UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 24, 2004
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 333-19495
RADNOR HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 23-2674715 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| Three Radnor Corporate Center, Suite 300 100 Matsonford Road, Radnor, Pennsylvania |
19087 | |
| (address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: 610-341-9600
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
The number of shares outstanding of the Registrant’s common stock as of
November 8, 2004:
| Class |
Number of Shares | |
| Voting Common Stock; $.10 par value |
600 | |
| Nonvoting Common Stock; $.10 par value |
245 | |
| Class B Nonvoting Common Stock; $.01 par value |
5,400 |
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
| September 24, 2004 |
December 26, 2003 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash |
$ | 2,580 | $ | 6,896 | ||||
| Accounts receivable, net |
58,156 | 41,441 | ||||||
| Inventories, net |
68,311 | 52,202 | ||||||
| Prepaid expenses and other |
10,017 | 10,186 | ||||||
| Deferred tax asset |
2,181 | 2,889 | ||||||
| 141,245 | 113,614 | |||||||
| Property, plant and equipment, at cost |
305,977 | 290,795 | ||||||
| Less accumulated depreciation |
(105,104 | ) | (92,142 | ) | ||||
| 200,873 | 198,653 | |||||||
| Investments |
66,013 | 66,606 | ||||||
| Intangible assets |
7,432 | 5,790 | ||||||
| Other assets |
20,433 | 10,811 | ||||||
| $ | 435,996 | $ | 395,474 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 63,087 | $ | 45,993 | ||||
| Accrued liabilities |
20,014 | 26,913 | ||||||
| Current portion of long-term debt |
6,729 | 13,626 | ||||||
| Current portion of capitalized lease obligations |
2,316 | 2,324 | ||||||
| 92,146 | 88,856 | |||||||
| Long-term debt, net of current portion |
284,543 | 237,478 | ||||||
| Capitalized lease obligations, net of current portion |
4,189 | 6,038 | ||||||
| Deferred tax liability |
1,074 | 3,552 | ||||||
| Other non-current liabilities |
3,502 | 3,608 | ||||||
| Minority interest in consolidated subsidiary |
46,479 | 48,934 | ||||||
| Commitments and contingencies |
— | — | ||||||
| Stockholders’ equity: |
||||||||
| Common stock |
1 | 1 | ||||||
| Additional paid-in capital |
19,387 | 19,387 | ||||||
| Retained deficit |
(17,940 | ) | (15,267 | ) | ||||
| Cumulative translation adjustment |
2,615 | 2,887 | ||||||
| Total stockholders’ equity |
4,063 | 7,008 | ||||||
| $ | 435,996 | $ | 395,474 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 24, 2004 |
September 26, 2003 |
September 24, 2004 |
September 26, 2003 |
|||||||||||||
| Net sales |
$ | 120,274 | $ | 86,929 | $ | 324,679 | $ | 250,417 | ||||||||
| Cost of goods sold |
101,960 | 70,010 | 266,745 | 204,886 | ||||||||||||
| Gross profit |
18,314 | 16,919 | 57,934 | 45,531 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Distribution |
7,423 | 6,227 | 21,106 | 17,099 | ||||||||||||
| Selling, general and administrative |
7,532 | 6,839 | 24,299 | 21,737 | ||||||||||||
| Other expenses (Note 5) |
— | — | — | 1,838 | ||||||||||||
| Income from operations |
3,359 | 3,853 | 12,529 | 4,857 | ||||||||||||
| Interest, net |
6,571 | 5,089 | 18,602 | 15,583 | ||||||||||||
| Income from unconsolidated affiliates |
(150 | ) | (792 | ) | (460 | ) | (2,304 | ) | ||||||||
| Other, net |
127 | 15 | 484 | 429 | ||||||||||||
| Minority interest in operations of consolidated subsidiary |
(842 | ) | — | (2,454 | ) | — | ||||||||||
| Loss before income taxes |
(2,347 | ) | (459 | ) | (3,643 | ) | (8,851 | ) | ||||||||
| Provision (benefit) for income taxes: |
||||||||||||||||
| Current |
162 | 125 | 1,281 | 396 | ||||||||||||
| Deferred |
(1,039 | ) | (299 | ) | (2,251 | ) | (3,759 | ) | ||||||||
| (877 | ) | (174 | ) | (970 | ) | (3,363 | ) | |||||||||
| Net loss |
$ | (1,470 | ) | $ | (285 | ) | $ | (2,673 | ) | $ | (5,488 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| For the nine months ended |
||||||||
| September 24, 2004 |
September 26, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (2,673 | ) | $ | (5,488 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
15,403 | 13,341 | ||||||
| Deferred income taxes |
(2,251 | ) | (3,759 | ) | ||||
| Income from unconsolidated affiliates |
(460 | ) | (2,304 | ) | ||||
| Minority interest in operations of consolidated subsidiary |
(2,454 | ) | — | |||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
(16,622 | ) | (3,257 | ) | ||||
| Inventories |
(16,128 | ) | (958 | ) | ||||
| Prepaid expenses and other |
(1,373 | ) | (3,726 | ) | ||||
| Accounts payable |
17,010 | 6,238 | ||||||
| Accrued liabilities and other |
(6,708 | ) | (4,302 | ) | ||||
| Net cash used in operating activities |
(16,256 | ) | (4,215 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(16,471 | ) | (9,329 | ) | ||||
| Distributions from unconsolidated affiliates |
3,144 | 4,241 | ||||||
| Investments in unconsolidated affiliates |
(2,091 | ) | (4,123 | ) | ||||
| Increase in other assets |
(6,430 | ) | (1,607 | ) | ||||
| Net cash used in investing activities |
(21,848 | ) | (10,818 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from borrowings |
89,877 | 199,054 | ||||||
| Repayment of debt |
(49,689 | ) | (179,400 | ) | ||||
| Payments on capitalized lease obligations |
(1,857 | ) | (713 | ) | ||||
| Payment of financing fees |
(4,530 | ) | (5,210 | ) | ||||
| Net cash provided by financing activities |
33,801 | 13,731 | ||||||
| Effect of exchange rate changes on cash |
(13 | ) | (861 | ) | ||||
| Net decrease in cash |
(4,316 | ) | (2,163 | ) | ||||
| Cash, beginning of period |
6,896 | 4,059 | ||||||
| Cash, end of period |
$ | 2,580 | $ | 1,896 | ||||
| Supplemental disclosure of cash flows information: |
||||||||
| Cash paid during the period for interest |
$ | 19,941 | $ | 15,397 | ||||
| Cash paid during the period for income taxes |
$ | 115 | $ | 1,055 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Summary of Operating Segments
(In thousands)
(Unaudited)
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 24, 2004 |
September 26, 2003 |
September 24, 2004 |
September 26, 2003 |
|||||||||||||
| Net Sales to Unaffiliated Customers: |
||||||||||||||||
| Packaging |
$ | 62,966 | $ | 48,790 | $ | 179,237 | $ | 141,575 | ||||||||
| Specialty Chemicals |
60,014 | 40,446 | 154,439 | 115,591 | ||||||||||||
| Corporate and Other |
— | — | — | — | ||||||||||||
| Transfers Between Operating Segments (1) |
(2,706 | ) | (2,307 | ) | (8,997 | ) | (6,749 | ) | ||||||||
| Consolidated |
$ | 120,274 | $ | 86,929 | $ | 324,679 | $ | 250,417 | ||||||||
| Income (Loss) From Operations: |
||||||||||||||||
| Packaging |
$ | 1,918 | $ | 4,719 | $ | 12,154 | $ | 11,574 | ||||||||
| Specialty Chemicals |
2,503 | 608 | 6,937 | 1,441 | ||||||||||||
| Corporate and Other |
(1,062 | ) | (1,474 | ) | (6,562 | ) | (8,158 | ) | ||||||||
| Consolidated |
$ | 3,359 | $ | 3,853 | $ | 12,529 | $ | 4,857 | ||||||||
| Income (Loss) Before Income Taxes: |
||||||||||||||||
| Packaging |
$ | (1,698 | ) | $ | 2,462 | $ | 1,372 | $ | 2,544 | |||||||
| Specialty Chemicals |
830 | (345 | ) | 2,044 | (2,737 | ) | ||||||||||
| Corporate and Other |
(1,479 | ) | (2,576 | ) | (7,059 | ) | (8,658 | ) | ||||||||
| Consolidated |
$ | (2,347 | ) | $ | (459 | ) | $ | (3,643 | ) | $ | (8,851 | ) | ||||
| (1) | Transfers between operating segments reflect the sale of expandable polystyrene (“EPS”) from the specialty chemicals operating segment to the packaging operating segment. |
5
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Summary by Geographic Region
(In thousands)
(Unaudited)
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 24, 2004 |
September 26, 2003 |
September 24, 2004 |
September 26, 2003 |
|||||||||||||
| Net Sales to Unaffiliated Customers: |
||||||||||||||||
| United States |
$ | 73,965 | $ | 56,796 | $ | 207,299 | $ | 164,298 | ||||||||
| Canada |
11,009 | 8,656 | 30,933 | 26,209 | ||||||||||||
| Europe |
38,006 | 23,784 | 95,444 | 66,659 | ||||||||||||
| Transfers Between Geographic Regions (1) |
(2,706 | ) | (2,307 | ) | (8,997 | ) | (6,749 | ) | ||||||||
| Consolidated |
$ | 120,274 | $ | 86,929 | $ | 324,679 | $ | 250,417 | ||||||||
| Income From Operations: |
||||||||||||||||
| United States |
$ | 815 | $ | 2,038 | $ | 3,976 | $ | 954 | ||||||||
| Canada |
1,022 | 903 | 4,283 | 2,712 | ||||||||||||
| Europe |
1,522 | 912 | 4,270 | 1,191 | ||||||||||||
| Consolidated |
$ | 3,359 | $ | 3,853 | $ | 12,529 | $ | 4,857 | ||||||||
| Income (Loss) Before Income Taxes: |
||||||||||||||||
| United States |
$ | (3,956 | ) | $ | (1,457 | ) | $ | (9,131 | ) | $ | (10,067 | ) | ||||
| Canada |
555 | 617 | 2,818 | 1,565 | ||||||||||||
| Europe |
1,054 | 381 | 2,670 | (349 | ) | |||||||||||
| Consolidated |
$ | (2,347 | ) | $ | (459 | ) | $ | (3,643 | ) | $ | (8,851 | ) | ||||
| (1) | Transfers between geographic regions reflect the sale of EPS from the Company’s Canadian specialty chemicals operations to its domestic food packaging operations, as well as the sale of product from the Company’s domestic food packaging operations to its European food packaging operations. |
6
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | BASIS OF PRESENTATION |
General
The condensed consolidated financial statements included herein have been prepared by Radnor Holdings Corporation and subsidiaries (collectively, “Radnor,” “we,” “us,” “our” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the statements include all adjustments (which include only normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for such periods. The results of operations for the interim periods are not necessarily indicative of the results for a full year, due to the seasonality inherent in some of the Company’s operations and the possibility for general economic changes.
Stock-based Compensation
At September 24, 2004, the Company had a stock-based compensation plan as described in Note 9 to the consolidated financial statements in the Company’s Form 10-K/A for fiscal 2003. The Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for all of the stock options issued under its stock option plan. As of September 24, 2004, all previously issued stock options were fully vested. Accordingly, no compensation expense has been recognized in the Company’s net loss for stock options, as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. In the third quarter of fiscal 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” and will account for all prospective option grants under the fair value method. No stock options have been issued by the Company subsequent to its adoption of SFAS No. 148.
The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan (in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 24, 2004 |
September 26, 2003 |
September 24, 2004 |
September 26, 2003 |
|||||||||||||
| Net Loss |
||||||||||||||||
| As reported |
$ | (1,470 | ) | $ | (285 | ) | $ | (2,673 | ) | $ | (5,488 | ) | ||||
| Pro forma |
(1,470 | ) | (285 | ) | (2,673 | ) | (5,488 | ) | ||||||||
| 2. | POLAR PLASTICS ACQUISITION |
On November 14, 2003, the Company purchased a business consisting of a state-of-the-art manufacturing facility, including thermoforming and injection molding machines capable of producing polypropylene and polystyrene products, raw material storage and handling equipment, as well as related production assets and net working capital from Polar Plastics Inc. (the “Acquisition”). The purchase price for the assets was approximately $23.8 million, consisting of $4.5 million in cash paid at closing, issuance of a six-year note in the amount of $10.0 million bearing interest at 6.0% (with interest but no principal payable until
7
January 1, 2005) and the assumption of $9.3 million in other long-term contractual liabilities. Polar Plastics and certain of its affiliates and key management also entered into seven-year non-competition agreements that will require an additional $3.0 million in payments over five years.
If the Acquisition had occurred at the beginning of fiscal 2003, pro forma revenues and net loss for the three and nine months ended September 26, 2003 would have been approximately $96.0 million and $1.1 million and $275.8 million and $7.6 million, respectively. These pro forma disclosures are unaudited and are based on historical results, adjusted for the impact of certain acquisition-related items such as depreciation and amortization of property, plant and equipment and identified intangibles, increased interest expense on acquisition debt and the related income tax effects. This unaudited pro forma disclosure is presented for informational purposes only and should not be construed to be indicative of the actual results of operations of the combined companies on the dates for the periods indicated or of the results that may be obtained in the future.
| 3. | INVENTORIES |
The components of inventories were as follows (in thousands):
| September 24, 2004 |
December 26, 2003 | |||||
| Raw Materials |
$ | 18,467 | $ | 14,003 | ||
| Work in Process |
3,125 | 1,550 | ||||
| Finished Goods |
46,719 | 36,649 | ||||
| $ | 68,311 | $ | 52,202 | |||
| 4. | INTANGIBLE ASSETS |
Intangible assets consisted of (in thousands):
| September 24, 2004 |
December 26, 2003 | |||||||||||||||||||
| Gross Amount |
Accum. Amort. |
Net Amount |
Gross Amount |
Accum. Amort. |
Net Amount | |||||||||||||||
| Customer List |
$ | 5,583 | $ | (488 | ) | $ | 5,095 | $ | 3,228 | $ | (61 | ) | $ | 3,167 | ||||||
| Non-Compete Agreement |
2,671 | (334 | ) | 2,337 | 2,671 | (48 | ) | 2,623 | ||||||||||||
| $ | 8,254 | $ | (822 | ) | $ | 7,432 | $ | 5,899 | $ | (109 | ) | $ | 5,790 | |||||||
The increase in the customer list was due to the finalization of purchase price accounting related to the Acquisition. The intangible assets are being amortized on a straight-line basis over the expected period of benefit. The aggregate amortization expense related to intangible assets for the three months and nine months ended September 24, 2004 was $0.3 million and $0.7 million, respectively.
| 5. | LONG-TERM DEBT |
On March 11, 2003, the Company issued $135.0 million of 11.0% Senior Notes due 2010 and amended its domestic revolving credit facility to include a $45.0 million term loan and to increase the revolving credit commitment from $35.0 million to $45.0 million. The Company recorded $1.8 million of other expenses related to extinguishment of long-term debt, which included the $1.0 million write-off of deferred financing costs and debt premium related to the repayment of the Company’s 10.0% Series A and Series B Senior Notes due 2003, as well as $0.8 million of personnel costs directly related to the debt extinguishment.
8
On April 27, 2004, the Company issued $70.0 million of Senior Secured Floating Rate Notes due 2009. The notes bear interest at a floating rate of LIBOR plus 6.75% per year. Interest on the notes is reset quarterly and is payable quarterly, with the first payment having been made on July 15, 2004. The notes will mature on April 15, 2009. The net proceeds were used to repay a then outstanding $40.5 million term loan and outstanding borrowings under the existing revolving credit facilities. On September 27, 2004, the Company amended certain financial covenants in its domestic credit facility.
| 6. | INTEREST EXPENSE |
Included in interest expense was $375,000 and $181,000 of amortization of deferred financing costs for the three months ended September 24, 2004 and September 26, 2003, respectively, and $803,000 and $702,000 of amortization of deferred financing costs for the nine months ended September 24, 2004 and September 26, 2003, respectively. Interest expense also included premium amortization of $105,000 for the nine months ended September 26, 2003 related to the issuance of the Company’s 10% Series B Senior Notes due 2003, which were repaid on March 11, 2003.
| 7. | RELATED PARTY TRANSACTIONS |
The Company provides certain management services and rights to a related company. For the management services and rights, the Company receives fees and royalties and is reimbursed for all expenses advanced on behalf of the entity. During the three months ended September 24, 2004 and September 26, 2003, the Company earned management fees of $1.8 million and $0.1 million, respectively, and during the nine months September 24, 2004 and September 26, 2003, the Company earned management fees of $2.5 million and $0.2 million, respectively.
| 8. | COMPREHENSIVE INCOME |
Comprehensive income is the total of net income (loss) and non-owner changes in equity. The Company had comprehensive income (loss) as follows (in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 24, 2004 |
September 26, 2003 |
September 24, 2004 |
September 26, 2003 |
|||||||||||||
| Net Loss |
$ | (1,470 | ) | $ | (285 | ) | $ | (2,673 | ) | $ | (5,488 | ) | ||||
| Foreign Currency Translation Adjustment |
815 | 286 | (272 | ) | 4,068 | |||||||||||
| Comprehensive Income (Loss) |
$ | (655 | ) | $ | 1 | $ | (2,945 | ) | $ | (1,420 | ) | |||||
| 9. | SUPPLEMENTAL FINANCIAL INFORMATION |
Radnor Holdings Corporation is a holding company that has no operations separate from its investment in subsidiaries. The Company’s $135.0 million of 11.0% Senior Notes due 2010 and $70.0 million of Senior Secured Floating Rate Notes due 2009 are fully and unconditionally jointly and severally guaranteed by substantially all of the Company’s domestic subsidiaries, all of which are 100% owned by the Company.
As a holding company, the Company is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Subject to certain limitations, the Company is, and will continue to be, able to control its receipt of dividends and other payments from its subsidiaries.
9
There are no direct prohibitions on the ability of the Company or any guarantor to obtain funds from its respective subsidiaries by dividend or by loan, but certain of the Company’s foreign subsidiaries’ credit agreements contain covenants, such as minimum debt to equity and current assets to current liabilities ratios, that indirectly limit the ability of these subsidiaries to transfer funds to the Company. As of September 24, 2004 and December 26, 2003, the net assets of these foreign subsidiaries totaled $34.6 million and $29.8 million, respectively.
The following consolidating financial statements of Radnor Holdings Corporation and subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X:
10
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
September 24, 2004
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Assets |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash |
$ | — | $ | 541 | $ | 2,039 | $ | — | $ | 2,580 | ||||||||||
| Accounts receivable, net |
— | 29,967 | 32,484 | (4,295 | ) | 58,156 | ||||||||||||||
| Inventories, net |
— | 57,650 | 10,661 | — | 68,311 | |||||||||||||||
| Intercompany receivable |
— | — | 25,140 | (25,140 | ) | — | ||||||||||||||
| Prepaid expenses and other |
52 | 9,160 | 863 | (58 | ) | 10,017 | ||||||||||||||
| Deferred tax asset |
(19 | ) | 2,200 | — | — | 2,181 | ||||||||||||||
| 33 | 99,518 | 71,187 | (29,493 | ) | 141,245 | |||||||||||||||
| Property, plant and equipment, at cost |
— | 245,135 | 60,842 | — | 305,977 | |||||||||||||||
| Less accumulated depreciation |
— | (81,857 | ) | (23,247 | ) | — | (105,104 | ) | ||||||||||||
| — | 163,278 | 37,595 | — | 200,873 | ||||||||||||||||
| Intercompany receivable |
60,760 | (5,513 | ) | 5,510 | (60,757 | ) | — | |||||||||||||
| Investments in subsidiaries |
106,153 | 22,094 | — | (128,247 | ) | — | ||||||||||||||
| Investments in unconsolidated affiliates |
— | — | 66,013 | — | 66,013 | |||||||||||||||
| Other assets |
6,731 | 20,638 | 496 | — | 27,865 | |||||||||||||||
| $ | 173,677 | $ | 300,015 | $ | 180,801 | $ | (218,497 | ) | $ | 435,996 | ||||||||||
| Liabilities and Stockholders’ Equity |
||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | — | $ | 40,290 | $ | 23,502 | $ | (705 | ) | $ | 63,087 | |||||||||
| Accrued liabilities and other |
1,458 | 13,739 | 4,993 | (176 | ) | 20,014 | ||||||||||||||
| Intercompany payable |
24,254 | 30,975 | — | (55,229 | ) | — | ||||||||||||||
| Current portion of long-term debt and capitalized lease obligations |
— | 8,121 | 924 | — | 9,045 | |||||||||||||||
| 25,712 | 93,125 | 29,419 | (56,110 | ) | 92,146 | |||||||||||||||
| Long-term debt, net of current portion |
205,000 | 86,835 | 9,268 | (16,560 | ) | 284,543 | ||||||||||||||
| Capital lease obligations, net of current portion |
— | 4,189 | — | — | 4,189 | |||||||||||||||
| Intercompany payable |
3,598 | 18,956 | 11,705 | (34,259 | ) | — | ||||||||||||||
| Deferred tax liability |
(10,221 | ) | (527 | ) | 11,703 | 119 | 1,074 | |||||||||||||
| Other non-current liabilities |
— | 3,498 | 4 | — | 3,502 | |||||||||||||||
| Minority interest in consolidated subsidiary |
— | — | 46,479 | — | 46,479 | |||||||||||||||
| Commitments and contingencies |
— | — | — | — | — | |||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||
| Common stock |
1 | 4 | 22 | (26 | ) | 1 | ||||||||||||||
| Additional paid-in capital |
9,164 | 99,251 | 22,620 | (111,648 | ) | 19,387 | ||||||||||||||
| Retained earnings (deficit) |
(59,577 | ) | (2,006 | ) | 43,636 | 7 | (17,940 | ) | ||||||||||||
| Cumulative translation adjustment |
— | (3,310 | ) | 5,945 | (20 | ) | 2,615 | |||||||||||||
| Total stockholders’ equity (deficit) |
(50,412 | ) | 93,939 | 72,223 | (111,687 | ) | 4,063 | |||||||||||||
| $ | 173,677 | $ | 300,015 | $ | 180,801 | $ | (218,497 | ) | $ | 435,996 | ||||||||||
11
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the three months ended September 24, 2004
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net sales |
$ | — | $ | 73,965 | $ | 49,015 | $ | (2,706 | ) | $ | 120,274 | |||||||||
| Cost of goods sold |
— | 62,619 | 42,047 | (2,706 | ) | 101,960 | ||||||||||||||
| Gross profit |
— | 11,346 | 6,968 | — | 18,314 | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Distribution |
— | 5,274 | 2,149 | — | 7,423 | |||||||||||||||
| Selling, general and administrative |
6 | 5,215 | 2,311 | — | 7,532 | |||||||||||||||
| Income (loss) from operations |
(6 | ) | 857 | 2,508 | — | 3,359 | ||||||||||||||
| Interest, net |
1,902 | 4,183 | 486 | — | 6,571 | |||||||||||||||
| Income from unconsolidated affiliates |
— | — | (150 | ) | — | (150 | ) | |||||||||||||
| Other, net |
— | (316 | ) | 443 | — | 127 | ||||||||||||||
| Minority interest in operations of consolidated subsidiary |
— | — | (842 | ) | — | (842 | ) | |||||||||||||
| Income (loss) before income taxes |
(1,908 | ) | (3,010 | ) | 2,571 | — | (2,347 | ) | ||||||||||||
| Provision (benefit) for income taxes: |
||||||||||||||||||||
| Current |
— | 15 | 147 | — | 162 | |||||||||||||||
| Deferred |
(870 | ) | (511 | ) | 342 | — | (1,039 | ) | ||||||||||||
| (870 | ) | (496 | ) | 489 | — | (877 | ) | |||||||||||||
| Net income (loss) |
$ | (1,038 | ) | $ | (2,514 | ) | $ | 2,082 | $ | — | $ | (1,470 | ) | |||||||
12
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the nine months ended September 24, 2004
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net sales |
$ | — | $ | 207,299 | $ | 126,377 | $ | (8,997 | ) | $ | 324,679 | |||||||||
| Cost of goods sold |
— | 169,931 | 105,811 | (8,997 | ) | 266,745 | ||||||||||||||
| Gross profit |
— | 37,368 | 20,566 | — | 57,934 | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Distribution |
— | 15,005 | 6,101 | — | 21,106 | |||||||||||||||
| Selling, general and administrative |
12 | 18,283 | 6,004 | — | 24,299 | |||||||||||||||
| Income (loss) from operations |
(12 | ) | 4,080 | 8,461 | — | 12,529 | ||||||||||||||
| Interest, net |
4,857 | 11,903 | 1,842 | — | 18,602 | |||||||||||||||
| Income from unconsolidated affiliates |
— | — | (460 | ) | — | (460 | ) | |||||||||||||
| Other, net |
— | (708 | ) | 1,192 | — | 484 | ||||||||||||||
| Minority interest in operations of consolidated subsidiary |
— | — | (2,454 | ) | — | (2,454 | ) | |||||||||||||
| Income (loss) before income taxes |
(4,869 | ) | (7,115 | ) | 8,341 | — | (3,643 | ) | ||||||||||||
| Provision (benefit) for income taxes: |
||||||||||||||||||||
| Current |
— | 25 | 1,256 | — | 1,281 | |||||||||||||||
| Deferred |
(1,662 | ) | (1,176 | ) | 587 | — | (2,251 | ) | ||||||||||||
| (1,662 | ) | (1,151 | ) | 1,843 | — | (970 | ) | |||||||||||||
| Net income (loss) |
$ | (3,207 | ) | $ | (5,964 | ) | $ | 6,498 | $ | — | $ | (2,673 | ) | |||||||
| RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows For the nine months ended September 24, 2004 (In thousands)
|
| |||||||||||||||||||
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net cash provided by (used in) operating activities |
$ | (6,664 | ) | $ | (12,009 | ) | $ | 6,287 | $ | (3,870 | ) | $ | (16,256 | ) | ||||||
| Cash flows from investing activities: |
||||||||||||||||||||
| Capital expenditures |
— | (15,456 | ) | (1,015 | ) | — | (16,471 | ) | ||||||||||||
| Change in other assets |
(74 | ) | (10,023 | ) | 6,997 | (2,277 | ) | (5,377 | ) | |||||||||||
| Net cash provided by (used in) investing activities |
(74 | ) | (25,479 | ) | 5,982 | (2,277 | ) | (21,848 | ) | |||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||
| Net borrowings (payments) on bank financed debt and notes payable |
70,000 | (31,810 | ) | 1,997 | 1 | 40,188 | ||||||||||||||
| Net payments on capitalized lease obligations |
— | (1,857 | ) | — | — | (1,857 | ) | |||||||||||||
| Payment of financing costs |
(2,793 | ) | (1,737 | ) | — | — | (4,530 | ) | ||||||||||||
| Additional paid-in capital |
— | 1,647 | — | (1,647 | ) | — | ||||||||||||||
| Dividends paid |
350 | (350 | ) | — | — | — | ||||||||||||||
| Change in intercompany, net |
(60,819 | ) | 69,310 | (16,284 | ) | 7,793 | — | |||||||||||||
| Net cash provided by (used in) financing activities |
6,738 | 35,203 | (14,287 | ) | 6,147 | 33,801 | ||||||||||||||
| Effect of exchange rate changes on cash |
— | (37 | ) | 24 | — | (13 | ) | |||||||||||||
| Net decrease in cash |
— | (2,322 | ) | (1,994 | ) | — | (4,316 | ) | ||||||||||||
| Cash, beginning of period |
— | 2,863 | 4,033 | — | 6,896 | |||||||||||||||
| Cash, end of period |
$ | — | $ | 541 | $ | 2,039 | $ | — | $ | 2,580 | ||||||||||
13
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 26, 2003
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Assets |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash |
$ | — | $ | 2,863 | $ | 4,033 | $ | — | $ | 6,896 | ||||||||||
| Accounts receivable, net |
— | 24,634 | 23,905 | (7,098 | ) | 41,441 | ||||||||||||||
| Inventories, net |
— | 41,131 | 11,071 | — | 52,202 | |||||||||||||||
| Intercompany receivable |
— | 270 | 21,409 | (21,679 | ) | — | ||||||||||||||
| Prepaid expenses and other |
49 | 8,905 | 1,290 | (58 | ) | 10,186 | ||||||||||||||
| Deferred tax asset |
(25 | ) | 2,914 | — | — | 2,889 | ||||||||||||||
| 24 | 80,717 | 61,708 | (28,835 | ) | 113,614 | |||||||||||||||
| Property, plant and equipment, at cost |
— | 230,506 | 60,289 | — | 290,795 | |||||||||||||||
| Less accumulated depreciation |
— | (71,509 | ) | (20,633 | ) | — | (92,142 | ) | ||||||||||||
| — | 158,997 | 39,656 | — | 198,653 | ||||||||||||||||
| Intercompany receivable |
38,051 | 22,934 | — | (60,985 | ) | — | ||||||||||||||
| Investments in subsidiaries |
106,153 | 25,078 | — | (131,231 | ) | — | ||||||||||||||
| Investments in unconsolidated affiliates |
— | — | 66,606 | — | 66,606 | |||||||||||||||
| Other assets |
4,669 | 11,380 | 552 | — | 16,601 | |||||||||||||||
| $ | 148,897 | $ | 299,106 | $ | 168,522 | $ | (221,051 | ) | $ | 395,474 | ||||||||||
| Liabilities and Stockholders’ Equity |
||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | — | $ | 28,664 | $ | 17,675 | $ | (346 | ) | $ | 45,993 | |||||||||
| Accrued liabilities and other |
4,054 | 18,965 | 4,070 | (176 | ) | 26,913 | ||||||||||||||
| Intercompany payable |
— | 9,036 | 63 | (9,099 | ) | — | ||||||||||||||
| Current portion of long-term debt and capitalized lease obligations |
— | 14,933 | 1,017 | — | 15,950 | |||||||||||||||
| 4,054 | 71,598 | 22,825 | (9,621 | ) | 88,856 | |||||||||||||||
| Long-term debt, net of current portion |
135,000 | 111,841 | 7,197 | (16,560 | ) | 237,478 | ||||||||||||||
| Capital lease obligations, net of current portion |
— | 6,038 | — | — | 6,038 | |||||||||||||||
| Intercompany payable |
65,962 | 119 | 18,868 | (84,949 | ) | — | ||||||||||||||
| Deferred tax liability |
(8,564 | ) | 7,113 | 4,884 | 119 | 3,552 | ||||||||||||||
| Other non-current liabilities |
— | 3,571 | 37 | — | 3,608 | |||||||||||||||
| Minority interest in consolidated subsidiary |
— | — | 48,934 | — | 48,934 | |||||||||||||||
| Commitments and contingencies |
— | — | — | — | — | |||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||
| Common stock |
1 | 4 | 22 | (26 | ) | 1 | ||||||||||||||
| Additional paid-in capital |
9,164 | 97,604 | 22,620 | (110,001 | ) | 19,387 | ||||||||||||||
| Retained earnings (deficit) |
(56,720 | ) | 4,308 | 37,138 | 7 | (15,267 | ) | |||||||||||||
| Cumulative translation adjustment |
— | (3,090 | ) | 5,997 | (20 | ) | 2,887 | |||||||||||||
| Total stockholders’ equity (deficit) |
(47,555 | ) | 98,826 | 65,777 | (110,040 | ) | 7,008 | |||||||||||||
| $ | 148,897 | $ | 299,106 | $ | 168,522 | $ | (221,051 | ) | $ | 395,474 | ||||||||||
14
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the three months ended September 26, 2003
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net sales |
$ | — | $ | 57,463 | $ | 32,440 | $ | (2,974 | ) | $ | 86,929 | |||||||||
| Cost of goods sold |
— | 46,238 | 26,746 | (2,974 | ) | 70,010 | ||||||||||||||
| Gross profit |
— | 11,225 | 5,694 | — | 16,919 | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Distribution |
— | 4,321 | 1,906 | — | 6,227 | |||||||||||||||
| Selling, general and administrative |
6 | 4,850 | 1,983 | — | 6,839 | |||||||||||||||
| Income (loss) from operations |
(6 | ) | 2,054 | 1,805 | — | 3,853 | ||||||||||||||
| Interest, net |
2,304 | 2,222 | 563 | — | 5,089 | |||||||||||||||
| Income from unconsolidated affiliates |
— | — | (792 | ) | — | (792 | ) | |||||||||||||
| Other, net |
— | (239 | ) | 254 | — | 15 | ||||||||||||||
| Income (loss) before income taxes |
(2,310 | ) | 71 | 1,780 | — | (459 | ) | |||||||||||||
| Provision (benefit) for income taxes: |
||||||||||||||||||||
| Current |
— | 4 | 121 | — | 125 | |||||||||||||||
| Deferred |
(604 | ) | (163 | ) | 468 | — | (299 | ) | ||||||||||||
| (604 | ) | (159 | ) | 589 | — | (174 | ) | |||||||||||||
| Net income (loss) |
$ | (1,706 | ) | $ | 230 | $ | 1,191 | $ | — | $ | (285 | ) | ||||||||
15
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the nine months ended September 26, 2003
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net sales |
$ | — | $ | 166,171 | $ | 92,868 | $ | (8,622 | ) | $ | 250,417 | |||||||||
| Cost of goods sold |
— | 136,151 | 77,657 | (8,922 | ) | 204,886 | ||||||||||||||
| Gross profit |
— | 30,020 | 15,211 | 300 | 45,531 | |||||||||||||||
| Operating expenses: |
||||||||||||||||||||
| Distribution |
— | 12,002 | 5,097 | — | 17,099 | |||||||||||||||
| Selling, general and administrative |
11 | 15,515 | 6,211 | — | 21,737 | |||||||||||||||
| Other expenses (Note 5) |
1,013 | 825 | — | — | 1,838 | |||||||||||||||
| Income (loss) from operations |
(1,024 | ) | 1,678 | 3,903 | 300 | 4,857 | ||||||||||||||
| Interest, net |
4,072 | 9,886 | 1,625 | — | 15,583 | |||||||||||||||
| Income from unconsolidated affiliates |
— | — | (2,304 | ) | — | (2,304 | ) | |||||||||||||
| Other, net |
— | (633 | ) | 1,062 | — | 429 | ||||||||||||||
| Income (loss) before income taxes |
(5,096 | ) | (7,575 | ) | 3,520 | 300 | (8,851 | ) | ||||||||||||
| Provision (benefit) for income taxes: |
||||||||||||||||||||
| Current |
— | 12 | 384 | — | 396 | |||||||||||||||
| Deferred |
(1,897 | ) | (2,586 | ) | 724 | — | (3,759 | ) | ||||||||||||
| (1,897 | ) | (2,574 | ) | 1,108 | — | (3,363 | ) | |||||||||||||
| Net income (loss) |
$ | (3,199 | ) | $ | (5,001 | ) | $ | 2,412 | $ | 300 | $ | (5,488 | ) | |||||||
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 26, 2003
(In thousands)
| Holding Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
| Net cash provided by (used in) operating activities |
$ | (5,536 | ) | $ | (5,907 | ) | $ | 5,509 | $ | 1,719 | $ | (4,215 | ) | |||||||
| Cash flows from investing activities: |
||||||||||||||||||||
| Capital expenditures |
— | (8,666 | ) | (663 | ) | — | (9,329 | ) | ||||||||||||
| Change in other assets |
(7,267 | ) | 1,083 | 3,997 | 698 | (1,489 | ) | |||||||||||||
| Net cash provided by (used in) investing activities |
(7,267 | ) | (7,583 | ) | 3,334 | 698 | (10,818 | ) | ||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||
| Net borrowings (payments) on bank financed debt and notes payable |
(24,500 | ) | 40,868 | 3,320 | (34 | ) | 19,654 | |||||||||||||
| Net payments on capitalized lease obligations |
— | (713 | ) | — | — | (713 | ) | |||||||||||||
| Payment of financing costs |
— | (4,546 | ) | — | (664 | ) | (5,210 | ) | ||||||||||||
| Change in intercompany, net |
37,303 | (21,624 | ) | (13,960 | ) | (1,719 | ) | — | ||||||||||||
| Net cash provided by (used in) financing activities |
12,803 | 13,985 | (10,640 | ) | (2,417 | ) | 13,731 | |||||||||||||
| Effect of exchange rate changes on cash |
— | (737 | ) | (124 | ) | — | (861 | ) | ||||||||||||
| Net decrease in cash |
— | (242 | ) | (1,921 | ) | — | (2,163 | ) | ||||||||||||
| Cash, beginning of period |
— | 261 | 3,798 | — | 4,059 | |||||||||||||||
| Cash, end of period |
$ | — | $ | 19 | $ | 1,877 | $ | — | $ | 1,896 | ||||||||||
16
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Radnor Holdings Corporation is a leading manufacturer and distributor of a broad line of disposable foodservice products in the United States and specialty chemical products worldwide. We operate 15 plants in North America and 3 in Europe and distribute our foodservice products from 10 distribution centers throughout the United States. On November 14, 2003 we acquired the operations of Polar Plastics, Inc. and its subsidiary (the “Acquisition”). The Acquisition extended our product line to include thermoformed and injection molded foodservice products. We are also upgrading our thermoforming equipment and installing new production lines to facilitate the introduction of our proprietary cold drink cups.
We have been manufacturing expandable polystyrene, or EPS, and related products sold to the foodservice, insulation and protective packaging industries for more than 25 years. In the foodservice industry, we are the second largest manufacturer of foam cup and container products in the United States. By capacity, we are also the fifth largest worldwide producer of EPS. In fiscal 2003, we produced 13 billion foam cups for hot and cold drinks, foam bowls and containers and thermoformed lids and 354 million pounds of EPS. We supply 100% of our own EPS needs in addition to supplying EPS to other manufacturers of foodservice, insulation and protective packaging products.
Net Sales
Net sales represent the sales of the Company’s products less (i) cash discounts and allowances, which historically have averaged approximately 2% of gross sales, and (ii) sales and marketing rebates.
Cost of Goods Sold
Raw material costs represent a large portion of the Company’s cost of goods sold and are susceptible to price fluctuations based upon supply and demand as well as general market conditions. Beginning in July 2003 through September 2004, market prices of styrene monomer, the primary raw material in the Company’s foam products, increased by 81% to $0.70 per pound. Although future raw material prices cannot be predicted with accuracy, prices for styrene monomer are forecasted by independent industry surveys and producer reports to decrease to $0.68 per pound by the end of 2004 and to $0.55 per pound by the end of 2005. While the Company has been able to pass on the majority of past raw material price increases to customers, the lag between raw material price increases and implemented selling price increases negatively impacts operating results. In addition, the Company may not be able to increase prices if raw material costs rise further in the future.
Our plastic foodservice products are thermoformed and injection molded from polypropylene and polystyrene resins. The prices of polystyrene resins generally fluctuate in a fashion similar to the fluctuations affecting styrene monomer, since polystyrene is largely a derivative of styrene monomer. Prices can also change based on the operating rates of polystyrene manufacturing facilities. Published contract pricing for high-impact polystyrene, or HIPS, is currently $0.88 per pound and is forecasted to increase to $0.91 per pound by the end of the year before falling to $0.75 per pound by the end of 2005.
Polypropylene resin pricing generally follows the raw material price of propylene and is influenced by the operating rates of polypropylene manufacturing locations. Polypropylene has had a tendency to fluctuate significantly over time. For example, the contract price for polypropylene ranged from $0.40 to $0.56 per pound from July 2003 through September 2004. Independent industry surveys and producer reports project the contract price for polypropylene to increase to $0.62 per pound by the end of 2004 before falling to $0.57 per pound by the end of 2005.
17
Distribution Expense
The Company delivers its products from its distribution centers using a combination of common carriers and its own fleet of leased vehicles. Distribution expense consists of the costs to ship products, including costs of labor and leased vehicles.
Key Business Indicators
The Company’s financial results are directly impacted by several key items, which management has identified as key indicators in its evaluation of the business. These indicators include:
| • | Sales Volumes – The comparison of unit volumes sold versus the comparable period in prior years provides key operating information. |
| • | Pricing Spread over Raw Material Costs – The selling prices of the Company’s products as compared to various raw material costs, including styrene monomer, polystyrene and polypropylene, are key financial performance metrics. |
| • | Energy-Related Costs– Energy-related costs provide key information with respect to overall profitability. |
Comparability of Periods
Financial results for the periods presented are not fully comparable because of the Acquisition in November 2003.
Results of Operations
Executive Summary
Higher across-the-board selling prices and increased sales volumes more than offset increases in raw material costs and energy-related costs as gross profit increased 8.3% and 27.3%, respectively, during the three and nine months ended September 24, 2004 compared to the same periods in the prior year. Increases in operating expenses resulted in a $0.5 million decrease in income from operations during for the three months ended September 24, 2004, while income from operations increased $7.7 million during the nine months ended September 24, 2004.
Three months ended September 24, 2004 compared with the three months ended September 26, 2003
Consolidated Results
Significant Trends
As discussed above, the Company’s principal raw materials are styrene monomer and resins made from polypropylene and polystyrene. Market prices for styrene monomer were approximately 66% higher during the quarter ended September 24, 2004 than in the same period in 2003 due in large part to escalating feedstock costs while market prices for polypropylene and polystyrene increased approximately 34% and 38%, respectively. In July 2004, an 8% price increase was implemented on our foodservice plastic products. In addition, the Company implemented a price increase on all of its foodservice products effective September 2004, which averaged 6%.
18
The following table summarizes the consolidated results of operations for the three months ended September 24, 2004 and September 26, 2003.
| Three Months Ended |
Increase |
% Change |
|||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
|||||||||||
| Net sales |
$ | 120.3 | $ | 86.9 | $ | 33.4 | 38.4 | % | |||||
| Gross profit |
18.3 | 16.9 | 1.4 | 8.3 | % | ||||||||
| Operating expenses |
14.9 | 13.0 | 1.9 | 14.6 | % | ||||||||
| Income (loss) from operations |
3.4 | 3.9 | (0.5 | ) | -12.8 | % | |||||||
Net sales for the three months ended September 24, 2004 were $120.3 million, a 38.4% increase from $86.9 million for the three months ended September 26, 2003. This increase was primarily caused by higher average selling prices (17.4%) and higher sales volumes (4.0%), combined with the impact of the the Acquisition (12.1%) and changes in foreign currency rates (4.2%).
Despite the historic increase in raw material costs, gross profit increased $1.4 million, or 8.3%, to $18.3 million for the three months ended September 24, 2004 from $16.9 million for the similar three-month period in 2003. This increase was primarily due to selling price increases across all segments ($15.1 million), the impact of higher sales volumes ($0.5 million) and the Acquisition ($0.3 million), partially offset by higher raw material costs ($13.7 million).
During the three months ended September 24, 2004, operating expenses increased $1.9 million to $14.9 million from $13.0 million for the three months ended September 26, 2003. The increase was primarily due to higher distribution costs ($1.2 million) resulting from higher sales volumes, higher insurance-related costs ($1.0 million), depreciation and amortization ($0.3 million), foreign currency exchange losses ($0.3 million), offset by higher management fees ($1.7 million). As a percentage of net sales, operating costs decreased to 12.4% for the three months ended September 24, 2004 compared to 15.0% for the three months ended September 26, 2003.
For the reasons described above, income from operations decreased by $0.5 million for the three months ended September 24, 2004 to $3.4 million from $3.9 million for the comparable period in 2003.
Interest expense increased $1.5 million to $6.6 million during the three months ended September 24, 2004 from $5.1 million in the comparable period in the prior year, due to higher average debt levels, primarily resulting from the Acquisition, and higher average interest rates. Other expenses for the three months ended September 26, 2004 were comparable to the same period last year.
The effective tax rate for the three months ended September 24, 2004 was 37%, as compared to 38% in the same period in the prior year. As of September 24, 2004, the Company had $100.4 million of net operating loss carryforwards for federal income tax purposes, which expire through 2024.
19
Segment Analysis
Packaging Segment Results
The following table summarizes the packaging segment results of operations for the three months ended September 24, 2004 and September 26, 2003.
| Three Months Ended |
Increase |
% Change |
|||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
|||||||||||
| Net sales |
$ | 62.9 | $ | 48.8 | $ | 14.1 | 28.9 | % | |||||
| Gross profit |
10.5 | 11.6 | (1.1 | ) | -9.5 | % | |||||||
| Operating expenses |
8.5 | 6.9 | 1.6 | 23.2 | % | ||||||||
| Income from operations |
2.0 | 4.7 | (2.7 | ) | -57.4 | % | |||||||
Operating results for the packaging segment were favorably impacted by increased selling prices and volumes, offset by higher raw material and energy-related costs during the quarter ended September 24, 2004, compared to the same quarter in the prior year. Although both selling prices and sales volumes increased compared to the same quarter last year, the lag between increases in raw material and energy-related costs and implemented selling price increases, combined with higher operating expenses, resulted in a decrease in income from operations to $2.0 million for the three months ended September 24, 2004 from $4.7 million for the same three-month period in the prior year.
Net sales in the packaging segment for the three months ended September 24, 2004 increased 28.9% to $62.9 million from $48.8 million during the third quarter of 2003. This increase was due to higher average selling prices (2.9%), resulting from implemented price increases, and increased sales volumes (2.5%), combined with the impact of the Acquisition.
Gross profit decreased $1.1 million, or 9.5%, to $10.5 million for the three months ended September 24, 2004 compared to $11.6 million for the three-month period ended September 26, 2003. This decrease was primarily caused by the lag between higher raw material and energy-related costs ($1.9 million), and price increases implemented during the course of the quarter, which will more than offset the increased costs on an annualized basis. In addition, operating results for the quarter ended September 24, 2004 were negatively impacted by costs related to the introduction of the Company’s proprietary cold drink cups, including facilities preparation, training, personnel and other overhead costs. For the quarter ended September 24, 2004 depreciation expense increased by $0.8 million to $3.1 million as compared to the same period in the prior year.
Operating expenses increased $1.6 million to $8.5 million during the three months ended September 24, 2004 from $6.9 million during the same period in the prior year. This increase was primarily due to higher distribution costs resulting from the Acquisition and increased sales volumes ($0.4 million), as well as increased depreciation and amortization expense ($0.4 million). As a percentage of net sales, operating costs decreased to 13.5% for the three months ended September 24, 2004 compared to 14.1% for the three months ended September 26, 2003. For the three months ended September 24, 2004 depreciation and amortization included in operating expenses increased by $0.4 million to $0.6 million.
For the reasons described above, income from operations decreased $2.7 million to $2.0 million for the three months ended September 24, 2004 from $4.7 million in the prior year period.
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Specialty Chemicals Segment Results
The following table summarizes the specialty chemicals segment results of operations for the three months ended September 24, 2004 and September 26, 2003.
| Three Months Ended |
Increase |
% Change |
||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
||||||||||
| Net sales |
$ | 60.0 | $ | 40.4 | $ | 19.6 | 48.5 | % | ||||
| Gross profit |
7.9 | 5.3 | 2.6 | 49.1 | % | |||||||
| Operating expenses |
5.4 | 4.7 | 0.7 | 14.9 | % | |||||||
| Income from operations |
2.5 | 0.6 | 1.9 | 316.7 | % | |||||||
The operating results of the specialty chemicals segment improved significantly during the quarter ended September 26, 2004, compared to the same quarter in the prior year. Higher selling prices and sales volumes more than offset increases in raw material costs, resulting in a $1.9 million increase in income from operations to $2.5 million for the three months ended September 24, 2004 from $0.6 million for the similar three-month period in the prior year.
For the three months ended September 24, 2004, net sales in the specialty chemicals segment increased $19.6 million or 48.5% to $60.0 million from $40.4 million during the three months ended September 26, 2003. This increase was primarily due to a 33.8% increase in average selling prices. In addition to higher selling prices, the impact of changes in foreign currency exchange rates (8.9% or $3.6 million) and a 5.6% increase in sales volumes also contributed to the increase in net sales. Net sales included $2.7 million and $2.3 million of sales to the packaging segment for the three months ended September 24, 2004 and September 26, 2003, respectively, which were eliminated in consolidation.
Gross profit increased $2.6 million, or 49.1%, to $7.9 million for the three months ended September 24, 2004 from $5.3 million for the similar three-month period in 2003. As a percentage of net sales, gross profit increased to 13.2% for the three months ended September 24, 2004 from 13.1% for the three months ended September 26, 2003. This increase was primarily due to the impact of higher selling prices ($13.7 million), the impact of favorable changes in foreign currency exchange rates ($0.6 million), and increased sales volumes ($0.3 million), partially offset by higher styrene monomer costs ($12.7 million). In addition, depreciation expense increased by $0.1 million to $1.5 million for the quarter ended September 24, 2004 as compared to the same period in the prior year.
For the three months ended September 24, 2004, operating expenses increased by $0.7 million to $5.4 million from $4.7 million in the prior year period primarily due to higher general and administrative costs ($0.4 million) and the impact of changes in foreign currency exchange rates ($0.3 million). As a percentage of net sales, operating costs decreased to 9.0% for the three months ended September 24, 2004 compared to 11.6% for the three months ended September 26, 2003. For the three months period ended September 24, 2004 depreciation and amortization included in operating expenses decreased by $0.1 million to $0.1 million.
For the reasons described above, income from operations increased $1.9 million to $2.5 million during the three months ended September 24, 2004 compared to $0.6 million in the prior year period.
Corporate and Other
For the fiscal quarter ended September 24, 2004, corporate operating expenses decreased by $0.4 million compared to the similar fiscal quarter in the prior year. This decrease was due primarily to higher fees earned in connection with management services provided to a related company ($1.7 million) that are treated as a reduction of general and administrative expenses, partially offset by higher insurance-related costs ($1.0 million) and an increase in foreign currency exchange losses ($0.2 million).
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Nine months ended September 24, 2004 compared with the nine months ended September 26, 2003
Consolidated Results
The following table summarizes the consolidated results of operations for the nine months ended September 24, 2004 and September 26, 2003.
| Nine Months Ended |
Increase |
% Change |
||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
||||||||||
| Net sales |
$ | 324.7 | $ | 250.4 | $ | 74.3 | 29.7 | % | ||||
| Gross profit |
57.9 | 45.5 | 12.4 | 27.3 | % | |||||||
| Operating expenses |
45.4 | 40.6 | 4.8 | 11.8 | % | |||||||
| Income from operations |
12.5 | 4.9 | 7.6 | 155.1 | % | |||||||
Net sales for the nine months ended September 24, 2004 were $324.7 million, a 29.7% increase from $250.4 million for the nine months ended September 24, 2003. This increase was primarily caused by an 8.7% increase in average selling prices and a 5.1% increase in sales volumes, combined with the effects of the Acquisition and changes in foreign currency rates.
Gross profit increased $12.4 million, or 27.3%, to $57.9 million for the nine months ended September 24, 2004 from $45.5 million for the similar nine-month period in 2003. This increase was primarily caused by higher average selling prices across all segments ($21.7 million), increased sales volumes ($9.4 million) and the impact of the Acquisition ($2.9 million), partially offset by higher raw material costs ($27.1 million). Despite the overall improvement in gross profit, the lag between increases in raw material costs and implemented price increases negatively impacted profit margins.
During the nine months ended September 24, 2004, operating expenses increased $4.8 million to $45.4 million from $40.6 million for the nine months ended September 26, 2003. The increase was primarily due to higher distribution costs ($4.0 million) and higher insurance-related costs ($3.1 million), offset by $1.8 million of expenses incurred during the nine months ended September 26, 2003 related to the extinguishment of long-term debt as described in Note 5 for which there was no corresponding expense in the current period and higher management fees earned from a related company ($2.3 million).
For the reasons described above, income from operations increased by $7.6 million for the nine months ended September 24, 2004 to $12.5 million from $4.9 million for the comparable period in 2003.
Interest expense increased $3.0 million to $18.6 million during the nine months ended September 24, 2004 from $15.6 million in the comparable period in the prior year, due to higher average debt levels primarily resulting from the Acquisition. Other expense of $0.5 million for the nine months ended September 24, 2004 was comparable to the same period last year.
The effective tax rate for the nine months ended September 24, 2004 was 27%, as compared to 38% in the same period in the prior year. This reduction in the effective tax rate was primarily due to the creation of a reserve against certain expenses at the Company’s Canadian operations. As of September 24, 2004, the Company had $100.4 million of net operating loss carryforwards for federal income tax purposes, which expire through 2024.
Segment Analysis
Packaging Segment Results
The following table summarizes the packaging segment results of operations for the nine months ended September 24, 2004 and September 26, 2003.
| Nine Months Ended |
Increase |
% Change |
||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
||||||||||
| Net sales |
$ | 179.2 | $ | 141.6 | $ | 37.6 | 26.6 | % | ||||
| Gross profit |
36.5 | 31.3 | 5.2 | 16.6 | % | |||||||
| Operating expenses |
24.3 | 19.7 | 4.6 | 23.4 | % | |||||||
| Income from operations |
12.2 | 11.6 | 0.6 | 5.2 | % | |||||||
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During the nine months ended September 24, 2004, net sales increased by $37.6 million or 26.6% to $179.2 million, as compared to the same period in the prior year. This increase was mainly due a 3.3% increases in average selling prices and a 1.4% increase in sales volumes, combined with the impact of the Acquisition.
Gross profit increased $5.2 million, or 16.6%, to $36.5 million for the nine months ended September 24, 2004 compared to $31.3 million for the nine-month period ended September 26, 2003. As a percentage of net sales, gross profit decreased to 20.4% for the nine months ended September 24, 2004 from 22.1% for the nine months ended September 26, 2003. The increase in gross profit was primarily caused by higher average selling prices ($4.7 million) and higher sales volumes ($0.1 million), partially offset by higher raw material costs ($2.1 million). In addition, depreciation expense increased by $2.2 million to $8.5 million for the nine months ended September 24, 2004 as compared to the same period in the prior year.
Despite the improvement in gross profit, the lag between increases in raw material costs and implemented selling price increases during the quarter, which will more than offset the increase in costs on an annualized basis, negatively effected profit margins. In addition, operating results for the nine months ended September 24, 2004 were negatively impacted by costs related to the introduction of the Company’s proprietary cold drink cups, including facilities preparation, training, personnel and other overhead costs.
Operating expenses increased $4.6 million to $24.3 million during the nine months ended September 24, 2004 from $19.7 million during the same period in the prior year. This increase was primarily due to higher distribution costs resulting from the higher sales volumes and the impact of the Acquisition combined with higher selling expenses ($0.7 million) and higher depreciation and amortization ($0.8 million). For the nine months ended September 24, 2004 depreciation and amortization included in operating expenses increased by $0.8 million to $1.3 million.
For the reasons described above, income from operations increased $0.6 million to $12.2 million for the nine months ended September 24, 2004 from $11.6 million in the prior year period.
Specialty Chemicals Segment Results
The following table summarizes the specialty chemicals segment results of operations for the nine months ended September 24, 2004 and September 26, 2003.
| Nine Months Ended |
Increase |
% Change |
||||||||||
| (dollars in millions)
|
Sept. 24, 2004 |
Sept. 26, 2003 |
||||||||||
| Net sales |
$ | 154.4 | $ | 115.6 | $ | 38.8 | 33.6 | % | ||||
| Gross profit |
21.5 | 14.3 | 7.2 | 50.3 | % | |||||||
| Operating expenses |
14.6 | 12.9 | 1.7 | 13.2 | % | |||||||
| Income from operations |
6.9 | 1.4 | 5.5 | 392.9 | % | |||||||
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During the nine months ended September 24, 2004, net sales in the specialty chemicals segment increased 33.6% to $154.4 million from $115.6 million during the nine months ended September 26, 2003. This increase was primarily due to higher selling prices ($17.0 million) resulting from implemented price increases, and higher sales volumes ($10.8 million) as unit sales volume increased 9.6%. In addition to higher selling prices and sales volumes, net sales also increased due to the impact of favorable changes in foreign currency exchange rates ($10.9 million). Net sales included $9.0 million and $6.7 million of sales to the packaging segment for the nine months ended September 24, 2004 and September 26, 2003, respectively, which were eliminated in consolidation.
Gross profit increased by $7.2 million to $21.5 million or 13.9% of net sales for the nine months ended September 24, 2004 from $14.3 million or 12.4% of net sales for the similar nine-month period in 2003. This was primarily due to higher EPS selling prices ($17.0 million), increased sales volumes ($9.3 million), increased manufacturing efficiencies ($2.6 million) and the impact of favorable changes in foreign currency exchange rates ($1.7 million), partially offset by higher styrene monomer costs ($25.0 million). In addition, depreciation expense increased by $0.1 million to $4.2 million for the quarter ended September 24, 2004 as compared to the same period in the prior year.
For the nine months ended September 24, 2004, operating expenses increased by $1.7 million to $14.6 million from $12.9 million in the prior year period primarily due to the impact of changes in foreign currency rates ($1.0 million) and higher distribution costs ($0.7 million) resulting from higher sales volumes described above. For the nine months ended September 24, 2004 depreciation and amortization included in operating expenses decreased by $0.2 million to $0.3 million.
For the reasons described above, income from operations increased $5.5 million to $6.9 million during the nine months ended September 24, 2004 compared to $1.4 million in the prior year period.
Corporate and Other
Corporate operating expenses decreased by $1.6 million during the nine months ended September 24, 2004 compared to the nine months ended September 26, 2003. This decrease was due to $1.8 million in other expenses related to the extinguishment of long-term debt that occurred on March 11, 2003 for which there was no corresponding expense in the current period, combined with higher fees earned in connection with management services provided to a related company ($2.3 million) and lower salaries and wages ($0.8 million), partially offset by higher insurance-related costs ($3.1 million).
Liquidity and Capital Resources
During the nine-month period ended September 24, 2004, the Company had after tax cash flow of $7.6 million and an increase in working capital of $23.9 million, resulting in a negative cash flow from operating activities of $16.3 million. The increase in working capital was primarily due to higher accounts receivable ($16.6 million), inventory ($16.1 million) and lower accrued expenses ($6.7 million), partially offset by higher accounts payable ($17.0 million). Accounts receivable increased due to higher sales volumes and selling prices, while inventory increased primarily due to increases in raw material costs. The increase in accounts payable was primarily due to higher raw material costs.
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During the nine months ended September 24, 2004, inventory turnover was approximately 5.9 times per year compared to 6.3 during the same period last year, due in part to the Acquisition. As of September 24, 2004, the average collection period for our accounts receivable was 42 days as compared to 45 days in the prior year period.
The Company used $21.8 million in investing activities during the nine months ended September 24, 2004. The Company spent $16.5 million in capital expenditures while other assets increased by $6.4 million primarily due to deposits paid related to the purchase of new manufacturing equipment and payments related to raw material supply contracts, which are amortized over the length of the contracts. Distributions received from investments exceeded additional investments by $1.1 million during the nine-month period.
On April 27, 2004, the Company issued $70.0 million of Senior Secured Floating Rate Notes due 2009. The notes bear interest at a floating rate of LIBOR plus 6.75% per year. Interest on the notes resets and is payable quarterly, with the first payment having been made on July 15, 2004. The notes will mature on April 15, 2009. The net proceeds of the issuance were used to repay a then outstanding $40.5 million term loan and outstanding borrowings under the existing revolving credit facilities. On September 27, 2004, the Company amended certain financial covenants in its domestic credit facility.
As of September 24, 2004, the Company had $54.3 million outstanding under its revolving credit facilities. After taking into account cash on hand, we would have had the ability to draw up to an additional $10.9 million under these facilities as of September 24, 2004. The principal uses of cash for the next several years will be debt service, capital expenditures and working capital requirements. The Company is currently pursuing the divestiture of certain non-core assets to enhance its liquidity. From time to time, the Company evaluates and may pursue various capital raising transactions including the sale of debt or equity securities and the divestiture of other non-core assets, in order to further enhance the Company’s overall liquidity and improve its capital structure.
As a holding company, the Company is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Subject to certain limitations, the Company is, and will continue to be, able to control its receipt of dividends and other payments from its subsidiaries. Under the Company’s current business plan, the Company expects that in 2005 and in the long-term, cash generated from operations will be sufficient to meet the Company’s expected operating needs. However, as a result of uncertainties including pricing of the Company’s products, general market and economic conditions and fluctuations in raw material prices, the Company is not able to accurately predict the amount of cash that will be generated from operating activities and cash generated from operating activities, if any, may not be sufficient to meet the Company’s operating needs. To the extent that the Company uses cash in operating activities, we expect that such amounts will be financed from borrowings under credit facilities.
25
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Included in the Company’s 2003 annual report on Form 10-K/A are the significant accounting policies of the Company, which are described in Note 2 to the consolidated financial statements, and the critical accounting policies and estimates, which are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Information concerning the Company’s implementation and impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is included in the notes to the condensed consolidated financial statements included herein. Otherwise, there were no changes in the Company’s accounting policies and estimates in the current period that had a material impact on the Company’s financial condition, change in financial condition, liquidity or results of operations.
Forward Looking Statements
All statements contained herein that are not historical facts are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties are described in detail in the Company’s annual report on Form 10-K/A for the year ended December 26, 2003, Commission File No. 333-19495, to which reference is hereby made.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 24, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures have been effective in ensuring that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company’s internal control over financial reporting subsequent to the date of such evaluation.
Changes in Internal Controls
No significant changes were made in the Company’s internal controls during the fiscal quarter ended September 24, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal course of business. After taking into consideration legal counsel’s evaluation of such actions, management believes that these actions will not have a material effect on the Company’s financial position, results of operations or liquidity.
Item 6. EXHIBITS
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code, 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.
| RADNOR HOLDINGS CORPORATION | ||||
| Date: November 8, 2004 | By: | /s/ Michael V. Valenza | ||
| Michael V. Valenza | ||||
| Senior Vice President–Finance and | ||||
| Chief Financial Officer | ||||
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