10-Q 1 exo-9302012x10q.htm 10-Q EXO-9.30.2012-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 333-136559
 
 
EXOPACK HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
76-0678893
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3070 Southport Rd.,
Spartanburg, SC
 
29302
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (864) 596-7140
 
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  ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
  o
Accelerated filer
  o
Non-accelerated filer
  x  (Do not check if a smaller reporting company)
Smaller reporting company
  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The registrant is a privately held corporation and has no voting or non-voting common equity held by non-affiliates. As of November 13, 2012, one share of the registrant’s common stock was outstanding.
 


EXOPACK HOLDING CORP.
TABLE OF CONTENTS
FORM 10-Q
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands of dollars, except for share and per share data)
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets
 
 
 
Cash
$
1,602

 
$
2,317

Trade accounts receivable (net of allowance for uncollectible accounts of $1,825 and $1,708 for 2012 and 2011, respectively)
101,653

 
88,837

Other receivables
2,481

 
4,083

Inventories
98,859

 
113,939

Deferred income taxes
2,882

 
2,745

Prepaid expenses and other current assets
4,522

 
4,367

Total current assets
211,999

 
216,288

Property, plant, and equipment, net
225,598

 
223,035

Deferred financing costs, net
14,931

 
17,144

Intangible assets, net
86,361

 
89,179

Goodwill
69,673

 
69,641

Other assets
8,517

 
8,616

Total assets
$
617,079

 
$
623,903

Liabilities and Stockholder’s Deficit
 
 
 
Current liabilities
 
 
 
Revolving credit facility and current portion of long-term debt and capital leases
$
19,911

 
$
8,201

Accounts payable
75,289

 
84,561

Accrued liabilities
42,625

 
35,502

Income taxes payable
1,162

 
718

Total current liabilities
138,987

 
128,982

Long-term liabilities
 
 
 
Long-term debt, less current portion
577,125

 
579,750

Capital lease obligations, less current portion
13,916

 
10,775

Deferred income taxes
22,665

 
21,621

Other liabilities
26,166

 
29,101

Total long-term liabilities
639,872

 
641,247

Commitments and contingencies

 

Stockholder’s deficit
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding at September 30, 2012 and December 31, 2011
—

 
—

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding at September 30, 2012 and December 31, 2011
—

 
—

Distributions in excess of paid-in capital
(75,654
)
 
(76,038
)
Accumulated other comprehensive loss, net
(23,659
)
 
(25,198
)
Accumulated deficit
(62,467
)
 
(45,090
)
Total stockholder’s deficit
(161,780
)
 
(146,326
)
Total liabilities and stockholder’s deficit
$
617,079

 
$
623,903

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

1

EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands of dollars)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Net sales
$
210,438

 
$
219,644

 
$
641,370

 
$
663,892

Cost of sales
185,129

 
190,546

 
559,992

 
574,309

Gross margin
25,309

 
29,098

 
81,378

 
89,583

Selling, general and administrative expenses
17,995

 
18,341

 
57,070

 
56,561

Operating income
7,314

 
10,757

 
24,308

 
33,022

Other expenses
 
 
 
 
 
 
 
Interest expense
13,170

 
12,976

 
39,300

 
36,572

Loss on early extinguishment of debt
—

 
—

 
—

 
22,051

Other (income) expense, net
(7
)
 
(96
)
 
(242
)
 
(150
)
Net other expenses
13,163

 
12,880

 
39,058

 
58,473

Loss before income taxes
(5,849
)
 
(2,123
)
 
(14,750
)
 
(25,451
)
Provision (benefit) for income taxes
1,576

 
(554
)
 
2,627

 
(9,395
)
Net loss
$
(7,425
)
 
$
(1,569
)
 
$
(17,377
)
 
$
(16,056
)


EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
(in thousands of dollars)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Net loss
$
(7,425
)
 
$
(1,569
)
 
$
(17,377
)
 
$
(16,056
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
     Foreign currency translation adjustment
1,482

 
(1,726
)
 
1,539

 
(952
)
Comprehensive loss
$
(5,943
)
 
$
(3,295
)
 
$
(15,838
)
 
$
(17,008
)

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





2

EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S DEFICIT (unaudited)
(in thousands of dollars, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Distributions in excess of
Paid-in Capital
 
Accumulated Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2011
1

 
$
—

 
$
(76,038
)
 
$
(25,198
)
 
$
(45,090
)
 
$
(146,326
)
Stock compensation expense
—

 
—

 
384

 
—

 
—

 
384

Net loss
—

 
—

 
—

 
—

 
(17,377
)
 
(17,377
)
Foreign currency translation adjustment
—

 
—

 
—

 
1,539

 
—

 
1,539

Balances at September 30, 2012
1

 
$
—

 
$
(75,654
)
 
$
(23,659
)
 
$
(62,467
)
 
$
(161,780
)

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


3

EXOPACK HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of dollars)
 
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
Cash flows from operating activities
 
 
 
Net loss
$
(17,377
)
 
$
(16,056
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
29,988

 
30,224

Deferred income tax provision (benefit)
859

 
(10,508
)
Stock compensation expense
384

 
305

Loss on early extinguishment of debt
—

 
11,883

Loss on sale and disposition of property, plant and equipment
195

 
909

Changes in operating assets and liabilities:
 
 
 
Receivables
(12,186
)
 
(3,255
)
Inventories
15,654

 
(7,011
)
Prepaid expenses and other assets
1,366

 
(776
)
Accounts payable and accrued and other liabilities
(4,997
)
 
(13,879
)
Income tax receivable/payable
399

 
(72
)
Net cash provided by (used in) operating activities
14,285

 
(8,236
)
Cash flows from investing activities
 
 
 
Repayments from joint venture
124

 
85

Purchases of property, plant and equipment, including capitalized software
(21,253
)
 
(34,779
)
Proceeds from sales of property, plant and equipment
7

 
1,383

Net cash used in investing activities
(21,122
)
 
(33,311
)
Cash flows from financing activities
 
 
 
Repayment of subordinated term loan
—

 
(33
)
Issuance of term loan
—

 
350,000

Repayments of term loan
(2,625
)
 
(875
)
Repayment of capital lease obligations
(1,899
)
 
(1,447
)
Deferred loan costs paid
(96
)
 
(17,753
)
Dividend to parent
—

 
(150,000
)
Issuance of senior notes
—

 
235,000

Repayment of former senior notes
—

 
(320,000
)
Borrowings under revolving credit facility
545,796

 
809,215

Repayments of revolving credit facility
(535,053
)
 
(863,694
)
Net cash provided by financing activities
6,123

 
40,413

Effect of exchange rate changes on cash
(1
)
 
(63
)
Decrease in cash
(715
)
 
(1,197
)
Cash
 
 
 
Beginning of period
2,317

 
2,508

End of period
$
1,602

 
$
1,311


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

4

Exopack Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Organization, Acquisitions and Basis of Presentation
Exopack Holding Corp. and subsidiaries (the “Company”) was formed in October of 2005 through the acquisition and consolidation of three flexible packaging businesses, including Exopack Holding Corporation (“Exopack”), Cello-Foil Products, Inc. (“Cello-Foil”), and The Packaging Group (“TPG”). Following this acquisition and consolidation, the Company is wholly-owned by Exopack Key Holdings, LLC, which is a wholly-owned subsidiary of CPG Finance, Inc. (“CPG”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”).
On August 6, 2007, the Company acquired 100% of the membership interests of InteliCoat Technologies Image Products Matthews, LLC and 100% of the outstanding shares of its affiliate, InteliCoat Technologies EF Holdco, Ltd. (collectively, “Electronic and Engineered Films Business” or “EEF”), and also acquired certain assets and assumed certain liabilities of other EEF entities (the “EEF Acquisition”). EEF, through its parent companies prior to the EEF Acquisition, was previously controlled by an affiliate of Sun Capital. The Company subsequently renamed this acquired EEF business Exopack Advanced Coatings (“EAC”).
On November 28, 2007, the Company acquired certain assets and assumed certain liabilities of DuPont Liquid Packaging System’s performance films business segment (“Liqui-Box”), including its Whitby, Ontario, Canada operating facility. Prior to the acquisition, the Company used Liqui-Box as a vendor for one of its Canadian facilities. The Company subsequently renamed this acquired Liqui-Box business Exopack Performance Films (“EPF”).
On July 13, 2010, the Company acquired certain assets and assumed certain liabilities of a flexible packaging business previously operated by Bemis Company, Inc. This acquisition provided the Company the unique opportunity to gain a position in the meat and cheese packaging sector. The Company subsequently renamed this acquired business Exopack Meat, Cheese and Specialty ("EMCS").
The Company operates eighteen manufacturing facilities located throughout the United States, United Kingdom, Canada and China. The Company operates seven manufacturing facilities in the food packaging segment, of which the Company leases one and owns the remaining six facilities. The Company operates eight manufacturing facilities in the non-food packaging segment, of which the Company leases three, including one in Concord, Canada, and owns the remaining five facilities. The Company operates three manufacturing facilities in the coated products segment, all of which the Company leases, including one manufacturing facility in North Wales, United Kingdom and one manufacturing facility in Guangzhou, China. During the second quarter of 2012, the Company announced a plan to close its manufacturing facility located in Seymour, Indiana. The Company is consolidating its consumer multiwall packaging operations into other facilities located in Spartanburg, South Carolina, Tifton, Georgia and Sibley, Iowa. The final transition of equipment and inventory from the Seymour facility to the other facilities is scheduled for completion during the fourth quarter of 2012.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report. It is management’s opinion, however, that all material adjustments (consisting only of normal recurring adjustments, unless otherwise noted) have been made which are necessary for a fair statement of the Company’s financial position, results of operations and comprehensive income, stockholder's deficit and cash flows. The results for the interim periods are not necessarily indicative of the results to be expected for any other interim period, for the fiscal year or for any future period.
The consolidated balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

5


Variable Interest Entity
During 2009, the Company entered into a joint venture with INDEVCO Group, a manufacturer based in Lebanon (“INDEVCO”). The Company determined that the joint venture is a variable interest entity (“VIE”) under guidance of the Financial Accounting Standards Board ("FASB") related to accounting for variable interest entities and that the Company is not the primary beneficiary of the VIE. The VIE consists of a manufacturing operation, located within an existing manufacturing facility owned by INDEVCO in Lebanon, used to co-extrude polyethylene film for use in flexible packaging. During 2010, the VIE purchased and installed the necessary equipment and production commenced. The Company’s maximum exposure to loss as a result of its involvement with the unconsolidated VIE is limited to the Company’s recorded investment in this VIE, which was approximately $582,000 at September 30, 2012. The Company recognized approximately $3,000 as its share of loss from the joint venture's operations and received loan payments of approximately $63,000 during the three months ended September 30, 2012. The Company recognized approximately $27,000 as its share of income from the joint venture and received loan payments of approximately $125,000 during the nine months ended September 30, 2012. The Company may be subject to additional losses to the extent of any financial support that the Company provides in the future.
Financial Assets and Financial Liabilities Measured at Fair Value
The fair values of the Company’s financial assets and financial liabilities listed below reflect the amounts that would be received upon the sale of the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date (exit price).
The Company’s financial instruments include cash, accounts receivable, accounts payable, short-term borrowings, and long-term debt. At September 30, 2012, the carrying value of these financial instruments, excluding the Senior Notes portion of the long-term debt, approximates fair value because of the short-term maturities of these instruments.
Fair value disclosures are classified based on the fair value hierarchy. Level 1 fair value measurements represent exchange-traded securities which are valued at quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Level 2 fair value measurements are determined using input prices that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Level 3 fair value measurements are determined using unobservable inputs, such as internally developed pricing models for the asset or liability due to little or no market activity for the asset or liability.
The fair value measurements of the Company’s Senior Notes are primarily determined using input prices that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
The carrying values and estimated fair value of the Senior Notes at September 30, 2012 were:
 
 
September 30, 2012
(in thousands of dollars)
 
Carrying Value
 
Fair Value (Level 2)
Senior Notes
 
$
235,000

 
$
225,600


The Company does not have any financial instruments measured under the Level 3 hierarchy.

2.
Recent Accounting Pronouncements
FASB Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment, permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new accounting rules became effective for the Company for all periods after December 15, 2011.

6


FASB ASU No. 2011-05, Presentation of Comprehensive Income, requires entities to present net income and comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and comprehensive income. FASB has amended FASB ASU No. 2011-05 with FASB ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards No. 2011-05, which defers the effective date of certain requirements outlined in FASB ASU No. 2011-05 pending further deliberation by the FASB. FASB ASU No. 2011-05 also reinstates requirements regarding presentation of reclassifications out of accumulated other comprehensive income, which were in place prior to the issuance of FASB ASU No. 2011-05. The portions of FASB ASU No. 2011-05 that are currently in effect were adopted by the Company on January 1, 2012. This guidance did not have a significant impact on the Company's consolidated financial statements.
FASB ASU No. 2011-04, Fair Value Measurement, provides guidance to improve the comparability of fair value measurements presented in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The new standard requires the Company to report the level in the fair value hierarchy of assets and liabilities not measured at fair value on the balance sheet, but for which the fair value is disclosed, and requires the Company to expand existing disclosures. FASB ASU No. 2011-04 was adopted by the Company on January 1, 2012. This guidance did not have a significant impact on the Company's consolidated financial statements.
FASB ASU No. 2012-02, Goodwill and Other Testing Indefinite-Lived Intangible Assets for Impairment, annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
 
3.
Inventories
The Company’s inventories are stated at the lower of cost or market. The cost of substantially all inventories is determined primarily using the first-in, first-out and weighted average method. Inventories are summarized as follows:
 
(in thousands of dollars)
September 30, 2012
 
December 31, 2011
Inventories
 
 
 
Raw materials and supplies
$
37,423

 
$
40,580

Work in progress
15,799

 
15,191

Finished goods
45,637

 
58,168

Total inventories
$
98,859

 
$
113,939

 
4.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in purchase business combinations. The Company does not amortize goodwill, but does assess the recoverability of goodwill annually or whenever events or circumstances indicate that it is "more likely than not" that the fair value of a reporting unit has dropped below its carrying value. Effective July 1, 2012, the Company began implementing an organizational change to bring management closer to its customers and facility operations, to further increase focus on sales growth and operational excellence, and to provide a more effective basis for management decisions. In connection with these organizational changes, the Company re-evaluated its segment reporting. As a result of the reorganization, the Company's operations now consist of three reportable operating segments 1) food packaging; 2) non-food packaging; and 3) coated products (which we refer to as "EAC"). Due to this triggering event, the Company tested goodwill for impairment as of July 31, 2012 and reallocated goodwill based on the new segments. No impairment was noted during our testing.

7


The Company had total goodwill of approximately $69.7 million at September 30, 2012 and $69.6 million at December 31, 2011. A summary of the reallocation in goodwill for the nine months ended September 30, 2012 is as follows:
(in thousands of dollars)
Food Packaging Segment
 
Non-Food Packaging Segment
 
Coated Products Segment
 
Total
Goodwill at July 1, 2012
$
32,924

 
$
21,560

 
$
15,157

 
$
69,641

     Foreign currency translation
 
 
 
 
32

 
32

Goodwill at September 30, 2012
$
32,924

 
$
21,560

 
$
15,189

 
$
69,673

Impairment or other expenses associated with changes in goodwill, with the exception of approximately $3.3 million and $1.9 million of goodwill assigned to the Company’s food packaging segment and coated products segments, respectively, are not deductible for tax purposes.
The Company’s other intangible assets are summarized as follows:
 
(in thousands of dollars)
September 30, 2012
 
December 31, 2011
Intangible assets
 
 
 
Definite-lived intangible assets:
 
 
 
Customer lists (amortized over 10-21 years)
$
43,300

 
$
43,276

Patents (amortized over 2-15 years)
7,163

 
7,163

Trademarks and trade names (amortized over 20 years)
2,629

 
2,618

 
53,092

 
53,057

Accumulated amortization
(17,731
)
 
(14,878
)
Net definite-lived intangible assets
35,361

 
38,179

Indefinite-lived intangible assets - trademarks and trade names
51,000

 
51,000

Net intangible assets
$
86,361

 
$
89,179


The increase in gross intangible assets during the nine months ended September 30, 2012 was due solely to the change in the exchange rate between the United States dollar and the British pound during the period. Amortization expense for definite-lived intangible assets for the three months ended September 30, 2012 and 2011 was approximately $947,000 and $948,000, respectively, and for the nine months ended September 30, 2012 and 2011 was approximately $2.8 million and $2.9 million, respectively. Future amortization for definite-lived customer lists, patents and trademarks and trade names is estimated to be approximately $1.0 million for the remainder of 2012, approximately $3.8 million for each of the years 2013 through 2014, approximately $3.5 million for 2015 and approximately $2.6 million for 2016. The Company tested indefinite-lived intangible assets - trademarks and trade names for impairment as of July 31, 2012. No impairment was identified as a result of the testing.
 
5.
Financing Arrangements

2011 Recapitalization Transactions

On May 31, 2011, the Company completed a series of transactions (the "Recapitalization Transactions") that recapitalized the Company's indebtedness. These transactions included:

•The private placement of $235.0 million principal amount of 10% senior notes due 2018;
•The entry into a six-year $350.0 million senior secured term loan facility;
•The amendment and restatement of the Company's existing revolving credit facility; and
•The repayment of all of the Company's outstanding 11.25% senior notes due 2014 (the "Former Senior Notes").

8

•

The balances due under long-term debt agreements at September 30, 2012 and December 31, 2011 were as follows:

(in thousands of dollars)
September 30, 2012
 
December 31, 2011
Senior Notes
$
235,000

 
$
235,000

Term Loan Facility
345,625

 
348,250

Senior Credit Facility
13,527

 
2,712

Capital Leases
16,800

 
12,764

   Total debt
610,952

 
598,726

Less: Current portion
19,911

 
8,201

Total long-term debt
$
591,041

 
$
590,525


The Recapitalization Transactions and the Company's current financing arrangements are further described below.
Issuance of Senior Notes
On May 31, 2011, the Company issued $235.0 million aggregate principal amount of 10% senior notes due 2018 in a private placement pursuant to Rule 144A and Regulation S. Pursuant to an exchange offer in January 2012, the Company exchanged all of the 10% senior notes for 10% senior notes registered under the Securities Act of 1933 (the "Senior Notes").
The Senior Notes mature on June 1, 2018. Interest on the Senior Notes accrues at the rate of 10% per annum and is payable on a semi-annual basis on each June 1 and December 1, commencing December 1, 2011. Before June 1, 2014, the Company may redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before June 1, 2014, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net proceeds of certain equity offerings at a price equal to 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, provided at least 65% of the aggregate principal amount of the Senior Notes remains outstanding immediately after such redemption. The Company may also redeem the Senior Notes at any time, in part or in whole, on or after June 1, 2014 at the redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption.
The Company and all of its domestic restricted subsidiaries have guaranteed the Senior Notes. See Note 13 for supplemental guarantor financial information required by Rule 3-10 of Regulation S-X. The Senior Notes place certain restrictions on the Company including, but not limited to, the Company’s ability to incur additional indebtedness or issue preferred stock, pay dividends or make other distributions or repurchase or redeem the Company’s stock or subordinated indebtedness, make investments, sell assets and issue capital stock of restricted subsidiaries, incur liens, enter into agreements restricting the ability of the Company’s subsidiaries to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell all or substantially all of the Company’s assets. At September 30, 2012, the Company was in compliance with these restrictions.
In connection with the issuance of the Senior Notes, the Company incurred approximately $6.9 million in deferred financing costs that are being amortized over the term of the Senior Notes.
Term Loan Facility
On May 31, 2011, the Company, its parent company and certain of the Company’s subsidiaries entered into a new $350.0 million senior secured term loan B facility (the “Term Loan Facility”). In addition to providing for term loans of up to $350.0 million, the Term Loan Facility also provides for an uncommitted incremental term loan facility of up to $75.0 million that will be available subject to certain conditions. In general, in the absence of an event of default, the Term Loan Facility matures on May 31, 2017.
Beginning on September 30, 2011, the Company began making required installment payments on the Term Loan Facility in quarterly principal amounts of $875,000. Any remaining outstanding amounts are payable at maturity in 2017. Borrowings under the Term Loan Facility accrue interest at (i) for base rate loans, a rate per annum equal to the highest of (a) the federal funds rate in effect on such date plus 0.5% per annum, (b) the variable annual rate of interest then announced by Bank of America as its “prime rate,” and (c) the Eurodollar Rate (as defined in the Term Loan Facility) plus 1.00%, plus, in each case, an applicable margin of 4.0% to 5.0% as set forth in the Term Loan Facility; and (ii) for Eurodollar Rate Loans (as defined in the Term Loan Facility) for any interest period, the rate per annum equal to the

9

British Bankers Association LIBOR Rate published by Reuters two business days before such interest period for dollar deposits with a term equivalent to such interest period, subject to a minimum interest rate and a substitute rate in certain circumstances, plus an applicable margin set forth in the Term Loan Facility. The interest rate applicable to outstanding borrowings under the Term Loan Facility was 6.5% at September 30, 2012.
The Term Loan Facility is collateralized by (i) a first priority lien on substantially all of the Company’s assets, other than the first priority lien collateral securing indebtedness under the Senior Credit Facility described below and assets of the Company’s foreign subsidiaries, and (ii) a second priority lien on the first priority lien collateral securing indebtedness under the Senior Credit Facility. In addition, obligations under the Term Loan Facility are secured by a first priority lien on the Company’s equity interests in its domestic subsidiaries and a portion of the Company’s equity interests in its foreign subsidiaries. All obligations under the Term Loan Facility are fully and unconditionally guaranteed by, subject to certain exceptions, each of the Company’s existing and future domestic subsidiaries.
The Term Loan Facility contains customary events of default, including, but not limited to, failure to make payments under the Term Loan Facility, materially incorrect representations, breaches of covenants (subject to a thirty-day grace period after notice in the case of certain covenants), cross-default to other material indebtedness, material unstayed judgments, certain ERISA, bankruptcy and insolvency events, failure of guarantees or security to remain in full force and effect, and changes of control. The Term Loan Facility places certain restrictions on the Company that are similar to the restrictions related to the Senior Notes. In addition, capital expenditures are limited to $45.0 million each fiscal year with carryover of any unused amounts to the next fiscal year. At September 30, 2012, the Company was in compliance with these restrictions.
In connection with entering into the Term Loan Facility, the Company incurred approximately $10.1 million in deferred financing costs that are being amortized over the term of the Term Loan Facility.
Senior Credit Facility
Since January 31, 2006, the Company has maintained a senior secured revolving credit facility. On August 6, 2007, the Company amended this facility to provide for an increase in the maximum credit facility to $75.0 million, which included a Canadian dollar sub-facility available to the Company’s Canadian subsidiaries for up to $15.0 million (or the Canadian dollar equivalent). A reserve has been established against the U.S. facility for the U.S. dollar equivalent of amounts outstanding under the Canadian sub-facility. On October 31, 2007, the Company amended this facility to provide for an increase in the maximum credit facility to $110.0 million, to provide for an increase in the Canadian dollar sub-facility to $25.0 million and to amend certain borrowing base limitations. On July 2, 2010, the loan agreement related to this facility was amended and restated to provide for an increase in the maximum credit facility to $125.0 million.
On May 31, 2011, as part of the Recapitalization Transactions, the loan agreement related to the Senior Credit Facility was amended and restated to provide for a decrease in the maximum credit facility to $75.0 million and to provide for a decrease in the Canadian dollar sub-facility to $15.0 million. The Senior Credit Facility also provides the Company’s domestic and Canadian subsidiaries with letter of credit sub-facilities. Availability under the Senior Credit Facility is subject to borrowing base limitations for both the U.S. and the Canadian subsidiaries, as defined in the loan agreement. In general, in the absence of an event of default, the Senior Credit Facility matures on May 31, 2016. Under the terms of the Company’s lock box arrangement, remittances automatically reduce the revolving debt outstanding on a daily basis and therefore the Senior Credit Facility is classified as a current liability on the accompanying consolidated balance sheets at September 30, 2012 and December 31, 2011. At September 30, 2012, approximately $13.5 million was outstanding and approximately $57.3 million was available for additional borrowings under the Senior Credit Facility.
The Company may also borrow up to an additional $25 million under the Senior Credit Facility subject to certain conditions. At September 30, 2012, there were outstanding letters of credit of approximately $4.2 million under the Senior Credit Facility.
Under the Senior Credit Facility, in general, interest subsequent to May 31, 2011 accrues on amounts outstanding under the U.S facility at a variable annual rate equal to the U.S. Index Rate (as defined therein) plus 1.25% to 2.0%, depending on the Company’s utilization of the Senior Credit Facility, or at the Company’s election, at an annual rate equal to the LIBOR Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. In general, interest accrues on amounts outstanding under the Canadian sub-facility at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.25% to 2.0%, depending upon utilization, or at the Company’s election, at an annual rate equal to the BA Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. The Senior Credit Facility also includes unused facility and letter-of-credit fees which are reflected in interest expense in the accompanying consolidated statements of operations. The weighted-average interest rate on borrowings outstanding under the Senior Credit Facility at September 30, 2012 was approximately 4.4%. The Senior Credit Facility also includes unused facility and letter-of-credit fees which are reflected in interest expense in the accompanying consolidated statements of operations.

10

Under the Senior Credit Facility, in general, interest for the period from January 1, 2011 through May 31, 2011 accrued on amounts outstanding under the U.S. facility at a variable annual rate equal to the U.S. Index Rate (as defined in the prior loan agreement) plus 2.0%, or at the Company’s election, at an annual rate equal to the LIBOR Rate (as defined in the prior loan agreement) plus 3.0%. In general, interest accrues on amounts outstanding under the Canadian sub-facility at a variable rate equal to the Canadian Index Rate (as defined in the prior loan agreement) plus 2.0%, or at the Company’s election, at an annual rate equal to the BA Rate (as defined in the prior loan agreement) plus 3.0%.
The Senior Credit Facility is collateralized by substantially all of the Company’s tangible and intangible property (other than real property and equipment). In addition, all of the Company’s equity interests in its domestic subsidiaries and a portion of the equity interests in its foreign subsidiaries are pledged to collateralize the Senior Credit Facility.
The Senior Credit Facility contains certain customary affirmative and negative covenants that restrict the Company’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, grant liens, engage in mergers, acquisitions and asset sales, declare dividends and distributions, redeem or repurchase equity interests, incur contingent obligations, prepay certain subordinated indebtedness, make loans, certain payments and investments and enter into transactions with affiliates. At September 30, 2012, the Company was in compliance with these covenants.
In connection with the loan agreement amendments relating to the Senior Credit Facility, the Company incurred approximately $817,000 in deferred financing costs that are being amortized over the term of the Senior Credit Facility.
Loss on Early Extinguishment of Debt
In May 2011, the Company entered into the Term Loan Facility and issued the Senior Notes, and the Company used a portion of the proceeds from these transactions to repay the Former Senior Notes and all amounts outstanding under the Senior Credit Facility. In connection with the refinancing transaction, the Company wrote off deferred financing costs of approximately $11.9 million and paid approximately $10.2 million in early redemption and consent costs related to the Former Senior Notes.
Lease Transactions
On July 12, 2010, the Company completed an equipment sale/leaseback transaction with a third party that resulted in net proceeds of approximately $4.9 million, after fees and deposits. These funds were subsequently used to reduce amounts outstanding under the Senior Credit Facility. The Company determined that this lease qualified as a capital lease ("Sale/Leaseback Lease") and, accordingly, recorded a capital lease obligation equal to the present value of the minimum lease payments of approximately $5.2 million. The lease term is five years with a lease expiration date of July 2015. In connection with the sale/leaseback transaction, the Company paid approximately $1.7 million in security deposits, which are refundable at lease expiration and are included in other assets on the accompanying consolidated balance sheets.
In conjunction with the EMCS acquisition, the Company assumed one lease related to real estate ("EMCS Real Estate Lease") and three leases related to extrusion equipment that the Company determined qualified as capital leases. The Company recorded a total capital lease obligation equal to the present value of the minimum lease payments, or approximately $9.2 million. The leases were scheduled to expire over various periods with the EMCS Real Estate Lease expiring in May 2019 and the three equipment leases expiring in May 2014, September 2014 and December 2017, respectively. Subsequent to the EMCS acquisition, the Company re-negotiated two of the equipment leases. The remaining equipment lease was canceled and the equipment was purchased by the Company for approximately $1.5 million. The new equipment lease ("EMCS Equipment Lease") expires in September 2014. In connection with the EMCS Equipment Lease, the Company paid approximately $1.4 million in security deposits, which are refundable at lease expiration and are included in other assets in the accompanying consolidated balance sheets.
On September 1, 2011, the Company entered into a lease agreement with a third party related to real estate for the facility located in Thomasville, North Carolina. The Company has determined this lease qualifies as a capital lease ("Thomasville Real Estate Lease") and, accordingly, has recorded a capital lease obligation equal to the present value of the minimum lease payments of approximately $2.3 million. The lease term is ten years and four months with a lease expiration date of December 31, 2021.
On March 29, 2012, the Company entered into a modification of a lease agreement with a third party related to equipment for the facility located in Tifton, Georgia. The Company has determined that, due to the modification, this lease now qualifies as a capital lease ("Tifton Equipment Lease") and, accordingly, has recorded a capital lease obligation equal to the present value of the minimum lease payments of approximately $5.9 million. The new lease term is seven years with a lease expiration date of March 1, 2019. In connection with the modification of the lease agreement, the Company expensed $132,000 in prepaid lease costs.

11


The components of the Company's capital leases at September 30, 2012 were as follows:
Original Lease Name
Lease Term
Plant Property & Equipment
Accumulated Depreciation
Net Book Value
Capital Lease Obligation
Short-Term
Long-Term
Total
 
 
 
 
 
 
 
 
(in thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale/Leaseback Lease
5 years
$
5,154

$
(2,319
)
$
2,835

$
966

$
1,957

$
2,923

 
 
 
 
 
 
 
 
EMCS Real Estate Lease
9 years
4,270

(320
)
3,950

90

4,193

4,283

 
 
 
 
 
 
 
 
EMCS Equipment Lease
4 years
3,807

(2,141
)
1,666

922

1,003

1,925

 
 
 
 
 
 
 
 
Thomasville Real Estate Lease
10.3 years
2,307

(242
)
2,065

148

2,011

2,159

 
 
 
 
 
 
 
 
Tifton Equipment Lease
7 years
5,936

(424
)
5,512

758

4,752

5,510

 
 
 
 
 
 
 
 
     Total
 
$
21,474

$
(5,446
)
$
16,028

$
2,884

$
13,916

$
16,800


6.
Stock Option Plan
In December 2005, CPG’s Board of Directors approved the establishment of the 2005 Stock Option Plan (the "2005 Stock Option Plan") in which officers and certain key employees of the Company are able to participate, and reserved 100,000 shares of CPG’s non-voting common shares for the 2005 Stock Option Plan. Under the 2005 Stock Option Plan, options have a term of no longer than ten years and vest ratably over a five-year period.
The FASB revised guidance related to share based payments in December of 2004. This guidance requires nonpublic companies that have used the “minimum value method” under the previous guidance for either recognition or pro forma purposes to use the prospective method of the new guidance for transition. The prospective method allows companies to continue to account for previously issued awards that remain outstanding at the date of adopting the new guidance using pre-existing accounting standards and, accordingly, there will be no future material compensation expense related to the options issued in December 2005. The pro forma impact of the December 2005 options would be immaterial for disclosure purposes during 2012 and 2011. The prospective method also requires nonpublic companies to record compensation costs in accordance with the new guidance only for awards issued, modified, repurchased, or cancelled after the effective date. Compensation expense related to options issued subsequent to the adoption of the new guidance is being recorded ratably over the vesting period of five years. CPG issued options to purchase 23,000 and 4,500 common shares during the nine months ended September 30, 2012 and 2011, respectively. The Company recorded stock compensation expense of approximately $100,000 and $148,000 during the three months ended September 30, 2012 and 2011, respectively, and approximately $384,000 and $305,000 during the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, the total compensation cost related to non-vested awards not yet recognized was approximately $1.3 million. This compensation cost is expected to be recognized over the remaining weighted-average vesting period of 2.7 years.
The fair value of options granted during the nine months ended September 30, 2012 was estimated using the Black-Scholes pricing model. The estimated fair value of $45 per share was based on a 10-year weighted-average expected life, a risk-free interest rate of 2.0% and volatility of 40%.

12


The following tables summarize information about stock options outstanding at September 30, 2012 (there were no stock options exercisable at September 30, 2012).
 
 
 
Options Outstanding
Exercise Price
 
Number
Outstanding
 
Weighted-Average
Remaining
Contractual Life
$
72

 
33,500

 
3.3
$
130

 
1,500

 
5.0
$
140

 
3,700

 
5.0
$
184

 
200

 
5.0
$
163

 
8,800

 
5.0
$
139

 
7,500

 
7.9
$
85

 
3,000

 
9.5
 
 
58,200

 
6.0
 
 
Options
Outstanding
 
Weighted-Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted-Average
Remaining
Contractual
Life
Options outstanding at December 31, 2011
70,700

 
$
107.12

 
 
 
 
Granted
23,000

 
$
84.98

 
 
 
 
Forfeited
(35,500
)
 
$
102.38

 
 
 
 
Options outstanding at September 30, 2012
58,200

 
$
101.27

 
—

 
6.0
There were 41,800 options available for grant under the 2005 Stock Option Plan at September 30, 2012.  


7.
Employee Benefit Plans and Other Programs
Defined Benefit Plans
The pension assets and obligations of the Retirement Plan of Exopack, LLC (the “Retirement Plan”) and the pension obligations of the Exopack, LLC Pension Restoration Plan for Salaried Employees (the “Restoration Plan”) (collectively, the “Pension Plans”) were transferred to and assumed by the Company in connection with the acquisition of Exopack in 2005. Substantially all full-time employees of Exopack, LLC hired prior to June 30, 2003 were eligible to participate in the Retirement Plan. The Pension Plans were frozen prior to the acquisition of Exopack in 2005. Accordingly, the employees’ final benefit calculation under the Pension Plans was the benefit they had earned under the Pension Plans as of the date the Pension Plans were frozen. This benefit will not be diminished, subject to the terms and conditions of the Pension Plans, which remain in effect. The Company also sponsors a postretirement benefit plan covering, on a restricted basis, certain Exopack employees pursuant to a collective bargaining agreement.
In conjunction with the EMCS acquisition, the Company assumed a defined benefit pension plan for certain employees at the Menasha, Wisconsin facility. Employees hired prior to March 1, 2010 were eligible to participate in the plan upon completion of 1,000 service hours. This plan was subsequently incorporated into the Retirement Plan of Exopack, LLC.

13


The components of the net periodic benefit cost for the Pension Plans and the postretirement benefit plan are as follows for the three and nine months ended September 30, 2012 and 2011:
 
Pension plans
Three Months Ended
 
Nine Months Ended
(in thousands of dollars)
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Service cost
$
122

 
$
87

 
$
360

 
$
305

Interest cost
829

 
893

 
2,521

 
2,487

Expected return on plan assets
(930
)
 
(880
)
 
(2,542
)
 
(2,436
)
Amortization of net actuarial losses
654

 
102

 
1,708

 
299

Net periodic benefit cost
$
675

 
$
202

 
$
2,047

 
$
655



Postretirement benefit plan
Three Months Ended
 
Nine Months Ended
(in thousands of dollars)
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Service cost
$
6

 
$
6

 
$
18

 
$
18

Interest cost
7

 
8

 
21

 
24

Amortization of net actuarial gains
(4
)
 
(4
)
 
(12
)
 
(12
)
Net periodic benefit cost
$
9

 
$
10

 
$
27

 
$
30



The Company contributed approximately $2.5 million and $1.8 million, to the Retirement Plan during the three months ended September 30, 2012 and 2011, respectively and approximately $3.9 million and $2.7 million during the nine months ended September 30, 2012 and 2011, respectively. Contributions of approximately $458,000 are expected to be made to the Retirement Plan during the remainder of 2012. At September 30, 2012, the fair value of the assets of the Pension Plans was estimated at $54.9 million, up from $47.2 million at December 31, 2011.

Retirement Plan for Employees of Exopack Performance Films, Inc.
On January 29, 2008, the Company adopted the Retirement Plan for employees of Exopack Performance Films, Inc., retroactive to December 1, 2007. Exopack Performance Films’ employees at the Whitby location are eligible to participate in the plan. The Company contributed approximately $78,000 and $82,000 to the defined contribution plan during the three months ended September 30, 2012 and 2011, respectively, and approximately $226,000 and $241,000 during the nine months ended September 30, 2012 and 2011, respectively.
Exopack, LLC Savings Plan
The Company has a 401(k) plan, which is a defined contribution plan that covers all full-time employees in the United States. Employee contributions to the plan are partially matched by the Company. Company matching contributions vest immediately. Expense totaled approximately $963,000 and $481,000 for the three months ended September 30, 2012 and 2011, respectively and approximately $1.5 million and $1.5 million for the nine months ended September 30, 2012 and 2011, respectively.
Deferred Compensation Agreements
The Company has unfunded deferred compensation agreements assumed in connection with the acquisition of Cello-Foil in 2005. The Company is obligated to provide certain deferred compensation for covered individuals over specified periods beginning at age 62. The deferred compensation liability for these agreements was approximately $213,000 and $261,000 at September 30, 2012 and December 31, 2011, respectively (recorded in “other liabilities” in the accompanying consolidated balance sheets). Deferred compensation expense for each of the three and nine months ended September 30, 2012 and 2011 was insignificant.

14

Management Incentive Compensation Plan
The Company maintains a management incentive compensation plan for eligible management personnel based on both Company and individual performance against pre-defined goals. The plan provides for quarterly cash payments of 66.7% of the quarterly amount earned and 33.3% is accrued and held back for payment once the annual audit is finalized. The Company recognized charges of approximately $555,000 and $411,000 for the three months ended September 30, 2012 and 2011, respectively, and approximately $941,000 and $2.0 million for the nine months ended September 30, 2012 and 2011, respectively, for benefits under the management incentive compensation plan.
Option Holder Bonus Agreements
During June 2011, CPG entered into bonus agreements (the “Bonus Agreements”) with the employees of the Company who hold options to purchase shares of CPG’s common stock. The Bonus Agreements provided for the payment to each employee holding options an amount equal to the dividend amount per share minus the exercise price per share. Following entry into the Bonus Agreements, CPG made cash payments to employees holding vested in-the-money options. Additional payments will be made as the options vest, expire, and upon certain events of termination of the applicable employee’s employment or the occurrence of certain change of control events. The Company recognized charges related to these bonus agreements of approximately $168,000 and $322,000 during the three months ended September 30, 2012 and 2011, respectively, and approximately $533,000 and $3.9 million during the nine months ended September 30, 2012 and 2011, respectively.

8.
Severance Expenses
During the three and nine months ended September 30, 2012 and 2011, the Company terminated the employment of certain employees and eliminated some of their positions. In connection with these terminations, the Company recorded employee termination costs of approximately $749,000 and $646,000 for the three months ended September 30, 2012 and 2011, respectively, and approximately $2.9 million and $1.1 million for the nine months ended September 30, 2012 and 2011, respectively. The amounts were included in “Selling, general and administrative expenses" in the consolidated statements of operations. Approximately $858,000 in severance was accrued at December 31, 2011. Of these amounts, the Company paid approximately $2.0 million through September 30, 2012, and approximately $1.9 million remained accrued for employee termination benefits at September 30, 2012. The Company expects that the accrued amount will be paid in 2012 and 2013.

9.
Contingencies
From time to time, the Company becomes party to legal proceedings and administrative actions, which are of an ordinary or routine nature, incidental to the operations of the Company. Although it is difficult to predict the outcome of any legal proceeding, in the opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
 

15


10.
Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss for the nine months ended September 30, 2012:
 
(in thousands of dollars)
Foreign
Currency
Translation
Adjustments
 
Pension and
Post Retirement
Plans Liability
 
Cumulative Tax
Effect on Liability
 
Accumulated
Comprehensive
Income (Loss)
Balances at December 31, 2011
$
(1,161
)
 
$
(27,813
)
 
$
3,776

 
$
(25,198
)
Year-to date net change
1,539

 
—

 
—

 
1,539

Balances at September 30, 2012
$
378

 
$
(27,813
)
 
$
3,776

 
$
(23,659
)
 

11.
Related Party Transactions
Fees Related to Management and Consulting Services
In 2005, the Company entered into a management services agreement with Sun Capital Partners Management IV, LLC, an affiliate of Sun Capital (“Sun Capital Management”). The management services agreement was amended on January 31, 2006. Pursuant to the terms of the agreement, as amended, Sun Capital Management has provided and will provide the Company with certain financial and management consulting services, subject to the supervision of the Company's Board of Directors. In exchange for these services, the Company will pay Sun Capital Management an annual management fee equal to the greater of $1.0 million or 2% of EBITDA (as defined in the management services agreement). On May 31, 2011, the management services agreement was replaced with a new consulting agreement (the "consulting agreement"), which will terminate on May 31, 2021. Pursuant to the terms of the consulting agreement, Sun Capital Management has provided and will provide the Company with certain financial and management consulting services, subject to the supervision of the Company’s Board of Directors. In exchange for these services, the Company pays Sun Capital Management an annual consulting fee equal to the greater of $3.0 million or 6% of EBITDA (as defined in the consulting agreement), not to exceed $6.0 million annually.
The Company incurred management and consultant fees and other related expenses under the management services and the consulting agreements of approximately $1.5 million and $1.5 million during the three months ended September 30, 2012 and 2011, respectively, and approximately $4.5 million and $3.0 million during the nine months ended September 30, 2012 and 2011, respectively. Such fees are reflected in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
The Company incurred approximately $15,000 and $12,000 for certain additional consulting fees from Sun Capital Management during the three months ended September 30, 2012 and 2011, respectively, and approximately $43,000 and $40,000 during the nine months ended September 30, 2012 and 2011, respectively.
Fees Related to Transactions
In addition to the above fees, in connection with any consulting services provided to the Company, its subsidiaries, or its stockholders with respect to certain corporate events, including, without limitation, refinancing, restructurings, equity or debt offerings, acquisitions, mergers, consolidations, business combinations, sales and divestitures, Sun Capital Management is entitled to 1.0% of the aggregate consideration paid (including liabilities assumed) in connection with the applicable corporate event as well as any customary and reasonable fees. The Company will also reimburse Sun Capital Management for all out-of-pocket expenses incurred in the performance of the services under the consulting agreement. During the year ended December 31, 2011, the Company incurred approximately $1.6 million in management fees and other related expenses associated with the Recapitalization Transactions. These fees are included in "deferred financing costs" in the accompanying consolidated balance sheets. There were no transaction fees for the three and nine months ended September 30, 2012.
Dividends Paid
As part of the Recapitalization Transactions, a dividend of $150.0 million was paid to an affiliate of Sun Capital on May 31, 2011.

16



12.
Segments and Significant Customers
Segments
Effective July 1, 2012 the Company determined that reorganization was appropriate to clarify and highlight detailed aspects of sales growth and operational excellence for management, thus providing a more effective basis for management decisions. As a result of the reorganization, the Company's operations consist of three reportable operating segments 1) food packaging; 2) non-food packaging; and 3) coated products (commonly referred to as EAC). Previously, the Company reported external segment information under four operating segments, including 1) pet food and specialty packaging; 2) consumer food and packaging specialty; 3) performance packaging; and 4) coated products.
The Company identifies its reportable segments in accordance with FASB guidance for disclosures about segments of an enterprise and related information. In accordance with FASB guidance, the Company reviewed certain qualitative factors were reviewed in identifying and determining reporting segments. These factors are as follows: 1) nature of the products; 2) nature of the production processes and major raw material inputs; 3) class of consumer for each product; and 4) methods used to distribute each product. While all of these factors were reviewed, the most relevant factors are the nature of the products and the type of customers served. The types of products sold from each segment are similar in nature and have a similar customer base. Food and beverage products and pet food are produced for the retail market and are similar in nature and in terms of end use, and are therefore included in the food segment. Building materials, consumer goods and chemicals and minerals are primarily provided to the industrial market. As a result, these products were included in the non-food segment. The coated products segment is aimed at producing items for the medical devices, electronics, and optical films industries. These products are individually distinct from other reportable segments and have been combined into a separate dedicated segment. The Company evaluates segment performance based on operating income or loss. Segment operating results for fiscal year 2011 have been revised to conform to the reorganization of the Company's operating segments.
The Company evaluates performance based on profit or loss from operations. For the three and nine months ended September 30, 2012 and 2011, segment data included a charge allocating certain corporate costs to each of its segments, as summarized in the table below:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands of dollars)
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Food packaging
$
3,386

 
$
3,508

 
$
10,482

 
$
11,048

Non-food packaging
1,094

 
1,177

 
3,431

 
3,946

Total allocations
$
4,480

 
$
4,685

 
$
13,913

 
$
14,994


Not all corporate costs have been allocated to an operating segment. Due to the unique nature of the products in the coated products segment, meaningful savings cannot be realized through shared functions at the corporate level. Therefore, corporate costs were only allocated to the food and non-food segments during the three and nine months ended September 30, 2012 or 2011.
While sales and transfers between segments are recorded at cost plus a reasonable profit, the effects of intersegment sales are excluded from the computations of segment operating income. Intercompany profit is eliminated in consolidation and is not significant for the periods presented.
  

17


The table below presents information about the Company’s reportable segments for the three and nine months ended September 30, 2012 and 2011.
 

 
Three Months Ended
 
Nine Months Ended
(in thousands of dollars)
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Revenues from external customers:
 
 
 
 
 
 
 
Food packaging
$
122,492

 
$
128,603

 
$
374,819

 
$
394,511

Non-Food packaging
67,312

 
70,376

 
201,714

 
207,739

Coated products
20,634

 
20,665

 
64,837

 
61,642

Total
$
210,438

 
$
219,644

 
$
641,370

 
$
663,892

Intersegment revenues:
 
 
 
 
 
 
 
Food packaging
$
1,303

 
$
2,263

 
$
4,874

 
$
6,299

Non-Food packaging
891

 
476

 
1,923

 
1,588

Coated products
—

 
—

 
—

 
—

Total
$
2,194

 
$
2,739

 
$
6,797

 
$
7,887

Operating income:
 
 
 
 
 
 
 
Food packaging
$
7,729

 
$
9,552

 
$
27,758

 
$
33,198

Non-Food packaging
4,696

 
6,062

 
15,337

 
15,405

Coated products
4,247

 
2,939

 
11,984

 
9,042

Corporate
(9,358
)
 
(7,796
)
 
(30,771
)
 
(24,623
)
Total
7,314

 
10,757

 
24,308

 
33,022

Interest expense - Corporate
13,170

 
12,976

 
39,300

 
36,572

Loss on early extinguishment of debt
—

 
—

 
—

 
22,051

Other income, net
(7
)
 
(96
)
 
(242
)
 
(150
)
Loss before income taxes
$
(5,849
)
 
$
(2,123
)
 
$
(14,750
)
 
$
(25,451
)

Significant Customers
One customer, primarily in the food packaging segment, accounted for 10.2% of the Company's net sales during the nine months ended September 30, 2012. No customer accounted for more than 10% of the Company’s net sales during the nine months ended September 30, 2011. One customer, primarily within the Company’s food packaging segment, accounted for 11.9% and 11.3% of the Company’s total accounts receivable at September 30, 2012 and December 31, 2011, respectively.

18


13.
Supplemental Guarantor Financial Information
The Senior Notes are jointly, severally, fully and unconditionally guaranteed by the Company’s domestic restricted subsidiaries. Each guarantor subsidiary is 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10(h) of Regulation S-X. The Senior Notes include a provision which allows for a guarantor subsidiary to be released of any obligation under the subsidiary guarantee under certain conditions. These conditions include the sale or other disposition of all or substantially all of the guarantor subsidiary's assets, the sale or other disposition of all the capital stock of the guarantor subsidiary, change in the designation of any restricted subsidiary as an unrestricted subsidiary by the Company, or upon legal defeasance or satisfaction and discharge of the Senior Notes. Following are consolidating financial statements of the Company, including the guarantors, provided pursuant to Rule 3-10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes.
The following consolidating financial statements present the balance sheets as of September 30, 2012 and December 31, 2011, the statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2012 and 2011, and the statements of cash flows for the nine months ended September 30, 2012 and 2011, of (i) Exopack Holding Corp. (the “Parent”), (ii) the domestic subsidiaries of Exopack Holding Corp. (the “Guarantor Subsidiaries”), (iii) the foreign subsidiaries of Exopack Holding Corp. (the “Nonguarantor Subsidiaries”), and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis. The Parent and the Guarantor Subsidiaries have each reflected investments in their respective subsidiaries under the equity method of accounting. There are no restrictions limiting transfers of cash from Guarantor Subsidiaries and Nonguarantor Subsidiaries to the Parent. The consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements of the Company.

19


CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2012
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash
$
—

 
$
18

 
$
1,584

 
$
—

 
$
1,602

Trade accounts receivable (net of allowance for uncollectible accounts of $1,825)
—

 
81,458

 
20,195

 
—

 
101,653

Other receivables
—

 
2,222

 
340

 
(81
)
 
2,481

Inventories
—

 
84,640

 
14,219

 
—

 
98,859

Deferred income taxes
—

 
2,799

 
83

 
—

 
2,882

Prepaid expenses and other current assets
—

 
3,335

 
1,187

 
—

 
4,522

Total current assets
—

 
174,472

 
37,608

 
(81
)
 
211,999

Property, plant, and equipment, net
—

 
200,886

 
24,712

 
—

 
225,598

Deferred financing costs, net
5,628

 
9,303

 
—

 
—

 
14,931

Intangible assets, net
—

 
85,831

 
530

 
—

 
86,361

Goodwill
—

 
68,943

 
730

 
—

 
69,673

Investment in subsidiaries
—

 
14,575

 
—

 
(14,575
)
 
—

Intercompany receivables
35,639

 
30,534

 
—

 
(66,173
)
 
—

Deferred income taxes
64,976

 
—

 
—

 
(64,976
)
 
—

Other assets
—

 
8,512

 
5

 
—

 
8,517

Total assets
$
106,243

 
$
593,056

 
$
63,585

 
$
(145,805
)
 
$
617,079

Liabilities and Stockholder’s (Deficit) Equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Revolving credit facility and current portion of long-term debt and capital leases
$
—

 
$
16,472

 
$
3,439

 
$
—

 
$
19,911

Accounts payable
—

 
65,584

 
9,705

 
—

 
75,289

Accrued liabilities
7,833

 
32,108

 
2,684

 
—

 
42,625

Income taxes payable
—

 
—

 
1,243

 
(81
)
 
1,162

Total current liabilities
7,833

 
114,164

 
17,071

 
(81
)
 
138,987

Long-term liabilities
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
235,000

 
342,125

 
—

 
—

 
577,125

Capital lease obligations, less current portion
—

 
13,916

 
—

 
—

 
13,916

Deferred income taxes
—

 
86,538

 
1,103

 
(64,976
)
 
22,665

Intercompany payables
1,605

 
34,171

 
30,397

 
(66,173
)
 
—

Deficiency in excess of investment in subsidiaries
23,585

 
—

 
—

 
(23,585
)
 
—

Other liabilities
—

 
25,727

 
439

 
—

 
26,166

Total long-term liabilities
260,190

 
502,477

 
31,939

 
(154,734
)
 
639,872

Commitments and contingencies


 


 


 


 


Stockholder’s (deficit) equity
 
 
 
 
 
 
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding
—

 
—

 
—

 
—

 
—

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding
—

 
—

 
—

 
—

 
—

(Distributions in excess of) additional paid-in capital
(75,654
)
 
(75,654
)
 
30,981

 
44,673

 
(75,654
)
Accumulated other comprehensive (loss) income, net
(23,659
)
 
(23,659
)
 
(1,715
)
 
25,374

 
(23,659
)
(Accumulated deficit) retained earnings
(62,467
)
 
75,728

 
(14,691
)
 
(61,037
)
 
(62,467
)
Total stockholder’s (deficit) equity
(161,780
)
 
(23,585
)
 
14,575

 
9,010

 
(161,780
)
Total liabilities and stockholder’s equity (deficit)
$
106,243

 
$
593,056

 
$
63,585

 
$
(145,805
)
 
$
617,079





20

CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2011
 
 
 
 
Guarantor
 
Nonguarantor
 
 
 
 
(in thousands of dollars)
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash
$
—

 
$
111

 
$
2,206

 
$
—

 
$
2,317

Trade accounts receivable (net of allowance for uncollectible accounts of $1,708)
—

 
76,009

 
12,828

 
—

 
88,837

Other receivables
—

 
3,467

 
645

 
(29
)
 
4,083

Inventories
—

 
96,602

 
17,337

 
—

 
113,939

Deferred income taxes
—

 
2,665

 
80

 
—

 
2,745

Prepaid expenses and other current assets
—

 
3,306

 
1,061

 
—

 
4,367

Total current assets
—

 
182,160

 
34,157

 
(29
)
 
216,288

Property, plant, and equipment, net
—

 
198,075

 
24,960

 
—

 
223,035

Deferred financing costs, net
6,286

 
10,858

 
—

 
—

 
17,144

Intangible assets, net
—

 
88,632

 
547

 
—

 
89,179

Goodwill
—

 
68,943

 
698

 
—

 
69,641

Investment in subsidiaries
—

 
13,493

 
—

 
(13,493
)
 
—

Intercompany receivables
44,314

 
27,607

 
—

 
(71,921
)
 
—

Deferred income tax
64,976

 
—

 
—

 
(64,976
)
 
—

Other assets
—

 
8,521

 
95

 
—

 
8,616

Total assets
$
115,576

 
$
598,289

 
$
60,457

 
$
(150,419
)
 
$
623,903

Liabilities and Stockholder’s Equity (Deficit)
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Revolving credit facility and current portion of long-term debt
$
—

 
$
6,528

 
$
1,673

 
$
—

 
$
8,201

Accounts payable
—

 
71,629

 
12,932

 
—

 
84,561

Accrued liabilities
1,959

 
30,999

 
2,544

 
—

 
35,502

Income taxes payable
—

 
—

 
747

 
(29
)
 
718

Total current liabilities
1,959

 
109,156

 
17,896

 
(29
)
 
128,982

Long-term liabilities
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
235,000

 
344,750

 
—

 
—

 
579,750

Capital lease obligations, less current portion
—

 
10,775

 
—

 
—

 
10,775

Deferred income taxes
—

 
85,514

 
1,083

 
(64,976
)
 
21,621

Intercompany payables
—

 
44,450

 
27,471

 
(71,921
)
 
—

Deficiency in excess of investment in subsidiaries
24,943

 
—

 
—

 
(24,943
)
 
—

Other liabilities
—

 
28,587

 
514

 
—

 
29,101

Total long-term liabilities
259,943

 
514,076

 
29,068

 
(161,840
)
 
641,247

Commitments and contingencies


 


 


 


 


Stockholder’s (deficit) equity
 
 
 
 
 
 
 
 
 
Preferred stock, par value, $0.001 per share - 100,000 shares authorized, no shares issued and outstanding
—

 
—

 
—

 
—

 
—

Common stock, par value, $0.001 per share - 2,900,000 shares authorized, 1 share issued and outstanding
—

 
—

 
—

 
—

 
—

(Distributions in excess of) Additional paid-in capital
(76,038
)
 
(76,038
)
 
30,180

 
45,858

 
(76,038
)
Accumulated other comprehensive (loss) income, net
(25,198
)
 
(25,198
)
 
(2,293
)
 
27,491

 
(25,198
)
(Accumulated deficit) retained earnings
(45,090
)
 
76,293

 
(14,394
)
 
(61,899
)
 
(45,090
)
Total stockholder’s (deficit) equity
(146,326
)
 
(24,943
)
 
13,493

 
11,450

 
(146,326
)
Total liabilities and stockholder’s equity (deficit)
$
115,576

 
$
598,289

 
$
60,457

 
$
(150,419
)
 
$
623,903




21

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
183,582

 
$
32,790

 
$
(5,934
)
 
$
210,438

Cost of sales
—

 
162,816

 
28,247

 
(5,934
)
 
185,129

Gross margin
—

 
20,766

 
4,543

 
—

 
25,309

Selling, general and administrative expenses
99

 
16,715

 
1,181

 
—

 
17,995

Operating (loss) income
(99
)
 
4,051

 
3,362

 
—

 
7,314

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
5,473

 
7,222

 
475

 
—

 
13,170

Other (income) expense, net
—

 
(2,098
)
 
212

 
1,879

 
(7
)
Net other expense
5,473

 
5,124

 
687

 
1,879

 
13,163

(Loss) income before income taxes
(5,572
)
 
(1,073
)
 
2,675

 
(1,879
)
 
(5,849
)
Provision for income taxes
—

 
1,027

 
549

 
—

 
1,576

Net (loss) income before equity in earnings of affiliates
(5,572
)
 
(2,100
)
 
2,126

 
(1,879
)
 
(7,425
)
Equity in earnings (loss) of affiliates
(1,853
)
 
247

 
—

 
1,606

 
—

Net (loss) income
$
(7,425
)
 
$
(1,853
)
 
$
2,126

 
$
(273
)
 
$
(7,425
)
Comprehensive (loss) income
$
(5,943
)
 
$
(1,853
)
 
$
3,608

 
$
(1,755
)
 
$
(5,943
)

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
192,771

 
$
31,523

 
$
(4,650
)
 
$
219,644

Cost of sales
—

 
167,569

 
27,627

 
(4,650
)
 
190,546

Gross margin
—

 
25,202

 
3,896

 
—

 
29,098

Selling, general and administrative expenses
147

 
16,282

 
1,912

 
—

 
18,341

Operating (loss) income
(147
)
 
8,920

 
1,984

 
—

 
10,757

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
5,468

 
7,021

 
487

 
—

 
12,976

Other (income) expense, net
—

 
(207
)
 
111

 
—

 
(96
)
Net other expense
5,468

 
6,814

 
598

 
—

 
12,880

(Loss) income before income taxes
(5,615
)
 
2,106

 
1,386

 
—

 
(2,123
)
(Benefit from) provision for income taxes
(1,735
)
 
847

 
334

 
—

 
(554
)
Net (loss) income before equity in earnings of affiliates
(3,880
)
 
1,259

 
1,052

 
—

 
(1,569
)
Equity in earnings (loss) of affiliates
2,311

 
1,052

 
—

 
(3,363
)
 
—

Net (loss) income
$
(1,569
)
 
$
2,311

 
$
1,052

 
$
(3,363
)
 
$
(1,569
)
Comprehensive (loss) income
$
(3,295
)
 
$
2,311

 
$
(674
)
 
$
(1,637
)
 
$
(3,295
)



22

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
561,515

 
$
97,462

 
$
(17,607
)
 
$
641,370

Cost of sales
—

 
492,525

 
85,074

 
(17,607
)
 
559,992

Gross margin
—

 
68,990

 
12,388

 
—

 
81,378

Selling, general and administrative expenses
384

 
51,765

 
4,921

 
—

 
57,070

Operating (loss) income
(384
)
 
17,225

 
7,467

 
—

 
24,308

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
16,428

 
21,423

 
1,449

 
—

 
39,300

Other (income) expense, net
—

 
(4,910
)
 
575

 
4,093

 
(242
)
Net other expense
16,428

 
16,513

 
2,024

 
4,093

 
39,058

(Loss) income before income taxes
(16,812
)
 
712

 
5,443

 
(4,093
)
 
(14,750
)
Provision for income taxes
—

 
980

 
1,647

 
—

 
2,627

Net (loss) income before equity in earnings of affiliates
(16,812
)
 
(268
)
 
3,796

 
(4,093
)
 
(17,377
)
Equity in earnings (loss) of affiliates
(565
)
 
(297
)
 
—

 
862

 
—

Net (loss) income
$
(17,377
)
 
$
(565
)
 
$
3,796

 
$
(3,231
)
 
$
(17,377
)
Comprehensive (loss) income
$
(15,838
)
 
$
(565
)
 
$
5,335

 
$
(4,770
)
 
$
(15,838
)

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
584,311

 
$
94,316

 
$
(14,735
)
 
$
663,892

Cost of sales
—

 
505,922

 
83,122

 
(14,735
)
 
574,309

Gross margin
—

 
78,389

 
11,194

 
—

 
89,583

Selling, general and administrative expenses
304

 
51,350

 
4,907

 
—

 
56,561

Operating (loss) income
(304
)
 
27,039

 
6,287

 
—

 
33,022

Other expenses (income)
 
 
 
 
 
 
 
 
 
Interest expense
23,324

 
11,815

 
1,433

 
—

 
36,572

Loss on early extinguishment of debt
22,051

 
—

 
—

 
—

 
22,051

Other (income) expense, net
—

 
(1,531
)
 
381

 
1,000

 
(150
)
Net other expense
45,375

 
10,284

 
1,814

 
1,000

 
58,473

(Loss) income before income taxes
(45,679
)
 
16,755

 
4,473

 
(1,000
)
 
(25,451
)
(Benefit from) provision for income taxes
(16,982
)
 
6,506

 
1,081

 
—

 
(9,395
)
Net (loss) income before equity in earnings of affiliates
(28,697
)
 
10,249

 
3,392


(1,000
)
 
(16,056
)
Equity in earnings (loss) of affiliates
12,641

 
2,392

 
—

 
(15,033
)
 
—

Net income (loss)
$
(16,056
)
 
$
12,641

 
$
3,392


$
(16,033
)
 
$
(16,056
)
Comprehensive (loss) income
$
(17,008
)
 
$
12,641

 
$
2,440

 
$
(15,081
)
 
$
(17,008
)


23

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(17,377
)
 
$
(565
)
 
$
3,796

 
$
(3,231
)
 
$
(17,377
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
754

 
26,658

 
2,831

 
—

 
30,243

Equity in (earnings) loss of affiliates
565

 
297

 
—

 
(862
)
 
—

Deferred income tax provision (benefit)
—

 
890

 
(31
)
 
—

 
859

Stock compensation expense
384

 
384

 
—

 
(384
)
 
384

Loss on sale and disposition of property, plant and equipment
—

 
195

 
—

 
—

 
195

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Receivables
—

 
(5,449
)
 
(6,737
)
 
—

 
(12,186
)
Inventories
—

 
11,962

 
3,692

 
—

 
15,654

Prepaid expenses and other assets
—

 
869

 
242

 
—

 
1,111

Accounts payable and accrued and other liabilities
5,874

 
(7,219
)
 
(3,652
)
 
—

 
(4,997
)
Income tax receivable/payable
—

 
(51
)
 
450

 
—

 
399

Net cash (used in) provided by operating activities
(9,800
)
 
27,971

 
591

 
(4,477
)
 
14,285

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Repayments from joint venture
—

 
124

 
—

 
—

 
124

Purchases of property, plant and equipment, including capitalized software
—

 
(19,674
)
 
(1,579
)
 
—

 
(21,253
)
Proceeds from sales of property, plant and equipment
—

 
7

 
—

 
—

 
7

Investments in subsidiaries
(384
)
 
—

 
—

 
384

 
—

Net cash (used in) provided by investing activities
(384
)
 
(19,543
)
 
(1,579
)
 
384

 
(21,122
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Repayments of term loan
—

 
(2,625
)
 
—

 
—

 
(2,625
)
Repayment of capital lease obligations
—

 
(1,899
)
 
—

 
—

 
(1,899
)
Deferred loan costs paid
(96
)
 
—

 
—

 
—

 
(96
)
Dividends paid
—

 
—

 
(4,093
)
 
4,093

 
—

Borrowings under revolving credit facility
—

 
493,692

 
52,104

 
—

 
545,796

Repayments of revolving credit facility
—

 
(484,644
)
 
(50,409
)
 
—

 
(535,053
)
Intercompany (repayments) borrowings
10,280

 
(13,206
)
 
2,926

 
—

 
—

Capital contribution from guarantors
—

 
(800
)
 
800

 
—

 
—

Net cash (used in) provided by financing activities
10,184

 
(9,482
)
 
1,328

 
4,093

 
6,123

Effect of exchange rate changes on cash
—

 
961

 
(962
)
 
—

 
(1
)
Increase in cash
—

 
(93
)
 
(622
)
 
—

 
(715
)
Cash
 
 
 
 
 
 
 
 
 
Beginning of period
—

 
111

 
2,206

 
—

 
2,317

End of period
$
—

 
$
18

 
$
1,584

 
$
—

 
$
1,602




24

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
 
(in thousands of dollars)
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(16,056
)
 
$
12,641

 
$
3,392

 
$
(16,033
)
 
$
(16,056
)
Adjustments to reconcile net (loss) income to net cash (used in)provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
2,200

 
25,240

 
2,784

 
—

 
30,224

Equity in (earnings) loss of affiliates
(12,641
)
 
(2,392
)
 
—

 
15,033

 
—

Deferred income tax (benefit) provision
(16,982
)
 
6,505

 
(31
)
 
—

 
(10,508
)
Stock compensation expense
305

 
305

 
—

 
(305
)
 
305

Loss on early extinguishment of debt
11,883

 
—

 
—

 
—

 
11,883

Loss (gain) on sales and disposal of property, plant and equipment
—

 
971

 
(62
)
 
—

 
909

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Receivables
—

 
(878
)
 
(2,377
)
 
—

 
(3,255
)
Inventories
—

 
(4,293
)
 
(2,718
)
 
—

 
(7,011
)
Prepaid expenses and other assets
—

 
(688
)
 
(88
)
 
—

 
(776
)
Accounts payable and accrued and other liabilities
(7,166
)
 
(5,790
)
 
(923
)
 
—

 
(13,879
)
Income tax receivable/payable
—

 
(89
)
 
17

 
—

 
(72
)
Net cash (used in) provided by operating activities
(38,457
)
 
31,532

 
(6
)
 
(1,305
)
 
(8,236
)
Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Investment in joint venture
—

 
85

 
—

 
—

 
85

Purchases of property, plant and equipment
—

 
(29,473
)
 
(5,306
)
 
—

 
(34,779
)
Proceeds from sales of property, plant and equipment
—

 
1,318

 
65

 
—

 
1,383

Investments in subsidiaries
(305
)
 
—

 
—

 
305

 
—

Net cash (used in) provided by investing activities
(305
)
 
(28,070
)
 
(5,241
)
 
305

 
(33,311
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Repayment of subordinated term loans
—

 
(33
)
 
—

 
—

 
(33
)
Issuance of new term loan
—

 
350,000

 
—

 
—

 
350,000

Repayments of new term loan
—

 
(875
)
 
—

 
—

 
(875
)
Repayment of capital lease obligations
—

 
(1,447
)
 
—

 
—

 
(1,447
)
Deferred loan costs paid
(6,788
)
 
(10,965
)
 
—

 
—

 
(17,753
)
Dividends paid
—

 
(150,000
)
 
(1,000
)
 
1,000

 
(150,000
)
Issuance of senior notes
235,000

 
—

 
—

 
—

 
235,000

Repayment of former senior notes
(320,000
)
 
—

 
—

 
—

 
(320,000
)
Borrowings under revolving credit facility
—

 
748,233

 
60,982

 
—

 
809,215

Repayments of revolving credit facility
—

 
(797,948
)
 
(65,746
)
 
—

 
(863,694
)
Intercompany borrowings (repayments)
130,550

 
(133,356
)
 
2,806

 
—

 
—

Capital contributions from guarantors
—

 
(6,198
)
 
6,198

 
—

 
—

Net cash provided by (used in) financing activities
38,762

 
(2,589
)
 
3,240

 
1,000

 
40,413

Effect of exchange rate changes on cash
—

 
(849
)
 
786

 
—

 
(63
)
Increase (decrease) in cash
—

 
24

 
(1,221
)
 
—

 
(1,197
)
Cash
 
 
 
 
 
 
 
 
 
Beginning of period
—

 
48

 
2,460

 
—

 
2,508

End of period
$
—

 
$
72

 
$
1,239

 
$
—

 
$
1,311



25


14.
Income Taxes
Income taxes are recorded under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company does not currently intend to repatriate earnings, if any, from its Canadian subsidiaries, and considers these earnings to be permanently invested outside the U.S. As a result, no deferred tax liability has been recognized for earnings from the Company's Canadian subsidiaries. The Company has provided for deferred U.S. taxes on all undistributed earnings from our U.K. subsidiaries. The Company established a valuation allowance of approximately $9.2 million during the year ended December 31, 2011 to offset its U.S. net deferred tax assets after excluding deferred tax liabilities related to indefinite lived intangibles that are not going to provide a source of taxable income in the foreseeable future. For the nine months ended September 30, 2012, no benefit was recorded for the domestic loss and a portion of the Canadian loss as the Company does not currently believe these losses will result in a future tax benefit.
The Company's effective income tax rate for the three months ended September 30, 2012 and 2011 was approximately (27)% and 26%, and for the nine months ended September 30, 2012 and 2011 was approximately (18)% and 37%, respectively, which reflects losses which the Company does not believe will result in a tax benefit, as well as foreign income in separate jurisdictions for which the Company recorded tax expense. In addition, the effective income tax rate for the three months ended September 30, 2012 was impacted by an increase in the expected valuation allowance related to the indefinite lived intangibles mentioned above, which are amortized over 15 years for tax purposes but are not amortized for book purposes. The Company's tax expense is based on projected earnings and losses by jurisdiction for the annual period. During the three months ended September 30, 2012, the Company set its effective income tax rate based on those jurisdictions and entities where it expects to have book income for the year and excluded recording a benefit for loss on those jurisdictions for which it expects to derive no future benefit. The effective tax rate may fluctuate significantly on a quarterly basis due to both changes in jurisdictions in which earnings or losses are realized and the estimate of those earnings and losses.

26



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report of Exopack Holding Corp. (the “Company”) for the quarterly period ended September 30, 2012 including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. These forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to the following:
•
intense competition in the flexible packaging markets may adversely affect our operating results;
•
the profitability of our business depends on the price and availability of polyethylene resin and paper, two of our principal raw materials, and our ability to pass on polyethylene resin and paper price increases to customers;
•
our business is affected by global economic factors including risks associated with a recession and our customers’ access to credit;
•
we are subject to the risk of loss resulting from nonpayment or nonperformance by our customers;
•
financial difficulties and related problems at our vendors, suppliers and other business partners could result in a disruption to our operations and have a material adverse effect on our business;
•
fluctuations in the financial markets will likely affect our pension plan assets and our future cash flows;
•
energy price increases could adversely affect the results of our operations;
•
we must adapt to technological advances in the packaging industry;
•
we may be unable to protect our proprietary technology from infringement;
•
our operations could expose us to substantial environmental costs and liabilities;
•
although we believe we currently have sufficient liquidity, we may not be able to obtain funding, if needed, because of the deterioration of the credit and capital markets;
•
we are subject to risk related to our international operations;
•
we may, from time to time, experience problems in our labor relations;
•
loss of third-party transportation providers upon whom we depend or increases in fuel prices could increase our costs or cause a disruption in our operations;
•
unexpected equipment failures may lead to production curtailments or shutdowns;
•
an affiliate of Sun Capital controls us and may have conflicts of interest with us in the future;
•
we are required to comply with Section 404 of the Sarbanes-Oxley Act, and there can be no assurance that we will be able to establish, maintain and apply effective internal control over financial reporting under applicable SEC rules promulgated under Section 404;
•
it is uncertain when our search for a new chief executive officer and chief financial officer will be completed, and a prolonged search for these positions, or the loss of other key individuals could disrupt our operations and harm our business;
•
we may be adversely affected by interest rate changes;
•
our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding Senior Notes and Term Loan Facility, obtaining financing in the future and reacting to changes in our business;
•
despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt and this could further exacerbate the risks described above;
•
to service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control;

27


•
the indenture governing our outstanding Senior Notes and the credit agreements governing our Senior Credit Facility and Term Loan Facility impose significant operating and financial restrictions on us and our subsidiaries;
•
a failure in our information technology infrastructure or applications could negatively affect our business; and
•
numerous other factors over which we may have limited or no control may affect our performance and profitability.
You can often identify these and other forward-looking statements by the use of the words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “potential,” “projected,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and our Annual Report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K"). For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors included in Item 1A of the Form 10-K.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will assume no obligation to update any of the forward-looking statements after the date of this report to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. You should carefully review the risk factors described in other documents that we file from time to time with the U.S. Securities and Exchange Commission.
Overview
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the unaudited consolidated financial statements, including the notes thereto, included elsewhere in this report, and with the audited consolidated financial statements, including the notes thereto, included in the Form 10-K.
We are a provider of flexible packaging, film products, and specialty substrates primarily based in North America with locations in Europe and China. We design, manufacture and supply plastic and paper-based flexible packaging, film products and precision coated substrates to approximately 1,400 customers in a variety of industries, including food, medical, pet food, chemicals, beverages, personal care and hygiene, lawn and garden, and building materials industries, among others. We have 18 manufacturing facilities in the Unites States, Canada, United Kingdom and China. We provide packaging and film products for many of the world's most well-known brands. Our primary strategy is to use a technologically advanced manufacturing platform coupled with excellent customer service in order to help our customers distinguish their brands and improve product shelf life.
We generate revenues, earnings and cash flows from the sale of flexible packaging, film and coated products primarily in the United States, Canada, Europe, and China. Management views net sales and operating income as the primary indicators of our financial performance.
Due to the slow demand for pet food packaging in early 2012, we made the decision to close the Seymour, Indiana facility during the second quarter of 2012 and merge its production into the Spartanburg, South Carolina facility. We intend to make the Spartanburg facility a Center of Excellence for Pet Food packaging that will be responsive to and focused on the needs of our customers.
The closure of the Seymour facility had a significant impact on our third quarter 2012 results. The facility was closed on an expedited basis at the end of the second quarter of 2012 and we experienced difficulties transferring the equipment to Spartanburg. In addition, we had inadequate inventory to support our customers during the movement of the equipment and some customer shipments were delayed. In the process we were forced to outsource some production and hire and train, additional on the relocated equipment, which created excess costs and operating inefficiencies.




28

The closure costs through the third quarter of 2012 accumulated to $6.4 million, and are broken down as follows:

(amounts in thousands)
 
 
Artwork
 
$
207.40

Severance
 
303.00

Freight
 
528.20

Equipment relocation
 
981.10

Consulting, inventory adjustments and other closure expenses
 
1,573.80

Labor, training and waste inefficiencies
 
2,816.50

          Total costs
 
$
6,410.00


The transition is now substantially complete. The relocated equipment is running in the new location, new employees are trained, efficiencies are improving and customer lead times are returning to normal. The end result is a positive one for us and our customers as there is now a streamlined manufacturing platform that positions us for future growth and operational success.

2011 Recapitalization Transactions

On May 31, 2011, the Company completed a series of transactions (the "Recapitalization Transactions") that recapitalized the Company's indebtedness. These transactions included:

•The private placement of $235.0 million principal amount of 10% senior notes due 2018;
•The entry into a six-year $350.0 million senior secured term loan facility;
•The amendment and restatement of the Company's existing revolving credit facility; and
•The repayment of all of the Company's outstanding 11.25% senior notes due 2014 (the "Former Senior Notes").
We used the proceeds from the Recapitalization Transactions to repay all of the outstanding Former Senior Notes, including accrued interest of $12.3 million and early redemption and consent costs of $10.2 million, repaid borrowings outstanding under the Senior Credit Facility of $73.7 million, paid a dividend to an affiliate of Sun Capital of $150.0 million and funded total financing costs of approximately $17.7 million. See Note 5 to our consolidated financial statements included elsewhere in this quarterly report and "Financing Arrangements as of September 30, 2012" below for further information regarding the Recapitalization Transactions and our current financing arrangements.
Reportable Segments
Effective July 1, 2012 we determined that reorganization was an appropriate step to clarify and highlight detailed aspects of sales growth and operational excellence for management, thus providing a more effective basis for management decisions. As a result of organizational changes, we re-evaluated our segment reporting in the second quarter of 2012. As a result of the reorganization, our operations now consist of three reportable operating segments 1) food packaging; 2) non-food packaging; and 3) coated products (which we refer to as EAC). Previously, we reported external segment information under four operating segments, including 1) pet food and specialty packaging; 2) consumer food and specialty packaging; 3) performance packaging; and 4) coated products.
In accordance with FASB guidance we reviewed certain qualitative factors in identifying and determining reporting segments. These factors are as follows: 1) nature of the products; 2) nature of the production processes and major raw material inputs; 3) class of consumer for each product; and 4) methods used to distribute each product. While all of these factors were reviewed, we believe that the most significant factors for us are the nature of our products and the type of customers served. We believe that the types of products sold from each segment are similar in nature and in customer base. Food and beverage products and pet food are produced for the retail market and are similar in nature in terms of end use, and are therefore included in the food segment. Building materials, consumer goods, lawn and garden, and chemicals and minerals are primarily provided to the industrial market. As a result, these products were included in the non-food segment. The coated products segment is aimed at producing items for the medical devices, electronics, and optical films industries. These products are individually distinct from our other reportable segments and have been combined into a separate dedicated segment. We evaluate segment

29

performance based on operating income or loss. We have revised segment operating results for fiscal year 2011 to conform to the reorganization of the Company's operating segments.
Severance Expenses
During the three and nine months ended September 30, 2012 and 2011, we terminated the employment of certain employees and eliminated some of their positions. In connection with these terminations, we recorded employee termination costs of approximately $749,000 and $646,000 for the three months ended September 30, 2012 and 2011, respectively, and approximately $2.9 million and $1.1 million for the nine months ended September 30, 2012 and 2011, respectively. These amounts were included in “Selling, general and administrative expenses” in the consolidated statements of operations. Approximately $858,000 in severance was accrued at December 31, 2011. Of these amounts, we paid approximately $2.0 million through September 30, 2012 and approximately $1.9 million remained accrued for employee termination benefits at September 30, 2012. We expect that the remaining $1.9 million will be paid in 2012 and 2013.
Management Changes
During the nine months ended September 30, 2012, we announced certain changes to our executive management team. Jack E. Knott, the Executive Chairman of our Board of Directors, is currently providing the executive services previously provided by our Chief Executive Officer. Duane Owens, the Company's Treasurer and Director of Investor Relations is currently serving as interim Chief Financial Officer. Our former Chief Executive Officer and our former Chief Financial Officer separated from the Company in August. We have initiated a search for a new Chief Executive Officer and a new Chief Financial Officer. We intend to leave our former Chief Executive Officer's position on the Board of Directors vacant for the immediate future.



30



Results of Operations
The following presents an overview of our results of operations for the three months ended September 30, 2012 compared with the three months ended September 30, 2011.
 
 
Three Months Ended
 
September 30, 2012
 
September 30, 2011
 
$
 
% of Net Sales
 
$
 
% of Net Sales
Statements of Operations Data:
(dollar amounts in thousands)
Net sales
$
210,438

 
100.0
 %
 
$
219,644

 
100.0
 %
Cost of sales
185,129

 
88.0
 %
 
190,546

 
86.8
 %
Selling, general and administrative expenses
17,995

 
8.6
 %
 
18,341

 
8.4
 %
Interest expense
13,170

 
6.3
 %
 
12,976

 
5.9
 %
Other (income) expense, net
(7
)
 
(0.1
)%
 
(96
)
 
(0.1
)%
Loss before income taxes
(5,849
)
 
(2.8
)%
 
(2,123
)
 
(1.0
)%
Provision (benefit) for income taxes
1,576

 
0.7
 %
 
(554
)
 
(0.3
)%
Net loss
$
(7,425
)
 
(3.5
)%
 
$
(1,569
)
 
(0.7
)%

Net Sales. Net sales for the three months ended September 30, 2012 decreased by approximately $9.2 million, or 4%, compared with the same period in 2011 due to a decrease in sales volume of approximately 6% which was partially offset by an increase in the average selling price of approximately 2%. The decrease in sales volume was experienced primarily by our food packaging segment, primarily attributable to decreased sales of pinch seal bags and self-opening bags, partially offset by an increase in sales of print rollstock. The increase in average sales price was driven primarily by price increases, due to the pass-through of increased raw material prices, in our food packaging segment.
Cost of Sales. Cost of sales for the three months ended September 30, 2012 decreased by approximately $5.4 million, or 3%, compared with the same period in 2011. Cost of sales as a percentage of net sales increased to 88.0% of net sales, or $185.1 million for the three months ended September 30, 2012 from 86.8% of net sales, or $190.5 million for the three months ended September 30, 2011. Cost of sales increased as a percentage of sales due to certain operational inefficiencies and changes in product mix.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the three months ended September 30, 2012 decreased by approximately $346,000, or 2%, compared with the same period in 2011. The significant components of the total decrease in SG&A expenses were a decrease of $408,000 related to process improvement consulting, a decrease of $211,000 related to the 2011 Recapitalization Transactions, and other lesser decreases totaling $736,000. This decrease in expense was partially offset by an increase of $1.0 million in costs related to the closure of our Seymour, Indiana facility.
Interest Expense. Interest expense for the three months ended September 30, 2012 increased by approximately $194,000, or approximately 2%, compared with the same period in 2011 primarily due to higher debt levels on the Senior Credit Facility and capital lease obligations.
Loss on Early Extinguishment of Debt. During the three months ended June 30, 2011, in connection with the Recapitalization Transactions, we wrote off deferred financing costs of approximately $11.9 million and recognized approximately $10.2 million in early redemption and consent costs related to the early extinguishment of our Former Senior Notes.
Income Tax Expense. We recorded an income tax expense of approximately $1.6 million for the three months ended September 30, 2012, on a loss before income taxes of approximately $5.8 million, or an effective tax rate of (27)%. An income tax benefit of $554,000 million was recorded for the same period in 2011 and was based on a loss before income taxes of approximately $2.1 million, for an effective rate of 26%. The effective income tax rate for the three months ended September 30, 2012 reflects domestic and foreign losses, which we do not believe will result in a tax benefit, as well as foreign income in separate jurisdictions for which we recorded tax expense. The effective income tax rate for the three months ended September 30, 2012 was also impacted by an increase in the expected valuation allowance related to indefinite lived intangibles, which are amortized over 15 years for tax purposes but are not amortized for book purposes. Our effective tax rate may fluctuate

31

significantly on a quarterly basis due to both changes in jurisdictions in which earnings or losses are realized and the estimate of those earnings and losses.
Reportable Segments. Our food packaging segment had net sales of $122.5 million and $128.6 million, and operating income of $7.7 million and $9.6 million, for the three months ended September 30, 2012 and 2011, respectively. The decrease of $6.1 million in net sales was due to a 17% decrease in sales volume, primarily attributable to unfavorable sales of pinch seal bags and self-opening bags, partially offset by favorable sales of our print rollstock and an increase in average selling price of approximately 11%. The decrease in operating income of $1.9 million, or 19%, was largely due to the decrease in sales, an unfavorable sales mix and other increased operating expenses due to the closure of the Seymour, Indiana facility, partially offset by favorable selling, general and administrative expenses.

Our non-food packaging segment had net sales of $67.3 million and $70.4 million, and operating income of $4.7 million and $6.1 million, for the three months ended September 30, 2012 and 2011, respectively. The decrease of $3.1 million in net sales was primarily due to a decrease in selling price of approximately 6%, partially offset by increased sales volume of 2%. The decrease in operating income of $1.4 million, or 22%, was largely due to the decrease in sales.

Our coated products segment had net sales of $20.6 million and $20.7 million, and operating income of $4.2 million and $2.9 million for the three months ended September 30, 2012 and 2011, respectively. Net sales were relatively flat with a decrease of $100,000. The increase of $1.3 million, or 45%, in operating income was primarily a result of favorable sales mix.

Corporate operating loss, which includes certain unallocated corporate costs, increased approximately $1.6 million, or 20%, for the three months ended September 30, 2012 as compared with the same period in 2011. The increase in corporate operating loss was largely attributable to increased severance costs, increased amortization of capitalized software, and increased pension expense. These cost increases were partially offset by a decrease in costs related to the Recapitalization Transactions and decreased costs related to process improvement consulting.

The following presents an overview of our results of operations for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011.
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
$
 
% of Net Sales
 
$
 
% of Net Sales
Statements of Operations Data:
(dollar amounts in thousands)
Net sales
641,370

 
100.0
 %
 
663,892

 
100.0
 %
Cost of sales
559,992

 
87.3
 %
 
574,309

 
86.5
 %
Selling, general and administrative expenses
57,070

 
8.9
 %
 
56,561

 
8.5
 %
Interest expense
39,300

 
6.1
 %
 
36,572

 
5.5
 %
Loss on early extinguishment of debt
—

 
—
 %
 
22,051

 
3.3
 %
Other income, net
(242
)
 
—
 %
 
(150
)
 
—
 %
Loss before income taxes
(14,750
)
 
(2.3
)%
 
(25,451
)
 
(3.8
)%
(Benefit from) provision for income taxes
2,627

 
0.4
 %
 
(9,395
)
 
(1.4
)%
Net loss
$
(17,377
)
 
(2.7
)%
 
$
(16,056
)
 
(2.4
)%

Net Sales. Net sales for the nine months ended September 30, 2012 decreased by approximately $22.5 million, or 3%, compared with the same period in 2011 due to a decrease in volume of approximately 6%, which was partially offset by an increase in the average selling price of approximately 3%. The decrease in sales volume was driven primarily by our food and non-food packaging segments. The decrease in our food and specialty packaging segment was primarily attributable to decreased pinch seal, self-opening bag, and print rollstock bag volume. The decrease in our non-food packaging segment was primarily attributable to a decrease in demand for shipping sacks and pasted valve bag volume due to lower demand of ice salt bags because of the warmer than normal winter in many parts of North America. The increase in average sales price was driven primarily by price increases, due to the pass-through of increased raw material prices, in our food packaging segment.

32

Cost of Sales. Cost of sales for the nine months ended September 30, 2012 decreased by approximately $14.3 million, or 2%, compared with the same period in 2011. Cost of sales as a percentage of net sales increased to 87.3%, or $560.0 million for the nine months ended September 30, 2012 from 86.5% of net sales, or $574.3 million for the nine months ended September 30, 2011. Cost of sales for the nine months ended September 30, 2012 was unfavorably impacted primarily by a decrease in net sales as well as accelerated depreciation due to the closure of our Seymour, Indiana facility.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the nine months ended September 30, 2012 increased by approximately $509,000, or 1%, compared with the same period in 2011. The significant components of the total increase in SG&A expenses were an increase of $2.0 million in costs related to the closure of our Seymour, Indiana facility, an increase of $1.7 million in consulting, professional, and legal fees, an increase of $1.7 million in severance expenses, and an increase of $1.6 million in management fees. These increased expenses were partially offset by a decrease of $3.7 million related to the 2011 Recapitalization Transactions, a decrease of $2.0 million related to the acquisition of EMCS, and other lesser decreases totaling $848,000.
Interest Expense. Interest expense for the nine months ended September 30, 2012 increased by approximately $2.7 million, or approximately 7%, compared with the same period in 2011 primarily due to increased interest related to higher debt levels resulting from the Recapitalization Transactions, amortization of deferred loan costs associated with the new debt incurred and increased interest expense related to capital lease obligations.
Loss on Early Extinguishment of Debt. During the nine months ended September 30, 2011, in connection with the Recapitalization Transactions, we wrote off deferred financing costs of approximately $11.9 million and recognized approximately $10.2 million in early redemption and consent costs related to the early extinguishment of our Former Senior Notes.
Income Tax Expense. We recorded an income tax expense of approximately $2.6 million for the nine months ended September 30, 2012, on loss before income taxes of approximately $14.8 million, or an effective tax rate of (18)%. The income tax benefit of approximately $9.4 million recorded for the same period in 2011 was based on a loss before income taxes of $25.5 million, or an effective tax rate of 37%. The effective income tax rate for the nine months ended September 30, 2012 reflects domestic and foreign losses, which we do not believe will result in a tax benefit, as well as foreign income in separate jurisdictions for which we recorded tax expense. The effective income tax rate for the nine months ended September 30, 2012 was also impacted by an increase in the expected valuation allowance related to indefinite lived intangibles, which are amortized over 15 years for tax purposes but are not amortized for book purposes. Our effective tax rate may fluctuate significantly on a quarterly basis due to both changes in jurisdictions in which earnings or losses are realized and the estimate of those earnings and losses.
Reportable Segments. Our food packaging segment had net sales of $374.8 million and $394.5 million, and operating income of $27.8 million and $33.2 million, for the nine months ended September 30, 2012 and 2011, respectively. The decrease in net sales of $19.7 million was primarily due to a 14% decrease in sales volume, primarily attributable to unfavorable sales of pinch seal bags, self-opening bags and print rollstock bags. The decrease in operating income of $5.4 million, or 15%, was largely due to the decrease in sales, an unfavorable sales mix and accelerated depreciation and other increased operating expenses due to the closure of the Seymour, Indiana facility.
Our non-food packaging segment had net sales of $201.7 million and $207.7 million, and operating income of $15.3 million and $15.4 million, for the nine months ended September 30, 2012 and 2011, respectively. The decrease in net sales of $6.0 million was due to a 2% decrease in sales volume, primarily attributable to the unfavorable sales of pasted valve bags, popcorn bags and shipping sacks, partially offset by favorable sales of print rollstock and self opening bags. Operating income was relatively flat with a decrease of approximately $100,000, or 1%. This was primarily attributable to a decrease in sales volume.
Our coated products segment had net sales of $64.8 million and $61.6 million, and operating income of $12.0 million and $9.0 million for the nine months ended September 30, 2012 and 2011, respectively. The increase of $3.2 million, or 5%, in net sales was primarily a result of increased volume across several markets, particularly in the medical, prepress, custom and optical markets, partially offset by decreased volume in the conductives, microfilm and electronics markets. The increase in operating income of $3.0 million, or 33%, was primarily the result of increased sales volume and favorable sales mix.
Corporate operating loss, which includes certain unallocated corporate costs, increased approximately $6.2 million for the nine months ended September 30, 2012 as compared with the same period in 2011. The increase in corporate operating loss was attributable to increased management fees, increased professional fees, primarily related to interim executive service fees and process improvement consulting, increased severance costs, increased amortization of capitalized software, and increased pension expense. These cost increases were partially offset by a decrease in transition and integration costs related to the acquisition of EMCS and a decrease in costs related to the Recapitalization Transactions.

33



Liquidity and Capital Resources
2011 Recapitalization Transactions
On May 31, 2011, we completed the Recapitalization Transactions that recapitalized our indebtedness. These transactions included (i) the private placement of $235.0 million principal amount of 10% senior notes due 2018; (ii) the entry into a six year $350.0 million senior secured term loan facility; (iii) the amendment and restatement of our existing revolving credit facility; and (iv) the repayment of our outstanding 11.25% senior notes due 2014 (the "Former Senior Notes"). In connection with the Recapitalization Transactions, a dividend of $150.0 million was paid to an affiliate of Sun Capital on May 31, 2011.
Although the Recapitalization Transactions significantly increased our overall amount of debt, it also increased our available liquidity and reduced the amount of required principal payments on our debt during the next three years. At September 30, 2012, we had approximately $57.3 million of available borrowing capacity under our revolving credit facility, and we have the ability to increase this borrowing capacity by up to an additional $25.0 million under certain conditions. We believe that our expected operating cash flow and this available liquidity will be sufficient to support our operations, fund our working capital and capital expenditure needs and provide for scheduled interest and principal payments for the next twelve months.
Cash Flows for the Nine Months Ended September 30, 2012 compared to the Nine Months Ended September 30, 2011
Net cash decreased for the nine months ended September 30, 2012 and 2011 by $715,000 and $1,197,000, respectively.
Cash flows provided by operating activities for the nine months ended September 30, 2012 of $14.3 million consisted primarily of cash provided by earnings, which was offset by net unfavorable changes in working capital. Cash provided by earnings was $14.3 million (consists primarily of a net loss of $17.4 million adjusted to exclude the effect of non-cash charges for depreciation and amortization of $30.2 million, deferred income tax benefit of $859,000 and stock compensation expense of $384,000). The net unfavorable working capital changes resulted from increased trade receivables and decreased accounts payable and accrued and other liabilities, which were partially offset by decreased inventory. Inventories decreased $15.7 million due largely to decreased quantities. Trade accounts receivable increased $12.2 million due to the timing of collections. Accounts payable and accrued and other liabilities decreased $5.0 million primarily due to a decrease in the quantity of raw materials and timing of payments.
Cash flows used by operating activities for the nine months ended September 30, 2011 of $8.2 million consisted primarily of cash provided by earnings, which was offset by net unfavorable changes in working capital. Cash provided by earnings was $16.7 million (net loss of $16.1 million adjusted to exclude the effect of non-cash charges for depreciation and amortization of $30.2 million, loss from early extinguishment of debt of $11.9 million, deferred income tax benefit of $10.5 million plus other non-cash items that net to approximately $1.2 million, including stock compensation expense and loss on sales and disposition of property, plant and equipment). The net unfavorable working capital changes resulted from increases in inventories and trade receivables partially offset by decreases in accounts payable and accrued and other liabilities. Inventories increased $7.0 million due largely to increased raw material costs and increased quantities. Trade accounts receivable increased $3.3 million due to increased sales. Accounts payable and accrued and other liabilities decreased $13.9 million due primarily to the timing of accounts payable and accrued interest payments.
Cash flows used in investing activities for the nine months ended September 30, 2012 and 2011 were $21.1 million and $33.3 million, respectively, primarily comprised of capital expenditures for property, plant and equipment and capitalized software.
Cash flows provided by financing activities for the nine months ended September 30, 2012 were $6.1 million, primarily comprised of net borrowings on the Senior Credit Facility to fund capital expenditures. Cash flows provided by financing activities for the nine months ended September 30, 2011 were $40.4 million, primarily comprised of net borrowings on the Term Loan Facility and issuance of the Senior Notes partially offset by the repayment of the Former Senior Notes, a dividend paid to our parent company, significant repayments of our revolving line of credit, deferred loan costs paid and capital lease obligation payments.

34


Financing Arrangements as of September 30, 2012
On May 31, 2011, we issued the Senior Notes in a private placement pursuant to Rule 144A and Regulation S. The initial aggregate principal amount of the senior notes issued was $235.0 million. Pursuant to an exchange offer in January 2012, we exchanged all of the 10% senior notes for 10% senior notes registered under the Securities Act of 1933 (the "Senior Notes"). The Senior Notes mature on June 1, 2018. Interest accrues at the rate of 10% per annum and is payable in semi-annual installments on June 1 and December 1 of each year, commencing on December 1, 2011.
The Senior Notes are jointly, severally, fully and unconditionally guaranteed by the Company's domestic restricted subsidiaries. Each guarantor subsidiary is 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10(h) of Regulation S-X. The Senior Notes include a provision which allows for a guarantor subsidiary to be released of any obligation under the subsidiary guarantee under certain conditions. These conditions include the sale or other disposition of all or substantially all of the guarantor subsidiary's assets, the sale or other disposition of all the capital stock of the guarantor subsidiary, change in the designation of any restricted subsidiary as an unrestricted subsidiary by the Company, or upon legal defeasance or satisfaction and discharge of the Senior Notes. The Senior Notes and the guarantees are effectively subordinated to all of our and the guarantors' secured indebtedness, including our Term Loan Facility and Senior Credit Facility (see descriptions below), to the extent of the value of the assets securing that indebtedness.
The indenture governing the Senior Notes imposes certain restrictions on us, including, but not limited to, our ability to incur additional indebtedness, make investments, sell assets and issue capital stock of restricted subsidiaries, incur liens, enter into agreements restricting the ability of our subsidiaries to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell all or substantially all of our assets. In connection with the issuance of the Senior Notes we incurred approximately $6.9 million in deferred financing costs which are being amortized over the term of the Senior Notes.
Also on May 31, 2011, we, along with our parent company and certain of our subsidiaries, entered into the Term Loan Facility for $350.0 million. The Term Loan Facility also provides for an uncommitted incremental term loan facility of up to $75.0 million that will be available subject to certain conditions. The Term Loan Facility matures on May 31, 2017. Beginning on September 30, 2011, we began making required installment payments on the Term Loan Facility in quarterly principal amounts of $875,000. Any remaining outstanding amounts are payable at maturity in 2017. Borrowings under the Term Loan Facility accrue interest at (i) for base rate loans, a rate per annum equal to the highest of (a) the federal funds rate in effect on such date plus 0.5% per annum, (b) the variable annual rate of interest then announced by Bank of America as its “prime rate,” and (c) the Eurodollar Rate (as defined in the Term Loan Facility) plus 1.00%, plus, in each case, an applicable margin of 4.0% to 5.0% as set forth in the Term Loan Facility; and (ii) for Eurodollar Rate Loans (as defined in the Term Loan Facility) for any interest period, the rate per annum equal to the British Bankers Association LIBOR Rate published by Reuters two business days before such interest period for dollar deposits with a term equivalent to such interest period, subject to a minimum interest rate and a substitute rate in certain circumstances, plus an applicable margin set forth in the Term Loan Facility. The interest rate applicable to outstanding borrowings under the Term Loan Facility was 6.5% at September 30, 2012.
The Term Loan Facility contains customary events of default, including, but not limited to, failure to make payments under the Term Loan Facility, materially incorrect representations, breaches of covenants, cross-default to other material indebtedness, material unstayed judgments, certain ERISA, bankruptcy and insolvency events, failure of guarantees or security to remain in full force and effect, and changes of control. At September 30, 2012, we were in compliance with these restrictions. In connection with the Term Loan we incurred approximately $10.1 million in deferred financing costs which are being amortized over the term of the Term Loan Facility.
On May 31, 2011, we, along with our parent company and certain of our subsidiaries, amended our existing Senior Credit Facility by entering into a Third Amended and Restated Credit Agreement with a syndicate of financial institutions, which amended and restated our Second Amended and Restated Credit Agreement dated July 2, 2010. As amended and restated in connection with the Recapitalization Transactions, the Senior Credit Facility provides for a secured revolving line of credit in an amount of up to $75.0 million, which includes a Canadian dollar sub-facility available to our Canadian subsidiaries for up to $15.0 million (or the Canadian dollar equivalent). The Senior Credit Facility matures on May 31, 2016. Under the Senior Credit Facility, in general, interest accrues on amounts outstanding under the U.S facility at a variable annual rate equal to the U.S. Index Rate (as defined therein) plus 1.25% to 2.0%, depending on our utilization of the Senior Credit Facility, or at our election, at an annual rate equal to the LIBOR Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. In general, interest accrues on amounts outstanding under the Canadian sub-facility at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.25% to 2.0%, depending upon utilization, or at our election, at an annual rate equal to the BA Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization. The weighted-average interest rate on borrowings outstanding under the Senior Credit Facility at September 30, 2012 was approximately 4.4%. In connection with the Senior Credit Facility we incurred approximately $817,000 in additional deferred financing costs which are being amortized over the term of the Senior Credit Facility.

35

The Senior Credit Facility is collateralized by substantially all of our tangible and intangible property (other than real property and equipment). In addition, all of our equity interest in its domestic subsidiaries and a portion of the equity interests in its foreign subsidiaries are pledged to collateralize the Senior Credit Facility.
The Senior Credit Facility contains certain customary affirmative and negative covenants that restrict us and our subsidiaries’ ability to, among other things, incur additional indebtedness, grant liens, engage in mergers, acquisitions and asset sales, declare dividends and distributions, redeem or repurchase equity interests, incur contingent obligations, prepay certain subordinated indebtedness, make loans, certain payments and investments and enter into transactions with affiliates.
At September 30, 2012, approximately $13.5 million was outstanding and approximately $57.3 million was available for additional borrowings under the Senior Credit Facility. At September 30, 2012, there were outstanding letters of credit of approximately $4.2 million under the Senior Credit Facility. We may also borrow up to an additional $25.0 million under the Senior Credit Facility subject to certain conditions.
Additional information about our financing arrangements as of September 30, 2012, including the Senior Notes, our Senior Credit Facility, and our Term Loan Facility, is included in Note 5 to the consolidated financial statements included elsewhere in this report.
Liquidity and Capital Outlook
We fund our liquidity needs for capital expenditures, working capital, contributions to our pension plan and scheduled interest and principal payments through cash flow from operations and borrowings under our Senior Credit Facility. Continued uncertain global economic conditions have resulted in a significant decline in the credit markets and the overall availability of credit. Notwithstanding these disruptions, we believe we have sufficient liquidity to meet our needs for the next twelve months, although market disruptions may result in increased borrowing costs associated with our Senior Credit Facility and the Term Loan Facility. Management continues to monitor events and the financial institutions associated with our Senior Credit Facility, including monitoring credit ratings and outlooks. In the event that we require additional liquidity beyond our cash flows and borrowings available under our existing Senior Credit Facility due to market conditions, unexpected actions by our lenders, changes to our growth strategy, or other factors, our ability to obtain any additional financing on favorable terms, if at all, could be severely limited.
Including approximately $39.3 million of interest expense incurred through September 30, 2012, we expect to incur a total of approximately $51.6 million in interest expense related to the Senior Notes and New Term Loan Facility in 2012, including amortization of related deferred financing costs and fees. In addition, we currently anticipate that our capital expenditures for 2012 will be between $30.0 million and $33.0 million. To pay for the interest expense on the Senior Notes, the interest expense and principal payments under the Term Loan Facility and anticipated capital expenditures, we plan to utilize internally generated funds and funds available under our Senior Credit Facility. At September 30, 2012, approximately $13.5 million of borrowings were outstanding and approximately $57.3 million was available for borrowings under our Senior Credit Facility. Management believes that, based on current and anticipated financial performance, cash flows from operations and borrowings under our Senior Credit Facility will be adequate to meet anticipated requirements for capital expenditures, working capital and scheduled interest and principal payments for 2012.
As noted above, the indenture governing the Senior Notes, the credit agreement governing our Term Loan Facility and the credit agreement governing our Senior Credit Facility contain certain covenants that, among other things, restrict our ability to borrow additional money, pay dividends, make investments, create liens, enter into transactions with affiliates and sell assets or enter into mergers with others. The Senior Credit Facility matures on May 31, 2016, the Term Loan Facility matures on May 31, 2017 and the Senior Notes mature June 1, 2018. We may not generate sufficient cash flow from operations or may not be able to obtain sufficient funding to satisfy all of our obligations, including those noted above. If we are unable to pay our obligations, we may be required to pursue one or more alternative strategies, such as selling assets, or refinancing or restructuring our indebtedness. Such alternative strategies may not be feasible or may not be adequate to satisfy our obligations.
Although we currently have no specific acquisition planned, one of our potential growth strategies is growth through acquisitions, which may require additional funding. In such case, although we believe that we would be able to borrow additional funds beyond our current credit lines, there can be no assurance that such financing would be available or, if so, on terms that are acceptable to us, especially due to continued uncertainties affecting global financial markets.
Our ability to pay future dividends is subject to the terms of the indenture governing the Senior Notes, the terms of the Term Loan Facility, the terms of our Senior Credit Facility, and the discretion of our Board of Directors.

36


Off-Balance Sheet Arrangements
During 2009, we entered into a joint venture with INDEVCO Group, a manufacturer based in Lebanon (“INDEVCO”). We determined that the joint venture is a variable interest entity (“VIE”) under guidance of the Financial Accounting Standards Board related to accounting for variable interest entities and that we are not the primary beneficiary of the VIE. The VIE consists of a manufacturing operation, located within an existing manufacturing facility owned by INDEVCO in Lebanon, used to co-extrude polyethylene film for use in flexible packaging. During 2010, the VIE purchased and installed the necessary equipment and production commenced. Our maximum exposure to loss as a result of our involvement with the unconsolidated VIE is limited to our recorded investment in this VIE, which was approximately $582,000 at September 30, 2012. We recognized approximately $3,000 as our share of the loss of the joint venture’s operations and received loan payments of approximately $63,000 during the three months ended September 30, 2012. We recognized approximately $27,000 as our share of income of the joint venture's operations and received loan payments of approximately $125,000 during the nine months ended September 30, 2012. We may be subject to additional losses to the extent of any financial support that we provide in the future.
Contractual Obligations
The following table summarizes the scheduled payments and obligations under our contractual and other commitments at September 30, 2012:
 
 
Payments Due by Period
Contractual Obligations
Total
 
2012
 
2013-2014
 
2015-2016
 
Beyond
2016
 
(dollar amounts in thousands)
Long-term Debt obligations:
 
 
 
 
 
 
 
 
 
Term Loan Facility
$
345,625

 
$
875

 
$
7,000

 
$
7,000

 
$
330,750

Senior Notes due 2018
235,000

 
—

 
—

 
—

 
235,000

Senior Revolving Credit Facility(1)
13,527

 
13,527

 
—

 
—

 
—

Capital lease obligations(2)
21,428

 
1,000

 
7,736

 
4,121

 
8,571

Total debt obligations
615,580

 
15,402

 
14,736

 
11,121

 
574,321

Pension funding obligations(3)
20,795

 
458

 
5,747

 
7,701

 
6,889

Operating lease obligations
24,641

 
2,029

 
11,920

 
4,612

 
6,080

Interest payments(4)
245,082

 
17,616

 
92,035

 
91,173

 
44,258

Total contractual obligations
$
906,098

 
$
35,505

 
$
124,438

 
$
114,607

 
$
631,548

 
(1)
Under the terms of the lockbox arrangement, remittances automatically reduce the revolving debt outstanding on a daily basis and therefore borrowings outstanding under our Senior Credit Facility are classified as a current liability. The Senior Credit Facility does not mature until May 31, 2016.
(2)
Includes principal and interest payments on capital leases.
(3)
Represents currently estimated amounts.
(4)
Includes payments on the fixed-rate Senior Notes and estimated payments on the variable rate Term Loan Facility.    
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this quarterly report for information regarding recently issued accounting pronouncements.

37



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do not enter into derivative or other financial instruments for trading or speculative purposes.
Interest Rates. We are exposed to market risk in the form of interest rate risk related to borrowings under our Senior Credit Facility. Borrowings under the U.S. portion of our Senior Credit Facility accrue interest on amounts outstanding under the U.S facility at a variable annual rate equal to the U.S. Index Rate (as defined therein) plus 1.25% to 2.0%, depending on our utilization of the Senior Credit Facility, or at our election, at an annual rate equal to the LIBOR Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization of the Senior Credit Facility. Borrowings under the Canadian sub-facility portion of our Senior Credit Facility accrue interest at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.25% to 2.0%, depending upon utilization of the Senior Credit Facility, or at our election, at an annual rate equal to the BA Rate (as defined therein) plus 2.25% to 3.0%, depending upon utilization of the Senior Credit Facility. The weighted-average interest rate on borrowings outstanding under the Senior Credit Facility at September 30, 2012 was approximately 4.4%. Because these rates may increase or decrease at any time, we are subject to the risk that they may increase, thereby increasing the interest rates applicable to our borrowings under the Senior Credit Facility. Increases in the applicable rates would increase our interest expense and reduce our net income or increase our net loss. We do not have any instruments in place, such as interest rate swaps or caps, which would mitigate our exposure to interest rate risk related to these borrowings. Based on the amount of borrowings under the Senior Credit Facility at September 30, 2012, the effect of a hypothetical one percent increase in interest rates would increase our annual interest expense by approximately $135,000.
We are also exposed to market risk in the form of interest rate risk related to the Term Loan Facility. Borrowings on the Term Loan Facility accrue interest at (i) for base rate loans, a rate per annum equal to the highest of (a) the federal funds rate in effect on such date plus 0.5% per annum, (b) the variable annual rate of interest then announced by Bank of America as its “prime rate,” and (c) the Eurodollar Rate (as defined in the Term Loan Facility) plus 1.00%, plus, in each case, an applicable margin of 4.0% to 5.0% as set forth in the Term Loan Facility; and (ii) for Eurodollar Rate Loans (as defined in the Term Loan Facility) for any interest period, the rate per annum equal to the British Bankers Association LIBOR Rate published by Reuters two business days before such interest period for dollar deposits with a term equivalent to such interest period, subject to a minimum interest rate and a substitute rate in certain circumstances, plus an applicable margin set forth in the Term Loan Facility. Because these rates may increase or decrease at any time, we are subject to the risk that they may increase, thereby increasing the interest rates applicable to our borrowings under the Term Loan Facility. Increases in the applicable rates would increase our interest expense and reduce our net income or increase our net loss. We do not have any instruments in place, such as interest rate swaps or caps, which would mitigate our exposure to interest rate risk related to these borrowings. The interest rate applicable to outstanding borrowings under the Term Loan Facility was at the minimum of 6.5% at September 30, 2012.
Commodity Prices. We purchase commodities, such as paper, resin, films, energy, and various fuels which are subject to price fluctuations. We do not currently engage in the hedging of commodities. Commodities are generally purchased at market or fixed prices that are established by the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. Although the average selling prices of resin-based products in our consumer food and specialty packaging and performance packaging segments generally increase or decrease as the cost of resins increases or decreases, the impact of a change in resin prices is more immediately reflected in our raw material costs than in our selling prices. Although most of our customers have contracts that prevent us from passing through raw material price increases immediately, historically, we have been able to pass through raw material prices to our customers within a relatively short period of time, maintaining a relatively stable spread between selling price and raw material purchase price. We monitor the correlation between commodity prices and our selling prices and we may consider hedging alternatives in the future to potentially reduce the effect of price fluctuations.
Currency and Exchange Rates. The majority of our revenues, operating expenses and significant capital expenditures are denominated in U.S. dollars; however we do have some exposure to foreign currency risk related to our operations in the United Kingdom, China and Canada, our Canadian sub-facility and interactions with our foreign subsidiaries. Transactions in other currencies are translated into U.S. dollars using the rates in effect as of the date of such transactions. We have not entered into any foreign currency forward contracts or similar arrangements to limit our exposure to foreign exchange rate fluctuations, but we may consider such arrangements in the future.

38



ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission’s rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Based on management’s evaluation as of the end of the period covered by this quarterly report, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule  13a-15(f) and 15d-15(f) under the Exchange Act).

39



PART II
OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
From time to time, we become party to legal proceedings and administrative actions, which are of an ordinary or routine nature, incidental to our operations. Although it is difficult to predict the outcome of any legal proceeding, in the opinion of our management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Certain risk associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. Other than as described below, there have been no material changes to the previously-reported risk factors as of the date of this quarterly report. All of such previously-reported risk factors continue to apply to our business and should be carefully reviewed in connection with an evaluation of our Company. The following disclosures are in addition to or provide updates to the previously-reported risk factors.

Loss of key individuals could disrupt our operations and harm our business.
Our success depends, in part, on the efforts of certain key individuals and members of our senior management and facility operations teams. The loss of the services of any of our executive officers or key employees could disrupt our operations and have a material adverse effect on our business. We do not carry "key man" life insurance coverage for our senior management. Effective June 29, 2012, Tom Vale resigned as our President, Chief Operating Officer and Secretary. On August 13, 2012, we announced the separation from the Company of Christian B. Ragot, who served as our Chief Executive Officer and as a member of our Board of Directors. On August 13, 2012, Miles W. McHugh resigned as our Chief Financial Officer. Jack E. Knott, the Executive Chairman of our Board of Directors, is currently providing the executive services previously provided by our Chief Executive Officer. Duane Owens, our Treasurer and Director of Investor Relations is currently serving as interim Chief Financial Officer. We have initiated a search for a new Chief Executive Officer and a new Chief Financial Officer. We are unable to determine how long it will take us to find permanent replacements for our Chief Executive Officer and Chief Financial Officer positions. Until these positions are filled, there may be an adverse effect on the performance of these functions. A prolonged search to fill these positions could have a material adverse effect on our business.


ITEM 6. EXHIBITS
The list of exhibits in the Exhibit Index to this quarterly report is incorporated herein by reference.

40

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Exopack Holding Corp.
 
 
 
 
By:
/s/ Jack E. Knott
 
 
Jack E. Knott
 
 
Principal Executive Officer
 
 
 
 
By:
/s/ Duane A. Owens
 
 
Duane A. Owens
 
 
Principal Financial and Accounting Officer

Date: November 13, 2012

41

EXHIBIT INDEX
 
Exhibit
Number
 
Description
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
100.INS
*
XBRL Instance Document
 
 
 
100.SCH
*
XBRL Taxonomy Extension Schema Document
 
 
 
100.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
100.DEF
*
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
100.LAB
*
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
100.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
*
 
These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.