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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
( ) 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 0-08791
PVC CONTAINER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2616435
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Industrial Way West, Eatontown, New Jersey 07724
----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (732) 542-0060
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 16, 2005
- --------------------- ---------------------------
Common $.01 par value 7,042,393 shares
CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2005 and June 30, 2004 (Unaudited) 3
Consolidated Statements of Operations - Three and Nine Months Ended
March 31, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 2005 and 2004 (Unaudited) 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-21
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits 22
Signatures 23
Exhibits 24-26
Page 2
Part I Financial Information
Item 1: Financial Statements
PVC Container Corporation
Consolidated Balance Sheets
(Unaudited)
March June
31, 2005 30, 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 480,179 $ 365,820
Accounts receivable, net 13,754,542 14,901,390
Inventories 13,943,646 12,461,663
Prepaid expenses and other current assets 1,171,036 1,291,177
Deferred income taxes 3,385,088 1,286,803
Net assets held for disposition 1,735,891 --
------------ ------------
Total current assets 34,470,382 30,306,853
Properties, plant and equipment at cost, net 22,785,641 28,609,378
Goodwill, net of accumulated amortization -- 3,296,298
Other assets 87,794 176,692
------------ ------------
$ 57,343,817 62,389,221
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,421,437 $ 10,207,342
Accrued expenses 2,710,752 2,373,488
Current portion of long-term debt 2,858,188 3,929,649
------------ ------------
Total current liabilities 14,990,377 16,510,479
Long-term debt 26,036,461 24,077,230
Interest rate swap 50,164 198,278
Deferred income taxes 3,165,773 2,628,292
Other liabilities 100,000 --
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000
shares, none issued -- --
Common stock, par value $.01, authorized 10,000,000
shares, 7,044,655 shares issued and outstanding as of
March 31, 2005 and June 30, 2004 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 9,154,007 15,215,294
Accumulated other comprehensive loss (29,597) (116,984)
Treasury stock, at cost (2,262 shares at March 31,
2005 and June 30, 2004) (4,795) (4,795)
------------ ------------
Total stockholders' equity 13,001,042 18,974,942
------------ ------------
$ 57,343,817 $ 62,389,221
============ ============
See accompanying notes.
Page 3
PVC Container Corporation
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
March 31 March 31
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 22,414,988 $ 22,655,555 $ 61,976,990 $ 57,852,585
Cost and expenses:
Cost of goods sold (exclusive of
depreciation and amortization expense
shown separately below) 18,231,540 17,876,219 50,863,577 46,265,623
Selling, general and administrative expenses 2,397,344 2,539,707 8,132,441 6,791,689
Depreciation and amortization 1,325,894 1,519,422 3,896,374 4,405,970
Goodwill impairment charges -- -- 3,296,299 --
Provision for restructuring and other exit 50,926 185,505 623,825 461,990
activities
Asset impairment 3,727 -- 452,342 --
------------ ------------ ------------ ------------
22,009,431 22,120,853 67,264,858 57,925,272
------------ ------------ ------------ ------------
Income (loss) from operations 405,557 534,702 (5,287,868) (72,687)
Other income (expense):
Interest expense (450,459) (433,973) (1,286,679) (1,365,410)
Other income 36,700 -- 79,700 144,500
------------ ------------ ------------ ------------
(413,759) (433,973) (1,206,979) (1,220,910)
------------ ------------ ------------ ------------
(Loss) Income before benefit (provision) for (8,202) 100,729 (6,494,847) (1,293,597)
income taxes
Benefit (provision) for income taxes 3,981 (42,515) 1,099,860 491,570
------------ ------------ ------------ ------------
(Loss) income from continuing operations (4,221) 58,214 (5,394,987) (802,027)
Discontinued operations
(Loss) income from discontinued plastic
compounding segment (including fixed asset
impairment charge of, $0, $733,081, $0, (422,944) 441,485 (802,095) 1,076,453
respectively)
Benefit (provision) for income taxes 204,620 (186,307) 135,795 (409,052)
------------ ------------ ------------ ------------
(Loss) income from discontinued operations (218,324) 255,178 (666,300) 667,401
Net (loss) income from operations $ (222,545) $ 313,392 $ (6,061,287) $ (134,626)
============ ============ ============ ============
(Loss) income per share (basic and diluted) $ (0.03) $ 0.04 $ (0.86) $ (0.02)
============ ============ ============ ============
See accompanying notes.
Page 4
PVC Container Corporation
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
MARCH 31
2005 2004
----------- -----------
CASH FLOWS FROM CONTINUED AND DISCONTINUED OPERATING ACTIVITIES
Net loss $(6,061,287) $ (134,626)
Adjustments to reconcile net loss to net cash provided by
continued and discontinued
operating activities:
Depreciation and amortization 4,246,024 4,727,927
Goodwill impairment 3,296,299 --
Asset impairment 1,185,423 --
Amortization of deferred financing costs 134,868 135,700
Deferred income taxes (1,621,531) (302,074)
Gain on sale of equipment (80,550) (144,500)
Insurance recovery (30,000) --
Loss on sale of building -- 122,322
Changes in assets and liabilities:
Accounts receivable, net of allowances 1,146,848 (1,384,400)
Inventories (1,481,983) (2,721,065)
Prepaid expenses and other current assets 120,141 (287,673)
Other assets 4,029 13,272
Accounts payable and accrued expenses (348,641) (442,109)
----------- -----------
Net cash provided (used) by continued and discontinued 509,640 (417,226)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,039,877) (3,722,012)
Proceeds from sale of equipment 80,550 144,500
Proceeds from sale of building 696,278 175,587
Insurance recoveries 30,000 --
----------- -----------
Net cash used in investing activities (1,233,049) (3,401,925)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from revolving credit line 3,243,097 3,606,415
Payments of indebtedness (2,738,069) (2,775,440)
Proceeds from long-term debt 382,740 2,531,818
Deferred financing costs (50,000) (20,000)
----------- -----------
Net cash provided by financing activities 837,768 3,342,793
----------- -----------
Net increase (decrease) in cash and cash equivalents 114,359 (476,358)
Cash and cash equivalents at beginning of period 365,820 673,055
----------- -----------
Cash and cash equivalents at end of period $ 480,179 $ 196,697
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,306,022 $ 1,436,155
=========== ===========
Income taxes paid $ 32,625 $ 316,617
=========== ===========
See accompanying notes.
Page 5
Note 1 Description of Business
General
PVC Container Corporation (the "Company") was incorporated in Delaware in 1968.
The Company's major business activity is manufacturing and selling a line of
plastic bottles made from polyvinyl chloride ("PVC") compounds, high-density
polyethylene ("HDPE"), and polyethylene terephthalate ("PET") resins. The
Company sells these bottles through Novapak Corporation, which is a wholly-owned
subsidiary. Another wholly-owned subsidiary, Airopak Corporation, produces
bottles that are fluorinated to improve the chemical resistance and barrier
properties. The Company's products are used primarily to package cosmetics,
toiletries, foods, household chemicals, and lawn and garden and industrial
chemical products.
In addition to plastic bottles, the Company produces and sells PVC compounds
through its wholly-owned subsidiary, Novatec Plastics Corporation. The Company
uses these compounds and sells them to other plastic bottle manufacturers whose
products compete with those the Company produces.
During the last several years, the Company has endeavored to diversify its PVC
compound business. The Company has developed and begun to sell several types of
specialty PVC compounds for non-bottle applications, including extruded profiles
and accessories, furniture, molding and other indoor fixtures, and a variety of
injection molded electrical and electronic housings.
Note 2 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial reporting, pursuant to the rules and regulations of the
Securities and Exchange Commission. In management's opinion, the accompanying
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
financial position as of March 31, 2005, and the results of operations and cash
flows for the three-and nine-month periods ended March 31, 2005 and 2004.
Operating results for the three-and, nine- month periods ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2005.
The accompanying consolidated financial statements include the accounts of PVC
Container Corporation and its wholly-owned subsidiaries: Novapak Corporation;
Novatec Plastics Corporation; Marpac Industries, Inc.; Airopak Corporation; and
PVC Container International Sales Corporation, a foreign sales company that was
dissolved effective June 29, 2004. All inter-company accounts have been
eliminated. While the Company believes the disclosures presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the financial statements and the notes
included in the Company's annual report on Form 10-K for the fiscal year ended
June 30, 2004.
Page 6
Discontinued Operations
In May 2005 the Company signed a non-binding asset purchase agreement with a
third party to sell certain assets that are a component of the Compound segment.
Due diligence is not completed and the transaction is expected to close in the
fourth quarter. All of the fixed assets of Compound segment have been classified
as assets held for sale. Management does not anticipate any significant changes
to the asset purchase agreement, or expect that the asset purchase agreement
will be withdrawn. As a result, the Compound segment has been reflected in the
Company's financial statements as a discontinued operation for all periods
presented, unless otherwise indicated. Amounts provided in these notes to the
consolidated financial statements may pertain to both continuing and
discontinued operations. Sales for this discontinued segment see Note 7.
Diluted earnings per share are based on the average number of common shares
outstanding during each period, assuming exercise of all stock options having
exercise prices less than the average market price of the common stock using the
treasury stock method. The weighted average number of shares of common stock
used in computing basic and diluted loss per share were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Weighed average common shares outstanding used
to calculate basic loss per share 7,042,393 7,042,393 7,042,393 7,042,393
Net effect of dilutive securities based upon the
treasury stock method using an average market price -- -- -- --
Weighed average common and dilutive securities
outstanding used to calculate diluted loss per share 7,042,393 7,042,393 7,042,393 7,042,393
========= ========= ========= =========
The Company has excluded all outstanding stock options because they would have
had an anti-dilutive effect.
Note 3 Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards 123 (SFAS 123), the
Company has elected to follow the intrinsic value method under Accounting
Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations in accounting for its employee stock option
plans. Pursuant to APB 25, the Company does not recognize compensation expense
at the time an option is granted as long as the exercise price of the option is
fixed and equals or exceeds the fair market value of the underlying common stock
on the date of grant.
As required by the disclosure provisions of SFAS 123, the following table
illustrates the effect on net loss and net loss per common share as if the
Company had applied the fair value method to measure stock-based compensation.
Page 7
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ------------- -----------
Net (loss), income as reported $ (222,545) $ 313,392 $ (6,061,287) $ (134,625)
Add: Stock-based compensation
included in reported net loss,
net of tax
Deduct: Stock-based compensation
expense under fair value
reporting, net of tax $ 40,207 $ (6,507) $ 45,162 $ (19,521)
----------- ----------- ------------- -----------
Pro forma net (loss), income $ (182,338) $ 306,885 $ (6,016,125) $ (154,146)
=========== =========== ============= ===========
Loss per share:
Net loss, as reported:
Basic $ (0.03) $ 0.04 $ (0.85) $ (0.02)
Diluted $ (0.03) $ 0.04 $ (0.85) $ (0.02)
Pro forma net loss:
Basic $ (0.03) $ 0.04 $ (0.85) $ (0.02)
Diluted $ (0.03) $ 0.04 $ (0.85) $ (0.02)
Note 4 Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board issued its final
standard on accounting for share-based payments (SBP), FASB Statement No. 123R
(revised 2004), which requires companies to expense the value of employee stock
options and similar awards. The standard is effective for public companies for
interim and annual periods beginning after July 1, 2005, and applies to all
outstanding and unvested SBP awards. Management has been assessing the impact of
this standard. The Company plans to measure the fair value of the stock options
using the Black-Scholes-Merton option pricing model. Management does not expect
the adoption of FASB Statement No. 123R to have a significant impact on the
financial position or results of operation of the Company.
Note 5 Inventories
Inventories consist of:
MARCH JUNE
31, 2005 30, 2004
------------ ------------
Raw materials $ 5,610,885 $ 4,980,080
Finished goods 7,884,274 6,742,899
Reserves (1,016,060) (876,888)
------------ ------------
Total FIFO inventories 12,479,099 10,846,091
Molds for resale, in production 795,541 945,212
Supplies 669,006 670,360
------------ ------------
$ 13,943,646 $ 12,461,663
============ ============
Note 6 PNC Bank Agreement and Equipment Financing
Page 8
The Company entered into a $43,750,000 senior secured credit facility ("PNC Bank
Agreement") with PNC Bank in August 2000. The PNC Bank Agreement was a five
year, $25,000,000 senior revolving credit facility; a five year, $12,183,000
senior term loan; a five year, $4,192,000 standby letter of credit; and a
$2,000,000 capital expenditure line. On November 15, 2004, the PNC Bank
Agreement was amended to extend the maturity of each of these four components
until 2007, and to make specific changes to the credit facilities. The total
senior secured credit facility was reduced to $28,532,000 (which was the
outstanding facility amount at the extension date), consisting of the following:
a senior revolving credit facility of $18,000,000; a senior term loan of
$5,686,000; a standby letter of credit of $3,846,000; and a capital expenditure
line of $1,000,000. At March 31, 2005, the Company was in compliance with all
applicable debt covenants.
The term loan bears interest at LIBOR plus 300 basis points, though the Company
entered into interest-rate swap agreements to effectively convert a portion of
the floating term loan debt interest to a fixed rate. The revolving credit
facility bears interest at the prime rate. The $1 million capital expenditure
line of credit bears interest at LIBOR plus 300 basis points. Borrowings under
the PNC Bank Agreement totaled approximately $16.9 million at March 31, 2005.
Other debt as at March 31, 2005, in the amount of $12.0 million represents
equipment financing with various other institutions.
Note 7 Segments
The Company has two reportable segments identified by product type: Plastic
Containers and Compound. The Plastic Containers segment manufactures custom
designed PET, HDPE, and PVC containers mainly for cosmetics, toiletries, foods,
household chemicals, and lawn and garden and industrial chemical products. The
Compound segment manufactures PVC compound for use by the Company and sale to
external customers.
The reportable segments are managed separately because they use different
manufacturing processes and operate in different strategic markets. The Company
evaluates each segment's performance based on net income (loss). The accounting
policies for the reportable segments are the same as those for the Company.
Inter-segment sales and transfers are recorded at market prices.
Information on segments and a reconciliation to consolidated totals are as
follows:
Page 9
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2005 2004
------------------ -----------------
Net revenues:
Continuing revenues from
external customers Compound $ 0 $ 0
Plastic containers 61,976,990 57,852,585
------------ ------------
Total consolidated net revenues $ 61,976,990 $ 57,852,585
============ ============
Not included in the above tables as revenues
from discontinued operations as follows:
Company total $ 15,494,730 $ 15,874,608
Inter segment revenue Compound (4,072,071) (4,881,348)
------------ ------------
Revenue from external Customers $ 11,422,659 $ 10,993,260
============ ============
Net (loss) income:
Discontinued operations-Compound $ (666,300) $ 667,401
Continued operations-Compound 0 0
Plastic containers (5,394,987) (802,027)
------------ ------------
Total consolidated net loss $ (6,061,287)(1) $ (134,626)
============ ============
(1) Includes $4.5 million of impairment charges for goodwill and other long-term
assets.
March 31, 2005 June 30, 2004
Total assets:
Assets held for disposition $ 1,735,891 $ 0
Compound 3,366,114 6,058,541
Plastic containers 52,241,812 56,330,680
------------- ------------
Total consolidated assets $ 57,343,817 $ 62,389,221
============= ============
Note 8 Comprehensive Loss
The following table sets forth comprehensive loss for the three and nine-month
periods ended March 31, 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2005 2004 2005 2004
------------ ------------ ------------ ----------
Net loss $ (222,545) $ 313,392 $ (6,061,287) $ (134,626)
Unrealized gain on interest
rate swap, net of taxes 25,598 23,452 87,387 130,636
------------ ------------ ------------ ----------
Comprehensive loss $ (196,947) $ 336,844 $ (5,973,900) $ (3,990)
============ ============ ============ ==========
Note 9 Provision for Restructuring
Page 10
In the second fiscal quarter 2005, the Company recorded a $573,000 pre-tax
charge for restructuring to compensate for the escalating cost of raw materials
and the Company's inability, for competitive reasons, to pass all of these
increases on to customers. The Company has begun a cost reduction initiative,
which management expects will reduce payroll and benefits by nearly $1,700,000
annually. This initiative is expected to improve operating efficiency and
position the Company to take advantage of new business opportunities.
In the third fiscal quarter 2005, the Company recorded an additional $51,000
pre-tax charge for restructuring, bringing the year-to-date amount to $624,000
all of which was paid as of March 31, 2005. The Company is in the final stages
of the cost reduction initiative discussed above.
The Company has begun to implement work force reductions and will continue to do
so in stages through June 30, 2005. These reductions will be accomplished
through both involuntary and voluntary terminations. The voluntary program was
offered to all employees, but the Company retained the right to reject offers to
resign on a case-by-case basis.
Beginning in the second fiscal quarter 2005 and continuing through the fourth
fiscal quarter 2005, management estimates the Company will recognize total
charges of up to $700,000, including severance and related benefit costs
associated with work force reductions. Management expects the Company to
eliminate 29 salaried positions through the end of the fiscal year ending June
30, 2005. As of March 31, 2005, 25 of these positions have been eliminated and
the employees holding those positions are no longer with the Company.
During the nine months ended March 31, 2004, the Company incurred total
restructuring costs of $340,000, all of which was paid through March 31, 2004.
Approximately $116,000 of that amount, which includes $43,000 for severance and
other personnel related costs for 38 employees and $73,000 for equipment
relocation and other transfer costs, was incurred and recognized during the
quarter ended September 30, 2003. During the quarter ended December 31, 2003,
the Company continued the restructuring and recorded $160,000, all of which has
been paid. This amount included $130,000 for severance and other personnel costs
and $30,000 for equipment relocation and other transfer costs. During the
quarter ended March 31, 2004, the Company continued the restructuring and
recorded $64,000 for the period, all of which has been paid. This amount related
to severance and other personnel costs. These costs are reflected in the Plastic
Containers segment of our business. In addition, the Plastic Containers segment
experienced manufacturing inefficiencies related to the transfer of operations
from Kingston to Philmont. These additional costs are reflected in cost of goods
sold.
Note 10 Pension
Page 11
The following table presents the components of net periodic benefit cost for
pension benefits for the three and nine-month periods ended March 31, 2005:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- ---------
Pension benefits
Service cost with interest to the
end of the quarter $ 2,434 $ 1,661 $ 7,292 $ 4,938
Interest cost 14,878 15,661 44,954 46,992
Expected return on plan assets (21,104) (21,303) (63,469) (63,726)
Amortization of transition
obligation (asset) 744 750 2,266 2,268
Amortization of prior service
cost (gain) 413 416 1,257 1,258
Amortization of experience loss
(gain) 1,911 2,397 5,819 7,245
-------- -------- -------- ---------
Net periodic benefits cost $ (724) $ (418) $ (1,881) $ (1,025)
======== ======== ======== =========
The Company made a minimum required contribution of $8,662 during the nine
months ended March 31, 2005.
Note 11 Impairment of Goodwill
During the second quarter of fiscal 2005, the Company's New York extrusion blow
molding facility experienced unexpected and significant reductions in gross
margin and declines in revenue, primarily because the Company lost several
customer contracts and was unable to successfully pass on rising resin prices to
customers. Moreover, unfavorable product mix had a negative effect on
operations, and certain cost containment and cost reduction initiatives at this
facility did not have the expected impact on operating performance. Management's
forecast of future cash flows for the New York operation was substantially lower
than previous forecasts. Because of these impairment indicators, the Company
performed an interim test for goodwill impairment using the discounted cash flow
evaluation approach. That test showed that the goodwill was impaired,
necessitating a charge of $3.3 million for the full carrying value of goodwill.
This charge is presented in the "goodwill impairment charges" line item in the
Company's consolidated statement of operations for the quarter ended December
31, 2004.
Note 12 Income Taxes
The effective income tax rate changed from a provision of 42.2% to a benefit of
48.3% for the three month period ended March 31, 2004 and 2005 respectfully. The
effective income tax rate changed from a provision of 38.9% to a benefit of
16.9% for the nine month period ended March 31, 2004 and 2005 respectively. This
change in the tax effective rate is due to the tax benefits received through the
utilization of net operating losses, offset by non-deductible permanent charges
for impairment of goodwill.
Note 13 Other
During the first fiscal quarter 2005, the Company recorded a charge of $100,000
related to lifetime medical benefits for the retiring Chief Executive Officer
and his spouse under the terms of his severance agreement.
The Company entered into a $710,000 severance agreement with the retiring Chief
Executive Officer; $355,000 has been paid pursuant to the agreement as
Page 12
of March 31, 2005. The Company recorded a severance costs of $177,500 in the
quarter ended March 31, 2005, and will record an equal charge in the next fiscal
quarter to coincide with the additional $355,000 payable on June 29, 2005.
The charges relating to lifetime medical benefits and executive severance costs
are reflected in selling, general and administrative expenses.
Actuary and liability balances related to the severance charges for the nine
months ended March 31, 2005 were as follows:
Charged to
Costs and
Expenses For Amount
June 30, 2004 Nine Months Paid March 31, 2005
Severance $ -- $532,500 $355,000 $177,500
Lifetime medical $ -- $100,000 $ -- $100,000
----- -------- -------- --------
$ -- $632,500 $355,000 $277,500
===== ======== ======== ========
Note 14 Net Assets Held For Disposition
The Company had an asset held for sale in the amount of $700,000 (selling price
of $750,000 less disposal costs) in the Plastic Container segment.
The Kingston, New York manufacturing facility was classified in net assets held
for disposition at December 31, 2004. During the second quarter of fiscal year
2005, the Company recorded a $450,000 pre-tax charge to operations for asset
impairment related to the expected loss on the sale of that facility. The
facility was formally sold on March 14, 2005 pursuant to a contract executed in
January 2005. An additional impairment charge in the amount of $4,000 was
incurred during the third quarter of fiscal year 2005. Total impairment charges
of $453,000 were recorded as a pre-tax charge to operations.
The Company has assets held for sale with a recorded value of $1,736,000,
consisting of building and land in the amount of $1,111,000, and net value of
machinery and equipment with a net value of $625,000. During the third fiscal
quarter 2005, the Company recorded a $733,000 pre-tax charge to operations for
asset impairment relating to the expected loss on the sale of machinery and
equipment located at the Eatontown, New Jersey manufacturing facility. The
Company has classified this facility (part of the Compound segment) in net
assets held for disposition at March 31, 2005. In May the Company signed a
non-binding asset purchase agreement with a third party to sell the equipment
for approximately $625,000, which is below book value.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information and analysis of our results of
operations for the three and nine months ended March 31, 2005, and 2004, and our
liquidity and capital resources. This discussion should be read in conjunction
with our consolidated financial statements included elsewhere in this report.
OVERVIEW
Page 13
PVC Container Corporation is a major producer of plastic containers for the
packaging industry. We operate several wholly-owned subsidiaries that
manufacture and sell general line plastic bottles and specialty plastic
containers and supply PVC compounds and specialty plastic alloys in the United
States. Our plastic bottles are sold primarily to manufacturers and distributors
of personal care products, food, household chemicals, and lawn and garden and
industrial chemical products. PVC compounds are used in our own operations or
sold to other plastic manufacturers.
CRITICAL ACCOUNTING POLICIES
Several of our accounting policies involve significant judgments and
uncertainties. Four policies have the potential to significantly affect our
results of operations and financial position:
For impairment analysis, we measure the present value of future cash flows
against the carrying value of the long-lived asset.
For accounts receivable, we estimate the net collectibility, considering
both historical and anticipated trends of trade discounts and allowances
and the possibility of non-collection due to the financial position of our
customers.
For inventory, we estimate the volume of goods that we will not be able to
sell in the normal course of business and write down the value of those
goods to the recovery value expected to be realized through off-price
channels.
Our income tax policy records the estimated future tax effects of
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying consolidated balance sheets, as well as
operating loss carry forwards. We follow very specific guidelines
regarding the recoverability of any tax assets recorded on the balance
sheet and provide any necessary allowances as required.
Historically, actual results in these areas have not been materially different
than our estimates, and we do not anticipate that our estimates and assumptions
will materially change in the future. However, if we incorrectly anticipate
trends or unexpected events occur, our results of operations could be materially
affected.
OPERATING PERFORMANCE
Page 14
In the discussion of the Company's results of operations that follows, the
Company presents EBITDA, which is earnings before interest, taxes, depreciation,
and amortization. The Company believes that the presentation of EBITDA provides
useful information to investors because management uses EBITDA to assess
operating performance. In addition, management believes that EBITDA is a
measurement widely used in the Company's industry, so we provide this
information to allow investors to analyze our performance relative to our
competitors. However, EBITDA is not computed in accordance with generally
accepted accounting principles and should not be considered in isolation or as a
substitute for any measure of performance that is determined in accordance with
generally accepted accounting principles. EBITDA may not be comparable to
similarly titled measures of other companies. The following table provides a
reconciliation from net loss to EBITDA.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
----------------------- ------------------------
2005 2004 2005 2004
---------- ---------- ----------- ----------
Net (loss) income as reported $ (222,545) 313,392 $(6,061,287) $ (134,626)
Add back:
(Benefit) for income taxes (208,601) 228,822 (1,235,655) (82,518)
Interest Expense (net) 475,758 458,304 1,355,939 1,435,351
Depreciation & Amortization 1,436,913 1,630,441 4,246,024 4,727,927
---------- ---------- ----------- ----------
EBITDA $1,481,525 $2,630,959 $(1,694,979) $5,946,134
========== ========== =========== ==========
RESULTS OF OPERATIONS
Net sales for the three-month period ended March 31, 2005, decreased by .1% to
$22,415,000, compared to $22,656,000, for the three-month period ended March 31,
2004. For the nine-month period ended March 31, 2005, sales increased by 7.1% to
$61,977,000, compared to $57,853,000 for the nine-month period ended March 31,
2004.
The decrease in net sales for the three-month period reflects relatively flat
demand for our general line HDPE and PVC extrusion blow bottle sales volume.
However, our PET bottle sales reflected a 21.4% growth as compared to the same
period a year ago. Sales for the Company's specialty bottle group were
substantially the same as compared to the three-month period ended March 31,
2004.
The increase in sales for the nine-month period ended March 31, 2005, reflects a
27.0% growth in PET bottle sales; the Company continues to expand its market
share in this line of business. The Company's specialty bottle group experienced
a 9.1% sales increase during the nine-month period as compared to the same
periods a year ago. Our general line HDPE and PVC extrusion blow bottle sales
volume decreased by 5.1% during the nine-month period ended March 31, 2005,
reflecting the Company's strategic decision to emphasize growth in our PET
bottle sales and its specialty bottle business.
Sales increases during the nine-month period ended March, 31, 2005 were
partially driven by higher average selling prices resulting from the pass-
through of higher raw material costs.
Cost of goods sold for the three months ended March 31, 2005, was $18,232,000,
or 81.3% of net sales, compared to $17,876,000, or 78.9% of net
Page 15
sales, for the three months ended March 31, 2004. For the nine months ended
March 31, 2005, cost of sales was $50,864,000, or 82.1% of net sales, compared
to $46,266,000, or 80.0% of net sales, for the same period in 2004. The increase
in cost of goods sold for the three and nine-month periods was caused primarily
by increased raw material and energy costs, along with under-absorbed direct
labor and factory overhead costs. Because raw material costs are expected to
continue to increase, we are increasing our focus on cost containment,
mitigating the cost increases with our strategic sourcing initiative, reducing
our manufacturing overhead, improving manufacturing yields and labor
utilization, and improving our ability to pass on material price increases to
our customers.
Selling general and administrative ("SG&A") expenses decreased by $142,400 for
the three-month period ended March 31, 2005, over the amount recorded the same
period a year ago. For the quarter March 31, 2005, SG&A expenses were
$2,397,300, or 10.7% of net sales, compared to $2,539,700, or 11.2% of net sales
for the same quarter in 2004. This decrease is mainly due to lower salaries and
benefits costs resulting from the restructuring initiated in November 2004, and
reduced lower consulting fees.
For the nine-month period ended March 31, 2005, SG&A expenses were $8,132,400,
or 13.1% of net sales, compared to $6,791,700, or 11.7% of net sales for the
same period a year ago. This increase is mainly due to increased consulting fees
related to operational improvements, an executive severance agreement and
executive recruiting costs. We are evaluating and implementing several
initiatives designed to reduce SG&A expenses as a percentage of sales, one of
which was the cause for the restructuring charge discussed below.
Depreciation and amortization expense decreased to $1,326,000 for the three-
month period ended March 31, 2005, compared to $1,519,000 for the three months
ended March 31, 2004. For the nine-month period ended March 31, 2005,
depreciation and amortization expense were $3,896,000, compared to $4,406,000
for the nine months ended March 31, 2004. The primary cause for this decrease
during both periods was that certain manufacturing and computer assets became
fully depreciated in the current fiscal year.
During the second quarter of fiscal 2005, the Company charged to operations its
full carrying value of goodwill resulting from operations at the Company's New
York extrusion blow molding facility. This facility experienced significant and
unexpected reductions in gross margin and declines in revenue because the
Company lost several customer contracts and was unable to successfully pass on
rising compound prices to customers. Moreover, certain cost containment and cost
reduction initiatives at this facility did not have the expected impact on
operating performance. Management's forecast of future cash flows for the New
York operation was substantially lower than previous forecasts. Because of these
impairment indicators, the Company performed an interim test for goodwill
impairment using the discounted cash flow evaluation approach and determined
that the goodwill was impaired.
In the third fiscal quarter 2005, the Company recorded an additional $51,000
pre-tax charge for restructuring bringing the year-to-date amount to $624,000
Page 16
all of which was paid as of March 31, 2005. This restructuring is to compensate
for the escalating cost of raw materials and the Company's inability, for
competitive reasons, to pass all of these increases to its customers. The
Company is in the final stages of a cost reduction initiative, which it expects
will reduce payroll and benefits by nearly $1,700,000 annually. This initiative
is expected to improve operating efficiency and position the Company to take
advantage of new business opportunities.
The aforementioned work force reduction during the second and third fiscal
quarters of 2005, will continue through the fourth fiscal quarter 2005.
Management estimates the Company will recognize total charges of up to $700,000,
including severance and related benefit costs associated with work force
reductions. We expect to eliminate 29 salaried positions through the end of the
fiscal year ending June 30, 2005. As of March 31, 2005, 25 of these positions
have been eliminated, and the employees who held those positions are no longer
with the Company. Management will continue to make strategic decisions to seek
out all cost savings initiatives to attain maximum profitability.
During the nine months ended March 31, 2004, the Company incurred total
restructuring costs of $339,000, all of which was paid through March 31, 2004.
Approximately $116,000 of that amount, which includes $43,000 for severance and
other personnel related costs for 38 employees and $73,000 for equipment
relocation and other transfer costs, was incurred and recognized during the
quarter ended September 30, 2003. During the quarter ended December 31, 2003,
the Company continued the restructuring and recorded $160,000, all of which has
been paid. This amount includes $130,000 for severance and other personnel costs
and $30,000 for equipment relocation and other transfer costs. During the
quarter ended March 31, 2004, the Company continued the restructuring and
recorded $63,000 during the three months ended March 31, 2004, all of which has
been paid, for severance and other personnel costs. These costs are reflected in
the Plastic Container segment. In addition, the Plastic Container segment
experienced manufacturing inefficiencies related to the transfer of operations
from Kingston, New York to Philmont, New York. These additional costs are
reflected in cost of goods sold.
The Company had an asset held for sale with a recorded value of $700,000
(selling price of $750,000 less disposal costs) in the Plastic Container
segment. During the second quarter of fiscal year 2005, the Company recorded a
$450,000 pre-tax charge to operations for asset impairment arising from the
expected loss on the sale of its Kingston, New York manufacturing facility. The
Company classified this facility in net assets held for disposition at December
31, 2004, and in January, the Company entered into a contract for sale. The
closing date was March 14, 2005. An additional impairment charge in the amount
of $4,000 was incurred during the third quarter of fiscal year 2005. Total
impairment charge of $453,000 was recorded as a pre-tax charge to operations.
The Company has assets held for sale with a recorded value of $1,736,000
consisting of building and land in the amount of $1,111,000 and machinery and
Page 17
equipment with a net value of $625,000. During the third fiscal quarter 2005,
the Company recorded a $733,000 pre-tax charge to operations for asset
impairment relating to the expected loss on the sale of machinery and equipment
located at the Eatontown, New Jersey manufacturing facility. The Company has
classified this facility (part of the Compound segment) in net assets held for
disposition at March 31, 2005. In May the Company signed a non binding asset
purchase agreement with a third party, to sell the equipment for approximately
$625,000, which is below book value.
The effective income tax rate changed from a provision of 42.2% to a benefit of
48.3% for the three month period ended March 31, 2004 and 2005 respectfully. The
effective income tax rate changed from a provision of 38.9% t a benefit of 16.9%
for the nine month period ended March 31, 2004 and 2005 respectively. This
change in the tax effective rate is due to the tax benefits received through the
utilization of net operating losses, offset by non-deductible permanent charges
for impairment of goodwill.
In May 2005 the Company signed a non-binding asset purchase agreement with a
third party to sell certain assets that are a component of the Compound segment.
Due diligence is not completed and the transaction is expected to close in the
fourth quarter. All of the fixed assets of Compound segment have been classified
as assets held for sale. Management does not anticipate any significant changes
to the asset purchase agreement, or expect that the asset purchase agreement
will be withdrawn. As a result, the Compound segment has been reflected in the
Company's financial statements as a discontinued operation for all periods
presented, unless otherwise indicated. Amounts provided in these notes to the
consolidated financial statements may pertain to both continuing and
discontinued operations. Sales for this discontinued segment see Note 7.
Net loss for the quarter ended March 31, 2005, was $222,500, or $0.03 on a
diluted earnings per share basis, compared to a net profit of $313,000, or $0.04
on a diluted earnings per share basis, for the same period a year ago. For the
nine months ended March 31, 2005, the net loss was $6,061,000, or $0.86 on a
diluted earnings per share basis, compared to a net loss of $134,600, or $0.02
on a diluted earnings per share basis, for the nine-month period ended March 31,
2004.
LIQUIDITY AND CAPITAL RESOURCES
This discussion is presented on a consolidated basis because management
generally does not monitor liquidity and capital resources on a segment basis.
Because we sell plastic containers used in seasonal industries such as lawn and
garden, we have seasonal sales like the rest of the industry. Due to these
seasonal fluctuations, we incur short-term indebtedness to finance our working
capital requirements.
The Company's liquidity position and working capital remained adequate for the
nine-month period ended March 31, 2005. Net working capital as of March
Page 18
31, 2005, increased to $19,480,000 from $13,796,000 as at June 30, 2004. The
current ratio of assets to liabilities increased from 1.8 at June 30, 2004, to
2.3 at March 31, 2005, due primarily to the net increase in inventories for the
anticipation of increased sales in future periods and to avoid shipping delays
along with the purchase of larger quantities of PET compound to hedge against
future price increases, prepaid expenses, and current portion of deferred income
taxes.
During the nine-month period ended March 31, 2005, the Company generated net
cash from operating activities of $510,000; proceeds from our revolving credit
facility, additional equipment financing and proceeds from the sale of assets
which totaled $4,322,000. These funds were primarily used to acquire capital
assets of $2,040,000 and to reduce debt by $2,738,000.
Cash provided from accounts receivable, net of allowances during the nine- month
period ended March 31, 2005, was $1,146,800, compared to cash used of $1,384,400
during the same period a year ago. This increase is primarily due to a decrease
in days sales outstanding and better collections of outstanding balances.
Cash used for inventories, net of reserves, during the nine-month period ended
March 31, 2005, was $1,482,000, a significant decrease from the $2,721,000 used
in the corresponding period of the prior year. We reduced inventories by
initiating various strategic initiatives to enhance scheduling and planning
efficiencies and improving our purchasing procedures.
Cash used for capital assets during the nine-month period ended March 31, 2005,
decreased by $1,682,000 from the same period a year ago. For the nine-month
period ended March 31, 2004, capital assets were purchased largely to support
growth in our PET product line.
Proceeds from the sale of the Kingston facility which occurred on March 14,
2005, were $696,000.
Our short-term liquidity and short-term capital resources are projected to be
adequate to allow the Company to continue to meet financial obligations.
Management believes the financial resources available to the Company, including
internally generated funds and borrowings under our revolving credit facility,
will be sufficient to meet foreseeable working capital requirements. At March
31, 2005, we had unused sources of liquidity consisting of cash and cash
equivalents of $480,000, and unused credit under a revolving credit facility of
$6,284,000.
Our revolving credit facility includes financial and other covenants, including
a minimum equity covenant and a fixed charge coverage covenant. As of March 31,
2005, we were in compliance with all applicable covenants. In November 2004, the
Company extended the PNC Bank Agreement described in Note 6, which was scheduled
to mature in 2005. The terms and conditions are substantially the same as the
original agreement, although the total amount of the facility was reduced. The
total senior secured credit facility was approximately $28,500,000 at March 31,
2005.
We utilize revolving loan facilities for seasonal working capital needs and for
other general corporate purposes. We can use amounts available under
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revolving loan facilities in excess of seasonal working capital needs to pursue
our growth strategy, particularly in PET product lines, and for other permitted
purposes.
There were no material changes during the nine months ended March 31, 2005, in
the contractual obligations presented in the consolidated financial statements
in our annual report on Form 10-K for the fiscal year ended June 30, 2004, other
than the changes in the PNC Bank Agreement discussed above.
The effective portion of the gain or loss on a derivative instrument that is
designated and qualifies as a cash flow hedge is reported as a component of
other comprehensive income and reclassified into earnings in the period or
periods during which the hedged transaction affects earnings.
Off-Balance Sheet Arrangements
There are no material off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this report that are not reported financial results or
other historical information are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements give current expectations or forecasts of future events and are not
guarantees of future performance. They are based on management's expectations,
and involve a number of business risks and uncertainties, any one of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements.
Forward-looking statements do not relate strictly to historic or current facts.
They use words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. For example,
forward-looking statements may be statements relating to future actions;
prospective changes in raw material costs, product pricing or product demand;
future performance or results of current and anticipated market conditions and
market strategies; sales efforts; expenses; and financial results.
There are risks and uncertainties that may cause results to differ materially
from those set forth in the Company's forward-looking statements. It is not
possible to predict or identify all risk factors, but unanticipated changes that
could cause such results to differ materially could include changes in U.S.,
regional, or world polymer growth rates affecting the Company's markets; changes
in global industry capacity or in the rate at which anticipated changes in
capacity are realized in the polyvinyl chloride or other industries in which the
Company participates; fluctuations in raw material prices, quality and supply
and in energy prices and supply, and particularly fluctuations outside the
normal range of industry cycles; and an inability to raise prices or sustain
price increases for products.
The Company cannot guarantee that any forward-looking statement will be
realized, although management believes its plans and assumptions are prudent.
Should known or unknown risks or uncertainties materialize, or should
Page 20
underlying assumptions prove inaccurate, actual results could vary materially
from those anticipated, estimated, or projected.
The Company undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events, or otherwise.
Investors should consult any further disclosures the Company makes on related
subjects in its filings with the Securities and Exchange Commission.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. Interest rate pricing transactions are used only to the extent
considered necessary to meet our objectives. We do not utilize derivative
financial instruments for trading or other speculative purposes.
Our interest rate risk management objective is to limit the impact of interest
rate changes on our net income and cash flow and to reduce our overall borrowing
cost. We use variable rate swap agreements to manage our exposure to interest
rate fluctuations. These agreements effectively convert variable interest rates
to fixed rates, enabling management to predict interest expense and to avoid the
risk of dramatic rate fluctuations. We have entered into rate swap agreements
with banks under our senior secured credit facility.
As of March 31, 2005, the Company had total outstanding indebtedness of
$28,895,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $22,295,000. Based on the Company's March 31, 2005,
variable debt level, a 25 basis point increase or decrease in interest rates
would have had a $13,935 impact on interest expense for the quarter ended March
31, 2005.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company has evaluated the effectiveness of its disclosure controls and
procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's principal
executive officer and principal financial officer believe, as of the end of the
period covered by this Quarterly Report, that disclosure controls and procedures
were effective in ensuring that all material information relating to the
Company, including its consolidated subsidiaries, required to be disclosed in
the reports the Company files with the Securities and Exchange Commission has
been made known in a timely manner. There were no changes to the Company's
internal control over financial reporting during the period covered by this
Quarterly Report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1: Legal Proceedings
Page 21
There are no actions or claims pending against the Company, which, in the
opinion of management, would adversely affect the financial position, results of
operations or cash flows of the Company.
Item 6: Exhibits
31.1 Certification of William J. Bergen, President, Chief Executive Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Jeffrey A. Shapiro, Senior Vice President, Chief Financial
Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of William J. Bergen, Chief Executive Officer, and Jeffrey
Shapiro, Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Page 22
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 16, 2005 PVC Container Corporation
/s/ William J. Bergen
William J. Bergen
President and Chief Executive Officer
Date: May 16, 2005 PVC Container Corporation
/s/ Jeffrey Shapiro
Jeffrey Shapiro
Chief Financial Officer
Page 23