UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2016

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For The Transition Period From            To             .

 

Commission file numbers: 333-82084-01





Registrant’s telephone number, including area code: (920) 734-9841

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☒    No  ☐

 

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 ☐   No  ☒

 

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   ☒    No  ☐



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒



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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large Accelerated filer  ☐    Accelerated filer  ☐    Non-accelerated filer  ☒    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  ☐    No  ☒



As of March 1, 2017,  6,260,418 shares of Paperweight Development Corp. common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. No shares of Paperweight Development Corp were held by non-affiliates.

 

Documents incorporated by reference: None.

















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EXPLANATORY NOTE



The sole purpose of this Amendment No. 1 on Form 10-K/A (the “Amendment”) to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2016, originally filed with the U.S. Securities and Exchange Commission on March 17, 2017 (the “Original Filing”), is to correct a typographical error on the date of the Independent Auditor’s Report issued by PricewaterhouseCoopers with respect to the Registrant’s consolidated statements of comprehensive income (loss), of redeemable common stock, accumulated deficit and accumulated other comprehensive income, and of cash flows for the year ended January 3, 2015. In the Original Filing, the correct date, March 13, 2015 was inadvertently changed to March 17, 2017 during the filing process.    



No other changes have been made to the Original Filing and the Amendment does not in any other way amend or restate the Company’s previously reported financial statements. This Amendment has not been updated to reflect events occurring subsequent to the filing of the Original Filing and should be read in conjunction with the Original Filing.



 

 

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INDEX 









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Part II



Item 8.            Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm



To the Board of Directors

Paperweight Development Corp.



We have audited the accompanying consolidated balance sheets of Paperweight Development Corp. and its subsidiaries (the Company) as of December 31, 2016 and January 2, 2016 and the related consolidated statements of comprehensive income (loss), cash flows, redeemable common stock, accumulated deficit and accumulated other comprehensive income for the years then ended.  Our audits also included the financial statement schedules of Paperweight Development Corp. and its subsidiaries listed in item 15(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paperweight Development Corp. and its subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.



We also have audited the adjustments to the January 3, 2015 financial statements to retrospectively apply the effects related to discontinued operations, as described in Note 3.   In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the January 3, 2015 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the January 3, 2015 financial statements taken as a whole.



/s/ RSM US LLP

Milwaukee, Wisconsin

March 17, 2017









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Report of Independent Registered Public Accounting Firm



To the Board of Directors of

Paperweight Development Corp.



In our opinion, the consolidated statements of comprehensive income (loss), of redeemable common stock, accumulated deficit and accumulated other comprehensive income, and of cash flows for the year ended January 3, 2015, before the effects of the adjustments to retrospectively reflect the discontinued operations described in Note 3, present fairly, in all material respects, the results of operations and cash flows of Paperweight Development Corp. and its subsidiaries for the year ended January 3, 2015, in conformity with accounting principles generally accepted in the United States of America (the January 3, 2015 financial statements before the effects of the adjustments discussed in Note 3 are not presented herein).  In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) for the year ended January 3, 2015 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements before the effects of the adjustments described above.  These financial statements and financial statement schedules are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.  We conducted our audit, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.



We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations described in Note 3 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied.  Those adjustments were audited by other auditors.









/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 13, 2015







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The accompanying notes are an integral part of these consolidated financial statements.







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The accompanying notes are an integral part of these consolidated financial statements.

















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The accompanying notes are an integral part of these consolidated financial statements.



























































The accompanying notes are an integral part of these consolidated financial statements.



 

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1.       BASIS OF PRESENTATION AND NATURE OF OPERATIONS

 

The accompanying consolidated financial statements, after the elimination of intercompany accounts and transactions, include the accounts of Paperweight Development Corp. (“PDC”) and its 100%-owned subsidiaries (collectively the “Company”), which includes Appvion, Inc. and its 100%-owned subsidiaries (collectively “Appvion”), for the years ended December 31, 2016, January 2, 2016 and January 3, 2015.



NATURE OF OPERATIONS

 

Appvion is the primary operating subsidiary of PDC. The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as well as security technologies. It has two reportable segments: thermal papers and carbonless papers (see Note 22, Segment Information).

 

The thermal papers segment develops and produces substrates for the transaction and item identification markets. Thermal paper is used in four principal end markets: (1) point-of-sale products for retail receipts and coupons; (2) labels for shipping, warehousing, medical and clean-room applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic charts. Point-of-sale products are sold to printers and converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers. Label products are sold to companies who apply pressure sensitive adhesive coatings and release liners and then sell these products to label printers. Tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming tickets, tags, coupons and medical charts. Sales within the thermal papers segment accounted for approximately 59% of consolidated net sales in 2016, 53%  of consolidated net sales in 2015 and 54%  of consolidated net sales in 2014.



The carbonless papers segment includes carbonless, security and other specialty paper products. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company produces coated products for design and print applications and offers custom coating solutions. Carbonless products are sold to converters, printers and merchant distributors who stock and sell carbonless paper to printers. The Company also produces security papers with features that resist forgery, tampering and counterfeiting. The Company’s portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine-readable technologies, to serve global markets. Sales within the carbonless papers segment accounted for approximately 41%  of consolidated net sales in 2016,  47% of consolidated net sales in 2015 and 46%  of consolidated net sales in 2014.



 RELATIONSHIPS WITH FORMER PARENT

 

At the close of business on November 9, 2001, PDC and New Appleton LLC completed the purchase of all the partnership interests of Arjo Wiggins Delaware General Partnership (“AWDGP”) and its 100%-owned subsidiary, Appleton Papers Inc. (now Appvion, Inc.).

 

In conjunction with the acquisition, the Company entered into two indemnification agreements under which Arjo Wiggins Appleton Limited, now known as Windward Prospects Ltd (formerly “AWA”), the former parent of Appvion, agreed to indemnify PDC and PDC agreed to indemnify Appvion for the costs, expenses and liabilities related to certain governmental and third-party environmental claims, referred to as the Fox River Liabilities.

 

Under the indemnification agreements, Appvion is indemnified for the first $75 million of certain costs, expenses and liabilities relating to the Fox River and Future Sites and for amounts in excess of $100 million, including Appvion’s costs and expenses in negotiating and entering into the September 2014 Funding Agreement, Appvion’s historical costs and expenses in defending against the U.K. litigation and any future costs and expenses incurred by Appvion in pursuing recoveries (see Note 17, Commitments and Contingencies). During 2008, Appvion paid $25 million to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA.



On September 30, 2014, Appvion entered into a Funding Agreement with Windward, NCR, and B.A.T. Industries, p.l.c. (“BAT”) relating to clean-up costs for the Lower Fox River and certain potential future sites. Under the Funding Agreement, Appvion agreed to assume certain additional funding obligations not to exceed $25 million for Fox River Costs and $25 million for Future Sites Costs. Appvion bears sole responsibility for its funding obligations under the Funding Agreement, which were satisfied in 2016. The Funding Agreement does not, however, modify, alter or amend the two indemnification agreements entered into in 2001 wherein AWA agreed to indemnify PDC and PDC agreed to indemnify Appvion for certain costs, expenses and liabilities relating to Fox River and Future Sites.

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As amended in, and as limited by the terms of the purchase agreement relating to the acquisition of Appvion, AWA and two of its affiliates have agreed to indemnify PDC and Appvion for certain losses resulting from (1) inaccuracies in the environmental representations and warranties made by AWA and its affiliates, (2) certain known environmental matters that existed at the closing of the acquisition, (3) environmental matters related to the businesses of Newton Falls, Inc., Appleton Coated LLC and several other of the Company’s former affiliates and subsidiaries and (4) environmental matters relating to the real property on which the Company’s former Camp Hill, Pennsylvania plant is located that existed prior to its sale of this plant to a third-party.



RELATIONSHIP OF APPVION, INC. WITH PARENT



As a result of PDC's November 2001 acquisition of Appleton Papers Inc. (now Appvion, Inc.), Appvion entered into borrowings with a third-party and transferred the acquired cash through a subordinated demand note receivable with PDC to fund the acquisition from AWA.



As described in Note 20, the ESOP purchased 100% of the PDC shares in 2001. All ESOP shares activities, including issuance, deferrals, redemptions, and accretion, are recorded by PDC. Cash was transacted through an intercompany loan from Appvion to PDC in order to fund ESOP redemption activities and ESOP deferrals were in turn paid back to Appvion. Redemption activities were significantly larger than employee deferrals. During November 2013, this intercompany note and all related interest due from PDC was forgiven in full by Appvion. During December 2013, an interest-bearing intercompany loan from PDC to Appvion was established to record the transfer of ESOP deferrals, used to purchase PDC stock, to Appvion by PDC. During 2014, this intercompany loan from PDC to Appvion was fully repaid. Currently there is an interest-bearing intercompany loan from Appvion to PDC established in order to fund required distributions from PDC to ESOP participants, net of the transfer of ESOP deferrals used to purchase PDC stock.



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

FISCAL YEAR

 

The Company’s fiscal year is the 52-week or 53-week period ending the Saturday nearest December 31. Fiscal year 2016 was a 52-week period ending December 31, 2016.  Fiscal year 2015 was a 52-week period ending January 2, 2016. Fiscal year 2014 was a 53-week period ending January 3, 2015.



USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more critical estimates made by management relate to pension and postretirement assumptions, accrued discounts, intangible and tangible asset impairment analyses, fair market value of redeemable common stock and receivable reserves. Actual results could differ from those estimates.

 

REVENUE RECOGNITION

 

Revenue is recognized by the Company when all of the following criteria are met: persuasive evidence of a selling arrangement exists; the Company’s price to the customer is fixed; collectability is reasonably assured; and title has transferred to the customer. These criteria are met at the time of shipment. Estimated costs for sales incentives, discounts and sales returns and allowances are recorded as sales reductions in the period in which the related revenue is recognized. The Company typically does not invoice its customers for shipping and handling fees, which are classified as selling, general and administrative expenses and totaled approximately $36 million in 2016, $39 million in 2015 and $42 million in 2014.

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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES



The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates, commodity prices and interest rates and follows the guidance of ASC 815, “Derivatives and Hedging.” The fair values of all derivatives are recorded in the Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.



The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges in accordance with ASC 815 and are recorded in the Consolidated Balance Sheet at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. These contracts are designed to hedge the variability in future cash flows attributable to changes in currency exchange rates.



In July 2013, the Company fixed the underlying interest rate at 2.74% on $100 million of its variable rate first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. This interest rate swap contract has been designated as a cash flow hedge and is recorded in the Consolidated Balance Sheet at fair value. The effective portion of the contract’s gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. This contract is highly effective in hedging the variability in future cash flows attributable to changes in interest rates.



For the years ended December 31, 2016, January 2, 2016, and January 3, 2015, the amounts recognized in earnings due to ineffectiveness of hedge transactions were immaterial. The amount reported as unrealized gain on derivatives of $0.8 million in 2016, and losses on derivatives of $0.4 million in 2015 and $1.5 million in 2014, in accumulated other comprehensive income, represents the net gain (loss) on derivatives designated as cash flow hedges.

 

CASH EQUIVALENTS

 

Cash equivalents consist of funds invested in institutional money market funds with daily liquidity. At December 31, 2016 and January 2, 2016, there were cash overdrafts of approximately $16.2 million and $8.3 million, respectively, which are included in accounts payable within the Consolidated Balance Sheets and the year-over-year change is included in the “Cash Flows from Financing Activities” section of the Consolidated Statement of Cash Flows.

 

ACCOUNTS RECEIVABLE



Trade accounts receivable are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the allowance for doubtful accounts, as well as reserves for estimated cash discounts to be taken by customers and potential credits issued to customers. The Company evaluates the adequacy of the allowance for doubtful accounts monthly based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends, all of which are subject to change. Actual uncollected amounts have historically been consistent with the Company’s expectations. Reserves for estimated cash discounts are reviewed quarterly based upon current payment terms and historical patterns of actual cash discounts taken. Reserves for potential credits are reviewed semi-annually based upon historical patterns of actual credits issued. The Company may revise its estimates as more information becomes available.



INVENTORIES

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method for raw materials, work in process and finished goods inventories. Stores and spare parts inventories are valued at average cost. Finished goods and work in process inventories include the cost of materials, labor and manufacturing overhead.



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PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are stated at cost, including interest incurred during construction and depreciated over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The general range of useful lives for financial reporting is 10 to 40 years for buildings and improvements and 3 to 20 years for machinery and equipment. Maintenance and repair costs that do not significantly improve the related asset or extend its useful life are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts with resulting gains or losses reflected in operating income.



INTERNAL USE SOFTWARE

 

Costs incurred related to the development of internal use software are accounted for in accordance with ASC 350, “Intangibles – Goodwill and Other” which requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use once certain criteria are met. Capitalized software costs are amortized over the lesser of 5 years or the useful life of the software using the straight-line method.

 

INTANGIBLE ASSETS

 

Certain intangible assets have been determined to have indefinite useful lives and will not be amortized until their useful lives are determined to no longer be indefinite. Other intangible assets (customer relationships and the remaining registered trademarks) are amortized over their estimated useful lives of 20 to 25 years.



IMPAIRMENT OF INTANGIBLES AND LONG-LIVED ASSETS

 

The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This impairment analysis consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess.

 

The Company reviews the carrying value of intangible assets with definite lives and other long-lived assets whenever events or changes in circumstances indicate the assets may be impaired. If indicators of potential impairment are identified, the Company compares the undiscounted cash flows expected to be generated by the asset or asset group to the carrying value of the asset or asset group. If the carrying amount of the asset exceeds the expected undiscounted cash flows, an impairment loss for the difference between the carrying value and fair value of the asset or asset group is recognized.

 

INCOME TAXES

 

In conjunction with the acquisition of Appvion, PDC elected to be treated as a subchapter S corporation and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes, and therefore, the Company anticipates that it will not incur any future U.S. federal income tax liability and minimal state and local income tax liabilities.

 

Ineligible subsidiaries account for income taxes in accordance with ASC 740, “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets in those circumstances where it is more likely than not that some or all of the deferred tax asset may not be realized.



EMPLOYEE BENEFIT PLANS



The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company recognizes all actuarial gains and losses immediately in net periodic cost annually in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement during a fiscal year, and the market-related value of plan assets used in the cost calculations is equal to fair value.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC 820 establishes a framework for measuring fair value and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

When available, quoted market prices were used to determine fair value and such measurements are classified within Level 1. In some cases where market prices are not available, observable market-based inputs were used to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

 

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

ASC 820 expanded the definition of fair value to include the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or by the Company) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), fair value calculations have been adjusted accordingly.



The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows that result in a measurement that is classified as Level 2. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate, also deemed to be categorized as Level 2.

 

In addition to the methods and assumptions used to record the fair value of financial instruments as discussed above, the following methods and assumptions are used to estimate the fair value of financial instruments as required by ASC 825, “Financial Instruments.”  Cash and cash equivalents, accounts receivable and accounts payable recorded in the balance sheets approximate fair value based on the short maturity of these instruments. Fair values of long-term debt are estimated based on market conditions and interest rates available to the Company for similar financial instruments.



ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The components of the non-owner changes in equity, or accumulated other comprehensive income, are as follows (dollars in thousands):





RESEARCH AND DEVELOPMENT

 

Research and development costs are charged to expense as incurred. Such costs incurred in the development of new products or significant improvements to existing products totaled $8.2 million in 2016, $9.0 million in 2015, and $9.5 million in 2014.

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ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This guidance is issued to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance.  This guidance should be applied using a retrospective transition method for the presentation of the service cost component and other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective data, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.  The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  This guidance should be applied using a retrospective transition method to each period presented.  The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This guidance simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. The Company assessed the adoption of this guidance and has concluded there will be no impact to its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This guidance requires lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This guidance requires that inventory measured using any method other than last-in, first-out or the retail inventory method shall be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. The amendments in this ASU are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company has assessed that the impact this guidance will have is immaterial on its consolidated financial statements.



In April 2015, the FASB issued ASU No. 2015-04, “Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” This guidance provides a practical expedient to entities with a fiscal year-end that does not coincide with a month-end so as to permit the entity to measure defined benefit plan assets and obligations using the month-end closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should also be applied consistently to all plans if an entity has more than one plan. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and the impact was immaterial to its consolidated financial statements as a result of adoption.

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In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. Then, in August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” The amendments in ASU 2015-15 address the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements such that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in these ASU’s are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. These ASU’s were adopted in 2016, and in accordance with the guidance, $8.1 million of unamortized debt issuance costs, specifically attributable to each of the Company’s long-term debt issues, were reclassified from other assets, as previously reported on the Consolidated Balance Sheet as of January 2, 2016, to long-term debt. The unamortized debt issuance costs are now presented as a direct deduction from each debt liability, consistent with the presentation of the corresponding debt discount, where applicable.



In January 2015, the FASB issued ASU No. 2015-01, “Income Statement – Extraordinary and Unusual Items.” This guidance eliminates the concept of extraordinary items which required entities to separately classify, present and disclose extraordinary events and transactions. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, though early adoption is permitted provided the guidance is applied from the beginning of the year of adoption. An entity may apply the guidance prospectively and may also apply the guidance retrospectively to all prior periods presented in the financial statements. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and there was no impact to its consolidated financial statements as a result of adoption.



In November 2014, the FASB issued ASU No. 2014-16 “Derivatives and Hedging:  Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” This guidance requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. ASU 2014-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. As required, the Company adopted this guidance for its fiscal year beginning January 3, 2016 and there was no impact to its consolidated financial statements as a result of adoption.



In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendments require management to evaluate whether there are relevant conditions and events, known and reasonably knowable, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or within one year after the date the financial statements are available to be issued when applicable). Management should consider whether its plans intended to mitigate the relevant conditions or events will alleviate the substantial doubt. The amendments provide guidance as to what disclosures are required when substantial doubt is alleviated or not. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods beginning after December 15, 2016, with early adoption permitted. The Company has adopted this ASU and there was no impact to its consolidated financial statements.

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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers, the guidance requires five steps to be applied which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. Additionally, in March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations” to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance associated with identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at March 3, 2016 EITF Meeting” to rescind specific guidance included in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities-Oil and Gas, effective upon adoption of Topic 606. Also in May 2016, the FASB issued ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” to address certain issues in the guidance regarding assessing collectability, presentation of state taxes, noncash consideration, and completed contracts and contract modifications at transition. These ASU’s will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but no earlier than the original effective date of fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is assessing the impact the guidance will have, if any, on its consolidated financial statements.



3.       DISCONTINUED OPERATIONS



On August 3, 2015, Appvion completed the sale of the assets primarily used in the development, manufacture and sale of microencapsulation materials by the Encapsys segment of the Company (the “Encapsys Business”) to Rise Acquisition LLC (“Rise”), a Delaware limited liability company and an affiliate of Sherman Capital Holdings LLC, a Delaware limited liability company, for an aggregate purchase price of $208 million in cash, subject to working capital adjustments, and the assumption of certain liabilities (the “Sale”). Total working capital adjustments and cash expenses of the Sale were approximately $7.5 million. Of the approximate $200.5 million of net proceeds, $165 million was used immediately to repay a portion of long-term debt. In addition, proceeds of $35 million were set aside as restricted cash to be used within one year of this transaction for the specific purpose of capital investment and/or further debt reduction. As of January 2, 2016, Appvion had used this entire amount of restricted cash to repay an additional $25 million in long-term debt and $10 million for capital investment. The estimated carrying value of the net assets sold was $11.8 million.



The operating results for this business for the years ended January 2, 2016 and January 3, 2015 have been reclassified and are now reported separately as discontinued operations. The $188.7 million gain on the sale of Encapsys is also reported as discontinued operations in the Consolidated Statement of Comprehensive Income (Loss) for the year ended January 2, 2016.



In connection with the Sale, Appvion and Rise entered into certain other agreements, including a Supply Agreement, by which Rise will supply Appvion with all of its microencapsulation product requirements for use in its carbonless paper products for a ten-year term subject to renewal, and a Transition Services Agreement, by which Appvion will provide certain transition services to Rise for up to three years following the closing date. Additionally, Appvion and Rise entered into a lease agreement, by which Appvion will lease a portion of its facilities in Appleton, Wisconsin to Rise for a three-year term, as well as a Patent License Agreement with respect to certain shared patents related to the Encapsys Business and Appvion’s retained paper businesses. 

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The following table presents the key line items constituting income from discontinued operations for the Encapsys Business for the years ended December 31, 2016, January 2, 2016, and January 3, 2015 (dollars in thousands):







The following are the significant line items of the Encapsys Business impacting cash flow for the periods presented (dollars in thousands):







   

4.       ACCOUNTS RECEIVABLE SECURITIZATION



During June 2014, the Company entered into an accounts receivable securitization program with a commitment size of $30.0 million, whereby transactions under the program are accounted for as sales of trade receivables in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables under the program are recorded as a reduction of accounts receivable in the Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016. Proceeds received, including collections on the deferred purchase price notes receivable, are included in cash flows from operating activities in the Consolidated Statements of Cash Flows for the years ended December 31, 2016, January 2, 2016 and January 3, 2015.



Trade receivables sold to the third-party financial institution, and being serviced by Appvion, Inc., totaled $32.7 million as of December 31, 2016, for which $12.5 million in proceeds was received. Trade receivables sold to the third-party financial institution as of January 2, 2016 totaled $36.9 million, for which $18.1 million in proceeds was received. The fair value of the receivables sold equaled the carrying cost at the time of sale and no gain or loss was recorded as a result of the sale. The fair value of the deferred purchase price notes receivable recorded as of year-end 2016 was $19.3 million and $16.5 million as of year-end 2015 and is included in accounts receivable in the Consolidated Balance Sheet as of December 31, 2016 and January 2, 2016, respectively.  The Company estimates the fair value of the deferred purchase price notes receivable using Level 3 inputs based on historical performance of similar receivables including an allowance for doubtful accounts, as well as estimated cash discounts to be taken by customers and potential credits issued to customers. The Company deems the interest rate risk related to the deferred purchase price notes to be de minimis primarily due to the short average collection cycle (30 days) of the related receivables.



Servicing fees paid for the program were $0.6 million for the year ended December 31, 2016, $0.5 million for the year ended January 2, 2016, and $0.4 million for the year ended January 3, 2015. Transaction costs of $0.7 million, related to the June 2014 entry into this program, were deferred and recorded on the balance sheet as other long-term assets. They are being amortized over the three-year term of the securitization agreement. The remaining balance at December 31, 2016 was $0.1 million.

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5.       OTHER INTANGIBLE ASSETS

 

The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicated that an asset might be impaired.



The Company’s intangible assets consist of the following (dollars in thousands):





Of the $78.3 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless papers are being amortized over their useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and are not subject to amortization. Customer relationships are being amortized over their estimated useful lives of 25 years.



Amortization expense from continuing operations for the years ended December 31, 2016, January 2, 2016,  and January 3, 2015 approximated $2.3 million. Excluding the impact of any future acquisitions, the Company anticipates annual amortization of intangible assets will approximate $2.3 million for each of the years 2017 through 2021.



6.       INVENTORIES    



Inventories consist of the following (dollars in thousands):







Stores and spare parts inventory represents manufacturing supplies and equipment parts of varying age that must be available, on demand, to ensure minimal interruption of manufacturing processes. The balance is valued at average cost. All other inventories are valued using the first-in, first-out (“FIFO”) method.

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7.       PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment balances consist of the following (dollars in thousands):







8.      OTHER ACCRUED LIABILITIES



Other accrued liabilities, as presented in the current liabilities section of the Consolidated Balance Sheet, consist of the following (dollars in thousands):





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9.      LONG-TERM OBLIGATIONS

 

Long-term obligations, excluding capital lease obligations, consist of the following (dollars in thousands):







During 2016, the Company made mandatory debt repayments of $1.6 million, plus interest, on its State of Ohio loans. During the year, the Company borrowed $380.0 million and repaid $357.7 million on its revolving credit facility, leaving an outstanding balance at year-end 2016 of $31.9 million. In addition, approximately $15.0 million of the revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder, which, in accordance with its debt covenants, left approximately $16.3 million of unused borrowing capacity under its revolving credit facility. No amounts were drawn by beneficiaries under the outstanding letters of credit.



During the first quarter of 2016, the Company adopted ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” In accordance with the guidance, $8.1 million of unamortized debt issuance costs, specifically attributable to each of the Company’s long-term debt issues, were reclassified from other assets, as previously reported on the Consolidated Balance Sheet as of January 2, 2016, to long-term debt. The unamortized debt issuance costs are now presented as a direct deduction from each debt liability, consistent with the presentation of the corresponding debt discount, where applicable.



First Lien Credit Agreement



On June 28, 2013, Appvion entered into a credit agreement (the “Credit Agreement”) providing for a $100 million revolving line of credit due June 28, 2018 and a $335 million first lien term loan due June 28, 2019.  The Credit Agreement ranks senior in right of payment to all existing and future subordinated indebtedness of Appvion and is secured by security interests in substantially all of the property and assets of Appvion and the debt guarantors. The Credit Agreement is unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. It contains covenants customary for similar credit facilities. Affirmative and negative covenants under the Credit Agreement restrict Appvion’s ability and the ability of Appvion’s subsidiaries, subject to certain exceptions, to incur additional indebtedness and liens, engage in sale and leaseback transactions, make investments, make loans and advances, transact certain asset sales, engage in mergers, acquisitions, consolidations, liquidations and dissolutions, pay dividends or make other payments in respect of equity interests and other restricted payments, engage in certain transactions with affiliates, limit capital expenditures and make prepayments, redemptions and repurchases of other indebtedness.

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After giving effect to the Third Amendment and Fifth Amendment (as defined below), the amount committed under the revolving line of credit was reduced to $75 million and $170 million of the first lien term loan was repaid using proceeds from the Sale of the Encapsys Business. The first lien term loan and revolving line of credit bear interest at a base rate plus 5.5% per annum or Eurodollar plus 6.5% per annum. The Credit Agreement provides for a fixed floor rate of 2.25% for base rate loans and 1.25% for Eurodollar loans.



On July 30, 2013, Appvion fixed the underlying interest rate at 2.74% on $100.0 million of the first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. Within five business days after the year-end financial statements have been filed, Appvion is required to prepay an aggregate principal amount of the term loan equal to the excess, if any, of (a)  50% of defined excess cash flow, provided that such percentage shall be reduced to (1) 25% based upon Appvion achieving a consolidated leverage ratio of less than 3.5 to 1.0 but greater than or equal to 2.5 to 1.0 and (2) 0% based upon Appvion achieving a consolidated leverage ratio of less than 2.5 to 1.0 minus (b) the aggregate amount of all prepayments of the revolving credit line which constitute permanent reductions of the revolving credit facility and all optional prepayments of the first lien term loan made during the year.



On August 3, 2015, Appvion, PDC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders under the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment became effective simultaneously with the closing of the Sale of the Encapsys Business. Upon its effectiveness, the Third Amendment, among other things, (i) permitted the Company to consummate the Sale of the Encapsys Business and provided for the corresponding release of liens on the Encapsys Business, (ii) required that not less than $165 million of the net proceeds be applied to prepay the revolving credit loans and the term loans under the Credit Agreement and provided that the remainder of the net proceeds be reinvested or otherwise applied to further prepay indebtedness in accordance with the Credit Agreement, (iii) provided for a permanent reduction of the revolving credit facility commitments from $100 million to $75 million, (iv) required the payment of a consent fee equal to 0.175% of the aggregate principal amount of loans and commitments, (v) added the pricing grid discussed above and (vi) further conformed certain terms and covenants under the Credit Agreement to account for the Sale of the Encapsys Business and the transactions contemplated thereby. The Third Amendment also removed the maximum consolidated leverage covenant and added (i) a maximum consolidated first lien leverage covenant that requires maintenance of a consolidated first lien leverage ratio, initially, of not more than 3.50 to 1.00, and on and after the third fiscal quarter of 2016, of not more than 3.25 to 1.00 and on and after the third fiscal quarter of 2017, of not more than 3.00 to 1.00 and (ii) a minimum consolidated fixed charge coverage covenant that requires maintenance of a consolidated fixed charge coverage ratio, initially, of not less than 0.95 to 1.00 and on and after the first fiscal quarter of 2016, of not less than 1.00 to 1.00. The Company incurred $0.9 million of debt acquisition costs related to the execution of this amendment. These costs have been deferred and will be amortized over the remaining term of the Credit Agreement.



On June 24, 2016, Appvion, PDC, and the Lending Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amends the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.



On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixes the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increases the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) requires the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.



On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amends the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement.  Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.

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Second Lien Secured Notes



On November 19, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend debt maturities and reduce interest expense. The refinancing included the issuance of $250 million in aggregate principal amount of second lien senior secured notes carrying an annual interest rate of 9.0%, payable semi-annually in arrears on June 1 and December 1 each year. The notes will mature on June 1, 2020 and are unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd.  The notes are secured by a second priority security interest in substantially all of the property and assets of Appvion and the debt guarantors. These liens are junior in priority to the liens on this same collateral securing the outstanding debt incurred under the Credit Agreement. The notes contain covenants customary for similar debt which restrict Appvion’s ability, as well as the ability of the guarantors, to sell or lease certain assets or merge or consolidate with or into other companies, incur additional debt or issue preferred shares, incur liens, pay dividends or make other distributions, make other restricted payments and investments, place restrictions on the ability of certain of Appvion’s subsidiaries to pay dividends or other payments to Appvion, enter into sale and leaseback transactions, amend particular agreements relating to Appvion’s transaction with its former parent AWA and the ESOP and enter into transactions with certain affiliates. 



Management reported that the Company was in compliance with all debt covenants at December 31, 2016, and is forecasted to remain compliant for the next 12 months. The Company’s ability to comply with the financial covenants in the future depends on achieving forecasted operating results and operating cash flows. The Company’s failure to comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of noncompliance with debt covenants, if the lenders will not amend or waive the Company’s noncompliance with the covenants, the outstanding debt would become due and the Company would need to seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing in such circumstances. If the Company were not able to secure alternative financing, this would have a material adverse impact on the Company.



Scheduled repayment of principal on long-term obligations outstanding at December 31, 2016, is as follows (dollars in thousands):







10.      INCOME TAXES



In conjunction with the acquisition of Appvion, PDC elected to be treated as a subchapter S corporation and elected that its eligible subsidiaries be treated as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes. As a result, its tax provision includes only foreign and minimal state and local income taxes. For 2016 the Company recorded a net tax provision of $0.4 million primarily for U.S state and local income taxes. For 2015 the Company recorded a net tax provision of $0.2 million primarily for U.S. state and local income taxes. For 2014 the Company recorded a net tax provision of $0.3 million primarily for Canadian income taxes.



All U.S. federal C corporation tax years are closed. Various Canadian and state tax years remain open. Reserves for uncertain tax positions, as they relate to these matters, are insignificant. When, and if applicable, potential interest and penalty costs are accrued as incurred, with interest expense recognized in interest expense, net and penalty costs recognized in selling, general and administrative (“SG&A”) expense in the Consolidated Statement of Comprehensive Income (Loss).

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11.      LEASES

 

The Company leases buildings, machinery and equipment and other facilities. Many of these leases obligate the Company to pay real estate taxes, insurance and maintenance costs. Total rent expense was $5.4 million for 2016,  $6.3 million for 2015 and $6.4 million for 2014. 



Future minimum lease payments as of December 31, 2016, under leases that have initial or remaining non-cancelable terms in excess of one year are as follows (dollars in thousands):







12.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates, commodity prices and interest rates. The fair values of all derivatives are recorded in the Consolidated Balance Sheet. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.



The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transactions will not occur. These contracts are designed to hedge the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $12.3 million as of December 31, 2016. These contracts have settlement dates extending through June 2017.



The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using collar contracts to manage risks associated with market fluctuations in energy prices.  These contracts are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the collar price.  The contracts’ gains or losses due to changes in fair value are recorded in current period earnings.  As of December 31, 2016, all contracts have been settled.



On July 30, 2013, Appvion entered into an interest rate swap contract on $100 million of its variable rate first lien term loan with a forward start date of September 15, 2014 and a maturity date of June 28, 2019.  This interest rate swap pays the Company variable interest at the three-month Eurodollar rate or a fixed floor rate of 1.25%, whichever is greater, and the Company pays the counterparty a fixed interest rate. The fixed Eurodollar interest rate for the contract is 2.74%. Based on the terms of the interest rate swap contract and the underlying debt, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge. Any changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive income in the accompanying Consolidated Balance Sheet until earnings are affected by the variability of cash flows.



The following table presents the location and fair values of derivative instruments included in the Company’s Consolidated Balance Sheets (dollars in thousands):



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The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2016, January 2, 2016,  and January 3, 2015 and (gains) losses initially recognized in accumulated other comprehensive income in the Consolidated Balance Sheet at the period-ends presented (dollars in thousands):







13.      FAIR VALUE MEASUREMENTS

 

The carrying amount (including current portions) and estimated fair value of certain of the Company’s recorded financial instruments are as follows (dollars in thousands):







The first lien term loan and the second lien notes are traded in public markets. Their fair value was determined using Level 2 inputs based on quoted market prices. The fair value of the State of Ohio loans was determined using Level 2 observable market inputs including current rates for financial instruments of the same remaining maturity and similar terms. The revolving credit facility and industrial development bonds have variable interest rates that reflect current market terms and conditions.



Due to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities were reasonable estimates of fair value as of December 31, 2016 and January 2, 2016.



14.      EMPLOYEE BENEFITS

 

The Company has various defined benefit pension plans and defined contribution pension plans. They include a Supplemental Executive Retirement Plan (“SERP”) to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax-qualified plan limitations of the pension plan for eligible salaried employees.

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 The status of these plans, including a reconciliation of benefit obligation, a reconciliation of plan assets and the funded status of the plans, as well as the key assumptions used in accounting for the plans, is shown below (dollars in thousands):







The amounts in accumulated other comprehensive income on the Consolidated Balance Sheet, net, that have not been recognized as components of net periodic benefit cost at December 31, 2016 and January 2, 2016, are as follows (dollars in thousands):







The amount in accumulated other comprehensive income that is expected to be recognized as components of net periodic benefit cost over the next year is as follows (dollars in thousands):









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The components of net periodic pension cost include the following (dollars in thousands):





Expected future benefit payments are as follows (dollars in thousands):







As of the 2016 and 2015 measurement dates, the approximate asset allocations by asset category for the Company’s pension plan were as follows:













The Company’s Benefits Finance Committee (the “Committee”) is, among other things, charged with monitoring investment performance. The Committee periodically reviews fund performance and asset allocations. The plan trustee makes changes as necessary to realign the asset mix with the target allocations. The Committee has an investment policy for the pension plan assets that establishes target asset allocations by asset class as follows:







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The investment policy objectives adopted by the Committee are designed to (a) provide benefit security to plan participants, (b) support accounting policy and funding goals, (c) maintain a target funded ratio to avoid adverse outcomes, and (d) promote stability and growth in funded status. The Committee is assisted by an investment advisor in managing the fund investments and establishing asset allocations and long-term return expectations. The investment advisor develops and maintains long-term return, risk and correlation expectations for a broad array of capital markets which the Committee uses in its monitoring activity.



The expected long-term rate of return on assets assumption is developed considering the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Expected returns for each asset class are developed using estimates of expected real returns plus expected inflation. Long-term expected real returns are derived from future expectations for the U.S. Treasury real yield curve. Based on the assumptions and methodology described above, the Company selected 7.00% as its long-term rate of return on assets assumptions for both year-end 2016 and 2015. The mortality assumption used for each of the years 2016 and 2015 was the RP-2014 mortality table.

 

The discount rate is developed by selecting a portfolio of high-quality corporate bonds appropriate to provide for the projected benefit payments of the plan. This portfolio is selected from a universe of over 700 Aa-graded noncallable bonds available in the market as of December 31, 2016, further limited to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the market value of the bonds selected to the discounted value of the plan’s benefit payments. Based on the methodology described above, and a selected portfolio of 21 bonds, the Company selected a discount rate of 4.21% for 2016 and 4.58% for 2015 to value year-end liabilities for the pension plans.

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In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the fair value of the assets within the pension plan as of December 31, 2016 and January 2, 2016 are as follows (dollars in thousands):











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(a) U.S. and international equity investments include investments in commingled funds that invest primarily in publicly-traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and are divided by investment style and market

capitalization.

(b) Emerging markets equity investments include investments in commingled funds that invest primarily in publicly-traded equities. Equity investments are diversified across non-U.S. stocks and are divided by country, investment style and market capitalization.

(c) Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. The plan’s private equity investments are limited to 5% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount.

(d) Fixed income securities include investments in commingled funds that invest in a diversified blend of investment grade fixed income securities.

(e) Investment in real estate is designed to provide stable income returns and added diversification based upon the historical low correlation between real estate and equity or fixed income investments. The plan’s real estate assets consist of a commingled fund that invests in a diversified portfolio of direct real estate investments.

 

Description of Fair Value Measurements

 

Level 1 – Quoted, active market prices for identical assets or liabilities. Foreign and domestic common stocks are exchange-traded and are valued at the closing price reported by the respective exchanges on the day of valuation. Share prices of the funds, referred to as a fund's Net Asset Value (“NAV”), are calculated daily based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust funds and funds for employee benefit trust shares occur by contract at the respective fund’s redemption date NAV.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets and model-derived valuations in which all significant inputs are observable in active markets. The pension plan’s Level 2 investments include foreign and domestic common stocks, mutual funds, collective trust funds and funds for employee benefit trust. The NAVs of the funds are calculated monthly based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust fund and funds for employee benefit trust shares occur by contract at the respective fund’s redemption date NAV.

 

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The pension plan’s Level 3 assets are primarily investment funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of these assets, management takes into account the estimated NAV of the underlying funds, as well as any other considerations that may increase or decrease such estimated value.

 

While the Company believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets described below, could have a material effect on the computation of their estimated fair values.



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The Company expects to contribute $4.5 million to its funded pension plan in 2017. The defined benefit plan provides that hourly employees receive payments of stated amounts for each year of service. Payments under the defined benefit plan covering salaried employees are based on years of service and the employees’ compensation during employment. At December 31, 2016, the accumulated benefit obligation for the defined benefit plans were approximately $428.9 million.  At January 2, 2016, the accumulated benefit obligation for the defined benefit plans was approximately $421.0 million.

 

Certain of the Company’s hourly employees participated in a multi-employer defined benefit plan, the Pace Industry Union-Management Pension Plan (EIN #11-6166763). Participants in this plan included the West Carrollton represented manufacturing employees, where the collective bargaining agreement expired April 1, 2012. Participants also included the represented employees at the Kansas City, Kansas distribution center, where the collective bargaining agreement expired December 31, 2011. As a result of labor contracts ratified in June 2012 and September 2012, by the bargaining employees at the Kansas City, Kansas distribution center and West Carrollton, Ohio plant, respectively, both groups elected to end their participation in this multi-employer plan and instead participate in the defined benefit pension plan sponsored by the Company.   In addition, during first quarter 2012 there was a workforce reduction at the West Carrollton, Ohio plant resulting from the cessation of papermaking activities. As a result, the Company recorded a $25.0 million expense in 2012 representing its estimated cost to satisfy a complete withdrawal liability under the terms of the plan’s trust agreement, with a payment period that began January 2014 and could extend for up to 20 years, discounted in accordance with ASC Section 450-20-S99-1. Payments of $2.0 million were made during 2016, resulting in recorded interest expense of $1.1 million. As of December 31, 2016, the reserve has been reduced by $0.9 million. Of the $22.5 million reserve, $0.9 million is classified as short-term and $21.6 million is classified as long-term within the Consolidated Balance Sheet at December 31, 2016.



A deferred compensation plan, named the Executive Nonqualified “Excess” Plan of Appvion, Inc., effective on February 1, 2006, and as amended effective January 1, 2015, was established for highly-compensated employees, including all directors and executive officers. Salaried employees, with base salaries of $130,000 and over, are eligible to participate in the plan. This plan was established for the purpose of allowing a tax-favored option for saving for retirement when the IRS limits the ability of highly-compensated employees to participate under tax-qualified plans. This plan allows for deferral of compensation on a pre-tax basis and accumulation of tax-deferred earnings. Participants in the plan may choose to have deferrals increased or decreased based on the performance of a selection of mutual funds. No assets are actually set aside to fund the Company’s obligation under this plan. The non-employee directors are also allowed to participate in this plan. For the years ended December 31, 2016 and January 2, 2016, $2.7 million and $5.4 million, respectively, was recorded in other long-term assets for this plan.



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15.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

 

The Company has defined postretirement benefit plans that provide medical, dental and life insurance for certain retirees and eligible dependents.



The status of these plans, including a reconciliation of benefit obligations and the funded status of the plans, as well as the key assumptions used in accounting for the plans, is as follows (dollars in thousands):











The discount rate is developed by selecting a portfolio of high-quality corporate bonds appropriate to provide for the projected benefit payments of the plan. This portfolio is selected from a universe of over 700 Aa-graded noncallable bonds available in the market as of December 31, 2016, further limited to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the market value of the bonds selected to the discounted value of the plan’s benefit payments. Based on the methodology described above, and a selected portfolio of 25 bonds, the Company selected a discount rate of 3.95% for the postretirement benefit plan.



The December 31, 2016, accumulated postretirement benefit obligation (“APBO”) was determined using assumed medical care cost trend rates of 7.33%, decreasing one third percent each year to an ultimate rate of 5% in 2023. The January 2, 2016, APBO was determined using assumed medical care cost trend rates of 7.67%, decreasing one third percent each year to an ultimate rate of 5% in 2023.



The amount in accumulated other comprehensive income in the Consolidated Balance Sheet, that has not been recognized as a component of net periodic benefit cost at December 31, 2016 and January 2, 2016 is as follows (dollars in thousands):







The amount in accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost over the next year is shown below (dollars in thousands):





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The components of other postretirement benefit (gain) loss include the following (dollars in thousands):







The key assumptions used in the measurement of the Company’s net periodic benefit (gain) loss are shown in the following table:







Impact of a one percent change in medical trend rate (dollars in thousands):







Expected postretirement benefit payments for each of the next five years, and the aggregate from 2022 through 2026, are as follows (dollars in thousands):









16.      LONG-TERM INCENTIVE COMPENSATION 

 

In December 2001, the Company adopted the Appvion, Inc. Long-Term Incentive Plan (“LTIP”). As of January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU"), and as amended effective January 1, 2015. Both plans utilize phantom units. The value of a unit in the LTIP is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) between the grant date and the exercise date. All units granted under the LTIP may be exercised after three full years. Units expire ten years after the grant date. The value of a unit in the RSU is based on the value of PDC common stock, as determined by the ESOP trustee. All RSUs vest three years after the award date and are paid at vesting. The cash payment upon vesting is equal to the value of one share of PDC common stock at the most recent valuation date times the number of units granted. RSU units can be deferred to the Non-Qualified Excess Plan if the recipient so elects shortly after the units have been granted. All units under both the LTIP and RSU plans will vest immediately, and cash payment will be made, upon a change in control as defined in the plans.  At year-end 2016, the fair market value of one share of PDC common stock is $10.35.

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The Compensation Committee of the board establishes the number of units granted each year under these plans in accordance with the Compensation Committee’s stated goals and policies. The Compensation Committee has the discretion to use either, or both, plan(s) as appropriate to attract, motivate and retain key management employees while managing the expense to the Company. During 2016,  310,150 additional units were granted under the LTIP plan and 130,850 additional units were granted under the RSU plan. During 2015,  417,300 additional units were granted under the LTIP plan and 180,150 additional units were granted under the RSU plan. During 2014,  238,650 additional units were granted under the LTIP plan and 120,650 additional units were granted under the RSU plan. Units are valued using the most recent PDC stock price as determined by the semi-annual ESOP valuation as of June 30 and December 31.



Approximately $0.3 and $0.2 million of expense, related to the LTIP plan, was recorded during 2016 and 2015, respectively, in SG&A expense. Due to a decrease in stock price, a $1.6 million recovery was recorded during 2014 in SG&A expense. Based on the Company’s stock price as of the end of December 2016, the Company had no unrecognized compensation expense related to nonvested phantom units granted under the plan. Since the inception of the plan, 4,817,370 phantom units have been granted, 2,887,648 phantom units have been forfeited and 1,018,688 phantom units have been exercised, leaving an outstanding balance of 911,034 phantom units at December 31, 2016. A summary of 2014 - 2016 activity within the LTIP plan is as follows.







During 2016, 416,778 phantom units were exercised. In the second half of 2016, 361,000 units, originally granted at $12.84 per unit, and 55,778 units, originally granted at a price of $11.00 per unit, were exercised at the mid-year 2016 share price of $13.70 per unit for a total payment of $0.5 million representing the appreciation of the units. No phantom units were exercised during 2015. During 2014, 180,500 phantom units were exercised. In the first half of 2014, 146,000 units, originally granted at a price of $12.84 per unit, were exercised at the year-end 2013 price of $16.25 per unit for a total payment of $0.5 million representing the appreciation of the units. In the second half of 2014, 24,500 units, originally granted at a price of $12.84 per unit, and 10,000 units, originally granted at a price of $14.10 per unit, were exercised at the mid-year 2014 share price of $16.30 per unit for a total payment of $0.1 million representing the appreciation of the units. As of December 31, 2016,  no long-term liability was included in the Consolidated Balance Sheet.  

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Approximately $0.7 million, $1.6 million and $0.6 million of expense, related to the RSU plan, was recorded during 2016, 2015 and 2014, respectively. Since the inception of the plan,  876,075 units have been granted, 201,557 units have been forfeited and 425,868 units became fully vested and were paid, leaving an outstanding balance of 248,650 units at December 31, 2016. These shares are expected to be recognized over the weighted-average period of 1.76 years. As of year-end 2016, 37,850 RSU units became vested and exercisable. In accordance with the plan, a  payment for these RSU’s of $0.4 million was made on February 17, 2017, based on the year-end 2016 price of $10.35 per unit. A summary of 2014 – 2016 activity within the RSU plan is as follows.









Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as determined by the semi-annual ESOP valuation. This deferred compensation vests coincidental with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. The expense for this plan was approximately $0.1 million and $0.5 million in 2016 and 2015, respectively. During 2014, there was a $0.2 million recovery of expense.



17.      COMMITMENTS AND CONTINGENCIES

 

Lower Fox River

On September 30, 2014, Appvion entered into a Funding Agreement with NCR, B.A.T. Industries, p.l.c. (“BAT”) and Windward relating to clean-up costs for the Lower Fox River and certain potential future sites. Under the Funding Agreement, the parties paid the following amounts on September 30, 2014 toward historical Fox River Costs (as defined in the Funding Agreement) incurred by NCR through September 1, 2014:  BAT ‑ $77.08 million; Windward ‑ $10 million; and Appvion ‑ $6 million.  In addition, BTI 2014 LLC, a wholly‑owned subsidiary of BAT (“BTI”), is responsible for funding 50% of the Fox River Costs incurred by NCR after September 1, 2014.  The parties also agreed:  (a) to vigorously pursue reasonable claims and viable claims against certain third parties and to deposit any recoveries therefrom into BTI; and (b) that any funds remaining in BTI after paying BAT and NCR for any unreimbursed funding of Fox River Costs would be used to fund 60% of any Future Sites Costs, as defined in the Funding Agreement.

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Subject to the limitations described below, Appvion agreed to assume the following additional funding obligations under the Funding Agreement:



Effective August 31, 2016, the parties agreed that the amount due from Appvion on September 1, 2016, as set forth in (c) above would be separated into two payments: (i) $3.0 million, which was paid on September 1, 2016; and (ii) $4.5 million, which was subsequently paid on October 3, 2016. 

Notwithstanding the foregoing, Appvion’s additional funding obligations are subject to the following limitations:

 

The parties to the Funding Agreement agree that they have no recourse against Appvion for any further liability relating to the Fox River or Future Sites beyond the Appvion Fox River Cap and the Appvion Future Sites Cap, respectively.



Appvion bears sole responsibility for its funding obligations under the Funding Agreement. The Funding Agreement does not, however, modify, alter or amend the two indemnification agreements entered into in 2001 wherein Windward agreed to indemnify PDC and PDC agreed to indemnify Appvion for certain costs, expenses and liabilities relating to Fox River and Future Sites, including Appvion’s costs and expenses in negotiating and entering into the Funding Agreement and any future costs and expenses incurred by Appvion in pursuing recoveries.



Other



From time to time, the Company may be subject to various demands, claims, suits or other legal or regulatory proceedings arising in the ordinary course of business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in the future, there can be no assurance that it will be successful.

 

The Company does not believe that any pending or threatened demands, claims, suits or other legal or regulatory proceedings will have, individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows. 

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18.      CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

Supplemental cash flow disclosures (dollars in thousands):









19.      CONCENTRATIONS OF CREDIT AND OTHER RISKS

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base. The Company does not believe it is dependent upon any single customer. Sales to the Company’s two largest customers each represented approximately 9% and 8% of net sales for 2016, 2015, and 2014, respectively.



The five largest customers in the carbonless papers segment collectively accounted for approximately 46% of carbonless net sales in 2016,  44% of carbonless papers net sales in 2015 and 41% of carbonless papers net sales in 2014. The five largest customers in the thermal papers segment collectively accounted for approximately 47% of thermal papers net sales in 2016,  44% of thermal papers net sales in 2015 and 41% of thermal papers net sales in 2014.



          Base stock is a key raw material in the Company’s business. In 2016, the Company purchased approximately $226 million of base stock from external suppliers. Approximately $24 million of this base stock was purchased for the production of carbonless products with nearly 100% purchased from one external supplier. The Company purchased approximately $202 million of base stock for the production of thermal products with approximately 92% purchased from a single external supplier. In 2015, the Company purchased approximately $215 million of base stock from external suppliers. Approximately $39 million of this base stock was purchased for the production of carbonless products with approximately 100% purchased from one external supplier. The Company purchased approximately $176 million of base stock for the production of thermal products with approximately 94% purchased from a single external supplier. In 2014, the Company purchased approximately $239 million of base stock from external suppliers. Approximately $45 million of this base stock was purchased for the production of carbonless products with approximately 98% purchased from one external supplier. The Company purchased approximately $194 million of base stock for the production of thermal products with approximately 70% purchased from a single external supplier. 



20.      EMPLOYEE STOCK OWNERSHIP PLAN



The KSOP includes a separate ESOP component. The KSOP is a tax-qualified retirement plan that also contains a 401(k) feature, which provides participants with the ability to make pre-tax contributions to the KSOP by electing to defer a percentage of their compensation. The ESOP is a tax-qualified employee stock ownership plan that is designed to invest primarily in the common stock of PDC.



Eligible participants, as “named fiduciaries” under ERISA, were offered a one-time irrevocable election in 2001 to acquire a beneficial interest in the common stock of PDC by electing to direct the transfer of all or a portion of their existing account balances in the KSOP and the 401(a) plan (Appleton Papers Inc. Retirement Medical Savings Plan) to the Company Stock Fund. The total proceeds transferred by eligible participants to the Company Stock Fund were approximately $107 million. All proceeds of the offering were used by the ESOP trustee to purchase 10,684,373 shares of PDC common stock. As a result of this purchase, the ESOP owns 100% of the common stock of PDC. The ESOP trustee is expected to purchase common stock from PDC with future pre-tax payroll deferrals made by employees. The Company also intends to fund a significant part of its matching contribution commitment with common stock of PDC. Matching contributions charged to expense were $1.6 million in 2016, $1.9 million in 2015, and $2.3 million in 2014. 

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The value of each participant’s account balance will be paid to that participant, or that participant’s beneficiary, in the case of the participant’s death, upon the participant’s retirement, death, disability, resignation, dismissal or permanent layoff. Requests for lump sum distributions from the Company Stock Fund will be granted in accordance with a uniform, nondiscriminatory policy established by the ESOP committee. Covenants in the Credit Agreement, as amended, providing for the first lien term loan and revolving credit facility, as well as the indenture governing the second lien senior secured notes restrict Appvion’s ability to pay dividends to PDC, which could limit PDC’s ability to repurchase shares distributed to ESOP participants who have terminated employment or who are entitled to diversification rights. PDC has obligations to make distributions to former participants in the ESOP under ERISA and these obligations may conflict with the terms of these debt agreements. During 2016, 2015, and 2014, the Company exercised its right to satisfy requests for distributions to former participants using five equal annual installments.



In 2016, the ESOP trustee purchased 145,102 shares of PDC redeemable common stock for an aggregate price of $1.6 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 138,018 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 780,600 shares of PDC redeemable common stock were repurchased during 2016 at an aggregate price of $10.2 million.



In 2015, the ESOP trustee purchased 167,177 shares of PDC redeemable common stock for an aggregate price of $1.9 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 160,097 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 775,075 shares of PDC redeemable common stock were repurchased during 2015 at an aggregate price of $9.4 million.

 

In 2014, the ESOP trustee purchased 178,179 shares of PDC redeemable common stock for an aggregate price of $2.4 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 172,167 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 1,273,759 shares of PDC redeemable common stock were repurchased during 2014 at an aggregate price of $18.2 million.



In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable should be recorded at redemption value.  For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date. This guidance also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.



The fair value of the redeemable common stock is determined by an independent, third-party appraiser selected by the ESOP Trustee, as required by law and the ESOP. Such valuations are made as of June 30 and December 31. The year-end 2016 share price was $10.35. Based upon the estimated fair value of the redeemable common stock at December 31, 2016, an ultimate redemption liability of approximately $64.8 million was determined. The redeemable common stock recorded book value as of December 31, 2016, was $100.6 million. The net decrease in fair value and accretion of redeemable common stock was $3.4 million for the year ended December 31, 2016.



As of December 31, 2016, the Company is obligated to purchase 1,956,365 shares of redeemable common stock eligible for redemption as a result of participants terminating employment due to retirement, resignation, dismissal, permanent layoff, disability or death. Using the year-end 2016 share price, the Company has estimated a future share repurchase obligation of approximately $20.2 million. Per plan provisions, neither the dates of nor prices at distribution are fixed or determinable, and therefore, repurchase obligations to be settled over the next five years will vary from the estimated repurchase obligation above.

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21.      UNAUDITED QUARTERLY FINANCIAL DATA    



Unaudited quarterly financial data for 2016 includes the following (dollars in thousands):







Unaudited quarterly financial data for 2015 includes the following (dollars in thousands):







On August 3, 2015, Appvion completed the sale of the assets primarily used in the development, manufacture and sale of microencapsulation materials by the Encapsys segment of the Company for an aggregate purchase price of $208 million in cash, subject to working capital adjustments, and the assumption of certain liabilities. Total working capital adjustments and cash expenses of the sale were approximately $7.5 million. The financial results of the Encapsys segment, including the gain on the sale of the assets, have been reclassified as discontinued operations.



22.      SEGMENT INFORMATION 

 

The Company’s reportable segments are carbonless papers and thermal papers. The accounting policies applicable to these reportable segments are the same as those described in the summary of significant accounting policies. Management evaluates the performance of the segments based primarily on operating income (loss). Items excluded from the determination of segment operating income (loss) are unallocated corporate charges, interest expense, net, debt modification/extinguishment expense, foreign exchange loss and other expense.



The carbonless papers segment includes carbonless, security and other specialty paper products. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company also produces coated products for design and print applications and offers custom coating solutions. Carbonless products are sold to converters, printers and merchant distributors who stock and sell carbonless paper to printers. The Company also produces security papers with features that resist forgery, tampering and counterfeiting. The Company’s portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine-readable technologies, to serve global markets.



The thermal papers segment develops and produces substrates for the transaction and item identification markets. Thermal paper is used in four principal end markets: (1) point-of-sale products for retail receipts and coupons; (2) label products for shipping, warehousing, medical and clean-room applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic charts. Point-of-sale products are sold to printers and converters who in turn sell to end-user customers or to resellers such as office supply stores, office superstores, warehouse clubs, mail order catalogs, equipment dealers, merchants and original equipment manufacturers. Label products are sold to companies who apply pressure sensitive adhesive coatings and release liners and then sell these products to label printers. Tag, ticket and chart grades are sold to specialty printing companies who convert them to finished products such as entertainment, lottery and gaming tickets, tags, coupons and medical charts.

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The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):





During 2016, the Company recorded a net mark-to-market $2.0 million related to its retiree benefit plans.  This loss was allocated as follows: $1.3 million to carbonless papers and $0.7 million to thermal papers. 



During 2015, the Company recorded a net mark-to-market loss of $3.5 million related to its retiree benefit plans. This loss was allocated as follows: $2.3 million to carbonless papers, $0.9 million to thermal papers and $0.3 million to unallocated corporate charges.



During September 2014, Appvion entered into a Funding Agreement relating to clean-up costs and liabilities for the Lower Fox River sites and potential future sites. Under the Funding Agreement, the parties agreed to a specific funding arrangement for which Appvion recorded a $24.0 million third quarter charge in unallocated corporate charges for its portion of the Funding Agreement. During 2014, the Company recorded a mark-to-market loss for pension and other postretirement benefit plans of $65.9 million. This loss was allocated as follows: $40.5 million to carbonless papers, $24.1 million to thermal papers and $1.3 million to unallocated corporate charges.



Revenues from sales in the U.S. were $529.7 million in 2016, $526.0 million in 2015, and $568.6 million in 2014. Revenues from sales to customers in foreign countries were $160.7 million in 2016, $174.0 million in 2015, and $196.1 million in 2014. All long-lived assets were located in the U.S. as of December 31, 2016 and January 2, 2016. Substantially all long-lived assets were located in the U.S. as of January 3, 2015.

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23.      ACCUMULATED OTHER COMPREHENSIVE INCOME



The changes in accumulated other comprehensive income by component for the year ended December 31, 2016 are as follows (dollars in thousands)









The changes in accumulated other comprehensive income by component for the year ended January 2, 2016 are as follows (dollars in thousands):





Details about these reclassifications are as follows (dollars in thousands):







(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 14, Employee Benefits, and Note 15, Postretirement Benefit Plans other than Pensions.