Attached files
file | filename |
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EX-32.2 - EX-32.2 - PAPERWEIGHT DEVELOPMENT CORP | c365-20170402xex32_2.htm |
EX-32.1 - EX-32.1 - PAPERWEIGHT DEVELOPMENT CORP | c365-20170402xex32_1.htm |
EX-31.2 - EX-31.2 - PAPERWEIGHT DEVELOPMENT CORP | c365-20170402xex31_2.htm |
EX-31.1 - EX-31.1 - PAPERWEIGHT DEVELOPMENT CORP | c365-20170402xex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: April 2, 2017
OR
☐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: 333-82084-01
PAPERWEIGHT DEVELOPMENT CORP. |
(Exact Name of Registrant as Specified in Its Charter) |
Wisconsin |
(State or Other Jurisdiction of Incorporation or Organization) |
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39-2014992 |
(I.R.S. Employer Identification No.) |
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825 East Wisconsin Avenue, P.O. Box 359, Appleton, Wisconsin |
(Address of Principal Executive Offices) |
Registrant’s telephone number, including area code: (920) 734-9841
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ (Do not check if a smaller reporting company)
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of May 1, 2017, 6,260,418 shares of Paperweight Development Corp. common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. No shares of Paperweight Development Corp. were held by non-affiliates.
Documents incorporated by reference: None.
1
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Page Number |
PART I |
FINANCIAL INFORMATION |
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Item 1 |
Financial Statements (unaudited) |
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a) |
3 |
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b) |
Condensed Consolidated Statements of Comprehensive Income (Loss) |
4 |
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c) |
5 |
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d) |
6 |
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e) |
7 |
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Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
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Item 3 |
24 |
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Item 4 |
24 |
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PART II |
OTHER INFORMATION |
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Item 6 |
26 |
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27 |
2
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements (unaudited)
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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(unaudited) |
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(dollars in thousands, except share data) |
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April 2, |
December 31, |
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2017 |
2016 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
1,453 |
$ |
6,397 | |
Accounts receivable, less allowance for doubtful accounts of $391 and $323, respectively |
41,104 | 41,297 | |||
Inventories |
91,297 | 86,392 | |||
Other current assets |
4,356 | 4,478 | |||
Total current assets |
138,210 | 138,564 | |||
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Property, plant and equipment, net |
202,482 | 206,413 | |||
Intangible assets, net |
34,126 | 34,697 | |||
Other assets |
7,409 | 7,495 | |||
Total assets |
$ |
382,227 |
$ |
387,169 | |
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LIABILITIES, REDEEMABLE COMMON STOCK, |
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ACCUMULATED DEFICIT AND |
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ACCUMULATED OTHER COMPREHENSIVE INCOME |
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Current liabilities |
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Current portion of long-term debt, net |
$ |
657 |
$ |
982 | |
Accounts payable |
50,887 | 49,433 | |||
Accrued interest |
9,141 | 3,258 | |||
Other accrued liabilities |
37,681 | 44,939 | |||
Total current liabilities |
98,366 | 98,612 | |||
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Long-term debt, net |
440,173 | 437,515 | |||
Postretirement benefits other than pension |
20,624 | 20,842 | |||
Accrued pension |
112,015 | 111,963 | |||
Other long-term liabilities |
29,717 | 30,536 | |||
Commitments and contingencies (Note 11) |
— |
— |
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Redeemable common stock, $0.01 par value, |
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shares authorized: 30,000,000, |
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shares issued and outstanding: 6,260,418 and 6,260,418 |
100,641 | 100,641 | |||
Accumulated deficit |
(437,325) | (431,887) | |||
Accumulated other comprehensive income |
18,016 | 18,947 | |||
Total liabilities, redeemable common stock, accumulated |
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deficit and accumulated other comprehensive income |
$ |
382,227 |
$ |
387,169 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
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(unaudited) |
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(dollars in thousands) |
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For the Three |
For the Three |
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Months Ended |
Months Ended |
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April 2, 2017 |
April 3, 2016 |
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$ |
166,693 |
$ |
180,540 | |||
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Cost of sales |
135,876 | 144,375 | ||||
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Gross profit |
30,817 | 36,165 | ||||
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Selling, general and administrative expenses |
24,260 | 26,604 | ||||
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Operating income (loss) |
6,557 | 9,561 | ||||
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Other expense |
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Interest expense, net |
11,725 | 10,182 | ||||
Foreign exchange (gain) loss |
(89) | (533) | ||||
Other expense |
295 | 264 | ||||
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Income (loss) before income taxes |
(5,374) | (352) | ||||
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Provision for income taxes |
64 | 69 | ||||
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Net income (loss) |
(5,438) | (421) | ||||
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Other comprehensive income (loss): |
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Changes in retiree plans |
(913) | (915) | ||||
Unrealized gains (losses) on derivatives |
(18) | (1,171) | ||||
Total other comprehensive income (loss) |
(931) | (2,086) | ||||
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Comprehensive income (loss) |
$ |
(6,369) |
$ |
(2,507) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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FOR THE THREE MONTHS ENDED |
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(unaudited) |
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(dollars in thousands) |
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April 2, |
April 3, |
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2017 |
2016 |
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Net income (loss) |
$ |
(5,438) |
$ |
(421) | |
Adjustments to reconcile net income (loss) to net cash |
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provided (used) by operating activities: |
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Depreciation |
5,687 | 6,013 | |||
Amortization of intangible assets and other |
663 | 642 | |||
Amortization of financing fees |
875 | 469 | |||
Amortization of debt discount |
234 | 194 | |||
Employer 401(k) noncash matching contributions |
466 | 477 | |||
Foreign exchange (gain) loss |
(93) | (578) | |||
Noncash (gain) loss on hedging |
(7) |
— |
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Loss on disposals of equipment |
— |
(12) | |||
(Increase)/decrease in assets and increase/(decrease) in liabilities: |
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Accounts receivable |
(60) | (4,567) | |||
Inventories |
(4,800) | (5,652) | |||
Other current assets |
123 | 511 | |||
Accounts payable and other accrued liabilities |
(3,609) | (2,315) | |||
Accrued pension |
(546) | 91 | |||
Other, net |
(1,055) | (794) | |||
Net cash provided (used) by operating activities |
(7,560) | (5,942) | |||
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Cash flows from investing activities: |
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Proceeds from sale of equipment |
— |
14 | |||
Additions to property, plant and equipment |
(1,190) | (1,799) | |||
Net cash provided (used) by investing activities |
(1,190) | (1,785) | |||
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Cash flows from financing activities: |
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Debt acquisition costs |
(800) |
— |
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Proceeds of first lien term loan |
20,000 |
— |
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Payments relating to capital lease obligations |
(60) | (54) | |||
Proceeds from revolving line of credit |
162,830 | 89,500 | |||
Payments of revolving line of credit |
(180,400) | (88,600) | |||
Payments of State of Ohio loans |
(406) | (383) | |||
Increase (decrease) in cash overdraft |
2,638 | 7,661 | |||
Net cash provided (used) by financing activities |
3,802 | 8,124 | |||
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Effect of foreign exchange rate changes on cash and cash equivalents |
4 | 45 | |||
Change in cash and cash equivalents |
(4,944) | 442 | |||
Cash and cash equivalents at beginning of period |
6,397 | 1,817 | |||
Cash and cash equivalents at end of period |
$ |
1,453 |
$ |
2,259 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK, |
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ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME |
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FOR THE THREE MONTHS ENDED |
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(unaudited) |
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(dollars in thousands, except share data) |
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Redeemable Common Stock |
Accumulated |
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Other |
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Shares |
Accumulated |
Comprehensive |
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Outstanding |
Amount |
Deficit |
Income |
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Balance, December 31, 2016 |
6,260,418 |
$ |
100,641 |
$ |
(431,887) |
$ |
18,947 | ||||
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Net income (loss) |
— |
— |
(5,438) |
— |
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Other comprehensive income (loss) |
— |
— |
— |
(931) | |||||||
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Balance, April 2, 2017 |
6,260,418 |
$ |
100,641 |
$ |
(437,325) |
$ |
18,016 | ||||
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Balance, January 2, 2016 |
6,757,898 |
$ |
114,749 |
$ |
(419,925) |
$ |
21,672 | ||||
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Net income (loss) |
— |
— |
(421) |
— |
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Other comprehensive income (loss) |
— |
— |
— |
(2,086) | |||||||
Redemption of redeemable common stock |
(33) |
— |
— |
— |
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Balance, April 3, 2016 |
6,757,865 |
$ |
114,749 |
$ |
(420,346) |
$ |
19,586 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, all adjustments made for the fair statement of comprehensive income (loss) for the three months ended April 2, 2017 and April 3, 2016, the cash flows for the three months ended April 2, 2017 and April 3, 2016 and financial position at April 2, 2017 and December 31, 2016 were normal recurring adjustments.
These condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes of Paperweight Development Corp. (“PDC”) and its 100%-owned subsidiaries (collectively the “Company”), which includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”) for each of the three years in the period ended December 31, 2016, which are included in the annual report on Form 10-K for the year ended December 31, 2016. The condensed consolidated balance sheet data as of December 31, 2016, contained within these condensed financial statements, was derived from the audited financial statements of PDC but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.
2. ACCOUNTS RECEIVABLE SECURITIZATION
During June 2014, the Company entered into a three-year accounts receivable securitization program with a commitment size of $30.0 million, whereby transactions under the program are accounted for as sales of trade receivables in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables under the program are recorded as a reduction of accounts receivable in the Condensed Consolidated Balance Sheets as of April 2, 2017 and December 31, 2016. Proceeds received, including collections on the deferred purchase price notes receivable, are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2017 and April 3, 2016.
Trade receivables sold to the third-party financial institution, and being serviced by Appvion, Inc., totaled $34.2 million as of April 2, 2017, for which $15.0 million in proceeds was received. Trade receivables sold to the third-party financial institution as of December 31, 2016 totaled $32.7 million, for which $12.5 million in proceeds was received. The fair value of the receivables sold equaled the carrying cost at the time of sale and no gain or loss was recorded as a result of the sale. The fair value of the deferred purchase price notes receivable recorded as of April 2, 2017 was $18.2 million and $19.3 million as of year-end 2016 and is included in accounts receivable in the Condensed Consolidated Balance Sheets as of April 2, 2017 and December 31, 2016, respectively. The Company estimates the fair value of the deferred purchase price notes receivable using Level 3 inputs based on historical performance of similar receivables including an allowance for doubtful accounts, as well as estimated cash discounts to be taken by customers and potential credits issued to customers. The Company deems the interest rate risk related to the deferred purchase price notes to be de minimis primarily due to the short average collection cycle (30 days) of the related receivables.
Servicing fees paid for the program were $0.2 million and $0.1 million for the three month periods ended April 2, 2017 and April 3, 2016, respectively. Transaction costs of $0.7 million, related to the June 2014 entry into this program, were deferred and recorded on the balance sheet as other long-term assets. They are being amortized over the three-year term of the securitization agreement, ending June 2017.
Pursuant to its terms, the three-year accounts receivable securitization program was scheduled to terminate at maturity in June 2017. However, on May 11, 2017, the Company entered into an extension agreement with respect to this facility which extends the facility through August 4, 2017 and reduced the facility from $30.0 million to $25.0 million. As a result, the outstanding balance under this facility will be coming due at the extended maturity date of August 4, 2017. While the Company does not currently have the liquid funds necessary to repay the amounts outstanding under the accounts receivable securitization facility at the extended maturity date, the Company is currently in negotiations with respect to a potential refinancing of the facility and management believes that it will be able to refinance the facility (or otherwise satisfy its repayment obligations with respect to such facility through a combination of cash on hand, borrowings under its revolving credit facility and other refinancing activities) prior to the extended maturity date.
7
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
3. OTHER INTANGIBLE ASSETS
The Company’s intangible assets consist of the following (dollars in thousands):
As of April 2, 2017 |
As of December 31, 2016 |
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Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
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Amortizable intangible assets: |
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Trademarks |
$ |
44,665 |
$ |
35,192 |
$ |
44,665 |
$ |
34,667 | |||||||
Patents |
4,776 | 4,776 | 5,443 | 5,443 | |||||||||||
Customer relationships |
5,365 | 3,577 | 5,365 | 3,531 | |||||||||||
Subtotal |
54,806 |
$ |
43,545 | 55,473 |
$ |
43,641 | |||||||||
Unamortizable intangible assets: |
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Trademarks |
22,865 | 22,865 | |||||||||||||
Total |
$ |
77,671 |
$ |
78,338 | |||||||||||
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Amortization expense of intangibles for each of the three months ended April 2, 2017 and April 3, 2016 was $0.6 million.
4. INVENTORIES
Inventories consist of the following (dollars in thousands):
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April 2, 2017 |
December 31, 2016 |
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Finished goods |
$ |
52,358 |
$ |
47,710 | ||
Raw materials |
14,394 | 12,701 | ||||
Work in process |
8,587 | 9,888 | ||||
Stores and spare parts |
15,958 | 16,093 | ||||
$ |
91,297 |
$ |
86,392 |
Stores and spare parts inventory represents manufacturing supplies and equipment parts of varying age that must be available, on demand, to ensure minimal interruption of manufacturing processes. The balance is valued at average cost. All other inventories are valued using the first-in, first-out (“FIFO”) method.
8
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances consist of the following (dollars in thousands):
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April 2, 2017 |
December 31, 2016 |
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Land and improvements |
$ |
9,810 |
$ |
9,774 | ||
Buildings and improvements |
131,787 | 131,643 | ||||
Machinery and equipment |
514,084 | 515,101 | ||||
Software |
33,957 | 33,989 | ||||
Capital leases |
1,226 | 1,180 | ||||
Construction in progress |
3,448 | 2,254 | ||||
694,312 | 693,941 | |||||
Accumulated depreciation |
(491,830) | (487,528) | ||||
$ |
202,482 |
$ |
206,413 |
Depreciation expense from continuing operations for the three months ended April 2, 2017 and April 3, 2016 consists of the following (dollars in thousands):
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For the Three |
For the Three |
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Months Ended |
Months Ended |
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April 2, 2017 |
April 3, 2016 |
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Cost of sales |
$ |
5,036 |
$ |
5,267 | ||
Selling, general and administrative expenses |
651 | 746 | ||||
$ |
5,687 |
$ |
6,013 |
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities, as presented in the current liabilities section of the Condensed Consolidated Balance Sheet, consist of the following (dollars in thousands):
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April 2, 2017 |
December 31, 2016 |
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Compensation |
$ |
4,394 |
$ |
6,090 | ||
Trade discounts |
9,260 | 10,844 | ||||
Workers’ compensation |
2,457 | 2,587 | ||||
Accrued insurance |
1,073 | 1,381 | ||||
Other accrued taxes |
928 | 1,268 | ||||
Postretirement benefits other than pension |
1,543 | 1,543 | ||||
Due on accounts receivable securitization |
8,700 | 10,500 | ||||
Other |
9,326 | 10,726 | ||||
$ |
37,681 |
$ |
44,939 |
9
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
7. NEW ACCOUNTING PRONOUNCEMENTS
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This guidance is issued to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. This guidance should be applied using a retrospective transition method for the presentation of the service cost component and other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective data, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers, the guidance requires five steps to be applied which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. Additionally, in March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations” to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance associated with identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at March 3, 2016 EITF Meeting” to rescind specific guidance included in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities-Oil and Gas, effective upon adoption of Topic 606. Also in May 2016, the FASB issued ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” to address certain issues in the guidance regarding assessing collectability, presentation of state taxes, noncash consideration, and completed contracts and contract modifications at transition. These ASU’s will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but no earlier than the original effective date of fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is assessing the new standards and does not believe there will be a material impact to its consolidated financial statements.
8. EMPLOYEE BENEFITS
The components of net periodic benefit cost (gain) associated with the defined benefit pension plans include the following (dollars in thousands):
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|
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For the Three |
For the Three |
||||
|
Months Ended |
Months Ended |
||||
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April 2, 2017 |
April 3, 2016 |
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Service cost |
$ |
1,462 |
$ |
1,371 | ||
Interest cost |
4,397 | 4,708 | ||||
Expected return on plan assets |
(5,666) | (5,249) | ||||
Amortization of prior service credit |
(598) | (598) | ||||
Net periodic benefit (gain) cost |
$ |
(405) |
$ |
232 |
The Company expects to contribute $4.5 million to its funded pension plan in 2017.
10
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Certain of the Company’s hourly employees participated in a multi-employer defined benefit plan, the Pace Industry Union-Management Pension Plan (EIN #11-6166763). Participants in this plan included the West Carrollton, Ohio represented manufacturing employees, where the collective bargaining agreement expired on April 1, 2012. Participants also included the represented employees at the Kansas City, Kansas distribution center, where the collective bargaining agreement expired December 31, 2011. As a result of labor contracts ratified in June 2012 and September 2012, by the bargaining employees at the Kansas City, Kansas distribution center and West Carrollton, Ohio plant, respectively, both groups elected to end their participation in this multi-employer plan and instead participate in the defined benefit pension plan sponsored by the Company. In addition, during 2012 there was a workforce reduction at the West Carrollton, Ohio plant resulting from the cessation of papermaking activities. As a result, the Company recorded $25.0 million of expense in 2012 representing its estimated cost to satisfy a complete withdrawal liability under the terms of the plan’s trust agreement, with a payment period that began January 2014 and could extend for up to 20 years, discounted in accordance with ASC Section 450-20-S99-1. Payments of $0.5 million were made during first quarter 2017, resulting in recorded interest expense of $0.3 million and a $0.2 million reduction of the reserve since year-end 2016. Of the $22.3 million reserve, $0.9 million is classified as short-term and $21.4 million is classified as long-term within the Condensed Consolidated Balance Sheet at April 2, 2017.
9. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
The components of other postretirement benefit gain include the following (dollars in thousands):
|
||||||
|
For the Three |
For the Three |
||||
|
Months Ended |
Months Ended |
||||
|
April 2, 2017 |
April 3, 2016 |
||||
Service cost |
$ |
15 |
$ |
16 | ||
Interest cost |
214 | 250 | ||||
Amortization of prior service credit |
(315) | (317) | ||||
Net periodic benefit (gain) loss |
$ |
(86) |
$ |
(51) |
10. LONG-TERM INCENTIVE COMPENSATION
In December 2001, the Company adopted the Long-Term Stock Appreciation Rights Plan (“SAR” Plan). As of January 3, 2010, the Company adopted the Long-Term Restricted Stock Unit Plan ("RSU" Plan). Both plans utilize phantom units. The value of a unit in the SAR Plan is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) between the grant date and the exercise date. The value of a unit in the RSU Plan is based on the value of PDC common stock, as determined by the ESOP trustee. As of the end of first quarter 2017, the fair market value of one share of PDC common stock was $10.35.
As of year-end 2016, 37,850 RSU units became vested and exercisable. In accordance with the RSU Plan, payment for these RSU’s was made in February 2017. During the first three months of 2017, 170,400 additional units were granted under the RSU Plan. A balance of 381,200 RSU units remains as of April 2, 2017. Approximately $0.3 million of expense, related to this RSU Plan, was recorded during each of the three-month periods ended April 2, 2017 and April 3, 2016. As of April 2, 2017, total unrecognized stock-based compensation expense relating to unvested long-term restricted employee stock units was $2.6 million. This amount is expected to be recognized over the weighted-average period of 2.4 years.
During the first three months of 2017, 476,100 additional units were granted under the SAR Plan. Due to terminations of employment, 40,784 unvested units were forfeited during the current quarter. There was no expense recorded for this SAR Plan during the three-month periods ended April 2, 2017 and April 3, 2016.
Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. In March 2013, the board adopted the Appvion, Inc. Non-Employee Director Deferred Compensation Plan to formalize the terms of the agreement. Approximately $0.1 million of expense, related to this plan, was recorded during each of the three‑month periods ended April 2, 2017 and April 3, 2016.
11
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to various demands, claims, suits or other legal or regulatory proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.
The Company does not believe that any pending or threatened demands, claims, suits or other legal or regulatory proceedings will have, individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows.
12. EMPLOYEE STOCK OWNERSHIP PLAN
The Company’s matching contributions charged to expense were $0.5 million for the three-month periods ended April 2, 2017 and April 3, 2016. During the first three months of 2017, there were no changes to the number of outstanding shares of PDC redeemable common stock. As a result of hardship withdrawals, required diversifications and employee terminations, 33 shares of PDC redeemable common stock were repurchased during the first three months of 2016 at an aggregate price of approximately $410.
In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable. Shares that are currently redeemable should be recorded at redemption value. For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date. This guidance also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.
As of April 2, 2017, the fair market value of one share of PDC common stock was $10.35. Based on the estimated fair value of the redeemable common stock at April 2, 2017 and December 31, 2016, an ultimate redemption liability of approximately $64.8 million was determined. The redeemable common stock recorded book value as of April 2, 2017 and December 31, 2016, was $100.6 million. As a result of there being no stock activity during the first quarter of 2017, there was no change in fair value and accretion of redeemable common stock.
13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates and interest rates. The fair values of all derivatives are recorded in the Condensed Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.
The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transactions will not occur. These contracts are designed to hedge the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $7.9 million as of April 2, 2017. These contracts have settlement dates extending through June 2017.
12
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
On July 30, 2013, Appvion entered into an interest rate swap contract on $100 million of its variable rate first lien term loan with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. This interest rate swap pays the Company variable interest at the three-month Eurodollar rate or a fixed floor rate of 1.25%, whichever is greater, and the Company pays the counterparty a fixed interest rate. The fixed Eurodollar interest rate for the contract is 2.74%. Based on the terms of the interest rate swap contract and the underlying debt, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge. Any changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheet until earnings are affected by the variability of cash flows.
The following table presents the location and fair values of derivative instruments included in the Company’s Condensed Consolidated Balance Sheets (dollars in thousands):
|
||||||||
Designated as a Hedge |
Balance Sheet Location |
April 2, 2017 |
December 31, 2016 |
|||||
Foreign currency exchange derivatives |
Accounts receivable |
$ |
199 |
$ |
452 | |||
Foreign currency exchange derivatives |
Other accrued liabilities |
— |
— |
|||||
Interest rate swap |
Other long-term liabilities |
(2,415) | (2,657) | |||||
|
The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss) for the three-months ended April 2, 2017 and April 3, 2016 and (gains) losses initially recognized in accumulated other comprehensive income in the Condensed Consolidated Balance Sheet at the period-ends presented (dollars in thousands):
|
||||||||
|
Statement of |
|||||||
|
Comprehensive |
For the Three |
For the Three |
|||||
|
Income (Loss) |
Months Ended |
Months Ended |
|||||
Designated as a Hedge |
Location |
April 2, 2017 |
April 3, 2016 |
|||||
Foreign currency exchange derivatives |
Net sales |
$ |
(221) |
$ |
(22) | |||
(Gains) losses recognized in accumulated |
||||||||
other comprehensive income (loss) |
(132) | 344 | ||||||
|
||||||||
Interest rate swap |
Interest expense |
366 | 390 | |||||
|
||||||||
(Gains) losses recognized in accumulated |
||||||||
other comprehensive income (loss) |
2,389 | 3,897 |
13
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
14. LONG-TERM OBLIGATIONS
Long-term obligations, excluding capital lease obligations, consist of the following (dollars in thousands):
|
||||||
April 2, |
December 31, |
|||||
|
2017 |
2016 |
||||
Revolving credit facility at approximately 9.50% base rate and 7.28% Euro rate, |
||||||
due June 2018 |
$ |
14,350 |
$ |
31,920 | ||
Premium payment due, in connection with Fifth Amendment |
1,125 |
— |
||||
Unamortized debt issuance costs |
(1,371) | (521) | ||||
Secured variable rate industrial development bonds, 0.8% average interest rate at |
||||||
April 2, 2017, due in 2027 |
6,000 | 6,000 | ||||
Unamortized debt issuance costs |
(53) | (54) | ||||
State of Ohio assistance loan at 6%, approximately $100 due monthly and final |
||||||
payment due May 2017 |
330 | 655 | ||||
Unamortized debt issuance costs |
(6) | (11) | ||||
State of Ohio loan at 3%, approximately $30 due monthly and final |
||||||
payment due May 2019 |
708 | 788 | ||||
First lien term loan at 7.75%, due June 2019 |
178,300 | 158,300 | ||||
Premium payment due, in connection with Fifth Amendment |
2,675 |
— |
||||
Unamortized debt issuance costs |
(4,011) | (728) | ||||
Unamortized discount |
(1,437) | (1,684) | ||||
Second lien senior secured notes at 9.0%, due June 2020 |
250,000 | 250,000 | ||||
Unamortized discount |
(2,096) | (2,238) | ||||
Unamortized debt issuance costs |
(3,684) | (3,930) | ||||
|
440,830 | 438,497 | ||||
Less obligations due within one year |
(657) | (982) | ||||
$ |
440,173 |
$ |
437,515 | |||
|
During the first three months of 2017, the Company made mandatory debt repayments of $0.4 million on its State of Ohio loans. The Company also borrowed $162.8 million and repaid $180.4 million on its revolving credit facility, leaving an outstanding balance at quarter-end of $14.4 million. Approximately $14.3 million of the revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder, which, in accordance with its debt covenants, left approximately $12.6 million of unused borrowing capacity under its revolving credit facility. No amounts were drawn by beneficiaries under the outstanding letters of credit.
First Lien Credit Agreement
On June 28, 2013, Appvion entered into a credit agreement (the “Credit Agreement”) providing for a $100 million revolving line of credit due June 28, 2018 and a $335 million first lien term loan due June 28, 2019. The Credit Agreement ranks senior in right of payment to all existing and future subordinated indebtedness of Appvion and is secured by security interests in substantially all of the property and assets of Appvion and the debt guarantors. As noted above, the maturity date of the revolving credit facility is June 28, 2018 and the maturity date of the first lien term loan is June 28, 2019. The Credit Agreement is unconditionally, and jointly and severally, guaranteed by PDC, Appvion Canada, Ltd. and APVN Holdings LLC. It contains covenants customary for similar credit facilities. Affirmative and negative covenants under the Credit Agreement restrict Appvion’s ability and the ability of Appvion’s subsidiaries, subject to certain exceptions, to incur additional indebtedness and liens, engage in sale and leaseback transactions, make investments, make loans and advances, transact certain asset sales, engage in mergers, acquisitions, consolidations, liquidations and dissolutions, pay dividends or make other payments in respect of equity interests and other restricted payments, engage in certain transactions with affiliates, limit capital expenditures and make prepayments, redemptions and repurchases of other indebtedness.
14
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
After giving effect to the Third Amendment and Fifth Amendment (as defined below), the total amount committed under the revolving line of credit was reduced to $75 million and $170 million of the first lien term loan was repaid using proceeds from the third quarter 2015 sale of the Company’s former Encapsys business. The first lien term loan and revolving line of credit bear interest at a base rate plus 5.5% per annum or Eurodollar plus 6.5% per annum. The Credit Agreement provides for a fixed floor rate of 2.25% for base rate loans and 1.25% for Eurodollar loans.
On July 30, 2013, Appvion fixed the underlying interest rate at 2.74% on $100.0 million of the first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. Within five business days after the year-end financial statements have been filed, Appvion is required to prepay an aggregate principal amount of the term loan equal to the excess, if any, of (a) 50% of defined excess cash flow, provided that such percentage shall be reduced to (1) 25% based upon Appvion achieving a consolidated leverage ratio of less than 3.5 to 1.0 but greater than or equal to 2.5 to 1.0 and (2) 0% based upon Appvion achieving a consolidated leverage ratio of less than 2.5 to 1.0 minus (b) the aggregate amount of all prepayments of the revolving credit line which constitute permanent reductions of the revolving credit facility and all optional prepayments of the first lien term loan made during the year.
On August 3, 2015, Appvion, PDC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders party to the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment became effective simultaneously with the closing of the sale of the Encapsys business. Upon its effectiveness, the Third Amendment, among other things, (i) permitted the Company to consummate the sale of the Encapsys business and provided for the corresponding release of liens on the Encapsys business, (ii) required that not less than $165 million of the net proceeds be applied to prepay the revolving credit loans and the term loans under the Credit Agreement and provided that the remainder of the net proceeds be reinvested or otherwise applied to further prepay indebtedness in accordance with the Credit Agreement, (iii) provided for a permanent reduction of the revolving credit facility commitments from $100 million to $75 million, (iv) required the payment of a consent fee equal to 0.175% of the aggregate principal amount of loans and commitments, (v) added the pricing grid discussed above and (vi) further conformed certain terms and covenants under the Credit Agreement to account for the sale of the Encapsys business and the transactions contemplated thereby. The Third Amendment also removed the maximum consolidated leverage covenant and added (i) a maximum consolidated first lien leverage covenant that requires maintenance of a consolidated first lien leverage ratio, initially, of not more than 3.50 to 1.00, and on and after the third fiscal quarter of 2016, of not more than 3.25 to 1.00 and on and after the third fiscal quarter of 2017, of not more than 3.00 to 1.00 and (ii) a minimum consolidated fixed charge coverage covenant that requires maintenance of a consolidated fixed charge coverage ratio, initially, of not less than 0.95 to 1.00 and on and after the first fiscal quarter of 2016, of not less than 1.00 to 1.00. The Company incurred $0.9 million of debt acquisition costs related to the execution of this amendment. These costs have been deferred and will be amortized over the remaining term of the Credit Agreement.
On June 24, 2016, Appvion, PDC, and the Lending Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amended the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.
On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixed the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increased the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) required the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.
On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amended the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement. Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.
15
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Second Lien Secured Notes
On November 19, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend maturities and reduce interest expense. The refinancing included the issuance of $250 million in aggregate principal amount of second lien senior secured notes carrying an annual interest rate of 9.0%, payable semi-annually in arrears on June 1 and December 1 of each year. The notes will mature on June 1, 2020 and are unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. The notes are secured by a second-priority security interest in substantially all of the property and assets of Appvion and the debt guarantors. These liens are junior in priority to the liens on this same collateral securing the outstanding debt incurred under the Credit Agreement. The notes contain covenants customary for similar debt which restrict Appvion’s ability, as well as the ability of the guarantors, to sell or lease certain assets or merge or consolidate with or into other companies, incur additional debt or issue preferred shares, incur liens, pay dividends or make other distributions, make other restricted payments and investments, place restrictions on the ability of certain of Appvion’s subsidiaries to pay dividends or other payments to Appvion, enter into sale and leaseback transactions, amend particular agreements relating to Appvion’s transaction with its former parent Windward Prospects Ltd. and the ESOP and enter into transactions with certain affiliates.
15. FAIR VALUE MEASUREMENTS
The carrying amount (including current portions) and estimated fair value of certain of the Company’s recorded financial instruments are as follows (dollars in thousands):
|
|||||||||||||
April 2, 2017 |
December 31, 2016 |
||||||||||||
Carrying |
Fair |
Carrying |
Fair |
||||||||||
Financial Instruments |
Amount |
Value |
Amount |
Value |
|||||||||
First lien term loan |
$ |
176,864 |
$ |
171,558 |
$ |
157,572 |
$ |
151,269 | |||||
Second lien notes |
247,904 | 146,573 | 247,762 | 143,702 | |||||||||
Revolving credit facility |
14,350 | 14,350 | 31,920 | 31,920 | |||||||||
State of Ohio loans |
1,038 | 1,038 | 1,443 | 1,443 | |||||||||
Industrial development bonds |
6,000 | 6,000 | 6,000 | 6,000 | |||||||||
|
446,156 | 339,519 | 444,697 | 334,334 | |||||||||
Debt issuance costs and premiums due |
(5,326) | (6,200) | |||||||||||
$ |
440,830 |
$ |
339,519 |
$ |
438,497 |
$ |
334,334 |
The first lien term loan and the second lien notes are traded in public markets. Their fair value was determined using Level 2 inputs based on quoted market prices. The fair value of the State of Ohio loans was determined using Level 2 observable market inputs including current rates for financial instruments of the same remaining maturity and similar terms. The revolving credit facility and industrial development bonds have variable interest rates that reflect current market terms and conditions.
Due to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities were reasonable estimates of fair value as of April 2, 2017 and December 31, 2016.
16
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
16. SEGMENT INFORMATION
The Company’s reportable segments consist of carbonless papers and thermal papers. Management evaluates the performance of the segments based primarily on operating income (loss). Items excluded from the determination of segment operating income (loss) are unallocated corporate charges, net interest expense, debt modification/extinguishment expense, foreign exchange loss (gain) and other expense. The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):
|
||||||
For the Three |
For the Three |
|||||
|
Months Ended |
Months Ended |
||||
|
April 2, 2017 |
April 3, 2016 |
||||
Net sales |
||||||
Carbonless papers |
$ |
71,648 |
$ |
78,583 | ||
Thermal papers |
95,045 | 101,957 | ||||
Total |
$ |
166,693 |
$ |
180,540 | ||
Operating income (loss) |
||||||
Carbonless papers |
$ |
6,474 |
$ |
7,494 | ||
Thermal papers |
2,245 | 3,888 | ||||
|
8,719 | 11,382 | ||||
Unallocated corporate charges |
(2,162) | (1,821) | ||||
Total |
$ |
6,557 |
$ |
9,561 | ||
|
||||||
Depreciation and amortization (A) |
||||||
Carbonless papers |
$ |
3,286 |
$ |
3,395 | ||
Thermal papers |
2,967 | 3,159 | ||||
6,253 | 6,554 | |||||
Unallocated corporate charges |
97 | 101 | ||||
Total |
$ |
6,350 |
$ |
6,655 |
(A) |
Depreciation and amortization from continuing operations are allocated to the reportable segments based on the amount of activity provided by departments to the respective product lines in each reportable segment. |
17
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income by component for the three months ended April 2, 2017 are as follows (dollars in thousands):
|
|||||||||
|
|||||||||
|
Change in |
Hedging |
|||||||
|
Retiree Plans |
Activities |
Total |
||||||
Balance, December 31, 2016 |
$ |
21,186 |
$ |
(2,239) |
$ |
18,947 | |||
|
|||||||||
Other comprehensive loss before reclassifications |
— |
(163) | (163) | ||||||
Amounts recorded in accumulated other |
|||||||||
comprehensive income |
(913) | 145 | (768) | ||||||
Net other comprehensive loss |
(913) | (18) | (931) | ||||||
|
|||||||||
Balance, April 2, 2017 |
$ |
20,273 |
$ |
(2,257) |
$ |
18,016 |
The changes in accumulated other comprehensive income by component for the three months ended April 3, 2016 are as follows (dollars in thousands):
|
|||||||||
|
Change in |
Hedging |
|||||||
|
Retiree Plans |
Activities |
Total |
||||||
Balance, January 2, 2016 |
$ |
24,742 |
$ |
(3,070) |
$ |
21,672 | |||
|
|||||||||
Other comprehensive loss before reclassifications |
— |
(1,539) | (1,539) | ||||||
Amounts recorded in accumulated other |
|||||||||
comprehensive income |
(915) | 368 | (547) | ||||||
Net other comprehensive loss |
(915) | (1,171) | (2,086) | ||||||
|
|||||||||
Balance, April 3, 2016 |
$ |
23,827 |
$ |
(4,241) |
$ |
19,586 |
18
PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Details about these reclassifications are as follows (dollars in thousands):
|
||||||||
|
Amount Reclassified from |
|||||||
|
Accumulated Other |
|||||||
|
Comprehensive Income |
|||||||
|
||||||||
|
Affected Line Item |
|||||||
|
For the Three |
For the Three |
in Condensed Consolidated |
|||||
Details about Accumulated |
Months Ended |
Months Ended |
Statements of |
|||||
Other Comprehensive |
April 2, |
April 3, |
Comprehensive Income |
|||||
Income Components |
2017 |
2016 |
(Loss) |
|||||
Change in retiree plans |
||||||||
Amortization of prior service credit |
$ |
913 |
$ |
915 |
(a) |
|||
|
||||||||
Hedging activities |
||||||||
Foreign exchange contracts |
$ |
221 |
$ |
22 |
Net sales |
|||
Interest rate swap |
(366) | (390) |
Interest expense |
|||||
|
$ |
(145) |
$ |
(368) | ||||
|
||||||||
Total reclassifications for the period |
$ |
768 |
$ |
547 | ||||
|
(a) |
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 8, Employee Benefits, and Note 9, Postretirement Benefit Plans other than Pension |
19
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless stated to the contrary or the context requires otherwise, all references in this report to the Company refer to Paperweight Development Corp. (“PDC” or “Paperweight”) and its 100%-owned subsidiaries. It includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”).
Overview
This discussion summarizes significant factors affecting the consolidated operating results, financial position and liquidity of PDC for the quarter ended April 2, 2017. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes. Reference should also be made to the Annual Report on Form 10-K for the year ended December 31, 2016, the Consolidated Financial Statements and related Notes included therein.
Amendments to the Credit Agreement
On January 16, 2017, Appvion, PDC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders party to the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixes the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increases the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) requires the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.
On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amends the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement. Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.
Financial Highlights
First quarter 2017 net sales of $166.7 million were $13.8 million, or 7.6%, lower than first quarter 2016 net sales of $180.5 million largely due to lower product pricing. Shipment volumes were approximately 3% lower than those for first quarter 2016. First quarter thermal papers net sales of $95.0 million were $6.9 million lower with shipment volumes down nearly 4% versus first quarter 2016. First quarter carbonless papers sales of $71.7 million were $6.9 million lower with shipment volumes approximately 2% lower than first quarter 2016.
First quarter 2017 gross profit of $30.8 million was $5.4 million lower than first quarter 2016 and gross margin decreased to 18.5% from a 20.1% margin for the same period last year. The decrease was largely due to lower volume and pricing in both carbonless papers and thermal papers segments, and unfavorable product mix in carbonless papers that were somewhat offset by lower raw material costs and continued execution of cost-savings initiatives. First quarter selling, general and administrative (“SG&A”) expenses were $2.4 million, or 9.0%, lower than the first quarter of 2016 primarily due to lower distribution costs and general department expenses.
During the first quarter of 2017, the Company recorded a net loss of $5.4 million compared to a net loss of $0.4 million in first quarter 2016. Current quarter results include a $1.5 million increase in interest expense as a result of the increased interest rate related to the Fifth Amendment to the Credit Agreement as described above.
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Comparison of Unaudited Results of Operations for the Quarters Ended April 2, 2017 and April 3, 2016
|
||||||||||||
For the Year Ended |
||||||||||||
April 2, |
April 3, |
Increase |
||||||||||
2017 |
2016 |
(Decrease) |
||||||||||
(dollars in millions) |
||||||||||||
Net sales |
$ |
166.7 |
$ |
180.5 | (7.6) |
% |
||||||
Cost of sales |
135.9 | 144.3 | (5.8) |
% |
||||||||
Gross profit |
30.8 | 36.2 | (14.9) |
% |
||||||||
Selling, general and administrative expenses |
24.2 | 26.6 | (9.0) |
% |
||||||||
Operating income (loss) |
6.6 | 9.6 | (31.3) |
% |
||||||||
Interest expense, net |
11.7 | 10.2 | 14.7 |
% |
||||||||
Other non-operating expense, net |
0.2 | (0.3) | (166.7) |
% |
||||||||
Income (loss) before income taxes |
(5.3) | (0.3) | (1,666.7) |
% |
||||||||
Provision for income taxes |
0.1 | 0.1 |
— |
% |
||||||||
|
||||||||||||
Net income (loss) |
(5.4) | (0.4) | (1,250.0) |
% |
||||||||
|
||||||||||||
Comparison as a percentage of net sales |
||||||||||||
Cost of sales |
81.5 |
% |
79.9 |
% |
160 |
bps |
||||||
Gross margin |
18.5 |
% |
20.1 |
% |
(160) |
bps |
||||||
Selling, general and administrative expenses |
14.5 |
% |
14.7 |
% |
(20) |
bps |
||||||
Operating margin |
4.0 |
% |
5.4 |
% |
(140) |
bps |
||||||
Income (loss) before income taxes |
(3.2) |
% |
(0.2) |
% |
(300) |
bps |
||||||
Net income (loss) |
(3.2) |
% |
(0.2) |
% |
(300) |
bps |
||||||
|
First quarter 2017 operating income of $6.6 million compared to first quarter 2016 operating income of $9.6 million. The year-over-year operating income variance was the result of the following (dollars in millions):
Operating Income - Q1 2016 |
$ |
9.6 |
Lower shipment volumes |
(1.7) | |
Unfavorable price and mix |
(10.0) | |
Favorable manufacturing costs |
6.5 | |
Lower SG&A and other |
2.2 | |
Operating Income - Q1 2017 |
$ |
6.6 |
|
21
Business Segment Discussion
Thermal Papers
· |
First quarter 2017 thermal papers net sales totaled $95.0 million, a decrease of $6.9 million, or 6.8%, compared to first quarter 2016 with shipment volumes down nearly 4% compared to first quarter 2016. Current quarter shipments of tag, label and entertainment papers (“TLE”) were approximately 1% lower than in first quarter 2016 and shipments of receipt paper declined approximately 7% compared to the same period last year. The thermal segment did see a slight improvement to product mix; however, this was offset by lower prices for receipt paper. |
· |
The thermal papers segment recorded first quarter 2017 operating income of $2.2 million compared to first quarter 2016 operating income of $3.9 million. The year-over-year operating income variance was the result of the following (dollars in millions): |
Thermal Operating Income - Q1 2016 |
$ |
3.9 |
Lower shipment volumes |
(0.7) | |
Unfavorable price and mix |
(4.8) | |
Favorable manufacturing costs |
2.8 | |
Lower SG&A and other |
1.0 | |
Thermal Operating Income - Q1 2017 |
$ |
2.2 |
|
Carbonless Papers
· |
First quarter 2017 carbonless net sales totaled $71.7 million, a decrease of $6.9 million, or 8.8%, compared to the same period of the prior year. Current quarter shipment volumes were approximately 2% lower than first quarter 2016, and although such shipment volumes were up nearly 9% from the fourth quarter 2016. Despite overall volume declines in this segment, specialty papers had volume growth of more than 38% when comparing first quarter 2017 to the same period last year, and volume growth of nearly 13% over the fourth quarter 2016. |
· |
First quarter 2017 carbonless papers recorded operating income of $6.5 million compared to operating income of $7.5 million reported in first quarter 2016. The year-over-year operating income variance was the result of the following (dollars in millions): |
Carbonless Operating Income - Q1 2016 |
$ |
7.5 |
Lower shipment volumes |
(1.0) | |
Unfavorable price and mix |
(5.2) | |
Favorable manufacturing costs |
3.7 | |
Lower SG&A and other |
1.5 | |
Carbonless Operating Income - Q1 2017 |
$ |
6.5 |
|
Unallocated Corporate Charges
· |
Unallocated corporate charges totaled $2.1 million in first quarter 2017 and $1.8 million in first quarter 2016. |
22
Liquidity and Capital Resources
Overview. The Company’s primary sources of liquidity and capital resources are cash provided by operations and credit available under its revolving credit facility. The Company expects cash on hand, internally-generated cash flow and available credit from its revolving credit facility will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service, other contractual obligations and capital expenditures). At April 2, 2017, the Company had $1.5 million of cash and, in accordance with its debt covenants, approximately $12.6 million of unused borrowing capacity under its revolving credit facility. At that date, the revolving credit facility had an outstanding balance of $14.4 million compared to $31.9 million at year-end 2016. Approximately $14.3 million of the revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder. Net debt (total debt less cash) increased to $439.4 million from $432.1 million at year-end 2016.
Management reported that the Company was in compliance with all debt covenants at April 2, 2017, and is forecasted to remain in compliance for the next 12 months. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results and operating cash flows. The Company’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any such amendments to or waivers of the covenants. In the event of noncompliance with debt covenants, if the lenders will not amend or waive the Company’s non-compliance with the covenants, the outstanding debt would become due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing in such circumstances. Failure to secure alternative financing would have a material adverse impact on the Company.
Cash Flows from Operating Activities. Net cash used by operating activities during the first three months of 2017 was $7.6 million compared to $5.9 million of net cash used during the same period in 2016. In addition to a net loss of $5.4 million, noncash charges totaling $7.8 million were recorded. Noncash charges included $6.4 million of depreciation and amortization of intangible assets, $0.1 million of foreign exchange gain, $0.5 million of noncash employer matching contributions to the KSOP and $1.0 million of other noncash charges. During the first three months of 2017, working capital increased by $10.0 million. This was largely the result of a $4.8 million increase in inventory, a $0.1 million increase in accounts receivable, a $3.6 million decrease in accounts payable and other accrued liabilities, and a net working capital increase of $1.5 million in other current assets and liabilities.
Cash Flows from Investing Activities. During the first three months of 2017, $1.2 million of cash was used for the acquisition of property, plant and equipment, compared to $1.8 million during this same period last year.
Cash Flows from Financing Activities. Net cash provided by financing activities during the first three months of 2017 was $3.8 million compared to $8.1 million during the same period of the prior year. During the current period, the Company issued additional term loans with the Sixth Amendment to the Credit Agreement, providing $19.2 million of net proceeds. The proceeds were used to pay down the revolving credit facility, resulting in a net reduction of the line of credit of $17.6 million for the first three months of 2017. Also during the first three months of 2017, the Company made mandatory debt repayments of $0.4 million on its State of Ohio loans. In addition, cash overdrafts increased $2.6 million during the first three months of 2017. Cash overdrafts represent short-term obligations, in excess of deposits on hand, which have not yet cleared through the banking system. Fluctuations in the balance are a function of quarter-end payment patterns and the speed with which the payees deposit the checks.
Pursuant to its terms, the three-year accounts receivable securitization program was scheduled to terminate at maturity in June 2017. However, on May 11, 2017, the Company entered into an extension agreement with respect to this facility which extends the facility through August 4, 2017 and reduced the facility from $30.0 million to $25.0 million. As a result, the outstanding balance under this facility will be coming due at the extended maturity date of August 4, 2017. While the Company does not currently have the liquid funds necessary to repay the amounts outstanding under the accounts receivable securitization facility at the extended maturity date, the Company is currently in negotiations with respect to a potential refinancing of the facility and management believes that it will be able to refinance the facility (or otherwise satisfy its repayment obligations with respect to such facility through a combination of cash on hand, borrowings under its revolving credit facility and other refinancing activities) prior to the extended maturity date.
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Item 3—Quantitative and Qualitative Disclosures about Market Risk
For information regarding quantitative and qualitative disclosures about market risk, see the Annual Report on Form 10‑K for the year ended December 31, 2016. There have been no material changes in the quantitative or qualitative exposure to market risk from that described in the Form 10‑K.
Item 4—Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely discussion regarding required disclosure. Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective as of April 2, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the first quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. The words “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seeks” or similar expressions are intended to identify forward-looking statements. All statements in this report other than statements of historical fact, including statements which address the Company’s strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that it expects or anticipates will occur, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside the Company’s control that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, the factors listed under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2016, as well as in the Quarterly Report on Form 10-Q for the current quarter ended April 2, 2017, which factors are incorporated herein by reference and as updated above. Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, undue reliance should not be placed on the forward-looking statements. The Company disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
25
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31.1 |
Certification of Kevin M. Gilligan, President, Chief Executive Officer and a Director of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended. |
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31.2 |
Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended. |
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32.1 |
Certification of Kevin M. Gilligan, President, Chief Executive Officer and a Director of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350. |
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|
32.2
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Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350. |
101.ins |
XBRL Instance Document |
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101.sch |
XBRL Taxonomy Extension Schema |
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101.cal |
XBRL Taxonomy Extension Calculation Linkbase |
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101.def |
XBRL Taxonomy Extension Definition Linkbase |
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101.lab |
Taxonomy Extension Label Linkbase |
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101.pre |
Taxonomy Extension Presentation Linkbase |
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
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|
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PAPERWEIGHT DEVELOPMENT CORP. (Registrant) |
|
|
Date: May 12, 2017 |
/s/ Thomas J. Ferree |
|
Thomas J. Ferree |
|
Senior Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer) |
27