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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

 

¨ 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: 001-37598

 

 

Multi Packaging Solutions International Limited

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Bermuda   98-1249740

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

Clarendon House, 2 Church Street

Hamilton, Bermuda

  HM 11
(Address of Principal Executive Offices)   (Zip Code)

(441) 295-5950

(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 Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 11, 2016, there were 77,452,946 common shares, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED AND SUBSIDIARIES

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2015

INDEX

 

PART I - FINANCIAL INFORMATION

     1   

Item 1.

 

Financial Statements (Unaudited)

     1   
 

Condensed Consolidated Balance Sheets

     1   
 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

     3   
 

Condensed Consolidated Statement of Shareholders’ Equity

     4   
 

Condensed Consolidated Statements of Cash Flows

     5   
 

Notes to the Condensed Consolidated Financial Statements

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     39   

Item 4.

 

Controls and Procedures

     39   

PART II - OTHER INFORMATION

     40   

Item 1.

 

Legal Proceedings

     40   

Item 1A.

 

Risk Factors

     40   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3.

 

Defaults Upon Senior Securities

     41   

Item 4.

 

Mine Safety Disclosures

     41   

Item 5.

 

Other Information

     41   

Item 6.

 

Exhibits

     42   
 

Signatures

     43   
 

Index to Exhibits and Exhibits

  


Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

PART 1- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ASSETS

 

     December 31,
2015
    June 30,
2015
 
     (unaudited)        

Current assets

    

Cash and cash equivalents

   $ 59,045      $ 55,675   

Accounts receivable, net

     248,185        240,110   

Inventories

     163,849        171,836   

Prepaid expenses and other current assets

     28,180        26,892   

Deferred income taxes

     7,758        8,454   
  

 

 

   

 

 

 

Total current assets

     507,017        502,967   
  

 

 

   

 

 

 

Property, plant and equipment

    

Land

     55,792        58,316   

Buildings and improvements

     57,793        58,368   

Machinery and equipment

     375,518        373,639   

Furniture and fixtures

     14,784        13,056   

Construction in progress

     10,582        12,255   
  

 

 

   

 

 

 

Total

     514,469        515,634   

Less: Accumulated depreciation

     (112,331     (86,691
  

 

 

   

 

 

 

Total property, plant and equipment, net

     402,138        428,943   
  

 

 

   

 

 

 

Other assets

    

Intangible assets, net

     386,280        419,733   

Goodwill

     468,144        474,901   

Deferred financing costs, net

     3,191        4,311   

Deferred income taxes

     14,322        14,568   

Other assets

     32,681        36,702   
  

 

 

   

 

 

 

Total assets

   $ 1,813,773      $ 1,882,125   
  

 

 

   

 

 

 

 

1


Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

PART 1- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

     December 31,
2015
    June 30,
2015
 
     (unaudited)        

Current liabilities

    

Accounts payable

   $ 168,529      $ 176,431   

Payroll and benefits

     38,469        51,606   

Other current liabilities

     43,590        46,097   

Short-term foreign borrowings

     4,501        3,488   

Current portion of long-term debt

     10,167        11,740   

Income taxes payable

     5,308        6,022   
  

 

 

   

 

 

 

Total current liabilities

     270,564        295,384   

Long-term debt, less current portion

     948,220        1,173,161   

Deferred income taxes

     86,245        93,061   

Other long-term liabilities

     31,439        31,829   
  

 

 

   

 

 

 

Total liabilities

     1,336,468        1,593,435   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity

    

Contributed Capital, $1.00 par value, 1,000,000,000 shares authorized, 77,448,304 and 61,939,432 issued and outstanding at December 31, 2015 and June 30, 2015, respectively

     77,448        61,939   

Paid in capital

     470,510        278,695   

Accumulated deficit

     (40,275     (45,365

Accumulated other comprehensive loss

     (33,439     (13,287
  

 

 

   

 

 

 

Total Multi Packaging Solutions International Limited shareholders’ equity

     474,244        281,982   

Noncontrolling interest

     3,061        6,708   
  

 

 

   

 

 

 

Total shareholders’ equity

     477,305        288,690   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,813,773      $ 1,882,125   
  

 

 

   

 

 

 

 

2


Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share amounts)

(unaudited)

 

     Three Months Ended
December 31,
    Six Months Ended
December 31,
 
     2015     2014     2015     2014  

Net sales

   $ 429,357      $ 404,827      $ 888,408      $ 798,909   

Cost of goods sold

     333,632        322,493        693,342        634,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     95,725        82,334        195,066        164,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

        

Selling, general and administrative expenses

     59,306        61,955        117,890        116,983   

Stock based and deferred compensation expense

     27,232        455        26,960        886   

Transaction related expenses

     2,064        3,463        2,414        4,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expenses

     88,602        65,873        147,264        122,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,123        16,461        47,802        42,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

     100        (1,776     (3,535     1,543   

Debt extinguishment charges

     (3,867     —          (3,867     —     

Interest expense

     (16,016     (17,871     (34,745     (36,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (19,783     (19,647     (42,147     (34,868
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (12,660     (3,186     5,655        7,796   

Income tax expense (benefit)

     (4,656     (791     575        2,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (8,004     (2,395     5,080        4,893   

Less : Net income (loss) attributable to noncontrolling interest

     (87     37        (10     318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Multi Packaging Solutions International Limited

   $ (7,917   $ (2,432   $ 5,090      $ 4,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Earnings per share

        

Basic

     (.11     (.04     .08        .07   

Diluted

     (.11     (.04     .08        .07   

Weighted-average number of common shares outstanding:

        

Basic

     73,825,723        61,939,432        67,817,268        61,939,432   

Diluted

     73,825,723        61,939,432        67,817,268        61,939,432   

Other comprehensive income (loss)

        

Cumulative foreign currency translation adjustment

     (11,880     (30,421     (21,572     (40,113

Adjustment on available-for-sale securities

     (5     4        (22     (13

Pension adjustments

     662        (154     1,454        638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (11,223     (30,571     (20,140     (39,488
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (19,227     (32,966     (15,060     (34,595

Comprehensive (income) loss attributable to non-controlling interests

     —          (101     (17     (113
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Multi Packaging Solutions International Limited

   $ (19,227   ($ 33,067   $ (15,077   $ (34,708
  

 

 

   

 

 

   

 

 

   

 

 

 

 

3


Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

 

     Common Shares      Paid In
     Accumulated
    Accumulated
Other
Comprehensive
    Noncontrolling
    Total
Shareholders’
 
     Shares      Amount      Capital      (Deficit)     Loss     Interest     Equity  

BALANCE, June 30, 2015

     61,939,432       $ 61,939       $ 278,695       $ (45,365   $ (13,287   $ 6,708      $ 288,690   

Net income (loss)

     —           —           —           5,090        —          (10     5,080   

Sale of 15,500,000 common shares, net of offering costs of $6,125

     15,500,000         15,500         164,799         —          —          —          180,299   

Stock compensation

     8,872        9         25,953         —          —          —          25,962   

Purchase of non-controlling interest

     —           —           1,063         —          (12     (3,637     (2,586

Fair market value adjustment on available-for-sale securities

     —           —           —           —          (22     —          (22

Pension adjustments, net

     —           —           —           —          1,454        —          1,454   

Foreign currency translation adjustment

     —           —           —           —          (21,572     —          (21,572
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, December 31, 2015

     77,448,304       $ 77,448       $ 470,510       $ (40,275   $ (33,439   $ 3,061      $ 477,305   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six months ended
December 31,
 
     2015     2014  

Operating Activities

    

Net income

   $ 5,080      $ 4,893   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Depreciation expense

     37,930        38,737   

Amortization expense

     30,335        28,952   

Debt extinguishment charges

     3,867        —     

Deferred income taxes

     (5,243     (2,031

Stock compensation

     25,962        606   

Equity in earnings of unconsolidated subsidiary

     —          (39

Unrealized foreign currency loss (gain)

     1,715        (4,524

Other

     850        4,258   

Change in assets and liabilities:

    

Accounts receivable

     (8,273     (16,233

Inventories

     2,421        6,445   

Prepaid expenses and other current assets

     369        (3,751

Other assets

     (4,239     2,534   

Accounts payable

     (8,572     (14,472

Payroll and benefits

     (12,160     (272

Other current liabilities

     (4,789     8,097   

Income taxes payable

     (894     2,195   

Other long-term liabilities

     (1,543     (14,352
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     62,816        41,043   
  

 

 

   

 

 

 

Investing Activities

    

Additions to property, plant and equipment

     (24,507     (24,206

Additions to intangible assets

     (68     (131

Proceeds from sale of assets

     1,003        601   

Acquisitions of businesses, net of cash acquired

     (2,496     (123,273
  

 

 

   

 

 

 

Net cash and cash equivalents used in investing activities

   $ (26,068   $ (147,009
  

 

 

   

 

 

 

 

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Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

(unaudited)

 

     Six months ended
December 31,
 
     2015     2014  

Financing Activities

    

Proceeds from initial public offering

   $ 186,424      $ —     

Payments of offering costs

     (6,125     —     

Proceeds from issuance of long-term debt

     —          136,906   

Proceeds from short-term borrowings

     41,619        103,825   

Payments on short-term borrowings

     (40,876     (103,937

Payments on long-term debt

     (216,809     (10,133

Deferred financing costs

     —          (4,442
  

 

 

   

 

 

 

Net cash and cash equivalents (used in) provided by financing activities

     (35,767     122,219   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     2,389        (117
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     3,370        16,136   

Cash and cash equivalents—beginning

     55,675        27,533   
  

 

 

   

 

 

 

Cash and cash equivalents—ending

   $ 59,045      $ 43,669   
  

 

 

   

 

 

 

 

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Table of Contents

MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(unaudited)

Note 1—Nature of Business

The Company

“MPS” and the “Company” refer to Multi Packaging Solutions International Limited and its controlled subsidiaries. MPS is a leading, global provider of value-added packaging solutions to a diverse customer base across the healthcare, consumer, and multi-media end markets. MPS provides its customers with print-based specialty packaging, including premium-folding cartons, labels and inserts across a variety of substrates and finishes.

Bermuda Reincorporation

On October 7, 2015, 100% of the share capital of Multi Packaging Solutions Global Holdings Limited was acquired by Multi Packaging Solutions International Limited, a company incorporated and organized under the laws of Bermuda, from Chesapeake Finance 1 Limited and Mustang Investment Holdings L.P. The consideration for such acquisition was the issuance of shares in the Company to Chesapeake Finance 1 Limited and Mustang Investment Holdings L.P. In connection with the issuance of shares, the number of shares was increased as a result of the par value changing from one British Pound Sterling to one U.S. dollar.

Stock-split and Initial Public Offering

On October 8, 2015, the Company’s board of directors approved and the Company executed a 1 for 5.08 reverse stock split of its common shares prior to completing its proposed initial public offering. All share and per share data has been presented to reflect this reverse split. On October 27, 2015, the Company completed its initial public offering of 16,500,000 common shares at a price of $13.00 per share. In connection with the offering, funds controlled by The Carlyle Group (“Carlyle”) and certain current and former employees, sold 1,000,000 common shares. The underwriters also have exercised their rights to purchase an additional 2,475,000 common shares from certain of the selling shareholders, including investment funds controlled by Madison Dearborn (“Madison”) and Carlyle, at the public offering price, less the underwriting discount. The Company did not receive any of the proceeds from the shares sold by Madison or Carlyle or from the exercise of the underwriters’ option. The Company received net proceeds of $186,424 from the initial public offering.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of December 31, 2015 and for the three and six months ended December 31, 2015 and 2014 have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of December 31, 2015 and the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended December 31, 2015 and 2014 and the statements of cash flows for the six months ended December 31, 2015 and 2014 and statement of shareholders’ equity for the six months ended December 31, 2015 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results for the three and six months ended December 31, 2015 are not necessarily indicative of results to be expected for the year ending June 30, 2016 or for any future interim period. The condensed consolidated balance sheet at June 30, 2015 has been derived from the audited consolidated financial statements of the Company. However, the interim financial information does not include all of the information and notes required by GAAP for complete consolidated financial statements. The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements for the year June 30, 2015, and notes thereto included in the Company’s Registration Statement filed on Form S-1.

Principles of Consolidation

The consolidated financial statements include the accounts of Multi Packaging Solutions International Limited and its controlled subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

 

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Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents.

Goodwill and Intangible Assets

Goodwill represents the cost of acquired businesses in excess of the fair value of the assets acquired and liabilities assumed of such businesses at the acquisition date. Goodwill is not amortized, but is subject to impairment tests. The Company reviews the carrying amounts of goodwill by reporting unit at least annually on April 1 (the annual assessment date), or more frequently when indicators of impairment are present, to determine if goodwill may be impaired. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value.

If the Company determines that the fair value is less than the carrying value based on the qualitative assessment, a quantitative assessment based upon discounted cash flow and market approach analyses is performed to determine the estimated fair value of the reporting units. The Company includes assumptions about expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying values of the reporting unit is in excess of its calculated fair value, management performs the next step, which is a hypothetical allocation of the calculated fair value to the assets and liabilities of the reporting unit, including intangible assets, to determine implied goodwill. Goodwill is considered impaired if the implied goodwill is less than the goodwill. There were no indicators of impairment during the three and six months ended December 31, 2015.

Intangible assets have been acquired through various business acquisitions and include customer relationships, developed technology, licensing agreements, and a photo library. The intangible assets are initially valued at their acquisition date using either a discounted cash flow model or relief from royalty method. The relief from royalty method is used for determining the fair value of developed technology and licensing agreements and assumes that if the acquired company did not own the intangible asset or intellectual property, it would be willing to pay a royalty for its use. The benefit of ownership of the intellectual property is valued as the relief from the royalty expense that would otherwise be incurred. Intangible assets are amortized on a straight-line basis, except for customer relationship intangibles that are amortized on an accelerated basis. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the Company’s future cash flows.

Derivative Instruments

The Company uses derivative instruments to manage its exposure to certain risks relating to its ongoing business operations. The Company has not elected hedge accounting for these derivative instruments, and accordingly are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. No derivative instruments are entered into for speculative purposes.

One risk managed by the Company using derivative instruments is interest rate risk. To manage interest rate exposure, the Company has in the past entered into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the London Interbank Offered Rate (“LIBOR”) interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates affect the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

The Company is also exposed to foreign-currency exchange-rate fluctuations in the normal course of business, primarily related to the British Pound Sterling, Euros, Mexican Pesos, Canadian Dollars, Chinese Yuan and the Polish Zloty denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, using non-deliverable forward foreign exchange contracts and foreign currency forward contracts, that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure related to merchandise inventory expenditures or sales made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.

The change in fair value of interest rate swaps was $153 and $1,807 for the three months ended December 31, 2015 and 2014 and was $179 and $3,275 for the six months ended December 31, 2015 and 2014, respectively, which is recorded in other income (expense), net in the accompanying condensed statements of operations and comprehensive income (loss). The Company considers derivative financial instruments as level 2 investments in the fair value hierarchy discussed in fair value measurements, below and within Note 7.

 

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Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company places its cash and cash equivalents with high quality financial institutions and limits the amount of credit exposure with any one institution. At times, the Company’s cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limits or comparable insurance in Europe.

Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs credit evaluations of its customers, but generally does not require collateral to support accounts receivable. At December 31, 2015 and June 30, 2015, no customers accounted for more than 10% of accounts receivable. For the three and six months ended December 31, 2015 and 2014, no customers accounted for more than 10% of net sales.

Revenue Recognition

The Company produces packaging products, principally cartons, labels, inserts and rigid packaging for sale to manufacturers of branded and private label consumer goods, pharmaceutical, medical and multi-media products. Products are printed on board, paper or plastic substrates and converted via printing presses and oftentimes subsequently finished in a folding or gluing or other operation. The Company records revenue on the sales of products manufactured when title to the product transfers, which is generally at the time of shipment to the customer.

In all of the above cases, revenue is recorded only when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed and determinable and (iv) collectability of the sales is reasonably assured. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded when they are determined to be probable and estimable.

Income Taxes

The Company recognizes income taxes in accordance with guidance established by GAAP, which requires an asset and liability approach for financial accounting and reporting for income taxes and establishes a minimum threshold for financial statement recognition of the benefit of tax positions. The provision for income taxes is based upon income or loss after adjustment for those items that are not considered in the determination of taxable income.

Deferred income taxes represent the tax effects of differences between the financial reporting and tax bases of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Earnings (Loss) Per Share

Earnings (Loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method).

 

     For the Three Months Ended
December 31
    For the Six Months Ended
December 31
 
     2015     2014     2015     2014  

Numerator:

        

Net income (loss) available to common shareholders—basic and diluted

   $ (7,917   $ (2,432   $ 5,090      $ 4,575   

Denominator:

        

Weighted average number of common shares outstanding—basic and diluted

     73,825,723        61,939,432        67,817,268        61,939,432   

Basic (loss) earnings per common share

   ($ 0.11   ($ 0.04   $ 0.08      $ 0.07   

Dilutive (loss) earnings per common share

   ($ 0.11   ($ 0.04   $ 0.08      $ 0.07   

 

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There were no options in the Company’s common shares outstanding during the three and six months ended December 31, 2015 and 2014, respectively.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. As modified, the FASB permits the adoption of the new revenue standard early, but not before the annual periods beginning after December 31, 2016. A public organization would apply the new revenue standard to all interim reporting periods within the year of adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial position and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial position and results of operations.

In September 2015, the FASB issued ASU 2016-15, “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. The amendments in this ASU eliminate the requirement to retrospectively account for those adjustments. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) - “Balance Sheet Classification of Deferred Taxes”, which will require the presentation of deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial position and results of operations.

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s Registration Statement filed on Form S-1.

Note 3—Acquisitions

AGI Shorewood

On November 21, 2014, the Company acquired the Non-European Folding Carton and Lithographic Printing Business of AGI Global Holdings Coöperatief U.A. and the US Folding Carton and Lithographic Printing Business of Atlas AGI Holdings LLC (collectively, “ASG”) for an aggregate purchase price of approximately $133,794 in cash. The Company acquired ASG to further expand the Company’s global network and customer base.

 

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The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair value estimates for the assets acquired and liabilities assumed were based on estimates and analysis using widely recognized valuation methods.

 

Assets

  

Cash and cash equivalents

   $ 19,401   

Accounts receivable

     76,435   

Inventories

     32,851   

Prepaid expenses and other current assets

     6,142   

Deferred income taxes

     15,322   

Property, plant and equipment

     49,470   

Other long-term assets

     3,610   

Less: Liabilities

  

Current liabilities

     (62,869

Other long-term liabilities

     (6,568
  

 

 

 

Preliminary purchase price

   $ 133,794   
  

 

 

 

During the six months ended December 31, 2015, the Company adjusted the preliminary purchase price allocation as a measurement period adjustment to reduce liabilities and reduce property, plant and equipment by approximately $527.

BluePrint Media Limited

On July 1, 2015, the Company completed the acquisition of BP Media, Ltd. (“BluePrint”). The acquisition of BluePrint provides the Company with pre-press and digital services in the European market, facilitating the processes surrounding translation and interchangeability of print content for foreign locations. In addition, BluePrint provides the Company with an established sales presence in the media markets in Europe, which will enable the Company to serve the European needs of global media releases. BluePrint had annual revenue of approximately $23 million. BluePrint was acquired for a purchase price of approximately $2.7 million, net of cash of $2.5 million with the potential for another $3.9 million based on certain financial targets. The preliminary purchase price allocation is not material to the consolidated financial statements and included $1.2 million of goodwill. The operations of BluePrint are included in the Company’s consolidated statements of operations and comprehensive income (loss) since July 1, 2015.

CD Cartondruck AG

The Company has contingent consideration relating to the June 9, 2011 purchase of CD Cartondruck AG (“Cartondruck”), of $2,136 payable on June 9, 2016. The value of the contingent consideration is being recorded as future compensation expense on a straight-line basis over the period of a required employment agreement. The contingent consideration is subject to satisfaction of certain employment contingencies. The Company has a restricted cash balance in the amounts of $1,939 as of December 31, 2015, which is recorded in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. The Company has a restricted cash balance at June 30, 2015 in the amount of $1,985, which is recorded in other assets on the accompanying condensed consolidated balance sheets.

Additionally, with the purchase of Cartondruck, there could also be an additional payment (the “Earnout”), which is based on the future performance of the acquired company. The Earnout will be recorded as future compensation ratably over the period it becomes probable of achievement. The Earnout ranges from $0 to $3,475 based on cumulative earnings before interest, taxes, depreciation and amortization (“EBITDA” as defined in the Share Purchase Agreement) achieved over a five-year period. As of December 31, 2015 and June 30, 2015, the Company concluded the Earnout was not probable of achievement and, therefore, no amount has been recognized to date.

Note 4—Inventories

Inventories consisted of the following:

 

     As of
December 31, 2015
     As of
June 30, 2015
 

Raw materials

   $ 58,827       $ 60,549   

Work in progress

     27,371         28,677   

Finished goods

     97,822         104,658   
  

 

 

    

 

 

 

Total inventories

     184,020         193,884   

Reserves

     (20,171      (22,048
  

 

 

    

 

 

 

Inventories

   $ 163,849       $ 171,836   
  

 

 

    

 

 

 

 

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Note 5—Fair Value of Financial Instruments

The following table sets forth the Company’s financial assets and liabilities carried at fair value on a recurring basis by level within the fair value hierarchy:

 

As of December 31, 2015

   Level 1      Level 2      Level 3      Total  

Assets:

           

Cash and cash equivalents

   $ 59,045       $ —         $ —         $ 59,045   

Restricted cash

     1,939         —           —           1,939   

Available for sale securities

     231         —           —           231   

Liabilities:

           

Interest rate swap

     —           (3,167      —           (3,167

Foreign currency contracts

     —           143         —           143   

As of June 30, 2015

   Level 1      Level 2      Level 3      Total  

Assets:

           

Cash and cash equivalents

   $ 55,675       $ —         $ —         $ 55,675   

Restricted cash

     1,985         —           —           1,985   

Available for sale securities

     253         —           —           253   

Foreign currency contracts

        57            57   

Liabilities:

           

Interest rate swap

     —           (2,988      —           (2,988

Foreign currency swap

     —           (34      —           (34

As of December 31, 2015 and June 30, 2015, the fair value of the bonds payable, due August 2021, was $206,500 and $204,000, respectively and the carrying value was $196,627 and $196,327, respectively. The bonds payable fair value was determined using quoted market prices (level 2).

The fair value of interest rate swap contracts are indicative values based on mid-market levels as of the close of business on the balance sheet date. The valuations are derived from the banks’ proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions.

The Company maintains two amortizing interest rate swaps that mature in December 2017. The swaps are being used to hedge the exposure to changes in the market LIBOR or EURIBOR rates. At December 31, 2015, one of the swaps had a notional amount of $171,982 whereby the Company pays a fixed rate of interest of 1.1649% and receives a variable rate based on LIBOR on the amortizing notional amount. The LIBOR swap had a fair value of $481,369 and is included in other long term liabilities on the consolidated balance sheets. The other swap had a notional amount of $146,121; whereby the Company pays a fixed rate of interest of 1.0139% and receives a variable rate based on EURIBOR (Euro Interbank Offered Rate) on the amortizing notional amount. The EURIBOR swap had a fair value of $2,686 and is included in other long-term liabilities on the condensed consolidated balance sheets.

Note 6—Other Income (Expense), net

Other income (expense), net is comprised of the following for the three and six months ended December 31, 2015 and 2014:

 

     Three months ended
December 31,
     Six months ended
December 31,
 
     2015      2014      2015      2014  

Loss on derivatives

   $ 572       $ (2,023    $ (183    $ (3,648

Foreign currency (losses) gains

     (463      (221      (3,340      4,577   

Other (loss) income

     (9      468         (12      614   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other (Expense) Income, net

   $ 100       $ (1,776    $ (3,535    $ 1,543   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 7—Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive income (loss) for the six months ended December 31, 2015 and 2014 is as follows:

 

     Foreign Currency
Translation
Adjustments and
other
     Available for
Sale Securities
     Pension
Adjustments
     Total  

Balance as of June 30, 2015

   $ (33,045    $ 15       $ 19,743       $ (13,287

Other Comprehensive income (loss)

     (21,572      (22      1,454         (20,140

Other Comprehensive income from noncontrolling interest due to the purchase of CD Cartondruck GmBH (see Note 14)

     (12      —           —           (12
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2015

   $ (54,629    $ (7    $ 21,197       $ (33,439
  

 

 

    

 

 

    

 

 

    

 

 

 
     Foreign Currency
Translation
Adjustments
     Available for
Sale Securities
     Pension
Adjustments
     Total  

Balance as of June 30, 2014

   $ 5,919       $ 9       $ 6,963       $ 12,891   

Other Comprehensive income (loss)

     (40,113      (13      638         (39,488
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2014

   $ (34,194    $ (4    $ 7,601       $ (26,597
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no amounts reclassified from accumulated other comprehensive income during the three and six months ended December 31, 2015 and 2014.

Note 8—Income Taxes

For the three and six months ended December 31, 2015 and 2014, the effective tax rates, including discrete items, attributable to continuing operations were as follows:

 

     Three months ended
December 31,
    Six months ended
December 31
 
     2015     2014     2015     2014  

Effective tax rate provision

     36.8     24.8     10.2     37.2

Our effective tax rate differs from the US federal statutory income tax rate of 35.0%, due to the mix and levels between United States and foreign earnings. Included in the three and six months ended December 31, 2015 was a benefit of $2,703 related to a change in the enacted UK statutory tax rate and a release of a reserve of $348 related to uncertain income tax positions. Excluding these discrete items, the effective tax rate through the six months ended December 31, 2015 is higher primarily due to non-deductible expenses, including stock compensation expense.

As of December 31, 2015 and June 30, 2015, the total liability for uncertain tax benefits was $2,446 and $2,794, respectively, including accrued interest and penalties and net of related benefits.

As of December 31, 2015, the Company is under tax audit in Canada for 2012-2014 and Germany for 2009-2011. In October 2015, the Mexican Tax Authorities concluded their audit of the 2008 and issued an assessment. The Company has determined that is has sufficient reserves to cover the assessment. The Company has filed an appeal with the Mexican Tax Court. The Company has been indemnified for all taxes payable and unrecognized tax positions by ASG from the prior owners for the audits in Canada and the tax court case in Mexico.

During the six months ended December 31, 2015 and 2014, cash paid for taxes was $8,033 and $2,985, respectively.

 

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Note 9—Employee Benefit Plans

Defined Benefit Plans

The Company maintains a number of defined benefit pension plans for the benefit of its employees throughout the world, which vary depending on the conditions and practices in the countries concerned. The principal defined benefit pension plan is the Field Group Pension Plan in the United Kingdom. The assets of the plan are held in an external trustee-administered fund. The Company also operates two further defined benefit pension plans in the United Kingdom (known as the Chesapeake pension plan and the GCM pension plan), as well as a number of defined benefit arrangements in France and Germany. The defined benefit pension plans in the United Kingdom are funded while the French and German plans are mainly unfunded. The benefits are based on a fixed rate of pay per year depending on the department worked in and function of the participant. Charges to expense are based upon costs computed by an independent actuary.

For the three and six months ended December 31, 2015 and 2014, the components of total periodic benefit costs were as follows:

 

     For the three months ended December 31,      For the six months ended December 31,  
     2015      2014      2015      2014  

Components of Net Periodic Benefit Costs:

           

Service cost

   $ 1,043       $ 998       $ 1,941       $ 1,896   

Interest cost

     4,534         7,004         10,582         13,409   

Expected return on plan assets

     (5,764      (7,730      (12,570      (15,072
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Periodic (Benefit) Cost

   $ (187    $ 272       $ (47    $ 233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10—Indebtedness

Total borrowings outstanding at December 31, 2015 and June 30, 2015 are summarized as follows:

 

     As of
December 31, 2015
     As of
June 30, 2015
 

Short-term foreign borrowings

   $ 4,501       $ 3,488   

Term notes:

     

Bonds Payable, due August 2021, net of discount

     196,627         196,327   

Dollar Tranche A Term Loan, due August 2020, net of discount

     96,177         119,109   

Dollar Tranche B Term Loans, due August 2020, net of discount

     258,362         319,822   

Dollar Tranche C Term Loans, due August 2020, net of discount

     105,160         130,030   

Sterling Term Loan, due September 2020, net of discount

     149,600         219,933   

Euro Term Loan, due September 2020, net of discount

     147,055         189,831   

Other borrowings:

     

Foreign debt

     4,681         8,049   

Other financing

     725         1,800   
  

 

 

    

 

 

 

Total borrowings outstanding

     962,888         1,188,389   

Less: short-term foreign borrowings and current portion of long-term debt, net of discount

     (14,668      (15,228
  

 

 

    

 

 

 

Long-term debt, less current portion

   $ 948,220       $ 1,173,161   
  

 

 

    

 

 

 

 

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During the three months ended December 31, 2015, the Company made voluntary prepayments of $207,414 on our long term debt ($25,000 on October 7, 2015 and approximately $182,414 on October 29, 2015).

At the time of the prepayment, the Company recognized incremental amortization on the deferred financing and debt discount fees in the amount of $3,867 as debt extinguishment charges for the three and six months ended December 31, 2015 on the accompanying condensed consolidated statements of operations and comprehensive income (loss).

 

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Note 11—Restructuring

During November 2013, the Company announced its intention to reorganize and cease its operations in its Terre Haute, Indiana, Evansville, Indiana and Fairfield, New Jersey facilities. In September 2015, the Company announced the closure of its facility in Melrose Park, Illinois.

The following is a summary of the activity with respect to a reserve established by the Company in connection with the restructuring plan, by category of costs.

 

     Severance and
Employee Related
     Costs Associated with Exit
or Disposal Activities
     Total  

Balance at June 30, 2015

   $ 256       $ 776       $ 1,032   

Restructuring related costs

     1,843         1,733         3,576   

Amounts paid

     (1,234      (1,338      (2,572
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

   $ 865       $ 1,171       $ 2,036   
  

 

 

    

 

 

    

 

 

 
     Severance and
Employee Related
     Costs Associated with Exit
or Disposal Activities
     Total  

Balance at September 30, 2015

   $ 1,557       $ 1,945       $ 3,502   

Restructuring related costs

     295         455         750   

Amounts paid

     (987      (1,229      (2,216
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

   $ 865       $ 1,171       $ 2,036   
  

 

 

    

 

 

    

 

 

 
     Severance and
Employee Related
     Costs Associated with Exit
or Disposal Activities
     Total  

Balance at June 30, 2014

   $ 2,060       $ 2,250       $ 4,310   

Restructuring related costs

     3,790        —          3,790  

Amounts paid

     (4,926      (983      (5,909
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

   $ 924       $ 1,267       $ 2,191   
  

 

 

    

 

 

    

 

 

 
     Severance and
Employee Related
     Costs Associated with Exit
or Disposal Activities
     Total  

Balance at September 30, 2014

   $ 1,817       $ 2,030       $ 3,847   

Restructuring related costs

     704        —          704  

Amounts paid

     (1,597      (763      (2,360
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

   $ 924       $ 1,267       $ 2,191   
  

 

 

    

 

 

    

 

 

 

These costs are recorded in cost of goods sold in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended December 31, 2015 and 2014 and are included within the North America segment. Accrued restructuring costs are included in other current liabilities on the condensed consolidated balance sheets.

Note 12—Commitments and Contingencies

The Company is involved in various proceedings, legal actions and claims arising in the normal course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. The Company records amounts for losses that are deemed to be probable and subject to reasonable estimate. The Company does not anticipate losses as a result of these proceedings that would materially affect the Company’s consolidated financial statements.

 

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Note 13—Related Party Transactions

On February 13, 2014, the Company loaned CEP III Chase Finance S.à r.l., an entity owned by Carlyle, and Mustang Intermediate Investments S.à r.l., an entity owned by Madison Dearborn Partners, each $1,677 to enable them to purchase 5.1% of the outstanding capital stock of CD Cartondruck GmbH. The notes bear interest at a rate of 2.0%, compounded annually, and had a maturity date of February 14, 2015. The loan had automatic renewal periods unless terminated through a written notice no less than four weeks prior to maturity. The $3,354 note receivable was recorded in other assets on the consolidated balance sheet as of June 30, 2015. On October 8, 2015, the Company purchased CD Cartondruck GmbH for the value of the note plus interest. The transaction was accounted for as an acquisition of noncontrolling interest and included in the statement of stockholders’ equity. As of October 8, 2015, the Company owns 100% of the outstanding capital stock of CD Cartondruck GmBH.

 

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Note 14—Stock Based Compensation

The Company recognized compensation expense related to awards under its stock option plans as follows:

 

     For the three months ended
December 31,
     For the six months ended
December 31,
 
     2015      2014      2015      2014  

Performance Based Units

   $ 9,460       $ —         $ 9,460       $ —     

2014 Equity Incentive Plan

     16,766         316         16,352       $ 606   

Payroll taxes relating to stock based compensation

     723         —           723         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     26,949         316         26,535         606   

Shares issued to Board of Directors

     150         —           150         —     

Other

     133         139         275         280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,232       $ 455       $ 26,960       $ 886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Performance Based Units

In connection with Carlyle’s acquisition of Chesapeake, certain members of Chesapeake’s management were allowed to co-invest with Carlyle in an entity controlled by Carlyle that holds an investment in the Company. At the time of the grant, those members of management that invested alongside Carlyle received a specified number of common shares, which were subject to a performance-based ratchet (the “Ratchet”). Pursuant to the Ratchet, members of management’s ownership percentage could increase based on Chesapeake completing an “Exit” that resulted in a specified return on invested capital (“MOIC”) and internal rate of return (“IRR”) for certain investors. An Exit is defined as the completion of a liquidating event, which includes the completion of an initial public offering (“IPO”). Since a liquidity event, including an IPO, is generally not probable until it occurs, no compensation cost had been recognized in the financial statements through the initial public offering date. On October 27, 2015, the Company completed its IPO (see Note 1) and accordingly the performance-based units vested and the Company recognized stock based compensation expense of approximately $9,460 during the three and six months ended December 31, 2015. The expense at the time of the IPO was calculated using the IPO stock price of $13 per share on a per share equivalent basis of Carlyle shares, less a lack of marketability discount rate due to the shares not being freely tradeable by the members of management.

2014 Equity Incentive Plan (Mustang Investment Holdings L.P.)

The 2014 Equity Incentive Plan (the “2014 Plan”) provides for profits interests and restricted capital interests in Mustang Investment Holdings L.P. (“Holdings”) to be granted to directors, officers and employees of the Company. During the three and six months ended December 31, 2015 and 2014, Holdings did not issue any time-vesting profits interests or performance-vesting profits interests. Time-vesting profits interests vested twenty percent per year on each of the first five anniversaries of August 15, 2013, as per the applicable award agreement. All performance-vesting profits interests would vest based on Holdings’ principal investors obtaining various thresholds of an internal rate of return as defined in the 2014 Plan, which represents a performance condition.

Since the profits interests issued under the 2014 Plan are for interests in Holdings, which is outside of the consolidated group, the value of the profits interests was marked to market at each of the Company’s reporting periods. On October 27, 2015, the Company completed its IPO and in connection with the IPO the performance-vesting units vested and the Company accelerated the vesting of the time-vesting profits interest.

 

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The Company recognized compensation expense related to awards under the 2014 Plan as follows:

 

     For the three months ended
December 31,
     For the six months ended
December 31,
 
     2015      2014      2015      2014  

Time vesting profit interests

   $ 5,844       $ 193       $ 5,569       $ 369   

Time vesting restricted capital interests

     3,549         123         3,410       $ 237   

Performance-vesting profit interests

     7,373         —           7,373         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,766       $ 316       $ 16,352       $ 606   
  

 

 

    

 

 

    

 

 

    

 

 

 

2014 Plan—Profits Interests Valuation

As an input to the Black-Scholes model, and for valuation of the profits interest and restricted capital interest awards, the Company estimates the fair value of Holdings’ equity quarterly. The Company relies on the results of a discounted cash flow analysis but also considers other widely recognized valuation models. The discounted cash flow analysis is dependent on a number of significant management assumptions regarding the expected future financial results of the Company and Holdings, as well as upon estimates of an appropriate cost of capital. A sensitivity analysis is performed in order to establish a narrow range of estimated fair values for the equity of Holdings. The market approach consists of identifying a set of guideline public companies. Multiples of historical and projected earnings before interest, taxes, depreciation and amortization (“EBITDA”) determined based on the guideline companies are applied to Holdings’ EBITDA in order to establish a range of estimated fair value for the equity of Holdings. After considering all of these estimates of fair value, the Company then determines a single estimated fair value of the equity to be used in accounting for equity-based compensation.

 

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The Company calculated the estimated fair value of each award as of the reporting date for each grant prior to the IPO using the Black–Scholes option valuation model. Currently, there is no active market for Holdings’ equity. Therefore, as a substitute for Holdings’ volatility, the Company elected to use the historical volatility of various publically traded companies in the printing industry. The expected term of profits interests granted is derived from the output of the option valuation model and represents the period of time that profits interests granted are expected to be outstanding. The risk-free rate for periods within the life of the profits interests is based on the U.S. Treasury yield curve in effect at the time of grant. During the three months ended December 31, 2014, the Company utilized 6.00 years as the expected term, 46.58% for its expected volatility, and 2.13% for the risk free rate of interest. The Company does not expect to pay any dividends and the weighted average of profits interest was $4.77 per profit interest. During the six months ended December 31, 2014, the Company utilized 6.13 years as the expected term, 46.58% for its expected volatility, 2.13% for the risk free rate of interest, the Company does not expect to pay any dividends and the weighted average of profits interest was $4.77 per profit interest. The expense at the time of the IPO was calculated using the IPO stock price of $13 per share on a per share equivalent basis of Mustang shares less a lack of marketability discount rate due to the shares not being freely tradeable.

 

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At the time of the Company’s IPO all the profit interests in Mustang were converted on an equivalent share basis. As of December 31, 2015, there are no profit interests outstanding.

As of December 31, 2015, there was no unearned compensation related to unvested profit interests.

Profits interests activity under the 2014 Plan summarized as follows:

2014 Plan—Restricted Capital Interests Valuation

For Restricted Capital Interests issued under the 2014 Plan the Company calculated the estimated fair value of each award using the Black-Scholes option valuation model that uses the assumptions described below and considers a lack of marketability discount. Currently, there is no active market for Holdings’ equity. Therefore, as a substitute for Holdings’ volatility, the Company elected to use the historical volatility of various publicly traded companies in the printing industry. The Company uses historical data to estimate employee terminations within the valuation model. The expected term of restricted capital interests granted is derived from the output of the option valuation model and represents the period of time that restricted capital interests granted are expected to be outstanding. The risk-free rate for periods within the life of the restricted capital interests is based on the U.S. Treasury yield curve in effect at the time of grant. During the three months ended December 31, 2014, the Company utilized 6.00 years as the expected term, 46.58% for its expected volatility, and 2.13% for the risk free rate of interest. The Company does not expect to pay any dividends and the weighted average of restricted capital interests was $4.77 per profit interest. During the six months ended December 31, 2014, the Company utilized 6.13 years as the expected term, 46.58% for its expected volatility, 2.13% for the risk free rate of interest, the Company does not expect to pay any dividends and the weighted average of the restricted capital interest was $4.77 per restricted capital interest. The expense at the time of the IPO was calculated using the IPO stock price of $13 per share on a per share equivalent basis of Mustang shares less a lack of marketability discount rate due to the shares not being freely tradeable.

 

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At the time of the Company’s IPO all the restricted capital interests in Mustang were converted on an equivalent share basis. As of December 31, 2015, there are no restricted capital interests outstanding. There were no restricted capital interests issued during the periods presented.

There was no unearned compensation related to unvested restricted capital interests at December 31, 2015.

Shares issued to Board of Directors

The Company compensates its independent board members for their services through an annual cash payment of $75 and an annual stock grant valued at $75. Additional compensation is given for service as chair of a committee of the Board of Directors. On November 30, 2015, the Company issued 8,872 shares of common stock to two members of the Company’s Board of Directors. These shares were valued at the market price of the Company’s stock on the date of grant. The Company recognized $150 of stock based compensation expense for these shares which is included in stock based compensation and deferred compensation expense on the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended December 31, 2015.

 

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Note 15—Segments

The Company operates its business along three operating segments, which are grouped on the basis of geography: North America, Europe and Asia. The Company believes this method of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. The three segments consist of similar operating activities as each segment produces similar products.

Generally, the Company evaluates performance based on stand-alone segment net income (loss) before income taxes, interest, depreciation, amortization, restructuring, transaction and other costs related to acquisitions (“Adjusted EBITDA”) and accounts for inter-segment sales and transfers, which were not material, as if the sales or transfers were to third parties, at current market prices.

 

     For the three months ended
December 31,
     For the six months ended
December 31,
 
     2015      2014      2015      2014  

Net Sales

           

North America

   $ 201,445       $ 178,920       $ 416,977       $ 337,470   

Europe

     200,971         214,103         422,384         445,189   

Asia

     26,941         11,804         49,047         16,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 429,357       $ 404,827       $ 888,408       $ 798,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and Amortization

           

North America

     15,936         16,188         32,431         31,844   

Europe

     16,465         17,167         33,739         35,066   

Asia

     1,332         491         2,095         779   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 33,733       $ 33,846       $ 68,265       $ 67,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income (Loss)

           

North America

     (5,045      5,221         9,297         11,337   

Europe

     7,320         10,152         30,543         30,391   

Asia

     4,848         1,088         7,962         936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Income (Loss)

   $ 7,123       $ 16,461       $ 47,802       $ 42,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (1)

           

North America

     29,539         32,500         61,801         47,207   

Europe

     33,569         24,453         74,360         70,669   

Asia

     6,298         1,507         10,441         1,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted EBITDA

   $ 69,406       $ 58,460       $ 146,602       $ 119,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the six months ended
December 31,
 
     2015      2014  

Capital Expenditures

     

North America

   $ 7,904       $ 7,886   

Europe

     12,117         15,988   

Asia

     4,486         332   
  

 

 

    

 

 

 

Total Capital Expenditures

   $ 24,507       $ 24,206   
  

 

 

    

 

 

 

 

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Table of Contents
     As of December 31,
2015
     As of June 30,
2015
 

Total Assets

     

North America

   $ 786,325       $ 915,601   

Europe

     950,207         866,214   

Asia

     77,241         100,310   
  

 

 

    

 

 

 

Total Assets

   $ 1,813,773       $ 1,882,125   
  

 

 

    

 

 

 

The Company’s product offerings consist of print-based specialty packaging products across the consumer, health care and multi-media end markets. The Company produces similar products including labels, cartons, inserts and rigid packaging (the “Specific Products”) in all of the geographies it serves, and in all of the end markets it serves. These Specific Products represent one product line. The nature of a specific carton, label, insert or rigid package is similar from end market to end market and geography to geography. Oftentimes, the Specific Products sold to the customer are bundled, including both label and carton, or label, carton and insert or any combination thereof. The following is a summary of gross sales estimated by product category for the respective periods:

 

     For the three months ended
December 31,
     For the six months ended
December 31,
 
     2015      2014      2015      2014  

Premium Folding Cartons

   $ 277,915         259,597       $ 584,877       $ 520,886   

Inserts

     61,673         62,901         127,087         121,524   

Labels

     31,963         33,455         65,649         67,627   

Rigid Packaging

     31,581         12,044         65,923         21,587   

Other Consumer Products

     56,805         57,804         110,140         113,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     459,937       $ 425,801       $ 953,676       $ 845,011   

Sales Reserves and Eliminations

     (30,580      (20,974      (65,268      (46,102
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Sales

   $ 429,357       $ 404,827       $ 888,408       $ 798,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales by category

           

Consumer

     226,749         201,653         460,086         404,403   

Health Care

     150,054         155,947         307,813         309,059   

Multi - Media

     52,554         47,227         120,509         85,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 429,357       $ 404,827       $ 888,408       $ 798,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA Reconciliation

 

(1) (Dollars in Thousands)

   For the three months ended
December 31,
     For the six months ended
December 31,
 
     2015      2014      2015      2014  

Net income (loss)

   $ (8,004    $ (2,395    $ 5,080       $ 4,893   

Depreciation and amortization

     32,727         32,533         66,038         65,580   

Interest expense

     16,016         17,871         34,745         36,411   

Income tax expense(benefit)

     (4,656      (791      575         2,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     36,083         47,218         106,438         109,787   

Transaction costs

     2,064         3,463         2,414         4,184   

Stock based and deferred compensation

     27,232         455         26,960         886   

Debt extinguishment charges

     3,867         —           3,867         —     

Purchase accounting adjustments

     292         377         623         853   

Restructuring related costs

     750         3,086         3,576         3,790   

(Gain) loss on sale of fixed assets

     168         472         362         408   

Foreign currency gains (loss)

     473         222         3,340         (4,576

Other adjustments to EBITDA

     (1,523      3,167         (978      4,298   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 69,406       $ 58,460       $ 146,602       $ 119,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 16—Subsequent Events

On January 26, 2015, the Company completed the acquisition of Chicago Paper Tube & Can Co (“CPT”). The acquisition of CPT provides the Company with high-end, round rigid packaging capability in North America. The purchase consideration was approximately $8.0 million and was funded out of cash on hand. CPT’s operations are not material to the Company’s financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated December 31 quarterly financial statements included elsewhere in this report. The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and other forward-looking statements are subject to numerous known and unknown risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and “Risk Factors” in our Registration Statement Filed on Form S-1. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the interim unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report, as well as the Company’s Registration Statement. All dollar values in this section, unless otherwise noted, are denominated in millions. For purposes of this section, all references to “we,” “us,” “our,” “MPS” or the “Company” refer to Multi Packaging Solutions International Limited and subsidiaries.

Any statements made in this quarterly report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this quarterly report, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:

 

  our ability to compete against competitors with greater resources or lower operating costs;

 

  adverse developments in economic conditions, including downturns in the geographies and target markets that we serve;

 

  difficulties in restructuring operations, closing facilities or disposing of assets;

 

  our ability to successfully integrate our acquisitions and identify and integrate future acquisitions;

 

  our ability to realize the growth opportunities and cost savings and synergies we anticipate from the initiatives that we undertake;

 

  changes in technology trends and our ability to develop and market new products to respond to changing customer preferences and regulatory environment;

 

  the impact of electronic media and similar technological changes, including the substitution of physical products for digital content;

 

  seasonal fluctuations;

 

  the impact of significant regulations and compliance expenditures as a result of environmental, health and safety laws;

 

  risks associated with our non-U.S. operations;

 

  exposure to foreign currency exchange rate volatility;

 

  the loss of, or reduced purchases by, one or more of our large customers;

 

  failure to attract and retain key personnel;

 

  increased information technology security threats and targeted cybercrime;

 

  changes in the cost and availability of raw materials;

 

  operational problems at our facilities;

 

  the impact of any labor disputes or increased labor costs;

 

  the failure of quality control measures and systems resulting in faulty or contaminated products;

 

  the occurrence or threat of extraordinary events, including natural disasters and domestic and international terrorist attacks;

 

  increased energy or transportation costs;

 

  our ability to develop product innovations and improve production technology and expertise;

 

  the impact of litigation, uninsured judgments or increased insurance premiums;

 

  an impairment of our goodwill or intangible assets;

 

  our ability to comply with all applicable export control laws and regulations of the United States and other countries and restrictions imposed by the Foreign Corrupt Practices Act;

 

  the impact of regulations to address climate change;

 

  risks associated with the funding of our pension plans, including actions by governmental authorities;

 

  the impact of regulations related to conflict minerals;

 

  our ability to acquire and protect our intellectual property rights and avoid claims of intellectual property infringement;

 

  risks related to our substantial indebtedness;

 

  failure of internal controls over financial reporting;

 

  the ability of The Carlyle Group and Madison Dearborn Partners to control us;

 

  other factors disclosed in this quarterly report; and

 

  other factors beyond our control.

 

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Table of Contents

These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We print and manufacture high quality paperboard, paper and plastic packaging in the North American, European and Asian segments. Within each of these geographic segments, we sell products into the healthcare, consumer and multi-media end markets.

The healthcare market includes pharmaceutical, nutraceutical and healthcare related products. The consumer market includes cosmetics, personal care and toiletries, food, spirits, sporting goods, transaction and gift cards, confectionary, liquor and general consumer products. The multi-media market includes home video, software, music, video games and media-related special packaging products.

Products are manufactured in 58 facilities located in the United States, Europe, Canada, Mexico and China. We also have strategic alliances with companies in Europe and China who outsource certain products and production activities. In some cases, we procure non-paperboard, paper or plastic products to include in special packaging project deliverables for our customers. Products are generally cartons, labels, inserts or other paper or paperboard packaging products.

Cartons are generally paperboard based folding cartons. Labels are generally paper and pressure sensitive label stock printed products that are delivered in reel form or in a cut and stack form and can include basic labels for bottles and boxes, and extended content labels designed to deliver more information to the ultimate purchaser of our customer’s products. Inserts include fine paper folded inserts used in the delivery of detailed warnings, instructions and other information to the ultimate purchaser of our customer’s products. Other products include all remaining products. Often the project deliverables to a customer include all or a combination of these products.

Our strategic objectives are (i) continuing to enhance our position as a leading provider of packaging products to the segments we serve and can serve in North America, Europe and Asia; (ii) the expansion further into international markets to meet the global sourcing needs of our customers; and (iii) the identification of other areas in the packaging industry that can most benefit from our ability to deliver quality packaging products according to our customers’ needs, including the leveraging of our recent transactions via cross-selling both products and geographies. To achieve these objectives, we intend to continue expanding our printing, packaging and graphic arts capabilities, including the development and application of advanced manufacturing technologies and the establishment of manufacturing facilities in strategic international markets.

Key Transactions

Acquisition of ASG North American, Mexican and China Print and Packaging Operations

On November 21, 2014 we completed the acquisition of the North American and Asian print businesses of AGI Global Holdings Coöperatief U.A. and AGI Shorewood Group, US Holdings, LLC (collectively, “ASG”). The acquisition of ASG, a manufacturer of print and packaging in the United States, Canada, Mexico and China, expands our global network and customer base. ASG had annual sales of approximately $350 million for the twelve months ending immediately prior to the date of the acquisition.

Acquisition of Presentation Products

On February 28, 2015 we completed the acquisition of Presentation Products (“Presentation”). The acquisition of Presentation complements the Company’s previously acquired rigid packaging operations. Presentation is a rigid specialty box manufacturer located in the United Kingdom and has import and China sourcing offices located in Hong Kong, China. Presentation specializes in high end consumer packaging with an emphasis in the spirits market. Presentation had annual sales of approximately $42 million for the twelve months ending immediately prior to the date of the acquisition.

Acquisition of BP Media

On July 1, 2015 we completed the acquisition of BP Media, Ltd. (“BluePrint”). The acquisition of BluePrint provides us with pre-press and digital services in the European market, facilitating the processes surrounding translation and interchangeability of print content for foreign locations. In addition, BluePrint provides us with an established sales presence in the media markets in Europe which will enable us to serve the European needs of global media releases. BluePrint had annual sales of approximately $23 million for the twelve months immediately prior to the date of acquisition.

 

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Acquisition of Chicago Paper Tube and Can

On January 26, 2016 we completed the acquisition of Chicago Paper Tube and Can (“CPT”). CPT provides the Company with high end round rigid packaging capability in North America. CPT had annual sales of approximately $5 million for the twelve months immediately prior to the date of acquisition.

Acquisition Accounting

All of the transactions described above were accounted for as a purchase business combination. Accordingly, in all cases the assets and liabilities of the acquired or merged entities were recorded at fair value as of the respective closing dates and the results of operations of the entities are included in our results of operations from the date of closing.

Reorganizations/Restructuring

The Company announced the closure of the former ASG facility located in Melrose Park, Illinois on September 1, 2015, with an anticipated completion date of February 2016. The Company recorded restructuring expenses of approximately $2.8 million in the quarter ended September 30, 2015 due primarily to the announced closure. The underlying facility is leased on a month-to-month basis. In addition to the restructuring expense recorded in September, the Company incurred duplicative costs associated with the transfer of Melrose Park work to other facilities, and as such recorded incremental restructuring expense in the quarter ended December 31, 2015 of approximately $0.8 million.

Trends

General Information

Our largest customers are generally large multinational entities, many of which are consolidating global packaging requirements under a smaller number of suppliers. We believe we are favorably situated for this transition due to our many facilities, global footprint, standardized equipment from plant to plant and our relative size to other packaging suppliers. The packaging marketplace is very fragmented, with no one vendor providing a significant portion of the packaging needs.

Net Sales Trends

Net sales are impacted by the macroeconomic performance of our geographic segments and the markets within these geographic segments. Packaging net sales tend to be strongest just before the underlying customer’s busy season, which for high-end branded products is generally strongest in our first and second fiscal quarters.

Healthcare net sales in each of our geographic segments are influenced by the severity of a particular region’s cold and flu seasons, as well as the development and acceptance of certain new products, and the stage of product, from the prescription-only stage to the private label or generic stage.

European consumer net sales of confectionary products are generally stronger in our second quarter due to the holiday season. North American and European consumer net sales of spirits are also generally stronger in our second quarter due to the holiday season. Asia consumer net sales of spirits are generally stronger in their holiday season, generally in our third fiscal quarter.

The net sales to the North American multi-media end market are influenced by the success of a particular year’s movie releases, which can generate special packaging needs for these customers. Net sales of packaging in the North American video game market are generally influenced by the age of existing, and introduction of new, gaming platforms. Product launches, which cannot be predicted far in advance, have an impact on net sales, particularly with respect to special packaging needed for the holiday season. Overall, we expect our multi-media net sales to continue to decline as a percentage of our total net sales.

Impact of Inflation and Pricing

We have not historically been and do not expect to be significantly impacted by inflation. Increases in payroll costs and any increases in raw material costs that we have encountered are generally able to be offset through lean manufacturing activities. We have consistently made annual investments in capital that deliver efficiencies and cost savings. The benefits of these efforts generally offset the margin impact of competitive pricing conditions in all of the markets we serve.

We remain sensitive to price competitiveness in the markets that we serve and in the areas that are targeted for growth, and believe that the installation of state-of-the-art printing and manufacturing equipment as well as utilization of lean manufacturing (and related labor and production efficiencies) will enable us to compete effectively.

 

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Operational Restructurings

We regularly evaluate our operating facilities in our geographic segments in order to determine how to allocate our resources, share best practices, ensure logistics that serve customers are appropriate and maximize our operating efficiencies. In connection with these evaluations, we have closed certain facilities in recent periods.

Results of Operations

Quarter Ended December 31, 2015 Compared to Quarter Ended December 31, 2014.

The table below presents our results of operations for the respective quarters:

 

    

Three Months Ended

December 31,

 

(Dollars in thousands)

   2015      2014  

Net sales

   $ 429,357       $ 404,827   

Cost of goods sold

     333,632         322,493   
  

 

 

    

 

 

 

Gross margin

     95,725         82,334   
  

 

 

    

 

 

 

Selling, general and administrative expenses

     

Selling general and administrative expenses

     59,306         61,955   

Stock based and deferred compensation expense

     27,232         455   

Transaction and other related expenses

     2,064         3,463   
  

 

 

    

 

 

 

Operating income

     7,123         16,461   
  

 

 

    

 

 

 

Other income (expense)

     

Other income (expense) net

     100         (1,776

Debt extinguishment charges

     (3,867      —     

Interest expense

     (16,016      (17,871
  

 

 

    

 

 

 

Total other expense, net

     (19,783      (19,647
  

 

 

    

 

 

 

Income (loss) before income taxes

     (12,660      (3,186

Income tax expense (benefit)

     (4,656      (791
  

 

 

    

 

 

 

Net income (loss)

     (8,004      (2,395

Less: income (loss) attributable to non-controlling interest

     (87      37   
  

 

 

    

 

 

 

Net income (loss) attributable to Company

   $ (7,917    $ (2,432
  

 

 

    

 

 

 

Net Sales

The increase in net sales for the three months ended December 31, 2015 was $24.5 million, or 6.1%, when compared to the quarter ended December 31, 2014. The increase is due to the inclusion of sales from the acquired operations of ASG, Presentation Products and BP Media, which were acquired in November 2014, February 2015 and July 2015, respectively. Net sales were unfavorably impacted by foreign currency changes, principally from translation differences, of approximately $23.6 million.

Net sales adjusted for the acquisitions had they been included since the beginning of the period, were $478.5 million for the three months ended December 31, 2014, a difference of $49.2 million from the GAAP net sales for the three months ended December 31, 2015. The difference is primarily attributable to the foreign exchange impact noted previously, as well as a reduction in general multi-media sales of $16.5 million and a decline in two consumer products companies’ sales of approximately $7.9 million.

 

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We operate our business along the following operating segments, which are grouped based on the basis of geographic region: North America, Europe, and Asia. Net sales by geographic segment, as further broken down by end market, are summarized as follows:

Net Sales by Geographic Segment

 

     Three months ended December
31,
 

(Dollars in thousands)

   2015      2014  

North America

     

Healthcare

   $ 67,259       $ 63,011   

Consumer

     88,297         71,237   

Multi-media

     45,889         44,672   
  

 

 

    

 

 

 
   $ 201,445       $ 178,920   
  

 

 

    

 

 

 

Europe

     

Healthcare

   $ 77,761       $ 88,117   

Consumer

     116,545         123,431   

Multi-media

     6,665         2,555   
  

 

 

    

 

 

 
   $ 200,971       $ 214,103   
  

 

 

    

 

 

 

Asia

     

Healthcare

   $ 5,034       $ 4,819   

Consumer

     21,907         6,985   
  

 

 

    

 

 

 
   $ 26,941       $ 11,804   
  

 

 

    

 

 

 

Total

   $ 429,357       $ 404,827   
  

 

 

    

 

 

 

The acquisition of ASG in November 2014 increased consumer, healthcare and multi-media sales due to that acquisition serving those end markets. All industry sales were higher due to the ASG acquisition; however overall sales trends in multi-media are expected to continue to decline and absent the acquisition activity, would have declined. Multi-media sales are declining due to the change in delivery systems towards digital delivery via downloads or online and pay-per-view systems. Our sales are reflective of the overall trend in the multi–media end market. Sales related to acquired businesses are evaluated as to profitability and optimization of manufacturing facility and if they are core to the Company’s ongoing business strategy. As a result, the Company can exit business that was not profitable or core to its business, and can move manufacturing to facilities that optimize the manufacturing effectiveness.

North America

The increase in North American net sales for the three months ended December 31, 2015 was $22.5 million or 12.6%, when compared to the quarter ended December 31, 2014. The increase in North American healthcare sales for the quarter ended December 31, 2015 was $4.2 million, or 6.7%, when compared to the quarter ended December 31, 2014. The increase in North American consumer net sales for the quarter ended December 31, 2015 was $17.1 million or 24.0%, when compared to the quarter ended December 31, 2014. The increase in North American multi-media sales for the quarter ended December 31, 2015, was $1.2 million or 2.7%, when compared to the quarter ended December 31, 2014. All of these increases are primarily a result of the ASG acquisition completed on November 21, 2014. ASG had a majority of its business operations in North America.

Adjusted for acquisitions in fiscal 2015 North American sales were $201.4 million in the quarter ended December 31, 2015 compared to $222.5 million for the quarter ended December 31, 2014. The decrease is principally due to the previously mentioned consumer product companies’ sales and negative foreign exchange of approximately $3.9 million.

Although North American multi-media sales increased for the quarter ended December 31, 2015 when compared to the quarter ended December 31, 2014 by $1.2 million, this increase was principally due to the inclusion of the sales from the acquired ASG operations in the quarter ended December 31, 2015. The acquired ASG operations were integrated immediately upon acquisition and, as a result, it is not possible to isolate the portion of revenues attributable to the ASG operations. However, had the ASG acquisition not occurred, multi-media sales would have declined for the quarter ended December 31, 2015.

 

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Europe

The decrease in Europe net sales for the quarter ended December 31, 2015 was $13.1 million, or 6.1%, when compared to the quarter ended December 31, 2014, principally due to the unfavorable impact of foreign exchange of $18.9 million offset by the sales from the BP Media and Presentation Products acquisitions completed on July 1, 2015 and February 28, 2015, respectively.

The decrease in Europe healthcare sales for the quarter ended December 31, 2015 was $10.4 million, or 11.8%, when compared to the quarter ended December 31, 2014, primarily due to the unfavorable impact of foreign exchange. On a constant currency basis, European health care sales remained relatively flat. The decrease in Europe consumer net sales for the quarter ended December 31, 2015 was $6.9 million, or 5.6%, when compared to the quarter ended December 31, 2014 and is due to negative foreign exchange impacts. Before foreign exchange, consumer increased primarily due to the acquisition of BP Media and Presentation Products, offset by a reduction in sales associated with tobacco companies due to the impact of tobacco legislation in Europe. The Company does not have nor expect to have significant sales to tobacco customers in the future. The increase in Europe multi-media net sales for the quarter ended December 31, 2015 was $4.1 million, or 160.9%, when compared to the quarter ended December 31, 2014, primarily due to the BP Media acquisition. Adjusted for acquisitions in fiscal 2015 European sales were $201.0 million in the quarter ended December 31, 2015 compared to $230.3 million in the quarter ended December 31, 2014, a decrease of $29.3 million. The decrease is principally from the impact of foreign exchange.

Asia

The increase in Asia net sales for the quarter ended December 31, 2015 was $15.1 million, or 128.2%, when compared to the quarter ended December 31, 2014. The largest impact on sales is due to the acquisition of ASG in November 2014 and the inclusion of its sales for the quarter.

The increase in Asia healthcare sales for the quarter ended December 31, 2015 was $0.2 million, or 4.5%, when compared to the quarter ended December 31, 2014. The increase in Asia consumer sales for the quarter ended December 31, 2015 was $14.9 million, or 213.6%, when compared to the quarter ended December 31, 2014.

Adjusted for acquisitions in fiscal 2015 Asian sales were $26.9 million in the quarter ended December 31, 2015 compared to $25.7 million in the quarter ended December 31, 2014, an increase of $1.2 million.

Gross Profit

 

(Dollars in thousands)

   Quarter ended
December 31,
 
   2015     2014  

Net Sales

   $ 429,357      $ 404,827   

Cost of Goods Sold

     333,632        322,493   
  

 

 

   

 

 

 

Gross Margin

     95,725        82,334   
  

 

 

   

 

 

 

Gross Margin %

     22.3     20.3
  

 

 

   

 

 

 

The gross margin for the quarter ended December 31, 2015 increased when compared to the gross margin for the quarter ended December 31, 2014 principally due to the favorable impact of integration programs and synergies realized from the merger with Chesapeake and the acquisition of ASG in November 2014. Gross margin percentage for the quarter ended December 31, 2015 was 22.3%, an increase of 200 basis points compared to 20.3% for the quarter ended December 31, 2014. The increase is reflecting the Company’s continuing facility improvement programs and realized synergies from acquisitions, offset by restructuring charges and plant closure.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the quarter ended December 31, 2015 were $88.6 million, an increase of $22.7 million when compared to the prior period. The increase is principally due to stock compensation charges recorded in the quarter of $26.9 million associated with the vesting of incentive units held by employees at the date of the Company’s initial public offering, offset by a reduction in transaction related expenses of approximately $1.4 million. Other than stock based and deferred compensation, and transaction related expenses, selling, general and administrative expenses for the quarter ended December 31, 2015 were $59.3 million, a decrease of $2.6 million when compared to the prior period. As a percentage of net sales, excluding stock based and deferred compensation and transaction related expenses, these expenses were 13.8% for the quarter

 

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ended December 31, 2015 as compared to 15.3% for the prior period. The reduction in this percentage is principally due to the benefit of reduced personnel costs associated with the integration of the acquired operations discussed above, offset by additional costs associated with operating as a public reporting company.

Plant Reorganization and Acquisition Synergies

As previously mentioned, the Company announced the closure of its plant in Melrose Park, Illinois, in September 2015. The operations were discontinued in October 2015 and the closure and exit of the facility is anticipated to be complete in February 2016. In connection with the closure, the Company recorded restructuring expenses in the quarter ended December 31, 2015 of $0.8 million. The Company leases the underlying facility on a month to month basis. The Company is continuing to monitor the decline in multi-media for reorganization opportunities, as well as our global footprint to optimize our scale and service offering to our customers. In the quarter ended December 31, 2015, the Company realized $4.9 million of planned synergies related to acquisitions, with $2.5 million still expected to be realized in future quarters.

Other Income (Expense)

Other income (expense) is principally related to foreign currency gains and losses.

Interest expense for the quarter ended December 31, 2015 was $16.0 million compared to $17.9 million for the quarter ended December 31, 2014. The reduction in interest expense is primarily due to the repayment of $182.4 million of term loans from the proceeds of the Company’s initial public offering and the early payment of $25.0 million of term notes during the quarter, as well as reduced interest expense as a result of the repricing of the Company’s European debt facilities in December 2014. This reduction was partially offset by incremental interest expense related to the Company’s borrowing in November 2014 to fund the ASG transaction. Included in interest expense in the quarter ended December 31, 2015 and 2014 are deferred finance fees and debt discount of approximately $1.0 million and $1.1 million, respectively.

In connection with the prepayment of the Company’s debt, the Company recognized incremental amortization on the deferred financing and debt discount fees in the amount of $3.9 million as debt extinguishment charges for the three months ended December 31, 2015.

Income Taxes

Our effective income tax rates for the quarters ended December 31, 2015 and the quarter ended December 31, 2014, were 36.8% and 24.8%, respectively. For the quarter ended December 31, 2015 the Company recorded a discrete benefit of $2.7 million as a result of the reduction in United Kingdom tax rates provided for in “UK Finance (No. 2) Act 2015”, which was enacted on November 18, 2015 (the “UK Tax Act”). The Company’s effective tax rate was principally impacted by the recording of non-deductible stock compensation expense in the quarter ended December 31, 2015, as well as the mix and levels between U.S. and foreign earnings and the UK Tax Act.

Operating Income/Adjusted EBITDA

 

(Dollars in thousands)

   Quarter ended
December 31,
 
     2015      2014  

Operating Income (Loss)

     

North America

   $ (5,045      5,221   

Europe

     7,320         10,152   

Asia

     4,848         1,088   
  

 

 

    

 

 

 

Total Operating Income (Loss)

   $ 7,123       $ 16,461   
  

 

 

    

 

 

 

Adjusted EBITDA

     

North America

     29,539         32,500   

Europe

     33,569         24,453   

Asia

     6,298         1,507   
  

 

 

    

 

 

 

Total Adjusted EBITDA

   $ 69,406       $ 58,460   
  

 

 

    

 

 

 

 

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North America

North American operating income (loss) was $(5.0) million and $5.2 million for the quarters ended December 31, 2015 and December 31, 2014, respectively, and North American Adjusted EBITDA was $29.5 million and $32.5 million for the quarters ended December 31, 2015 and December 31, 2014, respectively. The loss for the quarter was principally due to the recording of $18.5 million of stock compensation expense for North American employees associated with the Company’s initial public offering. Excluding this stock compensation expense, North American operating income and North American Adjusted EBITDA increased when compared to the prior year period principally due to the inclusion of the operating income resulting from the acquisition of the ASG businesses discussed above, enhanced by the Company’s plant improvement programs and integration activities for this transaction.

Europe

European operating income was $7.3 million and $10.1 million for the quarters ended December 31, 2015 and December 31, 2014, respectively, and European Adjusted EBITDA was $33.6 million and $24.5 million for the quarters ended December 31, 2015 and December 31, 2014, respectively. The income for the quarter was negatively impacted due to the recording of $8.5 million of stock compensation expense for European employees associated with the Company’s initial public offering. Excluding this expense, European operating income and European Adjusted EBITDA increased principally due to the inclusion of the operating income from the acquisition of the Presentation Products and BluePrint discussed above, plant improvement programs and integration activities from the Chesapeake acquisition, offset by unfavorable foreign exchange impacts.

Asia

Asian operating income (loss) was $4.8 million and $1.1 million for the quarters ended December 31, 2015 and December 31, 2014, respectively, and Asian Adjusted EBITDA was $6.3 million and $1.5 million for the quarters ended December 31, 2015 and December 31, 2014, respectively. The increases are principally due to the inclusion of the operating income resulting from the acquisition of the ASG businesses discussed above and integration activities.

Six Months Ended December 31, 2015 Compared to Six Months Ended December 31, 2014.

The table below presents our results of operations for the respective quarters:

 

(Dollars in thousands)

   Six Months ended
December 31,
 
   2015      2014  

Net sales

   $ 888,408       $ 798,909   

Cost of goods sold

     693,342         634,192   
  

 

 

    

 

 

 

Gross margin

     195,066         164,717   
  

 

 

    

 

 

 

Selling, general and administrative expenses

     

Selling general and administrative expenses

     117,890         116,983   

Stock based deferred compensation expense

     26,960         886   

Transaction and other related expenses

     2,414         4,184   
  

 

 

    

 

 

 

Operating income

     47,802         42,664   
  

 

 

    

 

 

 

Other income (expense)

     

Other income (expense) net

     (3,535      1,543   

Debt extinguishment charges

     (3,867      —     

Interest expense

     (34,745      (36,411
  

 

 

    

 

 

 

Total other expense, net

     (42,147      (34,868
  

 

 

    

 

 

 

Income (loss) before income taxes

     5,655         (7,796

Income tax expense

     575         2,903   
  

 

 

    

 

 

 

Net income

     5,080         4,893   

Less: income (loss) attributable to non-controlling interest

     (10      318   
  

 

 

    

 

 

 

Net income attributable to Company

   $ 5,090       $ 4,575   
  

 

 

    

 

 

 

 

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Net Sales

The increase in net sales for the six months ended December 31, 2015 was $89.0 million, or 11.2%, when compared to the six months ended December 31, 2014. The increase is due to the inclusion of sales from the acquired operations of ASG, Presentation Products and BP Media, which were acquired in November 2014, February 2015 and July 2015, respectively. Net sales were unfavorably impacted by foreign currency changes, principally from translation differences, of $58.0 million. The Company expects the remainder of this fiscal year will continue to have impacts from foreign exchange when results are compared to the prior year, although to a lesser extent.

Net sales adjusted for the acquisitions had they been included since the beginning of the period, were $999.8 million for the six months ended December 31, 2014, a difference of $111.4 million from the GAAP net sales for the six months ended December 31, 2015. The difference is primarily attributable to the foreign exchange impact noted previously, as well as a reduction in general multi-media sales of $24.6 million, the elimination of certain non-core businesses from the acquired operations of ASG, a decline in sales from two consumer products companies of approximately $23.2 million and the lower than anticipated sales related to a toy project of approximately $18.4 million.

 

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We operate our business along the following operating segments, which are grouped based on the basis of geographic region: North America, Europe, and Asia. Net sales by geographic segment, as further broken down by end market, are summarized as follows:

Net Sales by Geographic Segment

 

(Dollars in thousands)

   Six months ended
December 31,
 
   2015      2014  

North America

     

Healthcare

   $ 142,912       $ 123,214   

Consumer

     167,587         133,033   

Multi-media

     106,478         81,223   
  

 

 

    

 

 

 
   $ 416,977       $ 337,470   
  

 

 

    

 

 

 

Europe

     

Healthcare

   $ 154,653       $ 176,580   

Consumer

     253,700         264,384   

Multi-media

     14,031         4,224   
  

 

 

    

 

 

 
   $ 422,384       $ 445,188   
  

 

 

    

 

 

 

Asia

     

Healthcare

   $ 10,248       $ 9,265   

Consumer

     38,799         6,985   
  

 

 

    

 

 

 
   $ 49,047       $ 16,250   
  

 

 

    

 

 

 

Total

   $ 888,408       $ 798,908   
  

 

 

    

 

 

 

The acquisition of ASG in November 2014 increased consumer, healthcare and multi-media sales due to that acquisition serving those end markets. All industry sales were higher due to the ASG acquisition; however overall sales trends in multi-media are expected to continue to decline and absent the acquisition activity, would have declined. Multi-media sales are declining due to the change in delivery systems towards digital delivery via downloads or online and pay-per-view systems. Our sales are reflective of the overall trend in the multi–media end market. Sales related to acquired businesses are evaluated as to profitability and optimization of manufacturing facility and if they are core to the Company’s ongoing business strategy. As a result, the Company can exit business that was not profitable or core to its business, and can move manufacturing to facilities that optimize the manufacturing effectiveness.

North America

The increase in North American net sales for the six months ended December 31, 2015 was $79.5 million or 23.6%, when compared to the six months ended December 31, 2014. The increase in North American healthcare sales for the quarter ended December 31, 2015 was $19.7 million, or 16.0%, when compared to the six months ended December 31, 2014. The increase in North American consumer net sales for the six months ended December 31, 2015 was $34.6 million or 26.0%, when compared to the six months ended December 31, 2014. The increase in North American multi-media sales for the six months ended December 31, 2015, was $25.3 million or 31.0%, when compared to the six months ended December 31, 2014. All of these increases are primarily a result of the ASG acquisition completed on November 21, 2014. ASG had a majority of its business operations in North America.

Adjusted for acquisitions in fiscal 2015 North American sales were $417.0 million in the six months ended December 31, 2015 compared to $463.1 million for the six months ended December 31, 2014. The decrease is principally due to the previously mentioned consumer product companies’ sales, foreign exchange of approximately $9 million, and the toy project discussed above.

Although North American multi-media sales increased for the six months ended December 31, 2015 when compared to the six months ended December 31, 2014 by $25.3 million, this increase was principally due to the inclusion of the sales from the acquired ASG operations in the six months ended December 31, 2015. The acquired ASG operations were integrated immediately upon acquisition and, as a result, it is not possible to isolate the portion of revenues attributable to the ASG operations. However, had the ASG acquisition not occurred, multi-media sales would have declined for the six months ended December 31, 2015.

 

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Europe

The decrease in Europe net sales for the six months ended December 31, 2015 was $22.8 million, or 5.1%, when compared to the six months ended December 31, 2014, principally due to the unfavorable impact of foreign exchange of $48.0 million offset by the sales from the BP Media and Presentation Products acquisitions completed on July 1, 2015 and February 28, 2015, respectively.

The decrease in Europe healthcare sales for the six months ended December 31, 2015 was $21.9 million, or 12.4%, when compared to the six months ended December 31, 2014, primarily due to the unfavorable impact of foreign exchange. On a constant currency basis, European health care sales would have decreased approximately $3.7 million. The decrease in Europe consumer net sales for the six months ended December 31, 2015 was $10.7 million, or 4.0%, when compared to the six months ended December 31, 2014. The increase in multi-media net sales for the quarter ended December 31, 2015 was $9.8 million, or 232.2%, when compared to the quarter ended December 31, 2014. The increase in consumer and multi-media sales are primarily due to the acquisition of BP Media and Presentation Products acquisitions. In addition, foreign exchange unfavorably impacted the consumer sales by approximately $28.3 million. Sales associated with tobacco companies were down approximately $4.3 million due to tobacco legislation in Europe impacting the related customers. The Company does not have nor expect to have significant sales to tobacco customers in the future

Adjusted for acquisitions in fiscal 2015 European sales were $422.4 million in the six months ended December 31, 2015 compared to $478.7 million in the six months ended December 31, 2014, a decrease of $56.3 million. The decrease is principally from the impact of foreign exchange.

Asia

The increase in Asia net sales for the six months ended December 31, 2015 was $32.8 million, or 201.8%, when compared to the six months ended December 31, 2014. The largest impact on sales is due to the acquisition of ASG in November 2014 and the inclusion of its sales for the quarter.

The increase in Asia healthcare sales for the six months ended December 31, 2015 was $1.0 million, or 10.6%, when compared to the six months ended December 31, 2014. The increase in Asia consumer sales for the six months ended December 31, 2015 was $31.8 million, or 455.5% when compared to the six months ended December 31, 2014. The largest impact on sales is due to the acquisition of ASG in November 2014 and the inclusion of its sales for the six months ended December 31, 2015.

Adjusted for acquisitions in fiscal 2015 Asian sales were $49.0 million in the six months ended December 31, 2015 compared to $58.0 million in the six months ended December 31, 2014, a decrease of $9.0 million. The decrease is principally due to the discontinuance of sales from non-core customers obtained with the ASG acquisition.

Gross Profit

 

(Dollars in thousands)

   Six months ended
December 31,
 
   2015     2014  

Net Sales

   $ 888,408      $ 798,909   

Cost of Goods Sold

     693,342        634,192   
  

 

 

   

 

 

 

Gross Margin

     195,066        164,717   
  

 

 

   

 

 

 

Gross Margin %

     22.0     20.6
  

 

 

   

 

 

 

The gross margin for the six months ended December 31, 2015 increased when compared to the gross margin for the six months ended December 31, 2014 principally due to the inclusion of the sales from acquisitions for the entire period, as well as the favorable impact of integration programs and synergies realized from the merger with Chesapeake and the acquisition of ASG in November 2014. Gross margin percentage for the six months ended December 31, 2015 was 22.0%, an increase of 140 basis points compared to 20.6% for the six months ended December 31, 2014. The increase is reflecting the Company’s continuing facility improvement programs and realized synergies from acquisitions, offset by restructuring charges and plant closure of approximately $3.6 million.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the six months ended December 31, 2015 were $147.3 million, an increase of $25.2 million when compared to the prior period. The increase is principally due to stock compensation charges recorded in the quarter of $26.9 million

 

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associated with the vesting of incentive units held by employees at the date of the Company’s initial public offering, offset by a reduction in transaction related expenses of approximately $1.8 million. Other than stock based and deferred compensation, and transaction related expenses, selling, general and administrative expenses for the six months ended December 31, 2015 were $117.9 million, an increase of $0.9 million when compared to the prior period. As a percentage of sales, excluding stock based and deferred compensation and transaction related expenses, these expenses were 13.3% for the six months ended December 31, 2015 as compared to 14.6% for the prior period. The reduction in this percentage is principally due to the benefit of reduced personnel costs associated with the integration of the acquired operations discussed above, offset by additional costs associated with operating as a public reporting company.

Plant Reorganization and Acquisition Synergies

As previously mentioned, the Company announced the closure of its plant in Melrose Park, Illinois, in September 2015. The operations have been discontinued in October, 2015 and the closure and return of the facility is anticipated to be complete in February 2016. In connection with the closure, the Company recorded restructuring expenses in the six months ended December 31, 2015. The Company leases the underlying facility on a month to month basis. The Company is continuing to monitor the decline in multi-media for reorganization opportunities, as well as our global footprint to optimize our scale and service offering to our customers. In the six months ended December 31, 2015, the Company realized $9.5 million of planned synergies related to acquisitions, with $2.5 million still expected to be realized in future quarters.

Other Income (Expense)

Other income (expense) is principally related to foreign currency gains and losses.

Interest expense for the six months ended December 31, 2015 was $34.7 million compared to $36.4 million for the quarter ended December 31, 2014. The reduction in interest expense is primarily due to the repayment of $182.4 million of term loans from the proceeds of the Company’s initial public offering and $25.0 million from the early payment of term notes during the second quarter, as well as reduced interest expense from the repricing of the Company’s European debt facilities in December 2014. This reduction was partially offset by the Company’s borrowing in November 2014 to fund the ASG transaction. Included in interest expense in the six months ended December 31, 2015 and 2014 are deferred finance fees and debt discount of approximately $2.2 million and $2.1 million, respectively.

In connection with the repayment of the Company’s debt, the Company recognized incremental amortization on the deferred financing and debt discount fees in the amount of $3.9 million as debt extinguishment charges for the six months ended December 31, 2015.

Income Taxes

Our effective income tax rates for the six months ended December 31, 2015 and the six months ended December 31, 2014, were 10.2% and 37.2%, respectively. For the six months ended December 31, 2015 the Company recorded a discrete benefit of $2.7 million as a result of the reduction in United Kingdom tax rates provided for in the UK Tax Act. The Company’s effective tax rate was principally impacted by the recording of non-deductible stock compensation expense in the six months ended December 31, 2015, as well as the mix and levels between U.S. and foreign earnings and the UK Tax Act.

Operating Income/Adjusted EBITDA

 

(Dollars in thousands)

   Six months ended
December 31,
 
     2015      2014  

Operating Income (Loss)

     

North America

   $ 9,297       $ 11,337   

Europe

     30,543         30,391   

Asia

     7,962         936   
  

 

 

    

 

 

 

Total Operating Income (Loss)

   $ 47,802       $ 42,664   
  

 

 

    

 

 

 

Adjusted EBITDA

     

North America

   $ 61,801       $ 47,207   

Europe

     74,360         70,669   

Asia

     10,441         1,754   
  

 

 

    

 

 

 

Total Adjusted EBITDA

   $ 146,602       $ 119,630   
  

 

 

    

 

 

 

North America

North American operating income was $9.3 million and $11.3 million for the six months ended December 31, 2015 and December 31, 2014, respectively, and North American Adjusted EBITDA was $61.8 million and $47.2 million for the six months ended December 31, 2015 and

 

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December 31, 2014, respectively. North American operating income was negatively impacted for the six months ended December 31, 2015 principally due to the recording of $18.5 million of stock compensation expense for North American employees associated with the Company’s initial public offering. The increases in operating income and Adjusted EBITDA from the prior year period are principally due to the inclusion of the operating income resulting from the acquisition of the ASG businesses discussed above, enhanced by the Company’s plant improvement programs and integration activities for this transaction.

Europe

European operating income was $30.5 million and $30.4 million for the six months ended December 31, 2015 and December 31, 2014, respectively, and European Adjusted EBITDA was $74.3 million and $70.7 million for the six months ended December 31, 2015 and December 31, 2014, respectively. The income for the six months was negatively impacted due to the recording of $8.5 million of stock compensation expense for European employees associated with the Company’s initial public offering. The increase in operating income and Adjusted EBITDA from the prior year are principally due to the inclusion of the operating income from the acquisition of the Presentation Products and BluePrint discussed above, enhanced by the Company’s plant improvement programs, offset by unfavorable foreign exchange impacts.

Asia

Asian operating income was $7.9 million and $0.9 million for the six months ended December 31, 2015 and December 31, 2014, respectively, and Asian Adjusted EBITDA was $10.4 million and $1.8 million for the six months ended December 31, 2015 and December 31, 2014, respectively. The increases are principally due to the inclusion of the operating income resulting from the acquisition of the ASG businesses discussed above.

Liquidity and Capital Resources

On July 1, 2015, the Company acquired the operations of BluePrint using $2.7 million, net of cash acquired of existing cash balances to fund the acquisition.

On October 7, 2015, the Company made a prepayment of $25.0 million of its British Pound Sterling denominated term debt from existing cash balances.

On October 27, 2015, the Company completed its initial public offering of 16,500,000 common shares at a price of $13.00 per share. In connection with the offering, funds controlled by The Carlyle Group (“Carlyle”) and certain current and former employees, sold 1,000,000 common shares. The Company utilized $182.4 million of the offering net proceeds to reduce the Company’s first lien term loans. The underwriters also have exercised their rights to purchase an additional 2,475,000 common shares from certain of the selling shareholders, including investment funds controlled by Madison Dearborn and Carlyle, at the public offering price. The Company did not receive any of the proceeds from the shares sold by selling shareholders.

Cash balances as of December 31, 2015 were $59.0 million. There were no amounts outstanding under our revolving credit facility. Total debt, net of cash, was $903.8 million including deferred debt discount of $15.1 million.

Cash flow provided by (used in) operating activities, investing activities and financing activities is summarized in the following table:

 

     Six months ended
December 31,
 

(Dollars in thousands)

   2015      2014  

Cash flow provided by operating activities

   $ 62,816       $ 41,043   

Cash flow used in investing activities

     (26,068      (147,009

Cash flow provided by (used in) financing activities

     (35,767      122,219   

Cash Flow Provided by Operating Activities

Cash flow provided by operating activities for the six months ended December 31, 2015 increased by $21.8 million when compared to the prior period, principally due to the increase in Adjusted EBITDA as discussed above.

Cash flow provided by operating activities for the six months ended December 31, 2015 was $62.8 million. This is principally due to net income of $5.1 million, depreciation and amortization expense of $68.3 million and the recognition of non-cash stock compensation charges. These amounts were offset by net increases in working capital.

 

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Cash flow provided by operating activities for the six months ended December 31, 2014 was $41.0 million. This is principally due to net income of $4.9 million and depreciation and amortization expense of $67.7 million. These amounts were offset by net increases in working capital.

Cash Flow Used in Investing Activities

Cash flow used in investing activities for the six months ended December 31, 2015 decreased by $120.9 million when compared to the prior period, principally due to the acquisition of ASG in the prior period.

Cash flow used in investing activities for the six months ended December 31, 2015 was $26 million. This is principally due to investments in property, plant and equipment of $24.5 million.

Cash flow used in investing activities for the six months ended December 31, 2014 was $147.0 million. This is principally due to the acquisition of ASG.

Cash Flow Provided by (Used in) Financing Activities

Cash flow provided by (used in) financing activities was $(35.8) million for the six months ended December 31, 2015 compared to $122.2 million for the six months ended December 31, 2014, a change of $158.0 million. The change is principally due to the lending activity in the prior year associated with the acquisition of ASG, and the early repayment of debt from available cash balances of $25.0 million in the current period (initial public offering proceeds were generally offset by the related payment of term loans).

Cash flow used in financing activities for the six months ended December 31, 2015 was $35.8 million. This is principally due to the net effect of proceeds from our initial public offering, offset by regular payments of short and long term debt, as well as a prepayment of long term debt from excess cash and offering proceeds.

Cash flow provided by financing activities for the six months ended December 31, 2014 was $122.2 million. This is principally due to the borrowing of $136.0 million to fund the acquisition of ASG.

Cash and Working Capital

Cash and cash equivalents were $59.0 million at December 31, 2015 as compared to $55.7 million at June 30, 2015. Cash of $44.5 million and $39.6 million is held outside of the United States at December 31, 2015 and June 30, 2015, respectively. Working capital was $236.4 million as compared to $207.6 million as of the same dates, respectively. The current ratio was 1.9 to one as compared to 1.7 to one as of the same dates respectively.

Contractual Obligations

During the three months ended December 31, 2015, the Company made voluntary prepayments of approximately $207.4 million on its term loans ($25.0 million on October 7, 2015 and approximately $182.4 million on October 29, 2015). These payments, along with the Company’s regularly scheduled payments, reduced the Company’s estimated total obligation under the term loans from $1,224.4 million as of June 30, 2015 to $925.7 million as of December 31, 2015. Estimated future payments on outstanding debt obligations are based on interest rates as of December 31, 2015. Actual cash flows may differ significantly due to changes in underlying estimates.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the market risks previously disclosed in our financial statements and notes included in the Company’s Registration Statement on Form S-1.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2015, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

 

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are from time to time party to legal proceedings that arise in the ordinary course of business. We are not involved in any litigation other than that which has arisen in the ordinary course of business. We do not expect that any currently pending lawsuits will have a material effect on us.

 

ITEM 1A. RISK FACTORS

There were no material changes during the three months ended December 31, 2015 to the Company’s risk factors as previously reported on the Company’s Registration Statement filed on form S-1, as filed with the SEC on October 19, 2015.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities:

In connection with the internal reorganizational transactions that occurred prior to pricing of the initial public offering, the Company became the direct parent company of Multi Packaging Solutions Global Holdings Limited (“MPS Holdings”) by way of a 1-for-1 share-for-share exchange of shares of MPS Holdings for shares of the Company. This resulted in the number of common shares issued by the Company increasing from 2 common shares outstanding to 314,909,640 common shares outstanding. The issuance of the Company’s common shares were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a) (2) of the Securities Act as a transaction by an issuer not involving any public offering. Following the share-for-share exchange and prior to the initial public offering, a 5.08415-for-1 share split of the Company’s common shares was completed.

Use of Proceeds from our Initial Public Offering of Common Shares:

On October 27, 2015, we completed the initial public offering of our common shares pursuant to a registration statement on Form S-1, as amended (File No. 333-205278) that was declared effective on October 21, 2015. Under the registration statement, we registered the offering and sale of 18,975,000 common shares at a price of $13.00 per share. We sold 15,500,000 common shares and the selling shareholders named in the registration statement sold 3,475,000 common shares (which includes 2,475,000 common shares sold by the selling shareholders named in the registration statement that were part of the underwriters’ over-allotment option).

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Citigroup Global Markets Inc. acted as joint book running managers of the offering, which closed on October 27, 2015. We raised a total of $201.5 million in gross proceeds in the initial public offering, or approximately $182.4 million in net proceeds after deducting underwriting discounts and commissions of $11.6 million and $7.5 million of offering-related expenses. We did not receive any proceeds from the sale of common shares by the selling shareholders.

We used all our net proceeds from the offering to repay term debt and to pay related premiums and accrued and unpaid interest.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

See the Exhibit Index for the exhibits filed with this Quarterly Report on Form 10-Q or incorporated by reference.

 

ITEM 6. Exhibits.

 

Exhibit

No.

 

Description

  *3.1   Amendment to the Memorandum of Association of Multi Packaging Solutions International Limited
  *3.2   Amended and Restated Bye-laws of Multi Packaging Solutions International Limited
  *4.1   Shareholders Agreement among Mustang Investment Holdings L.P., CEP III Chase S.à r.l. and Multi Packaging Solutions International Limited, dated October 21, 2015
  31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Previously filed

 

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MULTI PACKAGING SOLUTIONS INTERNATIONAL LIMITED
Date: February 11, 2016     By:  

/s/ Marc Shore

      Marc Shore
     

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: February 11, 2016     By:  

/s/ William H. Hogan

      William H. Hogan
     

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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