UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 29, 2005
OR
o TRANSITION REPORT PURSUANT TO 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 incorporation or organization) |
(I.R.S. Employer Identification Number) |
41605 Ann Arbor Road, Plymouth, Michigan 48170
(734) 455-3600
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 þ 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 þ
The number of shares of the registrant’s common stock, $1.00 par value, outstanding as of January 29, 2005 was 28,416.
PLASTIPAK HOLDINGS, INC.
FORM 10-Q INDEX
i
PART - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
| January 29, | October 30, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 9,279,431 | $ | 11,805,284 | ||||
Accounts Receivable
|
||||||||
Trade (net of allowance of $2,992,563 and $2,557,711
at January 29, 2005 and October 30, 2004) |
61,359,234 | 74,818,848 | ||||||
Related parties |
7,565,118 | 7,953,867 | ||||||
| 68,924,352 | 82,772,715 | |||||||
Inventories |
121,076,364 | 99,277,849 | ||||||
Prepaid expenses |
12,562,999 | 20,871,455 | ||||||
Prepaid federal income taxes |
108,316 | 99,530 | ||||||
Deferred income taxes |
3,433,000 | 2,934,000 | ||||||
Other current assets |
5,160,273 | 3,021,049 | ||||||
Total Current Assets |
220,544,735 | 220,781,882 | ||||||
Property, Plant & Equipment- Net |
419,342,552 | 423,702,042 | ||||||
Other Assets |
||||||||
Cash surrender value of life insurance |
2,237,920 | 2,237,920 | ||||||
Deposits |
12,220,879 | 5,833,329 | ||||||
Capitalized loan costs (net of accumulated amortization
of $5,599,387 and $5,169,415 at January 29, 2005
and October 30, 2004) |
8,816,779 | 7,821,832 | ||||||
Intangible assets (net of accumulated amortization of
of $7,603,717 and $6,826,005 at January 29, 2005
and October 30, 2004) |
8,909,004 | 8,333,754 | ||||||
Prepaids |
784,571 | 840,916 | ||||||
Sundry |
475,361 | 305,474 | ||||||
Total Other Assets |
33,444,514 | 25,373,225 | ||||||
Total Assets |
$ | 673,331,801 | $ | 669,857,149 | ||||
The accompanying notes are an integral part of these financial statements.
1
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
| January 29, | October 30, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts
payable - trade |
$ | 134,195,834 | $ | 141,355,859 | ||||
Current portion of long term obligation |
5,052,567 | 5,232,248 | ||||||
Accrued liabilities
|
||||||||
Taxes other than income |
8,036,682 | 12,842,361 | ||||||
Other accrued expenses |
46,835,258 | 34,996,699 | ||||||
Income taxes |
96,234 | — | ||||||
Total Current Liabilities |
194,216,575 | 194,427,167 | ||||||
Senior Notes (net of unamortized premium and
FV of swaps of $1,864,617 and ($2,569,471) at January 29,
2005 and $1,935,424 and ($2,026,103) at October 30, 2004) |
324,295,147 | 324,909,322 | ||||||
Long-Term Obligations |
60,086,022 | 61,783,680 | ||||||
Deferred Income Taxes |
25,952,000 | 23,933,000 | ||||||
Other Non-Current Liabilities |
4,740,588 | 4,622,314 | ||||||
Obligations Under Stock Bonus Plans |
11,959,208 | 11,371,402 | ||||||
Stockholders’ Equity |
||||||||
Common stock, no par value, 60,000 shares authorized;
28,416 shares issued and outstanding |
28,416 | 28,416 | ||||||
Retained earnings |
52,053,845 | 48,781,848 | ||||||
Total Stockholders’ Equity |
52,082,261 | 48,810,264 | ||||||
Total Liabilities and Stockholders’ Equity |
$ | 673,331,801 | $ | 669,857,149 | ||||
The accompanying notes are an integral part of these financial statements.
2
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
| Three Months Ended | ||||||||
| January 29, | January 31, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | (unaudited) | |||||||
Revenues |
$ | 280,468,343 | $ | 225,967,628 | ||||
Cost and expenses |
242,096,857 | 203,556,028 | ||||||
Gross profit |
38,371,486 | 22,411,600 | ||||||
Selling, general and administrative expenses |
23,106,039 | 19,398,058 | ||||||
Operating profit |
15,265,447 | 3,013,542 | ||||||
Other expense (income)
|
||||||||
Interest expense |
9,812,859 | 8,944,164 | ||||||
Interest income |
(54,649 | ) | (98,468 | ) | ||||
Royalty income |
(40,000 | ) | (159,074 | ) | ||||
Loss (gain) on foreign currency translation |
701,399 | (271,015 | ) | |||||
Sundry income |
(46,159 | ) | (217,022 | ) | ||||
| 10,373,450 | 8,198,585 | |||||||
Earnings (loss) before income taxes |
4,891,997 | (5,185,043 | ) | |||||
Income tax expense (benefit)
Current |
||||||||
Current |
100,000 | (523,000 | ) | |||||
Deferred |
1,520,000 | (1,087,000 | ) | |||||
| 1,620,000 | (1,610,000 | ) | ||||||
Net earnings (loss) |
$ | 3,271,997 | $ | (3,575,043 | ) | |||
The accompanying notes are an integral part of these financial statements.
3
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Three Months Ended | ||||||||
| January 29, | January 31, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | (unaudited) | |||||||
Cash Flows from Operating Activities |
||||||||
Net earnings (loss) |
$ | 3,271,997 | $ | (3,575,043 | ) | |||
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
18,476,109 | 15,145,513 | ||||||
Amortization of net premium on Senior Notes |
(70,807 | ) | (70,810 | ) | ||||
Bad debt expense |
330,796 | 314,701 | ||||||
Deferred salaries |
122,328 | 382,300 | ||||||
Gain on sale of equipment |
(4,750 | ) | (103,555 | ) | ||||
Deferred tax expense (benefit) |
1,520,000 | (523,000 | ) | |||||
Restricted stock option - interest and compensation |
587,806 | 155,231 | ||||||
Foreign currency translation loss (gain) |
102,818 | (100,336 | ) | |||||
Change in assets and liabilities: |
||||||||
Decrease (increase) in accounts receivable |
13,517,567 | (12,366,278 | ) | |||||
(Increase) decrease in inventories |
(21,798,515 | ) | 1,395,124 | |||||
Decrease in prepaid expenses and other current assets |
6,062,060 | 3,349,265 | ||||||
Increase in prepaid federal income taxes |
(8,786 | ) | (1,013,319 | ) | ||||
Increase in other liabilities |
6,485,458 | 9,109,872 | ||||||
Increase in deposits |
(6,387,550 | ) | (7,218,528 | ) | ||||
(Decrease) increase in accounts payable |
(7,160,025 | ) | 2,623,035 | |||||
Increase in sundry other assets |
(169,887 | ) | (107,989 | ) | ||||
Increase (decrease) in income taxes |
96,234 | (6,000 | ) | |||||
Net cash provided by operating activities |
14,972,853 | 7,390,183 | ||||||
Cash Flows Used In Investing Activities |
||||||||
Acquisition of property and equipment |
(12,739,174 | ) | (38,517,981 | ) | ||||
Proceeds from sale of equipment |
29,423 | 797,669 | ||||||
Acquisition of intangible assets |
(1,352,961 | ) | (4,512,500 | ) | ||||
Net cash used in investing activities |
(14,062,712 | ) | (42,232,812 | ) | ||||
Cash Flows (Used In) Provided By Financing Activities |
||||||||
Net (repayments) borrowings under revolving debt |
(420,000 | ) | 14,681,384 | |||||
Principal payments on long-term obligations |
(1,591,075 | ) | (2,134,558 | ) | ||||
Proceeds from long-term obligations |
— | 226,519 | ||||||
Capitalized loan costs |
(1,424,919 | ) | — | |||||
Net cash (used in) provided by financing activities |
(3,435,994 | ) | 12,773,345 | |||||
Net decrease in cash and cash equivalents |
(2,525,853 | ) | (22,069,284 | ) | ||||
Cash and cash equivalents at beginning of the year |
11,805,284 | 37,278,406 | ||||||
Cash and cash equivalents at end of the period |
$ | 9,279,431 | $ | 15,209,122 | ||||
The accompanying notes are an integral part of these financial statements.
4
Plastipak Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
| Three Months Ended | ||||||||
| January 29, | January 31, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | (unaudited) | |||||||
Supplemental Cash Flow Information: |
||||||||
Cash paid for interest |
$ | 1,509,000 | $ | 1,530,000 | ||||
Supplemental Noncash Invseting and Financing Activities: |
||||||||
Acquisition of equipment through the assumption of
long-term obligations |
$ | 31,000 | $ | 7,936,000 | ||||
Increase in fair value of interest rate swaps |
$ | (543,000 | ) | $ | 2,182,000 | |||
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 accruals and estimated provisions for bonus and profit-sharing arrangements) considered necessary for a fair presentation have been included. Operating results for the three months ended January 29, 2005 are not necessarily indicative of the results that may be expected for the year ending October 29, 2005.
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 28, 2005.
Reclassifications
Certain reclassifications have been made to the 2004 financial information in order for them to conform to the classifications at January 29, 2005.
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 January 29, 2005 and January 31, 2004 contained 13 weeks.
Note C - New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151 (“SFAS 151”), “Inventory Costs”. SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. This statement requires that these items be expensed as incurred and not included in overhead. In addition, SFAS 151 requires that allocation of fixed production overhead to conversion costs should be based on normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact from this standard on its results of operations and financial position.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets”. SFAS 153, amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions”. This statement eliminates the exception to fair value in Opinion 29 for exchanges of similar productive assets and replaces it with a general exception for exchanges that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company historically has not engaged in significant exchanges that are included in the scope of SFAS 153.
6
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note C - New Accounting Pronouncements - Continued
In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R) (“SFAS 123(R)”), “Share-Based Payment”. This statement replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective for public companies as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 and for nonpublic companies as of the beginning of the first annual reporting period that begins after December 15, 2005. The Company is currently evaluating the impact from this standard on its results of operations and financial position.
In December 2004, the Financial Accounting Standards Board (FASB) issued two FASB Staff Positions (FSP) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. FSP FAS 109-1, “Application of FASB Statement No. 109, “Accounting for Income Taxes”, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”, states that the manufacturers’ deduction provided for under this legislation should be accounted for as a special deduction instead of a tax rate change. FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”, allows a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. These FSP’s may affect how a company accounts for deferred income taxes. These FSP’s are effective December 21, 2004. The Company is currently evaluating the impact from these FSP’s on its results of operations and financial position and is expected to complete its evaluation during the first half of fiscal 2005.
Note D - Inventories
Inventories consisted of the following at:
| January 29, | October 30, | |||||||
| 2005 | 2004 | |||||||
Raw Materials |
$ | 55,392,670 | $ | 38,747,489 | ||||
Finished Goods |
51,495,734 | 46,855,038 | ||||||
Parts & Supplies |
14,187,960 | 13,675,322 | ||||||
| $ | 121,076,364 | $ | 99,277,849 | |||||
7
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
| January 29, | October 30, | |||||||
| 2005 | 2004 | |||||||
Note E - Long-Term Obligations |
||||||||
Revolving credit facility pursuant to which Plastipak is
permitted to borrow up to $300,000,000. Interest is payable
quarterly at Eurodollar (plus an additional margin) or
prime-based rates, which varied from 4.50% to 5.25% at October
30, 2004 and 5.25% to 5.75% at January 29, 2005. The company
is required to pay quarterly facility fees during
the year. All the assets of Plastipak secure the credit facility. |
$ | 1,749,352 | $ | - | ||||
Notes payable to banks with interest rates varying from 2.9%
to 4.6%, are due at various times through 2006. Borrowings
are primarily
collateralized by letters of credit. |
49,140,000 | 51,251,830 | ||||||
Notes payable with interest rates varying from 2.6% to 7.5%
due in various installments at various dates through 2007,
collateralized by certain equipment and, in part, by letters of
credit. |
556,219 | 951,096 | ||||||
Capital leases with interest rates varying from 2.2% to 9.5% due in
various installments at various dates through 2009. |
13,693,018 | 14,813,002 | ||||||
| 65,138,589 | 67,015,928 | |||||||
Less current portion |
5,052,567 | 5,232,248 | ||||||
| $ | 60,086,022 | $ | 61,783,680 | |||||
On January 28, 2005, the Company amended its revolving credit agreement and entered into the Fifth Amended and Restated Revolving Credit Agreement. The amendment provides for an increase in the line of credit from $150,000,000 to $300,000,000. The agreement allows the Company to borrow up to $300,000,000 subject to borrowing base limitations and covenant restrictions. Interest under the Amended Credit Agreement is payable at 175 to 350 basis points per annum over Eurodollar or at prime rates, as the Company selects. The Amended Credit Agreement is secured by substantially all of the assets, including pledges of the stock of Plastipak and all of its material foreign subsidiaries. Plastipak, 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 January 29, 2005, $58.6 million and $1.8 million in letters of credit and borrowings, respectively, were currently outstanding under the Fifth Amended and Restated Credit Agreement and the Company had $239.6 million available for borrowing subject to borrowing base limitations and covenant restrictions.
Note F - Derivative Instruments and Hedging Activities
Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Financial Accounting Standards Board Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” 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.
8
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note F - Derivative Instruments and Hedging Activities - Continued
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. 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 million 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 January 29, 2005, the Company recorded an increase of $543,368 in other accrued expenses to recognize the fair value of the swap and a $543,368 decrease in the Senior Notes to recognize the difference between the carrying value and fair value of the related hedge liability.
On February 18, 2005 pursuant to an agreement between the Company and the bank to terminate the interest rate swap agreements, the Company paid the bank $3,245,000.
Note G – Stock Compensation Plans
Plastipak sponsors two Restricted Stock Bonus Plans: the Amended and Restated Restricted Stock Bonus Plan and the 2002 Restricted Stock Bonus Plan. The Company accounts for unexercised options under 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 for unexercised options 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 for unexercised options approximate that which would have been expensed had the value of the options granted been computed under provisions of SFAS 123.
The Company accounts for shares issued under these plans under the provisions of SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The provisions of SFAS 150 were effective for the Company beginning in the first quarter of fiscal 2005. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement requires an issuer to classify a financial instrument issued in the form of shares that is “mandatorily redeemable” and that embodies an unconditional obligation requiring the issuer (the Company) to redeem it by transferring its assets at specified or determinable date (or dates) or “upon an event that is certain to occur”. SFAS 150 requires that a company initially measure mandatorily redeemable instruments at fair value. The Company currently reflects a liability for these instruments at fair value; therefore, no initial transition adjustment was required.
9
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note G – Stock Compensation Plans - Continued
Each of the above-referenced plans require the Company, subject to certain limitations, to repurchase the shares issued under the plans at a price based upon a book value computation plus certain formula adjustments. Increases in the per share redemption value associated with shares issued under the plans are treated as interest expense and an increase to obligations under stock bonus plans. Included in interest expense for the period ended January 29, 2005 is $271,000. Increases in the per share redemption value associated with options granted under the plans are treated as compensation expense and an increase to obligations under stock bonus plans. Included in general and administrative expenses for period ended January 29, 2005 is $316,000, representing the excess of the redemption value over the exercise price for options granted and the increase in redemption value associated with unexercised options.
As of January 29, 2005, the balance of obligations under the stock bonus plans subject to mandatory redemption was $5,517,185. Under the Fifth Amended Credit Agreement, the Company may redeem equity interests of employees pursuant to the Restricted Stock Bonus Plans in amounts not to exceed $3,000,000 in the aggregate in any fiscal year.
The table below summarizes the changes in the Company’s stock compensation plans.
| Amended and | 2002 Plan | |||||||||||||
| Restated Restricted | Restricted Stock | |||||||||||||
| Stock Bonus Plan | Bonus Plan | Total | ||||||||||||
Options outstanding at November 1, 2003 |
1,808 | 700 | 2,508 | |||||||||||
Granted |
— | — | — | |||||||||||
Exercised |
— | (100 | ) | (100 | ) | |||||||||
Cancelled |
— | — | — | |||||||||||
Options outstanding at October 30, 2004 |
1,808 | 600 | 2,408 | |||||||||||
Granted |
— | — | — | |||||||||||
Exercised |
— | — | — | |||||||||||
Cancelled |
— | — | — | |||||||||||
Options outstanding at January 29, 2005 |
1,808 | 600 | 2,408 | |||||||||||
Options exercisable at October 30, 2004 |
1,808 | 600 | 2,408 | |||||||||||
Options exercisable at Janaury 29, 2005 |
1,808 | 600 | 2,408 | |||||||||||
Mandatorily Redeemable Shares January 29, 2005 |
1,642 | 400 | 2,042 | |||||||||||
10
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note H - 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 I - 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 January 29, 2005 and October 30, 2004, statements of operations and statements of cash flows for the three months ended January 29, 2005 and January 31, 2004 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.
11
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I - Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet
As of January 29, 2005
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Current Assets
|
||||||||||||||||||||
Cash |
$ | 588,961 | $ | 4,015,756 | $ | 4,674,714 | $ | — | $ | 9,279,431 | ||||||||||
Accounts receivable |
21,883,133 | 32,946,057 | 22,047,909 | (7,952,747 | ) | 68,924,352 | ||||||||||||||
Inventories |
— | 101,263,637 | 19,812,727 | — | 121,076,364 | |||||||||||||||
Prepaid expenses |
— | 10,227,606 | 2,335,393 | — | 12,562,999 | |||||||||||||||
Prepaid federal income taxes |
— | — | 108,316 | — | 108,316 | |||||||||||||||
Deferred income taxes |
(4,624,000 | ) | 5,532,000 | 2,525,000 | — | 3,433,000 | ||||||||||||||
Other current assets |
— | 3,242,316 | 1,917,957 | — | 5,160,273 | |||||||||||||||
Total Current Assets |
17,848,094 | 157,227,372 | 53,422,016 | (7,952,747 | ) | 220,544,735 | ||||||||||||||
Property, Plant &
Equipment- Net |
— | 370,579,417 | 48,763,135 | — | 419,342,552 | |||||||||||||||
Other Assets
|
||||||||||||||||||||
Cash surrender value
of life insurance |
— | 2,237,920 | — | — | 2,237,920 | |||||||||||||||
Deposits |
— | 12,154,207 | 66,672 | — | 12,220,879 | |||||||||||||||
Investment in and advances
to affiliates |
370,726,600 | (287,757,343 | ) | — | (82,969,257 | ) | — | |||||||||||||
Capitalized loan costs |
861,366 | 7,955,413 | — | — | 8,816,779 | |||||||||||||||
Intangible assets |
— | 7,542,691 | 1,366,313 | — | 8,909,004 | |||||||||||||||
Deferred tax asset -long term |
(766,556 | ) | 766,556 | — | — | — | ||||||||||||||
Prepaids |
— | 784,571 | — | — | 784,571 | |||||||||||||||
Sundry |
— | 2,300,000 | 475,361 | (2,300,000 | ) | 475,361 | ||||||||||||||
Total Other Assets |
370,821,410 | (254,015,985 | ) | 1,908,346 | (85,269,257 | ) | 33,444,514 | |||||||||||||
Total Assets |
$ | 388,669,504 | $ | 273,790,804 | $ | 104,093,497 | $ | (93,222,004 | ) | $ | 673,331,801 | |||||||||
12
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet - Continued
As of January 29, 2005
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Current Liabilities
|
||||||||||||||||||||
Accounts payable |
$ | 108,058 | $ | 98,630,590 | $ | 43,409,934 | $ | (7,952,748 | ) | $ | 134,195,834 | |||||||||
Current portion of long
term obligation |
— | 4,335,843 | 716,724 | — | 5,052,567 | |||||||||||||||
Taxes other than income |
— | 4,966,913 | 3,069,769 | — | 8,036,682 | |||||||||||||||
Other accrued expenses |
16,639,009 | 20,935,878 | 9,260,371 | 46,835,258 | ||||||||||||||||
Income taxes |
100,000 | (3,766 | ) | — | — | 96,234 | ||||||||||||||
Total Current Liabilities |
16,847,067 | 128,865,458 | 56,456,798 | (7,952,748 | ) | 194,216,575 | ||||||||||||||
Senior Notes |
327,011,066 | (2,715,919 | ) | — | — | 324,295,147 | ||||||||||||||
Long-Term Obligations |
— | 8,647,982 | 53,738,040 | (2,300,000 | ) | 60,086,022 | ||||||||||||||
Deferred Income Taxes |
(19,230,098 | ) | 42,657,097 | 2,525,000 | 1 | 25,952,000 | ||||||||||||||
Other Non-Current
Liabilities |
— | 4,260,954 | 479,634 | — | 4,740,588 | |||||||||||||||
Obligations Under
Stock Bonus Plan |
11,959,208 | — | — | — | 11,959,208 | |||||||||||||||
Stockholders’
Equity (Deficit) |
52,082,261 | 92,075,232 | (9,105,975 | ) | (82,969,257 | ) | 52,082,261 | |||||||||||||
Total Liabilities and
Stockholders’ Equity |
$ | 388,669,504 | $ | 273,790,804 | $ | 104,093,497 | $ | (93,222,004 | ) | $ | 673,331,801 | |||||||||
13
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
As of October 30, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Current Assets
|
||||||||||||||||||||
Cash |
$ | 2,527,142 | $ | 6,983,461 | $ | 2,294,681 | $ | — | $ | 11,805,284 | ||||||||||
Accounts receivable |
13,305,985 | 68,274,490 | 22,191,222 | (20,998,982 | ) | 82,772,715 | ||||||||||||||
Inventories |
— | 80,503,817 | 18,774,032 | — | 99,277,849 | |||||||||||||||
Prepaid expenses |
— | 12,545,099 | 8,326,356 | — | 20,871,455 | |||||||||||||||
Prepaid federal income taxes |
— | — | 99,530 | — | 99,530 | |||||||||||||||
Deferred income taxes |
(5,123,000 | ) | 5,532,000 | 2,525,000 | — | 2,934,000 | ||||||||||||||
Other current assets |
— | 1,985,425 | 1,035,624 | — | 3,021,049 | |||||||||||||||
Total Current Assets |
10,710,127 | 175,824,292 | 55,246,445 | (20,998,982 | ) | 220,781,882 | ||||||||||||||
Property, Plant &
Equipment- Net |
— | 372,030,366 | 51,721,676 | (50,000 | ) | 423,702,042 | ||||||||||||||
Other Assets
|
||||||||||||||||||||
Cash surrender value
of life insurance |
— | 2,237,920 | — | — | 2,237,920 | |||||||||||||||
Deposits |
— | 6,933,329 | — | (1,100,000 | ) | 5,833,329 | ||||||||||||||
Investment in and advances
to affiliates |
363,458,976 | (286,861,688 | ) | — | (76,597,288 | ) | — | |||||||||||||
Capitalized loan costs |
894,076 | 6,927,756 | — | — | 7,821,832 | |||||||||||||||
Intangible assets |
— | 6,660,393 | 1,673,361 | — | 8,333,754 | |||||||||||||||
Deferred tax
asset - long term |
(766,556 | ) | 766,556 | — | — | — | ||||||||||||||
Prepaids |
— | 840,916 | — | — | 840,916 | |||||||||||||||
Sundry |
— | 5,000,000 | 305,474 | (5,000,000 | ) | 305,474 | ||||||||||||||
Total Other Assets |
363,586,496 | (257,494,818 | ) | 1,978,835 | (82,697,288 | ) | 25,373,225 | |||||||||||||
Total Assets |
$ | 374,296,623 | $ | 290,359,840 | $ | 108,946,956 | $ | (103,746,270 | ) | $ | 669,857,149 | |||||||||
14
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Balance Sheet - Continued
As of October 30, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Current Liabilities
|
||||||||||||||||||||
Accounts payable |
$ | 100,142 | $ | 114,332,462 | $ | 43,299,347 | $ | (16,376,092 | ) | $ | 141,355,859 | |||||||||
Current portion of long
term obligations |
— | 4,171,370 | 1,060,878 | — | 5,232,248 | |||||||||||||||
Taxes other than income |
— | 4,167,463 | 8,674,898 | — | 12,842,361 | |||||||||||||||
Other accrued expenses |
7,535,535 | 27,953,070 | 5,230,982 | (5,722,888 | ) | 34,996,699 | ||||||||||||||
Total Current Liabilities |
7,635,677 | 150,624,365 | 58,266,105 | (22,098,980 | ) | 194,427,167 | ||||||||||||||
Senior Notes |
327,728,378 | (2,819,056 | ) | — | — | 324,909,322 | ||||||||||||||
Long-Term Obligations |
— | 8,084,014 | 58,699,666 | (5,000,000 | ) | 61,783,680 | ||||||||||||||
Deferred Income Taxes |
(21,249,098 | ) | 42,657,097 | 2,525,000 | 1 | 23,933,000 | ||||||||||||||
Other Non-Current
Liabilities |
— | 4,138,626 | 483,688 | — | 4,622,314 | |||||||||||||||
Obligations Under
Stock Bonus Plan |
11,371,402 | — | — | — | 11,371,402 | |||||||||||||||
Stockholders’
Equity (Deficit) |
48,810,264 | 87,674,794 | (11,027,503 | ) | (76,647,291 | ) | 48,810,264 | |||||||||||||
Total Liabilities and
Stockholders’ Equity |
$ | 374,296,623 | $ | 290,359,840 | $ | 108,946,956 | $ | (103,746,270 | ) | $ | 669,857,149 | |||||||||
15
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the three months ended January 29, 2005
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenues |
$ | — | $ | 238,558,225 | $ | 42,088,990 | $ | (178,872 | ) | $ | 280,468,343 | |||||||||
Cost and expenses |
— | 205,467,567 | 37,322,887 | (693,597 | ) | 242,096,857 | ||||||||||||||
Gross profit |
— | 33,090,658 | 4,766,103 | 514,725 | 38,371,486 | |||||||||||||||
Selling, general and
administrative expenses |
361,027 | 19,389,650 | 3,355,362 | — | 23,106,039 | |||||||||||||||
Operating (loss) profit |
(361,027 | ) | 13,701,008 | 1,410,741 | 514,725 | 15,265,447 | ||||||||||||||
Other (income) expense
|
||||||||||||||||||||
Equity in (earnings) loss
of affiliates |
(5,362,624 | ) | 690,658 | — | 4,671,966 | — | ||||||||||||||
Interest expense |
8,739,053 | 456,233 | 654,245 | (36,672 | ) | 9,812,859 | ||||||||||||||
Interest income |
(8,494,453 | ) | 8,427,150 | (24,018 | ) | 36,672 | (54,649 | ) | ||||||||||||
Royalty income |
— | (40,000 | ) | — | — | (40,000 | ) | |||||||||||||
Loss on foreign currency
translation |
— | — | 701,399 | — | 701,399 | |||||||||||||||
Sundry income |
(135,000 | ) | 100,381 | (11,540 | ) | — | (46,159 | ) | ||||||||||||
| (5,253,024 | ) | 9,634,422 | 1,320,086 | 4,671,966 | 10,373,450 | |||||||||||||||
Earnings before
income taxes |
4,891,997 | 4,066,586 | 90,655 | (4,157,241 | ) | 4,891,997 | ||||||||||||||
Income taxes |
1,620,000 | — | — | — | 1,620,000 | |||||||||||||||
Net earnings |
$ | 3,271,997 | $ | 4,066,586 | $ | 90,655 | $ | (4,157,241 | ) | $ | 3,271,997 | |||||||||
16
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Operations
For the three months ended January 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Revenues |
$ | — | $ | 197,217,215 | $ | 28,815,554 | $ | (65,141 | ) | $ | 225,967,628 | |||||||||
Cost and expenses |
— | 173,825,008 | 29,846,913 | (115,893 | ) | 203,556,028 | ||||||||||||||
Gross profit (loss) |
— | 23,392,207 | (1,031,359 | ) | 50,752 | 22,411,600 | ||||||||||||||
Selling, general and
administrative expenses |
202,862 | 17,198,789 | 1,996,407 | — | 19,398,058 | |||||||||||||||
Operating (loss) profit |
(202,862 | ) | 6,193,418 | (3,027,766 | ) | 50,752 | 3,013,542 | |||||||||||||
Other expense (income)
|
||||||||||||||||||||
Equity in loss (earnings)
of affiliates |
5,290,996 | 829,618 | — | (6,120,614 | ) | — | ||||||||||||||
Interest expense |
7,898,941 | 133,708 | 951,517 | (40,002 | ) | 8,944,164 | ||||||||||||||
Interest income |
(8,072,756 | ) | 7,951,245 | (16,959 | ) | 40,002 | (98,468 | ) | ||||||||||||
Royalty income |
— | (159,074 | ) | — | — | (159,074 | ) | |||||||||||||
Gain on foreign currency
translation |
— | — | (271,015 | ) | — | (271,015 | ) | |||||||||||||
Sundry income |
(135,000 | ) | (77,635 | ) | (4,387 | ) | — | (217,022 | ) | |||||||||||
| 4,982,181 | 8,677,862 | 659,156 | (6,120,614 | ) | 8,198,585 | |||||||||||||||
Loss before
income taxes |
(5,185,043 | ) | (2,484,444 | ) | (3,686,922 | ) | 6,171,366 | (5,185,043 | ) | |||||||||||
Income taxes |
(1,610,000 | ) | — | — | — | (1,610,000 | ) | |||||||||||||
Net loss |
$ | (3,575,043 | ) | $ | (2,484,444 | ) | $ | (3,686,922 | ) | $ | 6,171,366 | $ | (3,575,043 | ) | ||||||
17
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Cash Flows
For the three months ended January 29, 2005
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash Flows From
Operating Activities
|
||||||||||||||||||||
Net cash (used in) provided
by operating activities |
$ | (33,181 | ) | $ | 12,192,546 | $ | 5,513,488 | $ | (2,700,000 | ) | $ | 14,972,853 | ||||||||
Cash Flows (Used In) Provided
By Investing Activities
|
||||||||||||||||||||
Acquisition of property
and equipment |
— | (13,314,317 | ) | (664,657 | ) | 1,239,800 | (12,739,174 | ) | ||||||||||||
Proceeds from sale of equipment |
— | 29,423 | 1,239,800 | (1,239,800 | ) | 29,423 | ||||||||||||||
Investment in and advances
to affiliates |
(1,905,000 | ) | (1,700,000 | ) | — | 3,605,000 | — | |||||||||||||
Acquisition of intangible assets |
— | (1,352,961 | ) | — | — | (1,352,961 | ) | |||||||||||||
Net cash (used in) provided
by investing activities |
(1,905,000 | ) | (16,337,855 | ) | 575,143 | 3,605,000 | (14,062,712 | ) | ||||||||||||
Cash Flows Provided By
(Used In) Financing Activities
|
||||||||||||||||||||
Net borrowings (repayments)
under revolving debt |
— | 1,749,352 | (4,869,352 | ) | 2,700,000 | (420,000 | ) | |||||||||||||
Principal payments on long-term
obligations |
— | (1,401,829 | ) | (539,246 | ) | 350,000 | (1,591,075 | ) | ||||||||||||
Proceeds from long-term obligations |
— | 2,255,000 | — | (2,255,000 | ) | — | ||||||||||||||
Capital increases |
— | — | 1,700,000 | (1,700,000 | ) | — | ||||||||||||||
Capitalized loan costs |
— | (1,424,919 | ) | — | (1,424,919 | ) | ||||||||||||||
Net cash provided by
(used in) financing activities |
— | 1,177,604 | (3,708,598 | ) | (905,000 | ) | (3,435,994 | ) | ||||||||||||
Net (decrease) increase in cash |
(1,938,181 | ) | (2,967,705 | ) | 2,380,033 | — | (2,525,853 | ) | ||||||||||||
Cash and cash equivalents at
the beginning of the year |
2,527,142 | 6,983,461 | 2,294,681 | — | 11,805,284 | |||||||||||||||
Cash and cash equivalents at
the end of the period |
$ | 588,961 | $ | 4,015,756 | $ | 4,674,714 | $ | — | $ | 9,279,431 | ||||||||||
18
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- Guarantor and Nonguarantor Financial Statements and Reportable Segments (Continued)
Condensed Consolidating Statement of Cash Flows
For the three months ended January 31, 2004
| Parent | Guarantor | Nonguarantor | Consolidated | |||||||||||||||||
| Total | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash Flows From
Operating Activities
|
||||||||||||||||||||
Net cash provided by
operating activities |
$ | 1,142,252 | $ | 3,502,718 | $ | 2,745,213 | $ | — | $ | 7,390,183 | ||||||||||
Cash Flows (Used In) Provided
By Investing Activities
|
— | |||||||||||||||||||
Acquisition of property
and equipment |
— | (36,708,081 | ) | (1,809,900 | ) | — | (38,517,981 | ) | ||||||||||||
Proceeds from sale of equipment |
— | 797,669 | — | — | 797,669 | |||||||||||||||
Investment in and advances
to affiliates |
(14,000,000 | ) | (210,169 | ) | — | 14,210,169 | — | |||||||||||||
Acquisition of intangible assets |
— | (4,512,500 | ) | — | — | (4,512,500 | ) | |||||||||||||
Net cash (used in) provided
by investing activities |
(14,000,000 | ) | (40,633,081 | ) | (1,809,900 | ) | 14,210,169 | (42,232,812 | ) | |||||||||||
Cash Flows Provided By
(Used In) Financing Activities
|
||||||||||||||||||||
Net borrowings (repayments)
under revolving debt |
— | 14,971,953 | (290,569 | ) | — | 14,681,384 | ||||||||||||||
Principal payments on long-term
obligations |
— | (1,660,495 | ) | (474,063 | ) | — | (2,134,558 | ) | ||||||||||||
Proceeds from long-term obligations |
— | 14,000,000 | 226,519 | (14,000,000 | ) | 226,519 | ||||||||||||||
Capital increases |
— | — | 210,169 | (210,169 | ) | — | ||||||||||||||
Net cash provided by
(used in) financing activities |
— | 27,311,458 | (327,944 | ) | (14,210,169 | ) | 12,773,345 | |||||||||||||
Net (decrease) increase in cash |
(12,857,748 | ) | (9,818,905 | ) | 607,369 | — | (22,069,284 | ) | ||||||||||||
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 |
$ | 10,246,371 | $ | 2,931,867 | $ | 2,030,884 | $ | — | $ | 15,209,122 | ||||||||||
19
Plastipak Holdings, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited) - Continued
Note I- 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 | |||||||||
1/29/05 |
$ | 15,836,161 | $ | 2,639,948 | $ | 18,476,109 | ||||||
1/31/04 |
$ | 12,884,036 | $ | 2,261,477 | $ | 15,145,513 | ||||||
20
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 “Risk Related to Our Business” section, in our Form 10-K for the year ended October 30, 2004, 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 South American and European 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 have 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. serves 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. will serve as a post-consumer recycling operation in Central Europe and produce performs for sale in Eastern and Central Europe.
21
All of the Plastipak group of companies are headquartered in Plymouth, Michigan with the exception of our entities in Central Europe and Plastipak Brasil and its subsidiaries.
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 January 29, 2005 and January 31, 2004 were 13 weeks long.
Listed in the table below are our revenues and related percentages of revenue for the three months ended January 29, 2005 and January 31, 2004 in each of our product categories.
Consolidated Revenue By Product Category
| Three Months Ended | Three Months Ended | |||||||||||||||
| January 29, 2005 | January 31, 2004 | |||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||
| 2005 | % | 2004 | % | |||||||||||||
Carbonated and non-carbonated beverage revenue |
$ | 124,995 | 44.6 | % | $ | 105,049 | 46.5 | % | ||||||||
Consumer cleaning revenue |
83,492 | 29.8 | 69,533 | 30.8 | ||||||||||||
Food and processed juice revenue |
40,750 | 14.5 | 27,790 | 12.3 | ||||||||||||
Industrial, agricultural and automotive
revenue |
15,078 | 5.3 | 12,476 | 5.5 | ||||||||||||
Other revenue (a) |
16,153 | 5.8 | 11,120 | 4.9 | ||||||||||||
Total revenue |
$ | 280,468 | 100.0 | % | $ | 225,968 | 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 January 29, 2005 Compared to Three Months Ended January 31, 2004
Revenue
Revenue increased 24.1% to $280.5 million for the three months ended January 29, 2005 with unit sales increasing 7.2%. All business categories posted revenue gains for the first quarter versus the same period in 2004 with the largest growth coming from our food and processed juice category, which represented 46.6% growth for the period. Revenues in Brazil increased during the period with revenue up 44.0% while unit sales remained flat. In the U.S., volume gains were primarily attributable to new product initiatives and consistent performance in all our product categories. The increases in revenue were partially offset by price reductions implemented for new business and the extension of current business. In addition, using published industry standard price data, we estimate that higher resin prices resulted in approximately a $36.7 million increase in revenues for the three months ended January 29, 2005.
Revenue and unit sales increases by product category are discussed more specifically below:
| • | Carbonated and non-carbonated beverage revenue increased 19.0% to $125.0 million during the three-month period ended January 29, 2005 with unit volume up 3.3% over the same period in 2004. In Brazil, unit sales were essentially flat, with sales revenue increasing 44.0% to $41.5 million due primarily to higher raw material prices, improved pricing conditions and |
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| tightened capacity in the Brazilian market. In the U.S., unit sales increased 5.5% as a result of strong water sales combined with the introduction of new small PET containers in multi-pack units. | ||||
| • | Consumer cleaning revenue increased 20.1% to $83.5 million in the first quarter of 2005. Unit volume increased 4.0% as compared to the three month period ended January 31, 2004. Revenue and unit sales gains were a result of several new initiatives within the category that provided incremental volume lifts for our customers. | |||
| • | Food and processed juice revenue and unit volume posted significant increases during the first quarter compared to the same period of 2004. During the first quarter, revenue in this category increased 46.6% to $40.8 million, with unit volume up 32.6%. This growth was fueled by growth of our hot fill beverage business combined with broad based activity among our traditional food package product lines. | |||
| • | Industrial, agricultural and automotive category revenue increased 20.9% to $15.1 million with unit sales increasing 5.8% during the first quarter ended January 29, 2005. These increases for the quarter were a result of consistent performance in our large bottle package platforms used for products such as antifreeze and motor oil. | |||
| • | Other revenue increased 45.3% to $16.2 million. The increase in other revenue was primarily due to increased freight and other miscellaneous revenue. | |||
Gross Profit
Gross profit increased $16.0 million to $38.4 million for the quarter ended January 29, 2005. Gross profit as a percentage of revenue improved to 13.7% from 9.9%. The improvement in gross profit was attributable to higher unit sales volume and improved operating performance in both the U.S. and Brazil. In addition, gross profit benefited from a build up of inventory that contributed to favorable absorption of fixed costs as compared to the first quarter of 2004. The increase in gross profit was offset by price reductions of approximately $4.4 million implemented to extend customer contracts and increased operating costs associated with the start-up of our European operations and our new facility in Louisiana.
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, except where we have firm pricing, 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) for the three months ended January 29, 2005 increased 19.1% to $23.1 million. Increases in compensation, benefits, taxes, contributions, professional fees and administrative fees related to our European operations were the primary factors contributing to the $3.7 million increase in SG&A. As a percentage of revenue, selling, general and administrative expenses decreased to 8.2% for the three months ended January 29, 2005 from 8.6% for the three months ended January 31, 2004.
Interest Expense
Interest expense increased $0.9 million to $9.8 million for the three months ended January 29, 2005, as compared to $8.9 million for the three months ended January 31, 2004. The increase in interest expense was primarily attributable to a $1.3 million decrease in interest earned on interest rate swaps, a decrease in capitalized interest and an increase in interest expense associated with mandatorily redeemable shares of common stock. The increase in interest expense was offset by a $0.4 million decrease in interest expense associated with our South American operations.
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Other (Income) and Expense
Other income decreased by $1.3 million to a $0.6 million expense for the three months ended January 29, 2004. The decrease was primarily related to a change of $1.0 million in foreign currency exchange rates and a decrease in royalty and sundry income of approximately $0.3 million.
Income Tax Benefit
Provision for income taxes was a $1.6 million expense for the three months ended January 29, 2005 as compared to a $1.6 million benefit for the three months ended January 31, 2004. Earnings before income taxes were $4.9 million in the first quarter of 2005 compared to $5.2 million loss in the first quarter of 2004. The effective rate was 33.1% in the first quarter of 2005 as compared to 31.1% in the first quarter of 2004.
Net Earnings (Loss)
Net earnings increased $6.8 million from a net loss of $3.6 million for the three months ended January 31, 2004 to net earnings of $3.3 million for the three months ended January 29, 2005. This increase is largely due to increased gross profit generated by additional sales unit volume, new product initiatives and improved operating performance.
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 and planned expenditures have been used to maintain equipment and expand capacity for revenue growth. Past expenditures were funded with cash flow from operations, bank debt and additional operating and capital leases. Future capital expenditures will be funded in the same manner as past expenditures.
We had positive cash flow from operating activities of $15.0 million, which in part funded our capital expenditures of approximately $12.7 million. In fiscal 2005 and 2006, we expect to incur capital expenditures of approximately $90.0 million and $70.0 million, respectively.
We have expanded our operations to include Central Europe. We have 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. serves as a bottle manufacturing facility. Plastipak Czech Republic, s.r.o. is producing fabric enhancer bottles for a major customer in Prague, Czech Republic. 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.
In October 2004, Clean Tech Slovakia s.r.o. acquired from the Municipality of Kechnec, Slovakia, approximately 22 acres of land in the Kechnec Industrial Park, located approximately 10 miles outside the city of Kosice. In addition, it received written notice from the Recycling Fund, a business development arm of the federal government of Slovakia, of its award of 100 million Slovak Crowns, approximately U.S. $3.0 million, to be used in accordance with Clean Tech Slovakia s.r.o.’s application to the Recycling Fund for its projects in Slovakia. We plan to construct a post-consumer recycling facility and produce preforms for sale in Eastern and Central Europe from this location. It is anticipated that the total initial investment will not exceed $20.0 million.
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 three-month period ended January 29, 2005, 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 facilities in Central Europe. For the three months ended January 29, 2005, exchange rate fluctuations resulted in a loss of approximately $0.7 million.
Liquidity and Capital Resources
Net cash provided from operating activities improved by $7.6 million to $15.0 million for the three months ended January 29, 2005 as compared to $7.4 million for the three months ended January 31, 2004. Improved operating performance, an increase in depreciation and amortization, an increase restricted stock option compensation and interest along with an increase in deferred tax expense aggregating approximately $12.7 million increased cash from operations. Approximately $5.1 million in net working capital and other asset and liability changes offset the increase in cash. The changes in working capital and other assets and liabilities resulted primarily from a decrease in accounts receivable and accounts payable and an increase in raw materials inventory.
Net cash used in investing activities was $14.1 million and $42.2 million for the three months ended January 29, 2005 and January 31, 2004, 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 three months ended January 29, 2005 and January 31, 2004, property, plant and equipment acquisitions using cash were $12.7 million and $38.5 million, respectively. During the first quarter of 2005 and 2004, intangible asset acquisitions to extend customer contracts were $1.4 million and $4.5 million, respectively.
Net cash (used in) provided by financing activities was ($3.4) million and $12.8 million for the three months ended January 29, 2005 and January 31, 2004, respectively. During the first quarter of 2005, approximately $2.0 million was used to make principal payments on long-term obligations. Additionally, approximately $1.4 million was due to capitalized loan costs associated with the amendment of our credit facility on January 28, 2005. During the first quarter of 2004, we borrowed approximately $14.9 million which was primarily used to fund capital expenditures.
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. Looking forward, we have the following short-term and medium-term capital needs. Our overall capital expenditure budget in fiscal 2005 is approximately $90.0 million and $70.0 million in 2006, a majority of which is expected to be discretionary capital expenditures. We expect to finance all of our capital expenditures with operating cash flows and to cover any shortfalls with borrowings under the Fifth Amended Credit Agreement. 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.
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The proceeds from the Senior Notes sold on August 20, 2001 were used to pay off existing debt. In fiscal 2002 and 2003, we used the net proceeds from the August 20, 2001 and September 25, 2002 sale of Senior Notes for general corporate purposes, including working capital, capital expenditures and technology development.
On January 28, 2005, we entered into the Fifth Amended and Restated Revolving Credit Agreement (“Fifth Amended Credit Agreement”) which allows us to borrow up to $300.0 million, subject to a borrowing base consisting of 85% of eligible domestic accounts receivable, the lesser of 65% of the value of eligible domestic inventory or $60.0 million and 50% of the value of domestic equipment plus 65% of eligible real estate. The Fifth Amended Credit Agreement has a five-year term. Interest under the agreement is payable at 175 to 325 basis points per annum over Eurodollar or at prime rates, as we select. The Fifth 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 Fifth Amended Credit Agreement and Plastipak guarantees obligations under the Fifth Amended Credit Agreement. As of January 29, 2005, $58.6 million and $1.8 million in letters of credit and borrowings, respectively, were outstanding under the Fifth Amended Credit Agreement and we had $239.6 million available for borrowing subject to borrowing base limitations and covenant restrictions.
We entered into the Fifth Amended Credit Agreement for general business needs, including possible repurchases of the Senior Notes and the acquisition of machinery and equipment.
Under the Fifth Amended Credit Agreement we are required to calculate EBITDA because covenants in the agreement are tied to ratios based on that measure. For instance, the covenants under the Fifth 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 3.00 to 1), leverage ratio (maximum 4.85 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 January 29, 2005, we were in compliance with our covenants under the Fifth Amended Credit Agreement.
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 Fifth Amended Credit Agreement defines EBITDA as net earnings (loss) plus income tax expense, interest expense, depreciation and amortization. In addition, EBITDA is adjusted for certain non-cash items. A reconciliation between net earnings and EBITDA is calculated as follows:
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| Three Months Ended | Years Ended | Last Twelve Months (LTM) | ||||||||||||||||||||||
| January 29, | January 31, | October 30, | November 1, | January 29, | January 31, | |||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Net earnings (loss)
(per GAAP basis) |
$ | 3,271,997 | $ | (3,575,043 | ) | $ | 9,189,969 | $ | 4,361,056 | $ | 16,037,009 | $ | 2,606,898 | |||||||||||
Income tax expense |
1,620,000 | (1,610,000 | ) | 4,993,000 | 4,543,000 | 8,223,000 | 3,934,000 | |||||||||||||||||
Interest expense |
9,812,859 | 8,944,166 | 35,779,601 | 36,902,209 | 36,648,294 | 35,558,544 | ||||||||||||||||||
Depreciation |
17,104,908 | 13,976,288 | 60,701,290 | 49,859,253 | 63,829,910 | 51,874,342 | ||||||||||||||||||
Amortization |
1,371,201 | 1,169,225 | 4,946,455 | 6,490,262 | 5,148,431 | 6,042,695 | ||||||||||||||||||
Non-cash items |
(5,160 | ) | (185,822 | ) | 1,805,899 | 155,390 | 1,986,561 | (59,307 | ) | |||||||||||||||
EBITDA |
$ | 33,175,805 | $ | 18,718,814 | $ | 117,416,214 | $ | 102,311,170 | $ | 131,873,205 | $ | 99,957,172 | ||||||||||||
We have contractual obligations and commercial commitments that may affect our financial condition. The following tables identify material obligations and commitments as of January 29, 2005.
| 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)........... |
$ | 49,696,219 | $ | 253,273 | $ | 49,442,946 | $ | — | $ | — | ||||||||||
Capital Lease Obligations,
including current portion............ |
13,693,018 | 4,799,294 | 6,851,625 | 2,042,099 | — | |||||||||||||||
Operating Lease Obligations |
43,727,618 | 18,302,105 | 20,218,596 | 4,907,200 | 299,717 | |||||||||||||||
Capital Expenditure Commitments... |
13,112,118 | 13,112,118 | — | — | — | |||||||||||||||
Amended Credit Agreement (b)........... |
1,749,352 | — | — | 1,749,352 | — | |||||||||||||||
Salary Continuation Plan................ |
4,260,954 | 113,500 | 227,000 | 227,000 | 3,693,454 | |||||||||||||||
Mandatorily Redeemable Shares (c)... |
5,517,185 | — | — | — | 5,517,185 | |||||||||||||||
Obligations - Stock Bonus Plans (c)... |
6,442,023 | — | — | — | 6,442,023 | |||||||||||||||
Senior Notes.................................. |
325,000,000 | — | — | — | 325,000,000 | |||||||||||||||
Total Contractual Cash Obligations |
$ | 463,198,487 | $ | 36,580,290 | $ | 76,740,167 | $ | 8,925,651 | $ | 340,952,379 | ||||||||||
| 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 Credit................. |
58,623,703 | $ | 58,623,703 | $ | — | $ | — | $ | — | |||||||||||
Fifth Amended and Restated Credit
Agreement (d)............................ |
239,626,945 | — | — | 239,626,945 | — | |||||||||||||||
Total Commercial Commitments |
$ | 298,250,648 | $ | 58,623,703 | $ | — | $ | 239,626,945 | $ | — | ||||||||||
| (a) | Included in long-term debt obligations are notes payable primarily collateralized by letters of credit and equipment. | |
| (b) | The Fifth Amended Credit Agreement’s actual outstanding balance as of January 29, 2005. The Fifth Amended Credit Agreement will expire in January 2010. | |
| (c) | Under the Fifth Amended Credit Agreement, the Company may redeem equity interests of employees pursuant to the Restricted Stock Bonus Plans in amounts not to exceed $3.0 million in the aggregate in any fiscal year. | |
| (d) | The unused borrowing balance under the Fifth Amended Credit Agreement as of January 29, 2005. |
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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 Fifth Amended Credit Agreement, will be adequate to meet our future liquidity needs for at least the next few years. As of January 29, 2005, we had approximately $9.2 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 Fifth 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 Fifth Amended Credit Agreement or the 10.75% Senior Notes due 2011, on commercially reasonable terms or at all.
Off-Balance Sheet Arrangements
As of January 29, 2005, we had no off-balance sheet arrangements, other than those disclosed in the preceding tables “Contractual Cash Obligations” and “Other Commercial Commitments”.
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. The preparation of these financial statements requires that management make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are more fully discussed in Note A of our annual financial statements. 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 October 30, 2004, for a description of our significant accounting 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. Actual results could differ from those estimates, judgments and assumptions, impacting the reported results of operations and financial position of our Company. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made; if different estimates reasonably could have been used; or if changes in the estimate that are reasonably likely to occur periodically could materially impact the financial statements. 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, judgments and assumptions 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 could 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, such as property, plant and equipment, and intangible assets related to customer contracts are tested for impairment periodically and whenever an event occurs that indicates impairment may exist. Future events may cause us to conclude that an impairment associated with our long-lived assets exists. Any losses associated with impaired long-lived assets could have a material impact on our financial results.
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Reserve for inventory losses is based upon management’s review of inventory, which is classified as either slow moving, obsolete or potentially defective. Changes in product demand and quality issues may require us to increase our reserves.
Plastipak is self-insured for health costs and workers’ compensation up to a certain stop loss level. The estimated liability is based upon review by management and an independent insurance consultant of claims filed and claims incurred but not reported. An increase in the level of claims incurred could have a significant impact on our estimated liability of insurance costs and results of operations.
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 January 29, 2005 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.
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 January 29, 2005, the Company recorded an increase of $543,368 in other accrued expenses to recognize the fair value of the swap and a $543,368 decrease in the Senior Notes to recognize the difference between the carrying value and fair value of the related hedge liability.
On February 18, 2005 pursuant to an agreement between the Company and the bank to terminate the interest rate swap agreements, the Company paid the bank $3,245,000.
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.
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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 6. Exhibits
| (a) | List of 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 to Section 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 | |||
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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: March 15, 2005
|
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 |
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