Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - Pregis Holding II CORP | c59749exv32w1.htm |
EX-31.1 - EX-31.1 - Pregis Holding II CORP | c59749exv31w1.htm |
EX-32.2 - EX-32.2 - Pregis Holding II CORP | c59749exv32w2.htm |
EX-31.2 - EX-31.2 - Pregis Holding II CORP | c59749exv31w2.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 June 30, 2010
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 (State or other jurisdiction of Incorporation or Organization) |
20-3321581 (I.R.S. Employer Identification No.) |
|
1650 Lake Cook Road, Deerfield, IL (Address of principal executive offices) |
60015 (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 (Do not check if a smaller reporting company) | Smaller reporting company o |
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 June 30, 2010.
PREGIS HOLDING II CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
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Item 1. | Financial Statements |
Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except shares and per share data)
June 30, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 31,783 | $ | 80,435 | ||||
Accounts receivable |
||||||||
Trade, net of allowances of $4,909 and $6,015 respectively |
133,214 | 120,812 | ||||||
Other |
10,786 | 12,035 | ||||||
Inventories, net |
86,412 | 81,024 | ||||||
Deferred income taxes |
5,083 | 5,079 | ||||||
Due from Pactiv |
1,125 | 1,169 | ||||||
Prepayments and other current assets |
8,659 | 7,929 | ||||||
Total current assets |
277,062 | 308,483 | ||||||
Property, plant and equipment, net |
211,355 | 226,882 | ||||||
Other assets |
||||||||
Goodwill |
139,559 | 126,250 | ||||||
Intangible assets, net |
53,862 | 38,054 | ||||||
Deferred financing costs, net |
6,532 | 8,092 | ||||||
Due from Pactiv, long-term |
7,803 | 8,429 | ||||||
Pension and related assets |
13,331 | 13,953 | ||||||
Restricted cash |
3,500 | | ||||||
Other |
366 | 404 | ||||||
Total other assets |
224,953 | 195,182 | ||||||
Total assets |
$ | 713,370 | $ | 730,547 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Short-term debt |
$ | 8,225 | $ | | ||||
Current portion of long-term debt |
339 | 300 | ||||||
Accounts payable |
99,667 | 78,708 | ||||||
Accrued income taxes |
5,316 | 5,236 | ||||||
Accrued payroll and benefits |
12,731 | 14,242 | ||||||
Accrued interest |
7,103 | 7,722 | ||||||
Other |
18,321 | 18,011 | ||||||
Total current liabilities |
151,702 | 124,219 | ||||||
Long-term debt |
458,852 | 502,534 | ||||||
Deferred income taxes |
21,914 | 19,721 | ||||||
Long-term income tax liabilities |
5,085 | 5,463 | ||||||
Pension and related liabilities |
3,614 | 4,451 | ||||||
Other |
20,728 | 15,367 | ||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized,
149.0035 shares issued and outstanding at
June 30, 2010 and December 31, 2009 |
| | ||||||
Additional paid-in capital |
153,021 | 151,963 | ||||||
Accumulated deficit |
(98,118 | ) | (82,328 | ) | ||||
Accumulated other comprehensive income (loss) |
(3,428 | ) | (10,843 | ) | ||||
Total stockholders equity |
51,475 | 58,792 | ||||||
Total liabilities and stockholders equity |
$ | 713,370 | $ | 730,547 | ||||
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)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net Sales |
$ | 217,801 | $ | 196,003 | $ | 427,837 | $ | 381,547 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
171,368 | 147,049 | 333,838 | 288,056 | ||||||||||||
Selling, general and administrative |
29,561 | 26,403 | 66,441 | 54,399 | ||||||||||||
Depreciation and amortization |
11,464 | 11,305 | 22,659 | 22,776 | ||||||||||||
Other operating expense, net |
919 | 4,734 | 1,566 | 11,335 | ||||||||||||
Total operating costs and expenses |
213,312 | 189,491 | 424,504 | 376,566 | ||||||||||||
Operating income |
4,489 | 6,512 | 3,333 | 4,981 | ||||||||||||
Interest expense |
11,628 | 9,482 | 23,618 | 18,880 | ||||||||||||
Interest income |
| (95 | ) | (22 | ) | (122 | ) | |||||||||
Foreign exchange (gain)/loss, net |
(369 | ) | (8,105 | ) | 908 | (4,931 | ) | |||||||||
Income (loss) before income taxes |
(6,770 | ) | 5,230 | (21,171 | ) | (8,846 | ) | |||||||||
Income tax expense (benefit) |
(3,188 | ) | 2,167 | (5,381 | ) | (1,501 | ) | |||||||||
Net income (loss) |
$ | (3,582 | ) | $ | 3,063 | $ | (15,790 | ) | $ | (7,345 | ) | |||||
The accompanying notes are an integral part of these financial statements.
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Pregis Holding II Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net loss |
$ | (15,790 | ) | $ | (7,345 | ) | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
22,659 | 22,776 | ||||||
Amortization of inventory step-up |
406 | | ||||||
Deferred income taxes |
(6,479 | ) | (2,845 | ) | ||||
Unrealized foreign exchange loss (gain) |
1,123 | (4,693 | ) | |||||
Amortization of deferred financing costs |
1,757 | 1,187 | ||||||
Amortization of debt discount |
1,436 | 157 | ||||||
Gain on disposal of property, plant and equipment |
(86 | ) | (257 | ) | ||||
Stock compensation expense |
1,058 | 734 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts and other receivables, net |
(22,982 | ) | 8,436 | |||||
Due from Pactiv |
(134 | ) | | |||||
Inventories, net |
(13,058 | ) | 6,504 | |||||
Prepayments and other current assets |
(981 | ) | 1,251 | |||||
Accounts payable |
28,418 | (5,642 | ) | |||||
Accrued taxes |
674 | (1,963 | ) | |||||
Accrued interest |
(256 | ) | (785 | ) | ||||
Other current liabilities |
(3,517 | ) | (1,827 | ) | ||||
Pension and related assets and liabilities, net |
(942 | ) | (1,825 | ) | ||||
Other, net |
1,515 | (1,856 | ) | |||||
Cash provided by (used in) operating activities |
(5,179 | ) | 12,007 | |||||
Investing activities |
||||||||
Capital expenditures |
(14,323 | ) | (9,973 | ) | ||||
Proceeds from sale of assets |
163 | 363 | ||||||
Acquisition of business, net of cash acquired |
(31,385 | ) | | |||||
Change in restricted cash |
(3,500 | ) | | |||||
Cash used in investing activities |
(49,045 | ) | (9,610 | ) | ||||
Financing activities |
||||||||
Repayment of debt |
| (4,312 | ) | |||||
Proceeds from revolving credit facility |
500 | | ||||||
Proceeds from foreign lines of credit draws |
8,992 | | ||||||
Other, net |
(23 | ) | (215 | ) | ||||
Cash provided by (used in) financing activities |
9,469 | (4,527 | ) | |||||
Effect of exchange rate changes on cash
and cash equivalents |
(3,897 | ) | (248 | ) | ||||
Decrease in cash and cash equivalents |
(48,652 | ) | (2,378 | ) | ||||
Cash and cash equivalents, beginning of period |
80,435 | 41,179 | ||||||
Cash and cash equivalents, end of period |
$ | 31,783 | $ | 38,801 | ||||
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)
(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 or AEA) 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 (U.S. GAAP) 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 six months ended June 30, 2010 are not necessarily indicative of the
operating results for the full year.
On February 19, 2010 the Company acquired all of the outstanding shares of IntelliPack (see
Note 15). The results of operations of IntelliPack, Inc. (IntelliPack) are included in the
consolidated results of the Company beginning February 20, 2010.
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/A for the year ended December 31, 2009.
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 17).
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2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (ASU 2010-06). ASU 2010-06 provides new and amended
disclosure requirements related to fair value measurements. Specifically, this ASU requires new
disclosures relating to activity within Level 3 fair value measurements, as well as transfers in
and out of Level 1 and Level 2 fair value measurements. ASU 2010-06 also amends the existing
disclosure requirements relating to valuation techniques used for fair value measurements and the
level of disaggregation a reporting entity should include in fair value disclosures. This update is
effective for interim and annual reporting periods beginning after December 15, 2009. The Company
adopted this ASU as of January 1, 2010.
3. INVENTORIES
The major components of net inventories are as follows:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Finished goods |
$ | 43,264 | $ | 40,941 | ||||
Work-in-process |
13,069 | 14,216 | ||||||
Raw materials |
27,623 | 23,339 | ||||||
Other materials and supplies |
2,456 | 2,528 | ||||||
$ | 86,412 | $ | 81,024 | |||||
Inventories at June 30, 2010 and at December 31, 2009 were stated net of reserves
totaling $1,781 million and $1,881 million, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in goodwill by reportable segment for the six months ended June 30, 2010 are as
follows:
December 31, | Foreign Currency | Business | June 30, | |||||||||||||
Segment | 2009 | Translation | Acquisition | 2010 | ||||||||||||
Protective Packaging |
$ | 94,550 | $ | 401 | $ | 17,458 | $ | 112,409 | ||||||||
Specialty Packaging |
31,700 | (4,550 | ) | | 27,150 | |||||||||||
Total |
$ | 126,250 | $ | (4,149 | ) | $ | 17,458 | $ | 139,559 | |||||||
In the first quarter of 2010, the Company acquired IntelliPack resulting in purchased
goodwill of $17.5 million. See Note 15 for acquisition related disclosures.
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The Companys other intangible assets are summarized as follows:
Average | June 30, 2010 | December 31, 2009 | ||||||||||||||||||
Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Customer relationships |
12 | $ | 47,050 | $ | 16,141 | $ | 46,231 | $ | 15,739 | |||||||||||
Patents |
10 | 11,941 | 809 | 1,055 | 372 | |||||||||||||||
Non-compete agreements |
2 | 4,856 | 3,083 | 3,041 | 3,041 | |||||||||||||||
Software |
3 | 3,362 | 2,262 | 3,470 | 2,125 | |||||||||||||||
Land use rights and other |
32 | 1,275 | 549 | 1,486 | 582 | |||||||||||||||
Trademarks and trade names |
20 | 3,000 | 50 | | | |||||||||||||||
In-process research and development |
10 | 1,100 | 47 | | | |||||||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||||||
Trademarks and trade names |
4,219 | | 4,630 | | ||||||||||||||||
Total |
$ | 76,803 | $ | 22,941 | $ | 59,913 | $ | 21,859 | ||||||||||||
In the first quarter of 2010, the Protective Packaging segment acquired IntelliPack.
Preliminary estimates of the acquired intangibles are valued at approximately $21.3 million. See
Note 15 for acquisition related disclosures.
Amortization expense related to intangible assets totaled $1,764 and $1,137 for the three
months ended June 30, 2010 and 2009, respectively, and $2,953 and $2,241 for the six months ended
June 30, 2010 and 2009, respectively.
5. DEBT
The Companys long-term debt consists of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Revolving Credit Facility, due October, 2011 |
$ | 42,500 | $ | 42,000 | ||||
Senior secured 2005 notes, due April, 2013 |
122,290 | 143,160 | ||||||
Senior secured 2009 notes, due April, 2013
net of discount of $7,555 at June 30, 2010
and $10,216 at December 31, 2009 |
145,308 | 168,734 | ||||||
Senior subordinated notes, due October, 2013,
net of discount of $1,461 at June 30, 2010
and $1,638 at December 31, 2009 |
148,539 | 148,362 | ||||||
Lines of credit |
8,225 | | ||||||
Other |
554 | 578 | ||||||
Total debt |
467,416 | 502,834 | ||||||
Less: short term debt |
(8,225 | ) | | |||||
Less: current portion |
(339 | ) | (300 | ) | ||||
Long-term debt |
$ | 458,852 | $ | 502,534 | ||||
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For the six months ended June 30, 2010 and 2009, the revaluation of the Companys
euro-denominated senior secured notes, and in 2009 the Term B-2 facility, resulted in unrealized
foreign exchange gains/(losses) of $45,569 and $(861), respectively. These unrealized
gains/(losses) have been offset by unrealized gains/(losses) of $(47,761) and $1,240 relating to
the revaluation of the Companys euro-denominated inter-company notes receivable for the six months
ended June 30, 2010 and 2009, respectively. These amounts are included net within foreign exchange
loss, 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 $50.0 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.
As of June 30, 2010, the Company has drawn $42.5 million under the revolving credit facility
after reduction for amounts outstanding under letters of credit of $7.4 million. Revolving credit
facility interest expense totaled $480 for the six months ended June 30, 2010. It is the current
intent of the Company to hold the debt until its maturity, resulting in the debts classification
as long-term as of June 30, 2010.
The senior secured credit facility contains customary financial and negative covenants,
including, a first lien leverage covenant of 2.0x, and allows additional subordinate debt issuances
subject to a 2.0x interest coverage ratio. The term loan portion of the senior secured credit
facilities includes a $200 million accordion feature which allows the 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.
In 2010, the Company borrowed amounts available to its foreign subsidiaries under local lines
of credit. One of the lines provides for borrowings up to 5.0 million euro and also allows for
issuances of letters of credit. Issued letters of credit reduce the amounts available for cash
borrowings under such lines
of credit. A second local line of credit at one of our foreign subsidiaries allows for
borrowings up to a certain percentage of such subsidiarys specified accounts receivable. As of
June 30, 2010 amounts outstanding under these local lines of credit totaled $8.2 million.
On October 5, 2009, Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the 2009 notes). The 2009 notes
were exchanged for registered notes issued pursuant to an exchange offer which was consummated on
March 5, 2010. 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. 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 the Companys existing second
priority senior secured floating rate notes due April 2013 (the 2005 notes and, together with the
notes, the senior secured floating rate notes), originally issued on October 12, 2005. However,
the notes do not have the same Common Code or ISIN number as the 2005 notes, are not fungible with
the 2005 notes and will not trade together as a single class with the 2005 notes. The notes are
treated as issued with more than de minimis original issue discount for United States federal
income tax purposes, whereas the 2005 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 the Companys and the guarantors obligations under
the Companys senior secured credit facilities and any other obligations that are secured by first
priority liens on the collateral
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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 the Companys subsidiaries that are not guarantors; equal in right of payment
with the 2005 notes; equal in right of payment with all of the Companys 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
the Companys 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 the Companys senior secured credit facilities.
6. FAIR VALUE MEASUREMENTS
Under U.S. GAAP, certain assets and liabilities must be measured at fair value and ASC Topic
820, Fair Value Measurements and Disclosures (ASC Topic 820), details the disclosures that are
required for items measured at fair value.
ASC Topic 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 (loss) 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 six months ended June 30, 2010, the swap resulted in an increase to
interest expense of $885 and $1,812, respectively. For the three and six months ended June 30,
2009, the swap resulted in an increase of $456 and $332 to interest expense, respectively.
At June 30, 2010, 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 instrument as Level 2 within
the fair value hierarchy. At June 30, 2010, the fair value of this instrument was estimated to be
a liability of $3,075, which is reported within other noncurrent 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
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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
June 30, 2010, the fair values of the Companys senior secured 2005 notes, senior secured 2009
notes, and senior subordinated notes were estimated to be $108,227, $136,812, and $148,500
respectively, based on quoted market prices. Under ASC Topic 825, Financial Instruments,
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.
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 six
months ended June 30, 2010 and 2009 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost of benefits earned |
$ | 501 | $ | 291 | $ | 997 | $ | 527 | ||||||||
Interest cost on benefit obligations |
1,186 | 1,172 | 2,364 | 2,177 | ||||||||||||
Expected return on plan assets |
(1,608 | ) | (1,715 | ) | (3,204 | ) | (3,183 | ) | ||||||||
Amortization of unrecognized net gain |
(10 | ) | (60 | ) | (20 | ) | (112 | ) | ||||||||
Net periodic pension cost (benefit) |
$ | 69 | $ | (312 | ) | $ | 137 | $ | (591 | ) | ||||||
8. OTHER OPERATING EXPENSE, NET
A summary of the items comprising other operating expense, net is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Gain on disposal of
property,
plant and equipment |
$ | (44 | ) | $ | (46 | ) | $ | (86 | ) | $ | (257 | ) | ||||
Royalty
(income) expense |
17 | (38 | ) | 58 | (24 | ) | ||||||||||
Rental income |
(11 | ) | (6 | ) | (25 | ) | (12 | ) | ||||||||
Restructuring expense |
951 | 5,141 | 1,581 | 11,871 | ||||||||||||
Other expense, net |
6 | (317 | ) | 38 | (243 | ) | ||||||||||
Other operating expense, net |
$ | 919 | $ | 4,734 | $ | 1,566 | $ | 11,335 | ||||||||
Restructuring activities are discussed further in Note 8 below.
9. RESTRUCTURING ACTIVITY
In 2009, as part of the Companys efforts to reduce its overall cost structure, management
implemented headcount reductions and engaged outside consultants to assist in further restructuring
of its manufacturing operations.
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Following is a reconciliation of the restructuring liability for the six months ended June 30,
2010.
December 31, | Cash | Foreign Currency | June 30, | |||||||||||||||||||||
Segment | 2009 | Severance | Other | Paid Out | Translation | 2010 | ||||||||||||||||||
Protective Packaging |
$ | 754 | $ | 39 | $ | 398 | $ | (780 | ) | $ | (80 | ) | $ | 331 | ||||||||||
Specialty Packaging |
649 | 287 | | (547 | ) | (95 | ) | 294 | ||||||||||||||||
Corporate |
| | 857 | (857 | ) | | | |||||||||||||||||
Total |
$ | 1,403 | $ | 326 | $ | 1,255 | $ | (2,184 | ) | $ | (175 | ) | $ | 625 | ||||||||||
Amounts recorded for restructuring liabilities are included in other current liabilities
on the Companys consolidated balance sheets.
10. INCOME TAXES
The Companys effective tax rate was (25.42)% and (16.97)% for the six months ended June 30,
2010 and 2009, respectively. Reconciliation of the Companys effective tax rate to the U.S.
federal statutory rate is shown in the following table:
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
U.S. federal income tax rate |
(35.00) | % | (35.00 | )% | ||||
Changes in income tax rate resulting from: |
||||||||
Valuation allowances, net |
7.53 | 8.90 | ||||||
State and
local taxes on income, net of U.S. federal income tax benefit |
(0.36 | ) | (0.45 | ) | ||||
Foreign rate differential |
0.12 | 7.21 | ||||||
Non-deductible interest expense |
| (1.42 | ) | |||||
Permanent differences |
2.29 | 3.40 | ||||||
Other |
| 0.39 | ||||||
Income tax benefit |
(25.42) | % | (16.97 | )% | ||||
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 $527 and $1,489 for the three and six months ended June 30, 2010, which
included a $500 fee for services related to the acquisition of IntelliPack (see Note 15), and $599
and $1,091 for the same period of 2009.
The Company had sales to affiliates of AEA Investors LP totaling $413 and $815 for the three
and six months ended June 30, 2010 compared to $300 and $356 for the same periods of 2009,
respectively. The Company made purchases from affiliates of AEA Investors LP totaling $3,626 and
$7,749 for the three and six months ended June 30, 2010 compared to $2,882 and $5,474 for the same
periods of 2009, 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,
foam-in-place, 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 six months ended June 30, 2010 and 2009 are
as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Protective Packaging |
$ | 138,251 | $ | 118,748 | $ | 273,111 | $ | 234,177 | ||||||||
Specialty Packaging |
79,550 | 77,255 | 154,726 | 147,370 | ||||||||||||
$ | 217,801 | $ | 196,003 | $ | 427,837 | $ | 381,547 | |||||||||
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, restructuring expense and adjusted for other non-cash charges and benefits. 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 ASC Topic 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:
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Segment EBITDA |
||||||||||||||||
Protective Packaging |
$ | 10,658 | $ | 15,372 | $ | 21,439 | $ | 26,739 | ||||||||
Specialty Packaging |
9,857 | 10,118 | 19,401 | 19,429 | ||||||||||||
Total segment EBITDA |
20,515 | 25,490 | 40,840 | 46,168 | ||||||||||||
Corporate expenses |
(2,947 | ) | (2,537 | ) | (11,994 | ) | (5,820 | ) | ||||||||
Restructuring expense |
(951 | ) | (5,141 | ) | (1,581 | ) | (11,871 | ) | ||||||||
Depreciation and amortization |
(11,464 | ) | (11,305 | ) | (22,659 | ) | (22,776 | ) | ||||||||
Interest expense |
(11,628 | ) | (9,482 | ) | (23,618 | ) | (18,880 | ) | ||||||||
Interest income |
| 95 | 22 | 122 | ||||||||||||
Unrealized foreign exchange loss, net |
99 | 8,159 | (1,123 | ) | 4,693 | |||||||||||
Non-cash stock compensation |
(394 | ) | (301 | ) | (1,058 | ) | (734 | ) | ||||||||
Other |
| 252 | | 252 | ||||||||||||
Income (loss) before income taxes |
$ | (6,770 | ) | $ | 5,230 | $ | (21,171 | ) | $ | (8,846 | ) | |||||
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 income (loss)
before income taxes.
13. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) and its components for the three and six months ended June
30, 2010 and 2009 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | (3,582 | ) | $ | 3,063 | $ | (15,790 | ) | $ | (7,345 | ) | |||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment |
2,956 | 1,316 | 6,265 | (11 | ) | |||||||||||
Net change in fair value of hedging
instrument |
756 | (212 | ) | 1,150 | (1,369 | ) | ||||||||||
Comprehensive income (loss) |
$ | 130 | $ | 4,167 | $ | (8,375 | ) | $ | (8,725 | ) | ||||||
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
14
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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.
Financing commitments
As of June 30, 2010, the Company had $7.4 million of outstanding letters of credit under the
revolving credit facility. In addition, the Company also had outstanding guarantees and letters of
credit issued under other financing lines with foreign banks totaling $11.2 million.
15. ACQUISITION
On February 19, 2010, Pregis acquired all of the outstanding stock of IntelliPack, Inc.
through one of its wholly owned subsidiaries, Pregis Management Corporation (the IntelliPack
Acquisition). The initial purchase price of $31.5 million was funded with cash-on-hand. In
accordance with the terms of the agreement, additional consideration may be payable by Pregis if
certain future performance targets are achieved by IntelliPack. Based on preliminary estimates,
the fair value of contingent purchase consideration was valued at approximately $10.0 million as of
June 30, 2010. As of June 30, 2010 the Company recorded $2.4 million in other current liabilities
and $7.6 million in other long-term liabilities related to this contingent purchase consideration.
The classification of current and long-term was based on estimated timing of future payments.
The acquisition was accounted for under the purchase method of accounting. Accordingly, the
Company has allocated the purchase price on the basis of estimated fair value of the underlying
assets acquired and liabilities assumed. The Company is in the process of finalizing its valuation
analysis, which may result in subsequent revisions to the allocation. The purchase price has been
allocated on a preliminary basis as follows:
Current assets |
$ | 3,100 | ||
Property plant & equipment |
10,200 | |||
Intangible assets |
21,300 | |||
Goodwill |
17,500 | |||
Current liabilities |
(1,500 | ) | ||
Deferred tax liabilities |
(9,100 | ) | ||
Total purchase price |
$ | 41,500 | ||
15
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16. SUBSEQUENT EVENTS
On July 19, 2010 Pregis entered into an agreement to sell and leaseback real property
consisting of land and buildings at two of its U.S. manufacturing facilities. The net sale
proceeds totaled approximately $18.1 million. The Company anticipates this transaction to qualify
for sales leaseback accounting treatment. The lease term is 20 years with annual rents totaling
approximately $2.0 million.
17. 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
June 30, 2010
(Unaudited)
Condensed Consolidating Balance Sheet
June 30, 2010
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 6,088 | $ | 253 | $ | 25,442 | $ | | $ | 31,783 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 34,587 | 98,627 | | 133,214 | ||||||||||||||||||
Affiliates |
| 52,275 | 71,933 | 2,936 | (127,144 | ) | | |||||||||||||||||
Other |
| | 103 | 10,683 | | 10,786 | ||||||||||||||||||
Inventories, net |
| | 22,470 | 63,942 | | 86,412 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,507 | 2,442 | | 5,083 | ||||||||||||||||||
Due from Pactiv |
| | | 1,125 | | 1,125 | ||||||||||||||||||
Prepayments and other current assets |
| 3,899 | 978 | 3,782 | | 8,659 | ||||||||||||||||||
Total current assets |
| 62,396 | 132,831 | 208,979 | (127,144 | ) | 277,062 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
51,475 | 484,021 | | | (535,496 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,148 | 75,613 | 134,594 | | 211,355 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 102,633 | 36,926 | | 139,559 | ||||||||||||||||||
Intangible assets, net |
| | 35,703 | 18,159 | | 53,862 | ||||||||||||||||||
Restricted cash |
| 3,500 | | | | 3,500 | ||||||||||||||||||
Other |
| 6,552 | 3,393 | 18,087 | | 28,032 | ||||||||||||||||||
Total other assets |
| 10,052 | 141,729 | 73,172 | | 224,953 | ||||||||||||||||||
Total assets |
$ | 51,475 | $ | 557,617 | $ | 350,173 | $ | 416,745 | $ | (662,640 | ) | $ | 713,370 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Short-term debt |
$ | | $ | | $ | | $ | 8,225 | $ | | $ | 8,225 | ||||||||||||
Current portion of long-term debt |
| | | 339 | | 339 | ||||||||||||||||||
Accounts payable |
| 6,797 | 23,072 | 69,798 | | 99,667 | ||||||||||||||||||
Accounts payable, affiliate |
| 36,631 | 51,686 | 38,721 | (127,038 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,348 | ) | 1,583 | 5,081 | | 5,316 | |||||||||||||||||
Accrued payroll and benefits |
| 17 | 3,803 | 8,911 | | 12,731 | ||||||||||||||||||
Accrued interest |
| 7,103 | | | | 7,103 | ||||||||||||||||||
Other |
| 2,316 | 6,356 | 9,649 | | 18,321 | ||||||||||||||||||
Total current liabilities |
| 51,516 | 86,500 | 140,724 | (127,038 | ) | 151,702 | |||||||||||||||||
Long-term debt |
| 458,637 | | 215 | | 458,852 | ||||||||||||||||||
Intercompany balances |
| | 102,925 | 252,598 | (355,523 | ) | | |||||||||||||||||
Deferred income taxes |
| (16,316 | ) | 31,036 | 7,194 | | 21,914 | |||||||||||||||||
Other |
| 12,305 | 6,057 | 11,065 | | 29,427 | ||||||||||||||||||
Total Stockholders equity |
51,475 | 51,475 | 123,655 | 4,949 | (180,079 | ) | 51,475 | |||||||||||||||||
Total liabilities and stockholders
equity |
$ | 51,475 | $ | 557,617 | $ | 350,173 | $ | 416,745 | $ | (662,640 | ) | $ | 713,370 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2009
Condensed Consolidating Balance Sheet
December 31, 2009
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 40,883 | $ | | $ | 39,552 | $ | | $ | 80,435 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 30,394 | 90,418 | | 120,812 | ||||||||||||||||||
Affiliates |
| 64,072 | 62,382 | 3,963 | (130,417 | ) | | |||||||||||||||||
Other |
| | 10 | 12,025 | | 12,035 | ||||||||||||||||||
Inventories, net |
| | 20,051 | 60,973 | | 81,024 | ||||||||||||||||||
Deferred income taxes |
| 134 | 2,507 | 2,438 | | 5,079 | ||||||||||||||||||
Due from Pactiv |
| | | 1,169 | | 1,169 | ||||||||||||||||||
Prepayments and other current assets |
| 3,492 | 1,063 | 3,374 | | 7,929 | ||||||||||||||||||
Total current assets |
| 108,581 | 116,407 | 213,912 | (130,417 | ) | 308,483 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
58,792 | 484,778 | | | (543,570 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,239 | 66,525 | 159,118 | | 226,882 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 85,176 | 41,074 | | 126,250 | ||||||||||||||||||
Intangible assets, net |
| | 15,763 | 22,291 | | 38,054 | ||||||||||||||||||
Other |
| 8,092 | 3,381 | 19,405 | | 30,878 | ||||||||||||||||||
Total other assets |
| 8,092 | 104,320 | 82,770 | | 195,182 | ||||||||||||||||||
Total assets |
$ | 58,792 | $ | 602,690 | $ | 287,252 | $ | 455,800 | $ | (673,987 | ) | $ | 730,547 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | 300 | $ | | $ | 300 | ||||||||||||
Accounts payable |
| 4,972 | 16,820 | 56,916 | | 78,708 | ||||||||||||||||||
Accounts payable, affiliate |
| 32,152 | 46,676 | 51,595 | (130,423 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,365 | ) | 1,188 | 5,413 | | 5,236 | |||||||||||||||||
Accrued payroll and benefits |
| 16 | 4,148 | 10,078 | | 14,242 | ||||||||||||||||||
Accrued interest |
| 7,720 | | 2 | | 7,722 | ||||||||||||||||||
Other |
| 1 | 6,297 | 11,713 | | 18,011 | ||||||||||||||||||
Total current liabilities |
| 43,496 | 75,129 | 136,017 | (130,423 | ) | 124,219 | |||||||||||||||||
Long-term debt |
| 502,256 | | 278 | | 502,534 | ||||||||||||||||||
Intercompany balances |
| | 106,933 | 295,747 | (402,680 | ) | | |||||||||||||||||
Deferred income taxes |
| (8,485 | ) | 20,287 | 7,919 | | 19,721 | |||||||||||||||||
Other |
| 6,631 | 5,820 | 12,830 | | 25,281 | ||||||||||||||||||
Total Stockholders equity |
58,792 | 58,792 | 79,083 | 3,009 | (140,884 | ) | 58,792 | |||||||||||||||||
Total liabilities and stockholders equity |
$ | 58,792 | $ | 602,690 | $ | 287,252 | $ | 455,800 | $ | (673,987 | ) | $ | 730,547 | |||||||||||
18
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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 84,583 | $ | 136,257 | $ | (3,039 | ) | $ | 217,801 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 63,675 | 110,732 | (3,039 | ) | 171,368 | |||||||||||||||||
Selling, general and administrative |
| 3,390 | 10,331 | 15,840 | | 29,561 | ||||||||||||||||||
Depreciation and amortization |
| 133 | 4,566 | 6,765 | | 11,464 | ||||||||||||||||||
Other operating expense, net |
| 703 | (42 | ) | 258 | | 919 | |||||||||||||||||
Total operating costs and expenses |
| 4,226 | 78,530 | 133,595 | (3,039 | ) | 213,312 | |||||||||||||||||
Operating income (loss) |
| (4,226 | ) | 6,053 | 2,662 | | 4,489 | |||||||||||||||||
Interest expense |
| 3,555 | 3,185 | 4,888 | | 11,628 | ||||||||||||||||||
Interest income |
| | | | | | ||||||||||||||||||
Foreign exchange (gain) loss, net |
| 876 | | (1,245 | ) | | (369 | ) | ||||||||||||||||
Equity in loss of subsidiaries |
3,582 | (262 | ) | | | (3,320 | ) | | ||||||||||||||||
Income (loss) before income taxes |
(3,582 | ) | (8,395 | ) | 2,868 | (981 | ) | 3,320 | (6,770 | ) | ||||||||||||||
Income tax expense (benefit) |
| (4,813 | ) | 1,218 | 407 | | (3,188 | ) | ||||||||||||||||
Net income (loss) |
$ | (3,582 | ) | $ | (3,582 | ) | $ | 1,650 | $ | (1,388 | ) | $ | 3,320 | $ | (3,582 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2009
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 66,660 | $ | 131,272 | $ | (1,929 | ) | $ | 196,003 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of
sales, excluding depreciation and amortization |
| | 46,067 | 102,911 | (1,929 | ) | 147,049 | |||||||||||||||||
Selling, general and administrative |
| 2,759 | 7,888 | 15,756 | | 26,403 | ||||||||||||||||||
Depreciation and amortization |
| 156 | 3,546 | 7,603 | | 11,305 | ||||||||||||||||||
Other operating expense, net |
| 1,779 | 768 | 2,187 | | 4,734 | ||||||||||||||||||
Total operating costs and expenses |
| 4,694 | 58,269 | 128,457 | (1,929 | ) | 189,491 | |||||||||||||||||
Operating income (loss) |
| (4,694 | ) | 8,391 | 2,815 | | 6,512 | |||||||||||||||||
Interest expense |
| (402 | ) | 3,985 | 5,899 | | 9,482 | |||||||||||||||||
Interest income |
| (14 | ) | | (81 | ) | | (95 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| (4,594 | ) | 30 | (3,541 | ) | | (8,105 | ) | |||||||||||||||
Equity in loss of subsidiaries |
(3,063 | ) | (3,122 | ) | | | 6,185 | | ||||||||||||||||
Income (loss) before income taxes |
3,063 | 3,438 | 4,376 | 538 | (6,185 | ) | 5,230 | |||||||||||||||||
Income tax expense |
| 375 | 1,676 | 116 | | 2,167 | ||||||||||||||||||
Net income (loss) |
$ | 3,063 | $ | 3,063 | $ | 2,700 | $ | 422 | $ | (6,185 | ) | $ | 3,063 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010
(Unaudited)
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 160,042 | $ | 273,484 | $ | (5,689 | ) | $ | 427,837 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 119,890 | 219,637 | (5,689 | ) | 333,838 | |||||||||||||||||
Selling, general and administrative |
| 12,871 | 20,284 | 33,286 | | 66,441 | ||||||||||||||||||
Depreciation and amortization |
| 262 | 8,382 | 14,015 | | 22,659 | ||||||||||||||||||
Other operating expense, net |
| 913 | (51 | ) | 704 | | 1,566 | |||||||||||||||||
Total operating costs and expenses |
| 14,046 | 148,505 | 267,642 | (5,689 | ) | 424,504 | |||||||||||||||||
Operating income (loss) |
| (14,046 | ) | 11,537 | 5,842 | | 3,333 | |||||||||||||||||
Interest expense |
| 6,937 | 6,451 | 10,230 | | 23,618 | ||||||||||||||||||
Interest income |
| (6 | ) | | (16 | ) | | (22 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| 2,000 | | (1,092 | ) | | 908 | |||||||||||||||||
Equity in loss of subsidiaries |
15,790 | 1,393 | | | (17,183 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(15,790 | ) | (24,370 | ) | 5,086 | (3,280 | ) | 17,183 | (21,171 | ) | ||||||||||||||
Income tax expense (benefit) |
| (8,580 | ) | 2,153 | 1,046 | | (5,381 | ) | ||||||||||||||||
Net income (loss) |
$ | (15,790 | ) | $ | (15,790 | ) | $ | 2,933 | $ | (4,326 | ) | $ | 17,183 | $ | (15,790 | ) | ||||||||
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2009
(Unaudited)
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2009
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 132,927 | $ | 252,109 | $ | (3,489 | ) | $ | 381,547 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 94,076 | 197,469 | (3,489 | ) | 288,056 | |||||||||||||||||
Selling, general and administrative |
| 6,762 | 16,941 | 30,696 | | 54,399 | ||||||||||||||||||
Depreciation and amortization |
| 311 | 7,674 | 14,791 | | 22,776 | ||||||||||||||||||
Other operating expense, net |
| 3,925 | 2,773 | 4,637 | | 11,335 | ||||||||||||||||||
Total operating costs and expenses |
| 10,998 | 121,464 | 247,593 | (3,489 | ) | 376,566 | |||||||||||||||||
Operating income (loss) |
| (10,998 | ) | 11,463 | 4,516 | | 4,981 | |||||||||||||||||
Interest expense |
| (3,014 | ) | 8,247 | 13,647 | | 18,880 | |||||||||||||||||
Interest income |
| (41 | ) | | (81 | ) | | (122 | ) | |||||||||||||||
Foreign exchange (gain) loss, net |
| (555 | ) | 30 | (4,406 | ) | | (4,931 | ) | |||||||||||||||
Equity in loss of subsidiaries |
7,345 | 2,801 | | | (10,146 | ) | | |||||||||||||||||
Income (loss) before income taxes |
(7,345 | ) | (10,189 | ) | 3,186 | (4,644 | ) | 10,146 | (8,846 | ) | ||||||||||||||
Income tax expense (benefit) |
| (2,844 | ) | 1,262 | 81 | | (1,501 | ) | ||||||||||||||||
Net income (loss) |
$ | (7,345 | ) | $ | (7,345 | ) | $ | 1,924 | $ | (4,725 | ) | $ | 10,146 | $ | (7,345 | ) | ||||||||
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Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2010
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2010
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (15,790 | ) | $ | (15,790 | ) | 2,933 | $ | (4,326 | ) | $ | 17,183 | $ | (15,790 | ) | |||||||||
Non-cash adjustments |
15,790 | (24 | ) | 10,466 | 12,825 | (17,183 | ) | 21,874 | ||||||||||||||||
Changes in operating assets and
liabilities, net of effects of acquisitions |
| 11,674 | (3,161 | ) | (19,776 | ) | | (11,263 | ) | |||||||||||||||
Cash provided by (used in)
operating activities |
| (4,140 | ) | 10,238 | (11,277 | ) | | (5,179 | ) | |||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (170 | ) | (6,091 | ) | (8,062 | ) | | (14,323 | ) | ||||||||||||||
Proceeds from sale of assets |
| | | 163 | | 163 | ||||||||||||||||||
Acquisition of business, net of cash acquired |
| (31,500 | ) | 115 | | | (31,385 | ) | ||||||||||||||||
Change in restricted cash |
| (3,500 | ) | | | | (3,500 | ) | ||||||||||||||||
Cash used in investing activities |
| (35,170 | ) | (5,976 | ) | (7,899 | ) | | (49,045 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 4,009 | (4,009 | ) | | | | |||||||||||||||||
Proceeds from local lines of credit draws |
| | | 8,992 | | 8,992 | ||||||||||||||||||
Proceeds from issuance of long-term debt |
| 500 | | | | 500 | ||||||||||||||||||
Other, net |
| | | (23 | ) | | (23 | ) | ||||||||||||||||
Cash provided by (used in)
financing activities |
| 4,509 | (4,009 | ) | 8,969 | | 9,469 | |||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| 6 | | (3,903 | ) | | (3,897 | ) | ||||||||||||||||
Increase (decrease) in cash
and cash equivalents |
| (34,795 | ) | 253 | (14,110 | ) | | (48,652 | ) | |||||||||||||||
Cash and cash equivalents,
beginning of period |
| 40,883 | | 39,552 | | 80,435 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 6,088 | $ | 253 | $ | 25,442 | $ | | $ | 31,783 | ||||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2009
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2009
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (7,345 | ) | $ | (7,345 | ) | $ | 1,924 | $ | (4,725 | ) | $ | 10,146 | $ | (7,345 | ) | ||||||||
Non-cash adjustments |
7,345 | 1,522 | 8,960 | 9,221 | (10,146 | ) | 16,902 | |||||||||||||||||
Changes in operating assets and
liabilities, net of effects of acquisitions |
| 11,817 | (5,156 | ) | (4,211 | ) | | 2,450 | ||||||||||||||||
Cash provided by
operating activities |
| 5,994 | 5,728 | 285 | | 12,007 | ||||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (21 | ) | (2,053 | ) | (7,899 | ) | | (9,973 | ) | ||||||||||||||
Proceeds from sale of assets |
| | 22 | 341 | | 363 | ||||||||||||||||||
Cash used in investing activities |
| (21 | ) | (2,031 | ) | (7,558 | ) | | (9,610 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Intercompany activity |
| 13,461 | (13,461 | ) | | | | |||||||||||||||||
Repayment of long-term debt |
| (4,312 | ) | | | | (4,312 | ) | ||||||||||||||||
Other, net |
| | | (215 | ) | | (215 | ) | ||||||||||||||||
Cash provided by (used in)
financing activities |
| 9,149 | (13,461 | ) | (215 | ) | | (4,527 | ) | |||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| (229 | ) | | (19 | ) | | (248 | ) | |||||||||||||||
Increase (decrease) in cash and cash equivalents |
| 14,893 | (9,764 | ) | (7,507 | ) | | (2,378 | ) | |||||||||||||||
Cash and cash equivalents,
beginning of period |
| | 9,764 | 31,415 | | 41,179 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 14,893 | $ | | $ | 23,908 | $ | | $ | 38,801 | ||||||||||||
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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/A for
the fiscal year ended December 31, 2009.
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/A for the fiscal year ended December 31, 2009 filed with the SEC. |
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
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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 47 facilities in 18 countries, with
approximately 4,100 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 2009 net sales were generated outside of the U.S., as a
result, we are sensitive to fluctuations in foreign currency exchange rates, primarily between the
U.S. dollar and the euro and U.S. dollar and the pound sterling.
Our net sales for the three months and six months ended June 30, 2010 increased 11.1% and
12.1%, respectively, over the comparable periods of 2009. The increase was driven primarily by
increased volumes, driven by the impact of economic recovery as well as the Companys growth
initiatives, and sales associated with the recently completed IntelliPack Acquisition. This was
partially offset by lower year-over-year selling prices, particularly in our protective packaging
segment, and unfavorable foreign currency translation. Excluding the impact of unfavorable foreign
currency translation and the IntelliPack Acquisition, net sales for the three months and six months
ended June 30, 2010 increased 13.1% and 10.3%, respectively, compared to the same periods in 2009.
Our gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization) as a percent of net sales decreased to 21.3% and 22.0% for the three and six months
ended June 30, 2010, respectively, compared to 25.0% and 24.5% for the same periods of 2009. The
decline in our 2010 gross margin percentage was driven primarily by increased key raw material
costs partially offset by increased volumes, year-over-year selling price increases implemented in
the second quarter of 2010, and the impact from the Companys cost reduction programs. 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 six months of 2010 as
compared to the same period of 2009, average resin costs increased approximately 32% in North
America and 50% in Europe, as measured by the Chemical Market Associates, Inc. (CMAI) index and
ICIS index, their respective market indices. These increases in resin and other key raw material
costs reduced the Companys gross margin as a percent of sales by 526 basis points.
In the first quarter of 2009, we implemented restructuring initiatives to further reduce our
cost structure by optimizing our organizational structure and our operating processes. As of June
30, 2010, our restructuring initiatives were substantially complete. During the first half of 2010
we realized year-over-year cost savings of approximately $7.4 million relating to our 2009 and 2010
cost reduction initiatives.
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RESULTS OF OPERATIONS
Net Sales
Our net sales for the three and six months ended June 30, 2010 compared to the same periods
ended June 30, 2009 are summarized by segment as follows:
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 138,251 | $ | 118,748 | $ | 19,503 | 16.4 | % | $ | 2,148 | 1.8 | % | $ | 16,362 | 13.8 | % | $ | 5,006 | 4.2 | % | $ | (4,013 | ) | (3.4 | )% | |||||||||||||||||||||||
Specialty Packaging |
79,550 | 77,255 | 2,295 | 3.0 | % | 915 | 1.2 | % | 6,334 | 8.2 | % | | | % | (4,954 | ) | (6.4 | )% | ||||||||||||||||||||||||||||||
Total |
$ | 217,801 | $ | 196,003 | $ | 21,798 | 11.1 | % | $ | 3,063 | 1.6 | % | $ | 22,696 | 11.6 | % | $ | 5,006 | 2.6 | % | $ | (8,967 | ) | (4.6 | )% | |||||||||||||||||||||||
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 273,111 | $ | 234,177 | $ | 38,934 | 16.6 | % | $ | (4,703 | ) | (2.0 | )% | $ | 36,372 | 15.5 | % | $ | 6,938 | 3.0 | % | $ | 327 | 0.1 | % | |||||||||||||||||||||||
Specialty Packaging |
154,726 | 147,370 | 7,356 | 5.0 | % | 304 | 0.2 | % | 7,441 | 5.1 | % | | | % | (389 | ) | (0.3 | )% | ||||||||||||||||||||||||||||||
Total |
$ | 427,837 | $ | 381,547 | $ | 46,290 | 12.1 | % | $ | (4,399 | ) | (1.2 | )% | $ | 43,813 | 11.5 | % | $ | 6,938 | 1.8 | % | $ | (62 | ) | | % | ||||||||||||||||||||||
Segment Net Sales
Volume in the Companys protective packaging segment increased by 13.8% and 15.5% for the
three and six month periods ended June 30, 2010, respectively, compared to the same periods in
2009. The volume increase for these periods was driven primarily by improved economic conditions
as well as the impact from growth initiatives in areas such as inflatable systems and sustainable
products.
Price/mix for the Companys protective packaging segment increased net sales by 1.8% for the
three month period ended June 30, 2010, respectively, but reduced net sales by 2.0% for the six
month period ended June 30, 2010 compared to the same period in 2009. The increase in price/mix
for the three months ended June 30, 2010 was primarily due to selling price increases implemented
in April 2010. Price/mix for the six months ended June 30, 2010 was lower year-over-year due to
unfavorable pricing as selling prices in the first quarter of 2009 were at elevated levels due to
significant price increases implemented in the second half of 2008.
Volume in the Companys specialty packaging segment increased by 8.2% and 5.1% for the three
and six month periods ended June 30, 2010, respectively, compared to the same periods of 2009,
primarily due to the impact of growth initiatives in our fresh food packaging markets.
The specialty packaging segment did not experience the substantial volume declines in 2009
that the protective packaging segment experienced. As a result, the improved economic conditions
have not had as large of an impact on volume in the specialty packaging segment in 2010. This is
due to the different end markets the two segments serve. Protective packaging primarily serves the
industrial, housing, and automotive sectors, while the specialty packaging segment primarily serves
the consumer food and medical sectors. The consumer food and medical sectors experienced less
sensitivity to the overall economic weakness as compared to the industrial, housing, and automotive
sectors.
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Gross Margin
Gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization), as a percentage of net sales, was 21.3% for the three months ended June 30, 2010
compared to 25.0% for the same period of 2009. This decrease of 370 basis points was driven by
increased key raw material costs partially offset by the impact of selling price increases
implemented in the second quarter of 2010. The increase in key raw material costs resulted in a
negative 541 basis point impact on gross margin as a percentage of net sales. Savings from the
Companys cost reduction program resulted in a 139 basis point improvement for the three months
ended June 30, 2010 as compared to the equivalent period in 2009.
Gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization), as a percentage of net sales, was 22.0% for the six months ended June 30, 2010
compared to 24.5% for the same period of 2009. This decrease of 250 basis points was driven by
increased key raw material costs and negative price/mix, partially offset by the impact of selling
price increases implemented in the second quarter of 2010. The increase in key raw material costs
resulted in a negative 526 basis point impact on gross margin as a percentage of net sales.
Savings from the Companys cost reduction program resulted in a 193 basis point improvement for the
three months ended June 30, 2010 as compared to the equivalent period in 2009.
Average resin costs in North America for the three and six month periods ended June 30, 2010
were 32% higher than average resin costs for the same period in 2009 while average resin costs in
Europe were 50% higher than average resin prices for the same period of 2009, based on their
respective market indices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.2 million for the three months
ended June 30, 2010 compared to the same period of 2009. This increase was primarily driven by
SG&A costs associated with the IntelliPack Acquisition of $0.9 million, legal expenses of $0.5
million, and other volume related compensation expenses.
Selling, general and administrative expenses increased by $12.0 million for the six months
ended June 30, 2010 compared to the same period of 2009. This increase was primarily driven by
legal expenses of $4.9 million, acquisition related costs of $1.0 million, and SG&A costs
associated with the IntelliPack Acquisition of $1.3 million. The increased legal expenses were the
result of a patent dispute related to the Companys protective packaging segment; which was
resolved successfully by the Company in March 2010. Excluding the impact of the legal expenses,
acquisition related costs, and IntelliPacks SG&A expenses, selling, general and administrative
expenses for the six months ended June 30, 2010 increased by approximately $4.8 million due
primarily to increased pension, stock compensation, volume related
compensation expenses, and additional sales and marketing expenses incurred to help drive the
Companys growth initiatives.
Other Operating Expense, net
For the three and six months ended June 30, 2010, other operating expense, net totaled $0.9
million and $1.6 million, respectively, compared to $4.7 million and $11.3 million in the same
periods of 2009. 2009 other expense, net was driven by significant restructuring activity.
Restructuring charges for the three and six month periods ended June 30, 2009 were $5.1 million and
$11.9 million, respectively (see Note 8).
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Depreciation and Amortization Expense
Depreciation and amortization expense increased by $0.2 million for the three months ended
June 30, 2010 and decreased by $0.1 million for the six months ended June 30, 2010, compared to the
respective periods of 2009.
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 items. See Note 11 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 June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(dollars in thousands) | $ Change | % Change | ||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 10,658 | $ | 15,372 | $ | (4,714 | ) | (30.7 | )% | |||||||
Specialty Packaging |
9,857 | 10,118 | (261 | ) | (2.6 | )% | ||||||||||
Total segment
EBITDA |
$ | 20,515 | $ | 25,490 | $ | (4,975 | ) | (19.5 | )% | |||||||
Six Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(dollars in thousands) | $ Change | % Change | ||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 21,439 | $ | 26,739 | $ | (5,300 | ) | (19.8 | )% | |||||||
Specialty Packaging |
19,401 | 19,429 | (28 | ) | (0.1 | )% | ||||||||||
Total segment
EBITDA |
$ | 40,840 | $ | 46,168 | $ | (5,328 | ) | (11.5 | )% | |||||||
Segment EBITDA for the protective packaging segment declined $4.7 million and $5.3
million for the three and six months ended June 30, 2010, respectively, compared to the same
periods of 2009. These decreases were due primarily to the impact of increased key raw material
costs which were partially offset by increased volumes, the IntelliPack Acquisition, and the
results of our cost reduction programs. Savings from our cost reduction programs totaled
approximately $2.0 million and $5.5 million year-over-year for the three and six month periods
ended June 30, 2010, respectively.
Segment EBITDA for specialty packaging was relatively consistent on a year-over-year basis for
both the three and six month periods.
Interest Expense
Interest expense for the three and six months ended June 30, 2010 increased $2.1 million and
$4.7 million, respectively, compared to the same periods of 2009. The increases were driven by
higher debt balances and higher average interest rates both resulting from the retirement of the
Companys term debt in the third quarter of 2009 and its replacement with new floating rate notes
at a higher average interest rates.
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These increases are also reflective of higher amortization of discount and deferred financing
fees, again resulting from the Companys 2009 debt refinancing.
Foreign Exchange Loss (Gain), net
A portion of our third-party debt is denominated in euro and revalued to U.S. dollars at
month-end. 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 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.
Income Tax Expense
Our effective income tax rate was approximately 25.42% for the six months ended June 30, 2010,
which compares to approximately 16.97% for the six months ended June 30, 2009. For the six months
ended June 30, 2010 and 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
against losses in certain jurisdictions that are not expected to result in future tax benefits.
Net Income (Loss)
For the three and six months ended June 30, 2010, we had a net loss of $3.6 million and $15.8
million, respectively, compared to net income of $3.1 million and net loss of $7.3 million in the
comparable periods of 2009. As discussed herein, the 2010 net loss is primarily the result of
increased raw material costs, higher interest expense, and lower unrealized foreign currency gains,
which more than offset lower restructuring charges.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our sources and uses of funds for the six months ended June 30, 2010
compared to the six months ended June 30, 2009:
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(dollars in thousands) | ||||||||
Cash provided (used) in operating activities |
$ | (5,179 | ) | $ | 12,007 | |||
Cash used in investing activities |
(49,045 | ) | (9,610 | ) | ||||
Cash provided (used) in financing activities |
9,469 | (4,527 | ) | |||||
Effect of foreign exchange rate changes |
(3,897 | ) | (248 | ) | ||||
Decrease in cash and cash equivalents |
$ | (48,652 | ) | $ | (2,378 | ) | ||
Operating Activities. Cash provided by operating activities decreased by $17.2
million during the six months ended June 30, 2010 compared to the same period of 2009. This
decrease was primarily driven by increased working capital investments resulting from higher
overall sales volumes as well as higher average raw material costs and decreased earnings.
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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
trailed changes in raw material costs, the Company has historically been able to recover
significant increases in underlying raw material costs from its customers over a 12 to 24 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 key raw material costs could affect our cash generated
from operating activities in future periods.
Investing Activities. Cash used in investing activities totaled $49.0 million for the six
months ended June 30, 2010, $39.4 million higher than to the same period of 2009. This increase
was primarily the result of the IntelliPack Acquisition and, to a lesser extent, capital
expenditures. On February 19, 2010, Pregis acquired all of the stock of IntelliPack for an initial
purchase price of $31.5 million and including certain escrowed amounts totaling $3.5 million, which
was funded with cash-on-hand. Capital expenditures totaled $14.3 million in the 2010 period
compared to $10.0 million in the same period in 2009.
Financing Activities. Cash provided in financing activities for the six months ended June
30, 2010 included proceeds from local lines of credit totaling $9.0 million and the revolving
credit facility draw of $0.5 million.
Our liquidity requirements are significant, primarily due to debt service requirements and
capital investment in our businesses. We expect our 2010 capital expenditures to total
approximately $20 to $25 million and our 2010 debt service costs to total approximately $42
million. At June 30, 2010, we had cash and cash equivalents of $31.8 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 amounts available to the Company under its credit agreement. Additionally, in July
2010, the Company entered into a sales and leaseback arrangement for real property associated with
two of its U.S. manufacturing facilities generating $18.3 million of net cash proceeds.
Senior Secured Credit Facilities. In October 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. The term loans were
repaid in full in October 2009. 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. As of June 30, 2010, the
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Company had $42.5 million drawn under the revolving credit facility and $7.4 million of
outstanding letters of credit.
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).
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 October 5, 2009, the Company prepaid the term loans in full with proceeds
of a 125.0 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, 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.
Pregiss senior secured credit facilities require that it comply on a quarterly basis with a
First Lien Leverage Ratio test. The First Lien Leverage Ratio cannot exceed 2.0x and 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 First Lien Leverage Ratio as of June 30, 2010 and 2009:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at June 30, | ||||||||||
(dollars in thousands) | Measure | 2010 | 2009 | |||||||||
First Lien Leverage Ratio |
Maximum of 2.0x | 0.33 | 1.47 | |||||||||
Consolidated EBITDA |
| $ | 74,511 | $ | 91,391 | |||||||
Net Debt Secured by First Priority Lien |
| $ | 24,496 | $ | 428,188 |
As used in the calculation of First Lien Leverage 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 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, 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).
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Consolidated EBITDA is calculated under the senior secured credit facility for the twelve
months ended June 30, 2010 and 2009 as follows:
(unaudited) | Twelve Months Ended June 30, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net Loss |
$ | (26,454 | ) | $ | (46,235 | ) | ||
Senior Secured Credit Facility Consolidated Net Income definition add backs: |
||||||||
Non-cash compensation charges |
1,678 | 1,261 | ||||||
Net after tax extraordinary gains or losses (incl. severance and
restructuring charges) |
6,302 | 15,971 | ||||||
Non-cash unrealized currency gains or losses |
(310 | ) | 13,475 | |||||
Any FAS 142, 144, 141 impairment charge or asset write off |
194 | 20,101 | ||||||
Consolidated Net (Loss) Income |
$ | (18,590 | ) | $ | 4,573 | |||
Senior Secured Credit Facility Consolidated EBITDA definition add backs: |
||||||||
Interest expense |
47,048 | 43,477 | ||||||
Income tax benefit |
(6,879 | ) | (7,197 | ) | ||||
Depreciation expense and amortization |
44,665 | 47,970 | ||||||
Fees payable to AEA Investors LP |
2,442 | 1,892 | ||||||
Unusual and non-recurring charges |
11,516 | 676 | ||||||
Pro forma EBITDA of acquisitions |
2,277 | | ||||||
Adjustment for 5% EBITDA cap limitation of unusual and non-recurring items |
(7,968 | ) | | |||||
Consolidated EBITDA |
$ | 74,511 | $ | 91,391 | ||||
As of June 30, 2010, Pregis was in compliance with all covenants contained in its senior
secured credit facilities.
In October 2009 we used the proceeds of an offering of senior secured floating rate notes,
together with cash on hand, to repay in full amounts outstanding under the term loans under our
senior secured credit facilities. However, following the issuance of the senior secured floating
rate notes and the use of proceeds thereof and subject to compliance with our 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 senior secured floating rate 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 2005 senior secured notes) and $150 million aggregate principal amount of
123/8% senior subordinated notes due 2013 (the senior subordinated notes).
The 2005 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 2005 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 2005 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
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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).
On October 5, 2009 Pregis issued 125.0 million aggregate principal amount of additional
second priority senior secured floating rate notes due 2013 (the unregistered 2009 senior secured
notes). On March 5, 2010, Pregis exchanged all of the outstanding unregistered 2009 senior
secured notes for registered senior secured notes (the 2009 senior secured notes) pursuant to an
exchange offer. The 2009 senior secured notes bear interest at a floating rate of EURIBOR plus
5.00% per year. Interest on the 2009 senior secured notes is reset quarterly and payable on
January 15, April 15, July 15, and October 15 of each year. The 2009 senior secured notes mature
on April 15, 2013.
The 2009 senior secured notes are treated as a single class under the indenture with the
100.0 million principal amount of 2005 second priority senior secured floating rate notes for
purpose of voting and redemption. However, the 2009 senior secured notes do not have the same
Common Code or ISIN numbers as the 2005 senior secured notes, are not fungible with the 2005 senior
secured notes and will not trade together as a single class with the 2005 senior secured notes.
The 2009 senior secured notes are treated as issued with more than de minimis original issue
discount for United States federal income tax purposes, whereas the 2005 senior secured notes were
not issued with original issue discount for such purposes. Together the 2005 senior secured notes
and the 2009 senior secured notes are referred to herein as the senior secured notes.
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 are listed on the Irish Stock
Exchange. However, there can be no assurance that the senior secured notes will remain listed.
The proceeds from the sale of the notes in October 2009 were used to repay the Term B-1 and
Term B-2 indebtedness under our senior secured credit facilities.
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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, 2009, the capital stock of the following subsidiaries of Pregis constituted
collateral for the senior secured floating rate notes:
As of December 31, 2009 | ||||||||||||
Amount of Collateral | ||||||||||||
(Maximum of Book Value | ||||||||||||
and Market Value, | ||||||||||||
Subject | Book Value of | Market Value of | ||||||||||
Name of Subsidiary | to 20% Cap) | Capital Stock | Capital Stock | |||||||||
Pregis Innovative Packaging Inc. |
$ | 64,422,000 | $ | 38,900,000 | $ | 138,100,000 | ||||||
Hexacomb Corporation |
$ | 36,400,000 | $ | 36,400,000 | $ | 21,900,000 | ||||||
Pregis (Luxembourg) Holding S.àr.l. (66%) |
$ | 16,600,000 | $ | 16,600,000 | $ | | ||||||
Pregis Management Corporation* |
$ | 100 | $ | 100 | $ | 100 |
* | Effective March 17, 2010 Pregis Management Corporation changed its name to Pregis IntelliPack Corporation. |
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
45,000,000, or, at the December 31, 2009 exchange rate of U.S. dollars to euro of 1.4316:1.00,
approximately $64.4 million. As of December 31, 2009, the book value and the market value of the
shares of capital stock of Pregis Innovative Packaging Inc. were approximately $38.9 million and
$138.1 million, respectively; the book value and the market value of the shares of capital stock of
Hexacomb Corporation were approximately $36.4 million and $21.9 million respectively; and the book
value and the market value of 66% of the shares of capital stock of Pregis (Luxembourg) Holding S.à
r.l. were approximately $16.6 million and $ million, respectively. Therefore, in accordance
with the collateral agreement, the collateral pool for the senior secured floating rate notes
includes only approximately $64.4 million with respect to the shares of capital stock of Pregis
Innovative Packaging Inc. Since the book value and market value of the shares of capital stock of
our other domestic subsidiaries and Pregis (Luxemburg) Holdings S.a r.l are each less than the
$64.4 million threshold, they are not affected by the 20% clause of the collateral agreement.
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For the year ended December 31, 2009, 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.à r.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 is 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, 2009, the value of the collateral for the senior secured floating
rate notes totaled approximately $541.3 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
$423.9 million), and (2) the collateral value of the capital stock, as outlined above (which amount
totaled $117.4 million). As a result of the IntelliPack acquisition (see Note 15), the estimated
value of the collateral for the senior secured floating rate notes has increased. Except for the
increase in collateral value associated with the IntelliPack Acquisition (see Note 15), the
collateral value has not changed materially as of June 30, 2010. 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.
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.
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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 June 30, 2010 and 2009:
Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at June 30, | ||||||||||
(dollars in thousands) | Measure | 2010 | 2009 | |||||||||
Fixed Charge Coverage Ratio (after giving pro forma effect
to acquisitions and/or dispositions occurring in the
reporting period) |
Minimum of 2.0 | x | 2.1 | x | 2.3 | x | ||||||
Secured Indebtedness Leverage Ratio |
Maximum of 3.0 | x | 0.62 | x | 1.9 | x | ||||||
Consolidated Cash Flow (Adjusted EBITDA) |
| $ | 82,479 | $ | 91,391 | |||||||
Fixed Charges (after giving pro forma effect to acquisitions
and/or dispositions occurring in the reporting period) |
| $ | 39,095 | $ | 39,493 | |||||||
Secured Indebtedness |
| $ | 51,279 | $ | 173,509 |
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 June 30, 2010 and 2009, 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. In 2009 the secured indebtedness was comprised of the Companys term B-1
notes, term B-2 notes, and amounts outstanding under the Companys revolving credit facility. The
term B-1 and term B-2 notes were retired in October 2009 as part of the Companys refinancing.
This decrease in secured indebtedness is the primary driver in the year-over-year change of the
Secured Indebtedness Leverage Ratio.
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Adjusted EBITDA is calculated under the indentures governing our senior secured floating rate
notes and senior subordinated notes for the twelve months ended June 30, 2010 and 2009 as follows:
(unaudited) | Twelve Months Ended June 30, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
Net loss of Pregis Holding II Corporation |
$ | (26,454 | ) | $ | (46,235 | ) | ||
Interest expense, net of interest income |
47,048 | 43,477 | ||||||
Income tax (benefit) expense |
(6,879 | ) | (7,197 | ) | ||||
Depreciation and amortization |
44,665 | 47,970 | ||||||
EBITDA |
58,380 | 38,015 | ||||||
Other non-cash charges (income): (1) |
||||||||
Unrealized foreign currency transaction
losses (gains), net |
(310 | ) | 13,475 | |||||
Non-cash stock based compensation expense |
1,678 | 1,261 | ||||||
Non-cash asset impairment charge |
194 | 20,101 | ||||||
Net unusual or nonrecurring gains or losses: (2) |
||||||||
Restructuring, severance and related expenses |
6,302 | 15,971 | ||||||
Other unusual or nonrecurring gains or losses |
11,516 | 676 | ||||||
Other adjustments: (3) |
||||||||
Amounts paid pursuant to management
agreement with Sponsor |
2,442 | 1,892 | ||||||
Pro forma adjusted EBITDA of acquired business (4) |
2,277 | | ||||||
Adjusted EBITDA (Consolidated Cash Flow) |
$ | 82,479 | $ | 91,391 | ||||
(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 a trademark impairment charge of $1.0 million pursuant to the Companys 2008 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 and (c) other unusual and nonrecurring charges. | |
(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 which allow for the inclusion of earnings for acquired businesses as if the acquisition had occurred on the first day of the four-quarter measurement period. In the six months ended June 30, 2010, we have adjusted for approximately $2.3 million relating to pre-acquisition earnings relating to the acquisition of IntelliPack. There can be no assurance that we will be able to achieve comparable earnings in the future. |
Foreign Lines of Credit. From time to time, certain of our foreign businesses utilize various
lines of credit in their operations. These lines of credit are generally used as overdraft
facilities or for the issuance of trade letters of credit and are in effect until cancelled by one
or both parties. As of June 30, 2010, outstanding trade letters of credit and guarantees totaled
$14.4 million. Availability under these lines of credit totaled $3.3 million of which no amounts
were available to be drawn in cash.
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Long-term Liquidity. We believe that cash flow generated from operations, existing cash
balances, our borrowing capacity and other sources of liquidity such as sales and leaseback
transactions will be adequate to meet our obligations and business requirements for the next twelve
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/A for the year ended December 31,
2009 may also significantly impact our liquidity and covenant compliance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In accordance with ASC 350, the Company assesses the recoverability of goodwill and other
indefinite lived intangibles 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 goodwill impairment test is performed 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 operating results of that component. As such, we have tested for goodwill
impairment at the component level within our Specialty Packaging reporting segment, represented by
each of the businesses included within this segment. We also tested goodwill for impairment at
each of the operating segments which have been aggregated to comprise our Protective Packaging
reporting segment.
We use 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 primarily a combination of
the income approach, based on the present value of expected future cash flows and the market
approach. 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 the
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 the 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 of the goodwill.
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
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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 June 30, 2010.
Although the Company determined that there were no indicators of impairment as of June 30,
2010, 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 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 2009 Annual Report on Form 10-K/A. Since the date of our 2009
Form 10-K/A, 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, 2009. For a
discussion of our exposure to market risk, see our 2009 Annual Report on Form 10-K/A.
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 June 30, 2010. Based upon
that evaluation, our management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that, as of June 30, 2010, 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) were
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.
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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/A for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Reserved
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. | |
32.1
|
Certification of Pregis Holding II Corporations Chief Executive Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. | |
32.2
|
Certification of Pregis Holding II Corporations Chief Financial Officer pursuant to Section 906 of The Sarbanes Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PREGIS HOLDING II CORPORATION |
||||
Date: August 16, 2010 | By: | /s/ D. Keith LaVanway | ||
D. Keith LaVanway | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) |
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