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EXCEL - IDEA: XBRL DOCUMENT - Pregis Holding II CORP | Financial_Report.xls |
EX-31.1 - EX-31.1 - Pregis Holding II CORP | c64865exv31w1.htm |
EX-31.2 - EX-31.2 - Pregis Holding II CORP | c64865exv31w2.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, 2011
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-130353-04
Pregis Holding II Corporation
(Exact name of registrant as specified in its charter)
Delaware | 20-3321581 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
Incorporation or Organization) | ||
1650 Lake Cook Road, Deerfield, IL | 60015 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 597-2200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes þ
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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 149.0035 shares of the registrants common stock, par value $0.01 per share, issued
and outstanding as of June 30, 2011.
PREGIS HOLDING II CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
Item 1. Financial Statements
Pregis Holding II Corporation
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
(dollars in thousands, except share and per share data)
June 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 20,793 | $ | 47,845 | ||||
Accounts receivable |
||||||||
Trade, net of allowances of $8,228 and $7,513 respectively |
142,607 | 118,836 | ||||||
Other |
15,640 | 18,573 | ||||||
Inventories, net |
104,115 | 88,975 | ||||||
Deferred income taxes |
3,732 | 3,699 | ||||||
Due from Pactiv |
1,174 | 1,161 | ||||||
Prepayments and other current assets |
11,492 | 9,131 | ||||||
Total current assets |
299,553 | 288,220 | ||||||
Property, plant and equipment, net |
204,871 | 198,260 | ||||||
Other assets |
||||||||
Goodwill |
141,856 | 139,795 | ||||||
Intangible assets, net |
51,775 | 53,642 | ||||||
Deferred financing costs, net |
6,497 | 4,816 | ||||||
Due from Pactiv, long-term |
6,571 | 8,168 | ||||||
Pension and related assets |
12,207 | 11,848 | ||||||
Restricted Cash |
3,502 | 3,501 | ||||||
Other |
449 | 448 | ||||||
Total other assets |
222,857 | 222,218 | ||||||
Total assets |
$ | 727,281 | $ | 708,698 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 128 | $ | 46,363 | ||||
Accounts payable |
109,534 | 101,266 | ||||||
Accrued income taxes |
3,217 | 2,971 | ||||||
Accrued payroll and benefits |
15,154 | 14,626 | ||||||
Accrued interest |
8,202 | 7,654 | ||||||
Other |
19,543 | 20,903 | ||||||
Total current liabilities |
155,778 | 193,783 | ||||||
Long-term debt |
522,103 | 442,908 | ||||||
Deferred income taxes |
14,141 | 16,029 | ||||||
Long-term income tax liabilities |
4,210 | 5,732 | ||||||
Pension and related liabilities |
4,245 | 4,149 | ||||||
Other |
17,863 | 19,566 | ||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized,
149.0035 shares issued and outstanding at
June 30, 2011 and December 31, 2010 |
| | ||||||
Additional paid-in capital |
155,631 | 155,055 | ||||||
Accumulated deficit |
(132,049 | ) | (119,400 | ) | ||||
Accumulated other comprehensive loss |
(14,641 | ) | (9,124 | ) | ||||
Total stockholders equity |
8,941 | 26,531 | ||||||
Total liabilities and stockholders equity |
$ | 727,281 | $ | 708,698 | ||||
The accompanying notes are an integral part of these financial statements.
3
Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
(Unaudited)
(dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Sales |
$ | 242,163 | $ | 217,801 | $ | 469,161 | $ | 427,837 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales, excluding
depreciation
and amortization |
190,654 | 171,368 | 369,004 | 333,838 | ||||||||||||
Selling, general and
administrative |
31,185 | 29,561 | 64,259 | 66,441 | ||||||||||||
Depreciation and amortization |
12,485 | 11,464 | 24,855 | 22,659 | ||||||||||||
Other operating expense, net |
182 | 919 | 477 | 1,566 | ||||||||||||
Total operating costs and expenses |
234,506 | 213,312 | 458,595 | 424,504 | ||||||||||||
Operating income |
7,657 | 4,489 | 10,566 | 3,333 | ||||||||||||
Interest expense, net of interest
income |
12,084 | 11,628 | 25,214 | 23,596 | ||||||||||||
Foreign exchange (income) loss, net |
474 | (369 | ) | (654 | ) | 908 | ||||||||||
Loss before income taxes |
(4,901 | ) | (6,770 | ) | (13,994 | ) | (21,171 | ) | ||||||||
Income tax expense (benefit) |
9 | (3,188 | ) | (1,345 | ) | (5,381 | ) | |||||||||
Net loss |
$ | (4,910 | ) | $ | (3,582 | ) | $ | (12,649 | ) | $ | (15,790 | ) | ||||
The accompanying notes are an integral part of these financial statements.
4
Table of Contents
Pregis Holding II Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
(Unaudited)
(dollars in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities |
||||||||
Net loss |
$ | (12,649 | ) | $ | (15,790 | ) | ||
Adjustments to reconcile net loss to |
||||||||
cash provided by operating activities: |
||||||||
Depreciation and amortization |
24,855 | 22,659 | ||||||
Amortization of inventory step-up |
| 406 | ||||||
Deferred income taxes |
(2,322 | ) | (6,479 | ) | ||||
Unrealized foreign exchange (gain) loss |
(675 | ) | 1,123 | |||||
Amortization of deferred financing costs |
1,967 | 1,757 | ||||||
Amortization of debt discount |
1,672 | 1,436 | ||||||
Gain on disposal of property, plant and equipment |
(179 | ) | (86 | ) | ||||
Stock compensation expense |
576 | 1,058 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts and other receivables, net |
(13,771 | ) | (22,982 | ) | ||||
Due from Pactiv |
1,906 | (134 | ) | |||||
Inventories, net |
(10,666 | ) | (13,058 | ) | ||||
Prepayments and other current assets |
(1,474 | ) | (981 | ) | ||||
Accounts payable |
3,413 | 28,418 | ||||||
Accrued taxes |
(1,509 | ) | 674 | |||||
Accrued interest |
84 | (256 | ) | |||||
Other current liabilities |
(180 | ) | (3,517 | ) | ||||
Pension and related assets and liabilities, net |
(126 | ) | (942 | ) | ||||
Other, net |
(1,643 | ) | 1,515 | |||||
Cash used in operating activities |
(10,721 | ) | (5,179 | ) | ||||
Investing activities |
||||||||
Capital expenditures |
(18,955 | ) | (14,323 | ) | ||||
Proceeds from sale of assets |
411 | 163 | ||||||
Acquisition of business, net of cash acquired |
(673 | ) | (31,385 | ) | ||||
Change in restricted cash |
(1 | ) | (3,500 | ) | ||||
Cash used in investing activities |
(19,218 | ) | (49,045 | ) | ||||
Financing activities |
||||||||
Repayment of debt |
(43,000 | ) | | |||||
Proceeds from ABL credit facility |
47,783 | | ||||||
Proceeds from revolving credit facility |
500 | 500 | ||||||
Proceeds from foreign lines of credit draws |
765 | 8,992 | ||||||
Deferred financing fees |
(4,560 | ) | | |||||
Other, net |
82 | (23 | ) | |||||
Cash provided by financing activities |
1,570 | 9,469 | ||||||
Effect of exchange rate changes on cash
and cash equivalents |
1,317 | (3,897 | ) | |||||
Decrease in cash and cash equivalents |
(27,052 | ) | (48,652 | ) | ||||
Cash and cash equivalents, beginning of period |
47,845 | 80,435 | ||||||
Cash and cash equivalents, end of period |
$ | 20,793 | $ | 31,783 | ||||
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, 2011 are not necessarily indicative of the
operating results for the full year.
In February 2010 the Company acquired all of the outstanding shares of IntelliPack (see Note
14). 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 for the year ended December 31, 2010.
Separate financial statements of Pregis Corporation are not presented since the floating rate
senior secured notes due April 2013 and the 12.375% senior subordinated notes due October 2013
issued by Pregis Corporation are fully and unconditionally guaranteed on a senior secured and
senior subordinated basis, respectively, by Pregis Holding II and all existing domestic
subsidiaries of Pregis Corporation and since Pregis Holding II has no operations or assets separate
from its investment in Pregis Corporation (see Note 16).
6
Table of Contents
2. INVENTORIES
The major components of net inventories are as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 52,403 | $ | 42,192 | ||||
Work-in-process |
16,427 | 15,014 | ||||||
Raw materials |
32,744 | 29,470 | ||||||
Other materials and supplies |
2,541 | 2,299 | ||||||
$ | 104,115 | $ | 88,975 | |||||
Inventories at June 30, 2011 and at December 31, 2010 were stated net of reserves
totaling $2,072 and $2,156, respectively.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in goodwill by reportable segment for the six months ended June 30, 2011 are as
follows:
December 31, | Foreign Currency | June 30, | ||||||||||
Segment | 2010 | Translation | 2011 | |||||||||
Protective Packaging |
$ | 110,326 | $ | (26 | ) | $ | 110,300 | |||||
Specialty Packaging |
29,469 | 2,087 | 31,556 | |||||||||
Total |
$ | 139,795 | $ | 2,061 | $ | 141,856 | ||||||
The Companys other intangible assets are summarized as follows:
Average | June 30, 2011 | December 31, 2010 | ||||||||||||||||||
Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Customer relationships |
12 | $ | 50,659 | $ | 21,456 | $ | 48,922 | $ | 18,772 | |||||||||||
Patents |
10 | 14,374 | 2,260 | 12,097 | 1,352 | |||||||||||||||
Non-compete agreements |
2-5 | 4,944 | 3,551 | 4,902 | 3,319 | |||||||||||||||
Software |
3 | 4,385 | 3,516 | 3,971 | 2,884 | |||||||||||||||
Land use rights and other |
32 | 1,505 | 755 | 1,390 | 648 | |||||||||||||||
Trademarks and trade names |
20 | 3,000 | 200 | 3,000 | 125 | |||||||||||||||
In-process research and development |
10 | | | 2,200 | 183 | |||||||||||||||
Intangible assets not subject to
amortization: |
||||||||||||||||||||
Trademarks and trade names |
4,646 | | 4,443 | | ||||||||||||||||
Total |
$ | 83,513 | $ | 31,738 | $ | 80,925 | $ | 27,283 | ||||||||||||
Amortization expense related to intangible assets totaled $1,334 and $1,764 for the three
months ended June 30, 2011 and 2010, respectively, and $3,258 and $2,953 for the six months ended
June 30, 2011 and 2010, respectively.
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4. DEBT
The Companys long-term debt consists of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ABL credit facility, due March, 2016 |
$ | 47,783 | $ | | ||||
Revolving Credit Facility, due October, 2011 |
| 42,500 | ||||||
Senior secured 2005 notes, due April, 2013 |
145,020 | 133,700 | ||||||
Senior secured 2009 notes, due April, 2013
net of discount of $6,016 at June 30, 2011
and $6,928 at December 31, 2010 |
175,259 | 160,197 | ||||||
Senior subordinated notes, due October, 2013,
net of discount of $1,071 at June 30, 2011
and $1,272 at December 31, 2010 |
148,929 | 148,728 | ||||||
Foreign lines of credit |
4,837 | 3,719 | ||||||
Other |
403 | 427 | ||||||
Total debt |
522,231 | 489,271 | ||||||
Less: short-term debt |
(128 | ) | (46,363 | ) | ||||
Long-term debt |
$ | 522,103 | $ | 442,908 | ||||
In March 2011, Pregis Holding II and Pregis and certain of their subsidiaries entered into a
$75 million Credit Agreement with Wells Fargo Capital Finance, LLC, as agent, Wells Fargo Bank,
National Association, as lender and other lenders from time to time parties thereto (the ABL
credit facility). The ABL credit facility provides for borrowings in dollars, euros and pounds
sterling and consists of (1) a UK facility, under which certain UK subsidiaries of Pregis (the UK
Borrowers) may from time to time borrow up to a maximum amount of the lesser of the UK borrowing
base and $30 million and (2) a US facility, under which certain US subsidiaries of Pregis (the US
Borrowers and, together with the UK Borrowers, the Borrowers) may from time to time borrow up
to a maximum amount of the lesser of the US borrowing base and $75 million less amounts
outstanding under the UK facility. The borrowing base is calculated on the basis of certain
permitted over advance amounts, plus a percentage of certain eligible accounts receivable and
eligible inventory, subject to reserves established by the agent from time to time. The ABL credit
facility provides for the issuance of letters of credit and a swingline subfacility. The ABL
credit facility also provides for future uncommitted increases of its maximum amount, not to exceed
$40 million.
The ABL credit facility matures on the earlier of (a) March 22, 2016 and (b) January 15, 2013
or July 15, 2013, which is 90 days prior to the maturity of the existing senior secured notes and
senior subordinated notes, respectively, unless these notes are (i) redeemed, discharged or
defeased in full 90 days prior to maturity and (ii) refinanced with proceeds from permitted
indebtedness as defined in the ABL agreement with a maturity date at least 90 days after March 22,
2016. Advances under the ABL credit facility bear interest, at the Borrowers option, equal to
adjusted LIBOR plus an applicable margin for LIBOR loans or a base rate plus an applicable margin
for base rate loans. The applicable margin for LIBOR loans ranges from 2.5% to 3%, depending on
the average quarterly excess availability of the Borrowers. The applicable margin for base rate
loans is 100 basis points lower than the applicable margin for LIBOR loans.
All obligations under the ABL credit facility are guaranteed by Pregis Holding II and certain
of its direct and indirect subsidiaries (other than certain non wholly-owned and immaterial
subsidiaries and certain foreign subsidiaries), with foreign guarantors guaranteeing only the
obligations of the UK
8
Table of Contents
Borrowers. All obligations under the ABL credit facility and the guarantees
of those obligations are secured, subject to certain exceptions, by a first-priority security
interest in substantially all of the assets of Pregis Holding II, the Borrowers and the guarantors,
as well as the pledge of 100% of the capital stock of the Borrowers, the guarantors and their
direct subsidiaries, with the obligations of the US Borrowers being secured only by (1) a
first-priority security interest in substantially all assets of Pregis Holding II, the US Borrowers
and the domestic guarantors, (2) a pledge of 100% of the capital stock of the US Borrowers, the
domestic guarantors and their direct domestic subsidiaries and (3) a pledge of 65% of the voting
capital stock and 100% of the non-voting capital stock of the first-tier foreign subsidiaries of
the US Borrowers and domestic guarantors. The security interest in the domestic collateral ranks
prior to the security interest securing the Companys existing second priority floating rate notes
due 2013. The lenders under the ABL credit facility have agreed to share their domestic collateral
with future secured notes, if any, that refinance the existing notes, with the ABL credit facility
retaining a first priority security interest in all accounts receivable, inventory and certain
related assets of Pregis Holding II, the US Borrowers and the domestic guarantors and subordinating
its security interest in all other domestic assets and the capital stock of the US Borrowers,
domestic guarantors and their direct subsidiaries to the liens securing such new secured notes, if
any.
As of June 30, 2011, borrowings under the ABL credit facility totaled $47.8 million,
outstanding letters of credit were $6.3 million, and remaining availability was $20.9 million. The
Company utilized proceeds from the ABL credit facility to pay off and terminate its pre-existing
$50 million revolving credit facility.
Pregiss senior secured notes were issued in the principal amount of 100.0 million and 125.0
million, respectively, and bear interest at a floating rate equal to EURIBOR (as defined) plus
5.00% per year (for a total rate of 6.327% as of June 30, 2011). Interest resets quarterly and is
payable quarterly on January 15, April 15, July 15 and October 15. The senior secured notes mature
on April 15, 2013. The senior subordinated notes were issued in the principal amount of $150.0
million and bear interest at the rate of 12.375% annually. Interest on the senior subordinated
notes is payable semi-annually on April 15 and October 15. The senior subordinated notes mature on
October 15, 2013. The senior subordinated notes were issued at a discount of 98.149% of their
principal amount, resulting in an initial discount of $2.8 million, which is being amortized using
the effective interest method over the term of the notes. The senior secured notes issued in 2009
were issued at a discount of 94% of their principal amount, resulting in an initial discount of
$11.0 million (7.5 million), which is being amortized using the effective interest method over the
term of the notes. The senior secured notes and senior subordinated notes do not have required
principal payments prior to maturity.
Pregis Holding II and Pregiss domestic subsidiaries have guaranteed the obligations under the
senior secured notes and the senior subordinated notes on a senior secured basis and senior
subordinated basis, respectively. Additionally, the senior secured notes are secured on a second
priority basis by liens on all of the domestic collateral (subject to certain exceptions) securing Pregiss ABL credit facility.
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 ABL credit facility and any other first
priority obligations.
For the six months ended June 30, 2011, the revaluation of the Companys euro-denominated
senior secured notes resulted in an unrealized foreign exchange loss of $24.9 million which has
been partially offset by unrealized gains of $26.7 million related to the revaluation of the
Companys euro-denominated intercompany notes receivable for the six months ended June 30, 2011.
For the six months ended June 30, 2010, the revaluation of the Companys euro-denominated senior
secured notes resulted in an unrealized foreign exchange gain of $45.6 million which has been
partially offset by unrealized losses of $47.8 million related to the revaluation of the Companys
euro-denominated intercompany notes receivable for the six months ended June 30, 2010. These
amounts are included within foreign exchange (income) loss, net in the Companys consolidated
statements of operations.
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The Company has borrowings available to its foreign subsidiaries under two local lines of
credit. The first subsidiary line of credit allows for borrowings up to a certain percentage of
such subsidiarys specified accounts receivable. As of June 30, 2011, amounts outstanding under
this foreign line of credit totaled $4.8 million. The second foreign line of credit allows for
issuances of letters of credit only, which totaled $3.7 million as of June 30, 2011.
5. 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 minimize 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 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 were expected to be highly effective in offsetting the
fluctuations in the floating interest rate and are, therefore, being recorded in other
comprehensive income until the underlying transaction is recorded. This swap arrangement was
settled in March 2011.
The accounting for the cash flow impact of the swap was recorded as an adjustment to interest
expense. For the three months ended March 31, 2011, the swap resulted in an increase to interest
expense of $1,654, which included additional expense of $838 related to the termination of the
swap. There was no additional interest expense in the second quarter due to the settlement of the
swap in March 2011. 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.
At June 30, 2011, the Companys contingent purchase consideration relating to the IntelliPack
acquisition in 2010 is recorded at fair value and is categorized as Level 3 within the fair value
hierarchy. The fair value of this liability is estimated using a present value analysis as of June
30, 2011 and was $9.1 million. This analysis considers, among other items, the financial forecasts
of future operating results of the acquiree, the probability of reaching the forecast, and the
associated discount rate. A rollforward of this liability from the acquisition date to the balance
sheet date is as follows:
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Fair Value Measurements | ||||
at Reporting Date | ||||
Using Significant | ||||
Unobservable Inputs | ||||
(Level 3) | ||||
Contingent purchase consideration liability | ||||
Fair value at acquisition date |
$ | 9,700 | ||
Payments |
(772 | ) | ||
Change in fair value (1) |
672 | |||
Balance as of December 31, 2010 |
$ | 9,600 | ||
Payments |
(673 | ) | ||
Change in fair value (1) |
173 | |||
Balance as of June 30, 2011 |
$ | 9,100 | ||
(1) | The adjustment to the original contingent purchase consideration liability recorded was the result of using revised financial forecasts and updated fair value measurement and is included in interest expense in the statement of operations |
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. At June
30, 2011, the fair values of the Companys senior secured notes (issued in 2005), senior secured
notes (issued in 2009), and senior subordinated notes were estimated to be $139,582, $174,477, and
$145,500 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.
6. 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, 2011 and 2010 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost of benefits earned |
$ | 592 | $ | 501 | $ | 1,180 | $ | 997 | ||||||||
Interest cost on benefit obligations |
1,303 | 1,186 | 2,594 | 2,364 | ||||||||||||
Expected return on plan assets |
(1,658 | ) | (1,608 | ) | (3,300 | ) | (3,204 | ) | ||||||||
Amortization of unrecognized net gain |
| (10 | ) | | (20 | ) | ||||||||||
Net periodic pension cost |
$ | 237 | $ | 69 | $ | 474 | $ | 137 | ||||||||
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7. 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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gain on disposal of property,
plant and equipment |
$ | (94 | ) | $ | (44 | ) | $ | (179 | ) | $ | (86 | ) | ||||
Restructuring expense |
500 | 951 | 986 | 1,581 | ||||||||||||
Other expense, net |
(224 | ) | 12 | (330 | ) | 71 | ||||||||||
Other operating expense, net |
$ | 182 | $ | 919 | $ | 477 | $ | 1,566 | ||||||||
Restructuring activities are discussed further in Note 8 below.
8. RESTRUCTURING ACTIVITY
In 2010, the Company incurred restructuring costs within its European operations in an effort
to upgrade management and to further drive cost reductions. The Company used outside consultants
to aid in this process. These efforts have continued in 2011.
Following is a reconciliation of the restructuring liability for the six months ended June 30,
2011.
December 31, | Cash | Foreign Currency | June 30, | |||||||||||||||||||||
Segment | 2010 | Severance | Other | Paid Out | Translation | 2011 | ||||||||||||||||||
Protective Packaging |
$ | 135 | $ | 144 | $ | 300 | $ | (565 | ) | $ | 3 | $ | 17 | |||||||||||
Specialty Packaging |
822 | 35 | | (588 | ) | 51 | 320 | |||||||||||||||||
Corporate |
| | 507 | (507 | ) | | | |||||||||||||||||
Total |
$ | 957 | $ | 179 | $ | 807 | $ | (1,660 | ) | $ | 54 | $ | 337 | |||||||||||
Amounts recorded for restructuring liabilities are included in other current liabilities
on the Companys consolidated balance sheets.
9. INCOME TAXES
The Companys effective tax rate was (9.61)% and (25.42)% for the six months ended June 30,
2011 and 2010, respectively. Reconciliation of the Companys effective tax rate to the U.S.
federal statutory rate is shown in the following table:
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Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
U.S. federal income tax rate |
(35.00) | % | (35.00 | )% | ||||
Changes in income tax rate resulting from: |
||||||||
Valuation allowances |
19.87 | 7.53 | ||||||
State and local taxes on income,
net of U.S. federal income tax benefit |
(0.56 | ) | (0.36 | ) | ||||
Foreign rate differential |
1.23 | 0.12 | ||||||
Permanent differences |
2.98 | 2.29 | ||||||
Other |
1.87 | | ||||||
Income tax benefit |
(9.61) | % | (25.42 | )% | ||||
10. 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 $627 and $1,137 for the three and six months ended June 30, 2011, and $527
and $1,489 for the same periods of 2010 which included a $500 fee for services related to the
acquisition of IntelliPack.
The Company had sales to affiliates of AEA Investors LP totaling $1,431 for the three months
ended March 31, 2011. There were no sales to affiliates of AEA Investors LP for the second quarter
of 2011. For the three and six months ended June 30, 2010, the Company had sales to affiliates of
AEA Investors LP totaling $413 and $815, respectively. The Company made purchases from affiliates
of AEA Investors LP totaling $4,356 and $9,525 for the three and six months ended June 30, 2011
compared to $3,626 and $7,749 for the same periods of 2010.
11. 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, 2011 and 2010 are
as follows:
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Protective Packaging |
$ | 151,562 | $ | 138,251 | $ | 297,580 | $ | 273,111 | ||||||||
Specialty Packaging |
90,601 | 79,550 | 171,581 | 154,726 | ||||||||||||
$ | 242,163 | $ | 217,801 | $ | 469,161 | $ | 427,837 | |||||||||
The Company evaluates performance and allocates resources to its segments based on
segment EBITDA, which is calculated internally as net income before interest, taxes, depreciation,
amortization, and restructuring expense and adjusted for other non-cash 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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Segment EBITDA |
||||||||||||||||
Protective Packaging |
$ | 14,582 | $ | 10,658 | $ | 26,757 | $ | 21,439 | ||||||||
Specialty Packaging |
9,756 | 9,857 | 18,850 | 19,401 | ||||||||||||
Total segment EBITDA |
24,338 | 20,515 | 45,607 | 40,840 | ||||||||||||
Corporate expenses |
(3,553 | ) | (2,947 | ) | (8,645 | ) | (11,994 | ) | ||||||||
Restructuring expense |
(500 | ) | (951 | ) | (986 | ) | (1,581 | ) | ||||||||
Depreciation and amortization |
(12,485 | ) | (11,464 | ) | (24,855 | ) | (22,659 | ) | ||||||||
Interest expense, net of
interest income |
(12,084 | ) | (11,628 | ) | (25,214 | ) | (23,596 | ) | ||||||||
Unrealized foreign exchange
loss, net |
(277 | ) | 99 | 675 | (1,123 | ) | ||||||||||
Non-cash stock compensation |
(340 | ) | (394 | ) | (576 | ) | (1,058 | ) | ||||||||
Loss before income taxes |
$ | (4,901 | ) | $ | (6,770 | ) | $ | (13,994 | ) | $ | (21,171 | ) | ||||
Corporate expenses include the costs of corporate support functions, such as information
technology, finance, human resources, legal and executive management which have not been allocated
to the segments. Additionally, corporate expenses may include other non-recurring or
non-operational activity that the chief operating decision maker excludes in assessing business
unit performance. These expenses, along with depreciation and amortization, other operating
income/expense and other non-operating activity such as interest expense/income, restructuring, and
foreign exchange gains/losses, are not considered in the measure of the segments operating
performance, but are shown herein as reconciling items to the Companys consolidated loss before
income taxes.
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12. COMPREHENSIVE INCOME (LOSS)
Total comprehensive loss and its components for the three and six months ended June 30, 2011
and 2010 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (4,910 | ) | $ | (3,582 | ) | $ | (12,649 | ) | $ | (15,790 | ) | ||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment |
(1,860 | ) | 2,956 | (6,538 | ) | 6,265 | ||||||||||
Net change in fair value of hedging
instrument |
| 756 | 1,021 | 1,150 | ||||||||||||
Comprehensive income (loss) |
$ | (6,770 | ) | $ | 130 | $ | (18,166 | ) | $ | (8,375 | ) | |||||
As discussed in Note 5, the Company settled the interest rate swap in March 2011. The change
in fair value of the swap through the date of settlement was recorded in other comprehensive income
(loss) and the amount remaining in accumulated other comprehensive income (loss) on the date of
settlement was recorded as interest expense.
13. COMMITMENTS AND CONTINGENCIES
Legal matters
The Company is party to legal proceedings arising from its operations. Related reserves are
recorded when it is probable that liabilities exist and where reasonable estimates of such
liabilities can be made. While it is not possible to predict the outcome of any of these
proceedings, the Companys management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the aggregate, will have
a material adverse effect on the Companys financial position. The Company does not believe that,
with respect to any pending legal matters, it is reasonably possible that a loss exceeding amounts
already recognized may be material. However, actual outcomes may be different than expected and
could have a material effect on the companys results of operations or cash flows in a particular
period.
Environmental matters
The Company is subject to a variety of environmental and pollution-control laws and
regulations in all jurisdictions in which it operates. Where it is probable that related
liabilities exist and where reasonable estimates of such liabilities can be made, associated
reserves are established. Estimated liabilities are subject to change as additional information
becomes available regarding the magnitude of possible clean-up costs, the expense and effectiveness
of alternative clean-up methods, and other possible liabilities associated with such situations.
The Company does not believe that, with respect to any pending environmental matters, that a loss
is reasonably possible. However, actual outcomes may be different than expected and could have a
material effect on the companys results of operations or cash flows in a particular period.
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Financing commitments
As of June 30, 2011, the Company also had $6,330 of outstanding letters of credit under the
ABL credit facility. In addition, the Company also had outstanding guarantees and letters of
credit issued under other financing lines with local banks totaling $3,650.
14. ACQUISITIONS
In February 2010, Pregis acquired all of the outstanding stock of IntelliPack, Inc. through
one of its wholly owned subsidiaries, Pregis Management Corporation (the IntelliPack
Acquisition). Following the acquisition, Pregis Management Corporation was subsequently renamed
Pregis IntelliPack Corporation (IntelliPack). The initial purchase price of $31.5 million,
including certain escrowed amounts totaling $3.5 million, was funded with cash-on-hand. In
accordance with the terms of the agreement, additional consideration up to a maximum of $11.5
million may be payable by Pregis if certain future performance targets are achieved by IntelliPack.
Based on a present value analysis, the fair value of contingent purchase consideration was valued
at approximately $9.7 million on the acquisition date. The Company has paid $0.7 million as of
June 30, 2011 and $0.8 million during 2010 related to this contingency. The remaining contingent
purchase consideration was revalued at approximately $9.1 million as of June 30, 2011. The
classification of the additional consideration payable as current and long-term was based on the
estimated timing of future payments and the amounts are included in other current liabilities and
other long-term liabilities in the consolidated balance sheet.
15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, Fair Value
Measurement (Topic 820), (ASU 2011-04), in order to provide a consistent definition of fair value
and ensure that the fair value measurement and disclosure requirements are similar between U.S.
GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the
disclosure requirements particularly for Level 3 fair value measurements. This guidance will take
effect for the Company beginning on January 1, 2012. The adoption of this ASU is not expected to
significantly impact the Companys consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05 which provided new guidance on the presentation of
comprehensive income. ASU 2011-05 eliminates the option to report other comprehensive income and
its components in the statement of changes in stockholders equity and instead requires an entity
to present the total of comprehensive income, the components of net income, and the components of
other comprehensive income either in a single continuous statement or in two separate but
consecutive statements. This guidance is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with early adoption permitted. The adoption of
this ASU will not have a significant impact on the Companys consolidated financial statements as
it only requires a change in the format of the current presentation.
16. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION
Pregis Holdings II (presented as Parent in the following schedules), through its 100%-owned
subsidiary, Pregis Corporation (presented as Issuer in the following schedules), issued senior
secured notes and senior subordinated notes in connection with its acquisition by AEA Investors LP
and its affiliates. The senior notes are fully, unconditionally and jointly and severally
guaranteed on a senior secured basis and the senior subordinated notes are fully, unconditionally
and jointly and severally guaranteed on an unsecured senior subordinated basis, in each case, by
Pregis Holdings II and substantially all existing and future 100%-owned domestic restricted
subsidiaries of Pregis Corporation (collectively, the Guarantors). All other
16
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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 ABL credit facility 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 ABL credit facility 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.
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
June 30, 2011
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 2011
(unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 5,260 | $ | 463 | $ | 15,070 | $ | | $ | 20,793 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 36,699 | 105,908 | | 142,607 | ||||||||||||||||||
Affiliates |
| 132,572 | 173,968 | (9,908 | ) | (296,632 | ) | | ||||||||||||||||
Other |
| | 362 | 15,278 | | 15,640 | ||||||||||||||||||
Inventories, net |
| | 22,187 | 81,928 | | 104,115 | ||||||||||||||||||
Deferred income taxes |
| 134 | 3,070 | 528 | | 3,732 | ||||||||||||||||||
Due from Pactiv |
| 96 | | 1,078 | | 1,174 | ||||||||||||||||||
Prepayments and other current assets |
| 4,882 | 632 | 5,978 | | 11,492 | ||||||||||||||||||
Total current assets |
| 142,944 | 237,381 | 215,860 | (296,632 | ) | 299,553 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
8,941 | 495,346 | | | (504,287 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 971 | 54,190 | 149,710 | | 204,871 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 100,684 | 41,172 | | 141,856 | ||||||||||||||||||
Intangible assets, net |
| | 33,392 | 18,383 | | 51,775 | ||||||||||||||||||
Restricted cash |
| 3,502 | | | | 3,502 | ||||||||||||||||||
Other |
| 6,517 | 3,535 | 15,672 | | 25,724 | ||||||||||||||||||
Total other assets |
| 10,019 | 137,611 | 75,227 | | 222,857 | ||||||||||||||||||
Total assets |
$ | 8,941 | $ | 649,280 | $ | 429,182 | $ | 440,797 | $ | (800,919 | ) | $ | 727,281 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | 128 | $ | | $ | 128 | ||||||||||||
Accounts payable |
| 8,502 | 19,173 | 81,859 | | 109,534 | ||||||||||||||||||
Accounts payable, affiliate |
| 129,569 | 139,589 | 27,332 | (296,490 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,596 | ) | 1,272 | 3,541 | | 3,217 | |||||||||||||||||
Accrued payroll and benefits |
| 1,171 | 3,775 | 10,208 | | 15,154 | ||||||||||||||||||
Accrued interest |
| 8,169 | | 33 | | 8,202 | ||||||||||||||||||
Other |
| 3,452 | 6,165 | 9,926 | | 19,543 | ||||||||||||||||||
Total current liabilities |
| 149,267 | 169,974 | 133,027 | (296,490 | ) | 155,778 | |||||||||||||||||
Long-term debt |
| 496,991 | | 25,113 | | 522,104 | ||||||||||||||||||
Intercompany balances |
| | 77,385 | 299,590 | (376,975 | ) | | |||||||||||||||||
Deferred income taxes |
| (13,957 | ) | 24,625 | 3,473 | | 14,141 | |||||||||||||||||
Other long-term liabilities |
| 8,038 | 7,508 | 10,771 | | 26,317 | ||||||||||||||||||
Total Stockholders equity |
8,941 | 8,941 | 149,690 | (31,177 | ) | (127,454 | ) | 8,941 | ||||||||||||||||
Total liabilities and stockholders equity |
$ | 8,941 | $ | 649,280 | $ | 429,182 | $ | 440,797 | $ | (800,919 | ) | $ | 727,281 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Balance Sheet
December 31, 2010
Condensed Consolidating Balance Sheet
December 31, 2010
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 19,019 | $ | 763 | $ | 28,063 | $ | | $ | 47,845 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Trade, net of allowances |
| | 33,165 | 85,671 | | 118,836 | ||||||||||||||||||
Affiliates |
| 67,201 | 90,017 | 4,334 | (161,552 | ) | | |||||||||||||||||
Other |
| | 9 | 18,564 | | 18,573 | ||||||||||||||||||
Inventories, net |
| | 23,521 | 65,454 | | 88,975 | ||||||||||||||||||
Deferred income taxes |
| 134 | 3,070 | 495 | | 3,699 | ||||||||||||||||||
Due from Pactiv |
| 56 | | 1,105 | | 1,161 | ||||||||||||||||||
Prepayments and other current assets |
| 4,269 | 1,488 | 3,374 | | 9,131 | ||||||||||||||||||
Total current assets |
| 90,679 | 152,033 | 207,060 | (161,552 | ) | 288,220 | |||||||||||||||||
Investment in subsidiaries /
intercompany balances |
26,531 | 475,692 | | | (502,223 | ) | | |||||||||||||||||
Property, plant and equipment, net |
| 1,042 | 55,764 | 141,454 | | 198,260 | ||||||||||||||||||
Other assets |
||||||||||||||||||||||||
Goodwill |
| | 100,684 | 39,111 | | 139,795 | ||||||||||||||||||
Intangible assets, net |
| | 35,121 | 18,521 | | 53,642 | ||||||||||||||||||
Restricted cash |
| 3,501 | | | | 3,501 | ||||||||||||||||||
Other |
| 4,836 | 3,527 | 16,917 | | 25,280 | ||||||||||||||||||
Total other assets |
| 8,337 | 139,332 | 74,549 | | 222,218 | ||||||||||||||||||
Total assets |
$ | 26,531 | $ | 575,750 | $ | 347,129 | $ | 423,063 | $ | (663,775 | ) | $ | 708,698 | |||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 42,500 | $ | | $ | 3,863 | $ | | $ | 46,363 | ||||||||||||
Accounts payable |
| 5,243 | 22,537 | 73,486 | | 101,266 | ||||||||||||||||||
Accounts payable, affiliate |
| 50,104 | 62,896 | 48,415 | (161,415 | ) | | |||||||||||||||||
Accrued income taxes |
| (1,597 | ) | 1,665 | 2,903 | | 2,971 | |||||||||||||||||
Accrued payroll and benefits |
| 446 | 4,456 | 9,724 | | 14,626 | ||||||||||||||||||
Accrued interest |
| 7,619 | | 35 | | 7,654 | ||||||||||||||||||
Other |
| 5,136 | 6,137 | 9,630 | | 20,903 | ||||||||||||||||||
Total current liabilities |
| 109,451 | 97,691 | 148,056 | (161,415 | ) | 193,783 | |||||||||||||||||
Long-term debt |
| 442,625 | | 283 | | 442,908 | ||||||||||||||||||
Intercompany balances |
| | 77,384 | 276,200 | (353,584 | ) | | |||||||||||||||||
Deferred income taxes |
| (12,373 | ) | 24,625 | 3,777 | | 16,029 | |||||||||||||||||
Other long-term liabilities |
| 9,516 | 7,694 | 12,237 | | 29,447 | ||||||||||||||||||
Total Stockholders equity |
26,531 | 26,531 | 139,735 | (17,490 | ) | (148,776 | ) | 26,531 | ||||||||||||||||
Total liabilities and stockholders equity |
$ | 26,531 | $ | 575,750 | $ | 347,129 | $ | 423,063 | $ | (663,775 | ) | $ | 708,698 | |||||||||||
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Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2011
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2011
(Unaudited)
Non- | ||||||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 89,948 | $ | 155,265 | $ | (3,050 | ) | $ | 242,163 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 65,619 | 128,085 | (3,050 | ) | 190,654 | |||||||||||||||||
Selling, general and administrative |
| 3,692 | 10,799 | 16,694 | | 31,185 | ||||||||||||||||||
Depreciation and amortization |
| 129 | 4,656 | 7,700 | | 12,485 | ||||||||||||||||||
Other operating expense, net |
| 241 | (29 | ) | (30 | ) | | 182 | ||||||||||||||||
Total operating costs and expenses |
| 4,062 | 81,045 | 152,449 | (3,050 | ) | 234,506 | |||||||||||||||||
Operating income (loss) |
| (4,062 | ) | 8,903 | 2,816 | | 7,657 | |||||||||||||||||
Interest expense, net of interest income |
| 3,721 | 2,394 | 5,969 | | 12,084 | ||||||||||||||||||
Foreign exchange (gain) loss, net |
| (324 | ) | | 798 | | 474 | |||||||||||||||||
Equity in loss of subsidiaries |
4,910 | (2,213 | ) | | | (2,697 | ) | | ||||||||||||||||
Income (loss) before income taxes |
(4,910 | ) | (5,246 | ) | 6,509 | (3,951 | ) | 2,697 | (4,901 | ) | ||||||||||||||
Income tax expense (benefit) |
| (336 | ) | 17 | 328 | | 9 | |||||||||||||||||
Net income (loss) |
$ | (4,910 | ) | $ | (4,910 | ) | $ | 6,492 | $ | (4,279 | ) | $ | 2,697 | $ | (4,910 | ) | ||||||||
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)
Non- | ||||||||||||||||||||||||
Guarantor | 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, net of interest income |
| 3,555 | 3,185 | 4,888 | | 11,628 | ||||||||||||||||||
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 | ) | ||||||||
20
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2011
(Unaudited)
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2011
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net Sales |
$ | | $ | | $ | 173,953 | $ | 300,997 | $ | (5,789 | ) | $ | 469,161 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales, excluding depreciation
and amortization |
| | 128,495 | 246,298 | (5,789 | ) | 369,004 | |||||||||||||||||
Selling, general and administrative |
| 9,019 | 21,594 | 33,646 | | 64,259 | ||||||||||||||||||
Depreciation and amortization |
| 261 | 9,118 | 15,476 | | 24,855 | ||||||||||||||||||
Other operating expense, net |
| 498 | (35 | ) | 14 | | 477 | |||||||||||||||||
Total operating costs and expenses |
| 9,778 | 159,172 | 295,434 | (5,789 | ) | 458,595 | |||||||||||||||||
Operating income (loss) |
| (9,778 | ) | 14,781 | 5,563 | | 10,566 | |||||||||||||||||
Interest expense, net of interest income |
| 8,958 | 4,788 | 11,468 | | 25,214 | ||||||||||||||||||
Foreign exchange (gain) loss, net |
| (1,269 | ) | | 615 | | (654 | ) | ||||||||||||||||
Equity in loss of subsidiaries |
12,649 | (2,807 | ) | | | (9,842 | ) | | ||||||||||||||||
Income (loss) before income taxes |
(12,649 | ) | (14,660 | ) | 9,993 | (6,520 | ) | 9,842 | (13,994 | ) | ||||||||||||||
Income tax expense (benefit) |
| (2,011 | ) | 37 | 629 | | (1,345 | ) | ||||||||||||||||
Net income (loss) |
$ | (12,649 | ) | $ | (12,649 | ) | $ | 9,956 | $ | (7,149 | ) | $ | 9,842 | $ | (12,649 | ) | ||||||||
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)
Guarantor | Non-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, net of interest income |
| 6,931 | 6,451 | 10,214 | | 23,596 | ||||||||||||||||||
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 | ) | ||||||||
21
Table of Contents
Pregis Holding II Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2011
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2011
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (12,649 | ) | $ | (12,649 | ) | $ | 9,956 | $ | (7,149 | ) | $ | 9,842 | $ | (12,649 | ) | ||||||||
Non-cash adjustments |
12,649 | (1,913 | ) | 9,072 | 15,928 | (9,842 | ) | 25,894 | ||||||||||||||||
Changes in operating assets and
liabilities, net of effects of acquisitions |
| 20,944 | (13,213 | ) | (31,697 | ) | | (23,966 | ) | |||||||||||||||
Cash provided by (used in)
operating activities |
| 6,382 | 5,815 | (22,918 | ) | | (10,721 | ) | ||||||||||||||||
Investing activities |
||||||||||||||||||||||||
Capital expenditures |
| (190 | ) | (6,172 | ) | (12,593 | ) | | (18,955 | ) | ||||||||||||||
Proceeds from sale of assets |
| | 57 | 354 | | 411 | ||||||||||||||||||
Acquisition of business, net of cash acquired |
| (673 | ) | | | (673 | ) | |||||||||||||||||
Change in restricted cash |
| (1 | ) | | | (1 | ) | |||||||||||||||||
Cash used in investing activities |
| (864 | ) | (6,115 | ) | (12,239 | ) | | (19,218 | ) | ||||||||||||||
Financing activities |
||||||||||||||||||||||||
Repayment of long-term debt |
| (43,000 | ) | | | | (43,000 | ) | ||||||||||||||||
Proceeds from ABL credit facility |
| 27,783 | | 20,000 | | 47,783 | ||||||||||||||||||
Proceeds from revolving credit facility |
| 500 | | | | 500 | ||||||||||||||||||
Proceeds from local lines of credit draws |
| | | 765 | 765 | |||||||||||||||||||
Deferred financing fees |
| (4,560 | ) | | | | (4,560 | ) | ||||||||||||||||
Other, net |
| | | 82 | | 82 | ||||||||||||||||||
Cash provided by (used in)
financing activities |
| (19,277 | ) | | 20,847 | | 1,570 | |||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| | | 1,317 | | 1,317 | ||||||||||||||||||
Decrease in cash
and cash equivalents |
| (13,759 | ) | (300 | ) | (12,993 | ) | | (27,052 | ) | ||||||||||||||
Cash and cash equivalents,
beginning of period |
| 19,019 | 763 | 28,063 | | 47,845 | ||||||||||||||||||
Cash and cash equivalents,
end of period |
$ | | $ | 5,260 | $ | 463 | $ | 15,070 | $ | | $ | 20,793 | ||||||||||||
22
Table of Contents
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 revolving credit facility |
| 500 | | | | 500 | ||||||||||||||||||
Proceeds from local lines of credit draws |
| | | 8,992 | 8,992 | |||||||||||||||||||
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 | ||||||||||||
23
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this report and the Companys audited
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2010.
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 our need to comply with various negative and other covenants contained in our debt agreements; | ||
| risks associated with our ability to access existing liquidity and/or access the debt or equity markets; | ||
| 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; | ||
| our ability to retain management; | ||
| 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, both in the U.S. and worldwide; | ||
| risks related to our acquisition or divestiture strategy; | ||
| our ability to protect our intellectual property rights; | ||
| changes in governmental laws and regulations, including environmental laws and regulations; | ||
| changes in foreign currency exchange rates; and | ||
| other risks and uncertainties, including those described in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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
24
Table of Contents
to publicly announce the results of any revisions to any of such statements to
reflect future events or developments.
OVERVIEW
We are an international manufacturer, marketer and supplier of protective packaging products
and specialty packaging solutions. We currently operate 46 facilities in 18 countries, with
approximately 4,000 employees world-wide. We sell our products to a wide array of customers,
including retailers, distributors, packer processors, hospitals, fabricators and directly to the
end-users. Approximately 63% of our 2010 net sales were generated outside of the U.S., so we are
sensitive to fluctuations in foreign currency exchange rates, primarily between the euro and pound
sterling with the U.S. dollar.
Our net sales for the three and six months ended June 30, 2011 increased 11.2% and 9.7%,
respectively, over the comparable periods of 2010. The increase was driven primarily by the impact
of selling price increases, favorable currency translation, increased volumes from the Companys
growth initiatives, and incremental sales associated with the acquisition of IntelliPack.
Excluding the impact of favorable foreign currency translation and the net sales of the partial
first quarter of IntelliPack, net sales for the three and six months ended June 30, 2011 increased
4.3% and 5.8%, respectively, compared to the same periods in 2010.
Our gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization) as a percent of net sales was 21.3% for both the three and six months ended June 30,
2011, compared to 21.3% and 22.0% for the same periods of 2010. The year-to-date decline in our
2011 gross margin percentage was driven primarily by increased key raw material costs partially
offset by the impact of selling price increases. 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 2011 as compared to the same period of 2010, average
resin costs increased approximately 14% in North America and 22% in Europe, as measured by the
Chemical Market Associates, Inc. (CMAI) index and ICIS index, their respective market indices.
In March 2011, the Company successfully refinanced its existing $50 million revolving credit
facility with a new $75 million ABL credit facility. This refinancing addressed the October 2011
maturity of our old revolving credit facility while providing additional borrowing capacity.
25
Table of Contents
RESULTS OF OPERATIONS
Net Sales
Our net sales for the three and six months ended June 30, 2011 compared to the same periods
ended June 30, 2010 are summarized by segment as follows:
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 151,562 | $ | 138,251 | $ | 13,311 | 9.6 | % | $ | 5,602 | 4.0 | % | $ | (2 | ) | | % | $ | | | % | $ | 7,711 | 5.6 | % | |||||||||||||||||||||||
Specialty Packaging |
90,601 | 79,550 | 11,051 | 13.9 | % | 4,363 | 5.5 | % | (747 | ) | (0.9 | )% | | | % | 7,435 | 9.3 | % | ||||||||||||||||||||||||||||||
Total |
$ | 242,163 | $ | 217,801 | $ | 24,362 | 11.2 | % | $ | 9,965 | 4.6 | % | $ | (749 | ) | (0.3 | )% | $ | | | % | $ | 15,146 | 6.9 | % | |||||||||||||||||||||||
Change Attributable to the | ||||||||||||||||||||||||||||||||||||||||||||||||
Following Factors | ||||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, | Price / | Currency | ||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | Mix | Volume | Acquisition | Translation | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment: |
||||||||||||||||||||||||||||||||||||||||||||||||
Protective Packaging |
$ | 297,580 | $ | 273,111 | $ | 24,469 | 9.0 | % | $ | 12,612 | 4.6 | % | $ | 2,774 | 1.0 | % | $ | 2,339 | 0.9 | % | $ | 6,744 | 2.5 | % | ||||||||||||||||||||||||
Specialty Packaging |
171,581 | 154,726 | 16,855 | 10.9 | % | 8,576 | 5.6 | % | 830 | 0.5 | % | | | % | 7,449 | 4.8 | % | |||||||||||||||||||||||||||||||
Total |
$ | 469,161 | $ | 427,837 | $ | 41,324 | 9.7 | % | $ | 21,188 | 5.0 | % | $ | 3,604 | 0.8 | % | $ | 2,339 | 0.5 | % | $ | 14,193 | 3.4 | % | ||||||||||||||||||||||||
Segment Net Sales
Volume in the Companys protective packaging segment was flat for the three months ended June
30, 2011 and increased by 1.0% for the six month period ended June 30, 2011 compared to the same
period in 2010. The year-over-year volume increase for the period was driven primarily by the
Companys growth initiatives in inflatable systems.
Price/mix for the Companys protective packaging segment increased net sales by 4.0% and 4.6%
for the three and six month periods ended June 30, 2011 compared to the same periods in 2010.
Price/mix was favorable for both the three and six months ended June 30, 2011 due to selling price
increases implemented for both our North American and European businesses, over the last twelve
months in response to increased key raw material costs.
Volume in the Companys specialty packaging segment decreased by 0.9% for the three months
ended June 30, 2011 and increased 0.5% for the six months ended June 30, 2011 compared to the same
periods of 2010.
Price/mix for the Companys specialty packaging segment increased net sales by 5.5% and 5.6%
for the three and six months ended June 30, 2011 compared to the same periods in 2010. Price/mix
was favorable year-to-date due primarily to selling price increases implemented in our flexible
packaging business in response to increased key raw material costs.
26
Table of Contents
Gross Margin
Gross margin (defined as net sales less cost of sales, excluding depreciation and
amortization), as a percent of net sales, was 21.3% for both the three and six months ended June
30, 2011 compared to 21.3% and 22.0% for the same periods of 2010. The quarter-over-quarter
results were flat compared to a 70 basis points decrease year-to-date. This year-to-date decrease
was due to increased key raw material costs and was partially offset by the impact of selling price
increases and increased volumes. The increase in key raw material costs resulted in a negative 111
basis point impact on gross margin as a percent of net sales.
Average resin costs in North America for the three and six month periods ended June 30, 2011
were 16% and 14% higher, respectively, than average resin costs for the same periods in 2010 while
average resin costs in Europe were 16% and 22% higher, respectively, than average resin prices for
the same periods of 2010, based on their respective market indices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.6 million for the three months
ended June 30, 2011 compared to the same period of 2010. This increase was primarily driven by
unfavorable foreign currency translation. Excluding the impact of unfavorable foreign currency
translation selling, general and administrative expenses for the three months ended June 30, 2011
decreased by approximately $0.8 million.
Selling, general and administrative expenses decreased by $2.2 million for the six months
ended June 30, 2011 compared to the same period of 2010. This decrease was primarily driven by
legal expenses and 2010 acquisition related fees not incurred in 2011, partially offset by 2011
unfavorable foreign currency translation, severance expense, and incremental IntelliPack expenses
for the full first quarter of 2011 compared to a partial first quarter in 2010. The 2010 legal
expenses were the result of a patent dispute related to the Companys protective packaging segment.
In March 2010, there was an initial ruling which was favorable to the Company. As of June 30, 2011
there is a pending appeal regarding this legal matter which the Company also believes will have a
favorable outcome to the Company. Excluding the impact of unfavorable foreign currency
translation, legal expenses, and acquisition related costs, selling, general and administrative
expenses for the six months ended June 30, 2011 were flat compared to the same period in 2010.
Other Operating Expense, net
For the three and six months ended June 30, 2011, other operating expense, net totaled $0.2
million and $0.5 million, respectively, compared to $0.9 million and $1.6 million, respectively, in
the same periods of
2010. We recorded restructuring charges of $0.5 million and $1.0 million for the six months
ended June 30, 2011 and 2010, respectively. Restructuring charges were primarily related to
consulting expenses. See Note 8 to the unaudited consolidated financial statements for details
regarding our restructuring activity.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $1.0 million and $2.2 million for the three
and six months ended June 30, 2011, respectively, compared to the same periods of 2010, primarily
due to the IntelliPack expenses for the full first quarter of 2011 compared to a partial first
quarter in 2010 and the impact of unfavorable foreign currency translation.
27
Table of Contents
Segment Income
We measure our segments operating performance on the basis of segment EBITDA, defined as net
income (loss) before interest, taxes, depreciation, amortization, and restructuring expense and
adjusted for other non-cash charges and benefits. See Note 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, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 14,582 | $ | 10,658 | $ | 3,924 | 36.8 | % | ||||||||
Specialty Packaging |
9,756 | 9,857 | (101 | ) | (1.0 | )% | ||||||||||
Total segment
EBITDA |
$ | 24,338 | $ | 20,515 | $ | 3,823 | 18.6 | % | ||||||||
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Segment: |
||||||||||||||||
Protective Packaging |
$ | 26,757 | $ | 21,439 | $ | 5,318 | 24.8 | % | ||||||||
Specialty Packaging |
18,850 | 19,401 | (551 | ) | (2.8 | )% | ||||||||||
Total segment
EBITDA |
$ | 45,607 | $ | 40,840 | $ | 4,767 | 11.7 | % | ||||||||
Segment EBITDA for the Protective Packaging segment increased $3.9 million and $5.3 million
for the three and six months ended June 30, 2011 compared to the same periods of 2010. These
increases were primarily due to the impact from selling price increases, increased volumes, and the
impact of the IntelliPack acquisition partially offset by increased key raw material costs.
Segment EBITDA for specialty packaging decreased by $0.1 million and $0.6 million for the
three and six months ended June 30, 2011 compared to the same periods of 2010. These decreases
were due to higher key raw material costs which were only partially offset by the impact of selling
price increases.
Interest Expense
Interest expense for the three and six months ended June 30, 2011 increased $0.5 million and
$1.6 million, respectively, compared to the same periods of 2010. The year-to-date increase was
primarily driven by unfavorable foreign currency translation and increased interest expense on the
Companys euro denominated debt.
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.
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Income Tax Expense
Our effective income tax rate was approximately (9.61)% for the six months ended June 30,
2011, compared to approximately (25.42)% for the six months ended June 30, 2010. For the six
months ended June 30, 2011 and 2010, the Companys effective rate differs from the U.S. federal
statutory rate of 35% primarily due to the establishment of additional valuation allowances against
losses in certain jurisdictions that are not expected to result in future tax benefits.
Net Loss
For the three and six months ended June 30, 2011, we had a net loss of $4.9 million and $12.6
million, respectively, compared to a net loss of $3.6 million and $15.8 million in the comparable
periods of 2010. As discussed herein, the 2011 net loss is mainly the result of increased key raw
material costs partially offset by increases in selling prices and increased sales volumes.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our sources and uses of funds for the six months ended June 30, 2011
compared to the six months ended June 30, 2010:
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(dollars in thousands) | ||||||||
Cash used in operating activities |
$ | (10,721 | ) | $ | (5,179 | ) | ||
Cash used in investing activities |
(19,218 | ) | (49,045 | ) | ||||
Cash provided by financing activities |
1,570 | 9,469 | ||||||
Effect of foreign exchange rate changes |
1,317 | (3,897 | ) | |||||
Decrease in cash and cash equivalents |
$ | (27,052 | ) | $ | (48,652 | ) | ||
Operating Activities. Cash used in operating activities increased by $5.5
million during the six months ended June 30, 2011 compared to the same period of 2010. This
increase was driven primarily by increased working capital investment due to the increased
year-over-year sales volumes, unfavorable foreign currency translation, and increased key raw
material costs.
Cash from operating activities is sensitive to raw material costs and the Companys ability to
recover increases in these costs from its customers. Although price increases have typically
lagged the underlying change in raw material costs, the Company has historically been able to
recover significant increases in underlying raw material costs from its customers over a twelve to
twenty-four month period. Future cash from operations is 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. Significant increases in resin pricing
could negatively affect our cash generated from operating activities in future periods.
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Investing Activities. Cash used in investing activities totaled $19.2 million for the six
months ended June 30, 2011, a decrease of $29.8 million compared to the same period of 2010. This
decrease was primarily the result of the 2010 acquisition of IntelliPack and was partially offset
by increased capital expenditures. In February 2010, Pregis acquired all of the stock of
IntelliPack for an initial purchase price of $31.5 million and certain escrowed amounts totaling
$3.5 million, which was funded with cash-on-hand. In accordance with the terms of the agreement,
additional consideration up to a maximum amount of $11.5 million may be payable by Pregis if
certain future performance targets are achieved by IntelliPack. As of June 30, 2011 the Company
has paid $0.7 million related to this contingency. Capital expenditures totaled $19.0 million in
the 2011 period compared to $14.3 million in the 2010 period, driven by investments for capacity
expansion in our specialty segment.
Financing Activities. Cash provided by financing activities totaled $1.6 million for
the six months ended June 30, 2011 compared to $9.5 million for the same period in 2010. During 2011, proceeds from the ABL credit facility of $47.8 million were used for repayment of the senior secured credit facility of $43.0 million and $4.6 million in deferred financing fees associated with the ABL credit facility.
The decrease between years was primarily related to an $8.2 million decrease in our foreign lines of credit
draws.
Our liquidity requirements are significant, primarily due to debt service requirements and
capital investment in our businesses. We expect our 2011 capital expenditures to total
approximately $30 to $35 million and our 2011 debt service costs to total approximately $40
million. At June 30, 2011, we had cash and cash equivalents of $20.8 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 the ABL credit facility and foreign lines of
credit.
ABL Credit Facility. On March 23, 2011, Pregis Holding II and Pregis and certain of their
subsidiaries entered into a $75 million Credit Agreement with Wells Fargo Capital Finance, LLC, as
agent, Wells Fargo Bank, National Association, as lender and other lenders from time to time
parties thereto (the ABL credit facility). The ABL credit facility provides for the borrowings
in dollars, euros and pounds sterling and consists of (1) a UK facility, under which certain UK
subsidiaries of Pregis (the UK Borrowers) may from time to time borrow up to a maximum amount of
the lesser of the UK borrowing base and $30 million and (2) a US facility, under which certain US
subsidiaries of Pregis (the US Borrowers and, together with the UK Borrowers, the Borrowers)
may from time to time borrow up to a maximum amount of the lesser of the US borrowing base and $75
million less amounts outstanding under the UK facility. The borrowing base is calculated on the
basis of certain permitted over advance amounts, plus a percentage of certain eligible accounts
receivable and eligible inventory, subject to reserves established by the agent from time to time.
The ABL credit facility provides for the issuance of letters of credit and a swingline subfacility.
The ABL credit facility also provides for future uncommitted increases of its maximum amount, not
to exceed $40 million.
The ABL credit facility matures on the earlier of (a) March 22, 2016 and (b) January 15, 2013
or July 15, 2013, which is 90 days prior to the maturity of the existing senior secured notes and
senior subordinated notes, respectively, unless these notes are (i) redeemed, discharged or
defeased in full 90 days prior to maturity and (ii) refinanced with proceeds from permitted
indebtedness as defined in the
ABL agreement with a maturity date at least 90 days after March 22, 2016. Advances under the
ABL credit facility bear interest, at the Borrowers option, equal to adjusted LIBOR plus an
applicable margin for LIBOR loans or a base rate plus an applicable margin base rate loans. The
applicable margin for LIBOR loans ranges from 2.5% to 3%, depending on the average quarterly excess
availability of the
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Borrowers. The applicable margin for the base rate loans is 100 basis points
lower than the applicable margin for LIBOR loans.
All obligations under the ABL credit facility are guaranteed by Pregis Holding II and certain
of its direct and indirect subsidiaries (other than certain non wholly-owned and immaterial
subsidiaries and certain foreign subsidiaries), with foreign guarantors guaranteeing only the
obligations of the UK Borrowers. All obligations under the ABL credit facility and the guarantees
of those obligations are secured, subject to certain exceptions, by a first-priority security
interest in substantially all of the assets of the Pregis Holding II, the Borrowers and the
guarantors, as well as the pledge of 100% of the capital stock of the Borrowers, the guarantors and
their direct subsidiaries, with the obligations of the US Borrowers being secured only by (1) a
first-priority security interest in substantially all assets of the Pregis Holding II, the US
Borrowers and the domestic guarantors, (2) a pledge of 100% of the capital stock of the US
Borrowers, the domestic guarantors and their direct domestic subsidiaries and (3) a pledge of 65%
of the voting capital stock and 100% of the non-voting capital stock of the first-tier foreign
subsidiaries of the US Borrowers and domestic guarantors. The security interest in the domestic
collateral ranks prior to the security interest securing the Companys existing second priority
floating rate notes due 2013. The lenders under the ABL credit facility have agreed to share their
domestic collateral with future secured notes, if any, that refinance the existing notes, with the
ABL credit facility retaining a first priority security interest in all accounts receivable,
inventory and certain related assets of the Pregis Holding II, the US Borrowers and the domestic
guarantors and subordinating its security interest in all other domestic assets and the capital
stock of the US Borrowers, domestic guarantors and their direct subsidiaries to the liens securing
such new secured notes, if any.
The ABL credit facility contains customary representations, warranties, covenants and events
of default, and requires monthly compliance with a springing fixed charge coverage ratio of 1.1
to 1.0 if the excess availability of Pregis and its subsidiaries falls below a certain level. The
ABL credit facility is also subject to mandatory prepayments out of certain asset sale, insurance
and condemnation proceeds, if the excess availability of Pregis and its subsidiaries falls below a
certain level.
As of June 30, 2011, borrowings under the ABL credit facility totaled $47.8 million,
outstanding letters of credit were $6.3 million, and remaining availability was $20.9 million. The
Company utilized proceeds from the ABL to pay off and terminate its pre-existing $50 million
revolving credit facility.
Senior Secured Floating Rate Notes and Senior Subordinated Notes. On October 13, 2005, Pregis
issued 100.0 million aggregate principal amount of second priority senior secured floating rate
notes due 2013 (the senior secured notes) and $150 million aggregate principal amount of 12⅜%
senior subordinated notes due 2013 (the senior subordinated notes).
The senior secured notes mature on April 15, 2013. Interest accrues at a floating rate equal
to EURIBOR plus 5.00% per year and is payable quarterly on January 15, April 15, July 15 and
October 15 of each year. The senior secured notes are guaranteed on a senior secured basis by
Pregis Holding II, Pregiss immediate parent, and each of Pregiss current and future domestic
subsidiaries. At its option, Pregis may redeem some or all of the senior secured notes at 100% of
their principal amount. Upon the occurrence of a change of control, Pregis will be required to
make an offer to repurchase each holders notes at a repurchase price equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of repurchase.
The senior subordinated notes mature on October 15, 2013. Interest accrues at a rate of 12⅜%
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 at
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redemption prices equal to 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 2009 senior secured notes). 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 greater than 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.
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, 2010, the capital stock of the following subsidiaries of Pregis constituted
collateral for the senior secured floating rate notes:
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As of December 31, 2010 | ||||||||||||
Amount of Collateral | ||||||||||||
(Maximum of Book Value | Market Value | |||||||||||
and Market Value, | Book Value of | of Capital | ||||||||||
Name of Subsidiary | Subject to 20% Cap) | Capital Stock | Stock | |||||||||
Pregis Innovative Packaging Inc. |
$ | 60,165,000 | $ | 50,300,000 | $ | 112,300,000 | ||||||
Hexacomb Corporation |
$ | 43,400,000 | $ | 43,300,000 | $ | 37,200,000 | ||||||
IntelliPack |
$ | 38,300,000 | $ | 38,300,000 | $ | 9,100,000 | ||||||
Pregis (Luxembourg) Holding S.àr.l. (66%) |
$ | 17,300,000 | $ | 17,300,000 | $ | | ||||||
Pregis Management Corporation |
$ | 100 | $ | 100 | $ | 100 |
As described above, under the collateral agreement, the capital stock pledged to the
senior secured 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 notes. This threshold is 45,000,000, or, at the
December 31, 2010 exchange rate of U.S. dollars to euro of 1.3370:1.00, approximately $60.2
million. As of December 31, 2010, the book value and the market value of the shares of capital
stock of Pregis Innovative Packaging Inc. were approximately $50.3 million and $112.3 million,
respectively; the book value and the market value of the shares of capital stock of Hexacomb
Corporation were approximately $43.3 million and $37.2 million respectively; the book value of and
the market value of the shares of capital stock of IntelliPack were approximately $38.3 million and
$9.1 million respectively; and the book value and the market value of 66% of the shares of capital
stock of Pregis (Luxembourg) Holding S.àr.l. were approximately $17.3 million and $ million,
respectively. Therefore, in accordance with the collateral agreement, the collateral pool for the
senior secured floating rate notes includes approximately $60.2 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.ar.l
are each less than the $60.2 million threshold, they are not effected by the 20% clause of the
collateral agreement.
For purposes of calculating book value for the year ended December 31, 2010 in the table
above, certain historical equity relating to corporate expenses incurred by Pregis Management
Corporation were allocated to each of the three entities, Pregis Innovative Packaging Inc.,
Hexacomb Corporation, and Pregis (Luxembourg) Holding S.àr.l, in order to better reflect their
current book values for presentation herein on a fully-allocated basis.
The market value of the capital stock of the guarantors and subsidiaries constituting
collateral for the senior secured 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 necessary to
determine our compliance with the collateral arrangement governing the notes.
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The value of the collateral for the senior secured 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, 2010, the value of the collateral for the senior secured floating rate notes totaled
approximately $617.7 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 $459.2 million),
and (2) the collateral value of the capital stock, as outlined above (which amount totaled $158.5
million). Any proceeds received upon the sale of collateral would be paid first to the lenders
under our ABL credit facility, who have a first lien security interest in the collateral, before
any payment could be made to holders of the senior secured notes. There is no assurance that any
collateral value would remain for the holders of the senior secured notes after payment in full to
the lenders under our ABL credit facility.
Covenant Ratios Contained in the Senior Secured Notes and Senior Subordinated Notes. The
indentures governing the senior secured 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 ABL credit facility or other indebtedness we may incur in the future. First, Pregis is
permitted to incur indebtedness under the indentures if the ratio of Consolidated Cash Flow to
Fixed Charges on a pro forma basis (referred to in the indentures as the Fixed Charge Coverage
Ratio) is greater than 2:1 or, if the ratio is less, only if the indebtedness falls into specified
debt baskets, including, for example, a credit agreement debt basket, an existing debt basket, a
capital lease and purchase money debt basket, an intercompany debt basket, a permitted guarantee
debt basket, a hedging debt basket, a receivables transaction debt basket and a general debt
basket. In addition, under the senior secured floating rate notes indenture, Pregis is permitted
to incur first priority secured debt only if the ratio of Secured Indebtedness to Consolidated Cash
Flow on a pro forma basis (referred to in the senior secured floating rate notes indenture as the
Secured Indebtedness Leverage Ratio) is equal to or less than 3:1, plus $50 million. Second, the
restricted payment covenant provides that Pregis may declare certain dividends, or repurchase
equity securities, in certain circumstances only if Pregiss Fixed Charge Coverage Ratio is greater
than 2:1.
As used in the calculation of the Fixed Charge Coverage Ratio and the Secured Indebtedness
Leverage Ratio, Consolidated Cash Flow, commonly referred to as Adjusted EBITDA, is calculated by
adding Consolidated Net Income, income taxes, interest expense, depreciation and amortization and
other non-cash expenses, amounts paid pursuant to the management agreement with AEA Investors LP,
and the amount of any restructuring charge or reserve (including, without limitation, retention,
severance, excess pension costs, contract termination costs and cost to consolidate facilities and
relocate employees). In calculating the ratios, Consolidated Cash Flow is further adjusted by
giving pro forma effect to acquisitions and dispositions that occurred in the prior four quarters,
including certain cost savings and synergies expected to be obtained in the succeeding twelve
months. In addition, the term Net Income is adjusted to exclude any gain or loss from the
disposition of securities, and the term Consolidated Net Income is adjusted to exclude, among other
things, the non-cash impact attributable to the application of the purchase method of accounting in
accordance with GAAP, the cumulative effect of a change in accounting principles, and other
extraordinary, unusual or nonrecurring gains or losses. While the determination of appropriate
adjustments is subject to interpretation and requires judgment, we believe the adjustments listed
below are in accordance with the covenants discussed above.
The following table sets forth the Fixed Charge Coverage Ratio, Consolidated Cash Flow
(Adjusted EBITDA), Secured Indebtedness Leverage Ratio, Fixed Charges and Secured Indebtedness as
of and for the twelve months ended June 30, 2011 and 2010:
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Ratios | ||||||||||||
(unaudited) | Covenant | Calculated at June 30, | ||||||||||
(dollars in thousands) | Measure | 2011 | 2010 | |||||||||
Fixed Charge Coverage Ratio (after giving pro forma effect
to acquisitions and/or dispositions occurring in the
reporting period) |
Minimum of 2.0x | 1.9x | 2.1x | |||||||||
Secured Indebtedness Leverage Ratio |
Maximum of 3.0x | 0.7x | 0.62x | |||||||||
Consolidated Cash Flow (Adjusted EBITDA) |
| $ | 79,833 | $ | 82,479 | |||||||
Fixed Charges (after giving pro forma effect to acquisitions
and/or dispositions occurring in the reporting period) |
| $ | 42,863 | $ | 39,095 | |||||||
Secured Indebtedness |
| $ | 53,024 | $ | 51,279 |
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, 2011 and 2010, has been
more than offset by the decrease in the Companys trailing twelve month Consolidated Cash Flow over
the same period, resulting in a reduction in the actual ratio. As of June 30, 2011, the Companys
Fixed Charge Coverage Ratio was less than 2:0. As a result the Companys ability to borrow money
was limited to its available debt baskets, including among others a $220 million credit facility
basket (which has been used in part in order to incur debt under Pregiss ABL credit facility), a
$25 million general basket, and a $15 million capital lease basket.
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, 2011 and 2010 as follows:
(unaudited) | Twelve Months Ended June 30, | |||||||
(dollars in thousands) | 2011 | 2010 | ||||||
Net loss of Pregis Holding II Corporation |
$ | (33,931 | ) | $ | (26,454 | ) | ||
Interest expense, net of interest income |
49,729 | 47,048 | ||||||
Income tax (benefit) expense |
(4,889 | ) | (6,879 | ) | ||||
Depreciation and amortization |
48,651 | 44,665 | ||||||
EBITDA |
59,560 | 58,380 | ||||||
Other non-cash charges (income): (1) |
||||||||
Unrealized foreign currency transaction losses (gains), net |
(790 | ) | (310 | ) | ||||
Non-cash stock based compensation expense |
2,609 | 1,678 | ||||||
Non-cash asset impairment charge |
| 194 | ||||||
Loss on sale leaseback transaction |
1,837 | | ||||||
Net unusual or nonrecurring gains or losses: (2) |
||||||||
Restructuring, severance and related expenses |
8,642 | 6,302 | ||||||
Other unusual or nonrecurring gains or losses |
5,856 | 11,516 | ||||||
Other adjustments: (3) |
||||||||
Amounts paid pursuant to management agreement with Sponsor |
2,119 | 2,442 | ||||||
Pro forma adjusted EBITDA of acquired business (4) |
| 2,277 | ||||||
Adjusted EBITDA (Consolidated Cash Flow) |
$ | 79,833 | $ | 82,479 | ||||
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(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, and (c) 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 these comparable earning in the future. |
Local lines of credit. From time to time, certain of our foreign businesses utilize various
lines of credit in their operations. The first subsidiary line of credit allows for borrowing up
to a certain percentage of such subsidiarys specified accounts receivable. As of June 30, 2011
amounts outstanding under this foreign line of credit totaled $4.8 million. The second line of
credit only allows for issuance of letters of credit ($3.7 million were outstanding at June 30,
2011) and had availability of $2.2 million as of June 30, 2011.
Long-term Liquidity. We believe that cash flow generated from operations, existing cash
balances, and our borrowing capacity 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 for the year ended December 31, 2010 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.
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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 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, 2011.
Although the Company determined that there were no indicators of impairment as of June 30,
2011, 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 2010 Annual Report on Form 10-K. Since the date of our 2010
Form 10-K, there have been no material changes to our critical accounting policies or the
methodologies or assumptions we apply under them.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not materially changed since December 31, 2010. For a
discussion of our exposure to market risk, see our 2010 Annual Report on Form 10-K.
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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, 2011. Based upon
that evaluation, our management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that as of June 30, 2011 the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are
effective. In addition, there has been no change in the Companys internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various lawsuits, legal proceedings and administrative actions arising out of
the normal course of our business. While it is not possible to predict the outcome of any of these
lawsuits, proceedings and actions, management, based on its assessment of the facts and
circumstances now known, does not believe that any of these lawsuits, proceedings and actions,
individually or in the aggregate, will have a material adverse effect on our financial position or
that it is reasonably possible that a loss exceeding amount already recognized may be material.
However, actual outcomes may be different than expected and could have a material effect on our
results of operations or cash flows in a particular period.
Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2010.
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. | |
101.INS* |
XBRL Instance Document | |
101.SCH* |
XBRL Taxonomy Extension Schema | |
101.CAL* |
XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB* |
XBRL Taxonomy Extension Label Linkbase | |
101.PRE* |
XBRL Taxonomy Extension Presentation Linkbase |
* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed.
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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 12, 2011 | By: | /s/ D. Keith LaVanway | ||
D. Keith LaVanway | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) |
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