $ | 146,047 | ||||
Specialty
catalogs
|
54,049 | 54,186 | ||||||
Books
|
45,963 | 46,173 | ||||||
Corporate
|
2,541 | 2,594 | ||||||
Consolidated
total
|
$ | 245,627 | $ | 249,000 |
A
reconciliation of total segment operating income to consolidated income (loss)
before income taxes is as follows:
Three
months ended March 31,
|
||||||||
(in
thousands)
|
2010
|
2009
|
||||||
Total
operating income (as shown above)
|
$ | 4,936 | $ | 4,095 | ||||
Interest
expense
|
(3,949 | ) | (4,656 | ) | ||||
Interest
income
|
13 | 13 | ||||||
Other,
net
|
37 | (64 | ) | |||||
Income
(loss) before income taxes
|
$ | 1,037 | $ | (612 | ) |
6.
|
Income
Taxes
|
We
recorded income tax expense during the three months ended March 31, 2010 based
on a forecasted effective income tax rate of approximately 27%. Certain
adjustments for items discrete to the three months ended March 31, 2010 were
recognized which exceeded the tax expense recorded during the period, resulting
in a net income tax benefit of approximately $0.5 million. The most significant
discrete item was a change in the apportionment rules which will result in a
decrease in the income taxes we pay to the state of Maine. We recorded an income
tax benefit during the three months ended March 31, 2009 based on a forecasted
effective income tax rate of approximately 15%. The forecasted rate for 2009 was
lower than 2010 due to the impact of the permanent differences on a
significantly lower income before income taxes in 2009. Certain adjustments for
items discrete to the three months ended March 31, 2009 were recognized which
exceeded the tax benefit recorded during the period, resulting in net income tax
expense of approximately $0.1 million.
We file
consolidated tax returns with TSG Holdings Corp. (“Parent”), our parent company,
for Federal and certain state jurisdictions. We classify these current tax
liabilities as “Due to parent, net” on the consolidated balance
sheet.
7.
|
Fair
Value Measurements
|
Certain
of our assets and liabilities must be recorded at fair value. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (an
exit price). Accounting guidance outlines a valuation framework and creates a
fair value hierarchy in order to increase the consistency and comparability of
fair value measurements and the related disclosures and prioritizes the inputs
used in measuring fair value as follows:
Level 1:
Observable inputs such as quoted prices in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either
directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data which require the
reporting entity to develop its own assumptions.
Our
financial instruments consist of long-term investments in marketable securities
(held in trust for payment of non-qualified deferred compensation) and long-term
debt. We are permitted to measure certain financial assets and financial
liabilities at fair value that were not previously required to be measured at
fair value. We have elected not to measure any financial assets or financial
liabilities, including long-term debt, at fair value which were not previously
required to be measured at fair value. We classify the investments in marketable
securities within level 1 of the hierarchy since quoted market prices are
available in active markets.
8.
|
Related
Party Transactions
|
During
the first quarter of 2009, we paid a dividend in the aggregate amount of $9.1
million and made a loan in the principal amount of $2.0 million to our
Parent. The loan had a maturity date of January 4, 2012 and accrued
interest at the rate of 1.36% per year payable in cash or in kind on February 15
and August 15 each year. Our Parent used the entire cash proceeds of the
dividend and loan to purchase capital stock issued by our Parent (the “Stock
Purchase”) from Participatiemaatschappij Giraffe B.V. (“Giraffe”) and to pay
related expenses in connection therewith. In connection with the Stock Purchase,
Euradius Acquisition Co., a wholly owned subsidiary of our Parent,
sold all of the outstanding stock of Euradius International Dutch Bidco B.V.
(“Euradius”) to Giraffe. This resulted in our Parent fully divesting its
interest in Euradius, which was our Parent's only investment other than The
Sheridan Group, Inc. Neither Euradius nor its subsidiaries were guarantors
of the 2003 or 2004 Notes. Neither Euradius nor its subsidiaries were
subsidiaries of ours and their financial results were not included in our
consolidated financial statements.
The loan
owed by our Parent was satisfied by being netted against income tax obligations
we owed to our Parent and is presented within “Due to parent, net” in the
consolidated balance sheet.
We have a
10–year management agreement with our principal equity sponsors, expiring in
August of 2013, under which an annual management fee is payable equal to
the greater of $500,000 or 2% of EBITDA (as defined in the management agreement)
plus reasonable out–of–pocket expenses. We expensed $0.2 million in such
fees for both of the three month periods ended March 31, 2010 and
2009.
9.
|
Contingencies
|
We are
party to legal actions as a result of various claims arising in the normal
course of business. We believe that the disposition of these matters will not
have a material adverse effect on the financial condition, results of operations
or liquidity of the Company.
10.
|
Restructuring
and Other Exit Costs
|
In
January 2009, we announced our plan to consolidate some administrative and
production operations at our DPC facility in Hanover, New Hampshire.
Approximately 20 positions at our ULI facility in Ashburn, Virginia were
eliminated as a result of this action. We recorded $0.1 million of restructuring
costs during each of the first quarters of 2010 and 2009. The costs relate
primarily to guaranteed severance payments and employee health benefits. We
expect to record a minimal amount of additional restructuring costs during 2010
in connection with this consolidation.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The
following discussion should be read in conjunction with, and is qualified in its
entirety by reference to, our historical consolidated financial statements and
related notes included in the Annual Report on Form 10–K for the fiscal
year ended December 31, 2009. References to the “Company” refer to The
Sheridan Group, Inc. The terms “we,” “us,” “our” and other similar terms
refer to the consolidated businesses of the Company and all of its
subsidiaries.
Forward–Looking
Statements
This
Quarterly Report on Form 10–Q includes “forward–looking
statements.” Forward–looking statements are those that do not relate
solely to historical fact. They include, but are not limited to, any statement
that may predict, forecast, indicate or imply future results, performance,
achievements or events. They may contain words such as “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,”
“plan,” “predict,” “project,” “should,” “will,” “would” or words or phrases of
similar meaning. They may relate to, among other things:
|
·
|
our
liquidity and capital resources, including our ability to refinance our
debt;
|
|
·
|
competitive
pressures and trends in the printing
industry;
|
|
·
|
prevailing
interest rates;
|
|
·
|
legal
proceedings and regulatory matters;
|
|
·
|
general
economic conditions;
|
|
·
|
the
liquidity and capital resources of our customers and potential
customers;
|
|
·
|
predictions
of net sales, expenses or other financial
items;
|
|
·
|
future
operations, financial condition and prospects;
and
|
|
·
|
our
plans, objectives, strategies and expectations for the
future.
|
Forward–looking
statements involve risks and uncertainties that may cause actual results to
differ materially from the forward–looking statements, might cause us to modify
our plans or objectives, may affect our ability to pay timely amounts due
under our outstanding notes and/or may affect the value of our outstanding
notes. New risk factors can emerge from time to time. It is not possible for us
to predict all of these risks, nor can we assess the extent to which any factor,
or combination of factors, may cause actual results to differ from those
contained in forward–looking statements. Given these risks and uncertainties,
actual future results may be materially different from what we plan or
expect. We caution you that any forward–looking statement reflects only our
belief at the time the statement is made. We will not update these
forward–looking statements even if our situation changes in the
future.
Overview
Company
Background
We are a
leading specialty printer offering a full range of printing and value-added
support services for the journal, catalog, magazine, book and
article reprint markets. We provide a wide range of printing services and
value-added support services, such as digital proofing, preflight checking,
offshore composition, copy editing, subscriber services, mail sortation,
distribution and back issue fulfillment. We utilize a decentralized management
structure, which provides our customers with access to the resources of a large
company, while maintaining the high level of service and flexibility of a
smaller company.
The
Notes
On
August 21, 2003, we completed a private debt offering of 10.25% senior
secured notes totaling $105 million, priced to yield 10.50%, that mature
August 15, 2011 (the “2003 Notes”). On May 25, 2004, we completed a
private debt offering of 10.25% senior secured notes totaling $60 million,
priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The
2004 Notes have identical terms to the 2003 Notes.
The 2003
Notes and the 2004 Notes are collateralized by security interests in
substantially all of the assets of the Company and our subsidiaries, subject to
permitted liens. The capital stock, securities and other payment rights of the
Company’s subsidiaries will constitute collateral for the 2003 Notes and the
2004 Notes only to the extent that Rule 3-10 and Rule 3-16 of
Regulation S-X under the Securities Act do not require separate financial
statements of a subsidiary to be filed with the SEC. Payment obligations under
the 2003 Notes and the 2004 Notes are guaranteed jointly and severally, fully
and unconditionally, by all of the Company’s subsidiaries. The Sheridan
Group, Inc. owns 100% of the outstanding stock of all of our subsidiaries
and has no material independent assets or operations. There are no restrictions
on the ability of The Sheridan Group, Inc. to obtain funds by dividend,
advance or loan from its subsidiaries.
In the
event of default, the holders of at least 25% in aggregate principal amount of
the 2003 Notes and the 2004 Notes, may declare the principal, premium, if
any, and accrued and unpaid interest on the 2003 Notes and the 2004 Notes to be
due and payable immediately.
Critical
Accounting Estimates
In the
ordinary course of business, we make a number of estimates and assumptions
relating to the reporting of results of operations and financial position in the
preparation of financial statements in conformity with generally accepted
accounting principles. We believe the estimates, assumptions and judgments
described in the section “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Estimates” included in
our most recent Annual Report on Form 10–K for the year ended
December 31, 2009, have the greatest potential impact on our financial
statements, so we consider these to be our critical accounting policies. These
policies include our accounting for allowances for doubtful accounts, impairment
of goodwill and other identifiable intangibles, income taxes and self–insurance.
These policies require us to exercise judgments that are often difficult,
subjective and complex due to the necessity of estimating the effect of matters
that are inherently uncertain. Actual results could differ significantly from
those estimates under different assumptions and conditions. We believe the
consistent application of these policies enables us to provide readers of our
financial statements with useful and reliable information about our operating
results and financial condition.
Results
of Operations
Our
business includes three reportable segments comprised of “Publications,”
“Specialty Catalogs” and “Books.” The Publications business segment is focused
on the production of short-run journals, medium-run journals and specialty
magazines and is comprised of the assets and operations of The Sheridan Press,
Dartmouth Printing, United Litho and Dartmouth Journal Services. Our Books
segment is focused on the production of short-run books and is comprised of the
assets and operations of Sheridan Books. The Specialty Catalogs segment, which
is comprised of the assets and operations of The Dingley Press, is focused on
catalog merchants that require run lengths between 50,000 and 8,500,000
copies.
The
following table sets forth, for the periods indicated, information derived from
our condensed consolidated statements of operations, the relative percentage
that those amounts represent to total net sales (unless otherwise indicated),
and the percentage change in those amounts from period to period. This table
should be read in conjunction with the commentary that follows
it.
Percent
of revenue
|
||||||||||||||||||||||||
Three
months ended March 31,
|
Increase
(decrease)
|
Three
months ended March 31,
|
||||||||||||||||||||||
(in
thousands)
|
2010
|
2009
|
Dollars
|
Percentage
|
2010
|
2009
|
||||||||||||||||||
Net
sales
|
||||||||||||||||||||||||
Publications
|
$ | 37,766 | $ | 43,388 | $ | (5,622 | ) | (13.0 | %) | 55.3 | % | 56.4 | % | |||||||||||
Specialty
catalogs
|
17,032 | 18,646 | (1,614 | ) | (8.7 | %) | 24.9 | % | 24.2 | % | ||||||||||||||
Books
|
13,502 | 14,942 | (1,440 | ) | (9.6 | %) | 19.8 | % | 19.4 | % | ||||||||||||||
Intersegment
sales elimination
|
(2 | ) | - | (2 | ) |
nm
|
- | - | ||||||||||||||||
Total
net sales
|
68,298 | 76,976 | (8,678 | ) | (11.3 | %) | 100.0 | % | 100.0 | % | ||||||||||||||
Cost
of sales
|
53,524 | 63,049 | (9,525 | ) | (15.1 | %) | 78.4 | % | 81.9 | % | ||||||||||||||
Gross
profit
|
14,774 | 13,927 | 847 | 6.1 | % | 21.6 | % | 18.1 | % | |||||||||||||||
Selling
and administrative expenses
|
9,383 | 9,304 | 79 | 0.8 | % | 13.7 | % | 12.1 | % | |||||||||||||||
Loss
(gain) on disposition of fixed assets
|
33 | 7 | 26 | nm | 0.1 | % | - | |||||||||||||||||
Restructuring
costs
|
72 | 148 | (76 | ) | (51.4 | %) | 0.1 | % | 0.2 | % | ||||||||||||||
Amortization
of intangibles
|
350 | 373 | (23 | ) | (6.2 | %) | 0.5 | % | 0.5 | % | ||||||||||||||
Total
operating expenses
|
9,838 | 9,832 | 6 | 0.1 | % | 14.4 | % | 12.8 | % | |||||||||||||||
Operating
income
|
||||||||||||||||||||||||
Publications
|
3,704 | 3,614 | 90 | 2.5 | % | 9.8 | % | 8.3 | % | |||||||||||||||
Specialty
catalogs
|
788 | 36 | 752 | nm | 4.6 | % | 0.2 | % | ||||||||||||||||
Books
|
892 | 590 | 302 | 51.2 | % | 6.6 | % | 4.0 | % | |||||||||||||||
Corporate
expenses
|
(448 | ) | (145 | ) | (303 | ) | nm |
nm
|
nm
|
|||||||||||||||
Total
operating income
|
4,936 | 4,095 | 841 | 20.5 | % | 7.2 | % | 5.3 | % | |||||||||||||||
Other
(income) expense
|
||||||||||||||||||||||||
Interest
expense
|
3,949 | 4,656 | (707 | ) | (15.2 | %) | 5.8 | % | 6.0 | % | ||||||||||||||
Interest
income
|
(13 | ) | (13 | ) | - | - | - | - | ||||||||||||||||
Other,
net
|
(37 | ) | 64 | (101 | ) |
nm
|
(0.1 | %) | 0.1 | % | ||||||||||||||
Total
other expense
|
3,899 | 4,707 | (808 | ) | (17.2 | %) | 5.7 | % | 6.1 | % | ||||||||||||||
Income
(loss) before income taxes
|
1,037 | (612 | ) | 1,649 |
nm
|
1.5 | % | (0.8 | %) | |||||||||||||||
Income
tax (benefit) provision
|
(509 | ) | 131 | (640 | ) |
nm
|
(0.7 | %) | 0.2 | % | ||||||||||||||
Net
income (loss)
|
$ | 1,546 | $ | (743 | ) | $ | 2,289 |
nm
|
2.2 | % | (1.0 | %) |
_____________________
nm - not
meaningful
Commentary:
Net sales
for the first quarter of 2010 decreased $8.7 million or 11.3% versus the first
quarter of 2009, due primarily to reductions in print run lengths resulting from
the economic recession as well as the loss of work from certain customers due to
pricing considerations. Slightly more than half the dollar sales decline is due
to decreases in shipping and paper costs, which are passed on to our customers,
due principally to lower volumes being produced by us. Net sales for the
Publications segment decreased $5.6 million or 13.0% in the first quarter of
2010 compared to the same period a year ago due primarily to: (i) sales declines
in magazines as reductions in print advertising have led our customers to reduce
run lengths, page counts and frequency of publication (ii) loss of work
from certain customers due to pricing considerations and (iii) the conversion
from offset to digital printing for journals as publishers seek cost-effective
methods for delivering content. Decreases in shipping and paper costs, which are
passed on to our customers, accounted for more than 50% of the dollar sales
decline in Publications sales. Net sales for the Specialty Catalogs segment
decreased $1.6 million or 8.7% in the first quarter of 2010 compared with the
same period a year ago due primarily to the impact of lower paper costs, which
accounted for approximately 75% of the sales dollar decline coupled
with a reduction in print run lengths for catalogs reflecting reduced consumer
spending . Net sales for the Books segment decreased $1.5 million or 9.6%
in the first quarter of 2010 compared with the same period a year ago due
primarily to fewer titles being produced due to the economic recession as well
as the loss of work from certain customers due to pricing considerations. Lower
freight and paper costs accounted for about 40% of the sales decrease in
Books.
Gross
profit for the first quarter of 2010 increased by $0.8 million or 6.1% compared
to the first quarter of 2009. Gross margin of 21.6% of net sales for the first
quarter of 2010 reflected a 3.5 margin point increase versus the first quarter
of 2009. We were able to increase our gross profit and gross margin due
principally to reductions in staffing and benefits costs coupled with lower
pass through costs of freight and paper. Additionally, higher
revenue from recyclable materials as well as lower utility, variable and
discretionary costs helped to more than offset the decrease in
sales.
Operating
income of $4.9 million for the first quarter of 2010 represented an increase of
$0.8 million or 20.5% as compared to operating income of $4.1 million for the
first quarter of 2009. Reductions in staffing and benefits, including lower
healthcare costs, coupled with higher revenue from recyclable materials more
than offset the impact of lower sales and an increase in the bad debt
provision. Operating income increased in each of our segments in the
first quarter of 2010 compared to the first quarter of 2009 despite lower
sales. Publications operating income increased slightly in the first
quarter of 2010 compared to the first quarter of 2009 due principally to lower
freight, material, staffing and healthcare costs, partially offset by an
increase in bad debt expense to recognize potential risk associated with
specific customers. Increases in revenue from recyclable materials coupled with
lower operating lease costs also contributed to the improvement. Specialty
Catalogs operating income improved dramatically in the first quarter of 2010
versus the first quarter a year ago due in large part to lower staffing costs
and reductions in healthcare costs. Lower utility costs and
increased revenue from recyclable materials helped to offset the impact of the
lower sales and increases in other material costs. The Books segment increased
operating income by $0.3 million or 51% in the first quarter of 2010 compared to
the first quarter of 2009 due principally to lower people-related costs and
increased revenue from recyclable materials.
Other
expense of $3.9 million for the first quarter of 2010 represented a $0.8 million
decrease or 17.2% as compared to other expense of $4.7 million for the first
quarter of 2009. This decrease was due primarily to the $0.7 million decrease in
interest expense which was the result of the notes payable repurchases that
occurred during the second and third quarters of 2009.
Income
before income taxes of $1.0 million for the first quarter of 2010 represented a
$1.6 million increase as compared to the same period last year. The increase was
due primarily to the lower expenses which more than offset the decrease in
sales, as mentioned previously.
We
recorded income tax expense during the three months ended March 31, 2010 based
on a forecasted effective income tax rate of approximately 27%. Certain
adjustments for items discrete to the three months ended March 31, 2010 were
recognized which exceeded the tax expense recorded during the period, resulting
in a net income tax benefit of approximately $0.5 million. The most significant
discrete item relates to a change in the apportionment rules which will result
in a decrease in the income taxes we pay to the state of Maine. We recorded an
income tax benefit during the three months ended March 31, 2009 based on a
forecasted effective income tax rate of approximately 15%. The forecasted rate
for 2009 was lower than 2010 due to the impact of the permanent differences on a
significantly lower income before income taxes in 2009. Certain adjustments for
items discrete to the three months ended March 31, 2009 were recognized which
exceeded the tax benefit recorded during the period, resulting in net income tax
expense of approximately $0.1 million.
Net
income of $1.5 million for the first quarter of 2010 represented a $2.2 million
increase as compared to a net loss of $0.7 million for the first quarter of 2009
due to the factors mentioned previously.
Liquidity
and Capital Resources
We had
cash of $4.5 million as of March 31, 2010 compared to $4.1 million as of
December 31, 2009. During the first three months of 2010, we utilized cash on
hand to fund operations, make investments in new plant and equipment and make
the semi-annual interest payments on the senior secured notes.
Our
principal sources of liquidity are expected to be cash flow generated from
operations and borrowings under our working capital facility. Our principal uses
of cash are expected to be to meet debt service requirements, finance our
capital expenditures and provide working capital. We may from time to time seek
to purchase or retire our outstanding debt, including the 2003 Notes and 2004
Notes, through cash purchases, in open market purchases, privately negotiated
transactions or otherwise. Such repurchases, if any, will depend on prevailing
market conditions, our liquidity requirements, contractual restrictions and
other factors. The amounts involved may be material. Additionally, we may from
time to time fund cash distributions to our Parent, as we did in the first
quarter of 2009, in accordance with the limitations outlined in our bond
indenture and our working capital facility. We estimate that our capital
expenditures for the remainder of 2010 will total about $8.4 million. Based
on our current level of operations, we believe that our cash flow from
operations, available cash and available borrowings under our working capital
facility will be adequate to meet our future short-term liquidity needs. Our
2003 Notes and 2004 Notes mature on August 15, 2011. We do not have sufficient
funds, nor do we anticipate generating sufficient funds from operations, to
repay these notes. We intend to refinance these notes prior to their maturity
but we cannot assure you that we will be able to do so. Our future operating
performance and ability to extend or refinance our indebtedness will be
dependent on future economic conditions and financial, business and other
factors that may be beyond our control.
Operating
Activities
Net cash
provided by operating activities was $1.5 million for the first three
months of 2010 compared to cash used in operating activities of
$4.0 million for the first three months of 2009. This $5.5 million
improvement was primarily due to favorable changes in working capital and other
assets and liabilities that totaled $3.9 million and an increase in net income
of $2.3 million which was partially offset by net non-cash benefits of $0.7
million.
Investing
Activities
Net cash
used in investing activities was $1.1 million for the first three months of 2010
compared to $4.7 million for the first three months of 2009. This
$3.6 million decrease in cash used was primarily the result of the absence
in the first quarter of 2010 of the $2.0 million we advanced to our Parent
during the same period in 2009, the majority of which was used to repurchase its
capital stock resulting in the complete divestiture of its interest in Euradius
as well as $1.5 million of lower capital spending in the first quarter of 2010
as compared to the same period last year.
Financing
Activities
There was
no cash used in financing activities for the first three months of 2010 as
compared to $7.2 million for the first three months of 2009. The $7.2 million
used in the first quarter of 2009 was primarily the result of the $9.1 million
dividend paid to our Parent to enable it to repurchase its capital stock
resulting in the complete divestiture of its interest in Euradius partially
offset by the $1.9 million of net borrowings on our working capital
facility.
Indebtedness
As of
March 31, 2010, we had total indebtedness of $142.9 million comprised
entirely of amounts due under the 2003 Notes and the 2004 Notes, all with a
scheduled maturity of August 2011. We have significant interest payments
due on the outstanding notes as well as interest payments due on any borrowings
under our working capital facility, under which there were no amounts
outstanding as of March 31, 2010. Total cash interest payments related to our
working capital facility and the 2003 Notes and the 2004 Notes are expected to
be in excess of $14.6 million on an annual basis.
Our
working capital facility provides for available credit of up to $20.0 million,
subject to a borrowing base test, that we may repay and reborrow until the March
25, 2011 maturity date. Actual available credit under the working capital
facility fluctuates because it depends on inventory and accounts receivable
values that fluctuate and is subject to discretionary reserves and revaluation
adjustments that may be imposed by the agent from time to time and other
limitations. Our working capital facility contains various covenants which limit
our discretion in the operation of our businesses. Among other things, our
working capital facility restricts our ability to prepay other indebtedness,
including the 2003 Notes and the 2004 Notes, incur other indebtedness or pay
dividends. Our working capital facility prohibits us from repurchasing the
2003 Notes and the 2004 Notes unless certain conditions are met, including that
the amount expended for note repurchases after May 25, 2009 may not exceed $20.0
million in the aggregate, and that immediately after each note repurchase, there
must be at least $5.0 million available under the working capital facility. The
working capital facility also requires us to satisfy an interest coverage ratio
of at least 1.80 to 1.00 and to maintain EBITDA (as defined in and calculated
pursuant to our working capital facility, such EBITDA being referred to
hereinafter as “WCF EBITDA”) of at least $33.0 million, both calculated for the
period consisting of the four preceding consecutive fiscal quarters. Failure to
satisfy the financial tests in our working capital facility would constitute a
default under our working capital facility. For the twelve months ended March
31, 2010, our interest coverage ratio was 2.77 to 1.00 and our WCF EBITDA for
purposes of our working capital facility was $42.9 million. As of March 31,
2010, we had no borrowings outstanding under the working capital facility, had
unused amounts available of $18.1 million and had $1.4 million in outstanding
letters of credit.
WCF
EBITDA, as calculated pursuant to the working capital facility, generally
consists of net income (loss) before interest expense, income taxes,
depreciation, amortization, restructuring charges and certain other non-cash
items. WCF EBITDA is used below for purposes of calculating our compliance with
the covenants in our working capital facility and to evaluate our operating
performance and determine management incentive payments. WCF EBITDA is not an
indicator of financial performance or liquidity under generally accepted
accounting principles and may not be comparable to similarly captioned
information reported by other companies. In addition, it should not be
considered as an alternative to, or more meaningful than, income before income
taxes, cash flows from operating activities or other traditional indicators of
operating performance.
The
following table provides a reconciliation of WCF EBITDA to cash flows from
operating activities for the three month periods ended March 31, 2010 and 2009
(in thousands). The financial covenants under our working capital facility, as
noted above, are based upon a rolling twelve months. Therefore, WCF EBITDA for
the twelve months ended March 31, 2010 includes the amounts presented in the
following table as well as the amounts from the second, third and fourth
quarters of 2009.
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
Net
cash provided by (used in) operating activities
|
$ | 1,527 | $ | (4,003 | ) | |||
Accounts
receivable
|
161 | 910 | ||||||
Inventories
|
844 | (1,346 | ) | |||||
Other
current assets
|
(6 | ) | 661 | |||||
Refundable
income taxes
|
(162 | ) | 181 | |||||
Other
assets
|
(102 | ) | (405 | ) | ||||
Accounts
payable
|
431 | 2,199 | ||||||
Accrued
expenses
|
22 | 1,708 | ||||||
Accrued
interest
|
3,663 | 4,246 | ||||||
Income
taxes payable
|
(440 | ) | - | |||||
Other
liabilities
|
256 | 423 | ||||||
Provision
for doubtful accounts
|
(662 | ) | (40 | ) | ||||
Deferred
income tax benefit (provision)
|
1,080 | (229 | ) | |||||
Provision
for inventory realizability and LIFO value
|
(87 | ) | (12 | ) | ||||
Loss
on disposition of fixed assets, net
|
(33 | ) | (7 | ) | ||||
Income
tax (benefit) provision
|
(509 | ) | 131 | |||||
Cash
interest expense
|
3,705 | 4,363 | ||||||
Management
fees
|
198 | 180 | ||||||
Non
cash adjustments:
|
||||||||
Increase
in market value of investments
|
(12 | ) | - | |||||
Amortization
of prepaid lease costs
|
1 | 21 | ||||||
Loss
on disposition of fixed assets
|
46 | 7 | ||||||
Interest
income
|
(13 | ) | - | |||||
Restructuring
costs
|
72 | 148 | ||||||
WCF
EBITDA
|
$ | 9,980 | $ | 9,136 |
The
indenture governing the 2003 Notes and the 2004 Notes also contains various
restrictive covenants. It, among other things: (i) limits our ability and
the ability of our subsidiaries to incur additional indebtedness, issue shares
of preferred stock, incur liens and enter into certain transactions with
affiliates; (ii) places restrictions on our ability to pay dividends or
make certain other restricted payments; and (iii) places restrictions on
our ability and the ability of our subsidiaries to merge or consolidate with any
other person or sell, assign, transfer, convey or otherwise dispose of all or
substantially all of our assets.
Contractual
Obligations
The
following table summarizes the Company’s future minimum non-cancellable
contractual obligations as of March 31, 2010:
Remaining Payments Due by
Period
|
||||||||||||||||||||
2011
to
|
2013
to
|
2015
and
|
||||||||||||||||||
Total
|
2010
|
2012
|
2014
|
beyond
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Long
term debt, including interest (1)
|
$ | 164,872 | $ | 7,324 | $ | 157,548 | $ | - | $ | - | ||||||||||
Operating
leases
|
6,416 | 2,522 | 3,671 | 222 | 1 | |||||||||||||||
Purchase
obligations (2)
|
1,939 | 1,825 | 111 | 3 | - | |||||||||||||||
Other
long-term obligations (3)
|
428 | 113 | 302 | 13 | - | |||||||||||||||
Total
(4)
|
$ | 173,655 | $ | 11,784 | $ | 161,632 | $ | 238 | $ | 1 |
_____________________
(1)
|
Includes
the $142.9 million aggregate principal amount due on the 2003 Notes and
the 2004 Notes plus interest at 10.25% payable semi-annually through
August 15, 2011.
|
(2)
|
Represents
payments due under purchase agreements for consumable raw materials and
commitments for construction projects and equipment
acquisitions.
|
(3)
|
Represents
payments due under a non-compete arrangement with our former Chairman of
the Board.
|
(4)
|
At
March 31, 2010, we have recognized approximately $1.8 million of
liabilities for unrecognized tax benefits. There is a high degree of
uncertainty with respect to the timing of future cash outflows associated
with our unrecognized tax benefits because they are dependent on various
matters including, among others, tax examinations, changes in tax laws or
interpretation of those laws and expiration of statutes of limitation. Due
to these uncertainties, our unrecognized tax benefits have been excluded
from the contractual obligations table
above.
|
Off
Balance Sheet Arrangements
At
March 31, 2010 and December 31, 2009, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off–balance
sheet arrangements or other contractually narrow or limited purposes. We
therefore are not materially exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in such
relationships.
New
Accounting Standards
Effective
January 1, 2010, we adopted authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) related to the accounting and disclosure
requirements for transfers of financial assets. This guidance requires greater
transparency and additional disclosures for transfers of financial assets and
the entity’s continuing involvement with them and changes the requirements for
derecognizing financial assets. In addition, the guidance eliminates the concept
of a qualifying special-purpose entity. The adoption of this guidance did not
have a material impact on our financial position, results of operations or cash
flows.
In June
2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated by the FASB to require an
enterprise to perform an analysis to determine whether the entity’s variable
interest or interests give it a controlling interest in a variable interest
entity. The adoption of this guidance by us on January 1, 2010, did not have a
material impact on our financial position, results of operations or cash
flows.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Market
risk represents the risk of changes in value of a financial instrument,
derivative or non–derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in results of our operations and cash flows. In the ordinary course
of business, we are exposed to foreign currency and interest rate risks. These
risks primarily relate to the purchase of products and services from foreign
suppliers and changes in interest rates on our long–term debt.
Foreign
Exchange Rate Market Risk
We
consider the U.S. dollar to be the functional currency for all of our entities.
All of our net sales and virtually all of our expenses in the three months ended
March 31, 2010 and 2009 were denominated in U.S. dollars. Therefore,
foreign currency fluctuations had a negligible impact on our financial results
in those periods.
Interest
Rate Market Risk
We could
be exposed to changes in interest rates. Our working capital facility is
variable rate debt. Interest rate changes, therefore, generally do not affect
the market value of such debt but do impact the amount of our interest payments
and, therefore, our future earnings and cash flows, assuming other factors are
held constant. We did not have any borrowings under our working capital facility
during the first three months of 2010. All of our other debt carries fixed
interest rates.
Item 4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our principal executive officer
(“CEO”) and principal financial officer (“CFO”), of the design and operation of
our disclosure controls and procedures (as defined in
Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act
of 1934 (the “Exchange Act”)). Based on this evaluation, the CEO and CFO
concluded that our disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by us in reports
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that information required to be
disclosed in the reports we file or submit under the Exchange Act is accumulated
and communicated to our management, including the CEO and CFO, to allow timely
decisions regarding required disclosures.
Changes
in Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART II — OTHER INFORMATION
Item 1. Legal
Proceedings
From time
to time, we are party to various legal actions in the ordinary course of our
business. In our opinion, these matters are not expected to have a material
adverse effect on our business, financial condition or results of
operations.
Item 1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2009, which
could materially affect our business, financial condition or future results. The
risks described in our Annual Report on Form 10-K are not the only risks
facing us. Additional risk and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Reserved
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits
Certification
of Chief Executive Officer pursuant to Rule 13a–14(a) or
15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes–Oxley Act of
2002.
|
Certification
of Chief Financial Officer pursuant to Rule 13a–14(a) or
15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes–Oxley Act of
2002.
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes–Oxley Act of 2002, executed by John A.
Saxton, President and Chief Executive Officer of The Sheridan
Group, Inc. and Robert M. Jakobe, Chief Financial Officer of The
Sheridan
Group, Inc.
|
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.
The Sheridan Group, Inc.
|
|||
Registrant
|
|||
By:
|
/s/ John A. Saxton
|
||
John
A. Saxton
|
|||
President
and Chief Executive Officer
|
Date: May
12, 2010
18