Attached files
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EX-31.1 - EX-31.1 - Pregis Holding II CORP | c54637exv31w1.htm |
EX-31.2 - EX-31.2 - Pregis Holding II CORP | c54637exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30, 2009
Or
o | 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: 333-130353-04
Pregis Holding II Corporation
(Exact name of registrant as specified in its charter)
Delaware | 20-3321581 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
Incorporation or Organization) | ||
1650 Lake Cook Road, Deerfield, IL | 60015 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 597-2200
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 149.0035 shares of the registrants common stock, par value $0.01 per share, issued
and outstanding as of September 30, 2009.
PREGIS HOLDING II CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
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Table of Contents
Item 1. | Financial Statements |
Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)
(dollars in thousands, except shares and per share data)
September 30, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 100,202 | $ | 41,179 | ||||
Accounts receivable |
||||||||
Trade, net of allowances of $6,205 and $5,357 respectively |
123,250 | 121,736 | ||||||
Other |
7,944 | 13,829 | ||||||
Inventories, net |
85,751 | 87,867 | ||||||
Deferred income taxes |
4,867 | 4,336 | ||||||
Due from Pactiv |
1,166 | 1,399 | ||||||
Prepayments and other current assets |
8,788 | 8,435 | ||||||
Total current assets |
331,968 | 278,781 | ||||||
Property, plant and equipment, net |
238,193 | 245,124 | ||||||
Other assets |
||||||||
Goodwill |
128,015 | 127,395 | ||||||
Intangible assets, net |
39,540 | 41,254 | ||||||
Deferred financing costs, net |
4,506 | 7,734 | ||||||
Due from Pactiv, long-term |
10,025 | 13,234 | ||||||
Pension and related assets |
25,973 | 22,430 | ||||||
Other |
406 | 424 | ||||||
Total other assets |
208,465 | 212,471 | ||||||
Total assets |
$ | 778,626 | $ | 736,376 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 258 | $ | 4,902 | ||||
Accounts payable |
89,401 | 79,092 | ||||||
Accrued income taxes |
4,672 | 6,964 | ||||||
Accrued payroll and benefits |
15,994 | 11,653 | ||||||
Accrued interest |
10,337 | 6,905 | ||||||
Other |
19,067 | 21,740 | ||||||
Total current liabilities |
139,729 | 131,256 | ||||||
Long-term debt |
510,531 | 460,714 | ||||||
Deferred income taxes |
23,915 | 24,913 | ||||||
Long-term income tax liabilities |
8,281 | 11,310 | ||||||
Pension and related liabilities |
4,831 | 6,119 | ||||||
Other |
13,409 | 11,963 | ||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized,
149.0035 shares issued and outstanding at
September 30, 2009 and December 31, 2008 |
| | ||||||
Additional paid-in capital |
151,671 | 150,610 | ||||||
Accumulated deficit |
(75,004 | ) | (64,318 | ) | ||||
Accumulated other comprehensive income |
1,263 | 3,809 | ||||||
Total stockholders equity |
77,930 | 90,101 | ||||||
Total liabilities and stockholders equity |
$ | 778,626 | $ | 736,376 | ||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
(Unaudited)
(dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Sales |
$ | 207,047 | $ | 265,188 | $ | 588,594 | $ | 799,726 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
156,088 | 205,673 | 444,144 | 624,443 | ||||||||||||
Selling, general and administrative |
28,660 | 31,232 | 83,059 | 100,407 | ||||||||||||
Depreciation and amortization |
12,607 | 13,584 | 35,383 | 40,734 | ||||||||||||
Other operating expense, net |
2,267 | 4,601 | 13,602 | 8,500 | ||||||||||||
Total operating costs and expenses |
199,622 | 255,090 | 576,188 | 774,084 | ||||||||||||
Operating income |
7,425 | 10,098 | 12,406 | 25,642 | ||||||||||||
Interest expense |
9,192 | 13,392 | 28,072 | 37,293 | ||||||||||||
Interest income |
(54 | ) | (92 | ) | (176 | ) | (518 | ) | ||||||||
Foreign exchange loss (gain), net |
(886 | ) | 9,562 | (5,817 | ) | 6,641 | ||||||||||
Loss before income taxes |
(827 | ) | (12,764 | ) | (9,673 | ) | (17,774 | ) | ||||||||
Income tax expense (benefit) |
2,514 | (802 | ) | 1,013 | 3,029 | |||||||||||
Net loss |
$ | (3,341 | ) | $ | (11,962 | ) | $ | (10,686 | ) | $ | (20,803 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
(Unaudited)
(dollars in thousands)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net loss |
$ | (10,686 | ) | $ | (20,803 | ) | ||
Adjustments to reconcile net loss to
cash provided by operating activities: |
||||||||
Depreciation and amortization |
35,383 | 40,734 | ||||||
Deferred income taxes |
(1,483 | ) | (1,419 | ) | ||||
Unrealized foreign exchange loss (gain) |
(5,552 | ) | 6,814 | |||||
Amortization of deferred financing costs |
1,781 | 1,781 | ||||||
Gain on disposal of property, plant and equipment |
(249 | ) | (246 | ) | ||||
Stock compensation expense |
1,061 | 678 | ||||||
Impairment of interest rate swap asset |
| 1,299 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts and other receivables, net |
9,874 | (12,024 | ) | |||||
Due from Pactiv |
3,792 | 6,630 | ||||||
Inventories, net |
5,364 | (9,738 | ) | |||||
Prepayments and other current assets |
1,961 | (143 | ) | |||||
Accounts payable |
6,771 | 7,568 | ||||||
Accrued taxes |
(5,637 | ) | (4,778 | ) | ||||
Accrued interest |
3,547 | 4,577 | ||||||
Other current liabilities |
856 | 1,871 | ||||||
Pension and related assets and liabilities, net |
(2,931 | ) | (2,815 | ) | ||||
Other, net |
(2,395 | ) | 177 | |||||
Cash provided by operating activities |
41,457 | 20,163 | ||||||
Investing activities |
||||||||
Capital expenditures |
(17,644 | ) | (25,270 | ) | ||||
Proceeds from sale of assets |
692 | 1,042 | ||||||
Insurance proceeds |
| 1,868 | ||||||
Other, net |
| (593 | ) | |||||
Cash used in investing activities |
(16,952 | ) | (22,953 | ) | ||||
Financing activities |
||||||||
Proceeds from revolving credit facility |
38,700 | | ||||||
Financing fees |
(1,284 | ) | | |||||
Repayment of debt |
(4,312 | ) | (1,435 | ) | ||||
Other, net |
(125 | ) | 62 | |||||
Cash provided (used in) financing activities |
32,979 | (1,373 | ) | |||||
Effect of exchange rate changes on cash
and cash equivalents |
1,539 | (788 | ) | |||||
Increase (decrease) in cash and cash equivalents |
59,023 | (4,951 | ) | |||||
Cash and cash equivalents, beginning of period |
41,179 | 34,989 | ||||||
Cash and cash equivalents, end of period |
$ | 100,202 | $ | 30,038 | ||||
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
Pregis Holding II Corporation
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, unless otherwise noted)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Pregis Corporation (Pregis) is an international manufacturer, marketer and supplier of
protective packaging products and specialty packaging solutions. Pregis operates through two
reportable segments Protective Packaging and Specialty Packaging.
Pregis Corporation is 100%-owned by Pregis Holding II Corporation (Pregis Holding II or the
Company) which is 100%-owned by Pregis Holding I Corporation (Pregis Holding I). AEA Investors
LP and its affiliates (the Sponsors) own approximately 98% of the issued and outstanding equity
of Pregis Holding I, with the remainder held by management. AEA Investors LP is a New York-based
private equity investment firm.
Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Management believes these
financial statements include all normal recurring adjustments considered necessary for a fair
presentation of the financial position and results of operations of the Company. The results of
operations for the three and nine months ended September 30, 2009 are not necessarily indicative of
the operating results for the full year.
These unaudited interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2008.
Separate financial statements of Pregis Corporation are not presented since the floating rate
senior secured notes due April 2013 and the 12.375% senior subordinated notes due October 2013
issued by Pregis Corporation are fully and unconditionally guaranteed on a senior secured and
senior subordinated basis, respectively, by Pregis Holding II and all existing domestic
subsidiaries of Pregis Corporation and since Pregis Holding II has no operations or assets separate
from its investment in Pregis Corporation (see Note 16).
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157 or Accounting Standards Codification (ASC) Topic
820, Fair Value Measurement. This standard defines fair value, establishes a framework for
measuring fair value, and expands disclosure about fair value measurements. The Company adopted
this standard for all financial assets and liabilities as of January 1, 2008. FASB Staff Position
No. 157-2 or ASC Topic 820, Partial Deferral of the Effective Date of Statement No. 157, deferred
the effective date of SFAS No. 157 or ASC Topic 820 for all non-financial assets and liabilities to
fiscal years beginning after November 15, 2008. The Company adopted FASB Staff Position No. 157-2
or ASC Topic 820 on January 1, 2009 for all non-financial assets and liabilities. The adoption of
these standards did not have a material impact on the Companys consolidated financial statements.
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Table of Contents
In December 2007, the FASB issued SFAS No. 141(R) or ASC 805-10-65-1, Business Combinations,
which revised SFAS No. 141, Business Combinations. This standard requires an acquiror to measure
the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. This standard will also impact the accounting for
transaction costs and restructuring costs as well as the initial recognition of contingent assets
and liabilities assumed during a business combination. In addition, under this standard,
adjustments to the acquired entitys deferred tax assets and uncertain tax position balances
occurring outside the measurement period are recorded as a component of income tax expense, rather
than goodwill. This standard is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The provisions of this standard are applied prospectively and
will impact all acquisitions consummated subsequent to adoption. The guidance in this standard
regarding the treatment of income tax contingencies is retrospective to business combinations
completed prior to January 1, 2009. Adoption of this standard did not have a material impact on
the Companys financial statements.
In March 2008, the FASB issued SFAS No. 161 or ASC 815-10-65-1, Disclosures About Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133. This standard
expands quarterly disclosure requirements about an entitys derivative instruments and hedging
activities and is effective for fiscal years and interim periods beginning after November 15, 2008.
The Company adopted the provisions of this standard effective January 1, 2009. See Note 6 for the
Companys disclosures about its derivative instruments and hedging activities.
In April 2009, the FASB issued FSP FAS 107-1 or ASC 825-10-65-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, for the interium periods ending after March
15, 2009. This standard expands the fair value disclosures required for all financial instruments
within the scope of FAS 107 or ASC 825-10-65-1 to include interim periods. The adoption of this
standard did not have a material impact on the Companys consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165 or ASC Topic 855, Subsequent Events. This standard
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued and is
effective for interim or annual periods ending after June 15, 2009. The Company has evaluated
subsequent events through November 13, 2009, the date on which the Companys Form 10-Q for the
quarterly period ended September 30, 2009 is filed with the Securities and Exchange Commission.
In June 2009, the FASB issued the FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (the Codification). The Codification became the single
official source of authoritative nongovernmental U.S. generally accepted accounting priciples
(GAAP). The Codification did not change GAAP but reorganized the literature. The Codification
is effective for interim and annual periods ending after September 15, 2009, and the Company
adopted the Codification during the three months ended September 30, 2009.
Pregis adopted the provisions of FASB Accounting Standards Update (ASU) No. 2009-05,
Measuring Liabilities at Fair Value, for interim peiods ending after August 28, 2009. ASU No.
2009-05 provides guidance on measuring liabilities at fair value when a quoted price in an active
market for the identical liability is not available. The adoption of this standard did not have a
material impact on the Companys consolidated financial statements.
Pregis adopted the provisions of FASB Staff Position No. FAS 132R-1 or ASC Topic 715,
EmployersDiscolsures about Postretirement Benefit Plan Assets, on January 1, 2009. This standard
requires more detailed disclosures about Pregiss plan assets, including investment strategies,
major categories of plan assets, concentrations of risk within plan assets, and valuation
techniques used to measure the fair value of plan assets. Additional disclosures are required
beginning with the year ended 2009 consolidated financial statements. There was no impact to Pregiss condensed consolidated
financial statements.
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3. INVENTORIES
The major components of net inventories are as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Finished goods |
$ | 43,137 | $ | 43,338 | ||||
Work-in-process |
14,428 | 13,793 | ||||||
Raw materials |
25,496 | 27,489 | ||||||
Other materials and supplies |
2,690 | 3,247 | ||||||
$ | 85,751 | $ | 87,867 | |||||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in goodwill by reportable segment for the nine months ended September 30, 2009 are
as follows:
December 31, | Foreign Currency | September 30, | ||||||||||
Segment | 2008 | Translation | 2009 | |||||||||
Protective Packaging |
$ | 97,159 | $ | (1,164 | ) | $ | 95,995 | |||||
Specialty Packaging |
30,236 | 1,784 | 32,020 | |||||||||
Total |
$ | 127,395 | $ | 620 | $ | 128,015 | ||||||
The Companys other intangible assets are summarized as follows:
Average | September 30, 2009 | December 31, 2008 | ||||||||||||||||||
Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Customer relationships |
12 | $ | 46,669 | $ | 14,992 | $ | 45,646 | $ | 11,863 | |||||||||||
Patents |
10 | 1,072 | 358 | 1,036 | 261 | |||||||||||||||
Non-compete agreements |
2 | 3,047 | 3,047 | 3,002 | 2,908 | |||||||||||||||
Software |
3 | 3,254 | 1,907 | 2,469 | 1,224 | |||||||||||||||
Land use rights and other |
32 | 1,518 | 565 | 1,447 | 474 | |||||||||||||||
Intangible assets not subject to
amortization: |
||||||||||||||||||||
Trademarks and trade names |
4,849 | | 4,384 | | ||||||||||||||||
Total |
$ | 60,409 | $ | 20,869 | $ | 57,984 | $ | 16,730 | ||||||||||||
Amortization expense related to intangible assets totaled $1,192 and $1,149 for the three
months ended September 30, 2009 and 2008, respectively, and $3,433 and $3,662 for the nine months
ended September 30, 2009 and 2008, respectively.
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5. DEBT
The Companys long-term debt consists of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Senior secured credit facilities: |
||||||||
Term B-1 facility, due October, 2012 |
$ | 83,057 | $ | 85,140 | ||||
Term B-2 facility, due October, 2012 |
93,813 | 91,902 | ||||||
Revolving Credit Facility |
38,700 | | ||||||
Senior secured notes, due April, 2013 |
146,340 | 139,690 | ||||||
Senior subordinated notes, due October,
2013, net of discount of $1,724 at September 30, 2009
and $1,962 at December 31, 2008 |
148,276 | 148,038 | ||||||
Other |
603 | 846 | ||||||
Total debt |
510,789 | 465,616 | ||||||
Less: current portion |
(258 | ) | (4,902 | ) | ||||
Long-term debt |
$ | 510,531 | $ | 460,714 | ||||
For the nine months ended September 30, 2009 and 2008, the revaluation of the Companys
euro-denominated senior secured notes and Term B-2 facility resulted in unrealized foreign exchange
losses and (gains) of $10,790 and $(8,632), respectively. These unrealized losses and (gains) have
been offset by unrealized (gains) and losses of $(13,738) and $10,784 relating to the revaluation
of the Companys euro-denominated inter-company notes receivable for the nine months ended
September 30, 2009 and 2008, respectively. These amounts are included net within foreign exchange
loss (gain), net in the Companys consolidated statements of operations.
As a component of its senior secured credit facility, the Company is party to a revolving
credit facility. The revolving credit facility matures in October 2011 and provides for borrowings
of up to $50 million, a portion of which may be made available to the Companys non-U.S. subsidiary
borrowers in euros and/or pounds sterling. The revolving credit facility also includes a
swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility
bears interest at a rate equal to, at the Companys option, (1) an alternate base rate or (2) LIBOR
or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00%
for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the
credit agreement.
Lehman Commercial Paper Inc. (Lehman) was a participating lender in this facility for $5
million. As a result of the bankruptcy of Lehmans parent company, as of September 30, 2009, the
revolving credit facility has been effectively reduced by the majority of Lehmans $5 million
commitment. In October 2009 the Company regained this liquidity as a result of Barclays Capital
new participation.
On July 14, 2009 the Company drew $38.7 million, the full amount available under the revolving
credit facility after reduction for amounts outstanding under letters of credit. This amount
remains outstanding as of September 30, 2009. As of September 30, 2009, the Company also had $6.7
million of outstanding letters of credit outstanding under the revolving credit facility.
Revolving credit facility interest expense totaled $112 for the quarter ended September 30, 2009.
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On October 5, 2009 we amended our senior secured credit facilities. The amendment, among other
things:
| permits our company to engage in certain specified sale leaseback transactions in 2009 and up to $35.0 million of additional sale leaseback transactions through the maturity of the senior secured credit facilities; | ||
| replaces the maximum leverage ratio covenant of 5.0x under the senior secured credit facilities with the first lien leverage covenant of 2.0x; | ||
| eliminates the minimum cash interest coverage ratio covenant under the senior secured credit facilities; | ||
| increases the accordion feature of the term loan portion of the senior secured credit facilities by $100.0 million, allowing our company to borrow up to $200.0 million under the term loan portion of the senior secured credit facilities, subject to certain conditions including receipt of commitments therefore; | ||
| provides for additional subordinated debt issuances subject to a 2.0x interest coverage ratio; and | ||
| modifies several other covenants in the senior secured credit facilities to provide our company with more flexibility. |
On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the notes). The notes bear interest
at a floating rate of EURIBOR plus 5.00% per year. Interest on the notes will be reset quarterly
and is payable on January 15, April 15, July 15, and October 15 of each year, beginning on October 15, 2009. The notes
mature on April 15, 2013. The notes are treated as a single class under the indenture with the
100.0 million principal amount of our existing second priority senior secured floating rate notes
due 2013, originally issued on October 12, 2005. However, the notes do not have the same Common
Code or ISIN number as the existing notes, are not fungible with the existing notes and will not
trade together as a single class with the existing notes. The notes are treated as issued with
more than de minimis original issue discount for United States federal income tax purposes, whereas
the existing notes were not issued with original issue discount for such purposes.
The notes and the related guarantees are second priority secured senior obligations.
Accordingly, they are effectively junior to our and the guarantors obligations under our senior
secured credit facilities and any other obligations that are secured by first priority liens on the
collateral securing the notes or that are secured by a lien on assets that are not part of the
collateral securing the notes, in each case, to the extent of the value of such collateral or
assets; structurally subordinated to all existing and future indebtedness and other liabilities
(including trade payables) of our subsidiaries that are not guarantors; equal in right of payment
with the senior secured floating rate notes issued by us in 2005 (the 2005 notes and, together
with the notes, the senior secured floating rate notes); equal in right of payment with all of
our and the guarantors existing and future unsecured and unsubordinated indebtedness, and
effectively senior to such indebtedness to the extent of the value of the collateral; and senior in
right of payment to all of our and the guarantors existing and future subordinated indebtedness,
including the senior subordinated notes issued by us in 2005 (the senior subordinated notes) and
the related guarantees.
The proceeds from the October 2009 offering were used to repay the Term B-1 and Term B-2
indebtedness under our senior secured credit facilities. As the long-term loans were refinanced by
the
10
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new long-term senior secured floating rate notes, the term loans have been presented as
non-current on the consolidated balance sheet as of September 30, 2009.
6. FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157 or ASC 820 on January 1, 2008. Under generally accepted
accounting principles in the U.S., certain assets and liabilities must be measured at fair value,
and SFAS No. 157 or ASC 820 details the disclosures that are required for items measured at fair
value.
SFAS No. 157 or ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value, as follows:
Level 1 Quoted prices in active markets for identical assets and liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3 Unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
In order to maintain its interest rate risk and to achieve a targeted ratio of variable-rate
versus fixed-rate debt, the Company established an interest rate swap arrangement in the notional
amount of 65 million euro from EURIBOR-based floating rates to a fixed rate over the period of
October 1, 2008 to April 15, 2011. This swap arrangement was designated as a cash flow hedge and
changes in the fair value of this instrument are expected to be highly effective in offsetting the
fluctuations in the floating interest rate and are, therefore, being recorded in other
comprehensive income until the underlying transaction is recorded.
The accounting for the cash flow impact of the swap is recorded as an adjustment to interest
expense. For the three and nine months ended September 30, 2009, the swap resulted in an increase
to interest expense of $756 and $1,088, respectively. For the three and nine months ended
September 30, 2008, the swap resulted in a reduction to interest expense of $346 and $1,015,
respectively.
At September 30, 2009, this interest rate swap contract was the Companys only derivative
instrument and only financial instrument requiring measurement at fair value. The swap is an
over-the-counter contract and the inputs utilized to determine its fair value are obtained in
quoted public markets. Therefore, the Company has categorized this swap agreement as Level 2
within the fair value hierarchy. At September 30, 2009, the fair value of this instrument was
estimated to be a liability of $5,825, which is reported within other liabilities in the Companys
consolidated balance sheet.
The carrying values of other financial instruments included in current assets and current
liabilities approximate fair values due to the short-term maturities of these instruments. The
carrying value of amounts outstanding under the Companys senior secured credit facilities is
considered to approximate fair value as interest rates vary, based on prevailing market rates. At
September 30, 2009, the fair values of the Companys senior secured notes and senior subordinated
notes were estimated to be $137,560 and $139,500, respectively, based on quoted market prices.
Under SFAS No. 159 or ASC 825, entities are permitted to choose to measure many financial
instruments and certain other items at fair value. The Company did not elect the fair value
measurement option under this standard for any of its financial assets or liabilities.
11
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7. PENSION PLANS
The Company sponsors three defined benefit pension plans covering the majority of its
employees located in the United Kingdom and the Netherlands.
The components of net periodic pension cost related to these plans for the three and nine
months ended September 30, 2009 and 2008 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost of benefits earned |
$ | 707 | $ | 525 | $ | 1,234 | $ | 1,682 | ||||||||
Interest cost on benefit obligations |
1,166 | 1,432 | 3,343 | 4,295 | ||||||||||||
Expected return on plan assets |
(2,132 | ) | (1,918 | ) | (5,315 | ) | (5,756 | ) | ||||||||
Amortization of unrecognized net gain |
(61 | ) | (66 | ) | (173 | ) | (197 | ) | ||||||||
Net periodic pension cost (benefit) |
$ | (320 | ) | $ | (27 | ) | $ | (911 | ) | $ | 24 | |||||
8. OTHER OPERATING EXPENSE, NET
A summary of the items comprising other operating expense, net is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Gain) loss on disposal of property,
plant and equipment |
$ | 408 | $ | (673 | ) | $ | 151 | $ | (246 | ) | ||||||
Royalty expense |
51 | 16 | 27 | 154 | ||||||||||||
Rental income |
(10 | ) | (9 | ) | (22 | ) | (30 | ) | ||||||||
Restructuring expense |
2,050 | 5,194 | 13,921 | 7,814 | ||||||||||||
Other (income) expense, net |
(232 | ) | 73 | (475 | ) | 808 | ||||||||||
Other operating expense, net |
$ | 2,267 | $ | 4,601 | $ | 13,602 | $ | 8,500 | ||||||||
During the nine months ended September 30, 2009, the Company recorded restructuring
charges of $13,921. Restructuring activities are discussed further in Note 9 below.
9. RESTRUCTURING ACTIVITY
In 2008, management approved a company-wide restructuring program to further streamline the
Companys operations and reduce its overall cost structure. Activities included headcount
reductions and other overhead cost savings initiatives. Management also approved a cost reduction
plan that involved closure of a protective packaging facility located in Eerbeek, the Netherlands.
The plan included relocation of the Eerbeek production lines to other existing company facilities
located within Western Europe and reduction of related headcount.
In 2009, as part of the Companys continued efforts to reduce its overall cost structure,
management implemented additional headcount reductions and engaged outside consultants to assist in
further
restructuring of its manufacturing operations. Restructuring plans associated with those
consulting activities are not yet complete. Consulting costs for restructuring totaling $4.2
million were expensed as incurred and are presented in other in the table below. Also included
in other are costs associated with the discontinuance of a product line at one of the Companys
North American protective packaging plants of
approximately $0.6 million.
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Following is a reconciliation of the restructuring liability for the nine months ended
September 30, 2009. The company expects to have substantially satisfied the restructuring
liability by June 2010.
December 31, | Cash | Foreign Currency | September 30, | |||||||||||||||||||||
Segment | 2008 | Severance | Other | Paid Out | Translation | 2009 | ||||||||||||||||||
Protective Packaging |
$ | 4,178 | $ | 4,339 | $ | 3,688 | $ | (11,741 | ) | | $ | 464 | ||||||||||||
Specialty Packaging |
592 | 1,301 | | (1,429 | ) | 18 | 482 | |||||||||||||||||
Corporate |
83 | 574 | 4,019 | (2,854 | ) | 30 | 1,852 | |||||||||||||||||
Total |
$ | 4,853 | $ | 6,214 | $ | 7,707 | $ | (16,024 | ) | $ | 48 | $ | 2,798 | |||||||||||
Amounts recorded for restructuring liabilities are included in other current liabilities on
the Companys consolidated balance sheets. As of September 30, 2009, our restructuring initiatives
are substantially complete.
10. INCOME TAXES
The Companys effective tax rate was 10.47% and 17.04% for the nine months ended September 30,
2009 and 2008, respectively. Reconciliation of the Companys effective tax rate to the U.S.
federal statutory rate is shown in the following table:
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
U.S. federal income tax rate |
(35.00 | )% | (35.00 | )% | ||||
Changes in income tax rate resulting from: |
||||||||
Valuation allowances |
21.35 | 38.26 | ||||||
State and local taxes on income,
net of U.S. federal income tax benefit |
6.94 | (0.68 | ) | |||||
Foreign rate differential |
7.45 | 7.74 | ||||||
Return to provision calculation |
| (1.98 | ) | |||||
Non-deductible interest expense |
2.79 | 5.42 | ||||||
Permanent differences |
5.27 | 3.28 | ||||||
Other |
1.67 | | ||||||
Income tax expense |
10.47 | % | 17.04 | % | ||||
11. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement with its sponsors, AEA Investors LP and its
affiliates, who provide various advisory and consulting services. Fees and expenses incurred under
this agreement totaled $472 and $324 for the three months ended September 30, 2009 and 2008,
respectively, and $1,563 and $1,248 for the nine months ended September 30, 2009 and 2008,
respectively. These amounts are recorded in selling, general and administrative expenses in the
Companys consolidated statements of operations.
The Company had sales to affiliates of AEA Investors LP totaling $280 and $636 for the three
months and nine months ended September 30, 2009 compared to $167 and $388 for the same periods of
2008, respectively. The Company made purchases from affiliates of AEA Investors LP totaling $3,153
and $8,627 for the three and nine months ended September 30, 2009 compared to $2,889 and $7,987 for
the same periods of 2008, respectively.
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12. SEGMENT AND GEOGRAPHIC INFORMATION
The Companys segments are determined on the basis of its organization and internal reporting
to the chief operating decision maker. The Companys segments are as follows:
Protective Packaging This segment manufactures, markets, sells and distributes protective
packaging products in North America and Europe. Its protective mailers, air-encapsulated bubble
products, sheet foam, engineered foam, inflatable airbag systems, honeycomb products and other
protective packaging products are manufactured and sold for use in cushioning, void-fill,
surface-protection, containment and blocking & bracing applications.
Specialty Packaging This segment provides innovative packaging solutions for food, medical,
and other specialty packaging applications, primarily in Europe.
Net sales by reportable segment for the three and nine months ended September 30, 2009 and
2008 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Protective Packaging |
$ | 128,930 | $ | 172,088 | $ | 363,107 | $ | 520,226 | ||||||||
Specialty Packaging |
78,117 | 93,100 | 225,487 | 279,500 | ||||||||||||
$ | 207,047 | $ | 265,188 | $ | 588,594 | $ | 799,726 | |||||||||
The Company evaluates performance and allocates resources to its segments based on
segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation,
amortization, and restructuring expense and adjusted for other non-cash activity. Segment EBITDA
is a measure of segment profit or loss which is reported to the Companys chief operating decision
maker for purposes of making decisions about allocating resources to the Companys segments and
evaluating segment performance. In addition, segment EBITDA is included herein in conformity with
SFAS No. 131 or ASC 280, Disclosures about Segments of an Enterprise and Related Information.
Management believes that segment EBITDA provides useful information for analyzing and evaluating
the underlying operating results of each segment. However, segment EBITDA should not be considered
in isolation or as a substitute for net income (loss) before income taxes or other measures of
financial performance prepared in accordance with generally accepted accounting principles in the
United States. Additionally, the Companys computation of segment EBITDA may not be comparable to
other similarly titled measures computed by other companies.
The following table presents EBITDA by reportable segment and reconciles the total segment
EBITDA to loss before income taxes:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Segment EBITDA |
||||||||||||||||
Protective Packaging |
$ | 15,462 | $ | 20,271 | $ | 42,201 | $ | 49,813 | ||||||||
Specialty Packaging |
11,363 | 11,147 | 30,792 | 33,574 | ||||||||||||
Total segment EBITDA |
26,825 | 31,418 | 72,993 | 83,387 | ||||||||||||
Corporate expenses |
(4,390 | ) | (1,614 | ) | (10,210 | ) | (8,346 | ) | ||||||||
Restructuring expense |
(2,050 | ) | (5,194 | ) | (13,921 | ) | (7,814 | ) | ||||||||
Depreciation and amortization |
(12,607 | ) | (13,584 | ) | (35,383 | ) | (40,734 | ) | ||||||||
Interest expense |
(9,192 | ) | (13,392 | ) | (28,072 | ) | (37,293 | ) | ||||||||
Interest income |
54 | 92 | 176 | 518 | ||||||||||||
Unrealized foreign exchange gain (loss), net |
859 | (10,246 | ) | 5,552 | (6,814 | ) | ||||||||||
Non-cash stock compensation |
(327 | ) | (244 | ) | (1,061 | ) | (678 | ) | ||||||||
Other |
1 | | 253 | | ||||||||||||
Loss before income taxes |
$ | (827 | ) | $ | (12,764 | ) | $ | (9,673 | ) | $ | (17,774 | ) | ||||
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Corporate expenses include the costs of corporate support functions, such as information
technology, finance, human resources, legal and executive management which have not been allocated
to the segments. Additionally, corporate expenses may include other non-recurring or
non-operational activity that the chief operating decision maker excludes in assessing business
unit performance. These expenses, along with depreciation and amortization, other operating
income/expense and other non-operating activity such as interest expense/income, restructuring, and
foreign exchange gains/losses, are not considered in the measure of the segments operating
performance, but are shown herein as reconciling items to the Companys consolidated loss before
income taxes.
13. COMPREHENSIVE LOSS
Total comprehensive loss and its components for the three and nine months ended September 30,
2009 and 2008 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (3,341 | ) | $ | (11,962 | ) | $ | (10,686 | ) | $ | (20,803 | ) | ||||
Other comprehensive income loss, net of tax: |
||||||||||||||||
Foreign currency translation adjustment |
(971 | ) | (4,796 | ) | (982 | ) | (1,721 | ) | ||||||||
Net change in fair value of hedging
instrument |
(195 | ) | (763 | ) | (1,564 | ) | (221 | ) | ||||||||
Comprehensive loss |
$ | (4,507 | ) | $ | (17,521 | ) | $ | (13,232 | ) | $ | (22,745 | ) | ||||
14. COMMITMENTS AND CONTINGENCIES
Legal matters
The Company is party to legal proceedings arising from its operations. Related reserves are
recorded when it is probable that liabilities exist and where reasonable estimates of such
liabilities can be made. While it is not possible to predict the outcome of any of these
proceedings, the Companys management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the aggregate, will have
a material adverse effect on the Companys financial position. The Company does not believe that,
with respect to any pending legal matters, it is reasonably possible that a loss exceeding amounts
already recognized may be material. However, actual outcomes may be different than expected and
could have a material effect on the companys results of operations or cash flows in a particular
period.
Environmental matters
The Company is subject to a variety of environmental and pollution-control laws and
regulations in all jurisdictions in which it operates. Where it is probable that related
liabilities exist and where reasonable estimates of such liabilities can be made, associated
reserves are established. Estimated liabilities are subject to change as additional information
becomes available regarding the magnitude of possible clean-up costs, the expense and effectiveness
of alternative clean-up methods, and other possible liabilities associated with such situations.
The Company does not believe that, with respect to any pending environmental matters, it is
reasonably possible that a loss exceeding amounts already recognized may be material. However,
actual outcomes may be different than expected and could have a material effect on the companys
results of operations or cash flows in a particular period.
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Financing commitments
As of September 30, 2009, the Company also had $6.7 million of outstanding letters of credit
outstanding under the revolving credit facility. In addition, the Company also had outstanding
guarantees and letters of credit issued under other financing lines with local banks totaling
$5,786.
15. SUBSEQUENT EVENTS
On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013. See footnote 5 for additional
information.
On October 29, 2009 the Company entered into an agreement to sell and leaseback real property
consisting of land and buildings at one of its subsidiaries located in the United Kingdom. The net
sale proceeds totaled approximately $10.6 million (6.6 million British Pounds). The Company
anticipates this transaction to qualify for sales leaseback accounting treatment, resulting in a
$2.7 million gain on disposal of assets. The lease term is 25 years with annual rents totaling
approximately $1.2 million (750 thousand British Pounds).
16. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION
Pregis Holdings II (presented as Parent in the following schedules), through its 100%-owned
subsidiary, Pregis Corporation (presented as Issuer in the following schedules), issued senior
secured notes and senior subordinated notes in connection with its acquisition by AEA Investors LP
and its affiliates. The senior notes are fully, unconditionally and jointly and severally
guaranteed on a senior secured basis and the senior subordinated notes are fully, unconditionally
and jointly and severally guaranteed on an unsecured senior subordinated basis, in each case, by
Pregis Holdings II and substantially all existing and future 100%-
owned domestic restricted subsidiaries of Pregis Corporation (collectively, the Guarantors).
All other subsidiaries of Pregis Corporation, whether direct or indirect, do not guarantee the
senior secured notes and senior subordinated notes (the Non-Guarantors). The Guarantors also
unconditionally guarantee the Companys borrowings under its senior secured credit facilities on a
senior secured basis.
Additionally, the senior secured notes are secured on a second priority basis by liens on all
of the collateral (subject to certain exceptions) securing Pregis Corporations senior secured
credit facilities. In the event that secured creditors exercise remedies with respect to Pregis
and its guarantors pledged assets, the proceeds of the liquidation of those assets will first be
applied to repay obligations secured by the first priority liens under the senior secured credit
facilities and any other first priority obligations.
The following condensed consolidating financial statements present the results of operations,
financial position and cash flows of (1) the Parent, (2) the Issuer, (3) the Guarantors, (4) the
Non-Guarantors, and (5) eliminations to arrive at the information for Pregis Holding II on a
consolidated basis. Separate financial statements and other disclosures concerning the Guarantors
are not presented because management does not believe such information is material to investors.
Therefore, each of the Guarantors is combined in the presentation below.
16
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
September 30, 2009
(Unaudited)
Condensed Consolidating Balance Sheet
September 30, 2009
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 59,049 | $ | | $ | 41,153 | $ | | $ | 100,202 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 29,868 | 93,382 | | 123,250 | ||||||||||||||||||
Affiliates |
| 69,300 | 75,094 | 2,813 | (147,207 | ) | | |||||||||||||||||
Other |
| | 8 | 7,936 | | 7,944 | ||||||||||||||||||
Inventories, net |
| | 20,077 | 65,674 | | 85,751 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,589 | 2,144 | | 4,867 | ||||||||||||||||||
Due from Pactiv |
| | | 1,166 | | 1,166 | ||||||||||||||||||
Prepayments and other current assets |
| 5,404 | 414 | 2,970 | | 8,788 | ||||||||||||||||||
Total current assets |
| 133,887 | 128,050 | 217,238 | (147,207 | ) | 331,968 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
77,930 | 510,407 | | | (588,337 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,396 | 68,384 | 168,413 | | 238,193 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 85,597 | 42,418 | | 128,015 | ||||||||||||||||||
Intangible assets, net |
| | 16,104 | 23,436 | | 39,540 | ||||||||||||||||||
Other |
| 4,526 | 4,015 | 32,369 | | 40,910 | ||||||||||||||||||
Total other assets |
| 4,526 | 105,716 | 98,223 | | 208,465 | ||||||||||||||||||
Total assets |
$ | 77,930 | $ | 650,216 | $ | 302,150 | $ | 483,874 | $ | (735,544 | ) | $ | 778,626 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | 258 | $ | | $ | 258 | ||||||||||||
Accounts payable |
| 3,818 | 20,822 | 64,761 | | 89,401 | ||||||||||||||||||
Accounts payable, affiliate |
| 46,142 | 50,466 | 50,582 | (147,190 | ) | | |||||||||||||||||
Accrued income taxes |
| (3,613 | ) | 4,619 | 3,666 | | 4,672 | |||||||||||||||||
Accrued payroll and benefits |
| 26 | 4,312 | 11,656 | | 15,994 | ||||||||||||||||||
Accrued interest |
| 10,336 | | 1 | | 10,337 | ||||||||||||||||||
Other |
| 1,855 | 5,531 | 11,681 | | 19,067 | ||||||||||||||||||
Total current liabilities |
| 58,564 | 85,750 | 142,605 | (147,190 | ) | 139,729 | |||||||||||||||||
Long-term debt |
| 510,186 | | 345 | | 510,531 | ||||||||||||||||||
Intercompany balances |
| | 116,111 | 302,317 | (418,428 | ) | | |||||||||||||||||
Deferred income taxes |
| (5,237 | ) | 20,331 | 8,821 | | 23,915 | |||||||||||||||||
Other |
| 8,773 | 6,616 | 11,132 | | 26,521 | ||||||||||||||||||
Total Stockholders equity |
77,930 | 77,930 | 73,342 | 18,654 | (169,926 | ) | 77,930 | |||||||||||||||||
Total liabilities and stockholders
equity |
$ | 77,930 | $ | 650,216 | $ | 302,150 | $ | 483,874 | $ | (735,544 | ) | $ | 778,626 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2008
Condensed Consolidating Balance Sheet
December 31, 2008
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 9,764 | $ | 31,415 | $ | | $ | 41,179 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 30,338 | 91,398 | | 121,736 | ||||||||||||||||||
Affiliates |
| 75,907 | 70,569 | 1,864 | (148,340 | ) | | |||||||||||||||||
Other |
| | 57 | 13,772 | | 13,829 | ||||||||||||||||||
Inventories, net |
| | 23,829 | 64,038 | | 87,867 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,589 | 1,613 | | 4,336 | ||||||||||||||||||
Due from Pactiv |
| | | 1,399 | | 1,399 | ||||||||||||||||||
Prepayments and other current assets |
| 2,457 | 1,316 | 4,662 | | 8,435 | ||||||||||||||||||
Total current assets |
| 78,498 | 138,462 | 210,161 | (148,340 | ) | 278,781 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
90,101 | 524,168 | | | (614,269 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,704 | 74,590 | 168,830 | | 245,124 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 85,597 | 41,798 | | 127,395 | ||||||||||||||||||
Intangible assets, net |
| | 17,150 | 24,104 | | 41,254 | ||||||||||||||||||
Other |
| 7,734 | 4,046 | 32,042 | | 43,822 | ||||||||||||||||||
Total other assets |
| 7,734 | 106,793 | 97,944 | | 212,471 | ||||||||||||||||||
Total assets |
$ | 90,101 | $ | 612,104 | $ | 319,845 | $ | 476,935 | $ | (762,609 | ) | $ | 736,376 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 4,641 | $ | | $ | 261 | $ | | $ | 4,902 | ||||||||||||
Accounts payable |
| 1,257 | 15,081 | 62,754 | | 79,092 | ||||||||||||||||||
Accounts payable, affiliate |
| 46,698 | 61,668 | 39,974 | (148,340 | ) | | |||||||||||||||||
Accrued income taxes |
| (374 | ) | 1,217 | 6,121 | | 6,964 | |||||||||||||||||
Accrued payroll and benefits |
| 114 | 3,616 | 7,923 | | 11,653 | ||||||||||||||||||
Accrued interest |
| 6,905 | | | | 6,905 | ||||||||||||||||||
Other |
| 84 | 5,663 | 15,993 | | 21,740 | ||||||||||||||||||
Total current liabilities |
| 59,325 | 87,245 | 133,026 | (148,340 | ) | 131,256 | |||||||||||||||||
Long-term debt |
| 460,128 | | 586 | | 460,714 | ||||||||||||||||||
Intercompany balances |
| | 137,778 | 288,577 | (426,355 | ) | | |||||||||||||||||
Deferred income taxes |
| (4,315 | ) | 20,331 | 8,897 | | 24,913 | |||||||||||||||||
Other |
| 6,865 | 6,907 | 15,620 | | 29,392 | ||||||||||||||||||
Total Stockholders equity |
90,101 | 90,101 | 67,584 | 30,229 | (187,914 | ) | 90,101 | |||||||||||||||||
Total liabilities and stockholders
equity |
$ | 90,101 | $ | 612,104 | $ | 319,845 | $ | 476,935 | $ | (762,609 | ) | $ | 736,376 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 74,543 | $ | 134,480 | $ | (1,976 | ) | $ | 207,047 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
| | 52,172 | 105,892 | (1,976 | ) | 156,088 | |||||||||||||||||
Selling, general and administrative |
| 4,262 | 8,776 | 15,622 | | 28,660 | ||||||||||||||||||
Depreciation and amortization |
| 157 | 3,540 | 8,910 | | 12,607 | ||||||||||||||||||
Other operating expense, net |
| 1,077 | 109 | 1,081 | | 2,267 | ||||||||||||||||||
Total operating costs and expenses |
| 5,496 | 64,597 | 131,505 | (1,976 | ) | 199,622 | |||||||||||||||||
Operating income (loss) |
| (5,496 | ) | 9,946 | 2,975 | | 7,425 | |||||||||||||||||
Interest expense |
| (140 | ) | 3,677 | 5,655 | | 9,192 | |||||||||||||||||
Interest income |
| (29 | ) | | (25 | ) | | (54 | ) | |||||||||||||||
Foreign exchange loss (gain), net |
| (3,964 | ) | (10 | ) | 3,088 | | (886 | ) | |||||||||||||||
Equity in loss of subsidiaries |
3,341 | 2,093 | | | (5,434 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(3,341 | ) | (3,456 | ) | 6,279 | (5,743 | ) | 5,434 | (827 | ) | ||||||||||||||
Income tax expense |
| (115 | ) | 2,487 | 142 | | 2,514 | |||||||||||||||||
Net income (loss) |
$ | (3,341 | ) | $ | (3,341 | ) | $ | 3,792 | $ | (5,885 | ) | $ | 5,434 | $ | (3,341 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 95,998 | $ | 172,110 | $ | (2,920 | ) | $ | 265,188 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of
sales, excluding depreciation and amortization |
| | 69,867 | 138,726 | (2,920 | ) | 205,673 | |||||||||||||||||
Selling, general and administrative |
| 2,725 | 10,493 | 18,014 | | 31,232 | ||||||||||||||||||
Depreciation and amortization |
| 165 | 4,011 | 9,408 | | 13,584 | ||||||||||||||||||
Other operating expense, net |
| | (95 | ) | 4,696 | | 4,601 | |||||||||||||||||
Total operating costs and expenses |
| 2,890 | 84,276 | 170,844 | (2,920 | ) | 255,090 | |||||||||||||||||
Operating income (loss) |
| (2,890 | ) | 11,722 | 1,266 | | 10,098 | |||||||||||||||||
Interest expense |
| (249 | ) | 4,493 | 9,148 | | 13,392 | |||||||||||||||||
Interest income |
| (47 | ) | | (45 | ) | | (92 | ) | |||||||||||||||
Foreign exchange loss |
| 9,262 | | 300 | | 9,562 | ||||||||||||||||||
Equity in loss of subsidiaries |
11,962 | 3,558 | | | (15,520 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(11,962 | ) | (15,414 | ) | 7,229 | (8,137 | ) | 15,520 | (12,764 | ) | ||||||||||||||
Income tax expense (benefit) |
| (3,452 | ) | 1,792 | 858 | | (802 | ) | ||||||||||||||||
Net income (loss) |
$ | (11,962 | ) | $ | (11,962 | ) | $ | 5,437 | $ | (8,995 | ) | $ | 15,520 | $ | (11,962 | ) | ||||||||
19
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 207,470 | $ | 386,589 | $ | (5,465 | ) | $ | 588,594 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 146,248 | 303,361 | (5,465 | ) | 444,144 | |||||||||||||||||
Selling, general and administrative |
| 11,024 | 25,717 | 46,318 | | 83,059 | ||||||||||||||||||
Depreciation and amortization |
| 468 | 11,214 | 23,701 | | 35,383 | ||||||||||||||||||
Other operating expense, net |
| 5,002 | 2,882 | 5,718 | | 13,602 | ||||||||||||||||||
Total operating costs and expenses |
| 16,494 | 186,061 | 379,098 | (5,465 | ) | 576,188 | |||||||||||||||||
Operating income (loss) |
| (16,494 | ) | 21,409 | 7,491 | | 12,406 | |||||||||||||||||
Interest expense |
| (3,154 | ) | 11,924 | 19,302 | | 28,072 | |||||||||||||||||
Interest income |
| (70 | ) | | (106 | ) | | (176 | ) | |||||||||||||||
Foreign exchange loss (gain), net |
| (4,519 | ) | 20 | (1,318 | ) | | (5,817 | ) | |||||||||||||||
Equity in loss of subsidiaries |
10,686 | 4,894 | | | (15,580 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(10,686 | ) | (13,645 | ) | 9,465 | (10,387 | ) | 15,580 | (9,673 | ) | ||||||||||||||
Income tax expense (benefit) |
| (2,959 | ) | 3,749 | 223 | | 1,013 | |||||||||||||||||
Net income (loss) |
$ | (10,686) | $ | (10,686 | ) | $ | 5,716 | $ | (10,610 | ) | $ | 15,580 | $ | (10,686 | ) | |||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2008
(Unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2008
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 270,857 | $ | 537,156 | $ | (8,287 | ) | $ | 799,726 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 204,889 | 427,841 | (8,287 | ) | 624,443 | |||||||||||||||||
Selling, general and administrative |
| 9,286 | 32,781 | 58,340 | | 100,407 | ||||||||||||||||||
Depreciation and amortization |
| 413 | 12,283 | 28,038 | | 40,734 | ||||||||||||||||||
Other operating expense, net |
| 247 | 945 | 7,308 | | 8,500 | ||||||||||||||||||
Total operating costs and expenses |
| 9,946 | 250,898 | 521,527 | (8,287 | ) | 774,084 | |||||||||||||||||
Operating income (loss) |
| (9,946 | ) | 19,959 | 15,629 | | 25,642 | |||||||||||||||||
Interest expense |
| (3,619 | ) | 13,688 | 27,224 | | 37,293 | |||||||||||||||||
Interest income |
| (161 | ) | | (357 | ) | | (518 | ) | |||||||||||||||
Foreign exchange loss |
| 2,880 | | 3,761 | | 6,641 | ||||||||||||||||||
Equity in loss of subsidiaries |
20,803 | 13,867 | | | (34,670 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(20,803 | ) | (22,913 | ) | 6,271 | (14,999 | ) | 34,670 | (17,774 | ) | ||||||||||||||
Income tax expense (benefit) |
| (2,110 | ) | 1,335 | 3,804 | | 3,029 | |||||||||||||||||
Net income (loss) |
$ | (20,803 | ) | $ | (20,803 | ) | $ | 4,936 | $ | (18,803 | ) | $ | 34,670 | $ | (20,803 | ) | ||||||||
20
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (10,686 | ) | $ | (10,686 | ) | $ | 5,716 | $ | (10,610 | ) | $ | 15,580 | $ | (10,686 | ) | ||||||||
Non-cash adjustments |
10,686 | 3,226 | 11,814 | 20,795 | (15,580 | ) | 30,941 | |||||||||||||||||
Changes in operating assets and
|
| |||||||||||||||||||||||
liabilities, net of
effects of acquisitions |
| 12,044 | (1,013 | ) | 10,171 | | 21,202 | |||||||||||||||||
Cash provided by
operating activities |
| 4,584 | 16,517 | 20,356 | | 41,457 | ||||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (159 | ) | (5,583 | ) | (11,902 | ) | | (17,644 | ) | ||||||||||||||
Proceeds from sale of assets |
| | 969 | (277 | ) | | 692 | |||||||||||||||||
Cash used in investing activities |
| (159 | ) | (4,614 | ) | (12,179 | ) | | (16,952 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 21,667 | (21,667 | ) | | | | |||||||||||||||||
Proceeds from issuance of long-term debt |
| 38,700 | | | | 38,700 | ||||||||||||||||||
Repayment of long-term debt |
| (4,312 | ) | | | | (4,312 | ) | ||||||||||||||||
Other, net |
| (1,284 | ) | | (125 | ) | | (1,409 | ) | |||||||||||||||
Cash provided by (used in)
financing activities |
| 54,771 | (21,667 | ) | (125 | ) | | 32,979 | ||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| (147 | ) | | 1,686 | | 1,539 | |||||||||||||||||
Increase (decrease) in cash
and cash equivalents |
| 59,049 | (9,764 | ) | 9,738 | | 59,023 | |||||||||||||||||
Cash and cash equivalents,
beginning of period |
| | 9,764 | 31,415 | | 41,179 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 59,049 | $ | | $ | 41,153 | $ | | $ | 100,202 | ||||||||||||
21
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (20,803 | ) | $ | (20,803 | ) | $ | 4,936 | $ | (18,803 | ) | $ | 34,670 | $ | (20,803 | ) | ||||||||
Non-cash adjustments |
20,803 | 18,950 | 13,284 | 31,274 | (34,670 | ) | 49,641 | |||||||||||||||||
Changes in operating assets and
|
| |||||||||||||||||||||||
liabilities, net of
effects of acquisitions |
| (2,033 | ) | (6,688 | ) | 46 | | (8,675 | ) | |||||||||||||||
Cash provided by (used in)
operating activities |
| (3,886 | ) | 11,532 | 12,517 | | 20,163 | |||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| | (6,088 | ) | (19,182 | ) | | (25,270 | ) | |||||||||||||||
Proceeds from sale of assets |
| | 6 | 1,036 | | 1,042 | ||||||||||||||||||
Insurance proceeds |
| | | 1,868 | 1,868 | |||||||||||||||||||
Other, net |
| | | (593 | ) | | (593 | ) | ||||||||||||||||
Cash used in investing activities |
| | (6,082 | ) | (16,871 | ) | | (22,953 | ) | |||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 5,450 | (5,450 | ) | | | | |||||||||||||||||
Repayment of long-term debt |
| (1,435 | ) | | | | (1,435 | ) | ||||||||||||||||
Other, net |
| | | 62 | | 62 | ||||||||||||||||||
Cash provided by (used in)
financing activities |
| 4,015 | (5,450 | ) | 62 | | (1,373 | ) | ||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| 69 | | (857 | ) | | (788 | ) | ||||||||||||||||
Decrease in cash and cash equivalents |
| 198 | | (5,149 | ) | | (4,951 | ) | ||||||||||||||||
Cash and cash equivalents,
beginning of period |
| 8,641 | | 26,348 | | 34,989 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 8,839 | $ | | $ | 21,199 | $ | | $ | 30,038 | ||||||||||||
22
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this report and the Companys audited
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E in the Securities Exchange Act of 1934, as amended (the Exchange
Act). You can generally identify forward-looking statements by our use of forward-looking
terminology such as anticipate, believe, continue, could, estimate, expect, intend,
may, might, plan, potential, predict, seek, should, or will, or the negative
thereof or other variations thereon or comparable terminology. All forward-looking statements,
including, without limitation, managements examination of historical operating trends and data are
based upon our current expectations and various assumptions. We have based these forward-looking
statements on our current expectations, assumptions, estimates and projections. While we believe
these expectations, assumptions, estimates and projections are reasonable, such forward-looking
statements are only predictions and involve known and unknown risks and uncertainties, many of
which are beyond our control. These and other important factors may cause our actual results,
performance or achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements.
Some of the factors that could cause actual results to differ materially from those expressed
or implied by the forward-looking statements include, among others:
| risks associated with our substantial indebtedness and debt service, including the requirement that we comply with various negative and financial covenants contained in our loan agreements; | ||
| increases in prices and availability of resin and other raw materials, our ability to pass these increased costs on to our customers and our ability to raise our prices generally with respect to our products; | ||
| risks of increasing competition in our existing and future markets, including competition from new products introduced by competitors; | ||
| our ability to meet future capital requirements; | ||
| general economic or business conditions, including the recession in the U.S. and the worldwide economic slowdown, as well as recent disruptions to the credit and financial markets in the U.S. and worldwide; | ||
| risks related to our acquisition or divestiture strategy; | ||
| our ability to retain management; | ||
| our ability to protect our intellectual property rights; | ||
| changes in governmental laws and regulations, including environmental laws and regulations; | ||
| changes in foreign currency exchange rates; and | ||
| other risks and uncertainties, including those described in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC. |
23
Table of Contents
Given these risks and uncertainties, you are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included in this report are made only
as of the date hereof. We do not undertake and specifically decline any obligation to update any
such statements or to publicly announce the results of any revisions to any of such statements to
reflect future events or developments.
OVERVIEW
We are an international manufacturer, marketer and supplier of protective packaging products
and specialty packaging solutions. We currently operate 46 facilities in 18 countries, with
approximately 4,000 employees world-wide. We sell our products to a wide array of customers,
including retailers, distributors, packer processors, hospitals, fabricators and directly to the
end-users. Approximately 66% of our 2008 net sales were generated outside of the U.S., so we are
sensitive to fluctuations in foreign currency exchange rates, primarily between the euro and pound
sterling with the U.S. dollar.
Our net sales for the three and nine months ended September 2009 decreased 21.9% and 26.4%
over the comparable periods of 2008, respectively. The decline was driven primarily by decreased
volumes, resulting from the recessionary economic environment in North America and Europe, lower
year-over-year selling prices resulting from lower key raw material costs, and unfavorable foreign
currency translation. Excluding the impact of unfavorable foreign currency translation, net sales
for the three and nine months ended September decreased 17.2% and 18.5%, respectively, compared to
the prior year periods.
Our gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization) as a percent of net sales increased to 24.6% and 24.5% for the third quarter and
first nine months of 2009, respectively, compared to 22.4% and 21.9% for the same periods of 2008.
The improvement in our 2009 margin percentage was driven by the impact of our aggressive cost reduction initiatives,
continued disciplined pricing, and the impact of lower raw material costs.
The majority of the products we sell are plastic-resin based, and therefore our operations are
highly sensitive to fluctuations in the costs of plastic resins. In the first nine months of 2009
as compared to the same period of 2008, average resin costs declined approximately 22% in North
America and 34% in Europe, as measured by the Chemical Market Associates, Inc. (CMAI) index and
PLATTs index, their respective market indices. Over the same period, average selling prices
decreased as a result of downward pressure associated with decreases in average resin costs. The
period over period net benefit resulting from lower average resin costs offset by average lower
selling prices resulted in a 208 basis point improvement in gross margin as a percent of net sales
during the nine months ended September 30, 2009 compared to the equivalent period in 2008.
Although we did realize a year-over-year benefit from lower resin costs in the first nine
months of 2009, these costs have steadily increased through the first nine months of 2009 and are
expected to continue to increase in the fourth quarter. As a point of reference, resin costs have
increased 41% in North America and 51% in Europe through the first nine months of 2009 based on
their respective indices. These increases were driven primarily by supplier capacity reductions in
response to lower demand.
While both of our segments experienced sales declines due to the overall weak economic
climate, the declines in the specialty packaging segment have not been as significant as those
experienced in the protective packaging segment. The specialty packaging segment serves the
consumer food and medical markets, which to date have experienced less sensitivity to the economic
weakness than the industrial markets which the protective packaging segment serves.
We have implemented a number of initiatives to generate sustainable improvements in
profitability and to respond to the economic weakness that began in 2008 and has continued into
2009. In 2008, we
24
Table of Contents
implemented a number of company-wide restructuring programs focused on improving
profitability. These programs, which were substantially completed in 2008, included headcount
reductions, plant consolidations, and numerous productivity programs to maximize our operating
effectiveness. In the first quarter of 2009, we commenced additional restructuring initiatives to
further reduce our cost structure by optimizing our organizational structure and our operating
processes. As of September 30, 2009, our restructuring initiatives are substantially complete.
During the first nine months of 2009 we realized year-over-year cost savings of approximately $37.0
million relating to our 2008 and 2009 cost reduction initiatives.
25
Table of Contents
RESULTS OF OPERATIONS
Net Sales
Our net sales for the three and nine months ended September 30, 2009 compared to the same
period ended September 30, 2008 are summarized by segment as follows:
Change Attributable to the | ||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||
Three Months Ended September 30, | Price / | Currency | ||||||||||||||||||||||||||
2009 | 2008 | $ Change | % Change | Mix | Volume | Translation | ||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||
Protective Packaging |
$ | 128,930 | $ | 172,088 | $ | (43,158 | ) | (25.1 | )% | $ | (9,055 | )(5.3)% | $ | (27,676 | )(16.1)% | $ | (6,427 | )(3.7)% | ||||||||||
Specialty Packaging |
78,117 | 93,100 | (14,983 | ) | (16.1 | )% | (2,497 | )(2.7)% | (6,317 | )(6.8)% | (6,169 | )(6.6)% | ||||||||||||||||
Total |
$ | 207,047 | $ | 265,188 | $ | (58,141 | ) | (21.9 | )% | $ | (11,552 | )(4.4)% | $ | (33,993 | )(12.8)% | $ | (12,596 | )(4.7)% | ||||||||||
Change Attributable to the | ||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||
Nine Months Ended September 30, | Price / | Currency | ||||||||||||||||||||||||||
2009 | 2008 | $ Change | % Change | Mix | Volume | Translation | ||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||
Protective Packaging |
$ | 363,107 | $ | 520,226 | $ | (157,119 | ) | (30.2 | )% | $ | (12,133 | )(2.3)% | $ | (115,448 | )(22.2)% | $ | (29,538 | )(5.7)% | ||||||||||
Specialty Packaging |
225,487 | 279,500 | (54,013 | ) | (19.3 | )% | (3,105 | )(1.1)% | (17,290 | )(6.2)% | (33,618 | )(12.0)% | ||||||||||||||||
Total |
$ | 588,594 | $ | 799,726 | $ | (211,132 | ) | (26.4 | )% | $ | (15,238 | )(1.9)% | $ | (132,738 | )(16.6)% | $ | (63,156 | )(7.9)% | ||||||||||
Segment Net Sales
Volume in the Companys protective packaging segment declined by 16.1% and 22.2% for the three
and nine month periods ended September 30, 2009 compared to the same periods in 2008, as depicted
in the tables above. The volume decrease for both periods was driven by continued economic
weakness in both the North American and European markets, particularly within the industrial,
housing and automotive sectors, key markets which are served by this segment.
Price/mix for the Companys protective packaging segment reduced net sales by 5.3% and 2.3%
for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008,
as depicted in the tables above. Price/mix was unfavorable year-over-year in the third quarter due
to reduced market pricing driven by increased market competitiveness as a result of the weak
economic conditions as well as year-over-year declines in resin costs. Based on market indices,
North American resin costs were approximately 22% lower in the nine months ended September 30, 2009
compared to the equivalent 2008 period while European resin costs were 34% lower for the same
comparable periods.
Volume in the Companys specialty packaging segment decreased by 6.8% and 6.2% for the three
and nine month periods ended September 30, 2009 compared to the same periods of 2008, as depicted
in the tables above. These volume decreases are primarily the result of the termination of a
contract with a significant medical products customer. Excluding volume losses for this one
customer, volumes for the three and nine month periods ended September 30, 2009 would have
increased $0.2 million and decreased $2.0 million, compared to the same period 2008, respectively.
While the specialties segment has experienced minor volume declines compared to 2008,
adjusting for the loss of the significant customer discussed above, these declines have been less
significant as
26
Table of Contents
compared to the declines experienced in the protective packaging segment. This is
due to the different end markets the two segments serve. Protective packaging primarily serves the
industrial, housing, and automotive sectors, while the specialties segment primarily serves the
consumer food and medical sectors. The consumer food and medical sectors have experienced less
sensitivity to the overall economic weakness as compared to the industrial, housing, and automotive
sectors.
Price/mix for the Companys specialty packaging segment reduced net sales by 2.7% and 1.1% for
the three and nine month periods ended September 30, 2009 compared to the same periods in 2008, as
depicted in the tables above. Price/mix was unfavorable year-over-year in the third quarter due to
reduced market pricing driven by increased market competitiveness as a result of the weak economic
conditions as well as product mix.
Gross Margin
Gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization), as a percent of net sales, was 24.6% for the three months ended September 30, 2009
compared to 22.4% for the same period of 2008. This increase of 220 basis points was driven by
savings resulting from the Companys aggressive cost reduction initiatives partially offset by
lower volume. Savings from the companies cost reduction initiatives resulted in a 451 basis point
improvement of gross margin as a percentage of sales. These improvements were offset by the
negative impact of lower volumes on gross margin percentage, as certain costs in cost of goods sold
are relatively fixed in nature.
Average resin costs in North America for the three month period ended September 30, 2009 were
22% lower than average resin costs for the same period in 2008 while average resin costs in Europe
were 31% lower than average resin prices for the same period of 2008. The benefits resulting from
year-over-year resin decreases were in part offset by lower average selling prices.
Gross margin, as a percent of net sales, was 24.5% for the nine months ended September 30,
2009 compared to 21.9% for the same period of 2008. This increase of 260 basis points was driven
by savings resulting from the Companys aggressive cost reduction initiatives as well as decreased
resin and other key commodity costs, partially offset by lower average selling prices and lower
volumes. Savings from the Companys cost reduction initiatives resulted in a 380 basis point
improvement of gross margin as a percentage of sales. The net benefit resulting from lower
year-over-year average resin costs, partially offset by lower year-over-year average selling
prices, resulted in a 208 basis point improvement of gross margin as a percent of sales. Average
resin costs in North America for the nine month period ended September 30, 2009 were 22% lower than
average resin costs for the same period in 2008 while average resin costs in Europe were 34% lower
than average resin prices for the same period of 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.6 million and $17.3 million for
the three and nine months ended September 30, 2009 compared to the same periods of 2008. Excluding
the impact of favorable foreign currency translation, selling, general and administrative expenses
for the three and nine months ended September 30, 2009 decreased by approximately $1.7 million and
$11.6 million, respectively. These decreases were primarily driven by cost savings from our cost
reduction program. As a percent of net sales, selling, general and administrative costs increased
to 13.8% and 14.1% for the three and nine months ended September 30, 2009, compared to 11.8% and
12.6% for the comparable periods of 2008, due to the lower sales volumes.
27
Table of Contents
Other Operating Expense, net
For the three and nine months ended September 30, 2009, other operating expense, net totaled
$2.3 million and $13.6 million, compared to $4.6 million and $8.5 million in the same periods of
2008, respectively. In 2009 we recorded restructuring charges of $13.9 million, primarily for
severance charges relating to headcount reductions and consulting expenses. See Note 9 to the
unaudited consolidated financial statements for details regarding our restructuring activity.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by $1.0 million and $5.4 for the three and
nine months ended September 30, 2009, compared to the respective periods of 2008. The decrease in
depreciation and amortization expense is due to favorable foreign currency translation resulting
from a stronger U.S. dollar in 2009 compared to the same period of 2008 as well as the impact of
lower average depreciation rates related to recent capital expenditure additions.
Segment Income
We measure our segments operating performance on the basis of segment EBITDA, defined as net
income (loss) before interest, taxes, depreciation, amortization, and restructuring expense and
adjusted for other non-cash charges and benefits. See Note 12 to the unaudited consolidated
financial statements for a reconciliation of total segment EBITDA to consolidated net loss before
income taxes. Segment EBITDA for the relevant periods is as follows:
Three Months Ended September 30, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 15,462 | $ | 20,271 | $ | (4,809 | ) | (23.7 | )% | |||||||
Specialty Packaging |
11,363 | 11,147 | 216 | 1.9 | % | |||||||||||
Total segment
EBITDA |
$ | 26,825 | $ | 31,418 | $ | (4,593 | ) | (14.6 | )% | |||||||
Nine Months Ended September 30, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 42,201 | $ | 49,813 | $ | (7,612 | ) | (15.3 | )% | |||||||
Specialty Packaging |
30,792 | 33,574 | (2,782 | ) | (8.3 | )% | ||||||||||
Total segment
EBITDA |
$ | 72,993 | $ | 83,387 | $ | (10,394 | ) | (12.5 | )% | |||||||
Segment EBITDA for the protective packaging segment declined approximately 23.7% for the
three months ended September 30, 2009 compared to the same period of 2008. This decrease was
driven by lower volumes, unfavorable year-over-year selling prices, and unfavorable currency. This
was partially offset by the results of our cost reduction efforts, which totaled approximately $8.0 million
year-over-year for the quarter.
Segment EBITDA for the protective packaging segment declined approximately 15.3% for the nine
months ended September 30, 2009 compared to the same period of 2008. This decrease was driven by
decreases in volumes, negative pricing, and unfavorable currency. This was partially offset by our
cost reduction efforts (approximately $26 million) and the impact of lower resin costs.
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Segment EBITDA for specialty packaging increased by $0.2 million, or 1.9%, for the third
quarter of 2009, but decreased $2.8 million, or 8.3%, for the first nine months of 2009. Excluding
the impact associated with the loss of a significant customer we estimate EBITDA for this segment
would have increased by $2.1 million, or 18.9%, for the three months ended September 30, 2009
compared to the same period 2008, and would have increased $1.9 million, or 5.5%, for the
comparable nine month period.
Interest Expense
Interest expense for the three and nine months ended September 30, 2009 decreased $4.2 million
and $9.2 million compared to the same periods of 2008. The 2009 period reflects the impact of
lower U.S. dollar equivalent interest on our euro-denominated debt due to a stronger U.S. dollar in
the 2009 period and lower LIBOR and EURIBOR-based rates underlying a portion of our floating rate
debt.
Foreign Exchange Loss (Gain), net
A portion of our third-party debt is denominated in euro and revalued to U.S. dollars at our
month-end reporting periods. We also maintain an intercompany debt structure, whereby Pregis
Corporation has provided euro-denominated loans to certain of its foreign subsidiaries and these
and other foreign subsidiaries have provided euro-denominated loans to certain U.K. based
subsidiaries. At each month-end reporting period we recognize unrealized gains and losses on the
revaluation of these instruments, resulting from the fluctuations between the U.S. dollar and euro
exchange rate, as well as the pound sterling and euro exchange rate.
In the three months ended September 30, 2009, we recognized a net foreign exchange gain of
$0.9 million. The gain in the quarter reflects the relative weakening of the U.S. dollar at the
end of September 2009 when we revalued our euro-denominated third-party debt and inter-company
loans. For the nine months ended September 30, 2009, we recognized a net foreign exchange gain of
$5.8 million, most of which relates to net unrealized foreign exchange gains resulting from the
revaluation of our euro-denominated third-party debt and inter-company loans. This compares to the
three and nine month periods ended September 30, 2008, in which we recognized a net loss of $9.6
million and $6.6 million, respectively.
Income Tax Expense
Our effective income tax rate was approximately 10.47% for the nine months ended September 30,
2009, which compares to approximately 17.04% for the nine months ended September 30, 2008. For the
nine months ended September 30, 2009, the Companys effective rate was increased from a benefit at
the U.S. federal statutory rate of 35% primarily due to establishment of additional valuation
allowances taken against losses in certain countries that are not certain to result in future tax
benefits. For the same period in 2008, the Companys effective income tax rate was increased from
a benefit at the U.S. federal statutory rate of 35% primarily due to the reasons impacting the nine
months ended September 30, 2009.
Net Loss
For the three months ended September 30, 2009, we generated net loss of $3.3 million, compared
to a net loss of $12.0 million in the comparable period of 2008. For the nine months ended
September 30, 2009, we generated a net loss of $10.7 million, compared to a net loss of $20.8
million for the same period of 2008. As discussed herein, the 2009 net loss is mainly the result
of decreased sales volumes, as well as restructuring charges of $13.9 million.
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LIQUIDITY AND CAPITAL RESOURCES
The following table shows our sources and uses of funds for the nine months ended September
30, 2009 compared to the nine months ended September 30, 2008:
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
(dollars in thousands) | ||||||||
Cash provided by operating activities |
$ | 41,457 | $ | 20,163 | ||||
Cash used in investing activities |
(16,952 | ) | (22,953 | ) | ||||
Cash provided (used) in financing activities |
32,979 | (1,373 | ) | |||||
Effect of foreign exchange rate changes |
1,539 | (788 | ) | |||||
Increase (decrease) in cash and cash equivalents |
$ | 59,023 | $ | (4,951 | ) | |||
Operating Activities. Cash provided by operating activities increased by $21.3
million during the nine months ended September 30, 2009 compared to the same period of 2008. This
increase is driven primarily by year-over-year gross margin improvement, year-over-year reductions
in SG&A costs as well as lower levels of accounts receivable and reduced investment in inventories
resulting from lower volumes as well as our initiatives to reduce overall working capital levels.
Cash from operating activities is sensitive to raw material costs and the Companys ability to
recover increases in these costs from its customers. Although price increases have typically
lagged the underlying change in raw material costs, the Company has historically been able to
recover significant increases in underlying raw material costs from its customers over a twelve to
twenty-four month period. Future cash from operations are dependent upon the Companys continued
ability to recover increases in underlying raw material increases from its customers.
The Company has not experienced any significant changes in year-over-year days sales
outstanding, days inventory on-hand or days payable outstanding. The Company has not identified
any trends in key working capital investments that would have a material impact on its liquidity or
ability to satisfy its debt obligations or fund capital expenditures. The Company does not
currently expect that raw material price increases will have a material effect on liquidity in
future periods, but significant shifts in resin pricing could affect our cash generated from
operating activities in future periods.
Investing Activities. Cash used in investing activities totaled $17.0 million for the nine
months ended September 30, 2009, a decrease of $6.0 million compared to the same period of 2008.
Our primary use of cash for investing activities is for capital expenditures, which totaled $17.6
million in the 2009 period compared to $25.3 million in the 2008 period. Our 2008 capital
expenditures were significantly higher due to investments in new printing and laminating equipment related to the expansion of our
flexible packaging capacity, as well as significant investments in inflatable machines within our
protective packaging businesses to support growth in this area. We expect to leverage the
substantial capital expenditures incurred in 2008 and preceding years, which will allow us to
significantly reduce our capital spending in 2009.
Financing Activities. Cash provided in financing activities for the nine months ended
September 30, 2009 included proceeds from the revolving credit facility draw of $38.7 million net
of payments totaling $4.3 million on our long-term bank debt, net of activity on capital lease
debt.
Our liquidity requirements are significant, primarily due to debt service requirements and
capital investment in our businesses. We expect our 2009 capital expenditures to total
approximately $20 to $25 million and our 2009 debt service costs to total approximately $53
million. At September 30, 2009, we
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had cash and cash equivalents of $100.2 million. Our available cash and cash equivalents are held in bank deposits and money market funds. We actively monitor
the third-party depository institutions that hold our cash and cash equivalents to ensure safety of
principal while achieving a satisfactory yield on those funds. To date, we have experienced no
material loss or lack of access to our invested cash or cash equivalents; however, we can provide
no assurances that access to our invested cash and cash equivalents will not be impacted by adverse
conditions in the financial markets.
Our primary source of liquidity will continue to be cash flows from operations, existing cash
balances, and our revolving credit facility.
As of September 30, 2009, the Company had $6.7 million of outstanding letters of credit.
Senior Secured Credit Facilities. On October 13, 2005, Pregis entered into senior secured
credit facilities which provided for a revolving credit facility and two term loans: an $88.0
million term B-1 facility and a 68.0 million term loan B-2 facility, both of which mature in
October 2012. The revolving credit facility matures in October 2011 and provides for borrowings of
up to $50.0 million, a portion of which may be made available to the Companys non-U.S. subsidiary
borrowers in euros and/or pounds sterling. The revolving credit facility also includes a
swing-line loan sub-facility and a letter of credit sub-facility. The revolving credit facility
bears interest at a rate equal to, at the Companys option, (1) an alternate base rate or (2) LIBOR
or EURIBOR, plus an applicable margin of 0.375% to 1.00% for base rate advances and 1.375% to 2.00%
for LIBOR or EURIBOR advances, depending on the leverage ratio of the Company, as defined in the
credit agreement. In addition, the Company is required to pay an annual commitment fee of 0.375%
to 0.50% on the revolving credit facility depending on the leverage ratio of the Company, as well
as customary letter of credit fees.
Our senior secured credit facilities also permit us, subject to certain conditions, including
the receipt of commitments from lenders, to incur up to $200.0 million (or euro equivalent thereof)
of additional term loans (originally $100.0 million prior to the October 5, 2009 senior secured
credit facility amendment).
The term loan B-1 facility amortizes at a rate of 1% per annum in equal quarterly installments
during the first six years thereof, with the balance payable in equal quarterly installments during
the seventh year thereof. The term loan B-2 facility amortizes at a rate of 1% per annum in equal
quarterly installments during the first six years thereof, with the balance payable in equal
quarterly installments during the seventh year thereof.
Subject to exceptions and, in the case of asset sale proceeds, reinvestment options, Pregiss
senior secured credit facilities require mandatory prepayments of the loans from excess cash flows,
asset sales and dispositions (including insurance and condemnation proceeds), issuances of debt and
issuances of equity. On April 29, 2009, the Company made a mandatory prepayment of approximately
$3.9 million, on the basis of excess cash flow generated by the Company for the year ended December
31, 2008. On October 5, 2009 the Company prepaid the term loans in full with the proceeds of the 125
million note offering and cash on hand. Mandatory prepayments under our senior secured credit
facilities do not result in the permanent reduction of the revolving credit commitments under such
facilities, i.e., the prepaid revolving borrowings may be reborrowed immediately thereafter, so
long as the conditions to the revolving borrowings have been met.
Pregiss senior secured credit facilities and related hedging arrangements are guaranteed by
Pregis Holding II, the direct holding parent company of Pregis, and all of Pregiss current and
future domestic subsidiaries and, if no material tax consequences would result, Pregiss future
foreign subsidiaries and, subject to certain exceptions, are secured by a first priority security
interest in substantially all of Pregiss and its current and future domestic subsidiaries
existing and future assets (subject to certain exceptions), and a first priority pledge of the
capital stock of Pregis and the guarantor subsidiaries and an aggregate of 66% of the capital stock
of Pregiss first-tier foreign subsidiary.
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Pregiss senior secured credit facilities require that it comply on a quarterly basis
with certain financial covenants, including a Maximum Leverage Ratio test and a Minimum Cash
Interest Coverage Ratio test. Under the facility, Maximum Leverage Ratio is calculated as net debt
(total debt net of cash) divided by Consolidated EBITDA (as defined by the credit facility and is
calculated as a rolling twelve months at each quarter end). Under the facility, Minimum Cash
Interest Coverage Ratio is calculated as Consolidated EBITDA divided by cash interest expense. In
connection with the October 5, 2009 amendment to our senior secured credit facilities, the Maximum
Leverage Ratio and Minimum Cash Interest Coverage Ratio covenants were eliminated, and the First
Lien Leverage Ratio covenant of 2.0x replaced the Maximum Leverage Ratio covenant. The First Lien
Leverage Ratio is calculated as the ratio of (1) net debt that is secured by a first priority lien
to (2) Consolidated EBITDA
The following table sets forth the Maximum Leverage Ratio and Minimum Cash Interest Coverage
Ratio as of September 30, 2009 and 2008:
Ratios | ||||||||||
(unaudited) | Covenant | Calculated at September 30, | ||||||||
(dollars in thousands) | Measure | 2009 | 2008 | |||||||
Maximum Leverage Ratio
|
Maximum of 5.0x(1) | 4.8x | 4.3x | |||||||
Minimum Cash Interest Coverage Ratio
|
Minimum of 1.9x | 2.3x | 2.3x | |||||||
Consolidated EBITDA
|
| $ | 86,443 | $ | 103,304 | |||||
Total Net Debt (less $5MM base
cash) (2)
|
| $ | 415,587 | $ | 442,891 | |||||
Cash Interest Expense
|
| $ | 37,216 | $ | 45,282 |
(1) | At September 30, 2008 the Maximum Leverage Ratio covenant measure was 5.5x. | |
(2) | Excluded per credit facility |
The Maximum Leverage Ratio is primarily affected by increases or decreases in the
Companys trailing twelve month Consolidated EBITDA and increases or decreases in the Companys net
debt. Net debt as used in this ratio is affected primarily by currency translation related to
converting its euro-denominated debt into US dollars, changes in debt due to payments and
borrowings, and the amount of on-hand cash at each measurement date. The unfavorable decrease in
trailing twelve month Consolidated EBITDA was more than offset by favorable currency translation of
the Companys euro-denominated debt positively impacting the Companys Maximum Leverage Ratio at
September 30, 2009 compared to September 30, 2008.
The Minimum Cash Interest Coverage Ratio is primarily affected by increases or decreases in
the Companys trailing twelve month Consolidated EBITDA and increases or decreases in the Companys
cash interest expense (interest expense, excluding amortization of deferred financing fees and
discount). Interest expense as used in this ratio is primarily affected by changes in interest
rates (LIBOR and EURIBOR) and currency translation related to converting euro based interest
expense into US dollars. The favorable impact resulting from lower interest rates, for the
comparable twelve month periods ending September 30, 2009 and 2008, was partially offset by the decrease in the Companys trailing
twelve month Consolidated EBITDA over the same period.
As used in the calculation of Maximum Leverage Ratio and Minimum Cash Interest Coverage Ratio,
Consolidated EBITDA is calculated by adding Consolidated Net Income (as defined by the facility),
income taxes, interest expense, depreciation and amortization, other non-cash items reducing
Consolidated Net Income that do not represent a reserve against a future cash charge, costs and
expenses
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incurred with business acquisitions, issuance of equity interests permitted by the terms
of the loan documents, the amount of management, consulting, monitoring, transaction, and advisory
fees and related expenses paid to AEA Investors LP, and unusual and non-recurring charges
(including, without limitation, expenses in connection with actual and proposed acquisitions,
equity offerings, issuances and retirements of debt and divestitures of assets, whether or not any
such acquisition, equity offering, issuance or retirement or divestiture is actually consummated
during such period that do not exceed, in the aggregate, 5% of EBITDA for such period).
Consolidated EBITDA is calculated under the senior secured credit facility for the twelve
months ended September 30, 2009 and 2008 as follows:
(unaudited) | Twelve Months Ended September 30, | |||||||
(dollars in thousands) | 2009 | 2008 | ||||||
Net Income |
$ | (37,613 | ) | $ | (28,092 | ) | ||
Senior Secured Credit Facility Consolidated Net Income definition add backs: |
||||||||
Non-cash compensation charges |
1,344 | 902 | ||||||
Net after tax extraordinary gains or losses (incl. severance and
restructuring charges) |
13,251 | 7,981 | ||||||
Non-cash unrealized currency gains or losses |
2,370 | 7,846 | ||||||
Any FAS 142, 144, 141 impairment charge or asset write off |
20,101 | 403 | ||||||
Consolidated Net Income |
$ | (182 | ) | $ | (10,960 | ) | ||
Senior Secured Credit Facility Consolidated EBITDA definition add backs: |
||||||||
Interest expense |
39,315 | 48,300 | ||||||
Income tax expense |
(3,881 | ) | 2,533 | |||||
Depreciation expense and amortization |
46,992 | 55,797 | ||||||
Fees payable to AEA Investors LP |
2,040 | 1,834 | ||||||
Unusual and non-recurring charges |
2,524 | 9,063 | ||||||
Pro forma EBITDA of acquisitions |
| 454 | ||||||
Other |
| 427 | ||||||
Adjustment for 5% EBITDA cap limitation for unusual and non-recurring
charges |
(4,144 | ) | ||||||
Consolidated EBITDA |
$ | 86,443 | $ | 103,304 | ||||
Pregiss senior secured credit facilities also include negative covenants, subject to
certain exceptions, that restrict or limit Pregiss ability and the ability of its subsidiaries to,
among other things:
| incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging arrangements, | ||
| incur liens or agree to negative pledges in other agreements, | ||
| engage in sale and leaseback transactions, | ||
| make capital expenditures, | ||
| make loans and investments, | ||
| declare dividends, make payments or redeem or repurchase capital stock, | ||
| in the case of subsidiaries, enter into agreements restricting dividends and distributions, | ||
| engage in mergers, acquisitions and other business combinations, |
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| prepay, redeem or purchase certain indebtedness, | ||
| amend or otherwise alter the terms of Pregiss organizational documents, Pregiss indebtedness and other material agreements, | ||
| sell assets or engage in receivables securitization, | ||
| transact with affiliates, and | ||
| alter the business that Pregis conducts. |
As of September 30, 2009, Pregis was in compliance with all covenants contained in its senior
secured credit facilities.
On October 5, 2009 we amended our senior secured credit facilities. The amendment, among
other things:
| permits our company to engage in certain specified sale leaseback transactions in 2009 and up to $35.0 million of additional sale leaseback transactions through the maturity of the senior secured credit facilities; | ||
| replaces the maximum leverage ratio covenant of 5.0x under the senior secured credit facilities with the first lien leverage covenant of 2.0x; | ||
| eliminates the minimum cash interest coverage ratio covenant under the senior secured credit facilities; | ||
| increases the accordion feature of the term loan portion of the senior secured credit facilities by $100.0 million, allowing our company to borrow up to $200.0 million under the term loan portion of the senior secured credit facilities, subject to certain conditions including receipt of commitments therefore; | ||
| provides for additional subordinated debt issuances subject to a 2.0x interest coverage ratio; and | ||
| modifies several other covenants in the senior secured credit facilities to provide our company with more flexibility. |
In October 2009 we used the proceeds of the offering of outstanding notes, together with cash
on hand, to repay in full amounts outstanding under the term loans under our senior secured credit
facilities. However, the following issuance of the outstanding notes and the use of proceeds
thereof and subject to compliance with out senior secured credit facilities, the indenture
governing the senior secured floating rate notes will continue to allow us to incur at least $220
million (less amounts then outstanding under the senior secured credit facilities) of debt,
including new debt which replaces the term loans repaid with the proceeds of the offering of
outstanding notes. If such debt is incurred under the $220 million credit facility basket or in
compliance with a 3:1 senior secured leverage ratio, plus an additional $50 million, such debt
would constitute first priority lien obligations and could be secured on a first priority basis.
Senior Secured Floating Rate Notes and Senior Subordinated Notes. On October 13, 2005, Pregis
issued 100.0 million aggregate principal amount of second priority senior secured floating rate
notes due 2013 (the senior secured notes) and
$150 million aggregate principal amount of 12 3/8%
senior subordinated notes due 2013 (the senior subordinated notes).
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The senior secured notes mature on April 15, 2013. Interest accrues at a floating rate equal
to EURIBOR plus 5.00% per year and is payable quarterly on January 15, April 15, July 15 and
October 15 of each year. The senior secured notes are guaranteed on a senior secured basis by
Pregis Holding II, Pregiss immediate parent, and each of Pregiss current and future domestic
subsidiaries. At its option, Pregis may redeem some or all of the senior secured notes at 100% of
their principal amount. Upon the occurrence of a change of control, Pregis will be required to
make an offer to repurchase each holders notes at a repurchase price equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of repurchase.
The senior subordinated notes mature on October 15, 2013. Interest accrues at a rate of
12.375% and is payable semi-annually on April 15 and October 15 of each year. The notes are senior
subordinated obligations and rank junior in right of payment to all of Pregiss senior
indebtedness. The senior subordinated notes are guaranteed on a senior subordinated basis by Pregis
Holding II and each of Pregiss current and future domestic subsidiaries. Pregis may redeem some or
all of the notes on or after October 15, 2009 at redemption prices equal to 106.188% of their
principal amount (in the 12 months beginning October 15, 2009), 103.094% of their principal amount
(in the 12 months beginning October 15, 2010) and 100% of their principal amount (beginning October
15, 2011).
The indentures governing the senior secured notes and the senior subordinated notes contain
covenants that limit or prohibit Pregiss ability and the ability of its restricted subsidiaries,
subject to certain exceptions, to incur additional indebtedness, pay dividends or make other equity
distributions, make investments, create liens, incur obligations that restrict the ability of
Pregiss restricted subsidiaries to make dividends or other payments to Pregis, sell assets, engage
in transactions with affiliates, create unrestricted subsidiaries, and merge or consolidate with
other companies or sell substantially all of Pregiss assets. The indentures also contain reporting
covenants regarding delivery of annual and quarterly financial information. The indenture governing
the senior secured notes limits Pregiss ability to incur first priority secured debt to an amount
which results in its secured debt leverage ratio being equal to 3:1, plus $50 million, and
prohibits it from incurring additional second priority secured debt other than by issuing
additional senior secured notes. The indenture governing the senior secured notes also limits
Pregiss ability to enter into sale and leaseback transactions. The indenture governing the
senior subordinated notes prohibits Pregis from incurring debt that is senior to such notes and
subordinate to any other debt.
The senior secured notes and senior subordinated notes are not listed on any national
securities exchange in the United States. The senior secured notes were listed on the Irish Stock
Exchange in June 2007. However, there can be no assurance that the senior secured notes will
remain listed.
On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the notes). The notes bear interest
at a floating rate of EURIBOR plus 5.00% per year. Interest on the notes is reset quarterly and
payable on January 15, April 15, July 15, and October 15 of each year, beginning on October 15,
2009. The notes mature on April 15, 2013. The notes are treated as a single class under the
indenture with the 100.0 million principal amount of our existing second priority senior secured
floating rate notes due 2013, originally issued on October 12, 2005. However, the notes do not
have the same Common Code or ISIN numbers as the existing notes, are not fungible with the existing
notes and will not trade together as a single class with the existing notes. The notes are treated
as issued with more than de minimis original issue discount for United States federal income tax
purposes, whereas the existing notes were not issued with original issue discount for such
purposes.
The notes and the related guarantees will be second priority secured senior obligations.
Accordingly, they will be effectively junior to our and the guarantors obligations under our
senior secured credit facilities and any other obligations that are secured by first priority liens
on the collateral securing the notes or that are secured by a lien on assets that are not part of
the collateral securing the notes, in each
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case, to the extent of the value of such collateral or
assets; structurally subordinated to all existing and future indebtedness and other liabilities
(including trade payables) of our subsidiaries that are not guarantors; equal in right of payment
with the senior secured floating rate notes issued by us in 2005 (the senior secured notes and,
together with the notes, the senior secured floating rate notes); equal in right of payment with
all of our and the guarantors existing and future unsecured and unsubordinated indebtedness, and
effectively senior to such indebtedness to the extent of the value of the collateral; and senior in
right of payment to all of our and the guarantors existing and future subordinated indebtedness,
including the senior subordinated notes issued by us in 2005 and the related guarantees.
The proceeds from the sale of the notes on October 2009 were used to repay the Term B-1 and
Term B-2 indebtedness under our senior secured credit facilities.
Collateral for the Senior Secured Floating Rate Notes. The senior secured floating rate notes
are secured by a second priority lien, subject to permitted liens, on all of the following assets
owned by Pregis or the guarantors, to the extent such assets secure Pregiss senior secured credit
facilities on a first priority basis (subject to exceptions):
(1) | substantially all of Pregiss and each guarantors existing and future property and assets, including, without limitation, real estate, receivables, contracts, inventory, cash and cash accounts, equipment, documents, instruments, intellectual property, chattel paper, investment property, supporting obligations and general intangibles, with minor exceptions; and | ||
(2) | all of the capital stock or other securities of Pregiss and each guarantors existing or future direct or indirect domestic subsidiaries and 66% of the capital stock or other securities of Pregiss and each guarantors existing or future direct foreign subsidiaries, but only to the extent that the inclusion of such capital stock or other securities will mean that the par value, book value as carried by us, or market value (whichever is greatest) of such capital stock or other securities of any subsidiary is not equal to or greater than 20% of the aggregate principal amount of the senior secured floating rate notes outstanding. |
As of December 31, 2008, the capital stock of the following subsidiaries of Pregis constituted
collateral for the senior secured floating rate notes:
As of December 31, 2008 | ||||||||||||||||
Amount of Collateral | ||||||||||||||||
(Maximum of Book Value | ||||||||||||||||
and Market Value, | Book Value of | Market Value of | ||||||||||||||
Name of Subsidiary | Subject to 20% Cap) | Capital Stock | Capital Stock | |||||||||||||
Pregis Innovative Packaging Inc. |
$ | 27,938,000 | $ | 31,200,000 | $ | 52,200,000 | ||||||||||
Hexacomb Corporation |
$ | 27,938,000 | $ | 32,200,000 | $ | 55,700,000 | ||||||||||
Pregis (Luxembourg) Holding S.àr.l.
(66%) |
$ | 27,938,000 | $ | 20,800,000 | $ | 47,300,000 | ||||||||||
Pregis Management Corporation |
$ | 100 | $ | 100 | $ | 100 |
As described above, under the collateral agreement, the capital stock pledged to the
senior secured floating rate noteholders constitutes collateral only to the extent that the par
value or market value or book value (whichever is greatest) of the capital stock does not exceed
20% of the aggregate principal amount of the senior secured floating rate notes. This threshold is
20,000,000, or, at the December 31, 2008 exchange rate of U.S. dollars to euro of 1.3969:1.00,
approximately $27.9 million. As of December 31, 2008, the book value and the market value of the
shares of capital stock of Pregis Innovative Packaging Inc. were approximately $31.2 million and
$52.2 million, respectively; the book value and the market
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value of the shares of capital stock of Hexacomb Corporation were approximately $32.2 million
and $55.7 million, respectively; and the book value and the market value of 66% of the shares of
capital stock of Pregis (Luxembourg) Holding S.àr.l. were approximately $20.8 million and $47.3
million, respectively. Therefore, in accordance with the collateral agreement, the collateral pool
for the senior secured floating rate notes includes approximately $27.9 million with respect to the
shares of capital stock of each of Pregis Innovative Packaging Inc., Hexacomb Corporation, and
Pregis (Luxembourg) Holding S.àr.l. Since the book value and market value of the shares of capital
stock of our other domestic subsidiary are each less than the $27.9 million threshold, it is not
affected by the 20% clause of the collateral agreement. Because of the amount of capital stock of
any subsidiary pledged as collateral cannot exceed 20% of the principal amount of senior secured
floating rate notes outstanding, and as a result of the issuance of the outstanding notes on
October 5, 2009 the principal amount of senior secured floating rate notes outstanding increased
from 100 million to 225 million, the amount of capital stock pledged as collateral for the
benefit of holders of the senior secured floating rate notes effectively more than doubled on
October 5, 2009 (because the threshold for determining when capital stock of a subsidiary is
excluded from the collateral increased from 20 million to 45 million on that date).
For the year ended December 31, 2008, certain historical equity relating to corporate expenses
incurred by Pregis Management Corporation were allocated to each of the three entities, Pregis
Innovative Packaging Inc., Hexacomb Corporation, and Pregis (Luxembourg) Holding S.àr.l, in order
to better reflect their current book values for presentation herein on a fully-allocated basis.
The market value of the capital stock of the guarantors and subsidiaries constituting
collateral for the senior secured floating rate notes has been estimated by us on an annual basis,
using a market approach. At the time of the Acquisition, the purchase price paid for these
entities was determined based on a multiple of EBITDA, as was contractually agreed in the stock
purchase agreement. Since that time, we have followed a similar methodology, using a multiple of
EBITDA, based on that of recent transactions of comparable companies, to determine the enterprise
value of these entities. To arrive at an estimate of the market value of the entities capital
stock, we have subtracted from the enterprise value the existing debt, net of cash on hand, and
have also made adjustments for the businesses relative portion of corporate expenses. We have
determined that this methodology is a reasonable and appropriate means for determining the market
value of the capital stock pledged as collateral. We intend to complete these estimates of value
of the capital stock of these subsidiaries for so long as necessary to determine our compliance
with the collateral arrangement governing the notes.
The value of the collateral for the senior secured floating rate notes at any time will depend
on market and other economic conditions, including the availability of suitable buyers for the
collateral. As of December 31, 2008, the value of the collateral for the senior secured floating
rate notes totaled approximately $510.9 million, estimated as the sum of (1) the book value of the
total assets of Pregis and each guarantor, excluding intercompany activity (which amount totaled
$427.1 million), and (2) the collateral value of the capital stock, as outlined above (which amount
totaled $83.8 million). The collateral value has not changed materially as of September 30, 2009.
Any proceeds received upon the sale of collateral would be paid first to the lenders under our
senior secured credit facilities, who have a first lien security interest in the collateral, before
any payment could be made to holders of the senior secured floating rate notes. There is no
assurance that any collateral value would remain for the holders of the senior secured floating
rate notes after payment in full to the lenders under our senior secured credit facilities.
We are currently exploring opportunities to enter into sale leaseback transactions relating to
certain of our real estate properties, including properties in California, New York and Indiana
which have been pledged as collateral for the benefit of the holders of certain of our
indebtedness, including the outstanding notes and exchange notes offered hereby. If we consummate
sale leaseback transactions relating to all or any of such properties, the collateral securing the
outstanding notes and the exchange notes will be reduced.
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Covenant Ratios Contained in the Senior Secured Floating Rate Notes and Senior
Subordinated Notes. The indentures governing the senior secured floating rate notes and senior
subordinated notes contain two material covenants which utilize financial ratios. Non-compliance
with these covenants could result in an event of default under the indentures and, under certain
circumstances, a requirement to immediately repay all amounts outstanding under the notes and could
trigger a cross-default under Pregiss senior secured credit facilities or other indebtedness we
may incur in the future. First, Pregis is permitted to incur indebtedness under the indentures if
the ratio of Consolidated Cash Flow to Fixed Charges on a pro forma basis (referred to in the
indentures as the Fixed Charge Coverage Ratio) is greater than 2:1 or, if the ratio is less, only
if the indebtedness falls into specified debt baskets, including, for example, a credit agreement
debt basket, an existing debt basket, a capital lease and purchase money debt basket, an
intercompany debt basket, a permitted guarantee debt basket, a hedging debt basket, a receivables
transaction debt basket and a general debt basket. In addition, under the senior secured floating
rate notes indenture, Pregis is permitted to incur first priority secured debt only if the ratio of
Secured Indebtedness to Consolidated Cash Flow on a pro forma basis (referred to in the senior
secured floating rate notes indenture as the Secured Indebtedness Leverage Ratio) is equal to or
less than 3:1, plus $50 million. Second, the restricted payment covenant provides that Pregis may
declare certain dividends, or repurchase equity securities, in certain circumstances only if
Pregiss Fixed Charge Coverage Ratio is greater than 2:1.
As used in the calculation of the Fixed Charge Coverage Ratio and the Secured Indebtedness
Leverage Ratio, Consolidated Cash Flow, commonly referred to as Adjusted EBITDA, is calculated by
adding Consolidated Net Income, income taxes, interest expense, depreciation and amortization and
other non-cash expenses, amounts paid pursuant to the management agreement with AEA Investors LP,
and the amount of any restructuring charge or reserve (including, without limitation, retention,
severance, excess pension costs, contract termination costs and cost to consolidate facilities and
relocate employees). In calculating the ratios, Consolidated Cash Flow is further adjusted by
giving pro forma effect to acquisitions and dispositions that occurred in the prior four quarters,
including certain cost savings and synergies expected to be obtained in the succeeding twelve
months. In addition, the term Net Income is adjusted to exclude any gain or loss from the
disposition of securities, and the term Consolidated Net Income is adjusted to exclude, among other
things, the non-cash impact attributable to the application of the purchase method of accounting in
accordance with GAAP, the cumulative effect of a change in accounting principles, and other
extraordinary, unusual or nonrecurring gains or losses. While the determination of appropriate
adjustments is subject to interpretation and requires judgment, we believe the adjustments listed
below are in accordance with the covenants discussed above.
The following table sets forth the Fixed Charge Coverage Ratio, Consolidated Cash Flow
(Adjusted EBITDA), Secured Indebtedness Leverage Ratio, Fixed Charges and Secured Indebtedness as
of and for the twelve months ended September 30, 2009 and 2008:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at September 30, | ||||||||||
(dollars in thousands) | Measure | 2009 | 2008 | |||||||||
Fixed Charge
Coverage Ratio (after giving pro forma effect to acquisitions and/or dispositions occurring in the reporting period) |
Minimum of 2.0x | 2.4x | 2.3x | |||||||||
Secured Indebtedness Leverage Ratio |
Maximum of 3.0x | 2.0x | 1.7x | |||||||||
Consolidated Cash Flow (Adjusted EBITDA) |
| $ | 86,443 | $ | 107,448 | |||||||
Fixed Charges (after giving pro forma effect to acquisitions
and/or dispositions occurring in the reporting period) |
| $ | 36,624 | $ | 45,841 | |||||||
Secured Indebtedness |
| $ | 177,473 | $ | 179,207 |
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The Fixed Charge Coverage Ratio is primarily affected by increases or decreases in the
Companys trailing twelve month Consolidated Cash Flow (Adjusted EBITDA) and increases or decreases
in the Companys interest expense (interest expense net of interest income, excluding amortization
of deferred financing fees and discount). Interest expense as used in this ratio is primarily
affected by changes in interest rates (LIBOR and EURIBOR) and currency translation related to
converting euro based interest expense into US dollars. The favorable impact resulting from lower
interest rates, for the comparable twelve month periods ending September 30, 2009 and 2008, has
been more than offset by the decrease in the Companys trailing twelve month Consolidated Cash Flow
over the same period, resulting in narrowing of the cushion between the minimum covenant measure
and the actual ratio.
The Secured Indebtedness Leverage Ratio is primarily affected by increases or decreases in the
Companys trailing twelve month Consolidated Cash Flow and increases or decreases in the Companys
secured indebtedness. Secured indebtedness as used in this ratio is affected primarily by currency
translation related to converting its euro-denominated debt into US dollars. The unfavorable
decrease in trailing twelve month Consolidated Cash Flow has negatively impacted the actual ratio
and narrowed the cushion between the minimum covenant measure and the actual ratio.
Adjusted EBITDA is calculated under the indentures governing our senior secured floating rate
notes and senior subordinated notes for the twelve months ended September 30, 2009 and 2008 as
follows:
(unaudited) | Twelve Months Ended September 30, | |||||||
(dollars in thousands) | 2009 | 2008 | ||||||
Net loss of Pregis Holding II Corporation |
$ | (37,613 | ) | $ | (28,092 | ) | ||
Interest expense, net of interest income |
39,315 | 48,300 | ||||||
Income tax (benefit) expense |
(3,881 | ) | 2,533 | |||||
Depreciation and amortization |
46,992 | 55,797 | ||||||
EBITDA |
44,813 | 78,538 | ||||||
Other non-cash charges (income): (1) |
||||||||
Unrealized foreign currency transaction losses (gains), net |
2,370 | 7,846 | ||||||
Non-cash stock based compensation expense |
1,344 | 902 | ||||||
Non-cash asset impairment charge |
20,101 | 403 | ||||||
Other non-cash expenses, primarily fixed asset disposals and write-offs |
| 427 | ||||||
Net unusual or nonrecurring gains or losses: (2) |
||||||||
Restructuring, severance and related expenses |
13,251 | 12,409 | ||||||
Nonrecurring charges related to acquisitions and dispositions |
| 4,512 | ||||||
Other, principally executive management severance and recruiting
expenses |
2,524 | 123 | ||||||
Other adjustments: (3) |
||||||||
Amounts paid pursuant to management agreement with Sponsor |
2,040 | 1,834 | ||||||
Pro forma earnings and costs savings (4) |
| 454 | ||||||
Adjusted EBITDA (Consolidated Cash Flow) |
$ | 86,443 | $ | 107,448 | ||||
(1) | Other non-cash charges (income) include (a) net unrealized foreign currency transaction losses and gains, arising principally from the revaluation of our euro-denominated third-party debt and intercompany notes receivable, (b) non-cash compensation expense arising from the grant of Pregis Holding I options, (c) a non-cash goodwill impairment charge of $19.1 million recognized in 2008 and trademark impairment charge of $1.0 million and $0.4 million determined pursuant to the |
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Companys 2008 and 2007 annual impairment tests, respectively and (d) other non-cash charges that will not result in future cash settlement, such as losses on fixed asset disposals. | ||
(2) | As provided by our indentures, we adjusted for gains or losses deemed to be unusual or nonrecurring, including (a) restructuring, severance and related expenses due to our various cost reduction restructuring initiatives, (b) adjustments for costs and expenses related to acquisition, disposition or equity offering activities, including a $3.1 million adjustment in 2007 for third party due diligence and legal costs related to a potential acquisition that was ultimately not consummated, and (c) other unusual and nonrecurring charges, principally executive management severance and recruiting expenses in the September 30, 2008 period. | |
(3) | Our indentures also require us to make adjustments for fees, and reasonable out-of-pocket expenses, paid under the management agreement with AEA Investors LP. | |
(4) | Our indentures also permit adjustments to net income on a pro forma basis for certain cost savings that we expect to achieve with respect to acquisitions or dispositions. Therefore, in the twelve months ended September 30, 2008, we adjusted for approximately $0.5 million relating to pre-acquisition earnings and pro forma cost savings for anticipated synergies relating to the December 2007 acquisition of European honeycomb manufacturer, Besin. There can be no assurance that we will be able to achieve these comparable earnings or estimated savings in the future. |
Local lines of credit. From time to time, certain of the foreign businesses utilize various
lines of credit in their operations. These lines of credit are generally used as overdraft
facilities or for issuance of trade letters of credit and are in effect until cancelled by one or
both parties. As of September 30, 2009, we had availability of $7.2 million on these lines, after
considering outstanding trade letters of credit and guarantees totaling $5.8 million.
Long-term Liquidity. We believe that cash flow generated from operations and our borrowing
capacity will be adequate to meet our obligations and business requirements for the next 12 months.
There can be no assurance, however, that our business will generate sufficient cash flow from
operations, that anticipated net sales growth and operating improvements will be realized or that
future borrowings will be available under Pregiss senior secured credit facilities in an amount
sufficient to enable us to service our indebtedness or to fund our other liquidity needs. Our
ability to meet our debt service obligations and other capital requirements, including capital
expenditures, and to continue to comply with the covenants contained in our debt instruments, will
depend upon our future performance which, in turn, will be subject to general economic, financial,
business, competitive, legislative, regulatory and other conditions, many of which are beyond our
control. Some other risks that could materially adversely affect our ability to meet our debt
service obligations and comply with our debt covenants include, but are not
limited to, risks related to increases in the cost of resin, our ability to protect our
intellectual property, rising interest rates, a decline in the overall U.S. and European economies,
weakening in our end markets, the loss of key personnel, our ability to continue to invest in
equipment, and a decline in relations with our key distributors and dealers. In addition, any of
the other items discussed in the Risk Factors, included in our Annual Report on Form 10-K for the
year ended December 31, 2008 may also significantly impact our liquidity and covenant compliance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In accordance with SFAS No. 142 or ASC 350, the Company assesses the recoverability of
goodwill and other indefinite lived intangible assets annually, as of October 1, or whenever events
or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
The Company tests its goodwill at the reporting unit level. A reporting unit is an operating
segment or one level below an operating segment (referred to as a component). A component is
considered a reporting unit for purposes of goodwill testing if the component constitutes a
business for which discrete financial information is available and segment management regularly
reviews the
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operating results of that component. As such, the Company tests for goodwill
impairment at the component level within its Specialty Packaging reporting segment, represented by
each of the businesses included within this segment. The Company also tests goodwill for
impairment at each of the operating segments which have been aggregated to comprise its Protective
Packaging reporting segment.
The Company uses a two-step process to test goodwill for impairment. First, the reporting
units fair value is compared to its carrying value. Fair value is estimated using the income
approach, based on the present value of expected future cash flows. If a reporting units carrying
amount exceeds its fair value, an indication exists that the reporting units goodwill may be
impaired, and the second step of the impairment test would be performed. The second step of the
goodwill impairment test is used to measure the amount of impairment loss, if any. In the second
step, the implied fair value of the reporting units goodwill is determined by allocating the
reporting units fair value to all of its assets and liabilities other than goodwill in a manner
similar to a purchase price allocation. The implied fair value of goodwill that results from the
application of this second step is then compared to the carrying amount of the goodwill and an
impairment charge would be recorded for the difference if the carrying value exceeds the implied
fair value.
Fair value estimated using this method relies on multiple factors, including projections of
operating results, future cash flows, effective tax rates, cost of capital and market assumptions.
As a result, this method is subject to inherent uncertainties and is highly dependent upon the
Companys judgment relative to key assumptions. However, the Company believes this method provides
a consistent and reasonable approach to estimate the fair value of its reporting units.
The Company performed its last annual test of indefinite lived intangible assets, including
goodwill, as of October 1, 2008 and determined that a trade name intangible asset associated with
its Protective Packaging segment was impaired, due to near-term reduced sales levels. The Company
also recorded a non-cash goodwill impairment charge in the fourth quarter of 2008 in a reporting
unit within its Specialty Packaging segment. The goodwill impairment was primarily the result of
the anticipated loss of a key customer by the reporting unit. The remaining five reporting units
had fair values exceeding their carrying values. The range by which the fair values of these
reporting units exceeded their carrying values was 8% to 58% as of October 1, 2008. The
corresponding carrying values of goodwill for these reporting units ranged from $50 million to $145
million as of October 1, 2008.
At interim periods, the Company assesses if potential indicators of impairment exist.
Among the factors the Company considers as potential indicators of interim impairment are
significant adverse changes in legal factors or business climate, an adverse action or assessment
by a regulator,
unanticipated competition, loss of key personnel, or a more-likely-than-not expectation that a
reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,
recent operating losses at the reporting unit level, downward revisions to forecasts, restructuring
actions or plans, and industry trends. The Company did not identify any interim indicators of
impairment as of September 30, 2009.
Although the Company determined that there were no indicators of impairment as of September
30, 2009, it is possible that the future occurrence of potential indicators of impairment could
require an interim assessment for some or all of the Companys reporting units prior to its next
required annual assessment. In such circumstances, the Company may be required to recognize
non-cash impairment charges which could be material to the Companys consolidated financial
position and results of operations. Such non-cash impairment charges would not have a material
adverse impact on the Companys ability to comply with its debt covenants, as such charges are
specifically excluded from its covenant calculations.
Our financial statements are prepared in accordance with generally accepted accounting
principles in the United States, which require management to make estimates, judgments and
assumptions that affect
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the amounts reported in the financial statements and accompanying notes.
While our estimates and assumptions are based on our knowledge of current events and actions we may
undertake in the future, actual results may ultimately differ from these estimates and assumptions.
We have discussed those estimates that we believe are critical and require the use of complex
judgment in their application in our 2008 Annual Report on Form 10-K. Since the date of our 2008
Form 10-K, there have been no material changes to our critical accounting policies or the
methodologies or assumptions we apply under them.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not materially changed since December 31, 2008. For a
discussion of our exposure to market risk, see our 2008 Annual Report on Form 10-K.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Chief Executive Officer (its principal executive officer) and
the Chief Financial Officer (its principal financial officer), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures as of September 30, 2009. Based
upon that evaluation, our management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that as of September 30, 2009 the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
are effective. In addition, there has been no change in the Companys internal control over
financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various lawsuits, legal proceedings and administrative actions arising out of
the normal course of our business. While it is not possible to predict the outcome of any of these
lawsuits, proceedings and actions, management, based on its assessment of the facts and
circumstances now known, does not believe that any of these lawsuits, proceedings and actions,
individually or in the aggregate, will have a material adverse effect on our financial position or
that it is reasonably possible that a loss exceeding amount already recognized may be material.
However, actual outcomes may be different than expected and could have a material effect on our
results of operations or cash flows in a particular period.
Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Description | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II Corporations Chief Executive Officer. | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Pregis Holding II Corporations Chief Financial Officer. |
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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.
PREGIS HOLDING II CORPORATION |
||||
Date: November 13, 2009 | By: | /s/ D. Keith LaVanway | ||
D. Keith LaVanway | ||||
Chief Financial Officer (principal
financial officer and principal accounting officer) |
||||
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