Attached files
file | filename |
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EX-32.1 - EX-32.1 - Pregis Holding II CORP | c63660exv32w1.htm |
EX-31.2 - EX-31.2 - Pregis Holding II CORP | c63660exv31w2.htm |
EX-32.2 - EX-32.2 - Pregis Holding II CORP | c63660exv32w2.htm |
EX-12.1 - EX-12.1 - Pregis Holding II CORP | c63660exv12w1.htm |
EX-31.1 - EX-31.1 - Pregis Holding II CORP | c63660exv31w1.htm |
EX-21.1 - EX-21.1 - Pregis Holding II CORP | c63660exv21w1.htm |
EX-10.23 - EX-10.23 - Pregis Holding II CORP | c63660exv10w23.htm |
EX-10.22 - EX-10.22 - Pregis Holding II CORP | c63660exv10w22.htm |
EX-10.24 - EX-10.24 - Pregis Holding II CORP | c63660exv10w24.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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20-3321581 | |
(State or Other Jurisdiction of
|
(I.R.S. Employer Identification No.) | |
Incorporation or Organization) |
||
1650 Lake Cook Road |
||
Deerfield, Illinois
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60015 | |
(Address of Principal Executive Offices)
|
(Zip Code) |
(847) 597-2200
(Registrants Telephone Number, including Area Code)
(Registrants Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange | ||
Title of each class | on which registered | |
Securities
registered pursuant to Section 12(g) of the Act: None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o
No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes þ
No
o
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
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 checkmark whether the registrant has submitted electronically and posted on its
corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a small reporting company. See the definitions of accelerated
filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.
Large accelerated filer o
|
Accelerated filer o | Non-accelerated filer þ | Small reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o No
þ
The registrant has no common stock, voting or non-voting, held by non-affiliates.
There is no public market for the Companys common stock. There were 149.0035 shares of the
registrants common stock, par value $0.01 per share, issued and outstanding as of December 31,
2010 and as of March 24, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits to the registrants registration statement on Form S-4, as amended, filed in
2006 and 2007, and other reports filed by the registrant with the SEC, are incorporated by
reference into Item 15 of this report.
TABLE OF CONTENTS
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PART I
Except as otherwise required by the context, (1) references in this report to our company,
we, our or us (or similar terms) refer to Pregis Holding II Corporation, together with its
consolidated subsidiaries,
(2) references to Pregis Holding II or the registrant refer to Pregis Holding II Corporation
only, (3) references to Pregis refer only to Pregis Corporation, a wholly-owned subsidiary of
Pregis Holding II Corporation, and (4) references to Pregis Holding I refers to Pregis Holding I
Corporation, which owns all of the capital stock of Pregis Holding II Corporation.
ITEM 1. | BUSINESS |
The Company
We are an international manufacturer, marketer and supplier of protective packaging products
and specialty packaging solutions. We have two reportable segments:
| Protective Packaging, which manufactures, markets, sells and distributes protective packaging products in North America and Europe; and | ||
| Specialty Packaging, which focuses on the development, production and marketing of innovative packaging solutions for food, medical, and other specialty packaging applications, primarily in Europe. |
Additional quantitative disclosures with respect to our reportable segments is presented in
Note 18 to the audited financial statements included within this report, and in Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 of
this Report and incorporated herein by reference.
Competitive Strengths
We believe we are distinguished by the following competitive strengths:
| Leading Positions in Fragmented Markets. As one of the leading providers of protective packaging products as well as a leading competitor in our target markets in European specialty packaging solutions, we benefit from our broad product offering, scale, expertise in innovation, long standing customer relationships and diverse end-markets. Our specialty packaging businesses focus on non-commodity, specialized niche market segments with deep, collaborative customer relationships, high service expectations and exacting product requirements. | ||
| Broad Product Offering Combined with Customer-Focused Service. We believe we offer one of the broadest product lines in the packaging industry. Many of our customers tend to purchase multiple packaging products from manufacturers and our ability to bundle products reduces customer cost and simplifies procurement requirements. We also offer highly customized, value-added packaging solutions to attractive markets. Examples of these tailored solutions include customized shapes, customized laminates and other design services. In addition to our broad product line and customized solutions, we provide our customers with levels of quality, lead times, logistics and design services that we believe are among the most competitive in the packaging industry. | ||
| Advanced, Low-Cost Manufacturing. We benefit from a number of competitive advantages that help us compete effectively in our markets. For example: |
○ | Manufacturing technologies and capabilities for our products depend on advanced technological know-how. Our advanced manufacturing capabilities allow us to produce unique and compelling products to meet our customers needs. For example, our ability to manufacture co-extruded cushioning packaging, polypropylene and polyethylene sheet foam, extruded plank and paper-based products is a significant advantage relative to our competitors, who generally have more limited product offerings. We also |
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believe we are the sole producer of low density polypropylene sheet foam products and one of only two producers of co-extruded bubble cushioning products. |
○ | We continue to make significant investments in our manufacturing facilities, enabling us to produce higher-value added products, further broaden our product offering and improve profitability. Since the beginning of 2006, Pregis has invested over $150 million in capital expenditures in order to launch new products, restructure our operations, implement advanced manufacturing techniques and make other process improvements. We believe that our facilities are well-capitalized in comparison to many of our competitors. | ||
○ | Many of the products in our industry are lightweight with an estimated cost-effective shipping radius in the industry of approximately 200 to 400 miles. In addition, many of our customers seek broad geographic coverage and timely, often overnight, deliveries. Our expansive manufacturing and distribution network, which included a network of 46 facilities in 18 countries as of December 31, 2010, allows us to provide our customers with the geographic scale and service levels required to meet their needs. For example, we are the only manufacturer of kraft honeycomb products that can offer a national presence throughout the United States and much of Western Europe. | ||
○ | Our ability to procure lower cost raw materials due to our scale, coupled with our efficient manufacturing assets, enables us to maintain a cost structure which we believe to be lower than that of many of our competitors, which helps drive revenue growth and improve profitability. |
| Significant Diversification. Our business is well balanced with a diversified range of product offerings, geographical markets, end-markets and customers. We believe we offer one of the broadest product lines in the packaging industry. Geographically, we primarily serve markets in North America, Europe and, to a lesser extent, other regions of the world. We also benefit from serving a diverse set of end-markets and a diverse customer base, with our largest customer representing approximately 2% of sales in 2010. We believe this diversity helps reduce overall business risk, enhances our revenue stability and provides us with opportunities for growth resulting from changing customer needs and market trends. | ||
| Track Record of Customization and Innovation. Our focus on customized solutions is a key factor in our ability to grow by satisfying our customers changing needs. Examples of customization include surgical and procedure kits tailored to the needs of a hospital or an individual physician; custom print, decoration and barrier properties in flexible films; custom thermoformed container shapes and closure designs for the foodservice market; and die-cut and application-specific customized products for Protective Packagings Hexacomb® product line. The ability to innovate is a key factor in our ability to expand our product lines and meet shifts in market demand. For example, the Protective Packaging segment recently introduced a new family of green products to address the growing need for sustainable packaging alternatives. These products include Astro-Bubble® Green, the first air cushioning bubble product made with recycled content. Also included in our sustainable product portfolio are Astro-Bubble® Renew, Absolute EZ-Seam Renew (recycled content floor underlayment), Hefty Express® mailers and Jiffy Green bubble rolls and mailer products. In addition, we believe our Protective Packaging business is one of only two manufacturers of extruded engineered foam in both North America and Europe and the only producer of polypropylene sheet foam in North America. We believe that our customized and innovative products provide additional value to our customers. | ||
| Experienced Management Team and Strong Equity Sponsorship. Our senior managers have extensive commercial, manufacturing and finance backgrounds. Our management team has demonstrated its ability to improve our competitive position by successfully developing and executing our global business strategy. Our management team has led the implementation of lean and other productivity programs and significant cost savings initiatives, as well as internal and acquisitive expansion efforts, which position us for future growth and margin expansion. We also benefit from our equity sponsors relationships, |
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knowledge of the packaging, specialty chemicals and consumer products industries, and significant investment experience. |
Business Strategy
We are pursuing a business strategy developed to increase revenue and cash flow. The key
components of this strategy are:
| Capitalize on Our Market Position to Grow Sales. We are continuing to use our broad product offering, expansive geographic coverage, advanced manufacturing technologies and leading service levels to drive our growth. We also plan to continue to pursue initiatives that further broaden our product lines in the packaging industry. Our diversity of end-markets and customers, as well as our knowledge of trends and customer preferences, help us identify new business and product opportunities. Our product development teams continue to seek to enhance and expand the use of existing products as well as work collaboratively with our customers to design new products. We are also continuing to focus our efforts on the development of products that can provide immediate value to our customers and meet their performance requirements and quality expectations. | ||
| Continue Customer-Focused Service. We have successfully differentiated ourselves through a reputation for customer-focused, high quality service. We intend to further enhance our service levels by using our strong relationships with customers and end-users to gain industry and consumer insight into emerging trends and customer preferences. We implement our customer-focused strategy through a regional sales and distribution infrastructure, tailored to fit the needs of our customers and end-markets. The key elements of this strategy require us to develop and maintain long-standing relationships and partnerships with our customers. We have an average relationship of 20 years with our top 10 customers. We intend to continue to use this strategy to capture increased value for our products and services. | ||
| Maintain Technological Know-How and Low-Cost Manufacturing Position. We have made substantial investments to develop advanced packaging manufacturing technologies, and as a result we have a significant portfolio of industry-leading products and technologies. We continue to invest in advanced manufacturing capabilities and low-cost facilities in order to enable us to produce higher value-added products, further broaden our product offering and improve profitability. | ||
| Continue to Use Our International Platform. We intend to continue to share products, technologies, manufacturing processes and best practices, and research and development resources across our protective packaging operations in North America and Europe. In addition, we are using this international platform to introduce new products and technologies more efficiently, obtain information on distribution channels and end-markets, and re-deploy manufacturing assets and sales personnel as needed to capitalize on emerging trends in the markets we serve. |
History
Pregis Holding II is a Delaware corporation formed in 2005. AEA Investors LP and certain of
its affiliates (the Sponsors or AEA Investors), formed Pregis, Pregis Holding I, and Pregis
Holding II for the purpose of acquiring all of the outstanding shares of capital stock of the
global protective packaging and European specialty packaging businesses of Pactiv Corporation (the
Acquisition). AEA Investors entered into a stock purchase agreement on June 23, 2005 with
respect to the Acquisition, and the Acquisition was consummated on October 13, 2005. The adjusted
purchase price for the Acquisition was $559.7 million, after giving effect to direct costs of the
Acquisition, pension plan funding of $20.1 million, and post-closing working capital and
indebtedness adjustments. The Stock Purchase Agreement also indemnifies the Company for payment of
certain liabilities relating to the pre-Acquisition period.
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The Acquisition was financed with the proceeds from the offering of Pregiss Second Priority
Senior Secured Floating Rate Notes due 2013 and
123/8% Senior Subordinated Notes due 2013, borrowings
under Pregiss senior secured credit facilities and an equity contribution to Pregis Holding I by
AEA Investors.
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Products and Services
Our broad, industry-leading product offerings include protective packaging, flexible
packaging, rigid packaging, and medical supplies and packaging and serve a diversified range of
end-markets. Our products are primarily plastic resin- and plastic film-based but also include
products derived from kraft paper and other raw materials. Our protective packaging products are
used for cushioning, void-fill, surface protection, containment and blocking and bracing. Our
Protective Packaging business also acts as a distributor of protective packaging products in
certain European markets, including the United Kingdom and Central Europe. Our specialty packaging
products serve niche market segments with customized, value-added packaging solutions. The table
below provides an overview of products and end-markets served within our segments.
Protective Packaging | Specialty Packaging | |||
Products | Protective mailers | Flexible packaging: |
||
Air-encapsulated cushion products | Bags |
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Inflatable airbag systems | Pouches |
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Sheet foam | Labels |
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Engineered foam | ||||
Honeycomb | Rigid packaging: |
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Paper packaging systems | Thermoformed foodservice containers |
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Foam-in-place | Custom packaging |
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Medical supplies and packaging: |
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Operating drapes and gowns |
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Surgical procedure packs |
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Medical packaging |
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End-Markets Served | General industrial | Fresh food |
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High tech electronics | Dry food |
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Furniture manufacturing | Consumer products |
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Building products | Foodservice |
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Retail | Hospitals |
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Agriculture | Healthcare |
We manufacture protective packaging products in North America and Europe. We currently
manufacture our specialty packaging products in Germany, the United Kingdom, Egypt, and Bulgaria.
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Protective Packaging Products
Protective Mailers. Protective mailers are a lightweight, economical, pre-constructed means of
protecting a wide variety of small items from damage during shipping. Types of protective mailers
include cushion-lined, padded, foam-lined, rigid board and all-plastic mailers. Protective
Packaging markets its line of protective mailers under the Hefty Express®
brand name in North America and Jiffy brand name in Europe.
Air-Encapsulated Cushion Products. Introduced in the 1960s, cushion products are made from
extruded polyethylene or co-extruded polyethylene and nylon film with pockets of air encapsulated
between the top and bottom layers of the film. Each cell acts as a mini-shock absorber to protect
products during shipping. The primary functions of cushion products are cushion and void fill.
Protective Packagings range of cushion products is sold primarily under the
Astro-Cell® and Astro-SupraBubble® brand names. Based
on customer preferences, Protective Packaging can customize its cushion products by laminating them
with kraft paper, aluminum foil or other film. Co-extruded multi-layer cushion products retain air
over extended periods of time and are generally viewed by customers as higher value-added
alternatives to monolayer products. We believe that Protective Packaging is one of only two
manufacturers of co-extruded bubble cushioning products.
Inflatable Airbag Systems. Inflatable airbag systems consist of a dispenser which produces
inflatable airbags on-demand at the end-user location. This inflated airbag is designed for
void-fill and blocking and bracing applications. The competitive advantages of inflatable airbags
compared to loose-fill, wadded paper and other substitute packaging materials are price, reduced
freight costs, lower weight, lower inventory space and improved protection. Since inflatable
airbags are produced on-demand, often at the customers on-site location, inventory, freight and
warehousing requirements are significantly reduced for the customer.
Sheet Foam. Sheet foams are extruded foamed plastics with thicknesses not exceeding 5
millimeters (approximately 3/16-inches). This product is primarily used as surface and
light-cushioning protection in packaging applications, and as thermal and sound insulation in
non-packaging applications, such as flooring underlayment and concrete curing blankets. Protective
Packagings sheet foam is sold primarily under the Astro-Foam,
Prop-X and Microfoam® brand names, while its laminated
or custom sheet foams are sold under the Micro-Tuff and
Rhino brand names. Protective Packaging differentiates and custom tailors
sheet foam by laminating it with aluminum foil, high density polyethylene resin, kraft paper,
non-woven materials and other substrates.
Engineered Foam. Engineered foams are extruded foamed plastics with thicknesses greater than 5
millimeters (approximately 3/16-inches). This product provides a variety of functions, including
cushioning and blocking and bracing. In packaging applications, engineered foam is fabricated into
a wide range of protective packaging shapes, forms and die cuts for designed packages in which a
clean, attractive appearance is required. Unlike other protective packaging products, engineered
foam is typically sold to fabricators, who convert the material based on precise specifications
required by end-users. Engineered foams characteristics include high impact strength, elasticity
and chemical resistance. These characteristics make the product a preferred substrate in protective
packaging applications for electronic and medical equipment, automotive parts and machine tools, as
well as in certain non-packaging applications, particularly recreational uses.
Honeycomb. Honeycomb is a protective packaging material made from kraft paper that is sliced
into strips and glued together to form a pattern of nested hexagonal cells. Formed honeycomb is
similar in appearance to a beehive honeycomb and is custom-designed to meet the needs of each
end-user. Specific functional applications of honeycomb include spacing, cushioning and blocking
and bracing, as well as structural support for doors and tabletops. Honeycomb demonstrates
excellent protective qualities by minimizing the transfer of road-shock to products during shipping
and by providing a combination of cushioning, and blocking and bracing functions. Honeycomb offers
excellent performance due to its strength-to-weight ratio. As a result, honeycomb tends to be
preferred to corrugated packaging given its lower cost and better performance in its targeted
application. Select end-users value the products environmentally friendly characteristics compared
to molded resin-based alternatives. Protective Packaging manufactures honeycomb under the
Hexacomb® brand name in both North America and Europe.
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Paper Packaging Systems. Our paper systems offer an additional solution to the void-fill
portfolio of protective packaging products, using a flexible and eco-friendly packaging material.
The systems deliver crumpled, recyclable, renewable and biodegradable kraft paper used for
void-fill, cushioning, wrapping and blocking, and bracing applications. This packaging solution
broadens and compliments the existing void-fill inflatable solutions portfolio, offering a wider
selection of void-fill options to be placed at end-user sites, saving customers inventory, freight
and packaging costs.
Foam-in-place. Foam-in-place polyurethane is molded real-time by mixing two liquid chemicals
contained in a thin, low density polyethylene bag. The mixture expends rapidly around the product
being protected, creating a custom protective shell. This form of packaging is ideal for larger,
heavier and irregularly shaped objects that are lower volume and require a high degree of packaging
protection.
Specialty Packaging Products
Flexible Packaging Products
Films. Films include film-on-the-reel consisting of high quality mono and co-extruded
laminated polyethylene films for the fresh, dry and frozen foods, confectionery, hygiene, medical
and consumer goods markets, as well as mono, modified atmospheric packaging base and top web clear
and colored films with easy peel or fusion seal.
Bags. Bag products include printed polyethylene bags for the household, personal care,
horticultural and medical markets and reclosable bags.
Pouches. Pouch products include laminated stand-up pouches, printed in up to ten colors, for
food, hygienic and medical markets.
Labels. Labels include shrink, stretch and wrap-around labels for glass and plastic bottles,
printed in up to ten colors.
Rigid Packaging Products
Custom packaging. Custom packaging consists of individually customized packaging for food and
foodservice products, including snacks, salads, confectionery, biscuits and prepared meals. A
dedicated design and technology facility in Stanley, United Kingdom offers a full range of services
covering the product development process from drafting of initial concepts in three dimensions
through to the creation of prototype samples and final tool production. Custom solutions include
trays for chocolates and biscuit inserts for biscuits and confectionery products.
Foodservice. Foodservice products include standard thermoformed packaging produced internally,
which are sold alongside third-party foodservice products purchased for resale. Products offered
include containers and bowls, trays, tableware cups and cup carriers.
Medical Supplies and Packaging
Operating drapes. Operating drapes include a complete range of disposable operating drapes
such as back table covers, small drapes, universal patient drapes, customized drape systems and
drapes that are specific to particular operations. Products are sold under the
Secu-Drape brand as well as under private label brands.
Procedure packs. Procedure packs consist of standard and highly customized drapes and other
products (such as tubes, compresses, and scalpels) purchased from third-party suppliers that are
used for numerous surgical disciplines.
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Medical packaging. Medical packaging includes transparent pouches and tubes and reels with or
without indicators suitable for different sterilization processes and sold under the
Medipeel and Flexopeel brands; transparent or colored
pouches suitable for vacuum packaging and irradiation and sold under the
Cleerpeel brand; and wrapping materials and other accessories sold under the
Steriflex brand.
Customers
For the year ended December 31, 2010, on a corporate-wide basis, our top ten customers
accounted for approximately 12% of our net sales, with no single customer accounting for more than
2%.
Protective Packaging
We sell our protective packaging products to over 10,000 customers across North America and
Europe, consisting primarily of distributors, fabricators and direct end-users. The majority of our
protective packaging sales are to national and regional distributors who sell a variety of
packaging and other industrial products to end-user customers. Our sales to fabricators are driven
by engineered foam products, which are converted by fabricators into a wide range of protective
packaging shapes, forms and die cuts for designed packages with the precise specifications required
by end-users. We believe that packaging is critical to our customers packaged goods but accounts
for only approximately 3% of our customers total product costs.
Specialty Packaging
Our specialty packaging products are sold to a wide range of end-user customers, both directly
and through distributors, in the various markets the businesses serve, including major
international food, consumer products and healthcare companies, regional producers and distributors
and retailers, many with whom we have long-standing relationships.
Sales, Marketing and Distribution
Because of our broad range of products and customers, our sales and marketing efforts are
generally specific to a particular product, customer or geographic region. We market in various
ways, depending on both the customer and the product. We have differentiated ourselves from our
competitors by building a reputation for a customer-focused sales approach, quality service,
product and service innovation and product quality. The key elements of this strategy require us to
develop and maintain strong relationships with our customers, including direct end-users as well as
distributors and fabricators.
Our Protective Packaging sales and marketing is organized primarily on a regional basis in
North America and a country basis in Europe. In North America, several specialty end-markets, such
as agriculture, building products, furniture manufacturing and retail, as well as a small number of
key accounts, are covered on a national basis. Our honeycomb products are sold by a dedicated
sales force due to the specialized nature of the product offering. In Europe, specialists cover
several key accounts in the protective mailer, engineered foam, and inflatable airbag systems
product segments. Our Specialty Packaging businesses address the specialized market segments they
serve with both a direct sales force and distributors, utilizing the most effective channels to
address their customers needs. These businesses marketing efforts are led by their sales force
and customer service staff and also include an international sales network through dedicated agents
in various countries, including the United Kingdom, The Netherlands, Poland and Spain.
Research and Development
Our product development efforts are an important part of our commitment to customer-focused
service and innovative products and technology. Our research and development personnel work
closely with customers to enhance existing products and develop new products, as well as to gain
insights into emerging trends and customer preferences. We aim to launch a number of new products
and applications each year. Our development efforts are
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focused on new and existing product development, design and enhancement, manufacturing process
optimization and material development, all of which reinforce our strong customer relationships and
provide support to our sales and marketing teams. For the years ended December 31, 2010, 2009, and
2008, we spent $6.9 million, $5.4 million, and $5.8 million, respectively, on our research and
development efforts.
Suppliers and Raw Materials
Polyethylene, polypropylene, and other plastic resins constitute the primary raw materials
used to make our products. We also purchase various other materials, including plastic film,
nylon, kraft paper, corrugated products and inks. These materials are generally available from a
number of suppliers. Our businesses purchase raw materials in coordination with one another, and
we sometimes buy and sell additional quantities of resin, in order to take advantage of volume
discounts. In line with industry practice, we have historically attempted to mitigate a portion of
the impact of plastic resin price fluctuations by passing through changes in resin prices to
customers through a combination of product selling price adjustments, contractual cost pass through
mechanisms and/or commercial discussion and negotiation with customers. We cannot give any
assurance as to whether we will be able to recover from customers all or any portion of these
changes in resin prices. See Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 1A, Risk FactorsRisks Related to Our BusinessOur financial
performance is dependent on the cost of plastic resin, the continued availability of resin, and
energy costs.
Backlog
We did not have a significant manufacturing backlog at December 31, 2010 or 2009. We do not
have material long-term contracts with our customers, and the significant majority of our sales
orders are filled within a month of receipt. While our backlog is not significantly impacted by
any seasonal factors, it is subject to fluctuation given the size and timing of outstanding orders
at any point in time. Therefore, our backlog level is not necessarily indicative of the level of
future sales.
Competition
The markets in which we operate are highly competitive on the basis of service, product
quality and performance, product innovation and price. There are other companies producing
competing products that are substantially larger, are well established and have greater financial
resources than we have.
Our protective packaging products compete with similar products made by other manufacturers
and with a number of other packaging products that provide protection against damage to customers
products during shipment and storage. Through our Protective Packaging segment, we are one of the
few suppliers with a broad offering of protective packaging products and a presence in both North
America and Europe. The majority of competing producers focus on a specific geography or a narrow
product range. For example, our ability to manufacture co-extruded cushioning packaging,
polypropylene and polyethylene sheet foam, extruded plank and paper-based products is a significant
competitive advantage. Additionally, we are the sole producer of low density polypropylene sheet
foam products and the only manufacturer of kraft honeycomb products with a national presence in
North America. With a strategic footprint of 23 manufacturing facilities in North America and 14
in Europe as of December 31, 2010, the Protective Packaging segment benefits significantly from an
estimated cost-effective shipping radius in the industry of approximately 200 to 400 miles. Our
primary competitor in protective packaging is Sealed Air, while we also selectively compete with
companies such as Poly Air, FP International and Storopack in North America and Fagerdala, Sansetsu
and BFI in Europe.
Our Specialty Packaging segment has strong positions in its particular areas of focus. For
example, our flexible barrier packaging products have strong positions in detergent packaging,
fresh food laminates and secondary medical packaging films in Germany. Additionally, we believe we
are the second largest producer of disposable operating drapes in Germany and the third largest in
Europe (by volume), while we are also a leading supplier of rigid packaging products to the
foodservice market in the United Kingdom. The businesses comprising the
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Specialty Packaging segment compete with a number of national and regional suppliers in each
of their key products and end-markets, and there are additional competitive pressures in some
markets due to increasing consolidation among our customers.
Employees
As of December 31, 2010, we had approximately 4,000 total employees worldwide. Our Protective
Packaging segment employed approximately 2,390 employees, the majority of which are non-union.
There are six collective bargaining agreements in the United States, covering less than 200
employees. Our Specialty Packaging segment employed approximately 1,610 people, substantially all
of whom are unionized or otherwise covered by company works councils. In the last three years, we
have had no material work stoppages or strikes. We believe our employee relations are good.
Intellectual Property
We have selectively pursued protection afforded by patents and trademarks whenever deemed
critical. Our businesses also rely upon unregistered trademarks and copyrights, proprietary
know-how and trade secrets. We do not believe, however, that any individual item of our
intellectual property portfolio is material to our current business.
The major trademarks of the protective packaging businesses are registered in the geographies
where they operate. Selected trademarks include Astro-Foam,
Astro-Cell®, Astro-Bubble®, Air
Kraft®, Furniture GUARD®,
IntelliPack® Hexacomb®, Jiffy,
Microfoam®, Nopaplank, Polylam
and Polyplank®.
The major trademarks of the specialty packaging businesses are registered in the markets where
they operate. Major trademarks include Propyflex,
Secu-Drape, Cleerpeel,
Steriflex, Mediwell Super, Mediwell Super
Plus, Medipeel, Flexopeel, and
Secu-Tray.
We also manufacture, distribute and sell shipping mailers, including protective bags comprised
of paper or plastic and air cellular cushion material, under the Hefty
Express® brand name, pursuant to a trademark license agreement with Pactiv
Corporation. The license is an exclusive, royalty-free license that terminates in October 2015.
Pactiv has agreed that, following the expiration of the license, Pactiv will not use, or permit
others to use, the Hefty Express® mark in connection with the manufacture,
marketing, distribution and sale of shipping mailers. In turn, we entered into a license agreement
to grant Pactiv a perpetual, royalty-free license that allows Pactiv to continue to use certain
patents that are owned by us in the manufacture and sale of certain products, including the
manufacture of tamper-evident packaging containers in the United States.
Seasonality
Primarily due to the impact of our customer buying patterns and production activity, our sales
tend to be stronger in the second half of the year and weaker in the first half. In addition, our
cash flow from operations tends to be weaker in the first half of the year and stronger in the
second half due to seasonal working capital needs.
Environmental Matters
We are subject to extensive federal, state, municipal, local and foreign laws and regulations
relating to the protection of human health and the environment, including those limiting the
discharge of pollutants into the air and water and those regulating the treatment, storage,
disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials.
Certain environmental laws and regulations impose joint and several liability on past and present
owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which
contaminants were disposed or released without regard to whether the owner or operator knew of or
caused the presence of the contaminants, and regardless of whether the practices that resulted in
the contamination were legal at the time they occurred. In addition, under certain of these laws
and regulations, a party that disposes of
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contaminants at a third party disposal site may also become a responsible party required to
share in the costs of the investigation or cleanup of the site.
Our estimated expenditures for environmental compliance are incorporated into our annual
operating budgets and we do not expect the cost of compliance with current environmental laws and
regulations and liabilities associated with claims or known environmental conditions to be material
to us. However, future events, such as new or more stringent environmental laws and regulations,
any related damage claims, the discovery of previously unknown environmental conditions requiring
response action, or more vigorous enforcement or new interpretations of existing environmental laws
and regulations may require us to incur additional costs that could be material.
Available Information
We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to such reports on our website as soon as reasonably practicable after
we electronically file these materials with, or furnish them to, the Securities and Exchange
Commission. These reports are available, free of charge, at
www.pregis.com. These reports may
also be obtained at the SECs public reference room at 100 F Street, N.E., Washington, DC 20549.
The SEC also maintains a web site at www.sec.gov that contains reports and other information
regarding SEC registrants, including Pregis.
ITEM 1A. | RISK FACTORS |
You should carefully consider the risk factors set forth below as well as the other
information contained in this report, including our consolidated financial statements and related
notes. Any of the following risks could materially adversely affect our business, financial
condition or results of operations. The risks described below are not the only risks facing us or
that may materially adversely affect our business. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also materially and adversely
affect our business. Information contained in this section may be considered forward-looking
statements. See Cautionary Note Regarding Forward-Looking Statements for a discussion of certain
qualifications regarding such statements.
Risks Related to Our Business
Our financial performance is dependent on the cost of plastic resin, the continued availability of
resin, and energy costs.
The primary raw materials we use in the manufacture of some of our products are various
plastic resins, primarily polyethylene, which represented approximately 57% of our 2010 material
costs. In addition, approximately 77% of our 2010 net sales were from products made with plastic
resins. Our financial performance therefore is dependent to a substantial extent on the plastic
resin market.
The capacity, supply and demand for plastic resins and the petrochemical intermediates from
which they are produced are subject to cyclical price fluctuations and other market disturbances,
including supply shortages. The majority of the plastic resins used in our U.S. operations are
currently supplied by a single source, and the majority of the plastic resins used in our European
operations are currently supplied by a different single source. If our primary plastic resin
suppliers in the U.S. and Europe were to become unavailable to us, we believe we would be able to
obtain plastic resins from other suppliers, though there are a limited number of suppliers who
manufacture plastic resins suitable for us. In the event of an industry-wide general shortage of
resins used by us, or a shortage or discontinuation of certain types or grades of resin purchased
from one or more of our suppliers, we may not be able to arrange for alternative sources of resin.
Any such shortage may negatively impact our sales and financial condition and our competitive
position versus companies that are able to better or more cheaply source resin. Furthermore, we
currently purchase many of our other (non-resin) raw materials from a few key strategic suppliers.
In the event of a shortage or discontinuation of such raw materials, we could experience effects
similar to those caused by a resin shortage or discontinuation.
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Additionally, we may be subject to significant increases in resin costs that may materially
impact our financial condition. Resin costs have fluctuated significantly in recent years and may
continue to fluctuate as a result of changes in natural gas and crude oil prices. For the year
ended December 31, 2010, average resin costs increased approximately 27% in North America and 39%
in Europe, compared to the prior year period, as measured by the Chemical Market Associates, Inc.
(CMAI) index and PLATTSs index, their respective market indices, and these increases in resin
and other key raw material costs reduced our 2010 gross margin 480 basis points. The instability
in the world markets for petroleum and in North America for natural gas could quickly affect the
prices and general availability of raw materials, which could have a materially adverse impact to
us. Due to the uncertain extent and rapid nature of cost increases, we cannot reasonably estimate
our ability to successfully recover any cost increases. To the extent that cost increases cannot be
passed on to our customers, or the duration of time lags associated with a pass-through becomes
significant, such increases may have a material adverse effect on our profitability.
Freight costs are also a meaningful part of our cost structure. Over the past several years,
we have experienced increased freight costs as a result of rising energy costs. Such cost
increases, to the extent that they cannot be passed on to our customers or minimized through our
productivity programs, may have a material adverse effect on our profitability.
We may not generate sufficient cash flow to enable us to fund our liquidity needs.
Our ability to make payments on, or repay or refinance, our debt, including the notes, and to fund
planned capital expenditures and meet our other liquidity requirements, will depend largely upon
our future operating performance. Our future performance, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond
our control. In addition, our ability to borrow funds in the future to make payments on our debt
will depend on the satisfaction of the covenants in our ABL credit facility
(described in detail in the liquidity and capital resource section in Item 7 Management Discussion and
Analysis of Financial Conditions and Results of Operations)
and the
indenture governing the notes and our other debt agreements, including other agreements we may
enter into in the future. In particular, we may be required to maintain certain financial ratios
under the terms of credit agreements we enter into. There can be no assurance that our business
will generate sufficient cash flow from operations, that existing cash balances will be sufficient,
or that future borrowings will be available under Pregiss ABL credit facility in an amount sufficient to enable us to service our indebtedness or to fund our
other liquidity needs.
We cannot assure you that we will be able to refinance any of our debt, including our
outstanding notes and our ABL credit facility, on commercially reasonable terms or at all. In
particular, our senior secured notes (of which euro 225,000,000 are outstanding) are due on April
15, 2013 and our senior subordinated notes (of which $150,000,000 are outstanding) are due October
15, 2013. If we were unable to refinance our debt or obtain new financing prior to the maturity of
our debt, we would have to consider other options, such as sales of assets, sales of equity, and/or
negotiations with our lenders to restructure the applicable debt. We cannot guarantee you that we
would be able to consummate asset sales on terms and conditions satisfactory to us or at all.
Market conditions may make it difficult, or impossible, to raise new debt or equity financing, and
our equity holders may not approve the issuance of additional equity securities which would dilute
their interest. We may also not be able to successfully restructure our debt. In addition, our
ABL credit facility and the indenture governing the notes may restrict, or market or business
conditions may limit, our ability to take some of these actions.
In addition, we cannot assure you that we will generate or have access to sufficient cash flow
to enable us to fund our liquidity needs, including capital expenditures and operating expenses.
Our cash flows could be substantially and materially affected by increases in the cost of resin,
which comprises a large percentage of our costs. Resin costs could increase significantly over a
short period of time without a corresponding increase in our prices and revenue. To the extent we
experience difficulties generating adequate liquidity, we may not have access to new debt or equity
financing, on terms acceptable to us or at all, and our existing credit facilities may not be
adequate to meet our needs.
Other risks that could materially adversely affect our ability to meet our debt service
obligations, refinance our outstanding indebtedness and satisfy our other liquidity requirements
include, but are not limited to, risks related to our ability to obtain attractive working capital
terms from our key suppliers, risks related to our ability to protect our intellectual property,
rising interest rates, declines 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.
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Our ability to effectively manage our business could be significantly disrupted if members of our
management team were to leave.
Our success depends to a significant degree upon the continued contributions of our senior
management. Our senior management members have extensive engineering, manufacturing and finance
backgrounds. We believe that the depth of our management team is instrumental to our continued
success. The loss of any of our key executive officers in the future could significantly impede our
ability to successfully implement our business strategy, financial plans, expansion of services,
marketing and other objectives.
On February 23, 2011, we announced that Glenn M. Fisher was appointed as our new Chief
Executive Officer. Mr. Fischer, who has served on Pregis Board of Directors since 2005, is an
Operating Partner with AEA Investors and the former Chief Operating Officer of Airgas, Inc. Mr.
Fisher replaced Michael T. McDonnell, who had served as our Chief Executive Officer from October
2006 through February 2011.
We face competition in each of our businesses and our customers may not continue to purchase our products.
We face significant competition in the sale of our products. We compete with multiple
companies with respect to each of our products, including divisions or subsidiaries of larger
companies and foreign competitors. Certain of our competitors are substantially larger, are well
established and have financial and other resources that are greater than ours and may be better
able to withstand more challenging economic conditions. Specifically, our protective packaging
products compete with similar products made by other manufacturers and with a number of other
packaging products that provide protection against damage to customers products during shipment
and storage. Our primary competitor in the Protective Packaging segment is Sealed Air, while we
also selectively compete with companies such as Poly Air, FP International and Storopack in North
America and Fagerdala, Sansetsu and BFI in Europe. Our Specialty Packaging segment competes with a
number of national and regional suppliers in each of their key products and end-markets, and there
are additional competitive pressures in certain markets due to increasing consolidation among our
customers.
We compete on the basis of a number of considerations, including price (on a price-to-value
basis), service, quality, performance, product characteristics, brand recognition and loyalty,
marketing, product development, sales and distribution, and ability to supply products to customers
in a timely manner. Increases in our prices as compared to those of our competitors could
materially adversely affect us.
The competition we face involves the following key risks:
| loss of market share; | ||
| failure to anticipate and respond to changing consumer preferences and demographics; | ||
| failure to develop new and improved products; | ||
| failure of consumers to accept our brands and exhibit brand loyalty and pay premium prices; and | ||
| aggressive pricing by competitors. |
In addition, our competitors may develop products that are superior to our products or may
adapt more quickly to new technologies or evolving customer requirements. Technological advances by
our competitors may lead to new manufacturing techniques and make it more difficult for us to
compete. In addition, since we do not have long-term arrangements with most of our customers, these
competitive factors could cause our customers to cease purchasing our products.
If we are unable to meet future capital requirements, our businesses may be adversely affected.
We have made significant capital expenditures in our businesses in recent years to improve
productivity, quality and service. We spent approximately $31.0 million, $25.0 million, and $30.9
million in capital expenditures in fiscal years 2010, 2009 and 2008. As we grow our businesses, we
may have to incur significant additional capital expenditures. We cannot assure you that we will
have, or be able to obtain, adequate funds to make all necessary
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capital expenditures when required, or that the amount of future capital expenditures will not
be materially in excess of our anticipated or current expenditures. If we are unable to make
necessary capital expenditures, our product offerings may become dated, our productivity may
decrease and the quality of our products may be adversely affected, which, in turn, could reduce
our sales and profitability. In addition, even if we are able to invest sufficient resources, these
investments may not generate net sales that exceed our expenses, generate any net sales at all or
result in any commercially acceptable products.
Our business could be materially hurt by economic downturns.
Our business is affected by a number of economic factors, including the level of economic
activity in the markets in which we operate, including, for the Protective Packaging segment, the
general industrial, high tech electronics, furniture manufacturing, building products, retail, and
agriculture end-markets, and for our Specialty Packaging segment, the fresh food, consumer
products, dry food, medical, foodservice, convenience foods, bakery, and confectionery end-markets.
The demand for our products by our customers in these end-markets depends, in part, on general
economic conditions and business confidence levels. A decline in economic activity in the United
States and/or Europe could materially adversely affect our financial condition and results of
operations.
Difficult conditions and extreme volatility in capital, credit and commodities markets and in the
global economy could have a material adverse effect on our business, financial condition and
results of operations, and we do not know if these conditions will improve in the near future.
Our business, financial condition and results of operations could be materially adversely
affected by difficult conditions and extreme volatility in the capital, credit and commodities
markets and in the global economy. These factors, combined with rising energy prices, declining
business and consumer confidence and increased unemployment, precipitated an economic slowdown in
the United States and globally during 2009 and 2010. The difficult conditions in these markets and
the overall U.S. and global economy affect us in a number of ways. For example:
| Although we believe we have sufficient liquidity through existing cash and equivalents and under our ABL credit facility to run our business, under extreme market conditions there can be no assurance that such funds would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on favorable terms, or at all. | ||
| Market conditions could cause the counterparties to the derivative financial instruments we use to hedge our exposure to interest rate fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become even more costly as a result of these conditions. | ||
| Recent market volatility could make it difficult for us to raise capital in the public markets, if we needed to do so. | ||
| As of December 2010 our Moodys rating on our senior secured floating rate notes was B3, senior subordinated notes was Caa2, and revolving credit facility was Ba3. Our S&P ratings as of December 2010 on our secured floating rate notes was B-, senior subordinated notes was CCC+, and revolving credit facility was BB-. If our credit ratings are downgraded, there could be a negative impact on our ability to access capital markets and borrowing costs would increase. | ||
| Market conditions could result in our significant customers experiencing financial difficulties. We are exposed to the credit risk of our customers, and their failure to meet their financial obligations when due because of bankruptcy, lack of liquidity, operational failure or other reasons could result in decreased sales and earnings for us. | ||
| The economic slowdown decreased demand for our products, resulting in decreased sales volume. These volume decreases reduced our revenues and impacted earnings. There can be no assurance that our sales volumes will increase or stabilize in the future. |
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The turmoil in the global economy may also impact our business, financial condition and
results of operations in ways we cannot currently predict. We do not know if market conditions or
the state of the overall U.S. or global economy will improve in the near future.
Our business is subject to risks associated with manufacturing processes.
As of December 31, 2010, our Protective Packaging segment operated 23 manufacturing facilities
in North America and 14 in Europe and our Specialty Packaging segment operated 9 manufacturing
facilities in Germany, Bulgaria, the United Kingdom and Egypt. We produce substantially all of our
products in these facilities, including medical supplies and foodservice products, which require
special care to avoid contamination during manufacturing. Unexpected failures of our equipment and
machinery, as well as contamination in the clean rooms used to manufacture our hospital supplies
and foodservice products, may result in production delays, revenue loss, third party lawsuits and
significant repair costs, as well as injuries to our employees. Any interruption in production
capability may require us to make large capital expenditures to remedy the situation, which could
have a negative impact on our profitability and cash flows.
While we maintain insurance covering our manufacturing and production facilities, including
business interruption insurance, a catastrophic loss of the use of all or a portion of our
facilities due to accident, fire, explosion, labor issues, weather conditions, other natural
disaster or otherwise, whether short or long-term, could have a material adverse effect on us.
Moreover, our business interruption and general liability insurance may not be sufficient to offset
the lost revenues or increased costs that we may experience during a disruption of our operations.
Furthermore, we cannot assure you that we will maintain our insurance on comparable terms in the
future.
We may make acquisitions or divestitures that may be unsuccessful.
We have made, and may in the future opportunistically consider, the acquisition of other
manufacturers or product lines of other businesses that either complement or expand our existing
business, or the divestiture of some of our businesses. We may consider and make acquisitions both
in countries that we currently operate in and in other geographies. We cannot assure you that we
will be able to consummate any acquisitions or divestitures or that any future acquisitions or
divestitures will be able to be consummated at acceptable prices and terms. Acquisitions or
divestitures involve a number of special risks, including some or all of the following:
| the diversion of managements attention from our core businesses; | ||
| the disruption of our ongoing business; | ||
| the loss of key employees or customers of the acquired or divested business; | ||
| entry into markets in which we have limited or no experience, including other geographies that we have not previously operated in; | ||
| the ability to integrate our acquisitions without substantial costs, delays or other problems, which would be complicated by the breadth of our international operations; | ||
| inaccurate assessment of undisclosed liabilities; | ||
| the incorporation of acquired product lines into our business; | ||
| the failure to realize expected synergies and cost savings; | ||
| increasing demands on our operational systems; | ||
| the integration of information system and internal controls; and | ||
| possible adverse effects on our reported operating results, particularly during the first several reporting periods after the acquisition is completed. |
In addition, any acquisitions or divestitures would be affected by restrictions and
limitations, captured in the documents governing our indentures, including the indentures
governing our outstanding notes.
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A small number of stockholders own all of our common stock and control all major corporate
decisions, and their interests as equity holders may conflict with the interests of our
noteholders.
AEA Investors controls substantially all of our common stock and has the power to control our
affairs and policies. AEA Investors also controls the election of our directors, the appointment of
our management and the entering into of business combinations or dispositions and other
extraordinary transactions. The directors so elected have the authority, subject to the terms of
our indentures and our ABL credit facility, to issue additional stock, implement stock
repurchase programs, declare dividends and make other decisions with respect to our company. In
addition, Glenn Fischer, an operating partner of AEA Investors, is currently serving as our chief
executive officer.
The interests of AEA Investors could conflict with the interests of our noteholders. For
example, the interests of AEA Investors, as equity holders, might conflict with the interests of
our noteholders, particularly if we encounter financial difficulties or are unable to pay our debts
as they come due. Moreover, affiliates of AEA Investors may also have an interest in pursuing
acquisitions, divestitures, financings and other transactions that, in their judgment, could
enhance their equity investments, even though such transactions might involve risks to our
noteholders or not be in the interests of our noteholders.
We may be unable to respond effectively to technological changes in our industry.
We have made substantial investments to develop advanced packaging manufacturing technologies,
and as a result we have a significant portfolio of industry-leading products and technologies. For
instance, we believe Protective Packaging is one of only two major manufacturers of extruded
engineered foam in both North America and Europe, the only producer of polypropylene sheet foam in
North America and the first producer of inflatable engineered cushioning with individual cells.
Our future business success will continue to depend upon our ability to maintain and enhance our
technological capabilities, develop and market products and applications that meet changing
customer needs and successfully anticipate or respond to technological changes on a cost-effective
and timely basis. Our inability to anticipate, respond to or utilize changing technologies could
have an adverse effect on our business, financial condition or results of operations.
Our business operations could be negatively impacted if we fail to adequately protect our
intellectual property rights or if third parties claim that we are in violation of their
intellectual property rights.
We currently rely on a combination of registered and unregistered trademarks, patents,
copyrights, domain names, proprietary know-how, trade secrets and other intellectual property
rights throughout the world to protect certain aspects of our business. We employ various methods
to protect our intellectual property, including confidentiality and non-disclosure agreements with
third parties.
While we attempt to ensure that our intellectual property and similar proprietary rights are
protected, despite the steps we have taken to prevent unauthorized use of our intellectual
property, third parties and current and former employees and contractors may take actions that
affect our rights or the value of our intellectual property, similar proprietary rights or
reputation. We have relied on, and in the future we may continue to rely on litigation to enforce
our intellectual property rights and contractual rights, and, if such enforcement measures are not
successful, we may not be able to protect the value of our intellectual property. Regardless of its
outcome, any litigation could be protracted and costly and could have a material adverse effect on
our business and results of operations.
In addition, we face the risk of claims that we are infringing third parties intellectual
property rights. We believe that our intellectual property rights are sufficient to allow us to
conduct our business without incurring liability to third parties. However, we have received, and
from time to time, may receive in the future, claims from third parties by which such third parties
assert infringement claims against us and can give no assurance that claims or litigation asserting
infringement by us of third parties intellectual property rights will not be initiated in the
future. Any such claim, even if it is without merit, could be expensive and time-consuming; could
cause us to cease making, using or selling certain products that incorporate the disputed
intellectual property; could require us to redesign our products, if feasible; could divert
management time and attention; and could require us to enter into costly royalty or licensing
arrangements, to the extent such arrangements are available.
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We are subject to government regulation.
We are subject to government regulation by many U.S. and non-U.S. supranational, national,
federal, state and local governmental authorities. For instance, certain of our protective and
specialty packaging products are subject to the U.S. Clean Air Act, U.S. Food, Drug and Cosmetic
Act, U.S. Consumer Product Safety Act, U.S. Meat Products Inspection Acts, Canada Food and Drug
regulations and various E.U. directives. In some circumstances, before we may sell some of our
products these authorities must approve these products, our manufacturing processes and facilities.
We are also subject to ongoing reviews of our products and manufacturing processes.
In order to obtain regulatory approval of various new products, we must, among other things,
demonstrate to the relevant authority that the product is safe and effective for its intended uses
and that we are capable of manufacturing the product in accordance with current regulations. The
process of seeking approvals can be costly, time consuming and subject to unanticipated and
significant delays. There can be no assurance that approvals will be granted to us on a timely
basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals
would adversely affect our ability to introduce new products and to generate revenue from those
products.
New laws and regulations may be introduced in the future that could result in additional
compliance costs, seizures, confiscation, recall or monetary fines, any of which could prevent or
inhibit the development, distribution and sale of our products. If we fail to comply with
applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions,
recalls or seizures, as well as criminal penalties, which could have an adverse effect on our
business, financial condition or results of operations.
The cost of complying with laws relating to the protection of the environment may be significant.
We are subject to extensive federal, state, municipal, local and foreign laws and regulations
relating to the protection of human health and the environment, including those limiting the
discharge of pollutants into the air and water and those regulating the treatment, storage,
disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials.
Certain environmental laws and regulations impose joint and several liability on past and present
owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which
contaminants were disposed or released without regard to whether the owner or operator knew of or
caused the presence of the contaminants, and regardless of whether the practices that resulted in
the contamination were legal at the time they occurred. In addition, under certain of these laws
and regulations, a party that disposes of contaminants at a third party disposal site may also
become a responsible party required to share in the costs of the investigation or cleanup of the
site.
We believe that the future cost of compliance with current environmental laws and regulations
and liabilities associated with claims or known environmental conditions will not have a material
adverse effect on our business. We believe our costs for compliance with environmental laws and
regulations have historically averaged $1 to $2 million, annually. However, future events, such as
new or more stringent environmental laws and regulations, any related damage claims, the discovery
of previously unknown environmental conditions requiring response action, or more vigorous
enforcement or new interpretations of existing environmental laws and regulations may require us to
incur additional costs that could be material.
Concerns about greenhouse gas emissions on climate change and the resulting governmental and
market response to these concerns could increase costs that we incur and could otherwise affect our
consolidated financial position and results of operations.
Numerous legislative and regulatory initiatives have been enacted and proposed in response to
concerns about the impact of the emission of carbon dioxide and other greenhouse gases on climate
change. We use petroleum-based raw materials to manufacture many of our products, including
plastic packaging materials. Increased environmental legislation or regulation of the petroleum
industry could result in higher costs for us in the form of higher raw material and freight and
energy costs. We could also incur additional compliance costs for monitoring and reporting
emissions and for maintaining permits.
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Our international operations expose us to risks related to conducting business in multiple
jurisdictions outside the United States.
The international scope of our operations may lead to volatile financial results and
difficulties in managing our business. We generated approximately 63% of our sales outside the
United States for the year ended December 31, 2010; and we may expand our international operations
in the future. International sales and operations are subject to a number of risks, including:
| exchange rate fluctuations; |
| restrictive governmental actions such as the imposition of trade quotas and restrictions on transfers of funds; |
| changes in non-U.S. labor laws and regulations affecting our ability to hire, retain or dismiss employees; |
| the need to comply with multiple and potentially conflicting laws and regulations; |
| difficulties and costs of staffing, managing and accounting for foreign operations; |
| unfavorable business conditions or economic instability in any particular country or region; and |
| difficulty in obtaining distribution and support. |
Any of these factors, by itself or in combination with others, could materially
and adversely affect our business, results of operations or financial condition.
Our exposure to currency exchange rate fluctuations results primarily from the translation
exposure associated with the preparation of our consolidated financial statements, as well as from
transaction exposure associated with generating revenues and incurring expenses in different
currencies. While our consolidated financial statements are reported in U.S. dollars, the financial
statements of our subsidiaries outside the United States are prepared using the local currency as
the functional currency and translated into U.S. dollars by applying an appropriate exchange rate.
As a result, fluctuations in the exchange rate of the U.S. dollar relative to the local currencies
in which our subsidiaries outside the United States report could cause significant fluctuations in
our results. Our sales and expenses are recorded in a variety of currencies. During periods of a
strengthening U.S. dollar, our reported international sales and earnings could be reduced because
foreign currencies may translate into fewer U. S. dollars. Also, while we generally incur expenses
in the same geographic markets in which our products are sold, certain corporate overhead expenses
are relatively concentrated in the United States as compared with sales, so that in a time of
strengthening of the U.S. dollar, our profit margins could be reduced.
While our expenses with respect to foreign operations are generally denominated in the same
currency as the corresponding sales, we have transaction exposure to the extent our receipts and
expenditures are not offsetting in any currency. Moreover, the costs of doing business abroad may
increase as a result of adverse exchange rate fluctuations.
If we are unable to improve existing products and develop new products, our sales and industry
position may suffer.
We believe that our future success will continue to depend, in part, upon our ability to make
innovations in our existing products and to develop, manufacture and market new products. This will
depend, in part, on the success of our research and development and engineering efforts, our
ability to expand or modify our manufacturing capacity and the extent to which we convince
customers and consumers to accept our new products. Historically, our ability to innovate has been
a key factor in our ability to expand our product line and grow our revenue base. For example, the
Protective Packaging segment recently introduced a new family of green products to address the
growing need for sustainable packaging alternatives. These products include
Astro-Bubble®, the first introduction of recycled-content bubble. Also
included in our sustainable product portfolio are Astro-Bubble® Renew,
Absolute EZ-Seam Renew (recycled content floor underlayment), Hefty Express®
mailers and Jiffy Green bubble rolls
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and mailer products. If we fail to successfully introduce, market and manufacture new
products or product innovations and differentiate our products from those of our competitors, our
ability to maintain or expand our sales and to maintain or enhance our industry position could be
adversely affected, which in turn could materially adversely affect our business, financial
condition or results of operations.
We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
In accordance with Section 404 of the Sarbanes-Oxley Act, we are currently required to
evaluate our internal controls systems in order to allow management to report on our internal
control over financial reporting. As a result of this evaluation, we may from time to time identify
control deficiencies of varying degrees of severity under applicable SEC and Public Company
Accounting Oversight Board (PCAOB) rules and regulations that remain unremediated. As a publicly
reporting company, we are required to report, among other things, control deficiencies that
constitute a material weakness or changes in internal controls that, or that are reasonably
likely to, materially affect internal control over financial reporting. A material weakness is a
significant deficiency or combination of significant deficiencies in internal control over
financial reporting that results in a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis.
If we do not appropriately evaluate our internal controls, or if we find material weaknesses
in our internal controls that are not adequately remediated, we may become subject to adverse
regulatory consequences or a loss of confidence in the reliability of our financial statements. We
could also suffer a loss of confidence in the reliability of our financial statements if we do not
develop and maintain effective controls and procedures or if we are otherwise unable to deliver
timely and reliable financial information. Any loss of confidence in the reliability of our
financial statements or other negative reaction to our failure to maintain adequate internal
controls could affect our access to the capital markets. In addition, if we fail to remedy any
material weakness, our financial statements may be inaccurate and we may face restricted access to
the capital markets.
Under current SEC rules, we are not required to obtain or include an attestation report of our
independent registered public accounting firm with respect to managements report on our internal
controls. However, if in the future we are required to include such an attestation report, we could
lose investor confidence in the accuracy and completeness of our financial reports if our auditors
were unable to provide a required report or if the report identified weaknesses in our internal
controls which we did not adequately remedy.
Our substantial indebtedness could adversely affect our financial health and prevent us from
fulfilling our obligations under the instruments governing our indebtedness.
We have a significant amount of indebtedness. As of December 31, 2010, we had total
indebtedness of $489.3 million and
$6.4 million in letters of credit outstanding.
Our substantial indebtedness could have important consequences. For example, it could:
| make it more difficult for us to satisfy our obligations under the instruments governing our indebtedness; |
| increase our vulnerability to general adverse economic and industry conditions; |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; |
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| place us at a competitive disadvantage compared to our competitors that have less debt; and |
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| limit our ability to borrow additional funds for capital expenditures, acquisitions, working capital or other purposes. |
At December 31, 2010, we had $336.4 million of variable rate debt. If market interest rates
increase, such variable-rate debt will create higher debt service requirements, which could
adversely affect our cash flow. We expect our 2011 cash interest
expense to be approximately $37.4
million, calculated based on the interest rates and foreign currency exchange rates in effect at
December 31, 2010. As of December 31, 2010, each one point increase or decrease in the applicable variable interest rates
on Pregiss then-existing senior secured credit facilities and Pregiss senior secured floating rate notes would
correspondingly change our 2011 interest expense by approximately $3.6 million (based on rates in
effect at December 31, 2010). While we may enter into agreements limiting our exposure to higher
interest rates, any such agreements may not offer complete protection from this risk.
The agreements governing our debt, including the notes and our ABL credit facility,
contain various covenants that impose restrictions on us that may affect our ability to operate our
business.
Our existing agreements impose and future financing agreements are likely to impose operating
and financial restrictions on our activities. These restrictions require us to comply with or
maintain certain financial tests and ratios and limit or prohibit our ability to, among other
things:
| incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging arrangements; |
| incur liens or agree to negative pledges in other agreements; |
| make capital expenditures; |
| make loans and investments; |
| declare dividends, make payments or redeem or repurchase capital stock; |
| limit the ability of our subsidiaries to enter into agreements restricting dividends and distributions; |
| with respect to the senior secured floating rate notes, engage in sale-leaseback transactions; |
| engage in mergers, acquisitions and other business combinations; |
| prepay, redeem or purchase certain indebtedness; |
| amend or otherwise alter the terms of our organizational documents, our indebtedness and other material agreements; |
| sell assets or engage in receivables securitizations; |
| transact with affiliates; and |
| alter the business that we conduct. |
These restrictions on our ability to operate our business could seriously harm our business
by, among other things, limiting our ability to take advantage of financing, merger and acquisition
and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply
with these covenants and maintain these financial tests and ratios. If we are unable to generate
sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments
of principal, premium, and interest on our debt, or if we other wise fail to comply with any of the
covenants in our existing or future financing agreements, we could be in default under those
agreements and under other agreements containing cross-default provisions. A default would permit
lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any
collateral securing the debt, terminate other commitments to make loans, or prohibit the incurrence
of additional indebtedness. Under these circumstances, we might not have sufficient funds or other
resources to satisfy all of our obligations, secured lenders could initiate foreclosure proceedings
against our assets, and we could be forced into bankruptcy or liquidation. In addition, the
limitations imposed by financing agreements on our ability to incur additional debt and to take
other actions might significantly impair our ability to obtain other financing. We cannot
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assure you that we will be granted waivers or amendments to these agreements if for any reason
we are unable to comply with these agreements, or that we will be able to refinance our debt on
terms acceptable to us, or at all.
Not all of our subsidiaries guarantee our notes, and the assets of our non-guarantor subsidiaries
may not be available to make payments on our notes.
The guarantors of our notes do not include all of our subsidiaries. In particular, our
foreign subsidiaries and all of our future unrestricted subsidiaries do not guarantee the notes.
Payments on the notes are only required to be made by us and the subsidiary guarantors. As a
result, no payments are required to be made from assets of subsidiaries that do not guarantee the
notes, unless those assets are transferred by dividend or otherwise to us or a subsidiary
guarantor. In 2010, our non-guarantor subsidiaries had sales of $548.9 million, or 63.9% of our
combined 2010 sales, and a loss from continuing operations before income taxes of $(20.2) million.
Similarly, at December 31, 2010, our non-guarantor subsidiaries had total assets of $423.1 million,
or 59.7% of our total combined assets.
In the event that any non-guarantor subsidiary becomes insolvent, liquidates, reorganizes,
dissolves or otherwise winds up, holders of its debt and its trade creditors generally will be
entitled to payment on their claims from the assets of that subsidiary before any of those assets
are made available to us. Consequently, claims in respect of our notes will be structurally
subordinated to all of the liabilities of our non-guarantor subsidiaries, including trade payables.
As of December 31, 2010, our non-guarantor subsidiaries had $73.5 million of trade payables and
$3.9 million in short-term debt.
Our outstanding notes and the guarantees may not be enforceable because of fraudulent conveyance
laws.
Our obligations under our outstanding notes and the guarantors guarantees of our notes may be
subject to review under federal bankruptcy law or relevant state fraudulent conveyance laws if a
bankruptcy lawsuit is commenced by or on behalf of our or the guarantors unpaid creditors. Under
these laws, if in such a lawsuit a court were to find that, at the time we or a guarantor incurred
debt, including debt represented by the guarantee, we or such guarantor:
| incurred this debt with the intent of hindering, delaying or defrauding current or future creditors; or |
| received less than reasonably equivalent value or fair consideration for incurring this debt and we or the guarantor |
| was insolvent or was rendered insolvent by reason of the related financing transactions; |
| was engaged, or about to engage, in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business; or |
| intended to incur, or believed that it would incur, debts beyond its ability to pay these debts as they mature, as all of the foregoing terms are defined in or interpreted under the relevant fraudulent transfer or conveyance statutes; |
then the court could void the notes or the guarantee or subordinate the amounts owing under the
notes or the guarantee to our or the guarantors presently existing or future debt or take other
actions detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will vary depending
upon the law of the jurisdiction that is being applied in any such proceeding. Generally, an entity
would be considered insolvent if, at the time it incurred the debt or issued the guarantee:
| it could not pay its debts or contingent liabilities as they become due; |
| the sum of its debts, including contingent liabilities, is greater than its assets, at fair valuation; or |
| the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing debts and liabilities, including contingent liabilities, as they become absolute and mature. |
If the notes or a guarantee is voided as a fraudulent conveyance or found to be unenforceable
for any other reason, noteholders will not have a claim against the relevant obligor and will only
be our creditor or that of any guarantor whose obligation was not set aside or found to be
unenforceable. In addition, the loss of a guarantee will
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constitute a default under the indenture governing the notes, which default would cause all
outstanding notes to become immediately due and payable.
We may not have the ability to raise the funds necessary to finance the change of control offer
required by the indenture governing our outstanding notes.
Upon the occurrence of certain kinds of change of control events, we will be required to offer
to repurchase all of our outstanding notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase, unless all the notes have been previously
called for redemption. Holders of debt securities that we may issue in the future may also have
this right. Our failure to purchase tendered notes would constitute an event of default under the
indenture governing the notes, which in turn, would constitute a default under our other
outstanding indebtedness. In addition, the occurrence of a change of control would also constitute
an event of default under our other outstanding indebtedness. A default under our other outstanding
indebtedness would result in a default under the indenture if the lenders accelerate the debt under
such other indebtedness.
Therefore, it is possible that we would not have sufficient funds at the time of the change of
control to make the required purchase of the notes. Moreover, indebtedness we incur may restrict
our ability to repurchase the notes, including following a change of control event. As a result,
following a change of control event, we would not be able to repurchase notes unless we first repay
all indebtedness outstanding under any of our other indebtedness that contains similar provisions,
or obtain a waiver from the holders of such indebtedness to permit us to repurchase the notes. We
may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to
offer to repurchase outstanding notes may therefore require us to refinance our other outstanding
debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase
requirements may also delay or make it more difficult for others to obtain control of us.
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 of the Securities Exchange Act of 1934, as amended. 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, should, or will, or the negative thereof or other variations
thereon or comparable terminology. In particular, statements about the markets in which we
operate, including growth of our various markets and growth in the use of our products, and our
expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or
performance contained in this report under Item 1, Business, Item 1A, Risk Factors, and Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements. In addition, the forward-looking statements contained herein regarding
market share, market sizes and changes in markets are subject to various estimations, uncertainties
and risks.
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, including those discussed in this report under Item 1, Business, Item 1A,
Risk Factors, and Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations 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:
| risks associated with our substantial indebtedness and debt service; |
| increases in prices and availability of resin and other raw materials and our ability to pass these increased costs on to our customers and our ability to raise our prices generally with respect to our products; |
| our ability to retain management; |
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| 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 possibility of a recession in the U.S. and a 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 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 listed under Item 1A, Risk Factors. |
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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our international corporate headquarters is located in Deerfield, Illinois in a leased
facility. We position our manufacturing locations and warehouses in order to optimize access to
our customers and distributors. Our Protective Packaging segment operates 23 manufacturing
facilities in North America (United States, Canada and Mexico) and 14 in Europe. We have broad
reach within Europe, through key facilities located in Belgium, Germany, the Netherlands, Italy,
England, Poland and the Czech Republic. We own approximately 30% of our Protective Packaging
facilities, while the rest are leased. Our Specialty Packaging segment produces flexible packaging
products at two manufacturing facilities in Germany and one in Egypt, each of which are owned,
while its rigid packaging products are produced in three leased facilities within the United
Kingdom (one each in England, Scotland and Wales). Its medical supply products are manufactured at
owned facilities in Germany and Bulgaria. We also lease other warehouse and administrative space
at other locations. We believe the plants, warehouses, and other properties owned or leased by us
are well maintained and in good operating condition.
ITEM 3. 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.
ITEM 4. RESERVED
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established public trading market for the registrants common stock. All of the
registrants issued and outstanding common stock is held by Pregis Holding I.
The registrant has not paid any cash dividends in the past. We anticipate that any earnings
will be retained for development of our business and we do not anticipate paying any cash dividends
in the foreseeable future. Pregiss ABL credit facility, senior subordinated notes
and senior secured notes all restrict our ability to issue cash dividends. Any future dividends
declared would be at the discretion of our board of directors and would depend on our financial
condition, results of operations, contractual obligations, the terms of our financing agreements at
the time a dividend is considered, and other relevant factors.
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ITEM 6. SELECTED FINANCIAL DATA
The historical financial information as of December 31, 2010, 2009, 2008, 2007, and 2006, has
been derived from the audited consolidated financial statements of Pregis Holding II following the
Acquisition. You should read this data in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included elsewhere in this report.
Year ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Statement of Operations: |
||||||||||||||||||||
Net Sales |
$ | 873,206 | $ | 801,224 | $ | 1,019,364 | $ | 979,399 | $ | 925,499 | ||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
684,498 | 609,515 | 798,690 | 740,235 | 713,550 | |||||||||||||||
Selling, general and
administrative |
130,057 | 117,048 | 127,800 | 137,180 | 125,944 | |||||||||||||||
Depreciation and amortization |
46,454 | 44,783 | 52,344 | 55,799 | 53,179 | |||||||||||||||
Goodwill impairment |
| | 19,057 | | | |||||||||||||||
Other operating expense, net |
9,442 | 14,980 | 8,146 | 190 | 234 | |||||||||||||||
Total operating costs and expenses |
870,451 | 786,326 | 1,006,037 | 933,404 | 892,907 | |||||||||||||||
Operating income |
2,755 | 14,898 | 13,327 | 45,995 | 32,592 | |||||||||||||||
Interest expense |
48,364 | 42,604 | 49,069 | 46,730 | 42,535 | |||||||||||||||
Interest income |
(254 | ) | (394 | ) | (875 | ) | (1,325 | ) | (246 | ) | ||||||||||
Foreign exchange loss (gain), net |
642 | (6,303 | ) | 14,728 | (2,339 | ) | (6,139 | ) | ||||||||||||
Income (loss) before income taxes |
(45,997 | ) | (21,009 | ) | (49,595 | ) | 2,929 | (3,558 | ) | |||||||||||
Income tax expense (benefit) |
(8,925 | ) | (2,999 | ) | (1,865 | ) | 7,708 | 4,842 | ||||||||||||
Net loss |
$ | (37,072 | ) | $ | (18,010 | ) | $ | (47,730 | ) | $ | (4,779 | ) | $ | (8,400 | ) | |||||
Other Data: |
||||||||||||||||||||
Capital expenditures |
$ | 31,033 | $ | 25,045 | $ | 30,882 | $ | 34,626 | $ | 28,063 |
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2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Balance
Sheet Data (at end of years): |
||||||||||||||||||||
Cash and cash equivalents |
$ | 47,845 | $ | 80,435 | $ | 41,179 | $ | 34,989 | $ | 45,667 | ||||||||||
Working capital (1) |
46,592 | 103,828 | 106,346 | 129,370 | 121,851 | |||||||||||||||
Property, plant and equipment, net |
198,260 | 226,882 | 245,124 | 277,398 | 270,646 | |||||||||||||||
Total assets |
708,698 | 730,547 | 736,376 | 855,319 | 797,032 | |||||||||||||||
Total debt (2) |
489,271 | 502,834 | 465,616 | 477,724 | 455,317 | |||||||||||||||
Total stockholders / owners equity |
26,531 | 58,792 | 90,101 | 153,657 | 144,260 |
(1) | Working capital is defined as current assets, excluding cash, less current liabilities. | |
(2) | Total debt includes short-term and long-term debt. |
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes included elsewhere in this report. In addition to
historical information, this discussion may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, those described in this report under Item 1A,
Risk Factors. Future results could differ materially from those discussed below. See
Cautionary Note Regarding Forward-Looking Statements in Item 1A above.
BASIS OF PRESENTATION
We commenced operations as Pregis Corporation on October 13, 2005, at which time Pregis
acquired all of the outstanding shares of capital stock of Pactiv Corporations subsidiaries
operating its global protective packaging and European specialty packaging businesses.
We have two reportable segments:
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 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. This segment includes
the activities that had previously been reported as the Flexible Packaging, Rigid Packaging, and
Hospital Supplies reportable segments.
All significant intercompany transactions have been eliminated in the consolidated financial
statements.
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EXECUTIVE OVERVIEW
We are an international manufacturer, marketer and supplier of protective packaging products
and specialty packaging solutions. We currently operate 46 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 63% of our 2010 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 between the U.S. dollar and pound sterling.
Our net sales for full year ended December 31, 2010 increased 9.0% over the comparable period
of 2009. The increase was driven primarily by increased volumes due to the Companys growth
initiatives as well as the impact of economic recovery, sales associated with the IntelliPack
acquisition, along with the impact of selling price increases implemented in 2010. This was
partially offset by unfavorable foreign currency translation. Excluding the impact of unfavorable
foreign currency translation and the IntelliPack acquisition, net sales for the year ended December
31, 2010 increased 9.8% compared to the same period in 2009.
Our 2010 gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization) as a percent of net sales decreased to 21.6% compared to 23.9% for 2009. This
decline was driven primarily by increased key raw material costs partially offset by year-over-year
selling price increases.
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. In 2010, average resin costs
increased 27% in North America and 39% in Europe, as measured by the CMAI index and ICIS index,
their respective market indices, as compared to 2009. These increases in resin and other key raw
material costs reduced the Companys gross margin as a percent of sales by almost 500 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 are now complete as of 2010, we expect modest restructuring to
continue into the first quarter of 2011. In 2010, we incurred additional restructuring charges
focused primarily in our European protective packaging and specialty businesses. During 2010 we
realized year-over-year cost savings of approximately $14.1 million relating to our 2009 and 2010
cost reduction initiatives.
RESULTS OF OPERATIONS
Net Sales
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisitions | Translation | |||||||||||||||||||||||||||||||||||||||||
2010 versus 2009 |
$ | 873,206 | $ | 801,224 | $ | 71,982 | 9.0 | % | $ | 4,863 | 0.6 | % | $ | 73,730 | 9.2 | % | $ | 17,562 | 2.2 | % | $ | (24,173 | ) | (3.0 | )% | |||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||
2009 versus 2008 |
$ | 801,224 | $ | 1,019,364 | $ | (218,140 | ) | (21.4 | )% | $ | (33,354 | ) | (3.2 | )% | $ | (131,055 | ) | (12.9 | )% | $ | | 0.0 | % | $ | (53,731 | ) | (5.3 | )% |
Our 2010 net sales increased by 9.0% compared to 2009, driven by increased volumes due to
the Companys growth initiatives and economic recovery, sales associated with the IntelliPack
acquisition, and selling price increases. This was partially offset by unfavorable foreign
currency translation.
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Our 2009 net sales decreased by 21.4% compared to 2008, driven by decreased volumes resulting
from the recessionary economic environment in North America and Europe, lower year-over-year
selling prices resulting primarily from lower key raw material costs, and unfavorable foreign
currency translation.
A discussion of net sales by reportable segment is included in the Review of Business Segments
section of this Managements Discussion and Analysis.
Cost of sales, excluding depreciation and amortization
2010 | 2009 | 2008 | ||||||||||
Cost of sales, excluding depreciation and amortization |
$ | 684,498 | $ | 609,515 | $ | 798,690 | ||||||
Gross margin % |
21.6 | % | 23.9 | % | 21.6 | % |
Gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization) as a percentage of net sales decreased by 230 basis points to 21.6% in 2010 compared
to 2009. The decline was driven primarily by increased material costs partially offset by
year-over-year selling price increases.
Gross margin as a percentage of net sales increased by 230 basis points to 23.9% in 2009
compared to 2008. The improvement in our 2009 margin percentage was driven by the impact of our
aggressive cost reduction initiatives, continued disciplined pricing, and the impact of lower raw
material costs, partially offset by the impact of lower year-over-year selling prices.
Selling, general and administrative
2010 | 2009 | 2008 | ||||||||||
Selling, general and administrative |
$ | 130,057 | $ | 117,048 | $ | 127,800 | ||||||
As a percent of net sales |
14.9 | % | 14.6 | % | 12.5 | % |
Selling, general and administrative expenses (SG&A) increased by $13.0 million in 2010
compared to 2009. This increase was primarily driven by legal expenses of $5.5 million, SG&A
costs related to IntelliPack of $3.0 million, increased bad debt expense, stock compensation, and
acquisition related expenses. The increased legal expenses were the result of a patent dispute
related to the Companys protective packaging segment. In March 2010, there was an initial ruling
which was favorable to the Company. As of December 31, 2010, there is a pending appeal regarding
this legal matter which the company also believes will have a favorable outcome to the Company.
SG&A decreased by $10.8 million, or 8.4%, in 2009 compared to 2008. Excluding the impact of
favorable foreign currency translation, SG&A expenses decreased by approximately $6.6 million.
These decreases were primarily driven by cost savings from our cost reduction program. As a
percent of net sales, SG&A increased by 210 basis points to 14.6% driven by lower sales volumes.
Depreciation and Amortization
2010 | 2009 | 2008 | ||||||||||
Depreciation and Amortization |
$ | 46,454 | $ | 44,783 | $ | 52,344 | ||||||
As a percent of net sales |
5.3 | % | 5.6 | % | 5.1 | % |
Depreciation and amortization expense (D&A) increased $1.7 million, or 3.7%, in 2010 compared
to 2009. This increase was primarily due to the acquisition of IntelliPack, partially offset by
favorable foreign currency translation resulting from a stronger U.S. dollar in 2010 compared to
the same period of 2009.
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D&A declined $7.6 million, or 14.4%, in 2009 compared to 2008. The decrease in depreciation
and amortization expense is due to favorable foreign currency translation resulting from a stronger
U.S. dollar in 2009 compared to the same period of 2008.
Goodwill Impairment
We performed our annual goodwill impairment test during the fourth quarters of 2010 and 2009
and determined that there was no impairment to goodwill.
Other Operating Expense, Net
2010 | 2009 | 2008 | ||||||||||
Severance and restructuring |
$ | 7,895 | $ | 15,207 | $ | 9,321 | ||||||
Loss on disposal of property, plant and equipment |
1,595 | | | |||||||||
Curtailment gain |
| | (3,736 | ) | ||||||||
Trademark impairment |
| 194 | 1,297 | |||||||||
Other, net |
(48 | ) | (421 | ) | 1,264 | |||||||
$ | 9,442 | $ | 14,980 | $ | 8,146 | |||||||
Other operating expense, net includes other activity incidental to our operations, such as
restructuring expenses, impairment losses, and gains or losses on sale of operating fixed assets.
In 2010, other operating expense includes restructuring charges of $7.9 million, primarily for
consulting expenses and severance charges related to management changes and headcount reductions,
and a loss of $1.8 million relating to a sales leaseback transaction involving land, building and
related improvements at two of its U.S. manufacturing facilities (offset by the amortization of
deferred gain). See Note 15 to the consolidated financial statements for details regarding our
restructuring activities. See Note 5 to the consolidated financial statements for details
regarding the sale-leaseback transaction.
In 2009, other operating expense includes restructuring charges of $15.2 million, primarily
for severance charges relating to headcount reductions and consulting expenses. See Note 15 to the
consolidated financial statements for details regarding our restructuring activities.
Operating Income
2010 | 2009 | 2008 | ||||||||||
Operating income |
$ | 2,755 | $ | 14,898 | $ | 13,327 | ||||||
As a percent of net sales |
0.3 | % | 1.9 | % | 1.3 | % |
Operating income in 2010 decreased $12.1 million compared to 2009. The decrease in operating
income was primarily due to increased key raw material costs, partially offset by year-over-year
selling price increases, the impact of higher sales volumes, and the acquisition of IntelliPack.
Operating income in 2009 increased $1.6 million compared to 2008. The decrease in operating
income was primarily the result of lower year-over-year sales volumes, partially offset by the
Companys aggressive cost reduction initiatives and lower raw material costs.
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Interest Expense
2010 | 2009 | 2008 | ||||||||||
Interest expense |
$ | 48,364 | $ | 42,604 | $ | 49,069 | ||||||
As a percent of net sales |
5.5 | % | 5.3 | % | 4.8 | % |
Interest expense in 2010 increased $5.8 million compared to the same period of 2009. This
increase was driven by higher debt balances and higher average interest rates, both resulting from
the retirement of the Companys term debt in the third quarter of 2009 and its replacement with new
floating rate notes at a higher average interest rates. This increase was also reflective of
higher amortization of discount and deferred financing fees, again resulting from the Companys
2009 debt refinancing.
Interest expense in 2009 decreased $6.5 million, or 13.2%, compared to 2008. The 2009
interest expense reflects the impact of lower U.S. dollar equivalent interest on our
euro-denominated debt due to a stronger U.S. dollar in the 2009 period and lower LIBOR and
EURIBOR-based rates underlying a portion of our floating rate debt. This was partially offset by
the write-off of the deferred financing fees related to the refinancing of the Term B1 and B2 notes
of $2.7 million. The interest rate swap had a negative impact to interest expense. The Company
established an interest rate swap arrangement in order to maintain its targeted ratio of
variable-rate versus fixed rate debt in the notional amount of 65 million euro. It exchanged
EURIBOR-based floating rates to a fixed rate over the period of October 1, 2008 to April 15, 2011.
For the year ended December 31, 2009, our interest expense increased by $2.0 million on the basis
of settlements from the swap arrangements, compared to a reduction of $1.0 million for the year
ended December 31, 2008.
Foreign Exchange Loss (Gain), Net
2010 | 2009 | 2008 | ||||||||||
Foreign exchange loss (gain), net |
$ | 642 | $ | (6,303 | ) | $ | 14,728 |
A portion of our third-party debt is denominated in euro and revalued to U.S. dollars at our
month-end reporting periods. 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 reporting period 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 Benefit
2010 | 2009 | 2008 | ||||||||||
Income tax benefit |
$ | (8,925 | ) | $ | (2,999 | ) | $ | (1,865 | ) | |||
Effective tax rate |
19.4 | % | 14.3 | % | 3.8 | % |
In 2010, although we generated a $46.0 million pre-tax loss for book purposes, our effective
rate was decreased from a benefit at the U.S. statutory rate of 35% to a benefit of 19.4%,
primarily due to the establishment of additional valuation allowances against losses in certain
countries that are not more likely than not to result in future tax benefits, and foreign tax rate
differentials.
In 2009, although we generated a $21.0 million pre-tax loss for book purposes, our effective
rate was increased from a benefit at the U.S. statutory rate of 35% to a benefit of 14.3%,
primarily due to the establishment of additional valuation allowances against losses in certain
countries that are not more likely than not to result in future tax benefits, and foreign tax rate
differentials.
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Net Loss
As a result of the factors discussed previously, we generated a net loss of $37.1 million in
2010, compared to a net loss of $18.0 million in 2009, and a net loss $47.7 million in 2008.
REVIEW OF BUSINESS SEGMENTS
Net Sales 2010 vs. 2009
The key factors that contributed to the increase in 2010 net sales were as follows:
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisitions | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 559,683 | $ | 497,144 | $ | 62,539 | 12.6 | % | $ | 2,055 | 0.4 | % | $ | 53,522 | 10.8 | % | $ | 17,562 | 3.5 | % | $ | (10,600 | ) | (2.1 | )% | |||||||||||||||||||||||
Specialty Packaging |
313,523 | 304,080 | 9,443 | 3.1 | % | 2,808 | 0.9 | % | 20,208 | 6.6 | % | | 0.0 | % | (13,573 | ) | (4.5 | )% | ||||||||||||||||||||||||||||||
Total |
$ | 873,206 | $ | 801,224 | $ | 71,982 | 9.0 | % | $ | 4,863 | 0.6 | % | $ | 73,730 | 9.2 | % | $ | 17,562 | 2.2 | % | $ | (24,173 | ) | (3.0 | )% | |||||||||||||||||||||||
For the year ended December 31, 2010, net sales of our Protective Packaging segment
totaled $559.7 million, representing an increase of $62.5 million, or 12.6%, compared to net sales
of $497.1 million for the year ended December 31, 2009. The increase in net sales was due to
increased sales volumes resulting from the impact of our growth initiatives and the acquisition of
IntelliPack, partially offset by unfavorable foreign currency translation. Sales volume in the
Companys Protective Packaging segment increased by 10.8% for the year ended December 31, 2010
compared to the same period in 2009, as depicted in the table above. The volume increase was
driven primarily by the impact of the Companys growth initiatives in areas such as inflatable
systems, sustainable products, and the flooring business, as well as improved economic conditions.
Price/mix for the Companys Protective Packaging segment increased net sales by 0.4% for the
year ended December 31, 2010 compared to the same period in 2009. Price/mix was favorable
year-over-year due to the impact of selling price increases implemented in 2010 in response to
increased key raw material costs.
Volume in the Companys Specialty Packaging segment increased by 6.6% for the year ended
December 31, 2010 compared to the same period of 2009. The volume increase was primarily due to
the impact of the Companys growth initiatives in our flexible packaging and thermoforming
businesses.
Price/mix for the Companys Specialty Packaging segment increased net sales by 0.9% for the
year ended December 31, 2010 compared to the same period in 2009. Price/mix was favorable
year-over-year due to selling price increases implemented in our flexible packaging business in
2010 in response to increased key raw material costs.
Net Sales 2009 vs. 2008
The key factors that contributed to the decrease in 2009 net sales were as follows:
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||
Year ended December 31, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||
2009 | 2008 | $ Change | % Change | Mix | Volume | Translation | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 497,144 | $ | 661,976 | $ | (164,832 | ) | (24.9 | )% | $ | (28,154 | ) | (4.3 | )% | $ | (110,567 | ) | (16.7 | )% | $ | (26,111 | ) | (3.9 | )% | ||||||||||||||||
Specialty Packaging |
304,080 | 357,388 | (53,308 | ) | (14.9 | )% | (5,200 | ) | (1.5 | )% | (20,488 | ) | (5.7 | )% | (27,620 | ) | (7.7 | )% | ||||||||||||||||||||||
Total |
$ | 801,224 | $ | 1,019,364 | $ | (218,140 | ) | (21.4 | )% | $ | (33,354 | ) | (3.2 | )% | $ | (131,055 | ) | (12.9 | )% | $ | (53,731 | ) | (5.3 | )% | ||||||||||||||||
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For the year ended December 31, 2009, net sales of our Protective Packaging segment
totaled $497.1 million, representing a decrease of $164.8 million, or 24.9%, compared to net sales
of $662.0 million for the year ended December 31, 2008. The decrease in net sales was primarily
due to lower sales volumes. Sales volume in the Companys Protective Packaging segment declined by
16.7% for the year ended December 31, 2009 compared to the same period in 2008, as depicted in the
table above. The volume decrease was driven by economic weakness in both the North American and
European markets, particularly within the industrial, housing and automotive sectors, key markets
which are served by this segment.
Price/mix for the Companys Protective Packaging segment reduced net sales by 4.3% for the
year ended December 31, 2009 compared to the same period in 2008. Price/mix was unfavorable
year-over-year due to reduced market pricing resulting from year-over-year declines in resin costs
in the first nine months of 2009.
Volume in the Companys Specialty Packaging segment decreased by 5.7% for the year ended
December 31, 2009 compared to the same periods of 2008. The volume decline was primarily the
result of the termination of a contract with a significant medical products customer. Excluding
volume related to this one customer, volume for the year ended December 31, 2009 would have
decreased $1.1 million compared to 2008.
While the Specialty Packaging segment experienced minor volume decreases compared to 2008,
after adjusting for the loss of the significant customer discussed above, these decreases have been
less significant as compared to those experienced in the Protective Packaging segment. This is
primarily due to the different end-markets the two segments serve. Protective Packaging primarily
serves the industrial, housing, and automotive sectors, while the Specialty Packaging segment
primarily serves the consumer food and medical sectors. The consumer food and medical sectors have
experienced less sensitivity to the overall economic weakness as compared to the industrial,
housing, and automotive sectors.
Price/mix for the Companys Specialty Packaging segment reduced net sales by 1.5% for the year
ended December 31, 2009 compared to the same period in 2008. Price/mix was unfavorable
year-over-year due primarily to reduced market pricing driven by increased market competitiveness
as a result of the weak economic conditions.
Segment Income
We measure our segments operating performance on the basis of segment EBITDA, which is
calculated internally as net income before interest, taxes, depreciation, amortization,
restructuring expense and adjustments for other non-cash charges and benefits. See Note 18 to the
consolidated financial statements for a reconciliation of total segment EBITDA to consolidated
income (loss) before income taxes. Segment EBITDA for the relevant periods is as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(dollars in thousands) | ||||||||||||
Segment: |
||||||||||||
Protective Packaging |
$ | 47,824 | $ | 52,561 | $ | 61,166 | ||||||
Specialty Packaging |
31,232 | 41,339 | 42,523 | |||||||||
Total segment EBITDA |
$ | 79,056 | $ | 93,900 | $ | 103,689 | ||||||
On a consolidated basis, approximately $(2.1) million and $(6.8) million of the segment EBITDA
decline in 2010 and 2009 in relation to the prior years was due to the unfavorable foreign currency
impact from translating our foreign operations.
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Segment Income 2010 vs. 2009
For the year ended December 31, 2010, the Protective Packaging segments EBITDA totaled $47.8
million, representing a decrease of $4.7 million, or 9.0%, compared to EBITDA of $52.6 million for
the year ended December 31, 2009. The decline was driven primarily by increased key raw material
costs which were partially offset by increased sales volumes, impact of selling price increases
implemented through 2010, and the IntelliPack acquisition.
For the year ended December 31, 2010, the Specialty Packaging segments EBITDA totaled $31.2
million, representing a decrease of $10.1 million, or 24.4%, compared to EBITDA of $41.3 million
for the year ended December 31, 2009. This decrease was due primarily to higher key raw material
costs, increased SG&A cost to upgrade our European management team, higher bad debt expense, and
unfavorable foreign currency translation, partially offset by increased volumes.
Segment Income 2009 vs. 2008
For the year ended December 31, 2009, the Protective Packaging segments EBITDA totaled $52.6
million, representing a decrease of $8.6 million, or 14.1%, compared to EBITDA of $61.2 million for
the year ended December 31, 2008. The decline was driven by lower sales volumes due to the
weakened U.S. and European economic environments, unfavorable year-over-year selling prices, and
unfavorable foreign currency translation. This was partially offset by the results of our cost
reduction efforts, which totaled approximately $33.0 million for the year ended December 31, 2009.
For the year ended December 31, 2009, the Specialty Packaging segments EBITDA totaled $41.3
million, representing a decrease of $1.2 million, or 2.8%, compared to EBITDA of $42.5 million for
the year ended December 31, 2008. Excluding the impact associated with the loss of a significant
medical customer we estimate EBITDA for this segment would have increased $5.3 million, or 12.5%,
driven by the impact of our cost reduction initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the
Consolidated Statement of Cash Flows for the years ended December 31, 2010, 2009 and 2008, are
summarized as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(dollars in thousands) | ||||||||||||
Cash provided by operating activities |
$ | 12,741 | $ | 25,617 | $ | 39,654 | ||||||
Cash used in investing activities |
(47,247 | ) | (13,429 | ) | (28,541 | ) | ||||||
Cash provided by (used in) financing activities |
4,066 | 26,135 | (2,008 | ) | ||||||||
Effect of foreign exchange rate changes |
(2,150 | ) | 933 | (2,915 | ) | |||||||
Increase (decrease) in cash and cash equivalents |
$ | (32,590 | ) | $ | 39,256 | $ | 6,190 | |||||
Cash generated by operating activities totaled $12.7 million, $25.6 million, and $39.7 million
for the years ended December 31, 2010, 2009 and 2008, respectively. Cash provided by operating
activities decreased by $12.9
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million in 2010 compared to 2009. This decrease was primarily driven
by our decreased earnings partially offset by working capital improvements.
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
lagged the underlying change in raw material costs, the Company has historically been able to
recover significant increases in underlying raw material costs from its customers over a twelve to
twenty-four month period. Future cash from operations are dependent upon the Companys continued
ability to recover increases in underlying raw material increases from its customers.
Although accounts
receivable and inventory balances increased year-over-year due to
increased sales, the Companys year-over-year days sales outstanding improved throughout 2010 due to the
Companys efforts to improve collections, year-over year days inventory on-hand was relatively
flat, and year-over-year days payable outstanding improved as the Company implemented efforts
throughout the year to drive cash flow. Significant increases in resin pricing could negatively
affect our cash generated from operating activities in future periods.
Cash provided by operating activities decreased by $14.0 million in 2009 compared to
2008. This decrease is driven primarily by cash payments for restructuring, $18.8 million in 2009
versus $6.9 million in 2008. This was partially offset by lower levels of accounts receivable and
reduced investment in inventories resulting from lower volumes as well as our initiatives to reduce
overall working capital levels.
Cash used in investing activities totaled $47.2 million, $13.4 million, and $28.5 million for
the years ended December 31, 2010, 2009 and 2008. This 2010 increase was primarily the result of
the IntelliPack acquisition and higher capital expenditures, partially offset by proceeds from a
sale-leaseback transaction in North America. 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
$31.0 million in the 2010. On July 19, 2010 Pregis completed a sale-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.
In 2009, cash used in investing activities totaled $13.4 million primarily for capital
expenditures, which totaled $25.0 million which was partially offset by proceeds from a
sale-leaseback transaction in Europe of $11.6 million. In 2008, cash used in investing activities
was used primarily to fund capital expenditures of $30.9 million, offset by proceeds on minor
disposals of fixed assets and insurance proceeds of $3.2 million used to replace a printing machine
which had been destroyed by a fire. Additionally, in 2008 we funded final purchase price
adjustments and acquisition costs of approximately $1.0 million relating to the Besin acquisition
made in 2007.
Cash provided by (used in) financing activities totaled $4.1 million, $26.1 million, and
$(2.0) million for the years ended December 31, 2010, 2009 and 2008. In 2009 and 2008, the primary
financing use of cash was to fund the scheduled principal payments under our debt obligations. In
2010, cash provided by financing activities included proceeds from local lines of credit totaling
$3.7 million and the revolving credit facility draw of $0.5 million. In 2009, cash provided by
financing activities included proceeds from the revolving credit facility draw of $42.0 million ,
and the issuance of the 2009 senior secured floating rate notes of $172.2 million, offset by the
retirement of our Term B1 and B2 notes of $(177.0) million.
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Contractual Obligations
Our primary contractual cash obligations as of December 31, 2010 are summarized in the table
below.
2016 and | ||||||||||||||||||||||||||||
Total | 2011 | 2012 | 2013 | 2014 | 2015 | beyond | ||||||||||||||||||||||
Debt obligations: |
||||||||||||||||||||||||||||
Principal |
$ | 497,044 | $ | 46,219 | $ | | $ | 450,825 | $ | | $ | | $ | | ||||||||||||||
Interest (1) |
93,880 | 37,366 | 36,567 | 19,947 | | | | |||||||||||||||||||||
Total debt obligations |
590,924 | 83,585 | 36,567 | 470,772 | | | | |||||||||||||||||||||
Operating lease obligations |
128,500 | 16,131 | 12,940 | 10,920 | 9,259 | 6,710 | 72,540 | |||||||||||||||||||||
Capital lease obligations |
427 | 144 | 283 | |||||||||||||||||||||||||
Purchase obligations (2) |
| | | | | | | |||||||||||||||||||||
Total |
$ | 719,851 | $ | 99,860 | $ | 49,790 | $ | 481,692 | $ | 9,259 | $ | 6,710 | $ | 72,540 | ||||||||||||||
(1) | Represents estimated cash interest expense on borrowings outstanding as of December 31, 2010 without giving effect to any interest rate hedge arrangements. Interest on floating rate debt was estimated using the index rates in effect as of December 31, 2010 | |
(2) | This table does not include information on our recurring purchases of materials for use in production, as our raw material purchase contracts typically do not require fixed or minimum quantities. |
Due to the uncertainty of the timing of settlement with taxing authorities, we are unable to
make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits.
Therefore, $5.7 million of unrecognized tax benefits as of December 31, 2010 has been excluded from
the table above. Of this amount, $3.3 million is subject to indemnification under the Stock
Purchase Agreement with Pactiv and would therefore be reimbursed if the Company is required to
settle these amounts in cash. See Note 13 to the consolidated financial statements included
elsewhere within this report.
Our contractual obligations and commitments over the next several years are significant. In
addition to our contractual obligations noted above, we will also require cash to make capital
expenditures, pay taxes, and make contributions under the defined benefit pension plans covering
certain of our European employees. We incur capital expenditures for the purpose of maintaining
and replacing existing equipment and facilities, and from time to time, for facility expansion.
Our capital expenditures totaled $31.0 million, $25.0 million, and $30.9 million for the years
ended December 31, 2010, 2009 and 2008, respectively, and we expect our 2011 capital expenditures
to total approximately $30 to $35 million. We paid taxes of $2.2 million, $4.3 million, and $1.4
million during 2010, 2009 and 2008, respectively, net of amounts repaid by Pactiv under the terms
of the indemnity agreement. We contributed approximately $2.0 $3.0 million annually to our
defined benefit plans in each of the last three years and expect to contribute approximately $2.1
million during 2011, which is reduced due to the curtailment within our Netherlands pension plan.
We are also paying an annual management fee of $1.5 million, plus reasonable out-of-pocket
expenses, to AEA Investors LP for advisory and consulting services provided to us under the terms
of a management agreement.
Our principal source of liquidity will continue to be cash flows from operations, existing
cash balances, and borrowings available to us under our $75 million ABL credit facility (which in March 2011 replaced our previous $50 million revolving credit facility which was in effect as of December 31, 2010). As of
December 31, 2010, the Company had drawn $42.5 million under its then existing revolving credit facility and had
$1.1 million of availability after reduction for $6.4 million in outstanding letters of credit.
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To the extent that we generate cash in excess of that needed to fund our requirements as
discussed above, we presently expect that such excess cash would be used to invest in the business.
Long-term Liquidity. We believe that cash flow generated from operations, existing cash
balances, and our borrowing capacity 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 flows from operations, that anticipated operating improvements will
be realized or that future borrowings will be available under Pregiss ABL credit
facility 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, 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 other liquidity requirements include, but are not limited to, risks
related to increases in the cost of resin, our ability to obtain attractive working capital terms
from our key suppliers, our ability to protect our intellectual property, rising interest rates, a
further decline in the overall U.S. and European economies, weakening demand 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
detail under Item 1A, Risk Factors may also significantly impact our liquidity.
Senior Secured Credit Facilities. In connection with the Acquisition on October 13, 2005,
Pregis entered into senior secured credit facilities which provided for a $50 million 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 was repaid in full in March 2011, and the senior secured credit facilities were terminated in March 2011 when we entered into our ABL credit facility.
The revolving credit facility under our senior secured credit facilities provided for borrowings of up to $50.0 million, a portion of which could be made
available to the Companys non-U.S. subsidiary borrowers in euros and/or pounds sterling. The
revolving credit facility also included a swing-line loan sub-facility and a letter of credit
sub-facility. Interest on the revolving credit facility accrued 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 senior secured credit facilities. In addition, the Company was
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.
The senior secured credit facilities also included an accordion feature which permitted 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.
Pregiss senior secured credit facilities and related hedging arrangements were 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, were 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. In connection with the October 5, 2009 amendment to our senior
secured credit facilities, the Maximum Leverage Ratio and Minimum Cash Interest Coverage Ratio
covenants were eliminated, and the First Lien Leverage
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Ratio covenant of 2.0x replaced the Maximum
Leverage Ratio covenant. The First Lien Leverage Ratio was 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 December 31, 2010 and 2009:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at December 31, | ||||||||||
(dollars in thousands) | Measure | 2010 | 2009 | |||||||||
First Lien Leverage Ratio |
Maximum of 2.0x | 0.05 | | |||||||||
Consolidated EBITDA |
| $ | 69,996 | $ | 85,359 | |||||||
Net Debt Secured by First Priority Lien |
| $ | 3,802 | $ | (32,857 | )* |
* | Net Debt is negative as cash on hand exceeds first lien secured debt. |
As used in the calculation of First Lien Leverage Ratio, Consolidated EBITDA was 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-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 was calculated under the senior secured credit facility for the twelve
months ended December 31, 2010 and 2009 as follows:
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(unaudited) | Twelve Months Ended December 31, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net Loss |
$ | (37,072 | ) | $ | (18,010 | ) | ||
Senior Secured Credit Facility Consolidated Net Income definition add backs: |
||||||||
Non-cash compensation charges |
3,092 | 1,363 | ||||||
Net after tax extraordinary gains or losses (incl. severance and restructuring charges) |
9,157 | 16,138 | ||||||
Non-cash unrealized currency gains or losses |
1,008 | (6,125 | ) | |||||
Any FAS 142, 144, 141 impairment charge or asset write off |
| (59 | ) | |||||
Consolidated Net Loss |
$ | (23,815 | ) | $ | (6,693 | ) | ||
Senior Secured Credit Facility Consolidated EBITDA definition add backs: |
||||||||
Interest expense, net |
48,110 | 42,210 | ||||||
Income tax benefit |
(8,925 | ) | (2,999 | ) | ||||
Depreciation expense and amortization |
46,454 | 44,783 | ||||||
Other non-cash charges (including loss on sales leaseback) |
1,837 | | ||||||
Fees payable to AEA Investors LP |
2,471 | 2,045 | ||||||
Unusual and non-recurring charges |
10,022 | 6,013 | ||||||
Pro forma EBITDA of acquisitions |
531 | | ||||||
Adjustment for 5% EBITDA cap limitation of unusual and non-recurring items |
(6,689 | ) | | |||||
Consolidated EBITDA |
$ | 69,996 | $ | 85,359 | ||||
As of December 31, 2010, Pregis was in compliance with all covenants contained in its senior
secured credit facilities.
In October 2009 we used the proceeds of the offering of the unregistered 2009 senior secured
notes (defined below), 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
unregistered 2009 senior secured notes and the use of proceeds thereof and subject to compliance
with ABL credit facility, the indenture governing the senior secured floating rate
notes continues to allow us to incur at least $220 million (less amounts then outstanding under the
ABL credit facility) of debt. If such debt is incurred under the $220.0 million credit
facility basket or in compliance with a 3:1 senior secured leverage ratio, plus an additional $50.0
million, it would constitute first priority lien obligations and could be secured on a first
priority basis.
ABL Credit Facility.
On March 23, 2011, Pregis Holding II and Pregis and certain of
its subsidiaries entered into a $75 million Credit Agreement with Wells Fargo Capital Finance LLC, as agent, Wells Fargo Bank, National Association, as lender
and other lenders from time to time parties thereto (ABL credit facility). The ABL credit facility provides for the
borrowings in dollars, euros and pounds sterling and consists of (1) a UK facility, under which
certain UK subsidiaries of Pregis (the UK Borrowers) may from time to time borrow up to a
maximum amount of the lesser of the UK borrowing base and $30 million and (2) a US facility, under
which certain US subsidiaries of Pregis (the US Borrowers and, together with the UK Borrowers,
the Borrowers) may from time to time borrow up to a maximum amount of the lesser of the US
borrowing base and $75 million less amounts outstanding under the UK facility. The borrowing
base is calculated on the basis of certain permitted over advance amounts, plus a percentage of
certain eligible accounts receivable and eligible inventory, subject to reserves established by the
agent from time to time. The ABL credit facility provides for the issuances of letters of credit
and a swingline subfacility. The ABL credit facility also provides for future uncommitted
increases of its maximum amount, not to exceed $40 million.
The ABL credit facility matures on the earlier of March 22, 2016 and the date that is 90 days prior
to the maturity of the existing high yield notes of Pregis Corporation (as such notes may be
refinanced prior to such maturity date). Advances under the ABL credit facility bears interest, at
the Borrowers option, equal to adjusted LIBOR, plus an applicable margin, or a base rate, plus an
applicable margin. The applicable margin for LIBOR loans ranges from 2.5% to 3%, depending on the
average quarterly excess availability of the Borrowers. The applicable margin for the base rate
loans is 100 basis points lower than the applicable margin for the LIBOR loans.
The obligations of the US Borrowers are guaranteed by Pregis and substantially all of its US
subsidiaries (subject to certain exceptions for immaterial and non wholly-owned subsidiaries) and
are secured by a first priority security interest (ranking senior to the security interest
securing Pregis Corporations secured notes) in substantially all of the assets (other than certain
excluded property) of Pregis and its US subsidiaries and by the capital stock of substantially all
of Pregis US subsidiaries and 65% of the voting stock (and 100% of the nonvoting stock) of its
first-tier foreign subsidiaries. The obligations of the UK Borrowers are guaranteed by Pregis and
substantially all of its foreign and domestic subsidiaries (subject to certain exceptions for
immaterial and non wholly-owned subsidiaries) and are secured by substantially all of the assets
(other than certain excluded property) of Pregis and its foreign and domestic subsidiaries and by
the capital stock of substantially all of Pregis foreign and domestic subsidiaries.
The ABL credit facility contains customary representations, warranties, covenants and events of
default, and requires monthly compliance with a springing fixed charge coverage ratio of 1.1 to
1.0 if the excess availability of Pregis and its subsidiaries falls below a certain level. The ABL
credit facility is also subject to mandatory prepayments out of certain asset sale, insurance and
condemnation proceeds, if the excess availability of Pregis and its subsidiaries falls below a
certain level.
Senior Secured Notes and Senior Subordinated Notes. In connection with the Acquisition 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 $150.0 million aggregate
principal amount of 12⅜% senior subordinated notes due 2013 (the senior subordinated notes). 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,
and together with the 2005 senior secured notes the 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 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 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. Pregis may redeem some or all of the senior secured notes at redemption prices equal
to 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 senior secured notes at a repurchase price
equal to 101% of their principal amount, plus accrued and unpaid interest to the date of
repurchase.
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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 senior
subordinated notes on or after October 15, 2010 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).
The 2009 senior secured notes are treated as a single class under the indenture with the
100.0 million principal amount of 2005 senior secured notes. 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 all or 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.
The proceeds from the sale of the 2009 senior secured notes on October 5, 2009 were used to
repay the Term B-1 and Term B-2 indebtedness under our then-existing senior secured credit facilities.
Collateral for the Senior Secured Notes. The senior secured 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 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. |
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As of December 31, 2010, the capital stock of the following subsidiaries of Pregis constitutes
collateral for the senior secured notes:
As of December 31, 2010 | ||||||||||||
Amount of Collateral | ||||||||||||
(Maximum of Book Value | ||||||||||||
and Market Value, | Book Value of | Market Value of | ||||||||||
Name of Subsidiary | Subject to 20% Cap) | Capital Stock | Capital Stock | |||||||||
Pregis Innovative Packaging Inc. |
$ | 60,165,000 | $ | 50,300,000 | $ | 112,300,000 | ||||||
Hexacomb Corporation |
$ | 43,400,000 | $ | 43,300,000 | $ | 37,200,000 | ||||||
IntelliPack |
$ | 38,300,000 | $ | 38,300,000 | $ | 9,100,000 | ||||||
Pregis (Luxembourg) Holding S.àr.l. (66%) |
$ | 17,300,000 | $ | 17,300,000 | $ | | ||||||
Pregis Management Corporation |
$ | 100 | $ | 100 | $ | 100 |
As described above, under the collateral agreement, the capital stock pledged to the senior
secured 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 notes. This threshold is 45,000,000, or, at the December
31, 2010 exchange rate of U.S. dollars to euro of 1.3370:1.00, approximately $60.2 million. As of
December 31, 2010, the book value and the market value of the shares of capital stock of Pregis
Innovative Packaging Inc. were approximately $50.3 million and $112.3 million, respectively; the
book value and the market value of the shares of capital stock of Hexacomb Corporation were
approximately $43.3 million and $37.2 million respectively; the book value of and the market value
of the shares of capital stock of IntelliPack were approximately $38.3 million and $9.1 million
respectively; and the book value and the market value of 66% of the shares of capital stock of
Pregis (Luxembourg) Holding S.àr.l. were approximately $17.3 million and $ million, respectively.
Therefore, in accordance with the collateral agreement, the collateral pool for the senior secured
floating rate notes includes approximately $60.2 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 other domestic subsidiaries and Pregis (Luxemburg) Holdings S.ar.l are each
less than the $60.2 million threshold, they are not effected by the 20% clause of the collateral
agreement.
For the year ended December 31, 2010, 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.àr.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 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 necessary to determine our compliance with the collateral
arrangement governing the notes.
The value of the collateral for the senior secured 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, 2010, the value of the
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collateral for the senior secured floating rate notes totaled
approximately $617.7 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 $459.2 million),
and (2) the collateral value of the capital stock, as outlined above (which amount totaled $158.5
million). Any proceeds received upon the sale of collateral would be paid first to the lenders
under our ABL credit facility, who have a first lien security interest in the
collateral, before any payment could be made to holders of the senior secured notes. There is no
assurance that any collateral value would remain for the holders of the senior secured notes after
payment in full to the lenders under our ABL credit facility.
Covenant Ratios Contained in the Senior Secured Notes and Senior Subordinated Notes. The
indentures governing the senior secured 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 ABL credit facility 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
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 years ended December 31, 2010 and 2009:
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Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at December 31, | ||||||||||
(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 | 1.8 | x | 2.2 | x | |||||||
Secured Indebtedness Leverage Ratio |
Maximum of 3.0x | 0.6 | x | 0.5 | x | |||||||
Consolidated Cash Flow (Adjusted EBITDA) |
| $ | 76,685 | $ | 85,359 | |||||||
Fixed Charges (after giving pro forma effect to acquisitions
and/or dispositions occurring in the reporting period) |
| $ | 41,694 | $ | 38,834 | |||||||
Secured Indebtedness |
| $ | 46,647 | $ | 42,578 |
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 December 31, 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 a reduction in the actual ratio. As of December 31, 2010, the
Companys Fixed Charge Coverage Ratio was less than 2:0. 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.
Adjusted EBITDA is calculated under the indentures governing our senior secured notes and
senior subordinated notes for the years ended December 31, 2010 and 2009 as follows:
(unaudited) | Twelve Months Ended December 31, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net loss of Pregis Holding II Corporation |
$ | (37,072 | ) | $ | (18,010 | ) | ||
Interest expense, net of interest income |
48,110 | 42,210 | ||||||
Income tax benefit |
(8,925 | ) | (2,999 | ) | ||||
Depreciation and amortization |
46,454 | 44,783 | ||||||
EBITDA |
48,567 | 65,984 | ||||||
Other non-cash charges (income): |
||||||||
Unrealized foreign currency transaction losses (gains),
net |
1,008 | (6,125 | ) | |||||
Non-cash stock based compensation expense |
3,092 | 1,363 | ||||||
Non-cash asset impairment charge |
| (59 | ) | |||||
Loss on sale leaseback transaction |
1,837 | | ||||||
Net unusual or nonrecurring gains or losses: |
||||||||
Restructuring, severance and related expenses |
9,157 | 16,138 | ||||||
Other unusual or nonrecurring gains or losses |
10,022 | 6,013 | ||||||
Other adjustments: |
||||||||
Amounts paid pursuant to management agreement with Sponsor |
2,471 | 2,045 | ||||||
Pro forma adjusted EBITDA of acquired business |
531 | | ||||||
Adjusted EBITDA (Consolidated Cash Flow) |
$ | 76,685 | $ | 85,359 | ||||
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(1) | Other non-cash charges (income) include (a) net unrealized foreign currency transaction losses and gains, (b) non-cash compensation expense resulting from the grant of Pregis Holding I options, and (c) other non-cash charges that will 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 allow 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 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 twelve months ended December 31, 2010, we have adjusted for approximately $0.5 million relating to pre-acquisition earnings relating to the acquisition of IntelliPack. There can be no assurance that we will be able to achieve comparable earnings in the future. |
Local lines of credit. From time to time, certain of the foreign businesses utilize
various lines of credit in their operations. These lines of credit are generally used as overdraft
facilities or for issuance of trade letters of credit and are in effect until cancelled by one or
both parties. Amounts available under these lines of credit were $15.3 million and $14.8 million at
December 31, 2010 and 2009, respectively. At December 31, 2010, $3.7 million borrowings were drawn
under these lines and trade letters of credit totaling $3.3 million were issued and outstanding.
Credit Ratings. Our credit ratings as of the date of this Report are summarized
below. This downgrade has not impacted our borrowing costs.
Moodys | S&P | |||||||
Senior Secured Floating Rate Notes (2005) |
B3 | B- | ||||||
Senior Secured Floating Rate Notes (2009) |
B3 | B- | ||||||
Senior Subordinated Notes |
Caa2 | CCC+ | ||||||
Revolver |
Ba3 | BB- |
Factors that can affect our credit ratings include changes in our operating performance, the
economic environment, our financial position, and changes in our business strategy. Any future
ratings downgrade could adversely impact, among other things, our future borrowing costs and access
to the credit and capital markets.
OFF BALANCE SHEET ARRANGEMENTS
We have no special purpose entities or off balance sheet arrangements, other than operating
leases in the ordinary course of business, which are disclosed in Note 11 to the consolidated
financial statements.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our consolidated 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 consolidated 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. The Notes to our annual audited consolidated financial statements
contain a summary of our significant accounting policies. We believe the following discussion
addresses our most critical accounting policies, which are those that require our most subjective
or complex judgments that could materially impact our reported results if actual outcomes differed
significantly from estimates.
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Revenue Recognition. Our principal business is the manufacture and supply of protective and
specialty packaging products. We recognize net sales of our products when the risks and rewards of
ownership have transferred
to the customer, which is generally upon shipment (but in some cases may be upon delivery),
based on specific terms of sale. In arriving at net sales, we estimate the amount of deductions
from sales that are likely to be earned or taken by customers in conjunction with incentive
programs, such as volume rebates and early payment discounts, and record such estimates as sales
are recorded. Our deduction estimates are based on historical experience.
In recent years, we began participating in programs in certain of our European protective
packaging and flexible packaging businesses whereby the businesses purchase resin quantities in
excess of their internal requirements and resell the surplus to other customers at a nominal
profit. These resin resale programs enable the businesses to benefit from improved quantity
discounts and volume rebates, as well as increased flexibility in their resin purchasing. This
activity is presented on a net basis within net sales, in accordance with ASC Topic 605, Reporting
Revenue Gross as a Principal versus Net as an Agent, on the basis that the third-party resin
supplier is responsible for fulfillment of the order to the customers specifications, ships the
resin directly to the customer, and maintains general inventory risk and risk of physical loss
during shipment. We recognize revenue related to resin resale activity upon delivery to the
customer.
Pension. Predominantly in our U.K. and Netherlands based businesses, we provide defined
benefit pension plan coverage for salaried and hourly employees. We use several statistical and
other models which attempt to anticipate future events in calculating the expenses and liabilities
related to the plans. These factors include actuarial assumptions about discount rates, long-term
return on assets, salary increases, mortality rates, and other factors. The actuarial assumptions
used may differ materially from actual results due to changing market and economic conditions, or
longer or shorter life spans of participants. Such differences may result in a significant impact
on the recognized pension expense and recorded liability.
Goodwill and Other Indefinite Lived Intangible Assets. Carrying values of goodwill and other
intangible assets with indefinite lives are reviewed for possible impairment annually on the first
day of our fourth quarter, October 1, or when events or changes in business circumstances indicate
that the carrying value 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 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.
We performed the annual goodwill impairment test during the fourth quarter of 2010. The fair
value of our reporting units was estimated primarily using a combination of the income approach and
the market approach. We used discount rates ranging from 13% to 14.0% in determining the discounted
cash flows for each of our reporting units under the income approach, corresponding to our cost of
capital, adjusted for risk where appropriate. In determining estimated future cash flows, current
and future levels of income were considered that reflected business
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trends and market conditions.
Under the market approach, we estimated the fair value of the reporting units based on
peer company multiples of earnings before interest, taxes, depreciation and amortization
(EBITDA). We also considered the multiples at which businesses similar to the reporting units have
been sold or offered for sale.
The estimates and assumptions we use are consistent with the business plans and estimates we
use to manage operations and to make acquisition and divestiture decisions. The use of different
assumptions could impact whether an impairment charge is required and, if so, the amount of such
impairment. Future outcomes may also differ. If we fail to achieve estimated volume and pricing
targets, experience unfavorable market conditions or achieve results that differ from our
estimates, then revenue and cost forecasts may not be achieved, and we may be required to recognize
impairment charges.
The initial step of our impairment test indicated no impairment. All of the reporting units
had estimated fair values exceeding their carrying values. The range by which the fair values of
the reporting units exceeded their carrying values was 10% 87% as of October 1, 2010. The
corresponding carrying values of goodwill for these reporting units ranged from $4.0 million to
$61.0 million as of October 1, 2010.
We test the carrying value of other intangible assets with indefinite lives by comparing the
fair value of the intangible assets to the carrying value. Fair value is estimated using a relief
of royalty approach, a discounted cash flow methodology. Our 2010 and 2009 annual tests for
impairment of trade names, our only other intangible assets not subject to amortization, resulted
in no impairment write-downs in 2010 and a write-down of approximately $0.2 million in 2009. The
2009 write-down was due primarily to reduced near-term net sales projections for the respective
product.
Impairment of Long-Lived Assets. The Company reviews long-lived assets held for use for
impairment whenever events or changes in circumstances indicate that the carrying amount of the
related asset may not be recoverable. We use estimates of undiscounted cash flows from long-lived
assets to determine whether the book value of such assets is recoverable over the assets remaining
useful lives. If an asset is determined to be impaired, the impairment is measured as the amount by
which the carrying value of the asset exceeds its fair value. An impairment charge would have a
negative impact on net income.
Income Taxes. Our overall tax position is complex and requires careful analysis by management
to estimate the expected realization of income tax assets and liabilities. We recognize deferred
tax assets and liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets generally represent items
that can be used as a tax deduction or credit in the tax return in future years for which we have
already recorded the tax benefit in the financial statements. We regularly review our deferred tax
assets for recoverability and establish a valuation allowance to reduce such assets to amounts
expected to be realized. In determining the required level of valuation allowance, we consider
whether it is more likely than not that all or some portion of deferred tax assets will not be
realized. This assessment is based on managements expectations as to whether sufficient taxable
income of an appropriate character will be realized within the tax carryback and carryforward
periods. Our assessment involves estimates and assumptions about matters that are inherently
uncertain, and unanticipated events or circumstances could cause actual results to differ from
these estimates. Should we change our estimate of the amount of deferred tax assets that we would
be able realize, an adjustment to the valuation allowance would result in an increase or decrease
to the provision for income taxes in the period such a change in estimate was made.
We record liabilities for uncertain tax positions in accordance with Accounting Standards
Codification (ASC) Topic 740, Accounting for Uncertainty in Income Taxes (ASC Topic 740). The tax
positions we take are based on our interpretations of tax laws and regulations in the applicable
federal, state and international jurisdictions. We believe that our tax returns properly reflect
the tax consequences of our operations, and that our reserves for tax contingencies are appropriate
and sufficient for the positions taken. However, these positions are subject to audit and review by
the tax authorities, which may result in future taxes, interest and penalties. Because of the
uncertainty of the final outcome of these examinations, we have reserved for potential reductions
of tax benefits (including related interest) for amounts that do not meet the more-likely-than-not
thresholds for recognition
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and measurement as required by ASC Topic 740. The tax reserves are
reevaluated throughout the year, taking into account new legislation, regulations, case law and
audit results.
The Company does not provide for U.S. federal income taxes on unremitted earnings of foreign
subsidiaries since it is managements present intention to reinvest those earnings in foreign
operations. Positive unremitted earnings of foreign subsidiaries totaled $85,278 at December 31,
2010. If such amounts were repatriated, determination of the amount of U.S. income taxes that would
be incurred is not practical due to the complexities associated with this calculation.
RECENT 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 adoption did not have a material impact on the
Companys consolidated financial statements.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks related to changes in interest rates, foreign currency exchange
rates and commodity prices. To manage these risks, we may enter into various hedging contracts in
accordance with established policies and procedures. We do not use hedging instruments for trading
purposes.
Interest Rate Risk. We are subject to interest rate market risk in connection with our
long-term debt. Our principal interest rate exposure relates to outstanding amounts under our
senior secured notes. At December 31, 2010, we had $336.4 million of variable rate debt. A one
percentage point increase or decrease in the average interest rates would correspondingly change
our interest expense by approximately $3.6 million per year. This excludes the impact of the
interest rate swap arrangement currently in place to balance the fixed and variable rate debt
components of our capital structure. At December 31, 2010 and 2009, the carrying value of our 2005
senior secured notes was $133.7 million and $143.2 million, respectively, which compares to fair
value, based upon quoted market prices, of $125.7 million and $130.3 million for the respective
periods. At December 31, 2010 and 2009, the carrying value of our 2009 senior secured notes was
$160.2 million and $168.7 million, respectively, which compares to fair value, based upon quoted
market prices, of $157.1 million and $162.8 million for the respective periods.
The fair value of our fixed rate senior subordinated notes is exposed to market risk of
interest rate changes. The carrying value of the senior subordinated notes was $148.7 million and
$148.4 million at December 31, 2010 and 2009, respectively. The estimated fair value of such notes
was $136.5 million and $145.5 million at December 31, 2010 and 2009, based upon quoted market
prices.
Raw Material; Commodity Price Risk. We rely upon the supply of certain raw materials and
commodities in our production processes. The primary raw materials we use in the manufacture of our
products are various plastic resins, primarily polyethylene and polypropylene. Approximately 57% of
our 2010 net sales were from products made with plastic resins. We manage the exposures associated
with these costs primarily through terms of the sales and by maintaining relationships with
multiple vendors. We acquire these materials at market prices, which are negotiated on a continuous
basis, and we do not typically buy forward beyond two or three months or enter into guaranteed
supply or fixed price contracts with our suppliers. Additionally, we have not entered into hedges
with respect to our raw material costs. We seek to mitigate the market risk related to commodity
pricing by passing the increases in raw material costs through to our customers in the form of
price increases.
Foreign Currency Exchange Rate Risk. Our results of operations are affected by changes in
foreign currency exchange rates. Approximately 63% of our 2010 net sales were made in currencies
other than the U.S. dollar, principally the euro and the pound sterling. We have a natural hedge in
our operations, as we typically produce, buy raw materials, and sell our products in the same
currency. We are exposed to translational currency risk, however, in converting our operating
results in Europe, the United Kingdom and to a lesser extent Egypt, Poland, the Czech Republic,
Hungary, Bulgaria, Romania, Canada, and Mexico at the end of each reporting period. The
strengthening of the U.S. dollar relative to the euro and the pound sterling in 2010 had an
unfavorable impact on our financial results in U.S. dollars, compared to fiscal 2009 results. The
translational currency impact of a plus/minus swing of 10% in the U.S. dollar exchange rate on our
2010 operating income would have no impact based on the offsetting operating income and losses. The
euro companies operating loss offset the pound sterling companies operating income in 2010.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO FINANCIAL STATEMENTS
48
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of Pregis Holding II Corporation
We have audited the accompanying consolidated balance sheets of Pregis Holding II Corporation as of
December 31, 2010 and 2009 and the related consolidated statements of operations, equity and
comprehensive loss, and cash flows for the years ended December 31, 2010, 2009 and 2008. Our audits
also included the financial statement schedule listed in the index to the financial statements as
Schedule II Valuation and Qualifying Accounts. These financial statements and schedule are the
responsibility of Pregis Holding II Corporations management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Pregis Holding II Corporation at December 31, 2010
and 2009 and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
March 25, 2011
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Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
(dollars in thousands, except share and per share data)
December 31, | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 47,845 | $ | 80,435 | ||||
Accounts receivable |
||||||||
Trade, net of allowances of $7,513 and $6,015 respectively |
118,836 | 120,812 | ||||||
Other |
18,573 | 12,035 | ||||||
Inventories, net |
88,975 | 81,024 | ||||||
Deferred income taxes |
3,699 | 5,079 | ||||||
Due from Pactiv |
1,161 | 1,169 | ||||||
Prepayments and other current assets |
9,131 | 7,929 | ||||||
Total current assets |
288,220 | 308,483 | ||||||
Property, plant and equipment, net |
198,260 | 226,882 | ||||||
Other assets |
||||||||
Goodwill |
139,795 | 126,250 | ||||||
Intangible assets, net |
53,642 | 38,054 | ||||||
Deferred financing costs, net |
4,816 | 8,092 | ||||||
Due from Pactiv, long-term |
8,168 | 8,429 | ||||||
Pension and related assets |
11,848 | 13,953 | ||||||
Restricted Cash |
3,501 | | ||||||
Other |
448 | 404 | ||||||
Total other assets |
222,218 | 195,182 | ||||||
Total assets |
$ | 708,698 | $ | 730,547 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 46,363 | $ | 300 | ||||
Accounts payable |
101,266 | 78,708 | ||||||
Accrued income taxes |
2,971 | 5,236 | ||||||
Accrued payroll and benefits |
14,626 | 14,242 | ||||||
Accrued interest |
7,654 | 7,722 | ||||||
Other |
20,903 | 18,311 | ||||||
Total current liabilities |
193,783 | 124,219 | ||||||
Long-term debt |
442,908 | 502,534 | ||||||
Deferred income taxes |
16,029 | 19,721 | ||||||
Long-term income tax liabilities |
5,732 | 5,463 | ||||||
Pension and related liabilities |
4,149 | 4,451 | ||||||
Other |
19,566 | 15,367 | ||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized,
14,900.35 shares issued and outstanding at
December 31, 2010 and 2009 |
| | ||||||
Additional paid-in capital |
155,055 | 151,963 | ||||||
Accumulated deficit |
(119,400 | ) | (82,328 | ) | ||||
Accumulated other comprehensive loss |
(9,124 | ) | (10,843 | ) | ||||
Total stockholders equity |
26,531 | 58,792 | ||||||
Total liabilities and stockholders equity |
$ | 708,698 | $ | 730,547 | ||||
The accompanying notes are an integral part of these financial statements
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Pregis Holding II Corporation
Consolidated Statements of Operations
(dollars in thousands)
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net Sales |
$ | 873,206 | $ | 801,224 | $ | 1,019,364 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales, excluding depreciation
and amortization |
684,498 | 609,515 | 798,690 | |||||||||
Selling, general and administrative |
130,057 | 117,048 | 127,800 | |||||||||
Depreciation and amortization |
46,454 | 44,783 | 52,344 | |||||||||
Goodwill impairment |
| | 19,057 | |||||||||
Other operating expense, net |
9,442 | 14,980 | 8,146 | |||||||||
Total operating costs and expenses |
870,451 | 786,326 | 1,006,037 | |||||||||
Operating income |
2,755 | 14,898 | 13,327 | |||||||||
Interest expense |
48,364 | 42,604 | 49,069 | |||||||||
Interest income |
(254 | ) | (394 | ) | (875 | ) | ||||||
Foreign exchange loss (gain), net |
642 | (6,303 | ) | 14,728 | ||||||||
Loss before income taxes |
(45,997 | ) | (21,009 | ) | (49,595 | ) | ||||||
Income tax benefit |
(8,925 | ) | (2,999 | ) | (1,865 | ) | ||||||
Net loss |
$ | (37,072 | ) | $ | (18,010 | ) | $ | (47,730 | ) | |||
The accompanying notes are an integral part of these financial statements.
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Pregis Holding II Corporation
Consolidated Statements of Equity
and Comprehensive Loss
(dollars in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | Total | |||||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Stockholders | Comprehensive | |||||||||||||||||||
Stock | Capital | Deficit | Income (Loss) | Equity | Income (Loss) | |||||||||||||||||||
Balance at January 1, 2008 |
$ | | $ | 149,659 | $ | (16,588 | ) | $ | 20,586 | $ | 153,657 | |||||||||||||
Stock-based compensation |
951 | 951 | ||||||||||||||||||||||
Net loss |
(47,730 | ) | (47,730 | ) | $ | (47,730 | ) | |||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation adjustment |
(13,573 | ) | (13,573 | ) | (13,573 | ) | ||||||||||||||||||
Pension liability adjustment, net of tax of $65 |
(154 | ) | (154 | ) | (154 | ) | ||||||||||||||||||
Decrease in fair value of derivatives qualifying as cash flow hedges, net of tax of $1,798 |
(3,050 | ) | (3,050 | ) | (3,050 | ) | ||||||||||||||||||
Total comprehensive loss |
$ | (64,507 | ) | |||||||||||||||||||||
Balance at December 31, 2008 |
$ | | $ | 150,610 | $ | (64,318 | ) | $ | 3,809 | $ | 90,101 | |||||||||||||
Stock-based compensation |
1,353 | 1,353 | ||||||||||||||||||||||
Net loss |
(18,010 | ) | (18,010 | ) | $ | (18,010 | ) | |||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation adjustment |
327 | 327 | 327 | |||||||||||||||||||||
Pension liability adjustment |
(13,784 | ) | (13,784 | ) | (13,784 | ) | ||||||||||||||||||
Decrease in fair value of derivatives qualifying as cash flow hedges, net of tax of $703 |
(1,195 | ) | (1,195 | ) | (1,195 | ) | ||||||||||||||||||
Total comprehensive loss |
$ | (32,662 | ) | |||||||||||||||||||||
Balance at December 31, 2009 |
$ | | $ | 151,963 | $ | (82,328 | ) | $ | (10,843 | ) | $ | 58,792 | ||||||||||||
Stock-based compensation |
3,092 | 3,092 | ||||||||||||||||||||||
Net loss |
(37,072 | ) | (37,072 | ) | $ | (37,072 | ) | |||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation adjustment |
2,139 | 2,139 | 2,139 | |||||||||||||||||||||
Pension
liability adjustment, net of tax of $513 |
(2,482 | ) | (2,482 | ) | (2,482 | ) | ||||||||||||||||||
Decrease in fair value of derivatives qualifying as cash flow hedges, net of tax of $1,216 |
2,062 | 2,062 | 2,062 | |||||||||||||||||||||
Total comprehensive loss |
$ | (35,353 | ) | |||||||||||||||||||||
Balance at December 31, 2010 |
$ | | $ | 155,055 | $ | (119,400 | ) | $ | (9,124 | ) | $ | 26,531 | ||||||||||||
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Pregis Holding II Corporation Consolidated
Statement of Cash Flow
(dollars in thousands)
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating activities |
||||||||||||
Net loss |
$ | (37,072 | ) | $ | (18,010 | ) | $ | (47,730 | ) | |||
Adjustments to reconcile net loss to
cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
46,454 | 44,783 | 52,344 | |||||||||
Deferred income taxes |
(10,013 | ) | (1,060 | ) | (7,769 | ) | ||||||
Unrealized foreign exchange loss (gain) |
1,008 | (6,126 | ) | 14,022 | ||||||||
Amortization of deferred financing costs |
3,472 | 5,247 | 2,374 | |||||||||
Amortization of debt discount |
2,945 | 861 | ||||||||||
Loss (gain) on disposal of property, plant and equipment |
1,601 | (270 | ) | (313 | ) | |||||||
Stock compensation expense |
3,092 | 1,353 | 951 | |||||||||
Defined benefit pension plan expense (income) |
279 | (1,189 | ) | (187 | ) | |||||||
Curtailment gain on defined benefit pension plan |
| | (3,736 | ) | ||||||||
Goodwill impairment |
| | 19,057 | |||||||||
Trademark impairment |
| 194 | 1,297 | |||||||||
Impairment of interest rate swap asset |
| | 1,299 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts and other receivables, net |
(8,062 | ) | 7,283 | 13,907 | ||||||||
Due from Pactiv |
(135 | ) | 5,195 | 6,630 | ||||||||
Inventories, net |
(10,230 | ) | 9,153 | 13,597 | ||||||||
Prepayments and other current assets |
(1,233 | ) | 17 | 79 | ||||||||
Accounts payable |
24,430 | (2,944 | ) | (13,121 | ) | |||||||
Accrued taxes |
(1,532 | ) | (7,876 | ) | (6,373 | ) | ||||||
Accrued interest |
(132 | ) | 1,043 | 68 | ||||||||
Other current liabilities |
(426 | ) | (1,829 | ) | (7,014 | ) | ||||||
Pension and other |
(1,705 | ) | (10,208 | ) | 272 | |||||||
Cash provided by operating activities |
12,741 | 25,617 | 39,654 | |||||||||
Investing activities |
||||||||||||
Capital expenditures |
(31,033 | ) | (25,045 | ) | (30,882 | ) | ||||||
Proceeds from sale of assets |
1,517 | 1,766 | 1,063 | |||||||||
Proceeds from sale and leaseback of property, net of costs |
17,875 | 9,850 | | |||||||||
Acquisition of business, net of cash acquired |
(32,105 | ) | | (958 | ) | |||||||
Insurance proceeds |
| | 3,205 | |||||||||
Change in restricted cash |
(3,501 | ) | | | ||||||||
Other, net |
| | (969 | ) | ||||||||
Cash used in investing activities |
(47,247 | ) | (13,429 | ) | (28,541 | ) | ||||||
Financing activities |
||||||||||||
Proceeds from note issuance, net of discount |
| 172,173 | | |||||||||
Proceeds from revolving credit facility |
500 | 42,000 | (115 | ) | ||||||||
Repayment of term B1 & B2 notes |
| (176,991 | ) | | ||||||||
Deferred financing costs |
| (6,466 | ) | | ||||||||
Repayment of debt |
| (4,312 | ) | (1,893 | ) | |||||||
Proceeds from foreign lines of credit |
3,719 | | | |||||||||
Other, net |
(153 | ) | (269 | ) | | |||||||
Cash provided (used in) financing activities |
4,066 | 26,135 | (2,008 | ) | ||||||||
Effect of exchange rate changes on cash
and cash equivalents |
(2,150 | ) | 933 | (2,915 | ) | |||||||
Increase (decrease) in cash and cash equivalents |
(32,590 | ) | 39,256 | 6,190 | ||||||||
Cash and cash equivalents, beginning of period |
80,435 | 41,179 | 34,989 | |||||||||
Cash and cash equivalents, end of period |
$ | 47,845 | $ | 80,435 | $ | 41,179 | ||||||
Supplemental cash flow disclosures |
||||||||||||
Cash paid for income taxes, net of Pactiv reimbursement |
2,245 | 4,248 | 1,394 | |||||||||
Cash paid for interest |
40,793 | 36,547 | 44,984 |
The accompanying notes are an integral part of these financial statements.
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Pregis Holding II Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, unless otherwise noted)
1. DESCRIPTION OF THE BUSINESS AND CHANGE IN OWNERSHIP
Description of the Business
Pregis Corporation (Pregis) is an international manufacturer, marketer and supplier of
protective packaging products and specialty packaging solutions.
In 2008, Pregis realigned its segment reporting to conform to its current operating and
management structure of two reportable segments, Protective Packaging and Specialty Packaging. See
Note 18, Segment and Geographic Information, for further discussion of Pregiss new segment
reporting.
Ownership
On October 13, 2005, Pregis, pursuant to a Stock Purchase Agreement (as amended, the Stock
Purchase Agreement) with Pactiv Corporation (Pactiv) and certain of its affiliates, acquired the
outstanding shares of capital stock of Pactivs subsidiaries comprising its global protective
packaging and European specialty packaging businesses (the Acquisition). Pregis, along with
Pregis Holding II Corporation (Pregis Holding II or the Company) and Pregis Holding I
Corporation (Pregis Holding I), were formed by AEA Investors LP and its affiliates (the
Sponsors) for the purpose of consummating the Acquisition. The adjusted purchase price for the
Acquisition was $559.7 million, which included direct costs of the acquisition of $15.7 million,
pension plan funding of $20.1 million, and certain post-closing adjustments.
Funding for the Acquisition included equity investments from the Sponsors totaling $149.0
million, along with proceeds from the issuance of senior secured notes and senior subordinated
notes in a private offering, and borrowings under new term loan facilities. The equity investments
were made to Pregis Holding I, which is the direct parent company of Pregis Holding II, which in
turn is the direct parent company of Pregis. Therefore, immediately following the Acquisition, AEA
Investors LP, through its indirect ownership, owned 100% of the outstanding common stock of the
Company.
The Stock Purchase Agreement indemnified the Company for payment of certain liabilities
relating to the pre-acquisition period. Indemnification amounts for recorded liabilities, which
primarily relate to pre-acquisition income tax liabilities, are reflected in the balance sheet as
amounts Due from Pactiv.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Pregis Holding II and its
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
Separate financial statements of Pregis 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 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 and since Pregis Holding II has no operations
or assets separate from its investment in Pregis (see Note 23).
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
The Companys principal business is the manufacture and supply of protective and specialty
packaging products. Pregis recognizes net sales of these products when the risks and rewards of
ownership have transferred to the customer, which is generally upon shipment (but in some cases may
be upon delivery), based on specific terms of sale. In arriving at net sales, Pregis estimates the
amount of deductions from sales that are likely to be earned or taken by customers in conjunction
with incentive programs, such as volume rebates and early payment discounts and records such
estimates as sales are recorded. The Company bases its deduction estimates on historical
experience.
In recent years, the Company began participating in programs in certain of its European
protective and specialty packaging businesses whereby the businesses purchase resin quantities in
excess of their internal requirements and resells the surplus to other customers at a nominal
profit. These resin resale programs enable the businesses to benefit from improved quantity
discounts and volume rebates, as well as increased flexibility in their resin purchasing. The
Company presents this activity on a net basis within net sales on the basis that the third-party
resin supplier is responsible for fulfillment of the order to the customers specifications, ships
the resin directly to the customer, and maintains general inventory risk and risk of physical loss
during shipment. The Company recognizes revenue related to resin resale activity upon delivery to
the customer. Net resin resale revenue totaled $4,579, $3,388, and $5,249 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Foreign Currency Translation
Local currencies are the functional currencies for all foreign operations. Financial
statements of foreign subsidiaries are translated into U.S. dollars using end-of-period exchange
rates for assets and liabilities and the periods weighted average exchange rates for revenue and
expense components, with any resulting translation adjustments included as a component of
stockholders equity. Foreign currency transaction gains and losses resulting from transactions
executed in non-functional currencies are included in results of operations.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as checking accounts, money-market accounts,
certificates of deposit, and U.S. Treasury notes having an original maturity of 90 days or less
when purchased.
Accounts Receivable
Trade accounts receivable are classified as current assets and are reported net of allowances
for doubtful accounts and other deductions. Pregis reserves for amounts determined to be
uncollectible based on a number of factors, including historical trends and specific customer
liquidity. The determination of the amount of the allowance for doubtful accounts is subject to
significant levels of judgment and estimation by management. If circumstances change or economic
conditions deteriorate or improve, the allowance for doubtful accounts could increase or decrease.
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Management believes that the allowances at December 31, 2010 are adequate to cover potential
credit risk loss and that the Company is unlikely to incur a material loss due to concentration of
credit risk. Pregis has a large number
of customers in diverse industries and geographies, as well as a practice of establishing
reasonable credit limits, which limits credit risk.
Inventories
Inventories include costs of material, direct labor and related manufacturing overheads.
Inventories are stated at the lower of cost or market. Cost is determined for substantially all
inventories using the first-in, first-out (FIFO) or average-cost methods.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost. Maintenance and repairs that do not improve
efficiency or extend economic life are expensed as incurred. Depreciation is computed using the
straight-line method over the remaining estimated useful lives of assets. Remaining useful lives
range from 15 to 40 years for buildings and improvements and from 5 to 20 years for machinery and
equipment. Depreciation expense totaled $40,286, $40,155, and $47,314 for the years ended December
31, 2010, 2009 and 2008, respectively.
Goodwill and Other Intangible Assets
In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, the Company assesses
the recoverability of goodwill and other intangible assets with indefinite lives annually, as of
October 1, or whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be fully recoverable.
The Company tests its goodwill 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, the Company tests for goodwill impairment
at the component level within its Specialty Packaging reporting segment, represented by each of the
businesses included within this segment. The Company also tests goodwill for impairment at each of
the operating segments which have been aggregated to comprise its Protective Packaging reporting
segment.
The Company uses 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 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.
The Company tests the carrying value of other intangible assets with indefinite lives by
comparing the fair value of the intangible assets to the carrying value. Fair value is estimated
using a relief of royalty approach, which is a discounted cash flow methodology.
The Companys other intangible assets, consisting primarily of customer relationships,
patents, licenses, and non-compete agreements, are being amortized over their respective estimated
useful lives.
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Impairment of Other Long-Lived Assets
The Company reviews long-lived assets held for use for impairment whenever events or changes
in circumstances indicate that the carrying amount of the related asset may not be recoverable. We
use estimates of undiscounted cash flows from long-lived assets to determine whether the book value
of such assets is recoverable
over the assets remaining useful lives. If an asset is determined to be impaired, the
impairment is measured as the amount by which the carrying value of the asset exceeds its fair
value. An impairment charge would have a negative impact on net income.
Deferred Financing Costs
The Company incurred financing costs to put in place the long-term debt used to finance the
Acquisition and other debt raised and to subsequently amend portions of such debt agreements. These
costs have been deferred and are being amortized over the terms of the related debt. The
amortization of deferred financing costs is classified as interest expense in the statement of
operations and totaled $3,472, $5,247, and $2,374 for the years ended December 31, 2010, 2009 and
2008, respectively. The amortization expense for the year ended December 31, 2009 also includes the
write-off of deferred financing costs of $2,731 due to the repayment of the Term B1 and B2 notes.
Income Taxes
In accordance with the provisions of ASC Topic 740, Accounting for Income Taxes, the Company
utilizes the asset and liability method of accounting for income taxes, which requires that
deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary
differences between the book and tax basis of various assets and liabilities. A valuation allowance
is established to offset any deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized.
Financial statement recognition and measurement of tax positions taken or expected to be taken
in a tax return requires achieving a more-likely-than-not threshold. The Company records a
liability for the difference between the benefit recognized and measured pursuant to ASC Topic 740,
Income Taxes and the tax position taken or expected to be taken on the Companys tax return. To the
extent that the Companys assessment of such tax positions changes, the change in estimate is
recorded in the period in which the determination is made. The consolidated tax provision and
related accruals include the impact of such reasonably estimable losses and related interest and
penalties, as deemed appropriate.
The Company does not provide for U.S. federal income taxes on unremitted earnings of foreign
subsidiaries since it is managements present intention to reinvest those earnings in the foreign
operations. Positive unremitted earnings of foreign subsidiaries totaled $85,278 at December 31,
2010. If such amounts were repatriated, determination of the amount of U.S. income taxes that would
be incurred is not practicable due to the complexities associated with this calculation.
Financial Instruments
The Company may use derivative financial instruments to minimize risks from interest and
foreign currency exchange rate fluctuations. The Company does not use derivative instruments for
trading or other speculative purposes. Derivative financial instruments used for hedging purposes
must be designated as such and must be effective as a hedge of the identified risk exposure at the
inception of the contract. Accordingly, changes in the fair value of the derivative contract must
be highly correlated with changes in fair value of the underlying hedged item at inception of the
hedge and over the life of the hedge contract.
The Company records derivative instruments on the balance sheet as either assets or
liabilities, measured at fair value. Changes in the fair value of derivatives are recorded in
earnings or other comprehensive income, based on whether the instrument is designated as part of a
hedge transaction, and, if so, the type of hedge transaction. Gains or losses on derivative
instruments reported in other comprehensive income are subsequently recognized in earnings when the
hedged item impacts earnings. Cash flows of such derivative instruments are classified consistent
with the
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underlying hedged item. The ineffective portion of all hedges is recognized in earnings in
the current period. See Note 9 for additional information.
Freight
Pregis records amounts billed to customers for shipping and handling as sales, and records
shipping and handling expense as cost of sales.
Research and Development
Research and development costs, which are expensed as incurred, were $6,907, $5,384, and
$5,840 for the years ended December 31, 2010, 2009 and 2008, respectively.
Stock-Based Compensation
Share-based compensation expense results from grants of stock options. The Company recognizes
the costs associated with option grants using the fair value recognition provisions of ASC Topic
718, Compensation Stock Compensation. Generally, ASC Topic 718 requires the value of all
share-based payments to be recognized in the statement of operations based on their estimated fair
value at date of grant amortized over the grants vesting period. The Company uses the
straight-line method to amortize compensation costs over the grants respective vesting periods.
Pregis Holding I does not hold any treasury shares, so all option exercises result in the
issuance of new shares.
Recent 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 adoption did not have a material impact on the
Companys consolidated financial statements.
3. ACQUISITIONS
The transaction discussed below was accounted for using the purchase method of accounting.
Accordingly the purchase price was allocated to the assets acquired, liabilities assumed, and
identifiable intangible assets as applicable based on their fair market values at the date of
acquisition. Any excess of purchase price over the fair value of net assets acquired was recorded
as goodwill. The results of operations of the acquiree is included in the Companys consolidated
financial statements since the date of acquisition. The goodwill related to this acquisition is
not tax-deductible.
In February 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, including certain escrowed amounts
totaling $3.5 million was funded with cash-on-hand. In accordance with the terms of the agreement,
additional consideration up to a maximum of $11.5 million may be payable by Pregis if certain
future performance targets are achieved by IntelliPack. Based on a present value analysis, the
fair value of contingent purchase consideration was valued at approximately $9.7 million on
the acquisition date. The company paid $0.8 million during 2010
related to this contingency. The remaining contingent purchase
consideration was revalued at approximately $9.6 million as of December 31, 2010. The
classification of the additional consideration payable as current and
long-term was based on the estimated
timing of future payments and the amounts are included in other
current liabilities and other long-term liabilities in the consolidated balance sheet.
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The acquisition was accounted for under the purchase method of accounting. Accordingly, the
Company has allocated the purchase price on the basis of the estimated fair value of the underlying
assets acquired and liabilities assumed as follows:
Current assets |
$ | 4,200 | ||
Property plant & equipment |
9,100 | |||
Intangible assets |
22,200 | |||
Goodwill |
15,500 | |||
Current liabilities |
(1,500 | ) | ||
Deferred tax liabilities |
(8,300 | ) | ||
Total purchase price |
$ | 41,200 | ||
Purchase accounting for the IntelliPack acquisition was finalized in December 2010. The
finalization of purchase accounting did not materially impact
previously reported interim financial
statements.
4. INVENTORIES
The major components of net inventories are as follows:
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Finished goods |
$ | 42,192 | $ | 40,941 | ||||
Work-in-process |
15,014 | 14,216 | ||||||
Raw materials |
29,470 | 23,339 | ||||||
Other materials and supplies |
2,299 | 2,528 | ||||||
$ | 88,975 | $ | 81,024 | |||||
Inventories at December 31, 2010 and 2009 were stated net of reserves of $2.2 million and $1.9
million, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Land, building, and improvements |
$ | 91,317 | $ | 115,766 | $ | 121,514 | ||||||
Machinery and equipment |
293,061 | 270,131 | 254,686 | |||||||||
Other, including construction
in progress |
19,094 | 21,044 | 16,829 | |||||||||
403,472 | 406,941 | 393,029 | ||||||||||
Less: Accumulated depreciation |
(205,212 | ) | (180,059 | ) | (147,905 | ) | ||||||
$ | 198,260 | $ | 226,882 | $ | 245,124 | |||||||
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In July 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 sale-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 on 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 year ended December 31, 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 resulted in annual
rent expense of approximately $2.4 million. Future minimum lease payments for the initial lease
term total approximately $49.0 million.
In 2009, the Company entered into an agreement to sell and leaseback real property consisting
of land and buildings at one of its subsidiaries located in the United Kingdom. The net sale
proceeds totaled approximately $9.9 million. The lease term is 25 years with annual rents totaling
approximately $1.2 million. The sale resulted in a gain of approximately $3.1 million. The gain
is deferred and will be amortized to income over the lease term.
6. GOODWILL
Changes in the Companys carrying value of goodwill from January 1, 2008 to December 31, 2010
are summarized below:
Protective | Specialty | |||||||||||
Packaging | Packaging | Total | ||||||||||
Balance at January 1, 2008 |
95,155 | 54,845 | 150,000 | |||||||||
Goodwill impairment |
| (19,057 | ) | (19,057 | ) | |||||||
Fair value and purchase price
adjustments related to 2007
acquisitions |
(632 | ) | | (632 | ) | |||||||
Other adjustments |
(1,101 | ) | (838 | ) | (1,939 | ) | ||||||
Foreign currency translation |
3,737 | (4,714 | ) | (977 | ) | |||||||
Balance at December 31, 2008 |
97,159 | 30,236 | 127,395 | |||||||||
Other adjustments |
(1,068 | ) | 183 | (885 | ) | |||||||
Foreign currency translation |
(1,541 | ) | 1,281 | (260 | ) | |||||||
Balance at December 31, 2009 |
94,550 | 31,700 | 126,250 | |||||||||
Business acquisitions |
15,500 | | 15,500 | |||||||||
Foreign currency translation |
276 | (2,231 | ) | (1,955 | ) | |||||||
Balance at December 31, 2010 |
$ | 110,326 | $ | 29,469 | $ | 139,795 | ||||||
The Company performed its annual goodwill impairment assessment as of October 1, 2010. The
fair value of the Companys reporting units were estimated primarily using a combination of the
income approach and the market approach. The Company used discount rates ranging from 13.0% to
14.0% in determining the discounted cash flows for each of our reporting units under the income
approach, corresponding to our cost of capital, adjusted for risk where appropriate. In
determining estimated future cash flows, current and future levels of income were considered that
reflected business trends and market conditions. Under the market approach, the Company
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estimated
the fair value of the reporting units based on peer company multiples of earnings before interest,
taxes, depreciation and amortization (EBITDA). The Company also considered the multiples at which
businesses similar to the reporting units have been sold or offered for sale.
The initial step of the Companys impairment test indicated no impairment. All of the
reporting units had estimated fair values exceeding their carrying values. The range by which the
fair values of the reporting units exceeded their carrying values was 10% 87% as of October 1,
2010. The corresponding carrying values of goodwill for these reporting units ranged from $4
million to $61 million as of October 1, 2010.
There was no goodwill impairment charge recorded during 2009. Other adjustments to goodwill
during 2009 relate primarily to the reversal of valuation allowances established against deferred
tax assets in purchase accounting.
The Company recorded a an impairment charge of $19,057 in the fourth quarter of 2008 relating
to the goodwill in the Specialty Packaging segment.
Accumulated
goodwill impairment losses at the beginning and end of the year ended December 31,
2010 was $19,057 and relate entirely to the Specialty Packaging segment.
7. OTHER INTANGIBLE ASSETS
The Companys other intangible assets are summarized as follows:
Average | December 31, 2010 | December 31, 2009 | ||||||||||||||||
Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||
Customer relationships |
12 | $ | 48,922 | $ | 18,772 | $ | 46,231 | $ | 15,739 | |||||||||
Patents |
10 | 12,097 | 1,352 | 1,055 | 372 | |||||||||||||
Non-compete agreements |
2 - 5 | 4,902 | 3,319 | 3,041 | 3,041 | |||||||||||||
Software |
3 | 3,971 | 2,884 | 3,470 | 2,125 | |||||||||||||
Land use rights and other |
32 | 1,390 | 648 | 1,486 | 582 | |||||||||||||
Trademarks and trade names |
20 | 3,000 | 125 | | | |||||||||||||
In-process research and developement |
10 | 2,200 | 183 | | | |||||||||||||
Intangible assets not subject to
amortization: |
||||||||||||||||||
Trademarks and trade names |
4,443 | | 4,630 | | ||||||||||||||
Total |
$ | 80,925 | $ | 27,283 | $ | 59,913 | $ | 21,859 | ||||||||||
Amortization expense related to intangible assets totaled $6,168, $4,628, and $5,030 for
the years ended December 31, 2010, 2009 and 2008, respectively. Amortization expense for each of
the five years ending December 31, 2011 through December 31, 2015 is estimated to be $6,767,
$6,479, $6,080, $6,080, and $5,720, respectively.
In the first quarter of 2010, Pregis acquired IntelliPack. Acquired intangibles are valued at
$22.2 million. See Note 3 for acquisition related disclosures.
The Company performed its annual impairment assessment of the intangible assets not subject
to amortization as of October 1, 2010. There was no impairment charge recorded during 2010.
During its annual impairment assessment of the intangible assets not subject to amortization
during 2009 and 2008, the Company determined that a trade name associated with its protective
packaging business was impaired, due
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to projected near-term reduced sales levels. Using a
discounted cash flow methodology, the Company calculated impairment
charges of $194 and $1,297,
which are reflected in other operating expenses, net within the Companys statement of operations for
the years ended December 31, 2009 and 2008, respectively.
8. DEBT
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Senior secured credit facilities: |
||||||||
Revolving credit facility, due October, 2011 |
$ | 42,500 | $ | 42,000 | ||||
Senior secured 2005 notes, due April, 2013 |
133,700 | 143,160 | ||||||
Senior secured 2009 notes, due April, 2013
net of discount of $6,928 at December 31,
2010
and $10,216 at December 31, 2009 |
160,197 | 168,734 | ||||||
Senior subordinated notes, due October, 2013,
net of discount of $1,272 at December 31,
2010
and $1,638 at December 31, 2009 |
148,728 | 148,362 | ||||||
Foreign lines of credit |
3,719 | | ||||||
Other |
427 | 578 | ||||||
Total debt |
489,271 | 502,834 | ||||||
Less: current portion of long-term debt |
(46,363 | ) | (300 | ) | ||||
Long-term debt |
$ | 442,908 | $ | 502,534 | ||||
In connection with the Acquisition, on October 13, 2005, Pregis issued senior secured notes
and senior subordinated notes in a private offering and entered into new senior secured credit
facilities.
The senior secured 2005 and 2009 notes were issued in the principal amount of 100.0 million
and 125.0 million, respectively, and bear interest at a floating rate equal to EURIBOR (as
defined) plus 5.00% per year (for a total rate of 5.985% as of December 31, 2010). Interest resets
quarterly and is payable quarterly on January 15, April 15, July 15 and October 15. The senior
subordinated notes were issued in the principal amount of $150.0 million and bear interest at the
rate of 12.375% annually. Interest on the senior subordinated notes is payable semi-annually on
April 15 and October 15. The senior subordinated notes were issued at 98.149%, resulting in an
initial discount of $2.8 million, which is being amortized using the effective interest method over
the term of the notes. The senior secured 2009 notes were issued at 94%, resulting in an initial
discount of $11.0 million, (7.5million), which is being amortized using the
effective interest method over the term of the notes. The senior secured notes and senior
subordinated notes do not have required principal payments prior to maturity.
Pregis Holding II and Pregiss domestic subsidiaries have guaranteed the obligations under the
senior secured notes and the senior subordinated notes on a senior secured basis and senior
subordinated basis, respectively. Additionally, the senior secured notes are secured on a second
priority basis by liens on all of the collateral (subject to certain exceptions) securing Pregiss
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 new
senior secured credit facilities and any other first priority obligations.
At its option, the Company may currently redeem some or all of the senior secured notes at
100% of the principal amount of the notes. In addition, at its option, the Company will be able to
redeem some or all of the senior subordinated notes on or after October 15, 2009, at the redemption
prices set forth below (expressed as percentages of principal amount), plus accrued interest, if
any, if redeemed during the twelve-month period beginning on October 15 of the years indicated
below:
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Senior subordinated notes: |
2010 | 103.094 | % | |||
2011 and thereafter | 100.000 | % |
To date, the Company has not redeemed any of its senior secured or senior subordinated notes.
In connection with the Acquisition, 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 revolving credit facility 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. 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.
In addition to the amendment on October 5, 2009, Pregis issued 125.0 million aggregate
principal amount of additional second priority senior secured floating rate notes due 2013 (the
notes). 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, beginning on October 15, 2009. 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 2013, originally issued
on October 12, 2005. However, the notes do not have the same Common Code or International
Securities Identification Number as the existing notes, are not fungible with the existing notes
and will not trade together as a single class with the existing notes. The notes are treated as
issued with more than de minimis original issue discount for United States federal income tax
purposes, whereas the existing 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 senior secured floating rate notes issued by us in 2005 (the 2005
notes and, together with the notes, the senior secured floating rate 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 the Company 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.
As of December 31, 2010, the Company has drawn $42,500 under the revolving credit facility and
had $1,130 availability after reduction for amounts outstanding under letters of credit of $6,370.
Revolving credit facility interest expense totaled $977 for the year ended December 31, 2010.
Pregiss senior secured credit facilities are guaranteed by Pregis Holding II Corporation and
all of Pregiss current and future domestic subsidiaries (collectively, the Guarantors). The
repayment of these facilities is secured by a first priority security interest in substantially all
of the assets of the Guarantors, and a first priority pledge of their capital stock and 66% of the
capital stock of the Pregiss first tier foreign subsidiary.
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Subject to certain exceptions, the senior secured credit facilities require mandatory
prepayments of the loans from excess cash flows, asset sales and dispositions and issuances of debt
and equity. Additionally, the loans may be prepaid at the election of the Company.
From time to time, certain of the foreign businesses utilize various lines of credit in their
operations. These lines of credit are generally used as overdraft facilities or for issuance of
trade letters of credit and are in effect until cancelled by one or both parties. Amounts
available under these lines of credit were $15,305 and $14,762 at December 31, 2010 and 2009,
respectively. At December 31, 2010, there were $3,719 borrowings under these lines and trade
letters of credit totaling $3,251 were issued and outstanding.
The senior secured credit facilities, senior secured notes and subordinated notes contain a
number of covenants that, among other things, restrict or limit, subject to certain exceptions,
Pregiss ability and the ability of its subsidiaries, to incur, assume or permit to exist
additional indebtedness, guaranty obligations or hedging arrangements; incur liens or agree to
negative pledges in other agreements; engage in sale and leaseback transactions; make capital
expenditures; make loans and investments; declare dividends, make payments or redeem or repurchase
capital stock; in the case of subsidiaries, enter into agreements restricting dividends and
distributions; engage in mergers, acquisitions and other business combinations; prepay, redeem or
purchase certain indebtedness including the notes; amend or otherwise alter the terms of its
organizational documents, or its indebtedness including the notes and other material agreements;
sell assets or engage in receivables securitization; transact with affiliates; and alter the
business that it conducts. In addition, the senior secured credit facilities require that Pregis
complies on a quarterly basis with certain financial covenants, including a maximum leverage ratio
test and minimum cash interest coverage ratio test. As of December 31, 2010, Pregis was in
compliance with all of these covenants.
Furthermore, the senior secured notes and subordinated notes limit Pregiss ability to incur
additional indebtedness beyond that allowed within certain defined debt baskets and the Companys
ability to declare certain dividends or repurchase equity securities, unless Pregis meets a minimum
fixed charge coverage ratio and a maximum senior secured indebtedness leverage ratio, both
determined on a pro forma basis.
As
of December 31, 2010, The Company did not meet one of its incurrence debt
covenants under its indentures. As a result, the Companys ability to borrow money is
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 following table presents the future scheduled annual maturities of the Companys long-term
debt:
2011 |
$ | 46,363 | ||
2012 |
283 | |||
2013 |
450,825 | |||
$ | 497,471 | |||
As outlined above, a portion of Pregiss third-party debt is denominated in euro and revalued
to U.S. dollars at month-end reporting periods. The Company also maintains an intercompany debt
structure, whereby it 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 reporting period, the Company recognizes 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.
At December 31, 2010 and 2009, the revaluation of the Companys euro-denominated third party
debt resulted in unrealized foreign exchange losses and (gains) of $(20,577) and $3,567,
respectively. These unrealized losses and (gains) have been offset by unrealized losses and
(gains) of $21,801 and $(10,833) relating to revaluation of the Companys euro-denominated
intercompany notes at December 31, 2010 and 2009, respectively. These amounts are reported net
within the foreign exchange loss (gain) in the Companys statement of operations.
See Note
22 for a discussion on the new ABL credit facility entered into on March 23,
2011.
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9. DERIVATIVE INSTRUMENTS
In order to maintain 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, resulting in a loss of $1,022 and
$3,114, each net of tax, being recorded in accumulated other comprehensive income (loss) for the
years ended December 31, 2010 and 2009, respectively. The corresponding liability is included
within other non-current liabilities in the consolidated balance sheet. There was no ineffective
portion of the hedge recognized in earnings. At December 31, 2010 and 2009, the Company had no
other derivative instruments outstanding.
The Company remains exposed to credit risk in the event of nonperformance by the current
counterparty on its interest rate swap contract. However, the Company believes it has minimized
its credit risk by dealing with a leading, credit-worthy financial institution and, therefore, does
not anticipate nonperformance.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Under generally accepted accounting principles in the U.S., certain assets and liabilities
must be measured at fair value, and ASC Topic 820, Fair Value Measurements and Disclosures, 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.
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.
At December 31, 2010, the interest rate swap contract was the Companys only financial
instrument requiring recurring measurement at fair value. 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 swap agreement as Level 2 within
the fair value hierarchy. At December 31, 2010, the fair value of this instrument was
estimated to be a liability of $1,623, which is reported within other noncurrent liabilities in the
Companys consolidated balance sheet.
The Companys contingent purchase consideration relating to the IntelliPack acquisition
in 2010 is recorded at fair value as of December 31, 2010 and is categorized as Level 3 within the
fair value hierarchy. The fair value of this liability is estimated using a present value analysis
as of December 31, 2010 and was $9.6 million. This analysis considers, among other items, the financial forecasts of
future operating results of the acquiree, the probability of reaching the forecast and the
associated discount rate. A rollforward of this liability from the
acquisition date to the balance sheet date is as follows:
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Fair Value Measurements | ||||
at Reporting Date | ||||
Using Significant | ||||
Unobservable Inputs | ||||
(Level 3) | ||||
Contingent purchase consideration
liability |
||||
Fair value at acquisition date |
$ | 9,700 | ||
Payments |
(772 | ) | ||
Change in fair value (1) |
672 | |||
Balance as of December 31, 2010 |
$ | 9,600 | ||
(1) | The adjustment to original contingent purchase consideration liability recorded was the result of using revised financial forecasts and updated fair value measurement and is included in interest expense in the statement of operations. |
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. The
fair value of the Companys senior secured notes and senior subordinated notes are based on quoted
market prices (Level 1 within the fair value hierarchy). 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 within ASC Topic
825 for any of its financial assets or liabilities.
The carrying values and estimated fair values of the Companys financial instruments at
December 31, 2010 and 2009 are as follows:
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Long-term debt: |
||||||||||||||||
Senior secured variable-rate credit facilites |
$ | | $ | | $ | 42,000 | $ | 42,000 | ||||||||
Senior secured floating rate notes (2005) |
133,700 | 125,678 | 143,160 | 130,276 | ||||||||||||
Senior secured floating rate notes (2009) |
160,197 | 157,098 | 168,734 | 162,845 | ||||||||||||
12.375% senior subordinated notes |
148,728 | 136,500 | 148,362 | 145,500 | ||||||||||||
Other debt |
283 | 283 | 578 | 578 | ||||||||||||
Total long-term debt |
$ | 442,908 | $ | 419,559 | $ | 502,834 | $ | 481,198 | ||||||||
Derivative financial instruments |
||||||||||||||||
Interest rate swap liability |
$ | (1,623 | ) | $ | (1,623 | ) | $ | (4,950 | ) | $ | (4,950 | ) | ||||
The carrying value of the Companys senior secured floating-rate notes (2005) and (2009),
which are euro-denominated, decreased $17,997 during 2010 primarily due to the strengthening of the
U.S. dollar relative to the euro.
The Company is contingently liable under letters of credit (see Note 8). It is not
practicable to estimate the fair value of these financial instruments; however, the Company does
not expect any material losses to result from these financial instruments since performance is not
likely to be required.
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11. LEASES
The Company leases certain facilities, equipment, and other assets under non-cancelable
long-term operating leases. Rent expense totaled $19,514, $18,103, and $19,556 for the years ended
December 31, 2010, 2009 and 2008, respectively, including short-term rentals.
Future minimum rental payments for operating leases with remaining terms in excess of one year
are as follows:
2011 |
$ | 16,131 | ||
2012 |
12,940 | |||
2013 |
10,920 | |||
2014 |
9,259 | |||
2015 |
6,710 | |||
Thereafter |
72,540 | |||
$ | 128,500 | |||
12. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement with its Sponsors, for the provision of various
advisory and consulting services. Fees and expenses incurred under this agreement totaled $2,471,
$2,047, and $1,724 for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010,
this amount included a $500 fee for services related to the acquisition of IntelliPack (see Note
3). Such amounts are included within selling, general and administrative expenses.
The Company had sales to affiliates of AEA Investors LP totaling $2,402, $964, and $379 for
the years ended December 31, 2010, 2009 and 2008, respectively. For the same periods, the Company
made purchases from affiliates of AEA Investors LP totaling $15,796, $11,204, and $11,879,
respectively.
Certain members of the Companys management purchased shares in Pregis Holding I through the
Pregis Holding I Corporation Employee Stock Purchase Plan. Shares
were purchased at the estimated fair
value at the date of purchase. As of December 31, 2010, management held approximately 438 shares
in Pregis Holding I, representing approximately 2.0% of Pregis Holding Is issued and outstanding
equity.
In February 2010 Pregis Holding I board of directors voted and approved the modification of
the exercise price of stock options granted to the employees, including named executive officers, with
a per share exercise price in excess of $17,500 to $17,500. Another modification was approved in
September 2010 further reducing the option exercise price to $13,000 for all stock options granted
with an exercise price in excess of this amount. These
modifications were done to ensure that the outstanding options provided more motivational
value to the option holders. This modification resulted in an increase to stock compensation expense by $1.6 million.
13. INCOME TAXES
The Company files a consolidated federal income tax return with Pregis Holding I Corporation,
its ultimate parent. The provision for income taxes in the consolidated financial statements
reflects income taxes as if the businesses were stand-alone entities and filed separate income tax
returns.
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The domestic and foreign components of loss before income taxes were as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
U.S. loss before income taxes |
$ | (25,783 | ) | $ | (8,406 | ) | $ | (2,852 | ) | |||
Foreign loss before income taxes |
(20,214 | ) | (12,603 | ) | (46,743 | ) | ||||||
Total loss before income taxes |
$ | (45,997 | ) | $ | (21,009 | ) | $ | (49,595 | ) | |||
The components of the Companys income benefit are as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current |
||||||||||||
Federal |
$ | | $ | (316 | ) | $ | | |||||
State and local |
(347 | ) | 140 | 383 | ||||||||
Foreign |
1,436 | (1,763 | ) | 3,981 | ||||||||
1,089 | (1,939 | ) | 4,364 | |||||||||
Deferred |
||||||||||||
Federal |
$ | (8,520 | ) | $ | (4,002 | ) | $ | (414 | ) | |||
State and local |
| | (99 | ) | ||||||||
Foreign |
(1,494 | ) | 2,942 | (5,716 | ) | |||||||
(10,014 | ) | (1,060 | ) | (6,229 | ) | |||||||
Income tax benefit |
$ | (8,925 | ) | $ | (2,999 | ) | $ | (1,865 | ) | |||
Reconciliation of the difference between the effective rate of the benefit and the U.S.
federal statutory rate is shown in the following table:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
U.S. federal income tax rate |
(35.00 | )% | (35.00 | )% | (35.00 | )% | ||||||
Changes in income tax rate
resulting from: |
||||||||||||
Valuation allowances |
9.12 | 17.53 | 20.19 | |||||||||
Non-deductible interest
expense |
1.25 | 2.33 | 1.25 | |||||||||
Prior period items |
| (6.46 | ) | | ||||||||
Foreign rate differential |
3.26 | 4.52 | 8.26 | |||||||||
Foreign rate change |
1.00 | (0.04 | ) | | ||||||||
State and local taxes on
income, net of U.S. federal income
tax benefit |
(0.80 | ) | 0.52 | 0.07 | ||||||||
Permanent differences |
2.39 | 3.62 | 1.04 | |||||||||
Other |
(0.62 | ) | (1.29 | ) | 0.43 | |||||||
Income tax benefit |
(19.40 | )% | (14.27 | )% | (3.76 | )% | ||||||
Deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the financial statement basis and the tax basis of assets and
liabilities using enacted statutory tax rates applicable to future years. The Companys net
deferred income tax assets (liabilities) are as follows:
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December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Deferred tax assets |
||||||||
Tax loss carryforwards: |
||||||||
U.S. State and local |
$ | 14,290 | $ | 9,204 | ||||
Foreign |
32,594 | 28,406 | ||||||
Bad debt reserves |
655 | 882 | ||||||
Inventory reserves |
1,245 | 1,155 | ||||||
Other items |
12,409 | 8,922 | ||||||
Valuation allowance |
(38,049 | ) | (33,698 | ) | ||||
Net deferred tax assets |
23,144 | 14,871 | ||||||
Deferred tax liabilities |
||||||||
Property and equipment |
(8,828 | ) | (10,981 | ) | ||||
Goodwill and intangibles |
(20,173 | ) | (10,640 | ) | ||||
Pensions and other employee benefits |
(1,849 | ) | (2,614 | ) | ||||
Unrealized foreign exchange gain |
(4,219 | ) | (4,631 | ) | ||||
Other items |
(405 | ) | (647 | ) | ||||
Total deferred tax liabilities |
(35,474 | ) | (29,513 | ) | ||||
Net deferred tax liabilities |
$ | (12,330 | ) | $ | (14,642 | ) | ||
These deferred tax assets and liabilities are classified in the consolidated balance sheets
based on the balance sheet classification of the related assets and liabilities.
Management believes it is more likely than not that certain current and long-term deferred tax
assets, with the exception of certain foreign tax loss carryforwards and pension assets, will be
realized through the reduction of future taxable income. Although realization is not assured,
management has concluded that other deferred tax assets, for which a valuation allowance was
determined to be unnecessary, will be realized in the ordinary course of operations based on
scheduling of deferred tax liabilities.
U.S. federal net operating loss carryforwards at December 31, 2010 and 2009 were $13,437 and
$8,486, respectively, and will expire at various dates from 2027 to 2031. State tax loss
carryforwards, net of federal benefit, at December 31, 2010 and 2009, were $1,022 and $718,
respectively, and will expire at various dates from 2011 to 2018. Foreign tax loss carryforwards
at December 31, 2010 and 2009 were $118,820 and $104,566, respectively, of which $66,343 will
expire at various dates from 2011 to 2019, with the remainder having unlimited lives. The
valuation allowance above includes unrecognized tax benefits related to both state and foreign
tax loss carryforwards.
Tax Contingencies
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions.
Significant judgment is required in evaluating the Companys tax positions and determining its
provision for income taxes. During the ordinary course of business, there are many transactions
and calculations for which the ultimate tax determination is uncertain. The Company established
reserves for tax related uncertainties based on estimates of whether, and the extent to which,
additional taxes will be due. These reserves are established when the Company believes that
certain positions might be challenged despite the Companys belief that its tax return positions
are fully supportable. The reserves are adjusted in light of changing facts and circumstances,
such as the outcome of tax audits. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies
are provided in accordance with the requirements of ASC Topic 740.
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As of December 31, 2010, the Company had non-current liabilities totaling $5,732 for
unrecognized tax benefits including interest and net of indirect benefits, of which $2,149 would
affect the effective tax rate, if recognized. Included within the Companys liabilities for
unrecognized tax benefits at December 31, 2010 is $3,251 subject to indemnification under the Stock
Purchase Agreement with Pactiv. The indemnified amounts are included within the amounts due from
Pactiv in the consolidated balance sheet. The reconciliation of the beginning and ending amount of
gross unrecognized tax benefits is as follows:
2010 | 2009 | |||||||
Unrecognized tax benefit January 1 |
$ | 8,879 | $ | 12,127 | ||||
Additions based on tax positions related to the prior year |
| 963 | ||||||
Reductions based on tax positions related to the prior year |
| (2,114 | ) | |||||
Additions based on tax positions related to the current year |
2,374 | 1,686 | ||||||
Reductions
due to tax positions related to current year |
(508 | ) | | |||||
Reductions due to settlements |
| (2,538 | ) | |||||
Reductions due to lapse of applicable statute of limitations |
(59 | ) | (1,245 | ) | ||||
Unrecognized tax benefit December 31 |
$ | 10,686 | $ | 8,879 | ||||
The Company is subject to U.S. federal income tax as well as income tax in multiple state and
non-U.S. jurisdictions. The U.S. federal income tax return for the year 2007 and 2008 are subject
to potential examination by the Internal Revenue Service. The Company is currently subject to
examination in Germany for the years 2002 to 2005 and Egypt for the year 2004 to 2005. The Company
remains subject to potential examination in Germany for the years 2006 to 2010, Belgium for the
years 2007 to 2010, the United Kingdom for the year 2009 to 2010, Hungary for years 2006 to 2010,
Poland for years 2006 to 2010, the Czech Republic for years 2008 to 2010, Italy for the years 2006
to 2010, France for years 2008 to 2010, the Netherlands for years 2007 to 2010, Spain for years
2006 to 2010, and Egypt for years 2006 to 2010. The Company is fully indemnified by Pactiv for
pre-Acquisition liabilities and has received reimbursements for all amounts paid against such
liabilities thus far.
The Company accounts for interest and penalties related to income tax matters in income tax
expense. As of December 31, 2010 and 2009, the total amount of accrued interest and penalties
recorded in the Companys balance sheet was $954 and $794, respectively, of which $806 and $701,
respectively, are subject to indemnification by Pactiv under the Stock Purchase Agreement.
It is reasonably possible that the total amounts of unrecognized tax benefits will increase or
decrease within the next twelve months; however, the Company does not expect such increases or
decreases to be significant.
14. OTHER OPERATING EXPENSE, NET
A summary of the items comprising other operating expense, net is as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Restructuring expense |
$ | 7,895 | $ | 15,207 | $ | 9,321 | ||||||
Loss on disposal of property,
plant and equipment |
1,595 | | | |||||||||
Curtailment gain |
| | (3,736 | ) | ||||||||
Trademark impairment |
| 194 | 1,297 | |||||||||
Other (income) expense, net |
(48 | ) | (421 | ) | 1,264 | |||||||
Other operating expense, net |
$ | 9,442 | $ | 14,980 | $ | 8,146 | ||||||
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The significant items included within other operating expense, net are as follows:
| The Company recorded restructuring charges of $7,895, $15,207, and $9,321 in 2010, 2009 and 2008, respectively, related to its cost-reduction initiatives, which are discussed further in Note 15. | ||
| In July 2010, the Company completed a sales leaseback transaction involving land, building and related improvements of two of its U.S. manufacturing facilities. One property resulted in a loss of $1.9 million, while the other resulted in a gain of $1.8 million. See also Note 5. | ||
| In the fourth quarter of 2008, the Company recognized a curtailment gain of $3,736 relating to a pension plan covering employees of its Eerbeek, Netherlands facility, which is being closed in connection with the Companys restructuring activities. See also Note 16. | ||
| In 2010 and 2009 when conducting its annual impairment test of goodwill and intangible assets with indefinite lives, the Company determined that a trademark intangible asset associated with its protective packaging segment was impaired, due to near-term reduced sales levels. The Company did not record an impairment charge for 2010 but did record an impairment charge of $194 in 2009. | ||
| In 2008, the Company incurred a loss of $708 relating to storm damage at one of its European protective packaging facilities. This charge is included within in other expense (income), net above. |
15. RESTRUCTURING ACTIVITIES
During the fourth quarter of 2007, the Company established a reserve totaling $2,926,
representing mostly employee severance and related costs, pursuant to a plan to restructure the
workforce within its Specialty Packaging segment. The activities under the Specialty Packaging
restructuring plan were completed by the end of 2008 with remaining severance of approximately $600
paid in 2009.
During the second quarter of 2008, management approved a company-wide restructuring program to
further streamline the Companys operations and reduce its overall cost structure. Activities
included headcount reductions and other overhead cost savings initiatives. For the year ended
December 31, 2008, the Company recorded charges for severance and other activities totaling $3,572
and $1,075, respectively, relating to these initiatives.
During the third quarter of 2008, management approved a cost reduction plan that involves
closure of a protective packaging facility located in Eerbeek, The Netherlands. The plan includes
relocation of the Eerbeek production lines to other existing company facilities located within
Western Europe and reduction of related headcount. Through
December 31, 2008, the Company had
recorded additional severance charges totaling $3,880 relating to headcount reduction, as well as
other charges of $794 relating primarily to site preparation and relocation of the equipment lines.
The other restructuring expenses in 2008 relate primarily to the establishment of a European
shared service center and other third-party consulting fees relating to restructuring activities.
In 2009, as part of the Companys continued efforts to reduce its overall cost structure,
management implemented additional headcount reductions and engaged outside consultants to assist in
further restructuring of its manufacturing operations. Consulting costs for restructuring totaling
$3.3 million were expensed as incurred. Also included in other are costs of approximately $0.6
million associated with the discontinuance of a product line at one of the Companys North American
protective packaging plants.
In 2010, the Company incurred restructuring costs in its European operations in an effort to
upgrade management and to further drive cost reductions. The Company used outside consultants to
aide in this process.
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Following is a reconciliation of the restructuring liability for the years ended December 31,
2010, 2009, and 2008:
Severance | Other | |||||||||||
Charges | Charges | Total | ||||||||||
Balance, January 1, 2008 |
2,668 | | 2,668 | |||||||||
Restructuring charges |
7,452 | 1,869 | 9,321 | |||||||||
Amount Paid |
(5,055 | ) | (1,869 | ) | (6,924 | ) | ||||||
Foreign currency translation |
(212 | ) | | (212 | ) | |||||||
Balance, December 31, 2008 |
4,853 | | 4,853 | |||||||||
Restructuring charges |
7,138 | 8,069 | 15,207 | |||||||||
Amount Paid |
(10,685 | ) | (8,069 | ) | (18,754 | ) | ||||||
Foreign currency translation |
97 | 97 | ||||||||||
Balance, December 31, 2009 |
1,403 | | 1,403 | |||||||||
Restructuring charges |
3,239 | 4,656 | 7,895 | |||||||||
Amount Paid |
(3,688 | ) | (4,521 | ) | (8,209 | ) | ||||||
Foreign currency translation |
(132 | ) | | (132 | ) | |||||||
Balance, December 31, 2010 |
$ | 822 | $ | 135 | $ | 957 | ||||||
The pretax restructuring charges by reportable segment are as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Protective Packaging |
4,277 | 9,650 | 8,639 | |||||||||
Specialty Packaging |
1,201 | 2,157 | 34 | |||||||||
Corporate |
2,417 | 3,400 | 648 | |||||||||
Total |
$ | 7,895 | $ | 15,207 | $ | 9,321 | ||||||
The restructuring costs recorded to date have been included as a component of other operating
expense, net within the consolidated statement of operations, as reflected in Note 14. The
restructuring liability is included in other current liabilities within the consolidated balance
sheet.
The Company expects to make cash payments for severance against the remaining liability
through the first half of 2011.
16. RETIREMENT BENEFITS
Pension Benefits
The Company has three defined benefit pension plans covering the majority of its employees
located in the United Kingdom and the Netherlands. Plan benefits are generally based upon age at
retirement, years of service and the level of compensation. The trustees of these plans, in
consultation with their respective actuaries, recommend annual funding to be made to the plans at a
level they believe to be appropriate for the plans to meet their long-term obligations. The
employees also make contributions based on a percentage of eligible salary. The Company also has
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three small, unfunded defined benefit pension plans covering certain current or former employees of
its German businesses. The Company funds the obligations for these plans with insurance contracts.
For the years ended December 31, 2010 and 2009, the Company has excluded these small German plans
from its pension disclosure herein, since the plans are not material.
In accordance with ASC Topic 715, Compensation Retirement Benefits (ASC Topic 715) the
Company reflects the funded status of its pension plans in its consolidated balance sheets. Plan
assets and benefit obligations are measured at December 31.
Components of net periodic benefit cost are as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Service cost of benefits earned |
$ | 1,538 | $ | 1,058 | $ | 2,041 | ||||||
Interest cost on benefit obligations |
4,781 | 4,367 | 5,195 | |||||||||
Expected return on plan assets |
(6,000 | ) | (6,388 | ) | (7,180 | ) | ||||||
Curtailment Gain |
| | (3,736 | ) | ||||||||
Amortization of net loss |
(40 | ) | (226 | ) | (243 | ) | ||||||
Net periodic pension cost (income) |
$ | 279 | $ | (1,189 | ) | $ | (3,923 | ) | ||||
In 2008, as a result of the closure and job reductions related to the Companys facility in
Eerbeek, Netherlands, the Company recognized a $3,736 curtailment gain attributable to the decrease
in liability associated with the reduction in pension benefits. The curtailment gain was
recognized in 2008, consistent with the timing of the related employees terminations. See Note
15 for more information on the facility closure.
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The following tables show the changes in the benefit obligation, plan assets and funded status
of the Companys benefit plans:
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Change in projected benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 91,186 | $ | 65,532 | ||||
Service cost of benefits earned |
1,538 | 1,058 | ||||||
Interest cost on benefit obligation |
4,780 | 4,367 | ||||||
Participant contributions |
453 | 488 | ||||||
Actuarial losses (gains) |
6,967 | 16,385 | ||||||
Benefit payments |
(3,312 | ) | (3,406 | ) | ||||
Exchange rate (gain) loss |
(3,479 | ) | 6,762 | |||||
Benefit obligation at end of year |
98,133 | 91,186 | ||||||
Change in fair value of plan assets |
||||||||
Fair value of plan assets at beginning of year |
103,681 | 86,414 | ||||||
Actual return on plan assets |
10,247 | 9,637 | ||||||
Employer contributions |
1,755 | 1,980 | ||||||
Participant contributions |
453 | 488 | ||||||
Benefit payments |
(3,312 | ) | (3,406 | ) | ||||
Exchange rate gain (loss) |
(3,979 | ) | 8,568 | |||||
Fair value of plan assets at end of year |
108,845 | 103,681 | ||||||
Funded status at end of year |
$ | 10,712 | $ | 12,495 | ||||
Amounts recognized on the balance sheet |
||||||||
Other noncurrent assets |
$ | 10,712 | $ | 12,495 | ||||
Other noncurrent liabilities |
| | ||||||
Net amount recognized |
$ | 10,712 | $ | 12,495 | ||||
Amounts recognized in accumulated other comprehensive income |
||||||||
Net actuarial loss |
$ | 5,362 | $ | 2,880 | ||||
Net amount recognized |
$ | 5,362 | $ | 2,880 | ||||
PLANNED
ASSUMPMTIONS
The accumulated benefit obligation for the defined benefit pension plans was $96,557 and
$89,725 at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, the fair
value of plan assets for each of the pension plans exceeded the projected benefit obligations and
accumulated benefit obligations.
Plan Assumptions
The weighted average assumptions used to determine the Companys defined benefit obligations
were as follows:
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Discount rate |
5.57 | % | 5.60 | % | ||||
Compensation increase |
3.70 | % | 3.52 | % |
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The weighted average assumptions used to determine net periodic benefit costs were as follows:
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Discount rate |
5.60 | % | 6.43 | % | 5.63 | % | ||||||
Expected return on plan assets |
6.12 | % | 6.96 | % | 6.30 | % | ||||||
Compensation increases |
3.52 | % | 3.43 | % | 3.42 | % |
The discount rate assumption for each country is based on an index of high-quality corporate
bonds with maturities in excess of ten years. In developing assumptions regarding the expected
rate of return on pension plan assets, the Company receives independent input in each of the
relevant countries in which the trust assets are invested on asset-allocation strategies and
projections of long-term rates of return on various asset classes, risk-free rates of return and
long-term inflation projections.
The weighted average asset allocations by asset category for the Companys pension plan assets
were as follow as of the end of the last two years:
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Equity securities |
24 | % | 27 | % | ||||
Fixed - income securities |
64 | % | 70 | % | ||||
Other |
12 | % | 3 | % | ||||
100 | % | 100 | % | |||||
The Company employs a total return investment approach whereby a mixture of equity and
fixed-income investments are used to maximize the long-term return on plan assets for a prudent
level of risk. Risk tolerance is established through careful consideration of plan liabilities,
plan funded status, and business financial condition. The investment portfolio contains a
diversified blend of equity and fixed-income investments.
Pregiss long-term objectives for plan investments are to ensure that (a) there is an adequate
level of assets to support benefit obligations to participants over the life of the plans, (b)
there is sufficient liquidity in plan assets to cover current benefit obligations, and (c) there is
a high level of investment return consistent with a prudent level of
investment risk. The investment strategy is focused on a stable return, weighted more towards
a fixed income strategy, with modest investment return opportunity related to a lesser extent on
equity securities. To accomplish this objective, the Company causes assets to be invested in a mix
of fixed income and equity investments. Management expects investment mix to be consistent with
prior year mix which has typically ranged from 65% 70% in fixed income securities and 25% 35%
in equity securities.
The Company expects to contribute $2,131 to its pension plans in 2011.
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Following are the estimated future benefit payments to be made in the years indicated:
Year | Amount | |||
2011 |
$ | 3,423 | ||
2012 |
3,179 | |||
2013 |
3,156 | |||
2014 |
3,184 | |||
2015 |
3,262 | |||
2016 - 2020 |
17,979 |
The fair values of the Companys pension plan assets at December 31, 2010 by asset category
are as follows:
Quoted Prices | ||||||||||||
in Active | ||||||||||||
Markets for | Significant | |||||||||||
Identical | Observable | |||||||||||
Assets | Inputs | |||||||||||
Total | Level 1 | Level 2 | ||||||||||
Asset Category |
||||||||||||
Cash |
$ | 280 | $ | | $ | | ||||||
Fixed Income Securities |
||||||||||||
Government Treasuries |
5,284 | 5,284 | | |||||||||
Corporate Bonds |
56,316 | | 56,316 | |||||||||
Other Types of Investments |
||||||||||||
L&G Consensus Index 1 |
33,661 | | 33,661 | |||||||||
Insurance Contracts 2 |
13,304 | | | |||||||||
Total December 31, 2010 |
$ | 108,845 | $ | 5,284 | $ | 89,977 | ||||||
1 | This category contains investments in equity securities (approximately 82.2%), fixed interest gilts (approximately 6.9%), index-linked gilts (approximately 0.5%), corporate bonds (4%) and cash / liquidity (approximately 6.4%). | |
2 | This represents the estimated contract value with the insurer of the plan. The Company uses the contract value as a practical expedient in measuring fair value. |
Defined Contribution Plans
The Company sponsors two 401(k) defined contribution plans, one for salaried and hourly
nonunion employees and one for hourly union employees, in which its U.S. employees are eligible to
participate. Under these plans, employees may contribute a percentage of compensation and the
Company will match a portion of the employees contributions. Additionally, under the salaried and
hourly nonunion plan, the Company may make a discretionary profit sharing contribution, if Company
performance objectives are achieved. The Companys contributions to these plans in the years
ended December 31, 2010, 2009 and 2008 totaled $1,349, $1,270, and $2,540, respectively.
The Company also sponsors several small, defined contribution plans at certain of its foreign
operating units. The Company contribution is a defined percentage of eligible salary and in certain
of the plans the employees also make
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contributions. The total expense for these plans was $157,
$233, and $260 for the years ended December 31, 2010, 2009 and 2008, respectively.
Pension and Related Assets and Liabilities in the Balance Sheet
Pension and related assets, as reflected in the consolidated balance sheets, also include the
insurance investment contracts relating to the unfunded German pension plans which are excluded
from the pension disclosure herein. The asset values totaled $1,648 and $1,458 at December 31,
2010 and 2009, respectively.
Pension and related liabilities, as reflected in the consolidated balance sheets, include the
obligations for the German pension plans, totaling $3,144 and $3,321 at December 31, 2010 and 2009,
respectively, and for termination liabilities and other benefit related liabilities established at
certain of the Companys foreign subsidiaries. The termination amounts are payable to the
employees when they separate from the Company. The liabilities are calculated in accordance with
civil and labor laws based on each employees length of service, employment category and
remuneration, and are calculated at the amount that the employee would be entitled to, if the
employee terminated immediately. The liabilities related to these arrangements totaled $1,584 and
$1,130 at December 31, 2010 and 2009, respectively.
17. STOCK-BASED COMPENSATION
In October 2005, Pregis Holding I Corporation, the Companys ultimate parent company,
established the Pregis Holding I Corporation 2005 Stock Option Plan (the Pregis Plan) to provide
for the grant of nonqualified and incentive stock options to key employees, consultants and
directors of the Company. At December 31, 2010, the number of shares available for grant under
the Pregis Plan was 2,091.62, of which approximately 411 remain available for grant.
The majority of the options issued pursuant to the Pregis Plan vest equally over a five-year
period as service is rendered. The Company recognizes the compensation cost of all share-based
awards, other than those with
performance conditions, on a straight-line basis over the vesting period of the award.
In 2007 and 2008, certain management employees were awarded performance-based options, which
may vest in three equal installments if defined performance objectives are met for each or any of
the three years to which they relate. Vesting may be accelerated at any time as determined by the
committee administering the Pregis Plan. The options expire if not exercised within ten years of
the date of grant. Additionally, vested options will generally terminate 45 days after
termination of employment. The company recognises compensation cost for performance-based options,
on an accelerated attributions basis over the requisite or implied service period, if and when
the performance conditions are deemed probable.
The fair value of each option award granted after adoption of ASC Topic 718 has been estimated
on the date of grant using the Black-Scholes option-valuation model, using the following
assumptions:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected term (in years) |
3.0 - 5.0 | 3.0 - 5.0 | 3.0 - 5.0 | |||||||||
Volatility |
30.0% - 35.0 | % | 35.0 | % | 30.0 | % | ||||||
Risk - free interes rate |
1.3% - 2.8 | % | 1.3% - 2.5 | % | 1.4% - 3.5 | % | ||||||
Dividend yield |
| | |
The expected terms of the option grants were estimated, based on the vesting periods for the
grants. The plan has not been in existence a sufficient period for the Companys historical
experience to be used when estimating expected life. Therefore, the expected life of each stock
option was calculated using the simplified method based on the average of each options vesting term
and original contractual term. The risk-free interest rate assumption is based on U.S.
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Treasury
security yields for issues with a remaining term equal to the options expected life at the time of
grant. The Company does not have publicly traded equity, so it does not have historical data
regarding the volatility of its common stock. Therefore, the expected volatility used for 2010,
2009, and 2008 was based on volatility of similar entities, referred to as guideline companies.
In determining similarity, the Company considered industry, stage of life cycle, size and financial
leverage. The dividend yield on the Companys stock is assumed to be zero since the Company has
not paid dividends and has no current plans to do so in the future. Based on its minimal
historical experience of pre-vesting cancellations, the Company has assumed an annual forfeiture
rate of 5% for the majority of its option grants. These assumptions are evaluated, and revised as
necessary, based on changes in market conditions and historical experience.
The fair value of the Pregis Holding I Stock is determined by its
Board of Directors using valuation techniques which includes an
income approach and market approach to determine fair value.
The Companys stock option activity for the years ended December 31, 2010, 2009 and 2008
under the Pregis Plan is as follows:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Number of | Average | Remaining | ||||||||||
Options | Exercise Price | Contractual Life | ||||||||||
Outstanding at January 1, 2008 |
1,708.75 | $ | 14,935.00 | |||||||||
Granted |
342.76 | 20,000.00 | ||||||||||
Exercised |
(21.85 | ) | 13,000.00 | |||||||||
Forfeited |
(184.84 | ) | 16,230.00 | |||||||||
Expired |
(35.65 | ) | 13,000.00 | |||||||||
Outstanding at December 31, 2008 |
1,809.17 | $ | 15,782.00 | |||||||||
Granted |
346.70 | 19,610.00 | ||||||||||
Exercised |
(45.00 | ) | 13,000.00 | |||||||||
Forfeited |
(233.39 | ) | 16,346.00 | |||||||||
Expired |
(64.20 | ) | 15,307.00 | |||||||||
Outstanding at December 31, 2009 |
1,813.28 | 16,524.00 | 6.76 years | |||||||||
Granted (1) |
163.70 | 14,911.52 | ||||||||||
Exercised |
| | ||||||||||
Forfeited (1) |
(32.72 | ) | 13,000.00 | |||||||||
Expired (1) |
(143.73 | ) | 13,330.21 | |||||||||
Outstanding
at December 31, 2010 (2) |
1,800.54 | 13,000.00 | ||||||||||
Exercisable
at December 31, 2010 (2) |
1,074.74 | 13,000.00 | 6.04 years | |||||||||
(1) | Prior to giving effect to the modification of the exercise price discussed below. | |
(2) | After giving effect to the modification of the exercise price discussed below. |
The
weighted average grant-date fair value of options granted was $5,262
(after giving effect to the modification of the exercise price), $5,204, and $5,989
per share for the years ended December 31, 2010, 2009 and 2008, respectively. The total grant-date
fair of options that vested during 2010 and 2009 was $4,432 and $3,834, respectively.
In February 2010 Pregis Holding I board of directors voted and approved the modification of
the exercise price of stock options granted to employees, including named executive officers, with
a per share exercise price in excess of $17,500 to $17,500. Another modification was approved in
September 2010 further reducing the option exercise price to $13,000 for all stock options granted
with an exercise price in excess of this amount. These modifications were done to ensure that the
outstanding options provided more motivational value to the option
holders. This modification resulted in an increase to stock compensation
expense by $1.6 million.
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As of December 31, 2010, there was $3,894 of unrecognized compensation cost related to
non-vested options granted in 2006 through 2010 under the plans. This cost is expected to be
amortized over a weighted-average service period of approximately 3.0 years. For the years ended
December 31, 2010, 2009 and 2008, the Company recognized share-based compensation expense of
$3,092 ($1,982, net of tax) which included
the impact of the modification of the stock option exercise price, $1,353 ($851, net of tax), and $951 ($598, net of tax), respectively.
In December 2005, Pregis Holding I Corporation also adopted the Pregis Holding I Corporation
Employee Stock Purchase Plan (the Stock Purchase Plan) to provide key employees of the Company
the opportunity to purchase shares at an initial price of $10,000 per share, equal to the per share
price paid by the Sponsors in the Acquisition. New
executives joining the Company have also been given the opportunity to purchase shares at the
then-current fair market value. The Company has recognized no compensation expense related to
shares sold under this plan, since the price paid by management approximates fair value.
18. SEGMENT AND GEOGRAPHIC INFORMATION
The Company reports its segment information in accordance with ASC Topic 280, Segment
Reporting. The Company classified its operations in two reportable segments, known as Protective
Packaging and Specialty Packaging.
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 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.
The Company evaluates performance and allocates resources to each segment based on segment
EBITDA, which is calculated internally as net income before interest, taxes, depreciation,
amortization, and restructuring expense and adjusted for other non-cash activity. 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 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.
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Information regarding the Companys reportable segments is as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net Sales: |
||||||||||||
Protective Packaging |
$ | 559,683 | $ | 497,144 | $ | 661,976 | ||||||
Specialty Packaging |
313,523 | 304,080 | 357,388 | |||||||||
$ | 873,206 | $ | 801,224 | $ | 1,019,364 | |||||||
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Segment EBITDA: |
||||||||||||
Protective Packaging |
$ | 47,824 | $ | 52,561 | $ | 61,166 | ||||||
Specialty Packaging |
31,232 | 41,339 | 42,523 | |||||||||
Total segment EBITDA |
79,056 | 93,900 | 103,689 | |||||||||
Corporate expenses (1) |
(18,494 | ) | (17,539 | ) | (11,525 | ) | ||||||
Restructuring expense |
(7,895 | ) | (15,207 | ) | (9,321 | ) | ||||||
Curtailment |
| | 3,736 | |||||||||
Depreciation and amortization |
(46,454 | ) | (44,783 | ) | (52,344 | ) | ||||||
Interest expense |
(48,364 | ) | (42,604 | ) | (49,069 | ) | ||||||
Interest income |
254 | 394 | 875 | |||||||||
Unrealized foreign exchange gain
(loss), net |
(1,008 | ) | 6,126 | (14,022 | ) | |||||||
Non-cash stock compensation |
(3,092 | ) | (1,353 | ) | (951 | ) | ||||||
Goodwill Impairment |
| | (19,057 | ) | ||||||||
Other |
| 57 | (1,606 | ) | ||||||||
Loss before income taxes |
$ | (45,997 | ) | $ | (21,009 | ) | $ | (49,595 | ) | |||
2010 | 2009 | 2008 | ||||||||||
Depreciation and Amortization |
||||||||||||
Protective Packaging |
$ | 28,478 | $ | 28,214 | $ | 32,082 | ||||||
Specialty Packaging |
17,447 | 15,944 | 19,680 | |||||||||
Corporate |
529 | 625 | 582 | |||||||||
Total depreciation and amortization |
$ | 46,454 | $ | 44,783 | $ | 52,344 | ||||||
2010 | 2009 | 2008 | ||||||||||
Capital Spending |
||||||||||||
Protective Packaging |
$ | 18,004 | $ | 12,605 | $ | 18,239 | ||||||
Specialty Packaging |
13,029 | 12,440 | 12,643 | |||||||||
$ | 31,033 | $ | 25,045 | $ | 30,882 | |||||||
As of December 31, | ||||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Protective Packaging |
$ | 308,284 | $ | 305,723 | ||||
Specialty Packaging |
217,931 | 228,812 | ||||||
Corporate (2) |
182,483 | 196,012 | ||||||
Total assets |
$ | 708,698 | $ | 730,547 | ||||
(1) | 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 |
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maker excludes in assessing business unit performance. These expenses, along with depreciation and amortization and other non-operating activity such as interest expense/income and foreign exchange gains/losses are not considered in the measure of the segments operating performance, but are shown herein as reconciling items to the Companys consolidated income (loss) before income taxes. | ||
(2) | Corporate assets include goodwill, deferred financing costs, and other assets attributed to the corporate support functions. |
Net Sales by Major Product Line
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Protective packaging |
$ | 559,683 | $ | 497,144 | $ | 661,976 | ||||||
Flexible packaging |
172,989 | 167,540 | 188,160 | |||||||||
Rigid packaging |
59,471 | 54,698 | 63,651 | |||||||||
Medical supplies and packaging |
81,063 | 81,842 | 105,577 | |||||||||
Total net sales |
$ | 873,206 | $ | 801,224 | $ | 1,019,364 | ||||||
Net Sales by Geographic Area
The following table provides certain geographic-area information, as determined based on the
country from which the sales originate and in which the assets are based:
Net Sales | Total Long-Lived Assets (e) | |||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||
United States |
$ | 325,494 | $ | 273,846 | $ | 341,543 | $ | 220,804 | $ | 196,524 | ||||||||||
Germany |
214,150 | 209,792 | 254,629 | 93,863 | 104,631 | |||||||||||||||
United Kingdom |
140,004 | 134,827 | 164,737 | 19,790 | 22,984 | |||||||||||||||
Western Europe ( a ) |
64,601 | 65,350 | 88,742 | 27,380 | 31,606 | |||||||||||||||
Southern Europe ( b ) |
37,066 | 38,657 | 64,450 | 19,423 | 23,302 | |||||||||||||||
Central Europe ( c ) |
38,233 | 36,802 | 58,993 | 25,244 | 28,070 | |||||||||||||||
Accumulated Other ( d ) |
53,658 | 41,950 | 46,270 | 13,974 | 14,947 | |||||||||||||||
Total |
$ | 873,206 | $ | 801,224 | $ | 1,019,364 | $ | 420,478 | $ | 422,064 | ||||||||||
(a) | Includes Belgium and the Netherlands. | |
(b) | Includes Spain, Italy, and France. | |
(c) | Includes Poland, Hungary, the Czech Republic, Bulgaria, and Romania. | |
(d) | Includes Canada, Mexico, and Egypt. | |
(e) | Total long-lived assets are total assets, excluding intercompany notes and investments, less current assets. |
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19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of taxes, are as follows:
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cummulative foreign currency translation adjustment |
$ | (2,740 | ) | $ | (4,879 | ) | $ | (5,206 | ) | |||
Net unrealized losses on derivative instruments |
(1,022 | ) | (3,084 | ) | (1,889 | ) | ||||||
Defined benefit pension adjustments |
(5,362 | ) | (2,880 | ) | 10,904 | |||||||
$ | (9,124 | ) | $ | (10,843 | ) | $ | 3,809 | |||||
20. COMMITMENTS AND CONTINGENCIES
Financing commitments
At December 31, 2010, the Company had letters of credit outstanding under its credit facility
and foreign lines of credit totaling $13,339 of which $3,719 was drawn in cash.
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.
However, management believes that any additional costs that may be incurred as more information
becomes available will not have a material adverse effect on the Companys financial position,
although such costs could have a material effect on the Companys results of operations or cash
flows in a particular period.
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21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Year Ended December 31, 2010: |
||||||||||||||||
Net Sales |
$ | 210,036 | $ | 217,801 | $ | 223,681 | $ | 221,688 | ||||||||
Cost of sales, excluding
depreciation and amortization |
162,470 | 171,368 | 176,301 | 174,359 | ||||||||||||
Depreciation and amortization |
11,195 | 11,464 | 11,646 | 12,149 | ||||||||||||
Operating income (loss) |
(1,156 | ) | 4,489 | 2,065 | (2,643 | ) | ||||||||||
Loss before income taxes |
(14,401 | ) | (6,770 | ) | (9,133 | ) | (15,693 | ) | ||||||||
Net loss |
(12,208 | ) | (3,582 | ) | (7,917 | ) | (13,365 | ) | ||||||||
Year Ended December 31, 2009: |
||||||||||||||||
Net Sales |
$ | 185,544 | $ | 196,003 | $ | 207,047 | $ | 212,630 | ||||||||
Cost of sales, excluding
depreciation and amortization |
141,007 | 147,049 | 156,088 | 165,371 | ||||||||||||
Depreciation and amortization |
11,471 | 11,305 | 12,607 | 9,400 | ||||||||||||
Operating income (loss) |
(1,531 | ) | 6,512 | 7,425 | 2,492 | |||||||||||
Income (loss) before income taxes |
(14,076 | ) | 5,230 | (827 | ) | (11,336 | ) | |||||||||
Net income (loss) |
(10,408 | ) | 3,063 | (3,341 | ) | (7,324 | ) |
22. SUBSEQUENT EVENTS
On
March 23, 2011, Pregis Holding II and Pregis and certain of its
subsidiaries entered into a $75 million Credit Agreement
with Wells Fargo Capital Finance, LLC, as agent, Wells Fargo Bank, National Association, as lender
and other lenders from time to time parties thereto (ABL credit facility). The ABL credit facility provides for the
borrowings in dollars, euros and pounds sterling and consists of (1) a UK facility, under which
certain UK subsidiaries of Pregis (the UK Borrowers) may from time to time borrow up to a
maximum amount of the lesser of the UK borrowing base and $30 million and (2) a US facility, under
which certain US subsidiaries of Pregis (the US Borrowers and, together with the UK Borrowers,
the Borrowers) may from time to time borrow up to a maximum amount of the lesser of the US
borrowing base and $75 million less amounts outstanding under the UK facility. The borrowing
base is calculated on the basis of certain permitted over advance amounts, plus a percentage of
certain eligible accounts receivable and eligible inventory, subject to reserves established by the
agent from time to time. The ABL credit facility provides for the issuances of letters of credit
and a swingline subfacility. The ABL credit facility also provides for future uncommitted
increases of its maximum amount, not to exceed $40 million.
The ABL credit facility matures on the earlier of March 22, 2016 and the date that is 90 days prior
to the maturity of the existing high yield notes of Pregis Corporation (as such notes may be
refinanced prior to such maturity date). Advances under the ABL credit facility bears interest, at
the Borrowers option, equal to adjusted LIBOR, plus an applicable margin, or a base rate, plus an
applicable margin. The applicable margin for LIBOR loans ranges from 2.5% to 3%, depending on the
average quarterly excess availability of the Borrowers. The applicable margin for the base rate
loans is 100 basis points lower than the applicable margin for the LIBOR loans.
The obligations of the US Borrowers are guaranteed by Pregis and substantially all of its US
subsidiaries (subject to certain exceptions for immaterial and non wholly-owned subsidiaries) and
are secured by a first priority security interest (ranking senior to the security interest
securing Pregis Corporations secured notes) in substantially all of the assets (other than certain
excluded property) of Pregis and its US subsidiaries and by the capital stock of substantially all
of Pregis US subsidiaries and 65% of the voting stock (and 100% of the nonvoting stock) of its
first-tier foreign subsidiaries. The obligations of the UK Borrowers are guaranteed by Pregis and
substantially all of its foreign and domestic subsidiaries (subject to certain exceptions for
immaterial and non wholly-owned subsidiaries) and are secured by substantially all of the assets
(other than certain excluded property) of Pregis and its foreign and domestic subsidiaries and by
the capital stock of substantially all of Pregis foreign and domestic subsidiaries.
The ABL credit facility contains customary representations, warranties, covenants and events of
default, and requires monthly compliance with a springing fixed charge coverage ratio of 1.1 to
1.0 if the excess availability of Pregis and its subsidiaries falls below a certain level. The ABL
credit facility is also subject to mandatory prepayments out of certain asset sale, insurance and
condemnation proceeds, if the excess availability of Pregis and its subsidiaries falls below a
certain level.
23. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION
In connection with the Acquisition, Pregis Holding II (presented as Parent in the following
tables), through its 100%-owned subsidiary, Pregis Corporation (presented as Issuer in the
following tables), issued senior secured notes and senior subordinated notes. 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 Holding 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 new 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
83
Table of Contents
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.
84
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2010
Condensed Consolidating Balance Sheet
December 31, 2010
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 19,019 | $ | 763 | $ | 28,063 | $ | | $ | 47,845 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 33,165 | 85,671 | | 118,836 | ||||||||||||||||||
Affiliates |
| 67,201 | 90,017 | 4,334 | (161,552 | ) | | |||||||||||||||||
Other |
| | 9 | 18,564 | | 18,573 | ||||||||||||||||||
Inventories, net |
| | 23,521 | 65,454 | | 88,975 | ||||||||||||||||||
Deferred income taxes |
| 134 | 3,070 | 495 | | 3,699 | ||||||||||||||||||
Due from Pactiv |
| 56 | | 1,105 | | 1,161 | ||||||||||||||||||
Prepayments and other current assets |
| 4,269 | 1,488 | 3,374 | | 9,131 | ||||||||||||||||||
Total current assets |
| 90,679 | 152,033 | 207,060 | (161,552 | ) | 288,220 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
26,531 | 475,692 | | | (502,223 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,042 | 55,764 | 141,454 | | 198,260 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 100,684 | 39,111 | | 139,795 | ||||||||||||||||||
Intangible assets, net |
| | 35,121 | 18,521 | | 53,642 | ||||||||||||||||||
Restricted cash |
| 3,501 | | | | 3,501 | ||||||||||||||||||
Other |
| 4,836 | 3,527 | 16,917 | | 25,280 | ||||||||||||||||||
Total other assets |
| 8,337 | 139,332 | 74,549 | | 222,218 | ||||||||||||||||||
Total assets |
$ | 26,531 | $ | 575,750 | $ | 347,129 | $ | 423,063 | $ | (663,775 | ) | $ | 708,698 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 42,500 | $ | | $ | 3,863 | $ | | $ | 46,363 | ||||||||||||
Accounts payable |
| 5,243 | 22,537 | 73,486 | | 101,266 | ||||||||||||||||||
Accounts payable, affiliate |
| 50,104 | 62,896 | 48,415 | (161,415 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,597 | ) | 1,665 | 2,903 | | 2,971 | |||||||||||||||||
Accrued payroll and benefits |
| 446 | 4,456 | 9,724 | | 14,626 | ||||||||||||||||||
Accrued interest |
| 7,619 | | 35 | | 7,654 | ||||||||||||||||||
Other |
| 5,136 | 6,137 | 9,630 | | 20,903 | ||||||||||||||||||
Total current liabilities |
| 109,451 | 97,691 | 148,056 | (161,415 | ) | 193,783 | |||||||||||||||||
Long-term debt |
| 442,625 | | 283 | | 442,908 | ||||||||||||||||||
Intercompany balances |
| | 77,384 | 276,200 | (353,584 | ) | | |||||||||||||||||
Deferred income taxes |
| (12,373 | ) | 24,625 | 3,777 | | 16,029 | |||||||||||||||||
Other |
| 9,516 | 7,694 | 12,237 | | 29,447 | ||||||||||||||||||
Total Stockholders equity |
26,531 | 26,531 | 139,735 | (17,490 | ) | (148,776 | ) | 26,531 | ||||||||||||||||
Total liabilities and stockholders
equity |
$ | 26,531 | $ | 575,750 | $ | 347,129 | $ | 423,063 | $ | (663,775 | ) | $ | 708,698 | |||||||||||
85
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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 | |||||||||||
86
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2010
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2010
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 334,979 | $ | 548,863 | $ | (10,636 | ) | $ | 873,206 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
| | 248,018 | 447,116 | (10,636 | ) | 684,498 | |||||||||||||||||
Selling, general and administrative |
| 21,738 | 40,434 | 67,885 | | 130,057 | ||||||||||||||||||
Depreciation and amortization |
| 529 | 17,219 | 28,706 | | 46,454 | ||||||||||||||||||
Other operating expense, net |
| 2,384 | 1,988 | 5,070 | | 9,442 | ||||||||||||||||||
Total operating costs and expenses |
| 24,651 | 307,659 | 548,777 | (10,636 | ) | 870,451 | |||||||||||||||||
Operating income (loss) |
| (24,651 | ) | 27,320 | 86 | | 2,755 | |||||||||||||||||
Interest expense |
| 15,870 | 11,617 | 20,877 | | 48,364 | ||||||||||||||||||
Interest income |
| (17 | ) | | (237 | ) | | (254 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| 982 | | (340 | ) | | 642 | |||||||||||||||||
Equity in loss of subsidiaries |
37,072 | 845 | | | (37,917 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(37,072 | ) | (42,331 | ) | 15,703 | (20,214 | ) | 37,917 | (45,997 | ) | ||||||||||||||
Income tax expense (benefit) |
| (5,259 | ) | (3,608 | ) | (58 | ) | | (8,925 | ) | ||||||||||||||
Net income (loss) |
$ | (37,072 | ) | $ | (37,072 | ) | $ | 19,311 | $ | (20,156 | ) | $ | 37,917 | $ | (37,072 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2009
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2009
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 281,361 | $ | 527,871 | $ | (8,008 | ) | $ | 801,224 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
| | 200,639 | 416,884 | (8,008 | ) | 609,515 | |||||||||||||||||
Selling, general and administrative |
| 18,424 | 34,629 | 63,995 | | 117,048 | ||||||||||||||||||
Depreciation and amortization |
| 624 | 15,125 | 29,034 | | 44,783 | ||||||||||||||||||
Other operating expense, net |
| 3,830 | 2,905 | 8,245 | | 14,980 | ||||||||||||||||||
Total operating costs and expenses |
| 22,878 | 253,298 | 518,158 | (8,008 | ) | 786,326 | |||||||||||||||||
Operating income (loss) |
| (22,878 | ) | 28,063 | 9,713 | | 14,898 | |||||||||||||||||
Interest expense |
| 2,148 | 15,328 | 25,128 | | 42,604 | ||||||||||||||||||
Interest income |
| (85 | ) | | (309 | ) | | (394 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| (3,820 | ) | 20 | (2,503 | ) | | (6,303 | ) | |||||||||||||||
Equity in loss of subsidiaries |
18,010 | 2,338 | | | (20,348 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(18,010 | ) | (23,459 | ) | 12,715 | (12,603 | ) | 20,348 | (21,009 | ) | ||||||||||||||
Income tax expense (benefit) |
| (5,449 | ) | 1,272 | 1,178 | | (2,999 | ) | ||||||||||||||||
Net income (loss) |
$ | (18,010 | ) | $ | (18,010 | ) | $ | 11,443 | $ | (13,781 | ) | $ | 20,348 | $ | (18,010 | ) | ||||||||
87
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2008
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2008
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | | $ | 351,564 | $ | 678,643 | $ | (10,843 | ) | $ | 1,019,364 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 265,568 | 543,965 | (10,843 | ) | 798,690 | |||||||||||||||||
Selling, general and administrative |
| 11,946 | 41,591 | 74,263 | | 127,800 | ||||||||||||||||||
Depreciation and amortization |
| 577 | 16,378 | 35,389 | | 52,344 | ||||||||||||||||||
Goodwill impairment |
| | | 19,057 | | 19,057 | ||||||||||||||||||
Other operating expense, net |
648 | 923 | 6,575 | | 8,146 | |||||||||||||||||||
Total operating costs and expenses |
| 13,171 | 324,460 | 679,249 | (10,843 | ) | 1,006,037 | |||||||||||||||||
Operating income (loss) |
| (13,171 | ) | 27,104 | (606 | ) | | 13,327 | ||||||||||||||||
Interest expense |
| (4,482 | ) | 18,018 | 35,533 | | 49,069 | |||||||||||||||||
Interest income |
| (190 | ) | | (685 | ) | | (875 | ) | |||||||||||||||
Foreign exchange (gain) loss |
| 3,452 | | 11,276 | | 14,728 | ||||||||||||||||||
Equity in loss of subsidiaries |
47,730 | 34,876 | | | (82,606 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(47,730 | ) | (46,827 | ) | 9,086 | (46,730 | ) | 82,606 | (49,595 | ) | ||||||||||||||
Income tax expense (benefit) |
| 903 | (1,033 | ) | (1,735 | ) | | (1,865 | ) | |||||||||||||||
Net income (loss) |
$ | (47,730 | ) | $ | (47,730 | ) | $ | 10,119 | $ | (44,995 | ) | $ | 82,606 | $ | (47,730 | ) | ||||||||
88
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2010
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2010
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (37,072 | ) | $ | (37,072 | ) | 19,311 | $ | (20,156 | ) | $ | 37,917 | $ | (37,072 | ) | |||||||||
Non-cash adjustments |
37,072 | 6,986 | 13,809 | 28,888 | (37,917 | ) | 48,838 | |||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions |
| 14,352 | (8,903 | ) | (4,474 | ) | | 975 | ||||||||||||||||
Cash provided by (used in)
operating activities |
| (15,734 | ) | 24,217 | 4,258 | | 12,741 | |||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (332 | ) | (11,881 | ) | (18,820 | ) | | (31,033 | ) | ||||||||||||||
Proceeds from sale of assets |
| | (15 | ) | 1,532 | | 1,517 | |||||||||||||||||
Proceeds from sale leaseback |
| 17,875 | 17,875 | |||||||||||||||||||||
Acquisition of business, net of cash acquired |
| (32,220 | ) | 115 | | | (32,105 | ) | ||||||||||||||||
Change in restricted cash |
| (3,501 | ) | | | | (3,501 | ) | ||||||||||||||||
Cash provided by (used in)
investing activities |
| (36,053 | ) | 6,094 | (17,288 | ) | | (47,247 | ) | |||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 29,548 | (29,548 | ) | | | | |||||||||||||||||
Proceeds from local lines of credit draws |
| | | 3,719 | | 3,719 | ||||||||||||||||||
Proceeds from revolving credit facility |
| 500 | | | | 500 | ||||||||||||||||||
Other, net |
| | | (153 | ) | | (153 | ) | ||||||||||||||||
Cash provided by (used in)
financing activities |
| 30,048 | (29,548 | ) | 3,566 | | 4,066 | |||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| (125 | ) | | (2,025 | ) | | (2,150 | ) | |||||||||||||||
Increase (decrease) in cash
and cash equivalents |
| (21,864 | ) | 763 | (11,489 | ) | | (32,590 | ) | |||||||||||||||
Cash and cash equivalents,
beginning of period |
| 40,883 | | 39,552 | | 80,435 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 19,019 | $ | 763 | $ | 28,063 | $ | | $ | 47,845 | ||||||||||||
89
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2009
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (18,010 | ) | $ | (18,010 | ) | $ | 11,443 | $ | (13,781 | ) | $ | 20,348 | $ | (18,010 | ) | ||||||||
Non-cash adjustments |
18,010 | 1,294 | 15,766 | 26,435 | (20,348 | ) | 41,157 | |||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions |
| 699 | (41 | ) | 1,812 | | 2,470 | |||||||||||||||||
Cash provided by
operating activities |
| (16,017 | ) | 27,168 | 14,466 | | 25,617 | |||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (159 | ) | (8,220 | ) | (16,666 | ) | | (25,045 | ) | ||||||||||||||
Sales leaseback proceeds |
| | | 9,850 | | 9,850 | ||||||||||||||||||
Proceeds from sale of assets |
| | 2,132 | (366 | ) | | 1,766 | |||||||||||||||||
Cash used in investing activities |
| (159 | ) | (6,088 | ) | (7,182 | ) | | (13,429 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 30,844 | (30,844 | ) | | | | |||||||||||||||||
Proceeds from 2009 note issuance, net of discount |
| 172,173 | | | | 172,173 | ||||||||||||||||||
Process from revolving credit facility |
| 42,000 | | | | 42,000 | ||||||||||||||||||
Retirement of term B1 & B2 notes |
| (176,991 | ) | | | | (176,991 | ) | ||||||||||||||||
Deferred
financing costs |
| (6,466 | ) | | | | (6,466 | ) | ||||||||||||||||
Repayment of long-term debt |
| (4,312 | ) | | | | (4,312 | ) | ||||||||||||||||
Other, net |
| | (269 | ) | | (269 | ) | |||||||||||||||||
Cash provided by (used in)
financing activities |
| 57,248 | (30,844 | ) | (269 | ) | | 26,135 | ||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| (189 | ) | | 1,122 | | 933 | |||||||||||||||||
Increase (decrease) in cash
and cash equivalents |
| 40,883 | (9,764 | ) | 8,137 | | 39,256 | |||||||||||||||||
Cash and cash equivalents,
beginning of period |
| | 9,764 | 31,415 | | 41,179 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 40,883 | $ | | $ | 39,552 | $ | | $ | 80,435 | ||||||||||||
90
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2008
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2008
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (47,730 | ) | $ | (47,730 | ) | $ | 10,119 | $ | (44,995 | ) | $ | 82,606 | $ | (47,730 | ) | ||||||||
Non-cash adjustments |
47,730 | 44,239 | 14,257 | 55,719 | (82,606 | ) | 79,339 | |||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions |
| (15,328 | ) | 4,750 | 18,623 | | 8,045 | |||||||||||||||||
Cash (used in) provided by
operating activities |
| (18,819 | ) | 29,126 | 29,347 | | 39,654 | |||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| | (7,408 | ) | (23,474 | ) | | (30,882 | ) | |||||||||||||||
Proceeds from sale of assets |
| | 7 | 1,056 | | 1,063 | ||||||||||||||||||
Business acquisitions, net of cash
acquired |
| | | (958 | ) | | (958 | ) | ||||||||||||||||
Insurance proceeds |
3,205 | 3,205 | ||||||||||||||||||||||
Other, net |
| | | (969 | ) | | (969 | ) | ||||||||||||||||
Cash used in investing activities |
| | (7,401 | ) | (21,140 | ) | | (28,541 | ) | |||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 11,961 | (11,961 | ) | | | | |||||||||||||||||
Repayment of long-term debt |
| (1,893 | ) | | | | (1,893 | ) | ||||||||||||||||
Other, net |
| | | (115 | ) | | (115 | ) | ||||||||||||||||
Cash (used in) provided by financing activities |
| 10,068 | (11,961 | ) | (115 | ) | | (2,008 | ) | |||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| 110 | | (3,025 | ) | | (2,915 | ) | ||||||||||||||||
Increase
(decrease) in cash and cash equivalents |
| (8,641 | ) | 9,764 | 5,067 | | 6,190 | |||||||||||||||||
Cash and cash equivalents,
beginning of year |
| 8,641 | | 26,348 | | 34,989 | ||||||||||||||||||
Cash and cash equivalents,
end of year |
$ | | $ | | $ | 9,764 | $ | 31,415 | $ | | $ | 41,179 | ||||||||||||
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Schedule II Valuation and Qualifying Accounts
(dollars in thousands)
(dollars in thousands)
Changes in | ||||||||||||||||||||
Balance at | Additions | foreign | ||||||||||||||||||
beginning of | charged to | Deductions/ | currency | Balance at end | ||||||||||||||||
Description | period | income | Other | exchange rates | of period | |||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||
Year ended December 31, 2010 |
$ | 6,015 | $ | 3,167 | $ | (1,407 | ) | $ | (262 | ) | $ | 7,513 | ||||||||
Year ended December 31, 2009 |
5,357 | 1,928 | (1,614 | ) | 344 | 6,015 | ||||||||||||||
Year ended December 31, 2008 |
5,313 | 1,562 | (1,126 | ) | (392 | ) | 5,357 | |||||||||||||
Deferred tax asset valuation
reserve |
||||||||||||||||||||
Year ended December 31, 2010 |
$ | 33,698 | $ | 4,096 | $ | 1,944 | $ | (1,689 | ) | $ | 38,049 | |||||||||
Year ended December 31, 2009 |
25,911 | 3,684 | 3,252 | 851 | 33,698 | |||||||||||||||
Year ended December 31, 2008 |
17,068 | 10,011 | (893 | ) | (275 | ) | 25,911 |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive
Officer (our principal executive officer) and our Chief Financial Officer (our principal financial
officer), we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report
(the Evaluation Date). Based on this evaluation, the principal executive officer and principal
financial officer concluded as of the Evaluation Date that the disclosure controls and procedures
were effective such that information relating to us that is required to be disclosed in reports
filed with the SEC: (i) is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including
our principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Managements Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with generally accepted accounting
principles. In designing and evaluating our disclosure controls and procedures, management
recognizes that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and procedures, our management
necessarily is required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2010. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework. The assessment included extensive documenting,
evaluating and testing the design and operating effectiveness of our internal control over
financial reporting. Management concluded that based on its assessment, our internal control over
financial reporting was effective as of December 31, 2010.
This annual report on Form 10-K does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to the Dodd-Frank Act that was passed by Congress in July of 2010 that permits the
Company to provide only managements report in this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
For the quarter ended December 31, 2010, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table provides information about the current directors of Pregis Holding II and the
executive officers of Pregis Holding II and Pregis Corporation. The biographies of each of our
directors contain a description of the experience, qualifications, attributes or skills that caused
the Board to determine that the person should serve as a director for the Company.
Name | Age | Position with our Company | ||||||
Glenn M. Fischer |
60 | Chief Executive Officer and Director | ||||||
D. Keith LaVanway |
46 | Vice President and Chief Financial Officer | ||||||
Kevin J. Baudhuin |
48 | President, Global Protective Packaging | ||||||
Jeffrey A. Kellar |
55 | President, Hexacomb | ||||||
Borge Kvamme |
58 | President, Specialty Packaging | ||||||
Thomas E. ONeill |
59 | Vice President, Human Resources | ||||||
Paul S. Pak |
51 | Vice President, Procurement | ||||||
John L. Garcia |
54 | Chairman of the Board | ||||||
Brian R. Hoesterey |
43 | Director | ||||||
James W. Leng |
65 | Director | ||||||
James D. Morris |
57 | Director | ||||||
John P. OLeary, Jr. |
64 | Director | ||||||
Thomas J. Pryma |
37 | Director | ||||||
James E. Rogers |
65 | Director |
On February 23, 2011, Pregis Corporation announced that its Board of Directors has appointed
Glenn M. Fischer as the Companys Chief Executive Officer, effective immediately. Mr. Fischer
replaced Michael McDonnell, who resigned as the Companys President and Chief Executive Officer and
a director.
Glenn M. Fischer became a director of Pregis Holding II in October 2005 upon consummation of
the Acquisition and served as our Interim Chief Executive Officer from December 1, 2005 to February
28, 2006. Mr. Fischer is an operating partner with AEA Investors LP, which he joined in 2005. From
2000 to 2005 he was President and Chief Operating Officer of Airgas, Inc., the largest U.S.
distributor of industrial, medical and specialty gases, welding, safety and related products. Mr.
Fischer joined Airgas after spending 19 years with The BOC Group in a wide range of positions
leading to his appointment in 1997 as President of BOC Gases, North America. In addition to his
responsibility for all North American operations, Mr. Fischer served on The BOC Group Executive
Management Board. Prior to joining BOC in 1981, Mr. Fischer served at W.R. Grace in a variety of
finance, planning and management roles. He is currently a director of Henry Corporation and SRS
Roofing Supply Corporation. Mr. Fischer has extensive experience in finance, planning and
management and industrial operations and significant executive experience in the industrial sector.
D. Keith LaVanway became our Vice President and Chief Financial Officer on September 19, 2007.
Prior to joining Pregis, Mr. LaVanway held the position of Chief Financial Officer at Associated
Materials Incorporated (AMI), an Ohio-based building materials company, since 2001. Prior to
AMI, Mr. LaVanway served as Vice President, Finance at various operating divisions of Nortek, Inc.
and also held financial management roles at Abbott Laboratories and Ernst & Young.
Kevin J. Baudhuin became Pregiss President, Global Protective Packaging, effective October 4,
2010. Mr. Baudhuin previously served as Pregiss President, Protective Packaging, North America
from December 2007 to
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October 2010. Prior to joining Pregis, Mr. Baudhuin worked with The BOC
Group plc for over 20 years, most recently serving as President, Industrial & Special Projects,
North America from March 2004 to February 2007 and prior to that as Global Market Director, Special
Products from February 2002 to March 2004.
Jeffrey A. Kellar became Pregiss President, Hexacomb, effective January 5, 2009. Prior to
joining Pregis, Mr. Kellar was President of the flexible packaging division of Alcoa / Reynolds
Packaging Group from 2006 to 2008. Mr. Kellar previously held senior strategy and business
development roles with Tetra Pak Inc. for 12 years, and worked for 18 years in the brewing industry
at Molson Breweries and Miller Brewing Company.
Borge Kvamme became Pregiss President, Specialty Packaging effective January 4, 2010. Prior
to joining Pregis, Mr. Kvamme worked with Elopak for 25 years, most recently serving as Executive
Vice President EMEA division. Mr. Kvamme also held the position of Chief Marketing Officer for
Elopak. Throughout his career with Elopak, Mr. Kvamme held positions of increasing responsibility
in sales, marketing and general management and was responsible for leading the innovation process
within the company.
Thomas E. ONeill became our Vice President, Human Resources, effective August 15, 2007.
Prior to joining Pregis, Mr. ONeill worked with The BOC Group plc for over 25 years, most recently
serving as Global Human Resource Director, Industrial Products from 2000 to 2007. Previously he
served as Vice President Human Resources from 1995 to 2000, and Vice President Distribution, for
BOC Gases Americas.
Paul S. Pak became our Vice President, Procurement, effective September 1, 2008. Prior to
joining Pregis, Mr. Pak worked with Chrysler LLC from 1986 to 2008 where he held positions of
increasing responsibility in the procurement and supply chain functions, including his most recent
assignment as Executive Director, Chrysler Global Sourcing. Prior to this position, he led the
procurement, quality and logistics activities of DaimlerChrysler in Northeast Asia based in
Beijing, China as a Vice President of DaimlerChryslers Global Procurement & Supply organization.
John L. Garcia became the Chairman of the board of directors of Pregis Holding II on May 18,
2005. Mr. Garcia has been Chief Executive Officer of AEA Investors LP since 2006 and President of
AEA Investors LP and its predecessor since 2002 and was a Managing Director of AEA Investors Inc.
from 1999 through 2002. From 1994 to 1999, Mr. Garcia was a Managing Director with Credit Suisse
First Boston LLC, formerly known as Credit Suisse First Boston Corporation, where he served as
Global Head of the Chemicals Investment Banking Group and Head of the European Acquisition and
Leveraged Finance and Financial Sponsor Groups. Before joining Credit Suisse First Boston, Mr.
Garcia worked at Wertheim Schroder in New York as an investment banker and at ARCO Chemicals in
research, strategic planning and commercial development. Mr. Garcia is currently a director of AEA
Investors LP and Convenience Food Systems B.V. Mr. Garcia has extensive experience in investment
banking, corporate finance and strategic planning, including in the value-added industrial and
specialty chemical products industries.
Brian R. Hoesterey became a director of Pregis Holding II on May 18, 2005. Mr. Hoesterey is a
partner with AEA Investors LP, which he joined in 1999. Prior to joining AEA Investors, he was with
BT Capital Partners, the private equity investment vehicle of Bankers Trust. Mr. Hoesterey has also
previously worked for McKinsey & Co. and the investment banking division of Morgan Stanley. He is
currently a director of Henry Corporation, CPG International Inc., Unifrax Corporation, Houghton
International, and SRS Roofing Supply Corporation. Mr. Hoesterey has extensive experience with
industrial manufacturing operations, corporate finance and strategic planning. He also has
significant experience serving as a director of other large companies in the industrial sector.
James W. Leng became a director of Pregis Holding II in October 2005 upon consummation of the
Acquisition. Mr. Leng currently serves on the boards of TNK-BP Limited, Tata Steel Limited
(India), Alstom SA (France), and Doncasters Group Limited. Mr. Lengs past appointments include
Corus Group plc, Pilkington plc, Hanson plc, Laporte plc, and Low & Bonar plc. Mr. Leng has
extensive experience in corporate governance and strategic planning including in the consumer and
industrial products sectors.
James D. Morris became a director of Pregis Holding II in October 2005 upon consummation of
the Acquisition and served as our Chief Executive Officer from October 12, 2005 to December 31,
2005. Mr. Morris
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served as Senior Vice President and General Manager, Protective and Flexible
Packaging for Pactiv from January 2000 until becoming our Chief Executive Officer in October 2005.
Prior to 2000, and since he joined Pactiv in 1995, Mr. Morris was Vice President, Manufacturing and
Engineering of Pactivs Consumer and North American Foodservice divisions. In 1993, he became Vice
President of Operations for Plastics Packaging at Mobil Corporation and served in that role until
that business was acquired by Tenneco in 1995. He began his career as an engineer at Mobil
Corporation in 1975. Mr. Morris has extensive experience in corporate operations and executive
leadership. He is uniquely qualified to serve on our board, having previously worked in the senior
management of our Company for five years before joining our board.
John P. OLeary, Jr. became a director of Pregis Holding II in October 2005 upon consummation
of the Acquisition. Mr. OLeary has served as President and Chairman of Kenson Plastics Inc., a
specialty plastic converting company, since November 2008. Mr. OLeary served as Senior Vice
President, SCA North America, a packaging supplier, from 2002 through 2004. From 2001 through
2004, he was President and Chief Executive Officer of Tuscarora Incorporated, a wholly-owned
subsidiary of SCA Packaging International B.V. and a division of SCA North America. Tuscarora is a
producer and manufacturer of custom design protective packaging. Prior to SCAs acquisition of
Tuscarora, Mr. OLeary was Tuscaroras CEO and President, from 1989 to 2001, and its Chairman of
the Board from 1992 through 2001. Mr. OLeary currently serves on the Board of Directors of
Matthews International Corp. Mr. OLeary has extensive experience in strategic planning and
corporate operations including in the plastic and packaging industries.
Thomas J. Pryma became a director of Pregis Holding II on May 18, 2005. Mr. Pryma is a partner
with AEA Investors LP, which he joined in 1999. Prior to joining AEA, Mr. Pryma worked in the
Financial Sponsors and Corporate Banking Groups in the investment banking division of Merrill
Lynch. He is currently a director of Unifrax Corporation, Houghton International, RelaDyne and
Hospitalist Management Group. Mr. Pryma has extensive experience in investment banking, corporate
finance and strategic planning in the consumer and industrial products sectors, including within
the value-added industrial products sector. He also has significant experience in the area of
corporate governance.
James E. Rogers became a director of Pregis Holding II in October 2005 upon consummation of
the Acquisition. Since 1993, Mr. Rogers has served as president of SCI Investors Inc., a private
equity investment firm. From 1993 to 1996, Mr. Rogers served as Chairman of Custom Papers Group,
Inc., a paper manufacturing company. From 1991 to 1993, he was President and Chief Executive
Officer of Specialty Coatings International, Inc., a manufacturer of specialty paper and film
products. Prior to 1991, Mr. Rogers was Senior Vice President, Group Executive of James River
Corporation, a paper and packaging manufacturer. Mr. Rogers also serves as a director of Caraustar
Industries, Inc., Owens & Minor, Inc., and New Market Corporation. Mr. Rogers has extensive
experience in investment banking, strategic planning and corporate operations, as well as
experience with executive compensation.
Leadership Structure of the Board
Glenn M. Fischer is our Chief Executive Officer and John Garcia is our Chairman of the Board.
The Chairman of the Board is responsible for chairing board meetings, setting the agendas for the
Board meetings and providing information to the Board members in advance of meetings. We believe
that the leadership structure of the Board is appropriate for our company, given the nature of our
ownership structure. John Garcia is Chief Executive Officer and President of AEA investors, and
Glenn Fischer is an operating partner of AEA investors. The Board believes that the Companys
administration of risk management has not affected the Boards leadership structure, as described
above. For more information see Committees of the Board of Directors below.
Committees of the Board of Directors
The board of directors of Pregis Holding II has formed an audit committee and a compensation
committee. The members of the audit committee are Thomas J. Pryma and Brian R. Hoesterey. The board
of directors has determined that Messrs. Pryma and Hoesterey are audit committee financial experts,
based on their education and
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professional experience. Neither Mr. Pryma nor Mr. Hoesterey is an
independent director as such term is defined by the rules of the New York Stock Exchange and The
Nasdaq Stock Market.
The audit committee recommends the annual appointment and reviews the independence of auditors
and reviews the scope of audit and non-audit assignments and related fees, the results of the
annual audit, accounting principals used in financial reporting, internal auditing procedures, the
adequacy of our internal control procedures, related party transactions, and investigations into
matters related to audit functions. The audit committee is responsible for overseeing risk
management on behalf of the Board. Our audit committee meets at least quarterly with the Chief
Financial Officer and the independent auditors where it receives regular updates regarding our
managements assessment of risk exposures including liquidity, credit and operational risk and the
process in place to monitor such risks and review results of operations, financial reporting and
assessments of internal controls over financial reporting.
The members of the compensation committee are Thomas J. Pryma, Chairman, John L. Garcia, Brian
R. Hoesterey and John P. OLeary, Jr. The compensation committee reviews and approves the
compensation and benefits of our senior employees and directors, authorizes and ratifies equity and
other incentive arrangements, and authorized employment and related agreements.
Code of Ethics
Pregis Corporation has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller and persons
performing similar functions. A copy of the code of ethics has been posted on our website at
www.pregis.com. In the event that we amend or waive provisions of this code of ethics with respect
to such officers, we intend to also disclose the same on our website.
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ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Compensation Discussion and Analysis
General Philosophy. Our primary objectives with respect to executive compensation are to
attract and retain the best possible executive talent, to tie annual and long-term cash
compensation and stock option awards to achievement of measurable corporate, business unit and
individual performance objectives, and to align executives incentives with shareholder value
creation. To achieve these objectives, we maintain compensation plans that tie a substantial
portion of executives overall compensation to our financial performance and the value of our
common stock. Overall, the total compensation opportunity is intended to create an executive
compensation program that is set at competitive levels to comparable employers. Hiring and
compensation decisions for our executives are approved by the compensation committee of Pregis
Holding II. The compensation committee also considers compensation programs at AEAs other
portfolio companies.
Overall compensation for our executives is established based on the scope of their
responsibilities, taking into account competitive market compensation paid by other companies for
similar positions. Compensation is reviewed annually by the compensation committee, and may be
adjusted from time to time to realign total compensation with market levels after taking into
account inflation and individual responsibilities, performance and experience.
Our senior management compensation programs consist of three primary components:
1. Annual cash compensation. The annual cash compensation component is comprised of base
salary and at-risk, performance based cash bonuses. The cash bonus is intended to drive and
motivate annual performance.
Base salary. Base salaries for our executives are established based on the scope of their
responsibilities, taking into account competitive market compensation paid by other companies for
similar positions. Base salaries are reviewed annually, and may be adjusted from time to time to
realign salaries with market levels after taking into account inflation and individual
responsibilities, performance and experience.
As we developed compensation programs for new executives hired in 2010, we gave consideration
to the competitive marketplace (although we do not engage in formal benchmarking against a specific
list of peer companies) and the compensation for these executives relative to that of their
individual compensation histories and other members of our senior management.
As of October 1, 2010 Messrs. LaVanway and Baudhuins annual base salary changed. Mr.
Baudhuins increase reflects his increased responsibility as President of Global Protective
Packaging. For Mr. LaVanway, the increase was in recognition of his efforts in managing the
Company through very difficult economic conditions over the past few years.
Annual cash bonus. Depending on our performance, a significant portion of cash compensation
can be in the form of an annual cash incentive bonus based on the achievement of objective
performance metrics established soon after the beginning of the year. For 2010, the performance
goals for all of our senior executives, including the chief executive officer and chief financial
officer, were achievement of target levels of EBITDA and of working capital as a percentage of
sales. EBITDA under the annual cash incentive bonus plan is calculated as gross margin (defined as
net sales, less cost of sales, excluding depreciation and amortization) less selling, general and
administrative expenses. Extraordinary and non-recurring items may be added back or deducted at
the discretion of the compensation committee. Working capital as used in the target performance
metric is defined as trade receivables, plus inventories, less trade payables. The working capital
metric uses a thirteen-month average working capital, divided by net sales for the respective
fiscal year.
Under the annual cash incentive bonus plan, the compensation committee approves a target award
level and performance objectives for each executive officer. The target award level for each
executive officer is generally
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stated as a percentage of base annual salary. The following table
outlines the 2010 target bonus opportunity for our named executive officers:
Target Bonus | 2010 Cash | |||||||||||
Name | 2010 Salary | Award | Incentive Target | |||||||||
Michael T. McDonnell |
$ | 500,000 | 100 | % | $ | 500,000 | ||||||
D. Keith LaVanway |
372,500 | 60 | % | 223,500 | ||||||||
Kevin J. Baudhuin |
343,750 | 60 | % | 206,250 | ||||||||
Borge Kvamme (1) |
399,064 | 40 | % | 159,626 | ||||||||
Paul S. Pak |
300,000 | 40 | % | 120,000 |
(1) | Mr. Kvammes annual cash bonus target is 40% of base amount of 415,000 Switzerland Franc CHF (reflected herein based on an average 2010 exchange rate of CHF to U.S. dollars of 1:0.9616). |
Each annual performance goal is assigned a percentage of the target award, so that attainment
of the target amount of all performance objectives would entitle the executive to receive an award
equal to his target level. For the chief executive officer, chief financial officer, and Vice
President, Procurement these performance objectives were weighted 80% on the EBITDA performance of
our company as a whole, and 20% based on the companys average working capital as a percentage of
consolidated net sales. For our senior divisional managers, these targets were weighted 60% based
on the EBITDA performance of their division, 15% based on their divisions average working capital
as a percentage of net sales, 20% based on the EBITDA performance of the company as a whole, and 5%
based on the companys average working capital as a percentage of consolidated net sales.
Performance targets are set in accordance with responsibility and are all financial for senior
executives weighted to EBITDA which drives value of the Company.
Our executives target cash incentive bonus awards for 2010 were based on achievement of the
following 2010 financial targets:
Company Performance | Division Performance | |||||||||||||||
Target working | Target working | |||||||||||||||
Full Year | capital as a | Full Year | capital as a | |||||||||||||
Target | percentage of | Target | percentage of | |||||||||||||
Name | EBITDA | net sales | EBITDA | net sales | ||||||||||||
Michael T. McDonnell |
$ | 102,628 | 14.4 | % | ||||||||||||
D. Keith LaVanway |
102,628 | 14.4 | % | |||||||||||||
Kevin J. Baudhuin |
102,628 | 14.4 | % | 46,247 | 12.9 | % | ||||||||||
Borge Kvamme |
102,628 | 14.4 | % | 40,257 | 18.3 | % | ||||||||||
Paul S. Pak |
102,628 | 14.4 | % |
The target levels of performance are intended to be achievable when established. Our
executives and divisional managers work closely with the compensation committee and board of
directors to determine performance targets. In order to enhance our annual performance, the annual
bonus opportunity increases as the performance targets are exceeded. For example, if actual
performance is less than 85% of budget, no bonus is payable. If actual performance equals budget,
100% of the target bonus is payable, and if actual performance exceeds budget, the bonus is
increased by two percent for every one percent increase in performance over budget, up to a maximum
bonus payable upon the achievement of performance equal to greater than 125% of budget. Within
each target threshold, the bonus amount is interpolated based on the actual target level achieved.
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For the year ended December 31, 2010, Messrs. Baudhuin and Kvamme achieved their target bonus
award, on the basis of the performance of their respective divisions.
2. Pregis stock option plan. Participation in our 2005 Stock Option Plan has been offered to
executives to align their interests with the long-term growth objectives of our shareholders.
Under the standard option agreement, participants vest in their option awards equally over a
five-year period based on the continued performance of service, so the maximum value from the
options cannot be achieved until five years of service has been provided, other than in the event
of a change in control of our company as described below. The exercise price of options has
typically been set at or above the fair market value of the underlying shares as of the date of
grant. Accordingly, management is rewarded based only on the appreciation in the value of the
common stock of Pregis Holding I Corporation.
Mr. Baudhuin was the only named executive to receive additional stock options in 2010 due to
his increased responsibilities as the President of Global Protective Packaging. All other named
executive officers received their stock options upon commencement of employment. No performance
based options were granted in 2010.
In February 2010 Pregis Holding I board of directors voted and approved the re-pricing of
stock options granted to employees, including named executive officers, with a per share exercise
price in excess of $17,500 to $17,500. Another reduction was approved on September 22, 2010
further reducing the option price to $13,000 for all stock options granted with an exercise price
in excess of this amount. These re-pricings were done to ensure that the outstanding options provided more
motivational value to the option holders.
3. Pregis share purchase plan. Similar to the Stock Option Plan, the Employee Stock Purchase
Plan is intended to serve as a long-term incentive to drive growth. Shares of the common stock of
Pregis Holding I Corporation were offered for purchase for a limited period of time subsequent to
the Acquisition to a broad group of our employees in an effort to encourage employee performance,
and therefore our performance, through share ownership. The shares were offered for purchase at
$10,000 per share, the fair market value per share paid at the time of the Acquisition, so that
employee participants would be given the opportunity to participate on equal terms with
non-employee shareholders in the growth of our company. We continue to offer new executives
joining the company the opportunity to purchase shares at the then-current fair market value. See
Benefit PlansEmployee Stock Purchase Plan for the terms of this plan.
In 2010, named executive officers as well as all other employees who purchased stock in excess
of $13,000 were granted a number of additional shares so that they held, in the aggregate, a number
of shares equal to the number of shares the employees would have received had, based on their total
purchase price paid, the purchase price per share had been $13,000 instead of their actual purchase
price per share. The intent of this additional issuance was to ensure that the employees held a
number of shares sufficient to reflect a purchase price per share equal to the fair value of Pregis
Holding I stock as of September 22, 2010. In effect, their dollar value of shares purchased did
not change but their number of shares increased. In addition, the employees received a gross-up
payment for the taxes they were subject to on the shares issued.
Our senior executives are each party to an employment agreement. These agreements were
individually negotiated and will continue in their current forms until such time as the
compensation committee determines in its discretion that revisions are advisable. In addition,
consistent with our pay-for-performance compensation philosophy, we intend to continue to maintain
modest executive benefits and perquisites for officers; however, the compensation committee in its
discretion may revise, amend or add to an officers executive benefits and perquisites if it deems
it advisable. We believe these benefits and perquisites are currently competitive with levels
established by comparable companies. We have no current plans to make changes to either the
employment agreements or levels of benefits and perquisites provided. See Employment Agreements
for terms of the employment agreements.
We provide standard employee health and reimbursement benefits to our senior management which
we believe is industry competitive and necessary to attract and retain key individuals. Our
domestic executive officers
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participate in a company-sponsored 401(k) plan. The company-sponsored
401(k) plan currently matches 100% of employee contributions up to the first 1% of eligible
compensation and 50% of employee contributions up to the next 5% of eligible compensation.
Additionally, the company may make a discretionary profit sharing contribution of up to 4% of the
executive officers eligible compensation, depending on our performance. Our foreign division
executives participate in private pension plans to which our company makes an annual contribution,
as was individually negotiated with the respective executives.
Compensation Committee Report
The compensation committee of the Company has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on
such review and discussions, the compensation committee recommended to the board of directors that
the Compensation Discussion and Analysis be included in this report.
THE COMPENSATION COMMITTEE
Thomas J. Pryma, Chairman
John L. Garcia
Brian R. Hoesterey
John P. OLeary, Jr.
John L. Garcia
Brian R. Hoesterey
John P. OLeary, Jr.
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SUMMARY COMPENSATION TABLE
The table below summarizes compensation information for each individual who served as our
chief executive officer or our chief financial officer during 2010, our next three most highly
compensated executive officers serving as of December 31, 2010, and any executive officer that
would have been included as one of the three most highly compensated except for the fact that he
was not serving as an executive officer as of December 31, 2010.
Non-Equity | ||||||||||||||||||||||||||||
Incentive Plan | ||||||||||||||||||||||||||||
Option | Compensation | All Other | ||||||||||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus | Awards (2) | (3) | Compensation | Total | |||||||||||||||||||||
Michael T. McDonnell (1) |
2010 | $ | 500,000 | | $ | | $ | | $ | 8,750 | (4) | $ | 508,750 | |||||||||||||||
President and Chief Executive Officer |
2009 | $ | 500,000 | | $ | 14,310 | $ | | $ | 8,225 | $ | 522,535 | ||||||||||||||||
2008 | $ | 500,000 | | $ | | $ | | $ | 11,952 | $ | 511,952 | |||||||||||||||||
D. Keith LaVanway |
2010 | $ | 372,500 | 150,000 | (13) | $ | 338,227 | (9) | $ | | $ | 321,588 | (5) | $ | 1,087,315 | |||||||||||||
Vice President and Chief Financial
Officer |
2009 | $ | 360,000 | 55,000 | (13) | $ | 5,317 | $ | | $ | 8,575 | $ | 373,892 | |||||||||||||||
2008 | $ | 360,000 | | $ | 14,498 | $ | | $ | 71,335 | $ | 445,833 | |||||||||||||||||
Kevin J. Baudhuin |
2010 | $ | 343,750 | 17,891 | (13) | $ | 408,779 | (10) | $ | 82,019 | $ | 384,299 | (6) | $ | 1,218,847 | |||||||||||||
President, Global Protective Packaging |
2009 | $ | 325,000 | | $ | 9,573 | $ | 116,267 | $ | 8,275 | $ | 459,115 | ||||||||||||||||
2008 | $ | 325,000 | | $ | 866,816 | $ | 24,980 | $ | 270,080 | $ | 1,486,876 | |||||||||||||||||
Borge Kvamme (14) |
||||||||||||||||||||||||||||
President, Sprecialty Packaging |
2010 | $ | 399,064 | | $ | 316,464 | (11) | $ | 79,632 | $ | 203,859 | (7) | $ | 999,019 | ||||||||||||||
Paul S. Pak |
2010 | $ | 300,000 | 30,000 | (13) | $ | 56,826 | (12) | $ | | $ | 71,637 | (8) | $ | 428,463 | |||||||||||||
Vice President, Procurement |
2009 | $ | 300,000 | | $ | | $ | | $ | 6,188 | $ | 306,188 | ||||||||||||||||
2008 | $ | 100,000 | $ | 223,917 | $ | | $ | 16,047 | $ | 339,964 |
(1) | Mr. McDonnells employment with Pregis terminated effective February 22, 2011. | |
(2) | Represents the fair value of the equity awards granted during applicable fiscal year computed in accordance with ASC Topic 718. A discussion of the assumptions underlying the valuation is provided in Note 17 to the audited financial statements included within this report. | |
(3) | Represents amounts paid pursuant to non-equity incentive plans for the fiscal years presented. See Grants of Plan-Based Awards in Fiscal Year 2010. | |
(4) | Amount represents 2010 matching and profit sharing contributions under the Companys 401(k). | |
(5) | Amount represents 2010 tax gross-up of $313,313 related to the issuance of additional shares of stock due to the reduction in the value of the Companys stock and matching and profit sharing contributions under the Companys 401(k) plan of $8,275. | |
(6) | Amount represents 2010 tax gross-up of $375,981 related to the issuance of additional shares of stock due to the reduction in the value of the Companys stock and matching and profit sharing contributions under the Companys 401(k) plan of $8,318. | |
(7) | Amount includes (i) social costs of $169,242, (ii) car at a cost of $17,309, and (iii) and living expenses of $17,309. | |
(8) | Amount represents 2010 tax gross-up of $61,687 related to the issuance of additional shares of stock due to the reduction in the value of the Companys stock and matching and profit sharing contributions under the Companys 401(k) plan of $9,950. | |
(9) | Amount represents the incremental fair value computed in accordance with ASC topic 718 of Mr. LaVanways 2007 stock option grant which was re-priced in 2010. | |
(10) | Amount represents the fair value computed in accordance with ASC Topic 718 of Mr. Baudhuins 2010 stock option grant which vests in equal installments on each of the five anniversaries of October 1, 2010 and the incremental fair value of his 2007 stock option grant which was re-priced in 2010. |
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(11) | Amount represents the fair value of Mr. Kvammes 2009 stock option grant which vests in equal installments on each of the first five anniversaries of January 4, 2010. | |
(12) | Amount represents the incremental fair value computed in accordance with ASC Topic 718 of Mr. Paks 2008 stock option grant which was re-priced in 2010. | |
(13) | Amount represents discretionary compensation. | |
(14) | All 2010 compensation amounts have been determined based on an average 2010 exchange rate of Switzerland Franc CHF to U.S. Dollars of 1:0.9616. |
The following table provides information about plan-based awards made to the named
executive officers during fiscal 2010.
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2010
All Other Option | ||||||||||||||||||||||||||||||||||||||||
Awards: Number | Exercise or | Grant Date | ||||||||||||||||||||||||||||||||||||||
of Securities | Base Price of | Fair Value | ||||||||||||||||||||||||||||||||||||||
Grant | Estimated Possible Payouts Under Non- | Estimated Future Payouts Under | Underlying | Option Awards | of Options | |||||||||||||||||||||||||||||||||||
Name | Date (1) | Equity Incentive Plan Awards | Equity Incentive Plan Awards (4) | Options (5) | ($/Sh) | Awards (6) | ||||||||||||||||||||||||||||||||||
Threshold (2) | Target | Maximum (3) | Threshold | Target | Maximum | |||||||||||||||||||||||||||||||||||
Michael T. McDonnell |
| $ | 37,700 | $ | 500,000 | $ | 750,000 | | | | | $ | | $ | | |||||||||||||||||||||||||
D. Keith LaVanway |
| $ | 16,852 | $ | 223,500 | $ | 335,250 | | | | | $ | | $ | | |||||||||||||||||||||||||
08/17/2007 | | | | | | | 200.000 | $ | 13,000 | $ | 338,227 | (8) | ||||||||||||||||||||||||||||
Kevin J. Baudhuin |
| $ | 15,551 | $ | 206,250 | $ | 309,375 | | | | | $ | | $ | | |||||||||||||||||||||||||
10/01/2010 | | | | | | | 57.840 | $ | 13,000 | $ | 196,298 | (9) | ||||||||||||||||||||||||||||
12/12/2007 | | | | | | | 132.160 | $ | 13,000 | $ | 212,481 | (9) | ||||||||||||||||||||||||||||
Borge Kvamme (7) |
| $ | 12,036 | $ | 159,626 | $ | 239,438 | | | | | $ | | $ | | |||||||||||||||||||||||||
01/04/2010 | | | | | | | 85.000 | $ | 13,000 | $ | 316,464 | (10) | ||||||||||||||||||||||||||||
Paul S. Pak |
| $ | 9,048 | $ | 120,000 | $ | 180,000 | | | | | $ | | $ | | |||||||||||||||||||||||||
09/01/2008 | | | | | | | 35.000 | $ | 13,000 | $ | 56,826 | (11) |
(1) | These are the grant dates for the equity based awards. | |
(2) | Represents amount of payout if threshold of 85% of target is attained with respect to both EBITDA and ratio of working capital to sales. | |
(3) | If actual performance equals budget, 100% of target bonus is payable and if actual performance exceeds budget, the bonus is increased by two percent for every one percent increase in performance over budget. The amounts set forth in this column are the amounts payable upon achievement of 125% of budget. | |
(4) | No performance-based options were granted pursuant to the Pregis Holding I Corporation 2005 Stock Option Plan, in 2010. See Benefit Plans 2005 Stock Option Plan. | |
(5) | These options were granted pursuant to the Pregis Holding I Corporation 2005 Stock Option Plan, with time-based vesting requirements. See Benefit Plans 2005 Stock Option Plan. The exercise price per share of these options was greater than or equal to the per share fair market value of the common stock of Pregis Holding I on the date of grant. | |
(6) | These amounts represent the grant date fair value or in the case of a re-pricing, the incremental fair value, computed in accordance with ASC Topic 718, of options granted to the named executive officers in 2010. The grant date fair value was determined using a Black-Scholes valuation model in accordance with ASC Topic 718. A discussion of the assumptions underlying the valuation is provided in Note 17 to the audited financial |
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statements included within this report. The fair value for performance-based options is calculated for all of the performance-based options granted in 2010 based on assumptions relevant at the date of initial grant. | ||
(7) | All amounts for Mr. Kvamme have been determined based on an average 2010 exchange rate of CHF to U.S. Dollars of 1:0.9616. | |
(8) | Amount represents the incremental fair value of Mr. LaVanways 2007 stock option grant which was re-priced in 2010. | |
(9) | Amount represents the fair value of Mr. Baudhuins 2010 stock option grant which vests in equal installments on each of the five anniversaries of October 1, 2010 of $196,298 and the incremental fair value of Mr. Baudhuins 2007 stock option grant which was re-priced in 2010 of $212,481. | |
(10) | Amount represents the fair value of Mr. Kvammes 2009 stock option grant which vests in equal installments on each of the five anniversaries of January 4, 2010. | |
(11) | Amount represents the incremental fair value of Mr. Paks 2008 stock option grant which was re-priced in 2010. |
Employment Agreements
The compensation paid to our executive officers derives substantially from their individually
negotiated employment agreements.
Michael T. McDonnell
On October 2, 2006, Michael T. McDonnell, our former President and Chief Executive Officer,
entered into an employment agreement, providing for a three-year term, with automatic one-year
renewals, at an annual base salary of $500,000. As noted above, Mr. McDonnells employment with
Pregis was terminated effective February 22, 2011. Commencing with the fiscal year beginning
January 1, 2007, Mr. McDonnell was eligible to receive an annual incentive bonus upon achievement
of performance goals, consistent with the terms of the annual cash bonus plan described previously.
Mr. McDonnells target annual bonus is 100% of his base salary. He participated in our standard
benefit programs, including health, dental, life insurance and vision programs. Mr. McDonnell was
entitled
to severance benefits in connection with certain terminations of his employment (see
Potential Payments Upon Termination or Change in Control). Pursuant to his employment agreement,
Mr. McDonnell was granted an option to purchase 382.36 shares of Pregis Holding I common stock at a
purchase price of $13,000 per share. The stock option grant was made pursuant to our 2005 Stock
Option Plan and vested equally over five years, subject to accelerated vesting upon a change in
control of our company. Under the terms of his employment agreement, Mr. McDonnell also purchased
30 shares of the common stock of Pregis Holding I Corporation, pursuant to the terms of the
Employee Stock Purchase Plan. Mr. McDonnell is also a party to a noncompetition agreement that
restricts him for one year following his termination of employment from rendering any services to a
competitor or soliciting our customers or employees.
D. Keith LaVanway
On August 15, 2007, D. Keith LaVanway, our Chief Financial Officer, entered into an employment
agreement providing for a three-year term, with automatic one-year renewals, at an annual base
salary of $360,000, with employment to commence no later than September 4, 2007. As of October 1,
2010, Mr. LaVanways annual base salary was increased to $410,000. Commencing with the fiscal year
beginning January 1, 2008, Mr. LaVanway is eligible to receive an annual incentive bonus upon
achievement of performance goals, consistent with the terms of the annual cash bonus plan described
previously. Mr. LaVanways target annual bonus is 60% of his base salary. He participates in our
standard benefit programs, including health, dental, life insurance and vision programs. Mr.
LaVanway is entitled to severance benefits in connection with certain terminations of his
employment (see Potential Payments Upon Termination or Change in Control). Pursuant to an option
agreement, Mr. LaVanway was granted an option to purchase 200.00 shares of Pregis Holding I common
stock at a purchase price of $20,000 per share. The stock option grant was made pursuant to our
2005 Stock Option Plan and vests equally over five
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years, subject to accelerated vesting upon a
change in control of our company. Under the terms of his employment agreement, Mr. LaVanway also
purchased 25 shares of the common stock of Pregis Holding I Corporation, pursuant to the terms of
the Employee Stock Purchase Plan. Mr. LaVanway is also a party to a noncompetition agreement that
restricts him for one year following his termination of employment from rendering any services to a
competitor or soliciting our customers or employees.
Kevin J. Baudhuin
On December 11, 2007, Kevin J. Baudhuin, President, Protective Packaging North America,
entered into an employment agreement providing for a three-year term, with automatic one-year
renewals, at an annual base salary is $325,000. As of October 1, 2010 Mr. Baudhuin was named
President, Global Protective Packaging, and his current annual base salary increased to $400,000.
Mr. Baudhuin is also eligible to receive an annual incentive bonus upon achievement of performance
goals, consistent with the terms of the annual cash bonus plan described previously. Mr.
Baudhuins target annual bonus is 60% of his base salary. Mr. Baudhuin is entitled to severance
benefits in connection with certain terminations of his employment (see Potential Payments Upon
Termination or Change in Control). In addition, Mr. Baudhuin was eligible to receive a temporary
housing allowance of $5,000 per month for six months and reimbursement of reasonable related costs
until he relocated to the Chicago, Illinois area. He participates in our companys benefit
programs, including health, dental, life insurance and vision programs. Pursuant to an option
agreement, Mr. Baudhuin was granted an option to purchase 132.16 shares of Pregis Holding I common
stock at a purchase price of $20,000 per share. The stock option grant was made pursuant to our
2005 Stock Option Plan, and vests equally over five years, subject to accelerated vesting upon a
change in control of our company. Mr. Baudhuin is also a party to a noncompetition agreement that
restricts him for one year following his termination of employment from rendering any services to a
competitor or soliciting our customers or employees.
Borge Kvamme
On January 1, 2009, Borge Kvamme, President, Specialty Packaging, entered into a consultancy
agreement providing for an indefinite duration, under which his current annual base salary is
Switzerland Franc (CHF) 627,000 which includes (CHF) 176,000 of social costs. Mr. Kvamme is also
eligible to receive an annual incentive bonus upon achievement of performance goals, consistent
with the terms of the annual cash bonus plan described
previously. Mr. Kvammes target annual bonus is 40% of a base salary of CHF 415,000. The
company shall provide Mr. Kvamme at its expense private health insurance at a cost of CHF 22,000
annually. Mr. Kvamme is entitled to severance benefits in connection with certain terminations of
his employment (see Potential Payments Upon Termination or Change in Control). Mr. Kvamme is
also a party to a noncompetition agreement that restricts him for one year following his
termination of employment from rendering any services to a competitor or soliciting our customers
or employees.
Paul S. Pak
On September 1, 2008, Paul Pak, President, Procurement, entered into an employment agreement
providing for a three-year term, which automatic one-year renewals, at an annual base salary of
$300,000. Mr. Pak is also eligible to receive an annual incentive bonus upon achievement of
performance goals, consistent with the terms of the annual cash bonus plan described previously.
Mr. Paks target annual bonus is 40% of his base salary. Mr. Pak is entitled to severance benefits
in connection with certain terminations of his employment (see Potential Payments Upon Termination
or Change in Control). He participates in our companys benefit programs, including health,
dental, life insurance and vision programs. Pursuant to an option agreement, Mr. Pak was granted
an option to purchase 50 shares of Pregis Holding I common stock at a purchase price of $20,000 per
share. The stock option grant was made pursuant to our 2005 Stock Option Plan and vests equally
over five years, subject to accelerated vesting upon a change in control of our company. Mr. Pak
is also a party to a noncompetition agreement that restricts him for one year following his
termination of employment from rendering any services to a competitor or soliciting our customers
or employees.
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Benefit Plans
2005 Stock Option Plan
On December 20, 2005, Pregis Holding I ratified the Pregis Holding I Corporation 2005 Stock
Option Plan to provide for the grant of nonqualified and incentive stock options to key employees,
consultants and directors of Pregis Holding I and its subsidiaries (including Pregis) and
affiliates. The maximum number of shares of Pregis Holding I common stock underlying the options
that are available for award under the stock option plan is 2,091.62. If any options terminate or
expire unexercised, the shares subject to such unexercised options will again be available for
grant.
The stock option plan is administered by a committee of the board of directors of Pregis
Holding I. The committee interprets and implements the stock option plan, grants options,
exercises all powers, authority and discretion of the board under the stock option plan, and
determines the terms and conditions of option grants, including vesting provisions, exercise price
and termination date of options.
Each option is evidenced by an agreement between an optionee and Pregis Holding I containing
such terms as the committee determines. Unless determined otherwise by the committee, 20% of the
shares subject to the option vest on each of the first five anniversaries of the grant date subject
to continued employment. In 2007, the committee modified the vesting terms for certain option
grants to require vesting equally over three years, dependant upon achieving certain
performance-based targets. The committee may accelerate the vesting of options at any time.
Unless determined otherwise by the committee, the option price will not be less than the fair
market value of the underlying shares on the grant date. Unless otherwise set forth in an
agreement or as determined by the committee, vested options will terminate forty-five days after
termination of employment (180 days in the event of termination by reason of death or disability).
In the event of a transaction that constitutes a change in control of Pregis Holding I as
described in the stock option plan, unless otherwise set forth in an agreement or as determined by
the committee, each outstanding option will vest immediately prior to the occurrence of the
transaction, and Pregis Holding I will have the right to cancel any options which have not been
exercised as of the date of the transaction, subject to payment of the fair market value of the
common stock underlying the option less the aggregate exercise price of the option.
The stock option plan provides that the aggregate number of shares subject to the stock option
plan and any option, the purchase price to be paid upon exercise of an option, and the amount to be
received in connection with the exercise of any option may be appropriately adjusted to reflect any
stock splits, reverse stock splits or dividends paid in the form of Pregis Holding I common stock,
and equitably adjusted as determined by the committee for any other increase or decrease in the
number of issued shares of Pregis Holding I common stock resulting from the subdivision or
combination of shares or other capital adjustments, or the payment of any other stock dividend or
other extraordinary dividend, or any other increase or decrease in the number of shares of Pregis
Holding I common stock.
The Pregis Holding I board of directors may amend, alter, or terminate the stock option plan.
Any board action may not adversely alter outstanding options without the consent of the optionee.
The stock option plan will terminate ten years from its effective date, but all outstanding options
will remain effective until satisfied or terminated under the terms of the stock option plan and
option agreement.
As discussed in the Compensation Discussion and Analysis section options priced in excess of
$13,000 were re-priced as of September 22, 2010.
Employee Stock Purchase Plan
On December 20, 2005, Pregis Holding I adopted the Pregis Holding I Corporation Employee Stock
Purchase Plan to provide key employees of Pregis Holding I and its subsidiaries (including Pregis)
an opportunity to purchase
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shares of Pregis Holding I common stock. The purchase price per share
of stock sold under the plan when it was initiated was $10,000, which is the price per share that
AEA Investors LP and its affiliates paid when they purchased Pregis Holding I. We have continued
to offer new executives joining the company the opportunity to purchase shares at the then-current
fair market value. Employees who desire to participate in the plan are required to purchase at
least 0.25 shares.
Shares of stock sold under the plan are evidenced by a subscription agreement between a
subscriber and Pregis Holding I which contains terms and conditions regarding the ownership of
shares sold under the plan. The subscription agreement contains standard transfer restrictions.
In addition, if a subscribers employment with our company is terminated, Pregis Holding I
generally has the opportunity to purchase all of the subscribers shares purchased under the plan
at the then-current fair market value of the shares, or at cost in certain circumstances.
The following table sets forth information concerning outstanding awards of options to
purchase shares of common stock of Pregis Holding I which have been granted to the named executive
officers as of December 31, 2010.
Number of Securities | ||||||||||||||||
Number of Securities | Underlying | |||||||||||||||
Underlying Unexercised | Unexercised Options | Option Exercise | Option Expiration | |||||||||||||
Name | Options (#) Exercisable | (#) Unexercisable (1) | Price | Date | ||||||||||||
Michael T. McDonnell |
305.8880 | 76.4720 | (2) | $ | 13,000 | 10/02/2016 | ||||||||||
Michael T. McDonnell |
2.1612 | 13,000 | 02/27/2017 | |||||||||||||
D. Keith LaVanway |
120.00 | 80.00 | (3) | 13,000 | 08/15/2017 | |||||||||||
D. Keith LaVanway |
1.4817 | 13,000 | 03/04/2018 | |||||||||||||
Kevin J. Baudhuin |
79.2960 | 52.8640 | (4) | 13,000 | 12/12/2017 | |||||||||||
Kevin J. Baudhuin |
5.3460 | 2.6730 | (5) | 13,000 | 01/01/2020 | |||||||||||
Kevin J. Baudhuin |
| 57.8400 | (6) | 13,000 | 10/01/2020 | |||||||||||
Paul Pak |
14.0000 | 21.0000 | 13,000 | 09/01/2018 | ||||||||||||
Borge Kvamme |
| 85.0000 | (7) | 13,000 | 01/04/2020 |
(1) | Unvested stock options vest fully upon a change in control of our company. | |
(2) | Vest in equal installments on each of the next three anniversaries of October 6, 2008. | |
(3) | Vest in equal installments on each of the next four anniversaries of September 19, 2008. | |
(4) | Vest in equal installments on each of the next four anniversaries of June 1, 2008. | |
(5) | Vest in equal installments on each of the next three anniversaries of January 1, 2010. | |
(6) | Vest in equal installments on each of the next five anniversaries of October 1, 2010. | |
(7) | Vest in equal installments on each of the next five anniversaries of January 4, 2010. |
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Pension Benefits
None of our named executive officers participate in Company-sponsored defined benefit plans or
post-retirement benefit plans.
Potential Payments Upon Termination or Change in Control
The following sets forth potential payments to our named executive officers upon termination
of employment or upon a change in control under their employment agreements and our other
compensation programs. All payments assume a termination and change in control date of December
31, 2010 and an estimated value per share of approximately $10,000 as of December 31, 2010. The
estimated value per share is based on an estimated enterprise value of the Company determined using
an EBITDA multiple of approximately 6.50 times, which approximates a current comparable market
multiple of EBITDA.
Michael T. McDonnell
Pursuant to his employment agreement, if Mr. McDonnell were terminated without cause (as
defined in the employment agreement), if he were to terminate his employment for good reason (as
defined in the employment agreement), or if the term of his employment were not renewed, Mr.
McDonnell would be entitled to (A) a cash payment of $500,000, payable over twelve months, (B) no
incentive bonus for the year of termination, based on actual performance, (C) all accrued but
unpaid amounts payable under his employment agreement and any other employee benefit plan and (D)
the continuation of medical benefits until the earlier of one year following termination at a cost
of $7,261and the date Mr. McDonnell becomes eligible for medical benefits from a subsequent
employer. Pursuant to his employment agreement, if Mr. McDonnell were terminated as a result of
his death or disability (as defined in the employment agreement), Mr. McDonnell, his estate or
legal representative, as the case may be, would be entitled to all amounts accrued to the date of
termination and payable to Mr. McDonnell per the terms of the employment agreement and under any
other bonus, incentive or other plan, at the same time such payments would be made if he had
terminated without cause or for good reason. Our obligation to provide the termination
payment, the incentive bonus and the continued medical benefits is conditioned upon Mr. McDonnells
continued compliance with his obligations under a noncompetition agreement and the execution by Mr.
McDonnell of a release of claims. The provisions of the noncompetition agreement pertaining to
noncompetition and nonsolicitation apply for one year following Mr. McDonnells termination of
employment. Assuming that a change in control took place on December 31, 2010, these options would
not be in the money.
As discussed previously, Mr. McDonnells employment with the Company was terminated on
February 22, 2010. He entered into a separation agreement with the Company dated February 25, 2010
which provides for certain severance benefits to which he is entitled.
D. Keith LaVanway
Pursuant to his employment agreement, if Mr. LaVanway were terminated without cause (as
defined in the employment agreement), or if the term of his employment were not renewed, Mr.
LaVanway would be entitled to (A) a cash payment of $410,000, payable over twelve months, (B) no
incentive bonus for the year of termination, based on actual performance, (C) all accrued but
unpaid amounts payable under his employment agreement and any other employee benefit plan and (D)
the continuation of medical benefits until the earlier of one year following termination at a cost
of $7,261 and the date Mr. LaVanway becomes eligible for medical benefits from a subsequent
employer. Pursuant to his employment agreement, if Mr. LaVanway were terminated as a result of his
death or disability (as defined in the employment agreement), Mr. LaVanway, his estate or legal
representative, as the case may be, would be entitled to all amounts accrued to the date of
termination and payable to Mr. LaVanway per the terms of the employment agreement and under any
other bonus, incentive or other plan. Our obligation to provide the termination payment, the
incentive bonus and the continued medical benefits is conditioned upon Mr.
LaVanways continued compliance with his obligations under a noncompetition agreement and the
execution by Mr. LaVanway of a release of claims. The provisions of the noncompetition agreement
pertaining to noncompetition
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and nonsolicitation apply for one year following Mr. LaVanways
termination of employment. In addition, Mr. LaVanway holds options to acquire our common stock
that vest upon a change in control as defined in the 2005 Stock Option Plan. Assuming that a
change in control took place on December 31, 2010, these options would not be in the money.
Kevin J. Baudhuin
Pursuant to his employment agreement, if Mr. Baudhuin were terminated without cause (as
defined in the employment agreement), he would be entitled to (A) a cash payment of $400,000,
payable over twelve months, (B) an incentive bonus for the year of termination, based on actual
performance which would equal $82,016 and (C) all accrued but unpaid amounts payable under his
employment agreement and any other employee benefit plan. Pursuant to his employment agreement, if
Mr. Baudhuin were terminated as a result of his death or disability (as defined in the employment
agreement), Mr. Baudhuin, his estate or legal representative, as the case may be, would be entitled
to all amounts accrued to the date of termination and payable to Mr. Baudhuin per the terms of the
employment agreement and under any other bonus, incentive or other plan. Our obligation to provide
the termination payment and the incentive bonus is conditioned upon Mr. Baudhuins continued
compliance with his obligations under a noncompetition agreement and the execution by Mr. Baudhuin
of a release of claims. The provisions of the noncompetition agreement pertaining to
noncompetition and nonsolicitation apply for one year following Mr. Baudhuins termination of
employment. In addition, Mr. Baudhuin holds options to acquire our common stock that vest upon a
change in control as defined in the 2005 Stock Option Plan. Assuming that a change in control took
place on December 31, 2010, these options would not be in the money.
Paul S. Pak
Pursuant to his employment agreement, if Mr. Pak were terminated without cause (as defined
in the employment agreement), he would be entitled to (A) a cash payment of $300,000, payable over
twelve months, (B) no incentive bonus for the year of termination, and (C) all accrued but unpaid
amounts payable under his employment agreement and any other employee benefit plan. Pursuant to
his employment agreement, if Mr. Pak were terminated as a result of his death or disability (as
defined in the employment agreement), Mr. Pak, his estate or legal representative, as the case may
be, would be entitled to all amounts accrued to the date of termination and payable to Mr. Pak per
the terms of the employment agreement and under any other bonus, incentive or other plan. Our
obligation to provide the termination payment and the incentive bonus is conditioned upon Mr. Paks
continued compliance with his obligations under a noncompetition agreement and the execution by Mr.
Pak of a release of claims. The provisions of the noncompetition agreement pertaining to
noncompetition and nonsolicitation apply for one year following Mr. Paks termination of
employment. In addition, Mr. Pak holds options to acquire our common stock that vest upon a change
in control as defined in the 2005 Stock Option Plan. Assuming that a change in control took place
on December 31, 2010, these options would not be in the money.
Borge Kvamme
Pursuant to his employment agreement, if Mr. Kvamme were terminated without cause (as
defined in the employment agreement), he would be entitled to (A) a cash payment of CHF 627,000,
payable over twelve months, (B) an incentive bonus for the year of termination, which at target
performance would equal CHF 166,000, (C) twelve months of private health insurance and (D) all
accrued but unpaid amounts payable under his employment agreement. Our obligation to provide the
termination payment and the incentive bonus is conditioned upon Mr. Kvammes continued compliance
with his obligations under a noncompetition agreement and the execution by Mr. Kvammes of a
release of claims. The provisions of the noncompetition agreement pertaining to noncompetition and
nonsolicitation apply for one year following Mr. Kvammes termination of employment.
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Director Compensation
DIRECTOR COMPENSATION FOR 2010
Non-Equity | ||||||||||||||||||||||||
Fees Earned or | Incentive Plan | Change in | All Other | |||||||||||||||||||||
Name | Paid in Cash | OptionAwards (1) | Compensation | Pension Value | Compensation | Total | ||||||||||||||||||
James W. Leng |
| $ | | | | | $ | | ||||||||||||||||
James D. Morris |
| | | | | | ||||||||||||||||||
John P. OLeary, Jr. |
| | | | | | ||||||||||||||||||
James E. Rogers |
| | | | | | ||||||||||||||||||
Glenn Fischer, Brian R. Hoesterey, |
||||||||||||||||||||||||
Thomas J.
Pryma, John L. Garcia |
| | | | | | ||||||||||||||||||
Michael T. McDonnell (2) |
| | | | | |
(1) | During 2005, each of Messrs. Leng, Morris, OLeary, Jr. and Rogers were granted an option to acquire 41.380 shares of Pregis Holding I common stock at an exercise price of $13,000 per share vesting in equal installments over five years. These options are now all fully vested. | |
(2) | Mr. McDonnell received no compensation for serving as a director. See the Summary Compensation Table for amounts paid to him as compensation for serving as President and Chief Executive Officer. |
None of our directors currently receive any cash compensation for their services on the
board of directors or any committee of the board of directors. The Company currently reimburses
them for all out-of-pocket expenses incurred in the performance of their duties as directors.
Compensation Committee Interlocks and Insider Participation
The board of directors of Pregis Holding II has formed a compensation committee. The members
of the committee are Messrs. Pryma, Garcia, Hoesterey, and OLeary. During fiscal 2009 none of the
members of the compensation committee was an officer or employee of Pregis Holding II or any of its
subsidiaries. Messrs. Pryma, Garcia and Hoesterey are partners of AEA Investors LP. See Item 13,
Certain Relationships and Related Transactions, and Director Independence AEA Investors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
All of our issued and outstanding common stock is held by Pregis Holding I Corporation. The
following table sets forth information, as of December 31, 2010, with respect to the beneficial
ownership of Pregis Holding I by (a) any person or group who will beneficially own more than five
percent of the outstanding common stock of Pregis Holding I, (b) each of the directors of Pregis
and Pregis Holding II and the executive officers of Pregis and Pregis Holding II named in Item 11,
Executive Compensation and (c) all of the directors of Pregis and Pregis Holding II and the
executive officers of Pregis and Pregis Holding II as a group.
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Number of Shares of | Percent of | |||||||
Common Stock | Outstanding | |||||||
Name of Beneficial Owner: | Beneficially Owned(1) | Common Stock | ||||||
Directors and named executive officers: |
||||||||
AEA Investors (2)
|
14,900 | 98.0 | % | |||||
Michael T. McDonnell (3)
|
30 | * | ||||||
D. Keith LaVanway(4)
|
38 | * | ||||||
Kevin J. Baudhuin (5)
|
46 | * | ||||||
Paul Pak (6)
|
8 | * | ||||||
Borge Kvamme (7)
|
5 | * | ||||||
John L. Garcia (8)
|
| | ||||||
Glenn Fischer (8)
|
| | ||||||
Brian R. Hoesterey (8)
|
| | ||||||
James W. Leng (9)
|
| | ||||||
John P. OLeary, Jr. (9)
|
| | ||||||
James D. Morris (9)
|
15 | * | ||||||
Thomas J. Pryma (8)
|
| | ||||||
James E. Rogers (9)
|
| | ||||||
All directors and executive officers
as a group (16 persons)
(10)
|
173 | 1.3 | % | |||||
* | Represents ownership of less than one percent. | |
(1) | As used in this table, each person or entity with the power to vote or direct the disposition of shares of common stock is deemed to be a beneficial owner. | |
(2) | Consists of shares of common stock held by investment vehicles managed by AEA Investors LP and AEA Management (Cayman) Ltd. The address for AEA Investors LP is 55 East 52nd Street, New York, New York 10055. The address for AEA Management (Cayman) Ltd. is c/o Walkers SPV Limited, P.O. Box 908GT, George Town, Grand Cayman, Cayman Islands. | |
(3) | Does not include approximately 400 shares of common stock subject to options which have been granted, of which 308 are exercisable. | |
(4) | Does not include approximately 209 shares of common stock subject to options which have been granted, of which 122 are exercisable. | |
(5) | Does not include approximately 195 shares of common stock subject to options which have been granted, of which 85 are exercisable. | |
(6) | Does not include approximately 35 shares of common stock subject to options which have been granted, of which 14 are exercisable. | |
(7) | Does not include approximately 85 shares of common stock subject to options which have been granted, of which none are exercisable. | |
(8) | Messrs. Garcia, Fischer, Hoesterey and Pryma serve on the board of directors of Pregis Holding II as representatives of AEA Investors LP. Mr. Garcia is President of AEA Investors LP, Messrs. Hoesterey and Pryma are partners of AEA Investors LP and Mr. Fischer is an operating partner of AEA Investors LP. Messrs. Garcia, Fischer, Hoesterey and Pryma disclaim beneficial ownership of common stock owned by investment vehicles managed by AEA Investors LP and AEA Management (Cayman) Ltd., except to the extent of their respective pecuniary interests therein. | |
(9) | Does not include approximately 41 shares of common stock subject to options which have been granted, of which 41 are exercisable. |
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(10) | Does not include approximately 1,200 shares of common stock subject to options which have been granted, of which 739 are exercisable. Also excludes shares held by investment vehicles managed by AEA Investors LP and AEA Management (Cayman) Ltd. Messrs. Garcia, Fischer, Hoesterey and Pryma serve on the board of directors of Pregis Holding II as representatives of AEA Investors LP. Mr. Garcia is President of AEA Investors LP, Messrs. Hoesterey and Pryma are partners of AEA Investors LP and Mr. Fischer is an operating partner of AEA Investors LP. Messrs. Garcia, Fischer, Hoesterey and Pryma disclaim beneficial ownership of common stock owned by investment vehicles managed by AEA Investors LP and AEA Management (Cayman) Ltd., except to the extent of their respective pecuniary interests therein. |
The following table summarizes information, as of December 31, 2010, relating to equity
compensation plans of Pregis Holding I pursuant to which grants of options, restricted stock, or
certain other rights to acquire shares of Pregis Holding I may be granted from time to time.
Equity Compensation Plan Information
(a) | (b) | (c) | ||||||||||
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
Number of securities to | Weighted-average | equity compensation | ||||||||||
be issued upon exercise of | exercise price of | plans (excluding | ||||||||||
outstanding options, | outstanding options, | securities reflected in | ||||||||||
Plan category | warrants and rights | warrants and rights | column (a)) | |||||||||
Equity
compensation plans
approved by
security holders |
2,091.62 | $13,000/share | 411.00 | |||||||||
Equity compensation
plans not approved
by security holders |
N/A | N/A | N/A | |||||||||
Total |
2,091.62 | $13,000/share | 411.00 | |||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies for Review and Approval of Related Party Transactions
We have adopted a formal written policy regarding the review and approval of related party
transactions. In accordance with this policy, our audit committee must review all such
transactions, and may approve related party transactions if the audit committee determines that
they are on terms, including levels of service and quality, that are at least as favorable to our
company as could be obtained from unaffiliated parties.
AEA Investors
We are party to a management agreement with AEA Investors LP relating to the provision of
advisory and consulting services. Under the management agreement, we pay AEA Investors LP an
annual fee of $1.5 million, plus reasonable out-of-pocket expenses. We also agreed to indemnify
AEA Investors LP and its affiliates for liabilities arising from their actions under the management
agreement. For the years ended December 31, 2010, 2009 and 2008, we paid fees, and related
expenses, to AEA Investors of $2.5 million, $2.1 million, and $1.7 million, respectively, pursuant
to this agreement. We believe that the management agreement and the services above
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mentioned are or were on terms at least as favorable to us as we would expect to negotiate
with unrelated third parties.
Other Related Party Transactions
The Company had sales to affiliates of AEA Investors LP totaling $2.4 million, $1.0 million,
and $0.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. For the same
periods, the Company made purchases from affiliates of AEA Investors LP totaling $15.8 million,
$11.2 million and $11.9 million, respectively.
Board of Directors
The board of directors of Pregis Holding II consists of 8 members, including four members who
are representatives of AEA Investors, Messrs. Garcia, Fischer, Hoesterey and Pryma, and three
members who are investors in AEA Investors funds, Messrs. Leng, OLeary, Jr., and Rogers.
As a private company, whose securities are not listed on any national securities exchange,
Pregis Holding II is not required to have a majority of, or any, independent directors. Further,
even if Pregis Holding II were listed on a national securities exchange, because AEA Investors owns
more than 50% of the common stock of Pregis Holding I, and Pregis Holding I owns all of the common
stock of Pregis Holding II, Pregis Holding II would be deemed a controlled company under the
rules of the NYSE and Nasdaq, and, therefore, would not need to have a majority of independent
directors or all-independent compensation and nominating committees. However, the rules of the SEC
require us to disclose in this Form 10-K which of our directors would be considered independent
within the meaning of the rules of a national securities exchange that we may choose. Pregis
Holding II currently has four directors who would be considered independent within the definitions
of either the NYSE or Nasdaq: Messrs. Leng, OLeary, Rogers, and Morris. Four of our directors
are partners of AEA Investors: Messrs. Garcia, Fischer, Hoesterey and Pryma.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents by category of service the total fees for services rendered by
Ernst & Young LLP, the Companys principal accountant, for the years ended December 31, 2010 and
2009.
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
(dollars in thousands) | ||||||||
Audit Fees (1) |
$ | 2,579 | $ | 3,095 | ||||
Audit-Related Fees (2) |
51 | 28 | ||||||
Tax Fees (3) |
132 | 14 | ||||||
All Other Fees (4) |
2 | | ||||||
$ | 2,764 | $ | 3,137 | |||||
(1) | Includes fees and out-of-pocket expenses for professional services rendered in connection with the audit of the Companys annual consolidated financial statements, as well as other statutory audit services. Amount also includes fees for reviews of quarterly financial statements, comfort letters, consents and assistance with and review of documents filed with the Securities and Exchange Commission. | |
(2) | Includes fees and out-of pocket expenses for professional services rendered in connection with due diligence related to acquisitions. | |
(3) | Includes tax compliance services in certain foreign locations. | |
(4) | All other fees in 2010 include a subscription for access to an accounting research tool. |
Pre-Approval Policies and Procedures
The Audit Committee annually engages and pre-approves the audit and audit-related services
provided by the independent registered public accounting firm, for the following year, to assure
that the provision of such services does not impair the auditors independence. All allowable
non-audit services are regularly required to be specifically identified and submitted to the Audit
Committee for approval during regularly scheduled meetings.
For 2010, the Audit Committee discussed the non-audit services with Ernst & Young LLP and
management to determine that they are permitted under the rules and regulations concerning auditor
independence promulgated by the SEC and Public Accounting Oversight Board. Following such
discussions, the Audit Committee determined that the provision of such non-audit services by Ernst
& Young LLP was compatible with maintaining their independence.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Documents Filed as Part of this Annual Report: |
1. | Financial Statements. | ||
See Index to Financial Statements on page 48 of this report. | |||
2. | Financial Statement Schedules. | ||
See Schedule II Valuation and Qualifying Allowances on page 92 of this report. All other schedules are not required under the relevant instructions or are inapplicable and therefore have been omitted. | |||
3. | List of Exhibits. | ||
See Exhibit Index beginning on page 118 of this report. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PREGIS HOLDING II CORPORATION | ||||||
By: | /s/ Glenn M. Fischer
|
|||||
President, Chief Executive Officer |
Date: March 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacity and on the
dates indicated.
Signature | Title | Date | ||||
/s/ Glenn Fischer
|
Chief Executive
Officer and
Director (principal executive officer) |
March 25, 2011 | ||||
/s/ D. Keith LaVanway
|
Vice President and
Chief Financial
Officer (principal financial officer and principal accounting officer) |
March 25, 2011 | ||||
/s/ John L. Garcia
|
Director | March 25, 2011 | ||||
/s/ Brian R. Hoesterey
|
Director | March 25, 2011 | ||||
/s/ James W. Leng
|
Director | March 25, 2011 | ||||
/s/ John P. OLeary, Jr.
|
. | Director | March 25, 2011 | |||
/s/ James D. Morris
|
Director | March 25, 2011 | ||||
/s/ Thomas J. Pryma
|
Director | March 25, 2011 | ||||
/s/ James E. Rogers
|
Director | March 25, 2011 |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
2.1 | Stock Purchase Agreement, dated as of June 23, 2005, as amended,
among Pactiv Corporation and certain of its affiliates, as
sellers, and PFP Holding II Corporation, as purchaser. (1) |
|||
2.2 | Sale and Purchase Agreement dated as of July 4, 2007 between Mirto
Trading LTD, Mr. Birliba Mihai, Ms. Olariu Angelica, Mr. Mitrea
Florin, Pro Logistics S.R.L, and Pregis GmbH. (6) |
|||
3.1 | Certificate of Incorporation of Pregis Holding II Corporation. (1) |
|||
3.2 | By-laws of Pregis Holding II Corporation. (1) |
|||
4.1 | Indenture, dated October 12, 2005, among Pregis Corporation,
Pregis Holding II Corporation, Pregis Management Corporation,
Pregis Innovative Packaging Inc., Hexacomb Corporation, The Bank
of New York, as trustee and collateral agent, The Bank of New
York, as registrar and paying agent, and RSM Robson Rhodes LLP, as
Irish paying agent. (1) |
|||
4.1 | (a) | Supplemental Indenture, dated as of October 5, 2009, among Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., Hexacomb
Corporation, The Bank of New York Mellon Trust Company, N.A., as
trustee and collateral agent, The Bank of New York Mellon
(Luxembourg) S.A., as successor registrar to The Bank of New York,
The Bank of New York Mellon, as paying agent, and Grant Thornton,
as Irish paying agent. (8) |
||
4.2 | Indenture, dated October 12, 2005, among Pregis Corporation,
Pregis Holding II Corporation, Pregis Management Corporation,
Pregis Innovative Packaging Inc., Hexacomb Corporation, and The
Bank of New York, as trustee. (1) |
|||
4.3 | Form of Initial Notes and Form of Exchange Notes (included within
the Indentures filed as Exhibit 4.1 and Exhibit 4.2). (1) |
|||
4.3 | (a) | Form of Initial Notes and Form of Exchange Notes (included within
the Supplemental Indenture filed as Exhibit 4.1 (a). (8) |
||
10.1 | Credit Agreement, dated October 12, 2005, among Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., Hexacomb
Corporation, the several banks, other financial institutions and
related funds as may from time to time become parties thereto,
Credit Suisse, as collateral agent and administrative agent,
Lehman Brothers Inc., as syndication agent, and CIT Lending
Services, Inc. and JPMorgan Chase Bank, N.A., as co-documentation
agents. (1) |
|||
10.1 | (a) | Waiver Letter No. 2 and Amendment No. 1, dated as of May 31, 2006,
to Credit Agreement, dated October 12, 2005, among Pregis
Corporation and Credit Suisse, Cayman Islands Branch, as Agent and
as a Lender. (2) |
||
10.1 | (b) | Amendment No. 2, dated as of December 20, 2007, among Pregis
Corporation, Pregis Holding II Corporation and other parties
signatory thereto, amending the Credit Agreement, dated as of
October 12, 2005, among the Company, Pregis Holding II
Corporation, Credit Suisse, Cayman |
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Exhibit | ||||
Number | Description | |||
Island Branch, as
administrative agent and collateral agent, and the other parties
thereto. |
||||
10.1 | (c) | Amendment No. 3, dated as of October 5, 2009, among Pregis
Corporation, Pregis Holding II Corporation and the other parties
signatory thereto, amending the Credit Agreement, dated as of
October 12, 2005, among the Company, Pregis Holding II
Corporation, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and the other parties
thereto. (8) |
||
10.2 | First Lien Security Agreement, dated October 12, 2005, by Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., and Hexacomb
Corporation, to Credit Suisse, as collateral agent. (1) |
|||
10.3 | Second Lien Security Agreement, dated October 12, 2005, by Pregis
Corporation, Pregis Holding II Corporation, Pregis Management
Corporation, Pregis Innovative Packaging Inc., and Hexacomb
Corporation, to The Bank of New York, as trustee and collateral
agent. (1) |
|||
10.3 | (a) | Amendment No. 1 to the Second Lien Security Agreement, dated as of
October 5, 2009, among the Company, each of the other grantors
signatory thereto and The Bank of New York Mellon Trust company,
N.A., as trustee collateral agent. (8) |
||
10.4 | Senior Pledge Agreement, dated October 12, 2005, between Pregis
Corporation, as pledgor, and Credit Suisse, as security agent. (1) |
|||
10.5 | Subordinated Pledge Agreement, dated October 12, 2005, between
Pregis Corporation, as pledgor, and The Bank of New York, as
security agent. (1) |
|||
10.5 | (a) | Amendment No. 1 to the Subordinated Pledge Agreement, dated as of
October 5, 2009, among the Company, The Bank of New York Mellon
Trust Company, N.A. and Pregis (Luxembourg) Holding S.à r.l. (8) |
||
10.6 | First Lien Intellectual Property Security Agreement, dated October
12, 2005, by Pregis Corporation, Pregis Holding II Corporation,
Pregis Management Corporation, Pregis Innovative Packaging Inc.,
Hexacomb Corporation, to Credit Suisse, as collateral agent. (1) |
|||
10.7 | Amended and Restated Second Lien Intellectual Property Security
Agreement, dated as of October 5, 2009, among the Company, The
Bank of New York Mellon Trust Company, N.A. and the other parties
thereto. (8) |
|||
10.8 | Management Agreement, dated October 12, 2005, by and between
Pregis Corporation and AEA Investors LLC. (1) |
|||
10.9 | Pregis Holding I Corporation 2005 Stock Option Plan. (1) |
|||
10.10 | Form of Time-Vesting Nonqualified Stock Option Agreement. (1) |
|||
10.11 | Form of Performance-Vesting Nonqualified Stock Option Agreement (5) |
|||
10.12 | Pregis Holding I Corporation Employee Stock Purchase Plan. (1) |
|||
10.13 | Form of Pregis Holding I Corporation Employee Stock Purchase Plan
Employee Subscription Agreement. (1) |
|||
10.14 | Employment Agreement, dated October 2, 2006, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and Michael T. McDonnell, |
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Table of Contents
Exhibit | ||||
Number | Description | |||
Noncompetition Agreement,
dated October 2, 2006, by and between Pregis Holding I Corporation
and Michael T. McDonnell, Nonqualified Stock Option Agreement,
dated October 2, 2006, between Pregis Holding I Corporation and
Michael T. McDonnell, and Executive Subscription Agreement, dated
October 2, 2006, between Pregis Holding I Corporation and Michael
T. McDonnell. (2) |
||||
10.15 | Employment Agreement of a Managing Director, dated March 8, 2004,
between Kobusch Folien Verwaltungsgesellschaft mbH and Hartmut
Scherf (translation from German language). (1) |
|||
10.16 | Nonqualified Stock Option Agreements, dated February 6, 2006,
between Pregis Holding I Corporation and Vincent P. Langone,
Nonqualified Stock Option Agreement, dated November 30, 2005,
between Pregis Holding I Corporation and James D. Morris and
Nonqualified Stock Option Agreements, dated January 23, 2006,
between Pregis Holding I Corporation and each of Andy Brewer,
Dieter Eberle, Peter Lewis, and Hartmut Scherf. (1) |
|||
10.17 | Employment Agreement, dated August 15, 2007, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and D. Keith LaVanway. (7) |
|||
10.18 | Management Agreement between Pregis NV and Fernando De Miguel,
dated May 15, 2007. (7) |
|||
10.19 | Employment Agreement, dated December 11, 2007, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and Kevin J. Baudhuin. |
|||
10.20 | Separation Agreement and Release, dated September 30, 2009, by and
between Fernando De Miguel and Pregis NV. |
|||
10.21 | Separation Agreement and Release, dated February 25, 2011, by and
among Pregis Holding I Corporation, Pregis Holding II Corporation,
and Pregis Corporation and Michael T. McDonnell. (9) |
|||
10.22 | Employment Amendment, dated October 1, 2010, by and among Pregis
Holding I Corporation and Pregis Holding II Corporation and Pregis
Corporation and Kevin J. Baudhuin.* |
|||
10.23 | Credit
Agreement by and among Pregis Holding II Corporation, as parent,
Pregis Corporation and certain subsidiaries therefore, as US
Borrowers, certain subsidiaries of Pregis Corporation, as UK
Borrowers, the lenders that are signatories hereto as the lenders,
and Wells Fargo Capital Finance, LLC as the Agent dated as of March
23, 2011 * |
|||
10.24 | Security
Agreement, dated as of March 23, 2011, among Pregis Corporation, the
other parties thereto, and Wells Fargo Capital Finance, LLC, as
administrative agent and collateral agent. *
|
|||
12.1 | Computation of Ratio of Earnings to Fixed Charges. * |
|||
21.1 | List of Subsidiaries. * |
|||
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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(1) | Incorporated by reference to Amendment No. 1 to the registrants registration statement on Form S-4/A, (No. 333-130353), filed with the Commission on February 14, 2006. | |
(2) | Incorporated by reference to Amendment No. 2 to the registrants registration statement on Form S-4/A, as amended (No. 333-130353), filed with the Commission on November 9, 2006. | |
(3) | Incorporated by reference to Amendment No. 3 to the registrants registration statement on Form S-4/A, as amended (No. 333-130353), filed with the Commission on January 12, 2007. | |
(4) | Incorporated by reference to Amendment No. 4 to the registrants registration statement on Form S-4/A, as amended (No. 333-130353), filed with the Commission on April 16, 2007. | |
(5) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the Commission on February 28, 2008. | |
(6) | Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the Commission on July 9, 2007. | |
(7) | Incorporated by reference to Exhibits 10.30, 10.31, 10.32 and 10.33 to the Annual Report on Form 10-K, filed with the Commission on March 24, 2008. | |
(8) | Incorporated by reference to Exhibits 4.1, 4.2, 10.1, 10.3, and 10.4 to the Current Report on Form 8-K of Pregis Holding II Corporation, filed with the Commission on October 5, 2009. | |
(9) | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the Commission on March 2, 2011. | |
| Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. | |
* | Filed herewith. |
121