Attached files
file | filename |
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EX-32.2 - EX-32.2 - Pregis Holding II CORP | c61257exv32w2.htm |
EX-31.1 - EX-31.1 - Pregis Holding II CORP | c61257exv31w1.htm |
EX-31.2 - EX-31.2 - Pregis Holding II CORP | c61257exv31w2.htm |
EX-32.1 - EX-32.1 - Pregis Holding II CORP | c61257exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-130353-04
Pregis Holding II Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of Incorporation or Organization) |
20-3321581 (I.R.S. Employer Identification No.) |
|
1650 Lake Cook Road, Deerfield, IL (Address of principal executive offices) |
60015 (Zip Code) |
Registrants telephone number, including area code: (847) 597-2200
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 149.0035 shares of the registrants common stock, par value $0.01 per share, issued
and outstanding as of September 30, 2010.
PREGIS HOLDING II CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No. | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1. | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
Item 2. | 23 | |||||||
Item 3. | 38 | |||||||
Item 4. | 38 | |||||||
PART II OTHER INFORMATION |
||||||||
Item 1. | 38 | |||||||
Item 1A. | 39 | |||||||
Item 2. | 39 | |||||||
Item 3. | 39 | |||||||
Item 4. | 39 | |||||||
Item 5. | 39 | |||||||
Item 6. | 39 | |||||||
40 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
Item 1. Financial Statements
Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)
Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)
September 30, 2010 | December 31, 2009 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 44,587 | $ | 80,435 | ||||
Accounts receivable |
||||||||
Trade, net of allowances of $5,275 and $6,015 respectively |
136,785 | 120,812 | ||||||
Other |
16,168 | 12,035 | ||||||
Inventories, net |
91,551 | 81,024 | ||||||
Deferred income taxes |
5,494 | 5,079 | ||||||
Due from Pactiv |
1,178 | 1,169 | ||||||
Prepayments and other current assets |
7,861 | 7,929 | ||||||
Total current assets |
303,624 | 308,483 | ||||||
Property, plant and equipment, net |
204,037 | 226,882 | ||||||
Other assets |
||||||||
Goodwill |
142,431 | 126,250 | ||||||
Intangible assets, net |
54,313 | 38,054 | ||||||
Deferred financing costs, net |
5,674 | 8,092 | ||||||
Due from Pactiv, long-term |
8,305 | 8,429 | ||||||
Pension and related assets |
14,411 | 13,953 | ||||||
Restricted cash |
3,501 | | ||||||
Other |
533 | 404 | ||||||
Total other assets |
229,168 | 195,182 | ||||||
Total assets |
$ | 736,829 | $ | 730,547 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Short-term debt |
$ | 3,798 | $ | | ||||
Current portion of long-term debt |
340 | 300 | ||||||
Accounts payable |
97,900 | 78,708 | ||||||
Accrued income taxes |
6,310 | 5,236 | ||||||
Accrued payroll and benefits |
14,946 | 14,242 | ||||||
Accrued interest |
12,238 | 7,722 | ||||||
Other |
19,023 | 18,011 | ||||||
Total current liabilities |
154,555 | 124,219 | ||||||
Long-term debt |
490,453 | 502,534 | ||||||
Deferred income taxes |
20,736 | 19,721 | ||||||
Long-term income tax liabilities |
5,556 | 5,463 | ||||||
Pension and related liabilities |
3,692 | 4,451 | ||||||
Other |
22,337 | 15,367 | ||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized,
149.0035 shares issued and outstanding at
September 30, 2010 and December 31, 2009 |
| | ||||||
Additional paid-in capital |
153,352 | 151,963 | ||||||
Accumulated deficit |
(106,035 | ) | (82,328 | ) | ||||
Accumulated other comprehensive loss |
(7,817 | ) | (10,843 | ) | ||||
Total stockholders equity |
39,500 | 58,792 | ||||||
Total liabilities and stockholders equity |
$ | 736,829 | $ | 730,547 | ||||
The accompanying notes are an integral part of these financial statements.
3
Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net Sales |
$ | 223,681 | $ | 207,047 | $ | 651,518 | $ | 588,594 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
176,301 | 156,088 | 510,139 | 444,144 | ||||||||||||
Selling, general and administrative |
29,716 | 28,660 | 96,157 | 83,059 | ||||||||||||
Depreciation and amortization |
11,646 | 12,607 | 34,305 | 35,383 | ||||||||||||
Other operating expense, net |
3,953 | 2,267 | 5,519 | 13,602 | ||||||||||||
Total operating costs and expenses |
221,616 | 199,622 | 646,120 | 576,188 | ||||||||||||
Operating income |
2,065 | 7,425 | 5,398 | 12,406 | ||||||||||||
Interest expense |
11,724 | 9,192 | 35,320 | 28,072 | ||||||||||||
Interest income |
| (54 | ) | | (176 | ) | ||||||||||
Foreign exchange (gain) loss, net |
(526 | ) | (886 | ) | 382 | (5,817 | ) | |||||||||
Loss before income taxes |
(9,133 | ) | (827 | ) | (30,304 | ) | (9,673 | ) | ||||||||
Income tax expense (benefit) |
(1,216 | ) | 2,514 | (6,597 | ) | 1,013 | ||||||||||
Net loss |
$ | (7,917 | ) | $ | (3,341 | ) | $ | (23,707 | ) | $ | (10,686 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net loss |
$ | (23,707 | ) | $ | (10,686 | ) | ||
Adjustments
to reconcile net loss to cash provided by operating activities: |
||||||||
Depreciation and amortization |
34,305 | 35,383 | ||||||
Amortization of inventory step-up |
406 | | ||||||
Deferred income taxes |
(8,303 | ) | (1,483 | ) | ||||
Unrealized foreign exchange loss (gain) |
692 | (5,552 | ) | |||||
Amortization of deferred financing costs |
2,615 | 1,781 | ||||||
Amortization of debt discount |
2,174 | 238 | ||||||
Gain on disposal of property, plant and equipment |
1,778 | (249 | ) | |||||
Stock compensation expense |
1,389 | 1,061 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts and other receivables, net |
(21,635 | ) | 9,874 | |||||
Due from Pactiv |
(169 | ) | 3,792 | |||||
Inventories, net |
(12,005 | ) | 5,364 | |||||
Prepayments and other current assets |
65 | 1,961 | ||||||
Accounts payable |
19,909 | 6,771 | ||||||
Accrued taxes |
817 | (5,637 | ) | |||||
Accrued interest |
4,469 | 3,547 | ||||||
Other current liabilities |
611 | 856 | ||||||
Pension and related assets and liabilities, net |
(1,428 | ) | (2,931 | ) | ||||
Other, net |
(1,716 | ) | (2,633 | ) | ||||
Cash provided by operating activities |
267 | 41,457 | ||||||
Investing activities |
||||||||
Capital expenditures |
(21,783 | ) | (17,644 | ) | ||||
Proceeds from sale of assets |
499 | 692 | ||||||
Proceeds from sale leaseback, net of costs |
17,875 | | ||||||
Acquisition of business, net of cash acquired |
(31,655 | ) | | |||||
Change in restricted cash |
(3,501 | ) | | |||||
Cash used in investing activities |
(38,565 | ) | (16,952 | ) | ||||
Financing activities |
||||||||
Proceeds from revolving credit facility |
500 | 38,700 | ||||||
Financing Fees |
| (1,284 | ) | |||||
Repayment of debt |
| (4,312 | ) | |||||
Proceeds from foreign lines of credit |
3,670 | | ||||||
Other, net |
71 | (125 | ) | |||||
Cash provided by financing activities |
4,241 | 32,979 | ||||||
Effect of exchange rate changes on cash
and cash equivalents |
(1,791 | ) | 1,539 | |||||
Increase (decrease) in cash and cash equivalents |
(35,848 | ) | 59,023 | |||||
Cash and cash equivalents, beginning of period |
80,435 | 41,179 | ||||||
Cash and cash equivalents, end of period |
$ | 44,587 | $ | 100,202 | ||||
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
Pregis Holding II Corporation
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, unless otherwise noted)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Pregis Corporation (Pregis) is an international manufacturer, marketer and supplier of
protective packaging products and specialty packaging solutions. Pregis operates through two
reportable segments Protective Packaging and Specialty Packaging.
Pregis Corporation is 100%-owned by Pregis Holding II Corporation (Pregis Holding II or the
Company) which is 100%-owned by Pregis Holding I Corporation (Pregis Holding I). AEA Investors
LP and its affiliates (the Sponsors or AEA) own approximately 98% of the issued and outstanding
equity of Pregis Holding I, with the remainder held by management. AEA Investors LP is a New
York-based private equity investment firm.
Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally
accepted in the United States (U.S. GAAP) for complete financial statements. Management believes
these financial statements include all normal recurring adjustments considered necessary for a fair
presentation of the financial position and results of operations of the Company. The results of
operations for the three and nine months ended September 30, 2010 are not necessarily indicative of
the operating results for the full year.
On February 19, 2010 the Company acquired all of the outstanding shares of IntelliPack (see
Note 16). The results of operations of IntelliPack, Inc. (IntelliPack) are included in the
consolidated results of the Company beginning February 20, 2010.
These unaudited interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K/A for the year ended December 31, 2009.
Separate financial statements of Pregis Corporation are not presented since the floating rate
senior secured notes due April 2013 and the 12.375% senior subordinated notes due October 2013
issued by Pregis Corporation are fully and unconditionally guaranteed on a senior secured and
senior subordinated basis, respectively, by Pregis Holding II and all existing domestic
subsidiaries of Pregis Corporation and since Pregis Holding II has no operations or assets separate
from its investment in Pregis Corporation (see Note 17).
6
Table of Contents
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (ASU 2010-06). ASU 2010-06 provides new and amended
disclosure requirements related to fair value measurements. Specifically, this ASU requires new
disclosures relating to activity within Level 3 fair value measurements, as well as transfers in
and out of Level 1 and Level 2 fair value measurements. ASU 2010-06 also amends the existing
disclosure requirements relating to valuation techniques used for fair value measurements and the
level of disaggregation a reporting entity should include in fair value disclosures. This update is
effective for interim and annual reporting periods beginning after December 15, 2009. The Company
adopted this ASU as of January 1, 2010. The adaption did not have a material impact on the
Companys consolidated financial statements.
3. INVENTORIES
The major components of net inventories are as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Finished goods |
$ | 42,682 | $ | 40,941 | ||||
Work-in-process |
15,260 | 14,216 | ||||||
Raw materials |
31,177 | 23,339 | ||||||
Other materials and supplies |
2,432 | 2,528 | ||||||
$ | 91,551 | $ | 81,024 | |||||
Inventories at September 30, 2010 and at December 31, 2009 were stated net of reserves
totaling $1,908 and $1,881, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
On July 19, 2010 Pregis completed a sales leaseback transaction involving land, building and
related improvements at two of its U.S. manufacturing facilities. Sales proceeds, net of direct
costs of the transaction, totaled approximately $17.9 million.
The transaction qualified for sales leaseback accounting treatment under the provisions of ASC
Topic 840.40, Sale Leaseback Transactions, and met the criteria for operating lease classification.
As a result, the sold properties were removed from the Companys consolidated balance sheet and
gains and losses of the respective properties were measured as the difference between the net sales
proceeds as allocated based on the relative fair values and the net book values of the sold assets.
One of the properties resulted in a loss of $1.9 million which is recorded in the Companys
consolidated statement of operations for the three and nine months ended September 30, 2010. The
second property resulted in a gain of approximately $1.8 million which has been recorded on the
Companys consolidated balance sheet in other non-current liabilities and will be amortized to
income over the lease term.
The initial lease term for both properties is 20 years and the transaction result in increased
annual rent expense of approximately $2.4 million. Future minimum lease payments for the initial
lease term total approximately $49.0 million.
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5. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in goodwill by reportable segment for the nine months ended September 30, 2010 are
as follows:
December 31, | Foreign Currency | Business | September 30, | |||||||||||||
Segment | 2009 | Translation | Acquisition | 2010 | ||||||||||||
Protective Packaging |
$ | 94,550 | $ | 347 | $ | 17,458 | $ | 112,355 | ||||||||
Specialty Packaging |
31,700 | (1,624 | ) | | 30,076 | |||||||||||
Total |
$ | 126,250 | $ | (1,277 | ) | $ | 17,458 | $ | 142,431 | |||||||
In the first quarter of 2010, the Company acquired IntelliPack resulting in purchased
goodwill of $17.5 million. See Note 16 for acquisition related disclosures.
The Companys other intangible assets are summarized as follows:
Average | September 30, 2010 | December 31, 2009 | ||||||||||||||||||
Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Customer relationships |
12 | $ | 49,371 | $ | 18,052 | $ | 46,231 | $ | 15,739 | |||||||||||
Patents |
10 | 12,018 | 1,062 | 1,055 | 372 | |||||||||||||||
Non-compete agreements |
2 | 4,912 | 3,234 | 3,041 | 3,041 | |||||||||||||||
Software |
3 | 3,837 | 2,704 | 3,470 | 2,125 | |||||||||||||||
Land use rights and other |
32 | 1,418 | 629 | 1,486 | 582 | |||||||||||||||
Trademarks and trade names |
20 | 3,000 | 88 | | | |||||||||||||||
In-process research and development |
10 | 1,100 | 65 | | | |||||||||||||||
Intangible assets not subject to
amortization: |
||||||||||||||||||||
Trademarks and trade names |
4,491 | | 4,630 | | ||||||||||||||||
Total |
$ | 80,147 | $ | 25,834 | $ | 59,913 | $ | 21,859 | ||||||||||||
In the first quarter of 2010, Pregis acquired IntelliPack. Preliminary estimates of the
acquired intangibles are valued at approximately $21.3 million. See Note 16 for acquisition
related disclosures.
Amortization expense related to intangible assets totaled $1,597 and $1,192 for the three
months ended September 30, 2010 and 2009, respectively, and $4,550 and $3,433 for the nine months
ended September 30, 2010 and 2009, respectively.
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6. DEBT
The Companys long-term debt consists of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Revolving Credit Facility, due October 2011 |
$ | 42,500 | $ | 42,000 | ||||
Senior secured 2005 notes, due April 2013 |
136,340 | 143,160 | ||||||
Senior secured 2009 notes, due April 2013
net of discount of $7,750 at September 30, 2010
and $10,216 at December 31, 2009 |
162,675 | 168,734 | ||||||
Senior subordinated notes, due October 2013,
net of discount of $1,369 at September 30, 2010
and $1,638 at December 31, 2009 |
148,631 | 148,362 | ||||||
Foreign lines of credit |
3,798 | | ||||||
Other |
647 | 578 | ||||||
Total debt |
494,591 | 502,834 | ||||||
Less: short term debt |
(3,798 | ) | | |||||
Less: current portion |
(340 | ) | (300 | ) | ||||
Long-term debt |
$ | 490,453 | $ | 502,534 | ||||
For the nine months ended September 30, 2010 and 2009, the revaluation of the Companys
euro-denominated senior secured notes, and additionally in 2009 the Term B-2 facility, resulted in
unrealized foreign exchange gains/(losses) of $14,789 and $(10,790), respectively. These
unrealized gains/(losses) have been offset by unrealized gains/(losses) of $(14,089) and $13,738
relating to the revaluation of the Companys euro-denominated inter-company notes receivable for
the nine months ended September 30, 2010 and 2009, respectively. These amounts are included net
within foreign exchange loss, net in the Companys consolidated statements of operations.
As a component of its senior secured credit facility, the Company is party to a revolving
credit facility. The revolving credit facility matures in October 2011 and provides for borrowings
of up to $50.0 million, a portion of which may be made available to the Companys non-U.S.
subsidiary borrowers in euros and/or pounds sterling. The revolving credit facility also includes
a swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility
bears interest at a rate equal to, at the Companys option, (1) an alternate base rate or (2) LIBOR
or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00%
for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the
credit agreement.
As of September 30, 2010, the Company has drawn $42.5 million under the revolving credit
facility after reduction for amounts outstanding under letters of credit of $6.2 million.
Revolving credit facility interest expense totaled $731 for the nine months ended September 30,
2010. It is the current intent of the Company to hold the debt until its maturity, resulting in
the debts classification as long-term as of September 30, 2010.
The senior secured credit facility contains customary financial and negative covenants,
including, a first lien leverage covenant of 2.0x, and allows additional subordinate debt issuances
subject to a 2.0x interest coverage ratio. The term loan portion of the senior secured credit
facilities includes a $200 million accordion feature which allows the Company to borrow up to $200
million under the term loan
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portion of the senior secured credit facilities, subject to certain conditions including
receipt of commitments.
In 2010, the Company borrowed amounts available to its foreign subsidiaries under local lines
of credit. One of the lines provides for borrowings up to 5.0 million and allows for issuances of
letters of credit. Issued letters of credit reduce the amounts available for cash borrowings under
such lines of credit. A second foreign subsidiary line of credit allows for borrowings up to a
certain percentage of such subsidiarys specified accounts receivable. As of September 30, 2010
amounts outstanding under these foreign lines of credit totaled $8.1 million.
On October 5, 2009, Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the 2009 notes). The 2009 notes
were exchanged for registered notes issued pursuant to an exchange offer which was consummated on
March 5, 2010. The notes bear interest at a floating rate of EURIBOR plus 5.00% per year.
Interest on the notes will be reset quarterly and is payable on January 15, April 15, July 15, and
October 15 of each year. The notes mature on April 15, 2013. The notes are treated as a single
class under the indenture with the 100.0 million principal amount of the Companys existing second
priority senior secured floating rate notes due April 2013 (the 2005 notes and, together with the
notes, the senior secured floating rate notes), originally issued on October 12, 2005. However,
the notes do not have the same Common Code or ISIN number as the 2005 notes, are not fungible with
the 2005 notes and will not trade together as a single class with the 2005 notes. The notes are
treated as issued with more than de minimis original issue discount for United States federal
income tax purposes, whereas the 2005 notes were not issued with original issue discount for such
purposes.
The notes and the related guarantees are second priority secured senior obligations.
Accordingly, they are effectively junior to the Companys and the guarantors obligations under
the Companys senior secured credit facilities and any other obligations that are secured by first
priority liens on the collateral securing the notes or that are secured by a lien on assets that
are not part of the collateral securing the notes, in each case, to the extent of the value of such
collateral or assets; structurally subordinated to all existing and future indebtedness and other
liabilities (including trade payables) of the Companys subsidiaries that are not guarantors; equal
in right of payment with the 2005 notes; equal in right of payment with all of the Companys and
the guarantors existing and future unsecured and unsubordinated indebtedness, and effectively
senior to such indebtedness to the extent of the value of the collateral; and senior in right of
payment to all of the Companys and the guarantors existing and future subordinated indebtedness,
including the senior subordinated notes issued by us in 2005 (the senior subordinated notes) and
the related guarantees.
The proceeds from the October 2009 offering were used to repay the Term B-1 and Term B-2
indebtedness under the Companys senior secured credit facilities.
7. FAIR VALUE MEASUREMENTS
Under U.S. GAAP, certain assets and liabilities must be measured at fair value and ASC Topic
820, Fair Value Measurements and Disclosures (ASC Topic 820), details the disclosures that are
required for items measured at fair value.
ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value, as follows:
Level 1 Quoted prices in active markets for identical assets and liabilities.
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Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3 Unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
In order to maintain its interest rate risk and to achieve a targeted ratio of variable-rate
versus fixed-rate debt, the Company established an interest rate swap arrangement in the notional
amount of 65 million euro from EURIBOR-based floating rates to a fixed rate over the period of
October 1, 2008 to April 15, 2011. This swap arrangement was designated as a cash flow hedge and
changes in the fair value of this instrument are expected to be highly effective in offsetting the
fluctuations in the floating interest rate and are, therefore, being recorded in other
comprehensive loss until the underlying transaction is recorded.
The accounting for the cash flow impact of the swap is recorded as an adjustment to interest
expense. For the three and nine months ended September 30, 2010, the swap resulted in an increase
to interest expense of $852 and $2,664, respectively. For the three and nine months ended
September 30, 2009, the swap resulted in an increase of $756 and $1,088 to interest expense,
respectively.
At September 30, 2010, this interest rate swap contract was the Companys only derivative
instrument and only financial instrument requiring measurement at fair value on a recurring basis.
The swap is an over-the-counter contract and the inputs utilized to determine its fair value are
obtained in quoted public markets. Therefore, the Company has categorized this instrument as Level
2 within the fair value hierarchy. At September 30, 2010, the fair value of this instrument was
estimated to be a liability of $2,521, which is reported within other noncurrent liabilities in the
Companys consolidated balance sheet.
The carrying values of other financial instruments included in current assets and current
liabilities approximate fair values due to the short-term maturities of these instruments. The
carrying value of amounts outstanding under the Companys senior secured credit facilities is
considered to approximate fair value as interest rates vary, based on prevailing market rates. At
September 30, 2010, the fair values of the Companys senior secured 2005 notes, senior secured 2009
notes, and senior subordinated notes were estimated to be $111,284, $139,105, and $136,500
respectively, based on quoted market prices. Under ASC Topic 825, Financial Instruments,
entities are permitted to choose to measure many financial instruments and certain other items at
fair value. The Company did not elect the fair value measurement option under this standard for
any of its financial assets or liabilities.
8. PENSION PLANS
The Company sponsors three defined benefit pension plans covering the majority of its
employees located in the United Kingdom and the Netherlands.
The components of net periodic pension cost related to these plans for the three and nine
months ended September 30, 2010 and 2009 are as follows:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost of benefits earned |
$ | 506 | $ | 707 | $ | 1,503 | $ | 1,234 | ||||||||
Interest cost on benefit obligations |
1,160 | 1,166 | 3,524 | 3,343 | ||||||||||||
Expected return on plan assets |
(1,621 | ) | (2,132 | ) | (4,825 | ) | (5,315 | ) | ||||||||
Amortization of unrecognized net gain |
(9 | ) | (61 | ) | (29 | ) | (173 | ) | ||||||||
Net periodic pension cost (benefit) |
$ | 36 | $ | (320 | ) | $ | 173 | $ | (911 | ) | ||||||
9. OTHER OPERATING EXPENSE, NET
A summary of the items comprising other operating expense, net is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Restructuring expense |
$ | 2,064 | $ | 2,050 | $ | 3,645 | $ | 13,921 | ||||||||
Gain on disposal of property,
plant and equipment |
1,874 | 408 | 1,788 | 151 | ||||||||||||
Royalty (income) expense |
(18 | ) | 51 | 40 | 27 | |||||||||||
Rental income |
(11 | ) | (10 | ) | (36 | ) | (22 | ) | ||||||||
Other expense, net |
44 | (232 | ) | 82 | (475 | ) | ||||||||||
Other operating expense, net |
$ | 3,953 | $ | 2,267 | $ | 5,519 | $ | 13,602 | ||||||||
Restructuring activities are discussed further in Note 10 below.
10. RESTRUCTURING ACTIVITY
In 2009, as part of the Companys efforts to reduce its overall cost structure, management
implemented headcount reductions and engaged outside consultants to assist in further restructuring
of its manufacturing operations.
Following is a reconciliation of the restructuring liability for the nine months ended September 30, 2010.
December 31, | Restructuring Expenses | Cash | Foreign Currency | September 30, | |||||||||||||||||||||
Segment | 2009 | Severance | Other | Paid Out | Translation | 2010 | |||||||||||||||||||
Protective Packaging |
$ | 754 | $ | 1,018 | $ | 468 | $ | (1,663 | ) | $ | (63 | ) | $ | 514 | |||||||||||
Specialty Packaging |
649 | 314 | | (715 | ) | (65 | ) | 183 | |||||||||||||||||
Corporate |
| | 1,845 | (1,845 | ) | | | ||||||||||||||||||
Total |
$ | 1,403 | $ | 1,332 | $ | 2,313 | $ | (4,223 | ) | $ | (128 | ) | $ | 697 | |||||||||||
Amounts recorded for restructuring liabilities are included in other current liabilities
on the Companys consolidated balance sheets.
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11. INCOME TAXES
The Companys effective tax rate was (21.77)% and 10.47% for the nine months ended September
30, 2010 and 2009, respectively. Reconciliation of the Companys effective tax rate to the U.S.
federal statutory rate is shown in the following table:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
U.S. federal income tax rate |
(35.00) | % | (35.00 | )% | ||||
Changes in income tax rate resulting from: |
||||||||
Valuation allowances, net |
8.43 | 21.35 | ||||||
State and local taxes on income,
net of U.S. federal income tax benefit |
(0.81 | ) | 6.94 | |||||
Foreign rate differential |
0.15 | 7.45 | ||||||
Non-deductible interest expense |
| 2.79 | ||||||
Permanent differences |
1.87 | 5.27 | ||||||
Other |
3.59 | 1.67 | ||||||
Income tax expense (benefit) |
(21.77) | % | 10.47 | % | ||||
12. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement with its sponsors, AEA Investors LP and its
affiliates, who provide various advisory and consulting services. Fees and expenses incurred under
this agreement totaled $537 and $2,026 for the three and nine months ended September 30, 2010,
which included a $500 fee for services related to the acquisition of IntelliPack (see Note 16), and
$472 and $1,563 for the same period of 2009.
The Company had sales to affiliates of AEA Investors LP totaling $1,148 and $1,963 for the
three and nine months ended September 30, 2010 compared to $280 and $636 for the same periods of
2009, respectively. The Company made purchases from affiliates of AEA Investors LP totaling $4,136
and $11,885 for the three and nine months ended September 30, 2010 compared to $3,153 and $8,627
for the same periods of 2009, respectively.
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Companys segments are determined on the basis of its organization and internal reporting
to the chief operating decision maker. The Companys segments are as follows:
Protective Packaging This segment manufactures, markets, sells and distributes protective
packaging products in North America and Europe. Its protective mailers, air-encapsulated bubble
products, sheet foam, engineered foam, inflatable airbag systems, honeycomb products,
foam-in-place, and other protective packaging products are manufactured and sold for use in
cushioning, void-fill, surface-protection, containment and blocking & bracing applications.
Specialty Packaging This segment provides innovative packaging solutions for food, medical,
and other specialty packaging applications, primarily in Europe.
Net sales by reportable segment for the three and nine months ended September 30, 2010 and
2009 are as follows:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Protective Packaging |
$ | 141,814 | $ | 128,930 | $ | 414,925 | $ | 363,107 | ||||||||
Specialty Packaging |
81,867 | 78,117 | 236,593 | 225,487 | ||||||||||||
$ | 223,681 | $ | 207,047 | $ | 651,518 | $ | 588,594 | |||||||||
The Company evaluates performance and allocates resources to its segments based on
segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation,
amortization, restructuring expense and adjusted for other non-cash charges and benefits. Segment
EBITDA is a measure of segment profit or loss which is reported to the Companys chief operating
decision maker for purposes of making decisions about allocating resources to the Companys
segments and evaluating segment performance. In addition, segment EBITDA is included herein in
conformity with ASC Topic 280, Disclosures about Segments of an Enterprise and Related
Information. Management believes that segment EBITDA provides useful information for analyzing and
evaluating the underlying operating results of each segment. However, segment EBITDA should not be
considered in isolation or as a substitute for net income (loss) before income taxes or other
measures of financial performance prepared in accordance with generally accepted accounting
principles in the United States. Additionally, the Companys computation of segment EBITDA may not
be comparable to other similarly titled measures computed by other companies.
The following table presents EBITDA by reportable segment and reconciles the total segment
EBITDA to loss before income taxes:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Segment EBITDA |
||||||||||||||||
Protective Packaging |
$ | 13,725 | $ | 15,462 | $ | 35,164 | $ | 42,201 | ||||||||
Specialty Packaging |
7,674 | 11,363 | 27,075 | 30,792 | ||||||||||||
Total segment EBITDA |
21,399 | 26,825 | 62,239 | 72,993 | ||||||||||||
Corporate expenses |
(3,361 | ) | (4,389 | ) | (15,355 | ) | (10,209 | ) | ||||||||
Restructuring expense |
(2,064 | ) | (2,050 | ) | (3,645 | ) | (13,921 | ) | ||||||||
Depreciation and amortization |
(11,646 | ) | (12,607 | ) | (34,305 | ) | (35,383 | ) | ||||||||
Interest expense |
(11,724 | ) | (9,192 | ) | (35,320 | ) | (28,072 | ) | ||||||||
Interest income |
| 54 | | 176 | ||||||||||||
Unrealized foreign exchange loss, net |
431 | 859 | (692 | ) | 5,552 | |||||||||||
Non-cash stock compensation |
(331 | ) | (327 | ) | (1,389 | ) | (1,061 | ) | ||||||||
Non-cash loss on sales leaseback |
(1,914 | ) | | (1,914 | ) | | ||||||||||
Other |
77 | | 77 | 252 | ||||||||||||
Loss before income taxes |
$ | (9,133 | ) | $ | (827 | ) | $ | (30,304 | ) | $ | (9,673 | ) | ||||
Corporate expenses include the costs of corporate support functions, such as information
technology, finance, human resources, legal and executive management which have not been allocated
to the segments. Additionally, corporate expenses may include other non-recurring or
non-operational activity that the chief operating decision maker excludes in assessing business
unit performance. These expenses, along with depreciation and amortization, other operating
income/expense and other non-operating activity such as interest expense/income, restructuring, and
foreign exchange gains/losses, are not considered in the measure
14
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of the segments operating performance, but are shown herein as reconciling items to the
Companys consolidated loss before income taxes.
14. COMPREHENSIVE LOSS
Total comprehensive loss and its components for the three and nine months ended September 30,
2010 and 2009 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (7,917 | ) | $ | (3,341 | ) | $ | (23,707 | ) | $ | (10,686 | ) | ||||
Other comprehensive loss, net of tax: |
||||||||||||||||
Foreign currency translation adjustment |
(4,737 | ) | (971 | ) | 1,528 | (982 | ) | |||||||||
Net change in fair value of hedging instrument |
348 | (195 | ) | 1,498 | (1,564 | ) | ||||||||||
Comprehensive loss |
$ | (12,306 | ) | $ | (4,507 | ) | $ | (20,681 | ) | $ | (13,232 | ) | ||||
15. COMMITMENTS AND CONTINGENCIES
Legal matters
The Company is party to legal proceedings arising from its operations. Related reserves are
recorded when it is probable that liabilities exist and where reasonable estimates of such
liabilities can be made. While it is not possible to predict the outcome of any of these
proceedings, the Companys management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the aggregate, will have
a material adverse effect on the Companys financial position. The Company does not believe that,
with respect to any pending legal matters, it is reasonably possible that a loss exceeding amounts
already recognized may be material. However, actual outcomes may be different than expected and
could have a material effect on the companys results of operations or cash flows in a particular
period.
Environmental matters
The Company is subject to a variety of environmental and pollution-control laws and
regulations in all jurisdictions in which it operates. Where it is probable that related
liabilities exist and where reasonable estimates of such liabilities can be made, associated
reserves are established. Estimated liabilities are subject to change as additional information
becomes available regarding the magnitude of possible clean-up costs, the expense and effectiveness
of alternative clean-up methods, and other possible liabilities associated with such situations.
The Company does not believe that, with respect to any pending environmental matters, it is
reasonably possible that a loss exceeding amounts already recognized may be material. However,
actual outcomes may be different than expected and could have a material effect on the companys
results of operations or cash flows in a particular period.
16. ACQUISITION
On February 19, 2010, Pregis acquired all of the outstanding stock of IntelliPack, Inc.
through one of its wholly owned subsidiaries, Pregis Management Corporation (the IntelliPack
Acquisition). The initial purchase price of $31.5 million was funded with cash-on-hand. In
accordance with the terms of the
15
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agreement, additional consideration may be payable by Pregis if
certain future performance targets are achieved by IntelliPack. Based on preliminary estimates,
the fair value of contingent purchase consideration
was valued at approximately $10.0 million. As of September 30, 2010 the liability for
contingent consideration was $9.7 million after reductions for payments of $0.3 million. The
classification of current and long-term was based on estimated timing of future payments.
The acquisition was accounted for under the purchase method of accounting. Accordingly, the
Company has allocated the purchase price on the basis of estimated fair value of the underlying
assets acquired and liabilities assumed. The Company is in the process of finalizing its valuation
analysis, which may result in subsequent revisions to the allocation. The purchase price has been
allocated on a preliminary basis as follows:
Current assets |
$ | 3,100 | ||
Property plant & equipment |
10,200 | |||
Intangible assets |
21,300 | |||
Goodwill |
17,500 | |||
Current liabilities |
(1,500 | ) | ||
Deferred tax liabilities |
(9,100 | ) | ||
Total purchase price |
$ | 41,500 | ||
17. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION
Pregis Holdings II (presented as Parent in the following schedules), through its 100%-owned
subsidiary, Pregis Corporation (presented as Issuer in the following schedules), issued senior
secured notes and senior subordinated notes in connection with its acquisition by AEA Investors LP
and its affiliates. The senior notes are fully, unconditionally and jointly and severally
guaranteed on a senior secured basis and the senior subordinated notes are fully, unconditionally
and jointly and severally guaranteed on an unsecured senior subordinated basis, in each case, by
Pregis Holdings II and substantially all existing and future 100%-owned domestic restricted
subsidiaries of Pregis Corporation (collectively, the Guarantors). All other subsidiaries of
Pregis Corporation, whether direct or indirect, do not guarantee the senior secured notes and
senior subordinated notes (the Non-Guarantors). The Guarantors also unconditionally guarantee
the Companys borrowings under its senior secured credit facilities on a senior secured basis.
Additionally, the senior secured notes are secured on a second priority basis by liens on all
of the collateral (subject to certain exceptions) securing Pregis Corporations senior secured
credit facilities. In the event that secured creditors exercise remedies with respect to Pregis
and its guarantors pledged assets, the proceeds of the liquidation of those assets will first be
applied to repay obligations secured by the first priority liens under the senior secured credit
facilities and any other first priority obligations.
The following condensed consolidating financial statements present the results of operations,
financial position and cash flows of (1) the Parent, (2) the Issuer, (3) the Guarantors, (4) the
Non-Guarantors, and (5) eliminations to arrive at the information for Pregis Holding II on a
consolidated basis. Separate financial statements and other disclosures concerning the Guarantors
are not presented because management does not believe such information is material to investors.
Therefore, each of the Guarantors is combined in the presentation below.
16
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
September 30, 2010
(Unaudited)
Condensed Consolidating Balance Sheet
September 30, 2010
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 15,621 | $ | | $ | 28,966 | $ | | $ | 44,587 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 35,087 | 101,698 | | 136,785 | ||||||||||||||||||
Affiliates |
| 70,100 | 77,692 | (1,556 | ) | (146,236 | ) | | ||||||||||||||||
Other |
| | 112 | 16,056 | | 16,168 | ||||||||||||||||||
Inventories, net |
| | 23,033 | 68,518 | | 91,551 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,507 | 2,853 | | 5,494 | ||||||||||||||||||
Due from Pactiv |
| 52 | | 1,126 | | 1,178 | ||||||||||||||||||
Prepayments and other current assets |
| 3,962 | 779 | 3,120 | | 7,861 | ||||||||||||||||||
Total current assets |
| 89,869 | 139,210 | 220,781 | (146,236 | ) | 303,624 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
39,500 | 482,578 | | | (522,078 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,015 | 57,012 | 146,010 | | 204,037 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 102,633 | 39,798 | | 142,431 | ||||||||||||||||||
Intangible assets, net |
| | 34,887 | 19,426 | | 54,313 | ||||||||||||||||||
Restricted cash |
| 3,501 | | | | 3,501 | ||||||||||||||||||
Other |
| 5,694 | 3,525 | 19,704 | | 28,923 | ||||||||||||||||||
Total other assets |
| 9,195 | 141,045 | 78,928 | | 229,168 | ||||||||||||||||||
Total assets |
$ | 39,500 | $ | 582,657 | $ | 337,267 | $ | 445,719 | $ | (668,314 | ) | $ | 736,829 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Short-term debt |
$ | | $ | | $ | | $ | 3,798 | $ | | $ | 3,798 | ||||||||||||
Current portion of long-term debt |
| | | 340 | | 340 | ||||||||||||||||||
Accounts payable |
| 7,090 | 20,829 | 69,981 | | 97,900 | ||||||||||||||||||
Accounts payable, affiliate |
| 39,999 | 58,520 | 47,609 | (146,128 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,344 | ) | 1,607 | 6,047 | | 6,310 | |||||||||||||||||
Accrued payroll and benefits |
| 14 | 3,570 | 11,362 | | 14,946 | ||||||||||||||||||
Accrued interest |
| 12,238 | | | | 12,238 | ||||||||||||||||||
Other |
| 2,033 | 6,407 | 10,583 | | 19,023 | ||||||||||||||||||
Total current liabilities |
| 60,030 | 90,933 | 149,720 | (146,128 | ) | 154,555 | |||||||||||||||||
Long-term debt |
| 490,146 | | 307 | | 490,453 | ||||||||||||||||||
Intercompany balances |
| | 80,174 | 281,623 | (361,797 | ) | | |||||||||||||||||
Deferred income taxes |
| (18,906 | ) | 32,238 | 7,404 | | 20,736 | |||||||||||||||||
Other |
| 11,887 | 7,918 | 11,780 | | 31,585 | ||||||||||||||||||
Total Stockholders equity |
39,500 | 39,500 | 126,004 | (5,115 | ) | (160,389 | ) | 39,500 | ||||||||||||||||
Total liabilities and stockholders equity |
$ | 39,500 | $ | 582,657 | $ | 337,267 | $ | 445,719 | $ | (668,314 | ) | $ | 736,829 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2009
Condensed Consolidating Balance Sheet
December 31, 2009
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 40,883 | $ | | $ | 39,552 | $ | | $ | 80,435 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 30,394 | 90,418 | | 120,812 | ||||||||||||||||||
Affiliates |
| 64,072 | 62,382 | 3,963 | (130,417 | ) | | |||||||||||||||||
Other |
| | 10 | 12,025 | | 12,035 | ||||||||||||||||||
Inventories, net |
| | 20,051 | 60,973 | | 81,024 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,507 | 2,438 | | 5,079 | ||||||||||||||||||
Due from Pactiv |
| | | 1,169 | | 1,169 | ||||||||||||||||||
Prepayments and other current assets |
| 3,492 | 1,063 | 3,374 | | 7,929 | ||||||||||||||||||
Total current assets |
| 108,581 | 116,407 | 213,912 | (130,417 | ) | 308,483 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
58,792 | 484,778 | | | (543,570 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,239 | 66,525 | 159,118 | | 226,882 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 85,176 | 41,074 | | 126,250 | ||||||||||||||||||
Intangible assets, net |
| | 15,763 | 22,291 | | 38,054 | ||||||||||||||||||
Other |
| 8,092 | 3,381 | 19,405 | | 30,878 | ||||||||||||||||||
Total other assets |
| 8,092 | 104,320 | 82,770 | | 195,182 | ||||||||||||||||||
Total assets |
$ | 58,792 | $ | 602,690 | $ | 287,252 | $ | 455,800 | $ | (673,987 | ) | $ | 730,547 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | 300 | $ | | $ | 300 | ||||||||||||
Accounts payable |
| 4,972 | 16,820 | 56,916 | | 78,708 | ||||||||||||||||||
Accounts payable, affiliate |
| 32,152 | 46,676 | 51,595 | (130,423 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,365 | ) | 1,188 | 5,413 | | 5,236 | |||||||||||||||||
Accrued payroll and benefits |
| 16 | 4,148 | 10,078 | | 14,242 | ||||||||||||||||||
Accrued interest |
| 7,720 | | 2 | | 7,722 | ||||||||||||||||||
Other |
| 1 | 6,297 | 11,713 | | 18,011 | ||||||||||||||||||
Total current liabilities |
| 43,496 | 75,129 | 136,017 | (130,423 | ) | 124,219 | |||||||||||||||||
Long-term debt |
| 502,256 | | 278 | | 502,534 | ||||||||||||||||||
Intercompany balances |
| | 106,933 | 295,747 | (402,680 | ) | | |||||||||||||||||
Deferred income taxes |
| (8,485 | ) | 20,287 | 7,919 | | 19,721 | |||||||||||||||||
Other |
| 6,631 | 5,820 | 12,830 | | 25,281 | ||||||||||||||||||
Total Stockholders equity |
58,792 | 58,792 | 79,083 | 3,009 | (140,884 | ) | 58,792 | |||||||||||||||||
Total liabilities and stockholders equity |
$ | 58,792 | $ | 602,690 | $ | 287,252 | $ | 455,800 | $ | (673,987 | ) | $ | 730,547 | |||||||||||
18
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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2010
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2010
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 87,300 | $ | 139,234 | $ | (2,853 | ) | $ | 223,681 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 64,453 | 114,701 | (2,853 | ) | 176,301 | |||||||||||||||||
Selling, general and administrative |
| 3,837 | 10,041 | 15,838 | | 29,716 | ||||||||||||||||||
Depreciation and amortization |
| 132 | 4,336 | 7,178 | | 11,646 | ||||||||||||||||||
Other operating expense, net |
| 943 | 1,989 | 1,021 | | 3,953 | ||||||||||||||||||
Total operating costs and expenses |
| 4,912 | 80,819 | 138,738 | (2,853 | ) | 221,616 | |||||||||||||||||
Operating income (loss) |
| (4,912 | ) | 6,481 | 496 | | 2,065 | |||||||||||||||||
Interest expense |
| 4,005 | 2,715 | 5,004 | | 11,724 | ||||||||||||||||||
Interest income |
| | | | | | ||||||||||||||||||
Foreign exchange (gain) loss, net |
| (1,322 | ) | | 796 | | (526 | ) | ||||||||||||||||
Equity in loss of subsidiaries |
7,917 | 2,981 | | | (10,898 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(7,917 | ) | (10,576 | ) | 3,766 | (5,304 | ) | 10,898 | (9,133 | ) | ||||||||||||||
Income tax expense (benefit) |
| (2,659 | ) | 1,422 | 21 | | (1,216 | ) | ||||||||||||||||
Net income (loss) |
$ | (7,917 | ) | $ | (7,917 | ) | $ | 2,344 | $ | (5,325 | ) | $ | 10,898 | $ | (7,917 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 74,543 | $ | 134,480 | $ | (1,976 | ) | $ | 207,047 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 52,172 | 105,892 | (1,976 | ) | 156,088 | |||||||||||||||||
Selling, general and administrative |
| 4,262 | 8,776 | 15,622 | | 28,660 | ||||||||||||||||||
Depreciation and amortization |
| 157 | 3,540 | 8,910 | | 12,607 | ||||||||||||||||||
Other operating expense, net |
| 1,077 | 109 | 1,081 | | 2,267 | ||||||||||||||||||
Total operating costs and expenses |
| 5,496 | 64,597 | 131,505 | (1,976 | ) | 199,622 | |||||||||||||||||
Operating income (loss) |
| (5,496 | ) | 9,946 | 2,975 | | 7,425 | |||||||||||||||||
Interest expense |
| (140 | ) | 3,677 | 5,655 | | 9,192 | |||||||||||||||||
Interest income |
| (29 | ) | | (25 | ) | | (54 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| (3,964 | ) | (10 | ) | 3,088 | | (886 | ) | |||||||||||||||
Equity in loss of subsidiaries |
3,341 | 2,093 | | | (5,434 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(3,341 | ) | (3,456 | ) | 6,279 | (5,743 | ) | 5,434 | (827 | ) | ||||||||||||||
Income tax expense |
| (115 | ) | 2,487 | 142 | | 2,514 | |||||||||||||||||
Net income (loss) |
$ | (3,341 | ) | $ | (3,341 | ) | $ | 3,792 | $ | (5,885 | ) | $ | 5,434 | $ | (3,341 | ) | ||||||||
19
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(Unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 247,342 | $ | 412,718 | $ | (8,542 | ) | $ | 651,518 | |||||||||||
Operating costs and
expenses: |
||||||||||||||||||||||||
Cost of sales,
excluding
depreciation
and amortization |
| | 184,343 | 334,338 | (8,542 | ) | 510,139 | |||||||||||||||||
Selling, general
and administrative |
| 16,708 | 30,325 | 49,124 | | 96,157 | ||||||||||||||||||
Depreciation and
amortization |
| 394 | 12,718 | 21,193 | | 34,305 | ||||||||||||||||||
Other operating
expense, net |
| 1,856 | 1,938 | 1,725 | | 5,519 | ||||||||||||||||||
Total operating costs
and expenses |
| 18,958 | 229,324 | 406,380 | (8,542 | ) | 646,120 | |||||||||||||||||
Operating income (loss) |
| (18,958 | ) | 18,018 | 6,338 | | 5,398 | |||||||||||||||||
Interest expense |
| 10,936 | 9,166 | 15,218 | | 35,320 | ||||||||||||||||||
Interest income |
| | | | | | ||||||||||||||||||
Foreign exchange
(gain) loss, net |
| 678 | | (296 | ) | | 382 | |||||||||||||||||
Equity in loss of
subsidiaries |
23,707 | 4,374 | | | (28,081 | ) | | |||||||||||||||||
Income (loss) before
income taxes |
(23,707 | ) | (34,946 | ) | 8,852 | (8,584 | ) | 28,081 | (30,304 | ) | ||||||||||||||
Income tax expense
(benefit) |
| (11,239 | ) | 3,575 | 1,067 | | (6,597 | ) | ||||||||||||||||
Net income (loss) |
$ | (23,707 | ) | $ | (23,707 | ) | $ | 5,277 | $ | (9,651 | ) | $ | 28,081 | $ | (23,707 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 207,470 | $ | 386,589 | $ | (5,465 | ) | $ | 588,594 | |||||||||||
Operating costs and
expenses: |
||||||||||||||||||||||||
Cost of sales,
excluding
depreciation
and amortization |
| | 146,248 | 303,361 | (5,465 | ) | 444,144 | |||||||||||||||||
Selling, general
and administrative |
| 11,024 | 25,717 | 46,318 | | 83,059 | ||||||||||||||||||
Depreciation and
amortization |
| 468 | 11,214 | 23,701 | | 35,383 | ||||||||||||||||||
Other operating
expense, net |
| 5,002 | 2,882 | 5,718 | | 13,602 | ||||||||||||||||||
Total operating costs
and expenses |
| 16,494 | 186,061 | 379,098 | (5,465 | ) | 576,188 | |||||||||||||||||
Operating income (loss) |
| (16,494 | ) | 21,409 | 7,491 | | 12,406 | |||||||||||||||||
Interest expense |
| (3,154 | ) | 11,924 | 19,302 | | 28,072 | |||||||||||||||||
Interest income |
| (70 | ) | | (106 | ) | | (176 | ) | |||||||||||||||
Foreign exchange
(gain) loss, net |
| (4,519 | ) | 20 | (1,318 | ) | | (5,817 | ) | |||||||||||||||
Equity in loss of
subsidiaries |
10,686 | 4,894 | | | (15,580 | ) | | |||||||||||||||||
Income (loss) before
income taxes |
(10,686 | ) | (13,645 | ) | 9,465 | (10,387 | ) | 15,580 | (9,673 | ) | ||||||||||||||
Income tax expense
(benefit) |
| (2,959 | ) | 3,749 | 223 | | 1,013 | |||||||||||||||||
Net income (loss) |
$ | (10,686 | ) | $ | (10,686 | ) | $ | 5,716 | $ | (10,610 | ) | $ | 15,580 | $ | (10,686 | ) | ||||||||
20
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (23,707 | ) | $ | (23,707 | ) | $ | 5,277 | $ | (9,651 | ) | $ | 28,081 | $ | (23,707 | ) | ||||||||
Non-cash adjustments |
23,707 | 555 | 18,571 | 20,304 | (28,081 | ) | 35,056 | |||||||||||||||||
Changes in operating assets and
liabilities, net of effects
of acquisitions |
| 6,068 | (6,075 | ) | (11,075 | ) | | (11,082 | ) | |||||||||||||||
Cash provided by (used in)
operating activities |
| (17,084 | ) | 17,773 | (422 | ) | | 267 | ||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (169 | ) | (8,990 | ) | (12,624 | ) | | (21,783 | ) | ||||||||||||||
Proceeds from sale of assets |
| | (15 | ) | 514 | | 499 | |||||||||||||||||
Proceeds from sale leaseback |
| 17,875 | 17,875 | |||||||||||||||||||||
Acquisition of business, net
of cash acquired |
| (31,770 | ) | 115 | | | (31,655 | ) | ||||||||||||||||
Change in restricted cash |
| (3,501 | ) | | | | (3,501 | ) | ||||||||||||||||
Cash
provided by (used in) investing activities |
| (35,440 | ) | 8,985 | (12,110 | ) | | (38,565 | ) | |||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 26,758 | (26,758 | ) | | | | |||||||||||||||||
Proceeds from local lines of
credit |
| | | 3,670 | | 3,670 | ||||||||||||||||||
Proceeds from issuance of
long-term debt |
| 500 | | | | 500 | ||||||||||||||||||
Repayment of long-term debt |
| | | | | | ||||||||||||||||||
Other, net |
| | | 71 | | 71 | ||||||||||||||||||
Cash
provided by (used in) financing activities |
| 27,258 | (26,758 | ) | 3,741 | | 4,241 | |||||||||||||||||
Effect of exchange rate
changes on cash and cash equivalents |
| 4 | | (1,795 | ) | | (1,791 | ) | ||||||||||||||||
Increase (decrease) in cash
and cash equivalents |
| (25,262 | ) | | (10,586 | ) | | (35,848 | ) | |||||||||||||||
Cash and
cash equivalents, beginning of period |
| 40,883 | | 39,552 | | 80,435 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 15,621 | $ | | $ | 28,966 | $ | | $ | 44,587 | ||||||||||||
21
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (10,686 | ) | $ | (10,686 | ) | $ | 5,716 | $ | (10,610 | ) | $ | 15,580 | $ | (10,686 | ) | ||||||||
Non-cash adjustments |
10,686 | 3,226 | 11,814 | 20,795 | (15,580 | ) | 30,941 | |||||||||||||||||
Changes in operating assets and
liabilities, net of effects of acquisitions |
| 12,044 | (1,013 | ) | 10,171 | | 21,202 | |||||||||||||||||
Cash provided by
operating activities |
| 4,584 | 16,517 | 20,356 | | 41,457 | ||||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (159 | ) | (5,583 | ) | (11,902 | ) | | (17,644 | ) | ||||||||||||||
Proceeds from sale of assets |
| | 969 | (277 | ) | | 692 | |||||||||||||||||
Cash used in investing activities |
| (159 | ) | (4,614 | ) | (12,179 | ) | | (16,952 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 21,667 | (21,667 | ) | | | | |||||||||||||||||
Proceeds from issuance of long-term debt |
| 38,700 | | | | 38,700 | ||||||||||||||||||
Repayment of long-term debt |
| (4,312 | ) | | | | (4,312 | ) | ||||||||||||||||
Other, net |
| (1,284 | ) | | (125 | ) | | (1,409 | ) | |||||||||||||||
Cash provided by (used in)
financing activities |
| 54,771 | (21,667 | ) | (125 | ) | | 32,979 | ||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| (147 | ) | | 1,686 | | 1,539 | |||||||||||||||||
Increase
(decrease) in cash and cash equivalents |
| 59,049 | (9,764 | ) | 9,738 | | 59,023 | |||||||||||||||||
Cash and cash equivalents,
beginning of period |
| | 9,764 | 31,415 | | 41,179 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 59,049 | $ | | $ | 41,153 | $ | | $ | 100,202 | ||||||||||||
22
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes appearing elsewhere in
this report and the Companys audited financial statements and notes thereto
included in the Companys Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2009.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E in the Securities Exchange
Act of 1934, as amended (the Exchange Act). You can generally identify
forward-looking statements by our use of forward-looking terminology such as
anticipate, believe, continue, could, estimate, expect, intend,
may, might, plan, potential, predict, seek, should, or will, or
the negative thereof or other variations thereon or comparable terminology. All
forward-looking statements, including, without limitation, managements
examination of historical operating trends and data are based upon our current
expectations and various assumptions. We have based these forward-looking
statements on our current expectations, assumptions, estimates and projections.
While we believe these expectations, assumptions, estimates and projections are
reasonable, such forward-looking statements are only predictions and involve
known and unknown risks and uncertainties, many of which are beyond our
control. These and other important factors may cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements.
Some of the factors that could cause actual results to differ materially
from those expressed or implied by the forward-looking statements include,
among others:
| risks associated with our substantial indebtedness and debt service, including the requirement that we comply with various negative and financial covenants contained in our loan agreements; | ||
| risks associated with our ability to access existing liquidity under our current debt arrangements and our ability to access the debt and equity markets; | ||
| increases in prices and availability of resin and other raw materials, our ability to pass these increased costs on to our customers and our ability to raise our prices generally with respect to our products; | ||
| risks of increasing competition in our existing and future markets, including competition from new products introduced by competitors; | ||
| our ability to meet future capital requirements; | ||
| general economic or business conditions, including the recession in the U.S. and the worldwide economic slowdown, as well as recent disruptions to the credit and financial markets in the U.S. and worldwide; | ||
| risks related to our acquisition or divestiture strategy; | ||
| our ability to retain management; | ||
| our ability to protect our intellectual property rights; | ||
| changes in governmental laws and regulations, including environmental laws and regulations; | ||
| changes in foreign currency exchange rates; and | ||
| other risks and uncertainties, including those described in the Risk Factors section of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2009 filed with the SEC. |
23
Table of Contents
Given these risks and uncertainties, you are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements included in this report are made only as of the date hereof. We do
not undertake and specifically decline any obligation to update any such
statements or to publicly announce the results of any revisions to any of such
statements to reflect future events or developments.
OVERVIEW
We are an international manufacturer, marketer and supplier of protective
packaging products and specialty packaging solutions. We currently operate 47
facilities in 18 countries, with approximately 4,000 employees world-wide. We
sell our products to a wide array of customers, including retailers,
distributors, packer processors, hospitals, fabricators and directly to the
end-users. Approximately 66% of our 2009 net sales were generated outside of
the U.S. As a result, we are sensitive to fluctuations in foreign currency
exchange rates, primarily between the U.S. dollar and the euro and U.S. dollar
and the pound sterling.
Our net sales for the three months and nine months ended September 30,
2010 increased 8.0% and 10.7%, respectively, over the comparable periods of
2009. The increase was driven primarily by increased volumes, driven by the
impact of economic recovery as well as the Companys growth initiatives, and
sales associated with the recently completed IntelliPack acquisition. This was
partially offset by lower year-over-year selling prices, particularly in our
protective packaging segment, and unfavorable foreign currency translation.
Excluding the impact of unfavorable foreign currency translation and the
IntelliPack acquisition, net sales for the three months and nine months ended
September 30, 2010 increased 11.6% and 10.8%, respectively, compared to the
same periods in 2009.
Gross margin (defined as net sales less cost of sales, excluding
depreciation and amortization) as a percent of net sales decreased to 21.2%
for the three months ended September 30, 2010, compared to 24.6% for the same
period of 2009. This decline was driven primarily by higher key commodity and
other key raw material costs and higher energy costs, partially offset by
increased volumes, selling price increases, and the impact of the Companys
cost reduction programs.
Gross margin (defined as net sales less cost of sales, excluding
depreciation and amortization) as a percent of net sales decreased to 21.7%
for the nine months ended September 30, 2010, compared to 24.5% for the same
period of 2009. This decline was driven primarily by higher key commodity and
other key raw material costs, higher energy costs and unfavorable price/mix,
partially offset by increased volumes, and the impact of the Companys cost
reduction programs.
The majority of the products we sell are plastic-resin based, and
therefore our operations are highly sensitive to fluctuations in the costs of
plastic resins. For the three months ended September 30, 2010 as compared to
the same period of 2009, average resin costs increased approximately 20% in
North America and 30% in Europe, as measured by the Chemical Market
Associates, Inc. (CMAI) index and ICIS index, their respective market
indices. These increases in resin and other key raw material costs reduced the
Companys gross margin as a percent of sales by 204 basis points. In the first
nine months of 2010 as compared to the same period of 2009, average resin
costs increased approximately 28% in North America and 42% in Europe. These
increases in resin and other key raw material costs reduced the Companys
gross margin as a percent of sales by 473 basis points.
In the first quarter of 2009, we implemented restructuring initiatives to
further reduce our cost structure by optimizing our organizational structure
and our operating processes. Although our major restructuring initiatives were
completed in 2008 and 2009, we expect modest restructuring to continue in the
fourth quarter of 2010 into the first quarter of 2011. In the third quarter of
2010, we incurred additional restructuring charges focused primarily in our
European protective packaging and specialty businesses.
24
Table of Contents
During the first nine months of 2010 we realized year-over-year cost
savings of approximately $11.3 million relating to our 2009 and 2010 cost
reduction initiatives.
RESULTS OF OPERATIONS
Net Sales
Our net sales for the three and nine months ended September 30, 2010
compared to the same periods ended September 30, 2009 are summarized by
segment as follows:
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 141,814 | $ | 128,930 | $ | 12,884 | 10.0 | % | $ | 1,592 | 1.2 | % | $ | 11,401 | 8.9 | % | $ | 5,631 | 4.4 | % | $ | (5,740 | ) | (4.5 | )% | |||||||||||||||||||||||
Specialty Packaging |
81,867 | 78,117 | 3,750 | 4.8 | % | 932 | 1.2 | % | 10,189 | 13.0 | % | | | % | (7,371 | ) | (9.4 | )% | ||||||||||||||||||||||||||||||
Total |
$ | 223,681 | $ | 207,047 | $ | 16,634 | 8.0 | % | $ | 2,524 | 1.2 | % | $ | 21,590 | 10.4 | % | $ | 5,631 | 2.7 | % | $ | (13,111 | ) | (6.3 | )% | |||||||||||||||||||||||
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 414,925 | $ | 363,107 | $ | 51,818 | 14.3 | % | $ | (3,111 | ) | (0.9 | )% | $ | 47,773 | 13.2 | % | $ | 12,569 | 3.5 | % | $ | (5,413 | ) | (1.5 | )% | ||||||||||||||||||||||
Specialty Packaging |
236,593 | 225,487 | 11,106 | 4.9 | % | 1,236 | 0.5 | % | 17,630 | 7.8 | % | | | % | (7,760 | ) | (3.4 | )% | ||||||||||||||||||||||||||||||
Total |
$ | 651,518 | $ | 588,594 | $ | 62,924 | 10.7 | % | $ | (1,875 | ) | (0.3 | )% | $ | 65,403 | 11.1 | % | $ | 12,569 | 2.1 | % | $ | (13,173 | ) | (2.2 | )% | ||||||||||||||||||||||
Segment Net Sales
Volume in the Companys protective packaging segment increased by 8.9%
and 13.2% for the three and nine month periods ended September 30, 2010,
respectively, compared to the same periods in 2009. The volume increase for
these periods was driven primarily by improved economic conditions as well as
the impact from growth initiatives in areas such as inflatable systems and
sustainable products.
Price/mix for the Companys protective packaging segment increased net
sales by 1.2% for the three month period ended September 30, 2010,
respectively, but reduced net sales by 0.9% for the nine month period ended
September 30, 2010 compared to the same period in 2009. The increase in
price/mix for the three months ended September 30, 2010 was primarily due to
selling price increases implemented the second quarter 2010.
Volume in the Companys specialty packaging segment increased by 13.0%
and 7.8% for the three and nine month periods ended September 30, 2010,
respectively, compared to the same periods of 2009, primarily due to the
impact of growth initiatives in our fresh food packaging markets and
thermoforming business.
25
Table of Contents
Gross Margin
Gross margin, as a percentage of net sales, was 21.2% for the three
months ended September 30, 2010 compared to 24.6% for the same period of 2009.
This decrease of 340 basis points was driven by increased key raw material
costs partially offset by the impact of selling price increases implemented in
the second quarter of 2010. The increase in key raw material costs, higher
energy costs, and other key raw material costs resulted in a negative 204
basis point impact and 206 basis point impact, respectively, on gross margin
as a percentage of net sales. Savings from the Companys cost reduction
program resulted in a 188 basis point improvement for the three months ended
September 30, 2010 as compared to the equivalent period in 2009.
Gross margin (defined as net sales less cost of sales, excluding
depreciation and amortization), as a percentage of net sales, was 21.7% for
the nine months ended September 30, 2010 compared to 24.5% for the same period
of 2009. This decrease of 280 basis points was driven by increased key raw
material costs and negative price/mix, partially offset by the impact of
selling price increases implemented in the second quarter of 2010. The
increase in key raw material costs resulted in a negative 473 basis point
impact on gross margin as percent of net sales. Savings from the Companys
cost reduction program resulted in a 192 basis point improvement for the nine
months ended September 30, 2010 as compared to the equivalent period in 2009.
Average resin costs in North America for the three and nine month periods
ended September 30, 2010 were 20% and 28% higher than average resin costs for
the same period in 2009 while average resin costs in Europe were 30% and 42%
higher than average resin prices for the same periods of 2009, based on their
respective market indices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.1 million
for the three months ended September 30, 2010 compared to the same period of
2009. This increase was primarily driven by SG&A costs associated with the
IntelliPack acquisition of $0.9 million, legal expenses of $0.3 million, and
other volume related selling expenses partially offset by favorable foreign
currency translation.
Selling, general and administrative expenses increased by $13.1 million
for the nine months ended September 30, 2010 compared to the same period of
2009. This increase was primarily driven by legal expenses of $5.3 million,
acquisition related costs of $1.0 million, and SG&A costs associated with the
IntelliPack acquisition of $2.2 million. The increased legal expenses were
the result of a patent dispute related to the Companys protective packaging
segment, which was resolved successfully by the Company in March 2010.
Excluding the impact of the legal expenses, acquisition related costs, and
IntelliPacks SG&A expenses, selling, general and administrative expenses for
the nine months ended September 30, 2010 increased by approximately $4.6
million due primarily to increased pension, stock compensation, volume
related selling expenses, and additional sales and marketing expenses
incurred to help drive the Companys growth initiatives.
Other Operating Expense, net
For the three and nine months ended September 30, 2010, other operating
expense, net totaled $3.9 million and $5.5 million, respectively, compared to
$2.3 million and $13.6 million in the same periods of 2009. In 2009 other
expense, net was driven by significant restructuring activity. Restructuring
charges for the three and nine month periods ended September 30, 2009 were
$2.0 million and $13.9 million, respectively (see Note 10).
26
Table of Contents
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by $1.0 million
for the three months ended September 30, 2010 and decreased by $1.1
million for the nine months ended September 30, 2010, compared to the
respective periods of 2009.
Segment Income
We measure our segments operating performance on the basis of segment
EBITDA, defined as net income (loss) before interest, taxes, depreciation,
amortization, and restructuring expense and adjusted for other non-cash items.
See Note 13 to the unaudited consolidated financial statements for a
reconciliation of total segment EBITDA to consolidated net loss before income
taxes. Segment EBITDA for the relevant periods is as follows:
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 13,725 | $ | 15,462 | $ | (1,737 | ) | (11.2 | )% | |||||||
Specialty Packaging |
7,674 | 11,363 | (3,689 | ) | (32.5 | )% | ||||||||||
Total segment EBITDA |
$ | 21,399 | $ | 26,825 | $ | (5,426 | ) | (20.2 | )% | |||||||
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 35,164 | $ | 42,201 | $ | (7,037 | ) | (16.7 | )% | |||||||
Specialty Packaging |
27,075 | 30,792 | (3,717 | ) | (12.1 | )% | ||||||||||
Total segment EBITDA |
$ | 62,239 | $ | 72,993 | $ | (10,754 | ) | (14.7 | )% | |||||||
Segment EBITDA for the protective packaging segment declined $1.7
million and $7.0 million for the three and nine months ended September 30,
2010, respectively, compared to the same periods of 2009. These decreases were
due primarily to the impact of increased key raw material costs which were
partially offset by increased volumes, the IntelliPack acquisition, and the
results of our cost reduction programs. Savings from our cost reduction
programs totaled approximately $3.1 million and $8.6 million year-over-year
for the three and nine month periods ended September 30, 2010, respectively.
Segment EBITDA for specialty packaging declined $3.7 million for the
three and nine months ended September 30, 2010 compared to the same periods of
2009. These decreases were due primarily to higher key raw material costs,
higher energy costs, and unfavorable foreign currency translation, partially
offset by increased volumes.
Interest Expense
Interest expense for the three and nine months ended September 30,
2010 increased $2.5 million and $7.2 million, respectively, compared to the
same periods of 2009. The increases were driven by higher debt balances and
higher average interest rates, both resulting from the retirement of the
Companys term debt in
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the third quarter of 2009 and its replacement with new floating rate
notes at a higher average interest rates. These increases are also reflective
of higher amortization of discount and deferred financing fees, again
resulting from the Companys 2009 debt refinancing.
Foreign Exchange Loss (Gain), net
A portion of our third-party debt is denominated in euro and revalued to
U.S. dollars at month-end. We also maintain an intercompany debt structure,
whereby Pregis Corporation has provided euro-denominated loans to certain of
its foreign subsidiaries and these and other foreign subsidiaries have provided
euro-denominated loans to certain U.K. based subsidiaries. At each month-end we
recognize unrealized gains and losses on the revaluation of these instruments,
resulting from the fluctuations between the U.S. dollar and euro exchange rate,
as well as the pound sterling and euro exchange rate.
Income Tax Expense
Our effective income tax rate was approximately (21.77)% for the nine
months ended September 30, 2010, which compares to approximately 10.47% for
the nine months ended September 30, 2009. For the nine months ended September
30, 2010 and 2009, the Companys effective rate was increased from a benefit
at the U.S. federal statutory rate of 35% primarily due to establishment of
additional valuation allowances against losses in certain jurisdictions that
are not expected to result in future tax benefits.
Net Loss
For the three and nine months ended September 30, 2010, we had a net
loss of $7.9 million and $23.7 million, respectively, compared to net loss of
$3.3 million and net loss of $10.7 million in the comparable periods of 2009.
As discussed herein, the 2010 net loss is primarily the result of increased
raw material costs, higher interest expense, and lower unrealized foreign
currency gains, which more than offset lower restructuring charges.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our sources and uses of funds for the nine
months ended September 30, 2010 compared to the nine months ended September
30, 2009:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(dollars in thousands) | ||||||||
Cash provided by operating activities |
$ | 267 | $ | 41,457 | ||||
Cash used in investing activities |
(38,565 | ) | (16,952 | ) | ||||
Cash provided by financing activities |
4,241 | 32,979 | ||||||
Effect of foreign exchange rate changes |
(1,791 | ) | 1,539 | |||||
Increase (decrease) in cash and cash equivalents |
$ | (35,848 | ) | $ | 59,023 | |||
Operating Activities. Cash provided by operating
activities decreased by $41.2 million during the nine months ended September
30, 2010 compared to the same period of 2009. This decrease was
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primarily driven by increased working capital investments resulting
from higher overall sales volumes as well as higher average raw material costs
and decreased earnings.
Cash from operating activities is sensitive to raw material costs and
the Companys ability to recover increases in these costs from its customers.
Although price increases have typically trailed changes in raw material
costs, the Company has historically been able to recover significant
increases in underlying raw material costs from its customers over a 12 to 24
month period. Future cash from operations are dependent upon the Companys
continued ability to recover increases in underlying raw material increases
from its customers.
The Company has not experienced any significant changes in year-
over-year days sales outstanding, days inventory on-hand or days payable
outstanding. The Company has not identified any trends in key working capital
investments that would have a material impact on its liquidity or ability to
satisfy its debt obligations or fund capital expenditures. The Company does
not currently expect that raw material price increases will have a material
effect on liquidity in future periods, but significant shifts in key raw
material costs could affect our cash generated from operating activities in
future periods.
Investing Activities. Cash used in investing activities totaled $38.6
million for the nine months ended September 30, 2010, $21.6 million higher
than the same period of 2009. This increase was primarily the result of the
IntelliPack acquisition and, to a lesser extent, capital expenditures
partially offset by proceeds from a sales leaseback transaction. On February
19, 2010, Pregis acquired all of the stock of IntelliPack for an initial
purchase price of $31.5 million and including certain escrowed amounts
totaling $3.5 million, which was funded with cash-on-hand. Capital
expenditures totaled $21.8 million in the 2010 period compared to $17.6
million in the same period in 2009. On July 19, 2010 Pregis completed a sales
leaseback transaction involving land, building and related improvements at two
of its U.S. manufacturing facilities. Sales proceeds, net of direct costs of
the transaction, totaled approximately $17.9 million.
Financing Activities. Cash provided in financing activities for the nine
months ended September 30, 2010 included proceeds from local lines of credit
totaling $3.7 million and the revolving credit facility draw of $0.5 million.
Our liquidity requirements are significant, primarily due to debt service
requirements and capital investment in our businesses. We expect our 2010
capital expenditures to total approximately $25 to $30 million and our 2010
debt service costs to total approximately $42 million. At September 30, 2010,
we had cash and cash equivalents of $44.6 million. Our available cash and cash
equivalents are held in bank deposits and money market funds. We actively
monitor the third-party depository institutions that hold our cash and cash
equivalents to ensure safety of principal while achieving a satisfactory yield
on those funds. To date, we have not experienced material loss or lack of
access to our invested cash or cash equivalents; however, we can provide no
assurances that access to our invested cash and cash equivalents will not be
impacted by adverse conditions in the financial markets.
Our primary source of liquidity will continue to be cash flows from
operations, existing cash balances, and amounts available to the Company
under its credit agreement.
Senior Secured Credit Facilities. In October 2005, Pregis
entered into senior secured credit facilities which provided for a revolving
credit facility and two term loans: an $88.0 million term B-1 facility and a
68.0 million term loan B -2 facility. The term loans were repaid in full in
October 2009. The revolving credit facility matures in October 2011 and
provides for borrowings of up to $50.0 million, a portion of which may be made
available to the Companys non-U.S. subsidiary borrowers in euros and/or
pounds sterling. The revolving credit facility also includes a swing-line loan
sub-facility and a letter of credit sub-facility. The revolving credit
facility bears interest at a rate equal to, at the Companys option, (1) an
alternate base rate or (2) LIBOR or EURIBOR, plus an applicable margin of
0.375% to
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1.00% for base rate advances and 1.375% to 2.00% for LIBOR or EURIBOR
advances, depending on the leverage ratio of the Company, as defined in the
credit agreement. In addition, the Company is required to pay an annual
commitment fee of 0.375% to 0.50% on the revolving credit facility depending
on the leverage ratio of the Company, as well as customary letter of credit
fees. As of September 30, 2010, the Company had $42.5 million drawn under the
revolving credit facility and $6.2 million of outstanding letters of credit.
Our senior secured credit facilities also permit us, subject to certain
conditions, including the receipt of commitments from lenders, to incur up to
$200.0 million (or euro equivalent thereof) of additional term loans
(originally $100.0 million prior to the October 5, 2009 senior secured credit
facility amendment).
Subject to exceptions and, in the case of asset sale proceeds,
reinvestment options, Pregiss senior secured credit facilities require
mandatory prepayments of the loans from excess cash flows, asset sales and
dispositions (including insurance and condemnation proceeds), issuances of debt
and issuances of equity. On October 5, 2009, the Company prepaid the term loans
in full with proceeds of a 125.0 million note offering and cash on hand.
Mandatory prepayments under our senior secured credit facilities do not result
in the permanent reduction of the revolving credit commitments under such
facilities, i.e., the prepaid revolving borrowings may be reborrowed
immediately thereafter, so long as the conditions to the revolving borrowings
have been met.
Pregiss senior secured credit facilities and related hedging
arrangements are guaranteed by Pregis Holding II, the direct holding parent
company of Pregis, all of Pregiss current and future domestic subsidiaries
and, if no material tax consequences would result, Pregiss future foreign
subsidiaries and, subject to certain exceptions, are secured by a first
priority security interest in substantially all of Pregiss and its current
and future domestic subsidiaries existing and future assets (subject to
certain exceptions), and a first priority pledge of the capital stock of
Pregis and the guarantor subsidiaries and an aggregate of 66% of the capital
stock of Pregiss first-tier foreign subsidiary.
Pregiss senior secured credit facilities require that it comply on a
quarterly basis with a First Lien Leverage Ratio test. The First Lien
Leverage Ratio cannot exceed 2.0x and is calculated as the ratio of (1) net debt that is secured by a first priority lien to (2) Consolidated EBITDA.
The following table sets forth the First Lien Leverage Ratio as of September 30, 2010
and 2009:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at September 30, | ||||||||||
(dollars in thousands) | Measure | 2010 | 2009 | |||||||||
First Lien Leverage Ratio |
Maximum of 2.0x | 0.11 | 1.40 | |||||||||
Consolidated EBITDA |
| $ | 68,458 | $ | 86,443 | |||||||
Net Debt Secured by First Priority Lien |
| $ | 7,358 | $ | 120,971 |
As used in the calculation of First Lien Leverage Ratio,
Consolidated EBITDA is calculated by adding Consolidated Net Income (as
defined by the facility), income taxes, interest expense, depreciation and
amortization, other non-cash items reducing Consolidated Net Income that do
not represent a reserve against a future cash charge, costs and expenses
incurred with business acquisitions, issuance of equity interests permitted by
the terms of the loan documents, the amount of management, consulting,
monitoring, transaction, and advisory fees and related expenses paid to AEA,
and unusual and non-
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recurring charges (including, without limitation, expenses in connection
with actual and proposed acquisitions, equity offerings, issuances and
retirements of debt and divestitures of assets, whether or not any such
acquisition, equity offering, issuance or retirement or divestiture is actually
consummated during such period that do not exceed, in the aggregate, 5% of
EBITDA for such period).
Consolidated EBITDA is calculated under the senior secured credit
facility for the twelve months ended September 30, 2010 and 2009 as follows:
(unaudited) | Twelve Months Ended September 30, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net Loss |
$ | (31,031 | ) | $ | (37,613 | ) | ||
Senior Secured Credit Facility Consolidated Net Income definition add backs: |
||||||||
Non-cash compensation charges |
1,681 | 1,344 | ||||||
Net after
tax extraordinary gains or losses (incl. severance and restructuring charges) |
5,751 | 13,251 | ||||||
Non-cash unrealized currency gains or losses |
118 | 2,370 | ||||||
Any FAS 142, 144, 141 impairment charge or asset write off |
194 | 20,101 | ||||||
Consolidated Net (Loss) Income |
$ | (23,287 | ) | $ | (547 | ) | ||
Senior Secured Credit Facility Consolidated EBITDA definition add backs: |
||||||||
Interest expense |
49,634 | 39,315 | ||||||
Income tax benefit |
(10,609 | ) | (3,881 | ) | ||||
Depreciation expense and amortization |
43,705 | 46,992 | ||||||
Other non-cash charges (including loss on sales leaseback) |
1,837 | | ||||||
Fees payable to AEA Investors LP |
2,508 | 2,040 | ||||||
Unusual and non-recurring charges |
11,418 | 2,524 | ||||||
Pro forma EBITDA of acquisitions |
1,410 | | ||||||
Adjustment for 5% EBITDA cap limitation of unusual and non-recurring items |
(8,158 | ) | | |||||
Consolidated EBITDA |
$ | 68,458 | $ | 86,443 | ||||
As of September 30, 2010, Pregis was in compliance with all
covenants contained in its senior secured credit facilities.
In October 2009 we used the proceeds of an offering of senior secured
floating rate notes, together with cash on hand, to repay in full amounts
outstanding under the term loans under our senior secured credit facilities.
However, following the issuance of the senior secured floating rate notes and
the use of proceeds thereof and subject to compliance with our senior secured
credit facilities, the indenture governing the senior secured floating rate
notes will continue to allow us to incur at least $220 million (less amounts
then outstanding under the senior secured credit facilities) of debt,
including new debt which replaces the term loans repaid with the proceeds of
the offering of senior secured floating rate notes. If such debt is incurred
under the $220 million credit facility basket or in compliance with a 3:1
senior secured leverage ratio, plus an additional $50 million, such debt would
constitute first priority lien obligations and could be secured on a first
priority basis.
Senior Secured Floating Rate Notes and Senior Subordinated Notes. On
October 13, 2005, Pregis issued 100.0 million aggregate principal amount of
second priority senior secured floating rate notes due 2013 (the 2005 senior
secured notes) and $150 million aggregate principal amount of 12% senior
subordinated notes due 2013 (the senior subordinated notes).
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The 2005 senior secured notes mature on April 15, 2013. Interest accrues at a floating
rate equal to EURIBOR plus 5.00% per year and is payable quarterly on January 15, April 15, July 15
and October 15 of each year. The 2005 senior secured notes are guaranteed on a senior secured
basis by Pregis Holding II, Pregiss immediate parent, and each of Pregiss current and future
domestic subsidiaries. At its option, Pregis may redeem some or all of the 2005 senior secured
notes at 100% of their principal amount. Upon the occurrence of a change of control, Pregis will
be required to make an offer to repurchase each holders notes at a repurchase price equal to 101%
of their principal amount, plus accrued and unpaid interest to the date of repurchase.
The senior subordinated notes mature on October 15, 2013. Interest accrues at a rate of
12.375% and is payable semi-annually on April 15 and October 15 of each year. The notes are senior
subordinated obligations and rank junior in right of payment to all of Pregiss senior
indebtedness. The senior subordinated notes are guaranteed on a senior subordinated basis by Pregis
Holding II and each of Pregiss current and future domestic subsidiaries. Pregis may redeem some or
all of the notes at redemption prices equal to 103.094% of their principal amount (in the 12 months
beginning October 15, 2010) and 100% of their principal amount (beginning October 15, 2011).
On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the unregistered 2009 senior secured
notes). On March 5, 2010, Pregis exchanged all of the outstanding unregistered 2009 senior
secured notes for registered senior secured notes (the 2009 senior secured notes) pursuant to an
exchange offer. The 2009 senior secured notes bear interest at a floating rate of EURIBOR plus
5.00% per year. Interest on the 2009 senior secured notes is reset quarterly and payable on
January 15, April 15, July 15, and October 15 of each year. The 2009 senior secured notes mature
on April 15, 2013.
The 2009 senior secured notes are treated as a single class under the indenture with the
100.0 million principal amount of 2005 second priority senior secured floating rate notes for
purpose of voting and redemption. However, the 2009 senior secured notes do not have the same
Common Code or ISIN numbers as the 2005 senior secured notes, are not fungible with the 2005 senior
secured notes and will not trade together as a single class with the 2005 senior secured notes.
The 2009 senior secured notes are treated as issued with more than de minimis original issue
discount for United States federal income tax purposes, whereas the 2005 senior secured notes were
not issued with original issue discount for such purposes. Together the 2005 senior secured notes
and the 2009 senior secured notes are referred to herein as the senior secured notes.
The indentures governing the senior secured notes and the senior subordinated notes contain
covenants that limit or prohibit Pregiss ability and the ability of its restricted subsidiaries,
subject to certain exceptions, to incur additional indebtedness, pay dividends or make other equity
distributions, make investments, create liens, incur obligations that restrict the ability of
Pregiss restricted subsidiaries to make dividends or other payments to Pregis, sell assets, engage
in transactions with affiliates, create unrestricted subsidiaries, and merge or consolidate with
other companies or sell substantially all of Pregiss assets. The indentures also contain reporting
covenants regarding delivery of annual and quarterly financial information. The indenture governing
the senior secured notes limits Pregiss ability to incur first priority secured debt to an amount
which results in its secured debt leverage ratio being equal to 3:1, plus $50 million, and
prohibits it from incurring additional second priority secured debt other than by issuing
additional senior secured notes. The indenture governing the senior secured notes also limits
Pregiss ability to enter into sale and leaseback transactions. The indenture governing the senior
subordinated notes prohibits Pregis from incurring debt that is senior to such notes and
subordinate to any other debt.
The senior secured notes and senior subordinated notes are not listed on any national
securities exchange in the United States. The senior secured notes are listed on the Irish Stock
Exchange. However, there can be no assurance that the senior secured notes will remain listed.
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The proceeds from the sale of the notes in October 2009 were used to repay the Term B-1 and
Term B-2 indebtedness under our senior secured credit facilities.
Collateral for the Senior Secured Floating Rate Notes. The senior secured floating rate notes
are secured by a second priority lien, subject to permitted liens, on all of the following assets
owned by Pregis or the guarantors, to the extent such assets secure Pregiss senior secured credit
facilities on a first priority basis (subject to exceptions):
(1) | substantially all of Pregiss and each guarantors existing and future property and assets, including, without limitation, real estate, receivables, contracts, inventory, cash and cash accounts, equipment, documents, instruments, intellectual property, chattel paper, investment property, supporting obligations and general intangibles, with minor exceptions; and | ||
(2) | all of the capital stock or other securities of Pregiss and each guarantors existing or future direct or indirect domestic subsidiaries and 66% of the capital stock or other securities of Pregiss and each guarantors existing or future direct foreign subsidiaries, but only to the extent that the inclusion of such capital stock or other securities will mean that the par value, book value as carried by us, or market value (whichever is greatest) of such capital stock or other securities of any subsidiary is not equal to or greater than 20% of the aggregate principal amount of the senior secured floating rate notes outstanding. |
As of December 31, 2009, the capital stock of the following subsidiaries of Pregis constituted
collateral for the senior secured floating rate notes:
As of December 31, 2009 | ||||||||||||
Amount of Collateral | ||||||||||||
(Maximum of Book Value | ||||||||||||
and Market Value, Subject | Book Value of | Market Value of | ||||||||||
Name of Subsidiary | to 20% Cap) | Capital Stock | Capital Stock | |||||||||
Pregis Innovative Packaging Inc. |
$ | 64,422,000 | $ | 38,900,000 | $ | 138,100,000 | ||||||
Hexacomb Corporation |
$ | 36,400,000 | $ | 36,400,000 | $ | 21,900,000 | ||||||
Pregis (Luxembourg) Holding S.àr.l. (66%) |
$ | 16,600,000 | $ | 16,600,000 | $ | | ||||||
Pregis Management Corporation* |
$ | 100 | $ | 100 | $ | 100 |
* | Effective March 17, 2010 Pregis Management Corporation changed its name to Pregis IntelliPack Corporation. |
As described above, under the collateral agreement, the capital stock pledged to the
senior secured floating rate noteholders constitutes collateral only to the extent that the par
value or market value or book value (whichever is greatest) of the capital stock does not exceed
20% of the aggregate principal amount of the senior secured floating rate notes. This threshold is
45,000,000, or, at the December 31, 2009 exchange rate of U.S. dollars to euro of 1.4316:1.00,
approximately $64.4 million. As of December 31, 2009, the book value and the market value of the
shares of capital stock of Pregis Innovative Packaging Inc. were approximately $38.9 million and
$138.1 million, respectively; the book value and the market value of the shares of capital stock of
Hexacomb Corporation were approximately $36.4 million and $21.9 million respectively; and the book
value and the market value of 66% of the shares of capital stock of Pregis (Luxembourg) Holding S.à
r.l. were approximately $16.6 million and $ million, respectively. Therefore, in accordance
with the collateral agreement, the collateral pool for the senior secured floating rate notes
includes only approximately $64.4 million with respect to the shares of capital stock of Pregis
Innovative Packaging Inc. Since the book value and market value of the shares of capital stock of
our
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other domestic subsidiaries and Pregis (Luxemburg) Holdings S.a r.l are each less than the
$64.4 million threshold, they are not affected by the 20% clause of the collateral agreement.
For the year ended December 31, 2009, certain historical equity relating to corporate expenses
incurred by Pregis Management Corporation were allocated to each of the three entities, Pregis
Innovative Packaging Inc., Hexacomb Corporation, and Pregis (Luxembourg) Holding S.à r.l, in order
to better reflect their current book values for presentation herein on a fully-allocated basis.
The market value of the capital stock of the guarantors and subsidiaries constituting
collateral for the senior secured floating rate notes has been estimated by us on an annual basis,
using a market approach. At the time of the acquisition, the purchase price paid for these
entities was determined based on a multiple of EBITDA, as was contractually agreed in the stock
purchase agreement. Since that time, we have followed a similar methodology, using a multiple of
EBITDA, based on that of recent transactions of comparable companies, to determine the enterprise
value of these entities. To arrive at an estimate of the market value of the entities capital
stock, we have subtracted from the enterprise value the existing debt, net of cash on hand, and
have also made adjustments for the businesses relative portion of corporate expenses. We have
determined that this methodology is a reasonable and appropriate means for determining the market
value of the capital stock pledged as collateral. We intend to complete these estimates of value
of the capital stock of these subsidiaries for so long as is necessary to determine our compliance
with the collateral arrangement governing the notes.
The value of the collateral for the senior secured floating rate notes at any time will depend
on market and other economic conditions, including the availability of suitable buyers for the
collateral. As of December 31, 2009, the value of the collateral for the senior secured floating
rate notes totaled approximately $541.3 million, estimated as the sum of (1) the book value of the
total assets of Pregis and each guarantor, excluding intercompany activity (which amount totaled
$423.9 million), and (2) the collateral value of the capital stock, as outlined above (which amount
totaled $117.4 million). As a result of the IntelliPack acquisition (see Note 16), the estimated
value of the collateral for the senior secured floating rate notes has increased. Except for the
increase in collateral value associated with the IntelliPack acquisition (see Note 16), the
collateral value has not changed materially as of September 30, 2010. Any proceeds received upon
the sale of collateral would be paid first to the lenders under our senior secured credit
facilities, who have a first lien security interest in the collateral, before any payment could be
made to holders of the senior secured floating rate notes. There is no assurance that any
collateral value would remain for the holders of the senior secured floating rate notes after
payment in full to the lenders under our senior secured credit facilities.
Covenant Ratios Contained in the Senior Secured Floating Rate Notes and Senior Subordinated
Notes. The indentures governing the senior secured floating rate notes and senior subordinated
notes contain two material covenants which utilize financial ratios. Non-compliance with these
covenants could result in an event of default under the indentures and, under certain
circumstances, a requirement to immediately repay all amounts outstanding under the notes and could
trigger a cross-default under Pregiss senior secured credit facilities or other indebtedness we
may incur in the future. First, Pregis is permitted to incur indebtedness under the indentures if
the ratio of Consolidated Cash Flow to Fixed Charges on a pro forma basis (referred to in the
indentures as the Fixed Charge Coverage Ratio) is greater than 2:1 or, if the ratio is less, only
if the indebtedness falls into specified debt baskets, including, for example, a credit agreement
debt basket, an existing debt basket, a capital lease and purchase money debt basket, an
intercompany debt basket, a permitted guarantee debt basket, a hedging debt basket, a receivables
transaction debt basket and a general debt basket. In addition, under the senior secured floating
rate notes indenture, Pregis is permitted to incur first priority secured debt only if the ratio of
Secured Indebtedness to Consolidated Cash Flow on a pro forma basis (referred to in the senior
secured floating rate notes indenture as the Secured Indebtedness Leverage Ratio) is equal to or
less than 3:1, plus $50 million. Second, the restricted payment covenant provides that Pregis may
declare certain
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dividends, or repurchase equity securities, in certain circumstances only if
Pregiss Fixed Charge Coverage Ratio is greater than 2:1.
As used in the calculation of the Fixed Charge Coverage Ratio and the Secured Indebtedness
Leverage Ratio, Consolidated Cash Flow, commonly referred to as Adjusted EBITDA, is calculated by
adding Consolidated Net Income, income taxes, interest expense, depreciation and amortization and
other non-cash expenses, amounts paid pursuant to the management agreement with AEA Investors LP,
and the amount of any restructuring charge or reserve (including, without limitation, retention,
severance, excess pension costs, contract termination costs and cost to consolidate facilities and
relocate employees). In calculating the ratios, Consolidated Cash Flow is further adjusted by
giving pro forma effect to acquisitions and dispositions that occurred in the prior four quarters,
including certain cost savings and synergies expected to be obtained in the succeeding twelve
months. In addition, the term Net Income is adjusted to exclude any gain or loss from the
disposition of securities, and the term Consolidated Net Income is adjusted to exclude, among other
things, the non-cash impact attributable to the application of the purchase method of accounting in
accordance with GAAP, the cumulative effect of a change in accounting principles, and other
extraordinary, unusual or nonrecurring gains or losses. While the determination of appropriate
adjustments is subject to interpretation and requires judgment, we believe the adjustments listed
below are in accordance with the covenants discussed above.
The following table sets forth the Fixed Charge Coverage Ratio, Consolidated Cash Flow
(Adjusted EBITDA), Secured Indebtedness Leverage Ratio, Fixed Charges and Secured Indebtedness as
of and for the twelve months ended September 30, 2010 and 2009:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at September 30, | ||||||||||
(dollars in thousands) | Measure | 2010 | 2009 | |||||||||
Fixed Charge Coverage Ratio (after giving pro forma effect
to acquisitions and/or dispositions occurring in the
reporting period) |
Minimum of 2.0x | 1.88x | 2.4x | |||||||||
Secured Indebtedness Leverage Ratio |
Maximum of 3.0x | 0.61x | 2.0x | |||||||||
Consolidated Cash Flow (Adjusted EBITDA) |
| $ | 76,616 | $ | 86,443 | |||||||
Fixed Charges (after giving pro forma effect to acquisitions
and/or dispositions occurring in the reporting period) |
| $ | 40,758 | $ | 36,624 | |||||||
Secured Indebtedness |
| $ | 46,945 | $ | 177,473 |
The Fixed Charge Coverage Ratio is primarily affected by increases or decreases in the
Companys trailing twelve month Consolidated Cash Flow (Adjusted EBITDA) and increases or decreases
in the Companys interest expense (interest expense net of interest income, excluding amortization
of deferred financing fees and discount). Interest expense as used in this ratio is primarily
affected by changes in interest rates (LIBOR and EURIBOR) and currency translation related to
converting euro based interest expense into US dollars. The favorable impact resulting from lower
interest rates, for the comparable twelve month periods ending September 30, 2010 and 2009, has
been more than offset by the decrease in the Companys trailing twelve month Consolidated Cash Flow
over the same period, resulting in narrowing of the cushion between the minimum covenant measure
and the actual ratio. As of September 30, 2010, the Companys Fixed Charge Coverage Ratio was less
than 2:1. As a result the Companys ability to borrow money was limited to its available debt
baskets, including among others a $220 million credit facility basket, a $25 million general
basket, and a $15 million capital lease basket.
The Secured Indebtedness Leverage Ratio is primarily affected by increases or decreases in the
Companys trailing twelve month Consolidated Cash Flow and increases or decreases in the Companys
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secured indebtedness. In 2009 the secured indebtedness was comprised of the Companys term B-1
notes, term B-2 notes, and amounts outstanding under the Companys revolving credit facility. The
term B-1 and term B-2 notes were retired in October 2009 as part of the Companys refinancing.
This decrease
in secured indebtedness is the primary driver in the year-over-year change of the Secured
Indebtedness Leverage Ratio.
Adjusted EBITDA is calculated under the indentures governing our senior secured floating rate
notes and senior subordinated notes for the twelve months ended September 30, 2010 and 2009 as
follows:
(unaudited) | Twelve Months Ended September 30, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net loss of Pregis Holding II Corporation |
$ | (31,031 | ) | $ | (37,613 | ) | ||
Interest expense, net of interest income |
49,634 | 39,315 | ||||||
Income tax (benefit) expense |
(10,609 | ) | (3,881 | ) | ||||
Depreciation and amortization |
43,705 | 46,992 | ||||||
EBITDA |
51,699 | 44,813 | ||||||
Other non-cash charges (income): (1) |
||||||||
Unrealized foreign currency transaction losses (gains), net |
118 | 2,370 | ||||||
Non-cash stock based compensation expense |
1,681 | 1,344 | ||||||
Non-cash asset impairment charge |
194 | 20,101 | ||||||
Non-cash loss on sales leaseback and other |
1,837 | | ||||||
Net unusual or nonrecurring gains or losses: (2) |
||||||||
Restructuring, severance and related expenses |
5,751 | 13,251 | ||||||
Other unusual or nonrecurring gains or losses |
11,418 | 2,524 | ||||||
Other adjustments: (3) |
||||||||
Amounts paid pursuant to management agreement with Sponsor |
2,508 | 2,040 | ||||||
Pro forma adjusted EBITDA of acquired business (4) |
1,410 | | ||||||
Adjusted EBITDA (Consolidated Cash Flow) |
$ | 76,616 | $ | 86,443 | ||||
(1) | Other non-cash charges (income) include (a) net unrealized foreign currency transaction losses and gains, arising principally from the revaluation of our euro-denominated third-party debt and intercompany notes receivable, (b) non-cash compensation expense arising from the grant of Pregis Holding I options, (c) a non-cash goodwill impairment charge of $19.1 million recognized in 2008 and a trademark impairment charge of $1.0 million pursuant to the Companys 2008 annual impairment tests, respectively and (d) other non-cash charges that will not result in future cash settlement, such as losses on fixed asset disposals. | |
(2) | As provided by our indentures, we adjusted for gains or losses deemed to be unusual or nonrecurring, including (a) restructuring, severance and related expenses due to our various cost reduction restructuring initiatives, (b) adjustments for costs and expenses related to acquisition, disposition or equity offering activities and (c) other unusual and nonrecurring charges. | |
(3) | Our indentures also require us to make adjustments for fees, and reasonable out-of-pocket expenses, paid under the management agreement with AEA Investors LP. | |
(4) | Our indentures also permit adjustments to net income on a pro forma basis which allow for the inclusion of earnings for acquired businesses as if the acquisition had occurred on the first day of the four-quarter measurement period. In the nine months ended September 30, 2010, we have adjusted for approximately $1.4 million relating to pre-acquisition earnings relating to the acquisition of |
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IntelliPack. There can be no assurance that we will be able to achieve comparable earnings in the future. |
Foreign Lines of Credit. From time to time, certain of our foreign businesses utilize various
lines of credit in their operations. These lines of credit are generally used as overdraft
facilities or for the issuance
of trade letters of credit and are in effect until cancelled by one or both parties. As of
September 30, 2010, outstanding trade letters of credit and guarantees totaled $8.1 million.
Availability under these lines of credit totaled $7.5 million of which $4.5 million amounts were
available to be drawn in cash.
Long-term Liquidity. We believe that cash flow generated from operations, existing cash
balances, our borrowing capacity and other sources of liquidity such as sales and leaseback
transactions will be adequate to meet our obligations and business requirements for the next twelve
months. There can be no assurance, however, that our business will generate sufficient cash flow
from operations, that anticipated net sales growth and operating improvements will be realized or
that future borrowings will be available under Pregiss senior secured credit facilities in an
amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.
Our ability to meet our debt service obligations and other capital requirements, including capital
expenditures, and to continue to comply with the covenants contained in our debt instruments, will
depend upon our future performance which, in turn, will be subject to general economic, financial,
business, competitive, legislative, regulatory and other conditions, many of which are beyond our
control. Some other risks that could materially adversely affect our ability to meet our debt
service obligations and comply with our debt covenants include, but are not limited to, risks
related to increases in the cost of resin, our ability to protect our intellectual property, rising
interest rates, a decline in the overall U.S. and European economies, weakening in our end markets,
the loss of key personnel, our ability to continue to invest in equipment, and a decline in
relations with our key distributors and dealers. In addition, any of the other items discussed in
the Risk Factors, included in our Annual Report on Form 10-K/A for the year ended December 31,
2009 may also significantly impact our liquidity and covenant compliance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In accordance with ASC 350, the Company assesses the recoverability of goodwill and other
indefinite lived intangibles assets annually as of October 1, or whenever events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable.
The goodwill impairment test is performed at the reporting unit level. A reporting unit is an
operating segment or one level below an operating segment (referred to as a component). A
component is considered a reporting unit for purposes of goodwill testing if the component
constitutes a business for which discrete financial information is available and segment management
regularly reviews the operating results of that component. As such, we have tested for goodwill
impairment at the component level within our Specialty Packaging reporting segment, represented by
each of the businesses included within this segment. We also tested goodwill for impairment at
each of the operating segments which have been aggregated to comprise our Protective Packaging
reporting segment.
We use a two-step process to test goodwill for impairment. First, the reporting units fair
value is compared to its carrying value. Fair value is estimated using primarily a combination of
the income approach, based on the present value of expected future cash flows and the market
approach. If a reporting units carrying amount exceeds its fair value, an indication exists that
the reporting units goodwill may be impaired, and the second step of the impairment test would be
performed. The second step of the goodwill impairment test is used to measure the amount of the
impairment loss, if any. In the second step, the implied fair value of the reporting units
goodwill is determined by allocating the reporting units fair value to all of its assets and
liabilities other than goodwill in a manner similar to a purchase price allocation. The
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implied
fair value of the goodwill that results from the application of this second step is then compared
to the carrying amount of the goodwill and an impairment charge would be recorded for the
difference if the carrying value exceeds the implied fair value of the goodwill.
At interim periods, the Company assesses if potential indicators of impairment exists. Among
the factors the Company considers as potential indicators of interim impairment are significant
adverse changes in legal factors or business climate, an adverse action or assessment by a
regulator, unanticipated competition, loss of key personnel, or a more-likely-than-not expectation
that a reporting unit or a significant portion of a reporting unit will be sold or otherwise
disposed of, recent operating losses at the reporting unit level, downward revisions to forecasts,
restructuring actions or plans, and industry trends. The Company did not identify any interim
indicators of impairment as of September 30, 2010.
Our financial statements are prepared in accordance with generally accepted accounting
principles in the United States, which require management to make estimates, judgments and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
While our estimates and assumptions are based on our knowledge of current events and actions we may
undertake in the future, actual results may ultimately differ from these estimates and assumptions.
We have discussed those estimates that we believe are critical and require the use of complex
judgment in their application in our 2009 Annual Report on Form 10-K/A. Since the date of our 2009
Form 10-K/A, there have been no material changes to our critical accounting policies or the
methodologies or assumptions we apply under them.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not materially changed since December 31, 2009. For a
discussion of our exposure to market risk, see our 2009 Annual Report on Form 10-K/A.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Chief Executive Officer (its principal executive officer) and
the Chief Financial Officer (its principal financial officer), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures as of September 30, 2010. Based
upon that evaluation, our management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that, as of September 30, 2010, the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
were effective. In addition, there has been no change in the Companys internal control over
financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various lawsuits, legal proceedings and administrative actions arising out of
the normal course of our business. While it is not possible to predict the outcome of any of these
lawsuits, proceedings and actions, management, based on its assessment of the facts and
circumstances now known, does not believe that any of these lawsuits, proceedings and actions,
individually or in the aggregate, will have a material adverse effect on our financial position or
that it is reasonably possible that a loss exceeding amount already recognized may be material.
However, actual outcomes may be different than expected and could have a material effect on our
results of operations or cash flows in a particular period.
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Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our
Annual Report on Form 10-K/A for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Reserved
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Description | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II Corporations Chief Executive Officer. | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II Corporations Chief Financial Officer. | |
32.1
|
Certification of Pregis Holding II Corporations Chief Executive Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. | |
32.2
|
Certification of Pregis Holding II Corporations Chief Financial Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PREGIS HOLDING II CORPORATION |
||||
Date: November 15, 2010 | By: | /s/ D. Keith LaVanway | ||
D. Keith LaVanway | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) | ||||
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