UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
x QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
OR
o TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-73552
PLASTIPAK HOLDINGS, INC.
| Michigan | 52-2186087 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
41605 Ann Arbor Road, Plymouth, Michigan 48170
(734) 455-3600
(Former address: 9135 General Court, Plymouth, Michigan 48170)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of July 31, 2004 was 28,316.
PLASTIPAK HOLDINGS, INC.
FORM 10-Q INDEX
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
| July 31, | November 1, | |||||||
| ASSETS | 2004 |
2003 |
||||||
| (unaudited) | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 10,535,267 | $ | 37,278,406 | ||||
Accounts Receivable |
||||||||
Trade (net of allowance of $3,317,280 and $2,541,820
at July 31, 2004 and November 1, 2003) |
62,561,017 | 54,531,831 | ||||||
Related parties |
8,435,071 | 7,202,753 | ||||||
| 70,996,088 | 61,734,584 | |||||||
Inventories |
96,822,318 | 90,020,742 | ||||||
Prepaid expenses |
16,079,465 | 13,039,269 | ||||||
Prepaid federal income taxes |
2,545,164 | 2,793,980 | ||||||
Deferred income taxes |
2,922,000 | 1,843,000 | ||||||
Other current assets |
2,359,459 | 3,688,059 | ||||||
Total Current Assets |
202,259,761 | 210,398,040 | ||||||
Property, Plant & Equipment- Net |
416,131,982 | 366,920,226 | ||||||
Other Assets |
||||||||
Cash surrender value of life insurance |
1,990,892 | 1,990,892 | ||||||
Deposits |
11,184,966 | 10,716,360 | ||||||
Capitalized loan costs (net of accumulated amortization
of $4,739442 and $3,449,524 at July 31, 2004
and November 1, 2003) |
8,251,805 | 9,541,723 | ||||||
Intangible assets (net of accumulated amortization of
of $6,156,499 and $4,937,791 at July 31, 2004
and November 1, 2003) |
9,003,260 | 6,429,468 | ||||||
Prepaids |
841,704 | 936,658 | ||||||
Sundry |
298,400 | 266,645 | ||||||
| 31,571,027 | 29,881,746 | |||||||
Total Assets |
$ | 649,962,770 | $ | 607,200,012 | ||||
The accompanying notes are an integral part of these financial statements.
1
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
| July 31, | November 1, | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | 2004 |
2003 |
||||||
| (unaudited) | ||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 120,934,240 | $ | 115,125,413 | ||||
Current portion of long term obligation |
4,674,821 | 3,823,347 | ||||||
Accrued liabilities
|
||||||||
Taxes other than income |
10,090,328 | 4,740,907 | ||||||
Other accrued expenses |
40,370,267 | 29,309,529 | ||||||
Income taxes |
1,345,241 | 1,363,371 | ||||||
Total Current Liabilities |
177,414,897 | 154,362,567 | ||||||
Senior Notes (net of unamortized premium and
FV of swaps of $2,006,626 and ($4,711,202) at July 31, 2004
and $2,218,660 and ($4,748,452) at November 1, 2003) |
322,295,024 | 322,470,208 | ||||||
Long-Term Obligations |
65,441,254 | 60,601,547 | ||||||
Deferred Income Taxes |
23,261,000 | 16,483,000 | ||||||
Other Non-Current Liabilities |
4,582,399 | 4,030,943 | ||||||
Obligations Under Stock Bonus Plans |
10,484,727 | 8,306,882 | ||||||
Stockholders’ Equity |
||||||||
Common stock, $1.00 par value, 60,000 shares authorized;
28,316 shares issued and outstanding |
28,316 | 28,316 | ||||||
Retained earnings |
46,455,153 | 40,916,549 | ||||||
Total Stockholders’ Equity |
46,483,469 | 40,944,865 | ||||||
Total Liabilities and Stockholders’ Equity |
$ | 649,962,770 | $ | 607,200,012 | ||||
The accompanying notes are an integral part of these financial statements.
2
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Earnings
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| July 31, | August 2, | July 31, | August 2, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues |
$ | 261,559,078 | $ | 237,355,017 | $ | 738,738,884 | $ | 664,228,422 | ||||||||
Cost and expenses |
224,901,848 | 207,944,594 | 642,637,249 | 572,464,745 | ||||||||||||
Gross profit |
36,657,230 | 29,410,423 | 96,101,635 | 91,763,677 | ||||||||||||
Selling, general and
administrative expenses |
20,182,832 | 18,693,366 | 59,653,060 | 55,556,230 | ||||||||||||
Operating profit |
16,474,398 | 10,717,057 | 36,448,575 | 36,207,447 | ||||||||||||
Other expense (income) |
||||||||||||||||
Interest expense |
9,246,585 | 9,118,594 | 26,964,215 | 28,138,198 | ||||||||||||
Interest income |
(37,184 | ) | (208,947 | ) | (402,905 | ) | (768,149 | ) | ||||||||
Royalty income |
(62,734 | ) | (187,500 | ) | (439,780 | ) | (767,746 | ) | ||||||||
(Gain) loss on foreign
currency translation |
(653,355 | ) | 33,366 | (640,951 | ) | 819,791 | ||||||||||
Sundry income |
(83,154 | ) | (57,106 | ) | (235,624 | ) | (91,691 | ) | ||||||||
| 8,410,158 | 8,698,407 | 25,244,955 | 27,330,403 | |||||||||||||
Earnings before income taxes |
8,064,240 | 2,018,650 | 11,203,620 | 8,877,044 | ||||||||||||
Income tax expense (benefit) |
||||||||||||||||
Current |
34,000 | (2,878,000 | ) | (947,000 | ) | (1,177,000 | ) | |||||||||
Deferred |
3,313,000 | 4,486,000 | 5,699,000 | 5,043,000 | ||||||||||||
| 3,347,000 | 1,608,000 | 4,752,000 | 3,866,000 | |||||||||||||
Net earnings |
$ | 4,717,240 | $ | 410,650 | $ | 6,451,620 | $ | 5,011,044 | ||||||||
The accompanying notes are an integral part of these financial statements.
3
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Nine Months Ended |
||||||||
| July 31, | August 2, | |||||||
| 2004 |
2003 |
|||||||
| (unaudited) | (unaudited) | |||||||
Cash Flows from Operating Activities |
||||||||
Net Income |
$ | 6,451,620 | $ | 5,011,044 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
48,251,784 | 41,498,012 | ||||||
Amortization of net premium on Senior Notes |
(212,425 | ) | (212,425 | ) | ||||
Bad debt expense |
893,078 | 783,388 | ||||||
Deferred salaries |
618,675 | 290,700 | ||||||
Gain on sale of equipment |
(55,182 | ) | (212,792 | ) | ||||
Deferred tax expense |
5,699,000 | 5,043,000 | ||||||
Restricted stock option - compensation |
1,264,829 | 1,538,377 | ||||||
Foreign currency translation (gain) loss |
(145,603 | ) | 796,677 | |||||
Change in assets and liabilities: |
||||||||
Increase in accounts receivable |
(10,154,582 | ) | (4,828,791 | ) | ||||
Increase in inventories |
(6,801,576 | ) | (8,056,094 | ) | ||||
Increase in prepaid expenses and other current assets |
(2,048,642 | ) | (1,616,523 | ) | ||||
Decrease (increase) in prepaid federal income taxes |
248,816 | (51,915 | ) | |||||
Increase in other liabilities |
16,379,880 | 11,966,463 | ||||||
(Increase) decrease in deposits |
(468,606 | ) | 4,032,320 | |||||
Increase (decrease) in accounts payable |
5,808,827 | (6,865,648 | ) | |||||
Increase in sundry other assets |
(31,755 | ) | (235,503 | ) | ||||
Decrease in income taxes |
(18,130 | ) | (18,940 | ) | ||||
Net cash provided by operating activities |
65,680,008 | 48,861,350 | ||||||
Cash Flows (Used In) Provided By Investing Activities |
||||||||
Acquisition of property and equipment |
(87,331,791 | ) | (72,010,775 | ) | ||||
Proceeds from sale of equipment |
1,394,367 | 629,559 | ||||||
Acquisition of intangible assets |
(4,512,500 | ) | (775,000 | ) | ||||
Net cash used in investing activities |
(90,449,924 | ) | (72,156,216 | ) | ||||
Cash Flows Provided By (Used In) Financing Activities |
||||||||
Net borrowings under revolving credit facility |
1,961,472 | 1,052,982 | ||||||
Principal payments on long-term obligations |
(4,552,733 | ) | (4,981,250 | ) | ||||
Proceeds from long-term obligations |
618,038 | 50,545 | ||||||
Net cash used in financing activities |
(1,973,223 | ) | (3,877,723 | ) | ||||
Net decrease in cash and cash equivalents |
(26,743,139 | ) | (27,172,589 | ) | ||||
Cash and cash equivalents at beginning of the year |
37,278,406 | 66,196,262 | ||||||
Cash and cash equivalents at end of the period |
$ | 10,535,267 | $ | 39,023,673 | ||||
The accompanying notes are an integral part of these financial statements.
4
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
| July 31, | August 2, | |||||||
| 2004 |
2003 |
|||||||
| (unaudited) | (unaudited) | |||||||
Supplemental Cash Flow Information |
||||||||
Cash paid for interest |
$ | 22,650,000 | $ | 22,387,000 | ||||
Cash paid for income taxes |
$ | — | $ | 723,000 | ||||
Supplemental Noncash Investing and Financing Activities |
||||||||
Acquisition of equipment through the assumption of
long-term obligations |
$ | 7,810,000 | $ | 5,317,000 | ||||
Increase in Obligation Under Stock Bonus Plan |
$ | 913,000 | $ | 1,740,000 | ||||
Increase (decrease) in fair value of interest rate swaps |
$ | 37,000 | $ | (6,910,000) | ||||
The accompanying notes are an integral part of these financial statements.
5
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
Note A - Basis of Presentation, Nature of Operations and Summary of Accounting Policies
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended July 31, 2004 are not necessarily indicative of the results that may be expected for the year ending October 30, 2004.
These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Form 10-K filed by Plastipak Holdings, Inc. (Plastipak) with the Securities and Exchange Commission on January 29, 2004.
Reclassifications
Certain reclassifications have been made to the 2003 financial information in order for them to conform to the classifications at July 31, 2004.
Employee Compensation Plans
The Company has two stock-based employee compensation plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The plans are considered to be variable plans and therefore, stock-based employee compensation cost is reflected in net income as a component of general and administrative expenses, as all options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant. Amounts expensed approximate that which would have been expensed had the value of the options granted been computed under provisions of FAS 123.
Note B - Fiscal Period
Plastipak has elected a 52/53 week fiscal period for tax and financial reporting purposes. Plastipak’s fiscal period ends on the Saturday closest to October 31. The three month periods ended July 31, 2004 and August 2, 2003 contained 13 weeks. The nine-month periods ended July 31, 2004 and August 2, 2003 contained 39 weeks.
Note C - New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the applications of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both.
6
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note C - New Accounting Pronouncements – Continued
In December 2003, the Financial Accounting Standards Board issued FASB Interpretation 46(R), Consolidation of Variable Interest Entities. FIN 46(R) replaces FIN 46 and clarifies the accounting for interests in variable interest entities. FIN 46(R) should be applied to entities considered to be Special Purpose Entities (SPE’s) no later than the end of the first reporting period after December 15, 2003 and by the end of the first reporting period that ends after March 15, 2004 to entities other than SPE’s. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.
Note D - Inventories
Inventories consisted of the following at:
| July 31, | November 1, | |||||||
| 2004 |
2003 |
|||||||
Raw Materials |
$ | 36,876,910 | $ | 34,835,429 | ||||
Finished Goods |
46,107,431 | 41,984,322 | ||||||
Parts & Supplies |
13,837,977 | 13,200,991 | ||||||
| $ | 96,822,318 | $ | 90,020,742 | |||||
Note E - Legal Proceedings
The Company is a party to various litigation matters arising in the ordinary course of business. The ultimate legal and financial liability of this litigation cannot be estimated with certainty, but management believes, based on their examination of these matters, experience to date and discussions with counsel, that the ultimate liability will not be material to the Company’s business, financial condition or results of operations.
Note F - Derivative Instruments and Hedging Activities
Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and clarified, requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statement of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge.
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
7
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note F - Derivative Instruments and Hedging Activities - Continued
For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The Company currently uses only fair value hedge accounting.
On March 11, 2003, the Company entered into two interest rate swap agreements. In connection with the Senior Notes, the Company exchanged fixed rate interest of 10.75% for variable rate interest. The interest rate swap agreements have notional amounts of $50,000,000 each. The variable rates are equal to six month LIBOR plus 6.46% and 6.66%, respectively, for an 8-year period ending September 1, 2011. As of July 31, 2004, the Company recorded an increase of $4,711,202 in other accrued expenses to recognize the fair value of the swap and a $4,711,202 decrease in the Senior Notes to recognize the difference between the carrying value and fair value of the related hedged liability.
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments
The Senior Notes are unsecured, and guaranteed by each of Plastipak’s current and future material domestic subsidiaries.
The following condensed consolidating financial information presents:
| (1) | Condensed consolidating balance sheets as of July 31, 2004 and November 1, 2003, statements of operations for the three months and nine months ended July 31, 2004 and August 2, 2003 and statements of cash flows for the nine months ended July 31, 2004 and August 2, 2003 of (a) Plastipak the parent; (b) the guarantor subsidiaries (North American Operating Segment); (c) the nonguarantor subsidiaries (South American Operating Segment and European Operating Segment); (d) Plastipak on a consolidated basis, and | |||
| (2) | Elimination entries necessary to consolidate Plastipak Holdings, Inc., the parent, with the guarantor (North American Operating Segment) and nonguarantor (South American Operating Segment and European Operating Segment) subsidiaries. | |||
Each subsidiary guarantor is wholly-owned by Plastipak, all guarantees are full and unconditional and all guarantees are joint and several.
8
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet
As of July 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash |
$ | 1,652,849 | $ | 6,874,917 | $ | 2,007,501 | $ | — | $ | 10,535,267 | ||||||||||
Accounts receivable |
15,543,410 | 46,794,482 | 15,053,646 | (6,395,450 | ) | 70,996,088 | ||||||||||||||
Inventories |
— | 78,433,599 | 18,388,719 | — | 96,822,318 | |||||||||||||||
Prepaid expenses |
— | 9,747,760 | 6,331,705 | — | 16,079,465 | |||||||||||||||
Prepaid federal
income taxes |
1,953,000 | 498,234 | 93,930 | — | 2,545,164 | |||||||||||||||
Deferred income
taxes |
(2,600,000 | ) | 2,997,000 | 2,525,000 | — | 2,922,000 | ||||||||||||||
Other current assets |
— | 1,548,077 | 811,382 | — | 2,359,459 | |||||||||||||||
Total Current Assets |
16,549,259 | 146,894,069 | 45,211,883 | (6,395,450 | ) | 202,259,761 | ||||||||||||||
Property, Plant &
Equipment- Net |
— | 368,442,595 | 47,789,387 | (100,000 | ) | 416,131,982 | ||||||||||||||
Other Assets |
||||||||||||||||||||
Cash surrender value
of life insurance |
— | 1,990,892 | — | 1,990,892 | ||||||||||||||||
Deposits |
— | 12,460,305 | — | (1,275,339 | ) | 11,184,966 | ||||||||||||||
Investment in and
advances
to affiliates |
373,252,767 | (295,991,627 | ) | (77,261,140 | ) | — | ||||||||||||||
Capitalized loan
costs |
926,786 | 7,325,019 | — | — | 8,251,805 | |||||||||||||||
Intangible assets |
— | 7,022,851 | 1,980,409 | — | 9,003,260 | |||||||||||||||
Deferred tax asset
- -long term |
(429,556 | ) | 429,556 | — | — | — | ||||||||||||||
Prepaids |
— | 841,704 | — | — | 841,704 | |||||||||||||||
Sundry |
— | 5,000,000 | 298,400 | (5,000,000 | ) | 298,400 | ||||||||||||||
| 373,749,997 | (260,921,300 | ) | 2,278,809 | (83,536,479 | ) | 31,571,027 | ||||||||||||||
Total Assets |
$ | 390,299,256 | $ | 254,415,364 | $ | 95,280,079 | $ | (90,031,929 | ) | $ | 649,962,770 | |||||||||
9
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet - Continued
As of July 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Accounts payable |
$ | — | $ | 88,169,840 | $ | 39,141,020 | $ | (6,376,620 | ) | $ | 120,934,240 | |||||||||
Current portion of
long
term obligation |
— | 4,067,038 | 607,783 | — | 4,674,821 | |||||||||||||||
Taxes other than
income |
— | 6,318,739 | 3,771,589 | — | 10,090,328 | |||||||||||||||
Other accrued
expenses |
18,757,374 | 20,516,338 | 2,390,723 | (1,294,168 | ) | 40,370,267 | ||||||||||||||
Income taxes |
(168,440 | ) | 1,513,681 | — | — | 1,345,241 | ||||||||||||||
Total Current
Liabilities |
18,588,934 | 120,585,636 | 45,911,115 | (7,670,788 | ) | 177,414,897 | ||||||||||||||
Senior Notes |
325,217,224 | (2,922,200 | ) | — | — | 322,295,024 | ||||||||||||||
Long-Term
Obligations |
— | 8,628,584 | 61,812,670 | (5,000,000 | ) | 65,441,254 | ||||||||||||||
Deferred Income
Taxes |
(10,475,098 | ) | 31,211,097 | 2,525,000 | 1 | 23,261,000 | ||||||||||||||
Other Non-Current
Liabilities |
— | 4,094,658 | 487,741 | — | 4,582,399 | |||||||||||||||
Obligations Under
Stock Bonus Plan |
10,484,727 | — | — | — | 10,484,727 | |||||||||||||||
Stockholders’
Equity (Deficit) |
46,483,469 | 92,817,589 | (15,456,447 | ) | (77,361,142 | ) | 46,483,469 | |||||||||||||
Total Liabilities
and
Stockholders’ Equity |
$ | 390,299,256 | $ | 254,415,364 | $ | 95,280,079 | $ | (90,031,929 | ) | $ | 649,962,770 | |||||||||
10
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet
As of November 1, 2003
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash |
$ | 23,104,119 | $ | 12,750,772 | $ | 1,423,515 | $ | — | $ | 37,278,406 | ||||||||||
Accounts receivable |
9,090,858 | 47,835,342 | 11,085,537 | (6,277,153 | ) | 61,734,584 | ||||||||||||||
Inventories |
— | 71,520,128 | 18,500,614 | — | 90,020,742 | |||||||||||||||
Prepaid expenses |
— | 10,075,312 | 2,963,957 | — | 13,039,269 | |||||||||||||||
Prepaid federal
income taxes |
975,392 | 1,719,048 | 99,540 | — | 2,793,980 | |||||||||||||||
Deferred income
taxes |
(3,679,000 | ) | 2,997,000 | 2,525,000 | — | 1,843,000 | ||||||||||||||
Other current assets |
— | 3,336,833 | 351,226 | — | 3,688,059 | |||||||||||||||
Total Current Assets |
29,491,369 | 150,234,435 | 36,949,389 | (6,277,153 | ) | 210,398,040 | ||||||||||||||
Property, Plant &
Equipment- Net |
— | 315,739,770 | 51,430,456 | (250,000 | ) | 366,920,226 | ||||||||||||||
Other Assets |
||||||||||||||||||||
Cash surrender value
of life insurance |
— | 1,990,892 | — | — | 1,990,892 | |||||||||||||||
Deposits |
— | 10,716,360 | — | — | 10,716,360 | |||||||||||||||
Investment in and
advances
to affiliates |
337,670,382 | (271,963,985 | ) | — | (65,706,397 | ) | — | |||||||||||||
Capitalized loan
costs |
1,024,917 | 8,516,806 | — | — | 9,541,723 | |||||||||||||||
Intangible assets |
— | 3,527,915 | 2,901,553 | — | 6,429,468 | |||||||||||||||
Deferred tax asset
- - long term |
(429,556 | ) | 429,556 | — | — | — | ||||||||||||||
Prepaids |
— | 936,658 | — | — | 936,658 | |||||||||||||||
Sundry |
— | 5,001,699 | 264,946 | (5,000,000 | ) | 266,645 | ||||||||||||||
| 338,265,743 | (240,844,099 | ) | 3,166,499 | (70,706,397 | ) | 29,881,746 | ||||||||||||||
Total Assets |
$ | 367,757,112 | $ | 225,130,106 | $ | 91,546,344 | $ | (77,233,550 | ) | $ | 607,200,012 | |||||||||
11
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet - Continued
As of November 1, 2003
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 17,159 | $ | 85,093,312 | $ | 36,292,095 | $ | (6,277,153 | ) | $ | 115,125,413 | |||||||||
Current portion of
long
term obligation |
— | 2,970,955 | 852,392 | — | 3,823,347 | |||||||||||||||
Taxes other than
income |
— | 4,006,848 | 734,059 | — | 4,740,907 | |||||||||||||||
Other accrued
expenses |
10,207,937 | 17,755,822 | 1,345,770 | — | 29,309,529 | |||||||||||||||
Income taxes |
(168,440 | ) | 1,531,811 | — | — | 1,363,371 | ||||||||||||||
Total Current
Liabilities |
10,056,656 | 111,358,748 | 39,224,316 | (6,277,153 | ) | 154,362,567 | ||||||||||||||
Senior Notes |
325,701,807 | (3,231,599 | ) | — | — | 322,470,208 | ||||||||||||||
Long-Term
Obligations |
— | 5,562,807 | 60,038,740 | (5,000,000 | ) | 60,601,547 | ||||||||||||||
Deferred Income
Taxes |
(17,253,098 | ) | 31,211,098 | 2,525,000 | — | 16,483,000 | ||||||||||||||
Other Non-Current
Liabilities |
— | 3,480,939 | 550,004 | — | 4,030,943 | |||||||||||||||
Obligations Under
Stock Bonus Plan |
8,306,882 | — | — | — | 8,306,882 | |||||||||||||||
Stockholders’
Equity (Deficit) |
40,944,865 | 76,748,113 | (10,791,716 | ) | (65,956,397 | ) | 40,944,865 | |||||||||||||
Total Liabilities
and
Stockholders’ Equity |
$ | 367,757,112 | $ | 225,130,106 | $ | 91,546,344 | $ | (77,233,550 | ) | $ | 607,200,012 | |||||||||
12
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the three months ended July 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Revenues |
$ | — | $ | 240,958,746 | $ | 21,379,955 | $ | (779,623 | ) | $ | 261,559,078 | |||||||||
Cost and expenses |
— | 205,537,905 | 20,192,815 | (828,872 | ) | 224,901,848 | ||||||||||||||
Gross profit |
— | 35,420,841 | 1,187,140 | 49,249 | 36,657,230 | |||||||||||||||
Selling, general and
administrative expenses |
840,780 | 17,079,732 | 2,262,320 | — | 20,182,832 | |||||||||||||||
Operating (loss) profit |
(840,780 | ) | 18,341,109 | (1,075,180 | ) | 49,249 | 16,474,398 | |||||||||||||
Other (income) expense |
||||||||||||||||||||
Equity in (earnings) loss
of affiliates |
(8,522,930 | ) | 338,085 | — | 8,184,845 | — | ||||||||||||||
Interest expense |
8,340,931 | 128,245 | 818,709 | (41,300 | ) | 9,246,585 | ||||||||||||||
Interest income |
(8,588,021 | ) | 8,525,900 | (16,363 | ) | 41,300 | (37,184 | ) | ||||||||||||
Royalty income |
— | (62,734 | ) | — | — | (62,734 | ) | |||||||||||||
Gain on foreign currency
translation |
— | — | (653,355 | ) | — | (653,355 | ) | |||||||||||||
Sundry (income) expense |
(135,000 | ) | 246,563 | (194,717 | ) | — | (83,154 | ) | ||||||||||||
| (8,905,020 | ) | 9,176,059 | (45,726 | ) | 8,184,845 | 8,410,158 | ||||||||||||||
Earnings (loss) before
income taxes |
8,064,240 | 9,165,050 | (1,029,454 | ) | (8,135,596 | ) | 8,064,240 | |||||||||||||
Income taxes |
3,347,000 | — | — | — | 3,347,000 | |||||||||||||||
Net earnings (loss) |
$ | 4,717,240 | $ | 9,165,050 | $ | (1,029,454 | ) | $ | (8,135,596 | ) | $ | 4,717,240 | ||||||||
13
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the three months ended August 2, 2003
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Revenues |
$ | — | $ | 218,563,468 | $ | 20,426,682 | $ | (1,635,133 | ) | $ | 237,355,017 | |||||||||
Cost and expenses |
— | 188,929,311 | 20,700,416 | (1,685,133 | ) | 207,944,594 | ||||||||||||||
Gross profit (loss) |
— | 29,634,157 | (273,734 | ) | 50,000 | 29,410,423 | ||||||||||||||
Selling, general and
administrative expenses |
81,000 | 16,902,761 | 1,709,605 | — | 18,693,366 | |||||||||||||||
Operating (loss) profit |
(81,000 | ) | 12,731,396 | (1,983,339 | ) | 50,000 | 10,717,057 | |||||||||||||
Other expense (income) |
||||||||||||||||||||
Equity in loss (earnings)
of affiliates |
136,337 | 914,972 | — | (1,051,309 | ) | — | ||||||||||||||
Interest expense |
7,939,238 | 174,459 | 1,045,818 | (40,921 | ) | 9,118,594 | ||||||||||||||
Interest income |
(7,967,423 | ) | 7,797,790 | (80,235 | ) | 40,921 | (208,947 | ) | ||||||||||||
Royalty income |
— | (187,500 | ) | — | — | (187,500 | ) | |||||||||||||
Loss on foreign currency
translation |
— | — | 33,366 | — | 33,366 | |||||||||||||||
Sundry (income) expense |
(135,071 | ) | 78,654 | (689 | ) | — | (57,106 | ) | ||||||||||||
| (26,919 | ) | 8,778,375 | 998,260 | (1,051,309 | ) | 8,698,407 | ||||||||||||||
(Loss) earnings before
income taxes |
(54,081 | ) | 3,953,021 | (2,981,599 | ) | 1,101,309 | 2,018,650 | |||||||||||||
Income taxes |
(464,731 | ) | 479,470 | 1,593,261 | — | 1,608,000 | ||||||||||||||
Net earnings (loss) |
$ | 410,650 | $ | 3,473,551 | $ | (4,574,860 | ) | $ | 1,101,309 | $ | 410,650 | |||||||||
14
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the nine months ended July 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Revenues |
$ | — | $ | 668,650,687 | $ | 72,755,306 | $ | (2,667,109 | ) | $ | 738,738,884 | |||||||||
Cost and expenses |
— | 574,222,117 | 71,232,241 | (2,817,109 | ) | 642,637,249 | ||||||||||||||
Gross profit |
— | 94,428,570 | 1,523,065 | 150,000 | 96,101,635 | |||||||||||||||
Selling, general and
administrative expenses |
1,515,923 | 51,705,401 | 6,431,736 | — | 59,653,060 | |||||||||||||||
Operating (loss) profit |
(1,515,923 | ) | 42,723,169 | (4,908,671 | ) | 150,000 | 36,448,575 | |||||||||||||
Other (income) expense |
||||||||||||||||||||
Equity in (earnings) loss
of affiliates |
(11,455,006 | ) | 1,574,919 | — | 9,880,087 | — | ||||||||||||||
Interest expense |
24,094,369 | 436,975 | 2,553,740 | (120,869 | ) | 26,964,215 | ||||||||||||||
Interest income |
(24,953,906 | ) | 24,701,293 | (271,161 | ) | 120,869 | (402,905 | ) | ||||||||||||
Royalty income |
— | (439,780 | ) | — | — | (439,780 | ) | |||||||||||||
Gain on foreign currency
translation |
— | — | (640,951 | ) | — | (640,951 | ) | |||||||||||||
Sundry (income) expense |
(405,000 | ) | 380,286 | (210,910 | ) | — | (235,624 | ) | ||||||||||||
| (12,719,543 | ) | 26,653,693 | 1,430,718 | 9,880,087 | 25,244,955 | |||||||||||||||
Earnings (loss) before
income taxes |
11,203,620 | 16,069,476 | (6,339,389 | ) | (9,730,087 | ) | 11,203,620 | |||||||||||||
Income taxes |
4,752,000 | — | — | — | 4,752,000 | |||||||||||||||
Net earnings (loss) |
$ | 6,451,620 | $ | 16,069,476 | $ | (6,339,389 | ) | $ | (9,730,087 | ) | $ | 6,451,620 | ||||||||
15
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the nine months ended August 2, 2003
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Revenues |
$ | — | $ | 604,762,193 | $ | 63,092,513 | $ | (3,626,284 | ) | $ | 664,228,422 | |||||||||
Cost and expenses |
— | 516,610,693 | 59,580,337 | (3,726,285 | ) | 572,464,745 | ||||||||||||||
Gross profit |
— | 88,151,500 | 3,512,176 | 100,001 | 91,763,677 | |||||||||||||||
Selling, general and
administrative expenses |
246,619 | 50,922,245 | 4,387,366 | — | 55,556,230 | |||||||||||||||
Operating (loss) profit |
(246,619 | ) | 37,229,255 | (875,190 | ) | 100,001 | 36,207,447 | |||||||||||||
Other (income) expense
|
||||||||||||||||||||
Equity in (earnings) loss
of affiliates |
(8,391,424 | ) | 1,206,809 | — | 7,184,615 | — | ||||||||||||||
Interest expense |
24,651,058 | 620,629 | 2,992,794 | (126,283 | ) | 28,138,198 | ||||||||||||||
Interest income |
(22,905,495 | ) | 22,249,761 | (238,698 | ) | 126,283 | (768,149 | ) | ||||||||||||
Royalty income |
— | (767,746 | ) | — | — | (767,746 | ) | |||||||||||||
Loss on foreign currency
translation |
— | — | 819,791 | — | 819,791 | |||||||||||||||
Sundry (income) expense |
(405,071 | ) | 321,666 | (8,286 | ) | — | (91,691 | ) | ||||||||||||
| (7,050,932 | ) | 23,631,119 | 3,565,601 | 7,184,615 | 27,330,403 | |||||||||||||||
Earnings (loss) before
income taxes |
6,804,313 | 13,598,136 | (4,440,791 | ) | (7,084,614 | ) | 8,877,044 | |||||||||||||
Income taxes |
1,793,269 | 479,470 | 1,593,261 | — | 3,866,000 | |||||||||||||||
Net earnings (loss) |
$ | 5,011,044 | $ | 13,118,666 | $ | (6,034,052 | ) | $ | (7,084,614 | ) | $ | 5,011,044 | ||||||||
16
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Cash Flows
For the nine months ended July 31, 2004
| Parent | Guarantort | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Cash Flows From
Operating Activities |
||||||||||||||||||||
Net cash provided by
(used in) operating activities |
$ | 2,676,109 | $ | 63,384,550 | $ | (380,651 | ) | $ | — | $ | 65,680,008 | |||||||||
Cash Flows (Used In) Provided
By Investing Activities |
||||||||||||||||||||
Acquisition of property
and equipment |
— | (84,823,395 | ) | (4,305,859 | ) | 1,797,463 | (87,331,791 | ) | ||||||||||||
Proceeds from sale of equipment |
— | 1,271,227 | 1,920,603 | (1,797,463 | ) | 1,394,367 | ||||||||||||||
Investment in and advances
to affiliates |
(24,127,379 | ) | (1,674,658 | ) | — | 25,802,037 | — | |||||||||||||
Acquisition of intangible assets |
— | (4,512,500 | ) | — | — | (4,512,500 | ) | |||||||||||||
Net cash (used in) provided
by investing activities |
(24,127,379 | ) | (89,739,326 | ) | (2,385,256 | ) | 25,802,037 | (90,449,924 | ) | |||||||||||
Cash Flows Provided By
(Used In) Financing Activities |
||||||||||||||||||||
Net borrowings under revolving credit facility |
— | — | 1,961,472 | — | 1,961,472 | |||||||||||||||
Principal payments on long-term
obligations |
— | 20,478,921 | (904,275 | ) | (24,127,379 | ) | (4,552,733 | ) | ||||||||||||
Proceeds from long-term obligations |
— | — | 618,038 | — | 618,038 | |||||||||||||||
Capital increases |
— | — | 1,674,658 | (1,674,658 | ) | — | ||||||||||||||
Net cash provided by
(used in) financing activities |
— | 20,478,921 | 3,349,893 | (25,802,037 | ) | (1,973,223 | ) | |||||||||||||
Net (decrease) increase in cash |
(21,451,270 | ) | (5,875,855 | ) | 583,986 | — | (26,743,139 | ) | ||||||||||||
Cash and cash equivalents at
the beginning of the year |
23,104,119 | 12,750,772 | 1,423,515 | — | 37,278,406 | |||||||||||||||
Cash and cash equivalents at
the end of the period |
$ | 1,652,849 | $ | 6,874,917 | $ | 2,007,501 | $ | — | $ | 10,535,267 | ||||||||||
17
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Cash Flows
For the nine months ended August 2, 2003
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total |
Subsidiaries |
Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Cash Flows From
Operating Activities |
||||||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (2,066,098 | ) | $ | 50,953,235 | $ | (25,787 | ) | $ | — | $ | 48,861,350 | ||||||||
Cash Flows (Used In) Provided
By Investing Activities |
||||||||||||||||||||
Acquisition of property
and equipment |
— | (69,448,645 | ) | (2,562,130 | ) | — | (72,010,775 | ) | ||||||||||||
Proceeds from sale of equipment |
— | 616,967 | 12,592 | — | 629,559 | |||||||||||||||
Investment in and advances
to affiliates |
(13,600,000 | ) | (400,000 | ) | — | 14,000,000 | — | |||||||||||||
Acquisition of intangible assets |
— | (775,000 | ) | — | — | (775,000 | ) | |||||||||||||
Net cash (used in) provided
by investing activities |
(13,600,000 | ) | (70,006,678 | ) | (2,549,538 | ) | 14,000,000 | (72,156,216 | ) | |||||||||||
Cash Flows Provided By
(Used In) Financing Activities |
||||||||||||||||||||
Net borrowings under revolving credit facility |
— | — | 1,052,982 | — | 1,052,982 | |||||||||||||||
Principal payments on long-term
obligations |
— | (3,308,400 | ) | (1,672,850 | ) | — | (4,981,250 | ) | ||||||||||||
Proceeds from long-term obligations |
— | 12,000,000 | 50,545 | (12,000,000 | ) | 50,545 | ||||||||||||||
Capital increases |
— | — | 2,000,000 | (2,000,000 | ) | — | ||||||||||||||
Net cash provided by (used in)
financing activities |
— | 8,691,600 | 1,430,677 | (14,000,000 | ) | (3,877,723 | ) | |||||||||||||
Net decrease in cash |
(15,666,098 | ) | (10,361,843 | ) | (1,144,648 | ) | — | (27,172,589 | ) | |||||||||||
Cash and cash equivalents at
the beginning of the year |
44,619,480 | 19,388,938 | 2,187,844 | — | 66,196,262 | |||||||||||||||
Cash and cash equivalents at
the end of the period |
$ | 28,953,382 | $ | 9,027,095 | $ | 1,043,196 | $ | — | $ | 39,023,673 | ||||||||||
18
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Cash Flows - Continued
Supplemental Cash Flow Information
| Depreciation and Amortization Expense | Guarantor | Nonguarantor | |||||||||||
| Period ended | Subsidiaries | Subsidiaries | Total | ||||||||||
July 31, 2004 |
$ | 41,200,266 | $ | 7,051,518 | $ | 48,251,784 | |||||||
August 2, 2003 |
$ | 34,347,893 | $ | 7,150,119 | $ | 41,498,012 | |||||||
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes. Please refer to the “Risks Related to Our Business” section, in our Form 10-K for the year ended November 1, 2003, for a summary of factors that could cause actual results to differ materially from those projected in a forward-looking statement. As you read the material below, we urge you to carefully consider our financial statements and related information provided herein.
All statements other than statements of historical fact included in this Form 10-Q, including statements regarding our future financial position, economic performance and results of operations, as well as our business strategy, budgets and projected costs and plans and objectives of management for future operations are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, or “continue” or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, without limitation, risks associated with our Brazilian operations, competition in our product categories (including the impact of possible new technologies and the impact of such competition on pricing, revenues and margins), our high degree of leverage and substantial debt service obligations, the restrictive covenants contained in instruments governing our indebtedness, our exposure to fluctuations in resin and energy prices, our dependence on significant customers and the risk that customers will not purchase our products in the amounts we expect, our dependence on key management and our labor force and the material adverse effect that could result from the loss of their services. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements set forth in this paragraph.
Overview
Plastipak Holdings, Inc. (“Plastipak”) is a privately held Michigan corporation that was formed in 1998 to act as a holding company for several related companies. On October 30, 1999, Plastipak acquired all of the equity interests in Plastipak Packaging, Inc. (“Packaging”), Whiteline Express, Ltd. (“Whiteline”), Clean Tech, Inc. (“Clean Tech”) and TABB Realty, LLC (“TABB”), and a portion of the equity interests of Plastipak Packaging do Brasil, Ltda (“Plastipak Brasil”), through a reorganization (the “Reorganization”). Packaging, our principal operating company whose business commenced operations in 1967, designs and manufactures rigid plastic containers, and was incorporated in Delaware in 1982. Packaging also owns the remainder of Plastipak Brasil. Whiteline is a trucking company serving our transportation and logistics needs, and was incorporated in Delaware in 1982. Clean Tech, a plastics recycling operation, provides a source of clean, high quality post-consumer recycled plastic raw material, and was incorporated in Michigan in 1989. TABB owns real estate and leases it to Packaging, Whiteline, and Clean Tech. Plastipak Brasil produces injection-molded plastic preforms and blow molds rigid plastic packaging in Paulinia, Brazil and produces injection-molded plastic preforms in Manaus, Brazil. Plastipak Brasil also maintains a sales office in Buenos Aires, Argentina.
We recently organized three entities in Central Europe. Plastipak Slovakia, s.r.o. and Plastipak Czech Republic, s.r.o. were established as a wholly owned subsidiaries of Packaging in 2004 and 2003, respectively. Plastipak Czech Republic, s.r.o. will serve as a bottle manufacturing facility. Plastipak Slovakia, s.r.o. serves as a technical and business center. In 2003, Clean Tech Slovakia, s.r.o. was established as a wholly-owned subsidiary of Clean Tech. Clean Tech Slovakia, s.r.o. may serve as a post-consumer recycling operation in Europe.
Other than Plastipak Czech Republic, s.r.o., Plastipak Slovakia, s.r.o., Clean Tech Slovakia, s.r.o. and Plastipak Brasil and its subsidiaries, all of the Plastipak group of companies are headquartered in Plymouth, Michigan.
20
Results of Operations
We report our results of operations on the basis of a 52-53 week period. Our fiscal year end is the closest Saturday to October 31 each year. The three months ended July 31, 2004 and August 2, 2003 were 13 weeks long. The nine months ended July 31, 2004 and August 2, 2003 were 39 weeks long.
Listed in the table below are our revenues and related percentages of revenue for the three and nine months ended July 31, 2004 and August 2, 2003 in each of our product categories.
| Consolidated Revenue By Product Category | ||||||||||||||||||||||||||||||||
| Three Months Ended July 31, 2004 | Nine Months Ended July 31, 2004 | |||||||||||||||||||||||||||||||
| and August 2, 2003 | and August 2, 2003 | |||||||||||||||||||||||||||||||
| 2004 |
% |
2003 |
% |
2004 |
% |
2003 |
% |
|||||||||||||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||||||||||||||||||
Carbonated and non-
carbonated beverage revenue |
$ | 114,629 | 43.8 | % | $ | 110,175 | 46.5 | % | $ | 323,438 | 43.7 | % | $ | 295,113 | 44.4 | % | ||||||||||||||||
Consumer cleaning revenue |
72,003 | 27.5 | 70,734 | 29.8 | 217,698 | 29.5 | 205,732 | 31.0 | ||||||||||||||||||||||||
Food and processed juice
revenue |
45,340 | 17.3 | 29,305 | 12.3 | 116,010 | 15.7 | 87,681 | 13.2 | ||||||||||||||||||||||||
Industrial, agricultural and
automotive revenue |
13,229 | 5.1 | 11,498 | 4.8 | 39,736 | 5.4 | 36,240 | 5.5 | ||||||||||||||||||||||||
Other revenue (a) |
16,358 | 6.3 | 15,643 | 6.6 | 41,857 | 5.7 | 39,462 | 5.9 | ||||||||||||||||||||||||
Total revenue |
$ | 261,559 | 100.0 | % | $ | 237,355 | 100.0 | % | $ | 738,739 | 100.0 | % | $ | 664,228 | 100.0 | % | ||||||||||||||||
| (a) | Other revenue includes Clean Tech (recycling), Whiteline (transportation and logistics), health, personal care and distilled spirits revenue and other miscellaneous sources of revenue. |
Three Months Ended July 31, 2004 Compared to Three Months Ended August 2, 2003
Revenue
Revenue for the third quarter increased 10.2% over the same period in 2003 to $261.6 million with unit sales increasing 14.7%. In the U.S., all categories delivered increased revenue during the period with the largest increase in our food and processed juice category where expansion of our hot fill product line grew this category by over 50% compared with the same period in 2003. During the quarter, consistent performance in our carbonated and non-carbonated beverage category and gains in our industrial category contributed to the revenue and unit sales increases. Revenues in Brazil increased during the period with revenue up 10.1% and unit sales increasing 3.8%. Using industry standard price data, we estimate that higher resin prices would have resulted in approximately a $12.0 million increase in revenues for the three months ended July 31, 2004.
Revenue and unit sales increases and decreases by product category are discussed more specifically below:
| • | Carbonated and non-carbonated beverage revenue increased 4.0% to $114.6 million during the three-month period ended July 31, 2004. Unit volume increased 8.3% over the same period in 2003. In the U.S., increased demand for bottled water containers combined with shipments to supplement supply due to tight market conditions helped drive sales during the quarter. Brazil posted higher revenue and unit volume during the quarter as a result of several new initiatives with new customers in the region. |
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| • | Consumer cleaning revenue increased 1.8% to $72.0 million in the third quarter of 2004. Unit volume decreased 5.3% as compared to the three months ended August 2, 2003. The change in unit volume was a result of our exiting a piece of high volume, low margin business and redeploying the equipment used for this business to run lower volume, higher priced packages. |
| • | Food and processed juice revenue and unit volume increased significantly during the third quarter compared to the same period of 2003. During the third quarter, revenue in this category increased 54.7% to $45.3 million, with unit volume up 63.0%. All customers in the category contributed to the revenue increase, but the significant investment and resulting volume lift in our hot fill isotonic beverage business represented a significant portion of these gains. |
| • | Industrial, agricultural and automotive category revenue continued its steady performance in the period with revenue increasing 15.1% to $13.2 million. Unit sales for the three-month period ended July 31, 2004 increased 10.5% from the three-month period ended August 2, 2003. The popularity of multi-quart oil packages and the shift towards ready mix antifreeze continues to lift sales in this category. |
| • | Other revenue increased 4.6% to $16.4 million. The change was primarily attributable to an increase in sales volume related to health, personal care and distilled spirits along with an increase in other miscellaneous revenue offset by a decrease in freight revenue. |
Gross Profit
Gross profit increased 24.6% to $36.7 million for the three-month period ended July 31, 2004. The increase in gross profit was attributable to higher unit sales volume and improved operating performance, offset by price reductions implemented to extend customer contracts of approximately $4.0 million and increased operating costs associated with the start-up of several new product lines and the addition of our new facility in Louisiana. Gross profit as a percent of revenue increased to 14.0% as compared to 12.4% in the prior period.
Our primary raw materials consist of PET and HDPE resins. Although our revenue is affected by fluctuations in resin prices, our gross profit is, in general, unaffected by these fluctuations. In general, other than certain temporary arrangements, industry practice and contractual arrangements with our customers permit price changes to be passed through to customers. As a result, we have in the past experienced revenue changes without corresponding changes in gross profit. Currently, we have been notified of resin price increases, which will take effect during the fourth quarter of 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended July 31, 2004 increased 8.0% to $20.2 million. Increases in compensation, insurance, benefits and depreciation offset by a decrease in professional services and taxes were the primary factors contributing to the change. As a percentage of revenue, selling, general and administrative expenses declined to 7.7% for the three months ended July 31, 2004 from 7.9% for the three months ended August 2, 2003.
Interest Expense
Interest expense remained flat at approximately $9.2 million and $9.1 million for the three months ended July 31, 2004 and August 2, 2003, respectively.
Other (Income) and Expense
Other income increased by $0.4 million to approximately $0.8 million for the three-month period ended July 31, 2004. The increase was related to a decrease of $0.7 million in foreign currency exchange rate losses offset by a decline in interest income and royalty income of $0.3 million.
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Income Tax Expense
Provision for income taxes was a $3.3 million expense for the three months ended July 31, 2004 as compared to a $1.6 million expense for the three months ended August 2, 2003. Earnings before taxes were $8.1 million for the three months ended July 31, 2004 compared to $2.0 million of earnings for the three months ended August 2, 2003. In third quarter of 2004 and 2003, the effective tax rate was 41.5% and 79.7%, respectively. The effective tax rate for 2003 was affected by the accounting of a change in estimate for prior year book and tax differences and the settlement of prior period tax liabilities.
Net Earnings
Net earnings increased by $4.3 million from net earnings of $0.4 million for the three-month period ended August 2, 2003 to net earnings of $4.7 million for the three-month period ended July 31, 2004. An increase in gross profit offset by an increase in selling, general and administrative expenses along with other factors mentioned above resulted in an increase in net income over the prior period.
Nine Months Ended July 31, 2004 Compared to Nine Months Ended August 2, 2003
Revenue
Revenue increased 11.2% to $738.7 million for the nine months ended July 31, 2004 with unit sales increasing 16.0%. Significant increases in our food and processed juice category, strong unit volume growth in Brazil and consistent performance in our carbonated and non-carbonated beverage category contributed to these results. In the U.S., volume gains were attributable primarily to the expansion of our food and processed juice category and the addition of new products and new customers served by our new manufacturing facilities in Florida and Alabama. An increase in resin prices over the prior year also contributed to the increase in revenues. Using industry standard price data, we estimate that higher resin prices would have resulted in approximately a $20.0 million increase in revenues for the nine months ended July 31, 2004. The increases in revenue were partially offset by price reductions implemented for new business and the extension of current business.
Revenue and unit sales increases and decreases by product category are discussed more specifically below:
| • | Carbonated and non-carbonated beverage revenue increased 9.6% to $323.4 million during the nine-month period ended July 31, 2004 with unit volume up 14.1% over the same period in 2003. Increased demand for water packages combined with gains in small, single serve carbonated beverage packages contributed to the gains. |
| • | Consumer cleaning revenue increased 5.8% to $217.7 million for the nine months ended July 31, 2004, with unit volume increasing 1.9% over the prior year. Increased demand for liquid detergent containers was offset by our exit from a piece of high volume low margin business in this category. |
| • | Our food and processed juice category reported significant increases in both revenue and unit volume for the nine months ended July 31, 2004 as compared to the same period of 2003. During the nine months ended July 31, 2004, revenue increased 32.3% with unit demand up by 35.3% over the same period in 2003. Demand for new packaging in this category remains strong with squeezable packaging, glass to plastic conversions and expansion of our hot fill product line all driving sales in this category. |
| • | Industrial, agricultural and automotive category revenue continued its steady performance with revenue increasing 9.6% to $39.7 million during the nine months ended July 31, 2004, with unit sales increasing 3.4% over the prior period. The popularity of multi-quart oil packages and the shift towards ready mix antifreeze continues to lift sales in this category. |
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| • | Other revenue increased 6.1% to $41.9 million. The increase in other revenue was a combination of increased sales volume associated with health, personal care, distilled spirits and increased freight and other miscellaneous revenue. |
Gross Profit
Gross profit increased 4.7% to $96.1 million for the nine-month period ended July 31, 2004. The increase in gross profit was attributable to higher unit sales volume and improved operating performance related to our U.S. operations. The increase in gross profit was offset by price reductions implemented to extend customer contracts of approximately $14.0 million and increased operating costs associated with the start-up of several new product lines and the addition of our new facility in Louisiana. A decrease in operating performance related to our South American operations also offset the increase in gross profit. Gross profit as a percent of revenue decreased to 13.0% as compared to 13.8% in the prior period. The erosion of gross profit as a percentage of revenue was due to the factors mentioned above and to higher resin costs that increased revenue without increasing associated gross profit.
Our primary raw materials consist of PET and HDPE resins. Although our revenue is affected by fluctuations in resin prices, our gross profit is, in general, unaffected by these fluctuations. In general, other than certain temporary arrangements, industry practice and contractual arrangements with our customers permit price changes to be passed through to customers. As a result, we have in the past experienced revenue changes without corresponding changes in gross profit. Currently, we have been notified of resin price increases that will take effect in the fourth quarter of 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) for the nine months ended July 31, 2004 increased 7.4% to $59.7 million. Increases in compensation, benefits, taxes, travel expenses and administrative fees related to the start up of our European operations offset by a decrease in legal fees were the primary factors contributing to the $4.1 million increase in SG&A. As a percentage of revenue, SG&A decreased to 8.1% for the nine months ended July 31, 2004 from 8.4% for the nine months ended August 2, 2003.
Interest Expense
Interest expense decreased $1.1 million to $27.0 million for the nine-month period ended July 31, 2004, as compared to $28.1 million for the nine-month period ended August 2, 2003. The decrease in interest expense was primarily attributable to interest earned from interest rate swaps entered into on March 11, 2003, an increase in capitalized interest and a decrease in interest rates and interest expense associated with our South American operations.
Other (Income) and Expense
Other income increased by $0.9 million to $1.7 million for the nine-month period ended July 31, 2004. The increase was related to a change of $1.5 million in foreign currency exchange rates, a gain of approximately $0.1 million on the disposition and sale of fixed assets offset by a decline in interest and royalty income of $0.7 million.
Income Tax Expense
Provision for income taxes was a $4.8 million expense for the nine-month period ended July 31, 2004 as compared to a $3.9 million expense for the nine-month period ended August 2, 2003. Earnings before taxes were $11.2 million for the nine months ended July 31, 2004 compared to $8.9 million of earnings for the nine months ended August 2, 2003. During the nine months ended July 31, 2004 and August 2, 2003, the effective rate was 42.4% and 43.6%, respectively.
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Net Earnings
Net earnings improved by approximately $1.5 million from net earnings of $5.0 million for the nine-month period ended August 2, 2003 to net earnings of $6.5 million for the nine-month period ended July 31, 2004. An increase in gross profit, favorable foreign currency exchange rates and a decrease in interest expense offset by an increase in selling, general and administrative expenses resulted in an increase in net earnings over the prior period.
Financial Condition
We intend to expand our business, both domestically and internationally. We have a significant amount of financing capacity to fund the continued growth of our business. Past expenditures have been used to maintain equipment and expand capacity for revenue growth. These expenditures were funded with cash flow from operations, bank debt and additional operating and capital leases. Future capital expenditures will be used in the same manner as past expenditures.
During the nine months ended July 31, 2004, we spent approximately $87.3 million and assumed $7.8 million in capital lease obligations to cover the capital requirements of our operations. We expect to incur capital expenditures of approximately $120.0 million in fiscal 2004 and $70.0 million in 2005.
We have established three entities in Central Europe, Plastipak Czech Republic, s.r.o., Plastipak Slovakia, s.r.o. and Clean Tech Slovakia, s.r.o. Plastipak Czech Republic, s.r.o. will serve as a bottle manufacturing facility. Our investment is moving ahead on time and on budget. The initial investment required to support this facility will be approximately $8.0 to $10.0 million. Production is expected to begin in the fall of 2004. We plan to employ approximately 25 people to support the new site.
Plastipak Slovakia is serving as our technical and business center for Europe. Plastipak Slovakia has begun providing sales, marketing and administrative services for Central Europe. Certain machine parts have already been ordered through this office and are under evaluation at our equipment development center.
Clean Tech Slovakia s.r.o. is in continuing negotiations with the city of Kechnec for a parcel of land on which we are considering constructing a recycling operation for PET and HDPE resins. At this point in time we are unsure of the amount of investment required for this project.
We had positive cash flow from operating activities of $65.7 million, which in part funded our capital expenditures of approximately $87.3 million. The remaining balance of capital expenditures was covered by cash and cash equivalents and by financing activities including the assumption of capital lease obligations.
Seasonality
The carbonated soft drink (CSD) and, to a lesser extent, the other beverage portions of our business are highly seasonal, with peak demand during warmer summer months, and reduced demand during the winter. We normally add temporary staff and build inventory of products for our CSD and water customers in anticipation of seasonal demand in the quarter preceding the summer.
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Inflation
We use large quantities of plastic resins in manufacturing our products. These resins accounted for a major portion of our cost of goods sold in the nine-month period ended July 31, 2004, and are subject to substantial price fluctuations resulting from shortages in supply and changes in the prices of natural gas, crude oil and other petrochemical products from which these resins are produced. We generally enter into multi-year agreements with our resin suppliers, and our purchases of raw materials are subject to market prices and inflation.
Effect of Changes in Exchange Rates
In general, our results of operations are partially affected by changes in foreign exchange rates. We invoice our Brazilian and Argentine customers in the Brazilian Real and Argentine Peso, respectively. A portion of those invoices are pegged to the U.S. exchange rate. As a result, subject to market conditions, a decline in the value of the U.S. dollar relative to the Brazilian Real and to a lesser extent the Argentine Peso can have a favorable effect on our profitability. Conversely, an increase in the value of the dollar relative to the Brazilian Real and to a lesser extent the Argentine Peso can have a negative effect on our profitability. In addition, any change in value of the Euro as compared to the U.S. dollar may impact start-up costs associated with our new entities in Central Europe. Exchange rate fluctuations resulted in a gain of approximately $0.6 million for the period ended July 31, 2004.
Liquidity and Capital Resources
Net cash provided from operating activities increased by 34.4% to $65.7 million for the nine months ended July 31, 2004 as compared to the nine months ended August 2, 2003. The increase in cash was partially the result of approximately $8.6 million in net working capital and other asset and liability changes. The changes in net working capital and other asset and liability changes were due to decreased spending on inventories along with an increase in both accounts payable and other liabilities offset by an increase in accounts receivable and deposits for equipment purchases. An increase in depreciation and amortization of $6.7 million contributed to the increase in cash. Improved operating performance of $1.5 million also increased cash from operations.
Net cash used in investing activities was $90.4 million and $72.2 million for the nine months ended July 31, 2004 and August 2, 2003, respectively. Investing activities consisted primarily of the acquisition of property, plant and equipment for new business, new facilities and the expansion of existing facilities. For the nine months ended July 31, 2004 and August 2, 2003, property, plant and equipment acquisitions using cash were $87.3 million and $72.0 million, respectively. In 2004 and 2003, intangible asset acquisitions to extend customer contracts were $4.5 million and $0.8 million, respectively.
Net cash used in financing activities was $2.0 million and $3.9 million for the nine months ended July 31, 2004 and August 2, 2003, respectively.
On August 20, 2001 and September 25, 2002, we sold an aggregate total principal amount of $275 million and $50 million, respectively, of 10.75% Senior Notes to qualified institutional buyers. The notes have a maturity date of September 1, 2011, and we have the option to redeem all or a portion of the notes at any time on or after September 1, 2006. Interest under the notes is payable on September 1 and March 1 of each year. The indenture under which the notes were issued places restrictions on our ability to declare or pay dividends, purchase or acquire equity interests of Plastipak, and retire indebtedness that is subordinate to the notes. The notes also have covenants that place restrictions on the incurrence of debt, the issuance of stock, and granting of liens.
The proceeds from the Senior Notes sold on August 20, 2001 were used to pay off existing debt. During fiscal 2003 we used the net proceeds from the September 25, 2002 sale of Senior Notes for general corporate purposes, including working capital, capital expenditures and technology development.
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In conjunction with our first sale of Senior Notes, we entered into an Amended Credit Agreement effective August 20, 2001 which allows us to borrow up to $150 million, subject to a borrowing base consisting of 85% of eligible domestic accounts receivable, 65% of the value of eligible domestic inventory and 50% of the value of domestic property, plant and equipment. The Amended Credit Agreement has a five-year term. Interest under the Amended Credit Agreement is payable at 200 to 350 basis points per annum over Eurodollar or at prime rates, as we select. The Amended Credit Agreement is secured by substantially all of our assets, including pledges of the stock of Plastipak and all of its material foreign subsidiaries. Packaging, Whiteline, Clean Tech, and TABB are the borrowers and guarantors under the Amended Credit Agreement and Plastipak guarantees obligations under the Amended Credit Agreement. As of July 31, 2004, $58.5 million in letters of credit were outstanding under the Amended Credit Agreement and we had $91.5 million available for borrowing subject to covenant restrictions.
Under the Amended Credit Agreement we are required to calculate EBITDA because covenants in our debt agreement are tied to ratios based on that measure. For instance, the covenants under the Amended Credit Agreement incorporate EBITDA for the most recent last four fiscal quarters (last twelve months), as a component of the following ratios: debt service ratio (minimum 1.25 to 1), senior secured debt ratio (maximum 2.00 to 1), leverage ratio (maximum 4.25 to 1) and interest coverage ratio (minimum 2.25 to 1). Our ability to incur additional debt is tied to our bank covenants. As of July 31, 2004, we were in compliance with our covenants. EBITDA should not be considered an alternative measure of operating results or cash flows from operations (as determined by generally accepted accounting principles), but it is a widely accepted financial indicator of a company’s ability to incur and service debt. While commonly used, however, EBITDA is not identically calculated by companies presenting EBITDA and is, therefore, not necessarily an accurate means of comparison and may not be comparable to similarly titled measures disclosed by other companies.
Our Amended Credit Agreement defines EBITDA as net earnings (loss) plus income tax expense, interest expense, depreciation and amortization. A reconciliation between net earnings and EBITDA is calculated as follows:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| July 31, | August 2, | July 31, | ||||||||||||||
| 2004 |
2003 |
2004 |
August 2, 2003 |
|||||||||||||
Net earnings (per GAAP basis) |
$ | 4,717,240 | $ | 410,650 | $ | 6,451,620 | $ | 5,011,044 | ||||||||
Income tax expense |
3,347,000 | 1,608,000 | 4,752,000 | 3,866,000 | ||||||||||||
Interest Expense |
9,246,585 | 9,118,594 | 26,964,215 | 28,138,198 | ||||||||||||
Depreciation |
15,588,261 | 12,643,294 | 44,591,150 | 36,578,183 | ||||||||||||
Amortization |
1,244,594 | 1,686,239 | 3,660,634 | 4,919,829 | ||||||||||||
EBITDA |
$ | 34,143,680 | $ | 25,466,777 | $ | 86,419,619 | $ | 78,513,254 | ||||||||
| Years Ended |
Last Twelve Months (LTM) |
|||||||||||||||
| November 1, | November 2, | July 31, | ||||||||||||||
| 2003 |
2002 |
2004 |
August 2, 2003 |
|||||||||||||
Net earnings (per GAAP basis) |
$ | 4,361,056 | $ | 8,592,810 | $ | 5,801,632 | $ | 4,364,481 | ||||||||
Income tax expense |
4,543,000 | 4,831,000 | 5,429,000 | 4,376,000 | ||||||||||||
Interest Expense |
36,902,209 | 35,099,265 | 35,728,226 | 36,570,098 | ||||||||||||
Depreciation |
49,859,253 | 44,070,064 | 57,872,220 | 48,309,115 | ||||||||||||
Amortization |
6,490,262 | 3,947,529 | 5,231,067 | 6,171,283 | ||||||||||||
EBITDA |
$ | 102,155,780 | $ | 96,540,668 | $ | 110,062,145 | $ | 99,790,977 | ||||||||
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We have contractual obligations and commercial commitments that may affect our financial condition. The following tables identify material obligations and commitments as of July 31, 2004.
| Payments Due by Period |
||||||||||||||||||||
| Less Than 1 | 1-3 | 3-5 | More Than | |||||||||||||||||
| Contractual Cash Obligations |
Total |
Year |
Years |
Years |
5 Years |
|||||||||||||||
Long Term Debt Obligations, including
current portion (a) |
$ | 57,420,453 | $ | 607,783 | $ | 56,812,670 | $ | — | $ | — | ||||||||||
Capital Lease Obligations, including current
portion |
12,695,622 | 4,067,038 | 8,358,298 | 270,286 | — | |||||||||||||||
Operating Lease Obligations |
37,353,581 | 15,812,497 | 20,338,510 | 1,202,574 | — | |||||||||||||||
Capital Expenditure Commitments |
10,629,323 | 10,629,323 | — | — | — | |||||||||||||||
Revolving Credit Facility (b) |
— | — | — | — | — | |||||||||||||||
Salary Continuation Plan |
4,094,107 | — | — | — | 4,094,107 | |||||||||||||||
Obligations Under Stock Bonus Plans |
10,484,727 | — | — | — | 10,484,727 | |||||||||||||||
Senior Notes |
325,000,000 | — | — | — | 325,000,000 | |||||||||||||||
Total Contractual Cash Obligations |
$ | 457,677,813 | $ | 31,116,641 | $ | 85,509,478 | $ | 1,472,860 | $ | 339,578,834 | ||||||||||
| Commitment Expiration by Period |
||||||||||||||||||||
| Less Than 1 | 1-3 | 3-5 | More Than | |||||||||||||||||
| Other Commercial Commitments |
Total |
Year |
Years |
Years |
5 Years |
|||||||||||||||
Standby Letters of Credits |
$ | 58,499,217 | $ | 58,499,217 | $ | — | $ | — | $ | — | ||||||||||
Revolving Credit Facility (c) |
91,500,783 | — | 91,500,783 | — | — | |||||||||||||||
Total Commercial Commitments |
$ | 150,000,000 | $ | 58,499,217 | $ | 91,500,783 | $ | — | $ | — | ||||||||||
| (a) | Included in long-term debt obligations are notes payable primarily collateralized by letters of credit and equipment. | |||
| (b) | The revolving credit facility’s actual outstanding balance as of July 31, 2004. The revolving credit facility expires in August 2006. | |||
| (c) | The revolving credit facility’s unused borrowing balance as of July 31, 2004. | |||
Looking forward, we have the following short-term and medium-term capital needs. Our overall capital expenditure budget in fiscal 2004 is approximately $120.0 million and $70.0 million in fiscal 2005, a majority of which is expected to be discretionary capital expenditures. Our new facility in the Czech Republic is expected to begin production during the last quarter of fiscal 2004. We expect to have a new site in Louisiana beginning production in the first quarter of fiscal 2005. We expect to finance all of our capital expenditures with operating cash flows and to cover any shortfalls with borrowings under the Amended Credit Agreement.
Based on our current level of operations and anticipated cost savings and operating improvements, we believe that cash flow from operations and available cash, together with available borrowings under the Amended Credit Agreement, will be adequate to meet our future liquidity needs for at least the next few years. As of July 31, 2004, we had approximately $10.5 million in cash and cash equivalents. It is possible, however, that our business will not generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will not be realized or that future borrowings will not be available under the Amended Credit Agreement in an amount sufficient to enable us to service our indebtedness, or to fund our other liquidity needs. In addition, we may not be able to refinance any of our indebtedness, including the Amended Credit Agreement or the 10.75% Senior Notes due 2011, on commercially reasonable terms or at all.
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Off-Balance Sheet Arrangements
As of July 31, 2004, we had no off-balance sheet arrangements.
Critical Accounting Policies
Discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Please refer to Note A of our annual audited financial statements included in the “Financial Statements and Supplementary Data” section, in our Form 10-K for the year ended November 1, 2003, for a description of our significant accounting policies. These accounting policies are subject to judgments and uncertainties, which affect the application of these policies. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. On an on-going basis, we evaluate estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The material accounting policies that we believe are most critical to the understanding of our financial position and results of operations that require significant management estimates and judgments are discussed below.
Losses on accounts receivable are based upon their current status, historical experience and management’s evaluation of existing economic conditions. Significant changes in customer profitability or general economic conditions may have a significant effect on our allowance for doubtful accounts.
Property, plant and equipment represent a significant portion of our total assets. We record property, plant and equipment at cost. Depreciation is computed principally using the straight-line method based upon estimated useful lives ranging from 3 to 10 years for machinery and equipment and up to 39 years for buildings. Amortization of leasehold improvements is provided over the terms of the various leases. These estimates require assumptions that are believed to be reasonable. Long-lived assets are tested for impairment when an event occurs that indicates impairment may exist.
Impact of New Accounting Pronouncements
For information regarding the impact of new accounting pronouncements, see Note C to the unaudited condensed consolidated financial statements within Item 1 of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Contracts
At July 31, 2004 we had no material foreign exchange contracts. We do not enter into foreign exchange contracts for trading or speculative purposes.
Short-Term and Long-Term Debt
We are exposed to interest rate risk primarily through our borrowing activities. Our policy has been to utilize United States dollar denominated borrowings to fund our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements, while long-term debt is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements.
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On March 11, 2003, we entered into two interest rate swap agreements for an 8-year period ending September 1, 2011. In connection with the Senior Notes, we exchanged fixed rate interest of 10.75% for variable rate interest. The interest rate swap agreements have notional amounts of $50.0 million each. The variable rates are equal to six month LIBOR plus 6.46% and 6.66%, respectively; except for the initial period from March 11, 2003 to September 1, 2003, which was determined via linear interpolation. As of July 31, 2004, we recorded an increase of $4,711,202 in other accrued expenses to recognize the decrease in fair value of the swap and a $4,711,202 reduction in the Senior Notes to recognize the difference between the carrying value and fair value of the related hedged liability.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that as of such date the disclosure controls and procedures were adequate and effective in ensuring that material information relating to Plastipak would be made known to them by others in the company.
There were no significant changes in internal controls or other factors that could significantly affect Plastipak’s disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in Plastipak’s internal controls. As a result, no corrective actions were required or undertaken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fall of 1999, North American Container, Inc. (“NAC”) filed suit in the U.S. District Court for the Northern District of Texas (Civil Action No. 3-99CV1749-D), claiming damages in an unspecified amount against Plastipak and 41 other defendants for the alleged infringement of NAC U.S. Patent No. 5,072,841. On April 4, 2000 this patent reissued as patent RE 36,639, with 14 new claims. The new claims were the primary focus of NAC’s case against Plastipak and the major manufacturers, as well as major food and beverage distributors. Plastipak and the other defendants are vigorously defending this claim on the bases of both the invalidity of the patent and on non-infringement. On February 24, 2004, the U.S. District Court entered a judgment of non-infringement of all accused containers for all defendants, and a judgment of invalidity for some of the claims. North American Container has appealed this judgment to the U.S. Court of Appeals for the Federal Circuit and the appeal is in process. It is our continued belief that Plastipak and other defendants will prevail on appeal in this case. As a conservative measure, however, the existing reserve will be maintained, decreased, or increased based on contemporaneously evaluating the status of the ongoing appeal.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission Release 34-46427 | |
31.2
|
Certification of Principal Financial Officer Pursuant Section to 302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission Release 34-46427 | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K. None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PLASTIPAK HOLDINGS, INC. | ||||
Dated: September 14, 2004
|
By: | /s/ William C. Young | ||
| William C. Young President and Chief Executive Officer |
||||
| By: | /s/ Michael J. Plotzke | |||
| Michael J. Plotzke, Treasurer and Chief Financial Officer |
||||
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10-Q EXHIBIT INDEX
| EXHIBIT NO. |
DESCRIPTION |
|
| EX-31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission Release 34-46427 | |
| EX-31.2 | Certification of Principal Financial Officer Pursuant Section to 302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange Commission Release 34-46427 | |
| EX-32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| EX-32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
33