UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10–Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333–110441

THE SHERIDAN GROUP, INC.

(Exact name of registrant as specified in its charter)

Maryland		52–1659314
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11311 McCormick Road, Suite 260
Hunt Valley, Maryland		21031–1437
(Address of principal executive offices)		(Zip Code)

410–785–7277

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

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

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

There was 1 share of Common Stock outstanding as of August 9, 2012.

The Sheridan Group, Inc. and Subsidiaries

Quarterly Report

For the Quarter Ended June 30, 2012

INDEX

		Page
PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II — OTHER INFORMATION		23

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Mine Safety Disclosures	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

SIGNATURE		24

Index

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
ASSETS	2012			2011

Current assets:
Cash and cash equivalents	$	493,609		$	475,324
Accounts receivable, net of allowance for doubtful accounts of $918,564 and $1,173,194, respectively		22,835,146			25,504,733
Inventories, net		16,167,072			15,343,487
Other current assets		4,260,723			5,826,708
Refundable income taxes		22,106			109,387
Total current assets		43,778,656			47,259,639

Property, plant and equipment, net		95,388,304			98,835,957
Intangibles, net		28,007,779			28,850,705
Goodwill		33,978,641			33,978,641
Deferred financing costs, net		3,371,226			4,818,024
Other assets		1,050,690			1,090,681
Total assets	$	205,575,296		$	214,833,647

LIABILITIES

Current liabilities:
Accounts payable	$	13,274,275		$	14,842,454
Accrued expenses		14,868,732			13,019,152
Total current liabilities		28,143,007			27,861,606

Notes payable and working capital facility		127,093,709			135,864,880
Deferred income taxes and other liabilities		21,344,891			21,937,844
Total liabilities		176,581,607			185,664,330

STOCKHOLDER'S EQUITY

Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding at June 30, 2012 and December 31, 2011		-			-
Additional paid-in capital		42,111,947			42,106,557
Accumulated deficit		(13,118,258	)		(12,937,240	)
Total stockholder's equity		28,993,689			29,169,317
Total liabilities and stockholder's equity	$	205,575,296		$	214,833,647

The accompanying notes are an integral part of the condensed consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 and 2011

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Net sales	$	65,009,967		$	64,999,976		$	134,952,225		$	133,188,966

Cost of sales		51,646,706			53,703,042			107,903,404			110,306,094

Gross profit		13,363,261			11,296,934			27,048,821			22,882,872

Selling and administrative expenses		8,234,292			8,911,517			16,737,126			18,867,119
(Gain) loss on disposition of fixed assets		(81,865	)		(6,738	)		(77,789	)		17,253
Restructuring costs		(1,819	)		458,627			2,945			835,856
Amortization of intangibles		421,463			1,354,013			842,926			2,474,889

Total operating expenses		8,572,071			10,717,419			17,505,208			22,195,117

Operating income		4,791,190			579,515			9,543,613			687,755

Other (income) expense:
Interest expense		5,332,736			5,707,688			10,839,206			9,637,307
Interest income		(341	)		(541	)		(5,233	)		(1,431	)
(Gain) loss on repurchase of notes payable		(337,332	)		1,167,225			(755,282	)		1,167,225
Other, net		48,597			(7,076	)		46,162			(16,992	)

Total other expense		5,043,660			6,867,296			10,124,853			10,786,109

Loss before income taxes		(252,470	)		(6,287,781	)		(581,240	)		(10,098,354	)

Income tax benefit		(237,132	)		(2,403,298	)		(400,222	)		(3,851,175	)

Net loss	$	(15,338	)	$	(3,884,483	)	$	(181,018	)	$	(6,247,179	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 and 2011

(Unaudited)

	Six Months Ended
	June 30,			June 30,
	2012			2011
Cash flows provided by operating activities:
Net loss	$	(181,018	)	$	(6,247,179	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation		8,368,652			10,789,941
Amortization of intangible assets		842,926			2,474,889
Provision for doubtful accounts		(15,021	)		290,654
Provision for inventory realizability		77,753			34,953
Stock-based compensation		5,390			14,969
Amortization of deferred financing costs and original issue discount, included in interest expense		2,437,210			1,343,430
Deferred income tax benefit		(475,658	)		(3,375,938	)
Non-cash portion of net (gain) loss on repurchase of notes payable		(755,282	)		236,789
(Gain) loss on disposition of fixed assets		(77,789	)		17,253
Changes in operating assets and liabilities
Accounts receivable		2,684,608			(1,127,910	)
Inventories		(901,338	)		(685,211	)
Other current assets		1,478,923			1,760,650
Refundable income taxes		87,281			-
Other assets		39,991			468,906
Accounts payable		(2,157,108	)		(1,311,561	)
Accrued expenses		1,849,580			398,323
Due to parent, net		-			(534,440	)
Other liabilities		(30,233	)		(482,467	)
Net cash provided by operating activities		13,278,867			4,066,051

Cash flows used in investing activities:
Purchases of property, plant and equipment		(4,227,161	)		(9,525,104	)
Interest capitalized in connection with purchases of property, plant and equipment		(108,000	)		-
Proceeds from sale of fixed assets, net of disposal costs		80,880			24,991
Net cash used in investing activities		(4,254,281	)		(9,500,113	)

Cash flows used in financing activities:
Borrowing of working capital facility		52,753,285			20,904,113
Repayment of working capital facility		(54,300,000	)		(19,500,000	)
Repurchase of notes payable		(7,444,586	)		(142,900,000	)
Proceeds from issuance of notes payable		-			141,000,000
Payment of deferred financing costs in connection with notes payable and working capital facility		(15,000	)		(7,077,305	)
Net cash used in financing activities		(9,006,301	)		(7,573,192	)

Net increase (decrease) in cash and cash equivalents		18,285			(13,007,254	)

Cash and cash equivalents at beginning of period		475,324			13,717,082

Cash and cash equivalents at end of period	$	493,609		$	709,828

Non-cash investing and financing activities
Asset additions in accounts payable	$	1,169,772		$	595,760

The accompanying notes are an integral part of the condensed consolidated financial statements.

Index

THE SHERIDAN GROUP, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Company Information and Significant Accounting Policies

The accompanying unaudited financial statements of The Sheridan Group, Inc. and Subsidiaries (together, the “Company”) have been prepared by us pursuant to the rules of the Securities and Exchange Commission (the “SEC”). In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, our financial position as of June 30, 2012, our results of operations for the three and six month periods ended June 30, 2012 and 2011 and our cash flows for the six month periods ended June 30, 2012 and 2011. All such adjustments are deemed to be of a normal and recurring nature and all material intercompany balances and transactions have been eliminated. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto of The Sheridan Group, Inc. and Subsidiaries included in our Annual Report on Form 10-K for the year ended December 31, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the full fiscal year.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The amendment should be applied retrospectively. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.

In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative tests become optional. The guidance is effective for annual and interim impairment tests performed in fiscal years beginning after December 15, 2011, and earlier adoption is permitted. The adoption of this guidance did not have an impact on our financial statements.

In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not have any elements of other comprehensive income; therefore, the adoption of this guidance did not have an impact on our financial statements.

In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us beginning in the first quarter of 2012. The adoption of this guidance did not have an impact on our financial statements, other than additional disclosures.

Index

Inventory

Components of net inventories at June 30, 2012 and December 31, 2011 were as follows:

	June 30,			December 31,
	2012			2011
Work-in-process	$	5,832,523		$	6,160,151
Raw materials (principally paper)		10,611,691			9,460,478
		16,444,214			15,620,629
Excess of current costs over LIFO inventory value		(277,142	)		(277,142	)
Net inventory	$	16,167,072		$	15,343,487

3.	Notes Payable and Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”). The 2011 Notes, which were issued by The Sheridan Group, Inc. under an indenture (the “Indenture”), will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes will be payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. Proceeds of the offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our 10.25% senior secured notes that were due to mature on August 15, 2011 (the “2003 and 2004 Notes”) and to pay approximately $6.5 million in professional fees and expenses incurred in connection with the issuance of the 2011 Notes. These fees and expenses were capitalized as deferred financing costs and will be amortized to interest expense using the effective interest rate method over the term of the 2011 Notes. We recognized a loss on the repurchase of the 2003 and 2004 Notes of approximately $1.2 million as a result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs.

During the fourth quarter of 2011, we repurchased in the open market 2011 Notes with a face value of $8.2 million for $7.1 million, which included $0.1 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.7 million. As a result of the repurchases, we recognized a net gain of $0.5 million.

On November 23, 2011, we sold the Ashburn, Virginia facility. Per the terms of the Indenture, on December 16, 2011, we used the net proceeds from this sale of $3.9 million to repurchase 2011 Notes at 100% of their face value plus $0.1 million of accrued interest. We recognized a loss on the repurchase of $0.3 million as the result of the write-off of deferred financing costs and unamortized debt discount.

During the first quarter of 2012, we repurchased in the open market 2011 Notes with a face value of $5.9 million for $5.3 million, which included $0.2 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.4 million. As a result of the repurchases, we recognized a net gain of $0.4 million.

The carrying value of the 2011 Notes was $124.1 million as of June 30, 2012.

Concurrent with the private debt offering, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%.

We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding. In addition, we paid an upfront fee of $0.3 million at closing and approximately $0.4 million of professional fees, which were capitalized as deferred financing costs and will be amortized to interest expense on a straight-line basis over the term of the working capital facility. As of June 30, 2012, we had $3.0 million outstanding under the working capital facility, $1.3 million in letters of credit outstanding and unused amounts available of $10.7 million.

Index

On June 6, 2012, we entered into an agreement to extend the scheduled maturity date of the working capital facility to October 15, 2013. We capitalized a negligible amount of fees in connection with the extension of the working capital facility.

The Indenture and the working capital facility require us to maintain certain minimum Consolidated EBITDA (as defined in the underlying agreements) levels for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for each fiscal year. In addition, the Indenture and the working capital facility contain affirmative and negative covenants, representations and warranties, borrowing conditions, events of default and remedies for the holders and lenders. We have complied with all of the restrictive covenants as of June 30, 2012.

Prior to April 15, 2011, we had a working capital facility agreement that allowed for revolving debt of up to $20.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. We had no borrowings under this working capital facility during 2011. We paid an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we paid an annual fee of 3.875% on all letters of credit outstanding.

4.	Accrued Expenses

Accrued expenses as of June 30, 2012 and December 31, 2011 consisted of the following:

	June 30,		December 31,
	2012		2011
Payroll and related expenses	$	4,617,456	$	3,076,803
Accrued interest		3,389,649		3,611,240
Customer prepayments		3,677,889		3,181,217
Self-insured health and workers' compensation accrual		1,303,907		1,406,556
Other		1,879,831		1,743,336
	$	14,868,732	$	13,019,152

5.	Business Segments

We are a specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We operate in three business segments: “Publications,” “Specialty Catalogs” and “Books.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing and Dartmouth Journal Services. On July 1, 2011, we ceased operations at United Litho, which was part of our Publications segment, and consolidated the printing of specialty magazines at Dartmouth Printing. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

The accounting policies of the operating segments are the same as those described in Note 2 “Summary of Significant Accounting Policies” in the consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2011. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate depreciation, technology development costs, corporate restructuring costs and certain professional fees are not allocated to the segments and are shown as Corporate in the table below. Our customer base resides in the continental United States, and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.

We had no customer that accounted for 10.0% or more of our net sales for the three and six month periods ended June 30, 2012 and 2011.

Index

The following table provides segment information as of June 30, 2012 and 2011 and for the three and six month periods then ended:

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
(in thousands)

Net sales
Publications	$	37,312		$	36,868		$	74,774		$	73,066
Specialty catalogs		15,135			14,076			33,590			32,352
Books		12,593			14,073			26,628			27,866
Intersegment sales elimination		(30	)		(17	)		(40	)		(95	)
Consolidated total	$	65,010		$	65,000		$	134,952		$	133,189

Operating income
Publications	$	5,314		$	1,074		$	9,933		$	1,566
Specialty catalogs		(415	)		(1,111	)		(422	)		(1,332	)
Books		181			963			737			1,654
Corporate expenses		(289	)		(346	)		(704	)		(1,200	)
Consolidated total	$	4,791		$	580		$	9,544		$	688

	June 30,		December 31,
	2012		2011
Assets
Publications	$	120,299	$	124,886
Specialty catalogs		43,915		47,119
Books		39,376		39,429
Corporate		1,985		3,400
Consolidated total	$	205,575	$	214,834

A reconciliation of total segment operating income to consolidated loss before income taxes is as follows:

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2012			2011			2012			2011

Total operating income (as shown above)	$	4,791		$	580		$	9,544		$	688

Interest expense		(5,333	)		(5,708	)		(10,839	)		(9,637	)
Interest income		-			-			5			1
Gain (loss) on repurchase of notes payable		337			(1,167	)		755			(1,167	)
Other, net		(48	)		7			(46	)		17

Loss before income taxes	$	(253	)	$	(6,288	)	$	(581	)	$	(10,098	)

6.	Income Taxes

During the six months ended June 30, 2012, the effective income tax rate was 69% as compared to 38% for the same period in 2011. The increase in the effective income tax rate was primarily due to the significant decrease in the projected pre-tax loss for 2012 compared to 2011, while permanent differences are anticipated to remain constant year over year.

We file consolidated tax returns with TSG Holdings Corp. (“Holdings”), our parent company, for Federal and certain state jurisdictions. During the six months ended June 30, 2012, we generated a $0.4 million income tax benefit as the result of current net operating losses (NOLs). Due to operating loss carryforwards generated by us and Holdings, we will not realize a current benefit from our NOLs. Therefore, the current benefit has been reclassified as a non-current deferred tax asset and is netted against non-current deferred tax liabilities on the consolidated balance sheet, as it will be available to reduce taxable income in future periods.

7.	Fair Value Measurements

Certain of our assets and liabilities must be recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:

Index

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

Our financial instruments consist of long-term investments in marketable securities (held in trust for payment of non-qualified deferred compensation) and long-term debt. We are permitted to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities, including long-term debt, at fair value which were not previously required to be measured at fair value. We classify the investments in marketable securities within level 1 of the hierarchy since they are invested in publicly traded mutual funds with quoted market prices that are available in active markets.

The estimated fair value of our publicly traded debt, based on level 2 inputs, was approximately $105.9 million and $121.4 million as of June 30, 2012 and December 31, 2011, respectively.

8.	Related Party Transactions

Under the terms of a management agreement with our principal equity sponsors, we paid an annual management fee equal to the greater of $500,000 or 2% of EBITDA (as defined in the management agreement) plus reasonable out-of-pocket expenses. On April 15, 2011, the management agreement was terminated, and there were no amounts expensed in connection with the management agreement subsequent to the first quarter of 2011. We expensed $0.5 million in such fees for the six month period ended June 30, 2011.

9.	Contingencies

We are party to legal actions as a result of various claims arising in the normal course of business. We believe that the disposition of these matters will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

10.	Restructuring and Other Exit Costs

DPC/ULI Consolidation

Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our United Litho, Inc. (“ULI”) facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at Dartmouth Printing Company (“DPC”) in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the consolidation. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds from the sale of the facility were $3.9 million.

Restructuring charges in connection with the DPC/ULI consolidation recorded during the three and six months ended June 30, 2012 were minimal. We recorded $0.4 million and $0.8 million of restructuring charges during the three and six months ended June 30, 2011, respectively. Charges related to severance and other personnel costs totaled $0.3 million and $0.6 million and charges for other exit costs totaled $0.1 million and $0.2 million during the three and six months ended June 30, 2011, respectively. We estimate that approximately $0.2 million of additional restructuring charges resulting in future cash expenditures will be incurred during 2012, primarily related to severance and other exit costs. We had a negligible liability related to this restructuring outstanding as of June 30, 2012.

Workforce Reduction

During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during the third quarter of 2011. These costs related primarily to guaranteed severance payments and employee health benefits. There were no restructuring costs recorded during the three and six months ended June 30, 2012, and we do not believe any other costs will be expensed in the future in connection with this action. We had a liability of $0.2 million related to this restructuring outstanding as of June 30, 2012.

Index

The table below shows our restructuring activity and our restructuring accrual balance as of June 30, 2012 (in thousands):

	DPC/ULI			Workforce
	consolidation			reduction			Total
Restructuring accrual at December 31, 2011	$	168		$	282		$	450
Restructuring costs expensed		3			-			3
Restructuring costs paid		(151	)		(129	)		(280	)
Restructuring accrual at June 30, 2012	$	20		$	153		$	173

We recorded non-cash charges of $0.9 million and $1.6 million during the three and six months ended June 30, 2011, respectively, associated with the accelerated amortization of the United Litho trade name based on updated estimates of useful life. We also recorded non-cash charges of approximately $0.7 million and $2.0 million during the three and six months ended June 30, 2011 associated with the accelerated depreciation of ULI’s equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell. There were no such non-cash charges in connection with the shutdown of ULI recorded during the three and six months ended June 30, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our historical consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011. References to the “Company” refer to The Sheridan Group, Inc. The terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of the Company and all of its subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements.” Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would” or words or phrases of similar meaning. They may relate to, among other things:

●

our liquidity and capital resources, including our expected level of capital expenditures and our ability to refinance our debt;

●

competitive pressures and trends in the printing industry;

●

prevailing interest rates;

●

legal proceedings and regulatory matters;

●

general economic conditions;

●

the liquidity and capital resources of our customers and potential customers;

●

predictions of net sales, expenses or other financial items;

●

future operations, financial condition and prospects; and

●

our plans, objectives, strategies and expectations for the future.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements, may cause us to modify our plans or objectives, may affect our ability to pay timely amounts due under our outstanding notes and/or may affect the value of our outstanding notes. New risk factors can emerge from time to time. It is not possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements. Given these risks and uncertainties, actual future results may be materially different from what we plan or expect. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. We undertake no obligation to review or update these forward-looking statements to reflect events or circumstances occurring after the date of this report.

Index

Overview

Company Background

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We provide a wide range of printing services and value-added support services that supplement the core printing operations such as page composition, electronic copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution, custom publishing and back issue fulfillment. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company.

2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. On the same date, we entered into an amended and restated working capital facility, which now has a scheduled maturity of October 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses.

Restructuring costs and facility shutdown

DPC/ULI Consolidation

Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our United Litho, Inc. (“ULI”) facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at Dartmouth Printing Company (“DPC”) in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the closure. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds from the sale of the facility were $3.9 million.

Workforce Reduction

The table below shows our restructuring activity and our restructuring accrual balance as of June 30, 2012 (in thousands):

	DPC/ULI			Workforce
	consolidation			reduction			Total
Restructuring accrual at December 31, 2011	$	168		$	282		$	450
Restructuring costs expensed		3			-			3
Restructuring costs paid		(151	)		(129	)		(280	)
Restructuring accrual at June 30, 2012	$	20		$	153		$	173

We also recorded non-cash charges of approximately $0.7 million and $2.0 million during the three and six months ended June 30, 2011 associated with the accelerated depreciation of ULI’s equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell.

Index

There were no such non-cash charges in connection with the shutdown of ULI recorded during the three and six months ended June 30, 2012 and no additional non-cash charges will be recorded in the future.

Critical Accounting Estimates

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. We believe the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2011, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our accounting for allowances for doubtful accounts, impairment of goodwill and other identifiable intangibles, income taxes and self-insurance. These policies require us to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition.

Results of Operations

Our business includes three reportable segments comprised of “Publications,” “Specialty Catalogs” and “Books.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing and Dartmouth Journal Services. On July 1, 2011, we ceased operations at United Litho, which was part of our Publications segment, and consolidated the printing of specialty magazines at Dartmouth Printing. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

The following tables set forth, for the periods indicated, information derived from our condensed consolidated statements of operations, the relative percentage that those amounts represent to total net sales (unless otherwise indicated), and the percentage change in those amounts from period to period. This table should be read in conjunction with the commentary that follows it.

Index

Three months ended June 30, 2012 and June 30, 2011

													Percent of revenue
	Three months ended June 30,						Increase (decrease)						Three months ended June 30,
(in thousands)	2012			2011			Dollars			Percentage			2012			2011

Net sales
Publications	$	37,312		$	36,868		$	444			1.2	%		57.4	%		56.7	%
Specialty catalogs		15,135			14,076			1,059			7.5	%		23.3	%		21.6	%
Books		12,593			14,073			(1,480	)		(10.5	%)		19.3	%		21.7	%
Intersegment sales elimination		(30	)		(17	)		(13	)	nm				-			-
Total net sales	$	65,010		$	65,000		$	10			0.0	%		100.0	%		100.0	%

Cost of sales		51,647			53,703			(2,056	)		(3.8	%)		79.4	%		82.6	%

Gross profit	$	13,363		$	11,297		$	2,066			18.3	%		20.6	%		17.4	%

Selling and administrative expenses	$	8,234		$	8,911		$	(677	)		(7.6	%)		12.7	%		13.7	%
Gain on sale of fixed assets		(82	)		(7	)		(75	)	nm				(0.1	%)		-
Restructuring costs		(2	)		459			(461	)	nm				-			0.7	%
Amortization of intangibles		422			1,354			(932	)		(68.8	%)		0.6	%		2.1	%
Total operating expenses	$	8,572		$	10,717		$	(2,145	)		(20.0	%)		13.2	%		16.5	%

Operating income
Publications	$	5,314		$	1,074		$	4,240		nm				14.2	%		2.9	%
Specialty catalogs		(415	)		(1,111	)		696			62.6	%		(2.7	%)		(7.9	%)
Books		181			963			(782	)		(81.2	%)		1.4	%		6.8	%
Corporate expenses		(289	)		(346	)		57			16.5	%	nm			nm
Total operating income	$	4,791		$	580		$	4,211		nm				7.4	%		0.9	%

Other (income) expense
Interest expense	$	5,333		$	5,708		$	(375	)		(6.6	%)		8.2	%		8.8	%
Interest income		-			-			-		nm				-			-
(Gain) loss on repurchase of notes payable		(337	)		1,167			(1,504	)	nm				(0.5	%)		1.8	%
Other, net		48			(7	)		55		nm				0.1	%		-
Total other expense	$	5,044		$	6,868		$	(1,824	)		(26.6	%)		7.8	%		10.6	%

Loss before income taxes		(253	)		(6,288	)		6,035			96.0	%		(0.4	%)		(9.7	%)

Income tax benefit		(237	)		(2,403	)		2,166			90.1	%		(0.4	%)		(3.7	%)

Net loss	$	(16	)	$	(3,885	)	$	3,869			99.6	%		-			(6.0	%)

nm - not meaningful

Commentary:

Net sales for the second quarter of 2012 were virtually unchanged versus the second quarter of 2011 as incremental sales from new and existing customers were offset by lower paper pass through costs. Net sales for the Publications segment increased $0.4 million or 1.2% in the second quarter of 2012 compared to the same period a year ago due primarily to work from new and existing journal customers partially offset by sales declines in magazines and lower paper pass through costs. Net sales for the Specialty Catalogs segment increased $1.1 million or 7.5% in the second quarter of 2012 compared with the same period a year ago due primarily to work from new and existing customers coupled with increases in paper and freight pass through costs. Net sales for the Books segment decreased $1.5 million or 10.5% in the second quarter of 2012 compared with the same period a year ago due primarily to reductions in run lengths and color work. Lower paper pass through costs also contributed to the year to year decline in Books sales.

Gross profit for the second quarter of 2012 increased by $2.1 million or 18.3% compared to the second quarter of 2011 with over three-quarters of the improvement attributable to the improved results of the consolidated DPC/ULI business. Gross margin of 20.6% of net sales for the second quarter of 2012 reflected a 3.2 margin point increase versus the second quarter of 2011. The increases in our gross profit and margin were due principally to the absence in the second quarter of 2012 of the acceleration of depreciation expense in connection with the shutdown of ULI that was recorded in the second quarter of 2011 coupled with lower people-related costs, including healthcare claims, and lower equipment lease costs which were partially offset by lower recycling revenue.

Selling and administrative expenses decreased $0.7 million or 7.6% in the second quarter of 2012 as compared to the second quarter of 2011. The decrease was due primarily to lower people-related costs, including health care claims, as well as lower costs related to professional fees and bad debt expense.

Index

Restructuring costs were $0.5 million lower in the second quarter of 2012 as compared to the same period last year. The costs recorded during the second quarter of 2011 were related to the shutdown of ULI which was effectively completed by the end of 2011.

Amortization expense was $0.9 million lower in the second quarter of 2012 as compared to the same period last year due to the absence in 2012 of the accelerated amortization of the ULI trade name recorded in the second quarter of 2011 in connection with the shutdown of ULI.

Operating income of $4.8 million for the second quarter of 2012 represented an increase of $4.2 million as compared to the second quarter of 2011. Over three-quarters of the improvement in operating income versus a year ago is attributable to the improved results of the consolidated DPC/ULI business unit. More specifically, the increase in operating income was due primarily to lower people-related costs, including healthcare claims, coupled with the absence in the second quarter of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI, partially offset by lower recycling revenue. Publications operating income increased by $4.2 million in the second quarter of 2012 compared to the second quarter of 2011 due principally to higher sales as well as the absence in the second quarter of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI incurred during the second quarter of 2011. Publications operating income also benefitted from reductions in people-related and equipment lease costs, partially offset by lower recycling revenue. Specialty Catalogs had an operating loss of $0.4 million in the second quarter of 2012 as compared to an operating loss of $1.1 million in the second quarter of 2011, an improvement of $0.7 million. This improvement was primarily due to increased sales and lower healthcare claims. Operating income for the Books segment decreased by $0.8 million in the second quarter of 2012 as compared to the second quarter of 2011 due primarily to lower sales and lower recycling revenue.

Interest expense of $5.3 million in the second quarter of 2012 represented a $0.4 million decrease as compared to the second quarter of 2011 due primarily to the impact of the mandatory redemption of 2011 Notes with a face value of $3.9 million in the fourth quarter of 2011, using the proceeds from the sale of the ULI facility and repurchasing 2011 Notes with a face value of $17.0 million in the open market in the fourth quarter of 2011 and the first two quarters of 2012.

During the second quarter of 2012, we repurchased in the open market 2011 Notes with a face value of $2.9 million for $2.5 million, which included $0.1 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.2 million. As a result of the repurchases, we recognized a net gain of $0.3 million. This compares favorably to the $1.2 million loss recorded during the second quarter of 2011 in connection with the repurchase of our 2003 and 2004 Notes as the result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs.

The loss before income taxes of $0.3 million for the second quarter of 2012 represented a $6.0 million improvement as compared to the $6.3 million loss before income taxes for the same period last year. The improvement was due primarily to the lower costs mentioned previously.

Our effective income tax rate was approximately 94% for the second quarter of 2012 as compared to 38% for the second quarter of 2011. The increase in the effective income tax rate was primarily due to the significant decrease in the projected pre-tax loss for 2012 compared to 2011, while permanent differences are anticipated to remain constant year over year.

We had a minimal net loss during the second quarter of 2012 as compared to net loss of $3.9 million for the second quarter of 2011. This improvement was due to the factors mentioned previously.

Index

Six months ended June 30, 2012 and June 30, 2011

	Six months ended June 30,						Increase (decrease)						Percent of revenue Six months ended June 30,
(in thousands)	2012			2011			Dollars			Percentage			2012			2011

Net sales
Publications	$	74,774		$	73,066		$	1,708			2.3	%		55.4	%		54.9	%
Specialty catalogs		33,590			32,352			1,238			3.8	%		24.9	%		24.3	%
Books		26,628			27,866			(1,238	)		(4.4	%)		19.7	%		20.9	%
Intersegment sales elimination		(40	)		(95	)		55		nm				-			(0.1	%)
Total net sales	$	134,952		$	133,189		$	1,763			1.3	%		100.0	%		100.0	%

Cost of sales		107,903			110,306			(2,403	)		(2.2	%)		80.0	%		82.8	%

Gross profit	$	27,049		$	22,883		$	4,166			18.2	%		20.0	%		17.2	%

Selling and administrative expenses	$	16,737		$	18,867		$	(2,130	)		(11.3	%)		12.4	%		14.2	%
Loss on sale of fixed assets		(78	)		17			(95	)	nm				-			-
Restructuring costs		3			836			(833	)		(99.6	%)		-			0.6	%
Amortization of intangibles		843			2,475			(1,632	)		(65.9	%)		0.6	%		1.9	%
Total operating expenses	$	17,505		$	22,195		$	(4,690	)		(21.1	%)		13.0	%		16.7	%

Operating income
Publications	$	9,933		$	1,566		$	8,367		nm				13.3	%		2.1	%
Specialty catalogs		(422	)		(1,332	)		910			68.3	%		(1.3	%)		(4.1	%)
Books		737			1,654			(917	)		(55.4	%)		2.8	%		5.9	%
Corporate expenses		(704	)		(1,200	)		496			41.3	%	nm			nm
Total operating income	$	9,544		$	688		$	8,856		nm				7.0	%		0.5	%

Other (income) expense
Interest expense	$	10,839		$	9,637		$	1,202			12.5	%		8.0	%		7.2	%
Interest income		(5	)		(1	)		(4	)	nm				-			-
(Gain) loss on repurchase of notes payable		(755	)		1,167			(1,922	)	nm				(0.6	%)		0.9	%
Other, net		46			(17	)		63		nm				-			-
Total other expense	$	10,125		$	10,786		$	(661	)		(6.1	%)		7.4	%		8.1	%

Loss before income taxes		(581	)		(10,098	)		9,517			94.2	%		(0.4	%)		(7.6	%)

Income tax benefit		(400	)		(3,851	)		3,451			89.6	%		(0.3	%)		(2.9	%)

Net loss	$	(181	)	$	(6,247	)	$	6,066			97.1	%		(0.1	%)		(4.7	%)

nm - not meaningful

Commentary:

Net sales for the first six months of 2012 increased $1.8 million or 1.3% versus the first six months of 2011. Net sales for the Publications segment increased $1.7 million or 2.3% in the first six months of 2012 compared to the same period a year ago due primarily to work from new and existing journal customers partially offset by sales declines in magazines and lower pass through paper costs. Net sales for the Specialty Catalogs segment increased $1.2 million or 3.8% in the first six months of 2012 compared with the same period a year ago due to work from new and existing customers as well as increases in paper and freight pass through costs. Net sales for the Books segment decreased $1.2 million or 4.4% in the first six months of 2012 compared with the same period a year ago due primarily to reductions in paper pass through costs, run lengths and color work.

Gross profit for the first six months of 2012 increased by $4.2 million or 18.2% compared to the first six months of 2011. Gross margin of 20.0% of net sales for the first six months of 2012 reflected a 2.8 margin point increase versus the first six months of 2011. Approximately three-quarters of the increase in our gross profit was attributable to the improved performance of the consolidated DPC/ULI business unit. More specifically, the increase in gross profit was due principally to an increase in sales coupled with the absence in the first six months of 2012 of the acceleration of depreciation expense in connection with the shutdown of ULI that was recorded in the first six months of 2011. Additionally, lower people-related costs, including healthcare claims, as well as lower equipment lease costs were partially offset by lower recycling revenue and higher material costs.

Index

Selling and administrative expenses decreased $2.1 million or 11.3% in the first six months of 2012 as compared to the first six months of 2011. The decrease was due primarily to lower people-related costs, including health care claims, lower costs related to travel, professional fees and bad debt expense as well as the absence in the first six months of 2012 of the fee paid to our principal equity sponsors pursuant to an agreement that was terminated in the second quarter of 2011.

Restructuring costs were $0.8 million lower in the first six months of 2012 as compared to the same period last year. The costs recorded during the first six months of 2011 were related to the shutdown of ULI which was effectively completed by the end of 2011.

Amortization expense was $1.6 million lower in the first six months of 2012 as compared to the same period last year due to the absence in 2012 of the accelerated amortization of the ULI trade name recorded in the first six months of 2011 in connection with the shutdown of ULI.

Operating income of $9.5 million for the first six months of 2012 represented an increase of $8.8 million as compared to the first six months of 2011. Approximately three-quarters of the increase in operating income was attributable to improved results from the consolidated DPC/ULI business unit. More specifically, the increase in operating income was due primarily to the impact of higher sales and lower people-related costs, including healthcare claims, coupled with the absence in the first six months of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI as well as the absence of the fee paid to our principal equity sponsors, partially offset by lower recycling revenue and higher material costs. Publications operating income increased by $8.4 million in the first six months of 2012 compared to the first six months of 2011 with approximately three-quarters of the increase attributable to the consolidated DPC/ULI business unit. The increase in Publications operating income was due principally to the impact of higher sales, lower people-related costs, including healthcare claims, and the absence in the first six months of 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI incurred during the first six months of 2011. Publications operating income also benefitted from reductions in equipment lease costs and bad debt expense, partially offset by lower recycling revenue. Specialty Catalogs had an operating loss of $0.4 million in the first six months of 2012 as compared to an operating loss of $1.3 million in the first six months of 2011, an improvement of $0.9 million. This improvement was primarily due to an increase in sales coupled with lower healthcare claims, partially offset by higher material costs. Operating income for the Books segment decreased $0.9 million in the first six months of 2012 as compared with the same period last year due primarily to lower sales and recycling revenue. A decrease in corporate expenses increased operating income by $0.5 million in the first six months of 2012 as compared with the same period last year due primarily to the absence in the first six months of 2012 of the fee paid to our principal equity sponsors pursuant to an agreement that was terminated in the second quarter of 2011.

Interest expense of $10.8 million in the first six months of 2012 represented a $1.2 million increase as compared to the first six months of 2011 due primarily to the increased amortization of deferred financing costs and original issue discount, both in connection with the 2011 Notes issued in April 2011.

During the first six months of 2012, we repurchased in the open market 2011 Notes with a face value of $8.8 million for $7.8 million, which included $0.3 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.6 million. As a result of the repurchases, we recognized a net gain of $0.8 million. This compares favorably to the $1.2 million loss recorded during the first six months of 2011 in connection with the repurchase of our 2003 and 2004 Notes as the result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs.

The loss before income taxes of $0.6 million for the first six months of 2012 represented a $9.5 million improvement as compared to the $10.1 million loss before income taxes for the same period last year. The improvement was due primarily to the higher sales and lower costs mentioned previously.

Net loss of $0.2 million for the first six months of 2012 represented a $6.1 million improvement as compared to net loss of $6.3 million for the first six months of 2011 due to the factors mentioned previously.

Liquidity and Capital Resources

As further described below under “Indebtedness,” on April 15, 2011, we completed the 2011 Notes offering and entered into an agreement to amend and restate our working capital facility. Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses.

Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to pay interest on our debt, finance capital expenditures and provide working capital. We estimate that our capital expenditures for the remainder of 2012 will total about $6.8 million. The actual amount of our 2012 capital expenditures may vary materially depending on several factors including, among others, whether, when and to what extent any capital projects not yet planned, including those currently under senior-level review and any others, are approved, commenced and completed in 2012, the performance of our business and economic and market conditions. We may from time to time seek to purchase or retire our 2011 Notes through cash purchases, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to Holdings in accordance with the limitations outlined in the indenture governing our 2011 Notes and our working capital facility.

Index

Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowings under our working capital facility will be adequate to meet our liquidity needs for at least the next twelve months, but external sources would be necessary to repay at maturity or refinance our 2011 Notes (due April 2014).

We had cash of $0.5 million as of June 30, 2012 compared to $0.5 million as of December 31, 2011. During the first six months of 2012, we utilized cash on hand to fund operations, make investments in new plant and equipment, pay interest on our debt and repurchase some of our 2011 Notes.

Operating Activities

Net cash provided by operating activities was $13.3 million for the first six months of 2012 compared to $4.1 million for the first six months of 2011. This $9.2 million improvement was primarily due to a decrease in net loss of $6.1 million which was partially offset by a decrease in net non-cash expenses of $1.5 million coupled with favorable changes in working capital and other assets and liabilities that totaled $4.6 million. The major balance sheet changes included:

a favorable change of $3.8 million from accounts receivable due primarily to improved collections in the first six months of 2012 as compared to the first six months of 2011;

a favorable change of $1.5 million from accrued expenses due primarily to the timing and amount of payments for payroll and interest on the 2011 Notes as compared to the 2003 and 2004 Notes;

an unfavorable change of $0.8 million from accounts payable due primarily to the timing of payments to vendors.

Investing Activities

Net cash used in investing activities was $4.3 million for the first six months of 2012 compared to $9.5 million for the first six months of 2011. This $5.2 million decrease in cash used was primarily the result of lower capital spending in the first six months of 2012 as compared to the same period last year. The first six months of 2011 included capital spending in connection with the expansion of Dartmouth Printing Company as part of the DPC/ULI consolidation plan.

Financing Activities

Net cash used in financing activities was $9.0 million for the first six months of 2012 as compared to $7.6 million for the first six months of 2011. The primary uses of cash for the first six months of 2012 were $7.4 million to repurchase 2011 Notes and $1.5 million to repay borrowings on our working capital facility. The primary use of cash for the first six months of 2011 was to pay $7.1 million of costs in connection with the offering of the 2011 Notes and the amendment and restatement of our working capital facility. We had net borrowings on our working capital facility of $1.4 million for the first six months of 2011 and used $1.9 million to fund the difference between the proceeds from the 2011 Notes and the amount needed to repay our 2003 and 2004 Notes.

Indebtedness

2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed the offering of the 2011 Notes pursuant to an indenture, by and among the Company, the subsidiaries of the Company named on the signature pages thereto, as guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes will be payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. The 2011 Notes are fully and unconditionally guaranteed on a senior secured basis by all of our current subsidiaries.

The Indenture requires that we maintain certain minimum Consolidated EBITDA levels (as discussed further below) for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for each fiscal year. In addition, the Indenture contains covenants that, subject to a number of important exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness; make certain investments; create liens; agree to restrictions on the payment of dividends; consolidate or merge; sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries; enter into transactions with our affiliates; designate our subsidiaries as unrestricted subsidiaries; use the proceeds of permitted sales of our assets; and change business lines. If an event of default, as specified in the Indenture, shall occur and be continuing, either the trustee or the holders of a specified percentage of the 2011 Notes may accelerate the maturity of all the 2011 Notes.

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On April 15, 2011, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding. In addition, we paid an upfront fee of $0.3 million at closing. On June 6, 2012, we entered into an agreement to extend the scheduled maturity date of the working capital facility to October 15, 2013.

Both the 2011 Notes and the related guarantees and our and the guarantors’ obligations under the working capital facility are secured by a lien in substantially all of our and the guarantors’ assets. Pursuant to an intercreditor agreement between the trustee under the Indenture and the lender under the working capital facility, (1) in the case of real property, fixtures and equipment that secure the 2011 Notes and guarantees, the lien securing the notes and the guarantees will be senior to the lien securing borrowings, other credit extensions and guarantees under the working capital facility and (2) in the case of the other assets of the Company and the guarantors (including the shares of stock of the Company and the guarantors) that secure the 2011 Notes and guarantees, the lien securing the 2011 Notes and the related guarantees is contractually subordinated to the lien thereon securing borrowings, other credit extensions and guarantees under the working capital facility. Consequently, the 2011 Notes and the related guarantees are effectively subordinated to the borrowings, other credit extensions and guarantees under the working capital facility to the extent of the value of such other assets.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under the working capital facility were used to repurchase all of our existing 2003 Notes and 2004 Notes (due in 2011) and to pay related fees and expenses. We have significant interest payments due on the 2011 Notes as well as interest payments due on borrowings under our working capital facility. Total cash interest payments related to our working capital facility and the 2011 Notes are expected to be in excess of $16.1 million on an annual basis.

Each of the Indenture and the working capital facility agreement requires that we maintain certain minimum consolidated EBITDA (“Consolidated EBITDA”) amounts for any period of four consecutive quarters, taken as one accounting period, as follows:

Period		Amount
April 15, 2011 to March 31, 2012		$32.0 million
April 1, 2012 to March 31, 2013		$34.0 million
April 1, 2013 and thereafter		$35.0 million

Consolidated EBITDA has the same meaning under each of the Indenture and the working capital facility agreement and generally consists of net income (loss) before interest expense, income taxes, depreciation, amortization, restructuring charges and certain other non-cash items. Failure to satisfy the minimum Consolidated EBITDA amounts will constitute a default under each of the Indenture and the working capital facility agreement. For the twelve months ended June 30, 2012, our Consolidated EBITDA was $37.8 million.

Consolidated EBITDA is used for purposes of calculating our compliance with the minimum Consolidated EBITDA covenants in each of the Indenture and the working capital facility agreement and to evaluate our operating performance and determine management incentive payments. Consolidated EBITDA is not an indicator of financial performance or liquidity under generally accepted accounting principles and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income before income taxes, cash flows from operating activities or other traditional indicators of operating performance.

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The following table provides a reconciliation of Consolidated EBITDA to cash flows from operating activities for the six month periods ended June 30, 2012 and 2011 (in thousands). The Consolidated EBITDA covenants under each of the Indenture and the working capital facility agreement are based upon a rolling twelve months. Therefore, Consolidated EBITDA for the twelve months ended June 30, 2012 includes the amounts presented in the following table as well as the amounts from the third and fourth quarters of 2011.

	Six Months Ended June 30,
	2012			2011

Net cash provided by operating activities	$	13,279		$	4,066

Accounts receivable		(2,685	)		1,128
Inventories		901			685
Other current assets		(1,479	)		(1,761	)
Refundable income taxes		(87	)		-
Other assets		(40	)		(469	)
Accounts payable		2,157			1,312
Accrued expenses		(1,849	)		(398	)
Due to parent, net		-			534
Other liabilities		30			482
Provision for doubtful accounts		15			(291	)
Deferred income tax benefit		476			3,376
Provision for inventory realizability		(78	)		(35	)
Gain (loss) on disposition of fixed assets, net		78			(17	)
Income tax provision		(400	)		(3,851	)
Cash interest expense		8,402			8,294
Management fees		-			491
Non cash adjustments:
Increase in market value of investments		(6	)		(5	)
Amortization of prepaid lease costs		-			1
Loss on disposition of fixed assets		3			39
Interest income		(5	)		(1	)
Loss on repurchase of notes payable - cash portion		-			930
Restructuring costs		3			836
Non capitalizable professional fees associated with refinancing debt		-			278

Consolidated EBITDA	$	18,715		$	15,624

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Contractual Obligations

The following table summarizes the Company’s future minimum non-cancellable obligations as of June 30, 2012. The information presented in the table below reflects management’s estimates of the contractual maturities of our obligations. These maturities may differ significantly from the actual maturities of these obligations:

	Remaining Payments Due by Period
					2013 to		2015 to		2017 and
	Total		2012		2014		2016		beyond
(in thousands)

Long term debt, including interest (1)	$	161,413	$	8,071	$	153,342	$	-	$	-
Operating leases		4,373		875		2,425		1,072		1
Purchase obligations (2)		7,115		4,400		2,703		12		-
Other long-term obligations (3)		88		75		13		-		-

Total (4)	$	172,989	$	13,421	$	158,483	$	1,084	$	1

(1)	Includes the $129.1 million aggregate principal amount due on the 2011 Notes plus interest at 12.5% payable semi-annually through April 15, 2014.

(2)	Represents payments due under purchase agreements for consumable raw materials and commitments for construction projects and equipment acquisitions.

(3)	Represents payments due under a non-compete arrangement with our former Chairman of the Board.

(4)

At June 30, 2012, we have recognized $1.7 million of liabilities for unrecognized tax benefits. There is a high degree of uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits because they are dependent on various matters including tax examinations, changes in tax laws or interpretation of those laws, expiration of statutes of limitation, etc. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Off Balance Sheet Arrangements

At June 30, 2012 and December 31, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We therefore are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standards

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the purchase of products and services from foreign suppliers and changes in interest rates on our long-term debt.

Foreign Exchange Rate Market Risk

We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in the six months ended June 30, 2012 and 2011 were denominated in U.S. dollars. Therefore, foreign currency fluctuations had a negligible impact on our financial results in those periods.

Interest Rate Market Risk

We are exposed to changes in interest rates because our working capital facility is variable rate debt. Interest rate changes generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. During the first six months of 2012, we had borrowings under our working capital facility, and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the six months ended June 30, 2012. We do not currently utilize derivative financial instruments to hedge changes in interest rates. All of our other debt carries fixed interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to various legal actions in the ordinary course of our business. In our opinion, these matters are not expected to have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

10.1.A

First Amendment to Third Amended and Restated Credit Agreement, dated as of June 6, 2012, by and among the Company, as the borrower, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and the other lenders party thereto. (Filed as a like numbered exhibit to The Sheridan Group, Inc.’s Current Report on Form 8-K, filed on June 7, 2012 and incorporated herein by reference.)

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John A. Saxton, President and Chief Executive Officer of The Sheridan Group, Inc. and Robert M. Jakobe, Chief Financial Officer of The Sheridan Group, Inc.

101.1

The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURE

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

		The Sheridan Group, Inc.
		Registrant

		By:	/s/ Robert M. Jakobe
			Robert M. Jakobe
			Executive Vice President and Chief Financial Officer

Date:	August 9, 2012

SHERIDAN GROUP INC 10-Q