Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended November 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-73552
PLASTIPAK HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Michigan 52-2186087
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
41605 Ann Arbor Road, Plymouth, Michigan 48170
----------------------------------------------
(Address of principal executive offices)
(734) 455-3600
--------------
(Registrant's telephone number, including area code)
(Former address: 9135 General Court, Plymouth, Michigan 48170)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The number of shares of the registrant's common stock, $1.00 par value,
outstanding as of November 1, 2003 was 28,316.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PLASTIPAK HOLDINGS, INC.
FORM 10-K INDEX
PART I .................................................................................
Item 1. Business ........................................................................
Item 2. Properties ......................................................................
Item 3. Legal Proceedings ...............................................................
Item 4. Submission of Matters to a Vote of Security Holders .............................
PART II .................................................................................
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................................
Item 6. Selected Financial Data .........................................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .....................................................................
Item 8. Financial Statements and Supplementary Data .....................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................................
Item 9A. Controls and Procedures .........................................................
PART III .................................................................................
Item 10. Directors and Executive Officers of the Registrant ..............................
Item 11. Executive Compensation ..........................................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management ..................................................................
Item 13. Certain Relationships and Related Transactions ..................................
Item 14. Principal Accountant Fees and Services ..........................................
PART IV .................................................................................
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .............................................................
i
PART I
ITEM 1. BUSINESS
Plastipak Holdings, Inc. ("Plastipak") is a privately held Michigan
corporation that was formed in 1998 to act as a holding company for several
related companies. On October 30, 1999, Plastipak acquired all of the equity
interests in Plastipak Packaging, Inc. ("Packaging"), Whiteline Express, Ltd.
("Whiteline"), Clean Tech, Inc. ("Clean Tech") and TABB Realty, LLC ("TABB"),
and a majority of the equity interests of Plastipak Packaging do Brasil, Ltda
("Plastipak Brazil"), through a reorganization (the "Reorganization").
Packaging, our principal operating company whose business commenced operations
in 1967, designs and manufactures rigid plastic containers, and was incorporated
in Delaware in 1982. Packaging also owns the remainder of Plastipak Brazil.
Whiteline is a trucking company which serves our transportation and logistics
needs, and was incorporated in Delaware in 1982. Clean Tech, a plastics
recycling operation, provides a source of clean, high quality post-consumer
recycled plastic raw material, and was incorporated in Michigan in 1989. TABB
owns real estate and leases it to Packaging, Whiteline, and Clean Tech.
Plastipak Brazil produces injection-molded plastic performs and blow molds rigid
plastic packaging in Paulinia and Manaus. Plastipak Brazil also maintains a
sales office in Buenos Aires, Argentina. Other than Plastipak Brazil and its
subsidiaries, all of the Plastipak group of companies are headquartered in
Plymouth, Michigan.
Plastipak is a leading manufacturer of plastic packaging containers for
many of the world's largest consumer products companies. During fiscal 2003, we
manufactured and distributed approximately 7.4 billion containers worldwide for
over 450 customers. In North America, we are the exclusive supplier of plastic
containers to Procter & Gamble for heavy-duty, liquid laundry detergents and the
largest supplier of plastic containers to Kraft Foods for their salad dressings,
barbecue sauces and grated cheeses. We are recognized by our customers as an
innovator in blow-molded package design and manufacturing, and we have obtained
over 130 U.S. patents, many of which are registered in foreign countries, for
our state-of-the-art, package-manufacturing processes. For 36 years, we have
worked as a strategic partner with our customers in the early stages of their
new marketing initiatives. We provide integrated transportation and logistics
services, and satisfy our customers' needs for recycling, reliability and
dependability in plastic packaging. For the year ended November 1, 2003, our
revenue was $897.8 million, our earnings were $4.4 million and our EBITDA was
$102.2 million. For reconciliation between net earnings and EBITDA see
"Managements Discussion and Analysis of Financial Condition and Results from
Operations".
We have increased our revenue between 1999 and 2003 at a compounded
annual growth rate (CAGR) of approximately 12.2%. Further, all of our revenue
growth has been organic. This continued growth is being driven by the advantages
of plastic over glass and metal (e.g., weight, strength and shatter resistance),
customer preferences for plastic and technological advances. We believe that we
are well positioned to capitalize on the conversion trend and to increase our
market share in our product categories.
We locate our manufacturing plants near the filling sites of our key
customers. In addition to our track record of innovative design, superior
customer service and low-cost manufacturing processes, the proximity of our
locations to our key customers helps us retain our major customers. To meet the
demand of our diverse customer base, we operate thirteen plants in the United
States and Brazil. The total square footage of our manufacturing and warehousing
facilities is in excess of five million square feet. Our expansion in Brazil has
given us additional customer service capability and access to South America's
rapidly expanding plastic packaging market. We plan to use our relationships
with key customers to create new opportunities in North and South America.
Our principal executive offices are located at 41605 Ann Arbor Road,
Plymouth, Michigan 48170. Our mailing address is P.O. Box 2500C, Plymouth,
Michigan 48170-0907, and our telephone number is (734) 455-3600.
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K MAY NOT PROVE TO BE
ACCURATE.
This Form 10-K contains certain "forward-looking statements,"
including, in particular, the statements about our plans and strategies, under
the headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Business." Although we believe that our plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, we cannot assure you that such plans, intentions or expectations
will be achieved. Important factors that could cause actual results to differ
materially from our forward looking statements are set forth above in this "Risk
Factors" section and elsewhere in this Form 10-K. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements.
1
OVERVIEW
Because our broad range of product lines serves customers in diverse
industries and geographic regions, we believe our revenue and cash flow are
relatively predictable, reducing our exposure to market or economic
fluctuations. We have increased revenue organically between 1999 and 2003 at a
CAGR of approximately 12.2%. To support our revenue growth, we have invested
approximately $350.0 million in facilities, machinery and equipment over the
last five years. We believe our commitment to investing in state-of-the-art
facilities, machinery and equipment has resulted in significant additional
capacity to serve our customers' needs, and enables us to produce plastic
containers at competitive prices.
In the year ended November 1, 2003, 68.9% of our revenue was generated
by our top ten customers, all of whom are under contracts having terms of
between one and five years. We or the customer, however, may terminate these
contracts earlier under certain circumstances. Terms and conditions of our
customer contracts vary, but in general the contracts are requirements contracts
that do not obligate the customer to purchase any given amount of product from
us.
Our primary raw materials consist of PET and HDPE resins. Although
revenue is affected by fluctuations in resin prices, our gross margin is, in
general, substantially unaffected by these fluctuations. In general, industry
practice and contractual arrangements historically have permitted us to pass
price increases through to our customers by means of corresponding changes in
product pricing. As a result, we believe that our gross profits are relatively
insulated from resin price fluctuations.
We design, manufacture and distribute plastic containers in four
product categories:
- carbonated and non-carbonated beverage;
- consumer cleaning;
- food and processed juices; and
- industrial, automotive and agricultural.
OUR PRODUCT CATEGORIES
CARBONATED AND NON-CARBONATED BEVERAGE
We are a leader in the beverage packaging industry. Our carbonated and
non-carbonated beverage business has continued to grow, as plastic has continued
to make inroads in replacing other packaging materials. This product category
includes carbonated soft drinks ("CSD"), bottled water, juice drinks and beer.
We have seen significant growth in non-CSD demand for PET bottles, which are
clear and light-weight, and have become the standard for the bottled water
industry. We are one of the largest suppliers of PET bottles used for Pepsi's
Aquafina and Dr Pepper's Deja Blue water. In addition, we were awarded a
long-term contract from the Buffalo Rock Company, the largest independently
owned Pepsi franchise, to supply CSD and bottled water containers. This business
is being serviced out of our new facility in McCalla, Alabama.
We are also a leading producer of bottles for the CSD industry, where
production complexity is relatively low and production runs are relatively long.
We are a leading supplier to Pepsi Cola Bottlers of PET bottles for all of its
Pepsi brands, including Pepsi, Diet Pepsi and Mountain Dew. Our other large CSD
customers include AmBev (South America's largest brewer), Beverage Associates
(Cadbury Beverages), Dr Pepper/Seven Up Bottling Group, and National Beverage.
Carbonated and non-carbonated beverage sales provided 45.0% of our revenue for
the year ended November 1, 2003.
CONSUMER CLEANING
Procter & Gamble and Reckitt Benckiser are among our largest customers
in this product category. We are the sole supplier for all of Procter & Gamble's
branded heavy-duty, liquid laundry detergent containers in North America,
including Tide, Cheer, Era and Gain. We also supply containers for various
household products, such as Procter & Gamble's Bounce and Febreze and Reckitt's
Lysol, Resolve and Electrasol. We partner with many of our customers to create
distinctive containers such as Procter & Gamble's award-winning 300-oz. Tide
dispenser bottle launched in 2000. We have long been an industry leader in
developing new proprietary plastic packaging for consumer cleaning products. In
1984, also with Procter & Gamble, we developed the system for applying the "Drip
Proof" spout for Tide liquid laundry detergent. We also use many of our patents
for value-added features such as in-mold labeling, where a plastic or paper
brand label is molded
2
into and becomes part of the actual plastic container in a single process,
replacing glued-on, post-manufacture labeling. We use a sophisticated
preferential heating process to produce oval PET bottles suitable for trigger
spray applications, a product with growing popularity among consumers. We are
pursuing significant growth opportunities associated with the continued
conversion to HDPE and PET packaging of household cleaners. We continue to grow
as liquid detergents, which are primarily packaged in plastic, capture market
share from powdered detergents, which are primarily packaged in cardboard.
Consumer cleaning container sales provided 30.8% of our revenue for the year
ended November 1, 2003.
FOOD AND PROCESSED JUICES
We produce HDPE, PET and polypropylene (PP) containers for customers in
the food industry, with a focus on customers for whom proprietary packaging
designs are critical to product identification and distinction. AC Humko,
Everfresh, Ken's Foods, Kraft Foods, The Kroger Company, Marzetti and Tropicana
are among our primary customers in this product category. We are the largest
supplier of plastic containers to Kraft Foods in North America for their salad
dressings, 10 and 18-oz. squeeze mayonnaise and Miracle Whip, barbecue sauces
and grated cheeses. We also produce plastic containers for such popular
processed foods as coffee creamers, relishes and vegetable oils.
Growth in this category has been driven by the continuing conversion
from metal, glass and paper containers to plastic bottles, as the functionality,
safety and improving economics of plastic became more apparent, and as consumer
preference for plastic packaging continued to grow. PET squeeze bottles for such
condiments as salad dressing and mayonnaise have proven extremely popular with
consumers who recognize the added convenience that plastic provides.
We are increasing our activity and presence in the production of PET
bottles required for the hot-fill packaging of shelf-stable juices and juice
drinks. The hot-fill process, in which bottles are filled at between 180 to 190
degrees Fahrenheit to kill bacteria, permits the shipment and display of juices
and juice drinks without refrigeration. The manufacturing process for hot-fill
PET packaging is more demanding than that used for cold-fill beverage
containers, and typically involves slower processing speeds, greater shape
complexity and heavier weights. Recently, we were awarded a long-term contract
from Pepsi to supply Gatorade bottles beginning in February 2004. This business
will be serviced out of our facility in Garland, Texas. Food and processed
juices container sales accounted for 12.7% of our revenue in the year ended
November 1, 2003.
INDUSTRIAL, AUTOMOTIVE AND AGRICULTURAL
Castrol, SOPUS Products (Equilon - Shell), Chevron/Texaco and Old World
Industries (Peak) are among our major customers in this product category. To
increase our product diversity, we have targeted end markets in this product
category, including motor oil, antifreeze, windshield washer fluid and other
specialty automotive aftermarket products. We also supply containers for BEHR
deck cleaners and BASF chemical products. Industrial, automotive and
agricultural container sales generated 5.5% of our revenue in the year ended
November 1, 2003.
OUR COMPETITIVE STRENGTHS
LONG-TERM RELATIONSHIPS WITH MAJOR CONSUMER PRODUCT COMPANIES IN DIVERSE, STABLE
INDUSTRIES
We enjoy long-standing relationships that average over 15 years with
our top ten customers, including Kraft Foods (over 15 years), Pepsi Cola (over
15 years), Procter & Gamble (over 25 years) and Reckitt Benckiser (over 25
years). With our key customers, we have strategic-supply arrangements, many of
which have three years or more remaining before renewal. We attribute these
close relationships to our creative design and engineering capabilities, high
level of customer service, high quality products, efficient manufacturing,
reliable delivery, speed to market and experienced and stable management team
and workforce. We supply several of these customers with 100% of their plastic
packaging needs nationally, regionally or for a specific brand, including Kraft
Foods salad dressings and Tide liquid laundry detergent.
Our long-term relationships with our customers are strengthened by our
ability to meet their need for cooperative package design and development
processes. Our skilled and creative engineering staff and location of plants
near key customers' filling facilities encourage continued customer loyalty.
STRATEGICALLY LOCATED, STATE-OF-THE-ART OPERATING FACILITIES
We serve our U.S. customers through a nationwide network of thirteen
strategically located, technologically advanced manufacturing facilities,
through our Productivity Center in Jackson Center, Ohio, through our Packaging
Development
3
Center in Medina, Ohio, and a network of strategically located warehouse
facilities. Brazil is served by manufacturing facilities in Paulinia and Manaus.
Our plants feature top quality injection molding machines, high speed blow
molders (including the multi-station GEM-PAK technology, which was developed and
patented by our manufacturing and engineering teams), computerized material and
inventory handling, and machines modified to allow the quick changeover of molds
to meet varying customer needs. Over the last five years, we have invested
approximately $350.0 million in our facilities and state-of-the-art production
equipment, which have significantly reduced our costs. Our facilities are
strategically located near the filling sites of most of our key customers, which
we believe enables us to facilitate just-in-time inventory management, eliminate
costly shipping and handling charges, reduce working capital needs and foster
the development of long-term manufacturing and distribution relationships. We
believe that locating our facilities near our key customers also creates entry
barriers for our competition. With our fleet of approximately 300 tractors and
1100 trailers, we offer same-day delivery to many of our customers.
TECHNOLOGY-DEVELOPMENT CAPABILITIES
We are proud of our industry leading engineering and design
capabilities and believe that we often earn and retain business as a result of
these skills. Our packaging development and productivity centers have secured
over 130 patents and continue to incorporate leading technology into
customer-driven applications. We also believe we have a sustainable competitive
advantage because we can produce prototypes of new designs with great speed and
creativity for our customers. We are able to design and deliver a prototype to a
customer just two weeks after they first explained their packaging concept to
us. We have re-engineered existing manufacturing equipment to allow quick mold
changeovers, reducing the changeover process from days to hours, giving us
greater production flexibility.
Our Packaging Development Center creates innovative product designs for
our customers, and our Productivity Center has developed major process
improvements in the manufacture of our containers. Our customers rely on our
design and technical expertise because brand distinctive package design is a
critical component in many of their marketing programs. We have centered a
substantial portion of our growth strategy on customers that require custom, as
opposed to stock, plastic containers as a critical component of their marketing
efforts.
CUSTOMER-ORIENTED CULTURE
In our 36 years in business, we have created a special culture focused
on customer service. Plastipak's engineering teams participate in the early
phases of our key customers' new marketing initiatives. As an integrated team,
we work alongside our customers to shape the design features of new packaging
containers and develop new processes and equipment to manufacture those
containers. Further, to ensure that our employees' incentives are aligned with
our customers' objectives, compensation for approximately 500 key manufacturing
employees with leadership responsibility is based on operating and logistics
performance measures. We believe these employee incentives will further enhance
our strong relationships with key customers, help us attract new customers and
allow us to control costs.
MANAGEMENT DEPTH AND EXPERIENCE
Our management team has an impressive track record of cultivating our
customer base of major consumer product companies, launching innovative product
designs and achieving profitable, organic growth. Our top 12 senior executives
have on average 23 years experience in the industry and 19 years experience at
Plastipak. Our executives are invested in our success through their over 90%
ownership of our equity. We believe our retention levels are among the highest
in the industry. Our management team includes engineers who have developed many
of the processes that we have patented and use to our competitive advantage.
OUR BUSINESS STRATEGY
Our strategy is to continue to increase our revenues and profitability
and to further enhance our leading industry positions. From fiscal 1999 to 2003,
we increased our revenues by 58.8% to $897.8 million, our EBITDA by
approximately $36.0 million to $102.2 million (see "Management's Discussion and
Analysis of Financial Condition and Results from Operations") and our production
volume by 42.2% to 7.4 billion units, all through organic growth. We will
continue to prudently invest in production equipment only after establishing
contracts with our customers and completing our normal rigorous internal review
process. The key components of our strategy include the following objectives:
4
CAPITALIZE ON CONTINUED INDUSTRY CONVERSION TO PLASTIC CONTAINERS
We expect the conversion of food products from glass, paper and cans to
plastic containers, which we believe is being driven by consumer preference,
favorable total packaging economics, technology advances and improved
functionality, will continue. We are well positioned to capitalize on the
continuation of these trends. For example, our new product initiatives include
PET pickle jars, coffee containers and various juice bottles.
In addition to opportunities in the domestic hot-fill PET arena, and
increased use of PET containers for household cleaners, we believe that
additional conversions to HDPE packaging will occur in various snack, dairy and
juice drink applications.
Additionally, we expect that over the next three to five years, as
barrier technology progresses, a portion of the single serving beer container
market will be converted to plastic, for use in venues where breakage is a
concern. Brewers in the beer industry are strongly committed to brand identity
and differentiation, and would prefer serving their product to customers in
stadiums, concerts, sporting events, and at pools and beaches, in a way that
permits them to maintain that identity (rather than in paper or plastic cups).
Single serving plastic beer bottles offer that method.
We also believe that as barrier technology for smaller size plastic
containers progresses, we will be positioned to compete for the conversion of
single serving CSD packaging from aluminum cans and 10-oz. glass to plastic, a
60 billion-unit market. Last year, a major soft drink manufacturer introduced a
500 ml package utilizing barrier containers Plastipak supplied.
Also, owing to environmental concerns about disposable plastic waste,
the industries we serve are requiring more high-quality, recycled content in
their plastic packaging. We have significant experience in producing high
quality HDPE and PET containers with recycled content for various customers. We
own a dedicated facility that produces post-consumer recycled plastic resin that
offers us a secure source for recycled resin for our products. We believe we are
well positioned to capitalize on this growing consumer interest toward
recycling.
CONTINUE DEVELOPING VALUE-ADDED SERVICES AND PRODUCTS
Supported by our technology and packaging development centers, we have
successfully researched, developed and launched new-patented technologies in our
marketplace. We believe our success in this area differentiates us from our
competitors and will enable us to continue to gain market share. For key
customers, our technology development is an integral part of their overall
marketing strategy and has helped our customers drive innovation in the
marketplace.
EXPAND MARKET SHARE WITH KEY CUSTOMERS
Our high-quality, low-cost manufacturing capabilities and track record
of focused customer service position us well to continue growing market share
with our customer base of major consumer product companies. As our customers
continue to acquire new businesses and brands, we believe that we will secure
additional long-term contracts with them and grow our product offerings. Central
to our strategy to expand market share with key customers are the continued:
- delivery of focused customer service;
- location of facilities close to customer plants;
- innovation in packaging design; and
- provision of low cost manufacturing processes.
We also intend to target strategic new customers who require our core
competencies in blow molding and injection molding.
5
OUR CUSTOMERS
Substantially all of our sales are made to major branded consumer
products companies, primarily in the United States. Our customers demand a high
degree of packaging design and engineering to accommodate complex bottle shapes,
performance requirements, materials, speed to market and reliable delivery. As a
result, many customers opt for long-term contracts, many of which have terms of
one to five years. All of our top ten customers are under contracts with terms
between one and five years. These contracts, however, may be terminated earlier
by us or our customer upon a material breach of the contract or, in some cases,
in the event we determine it is not in our best interest to change our terms and
conditions through the procedures outlined in the contract to meet competitive
prices. Our customers have requested competitive price reductions from time to
time in the past under their contracts with us.
In many cases, we are the sole supplier of all of a customer's custom
plastic bottle requirements nationally, regionally or for a specific brand. Our
largest customer is Procter & Gamble. For fiscal 2001, 2002 and 2003, Procter &
Gamble accounted for approximately 23%, 25% and 27% of our revenue,
respectively. Our largest customers include:
CUSTOMER
CUSTOMER PRODUCT CATEGORY SINCE (a)
- -------------------------------- --------------------------------------- -----------
Procter & Gamble Consumer Cleaning Mid 1970s
Reckitt Benckiser Consumer Cleaning Mid 1970s
Kraft Foods Food and Processed Juices Mid 1980s
Old World Industrial, Automotive and Agricultural Mid 1980s
The Kroger Company Carbonated and Non-Carbonated Beverage, Late 1980s
Food and Processed Juices
National Beverage Carbonated and Non-Carbonated Beverage Late 1980s
Pepsi COBO Carbonated and Non-Carbonated Beverage Late 1980s
AC Humko Food and Processed Juices Early 1990s
PepsiAmerica Carbonated and Non-Carbonated Beverage Early 1990s
AmBev Carbonated and Non-Carbonated Beverage Mid 1990s
Beverage Associates Cooperative Carbonated and Non-Carbonated Beverage Mid 1990s
(Cadbury Beverages)
Dr Pepper Bottling Group Carbonated and Non-Carbonated Beverage Mid 1990s
Pepsi CPG Carbonated and Non-Carbonated Beverage Mid 1990s
SOPUS Products Industrial, Automotive and Agricultural Late 1990s
Polar Beverages Carbonated and Non-Carbonated Beverage Late 1990s
Buffalo Rock Company Carbonated and Non-Carbonated Beverage Late 2003
(a) These companies include their predecessors, if applicable.
While our business is concentrated with our major customers, we believe
that our technological skills and low-cost position, coupled with long-term
"partnering" relationships with our customers, make the complete loss of any of
these major customers less likely. Our ten largest customers have been
associated with us for an average of over 15 years.
RAW MATERIALS
Resin and energy, the principal raw materials of our plastics business,
have remained widely available to our U.S. operations, though subject to
considerable price volatility. The majority of Plastipak's customer contracts
allow us to pass through resin price increases on 30 days' notice. Since we
usually receive 30 days' notice of price increases from our resin suppliers, we
are generally able to tolerate price increases without substantial harm to
profits, although contracts containing pass-through provisions may not be
available to us in the future. See "Risks Related to Our Business." As a major
consumer of resin, we also leverage our bulk purchasing power to gain the best
possible pricing and terms we can obtain.
Clean Tech has continued to be able to meet almost all of our needs for
post-consumer recycled material. Post-consumer recycled material prices tend to
fluctuate in tandem with the virgin resin markets, since demand for
post-consumer recycled material increases as prices for virgin material rise
above those for post-consumer recycled material.
Trade restrictions and currency devaluations have driven up the cost of
imported resin in Brazil. See "Risks Related to Our Business."
6
MANUFACTURING AND DISTRIBUTION
We serve our customers with a wide range of state-of-the-art
manufacturing capabilities and services. Our thirteen manufacturing facilities
are strategically located near the filling sites of our key customers. We
believe that our proximity to key customers enables us to work closely with our
customers, to facilitate just-in-time inventory management, to eliminate costly
shipping and handling charges, to reduce working capital needs and to foster the
development of long-term manufacturing and distribution relationships.
We continue to be an industry leader in production technologies for
plastic containers by:
- efficiently manufacturing containers with specialized features, such as
multiple layers, barrier coatings, in-mold labeling and bottles designed
to accommodate trigger sprayers;
- improving manufacturing technology to allow ever increasing production
volumes without increasing the need for floor space (including the
multi-station GEM-PAK, which we developed and patented and which
significantly increases production capability as compared to older
blow-molding machines); and
- making innovative modifications to our blow molders to effect tooling
changes in a matter of hours, instead of days, allowing quick shifts in
product mix.
To meet demand and reduce our inventory costs, our facility managers
receive real-time order and forecasting information from some of our customers.
We have completed the implementation of phase I and phase II of our SAP
enterprise software project, which has integrated, automated and streamlined
many of our supply chain operations. As a result, we will better serve our
customers' needs.
Our subsidiary, Whiteline, is a fully licensed ICC common carrier, and
serves approximately 70% of our transportation needs. With Whiteline's fleet of
approximately 300 tractors and 1100 trailers, we offer same-day delivery to many
of our customers.
PACKAGING DEVELOPMENT
Our Productivity and Packaging Development Centers create innovative
product designs for our customers and process improvements in the manufacture of
our containers. Our customers rely on our design and technical expertise because
package design is a critical component in many of their marketing programs. We
have an in-house staff of approximately 70 employees at our Productivity and
Packaging Development Centers dedicated to product development and improvement.
These professionals work closely with customers to develop new products and
designs, often using sophisticated computer-aided design software.
We are capable of generating new product designs within weeks of
customer requests. We also believe that our customized designs help our
customers differentiate their products in the marketplace while also improving
the appeal and performance of their products. We believe that these capabilities
have given us a significant competitive advantage in certain high-margin niche
container product markets where the ability to produce sophisticated package
designs and deliver high quality graphics at a reasonable cost is crucial to a
product's success. Additionally, we have the engineering capabilities in-house
to create new machines, which can more efficiently produce the proprietary
products developed for our customers. Packaging development expenses were
approximately $7.1 million, $8.6 million and $8.0 million for fiscal 2001, 2002
and 2003, respectively.
SALES AND MARKETING
We reach our large and diversified base of over 450 customers primarily
through our direct field sales force. A large number of our sales
representatives focus their work on particular product lines and national
accounts, while the remaining field sales staff covers specific geographic
territories. We believe that our direct field sales force is able to focus on
target markets and create strong, enduring customer relationships. A direct
sales force also allows us to coordinate centralized pricing strategies.
7
FOREIGN OPERATIONS
Since 1996, we have expanded our operations into South America. We are
working to leverage our relationships with new customers in Brazil into new
opportunities in North and South America. Our initial operation was a plant
located in suburban Sao Paulo (Paulinia), Brazil. We have a facility in Manaus,
an area with favorable tax incentives in the state of Amazonia, Brazil. We also
have a sales office in Buenos Aires, Argentina. Our Brazilian net revenue has
grown from $8.0 million in 1996 to $86.5 million for the year ended November 1,
2003. We believe that the global trend in the conversion of glass, metal and
paper to plastic packaging will continue, particularly in the developing world,
as consumer economies expand and industrialization continues.
We are establishing three small entities in Central Europe, Plastipak
Slovakia, s.r.o., Plastipak Czech Republic, s.r.o., and Clean Tech Slovakia,
s.r.o. Plastipak Slovakia will serve as the technical and design center and
provide sales, marketing and administrative services for Central Europe. We are
currently negotiating contract terms and conditions with a major customer to
support the Plastipak Czech Republic site. If we are unsuccessful in these
negotiations, we will not be investing a significant dollar amount in this
entity. If we are successful, it is anticipated that the initial investment will
be approximately $7 to $10 million.
With respect to Clean Tech Slovakia, we will be applying for a
government grant from a recycling fund established by the Slovakian government
and this application is due by January 31, 2004. We presently intend to supply
recycled material for various applications out of this new site. It is unknown
at this time how much we will invest in this entity and this will depend on the
success of the grant application from the recycling fund.
COMPETITION
We face substantial competition throughout our product categories from
a number of well-established national and regional companies. Our primary
national competitors include Amcor, American National Can, Inc., Ball Plastics,
Consolidated Container Company, Constar International, Graham Packaging Company,
Liqui-Box Corporation, Owens-Illinois, Inc., and Silgan Holdings, Inc. In
addition, we face substantial competition from a number of captive packaging
operations with significant in-house bottling and blow-molding capacity, such as
Dean Foods, The Kroger Company, The Perrier Group of America and Suiza Foods.
INTELLECTUAL PROPERTY
We own over 130 U.S. patents, and have over 74 patent applications
currently pending at the United States Patent and Trademark Office. In addition,
over 270 foreign patents have been issued and are currently active, and
approximately 170 are pending, although not all of our U.S. patents are
registered in foreign countries. Our patents include patents for our GEM-PAK
molding system, a gas clamping electronically controlled molding machine.
We are continually developing new patents. Because our patented
packaging designs create goodwill and result in product differentiation, we
believe that these intellectual property assets are important to our business.
Our business is not dependent on any one of these patents, since plastics
manufacturing technology continues to move forward rapidly. Patent licensing,
however, serves to keep the new technologies we develop proprietary, giving us a
short, but important, window of competitive advantage.
In addition, we rely on proprietary know-how, continuing technological
innovation and other trade secrets to develop products and maintain our
competitive position. We attempt to protect our proprietary know-how and our
other trade secrets by executing, when appropriate, confidentiality agreements
with our customers and employees. We cannot assure you that our competitors will
not discover comparable or the same knowledge and techniques through independent
development or other means.
We have also licensed or sub-licensed certain of our intellectual
property rights to third parties. These range from trimming systems that
eliminate any plastic waste or "chips" from containers to our unique "in-mold
labeling" equipment for bottle decoration. Many bottle designs are also licensed
for revenue generation. In some cases, patented bottle designs are assigned or
used by our customers, as their needs arise. Since our unique customer
relationships allow us to be in on the ground floor in bottle design
development, our customers often attain patent coverage for our joint design
efforts.
8
ENVIRONMENTAL COMPLIANCE
We are subject to national, state, local and foreign laws and
regulations that impose limitations and prohibitions on the discharge and
emission of, and establish standards for the use, disposal, and management of,
some kinds of materials and waste, and impose liability for the costs of
investigating and cleaning up, and damages resulting from, present and past
spills, disposals, or other releases of hazardous substances or materials.
Environmental laws and regulations can be complex and may change often.
Compliance with these laws and regulations can require significant capital
expenditures, and violations may result in substantial fines and penalties. In
addition, environmental laws in the United States, such as the Comprehensive
Environmental Response, Compensation and Liability Act, impose liability on
several grounds for the investigation and cleanup of contaminated soil,
groundwater, and buildings, and for damages to natural resources, at a wide
range of properties. For example, contamination at properties formerly owned or
operated by us, as well as at properties we currently own or operate, and
properties to which hazardous substances were sent by us, may result in
liability for us under these environmental laws and regulations. As a
manufacturer, we also have an inherent risk of liability under environmental
laws and regulations regarding ongoing operations.
From time to time, we have been subject to claims asserted against us
by regulatory agencies for environmental matters relating to the generation and
disposal of hazardous substances and wastes. Some of these claims have related
to properties or business lines acquired by us after a release has occurred. In
each known instance, however, we believe that the claims asserted against us, or
obligations incurred by us, will not result in a material adverse effect upon
our business, financial position or results of operations. Nonetheless, there
can be no assurance that activities at these facilities or facilities acquired
in the future, or changes in environmental laws and regulations, will not result
in additional environmental claims being asserted against us or additional
investigations or remedial actions being required.
In addition, a number of governmental authorities in the United States
and in other countries have enacted and are expected to continue to enact
legislation aimed at reducing the amount of disposed plastic wastes. These
programs have included, for example, mandating rates of recycling and/or the use
of recycled materials, imposing deposits or taxes on plastic packaging material,
and/or requiring retailers or manufacturers to take back packaging used for
their products. This legislation, as well as voluntary initiatives similarly
aimed at reducing the level of plastic wastes, could reduce the demand for some
plastic packaging, result in greater costs for plastic packaging manufacturers
or otherwise affect our business. To date, these initiatives and developments
have not materially and adversely affected us. Some consumer products companies
(including some of our customers) have responded to these governmental
initiatives and to perceived environmental concerns of consumers by, for
example, using bottles made in whole or in part of recycled plastic. Our
subsidiary, Clean Tech, is among the top 20 suppliers of post-consumer recycled
materials in the United States. Clean Tech supplies the majority of Plastipak's
post-consumer recycled materials needs.
EMPLOYEES
We have approximately 3,600 non-union employees in the U.S. and 153
employees in Brazil. Given the seasonality of the plastic bottling industry, we
expect to continue to employ temporary and seasonal workers during peak
production months, in both the United States and Brazil. We have not had any
material labor disputes in the past five years and consider our relations with
our employees to be good.
RISKS RELATED TO OUR BUSINESS
COMPETITION -- WE FACE CONSIDERABLE COMPETITIVE RISKS.
We face substantial competition from a number of well-established
national and regional companies. Our primary national competitors include Amcor,
American National Can, Inc., Ball Plastics, Consolidated Container Company,
Constar International, Graham Packaging Company, Liqui-Box Corporation,
Owens-Illinois, Inc., and Silgan Holdings, Inc. In addition, we face substantial
competition from a number of captive packaging operations with significant
in-house bottling and blow-molding capacity, such as Dean Foods, The Kroger
Company, The Perrier Group of America and Suiza Foods. Many of our competitors
have financial and other resources that are substantially greater than ours. In
order to compete successfully, we will need to continue to make substantial
capital expenditures to develop new products and streamline our manufacturing
processes. Competition in our industry could negatively affect our business
operations.
9
CONCENTRATION OF CUSTOMERS -- WE HAVE SEVERAL MAJOR CUSTOMERS, THE LOSS OF WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
For the fiscal year ended November 1, 2003, our largest single customer
accounted for approximately 27% of our revenue. Our ten largest customers
accounted for approximately 68.9% of our revenue. The termination by any of
these customers of their relationship with us could have a material adverse
effect on our business and results of operations. All of our top ten customers
are under contracts with terms of between one and five years. In general, these
contracts are requirements contracts that do not obligate our customers to
purchase any specific minimum product from us. These contracts may be terminated
by us or by our customer prior to their expiration dates upon a material breach
of the contract or, in some cases, in the event we determine it is not in our
best interest to change our terms and conditions through the procedures outlined
in the contract to meet competitive prices. Our customers have requested
competitive price reductions from time to time in the past under their contracts
with us.
ECONOMIC AND POLITICAL RISK IN SOUTH AMERICA -- WE HAVE SPECIAL RISKS ASSOCIATED
WITH OUR SOUTH AMERICAN OPERATIONS.
We have significant operations in Brazil. We currently have two plants
located in Brazil. We also have a sales office in Buenos Aires, Argentina. For
the year ended November 1, 2003, net sales of our Brazilian subsidiaries totaled
approximately $86.5 million, representing approximately 9.2% of our worldwide
revenue for such period. We experienced a net loss of approximately $8.3 million
on our Brazilian sales for the year ended November 1, 2003.
Our results to date in Brazil have been less than we expected, as
currency devaluations, high interest rates, inflation, import restrictions and a
legal system which makes it difficult to enforce contracts have reduced both
revenue and profits. Import duties on equipment needed to upgrade our production
capabilities in Brazil are significant. We are working diligently to improve and
expand our operations in Brazil to make them profitable, but we cannot assure
you that our Brazilian operations will ever become profitable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Foreign Operations."
The following factors create higher risks to our South American
operations than we experience in the United States:
- continuing high nominal interest rates;
- limitations on conversion of foreign currencies into U.S.
dollars or remittance of dividends and other payments;
- imposition or increase of withholding and other taxes on
remittances and other payments;
- inability to fully utilize foreign tax credits and fully pass
through foreign losses here in the U.S. due to limitations
imposed by U.S. tax laws;
- the potential for political instability and inflation and the
imposition or increase of restrictions on investments and
other restrictions by foreign governments;
- inability of our foreign subsidiaries to enforce certain of
their key agreements through the legal systems in South
America; and
- recent changes in Brazilian tax laws.
CURRENCY FLUCTUATIONS -- WE HAVE SIGNIFICANT FOREIGN EXCHANGE RISKS WITH RESPECT
TO OUR BRAZILIAN OPERATIONS THAT WE CANNOT CONTROL.
Our Brazilian contracts are priced in U.S. dollars; however, we invoice
our customers in the Brazilian Real. Following several significant devaluations
of Brazil's currency, despite "make whole" agreements in our contracts, some of
our customers agreed to only partial price increases. These increases accounted
for only a portion of the cost to us of devaluation, leading to a reduction in
our gross margin in Brazil.
Fluctuations in the value of the U.S. dollar may adversely affect our
results of operations. Because our consolidated financial results are reported
in dollars, if we generate sales or earnings in other currencies the translation
of those results into dollars can result in a significant increase or decrease
in the amount of those sales or earnings. In addition, our debt
10
service requirements are primarily in U.S. dollars, even though a portion of our
cash flow is generated in the Brazilian Real. Significant changes in the value
of the Brazilian Real relative to the U.S. dollar could have a material adverse
effect on our financial condition and our ability to meet interest and principal
payments on U.S. dollar denominated debt, including the exchange notes and
borrowings under the Amended Credit Agreement. Given the volatility of exchange
rates, we may not be able to effectively manage our currency transaction and/or
translation risks. It is expected that the volatility in currency exchange rates
will continue to have a material effect on the financial condition or results of
operations of our foreign subsidiaries. We expect that the portion of our
revenue denominated in non-dollar currencies will continue to increase in future
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effects of Changes in Exchange Rates." In addition, the
value of our investment in Plastipak Brazil is partially a function of the
currency exchange rate between the U.S. dollar and the Brazilian Real. We have
not executed hedge transactions to endeavor to reduce our exposure to foreign
currency exchange rate risks, and do not believe that hedging is a viable option
for us in the immediate future.
FUTURE CAPITAL REQUIREMENTS -- IF WE CANNOT OBTAIN THE FUNDS TO MAKE THE
SIGNIFICANT CAPITAL EXPENDITURES THAT OUR BUSINESS WILL REQUIRE, WE MAY NOT BE
ABLE TO MAINTAIN OUR CURRENT LEVEL OF OPERATIONS OR GROW OUR BUSINESS.
To fund our growth plans and maintain our current level of operations,
we will continue to make substantial capital expenditures for product
development and improvements in our manufacturing processes. In fiscal 2002 and
2003, we made capital expenditures of approximately $85.0 million and $107.3
million, respectively. We estimate that capital expenditures in each of fiscal
2004 and 2005 will be approximately $120.0 million and $70.0 million,
respectively. In addition, we may be required to make additional investments as
the demands of our industry and our customers evolve. We may not be able to fund
any necessary investments, and the failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
ACQUISITION STRATEGY -- WE COULD FACE CONSIDERABLE BUSINESS AND FINANCIAL RISKS
IN IMPLEMENTING OUR ACQUISITION STRATEGY.
Our growth strategy may include acquisitions of other consumer goods
packaging businesses, although we do not currently have any commitments or
agreements with respect to any such acquisitions. Risks we could face with
respect to acquisitions include:
- problems in assimilating operations, technologies, services
and products;
- diversion of management's attention from existing business
concerns; and
- incurrence of debt and contingent liabilities.
Any of these risks could have a material adverse effect upon our
business, financial condition and results of operations. We may not be
successful in consummating future acquisitions on favorable terms or at all.
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND DEPENDENCE ON RESIN SUPPLIERS -- WE
ARE EXPOSED TO THE RISKS ASSOCIATED WITH FLUCTUATIONS IN THE PRICES OF RESIN.
We face the risk that our access to resin is interrupted or that we may
not be able to purchase it at competitive prices. We use large quantities of
plastic resins in manufacturing our products. Plastic resins accounted for a
major portion of our cost of goods sold in fiscal 2003. Plastic resins are
subject to substantial price fluctuations caused by shortages in supply and
changes in the prices of natural gas, crude oil and other petrochemical products
from which these resins are produced. We may experience supply interruptions in
the future. Our purchases of raw materials are subject to market prices.
Although we generally have pass through provisions in many of our customer
contracts, market conditions may not permit us to pass through any future raw
material price increases. The inability to procure resin or significant
increases in resin prices, coupled with an inability to promptly pass such
increases on to customers, would have a material adverse effect on our financial
condition and results of operations. Furthermore, a significant increase in
resin prices could slow the pace of conversion from paper, glass and metal
containers to plastic containers to the extent that these costs are passed on to
the customer. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Raw Materials."
11
DEPENDENCE ON KEY PERSONNEL -- WE ARE DEPENDENT ON SEVERAL KEY SENIOR MANAGERS,
THE LOSS OF WHOM COULD HAVE A MATERIAL EFFECT ON OUR BUSINESS AND DEVELOPMENT.
Our business and our future success depend to a significant extent upon
the continued service of our executive officers and senior managers. In
particular, the loss of the services provided by William C. Young, William A.
Slat, Michael J. Plotzke, Gene W. Mueller, Pradeep Modi, Thomas Busard, Frank
Pollock, Richard Darr, J. Ronald Overbeck, Leann M. Underhill and David
Daugherty, among others, could have a material adverse effect on our business
and results of operations. Our failure to retain such key personnel could have a
material adverse effect on our business, financial condition and results of
operations.
OTHER RISKS
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK -- WE ARE CONTROLLED BY THE YOUNG
FAMILY.
William C. Young, our Chief Executive Officer, and members of his
immediate family own over 90% of our common stock on a fully-diluted basis and,
therefore, control our board of directors. As a result, the Young family will
continue to have the ability to elect and remove directors and determine the
outcome of matters presented for approval by our shareholders. Circumstances may
occur in which the interests of the Young family could be in conflict with the
interests of the holders of our 10.75% Senior Notes.
REGULATION -- OUR OPERATIONS AND PRODUCTS ARE SUBJECT TO SUBSTANTIAL
ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS.
Our operations and properties are subject to stringent federal, state,
local and foreign laws and regulations relating to pollution, environmental
protection and workplace health and safety. Such laws and regulations frequently
change, are different in every jurisdiction, and can impose substantial fines
and sanctions for violations. Our operations must comply with these laws, and
must adapt to regulatory requirements in all jurisdictions in which we operate
as these requirements change.
Environmental laws generally impose liability for costs to investigate
and remediate contamination without regard to fault and, under certain
circumstances, liability may be joint and several resulting in one responsible
party being held responsible for the entire obligation. We have incurred, and
may continue to incur, such costs related to at least two of our properties.
Although we believe our operations and properties are substantially in
compliance, new laws and regulations, stricter enforcement or interpretation of
existing laws and regulations or the discovery of previously unknown
contamination or previously unknown off-site liability, the imposition of new
clean-up requirements, or claims for property damage or personal injury arising
from environmental matters could require us to incur costs or become the basis
for the new or increased liabilities that could have a material adverse effect
on our business, financial condition or results of operations.
Legislation concerning mandatory rates of recycling, mandatory use of
recycled materials, deposits or taxes on plastic packaging material or
requirements that retailers or manufacturers take back packaging used for their
products could reduce the demand for certain plastic packaging, result in
greater costs for plastic packaging manufacturers and, therefore, have a
material adverse effect on our business, financial condition and results of
operations.
PRODUCTS LIABILITY RISK -- WE FACE PRODUCTS LIABILITY RISK. IN ADDITION, OUR
BUSINESS IS EXPOSED TO THE PRODUCTS LIABILITY RISK OF OUR CUSTOMERS.
Because our plastic containers are used for consumer products, our
business is exposed to products liability risk and the risk of negative
publicity. The amount and scope of our product liability insurance may not be
adequate to cover a products liability claim that is successfully asserted
against us.
In addition, we are exposed to the products liability risk and negative
publicity of our customers and suppliers. Because many of our customers are
carbonated soft drink, dairy, water and branded consumer products companies,
with their own products liability risk, our sales may decline if any of our or
our competitors' customers are sued on a products liability claim. We may also
suffer a decline in sales from the negative publicity associated with such a
lawsuit or with adverse public perceptions in general regarding our products or
our customers' products in our containers.
12
INTELLECTUAL PROPERTY PROTECTION -- WE ENJOY LIMITED PROTECTION FOR OUR
INTELLECTUAL PROPERTY, AND ARE SUBJECT TO A PATENT INFRINGEMENT CLAIM.
We have a number of patents covering design and construction of our
products and manufacturing equipment. Patents do not ensure that competitors
will not develop competing products or infringe upon our patents, or that the
patents will withstand challenge in litigation. The costs of litigation to
defend our patents could be substantial and may outweigh the benefits of
enforcing our rights under our patents. Patent laws of foreign countries may
offer less protection than the patent laws of the United States.
We also rely on unpatented proprietary technology, trade secrets and
know-how. Others may independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. If we are unable to
maintain the proprietary nature of our technologies, we could be materially
adversely affected.
In 1999, North American Container filed a lawsuit against us and 41
other defendants claiming some of our products infringe one of their patents and
requesting an unspecified amount in damages. See "Business -- Legal
Proceedings". Discovery has been completed. The Court has issued its order
eliminating a significant portion of NAC's claims. This ruling is subject to the
appeal process. If we do not prevail in the litigation, our business and
financial condition could be materially adversely affected.
13
ITEM 2. PROPERTIES
We occupy a number of owned and leased properties located throughout
the United States, Brazil and Argentina for our technical centers, manufacturing
plants, corporate headquarters and sales offices. We currently utilize 40
facilities, 15 of which we own and 25 of which we lease. Our interests in all of
our U.S. facilities are pledged to secure our current credit facility.
The following table lists the location, square footage, principal use and
ownership interest in our facilities.
LOCATION SQUARE FOOTAGE PRINCIPAL USE OWNED/LEASED
-------- -------------- ------------- ------------
Jackson Center, OH 66,000 Productivity Center Owned
Medina, OH 74,000 Packaging & Development Center Owned
Champaign, IL 614,500 Manufacturing Owned
Dundee, MI 135,300 Manufacturing Owned
East Longmeadow, MA 262,700 Manufacturing Owned
Garland, TX 113,400 Manufacturing Owned
Highland, TX 72,200 Manufacturing Owned
Jackson Center, OH 970,000 Manufacturing Owned
Manaus, Brazil 70,000 Manufacturing Owned
McCalla, AL 281,000 Manufacturing Owned
Medina, OH 213,700 Manufacturing Owned
Paulinia, Brazil 161,000 Manufacturing Owned
Plant City, FL 78,500 Manufacturing Owned
Westland, MI 198,300 Manufacturing Owned
Lima, OH 126,600 Warehouse Owned
Alsip, IL 204,000 Manufacturing, Warehouse Leased
Alsip, IL 100,000 Warehouse Leased
Atlanta, GA 76,800 Warehouse Leased
Ayer, MA 77,000 Warehouse Leased
Canton, MI 35,000 Warehouse Leased
Champaign, IL 187,000 Warehouse Leased
Champaign, IL 208,630 Warehouse Leased
Champaign, IL 85,000 Warehouse Leased
Champaign, IL 145,000 Warehouse Leased
Champaing, IL 8,285 Warehouse Leased
Dallas, TX 168,712 Warehouse Leased
Garland, TX 200,000 Warehouse Leased
Houston, TX 140,000 Warehouse Leased
Lakeland, FL 63,008 Warehouse Leased
Lima, OH 100,000 Warehouse Leased
Lima, OH 100,000 Warehouse Leased
Medina, OH 178,000 Warehouse Leased
Medina, OH 6,000 Warehouse Leased
Medina, Ohio 74,000 Warehouse Leased
Plymouth, MI 2,880 Warehouse Leased
Romulus, MI 246,750 Warehouse Leased
Westland, MI 12,000 Warehouse Leased
Plymouth, MI 9,000 Office Leased
Plymouth, MI 32,000 Truck Garage Leased
Plymouth, MI 160,800 Headquarters Leased
We believe that our plants, which are of varying ages and types of
construction, are in good condition, are suitable for our operations and
generally provide sufficient capacity to meet our requirements for the
foreseeable future.
14
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters arising in the ordinary
course of our business. We cannot estimate with certainty the ultimate legal and
financial liability of this litigation but we believe, based on our examination
of these matters, experience to date and discussions with counsel, that the
ultimate liability will not be material to our business, financial condition or
results of operations.
In the fall of 1999, North American Container, Inc. ("NAC") filed suit
in the U.S. District Court for the Northern District of Texas (Civil Action No.
3-99CV1749-D), claiming damages in an unspecified amount against Plastipak and
41 other defendants for the alleged infringement of NAC U.S. Patent No.
5,072,841. On April 4, 2000 this patent reissued as patent RE 36,639, with 14
new claims. The new claims were the primary focus of NAC's case against
Plastipak and the major manufacturers, as well as major food and beverage
distributors. Plastipak is spending approximately $75,000 per month to
vigorously defend this suit for the alleged patent infringement of NAC's
"plastic container." The discovery phase of the litigation has been completed.
The Court issued an order that eliminated a significant portion of NAC's claims.
This order is subject to the appeal process. Our future cost of defending this
action for a protracted period of time could exceed $1.0 million.
Camplas, one of Plastipak Brazil's customers, failed to pay for bottles
supplied to it by Plastipak Brazil. In 1998, Plastipak Brazil filed suit for
payment. In response to Plastipak Brazil's suit, Camplas filed a counterclaim
alleging that the bottles were defective. Camplas seeks damages from Plastipak
Brazil in the amount of approximately R$12,200,000 (reais). The litigation is
progressing through their legal system. We do not believe this litigation
presents the risk of a material adverse effect on our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for Plastipak Holdings common equity.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the four fiscal
years ended November 1, 2003 were derived from our audited consolidated
financial statements. The following selected financial data for the year ended
October 30, 1999 were derived from audited combined financial statements of the
predecessor companies. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements and the related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this Form
10-K.
YEAR ENDED
--------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(dollar amounts in thousands)
STATEMENTS OF OPERATIONS DATA:
Total Revenues ......................... $ 565,527 $ 701,872 $ 809,774 $ 812,190 $ 897,829
Costs and expenses ..................... 491,009 625,691 709,012 697,001 777,670
Gross Profit ................. 74,518 76,181 100,762 115,189 120,159
Selling, general and
administrative expenses ............ 50,253 50,958 64,477 68,506 74,965
Operating profit ............. 24,265 25,223 36,285 46,683 45,194
Interest expense ....................... 26,021 27,028 28,956 35,099 36,902
Other income (a) ....................... (2,510) (1,418) (3,102) (1,840) (612)
Earnings (loss) before income taxes
and change in accounting principle.. 754 (387) 10,431 13,424 8,904
INCOME TAXES:
Current ............................ (270) 223 2,111 20 (485)
Deferred ........................... 1,967 (2,403) 1,173 4,811 5,028
--------- --------- --------- --------- ---------
$ 1,697 $ (2,180) $ 3,284 $ 4,831 $ 4,543
Earnings (loss) before
cumulative effect of change in
accounting principle ............... (943) 1,793 7,147 8,593 4,361
Cumulative effect of change in
accounting principle (b) ........... - 3,125 - - -
--------- --------- --------- --------- ---------
Net earnings (loss) .......... $ (943) $ 4,918 $ 7,147 $ 8,593 $ 4,361
========= ========= ========= ========= =========
SUPPLEMENTAL MEASURES:
EBITDA (c) ............................. $ 66,166 $ 68,886 $ 84,099 $ 96,541 $ 102,156
Ratio of net debt to EBITDA (d) ........ 4.09x 3.73x 3.32x 3.33x 3.42x
Ratio of EBITDA to interest expense .... 2.54x 2.55x 2.90x 2.75x 2.77x
BALANCE SHEET DATA (AT END OF PERIOD):
Adjusted working capital (e) ........... $ 41,872 $ 23,920 $ 31,480 $ 31,772 $ 22,580
Total assets ........................... 398,997 421,108 505,055 569,598 607,200
Total debt ............................. 278,917 260,200 333,062 387,815 386,895
Stockholders' equity ................... 17,861 22,592 29,467 37,284 40,945
(a) Included in other income for 1999 is a $5,749,000 charge related to a
reclassification pursuant to SFAS No. 145, "Rescission of FASB
Statements No. 4, 64, and 144, Amendment of FASB Statement No. 13 and
Technical Corrections". An extraordinary loss related to early
extinguishment of debt has been reclassified and the associated tax
benefit of $1,955,000 has been reclassified to current tax expense
(benefit).
(b) A gain was recorded for a change in accounting principle due to a
change in accounting for parts and supplies. Through October 30, 1999,
Packaging expensed parts and supplies utilized in its manufacturing
facilities. Effective October 31, 1999, these items are inventoried and
are charged to expense when used. Due to increased volume of purchases
of such items, management believes that this method is preferable and
it provides for a better matching of revenues and expenses. The
financial statements for the years preceding the fiscal year ended
October 28, 2000 have not been restated. See Note N to the consolidated
financial statements included in Plastipak's 10-K for fiscal year
ending November 2, 2002 filed on January 31, 2003.
16
(c) EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is not presented as, and
should not be considered an alternative measure of operating results or
cash flows from operations (as determined by generally accepted
accounting principles), but it is a widely accepted financial indicator
of a company's ability to incur and service debt. While commonly used,
however, EBITDA is not identically calculated by companies presenting
EBITDA and is, therefore, not necessarily an accurate means of
comparison and may not be comparable to similarly titled measures
disclosed by our competitors.
(d) Net debt equals total debt less cash and cash equivalents.
(e) Adjusted working capital represents current assets less cash and cash
equivalents minus current liabilities less short-term debt and current
portion of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Management's discussion and analysis should be read in conjunction with
the consolidated financial statements and the accompanying notes. Please refer
to the "Risk Related to Our Business" section for a summary of factors that
could cause actual results to differ materially from those projected in a
forward-looking statement. As you read the material below, we urge you to
carefully consider our financial statements and related information provided
herein.
All statements other than statements of historical fact included in
this Form 10-K, including statements regarding our future financial position,
economic performance and results of operations, as well as our business
strategy, budgets and projected costs and plans and objectives of management for
future operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe",
or "continue" or the negative thereof or variations thereon or similar
terminology. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include, without
limitation, risks associated with our Brazilian operations, competition in our
product categories (including the impact of possible new technologies and the
impact of such competition on pricing, revenues and margins), our high degree of
leverage and substantial debt service obligations, the restrictive covenants
contained in instruments governing our indebtedness, our exposure to
fluctuations in resin and energy prices, our dependence on significant customers
and the risk that customers will not purchase our products in the amounts we
expect, our dependence on key management and our labor force and the material
adverse effect that could result from the loss of their services. All
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the cautionary statements set forth
in this paragraph.
OVERVIEW
Plastipak Holdings, Inc. ("Plastipak") is a privately held Michigan
corporation that was formed in 1998 to act as a holding company for several
related companies. On October 30, 1999, Plastipak acquired all of the equity
interests in Plastipak Packaging, Inc. ("Packaging"), Whiteline Express, Ltd.
("Whiteline"), Clean Tech, Inc. ("Clean Tech") and TABB Realty, LLC ("TABB"),
and a portion of the equity interests of Plastipak Packaging do Brazil, Ltda
("Plastipak Brazil"), through a reorganization (the "Reorganization").
Packaging, our principal operating company whose business commenced operations
in 1967, designs and manufactures rigid plastic containers, and was incorporated
in Delaware in 1982. Packaging also owns the remainder of Plastipak Brazil.
Whiteline is a trucking company serving our transportation and logistics needs,
and was incorporated in Delaware in 1982. Clean Tech, a plastics recycling
operation, provides a source of clean, high quality post-consumer recycled
plastic raw material, and was incorporated in Michigan in 1989. TABB owns real
estate and leases it to Packaging, Whiteline, and Clean Tech. Plastipak Brazil
produces injection-molded plastic preforms, blow molds rigid plastic packaging
in Paulinia and produces injection-molded plastic preforms in Manaus. Plastipak
Brazil also maintains a sales office in Buenos Aires, Argentina. Other than
Plastipak Brazil and its subsidiaries, all of the Plastipak group of companies
are headquartered in Plymouth, Michigan.
17
RESULTS OF OPERATIONS
We report our results of operations on the basis of a 52-53 week
period. Our fiscal year end is the closest Saturday to October 31 each year. The
fiscal years ended November 1, 2003 and November 2, 2002 were 52 weeks long. The
fiscal year ended November 3, 2001 was 53 weeks long.
Listed in the table below are our revenue and related percentages of
revenue for the years ended November 1, 2003, November 2, 2002 and November 3,
2001. Our revenue has been achieved organically due to increased business with
new and existing customers.
CONSOLIDATED REVENUE BY PRODUCT CATEGORY
------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 3, 2001 (a)
---------------- ---------------- --------------------
(dollar amounts in thousands)
Carbonated and non-carbonated beverage revenue $404,179 45.0% $362,678 44.7% $373,091 46.0%
Consumer cleaning revenue $276,325 30.8% $242,106 29.8% $233,223 28.8%
Food and processed juice revenue $114,092 12.7% $110,146 13.6% $109,892 13.6%
Industrial, agricultural and automotive revenue $ 49,003 5.5% $ 41,752 5.1% $ 45,280 5.6%
Other revenue (b) $ 54,230 6.0% $ 55,508 6.8% $ 48,289 6.0%
-------- ----- -------- ----- -------- -----
Total revenue $897,829 100.0% $812,190 100.0% $809,775 100.0%
======== ===== ======== ===== ======== =====
(a) The periods ended November 1, 2003 and November 2, 2002 were 52 weeks
long. The period ended November 3, 2001 contained 53 weeks.
(b) Other revenue includes Clean Tech (recycling), Whiteline
(transportation and logistics), health, personal care and distilled
spirits revenue and other miscellaneous sources of revenue.
YEAR ENDED NOVEMBER 1, 2003 COMPARED TO YEAR ENDED NOVEMBER 2, 2002
REVENUE
Solid gains were delivered in the year ended November 1, 2003 with
revenue for the full year at $897.8 million, up 10.5% over the same period in
2002. Sales volume in 2003 increased to 7.4 Billion units, up 9.0% over 2002
levels. Our four key product categories, Beverage, Consumer Cleaning, Food and
Industrial and Automotive, all reported unit and revenue increases for the year.
Brazil represented approximately 26.4% of our unit volume growth in 2003 and
approximately 22.5% of our sales revenue increase in 2003.
Resin prices (which represent a significant cost of the product)
increased during the year ended November 1, 2003 as compared to the year ended
November 2, 2002. Using industry standard price data, we estimate that higher
resin prices resulted in approximately a $39.0 million increase in revenue for
the year ended November 1, 2003.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue increased 11.4%
to $404.2 million in 2003 with unit volume up 9.7% over 2002.
Revenue gains for 2003 were evenly split between the U.S. and
Brazil, each up approximately $20.0 million. Unit volume grew
at a higher rate in Brazil, driven by strong preform sales,
with Brazil unit volume up 26.4% and U.S. unit volume up 4.8%
during 2003. The difference between the revenue and unit
volume increases posted was largely attributable to higher
average raw material prices for the period that were passed
through to customers in the form of higher selling prices.
- Consumer cleaning revenue increased 14.1% to $276.3 million
during the year ended November 1, 2003 with unit volume up
9.0% over 2002 levels. These gains were primarily a result of
two factors: new product and customer
18
sales during the year combined with solid gains by current
customers in the liquid detergent and household cleaner
markets. In addition, higher HDPE material prices which
converted into higher selling prices contributed to the
increase in consumer cleaning revenue as compared to the year
ended November 2, 2002.
- Our food and processed juice product category reported higher
unit and dollar sales in 2003. For the year ended November 1,
2003, unit volume increased 8.5% and sales revenue increased
3.6% over 2002. The addition of new products in the juice,
cooking oil and condiments areas, combined with consistent
performance from our core product offerings, were key to our
success in this area for the year ended November 1, 2003.
- Industrial, agricultural and automotive revenue increased in
both units and dollar sales for 2003. Revenue in this category
increased 17.4% to $49.0 million with unit sales increasing
12.2% during the year ended November 1, 2003. These increases
were driven primarily from increased large bottle sales used
in the multi-quart oil market and anti-freeze market along
with new volume awards in the product category.
- Other revenue decreased 2.3% to $54.2 million. Other revenue,
which includes our health, personal care, distilled spirits,
freight and other miscellaneous revenue, posted decreases in
both revenue and sales units during 2003. This decrease is
attributable mainly to a decrease in sales volume in the
health, personal care and distilled spirits revenue.
GROSS PROFIT
Gross profit increased 4.3% to $120.2 million for the year ended
November 1, 2003. The increase in gross profit is primarily attributable to
higher unit sales volume and improved operating performance related to our South
American operations, offset by increased operating costs associated with the
start-up of several new product lines, the addition of two new facilities and
the expansion of two existing facilities. Price reductions implemented to extend
customer contracts and expand our business also offset the increase in gross
profit. We have not been able, through efficiencies in production to date, to
totally offset implemented price reductions. The collective impact of the price
reductions was approximately $5.8 million for the year ended November 1, 2003.
Gross profit as a percent of revenue decreased to 13.4% as compared to 14.2% in
the prior period. The erosion of gross profit as a percentage of revenue was
also due to higher resin costs that increased revenue without increasing
associated gross profit.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, unaffected by these fluctuations. In general, industry practice and
contractual arrangements with our customers permit price changes to be passed
through to customers. As a result, we experienced revenue changes without
corresponding changes in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for the year ended
November 1, 2003 increased 9.4% to $75.0 million. As a percentage of revenue,
selling, general and administrative expenses decreased to 8.3% for the year
ended November 1, 2003 from 8.4% in the year ended November 2, 2002. Increases
in insurance, legal and professional fees and depreciation expenses of
approximately $4.0 million were the primary factors contributing to the change.
Increases in compensation and benefits and travel expenses contributed $2.0
million to the increase in SG&A. The increase in SG&A was offset by a $0.7
decrease in overall SG&A associated with our South American operations.
INTEREST EXPENSE
Interest expense increased 5.1% to $36.9 million. The increase was
primarily due to the sale, on September 25, 2002, of $50.0 million of the 10.75%
Senior Notes. Interest expense for the year ended November 1, 2003 reflects a
full year of interest expense for the $50.0 million Senior Notes as compared to
the prior year ended November 2, 2002. The increase in interest expense related
to the Senior Notes was partially offset by interest earned from interest rate
swaps and a decrease in interest rates and interest expense associated with our
South American operations.
OTHER (INCOME) AND EXPENSE
Other income decreased by $1.2 million to $0.6 million for the year
ended November 1, 2003 as compared to $1.8 million for the year ended November
2, 2002. The decrease was primarily attributable to a $1.1 million increase in
foreign currency exchange rate losses related to our South American operations.
A loss of $0.5 million on the disposition and sale
19
of fixed assets, and a decrease in interest income offset by an increase in
royalty income of $0.4 million, also contributed to the change in other income
over the prior period.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $4.5 million expense for the year ended
November 1, 2003 as compared to a $4.8 million expense for the year ended
November 2, 2002. Earnings before taxes were $8.9 million for the year ended
November 1, 2003 compared to $13.4 million of earnings for the year ended
November 2, 2002. The effective rate was 51.0% and 36.0% for the years ending
November 1, 2003 and November 2, 2002, respectively. The increase in the
effective tax rate for the year ended November 1, 2003 is due to the accounting
of a change in estimate of prior year book and tax differences and the
settlement of prior period tax liabilities.
NET EARNINGS
Net earnings decreased by $4.2 million to net earnings of $4.4 million
for the year ended November 1, 2003 from net earnings of $8.6 million for the
year ended November 2, 2002. As previously discussed, start-up costs associated
with new product lines, the addition of two new facilities and expansion of two
existing facilities along with an increase in selling, general and
administrative expenses, an increase in interest expense and other factors
mentioned above resulted in a reduction in net earnings over the prior period.
YEAR ENDED NOVEMBER 2, 2002 COMPARED TO YEAR ENDED NOVEMBER 3, 2001
REVENUE
Revenue increased 0.3% to $812.2 million for the year ended November 2,
2002 while unit sales increased 5.1% for the period to 6.8 billion units
compared to the year ended November 3, 2001. The relatively flat revenue growth
is due to several factors. First, the year ended November 2, 2002 contained only
52 weeks, while the year ended November 3, 2001 contained 53 weeks. If 2002
revenue were restated for 53 weeks, 2002 revenue would have increased over the
prior period by approximately 2.4%. Second, resin prices (which represent a
significant cost of the product) have decreased in the year ended November 2,
2002 as compared to the year ended November 3, 2001. Lower resin prices were
passed on to our customers in the form of lower sales prices for the products we
sell. We estimate that lower resin prices resulted in approximately a $28.0
million reduction in revenue for fiscal year 2002. Finally, we exited a piece of
business through an asset sale in fiscal year 2001 which resulted in lower sales
revenue for fiscal year 2002.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue decreased 2.8%
to $362.7 million while unit sales during the year ended
November 2, 2002 increased by 7.6% over the year ended
November 3, 2001. Unit sales growth was attributable to the
U.S. market where unit sales increased 7.6% from 2001.
Increased business in Brazil resulted in an increase of 7.4%
of unit sales over 2001. Increased activity in the water
market continues to drive increased unit volume. While unit
sales increased, revenue declined in this category due to
lower average raw material prices, a product mix shift to more
single service packages that have lower selling prices, and
currency devaluations in Brazil.
- Consumer cleaning revenue increased 3.8% to $242.1 million.
Unit sales increased 3.0% over the prior year. Sales growth
was driven by several new packaging initiatives in this
category.
- Food and processed juices revenue increased 0.2% to $110.1
million. Unit sales during the year ended November 2, 2002
decreased 4.0% over the year ended November 3, 2001. The
decrease in sales units was primarily the result of the sale
of production assets in this category during the second
quarter of fiscal year 2001.
- Industrial, agricultural and automotive revenue decreased 7.8%
to $41.8 million, while unit sales for the year ended November
2, 2002 increased 2.6% over the same period in 2001. New
product awards in this category primarily drove unit sales
growth. In addition, the market successes of large multi-use
containers provided incremental volume growth in a category
that is otherwise flat. Dollar sales were impacted by the
change in resin pricing with revenue down for fiscal year 2002
compared to the same period in 2001.
20
- Other revenue increased 14.9% to $55.5 million. This increase
is attributable mainly to an increase in freight, recycling,
and other miscellaneous revenue. The increase was offset by a
decrease in health, personal care and distilled spirits
revenue due to our exit from a piece of business in this
sector.
GROSS PROFIT
Gross profit increased 14.3% to $115.2 million for the year ended
November 2, 2002. Gross profit as a percent of revenue improved to 14.2% from
12.4% in the prior period. The improvement in gross profit as a percent of
revenue was partially due to lower resin costs that decreased revenue without
decreasing associated gross profit. Gross profit increases were the result of
improved manufacturing reliability and throughput in fiscal 2002. In addition,
current process redesign initiatives helped generate increased gross profit.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, substantially unaffected by these fluctuations. In general, industry
practice and contractual arrangements with our customers permit price changes to
be passed through to customers. As a result, we have in the past experienced
revenue changes without corresponding changes in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 6.2% to $68.5
million for year ended November 2, 2002. As a percentage of revenue, selling,
general and administrative expenses increased slightly to 8.4% in the year ended
November 2, 2002 from 8.0% in the year ended November 3, 2001. The increase was
related to the reclassification of $1.3 million of site management wages from
manufacturing expenses and a $1.2 million increase related to the implementation
of SAP. Increases in corporate labor contributed approximately $2.2 million to
the increase. The increase in corporate labor is mainly due to compensation
expense recorded for restricted stock options in the amount of approximately
$2.4 million.
The increase in selling, general and administrative expenses was offset
by a decrease in bad debt expense. Bad debt expense decreased approximately 53%
to $1.8 million for the year ended November 2, 2002 from $3.7 million in the
prior period. The decrease in bad debt is mainly attributable to the economic
crisis in Brazil and Argentina during fiscal 2001. As a result of the economic
crisis, we incurred bad debt expenses of approximately $3.2 million for the year
ended November 3, 2001. Improved economic conditions in both Brazil and
Argentina and tighter credit controls led to a decrease in bad debt expense for
the year ended November 2, 2002. The decrease in bad debt expense represents 65%
of the increase in earnings before taxes between fiscal year 2002 and 2001.
INTEREST EXPENSE
Interest expense increased by 21.2% to $35.1 million. The increase was
due to the sale of $275.0 million and $50 million of the 10.75% Senior Notes in
August 2001 and September 2002, respectively. In addition, our debt level was
approximately $54.8 million higher as compared to the prior year ending November
3, 2001.
OTHER (INCOME) AND EXPENSE
Other income decreased by $1.3 million to $(1.8) million principally
due to $0.8 decrease in sundry income and a $0.6 million decrease in foreign
currency exchange rate losses that were principally related to the devaluation
of the Peso in Argentina.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $4.8 million expense for the year
ended November 2, 2002 as compared to a $3.3 million expense for the year ended
November 3, 2001. Earnings before taxes were $13.4 million for the year ended
November 2, 2002 compared to $10.4 million of earnings for the year ended
November 3, 2001. The effective rate was 36.0% and 31.5% for the years ending
November 2, 2002 and November 3, 2001 respectively.
NET EARNINGS
Net earnings increased by $1.5 million from net earnings of $7.1
million for the year ended November 1, 2001 to net earnings of $8.6 million for
the year ended November 2, 2002. The increase in net earnings was primarily due
to improvements in operating profit.
21
YEAR ENDED NOVEMBER 3, 2001 COMPARED TO YEAR ENDED OCTOBER 28, 2000
REVENUE
Revenue increased 15.4% to $809.8 million for the year ended November
3, 2001. Unit sales for the year ended November 3, 2001 increased 12.6% to
approximately 6.5 billion units from the year ended October 28, 2000. The
increases in revenue and unit sales are due to a number of factors:
- Carbonated and non-carbonated beverage revenue increased 16.2%
to $373.1 million. Additional growth was driven by increased
demand for water containers along with new business
commitments in the Northeast. Also, we continue to develop the
plastic beer bottle market with increased sales to several
regional breweries.
- Consumer cleaning revenue increased 24.1% to $233.2 million.
The increase in revenue was attributable primarily to our
sales of corrugated boxes and labels to Procter & Gamble.
Procter & Gamble previously purchased corrugated boxes and
labels from another supplier, but requested in June 2000 that
we begin to sell these materials to them in order to
streamline their production process. As a result, we now ship
our plastic containers to Procter & Gamble in corrugated boxes
with labels in place. Procter & Gamble simply fills and caps
the containers, seals the cartons and ships the filled
containers to their customers. We began this arrangement with
Procter & Gamble by purchasing their existing inventory of
corrugated boxes and labels, and we now purchase these items
from vendors approved by Procter & Gamble. The prices we
charge Procter & Gamble include an amount to cover our costs
of boxing and labeling the plastic containers we sell them. We
estimate that $83 million of our increased revenue for 2001
was attributable to this new arrangement with Procter &
Gamble. Additional growth was attributable to broad-based
volume increases across all customers within the category.
- Food and processed juices revenue increased 4.9% to $109.9
million. This growth is attributable to increased business in
juice-type products, pourable dressings, and squeezable
mayonnaise containers. These volume gains were partially
offset by the divestiture of volume previously supplied to
Sunny Delight.
- Industrial, agricultural and automotive revenue increased
31.1% to $45.3 million. This increase was driven by growth
primarily from F Style gallons, motor oil quarts and our
proprietary Handi-Grip container.
- Other revenue decreased 10.0% to $48.3 million. This decrease
is attributable to reduced business activity with customers
within the health, personal care and distilled spirits
category and a shift to smaller, lower priced packages within
our product mix. This decrease is attributable to less project
revenue with existing customers.
GROSS PROFIT
Gross profit increased 32.3% to $100.8 million for the year ended
November 3, 2001. The increase in gross profit resulted primarily from the
higher sales unit volume as compared to the prior year period. Gross profit
increases were also the result of improved manufacturing reliability and
throughput in fiscal 2001. In addition, current process redesign initiatives
generated increased gross profit.
Gross profit as a percent of revenue improved to 12.5% from 10.9% in
the prior period. The improvement in gross profit as a percent of revenue was
partially due to lower resin costs which decreased revenue without decreasing
associated gross profit. Gross profit as a percent of revenue was also improved
by increased gross profit generated by current process redesign initiatives.
Increases in gross profit as a percent of revenue were partially offset by $50.3
million of additional sales of corrugated boxes and labels to Procter and
Gamble. These sales did not increase gross profit and therefore negatively
affected gross profit as a percent of revenue.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, substantially unaffected by these fluctuations. In general, industry
practice and contractual arrangements with our customers permit price changes to
be passed through to customers by means of generally corresponding changes in
product pricing. As a result, we have in the past experienced revenue changes
without corresponding changes in gross profit.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 26.5% to $64.5
million for the year ended November 3, 2001. As a percentage of revenue,
selling, general and administrative expenses increased to 8.0% in the year ended
November 3, 2001 from 7.3% in the year ended October 28, 2000. The increase was
related to non-recurring charges including expenses related to the SAP
implementation and an increase in our reserve for doubtful accounts by
approximately $2.0 million related to our operations in South America. The
increase was also the result of higher spending on property taxes, state and
local taxes, deferred salary continuation, legal expenses and employee wages.
INTEREST EXPENSE
Interest expense increased by 7.1% to $29.0 million. The increase was
due to an increase in our working capital borrowings required to support our
revenue growth. The increase was also due to the sale on August 20, 2001 of
$275.0 million of the outstanding notes. The average interest rate for the year
ended November 3, 2001 was approximately 9.44% compared to an average interest
rate of approximately 8.38% for the prior period.
OTHER (INCOME) AND EXPENSE
Other income increased to $3.1 million principally due to improvement
in foreign currency exchange rates.
INCOME TAX EXPENSE (BENEFIT)
Our provision for income taxes for 2001 was $3.3 million, which
represents an effective tax rate for fiscal 2001 of 31.5%. This compares to a
tax benefit of $2.2 million, which represents an effective tax rate of 563% in
fiscal 2000. The effective tax rates for both periods were reduced by
utilization of research and experimentation tax credits that we determined were
applicable to our operations in fiscal 2000.
NET EARNINGS
Net earnings increased $2.2 million from net earnings of $4.9 million
for the year ended October 28, 2000 to net earnings of $7.1 million for the year
ended November 3, 2001. This increase is largely due to increased gross profit
generated by additional sales unit volume and reduced manufacturing costs and
improved performance.
FINANCIAL CONDITION
We intend to expand our business, both domestically and
internationally. We have a significant amount of financing capacity to fund the
continued growth of our business. Past expenditures have been used to maintain
equipment and expand capacity for revenue growth. These expenditures were funded
with cash flow from operations, additional debt and additional operating leases.
Future capital expenditures will be used in the same manner as past
expenditures.
During the year ended November 1, 2003, we spent approximately $100.8
million and assumed $6.5 million in capital lease obligations to cover the
capital requirements of our operations. We expect to incur capital expenditures
of approximately $120.0 million in fiscal 2004 and $70.0 million in 2005.
We are using technology that will allow us to pursue opportunities in
the condiment, sauce and beverage markets. South America provides significant
opportunities with our current customer base. Additionally, we are in the
process of establishing three small facilities in Central Europe. Our 2004
capital expenditure budget incorporates the opening of these facilities. See
"Business - Foreign Operations".
We had positive cash flow from operating activities of $75.4 million,
which in part funded our capital expenditures of approximately $100.8 million.
The remaining balance of capital expenditures was covered by cash and cash
equivalents and by financing activities including the assumption of capital
lease obligations.
SEASONALITY
The carbonated soft drink (CSD) and, to a lesser extent, the other
beverage portions of our business are highly seasonal, with peak demand during
warmer summer months, and reduced demand during the winter. We normally add
temporary
23
staff and build inventory of products for our CSD and water customers in
anticipation of seasonal demand in the quarter preceding the summer.
INFLATION
We use large quantities of plastic resins in manufacturing our
products. These resins accounted a major portion of our cost of goods sold in
the year ended November 1, 2003, and are subject to substantial price
fluctuations resulting from shortages in supply and changes in the prices of
natural gas, crude oil and other petrochemical products from which these resins
are produced. We generally enter into three-year agreements with our resin
suppliers, and our purchases of raw materials are subject to market prices and
inflation.
EFFECT OF CHANGES IN EXCHANGE RATES
In general, our results of operations are partially affected by changes
in foreign exchange rates. We invoice our Brazilian and Argentine customers in
the Brazilian Real and Argentine Peso, respectively. A portion of those invoices
are pegged to the U.S. exchange rate. As a result, subject to market conditions,
a decline in the value of the U.S. dollar relative to the Brazilian Real and to
a lesser extent the Argentine Peso can have a favorable effect on our
profitability. Conversely, an increase in the value of the dollar relative to
the Brazilian Real and to a lesser extent the Argentine Peso can have a negative
effect on our profitability. Exchange rate fluctuations resulted in a loss of
approximately $1.0 million for the year ended November 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased 45.5% to $75.4
million for the fiscal year ended November 1, 2003 as compared to the fiscal
year ended November 2, 2002. The increase is in part due to adjusted net working
capital and other asset and liability changes of $17.6 million for the year
ended November 1, 2003. The changes in working capital and other assets and
liabilities resulted primarily from increases in accounts payable, accounts
receivable and inventories and a decrease in deposits for equipment purchases.
An increase in purchases for raw materials mainly due to new business and new
facilities was the main factor contributing to the increase in accounts payable,
accounts receivable and inventories for fiscal 2003. An increase in
depreciation, amortization and foreign currency translation loss contributed
approximately $10.2 million to the increase. The increase in non-cash expenses
was offset by a decrease in operating performance of $4.2 million.
During the fiscal year ended November 2, 2002 net cash generated from
operations increased 18.3% to $51.9 million. The increase in 2002 was primarily
the result of a $6.4 million increase in non-cash expenses that include items
such as depreciation and amortization, bad debt expense, deferred income tax
expense, and foreign currency translation. Bad debt expense decreased
approximately 53% to $1.8 million for the year ended November 2, 2002 from $3.7
million in the prior period. The decrease in bad debt is mainly attributable to
the economic crisis in Brazil and Argentina during fiscal year 2001. As a result
of the economic crisis, we incurred bad debt expenses of approximately $3.2
million for the year ended November 3, 2001. Improved economic conditions in
both Brazil and Argentina and tighter credit controls led to a decrease in bad
debt expense for the year ended November 2, 2002. The decrease in bad debt
represents 65% of the increase in earnings before income taxes between fiscal
year 2002 and 2001. Net working capital and other asset and liability changes
increased net cash by $3.6 million. Improved operating performance of $1.5
million also contributed to the 2002 increase in cash.
For the fiscal year ended November 3, 2001 net cash generated from
operations was $43.8 million. The decrease in 2001 was primarily the result of
net working capital and other asset and liability changes. The increase in
working capital resulted primarily from decreases in accounts payable and
accounts receivable. The reductions were partially offset by improved operating
performance with net earnings increasing $2.2 million from fiscal 2000. The
decrease was also offset by an increase in depreciation and amortization of $2.5
million and an increase deferred tax expense of $2.0 million from fiscal 2000.
Net cash used in investing activities was $101.3 million and $89.6
million for fiscal 2003 and 2002, respectively. Investing activities were
primarily attributed to the acquisition of property and equipment. During fiscal
2003, cash used for the acquisition of intangible assets of $1.8 million was
partially offset by proceeds from the sale of equipment of $1.3 million. In
addition, acquisition of intangible assets decreased by $5.6 million to $1.8
million for the year ending November 1, 2003. The decrease is primarily related
to customer contracts acquired by our South American operations in fiscal 2002.
For the years ended November 1, 2003 and November 2, 2002, property and
equipment acquisitions were $100.8 million and $82.1 million, respectively. For
the fiscal year 2001 net cash used in investing activities was $52.8
24
million. Investing activities were primarily attributed to the acquisition of
property and equipment. In 2001, property and equipment acquisitions was $50.5
million. During fiscal year 2003, 2002 and 2001, we acquired equipment through
the assumption of capital lease obligations of $6.5 million, $2.4 million and
$5.5 million, respectively.
Net cash (used in) provided by financing activities was $(3.1) million
and $50.4 million for the years ended November 1, 2003 and November 2, 2002,
respectively. In the year ended November 1, 2003, net cash of $6.3 million was
used to make principal payments on long-term obligations. The use of cash was
offset by net proceeds from long-term obligations of $3.2 million. For the year
ended November 2, 2002 net cash provided by financing activities was $50.4
million. Net cash of $9.1 million was used to make principal payments on
long-term obligations. The use of cash was primarily offset by net proceeds from
long-term obligations of $58.7 million. In the year ended November 2, 2002, net
cash provided from borrowings was partially used to finance property and
equipment acquisitions. The remaining net cash provided from borrowings was used
for general corporate purposes, including working capital and capital
expenditures in fiscal year 2003. For the fiscal year 2001 net cash (used in)
provided from financing activities was $59.1 million. In 2001, cash provided
from borrowings was partially used to finance property and equipment
acquisitions.
On August 20, 2001 and September 25, 2002, we sold an aggregate total
principal amount of $275 million and $50 million, respectively, of 10.75% Senior
Notes to qualified institutional buyers. The notes have a maturity date of
September 1, 2011, and we have the option to redeem all or a portion of the
notes at any time on or after September 1, 2006. Interest under the notes is
payable on September 1 and March 1 of each year. The indenture under which the
notes were issued places restrictions on our ability to declare or pay
dividends, purchase or acquire equity interests of Plastipak, and retire
indebtedness that is subordinate to the notes. The notes also have covenants
that place restrictions on the incurrence of debt, the issuance of stock, and
granting of liens.
The proceeds from the Senior Notes sold on August 20, 2001 were used to
pay off existing debt. We continue to use the net proceeds from the September
25, 2002 sale of Senior Notes for general corporate purposes, including working
capital, capital expenditures and technology development.
On August 20, 2001, in conjunction with our first sale of Senior Notes,
we entered into an Amended Credit Agreement which allows us to borrow up to $150
million, subject to a borrowing base consisting of 85% of eligible domestic
accounts receivable, 65% of the value of eligible domestic inventory and 50% of
the value of domestic property, plant and equipment. The Amended Credit
Agreement has a five-year term. Interest under the Amended Credit Agreement is
payable at 200 to 350 basis points per annum over Eurodollar or at prime rates,
as we select. The Amended Credit Agreement is secured by substantially all of
our assets, including pledges of the stock of Plastipak and all of its material
foreign subsidiaries. Packaging, Whiteline, Clean Tech, and TABB are the
borrowers and guarantors under the Amended Credit Agreement and Plastipak
guarantees obligations under the Amended Credit Agreement. As of November 1,
2003, $57.9 million in letters of credit were outstanding under the Amended
Credit Agreement and we had $92.1 million available for borrowing.
Under the Amended Credit Agreement we are required to calculate EBITDA
because covenants in our debt agreement are tied to ratios based on that
measure. For instance, the covenants under the Amended Credit Agreement
incorporate EBITDA for the most recent last four fiscal quarters (last twelve
months), as a component of the following ratios: debt service ratio (minimum
1.25 to 1), senior secured debt ratio (maximum 2.00 to 1), leverage ratio
(maximum 4.25 to 1) and interest coverage ratio (minimum 2.25 to 1). Our ability
to incur additional debt is tied to our bank covenants. As of November 1, 2003,
we were in compliance with our covenants. EBITDA should not be considered an
alternative measure of operating results or cash flows from operations (as
determined by generally accepted accounting principles), but it is a widely
accepted financial indicator of a company's ability to incur and service debt.
While commonly used, however, EBITDA is not identically calculated by companies
presenting EBITDA and is, therefore, not necessarily an accurate means of
comparison and may not be comparable to similarly titled measures disclosed by
other companies.
25
Our Amended Credit Agreement defines EBITDA as net earnings (loss) plus
income tax expense, interest expense, depreciation and amortization. A
reconciliation between net earnings and EBITDA is calculated as follows:
YEARS ENDED
------------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
------------ ------------ ------------
Net earnings (per GAAP basis) $ 4,361,056 $ 8,592,810 $ 7,147,376
Income tax expense 4,543,000 4,831,000 3,284,000
Interest expense 36,902,209 35,099,265 28,955,895
Depr