e10-q

10-Q 1 g72586e10-q.htm PRINTPACK, INC. e10-q

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 29, 2001





		OR





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

For the transition period from ___________ to ___________

Commission file number 333-13727

PRINTPACK, INC.
(Exact name of registrant as specified in its charter)


Georgia		58-0673779




(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4335 Wendell Drive, S.W., Atlanta, Georgia 30336
(Address of principal executive offices) (Zip Code)

(404) 691-5830
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year,
if changed since last report)

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 [X] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Total number of shares of outstanding stock (net of shares held in treasury) as of November 9, 2001:

Common stock, no par value 4,218,560

PRINTPACK, INC.
INDEX


PART I.	FINANCIAL INFORMATION:

	“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

	Item I.	Financial Statements

	Balance Sheets at
		September 29, 2001 and June 30, 2001

	Statements of Operations and Comprehensive Income
		for the 13 weeks ended September 29, 2001 and September 23, 2000

	Statements of Cash Flows
		for the 13 weeks ended September 29, 2001 and September 23, 2000

	Statement of Changes in Shareholders’ Equity
		for the 13 weeks ended September 29, 2001

	Notes to Unaudited Financial Statements

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Part II.	OTHER INFORMATION:

	Item 6.	Exhibits and Reports on Form 8-K

	Signatures

PART 1. FINANCIAL INFORMATION

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

From time to time, Printpack, Inc. (“Printpack” or the “Company”) makes oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 (the “Act”) or by the SEC in its rules, regulations and releases. The Company desires to take advantage of the “safe harbor” provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Report on Form 10-Q (the “Report”), as well as those made in other filings with the SEC. Forward-looking statements contained in this Report are based on management’s current plans and expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Report, where such forward-looking statements appear, the Company has sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to: the level of consumer spending for consumer nondurable goods that use packaging made by the Company; fluctuations in raw material prices; possible environmental matters; competition; slowed growth in end user markets and pricing pressures; changes in economic conditions generally, both domestic and international; and possible implementation of future cost saving measures which could require the Company to take charges against earnings, including cash and non-cash charges. The preceding list of risks and uncertainties, however, is not intended to be exhaustive, and should be read in conjunction with other cautionary statements made herein and in the Company’s other publicly filed reports, including, but not limited to, the “Risk Factors” set forth in the Company’s Form 10-K for the fiscal year ended June 30, 2001.

The Company does not have, and expressly disclaims, any obligation to release publicly any updates or any changes in the Company’s expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

ITEM 1. FINANCIAL STATEMENTS

PRINTPACK, INC.
BALANCE SHEETS


					September 29,			June 30,
					2001			2001

					(Unaudited)
					(in thousands)
				ASSETS




Current assets




	Cash and cash equivalents				$	1,197		$	7,609




	Trade accounts receivable, less allowance for doubtful accounts of $624 and $769					78,244			83,034




	Inventories					89,222			82,489




	Prepaid expenses and other current assets					14,658			21,649




	Deferred income taxes					1,789			1,782

		Total current assets				185,110			196,563




Property, plant and equipment, net						307,396			297,206




Goodwill, less accumulated amortization of $30,181 and $29,223						45,686			38,846




Other assets						24,049			21,393

					$	562,241		$	554,008

			LIABILITIES AND SHAREHOLDERS’ EQUITY




Current liabilities




	Accounts payable and accrued expenses				$	73,995		$	90,676




	Accrued salaries, wages, benefits and bonuses					12,385			21,592




	Current maturities of long-term debt					5,665			8,893




	Current portion of capital lease obligations					3,134			512




	Short-term borrowings under line of credit					6,016			825

		Total current liabilities				101,195			122,498

Long-term debt						184,878			175,054




Subordinated long-term debt						213,052			210,305




Long-term capital lease obligations						6,191			1,773




Deferred income taxes						3,216			1,405




Other long-term liabilities						30,927			29,005

		Total liabilities				539,459			540,040

Shareholders’ equity




	Common stock, no par value, 15,000,000 shares authorized, 4,218,560 shares issued and outstanding					1,011			1,011




	Additional paid-in capital					6,687			6,687




	Retained earnings					19,682			9,888




	Receivable from parent					(3,694	)		(3,587	)




	Accumulated other comprehensive income					(904	)		(31	)

		Total shareholders’ equity				22,782			13,968

Commitments and contingencies						—			—

					$	562,241		$	554,008

The accompanying notes are an integral part of the financial statements.

PRINTPACK, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


			13 Weeks			13 Weeks
			Ended			Ended
			September 29,			September 23,
			2001			2000

			(Unaudited)			(Unaudited)
			(in thousands)
Net sales			$	259,762		$	251,247




Cost of goods sold				209,637			212,352

Gross margin				50,125			38,895




Selling, administrative and research and development expenses				25,029			20,800




Amortization of goodwill				958			958

Income from operations				24,138			17,137




Other (income) expense




		Interest expense		9,811			12,190




		Other, net		(482	)		(248	)

Income before provision for income taxes				14,809			5,195




Provision for income taxes				5,015			1,843

Net income				9,794			3,352




Other comprehensive income




	Foreign currency translation adjustment (net of income tax benefit of $295 and $345)			(578	)		(627	)

Comprehensive income			$	9,216		$	2,725

The accompanying notes are an integral part of the financial statements.

PRINTPACK, INC.
STATEMENTS OF CASH FLOWS


			13 Weeks			13 Weeks
			Ended			Ended
			September 29,			September 23,
			2001			2000

			(Unaudited)			(Unaudited)
			(in thousands)
Operating activities




	Net income		$	9,794		$	3,352




	Depreciation and amortization			15,138			14,079




	Other			(16,694	)		(14,498	)

		Net cash provided by operating activities		8,238			2,933

Investing activities




	Purchases of property, plant and equipment			(7,870	)		(6,197	)




	Payment for purchase of Independent Packaging, L.P.			(17,441	)		—

		Net cash used in investing activities		(25,311	)		(6,197	)

Financing activities




	Principal payments on long-term debt			(10,644	)		(2,442	)




	Net borrowings under receivable securitization facility			17,000			7,000




	Net borrowings on line of credit			5,191			544




	Payments under capital lease obligations			(779	)		—




	Payment for receivable from parent			(107	)		(1,690	)

		Net cash provided by financing activities		10,661			3,412

Increase (decrease) in cash and cash equivalents				(6,412	)		148




Cash and cash equivalents, beginning of period				7,609			870

Cash and cash equivalents, end of period			$	1,197		$	1,018

Schedule of noncash investing and financing activities




	Capital lease obligations incurred related to the purchase of property, plant and equipment		$	7,717			—

The accompanying notes are an integral part of the financial statements.

PRINTPACK, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)


				Additional							Other
		Common		Paid-In		Retained		Receivable			Comprehensive			Total
		Stock		Capital		Earnings		From Parent			Income			Equity

		(in thousands)
Balance as of June 30, 2001		$	1,011	$	6,687	$	9,888	$	(3,587	)	$	(31	)	$	13,968




	Net income		—		—		9,794		—			—			9,794




	Receivable from parent		—		—		—		(107	)		—			(107	)




	Foreign currency translation adjustment		—		—		—		—			(873	)		(873	)

Balance as of September 29, 2001		$	1,011	$	6,687	$	19,682	$	(3,694	)	$	(904	)	$	22,782

The accompanying notes are an integral part of the financial statements.

PRINTPACK, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 29, 2001

1. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Printpack, Inc. (“Printpack” or the “Company”) have been prepared by Company management and are presented on a basis in accordance with the accounting policies stated in the June 30, 2001 and June 24, 2000 financial statements and should be read in conjunction with the Notes to Financial Statements appearing therein. In the opinion of Printpack management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such financial statements have been included in the accompanying interim financial statements. The results of operations for the 13 week period ended September 29, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior year amounts have been reclassified to conform with the current year presentation.

2. INVENTORIES

Inventories are stated at the lower of cost or current market value. Cost is determined using the last-in, first-out (LIFO) method for domestic inventories and first-in, first-out (FIFO) method for international inventories.

Inventories are summarized as follows:


	September 29,		June 30,
	2001		2001

	(Unaudited)
	(in thousands)
Raw materials	$	31,788	$	32,007




Work-in-process		10,285		11,030




Finished goods		72,149		64,948

		114,222		107,985




Reduction to state inventories at last-in, first-out cost (LIFO)		25,000		25,496

	$	89,222	$	82,489

3. CONTINGENCIES

Printpack is subject to legal proceedings and other claims which arise in the ordinary course of business. In the opinion of management, the outcome of these actions will not materially affect the financial position, results of operations or cash flows of the Company.

4. RECEIVABLES SECURITIZATION FACILITY

On August 22, 1996, the Company created a wholly owned, bankruptcy remote, special purpose subsidiary, Flexible Funding Corp. (“Flexible Funding”), for the sole purpose of facilitating financing transactions for the Company. The Company contributed approximately $100,000 of trade receivables in exchange for the equity in Flexible Funding. Subsequently, Flexible Funding entered into a revolving line of credit facility with a bank (the “Facility”). The Facility allows Flexible Funding to draw a maximum of $50 million on the established line of credit through December 2003, on a revolving basis, through note agreements bearing interest at a negotiated rate. The line of credit is collateralized by 100% of the trade receivables of Flexible Funding. At September 29, 2001 and June 30, 2001, the Company had $47 million and $30 million, respectively, of notes outstanding under the Facility, collateralized by approximately $69 million and $73 million, respectively, in trade receivables.

PRINTPACK, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS — (Continued)

5. INTEREST RATE SWAP

In order to manage its exposure to interest rate movements, the Company entered into an interest rate swap agreement during the first quarter of fiscal 2002 with a notional amount of $100 million. The swap was designated as a partial hedge of the Company’s portfolio of fixed rate debt and effectively converts the interest rate on a portion of the Company’s long-term senior subordinated notes from fixed to variable.

The notional amount does not represent amounts exchanged by the parties and thus is not a measure of exposure to the Company. The amount exchanged is based on the notional amount and other terms of the swap. Under this agreement, the Company will pay interest at a variable rate equal to the six-month U.S. dollar LIBOR plus 4.98% to the counterparty. The counterparty will pay the Company interest at a fixed rate of 10.625%. The termination date of this swap agreement is August 15, 2006. The counterparty may, at its sole election, terminate the swap agreement on August 15, 2003. Interest rate differentials paid or received under this agreement are recognized over the six-month period as adjustments to interest expense. The fair value of the swap as of September 29, 2001 was approximately $2,747,000 and is included in Other assets on the accompanying Balance Sheet. The change in the fair value of the hedged debt instrument totaled approximately $2,747,000 and is included in Subordinated long-term debt on the accompanying Balance Sheet. The Company does not hold or issue interest rate swap agreements for trading purposes.

PRINTPACK, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations of Printpack, Inc. (“Printpack” or the “Company”) for the 13 weeks ended September 29, 2001 is compared to the same time period in fiscal 2001. The discussion and analysis of Printpack’s financial condition compares its condition at September 29, 2001 to June 30, 2001.

This Item contains certain forward-looking statements that reflect the Company’s assessment of a number of risks and uncertainties. The Company’s actual results could differ materially from the results anticipated in such forward-looking statements as a result of certain factors set forth in this Report. Where such forward-looking statements appear, the Company has sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. An additional statement made pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in the Company’s business is included in Part I of this Report under the caption “ ‘Safe Harbor’ Statement Under the Private Securities Litigation Reform Act of 1995.”

Results of Operations

Thirteen weeks ended September 29, 2001 compared to September 23, 2000

Net Sales. Net sales increased $8.6 million or 3.4% to $259.8 million in the first quarter of fiscal 2002 from $251.2 million in the first quarter of fiscal 2001. The increase was primarily due to higher sales volume generated by the acquisition of the business of Independent Packaging, L.P.

Gross Margin. Cost of goods sold decreased $2.8 million, or 1.3%, to $209.6 million in the first quarter of fiscal 2002 from $212.4 million in first quarter of fiscal 2001. Cost of goods sold decreased to 80.7% of net sales in the first quarter of fiscal 2002 from 84.6% of net sales in the first quarter of fiscal 2001, primarily due to favorable raw material prices as well as productivity improvements in the first quarter of fiscal 2002. Gross margin, consequently, increased $11.2 million, or 28.8%, to $50.1 million in the first quarter of fiscal 2002 from $38.9 million in the first quarter of fiscal 2001.

Operating Expenses. Selling, administrative and research and development expenses increased $4.2 million or 20.2%, to $25.0 million in the first quarter of fiscal 2002 from $20.8 million in the first quarter of fiscal 2001. The increase is primarily a result of increases in salaries and related costs. Selling, administrative and research and development expenses as a percentage of net sales increased to 9.6% in the fiscal 2002 period from 8.3% in the fiscal 2001 period.

Operating Income. Income from operations increased $7.0 million, or 40.9%, to $24.1 million in the first quarter of fiscal 2002 compared to $17.1 million in the first quarter of fiscal 2001. The increase was due to higher gross margins, partially offset by higher selling, administrative and research and development expenses as described above.

Other Income and Expense. Interest expense decreased $2.4 million, or 19.7%, to $9.8 million in the first quarter of fiscal 2002 from $12.2 million in the first quarter of fiscal 2001. The decrease in interest expense for the fiscal 2002 period as compared to the fiscal 2001 period is primarily due to lower interest rates and to a lesser extent reductions in outstanding debt.

Employees. At September 29, 2001, the Company had approximately 3,900 employees, of which approximately 900 at five manufacturing facilities were covered by collective bargaining agreements. The Company considers relations with its employees to be generally good.

Liquidity and Capital Resources

Cash provided by operating activities totaled $8.2 million in the first 13 weeks of fiscal 2002 compared to $2.9 million in the corresponding period of fiscal 2001. After adding back depreciation and amortization to net income, the Company’s operations provided $24.9 million in cash in the first 13 weeks of fiscal 2002 compared to $17.4 million in the corresponding period of fiscal 2001. An additional $16.7 million was used in the first 13 weeks of fiscal 2002 as compared to $14.5 million used in the corresponding period of fiscal 2001, primarily for working capital increases. Depreciation and amortization for the first 13 weeks of fiscal 2002 were $15.1 million compared to $14.1 million for the corresponding period of fiscal 2001.

Capital expenditures of $7.9 million in the first 13 weeks of fiscal 2002 and $6.2 million in the corresponding period of fiscal 2001 continued to be principally for new property, plant and equipment. In addition, the Company spent $17.4 million during the first quarter of fiscal 2002 to purchase the business and net assets of Independent Packaging, L.P.

Cash provided by financing activities in the first 13 weeks of fiscal 2002 was $10.7 million as compared to cash provided by financing activities of $3.4 million in the corresponding period of fiscal 2001. The cash provided by financing activities during the fiscal 2002 period is primarily a result of the Company drawing down on its credit facilities to finance increases in working capital noted above. The Company also advanced approximately $0.1 million and $1.7 million to its parent, Printpack Holdings, Inc., during the first 13 weeks of fiscal 2002 and 2001, respectively.

The Company entered into an interest rate swap agreement during the first quarter of fiscal 2002 with a notional amount of $100 million. The swap was designated as a partial hedge of the Company’s portfolio of fixed rate debt and effectively converts the interest rate on a portion of the Company’s long-term senior subordinated notes from fixed to variable. Total outstanding debt at September 29, 2001 of approximately $409.6 million included $96.6 million of floating rate and $313.0 million of fixed rate obligations, of which $102.7 million has effectively been converted to floating rate debt as described above.

The Company’s primary sources of liquidity have been cash flows from operations and borrowings under bank credit facilities. The Company has used borrowings under the bank credit facilities to meet seasonal fluctuations in working capital requirements, which generally peak during January through March when sales volumes generally are lowest. The credit facilities consist of term loans totaling $43.5 million, a $60.0 million revolving credit facility, a $10.0 million line of credit and a $50.0 million receivables securitization facility. At September 29, 2001 the Company had approximately $68.6 million available for borrowings under its credit agreements.

The Company believes that its future primary liquidity needs will consist of capital expenditures, debt service and working capital. Estimated annual capital expenditures for the Company are expected to be approximately $55.0 million to $60.0 million for fiscal 2002, excluding the Independent Packaging, L.P. acquisition described above. Approximately $15.0 million is expected to be used for replacements with the balance expected to be used for productivity improvements and to meet the specific needs of the Company’s customers.

Based upon current levels of operations and continued cost saving measures, the Company believes that cash flow from operations, borrowings under the credit agreement, sales of accounts receivable under its receivables securitization facility and other sources of liquidity, will be adequate to meet the Company’s anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for at least the next 12 months. There can be no assurance, however, that the Company’s business will continue to generate cash flows from operations at or above current levels or that anticipated improvements in operations and cost savings will be realized.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion should be read in conjunction with the Notes to Unaudited Financial Statements contained herein, as well as the Notes to Financial Statements contained in the Company’s Form 10-K for the fiscal year ended June 30, 2001.

INTEREST RATE RISK

With respect to its credit facilities entered into for other than trading purposes, the Company is subject to market risk exposure related to changes in interest rates. The Company is the obligor on the following variable interest rate long-term debt instruments: (i) $38,178,000 (at September 29, 2001) secured senior notes to banks payable in quarterly installments of $2,442,000 in the second quarter of fiscal 2002, $1,313,124 in the third quarter of fiscal 2002, $220,000 in the fourth quarter of fiscal 2002 and continuing through the second quarter of fiscal 2004 and a final payment of $32,882,876 during the third quarter of fiscal 2004 (final installment due March 2004), with an interest rate tied to LIBOR and payable monthly; (ii) $5,364,000 (at September 29, 2001) secured notes to a bank payable in monthly installments through May 2005 with an interest rate tied to the bank’s Base Rate as published from time to time and payable monthly; (iii) a $60,000,000 revolving credit facility with banks due in December 2003 with an interest rate tied to LIBOR and payable quarterly (at September 29, 2001, nothing was outstanding under this facility); (iv) a $10,000,000 line of credit with an interest rate tied to the Federal Funds rate (approximately $6,016,000 outstanding at September 29, 2001); and (v) $47,000,000 (at September 29, 2001) outstanding under a $50,000,000 accounts receivable securitization facility with a bank due in December 2003, with an interest rate tied to LIBOR and payable quarterly. While changes in LIBOR, the Federal Funds rate and a bank’s Base Rate would affect the cost of these funds in the future, the Company does not consider its current exposure to changes in such rates to be material, and the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company’s financial position, results of operations or cash flows would not be material. The carrying amounts of the Company’s variable rate long-term debt approximate their fair values.

The notional amount does not represent amounts exchanged by the parties and thus is not a measure of exposure to the Company. The amount exchanged is based on the notional amount and other terms of the swap. Under this agreement, the Company will pay interest at a variable rate equal to the six-month U.S. dollar LIBOR plus 4.98% to the counterparty. The counterparty will pay the Company interest at a fixed rate of 10.625%. The termination date of this swap agreement is August 15, 2006. The counterparty may, at its sole election, terminate the swap agreement on August 15, 2003. Interest rate differentials paid or received under this agreement are recognized over the six-month period as adjustments to interest expense. The fair value of the swap as of September 29, 2001 was approximately $2,747,000. The change in the fair value of the hedged debt instrument totaled approximately $2,747,000. The Company does not hold or issue interest rate swap agreements for trading purposes.

At September 29, 2001, the Company’s fixed interest rate long-term debt instruments included: (i) $200,000,000 in 10.625% unsecured senior subordinated notes payable in August 2006 with interest payable semi-annually; (ii) $100,000,000 in 9.875% unsecured senior notes payable in August 2004 with interest payable semi-annually; and (iii) $10,305,000 in 11% unsecured subordinated notes to shareholders of Printpack Holdings, Inc. payable in an installment of $3,422,000 in May 2005 and the remaining principal payable in May 2014 with interest payable annually. There is no material market risk related to the Company’s fixed interest rate long-term debt.

FOREIGN CURRENCY RISK

The Company’s revenue derived from international operations is not material and, therefore, the risk related to foreign currency exchange rates is not material.

The Company periodically uses foreign exchange derivative instruments or spot purchases to hedge its known liabilities in foreign currencies to reduce the impact of foreign currency gains and losses in its financial results. It is the Company’s policy not to enter into derivative transactions for speculative purposes.

INVESTMENT PORTFOLIO

The Company does not use financial instruments for trading purposes. The Company invests its excess cash in short-term, highly liquid investments consisting primarily of overnight repurchase agreements. The market risk on such investments is minimal.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


(a)		Exhibits





		None





(b)		Reports on Form 8-K





		No reports on Form 8-K were filed during the quarter for which this report is filed.

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.


		PRINTPACK, INC.


Dated:	November 9, 2001	By:	/s/ R. Michael Hembree

		R. Michael Hembree Vice President-Finance (Principal Financial Officer and a duly authorized officer)