UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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



For the quarterly period ended: July 2, 2017

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 number: 333-82084-01

                                          



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

 

Indicate by check mark whether each 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 each 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and emerging growth company in Rule 12b-2 of the Exchange Act.

Large Accelerated filer  ☐    Accelerated filer  ☐    Non-accelerated filer  ☒    (Do not check if a smaller reporting company)

Smaller reporting company ☐  Emerging growth company ☐



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



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 August 1, 2017,  5,823,112 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.

 



 

INDEX 











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PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)



PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except share data)



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



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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(dollars in thousands)







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







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PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

(unaudited)

(dollars in thousands)





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

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PAPERWEIGHT DEVELPOMENT CORP. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,

ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED

(unaudited)

(dollars in thousands, except share data)







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







 

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1.       BASIS OF PRESENTATION

 

In the opinion of management, all adjustments made for the fair statement of comprehensive income (loss) for the three and six months ended July 2, 2017 and July 3, 2016, the cash flows for the six months ended July 2, 2017 and July 3, 2016 and financial position at July 2, 2017 and December 31, 2016 were normal recurring adjustments. 



These condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes 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 each of the three years in the period ended December 31, 2016, which are included in the annual report on Form 10-K for the year ended December 31, 2016. The condensed consolidated balance sheet data as of December 31, 2016, contained within these condensed financial statements, was derived from the audited financial statements of PDC but does not include all disclosures required by accounting principles generally accepted in the United States of America.



The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.





2.       ACCOUNTS RECEIVABLE SECURITIZATION



During June 2014, the Company entered into a three-year 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.” On May 11, 2017, the Company entered into an extension agreement with respect to this facility which extends the facility through August 4, 2017 and reduced the facility from $30.0 million to $25.0 million. Also, on July 24, 2017, the Company entered into another extension agreement with respect to this facility which extends the facility through September 29, 2017 and reduced the facility from $25.0 million to $24.0 million.  Sales of trade receivables under the program are recorded as a reduction of accounts receivable in the Condensed Consolidated Balance Sheets as of July 2, 2017 and December 31, 2016. Proceeds received, including collections on the deferred purchase price notes receivable, are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2017 and July 3, 2016.  



Trade receivables sold to the third-party financial institution, and being serviced by Appvion, Inc., totaled $30.7 million as of July 2, 2017, for which $13.0 million in proceeds was received. Trade receivables sold to the third-party financial institution as of December 31, 2016 totaled $32.7 million, for which $12.5 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 July 2, 2017 was $16.8 million and $19.3 million as of year-end 2016 and is included in accounts receivable in the Condensed Consolidated Balance Sheets as of July 2, 2017 and December 31, 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 $0.1 million and $0.3 million for the three- and six-month periods ended July 2, 2017, respectively, as well as for the three- and six-month periods ended July 3, 2016, respectively.  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, ending June 2017, and were fully amortized as of July 2, 2017.  

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3.       OTHER INTANGIBLE ASSETS

 

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













Amortization expense of intangibles from continuing operations for the three- and six-months ended July 2, 2017 was $0.5 million and $1.1 million, respectively. Amortization expense of intangibles from continuing operations for the three- and six-months ended July 3, 2016 was $0.5 million and $1.1 million, respectively.





4.       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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5.       PROPERTY, PLANT AND EQUIPMENT 



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





Depreciation expense for the three- and six-months ended July 2, 2017 and July 3, 2016 consists of the following (dollars in thousands):

 









6.       OTHER ACCRUED LIABILITIES



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





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7.       NEW 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 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 does not believe there will be a material impact to the consolidated financial statements and currently intends to adopt the new standard using the modified retrospective method.

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8.       EMPLOYEE BENEFITS



The components of net periodic benefit cost (gain) associated with the defined benefit pension plans include the following (dollars in thousands):





The Company expects to contribute $3.9 million to its funded pension plan in 2017.



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, Ohio represented manufacturing employees, where the collective bargaining agreement expired on 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 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 $25.0 million of 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 $0.4 million and $0.9 million were made during second quarter 2017 and the first six months 2017, respectively, resulting in recorded interest expense of $0.2 million and $0.5 million for each of the two periods, respectively, and a  $0.4 million reduction of the reserve since year-end 2016. Of the $22.0 million reserve, $0.9 million is classified as short-term and $21.1 million is classified as long-term within the Condensed Consolidated Balance Sheet at July 2, 2017.





9.      POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

 

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





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10.      LONG-TERM INCENTIVE COMPENSATION

 

In December 2001, the Company adopted the Long-Term Stock Appreciation Rights Plan (“SAR” Plan). As of January 3, 2010, the Company adopted the Long-Term Restricted Stock Unit Plan ("RSU" Plan). Both plans utilize phantom units. The value of a unit in the SAR Plan 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. The value of a unit in the RSU Plan is based on the value of PDC common stock, as determined by the ESOP trustee. As of the end of second quarter 2017, the fair market value of one share of PDC common stock was $6.85.  



As of year-end 2016, 37,850 RSU units became vested and exercisable. In accordance with the RSU Plan, payment for these RSU’s was made in February 2017. During the first six months of 2017,  170,400 additional units were granted under the RSU Plan. Due to terminations of employment, 34,403 unvested units were forfeited during the current year quarter. A balance of 346,797 RSU units remains as of July 2, 2017.  Approximately $0.3 million of expense recovery, related to this RSU Plan, was recorded during the three-month period ended July 2, 2017,  and no expense was recorded during the six‑month periods ended July 2, 2017. Approximately $0.4 million and $0.7 million of expense, related to this RSU plan was recorded during each of the three- and six-month periods ended July 3, 2016, respectively. As of July 2, 2017, total unrecognized stock-based compensation expense relating to unvested long-term restricted employee stock units was $1.3 million. This amount is expected to be recognized over the weighted-average period of 2.1 years. 



During the first six months of 2017,  476,100 additional units were granted under the SAR Plan. Due to terminations of employment, 135,375 unvested units were forfeited during the current year period. There was no expense recorded for this SAR Plan during the three- and six-month periods ended July 2, 2017, respectively. Approximately $0.6 million of expense, related to this plan, was recorded in each of the three- and six-month periods ended July 3, 2016.



Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. In March 2013, the board adopted the Appvion, Inc. Non-Employee Director Deferred Compensation Plan to formalize the terms of the agreement. Approximately $0.4 million and $0.3 million of expense recovery, related to this plan, was recorded during each of the three‑ and six-month periods ended July 2, 2017, respectively. Approximately $0.2 million and $0.3 million of expense, related to this plan, was recording during the three- and six-month periods ended July 3, 2016, respectively. 





11.      COMMITMENTS AND CONTINGENCIES



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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12.      EMPLOYEE STOCK OWNERSHIP PLAN



The Company’s matching contributions charged to expense was $0.2 million for the three-month period ended July 2, 2017 and $0.4 million for the three-month period ended July 3, 2016. The company’s matching contributions charged to expense were $0.7 million and $0.9 million for the six-month periods ended July 2, 2017 and July 3, 2016, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 636,971 shares of PDC redeemable common stock were repurchased during the first six months of 2017 at an aggregate price of approximately $5.5 million. During the same period, the ESOP trustee purchased 103,420 shares of PDC redeemable common stock for an aggregate price of $0.7 million using pre-tax deferrals, rollovers and loan payments made by employees, while the Company’s matching contributions for the same period resulted in an additional 96,245 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications and employee terminations, 477,081 shares of PDC redeemable common stock were repurchased during the first six months of 2016 at an aggregate price of approximately $6.1 million. During the same period, the ESOP trustee purchased 69,090 shares of PDC redeemable common stock for an aggregate price of $0.9 million using pre-tax deferrals, rollovers, and loan payments made by employees, while the Company’s matching contributions for the same period resulted in an additional 66,502 shares of redeemable common stock being issued.



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.



As of July 2, 2017, the fair market value of one share of PDC common stock was $6.85. Based on the estimated fair value of the redeemable common stock at July 2, 2017, an ultimate redemption liability of approximately $39.9 million was determined. The redeemable common stock recorded book value as of July 2, 2017 was $91.8 million. The change in fair value and accretion of redeemable common stock was $0.6 million for the six months ended July 2, 2017.



Based on the estimated fair value of the redeemable common stock at July 3, 2016, an ultimate redemption liability of approximately $87.9 million was determined. The redeemable common stock recorded book value as of July 3, 2016 was $112.8 million. The change in fair value and accretion of redeemable common stock was $5.1 million for the six months ended July 3, 2016.



On August 9, 2017, the Board of Directors of Appvion approved Amendment Number Six to the Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan. On August 9, 2017, the Board of Directors of Appvion also appointed Mr. G. Grant Lyon as the sole member of the ESOP Administrative Committee of Appvion.

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13.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company selectively uses financial instruments to manage some market risks from changes in foreign currency exchange rates and interest rates. The fair values of all derivatives are recorded in the Condensed 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 Condensed 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 $4.9 million as of July 2, 2017. These contracts have settlement dates extending through December 2017.



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 Condensed 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 Condensed Consolidated Balance Sheets (dollars in thousands):





The following table presents the location and amount of (gains) losses on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss) for the three- and six-months ended July 2, 2017 and July 3, 2016 and (gains) losses initially recognized in accumulated other comprehensive income in the Condensed Consolidated Balance Sheet at the period-ends presented (dollars in thousands):







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14.      LONG-TERM OBLIGATIONS, LIQUIDITY AND CAPITAL RESOURCES

 

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







During the first six months of 2017, the Company made mandatory debt repayments of $0.8 million on its State of Ohio loans. The Company also borrowed $290.8 million and repaid $303.2 million on its revolving credit facility, leaving an outstanding balance at quarter-end of $19.5 million. Approximately $13.1 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 $2.8 million of unused borrowing capacity under its revolving credit facility. No amounts were drawn by beneficiaries under the outstanding letters of credit.



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. As noted above, the maturity date of the revolving credit facility is June 28, 2018 and the maturity date of the first lien term loan is June 28, 2019. The Credit Agreement is unconditionally, and jointly and severally, guaranteed by PDC,  Appvion Canada, Ltd. and APVN Holdings LLC. 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 total 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 third quarter 2015 sale of the Company’s former 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 party to 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 amended 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) fixed 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) increased 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) required 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 amended 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 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 of 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 Windward Prospects Ltd. and the ESOP and enter into transactions with certain affiliates.



Liquidity and Capital Resources



During the second quarter of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This update provides U.S. GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. The Company adopted this standard for the year ended December 31, 2016. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern for a period of 12 months following the date of issuance of the Company’s financial statements for the applicable reporting period, as of each reporting period, including interim periods.



The Company has significant debt maturities in the next 12 months, including $13.0 million outstanding under its accounts receivable securitization facility, which is set to mature on September 29, 2017, and $19.5 million outstanding under its revolving credit facility, which will mature on June 28, 2018.  These maturities, coupled with management’s forecast of future cash flows indicate that, if the Company is unable to refinance or extend its accounts receivable securitization facility due September 29, 2017 and/or the revolving credit facility due June 28, 2018, or otherwise to take steps to create additional liquidity, forecasted cash flows would not be sufficient for the Company to meet its obligations, including payment of the outstanding accounts receivable facility and the outstanding balance under the revolving credit facility at their maturities, as they become due in the ordinary course of business for the period of 12 months following August 16, 2017. As discussed below, the Company has plans to refinance these debts to extend their maturities and to create additional liquidity, however, there can be no assurance that these plans will be successfully completed.



Although the Company does not currently have the liquid funds necessary to repay the amounts outstanding under the revolving credit facility or the accounts receivable facility at their maturity, the Company is actively pursuing the capital markets to refinance all or a portion of its outstanding indebtedness, including the revolving credit facility and accounts receivable securitization facility. As a result of management’s efforts, the Company has received multiple non-binding financing proposals from third party sources to lend capital to refinance portions of the Company’s existing first lien debt, including its revolving credit facility and accounts receivable securitization facility (the “Refinancing”). Any commitment by the potential lenders is subject to, among other things, lender due diligence, the issuance of a written commitment letter and the negotiation and execution of definitive legal documentation satisfactory to the lenders and the Company. In addition to the Refinancing, the Company is considering its options with respect to the Company’s Second Lien Senior Secured Notes due June 2020.  These actions are intended to mitigate those conditions which raise substantial doubt about the Company’s ability to continue as a going concern for the period of 12 months following August 16, 2017.



Additionally, the Company is continuing to pursue a strategy of profit improvement initiatives to enhance its financial flexibility and profitability. Management continues to review operational plans for the remainder of 2017 and beyond, which could result in changes to operational plans and projected capital expenditures. The Company closely monitors the amounts and timing of its sources and uses of funds, particularly as they affect the Company’s ability to maintain compliance with the financial covenants of its revolving credit facility.



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The Company cannot predict the outcome of any actions to generate liquidity, including whether such actions will generate the expected liquidity as currently anticipated, or the ultimate availability of additional debt financing. The specific actions taken by the Company, the timing thereof, and the overall amount of any Refinancing will depend on a variety of factors, including market conditions.



Based on the significance of the Company’s debt obligations in the 12 months following August 16, 2017, including the maturities of $13.0 million under its accounts receivable facility that matures September 29, 2017 and the $19.5 million of outstanding borrowings under the revolving credit facility due June 28, 2018, and the uncertainty of the outcome of the Refinancing, management has determined that there is substantial doubt as to the Company’s ability to continue as a going concern for the period of 12 months following August 16, 2017.  While management plans to complete the Refinancing and has retained advisors to assist it with this process, there can be no assurance that the Refinancing will be completed on terms acceptable to the Company or at all.  The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to successfully complete the Refinancing or other liquidity-generating transactions.



If the Company is unable to complete the Refinancing, or if there are other material adverse developments in the Company’s business results of operations or liquidity, the Company may be forced to reduce or delay our business activities and capital expenditures, sell material assets, seek additional capital or restructure its debt either as part of a negotiated arrangement with lenders or potentially through a bankruptcy process. There can be no assurance that the Company would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.





15.      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 loan 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 July 2, 2017 and December 31, 2016.

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16.      SEGMENT INFORMATION

 

The Company’s reportable segments consist of carbonless papers and thermal papers. 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, net interest expense, debt modification/extinguishment expense, foreign exchange loss (gain) and other expense. 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):







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17.      ACCUMULATED OTHER COMPREHENSIVE INCOME



The changes in accumulated other comprehensive income by component for the six months ended July 2, 2017 are as follows (dollars in thousands):









The changes in accumulated other comprehensive income by component for the six months ended July 3, 2016 are as follows (dollars in thousands):







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