ITEM 1. BUSINESS
(In thousands, except for statistical data)
OVERVIEW
Multi-Color Corporation (Multi-Color, MCC, we, us, our or the Company), headquartered near Cincinnati, Ohio, is a leader in global label solutions supporting a number of the world’s most prominent brands including leading producers of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products. MCC serves international brand owners in the North American, Latin American, EMEA (Europe, Middle East and Africa) and Asia Pacific regions with a comprehensive range of the latest label technologies in Pressure Sensitive, Cut and Stack, In-Mold, Shrink Sleeve, Heat Transfer, Roll Fed, and Aluminum Labels.
The Company was incorporated in 1985, succeeding the predecessor business. Our corporate offices are located at 4053 Clough Woods Drive, Batavia, Ohio 45103 and our telephone number is (513) 381-1480.
Our common stock, no par value, is listed on the NASDAQ Global Select Market under the symbol “LABL”. See “Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” We maintain a website (www.mcclabel.com), which includes additional information about the Company. The website includes corporate governance information for our shareholders and our Code of Ethics can be found under the corporate governance section. Information on the website is not part of this Form 10-K. Shareholders can also obtain on and through our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such materials with or furnishes such materials to the Securities and Exchange Commission (SEC). The Company’s filed documents may also be accessed via the SEC Internet site at http://www.sec.gov.
On February 24, 2019, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with W/S Packaging Holdings, Inc., a Delaware corporation (“Parent”) and Monarch Merger Corporation, an Ohio corporation and a wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company in accordance with the Ohio General Corporation Law (the “Merger”), with the Company surviving such Merger as a wholly owned subsidiary of Parent.
References to 2019, 2018 and 2017 are for the fiscal years ended March 31, 2019, 2018 and 2017, respectively.
PRODUCTS AND SERVICES
The Company provides a wide range of products for the packaging needs of our customers and is one of the world’s largest producers of high quality pressure sensitive, in-mold and heat transfer labels and a major manufacturer of cut and stack, roll fed, aluminum and shrink sleeve labels. The Company also provides a full complement of print methods including rotogravure, lithographic, flexographic, digital and a combination of flexographic and screen printing, plus in-house pre-press services.
Pressure Sensitive Labels:
Pressure sensitive labels adhere to a surface with pressure. The label typically consists of four elements - a substrate, which may include paper, foil or plastic; an adhesive, which may be permanent or removable; a release coating; and a backing material to protect the adhesive against premature contact with other surfaces. The release coating and protective backing are removed prior to application to the container, exposing the adhesive, and the label is pressed or rolled into place. Innovative features of this product include promotional neckbands, peel-away coupons, resealable labels, see-through window graphics, and holographic foil enhancements to cold and hot foil stamping.
Pressure sensitive labels are the largest category of the overall label market and provide an extremely versatile, low-cost application that is able to produce sharp, bright colors in a wide variety of applications. We are one of the world’s largest producers of high quality pressure sensitive labels and this market represents a significant growth opportunity for us.
In-Mold Labels (IML):
The in-mold label process applies a label to a plastic container as the container is being formed in the mold cavity. The finished IML product is a finely detailed label that performs consistently well for plastic container manufacturers and adds marketing value and product security for consumer product companies.
Each component of the IML production process requires a special expertise for success. The components include the substrate (the base material for the label), inks, overcoats, varnishes and adhesives. We believe we are unique in the industry in that we manufacture IMLs on rotogravure, flexographic and lithographic printing presses. There are several critical characteristics of a successful IML: the material needs a proper coefficient of friction so that the finished label is easily and consistently picked up and applied to the injection or blow-molded container, the substrate must be able to hold the label’s inks, including metallics and fluorescents, overlay varnishes and adhesives and the material must be able to lay smoothly, without wrinkle or bulge, when applied to a very hot, just molded plastic container that will
quickly shrink, along with the label, as its temperature falls. We continually search for alternate substrates to be used in the IML process in order to improve label performance and capabilities, as well as to reduce substrate costs. Technical innovations in this area include the use of peel-away IML coupons and scented and holographic labels.
Heat Transfer Labels (HTL):
HTL are reverse printed and transferred from a special release liner onto the container using heat and pressure. The labels are a composition of inks and lacquers tailored to the customer’s specific needs. These labels are printed and then shipped to blow molders and/or contract decorators who transfer the labels to the containers. Once applied, the labels are permanently adhered to the container. The graphics capabilities include fine vignettes, metallic and thermochromatic inks, as well as the patented “frost”, giving an acid-etch appearance.
Therimage™ is our pioneer heat transfer label technology developed primarily for applications involving plastic containers serving the home & personal care and food & beverage consumer markets. Our Clear ADvantage™ brand enables us to provide premium graphics on both glass and plastic containers facilitating the highly sought after “no label” look for the health and beauty aid, beverage, personal care, household chemical and promotional markets. Our “ink only” and flameless HTL technology have increased our capabilities in this area. Flameless technology enables us to provide a solution to customers who want to remove open flames from their operations, which are normally required to pre-treat and post-treat containers for Therimage™ and Clear ADvantage™ products. Flameless technology has applications in all the aforementioned markets.
Cut and Stack:
Cut and stack labels are adhered to containers using an adhesive applied during the labeling process. These labels are an attractive and cost-effective choice for high volume applications. These labels can be produced on a wide variety of substrates and accommodate a comprehensive range of embellishments including foil stamping, embossing, metallics and unique varnish finishes.
Our innovations within cut and stack labels include peel-away promotional labels, thermochromics, holographics and metalized films. We also offer promotional products such as scratch-off coupons and static-clings.
Roll Fed:
Roll fed labels can be applied to any type of container and offer customers optimum space for brand presentation at a competitive price. Our roll fed labels are highly resistant to tearing and moisture and can be printed in brilliant colors with a wide range of special effects using thermochromic inks and interactive technologies.
Shrink Sleeve Labels:
Shrink sleeve labels are produced in colorful, cutting edge styles and materials. The labels are manufactured as sleeves, slid over glass or plastic bottles and then heated to conform precisely to the contours of the container. This label type is increasingly popular with consumer goods companies such as beverage manufacturers as it allows for product differentiation as well as having a 360-degree label and tamper resistant features. Demand in other end-markets (including the food and personal care markets) continues to grow, broadening the market opportunities for shrink sleeve labels as a whole.
Aluminum Labels:
Fully printable and equipped for embossing, our aluminum labels let our customers’ products shine with premium shelf impact while providing tamper evidence protection. The aluminum product range includes elegant neck labels that effortlessly adapt to the bottleneck shape and can be customized with embossing and de-embossing and a variety of ink effects. Also available in aluminum are Smart Top can lid labels. Smart Top labels are designed to maximize branding and messaging. They also provide the added benefit of protection against dust and germs and are fully recyclable.
Graphic Services:
We provide graphics and pre-press services for our customers at all of our manufacturing locations. These services include the conversion of customer digital files and artwork into proofs, production of print layouts and printing plates, and product mock ups and samples for market research.
As a result of these capabilities, we are able to go from concept to printed label, thus increasing our customers’ speed to market and further enhancing our value proposition.
SALES AND MARKETING
We provide a complete line of label solutions and a variety of pre-press activities. Our vision is to be the premier global resource for decorating solutions. We sell to a broad range of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer product companies located in the North American, Latin American, EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Our sales strategy is a consultative selling approach. Our sales organization reviews the requirements of the container and offers
a number of alternative decorating methods. Our customers view us as an expert source of materials, methods and technologies with the ability to offer the most cost-effective solution.
We have continued to make progress in expanding our customer base and portfolio of products, pre-press activities and manufacturing locations throughout the world. During 2019, 2018 and 2017, sales to major customers (those exceeding 10% of the Company’s net revenues in one or more of the periods presented) approximated 10%, 14% and 17%, respectively, of the Company’s consolidated net revenues. All of these sales were made to The Procter & Gamble Company. In fiscal 2018, we entered the German label market with the acquisition of GEWA Etiketten GmbH located in Bingen am Rhein, Germany, which specializes in producing pressure sensitive labels for the wine & spirits market. Our fiscal 2018 acquisition of Constantia Labels expanded our presence in Germany and gave us entrance into the Belgian, Romanian and Vietnamese label markets. We also entered the Tanzanian label market in fiscal 2018 with the acquisition of TP Label Limited, the labels business of Tanzania Printers Limited (Tanzania Printers), and TP Kenya Limited (collectively, “TP Label”), which is located in Dar es Salaam, Tanzania with a sales and distribution center located in Nairobi, Kenya. TP Label is primarily a pressure sensitive and cut and stack business, serving customers in the food & beverage market. We also entered the New Zealand wine & spirits market in fiscal 2018 with a start-up operating in Auckland, New Zealand.
PRODUCTION AND QUALITY
To guarantee consistent quality results, all of our label decorating services are backed by aggressively implemented and administered quality programs and qualified technical support staff. Our quality assurance program ensures excellence in every label.
Multi-Color’s comprehensive range of printing technologies facilitates our ability to respond quickly and effectively to changing customer needs. Our current printing technologies include rotogravure, lithographic, flexographic, digital and a combination of flexographic and screen printing. Pre-press technology offerings include color separations, color management programs and in-house platemaking and tooling.
Our manufacturing operations involve complex processes and utilize factory automation to produce a consistent, high quality label. We employ state of the art technologies, including digital platemaking and automated vision inspection systems complemented by a robust systemic quality management system.
EMPLOYEES
As of March 31, 2019, we employ over 8,300 associates across more than 70 operations globally.
RAW MATERIALS
Common to the printing industry, we purchase proprietary products from a number of raw material suppliers. To prevent potential disruptions to our manufacturing facilities, we have developed relationships with more than one supply source for each of our critical raw materials. Our raw material suppliers are major corporations with successful historical performance. Although we intend to prevent any long-term business interruption due to our inability to obtain raw materials, there could be short-term manufacturing disruptions during the vendor qualification period for any new raw material source.
ACQUISITIONS
We are continually in pursuit of selective acquisitions that will contribute to our growth. We believe that acquisitions are a method of increasing our presence in existing markets, expanding into new markets, gaining new customers and product offerings and improving operating efficiencies through economies of scale. Through acquisitions, we intend to broaden our revenue stream by expanding our lines of innovative label solutions, offering a variety of technical and graphic services and fulfilling the specific needs and requirements of our customers. The printing and packaging industry is highly fragmented and offers many opportunities for acquisitions.
On October 31, 2017, the Company completed its acquisition pursuant to the Sale and Purchase Agreement (as amended) with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, “Constantia Flexibles”), acquiring 100% of the Labels Division of Constantia Flexibles (“Constantia Labels”). Constantia Labels, headquartered in Vienna, Austria, is a leader in label solutions serving the food, beverage and consumer packaging goods industries.
On October 11, 2017, the Company acquired 100% of TP Label Limited, the labels business of Tanzania Printers Limited (Tanzania Printers), and TP Kenya Limited (collectively, “TP Label”), which is located in Dar es Salaam, Tanzania with a sales and distribution center located in Nairobi, Kenya. TP Label is primarily a pressure sensitive and cut and stack label business, serving customers in the food & beverage market.
On August 3, 2017, the Company acquired 100% of GEWA Etiketten GmbH (GEWA). GEWA is located in Bingen am Rhein, Germany and specializes in producing pressure sensitive labels for the wine & spirits market.
On January 3, 2017, the Company acquired Graphix Labels and Packaging Pty Ltd. (Graphix). Graphix is located in Melbourne, Victoria, Australia and specializes in producing labels for both the food & beverage and wine & spirits markets. In January 2017, the Company acquired an additional 67.6% of the common shares of Gironde Imprimerie Publicité (GIP). The Company acquired 30% of GIP as part of
the Barat acquisition in fiscal 2016. GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market.
On July 6, 2016, the Company acquired Industria Litografica Alessandrina S.r.l. (I.L.A.), which is located in the Piedmont region of Italy and specializes in producing premium self-adhesive and wet glue labels primarily for the wine & spirits market and also services the food industry.
On July 1, 2016, the Company acquired Italstereo Resin Labels S.r.l. (Italstereo), which is located near Lucca, Italy and specializes in producing pressure sensitive adhesive resin coated labels, seals and emblems.
See Note 17 to our consolidated financial statements for geographic information relating to our net revenues and long-lived assets. See Note 4 to our consolidated financial statements for further information regarding acquisitions.
COMPETITION
We have a large number of competitors in the pressure sensitive, cut and stack and roll fed label markets and several competitors in each of the IML, shrink sleeve, HTL and aluminum label markets. Some of these competitors in the pressure sensitive and cut and stack label markets have greater financial and other resources than us. The competitors in IML, shrink sleeve and HTL markets are either private companies or subsidiaries of public companies and we cannot assess the financial resources of these organizations. We could be adversely affected should a competitor develop labels similar or technologically superior to our labels. We believe competition is principally dependent upon product performance, service, pricing, technical support and innovation.
PATENTS AND LICENSES
We own a number of patents and patent applications that relate to the products and services we offer to our customers. Although these patents are important to us, we are not dependent upon any one patent. We believe that these patents, collectively, along with our ability to be a single source provider of many packaging needs, provide us with a competitive advantage over our competition. The expiration or unenforceability of any one of our patents would not have a material adverse effect on us.
REGULATION
Our operations are subject to regulation by federal, state and foreign environmental protection agencies. To ensure ongoing compliance with these requirements, we have implemented an internal compliance program. Additionally, we continue to make capital investments to maintain compliance with these environmental regulations and to improve our existing equipment. However, there can be no assurances that these regulations will not require expenditures beyond those that are currently anticipated.
In the U.S., the Food and Drug Administration regulates the raw materials used in labels for various products. These regulations apply to the consumer product companies for which we produce labels. We use materials specified by the consumer product companies in producing labels.
ITEM 1A.
ITEM 1A. RISK FACTORS
(In thousands, except for statistical data)
In addition to the other information set forth in this report, the following factors could materially affect the Company’s business, financial condition, cash flows or future results. Any one of these factors could cause the Company’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
Risks Relating to Our Business
The proposed acquisition of the Company by Parent may disrupt our business.
Upon the terms and subject to the conditions set forth in the Merger Agreement, if the proposed Merger is completed, our shareholders will be entitled to receive $50.00 in cash for each share of our common stock owned by them as of the effective time of the proposed Merger. The Merger Agreement generally requires us to operate our business in the ordinary course of business consistent with past practice pending consummation of the proposed Merger and restricts us, without Parent’s consent, from taking certain specified actions until the proposed Merger is completed. These restrictions may affect our ability to execute our business strategies, respond effectively to competitive pressures and industry developments, and attain our financial and other goals, and these restrictions may impact our financial condition, results of operations and cash flows.
Employee retention and recruitment may be challenging before the completion of the proposed Merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to accept employment with the Company because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, our business, financial condition and results of operations could be adversely affected.
The proposed Merger could also cause disruptions to our business or business relationships, which could have an adverse impact on our business, financial condition and results of operations. Parties with which we have business relationships, including customers and suppliers, may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the proposed Merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect our business, financial condition and results of operations.
We are also subject to litigation related to the proposed Merger and there could be other litigation, which could result in significant costs and expenses. See “Item 3 - Legal Proceedings.” In addition to potential litigation-related expenses, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the proposed Merger is consummated.
Failure to complete the proposed Merger in a timely manner or at all could negatively impact the market price of shares of our common stock, as well as our business, financial condition and results of operations.
We cannot be certain when or if the conditions for the proposed Merger will be satisfied or (if permissible under applicable law) waived. The proposed Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived, including (i) the approval of the proposed Merger by the affirmative vote of the Company shareholders entitled to exercise a majority of the voting power (the “Requisite Shareholder Approval”), (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the receipt of required foreign antitrust approvals and clearances in the European Union, Mexico and South Africa and (iii) other customary closing conditions. As of the filing of this Form 10-K, the Company has received the Requisite Shareholder Approval, foreign antitrust approvals and clearances in Mexico and South Africa and the expiration of the applicable waiting period under the HSR Act has occurred. In the event that the proposed Merger is not completed for any reason, the holders of shares of our common stock will not receive any payment for their shares in connection with the proposed Merger. Instead, the Company will remain an independent public company and holders of shares of our common stock will continue to own such shares. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed.
Additionally, if the proposed Merger is not consummated in a timely manner or at all, our ongoing business may be adversely affected, including due to:
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negative reactions from financial markets and a decline in the price of shares of our common stock;
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negative reactions from employees, customers, suppliers or other third parties;
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the diversion of management’s focus from pursuing other opportunities that could have been beneficial to us; and
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higher than anticipated costs of pursuing the proposed Merger.
If the proposed Merger is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect the price of shares of our common stock or our business, financial condition or results of operations.
We have incurred and will continue to incur substantial transaction fees and costs in connection with the proposed Merger.
We expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger. A material portion of these expenses are payable by us whether or not the proposed Merger is completed. Further, although we have assumed that a certain amount of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These costs could adversely affect our business, financial condition and results of operations.
Raw material cost increases or shortages could adversely affect our results of operations and cash flows.
Our sales and profitability are dependent upon the availability and cost of various raw materials, which are subject to price fluctuations, and the ability to control the fluctuating costs of raw materials, pass on any price increases to our customers or find suitable alternative suppliers. If we are unable to effectively manage these costs or improve our operating efficiencies, or if adverse developments arise concerning certain key raw material vendors, such as disruptions in their productions or lack of availability of the raw materials we need from them, or our relationships with them, our profit margin may decline, especially if the inflationary conditions that have occurred in these markets in the recent past continue to occur.
We face risks related to interruption of our operations and lack of redundancy.
Our production facilities, websites, transaction processing systems, network infrastructure, supply chain and customer service operations may be vulnerable to interruptions, including by cyber-attack, and we do not have redundancies in all cases to carry on these operations in the event of an interruption. Specifically, the long-term shutdown of our printing presses or malfunctions experienced with our presses could negatively impact our ability to fulfill customers’ orders and on-time delivery needs and adversely impact our operating results and cash flows. We have not identified alternatives to all of our facilities, systems, supply chains and infrastructure, including production, to serve us in the event of an interruption, and if we were to find alternatives, they may not be able to meet our requirements on commercially acceptable terms or at all. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and because many of the causes of system interruptions or interruptions of the production process may be outside of our control, we may not be able to remedy such interruptions in a timely manner, or at all. Any interruptions that cause any of our websites to be unavailable, reduce our order fulfillment performance or interfere with our manufacturing, technology or customer service operations could result in lost revenue, increased costs, negative publicity, damage to our reputation and brand, and an adverse effect on our business and results of operations.
Building redundancies into our infrastructure, systems and supply chain to mitigate these risks may require us to commit substantial financial, operational and technical resources, in some cases before the volume of our business increases with no assurance that our revenues will increase.
Various laws and governmental regulations applicable to a manufacturer or distributor of consumer products may adversely affect our business, results of operations and financial condition.
Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including laws and regulations with respect to labor and employment, product safety, including regulations enforced by the United States Consumer Products Safety Commission, import and export activities, the Internet and e-commerce, antitrust issues, taxes, chemical usage, air emissions, wastewater and storm water discharges and the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials. We routinely incur costs in complying with these regulations and, if we fail to comply, could incur significant penalties.
Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance or the consequences of non-compliance with these requirements, or the effect on our operations, any of which may be significant. If we fail to comply with applicable laws and regulations, we may be subject to criminal sanctions or civil remedies, including fines, injunctions, or prohibitions on importing or exporting. A failure to comply with applicable laws and regulations, or concerns about product safety, also may lead to a recall or post-manufacture repair of selected products, resulting in the rejection of our products by our customers and consumers, lost sales, increased customer service and support costs, and costly litigation. In addition, failure to comply with environmental requirements could require us to shut down one or more of our facilities. There is risk that any claims or liabilities, including product liability claims, relating to such noncompliance may exceed, or fall outside the scope of, our insurance coverage. Laws and regulations at the state, federal and international levels frequently change and the cost of compliance cannot be precisely estimated. Any changes in regulations, the imposition of additional regulations, or the enactment of any new governmental legislation that impacts employment/labor, trade, health care, tax, environmental or other business issues could have an adverse impact on our financial condition and results of operations.
Changes in applicable tax regulations could adversely affect our financial results.
The Company is subject to taxation in the U.S. and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The changes included in the Tax Act are broad and complex. The U.S. Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impact. As of December 31, 2018, the Company’s accounting for the impact of the Tax Act is complete.
As this and other tax regulations change and as there are updates or changes to our estimates of the transition impact, our financial results could be adversely impacted.
We must be able to continue to effectively manage our growth, including our recent acquisitions, and to execute our long-term growth strategy.
We have experienced significant and steady growth over the last several years. Our growth, in particular our recent acquisitions, combined with the geographical separation of our operations, has placed, and will continue to place, a strain on our management, administrative and operational infrastructure. Our ability to manage our operations and anticipated growth will require us to continue to refine our operational, financial and management controls, human resource policies, reporting systems and procedures in the locations in which we operate. In addition, our expectations regarding the earnings, operating cash flow, capital expenditures and liabilities resulting from acquisitions recently completed are based on information currently available to us and may prove to be incorrect. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. If we are unable to realize any of the anticipated benefits of an acquisition or manage expected future expansion, or if our long-term growth strategy is not successful, our ability to provide a high-quality customer experience could be harmed, which would damage our reputation and brand and substantially harm our business and results of operations. In addition, projections made by us in connection with forming our long-term growth strategy are inherently uncertain and based on assumptions and judgments by management that may be flawed or based on information about our business and markets that may change in the future, many of which are beyond our reasonable control. These and various other factors may cause our actual results to differ materially from our projections.
We are subject to risks associated with our international operations, including compliance with applicable U.S. and foreign anti-corruption laws and regulations such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and other applicable anti-corruption laws, which may increase the cost of doing business in international jurisdictions.
We have operations in the North American, Latin American, EMEA (Europe, Middle East and Africa) and Asia Pacific regions and we intend to continue expansion of our international operations. As a result, our business is exposed to risks inherent in foreign operations. If we fail to adequately address the challenges and risks associated with our international expansion and acquisition strategy, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results. These risks, which can vary substantially by jurisdiction, include the difficulties associated with managing an organization with operations in multiple countries, compliance with differing laws and regulations (including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and local laws prohibiting payments to government officials and other corrupt practices, tax laws, regulations and rates), enforcing agreements and collecting receivables through foreign legal systems. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors and agents will not take actions in violation of our policies, particularly as we expand our operations through organic growth and acquisitions. Any such violations could subject us to civil or criminal penalties, including material fines or prohibitions on our ability to offer our products in one or more countries, and could also materially damage our reputation, brand, international expansion efforts, business and operating results. Additional risks include the potential for restrictive actions by foreign governments, changes in economic conditions in each market, foreign customers who may have longer payment cycles than customers in the United States, the impact of economic, political and social instability of those countries in which we operate and acts of nature, such as typhoons, tsunamis, or earthquakes. The overall volatility of the economic environment has increased the risk of disruption and losses resulting from hyper-inflation, currency devaluation and tax or regulatory changes in certain countries in which we have operations. Approximately 62% of our sales were derived from our foreign operations (based on the country from which the product was shipped) during fiscal 2019.
We also face the challenges and uncertainties associated with operating in developing markets, which may subject us to a relatively high risk of political and social instability and economic volatility, all of which are enhanced, in many cases, by uncertainties as to how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom (“UK”) elected to withdraw from the European Union (“EU”) in a national referendum (commonly referred to as Brexit). The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the UK formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls from the governments of other EU member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common stock.
Due to the fact that we have operations located within the UK, Brexit could negatively impact our operations resulting primarily from (a) operational disruptions due to changes in the manner in which people and products are moved between the UK and EU following Brexit; and (b) potential price increases for supplies purchased by our UK businesses from companies located in the EU or elsewhere.
Currency exchange rate fluctuations could have an adverse effect on our revenue, cash flows and financial results.
Because we conduct a significant portion of our business outside the United States, our revenues and earnings and the value of our foreign net assets are affected by fluctuations in foreign currency exchange rates, which may favorably or adversely affect reported earnings and net assets. Currency exchange rates fluctuate in response to, among other things, changes in local, regional or global economic conditions, the imposition of currency exchange restrictions and unexpected changes in regulatory or taxation environments. Fluctuations in currency exchange rates may affect the Company’s operating performance by impacting revenues and expenses outside of the United States due to fluctuations in currencies other than the U.S. Dollar or where the Company translates into U.S. Dollars for financial reporting purposes the assets and liabilities of its foreign operations conducted in local currencies.
We have risks related to continued uncertain global economic conditions and volatility in the credit markets.
At times, domestic and international financial markets have experienced extreme disruption, including, among other things, extreme volatility in stock prices and severely diminished liquidity and credit availability. These developments and the related severe domestic and international economic downturns could adversely impact our business and financial condition in a number of ways, including effects beyond those that were experienced in previous recessions in the United States and foreign economies.
Global economic conditions also affect our customers’ businesses and the markets they serve, as well as our suppliers. Because a significant part of our business relies on our customers’ spending, a prolonged downturn in the global economy and an uncertain economic outlook could reduce the demand for printing and related services that we provide to these customers. Economic weakness and constrained advertising spending have resulted, and may in the future result, in decreased revenue, operating margin, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. We also have experienced, and expect to experience in the future, operating margin declines in certain businesses, reflecting the effect of items such as competitive pricing pressures and inventory write-downs. Economic downturns may also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments.
Finally, economic downturns may affect one or more of our lenders’ ability to fund future draws on our Credit Facility or our ability to access the capital markets or obtain new financing arrangements that are favorable to us. In such an event, our liquidity could be severely constrained with an adverse impact on our ability to operate our businesses. Our ability to meet the financial covenants in the Credit Facility may also be affected by events beyond our control, including a deterioration of economic and industry conditions, which could negatively affect our earnings. If it is determined we are not in compliance with these financial covenants, the lenders under the Credit Facility will be entitled to take certain actions, including acceleration of all amounts due under the facility. If the lenders take such action, we may be forced to amend the terms of the credit agreement, obtain a waiver or find alternative sources of capital. Obtaining new financing arrangements or amending our existing one may result in significantly higher fees and ongoing interest costs as compared to those in our current arrangement.
Competition in our industry could limit our ability to retain current customers and attract new customers.
The markets for our products and services are highly competitive and constantly evolving. We compete primarily based on the level and quality of customer service, technological leadership, product performance and price; the inability to successfully overcome competition in our business could have a material adverse impact on our operating results and cash flows. Some of our competitors have greater financial and other resources than us. We could face competitive pressure as a result of any of the following: our ability to continue to improve our product and service offerings and keep pace with and integrate technological advances and industry evolutions; new products developed by our competitors that are of superior quality, fit our customers’ needs better or have lower prices; patents obtained or developed by competitors; consolidation of our competitors; pricing pressures; loss of proprietary supplies of certain materials; decrease in the utilization of labels. The inability to successfully identify, develop and sell new or improved products and to overcome competition in our business could have a material adverse impact on our operating results and cash flows.
Our business growth strategy involves the potential for significant acquisitions, which involve risks and difficulties in integrating potential acquisitions and may adversely affect our business, results of operations and financial condition.
All acquisitions involve inherent uncertainties, which may include, among other things, our ability to:
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successfully identify targets for acquisition;
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negotiate reasonable terms;
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properly perform due diligence and determine all the significant risks associated with a particular acquisition;
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properly evaluate target company management capabilities; and
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successfully transition the acquired company into our business and achieve the desired performance.
We may acquire businesses with unknown liabilities, contingent liabilities, or internal control deficiencies. We have plans and procedures to conduct reviews of potential acquisition candidates for compliance with applicable regulations and laws prior to acquisition. Despite these efforts, realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position through the initiation, pendency or outcome of litigation or otherwise, or cause us to fail to meet our public financial reporting obligations.
We have a history of making acquisitions and, over the past several years, have invested, and in the future may continue to invest, a substantial amount of capital in acquisitions. We continue to evaluate potential acquisition opportunities to support, strengthen and grow our business. Although we have completed many acquisitions, there can be no assurance that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully in the future. In addition, any governmental review or investigation of our proposed acquisitions, such as by the Federal Trade Commission or the European Commissioner for Competition, may impede, limit or prevent us from proceeding with an acquisition. Future acquisitions may require us to incur additional debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain customers or management personnel. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives.
We have a significant amount of goodwill and other intangible assets on our balance sheet that are subject to periodic impairment evaluations; an impairment of our goodwill or other intangible assets may have a material adverse impact on our financial condition and results of operations.
When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired. As of March 31, 2019, we had $1,516,740 of goodwill and intangible assets, the value of which depends on a number of factors, including earnings growth, market capitalization and the overall success of our business. Accounting standards require us to test goodwill for impairment annually, and more frequently when events or changes in circumstances indicate impairment may exist.
There can be no assurance that reviews of our goodwill and other intangible assets will not result in impairment charges. Although it does not affect cash flow, an impairment charge does have the effect of decreasing our earnings, assets and shareholders’ equity. Future events may occur that could adversely affect the value of our assets and require future impairment charges. Such events may include, but are not limited to, poor operating results, strategic decisions made in response to changes in economic and competitive conditions, the impact of a deteriorating economic environment and decreases in our market capitalization due to a decline in the trading price of our common stock.
During the early years of an acquisition, the risk of impairment to goodwill and intangible assets is naturally higher. This is because the fair values of these assets align very closely with what we recently paid to acquire the reporting units to which these assets are assigned. This means the difference between the carrying value of the reporting unit and its fair value (typically referred to as “headroom”) is naturally smaller at the time of acquisition. Until this headroom grows over time (due to business growth or lower carrying value of the reporting unit due to natural amortization, etc.), a relatively small decrease in reporting unit fair value can trigger an impairment. That fair value is affected by actual business performance but is also determined by the market (usually reflected in the value of our common stock). As a consequence, sometimes even with favorable business performance, the market alone can drive an impairment condition if general business valuations decline significantly. When impairment charges are triggered, they tend to be material due to the sheer size of the assets involved.
Our debt instruments impose operating and financial restrictions on us and, in the event of a default, would have a material adverse impact on our business and results of operations.
As of March 31, 2019, our consolidated indebtedness, including current maturities of long-term indebtedness, was $1,537,353 (see Note 9) which could have important consequences including the following:
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Increasing our vulnerability to global economic and industry conditions;
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Requiring a substantial portion of cash flows from operating activities to be dedicated to the payment of principal and interest on our indebtedness and, as a result, reducing our ability to use our cash flows to fund our operations and capital expenditures, pay dividends, capitalize on future business opportunities and expand our business;
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Exposing us to the risk of increased interest expense as certain of our borrowings are at variable rates of interest;
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Limiting our ability to obtain additional financing for working capital, capital expenditures, additional acquisitions and other business purposes; and
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Limiting our flexibility to adjust to changing market conditions and react to competitive pressures.
We may be able to incur additional indebtedness in the future, subject to the restrictions contained in our credit agreements. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
Our debt instruments contain covenants that limit our flexibility in operating our business.
The agreements governing our indebtedness contain various covenants that may adversely affect our ability to operate our business. Among other things, these covenants limit our ability to incur additional indebtedness, dispose of assets, incur guarantee obligations, make restricted payments, create liens, make equity or debt investments, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates.
The agreements governing our indebtedness also require that (i) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.50 to 1.00 for the fiscal quarters ended during the period of March 31, 2017 through, and including June 30, 2019 and (ii) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.25 to 1.00 for the fiscal quarters ended during the period of September 30, 2019 and thereafter.
Our ability to meet the financial ratios and tests contained in our credit agreement and other debt arrangements, and otherwise comply with debt covenants may be affected by various events, including those that may be beyond our control. Accordingly, we may not be able to continue to meet those ratios, tests and covenants. A significant breach of any of these covenants, ratios, tests or restrictions, as applicable, could result in an event of default under our debt arrangements, which would allow our lenders to declare all amounts outstanding to be immediately due and payable. If the lenders were to accelerate the payment of our indebtedness, our assets may not be sufficient to repay in full the indebtedness and any other indebtedness that would become due as a result of any acceleration. Further, as a result of any breach and during any cure period or negotiations to resolve a breach or expected breach, our lenders may refuse to make further loans, which would materially affect our liquidity and results of operations.
In the event we were to fall out of compliance with one or more of our debt covenants in the future, we may not be successful in amending our debt arrangements or obtaining waivers for any such non-compliance. Even if we are successful in entering into an amendment or waiver, we could incur substantial costs in doing so. It is also possible that any amendments to our debt instruments or any restructured debt could impose covenants and financial ratios more restrictive than under our current facility. Any of the foregoing events could have a material adverse impact on our business and results of operations, and there can be no assurance that we would be able to obtain the necessary waivers or amendments on commercially reasonable terms, or at all.
Changes in the method of determining London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
Amounts drawn under our Credit Facility may bear interest rates in relation to LIBOR, depending on our selection of repayment options. On July 27, 2017, the Financial Conduct Authority (“FCA”) in the UK announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index called the Broad Treasury Financing Rate, calculated with a broad set of short-term repurchase agreements backed by treasury securities. If LIBOR ceases to exist, we may need to renegotiate the Credit Facility and may not be able to do so with terms that are favorable to us. The overall financing market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market or the inability to renegotiate the Credit Facility with favorable terms could have a material adverse effect on our business, financial position, and operating results.
We rely on several large customers and the loss of one of these customers would have a material adverse impact on our operating results and cash flows.
For the fiscal year ended March 31, 2019, one customer accounted for approximately 10% of our consolidated sales and our top twenty-five customers accounted for approximately 45% of our consolidated sales. While we maintain sales contracts with certain of our largest customers, such contracts do not impose minimum purchase or volume requirements and these contracts require renewal on a regular basis in the ordinary course of business. Any termination of a business relationship with, or a significant sustained reduction in business received from, one or more of our largest customers could have a material adverse effect on our revenues and results of operations. The volume and type of services we provide all of our customers may vary from year to year and could be reduced if a customer were to change its procurement strategy. We cannot guarantee that these contracts will be successfully renewed in the future. The loss or substantial reduction in business of any of our major customers could have a material adverse impact on our operating results and cash flows.
As a result of a recent procurement savings initiative conducted by our major customer, this customer has diversified its supply of certain label products produced by the Company in North America. We have provided pricing concessions to retain volume but also expect volume from this customer will be reduced. These actions resulted in softer revenues for fiscal 2019 and are expected to continue throughout fiscal 2020. The Company believes that it remains a significant supplier of labels to this customer in North America and that the Company’s global footprint and the Company’s high quality and innovative products will provide the Company the opportunity to grow its relationship with this customer in new products and regions. We expect to offset these developments by continuing to focus on organic growth and internal improvement opportunities. We believe the Company’s operating margins will enhance over the longer term as we historically achieved through continued premiumization, innovation and efficiency gains. However, the loss or continued reduction of business of our major customer could have a material adverse impact on our results of operations and cash flow.
We are highly dependent on information technology. If our systems fail or are unreliable our operations may be adversely impacted.
The efficient operation of our business depends on our information technology infrastructure and our management information systems.
In addition, production technology in the printing industry has continued to evolve specifically related to the pre-press component of production. Our information technology infrastructure and/or our management information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks, computer viruses or hackers, power loss, or other computer systems, Internet telecommunications or data network failures. Any significant breakdown, virus or destruction could negatively impact our business. We also periodically upgrade and install new systems, which if installed or programmed incorrectly, could cause significant disruptions. If a disruption occurs, we could incur losses and costs for interruption of our operations. Unauthorized disclosure of sensitive or confidential information, whether through system failure or breaches or employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose customers. Similarly, unauthorized access to or through our information systems or those we develop, whether by our employees or third parties, including a cyberattack by computer programmers and hackers who may develop and deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance might not be sufficient in type or amount to adequately cover us against claims related to security breaches, cyberattacks and other related breaches.
Changes in the foreign regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
Personal data is highly regulated in many other countries in which we operate. In addition, some of the data that we may process, store and transmit may travel outside of the United States. In Europe, we may be subject to the General Data Protection Regulation (“GDPR”). The GDPR imposes restrictions on the collection and use of personal data that, in some respects, is more stringent, and imposes more significant burdens on subject businesses, than current privacy standards in the United States. The EU member state regulations establish several obligations that organizations must follow with respect to the use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. Other countries have enacted or are considering enacting data localization laws that require certain data to stay within their borders. We may also face audits or investigations by one or more foreign government agencies relating to our compliance with these regulations that could result in the imposition of penalties or fines. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may increase our costs of operation and our inability or failure to comply with such regulation could result in legal liability or negative publicity for the Company.
We are involved on an ongoing basis in claims, lawsuits, and governmental proceedings relating to our operations, including environmental, commercial transactions, and other matters.
The ultimate outcome of these claims, lawsuits, and governmental proceedings cannot be predicted with certainty, but could have a material adverse effect on our financial condition, results of operations, and cash flow. We are also involved in other possible claims, including product and general liability, workers compensation and employment-related matters, some of which may be of a material nature or may be resolved in a manner that has a material adverse effect on our financial condition, results of operations, and cash flow. While we maintain insurance for certain of these exposures, the policies in place are high-deductible policies resulting in our assuming exposure for a layer of coverage with respect to such claims.
We cannot predict our future capital needs and any limits on our ability to raise capital in the future could prevent further growth.
We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. In addition, we may experience operational difficulties and delays due to working capital restrictions. If we cannot raise funds on acceptable terms, we may have to delay or scale back our growth plans and may not be able to effectively manage competitive pressures.
We depend on key personnel, and we may not be able to operate and grow our business effectively if we lose their services or are unable to attract qualified personnel in the future.
We are dependent upon the efforts of our senior management team. The success of our business is heavily dependent on our ability to retain our current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense, and we may not be able to retain our personnel. We enter into employment agreements with certain key personnel: our Executive Chairman, Chief Executive Officer and President, Chief Operating Officer-Consumer Product Goods, Chief Operating Officer-Food & Beverage, Chief Operating Officer-Wine & Spirits and Chief Financial Officer. These individuals may not continue in their present capacity with us for any particular period of time. Outside of the implementation of succession plans and executive transitions done in the normal course of business, the loss of the services of one or more members of our senior management team could require the remaining executive officers to divert immediate and substantial attention to seeking a replacement and would disrupt our business and impede our ability to execute our business strategy. Any inability to find a replacement for a departing executive officer on a timely basis could adversely affect our ability to operate and grow our business.
If we are unable to adequately protect our intellectual property, we may lose some of our competitive advantage.
Our success is determined in part by our ability to obtain United States and foreign patent protection for our technology and to preserve our trade secrets. Our ability to compete and the ability of our business to grow could suffer if our intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We rely on a combination of patents, copyrights, trademarks and trade secret protection
and contractual rights to establish and protect our intellectual property. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology.
We could become involved in intellectual property litigation, which is costly and could cause us to lose our intellectual property rights or subject us to liability.
Although we have received patents with respect to certain technologies of ours, there can be no assurance that these patents will afford us any meaningful protection. Although we believe that our use of the technology and products we developed and other trade secrets used in our operations do not infringe upon the rights of others, our use of the technology and trade secrets we developed may infringe upon the patents or intellectual property rights of others. In the event of infringement, we could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets we developed or refrain from using the same. We may not have the necessary financial resources to defend an infringement claim made against us or be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Moreover, if the patents, technology or trade secrets we developed or use in our business are deemed to infringe upon the rights of others, we could, under certain circumstances, become liable for damages, which could have a material adverse effect on us and our financial condition. As we continue to market our products, we could encounter patent barriers that are not known today. Furthermore, third parties may assert that our intellectual property rights are invalid, which could result in significant expenditures by us to refute such assertions. If we become involved in litigation, we could lose our proprietary rights, be subject to damages and incur substantial unexpected operating expenses. Intellectual property litigation is expensive and time-consuming, even if the claims are subsequently proven unfounded, and could divert management’s attention from our business. If there is a successful claim of infringement, we may not be able to develop non-infringing technology or enter into royalty or license agreements on acceptable terms, if at all. If we are unsuccessful in defending claims that our intellectual property rights are invalid, we may not be able to enter into royalty or license agreements on acceptable terms, if at all. This could prohibit us from providing our products and services to customers, which could have a material adverse effect on us and our financial condition.
Employee benefit costs, including increasing health care costs for our employees may adversely affect our business, results of operations and financial condition.
We seek to provide competitive employee benefit programs to our employees. Employee benefit costs, such as U.S. healthcare costs of our eligible and participating employees, may increase significantly at a rate that is difficult to forecast, in part because we are unable to determine the impact that U.S. federal healthcare legislation may have on our employer-sponsored medical plans. Higher employee benefit costs could have an adverse effect on our business, results of operations and financial condition.
We provide health care and other benefits to our employees. In recent years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our profitability. Changes to health care regulations in the U.S. may also increase the cost to us of providing such benefits.
Risks Relating to Our Common Stock
Our operating results fluctuate from quarter to quarter.
Our quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors, many of which are outside of our control, including:
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timing of the completion of particular projects or orders;
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material reduction, postponement or cancellation of major projects, or the loss of a major client;
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timing and amount of new business;
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differences in order flows;
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sensitivity to the effects of changing economic conditions on our clients’ businesses;
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the strength of the consumer products industry;
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the relative mix of different types of work with differing margins;
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costs relating to expansion or reduction of operations, including costs to integrate current and any future acquisitions;
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changes in interest costs, foreign currency exchange rates and tax rates; and
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costs associated with compliance with legal and regulatory requirements.
Because of this, we may be unable to adjust spending on fixed costs, such as building and equipment leases, depreciation and personnel costs, quickly enough to offset any revenue shortfall and our operating results could be adversely affected. Due to these factors or other unanticipated events, our financial and operating results in any one quarter may not be a reliable indicator of our future performance.
If we fail to comply with U.S. public company reporting obligations or to maintain adequate internal controls over financial reporting, our business, results of operations and financial condition could be adversely affected.
As a U.S. public company, we are required to comply with the periodic reporting obligations of the Securities Exchange Act of 1934, including preparing annual reports, quarterly reports and current reports. We are also subject to certain of the provisions of the Sarbanes-Oxley Act of 2002 and Dodd-Frank Act which, among other things, require enhanced disclosure of business, financial, compensation and governance information. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits, and restrict our ability to access financing. We may identify areas requiring improvement with respect to our internal control over financial reporting, which may require us to design enhanced processes and controls to address any additional issues identified. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.
Certain provisions of Ohio law and our Articles of Incorporation and Code of Regulations may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price, and may make it more difficult for our shareholders to remove our Board of Directors and management.
Provisions in our Amended Articles of Incorporation and Amended and Restated Code of Regulations may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
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advance notice requirements for shareholders proposals and nominations;
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the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or due to the resignation or departure of an existing board member;
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the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of shareholders to elect director candidates; and
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limitations on the removal of directors.
In addition, because we are incorporated in Ohio, we are governed by the provisions of Section 1704 of the Ohio Revised Code. These provisions may prohibit large shareholders, particularly those owning 10% or more of our outstanding voting stock, from merging or combining with us. These provisions in our Articles of Incorporation and Code of Regulations and under Ohio law could discourage potential takeover attempts, could reduce the price that investors are willing to pay for our common shares in the future and could potentially result in the market price being lower than it would without these provisions.
Although no preferred shares were outstanding as of March 31, 2019 and although we have no present plans to issue any preferred shares, our Articles of Incorporation authorize the Board of Directors to issue up to 1,000 preferred shares. The preferred shares may be issued in one or more series, the terms of which will be determined at the time of issuance by our Board of Directors without further action by the shareholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred shares could diminish the rights of holders of our common shares and, therefore, could reduce the value of our common shares. In addition, specific rights granted to future holders of preferred shares could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board of Directors to issue preferred shares and the foregoing anti-takeover provisions may prevent or frustrate attempts by a third party to acquire control of the Company, even if some of our shareholders consider such change of control to be beneficial.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
As of March 31, 2019, the Company owned and leased the following 72 manufacturing facilities:
All of the Company’s properties are in good condition, well maintained and adequate for our intended uses.
During the three months ended June 30, 2018, the Company announced plans to consolidate our manufacturing facility located in Melbourne, Australia into our existing facility in Notting Hill, Australia. The transition was substantially completed during the second quarter of fiscal 2019, except for restoring the facility to its original leased condition.
On October 31, 2017, the Company completed its acquisition pursuant to the Sale and Purchase Agreement (as amended) with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, “Constantia Flexibles”), acquiring 100% of the Labels Division of Constantia Flexibles (“Constantia Labels”). As a result of the acquisition, the Company acquired 24 manufacturing facilities across 14 countries, with major operations across Europe, Asia and North America.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal claims and contingencies that arise out of the normal course of business, including claims related to commercial transactions, product liability, health and safety, taxes, environmental matters, employee matters and other matters. Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on our financial condition, results of operations and cash flows.
On February 24, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with W/S Packaging Holdings, Inc., a Delaware corporation (“Parent”), and Monarch Merger Corporation, an Ohio corporation and a wholly-owned subsidiary of Parent (“Sub”). The Merger Agreement provides for the merger of Sub with and into the Company, on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with the Company continuing as the surviving corporation in the Merger. As a result of the Merger, the Company will become a wholly-owned subsidiary of Parent. On April 5, 2019, the Company filed with the Securities and Exchange Commission a definitive proxy statement (the “Proxy Statement”) with respect to the Company’s special meeting of the shareholders held on May 16, 2019 in connection with the Merger. At the special meeting of the shareholders, the Company received approval of the proposal to adopt the Merger Agreement and approval of the proposal to approve, on a non-binding advisory basis, the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the Merger.
On April 29, 2019, the Company was served with a complaint in an action captioned Eric Sabatini, Individually And On Behalf of All Others Similarly Situated, and Derivatively On Behalf of Multi-Color Corporation v. Nigel A. Vinecombe, Michael J. Henry, Vadis A. Rodato, Alex Baumgartner, Ari J. Benacerraf, Robert R. Buck, Charles B. Connolly, Robert W. Kuhn, Ronald Lienau and Multi-Color Corporation (the “Sabatini Complaint”) relating to the Merger Agreement and the Proxy Statement. The Sabatini Complaint was filed in the Hamilton County Court of Common Pleas in the State of Ohio and alleges, among other things, that the individual defendants breached their fiduciary duties to Company shareholders by failing to secure adequate merger consideration and failing to disclose material information in the Proxy Statement. The lawsuit asserts claims on behalf of a putative class of Company shareholders as well as derivatively on behalf of the Company. Among other remedies, the Sabatini Complaint seeks to enjoin the consummation of the Merger (or alternatively, rescission of the Merger in the event the defendants are able to consummate it), as well as damages, costs and attorneys’ and experts’ fees.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares trade on the NASDAQ Global Select Market under the symbol LABL.
As of April 30, 2019, there were approximately 230 shareholders of record of the Common Stock.
Beginning in and since the fourth quarter of the fiscal year ended March 31, 2005, we have paid a quarterly dividend of $0.05 per common share.
FIVE YEAR PERFORMANCE GRAPH
The following performance graph compares Multi-Color’s cumulative annual total shareholder return from March 31, 2014 through March 31, 2019, to that of the NASDAQ Market Index, a broad market index, and the Morningstar Packaging & Containers Index (“Morningstar Packaging & Containers”), an index of 64 printing and packaging industry peer companies. The graph assumes that the value of the investment in the common stock and each index was $100 on March 31, 2014, and that all dividends were reinvested. Stock price performances shown in the graph are not indicative of future price performances.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
(1) Fiscal 2019 results include goodwill impairment charges of $99,155 related to our In-Mold Labels Food & Beverage and Europe Food & Beverage reporting units. Results include $711 ($507 after-tax) in costs related to the closure of our manufacturing facilities located in Merignac, France and Cowansville, Canada. Results include $8,695 ($6,890 after tax) of acquisition and integration expenses, primarily related to the Constantia Labels acquisition, and $7,066 ($6,647 after-tax) of strategic review expenses.
(2) Fiscal 2018 results include $1,419 ($945 after-tax) in costs related to the closure of our manufacturing facilities located in Merignac and Dormans, France and Norway, Michigan. Results include $19,901 ($15,267 after tax) of acquisition and integration expenses, of which $18,857 related to the Constantia Labels acquisition.
(3) Fiscal 2017 results include $921 ($706 after-tax) in costs related to the closure of our manufacturing facilities located in the following: Glasgow, Scotland; Sonoma, California; Greensboro, North Carolina; Dublin, Ireland; Norway, Michigan and Watertown, Wisconsin.
(4) Fiscal 2016 results include $5,200 ($3,708 after-tax) in costs related to the closure of our manufacturing facilities located in the following: Glasgow, Scotland; Sonoma, California; Greensboro, North Carolina; Dublin, Ireland; Norway, Michigan and Watertown, Wisconsin; and a sales office located near Toronto, Canada.
(5) Fiscal 2015 results include a $951 impairment of goodwill related to the finalization of the fiscal 2014 annual impairment test for our Latin America Wine & Spirits reporting unit and $7,399 ($4,533 after-tax) in costs primarily related to the closure of our manufacturing facilities located in Norway, Michigan and Watertown, Wisconsin.
Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the impact of acquisitions completed during recent fiscal years that would impact the comparability of the selected financial data above. During fiscal 2018, we acquired GEWA with manufacturing plants in Germany; TP Label, which has manufacturing plants in Tanzania; and Constantia Labels, which has manufacturing plants across 14 countries, with major operations across Europe, Asia and North America. During fiscal 2017, we acquired Italstereo and I.L.A., which have manufacturing plants in Italy; Graphix, which has a manufacturing plant in Australia; and GIP, which has a manufacturing plant in France. During fiscal 2016, we acquired Mr. Labels and Supa Stik, which have manufacturing plants in Australia; Barat Group, which has manufacturing plants in France; Super Label, which has manufacturing plants in Malaysia, Indonesia, the Philippines, Thailand, and China; and System Label and Cashin Print, which have manufacturing plants in Ireland. During fiscal 2015, we acquired Multiprint Labels Limited and New Era Packaging, which have manufacturing plants in Ireland, and Multi Labels Ltd., which has a manufacturing plant in England.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information included in this Annual Report on Form 10-K contains certain forward-looking statements that involve potential risks and uncertainties. Multi-Color Corporation’s future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and those discussed in Part 1, Item 1A “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof.
Refer to “Forward-Looking Statements” following the index in this Form 10-K. In the discussion that follows, all amounts are in thousands (both tables and text), except per share data and percentages.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the Company’s financial condition and results of operations.
RESULTS OF OPERATIONS
The following table shows for the periods indicated, certain components of Multi-Color’s consolidated statements of operations as a percentage of net revenues.
* The sum of the percentages may not equal the totals due to rounding.
EXECUTIVE SUMMARY
We provide a complete line of innovative decorative label solutions and offer a variety of technical and graphic services to our customers based on their specific needs and requirements. Our customers include a wide range of consumer product companies, and we supply labels for many of the world’s best-known brands and products, including home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products.
As a result of a recent procurement savings initiative, our major customer has diversified its supply of certain label products produced by the Company in North America. We have provided pricing concessions to retain volume but also expect volume from this customer will be reduced. These actions resulted in softer revenues in fiscal 2019 and are expected to result in softer revenues throughout fiscal 2020. The Company believes that it remains a significant supplier of labels to this customer in North America and that the Company’s global footprint and the Company’s high quality and innovative products will provide the Company the opportunity to grow its relationship with this customer in new products and regions. We expect to offset these developments by continuing to focus on organic growth and internal improvement opportunities. We believe the Company’s operating margins will enhance over the longer term as we historically achieved through continued premiumization, innovation and efficiency gains. However, the loss or continued reduction of business of our major customer could have a material adverse impact on our results of operations and cash flow.
The label markets we serve exist in a competitive environment amidst price pressures. We continually search for ways to reduce our costs through improved production and labor efficiencies, reduced substrate waste, new substrate options and lower substrate pricing.
Operating income decreased 47% or $54,236 compared to the prior year primarily due to a goodwill impairment loss of $99,155 and strategic review expenses of $7,066. Acquisitions occurring after the beginning of fiscal 2018, net of divestitures, contributed $39,937 to operating income in fiscal 2019. Operating income in fiscal 2019 was impacted by a goodwill impairment loss of $99,155, inventory purchase accounting charges of $173 and acquisition and integration expenses of $8,695, primarily related to the Constantia Labels acquisition, and strategic review costs of $7,066. Operating income in fiscal 2019 also included $711 of expenses primarily related to consolidation of our manufacturing facilities in Merignac, France into our plant in Libourne, France and the closure of our plant in Dormans, France.
During 2019, 2018 and 2017, sales to major customers approximated 10%, 14% and 17%, respectively, of the Company’s consolidated net revenues. All were made to The Procter & Gamble Company.
Our vision is global leadership in premium label solutions. We currently serve customers located across the globe. We continue to monitor and analyze new trends in the packaging and consumer products industries to ensure that we are providing appropriate services and products to our customers. Certain factors that influence our business include consumer spending, new product introductions, new packaging technologies and demographics.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2019 AND MARCH 31, 2018
Net Revenues
Net revenues increased 33% or $424,642 in fiscal 2019 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2018, net of divestitures, accounted for a 33% increase in revenues. Organic revenues increased 2% and foreign exchange rates, primarily driven by depreciation of the Euro, led to a 2% decrease in revenues year over year.
Cost of Revenues and Gross Profit
Cost of revenues increased 33% or $349,322 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2018, net of divestitures, contributed 34% or $355,258. Cost of revenues for the prior year included $6,284 related to inventory purchase accounting charges primarily associated with the acquisition of Constantia Labels. Organic revenue growth and operating inefficiencies increased cost of revenues by $26,659. The remaining decrease of $26,311 related to the favorable impact of foreign exchange.
Gross profit increased 31% or $75,320 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2018, net of divestitures, contributed $74,505. Organic gross profit, excluding the impact of $6,284 of inventory purchase accounting changes in the prior year, decreased $756. The remaining decrease of 2% or $4,713 related to the unfavorable effects of foreign exchange. Gross margins were 18.7% of net revenues in fiscal 2019 compared to 19% of net revenues fiscal 2018.
Selling, General and Administrative (SG&A) Expenses and Facility Closure Expenses
SG&A expenses increased 24% or $31,109 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2018 contributed $34,569, net of divestitures, including acquisition and integration expenses of $3,108. Foreign exchange decreased selling, general and administrative expenses by $2,255. In the current year, the Company incurred an additional $5,587 of acquisition and integration expenses, for a total of $8,695, primarily in relation to Constantia Labels, compared to $19,901 in the prior year. In the current
year, the Company also incurred $7,066 of strategic review expenses. The remaining increase of $6,043 primarily relates to professional fees and compensation expenses, including $641 relating to modification of our Term Loan B, which will reduce interest expense in future periods.
Facility closure expenses decreased 50% or $708 compared to the prior year. These expenses primarily relate to consolidation of our manufacturing facilities in Merignac, France into Libourne, France.
Goodwill Impairment
After conducting our annual impairment testing, we recorded impairment charges of $99,155 to reduce the carrying value of the goodwill of our In-Mold Labels Food & Beverage and Europe Food & Beverage reporting units to fair value. See further details in the Critical Accounting Policies and Estimates section below.
Interest Expense and Other (Income) Expense, Net
Interest expense increased 40% or $21,372 compared to the prior year, primarily due to the increase in debt borrowings to finance the acquisition of Constantia Labels. Additionally, during the prior year, the Company paid $2,194 in interest on loans prior to the acquisition and $4,587 in fees to access unused bridge loans necessary to secure financing for the acquisition which contributed to the increase in interest expense. The Company also wrote off unamortized deferred debt fees related to the prior credit agreement upon execution of the New Credit Agreement in the amount of $660.
Other expense was $2,280 compared to $7,851 in the prior year. Other expense in the current year includes the release of foreign indemnification receivables of $3,063 related to previous acquisitions for which offsetting tax liabilities were relieved and foreign currency gains and losses. Other expense in the prior year included net foreign currency losses for the acquisition and structuring of Constantia Labels, the unfavorable impact of the release of a $1,124 foreign indemnification receivable, for which offsetting tax liabilities was also relieved and gains and losses on foreign exchange, and $512 of loss on the sale of the Southeast Asian Durables business.
Income Tax Expense (Benefit)
Income tax was an expense of $12,332 in fiscal 2019 compared to benefit of $18,195 in the prior year primarily due to tax rate changes enacted in calendar 2017 in the U.S. and Belgium, which resulted in net benefits of $1,350 and $2,268 in the current year, respectively, and net benefits in the prior year of $18,268 and $15,164, respectively. Additionally, the current year included $3,063 and the prior year included $1,124 for the release of tax liabilities related to foreign indemnification receivables related to previous acquisitions for which there were offsetting impacts in other expense.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2018 AND MARCH 31, 2017
Net Revenues
Net revenues increased 41% or $377,617 in fiscal 2018 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2017, net of divestitures, accounted for a 35% increase in revenues. Increased revenues globally led by North America contributed to an organic revenue increase of 4% and foreign exchange rates, primarily driven by appreciation of the Euro, led to a 2% increase in revenues year over year.
Cost of Revenues and Gross Profit
Cost of revenues increased 45% or $327,826 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2017, net of divestitures, contributed 39% or $284,211, as did the unfavorable impact of foreign exchange rates of 2% or $13,399. Organic revenue growth increased cost of revenues by 4% or $30,216.
Gross profit increased 25% or $49,791 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2017, net of divestitures, and favorable foreign exchange contributed $41,589 and $3,442, respectively, to the increase. Gross margins were 19.0% of net revenues for the current year compared to 21.3% in the prior year. Increased volumes and improved operating performance, predominantly in Europe, contributed to organic margin improvement of $4,760 compared to the prior year.
Selling, General and Administrative (SG&A) Expenses and Facility Closure Expenses
SG&A expenses increased 53% or $44,679 compared to the prior year. Acquisitions occurring after the beginning of fiscal 2017, net of divestitures, and unfavorable foreign exchange contributed $23,887 and $1,470, respectively, to the increase. In the current year, the Company incurred $19,901 of acquisition and integration expenses compared to $1,101 in the prior year. Acquisition and integration expenses in fiscal 2018 include $18,858 related to the Constantia Labels acquisition. The remaining increase of $522 primarily relates to compensation expenses.
Facility closure expenses increased 54% or $498 compared to the prior year. These expenses are primarily related to the consolidation of facilities in certain locations into other existing facilities. In fiscal 2018, these expenses were primarily related to the consolidation of our manufacturing facilities in Merignac, France into Libourne, France ($1,115) and the closure of our facility in Dormans, France ($260), and the consolidation of our plants in Norway, Michigan and Watertown, Wisconsin ($44). In the prior year, facility closure expenses related to the consolidation of the facilities in Dublin, Ireland ($355) and Glasgow, Scotland ($262), as well as the consolidation of the plants in Norway, Michigan and Watertown, Wisconsin ($133), Greensboro, North Carolina ($119), and Sonoma, California ($52).
Interest Expense and Other (Income) Expense, Net
Interest expense increased 112% or $28,539 compared to the prior year, primarily due to the increase in debt borrowings to finance the acquisition of Constantia Labels. The Company paid $2,194 in interest on loans prior to the acquisition and $4,587 in fees to access unused bridge loans necessary to secure financing for the acquisition, which contributed to the increase. The Company also wrote off unamortized deferred debt fees related to the prior credit agreement upon execution of the New Credit Agreement in the amount of $660.
Other expense was $7,851 compared to income of $2,735 in the prior year. Additional costs in the current year include, $6,478 of net foreign currency losses for the acquisition and structuring of Constantia Labels, the unfavorable impact of the release of a $1,124 foreign indemnification receivable in the current year period, for which an offsetting tax liability was also relieved reducing the current year effective tax rate and gains and losses on foreign exchange, and $512 of loss on the sale of the Southeast Asian Durables business. In the prior year period, adjustments were made to other income to reconcile certain supplemental purchase price accruals to management’s estimate of the liability for $887; and a gain of $690 was recorded to state Multi-Color’s 30% investment in Gironde Imprimerie Publicité at its fair value upon purchase of an additional 67.6% in the company (97.6% owned at March 31, 2017).
Income Tax Expense (Benefit)
Income tax was a benefit of $18,195 in fiscal 2018 compared to expense of $26,848 in the prior year. The income tax benefit was primarily the result of tax rate changes enacted during the period in the U.S. and Belgium, which resulted in net benefits of $18,268 and $15,164, respectively. Tax expense was also impacted by discrete items recognized in the current period that decreased tax expense, including the release of a tax liability related to a foreign indemnification receivable related to previous acquisitions for $1,124, for which there was an offsetting impact in other expense and other discrete items. In addition, the Company adopted a new accounting standard to simplify share-based payments during the current period, which decreased tax expense $1,462 compared to the prior year.
Liquidity and Capital Resources
Summary of Cash Flows
Net cash provided by operating activities was $159,439 in 2019 compared to $56,907 in the prior year. Net income adjusted for non-cash expenses consisting primarily of goodwill impairment, depreciation, amortization and deferred income taxes was $171,566 in the current year compared to $118,555 in the prior year. The $53,011 increase from 2018 to 2019 in net income adjusted for non-cash expenses was primarily driven by additional income from the inclusion of a full year of results in 2019 for the Constantia Labels acquired plants compared to five months in 2018 and changes in deferred taxes. Our use of operating assets and liabilities of $12,127 in the current year decreased from a use of $61,648 in the prior year.
Net cash provided by operating activities was $56,907 in 2018 and $107,210 in 2017. Net income adjusted for non-cash expenses consisting primarily of depreciation and amortization and changes in deferred taxes was $118,555 in 2018 compared to $109,097 in 2017. The $9,458 increase from 2017 to 2018 in net income adjusted for non-cash expenses was primarily driven by a 17% increase in net income from $61,365 in 2017 to $71,897 in 2018. Our net usage from operating assets and liabilities of $61,648 in 2018 increased from our net use of $1,887 in 2017.
Net cash used in investing activities was $78,632 in 2019, $1,080,331 in 2018, and $73,635 in 2017 of which $0, $1,024,644 and $28,839 was used for acquisitions in those years, respectively, including the Constantia Labels acquisition in 2018. The remaining net usages of $78,632 in 2019, $55,687 in 2018 and $44,796 in 2017 were capital expenditure related, primarily for the purchase of presses, net of various sales.
Net cash used in financing activities in fiscal 2019 was $83,335, which included $72,432 of net debt borrowings, $10 in debt issuance costs, dividends paid of $4,106 and $1,556 of proceeds from the issuance of common stock. Cash provided by financing activities also included $8,343 in deferred payments for the Constantia Labels, Italstereo, Gern & Cie, TP Label, Graphix Labels and Cashin Print acquisitions.
Net cash provided by financing activities in fiscal 2018 was $1,060,089, which included $1,098,907 of net debt borrowings, $26,669 in debt issuance costs, dividends paid of $4,024 and $2,572 of proceeds from the issuance of common stock. Dividends paid included $3,741 to shareholders of Multi-Color Corporation and $279 to the minority shareholders of our 60% owned legal entity in Malaysia, which was sold in the second quarter of fiscal 2018. Cash provided by financing activities also included $10,697 in deferred payments related to the Italstereo, Supa Stik, GIP and TP Label acquisitions.
Net cash used in financing activities in fiscal 2017 was $33,641, which included $31,467 of net debt payments and $4,000 of proceeds from various stock transactions, offset by $1,784 in deferred payments related to the Mr. Labels and Flexo Print acquisitions and dividends paid of $3,876. Dividends paid include $3,378 to shareholders of Multi-Color Corporation and $498 to the minority shareholders of our 60% owned legal entity in Malaysia.
Capital Resources
In conjunction with the Constantia Labels acquisition, effective October 31, 2017 the Company entered into a credit agreement (the “Credit Agreement”) with various lenders. The Credit Agreement replaced the Company’s previous credit agreement and consists of (i) a senior secured first lien term loan A facility (the “Term Loan A Facility”) in an aggregate initial principal amount of $150,000 with a five year maturity, (ii) a senior secured first lien term loan B facility (the “Term Loan B Facility”) in an aggregate initial principal amount of $500,000 with a seven year maturity, and (iii) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount up to $400,000, comprised of a $360,000 U.S. revolving credit facility (the “U.S. Revolving Credit Facility“) and a $40,000 U.S. Dollar equivalent Australian sub-facility (the “Australian Revolving Sub-Facility”), each with a five year maturity.
On October 16, 2018, the Company amended the terms of the Term Loan B Facility upon entering into Amendment No. 1 to the Credit Agreement, which lowered the applicable margin payable on LIBOR indexed loans thereunder from 225 bps to 200 bps.
The Credit Agreement contains customary mandatory and optional prepayment provisions and customary events of default. The Credit Agreement’s Term Loan A Facility, Term Loan B Facility and U.S. Revolving Credit Facility (together, the “U.S. facilities”) are guaranteed by substantially all of the Company’s direct and indirect wholly owned domestic subsidiaries, and such guarantors pledged substantially all their assets as collateral to secure the U.S. facilities. The Australian Revolving Sub-Facility is secured by substantially all of the assets of the Australian borrower and its direct and indirect subsidiaries.
The Credit Agreement can be used for working capital, capital expenditures and other corporate purposes and to fund permitted acquisitions (as defined in the Credit Agreement). Loans under the Credit Agreement bear interest at variable rates plus a margin, based on the Company’s consolidated secured net leverage ratio.
The Credit Agreement contains customary representations and warranties as well as customary negative and affirmative covenants, which require the Company to maintain the following financial covenants at the end of each quarter: (i) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.50 to 1.00 for the fiscal quarters ended during the period of March 31, 2017 through, and including June 30, 2019 and (ii) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.25 to 1.00 for the fiscal quarters ended during the period of September 30, 2019 and thereafter.
The Credit Agreement, the indenture governing the 4.875% Senior Notes (the “4.875% Senior Notes Indenture”) and the indenture governing the 6.125% Senior Notes (the “6.125% Senior Notes Indenture”) and together with the 4.875% Senior Notes Indenture, (the “Indentures”) limit the Company’s ability to incur additional indebtedness. Additional covenants contained in the Credit Agreement and the Indentures, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, make restricted payments, create liens, make equity or debt investments, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Under the Credit Agreement and the Indentures, certain changes in control of the Company could result in the occurrence of an Event of Default. In addition, the Credit Agreement limits the ability of the Company to modify terms of the Indentures. As of March 31, 2019, the Company was in compliance with the covenants in the Credit Agreement and the Indentures.
Available borrowings under the U.S. Revolving Credit Facility and Australian Revolving Sub-Facility were $354,241 and $4,023, respectively, at March 31, 2019. The Company also has various other uncommitted lines of credit available at March 31, 2019 in the aggregate amount of $23,625.
The $600,000 aggregate principal amount of 4.875% Senior Notes due 2025 (the “4.875% Senior Notes”) were issued in October 2017 to fund the acquisition of Constantia Labels. The 4.875% Senior Notes are unsecured senior obligations of the Company. Interest is payable on the 4.875% Senior Notes on May 1st and November 1st of each year beginning May 1, 2018 until the maturity date of November 1, 2025. The Company’s obligations under the 4.875% Senior Notes are guaranteed by certain of the Company’s existing direct and indirect wholly-owned domestic subsidiaries.
The $250,000 aggregate principal amount of 6.125% Senior Notes due 2022 (the “6.125% Senior Notes”) were issued in November 2014. The 6.125% Senior Notes are unsecured senior obligations of the Company. Interest is payable on the 6.125% Senior Notes on June 1st and December 1st of each year beginning June 1, 2015 until the maturity date of December 1, 2022. The Company’s obligations under the 6.125% Senior Notes are guaranteed by certain of the Company’s existing direct and indirect wholly-owned domestic subsidiaries.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of March 31, 2019:
(1) Interest on floating rate debt was estimated using projected forward London Interbank Offered Rate (LIBOR) and Bank Bill Swap Bid Rates (BBSY) rates as of March 31, 2019.
(2) The table excludes $5,846 in liabilities related to unrecognized tax benefits as the timing and extent of such payments are not determinable.
We do not have any off-balance sheet arrangements as of March 31, 2019.
Recent Acquisitions
On October 31, 2017, the Company completed its acquisition pursuant to the Sale and Purchase Agreement (as amended) with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, “Constantia Flexibles”), acquiring 100% of the Labels Division of Constantia Flexibles (“Constantia Labels”), for $1,299,403 less net cash acquired of $11,234. The purchase price included future performance based earnouts with a total fair value of $9,026 and deferred payments of $3,901, estimated as of the acquisition date. Constantia Labels, headquartered in Vienna, Austria, is a leader in label solutions serving the food, beverage and consumer packaging goods industries. Constantia Labels has approximately 2,800 employees globally and 24 production plants across 14 countries, with major operations across Europe, Asia and North America. The acquisition included a 75% controlling interest in certain label operations in South Africa.
On October 11, 2017, the Company acquired 100% of TP Label Limited, the labels business of Tanzania Printers Limited (Tanzania Printers), and TP Kenya Limited (collectively, “TP Label”), which is located in Dar es Salaam, Tanzania with a sales and distribution center located in Nairobi, Kenya, for $15,929 less net cash acquired of $397. The purchase price included $9,557, which was retained by MCC at closing and was used to repay the indebtedness of TP Label Limited and Tanzania Printers during the three months ended March 31, 2018. The purchase price also included an indemnification holdback of $1,593 to fund certain potential obligations of the sellers with respect to the transaction, which was deferred for one year and paid during the three months ended December 31, 2018. TP Label is primarily a pressure sensitive and cut and stack label business, serving customers in the food and beverage market.
On August 3, 2017, the Company acquired 100% of GEWA Etiketten GmbH (GEWA), including the remaining 2.4% of the common shares of GIP (see below), for $21,846 plus net debt assumed of $5,228. Upon closing, $2,185 of the purchase price was deposited into an escrow account and was released to the seller on the 18-month anniversary of the closing date in accordance with the purchase agreement. The escrow amount was to fund certain potential indemnification obligations of the seller with respect to the transaction. GEWA is located in Bingen am Rhein, Germany and specializes in producing pressure sensitive labels for the wine and spirits market.
On January 3, 2017, the Company acquired 100% of Graphix Labels and Packaging Pty Ltd. (Graphix) for $17,261. The purchase price included a deferred payment of $1,631 that was paid in the three months ended March 31, 2019. Graphix is located in Melbourne, Victoria, Australia and specializes in producing labels for both the food & beverage and wine & spirits markets.
In January 2017, the Company acquired an additional 67.6% of the common shares of Gironde Imprimerie Publicité (GIP) for $2,084 plus net debt assumed of $862. The purchase price included a deferred payment of $208 that was paid during the three months ended March 31, 2018. The Company acquired 30% of GIP as part of the Barat acquisition in fiscal 2016. Immediately prior to obtaining a controlling interest in GIP, the Company recognized a gain of $690 as a result of re-measuring our equity interest to its fair value of $771 based on the most recent share activity. In August 2017, the Company acquired the remaining 2.4% of the common shares of GIP in conjunction with the GEWA acquisition (see above). GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market.
On July 6, 2016, the Company acquired 100% of Industria Litografica Alessandrina S.r.l. (I.L.A.) for $6,301 plus net debt assumed of $3,547. The purchase price included $819 that is deferred for three years after the closing date. I.L.A. is located in the Piedmont region
of Italy and specializes in production of premium self-adhesive and wet glue labels primarily for the wine & spirits market and also services the food industry.
On July 1, 2016, the Company acquired 100% of Italstereo Resin Labels S.r.l. (Italstereo) for $3,342 less net cash acquired of $181. The purchase price included a deferred payment of $201 that was paid in the three months ended September 30, 2017 and a deferred payment of $133 that was paid in the three months ended September 30, 2018. Italstereo is located near Lucca, Italy and specializes in producing pressure sensitive adhesive resin coated labels, seals and emblems.
Inflation
We do not believe that our operations have been materially affected by inflation. Inflationary price increases for raw materials could adversely impact our sales and profitability in the future.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We continually evaluate our estimates, including, but not limited to, those related to revenue recognition, bad debts, inventories and any related reserves, income taxes, fixed assets, goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies impact the more significant judgments and estimates used in the preparation of our consolidated financial statements. Additionally, our senior management has reviewed the critical accounting policies and estimates with the Board of Directors’ Audit and Finance Committee. For a more detailed discussion of the application of these and other accounting policies, refer to Note 2 of the consolidated financial statements.
Business Combinations
The Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. The Company reports in its consolidated financial statements provisional amounts for the items for which accounting is incomplete. Goodwill is adjusted for any changes to provisional amounts made within the measurement period. The Company utilizes management estimates and an independent third-party valuation firm to assist in determining the fair values of assets acquired and liabilities assumed. Such estimates and valuations require the Company to make significant assumptions, including projections of future events and operating performance.
Goodwill and Other Acquired Intangible Assets
Impairment reviews comparing fair value to carrying value are highly judgmental and involve the use of significant estimates and assumptions, which determine whether there is potential impairment and the amount of any impairment charge recorded. Fair value assessments involve estimates of discounted cash flows that are dependent upon discount rates and long-term assumptions regarding future sales and margin trends, market conditions, cash flow and multiples of revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Actual results may differ from these estimates. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements. See further information about our policy for fair value measurements within this section below.
Goodwill. Goodwill is not amortized and is tested for impairment annually. Impairment is also tested when events or changes in circumstances indicate that the assets’ carrying values may be greater than the fair values.
No events or changes in circumstances occurred in 2019 or 2018 that required goodwill impairment testing in between annual tests.
Goodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s divisions. The Company can evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than the carrying value and whether it is necessary to perform the two-step goodwill impairment test.
In conjunction with our annual impairment tests as of January 31, 2019 and January 31, 2018, the Company performed quantitative assessments for all of our reporting units. The impairment tests compare the fair value of each reporting unit to its carrying value. We estimated the fair value of each reporting unit using a combination of: (i) a market approach based on multiples of revenue and EBITDA from recent comparable transactions and other market data; and (ii) an income approach based on expected future cash flows discounted at rates ranging between 8.5% to 13.0% in 2019 and 8.5% to 11.5% in 2018. The discount rate reflects the risk associated with each respective reporting unit, including the industry and geographies in which they operate. In fiscal 2019, the market and income approaches were weighted 25% and 75%, respectively, based on judgment of the comparability of the recent transactions and the risks inherent in estimating future cash flows. We considered recent economic and industry trends, as well as risk in executing our current plans from the perspective of a hypothetical buyer in estimating expected future cash flows in the income approach.
For most of our reporting units, the impairment test did not indicate impairment as the estimated fair value of the reporting units exceeded the carrying amount. For two of our reporting units, In-Mold Labels Food & Beverage and Europe Food & Beverage, both of which were
acquired in fiscal 2018 as part of the Constantia Labels acquisition, the carrying amounts exceeded the estimated fair value of the reporting units.
During the fourth quarter of fiscal 2019, the Company adopted ASC 2017-14, which removes step 2 of the goodwill impairment test. Goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. See Note 2 for further details. As such, the excess of the carrying value over the fair value for IML Food & Beverage and Europe Food & Beverage of $85,109 and $14,046, respectively, were recorded as non-cash goodwill impairment charges during the fourth quarter of fiscal 2019 and resulted in a reduction in goodwill. The impairment charges were a result of changes in expectations for future growth as part of our fourth quarter long-term strategic planning process.
Significant assumptions used to estimate the fair value of our reporting units include estimates of future cash flows, discount rates and multiples of revenue and EBITDA. These assumptions are typically not considered individually because assumptions used to select one variable should also be considered when selecting other variables; however, sensitivity of the overall fair value assessment to each significant variable is also considered.
Intangible Assets. Intangible assets with definite useful lives are amortized over periods of up to 21 years based on a number of assumptions including estimated period of economic benefit and utilization. Intangible assets are tested for impairment when events or changes in circumstances indicate that the assets’ carrying values may be greater than their fair values. Tests are performed over asset groups at the lowest level of identifiable cash flows.
The Company performed impairment testing on long-lived assets, including intangibles, at certain manufacturing locations during fiscal 2019 and 2018 due to the existence of impairment indicators. The estimated undiscounted future cash flows associated with the long-lived assets were greater than their carrying values, and therefore, no impairment was present in either of these two years related to intangible assets.
Impairment of Long-Lived Assets
We review long-lived assets for impairment when events or changes in circumstances indicate that assets might be impaired and the related carrying amounts may not be recoverable. Changes in market conditions and/or losses of a production line could have a material impact on the consolidated statements of operations. The determination of whether impairment exists involves various estimates and assumptions, including the determination of the undiscounted cash flows estimated to be generated by the assets involved in the review. The cash flow estimates are based upon our historical experience, adjusted to reflect estimated future market and operating conditions. Measurement of an impairment loss requires a determination of fair value. We base our estimates of fair values on quoted market prices when available, independent appraisals as appropriate and industry trends or other market knowledge. Tests are performed over asset groups at the lowest level of identifiable cash flows.
During fiscal 2019, we closed our manufacturing facility located in Cowansville, Canada. As a result, non-cash fixed asset impairment charges of $309 were recorded to adjust the carrying value of certain machinery and equipment to their estimated fair value, less costs to sell, which were determined based on a quoted market price. The Company recorded $150 in impairment losses on fixed assets during fiscal 2018 related to assets that more likely than not will be sold or otherwise disposed of significantly before the end of their estimated useful lives, all of which related to the closure of our manufacturing facilities in Merignac and Dormans, France. In addition, the Company performed impairment testing on long-lived assets at certain manufacturing locations during fiscal 2019 and 2018 due to the existence of other impairment indicators. The estimated undiscounted cash flows associated with the long-lived assets were greater than their carrying values, and therefore, no impairment was present in any of these two years related to long-lived assets.
Income Taxes
The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. Income taxes are recorded based on the current year amounts payable or refundable. Deferred income taxes are recognized at the enacted tax rates for the expected future tax consequences related to temporary differences between amounts reported for income tax purposes and financial reporting purposes as well as any tax attributes. Deferred income taxes are not provided for the undistributed earnings of subsidiaries operating outside of the U.S. that have been permanently reinvested in foreign operations.
We regularly review our deferred income tax balances for each jurisdiction to estimate whether these deferred income tax balances are more likely than not to be realized based on the information currently available. Projected future taxable income is based on forecasted results and assumptions as to the jurisdiction in which the income will be earned. The timing of reversals of any existing temporary differences is based on our methods of accounting for income taxes and current tax legislation. Unless the deferred tax balances are more likely than not to be realized, a valuation allowance is established to reduce the carrying values of any deferred tax balances until circumstances indicate that realization becomes more likely than not.
The Company establishes reserves for income tax related uncertainties based on estimates of whether it is more likely than not that the tax uncertainty would be sustained upon challenge by the appropriate tax authorities. Provisions for and changes to these reserves and any related net interest and penalties are included in income tax expense in the consolidated statements of operations. Significant judgment is required when evaluating our tax provisions and determining our provision for income taxes. We regularly review our tax positions and we adjust the reserves as circumstances change.
Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:
Level 1 - Quoted market prices in active markets for identical assets and liabilities
Level 2 - Observable inputs other than quoted market prices in active markets for identical assets and liabilities
Level 3 - Unobservable inputs
The determination of where an asset or liability falls in the hierarchy requires significant judgment.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analyses, the valuation of acquired intangibles and in the valuation of assets held for sale. The Company tests goodwill for impairment annually, as of the last day of January of each fiscal year. Impairment is also tested when events or changes in circumstances indicate that the assets’ carrying values may be greater than the fair values. Goodwill and intangible assets are typically valued using Level 3 inputs.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 to our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In thousands, except for statistical data)
Interest Rate Risk Management
The Company is exposed to market risks from changes in interest rates on certain of its outstanding debt. Loans under the New Credit Agreement (see Note 9), bear interest at variable rates plus a margin, based on the Company’s consolidated secured net leverage ratio.
In conjunction with entering into the Credit Agreement (see Note 9), the Company entered into two spot non-amortizing Swaps with a total notional amount of $300,000 to convert variable rate debt to fixed rate debt. These Swaps became effective October 2017, expired in October 2018, and resulted in interest payments of 1.5625% plus the applicable margin per the requirements in the Credit Agreement. The Company also entered into two forward starting non-amortizing Swaps with a total notional amount of $300,000 to convert variable rate debt to fixed rate debt. These Swaps became effective in October 2018, will expire in October 2022, and will result in interest payments of 2.1345% plus the applicable margin per the requirements in the Credit Agreement. In addition, the Company entered into a forward starting non-amortizing Swap with a total notional amount of $100,000 to convert variable rate debt to fixed rate debt. This Swap will become effective in May 2019, will expire in October 2022, and will result in interest payments of 2.8060% plus the applicable margin per the requirements of the Credit Agreement.
Upon inception, the Swaps were designated as cash flow hedges under ASU 2017-12, with gains and losses, net of tax, measured on an ongoing basis, recorded in accumulated other comprehensive income (loss) (“AOCI”).
Foreign Currency Risk Management
Foreign currency exchange risk arises from our international operations as well as from transactions with customers or suppliers denominated in currencies other than the U.S. Dollar. The functional currency of each of the Company’s subsidiaries is generally the currency of the country in which the subsidiary operates or the U.S. Dollar. The results of operations of our foreign subsidiaries are translated into U.S. Dollars at the average exchange rate for each monthly period. As foreign exchange rates change, there are changes to the U.S. Dollar equivalent of sales and expenses denominated in foreign currencies. During fiscal 2019, approximately 62% of our net sales were made by our foreign subsidiaries and their combined operating income was 53% of the Company’s operating income prior to the $99,155 goodwill impairment charges.
The balance sheets of our foreign subsidiaries are translated into U.S. Dollars at the closing exchange rates of each monthly balance sheet date. During fiscal 2019, the Company recorded an unrealized foreign currency translation loss of $136,726 in other comprehensive loss as a result of movements in foreign currency exchange rates related to our international operations. See Notes 2 and 20 to the Company’s consolidated financial statements. As of March 31, 2019, a 10% change in these foreign exchange rates would change shareholders’ equity by approximately $144,000. This hypothetical change was calculated by multiplying the net assets of each of our foreign subsidiaries by a 10% change in the applicable foreign exchange rate.
In June 2018, the Company began entering into foreign exchange forward contracts to fix the purchase price in U.S. Dollars of foreign currency denominated raw materials. These forward contracts are designated as cash flow hedges with gains and losses, net of tax, measured on an ongoing basis, recorded in AOCI.
Net Investment Hedging
In September 2017, as a means of managing foreign currency risk related to our significant operations in Europe, the Company executed four fixed-for-fixed cross currency swaps, in which the Company will pay Euros and receive U.S. Dollars with a combined notional amount of €400,000, which mature in November 2025. This will effectively convert U.S. Dollar denominated debt to Euro denominated debt. The Company designated €205,000 of swap notional as a net investment hedge of the Company’s net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. Changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized in AOCI to offset changes in the values of the net investments being hedged.
The remaining 195,000 of swap notional was not designated as an accounting hedge in September 2017. Therefore, changes in fair value of the derivative instruments were recognized in other income and expense in the consolidated statements of operations. Subsequently, in November 2017, the Company formally designated the remaining 195,000 of swap notional as a net investment hedge under ASU 2017-12, bringing the total designated notional value to 400,000. Effective November 1, 2017, hedge accounting was applied to the newly designated swap notional of 195,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
CONSOLIDATED FINANCIAL STATEMENTS
All financial statement schedules have been omitted because they are either not required or the information is included in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Multi-Color Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Multi-Color Corporation (an Ohio corporation) and subsidiaries (the “Company”) as of March 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated May 28, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Detroit, Michigan
May 28, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Multi-Color Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Multi-Color Corporation (an Ohio corporation) and subsidiaries (the “Company”) as of March 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended March 31, 2019, and our report dated May 28, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Detroit, Michigan
May 28, 2019
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31
(In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended March 31
(In thousands)
(1) The amount for the years ended March 31, 2019, 2018 and 2017 includes a tax impact of $262, $(654) and $284, respectively, related to the settlement of foreign currency denominated intercompany loans.
(2) Amounts are net of tax of $(10,026), $10,423 and $(133) for the years ended March 31, 2019, 2018 and 2017, respectively.
(3) Amounts are net of tax of $9, $(21) and $(108) for the years ended March 31, 2019, 2018 and 2017, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
As of March 31
(In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31
(In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for statistical and per share data)
(1) THE COMPANY
Multi-Color Corporation (Multi-Color, MCC, we, us, our or the Company), headquartered near Cincinnati, Ohio, is a leader in global label solutions supporting a number of the world’s most prominent brands including leading producers of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products. MCC serves international brand owners in the North American, Latin American, EMEA (Europe, Middle East and Africa) and Asia Pacific regions with a comprehensive range of the latest label technologies in Pressure Sensitive, Cut and Stack, In-Mold, Shrink Sleeve, Heat Transfer, Roll Fed, and Aluminum Labels.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
References to 2019, 2018 and 2017 are for the fiscal years ended March 31, 2019, 2018 and 2017, respectively. The consolidated financial statements included herein have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year classifications.
As of March 31, 2019, the Company’s operations were conducted through the Consumer Product Goods, Wine & Spirits and Food & Beverage operating segments, which are aggregated into one reportable segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.” The metrics used by management to assess the performance of the Company’s operating segments include revenue trends, gross profit margin and operating margin. The Company’s operating segments have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations
The Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. The Company utilizes management estimates and an independent third-party valuation firm to assist in determining these fair values. The excess of the acquisition price over the estimated fair value of the net assets is recorded as goodwill. Goodwill is adjusted for any changes to acquisition date fair value amounts made within the measurement period. Acquisition-related transaction costs are recognized separately from the business combination and expensed as incurred.
Revenue Recognition
On April 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all related amendments, which provides revised guidance for revenue recognition. The standard’s core principle is that an entity should recognize the revenue for transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard defines a five-step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. See Note 3 for discussion of our accounting policies under the revised guidance.
Cost of Revenues
Cost of revenues primarily consists of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of revenues also includes inbound freight costs and costs to distribute products to customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) primarily consist of sales and marketing costs, corporate and divisional administrative and other costs and depreciation and amortization expense related to non-manufacturing assets. Advertising costs are charged to expense as incurred and were minimal in 2019, 2018 and 2017.
Research and Development Costs
Our product development group focuses on research and development, product commercialization and technical service support. The group includes chemical, packaging and field engineers who are responsible for developing and commercializing innovative label and application solutions. Technical service personnel also assist customers and manufacturers in improving container and label performance. The services provided by this group differentiate us from many of our competitors and drive our selection for the most challenging projects.
Research and development costs are charged to expense as incurred and were $8,065, $5,834 and $5,274 in 2019, 2018 and 2017, respectively.
Cash and Cash Equivalents
The Company records all highly liquid short-term investments with maturities of three months or less as cash equivalents. At March 31, 2019 and 2018, the Company had cash in foreign bank accounts of $56,914 and $66,061, respectively. Outstanding checks of $15,272 and $2,280 were included in accounts payable as of March 31, 2019 and 2018, respectively.
Accounts Receivable
Our customers are primarily major consumer product, food & beverage, wine & spirits and container companies. Accounts receivable consist of amounts due from customers in connection with our normal business activities and are carried at sales value less allowance for doubtful accounts. The allowance for doubtful accounts is established to reflect the expected losses of accounts receivable based on past collection history, age, account payment status compared to invoice payment terms and specific individual risks identified. The delinquency of a receivable account is determined based on these factors. The Company does not accrue interest on aged accounts receivable.
Supply Chain Financing and Factoring
The Company has entered into supply chain financing agreements with certain customers and factoring arrangements with certain banks. The receivables for the agreements are sold without recourse to the customers’ banks and are accounted for as sales of accounts receivable. Losses on the sale of these receivables are included in selling, general and administrative expenses in the consolidated statements of operations, and losses of $1,964, $1,325 and $561 were recorded during 2019, 2018 and 2017, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value and substantially all are maintained using the FIFO (first-in, first-out) or specific identification method. Excess and obsolete inventory allowances are generally established based on inventory age.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation.
Depreciation expense, which includes the amortization of assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the assets, or the remaining terms of the leases, as follows:
Goodwill and Other Acquired Intangible Assets
Impairment reviews comparing fair value to carrying value are highly judgmental and involve the use of significant estimates and assumptions, which determine whether there is potential impairment and the amount of any impairment charge recorded. Fair value assessments involve estimates of discounted cash flows that are dependent upon discount rates and long-term assumptions regarding future sales and margin trends, market conditions, cash flow and multiples of revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Actual results may differ from these estimates. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements. See further information about our policy for fair value measurements within this section below. See further information regarding our impairment tests in Note 8.
Goodwill. Goodwill is not amortized and is tested for impairment annually. Impairment is also tested when events or changes in circumstances indicate that the assets’ carrying values may be greater than the fair values.
Goodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s divisions. The Company can evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than the carrying value and whether it is necessary to perform the quantitative goodwill impairment test. The impairment test compares the fair value of the reporting unit to the carrying value. The market and income approaches were weighted 25% and 75%, respectively, based on judgement of the comparability of recent transactions and the risks inherent in estimating future cash flows.
Intangible Assets. Intangible assets with definite useful lives are amortized over periods of up to 21 years based on a number of assumptions including estimated period of economic benefit and utilization. Intangible assets are tested for impairment when events or changes in circumstances indicate that the assets’ carrying values may be greater than their fair values. We test for impairment by comparing (i) estimates of undiscounted future cash flows, before interest charges, included in our operating plans to (ii) the carrying values of the related assets. Tests are performed over asset groups at the lowest level of identifiable cash flows.
Impairment of Long-Lived Assets
We review long-lived assets for impairment when events or changes in circumstances indicate that assets might be impaired and the related carrying amounts may not be recoverable. Changes in market conditions and/or losses of a production line could have a material impact on the consolidated statements of operations. The determination of whether impairment exists involves various estimates and assumptions, including the determination of the undiscounted cash flows estimated to be generated by the assets involved in the review. The cash flow estimates are based upon our historical experience, adjusted to reflect estimated future market and operating conditions.
Measurement of an impairment loss requires a determination of fair value. We base our estimates of fair values on quoted market prices when available, independent appraisals as appropriate and industry trends or other market knowledge. Tests are performed over asset groups at the lowest level of identifiable cash flows.
Income Taxes
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Income taxes are recorded based on the current year amounts payable or refundable. Deferred income taxes are recognized at the enacted tax rates for the expected future tax consequences related to temporary differences between amounts reported for income tax purposes and financial reporting purposes as well as any tax attributes. Deferred income taxes are not provided for the undistributed earnings of subsidiaries operating outside of the U.S. that have been permanently reinvested in foreign operations.
We regularly review our deferred income tax balances for each jurisdiction to estimate whether these deferred income tax balances are more likely than not to be realized based on the information currently available. Projected future taxable income is based on forecasted results and assumptions as to the jurisdiction in which the income will be earned. The timing of reversals of any existing temporary differences is based on our methods of accounting for income taxes and current tax legislation. Unless the deferred tax balances are more likely than not to be realized, a valuation allowance is established to reduce the carrying values of any deferred tax balances until circumstances indicate that realization becomes more likely than not.
The Company establishes reserves for income tax related uncertainties based on estimates of whether it is more likely than not that the tax uncertainty would be sustained upon challenge by the appropriate tax authorities. Provisions for and changes to these reserves and any related net interest and penalties are included in income tax expense in the consolidated statements of operations. Significant judgment is required when evaluating our tax provisions and determining our provision for income taxes. We regularly review our tax positions and we adjust the reserves as circumstances change.
Earnings per Common Share
Basic earnings per common share (EPS) is computed by dividing net income (loss) attributable to Multi-Color Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) attributable to Multi-Color Corporation by the sum of the weighted average number of common shares outstanding during the period plus, if dilutive, potential common shares outstanding during the period. Potential common shares outstanding during the period consist of restricted shares and the incremental common shares issuable upon the exercise of stock options and are reflected in diluted EPS by application of the treasury stock method.
Derivative Financial Instruments
The Company accounts for derivative financial instruments by recognizing derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value and recognizing the resulting gains or losses as adjustments to the consolidated statements of operations or accumulated other comprehensive income (loss). The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of AOCI in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated and qualify as fair value hedges, both the net gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings in the current period.
For derivative instruments that hedge the exposure to changes in foreign currency exchange rates used for translation of the net investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the derivative instrument is reported in AOCI as part of the foreign currency translation adjustment.
Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
Fair Value Measurements
The carrying value of financial instruments approximates fair value.
The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:
Level 1
-
Quoted market prices in active markets for identical assets and liabilities
Level 2
-
Observable inputs other than quoted market prices in active markets for identical assets and liabilities
Level 3
-
Unobservable inputs
The determination of where an asset or liability falls in the hierarchy requires significant judgment.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analyses, the valuation of acquired intangibles and in the valuation of assets held for sale. The Company tests goodwill for impairment annually, as of the last day of January of each fiscal year. Impairment is also tested when events or changes in circumstances indicate that the assets’ carrying values may be greater than the fair values. Goodwill and intangible assets are typically valued using Level 3 inputs.
Foreign Exchange
The functional currency of each of the Company’s subsidiaries is generally the currency of the country in which the subsidiary operates or the U.S. Dollar. Assets and liabilities of foreign operations are translated using period end exchange rates, and revenues and expenses are translated using average exchange rates during each period. Translation (gains) and losses are reported in accumulated other comprehensive loss as a component of stockholders’ equity and were $136,726, $(93,892) and $25,254 during 2019, 2018 and 2017, respectively. Transaction gains and (losses) are reported in other income and expense in the consolidated statements of operations and were $149, $3,899 and $(533) during 2019, 2018 and 2017, respectively.
New Accounting Pronouncements
On April 1, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all related amendments, which provides revised guidance for revenue recognition. We adopted this guidance using the modified retrospective transition method, which means that periods beginning in fiscal 2019 are reported under this guidance while prior periods continue to be reported under previous guidance. See Note 3.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220),” which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income (AOCI) to retained earnings. This new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2019. Early adoption is permitted, and the update must be applied either at the beginning of the period of adoption or retrospectively to each period in which the effects of the Tax Act related to items remaining in AOCI are recognized. The Company elected to early adopt this update in the second quarter of fiscal 2019. As part of this adoption, the Company elected to reclassify $1,750 of stranded income tax effects of the Tax Act from AOCI to retained earnings at the beginning of the second quarter of fiscal 2019.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other,” which simplifies the accounting for goodwill impairment. This update removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, which for the Company is any annual or interim goodwill impairment tests performed after April 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company elected to early adopt this update in the fourth quarter of fiscal 2019. Under the new guidance, the Company recognized goodwill impairment charges of $99,155 during the fourth quarter of fiscal 2019. See Note 8.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations,” which revises the definition of a business. The FASB’s new framework assists entities in evaluating whether a set (integrated set of assets and activities) should be accounted for as an acquisition of a business or a group of assets. The framework adds an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. This update was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which for the Company was the fiscal year beginning April 1, 2018. The Company adopted this update effective April 1, 2018, and its adoption did not have an impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The specific issues addressed include debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and separately identifiable cash flows and application of the predominance principle. This update was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which for the Company was the fiscal year beginning April 1, 2018. The Company adopted this update effective April 1, 2018, and its adoption did not have an impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires that lessees recognize almost all leases on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, leases will be classified as either finance leases or operating leases. This update is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, which for the Company is the fiscal year beginning April 1, 2019.
We will adopt the standard using the modified retrospective method which will be applied to leases that exist or are entered into on or after April 1, 2019. As a result, we will not adjust our comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company will elect to utilize the package of practical expedients that allows entities to 1) not reassess whether any expired or existing contracts are or contain leases, 2) retain the existing classification of lease contracts as of the date of adoption, and 3) not reassess initial direct costs for any existing leases. The Company is in the final stages of evaluating its existing lease portfolio and is continuing to assess and quantify the amount of right-of-use assets and lease liabilities that will be included on its balance sheet as of April 1, 2019, with an estimated amount of $125,000.
The Company is in the process of implementing a new lease accounting and administration software solution to manage and account for leases under the new guidance and is updating certain of its business processes and internal controls to meet the reporting and disclosure requirements of the new standard. We believe that the new standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and liabilities for our operating leases, but it is not expected to have a material impact on our statements of operations or cash flows. The ASU will also require disclosures to allow financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on the consolidated financial statements.
(3) Revenue Recognition
On April 1, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all related amendments, which provides revised guidance for revenue recognition. The standard’s core principle is that an entity should recognize the revenue for transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard defines a five-step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.
We adopted the standard by applying the modified retrospective method to all contracts that were not completed as of the adoption date. The aggregate effect of any modifications to those contracts was reflected in identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the price to the satisfied and unsatisfied performance obligations as of the adoption date. Accordingly, the comparative statements of operations and comparative balance sheet have not been restated.
Adjustments due to ASU 2014-09 were as follows:
Revenue is generated through the sale of products created to meet the packaging needs of our customers, culminating in a single performance obligation to produce labels with no alternate use, and revenue is recorded in an amount that reflects the net consideration that we expect to receive. Prices for our products are based on agreed upon rates with customers and do not include financing components or noncash consideration. The amount of consideration we receive and revenue we recognize is variable for certain customers and is impacted by incentives, including rebates, which are generally tied to achievement of certain sales volume levels.
We recognize revenue when obligations under the terms of a contract with our customer are satisfied, in an amount that reflects the consideration we expect to receive in exchange for the product. Depending on the terms of the agreement with the customer, we recognize revenue either at a point-in-time (at shipment or delivery depending on agreed upon terms) or over-time when the Company has an enforceable right to payment for performance completed to date.
We believe the costs incurred method is the best method to recognize our over-time revenue as costs incurred are proportionate to progress achieved in satisfying our performance obligations.
The Company also has bill and hold arrangements with certain customers. For these arrangements, control over the product is transferred when the product is ready for physical transfer to the customer, as we have a present right to payment, the customer can direct the use of the product (i.e., request shipment to its facility), and legal title has passed to the customer. Revenue is recognized at the time the product is produced and we have transferred control to the customer.
Payment terms typically range from 30-90 days, based upon agreed upon terms with the customer.
Taxes assessed by a governmental authority that we collect from our customers that are both imposed on and concurrent with our revenue producing activities (such as sales tax, value-added tax, and excise taxes) are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
MCC records contract assets when revenue is recognized but we have not yet invoiced the customer. This occurs when costs are incurred for the production of labels for over-time customers but the associated revenues have not been billed to the customer or when prepress costs related to fulfillment and completion of labels are incurred but the associated revenues for those labels have not been billed to the customer. Contract liabilities are recorded for expected shipping and handling charges for revenue recognized from over-time customers, billings to customers for prepress items to be utilized in the fulfilment and completion of labels that have not yet been fully utilized in the production process, and arrangements where MCC has billed the customer but has not yet shipped the labels and the transaction does not meet the criteria for bill and hold revenue recognition.
MCC recognized revenues of $10,760 during fiscal year 2019, that were included in contract liabilities as of March 31, 2018.
We elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts as part of the adoption of ASU 2014-09, as we expect that customers will pay for the products within one year. Additionally, as all contracts are expected to have an original duration of one year or less, we elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.
The following table summarizes the March 31, 2019 consolidated statements of operations and consolidated balance sheet as if ASU 2014-09 had not been adopted and the adjustment required upon adoption of ASU 2014-09.
The following table presents our net revenues disaggregated by region and timing of revenue recognition for the fiscal year ended March 31, 2019.
(4) ACQUISITIONS
Constantia Labels Summary
On October 31, 2017, the Company completed its acquisition pursuant to the Sale and Purchase Agreement (as amended) with Constantia Flexibles Germany GmbH, Constantia Flexibles International GmbH, Constantia Flexibles Group GmbH and GPC Holdings B.V. (collectively, “Constantia Flexibles”), acquiring 100% of the Labels Division of Constantia Flexibles (“Constantia Labels”). Constantia Labels, headquartered in Vienna, Austria, is a leader in label solutions serving the food, beverage and consumer packaging goods industries. Constantia Labels has approximately 2,800 employees globally and 24 production plants across 14 countries, with major operations across Europe, Asia and North America. The acquisition included a 75% controlling interest in certain label operations in South Africa.
The Company believes the combination of Constantia Labels’ food & beverage business with Multi-Color’s existing platforms, particularly in home & personal care and wine & spirits and emerging position in healthcare, will create a company with significant scale and geographic, end-market, customer and product diversification and additional growth opportunities. The results of Constantia Labels’ operations were included in the Company’s consolidated financial statements beginning on October 31, 2017.
The purchase price for Constantia Labels consisted of the following:
The Company issued 3,383 shares of its common stock to Constantia Flexibles as part of the consideration for the purchase of Constantia Labels. The Sale and Purchase Agreement provides for restrictions on the transfer of the shares issued to Constantia Flexibles and certain registration rights with respect to the shares. The fair value of the shares issued of $237,820 was calculated using the Company share price of $82.70, which was the closing price on October 31, 2017, discounted to reflect the temporary lack of liquidity.
The cash portion of the purchase price was funded through the 4.875% Senior Notes due 2025 and funds from the Credit Agreement (see Note 9). The purchase price included deferred payments with a total fair value of $3,901, estimated as of the acquisition date, of which $807 was paid during the three months ended June 30, 2018 with the remaining to be paid out approximately 90 days after December 31, 2018, 2019 and 2020. In addition, the purchase price includes future performance based earnouts with a total fair value of $9,026, estimated as of the acquisition date. The future value of the earnouts is dependent upon whether the Verstraete in Mould Labels N.V. (Verstraete) business, which was acquired in conjunction with the Constantia Labels’ acquisition, meets or exceeds certain agreed upon EBITA (earnings before interest, taxes, and amortization) metrics over the three to five-year period following the acquisition. The earnouts have a minimum future payout of zero, and the maximum amount of the future payout is based on the amount of EBITA growth achieved relative to calendar 2017. The earnouts may be paid out approximately 90 days after December 31, 2020, 2021 or 2022. Net cash acquired includes $49,725 of cash acquired less $38,491 of assumed bank debt and capital leases. The Company spent $17,379 in acquisition expenses related to the Constantia Labels acquisition. These expenses were recorded in selling, general and administrative expenses in the consolidated statements of operations as follows: $18 in the third quarter of fiscal 2017, $744 in the first quarter of fiscal 2018, $3,545 in the second quarter of fiscal 2018, $11,299 in the third quarter of fiscal 2018, $632 in the fourth quarter of fiscal 2018, $1,246 in the first quarter of fiscal 2019 and a credit of $(105) in the second quarter of fiscal 2019.
Purchase Price Allocation and Other Items
Based on fair value estimates, the purchase price for Constantia Labels has been allocated to individual assets acquired and liabilities assumed as follows:
The liabilities assumed in the Constantia Labels acquisition included a contingent liability of $9,671, estimated as of the acquisition date based on the Company’s best estimate. The contingent liability, payable to the pre-Constantia Flexibles owners of the respective entities, was based on future earnings of certain entities acquired. In the fourth quarter of fiscal 2018, $7,523 of the contingent liability was paid. The remaining contingent liability was paid during the three months ended March 31, 2019.
The fair value of the noncontrolling interests for Constantia Labels was estimated based on market valuations performed by an independent third party using a combination of: (i) an income approach based on expected future discounted cash flows; and (ii) an asset approach. During fiscal 2019, the Company increased its valuation of the noncontrolling interests for Constantia Labels by $1,200.
During fiscal 2019, goodwill decreased by $33,772 related to measurement period adjustments for the Constantia Labels acquisition. The measurement period adjustments primarily consisted of increases of $33,607 and $22,400 related to the valuation of property, plant and equipment and intangible assets, respectively, and decreases of $4,881 and $4,846 related to the valuation of net cash acquired (primarily due to the valuation of capital leases) and inventories, respectively. In addition, the valuation of deferred tax liabilities increased by $11,195 and accrued income taxes decreased by $3,574 due to completion of the final valuation of current and deferred income tax assets and liabilities.
During fiscal 2019, we recognized a $(4,055) credit to depreciation expense and $911 of amortization expense that would have been recognized in fiscal 2018 if the adjustments to provisional amounts were recognized as of the Constantia Labels’ acquisition date of October 31, 2017.
During the fourth quarter of fiscal 2018, goodwill decreased by $8,912 due to finalization of the purchase price and increased by $4,083 related to measurement period adjustments for the Constantia Labels acquisition. The measurement period adjustments primarily consisted of a $1,768 and $5,311 decrease in the valuation of inventory and other assets, respectively, and a $1,601 increase in the valuation of accrued and other liabilities, partially offset by a $4,765 decrease in the valuation of the related deferred tax liabilities.
The fair value of identifiable intangible assets acquired and their estimated useful lives are as follows:
Identifiable intangible assets are amortized over their useful lives based upon a number of assumptions including the estimated period of economic benefit and utilization. The weighted-average amortization period for identifiable intangible assets acquired in the Constantia Labels acquisition is 18 years.
The goodwill for Constantia Labels is attributable to combining Constantia Labels’ food & beverage business with Multi-Color’s existing platforms, particularly in home & personal care and wine & spirits and emerging position in healthcare, thereby creating additional growth opportunities for both businesses utilizing the expanded global footprint and the acquired workforce. Goodwill arising from the Constantia Labels acquisition is not deductible for income tax purposes.
The accounts receivable acquired as part of the Constantia Labels acquisition had a fair value of $117,248 at the acquisition date. The gross contractual value of the receivables prior to any adjustments was $119,883 and the estimated contractual cash flows that are not expected to be collected are $2,635.
Pro Forma Information
The following table provides the unaudited pro forma results of operations for the year ended March 31, 2018 and 2017 as if Constantia Labels had been acquired as of the beginning of fiscal year 2017. However, pro forma results do not include any anticipated synergies from the combination of the companies, and accordingly, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.
The following is a reconciliation of actual net revenues and net income attributable to Multi-Color Corporation to unaudited pro forma net revenues and net income:
(1) Constantia Labels actual results include the seven months pre-acquisition in fiscal 2018 and 12 months in fiscal 2017. Constantia Labels results for the five months post-acquisition in fiscal 2018 are included in the Multi-Color Corporation actual results.
The following table identifies the unaudited pro forma adjustments:
Other Acquisition Activity
On October 11, 2017, the Company acquired 100% of TP Label Limited, the labels business of Tanzania Printers Limited (Tanzania Printers), and TP Kenya Limited (collectively, “TP Label”), which is located in Dar es Salaam, Tanzania with a sales and distribution center located in Nairobi, Kenya, for $15,929 less net cash acquired of $397. The purchase price included $9,557, which was retained by MCC at closing and was used to repay the indebtedness of TP Label Limited and Tanzania Printers during the three months ended March 31, 2018. The purchase price also included an indemnification holdback of $1,593 to fund certain potential obligations of the sellers with respect to the transaction, which was deferred for one year and paid during the three months ended December 31, 2018. TP Label is primarily a pressure sensitive and cut and stack label business, serving customers in the food and beverage market.
On August 3, 2017, the Company acquired 100% of GEWA Etiketten GmbH (GEWA), including the remaining 2.4% of the common shares of GIP (see below), for $21,846 plus net debt assumed of $5,228. Upon closing, $2,185 of the purchase price was deposited into an escrow account and was released to the seller on the 18-month anniversary of the closing date in accordance with the purchase agreement. The escrow amount was to fund certain potential indemnification obligations of the seller with respect to the transaction. GEWA is located in Bingen am Rhein, Germany and specializes in producing pressure sensitive labels for the wine and spirits market.
On January 3, 2017, the Company acquired 100% of Graphix Labels and Packaging Pty Ltd. (Graphix) for $17,261. The purchase price included a deferred payment of $1,631 that was paid in the three months ended March 31, 2019. Graphix is located in Melbourne, Victoria, Australia and specializes in producing labels for both the food & beverage and wine & spirits markets.
In January 2017, the Company acquired an additional 67.6% of the common shares of Gironde Imprimerie Publicité (GIP) for $2,084 plus net debt assumed of $862. The purchase price included a deferred payment of $208 that was paid during the three months ended March 31, 2018. The Company acquired 30% of GIP as part of the Barat acquisition in fiscal 2016. Immediately prior to obtaining a controlling interest in GIP, the Company recognized a gain of $690 as a result of re-measuring our equity interest to its fair value of $771 based on the most recent share activity. In August 2017, the Company acquired the remaining 2.4% of the common shares of GIP in conjunction with the GEWA acquisition (see above). GIP is located in the Bordeaux region of France and specializes in producing labels for the wine & spirits market.
On July 6, 2016, the Company acquired 100% of Industria Litografica Alessandrina S.r.l. (I.L.A.) for $6,301 plus net debt assumed of $3,547. The purchase price included $819 that is deferred for three years after the closing date. I.L.A. is located in the Piedmont region of Italy and specializes in production of premium self-adhesive and wet glue labels primarily for the wine & spirits market and also services the food industry.
On July 1, 2016, the Company acquired 100% of Italstereo Resin Labels S.r.l. (Italstereo) for $3,342 less net cash acquired of $181. The purchase price included a deferred payment of $201 that was paid in the three months ended September 30, 2017 and a deferred payment of $133 that was paid in the three months ended September 30, 2018. Italstereo is located near Lucca, Italy and specializes in producing pressure sensitive adhesive resin coated labels, seals and emblems.
The results of operations of the acquisitions described above within this “Other Acquisition Activity” section have been included in the consolidated financial statements since the respective dates of acquisition and have been determined to be immaterial for purposes of additional disclosure.
Sale of Southeast Asian durables business
On July 3, 2017, the Company sold its 60% controlling interest in its Southeast Asian durables business to its minority shareholders for $3,620 in net cash proceeds. The Company recognized a loss of $512 on the sale of the business, which was recognized in other expense in the consolidated statements of operations.
(5) ACCOUNTS RECEIVABLE ALLOWANCE
The Company’s customers are primarily producers of home & personal care, wine & spirits, food & beverage, healthcare and specialty consumer products. Accounts receivable consist of amounts due from customers in connection with our normal business activities and are carried at sales value less allowance for doubtful accounts. The allowance for doubtful accounts is established to reflect the expected losses of accounts receivable based on past collection history, age, account payment status compared to invoice payment terms and specific individual risks identified. The following table summarizes the activity in the allowance for doubtful accounts:
(6) INVENTORIES
The Company’s inventories as of March 31 consisted of the following:
(7) PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment as of March 31 consisted of the following:
Total depreciation expense for 2019, 2018 and 2017 was $60,474, $46,913 and $33,480, respectively.
As a result of our decision to close certain manufacturing facilities during fiscal 2019 and 2018, the Company determined that it was more likely than not that certain fixed assets at these facilities would be sold or otherwise disposed of significantly before the end of their estimated useful lives.
As a result of the decision to close our manufacturing facility located in Cowansville, Canada, during fiscal 2019, non-cash fixed asset impairment charges of $309 were recorded to adjust the carrying value of certain machinery and equipment to their estimated fair value, less costs to sell, which were determined based on a quoted market price.
As a result of the decision to consolidate our manufacturing facility located in Merignac, France into our existing facility in Libourne, France during fiscal 2018, non-cash fixed asset impairment charges of $125 were recorded, primarily to write off land and building improvements that were not transferred to Libourne and were abandoned.
As a result of the decision to close our manufacturing facility located in Dormans, France, during fiscal 2018, non-cash fixed asset impairment charges of $25 were recorded, to adjust the carrying value of the land and building held for sale at the Dormans facility to their estimated fair value, less cost to sell, which were determined based on a quoted market price. The land and building at the Dormans facility were sold during fiscal 2018.
These asset impairment charges were recorded in facility closure expenses in the consolidated statements of operations. See Note 21 for further information on these facility closures.
In addition, the Company performed impairment testing on long-lived assets at certain manufacturing locations during fiscal 2019 and 2018 due to the existence of impairment indicators. The estimated undiscounted future cash flows associated with the long-lived assets were greater than their carrying values, and therefore, no impairment was present in either of these two years.
(8) GOODWILL AND INTANGIBLE ASSETS
The changes in the Company’s goodwill consisted of the following:
See Note 4 for further information regarding acquisitions.
In conjunction with our annual impairment tests as of January 31, 2019 and January 31, 2018, the Company performed quantitative assessments for all of our reporting units. The impairment tests compare the fair value of each reporting unit to its carrying value. We estimated the fair value of each reporting unit using a combination of: (i) a market approach based on multiples of revenue and EBITDA from recent comparable transactions and other market data; and (ii) an income approach based on expected future cash flows discounted at rates ranging between 8.5% to 13.0% in 2019 and 8.5% to 11.5% in 2018. The discount rate reflects the risk associated with each respective reporting unit, including the industry and geographies in which they operate. In fiscal 2019, the market and income approaches were weighted 25% and 75%, respectively, based on judgment of the comparability of the recent transactions and the risks inherent in estimating future cash flows. We considered recent economic and industry trends, as well as risk in executing our current plans from the perspective of a hypothetical buyer in estimating expected future cash flows in the income approach.
For most of our reporting units, the impairment test did not indicate impairment as the estimated fair value of the reporting units exceeded the carrying amount. For two of our reporting units, In-Mold Labels Food & Beverage and Europe Food & Beverage, both of which were acquired in fiscal 2018 as part of the Constantia Labels acquisition, the carrying amounts exceeded the estimated fair value of the reporting units.
During the fourth quarter of fiscal 2019, the Company adopted ASC 2017-14, which removes step 2 of the goodwill impairment test. Goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. See Note 2 for further details. As such, the excess of the carrying value over the fair value for IML Food & Beverage and Europe Food & Beverage of $85,109 and $14,046, respectively, were recorded as non-cash goodwill impairment charges during the fourth quarter of fiscal 2019 and resulted in a reduction in goodwill. The impairment charges were a result of changes in expectations for future growth as part of our fourth quarter long-term strategic planning process.
Significant assumptions used to estimate the fair value of our reporting units include estimates of future cash flows, discount rates and multiples of revenue and EBITDA. These assumptions are typically not considered individually because assumptions used to select one variable should also be considered when selecting other variables; however, sensitivity of the overall fair value assessment to each significant variable was also considered.
No events or changes in circumstances occurred in 2019 and 2018 that required goodwill impairment testing in between annual tests.
The Company’s intangible assets as of March 31 consisted of the following:
The intangible assets were established in connection with completed acquisitions. They are amortized, using the straight-line method, over their estimated useful lives based on a number of assumptions including customer attrition rates, percentage of revenue attributable to technologies, royalty rates and projected future revenue growth. The weighted-average amortization period for the intangible assets acquired in fiscal 2018 is 18 years. There were no acquisitions in fiscal 2019. Total amortization expense of intangible assets for 2019, 2018 and 2017 was $43,618, $26,009 and $14,425, respectively.
The estimated useful lives for each intangible asset class are as follows:
The annual estimated amortization expense for future years is as follows:
The Company performed impairment testing on long-lived assets, including intangibles, at certain manufacturing locations during fiscal 2019 and 2018 due to the existence of impairment indicators. The estimated undiscounted future cash flows associated with the long-lived assets were greater than their carrying values, and therefore, no impairment was present in either of these two years related to intangible assets.
(9) DEBT
The components of the Company’s debt as of March 31 consisted of the following:
(1) The 6.125% Senior Notes are due on December 1, 2022. The 4.875% Senior Notes are due on November 1, 2025.
(2) The Company is required to make mandatory principal payments on the outstanding borrowings under the Term Loan A Facility. The principal payments are due on the last day of March, June, September and December of each year, commencing on March 31, 2018 through the maturity date of October 31, 2022.
(3) The Company is required to make mandatory principal payments on the outstanding borrowings under the Term Loan B Facility. The principal payments are due on the last day of March, June, September and December of each year, commencing on March 31, 2018 through the maturity date of October 31, 2024.
(4) Borrowings under the U.S. Revolving Credit Facility and Australian Revolving Sub-Facility mature on October 31, 2022.
(5) Unamortized debt issuance costs related to the U.S. Revolving Credit Facility were reclassified to prepaid expenses and other long-term assets in the consolidated balance sheet as of March 31, 2019, as there are no borrowings outstanding on the U.S. Revolving Credit Facility as of March 31, 2019.
The carrying value of debt under the Credit Agreement approximates fair value. The fair value of the Senior Notes is based on observable inputs, including quoted market prices (Level 2). The fair values of the 4.875% Senior Notes and 6.125% Senior Notes were approximately $616,500 and $257,188, respectively, as of March 31, 2019. The fair values of the 4.875% Senior Notes and 6.125% Senior Notes were approximately $564,000 and $258,750, respectively, as of March 31, 2018.
The following is a schedule of future annual principal payments as of March 31, 2019:
Senior Secured Credit Facility
In conjunction with the Constantia Labels acquisition, effective October 31, 2017 the Company entered into a credit agreement (the “Credit Agreement”) with various lenders. The Credit Agreement replaced the Company’s previous credit agreement and consists of (i) a senior secured first lien term loan A facility (the “Term Loan A Facility”) in an aggregate initial principal amount of $150,000 with a five year maturity, (ii) a senior secured first lien term loan B facility (the “Term Loan B Facility”) in an aggregate initial principal amount of $500,000 with a seven year maturity, and (iii) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount up to $400,000, comprised of a $360,000 U.S. revolving credit facility (the “U.S. Revolving Credit Facility“) and a $40,000 U.S. Dollar equivalent Australian sub-facility (the “Australian Revolving Sub-Facility”), each with a five year maturity.
On October 16, 2018, the Company amended the terms of the Term Loan B Facility upon entering into Amendment No. 1 to the Credit Agreement, which lowered the applicable margin payable on LIBOR indexed loans thereunder from 225 bps to 200 bps.
The Credit Agreement contains customary mandatory and optional prepayment provisions and customary events of default. The Credit Agreement’s Term Loan A Facility, Term Loan B Facility and U.S. Revolving Credit Facility (together, the “U.S. facilities”) are guaranteed by substantially all of the Company’s direct and indirect wholly owned domestic subsidiaries, and such guarantors pledged substantially all their assets as collateral to secure the U.S. facilities. The Australian Revolving Sub-Facility is secured by substantially all of the assets of the Australian borrower and its direct and indirect subsidiaries.
The Credit Agreement can be used for working capital, capital expenditures and other corporate purposes and to fund permitted acquisitions (as defined in the Credit Agreement). Loans under the Credit Agreement bear interest at variable rates plus a margin, based on the Company’s consolidated secured net leverage ratio.
The weighted average interest rates on the Company’s borrowings are as follows:
The Credit Agreement contains customary representations and warranties as well as customary negative and affirmative covenants, which require the Company to maintain the following financial covenants at the end of each quarter: (i) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.50 to 1.00 for the fiscal quarters ended during the period of March 31, 2017 through, and including June 30, 2019 and (ii) the consolidated secured net leverage ratio as of the last day of any fiscal quarter of the Company shall not exceed 4.25 to 1.00 for the fiscal quarters ended during the period of September 30, 2019 and thereafter.
The Credit Agreement, the indenture governing the 4.875% Senior Notes (the “4.875% Senior Notes Indenture”) and the indenture governing the 6.125% Senior Notes (the “6.125% Senior Notes Indenture”) and together with the 4.875% Senior Notes Indenture, (the “Indentures”) limit the Company’s ability to incur additional indebtedness. Additional covenants contained in the Credit Agreement and the Indentures, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, make restricted
payments, create liens, make equity or debt investments, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Under the Credit Agreement and the Indentures, certain changes in control of the Company could result in the occurrence of an Event of Default. In addition, the Credit Agreement limits the ability of the Company to modify terms of the Indentures. As of March 31, 2019, the Company was in compliance with the covenants in the Credit Agreement and the Indentures.
Available borrowings under the U.S. Revolving Credit Facility and Australian Revolving Sub-Facility were $354,241 and $4,023, respectively, at March 31, 2019. The Company also has various other uncommitted lines of credit available at March 31, 2019 in the aggregate amount of $23,625.
4.875% Senior Notes
The $600,000 aggregate principal amount of 4.875% Senior Notes due 2025 (the “4.875% Senior Notes”) were issued in October 2017 to fund the acquisition of Constantia Labels. The 4.875% Senior Notes are unsecured senior obligations of the Company. Interest is payable on the 4.875% Senior Notes on May 1st and November 1st of each year beginning May 1, 2018 until the maturity date of November 1, 2025. The Company’s obligations under the 4.875% Senior Notes are guaranteed by certain of the Company’s existing direct and indirect wholly-owned domestic subsidiaries.
6.125% Senior Notes
The $250,000 aggregate principal amount of 6.125% Senior Notes due 2022 (the “6.125% Senior Notes”) were issued in November 2014. The 6.125% Senior Notes are unsecured senior obligations of the Company. Interest is payable on the 6.125% Senior Notes on June 1st and December 1st of each year beginning June 1, 2015 until the maturity date of December 1, 2022. The Company’s obligations under the 6.125% Senior Notes are guaranteed by certain of the Company’s existing direct and indirect wholly-owned domestic subsidiaries.
Debt Issuance Costs
In conjunction with Amendment No. 1 to the Credit Agreement, the Company paid $730 in third-party fees of which $720 related to a debt modification and were recorded to selling, general and administrative expenses during the third quarter of fiscal 2019. The remaining $10 in third-party fees related to new lenders entering the syndication and were deferred. In addition, $185 of existing unamortized debt issuance costs related to lenders exiting the Term Loan B were written-off to interest expense as a loss on extinguishment of debt. The remaining unamortized debt issuance costs related to a debt modification and, along with the new deferred costs, are being amortized over the remaining term of the Term Loan B Facility.
In conjunction with the issuance of the Credit Agreement, the Company incurred $16,331 in debt issuance costs, which are being deferred and amortized over the term of the Term A Loan Facility, Term Loan B Facility and Revolving Credit Facility, except for the portion written-off in conjunction with Amendment No. 1. In conjunction with terminating the Company’s prior credit agreement, $660 in unamortized debt issuance costs related to a debt extinguishment were written-off to interest expense during the three months ended December 31, 2017. The remaining unamortized fees under the prior credit agreement related to a debt modification and are being amortized over the term of the Revolving Credit Facility.
The Company incurred $10,338 in debt issuance costs associated with the issuance of the 4.875% Senior Notes, which are being deferred and amortized over the term of the 4.875% Senior Notes.
The Company recorded $5,085, $3,174 and $1,665 in interest expense in 2019, 2018 and 2017, respectively, in the consolidated statements of operations to amortize deferred financing costs.
The Company incurred $4,587 in commitment fees related to a senior unsecured bridge facility (the “Bridge Facility”), which were written off to interest expense upon expiration of the availability of the Bridge Facility in 2018.
Capital Leases
The present value of the net minimum payments on the capitalized leases as of March 31 is as follows:
Included in the consolidated balance sheet as of March 31, 2019 under property, plant and equipment are cost and accumulated depreciation related to capitalized leases of $42,710 and $6,336, respectively. Included in the consolidated balance sheet as of March 31, 2018 under property, plant and equipment are cost and accumulated depreciation related to capitalized leases of $49,640 and $9,841, respectively. The capitalized leases carry interest rates from 0.97% to 12.25% and mature from fiscal 2020 to fiscal 2032.
(10) RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The Company is exposed to market risks, both directly and indirectly, such as currency fluctuations and interest rate movement. To the extent the Company deems it to be appropriate, derivative instruments and hedging activities are used as a risk management tool to mitigate the potential impact of certain risks, primarily foreign currency exchange risk and interest rate risk.
The Company uses various types of derivative instruments including, but not limited to, forward contracts and swaps. The Company formally assesses, designates, and documents as a hedge of an underlying exposure each qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, the Company assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transactions are effective at offsetting changes in either the fair values or cash flows of the underlying exposures.
Interest Rate Risk Management
The Company uses interest rate swap agreements (the “Swaps”) to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Swaps involve the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the underlying notional amounts between the two parties.
The Company had three forward starting non-amortizing Swaps with a total notional amount of $125,000 to convert variable rate debt to fixed rate debt. The Swaps became effective October 2012 and expired in August 2016. The Swaps resulted in interest payments based on an average fixed rate of 1.396% plus the applicable margin per the requirements in the previous credit agreement.
In conjunction with entering into the previous credit agreement on November 21, 2014 (see Note 9), the Company de-designated the Swaps as a cash flow hedge. The cumulative loss on the Swaps recorded in accumulated other comprehensive income (AOCI) at the time of de-designation was reclassified into interest expense in the same periods during which the originally hedged transactions affected earnings, as these transactions were still probable of occurring. Subsequent to November 21, 2014, changes in the fair value of the de-designated Swaps were immediately recognized in interest expense.
In conjunction with entering into the Credit Agreement (see Note 9), the Company entered into two spot non-amortizing Swaps with a total notional amount of $300,000 to convert variable rate debt to fixed rate debt. These Swaps became effective October 2017, expired in October 2018, and resulted in interest payments of 1.5625% plus the applicable margin per the requirements in the Credit Agreement. The Company also entered into two forward starting non-amortizing Swaps with a total notional amount of $300,000 to convert variable rate debt to fixed rate debt. These Swaps became effective in October 2018, will expire in October 2022, and result in interest payments of 2.1345% plus the applicable margin per the requirements in the Credit Agreement. In addition, the Company entered into a forward starting non-amortizing Swap with a total notional amount of $100,000 to convert variable rate debt to fixed rate debt. This Swap will become effective in May 2019, will expire in October 2022, and will result in interest payments of 2.8060% plus the applicable margin per the requirements of the Credit Agreement.
Upon inception, the Swaps were designated as cash flow hedges under ASU 2017-12, with gains and losses, net of tax, measured on an ongoing basis, recorded in accumulated other comprehensive income (loss).
Foreign Currency Risk Management
Foreign currency exchange risk arises from our international operations as well as from transactions with customers or suppliers denominated in currencies other than the U.S. Dollar. The functional currency of each of the Company’s subsidiaries is generally the currency of the country in which the subsidiary operates or the U.S. Dollar. At times, the Company uses foreign currency forward contracts to minimize the impact of fluctuations in currency exchange rates.
The Company periodically enters into foreign currency forward contracts to fix the purchase price of foreign currency denominated firm commitments. Certain of these forward contracts are designated as fair value hedges and changes in the fair value of the contracts are recorded in other income and expense in the consolidated statements of operations in the same period during which the related hedged items affect the consolidated statements of operations. In addition, the Company periodically enters into short-term foreign currency forward contracts to fix the U.S. Dollar value of certain intercompany loan payments, which typically settle in the following quarter. During 2019 and 2018, these forward contracts were not designated as hedging instruments; therefore, changes in the fair value of the contracts were immediately recognized in other income and expense in the consolidated statements of operations.
In June 2018, the Company began entering into foreign exchange forward contracts to fix the purchase price in U.S. Dollars of foreign currency denominated raw materials. These forward contracts are designated as cash flow hedges with gains and losses, net of tax, measured on an ongoing basis, recorded in AOCI.
Net Investment Hedging
In September 2017, as a means of managing foreign currency risk related to our significant operations in Europe, the Company executed four fixed-for-fixed cross currency swaps, in which the Company will pay Euros and receive U.S. Dollars with a combined notional amount of €400,000, which mature in November 2025. This will effectively convert U.S. Dollar denominated debt to Euro denominated debt. The Company designated €205,000 of swap notional as a net investment hedge of the Company’s net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. Changes in fair value of the derivative instruments that were designated
and qualified as hedges of net investments in foreign operations were recognized in AOCI to offset changes in the values of the net investments being hedged.
The remaining 195,000 of swap notional was not designated as an accounting hedge in September 2017. Therefore, changes in fair value of the derivative instruments were recognized in other income and expense in the consolidated statements of operations. Subsequently, in November 2017, the Company formally designated the remaining 195,000 of swap notional as a net investment hedge under ASU 2017-12, bringing the total designated notional value to 400,000. Effective November 1, 2017, hedge accounting was applied to the newly designated swap notional of 195,000.
Disclosures about Derivative Instruments
All of the Company’s derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. The Company determines the fair values of its derivatives based on valuation models which project future cash flows and discount the future amounts to a present value using market based observable inputs including interest rate curves, foreign currency rates, futures and basis point spreads, as applicable. The fair values of qualifying and non-qualifying instruments used in hedging transactions as of March 31, 2019 and 2018 are as follows:
The amounts of gains and (losses) recognized in AOCI net of reclassifications into earnings, during the twelve months ended March 31, 2019 and 2018 are as follows:
(1) The net gain of $36,545 recognized in OCI on the cross currency swaps in a net investment hedge as of March 31, 2019 is comprised of an excluded component gain of $4,833 and an undiscounted spot gain of $43,480, net of tax of $(11,768).
The amounts of gains and (losses) reclassified from AOCI into earnings for the twelve months ended March 31, 2019 and 2018 are as follows:
(1) The Company had a $5,226 excluded component gain in AOCI which was recognized into income during the twelve months ended March 31, 2019.
(2) During the next 12 months, $26 of gains included in the March 31, 2019 AOCI balance are expected to be reclassified into interest expense.
The amounts of gains and (losses) included in earnings from qualifying and non-qualifying financial instruments used in hedging transactions for the twelve months ended March 31, 2019 and 2018 are as follows:
(11) ACCRUED EXPENSES AND OTHER LIABILITIES
The Company’s accrued expenses and other liabilities as of March 31 consisted of the following:
(12) EMPLOYEE BENEFIT PLANS
The Company maintains a 401K retirement savings plan (Plan) for U.S. employees who meet certain service requirements. The Plan provides for voluntary contributions by eligible U.S. employees up to a specified maximum percentage of gross pay. At the discretion of the Company’s Board of Directors, the Company may contribute a specified matching percentage of the employee contributions. The Company also makes contributions to various retirement savings plans for Australian employees as required by law equal to 9% of gross pay and to other voluntary and involuntary defined contribution plans in Scotland, China, Malaysia and other subsidiaries outside the U.S. Company contributions to these retirement savings plans were $10,194, $7,217 and $5,189 in 2019, 2018 and 2017, respectively.
The Company sponsors several pension plans, including our pension plan for certain former U.S. employees as well as other subsidiary pension plans around the globe. Our U.S. pension plan is a single employer defined benefit pension plan (Pension Plan), which covers eligible union employees at our former Norway, Michigan plant who were hired prior to July 14, 1998. The Pension Plan provides benefits based on a flat payment formula and years of credited service at a normal retirement age of 65. The benefits are actuarially reduced for early retirement. The Company recorded $10, $56 and $145 of net periodic benefit cost in 2019, 2018 and 2017, respectively.
The Company used a March 31 measurement date (the fiscal year end) for the Pension Plan in 2019 and 2018. The Pension Plan’s benefit obligation was $1,071 and $1,008 as of March 31, 2019 and 2018, respectively. The fair value of the Pension Plan’s assets was $632 and $498 as of March 31, 2019 and 2018, respectively. As of March 31, 2019 and 2018, the Pension Plan’s unfunded obligation was $439 and $510, respectively.
Non-U.S. Plans
Certain subsidiaries outside the U.S. sponsor defined benefit postretirement plans that cover eligible regular employees. The Company deposits funds and/or purchases investments to fund these plans in addition to providing reserves for these plans. Benefits under the defined benefit plans are typically based on years of service and the employee’s compensation. The range of assumptions that are used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries. These defined benefit plans are recorded based upon local accounting standards and are immaterial to the Company’s financial position and results of operations.
The Company’s largest defined benefit postretirement plan outside the U.S. covers eligible employees at our Münden, Germany plant (Münden Plan). The Münden Plan recorded $18 and $47 of net periodic benefit cost in 2019 and 2018, respectively. The Münden Plan’s benefit obligation, plan assets and unfunded obligation as of March 31, 2019 were $3,028, $2,958 and $70, respectively. The Münden Plan’s benefit obligation, plan assets and unfunded obligation as of March 31, 2018 were $3,075, $3,037 and $38, respectively.
(13) INCOME TAXES
Earnings before income taxes were as follows:
The provision (benefit) for income taxes as of March 31 includes the following components:
The following is a reconciliation between the U.S. statutory federal income tax rate and the effective tax rate:
During the fourth quarter of the Company’s fiscal year ended March 31, 2019, a goodwill impairment was recorded on various entities for which a tax deduction is not permitted. See Note 8 for additional details.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As the Company has a March 31 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 31.5% for the Company’s fiscal year ending March 31, 2018, and 21% for subsequent fiscal years. The Tax Act eliminates the domestic manufacturing deduction and implements certain transitional impacts to the Company, including a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate caused the Company to adjust the U.S. deferred tax assets and liabilities to the lower federal base rate of 21%.
As of March 31, 2018, the Company recorded a discrete net tax benefit of $18,268 as a result of the Tax Act, comprised of an estimated repatriation tax charge of $3,075 and an estimated net deferred tax benefit due to the rate change of $21,343. During the year ended March 31, 2019, the Company recorded an additional net tax benefit of $383, comprised of adjustments to the IRC 965 transition tax resulting in a net tax benefit of $528, net deferred tax benefit due to the rate change of $822, and a tax charge of $967 related to a change in the Company’s indefinite reinvestment assertion. The Company’s provisional accounting for the impact of the Tax Act was complete in the quarter ended December 31, 2018.
The majority of the Company’s earnings from foreign subsidiaries are considered permanently reinvested. The repatriation tax resulted in certain previously untaxed non-U.S. earnings being included in the U.S. federal and state 2017 taxable income. As a result of the Tax Act, the Company analyzed its global working capital requirements and the potential tax liabilities that would be incurred if certain non-U.S. subsidiaries made distributions, which include local country withholding tax and potential U.S. state taxation. At March 31, 2019, $1,189 of deferred tax was recorded for certain undistributed earnings of non-U.S. subsidiaries. Historically, no deferred taxes have been provided for any portion of the remaining undistributed earnings of the Company’s subsidiaries since these earnings have been, and will continue to be, permanently reinvested in these subsidiaries. For many reasons, including the number of legal entities and jurisdictions involved, the complexity of the Company’s legal entity structure, the complexity of tax laws in the relevant jurisdictions and the impact of projections of income for future years to any calculations, the Company believes it is not practicable to estimate, within any reasonable range, the amount of additional taxes which may be payable upon the distribution of earnings.
On December 25, 2017, a Belgian tax reform bill was signed into law. The bill revises the future ongoing Belgian corporate income tax by, among other things, lowering the Belgian corporate income tax rates and implementing a group consolidation system. The reduction of the Belgian corporate income tax rate caused us to adjust our Belgian deferred tax assets and liabilities to the newly enacted tax rates. For year ended March 31, 2018, the Company recognized a net deferred tax benefit of $15,164 due to the rate change. As of March 31, 2019, the Company recognized an additional net deferred tax benefit of $2,268 due to the rate change.
Effective April 1, 2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” As part of the adoption, the Company recognizes excess tax benefits or detriments for share-based payments as a reduction of or add-back to income tax expense. For the year ended March 31, 2018 and March 31, 2019, the Company recognized $1,462 and $227, respectively, as discrete benefits in income tax expense related to share-based compensation. Due to the nature of share-based payment exercise patterns, the Company will not know all the potential impacts of the update until the end of each period.
Effective April 1, 2018, the Tax Act subjects a U.S. parent to current tax on its “global intangible low-taxed income” (“GILTI”). The Company does not anticipate incurring a GILTI liability in fiscal year 2019, however, to the extent that expense is incurred under the GILTI provisions, the Company will treat it as a component of income tax expense in the period incurred.
Effective April 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all related amendments, which provides revised guidance for revenue recognition. The standard was adopted by applying the modified retrospective method and all applicable deferred tax impacts were recorded as an adjustment to retained earnings on the date of adoption.
The net deferred tax components as of March 31 consisted of the following:
As of March 31, 2019, Multi-Color had tax-effected federal, state, and foreign operating loss carryforwards of $0, $1,516, and $34,255 respectively. As of March 31, 2018, Multi-Color had tax-effected federal, state and foreign operating loss carryforwards of $1,014, $1,922, and $22,174, respectively. The state operating loss carryforwards will expire between fiscal 2020 and fiscal 2039. The foreign operating loss carryforwards include $18,552 with no expiration date; the remainder will expire between fiscal 2021 and fiscal 2039.
As of March 31, 2019 and 2018, Multi-Color had valuation allowances of $31,702 and $16,870, respectively. As of March 31, 2019 and 2018, $31,247 and $16,454, respectively, of the valuation allowances are related to certain deferred tax assets in foreign jurisdictions due to the uncertainty of the realization of future tax benefits from those assets. The increase in the valuation allowance during the year is primarily caused by adjustments to the opening balance sheet deferred tax balances associated with recording the Constantia acquisition.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. At each reporting date, the Company considers both negative and positive evidence that impacts the assessment of the realization of deferred tax assets.
The benefits of tax positions are not recorded unless it is more likely than not the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50% likelihood of being realized.
As of March 31, 2019 and 2018, the Company had liabilities of $5,846 and $7,038, respectively, recorded for unrecognized tax benefits for U.S. federal, state and foreign tax jurisdictions. During the years ended March 31, 2019 and 2018, the Company recognized an income tax benefit of $1,672 and expense of $120, respectively, for interest and penalties in the consolidated statements of operations. The liability for the gross amount of interest and penalties at March 31, 2019 and 2018 was $1,408 and $2,641, respectively. The liability for unrecognized tax benefits is classified in other noncurrent liabilities on the consolidated balance sheets for the portion of the liability where payment of cash is not anticipated within one year of the balance sheet date. During the year ended March 31, 2019, the Company released $5,251 of reserves, including interest and penalties, related to uncertain tax positions for which the statutes of limitations have
lapsed or there was a reduction in the tax position related to a prior year. The Company believes that it is reasonably possible that $2,068 of unrecognized tax benefits as of March 31, 2019 could be released within the next 12 months due to lapse of statute of limitations and settlements of certain foreign and domestic income tax matters. The unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate are $5,453.
A summary of the activity for the Company’s unrecognized tax benefits as of March 31 is as follows:
The Company files income tax returns in the U.S. federal jurisdiction, various foreign jurisdictions and various state and local jurisdictions where the statutes of limitations generally range from three to four years. At March 31, 2019, the Company is no longer subject to U.S. federal examinations by tax authorities for years before fiscal 2016. The Company is no longer subject to state and local examinations by tax authorities for years before fiscal 2015. In foreign jurisdictions, the Company is no longer subject to examinations by tax authorities for years before fiscal 1999.
(14) MAJOR CUSTOMERS
During 2019, 2018 and 2017, sales to major customers (those exceeding 10% of the Company’s net revenues in one or more of the periods presented) approximated 10%, 14% and 17%, respectively, of the Company’s consolidated net revenues. All of these sales were made to The Procter & Gamble Company.
In addition, accounts receivable balances from The Procter & Gamble Company approximated 2% and 3% of the Company’s total accounts receivable balance at March 31, 2019 and 2018, respectively. The loss or substantial reduction of the business of this major customer could have a material adverse impact on the Company’s results of operations and cash flows.
As a result of a recent procurement savings initiative conducted by our major customer, this customer has diversified its supply of certain label products produced by the Company in North America. We have provided pricing concessions to retain volume but also expect volume from this customer will be reduced. These actions resulted in softer revenues for fiscal 2019 and are expected to continue throughout fiscal 2020. The Company believes that it remains a significant supplier of labels to this customer in North America and that the Company’s global footprint and the Company’s high quality and innovative products will provide the Company the opportunity to grow its relationship with this customer in new products and regions. We expect to offset these developments by continuing to focus on organic growth and internal improvement opportunities. We believe the Company’s operating margins will enhance over the longer term as we historically achieved through continued premiumization, innovation and efficiency gains. However, the loss or continued reduction of business of our major customer could have a material adverse impact on our results of operations and cash flow.
(15) EARNINGS PER COMMON SHARE
The following is a reconciliation of the number of shares used in the basic EPS and diluted EPS computations:
The Company excluded 386, 94 and 172 shares in the fiscal years ended March 31, 2019, 2018 and 2017, respectively, from the computation of diluted EPS because these shares would have an anti-dilutive effect.
(16) STOCK-BASED COMPENSATION
The Company maintains incentive plans which authorize the issuance of stock-based compensation including stock options, restricted stock and restricted share units to officers, key employees and non-employee directors. New shares are issued upon exercise of stock
options or vesting of restricted stock or restricted share units. As of March 31, 2019, 894 shares of common stock remained reserved for future issuance under the 2012 Stock Incentive Plan, 2003 Stock Incentive Plan, as amended, and 2006 Director Equity Compensation Plan.
The Company measures compensation costs related to stock-based transactions at the grant date, based on the fair value of the award, and recognizes them as expense over the requisite service period.
For the year ended March 31, 2019, the Company recorded pre-tax compensation expense for stock-based incentive awards of $2,498 which increased selling, general and administrative expenses by $1,685 and cost of revenues by $813 and had an associated tax benefit of $475.
For the year ended March 31, 2018, the Company recorded pre-tax compensation expense for stock-based incentive awards of $3,456 which increased selling, general and administrative expenses by $2,489 and cost of revenues by $967 and had an associated tax benefit of $898.
For the year ended March 31, 2017, the Company recorded pre-tax compensation expense for stock-based incentive awards of $3,042 which increased selling, general and administrative expenses by $2,064 and cost of revenues by $978 and had an associated tax benefit of $943.
Stock Options
Stock options granted under the plans enable the holder to purchase common stock at an exercise price not less than the market value on the date of grant and will expire not more than ten years after the date of grant. The applicable options vest ratably over a five year period. The Company calculates the value of each employee stock option, estimated on the grant date, using the Black-Scholes model and the following weighted average assumptions:
The Company estimated volatility based on the historical volatility of its common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the options in effect at the time of the grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of the options represents the weighted-average period the stock options are expected to remain outstanding and is based on review of historical exercise behavior of option grants with similar vesting periods. The Company uses an estimated forfeiture rate based on historical data. The forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
A summary of the changes in the options outstanding for years ended March 31, 2019, 2018 and 2017 is shown below:
As of March 31, 2019, the total compensation cost related to nonvested options not yet recognized and the weighted-average period over which it is expected to be recognized is $3,474 and 2.9 years, respectively.
The weighted average grant-date fair value of options granted during the year ended March 31, 2019, 2018 and 2017 was $22.67, $27.98 and $22.72, respectively. Cash received from options exercised during the year ended March 31, 2019 was $1,556. The total grant-date fair value of options vested during the year ended March 31, 2019, 2018 and 2017 was $2,162, $1,800 and $2,062, respectively.
Restricted Stock
Restricted stock grants under the plans typically vest over a three to five year period. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and is recognized on a straight-line basis over the period the restrictions lapse. A summary of the changes in restricted shares for the year ended March 31, 2019, 2018 and 2017 is shown below:
As of March 31, 2019, the total compensation cost related to non-vested restricted shares not yet recognized and the weighted-average period over which it is expected to be recognized was $1,204 and 2.0 years. The total grant-date fair value of restricted shares vested during the year ended March 31, 2019, 2018 and 2017 was $472, $665 and $720, respectively.
Restricted Share Units
Restricted share units (RSUs) granted under the plans vest over a three-year period, and the number of RSUs that will vest is based on the Company’s level of achievement of a certain performance target. Based on the extent to which the performance condition is met, it is possible for none of the RSUs to vest or for a range up to the maximum to vest. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant and is recognized over the requisite service period based on the Company’s estimate of the probable outcome of the performance condition. We evaluate our estimate quarterly, and the expense is adjusted for any change in our estimate of the probable outcome. A summary of the changes in restricted share units for the years ended March 31, 2019, 2018 and 2017 are shown below:
As of March 31, 2019, the total compensation cost related to non-vested RSUs not yet recognized was $739 based upon the Company’s estimate of the probable outcome of the performance condition. The weighted-average period over which it is expected to be recognized was 2.2 years.
(17) GEOGRAPHIC INFORMATION
During fiscal 2018, we acquired GEWA, TP Label, Constantia Labels and began producing labels from our start-up in Auckland, New Zealand. During fiscal 2017, we acquired Italstereo, I.L.A., Graphix and GIP. All of these acquisitions expanded the Company’s geographic presence. See Note 4 for further information regarding these acquisitions. The Company now manufactures labels in the North American, Latin American, EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Net revenues, based on the geographic area from which the product is shipped, for the years ended March 31 and long-lived assets by geographic area as of March 31 are as follows:
(1) We allocate goodwill to our foreign and domestic locations. In fiscal 2018, negative goodwill associated with the acquisition of Constantia Labels was allocated to our plant in Belgium, as the final goodwill allocation was not complete.
(18) COMMITMENTS AND CONTINGENCIES
Operating Lease Agreements
The Company has various equipment, office and facility operating leases. Leases expire on various dates through March 2032 and some of the leases contain clauses requiring escalating rent payments. Rent expense during 2019, 2018 and 2017 was $24,380, $17,953 and $12,767, respectively.
The annual future minimum rental obligations as of March 31, 2019 are as follows:
Purchase Obligations
The Company has entered into purchase agreements for various raw materials, uniforms, supplies, utilities, other services and property, plant and equipment. Total estimated purchase obligations are $36,414 at March 31, 2019.
Litigation
The Company is subject to various legal claims and contingencies that arise out of the normal course of business, including claims related to commercial transactions, product liability, health and safety, taxes, environmental matters, employee matters and other matters. Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on our financial condition, results of operations and cash flows. See Note 23 for additional litigation discussion.
(19) SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:
(20) ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in the Company’s accumulated other comprehensive loss by component consisted of the following:
(1) Net of tax of $9,063 and $(1) for derivative contracts and defined benefit pension items, respectively.
(2) Net of tax of $(11,351) and $11 for derivative contracts and defined benefit pension items, respectively.
Reclassifications out of accumulated other comprehensive loss consisted of the following:
(1) Reclassified from AOCI into interest expense in the consolidated statements of operations. See Note 10.
(2) Reclassified from AOCI into cost of revenues in the consolidated statements of operations. See Note 10.
(3) Reclassified from AOCI into facility closure expenses in the consolidated statements of operations. These components are included in the computation of net periodic pension cost. See Note 12.
(21) FACILITY CLOSURES
Cowansville, Canada
During the three months ended March 31, 2019, the Company announced plans to close our manufacturing facility located in Cowansville, Canada. Production ceased at the facility as of March 31, 2019, and the closure is expected to be substantially completed during the first quarter of fiscal 2020.
Below is a summary of the exit and disposal costs related to the closure of the Cowansville facility:
Below is a reconciliation of the beginning and ending liability balances related to the exit and disposal costs:
As a result of the decision to close our Cowansville facility, the Company determined that it was more likely than not that certain fixed assets at the Cowansville facility would be sold or otherwise disposed of significantly before the end of their estimated useful lives. During fiscal 2019, non-cash impairment charges of $309 were recorded to adjust the carrying value of certain machinery and equipment to their estimated fair value, less costs to sell, which were determined based upon a quoted market price. In addition, the Company recorded a net gain on the sale of property, plant and equipment of $55 related to assets at the Cowansville facility and wrote-off $118 in inventory that will be disposed of as a result of the closure. These items were recorded in facility closure expenses in the consolidated statements of operations in fiscal 2019.
The cumulative costs incurred in conjunction with the closure as of March 31, 2019 are $483, which were recorded in facility closure expenses in the consolidated statements of operations in fiscal 2019.
Melbourne, Australia
During the three months ended June 30, 2018, the Company announced plans to consolidate our manufacturing facility located in Melbourne, Australia into our existing facility in Notting Hill, Australia. The transition was substantially completed during the second quarter of fiscal 2019 except for restoring the facility to its original leased condition, which is expected to be completed during the first quarter of fiscal 2020.
Below is a summary of the total contractual termination benefits and exit and disposal costs related to the closure of the Melbourne facility:
Other associated costs primarily consist of costs to dismantle, transport and reassemble manufacturing equipment that was moved from Melbourne to Notting Hill, costs to prepare the Notting Hill facility for installation of the new equipment and costs to restore the facility to its original leased condition.
Below is a reconciliation of the beginning and ending liability balances related to the contractual termination benefits and exit and disposal costs:
The cumulative costs incurred in conjunction with the closure are $782, which were recorded in integration expenses within selling, general and administrative expenses in the consolidated statements of operations in fiscal 2019.
Merignac, France
During the three months ended September 30, 2017, the Company announced plans to consolidate our manufacturing facility located in Merignac, France into our existing facility in Libourne, France. The transition was substantially completed in the third quarter of fiscal 2018.
Below is a summary of the total contractual termination benefits and exit and disposal costs related to the closure of the Merignac facility:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved to other manufacturing facilities and ongoing costs related to the leased facility until expiration or early termination of the related lease agreement.
Below is a reconciliation of the beginning and ending liability balances related to the contractual termination benefits and exit and disposal costs:
As a result of the decision to close our Merignac facility, the Company determined that it was more likely than not that certain fixed assets at the Merignac facility would be sold or otherwise disposed of significantly before the end of their estimated useful lives. During fiscal 2018, non-cash impairment charges of $125 related to these assets were recorded to write off land and building improvements that will not be transferred to Libourne and will be abandoned. In addition, the Company recorded a net loss on the sale of property, plant and equipment of $48 and $42 related to assets in Merignac that were not transferred to Libourne and were sold or abandoned during fiscal
2019 and 2018, respectively. In fiscal 2018, the Company reversed $102 in accrued pension related to employees that were terminated in conjunction with the closure. These items were recorded in facility closure expenses in the consolidated statements of operations.
The cumulative costs incurred in conjunction with the closure as of March 31, 2019 are $1,343, which were recorded in facility closure expenses in the consolidated statements of operations, $228 and $1,115 in fiscal 2019 and 2018, respectively.
Dormans, France
During the three months ended June 30, 2017, the Company announced plans to close our manufacturing facility located in Dormans, France. Production at the facility ceased during the first quarter of fiscal 2018, and closure activities were substantially completed during the fourth quarter of fiscal 2018.
Below is a summary of the exit and disposal costs related to the closure of the Dormans facility:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved to other manufacturing facilities.
During fiscal 2018, the Company recorded non-cash impairment charges of $25 to adjust the carrying value of the land and building held for sale at the Dormans facility to their estimated fair value, less costs to sell, which were determined based on a quoted market price. The land and building at the Dormans facility were sold during fiscal 2018. During fiscal 2018, the Company recorded a net loss on the disposal of property, plant and equipment of $59 related to assets in Dormans that were not transferred to other facilities and were sold or abandoned. In addition, the Company wrote-off $47 in raw materials that were not transferred to other facilities. These items were recorded in facility closure expenses in the consolidated statements of operations.
The cumulative costs incurred in conjunction with the closure as of March 31, 2019 are $260, which were recorded in facility closure expenses in the consolidated statements of operations in fiscal 2018.
Sonoma, California
On January 19, 2016, the Company announced plans to consolidate our manufacturing facility located in Sonoma, California, into our existing facility in Napa, California. The transition was substantially completed in the third quarter of fiscal 2017.
During fiscal 2017, the Company incurred the following exit and disposal costs related to the closure of the Sonoma facility, which were recorded in facility closure expenses in the consolidated statements of operations:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved from Sonoma to Napa.
During fiscal 2017, the Company recorded a net gain on the sale of property, plant and equipment of $185 related to assets in Sonoma that were not transferred to Napa and were sold. In addition, the Company wrote-off $140 in property, plant and equipment that was not transferred to Napa and was abandoned in fiscal 2017. These items were recorded in facility closure expenses in the consolidated statements of operations.
Glasgow, Scotland
During the three months ended March 31, 2016, the Company began the process to consolidate our two manufacturing facilities located in Glasgow, Scotland into one facility. The transition was substantially completed in the fourth quarter of fiscal 2017.
During fiscal 2017, the Company incurred the following exit and disposal costs related to the consolidation of the Glasgow facilities, which were recorded in facility closure expenses in the consolidated statements of operations:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved in order to consolidate our two manufacturing facilities located in Glasgow into one facility.
During fiscal 2017, the Company recorded a net gain on the sale of property, plant and equipment of $377 related to assets that were not transferred from the closing Glasgow facility to other locations and were sold, which was recorded in facility closure expenses in the consolidated statements of operations.
Greensboro, North Carolina
On October 5, 2015, the Company announced plans to consolidate our manufacturing facility located in Greensboro, North Carolina into other North American facilities. The transition was substantially completed in the fourth quarter of fiscal 2016.
During fiscal 2017, the Company incurred the following exit and disposal costs related to the closure of the Greensboro facility, which were recorded in facility closure expenses in the consolidated statements of operations:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved from the Greensboro facility to other North American facilities and costs to return the facility to its original leased condition.
Dublin, Ireland
During the three months ended December 31, 2015, the Company began the process to consolidate our manufacturing facility located in Dublin, Ireland into our existing facility in Drogheda, Ireland (near Dublin). The consolidation was substantially completed in the first quarter of fiscal 2017.
During fiscal 2017, the Company incurred the following exit and disposal costs related to the closure of the Dublin facility, which were recorded in facility closure expenses in the consolidated statements of operations:
Other associated costs primarily consisted of costs to dismantle, transport and reassemble manufacturing equipment that was moved from Dublin to Drogheda and costs to relocate employees.
Norway, Michigan and Watertown, Wisconsin
During fiscal 2015, the Company decided to close our manufacturing facilities located in Norway, Michigan and Watertown, Wisconsin. Due to available capacity, we transitioned the Norway and Watertown business to other North American facilities. During fiscal 2018 and 2017, the Company recorded settlement expense of $44 and $133, respectively, related to the defined benefit pension plan that covers eligible former union employees of the Norway plant who were hired prior to July 14, 1998. These costs were recorded in facility closure expenses in the consolidated statements of operations.
(22) QUARTERLY DATA (UNAUDITED)
Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter’s per share amount may not equal the total per share amount for the respective year.
Fiscal 2019 results include $711 ($507 after-tax) in costs related to the closure of our manufacturing facilities located in Merignac, France and Cowansville, Canada. These expenses were recorded as follows:
Fiscal 2018 results include $1,419 ($945 after-tax) in costs related to the closure of our manufacturing facilities located in Merignac and Dormans, France and Norway, Michigan. These expenses were recorded as follows:
(23) SUBSEQUENT EVENTS
On February 24, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with W/S Packaging Holdings, Inc., a Delaware corporation (“Parent”), and Monarch Merger Corporation, an Ohio corporation and a wholly-owned subsidiary of Parent (“Sub”). The Merger Agreement provides for the merger of Sub with and into the Company, on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with the Company continuing as the surviving corporation in the Merger. As a result of the Merger, the Company will become a wholly-owned subsidiary of Parent. On April 5, 2019, the Company filed with the Securities and Exchange Commission a definitive proxy statement (the “Proxy Statement”) with respect to the Company’s special meeting of the shareholders held on May 16, 2019 in connection with the Merger. At the special meeting of the shareholders, the Company received approval of the proposal to adopt the Merger Agreement and approval of the proposal to approve, on a non-binding advisory basis, the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the Merger.
On April 29, 2019, the Company was served with a complaint in an action captioned Eric Sabatini, Individually And On Behalf of All Others Similarly Situated, and Derivatively On Behalf of Multi-Color Corporation v. Nigel A. Vinecombe, Michael J. Henry, Vadis A. Rodato, Alex Baumgartner, Ari J. Benacerraf, Robert R. Buck, Charles B. Connolly, Robert W. Kuhn, Ronald Lienau and Multi-Color Corporation (the “Sabatini Complaint”) relating to the Merger Agreement and the Proxy Statement. The Sabatini Complaint was filed in the Hamilton County Court of Common Pleas in the State of Ohio and alleges, among other things, that the individual defendants breached their fiduciary duties to Company shareholders by failing to secure adequate merger consideration and failing to disclose material information in the Proxy Statement. The lawsuit asserts claims on behalf of a putative class of Company shareholders as well as derivatively on behalf of the Company. Among other remedies, the Sabatini Complaint seeks to enjoin the consummation of the Merger (or alternatively, rescission of the Merger in the event the defendants are able to consummate it), as well as damages, costs and attorneys’ and experts’ fees.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(In thousands, except for statistical data)
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rule 13a-15(b), Multi-Color’s management, with the participation of the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2019. Based on this evaluation, Multi-Color has concluded that the disclosure controls and procedures were effective as of March 31, 2019.
Multi-Color’s management does not expect that its disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to simple errors or mistakes. The design of any system of controls is based in part upon certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Management’s Report on Internal Control over Financial Reporting
Multi-Color’s management is responsible for the preparation and accuracy of the financial statements and other information included in this report. Multi-Color’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including Multi-Color’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, Multi-Color conducted an evaluation of the effectiveness of internal control over financial reporting as of March 31, 2019, based on the criteria set forth in Internal Control - Integrated Framework (2013) (the “Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that, as of March 31, 2019, its internal control over financial reporting was effective based on the Framework.
There are inherent limitations on the effectiveness of any system of internal controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective internal controls and procedures can only provide reasonable assurance of achieving their control objectives.
Item 8 includes the audit report of Grant Thornton LLP on Multi-Color’s internal control over financial reporting as of March 31, 2019.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Multi-Color’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
Information required by this Part III of the Form 10-K is incorporated by reference from an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission as may be required within 120 days after March 31, 2019.
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11.
ITEM 11. Executive Compensation
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The following Consolidated Financial Statements of Multi-Color Corporation and subsidiaries and the Reports of the Independent Registered Public Accounting Firm are included in Part II, Item 8.
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended March 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2019, 2018 and 2017
Consolidated Balance Sheets as of March 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended March 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting is included in Part II, Item 9A.
(a)(2) Financial Statement Schedules:
All schedules have been omitted because they are either not required or the information is included in the financial statements and notes thereto.
(b) Exhibits
ITEM 16. FORM 10-K SUMMARY
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
We, the undersigned directors and officers of Multi-Color Corporation, hereby severally constitute Michael J. Henry and Sharon E. Birkett, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.