Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Quarterly Period Ended March 31, 2010
OR
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o |
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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 001-01982
Constar International Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-1889304 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification Number) |
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One Crown Way, Philadelphia, PA
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19154 |
(Address of principal executive offices)
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(Zip Code) |
(215) 552-3700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act): Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes þ No o
As of May 6, 2010, 1,750,000 shares of the registrants Common Stock were outstanding.
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
Constar International Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
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Successor |
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
2,214 |
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$ |
2,469 |
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Accounts receivable, net |
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48,011 |
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39,054 |
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Inventories, net |
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47,707 |
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44,058 |
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Prepaid expenses and other current assets |
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7,971 |
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7,896 |
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Restricted cash |
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1,490 |
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7,589 |
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Total current assets |
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107,393 |
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101,066 |
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Property, plant and equipment, net |
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143,236 |
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151,526 |
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Goodwill and intangible assets, net |
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149,702 |
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150,080 |
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Other assets |
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5,460 |
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3,592 |
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Total assets |
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$ |
405,791 |
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$ |
406,264 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Short-term debt |
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$ |
9,065 |
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$ |
5,000 |
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Accounts payable (includes book overdrafts of $12,768 and $10,269 at
March 31, 2010 and December 31, 2009, respectively) |
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67,697 |
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59,128 |
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Accrued expenses and other current liabilities |
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22,715 |
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25,253 |
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Deferred income taxes |
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1,222 |
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1,222 |
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Total current liabilities |
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100,699 |
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90,603 |
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Long-term debt |
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173,341 |
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167,919 |
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Pension and postretirement liabilities |
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29,663 |
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31,105 |
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Deferred income taxes |
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17,984 |
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23,531 |
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Other liabilities |
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15,009 |
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14,503 |
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Total liabilities |
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336,696 |
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327,661 |
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Commitments and contingencies (Note 10) |
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Stockholders Equity: |
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Common stock, $.01 par value, 75,000 shares authorized, 1,750 shares
issued and outstanding at March 31, 2010 and December 31, 2009 |
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18 |
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18 |
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Additional paid-in capital |
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101,466 |
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101,466 |
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Accumulated other comprehensive loss, net of tax |
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(1,701 |
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(1,769 |
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Accumulated deficit |
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(30,688 |
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(21,112 |
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Total stockholders equity |
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69,095 |
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78,603 |
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Total liabilities and stockholders equity |
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$ |
405,791 |
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$ |
406,264 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Constar International Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
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Successor |
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Predecessor |
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Three Months |
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Three Months |
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Ended |
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Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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Net customer sales |
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$ |
133,591 |
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$ |
156,870 |
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Net affiliate sales |
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2,580 |
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Net sales |
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133,591 |
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159,450 |
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Cost of products sold, excluding depreciation |
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122,786 |
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141,921 |
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Depreciation and amortization |
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9,791 |
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7,256 |
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Gross profit |
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1,014 |
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10,273 |
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Selling and administrative expenses |
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4,557 |
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5,173 |
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Research and technology expenses |
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1,701 |
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1,866 |
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Provision for restructuring |
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365 |
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515 |
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Gain on disposal of assets |
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(546 |
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(320 |
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Total operating expenses |
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6,077 |
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7,234 |
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Operating income (loss) |
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(5,063 |
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3,039 |
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Interest expense |
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(9,127 |
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(4,257 |
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Interest expense related party |
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(39 |
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Reorganization items, net |
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(3,555 |
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Other income (expense), net |
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(786 |
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161 |
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Loss from continuing operations before income taxes |
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(14,976 |
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(4,651 |
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Benefit from income taxes |
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5,371 |
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18 |
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Loss from continuing operations |
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(9,605 |
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(4,633 |
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Income (loss) from discontinued operations, net of taxes |
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29 |
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(77 |
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Net loss |
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$ |
(9,576 |
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$ |
(4,710 |
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Basic and diluted loss per common share: |
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Continuing operations |
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$ |
(5.49 |
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$ |
(0.37 |
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Discontinued operations |
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0.02 |
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(0.01 |
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Net loss per share |
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$ |
(5.47 |
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$ |
(0.38 |
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Weighted average common shares outstanding: |
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Basic and diluted |
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1,750 |
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12,455 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Constar International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Successor |
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Predecessor |
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Three Months |
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Three Months |
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Ended |
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Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(9,576 |
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$ |
(4,710 |
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Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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9,990 |
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7,487 |
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Debt accretion expense |
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5,422 |
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Bad debt recoveries |
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(44 |
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(421 |
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Stock-based compensation |
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129 |
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Gain on disposal of assets |
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(546 |
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(320 |
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Deferred income taxes |
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(5,295 |
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Loss on interest rate swap |
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74 |
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Changes in working capital and other |
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(6,368 |
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6,068 |
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Reorganization items, net |
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1,125 |
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Net cash provided by (used in) operating activities |
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(6,343 |
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9,358 |
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Cash flows from investing activities: |
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Restricted cash |
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6,099 |
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(9,327 |
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Purchases of property, plant and equipment |
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(2,792 |
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(4,299 |
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Proceeds from sale of property, plant, and equipment |
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570 |
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99 |
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Net cash provided by (used in) investing activities |
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3,877 |
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(13,527 |
) |
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Cash flows from financing activities: |
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Costs associated with debt financing |
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(1,772 |
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Proceeds from short-term financing |
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150,265 |
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159,723 |
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Repayment of short-term financing |
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(146,200 |
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(167,459 |
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Net cash provided by (used in) financing activities |
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2,293 |
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(7,736 |
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Effect of exchange rate changes on cash and cash equivalents |
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(82 |
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(18 |
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Net decrease in cash and cash equivalents |
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(255 |
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(11,923 |
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Cash and cash equivalents at beginning of period |
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2,469 |
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14,292 |
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Cash and cash equivalents at end of period |
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$ |
2,214 |
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$ |
2,369 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Constar International Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar and share amounts in thousands, unless otherwise noted)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and in
accordance with Securities and Exchange Commission (SEC) regulations for interim financial
reporting. In the opinion of management, these consolidated financial statements contain all
adjustments of a normal and recurring nature necessary to provide a fair statement of the financial
position, results of operations and cash flows for the periods presented. Results for interim
periods should not be considered indicative of results for a full year. These financial statements
should be read in conjunction with the Consolidated Financial Statements and Notes thereto
contained in Constar International Inc.s (the Company or Constar) Annual Report on Form 10-K
for the year ended December 31, 2009 (however, see the discussion below regarding fresh-start
accounting). The Condensed Consolidated Financial Statements include the accounts of the Company
and all of its subsidiaries in which a controlling interest is maintained.
The Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC
or Codification) 852 Reorganizations applied to the Companys financial statements while the
Company operated under the provisions of Chapter 11 of the United States Bankruptcy Code. The
Company applied the guidance of ASC 852 for the period from December 30, 2008, to April 30, 2009.
ASC 852 does not change the application of generally accepted accounting principles in the
preparation of financial statements. However, for periods including and subsequent to the filing of
a Chapter 11 petition ASC 852 does require that the financial statements distinguish transactions
and events that are directly associated with the reorganization from the ongoing operations of the
business. Accordingly, certain revenues, expenses, gains, and losses that were realized or incurred
during the Chapter 11 proceedings have been classified as reorganization items, net on the
accompanying condensed consolidated statements of operations.
As of May 1, 2009, (the Effective Date) the Company adopted fresh-start accounting. The
adoption of fresh-start accounting resulted in the Company becoming a new entity for financial
reporting purposes. Accordingly, the financial statements prior to May 1, 2009 are not comparable
with the financial statements for periods on or after May 1, 2009. References to Successor or
Successor Company refer to the Company on or after May 1, 2009, after giving effect to the
cancellation of Constar common stock issued prior to the Effective Date, the issuance of new
Constar common stock in accordance with the related Plan of Reorganization, and the application of
fresh-start accounting. References to Predecessor or Predecessor Company refer to the Company
prior to May 1, 2009. For further information, see Note 4 Fresh-Start Accounting of the notes
to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
In accordance with ASC 205-20, Discontinued Operations, the Company has classified the
results of operations of its Italian operation as a discontinued operation in the condensed
consolidated statements of operations for all periods presented. In addition, the assets and
related liabilities of this entity have been classified as assets and liabilities of discontinued
operations on the condensed consolidated balance sheets. See Note 20 Discontinued Operations
for further discussion. Unless otherwise indicated, amounts provided throughout this report relate
to continuing operations only.
At March 31, 2010, restricted cash represents cash collateral related to outstanding letters
of credit under the Companys former credit agreement. At December 31, 2009 restricted cash represented cash collateral
related to the Companys interest rate swap liability. On February 11, 2010, the counterparty to the
Companys interest rate swap agreement novated its rights under the swap agreement to a third party
and the cash collateral was returned to the Company.
Certain reclassifications have been made to prior year balances in order to conform these
balances to the current years presentation.
6
2. New Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a higher level of
disaggregation for the different types of financial instruments. For the reconciliation of Level 3
fair value measurements, information about purchases, sales, issuances and settlements are
presented separately. This standard is effective for interim and annual reporting periods beginning
after December 15, 2009 with the exception of revised Level 3 disclosure requirements which are
effective for interim and annual reporting periods beginning after December 15, 2010. Comparative
disclosures are not required in the year of adoption. The Company adopted the provisions of the
standard on January 1, 2010. The adoption of these new requirements did not have a material impact
on the Companys results of operations or financial condition.
3. Reorganization Items
The Company incurred certain professional fees and other expenses directly associated with the
bankruptcy proceedings. In addition, the Company has made adjustments to the carrying value of
certain prepetition liabilities. Such costs and adjustments are classified as reorganization
items in the accompanying condensed consolidated statements of operations and consist of the
following:
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Successor |
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Predecessor |
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Three Months |
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Three Months |
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Ended |
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Ended |
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March 31, |
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March 31, |
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(In thousands) |
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2010 |
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2009 |
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Professional fees associated with bankruptcy proceedings |
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$ |
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$ |
(2,715 |
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Debtor-in-possession and Exit Financing fees |
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(100 |
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Other, net |
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(740 |
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Total reorganization items, net |
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$ |
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$ |
(3,555 |
) |
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The Successor Company made cash payments of $71 for the three months ended March 31, 2010, and
the Predecessor Company made cash payments of $2,428 for the three months ended March 31, 2009
related to reorganization items.
4. Accounts Receivable
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Successor |
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March 31, |
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December 31, |
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(In thousands) |
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2010 |
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|
2009 |
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Trade accounts receivable |
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$ |
42,993 |
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$ |
35,427 |
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Less: allowance for doubtful accounts |
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(119 |
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(322 |
) |
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Net trade accounts receivable |
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42,874 |
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35,105 |
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Value added taxes recoverable |
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3,603 |
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2,202 |
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Miscellaneous receivables |
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1,534 |
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1,747 |
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Accounts receivable, net |
|
$ |
48,011 |
|
|
$ |
39,054 |
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7
5. Inventories
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Successor |
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|
March 31, |
|
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December 31, |
|
(In thousands) |
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2010 |
|
|
2009 |
|
Finished goods |
|
$ |
31,985 |
|
|
$ |
28,900 |
|
Raw materials and supplies |
|
|
16,872 |
|
|
|
16,343 |
|
|
|
|
|
|
|
|
Total |
|
|
48,857 |
|
|
|
45,243 |
|
Less: reserves for obsolete and slow-moving inventories |
|
|
(1,150 |
) |
|
|
(1,185 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
47,707 |
|
|
$ |
44,058 |
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Land and improvements |
|
$ |
15,518 |
|
|
$ |
15,812 |
|
Buildings and improvements |
|
|
49,791 |
|
|
|
50,708 |
|
Machinery and equipment |
|
|
121,717 |
|
|
|
121,975 |
|
|
|
|
|
|
|
|
|
|
|
187,026 |
|
|
|
188,495 |
|
Less: accumulated depreciation and amortization |
|
|
(49,455 |
) |
|
|
(40,303 |
) |
|
|
|
|
|
|
|
|
|
|
137,571 |
|
|
|
148,192 |
|
Construction in progress |
|
|
5,665 |
|
|
|
3,334 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
143,236 |
|
|
$ |
151,526 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010, the Company accelerated the depreciation of
machinery and equipment idled during the period that resulted in a non-recurring charge of $0.9
million.
7. Goodwill and Intangible Assets
The Company performed an interim goodwill impairment assessment as of March 31, 2010 since the
trading value of its common stock of $28.0 million was less than the carrying value of its
stockholders equity of $69.1 million. In performing the interim impairment assessment the Company
estimated the fair value of its reporting unit using the following valuation methods and
assumptions. These methods are consistent with the Companys fourth quarter of 2009 annual and
interim impairment assessments:
|
1. |
|
Income Approach (discounted cash flow analysis) the discounted cash flow (DCF)
valuation method requires an estimation of future cash flows of an entity and then
discounting those cash flows to their present value using an appropriate discount rate.
The discount rate selected should reflect the risks inherent in the projected cash flows.
The key inputs and assumptions of the DCF method are the projected cash flows, the
terminal value of the entity, and the discount rate. The Company used the Gordon Growth
Model and assumed a 3.0% growth rate to estimate the terminal value of the business. Cash
flows were discounted at a rate of 10.9%. |
8
|
2. |
|
Market Approach (market multiples) this method begins with the identification of
a group of peer companies. Peer companies represent a group of companies in the same or
similar industry as the company being valued. A valuation average multiple is then
computed for the peer group based upon a valuation metric. The Company selected a ratio
of enterprise value to projected earnings before interest, taxes, depreciation and
amortization (EBITDA) as an appropriate valuation multiple. Various operating
performance measurements of the company being valued are then benchmarked against the
peer group and a discount or premium is applied to reflect favorable or unfavorable
comparisons. The resulting multiple is then applied to the company being valued to arrive
at an estimate of its fair value. An equity value is then derived by subtracting the fair
value of interest bearing debt from the total enterprise value. A control premium is then
applied to the equity value. The combined value of interest bearing debt plus an equity
value including control premium equals the estimated total, or enterprise value, of the
business. The
Company selected 11 public companies in the packaging industry as its peer group. The
Company
calculated for the peer group an average multiple of 2010 projected EBITDA and a
multiple of projected 2011 EBITDA. The peer group average multiples were then discounted
approximately 10% based upon an unfavorable comparison of the Companys historical growth
and profit margins as compared to the peer group. The result was a market multiple of 5.3
for 2010 and a market multiple of 4.7 for 2011. Weightings of 80% and 20% were assigned to
the 2010 and 2011 valuation multiples, respectively. The company used quoted market prices
to determine the fair value of its debt at March 31, 2010. A control premium of 20% was
assumed to determine the Companys equity value.
|
The Company believes that the valuation methods described above, weighted equally, provide a
value representative of the fair value of the Company better than the use of a single technique.
The determination of estimated fair value requires the exercise of judgment and is highly
sensitive to the Companys assumptions. The following table provides a summary of the impact that
changes in the assumptions used would have on the estimated fair value of the Companys reporting
unit at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Assumed |
|
Decrease in |
|
Valuation Method |
|
Assumption |
|
Change |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Discounted cash flow |
|
Projected cash flows |
|
10% decrease |
|
$ |
(12.1 |
) |
Discounted cash flow |
|
Terminal year growth rate |
|
100 basis point decrease |
|
$ |
(14.3 |
) |
Discounted cash flow |
|
Discount rate |
|
100 basis point increase |
|
$ |
(7.1 |
) |
|
|
|
|
|
|
|
|
Market approach |
|
Projected cash flows |
|
10% decrease |
|
$ |
(14.8 |
) |
Market approach |
|
Market multiple |
|
20% discount to peer average |
|
$ |
(15.9 |
) |
Market approach |
|
Control premium |
|
10% control premium |
|
$ |
(2.3 |
) |
Based upon the analysis performed as of March 31, 2010, the Company failed Step 1 of the
goodwill impairment test. Consequently, the Company performed a hypothetical purchase price
allocation to determine the amount of goodwill impairment, if any. The significant fair value
adjustment in the hypothetical purchase price allocation was to long-term debt. The adjustments to
measure the assets, liabilities and intangibles at fair value were for the purpose of measuring the
implied fair value of goodwill. The adjustments are not reflected in the condensed consolidated
balance sheet.
The results of the second step of the goodwill impairment test indicated that goodwill was not
impaired as of March 31, 2010. However, a small negative change in the assumptions used in the
valuation, particularly the projected cash flows, the discount rate, the terminal year growth rate,
and the market multiple assumptions could significantly affect the results of the impairment
analysis. If the Company makes additional downward revisions to its cash flow projections in the
future, the Company may experience a material impairment charge to the carrying amount of its
goodwill. At March 31, 2010, an approximate 6% decline in the estimated fair value of the
Companys reporting unit would have resulted in an impairment charge. Recognition of an impairment
of a significant portion of goodwill would negatively affect the Companys reported results of
operations and total capitalization, the effect of which could be material and could have a
negative impact on the Companys ability to raise capital on attractive terms.
9
The following table presents a summary of the activity related to the carrying value of
goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
(In thousands) |
|
March 31, 2010 |
|
|
|
March 31, 2009 |
|
Beginning balance: |
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
118,682 |
|
|
|
$ |
381,872 |
|
Accumulated impairment losses |
|
|
|
|
|
|
|
(233,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
118,682 |
|
|
|
|
148,813 |
|
|
|
|
|
|
|
|
|
|
|
Adjustments during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
118,682 |
|
|
|
|
381,872 |
|
Accumulated impairment losses |
|
|
|
|
|
|
|
(233,059 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
118,682 |
|
|
|
$ |
148,813 |
|
|
|
|
|
|
|
|
|
The Company did not perform an impairment test of its indefinite-lived intangible asset as of
March 31, 2010, since there were no triggering events that occurred during the three months ended
March 31, 2010, that would cause the Company to believe that the fair value of its trade name has
declined below its carrying value.
The following table presents a summary of the carrying value of indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Trade name |
|
|
25,500 |
|
|
|
25,500 |
|
Accumulated impairment losses |
|
|
(4,000 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
21,500 |
|
|
$ |
21,500 |
|
|
|
|
|
|
|
|
The following table presents a summary of finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Estimated |
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Life |
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
(In thousands) |
|
(in years) |
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Technology |
|
4 to 12 |
|
$ |
9,700 |
|
|
$ |
(1,108 |
) |
|
$ |
8,592 |
|
|
$ |
9,700 |
|
|
$ |
(805 |
) |
|
$ |
8,895 |
|
Leasehold interests |
|
4 |
|
|
1,204 |
|
|
|
(276 |
) |
|
|
928 |
|
|
|
1,204 |
|
|
|
(201 |
) |
|
|
1,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
10,904 |
|
|
$ |
(1,384 |
) |
|
$ |
9,520 |
|
|
$ |
10,904 |
|
|
$ |
(1,006 |
) |
|
$ |
9,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $378 and $-0- for the three months ended March 31, 2010 and 2009,
respectively, and is included within cost of goods sold in the accompanying condensed consolidated
statements of operations.
The following table summarizes the expected amortization expense for finite-lived intangible
assets:
|
|
|
|
|
(In thousands) |
|
|
|
|
Nine months ended December 31, 2010 |
|
$ |
1,132 |
|
2011 |
|
|
1,509 |
|
2012 |
|
|
1,509 |
|
2013 |
|
|
909 |
|
2014 |
|
|
608 |
|
After 2014 |
|
|
3,853 |
|
|
|
|
|
|
|
$ |
9,520 |
|
|
|
|
|
10
8. Debt
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Short-term debt: |
|
|
|
|
|
|
|
|
Credit Facility |
|
$ |
9,065 |
|
|
$ |
|
|
Exit Facility |
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
Total short-term debt |
|
$ |
9,065 |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
Secured Notes |
|
$ |
173,341 |
|
|
$ |
167,919 |
|
|
|
|
|
|
|
|
At March 31, 2010, there were $1.7 million and $1.4 million in letters of credit outstanding
under the Companys current and previous credit agreements, respectively. The letters of credit
outstanding under the Companys previous credit agreement at March 31, 2010, were collateralized with $1.5 million of
cash. The cash collateral is classified as restricted cash on the accompanying condensed
consolidated balance sheet. At December 31, 2009, there were
$4.0 million in letters of credit
outstanding under the Companys previous credit agreement.
On February 11, 2010, the Company entered into a revolving credit facility (the Credit
Agreement) with General Electric Capital Corporation (Agent) and terminated its previous credit
agreement. The Credit Agreement provides for up to $75.0 million of available credit, with a
sublimit of up to $15.0 million for the issuance of letters of credit. Available credit under the
Credit Agreement is limited to a borrowing base consisting of the sum of:
(a) |
|
up to 85% of the dollar equivalent of the book value of eligible
accounts receivable; plus |
(b) |
|
subject to certain limitations, the lesser of (i) 65% of the dollar
equivalent of the book value of eligible inventory valued at the lower
of cost on a first-in, first-out basis or market, and (ii) up to 85%
of the dollar equivalent of the book value of the net orderly
liquidation value of eligible inventory; minus |
(d) |
|
such reserves as the Agent may from time to time establish in its
discretion in connection with hedging arrangements; minus |
(e) |
|
such reserves as the Agent may from time to time establish in its
discretion. |
As of March 31, 2010 the Companys borrowing base under the Credit Agreement was $45.0 million
and its available credit was $34.2 million.
The Credit Agreements scheduled expiration date is February 11, 2013. However, the Credit
Agreement may terminate earlier if the Companys Secured Notes are not refinanced at least 90 days
prior to their scheduled due date or in the case of an event of default.
The Company will pay monthly a commitment fee equal to 0.75% per year on the undrawn portion
of the Credit Agreement. Loans will bear interest, at the option of the Company, at one of the
following rates: (i) a fluctuating base rate of not less than 3.5% plus a margin ranging from 2.75%
to 3.25% per year, or (ii) a fluctuating LIBOR base rate of not less than 2.5% plus a margin
ranging from 3.75% to 4.25% per year. Letters of credit carry an issuance fee of 0.25% per annum of
the outstanding amount and a monthly fee accruing at a rate per year of 4% of the average daily
amount outstanding.
The Company, its U.S. subsidiaries and its U.K. subsidiary jointly and severally guarantee the
obligations under the Credit Agreement. Collateral securing the obligations under the Credit
Agreement consists of all of the stock of the Companys domestic and United Kingdom subsidiaries,
65% of the stock of the Companys other foreign subsidiaries and all of the inventory, accounts
receivable, investment property, instruments, chattel paper, documents, deposit accounts and
intangibles of the Company and its domestic and United Kingdom subsidiaries.
11
The Credit Agreement contains certain financial covenants. Capital expenditures in any fiscal
year may not exceed $25.0 million plus the carry over of up to 75% of such amount from the
immediately preceding fiscal year if not used in that year. In addition, if the amount of available
credit less all outstanding loans and letters of credit during any fiscal quarter is less than
$15.0 million for any period of five consecutive business days, the Company must maintain
Consolidated EBITDA, as defined in the Credit Agreement (which the
Company refers to as Adjusted EBITDA), of not less than $40.0 million, calculated
on a trailing four fiscal quarters basis as of the last day of the then immediately preceding
fiscal quarter.
Based upon its current projections, the Company expects to be in compliance with its debt
covenants during 2010. The Companys projected available credit, based upon its most recent
earnings and financial projections, will exceed $15.0 million for all five consecutive business day
periods in 2010.
The Company believes that its trailing four fiscal quarters Adjusted EBITDA will fall
below $40.0 million for the second and third quarters of 2010 and will marginally exceed $40.0
million for the full year 2010, however the Company will remain in compliance with this covenant
because available credit will not fall below $15.0 million for any five consecutive business day
periods in 2010. The Companys projected availability and
Adjusted EBITDA may be impacted by
unit volume changes, resin price changes, changes in foreign currency exchange rates, working
capital changes, vendor demands for letters of credit, changes in product mix, factors impacting the value of the borrowing base, and
other factors, such as those discussed in Managements Discussion and Analysis of Financial
Condition and Results of OperationsOverview. In the event that
it appeared to the Company that the debt covenants would not be met,
the Company would plan to delay or eliminate certain capital expenditures, reduce its inventory,
institute cost reduction initiatives, seek additional funding related to its unsecured assets or
seek a waiver of the debt covenants. There can be no assurance that such actions would be
successful. For a reconciliation of Adjusted EBITDA to Net Income, see Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources.
The Credit Agreement contains other customary covenants and events of default. If an event of
default should occur and be continuing, the Lender may, among other things, accelerate the maturity
of the Credit Agreement. The Credit Agreement also contains cross-default provisions if there is an
event of default under the Secured Notes that has occurred or is continuing. The Company was in
compliance with the covenants of the Credit Agreement as of March 31, 2010.
Upon the adoption of fresh-start accounting, the Company adjusted the Secured Notes to fair
value based upon their quoted market price at April 30, 2009. The Company currently expects to
record accretion expense of approximately $22.8 million in 2010, $25.8 million in 2011 and
$3.5 million in 2012. For the three months ended March 31, 2010, the Company recorded $5.4 million
of accretion expense which is included in interest expense in the accompanying condensed
consolidated statement of operations.
The Companys outstanding long-term debt at March 31, 2010 and December 31, 2009, consists of
$220.0 million face value of Secured Notes due February 15, 2012. The Secured Notes bear interest
at the rate of three-month LIBOR plus 3.375% per annum. Interest on the Secured Notes is reset and
payable quarterly on each February 15, May 15, August 15 and November 15. In 2005 the Company
entered into an interest rate swap for a notional amount of $100 million under which the Company
exchanged its floating interest rate for a fixed rate of 7.9%. On February 11, 2010, the
counterparty to the interest rate swap novated its rights under the swap agreement to a third
party. The fixed payment of the swap agreement was also modified from the previous fixed rate of
7.9% to a new fixed rate of 8.17%. The interest rate swap agreement terminates on February 15,
2012. The Company may redeem some or all of the Secured Notes at any time under the circumstances
and at the prices described in the indenture governing the Secured Notes. The indenture governing
the Secured Notes contains provisions that require the Company to make mandatory offers to purchase
outstanding Secured Notes in connection with a change in control, asset sales and events of loss.
The Secured Notes are guaranteed by all of the Companys U.S. subsidiaries and its U.K. subsidiary.
Substantially all of the Companys property, plant, and equipment are pledged as collateral for the
Secured Notes. The Company does not have sufficient funds to repay the Secured Notes and intends to refinance them prior to their maturity.
There are no financial covenants related to the Secured Notes. The Secured Notes contain
certain non-financial covenants that, among other things, restrict the Companys ability to incur
indebtedness, create liens, sell assets, and enter into transactions with affiliates. The Company
was in compliance with these covenants at March 31, 2010. If an event of default shall occur and be
continuing under the indenture, either the Trustee or holders of a specified percentage of the
applicable notes may accelerate the maturity of such notes. If there is an event of default
under the Credit Agreement that has occurred or is continuing, the Trustee may accelerate the
maturity of the Secured Notes.
12
9. Restructuring
On October 10, 2008, the Company executed a four-year cold fill supply agreement effective
January 1, 2009, (the New Agreement) with Pepsi-Cola
Advertising and Marketing, Inc. (Pepsi).
Under the terms of the New Agreement, the Company anticipated approximately a 30% reduction in
volume in 2009. Therefore, in conjunction with the signing of the New Agreement, on October 10,
2008 a committee of the Companys Board of Directors approved a plan of restructuring to reduce the
Companys manufacturing overhead cost structure that involved the closure of three U.S.
manufacturing facilities and a reduction of operations in three other U.S. manufacturing
facilities. In addition, as a result of previously disclosed customer losses and a strategic
decision to exit the limited extrusion blow-molding business the Company closed its manufacturing
facility in Houston, Texas in May 2008.
In connection with the restructuring actions described above, the Company expects to incur
total charges of approximately $12 million. The total charges include (i) an estimated $2.7 million
related to costs to exit facilities, (ii) $1.5 million related to employee severance and other
termination benefits, and (iii) approximately $7.7 million of accelerated depreciation and other
non-cash charges.
In November of 2007, the Company terminated its agreement for the supply of bottles and
preforms with its supplier in Salt Lake City. As a result, the Company recorded restructuring
charges for costs to remove its equipment from this location and for severance benefits that will
be paid to terminated personnel. The Company did not incur any restructuring expenditures in 2010
related to the Salt Lake City shut-down.
The following table presents a summary of the restructuring reserve activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Plan |
|
|
2008 Plans |
|
|
|
|
|
|
Severance |
|
|
Contract |
|
|
|
|
|
|
|
|
|
and |
|
|
and Lease |
|
|
|
|
|
|
|
|
|
Termination |
|
|
Termination |
|
|
Other |
|
|
|
|
(In thousands) |
|
Benefits |
|
|
Costs |
|
|
Costs |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2010 (Successor) |
|
$ |
14 |
|
|
$ |
46 |
|
|
$ |
329 |
|
|
$ |
389 |
|
Charges to income |
|
|
|
|
|
|
188 |
|
|
|
177 |
|
|
|
365 |
|
Payments |
|
|
|
|
|
|
(214 |
) |
|
|
(450 |
) |
|
|
(664 |
) |
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 (Successor) |
|
$ |
14 |
|
|
$ |
20 |
|
|
$ |
56 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
The Company is subject to lawsuits and claims in the normal course of business and related to
businesses operated by predecessor corporations. Management believes that the ultimate liabilities
resulting from these lawsuits and claims will not materially impact its results of operations or
financial position.
Certain judgments against the Company would constitute an event of default under its debt
agreements.
Constar has been identified by the Wisconsin Department of Natural Resources as a potentially
responsible party at two adjacent sites in Wisconsin and agreed to share in the remediation costs
with one other party. Remediation is ongoing at these sites. Constar has also been identified as a
potentially responsible party at the Bush Valley Landfill site in Abingdon, Maryland and entered
into a settlement agreement with the EPA in July 1997. The activities required under that agreement
are ongoing. Constars share of the remediation costs at both sites has been minimal thus far and
no accrual has been recorded for future remediation at these sites.
13
The Companys Netherlands facility has been identified as impacting soil and groundwater from
volatile organic compounds at concentrations that exceed those permissible under Dutch law. The
main body of the groundwater plume is beneath the Netherlands facility but it also appears to
extend from an up gradient neighboring property. The Company commenced trial remediation in 2007.
The Company records an environmental liability on an undiscounted basis when it is probable that a
liability has been incurred and the amount of the liability is reasonably estimable. The Company
has recorded an accrual of $0.2 million as of March 31, 2010 and December 31, 2009 for estimated
costs associated with completing the required remediation activities. As more information becomes
available relating to what additional actions may be required at the site, this accrual may be
adjusted as necessary, to reflect the new information. There are no other accruals for
environmental matters.
Environmental exposures are difficult to assess for numerous reasons, including the
identification of new sites, advances in technology, changes in environmental laws and regulations
and their application, the scarcity of reliable data pertaining to identified sites, the difficulty
in assessing the involvement and financial capability of other potentially responsible parties and
the time periods over which site remediation occurs. It is possible that some of these matters, the
outcomes of which are subject to various uncertainties, may be decided in a manner unfavorable to
Constar. However, management does not believe that any unfavorable decision will have a material
adverse effect on the Companys financial position, cash flows or results of operations.
For the three months ended March 31, 2010, the Company recorded revenue of $0.9 million as a
result of the settlement of a dispute with a former customer.
11. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Pre-tax |
|
|
Tax (Expense) |
|
|
After-tax |
|
|
|
Pre-tax |
|
|
Tax (Expense) |
|
|
After-tax |
|
(In thousands) |
|
Amount |
|
|
Benefit |
|
|
Amount |
|
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
Net loss |
|
|
|
|
|
|
|
|
|
$ |
(9,576 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(4,710 |
) |
Other comprehensive Income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension curtailment |
|
|
627 |
|
|
|
|
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension remeasurement |
|
|
(128 |
) |
|
|
|
|
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement amortization |
|
|
(16 |
) |
|
|
(5 |
) |
|
|
(21 |
) |
|
|
|
1,457 |
|
|
|
|
|
|
|
1,457 |
|
Cash-flow hedge |
|
|
(484 |
) |
|
|
186 |
|
|
|
(298 |
) |
|
|
|
208 |
|
|
|
|
|
|
|
208 |
|
Foreign currency translation adjustments |
|
|
(112 |
) |
|
|
|
|
|
|
(112 |
) |
|
|
|
(660 |
) |
|
|
|
|
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
comprehensive
income (loss) |
|
|
(113 |
) |
|
|
181 |
|
|
|
68 |
|
|
|
|
1,005 |
|
|
|
|
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
$ |
(9,508 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(3,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Pension and post-retirement liabilities, net of tax |
|
$ |
(1,982 |
) |
|
$ |
(2,460 |
) |
Cash flow hedge, net of tax |
|
|
364 |
|
|
|
662 |
|
Foreign currency translation adjustments |
|
|
(83 |
) |
|
|
29 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(1,701 |
) |
|
$ |
(1,769 |
) |
|
|
|
|
|
|
|
12. Stock-Based Compensation
There have been no awards issued for the three months ended March 31, 2010. The Predecessor
Company maintained stock-based incentive compensation plans for its employees and stock-based
compensation plans for directors. All outstanding equity awards of the Predecessor were cancelled
upon the Companys emergence from bankruptcy.
14
The following table summarizes total stock-based compensation expense included in the
Predecessors consolidated statements of operations:
|
|
|
|
|
|
|
Predecessor |
|
|
|
Three Months Ended |
|
(In thousands) |
|
March 31, 2009 |
|
Restricted stock |
|
$ |
133 |
|
Restricted stock units |
|
|
(4 |
) |
|
|
|
|
|
|
$ |
129 |
|
|
|
|
|
13. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted earnings (loss) per
common share (Diluted EPS) is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period after giving effect to all potentially
dilutive securities outstanding during the period.
The Predecessor Companys potentially dilutive securities consisted of potential common shares
related to restricted stock awards. Diluted EPS includes the impact of potentially dilutive
securities except in periods in which there is a loss from continuing operations because the
inclusion of the potential common shares would be anti-dilutive. There were no potentially dilutive
securities issued or outstanding at March 31, 2010.
The computation of Diluted EPS for the three months ended March 31, 2009 excludes 0.5 million
shares of restricted stock due to the loss for the period.
14. Pension and Other Postretirement Benefits
Pension Benefits
The components of net periodic pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
|
March 31, 2009 |
|
(In thousands) |
|
U.S. |
|
|
Europe |
|
|
Total |
|
|
|
U.S. |
|
|
Europe |
|
|
Total |
|
Service cost |
|
$ |
159 |
|
|
$ |
201 |
|
|
$ |
360 |
|
|
|
$ |
155 |
|
|
$ |
137 |
|
|
$ |
292 |
|
Interest cost |
|
|
1,303 |
|
|
|
189 |
|
|
|
1,492 |
|
|
|
|
1,315 |
|
|
|
140 |
|
|
|
1,455 |
|
Expected return on plan assets |
|
|
(1,360 |
) |
|
|
(185 |
) |
|
|
(1,545 |
) |
|
|
|
(1,128 |
) |
|
|
(138 |
) |
|
|
(1,266 |
) |
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,189 |
|
|
|
83 |
|
|
|
1,272 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
(10 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension expense |
|
$ |
102 |
|
|
$ |
205 |
|
|
$ |
307 |
|
|
|
$ |
1,544 |
|
|
$ |
212 |
|
|
$ |
1,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010, due to a freeze in plan benefits the Company
recorded a curtailment adjustment to its U.K. pension plan liability. The curtailment resulted in a
decrease in the benefit obligation and an increase in accumulated other comprehensive income of
$0.6 million.
The Company estimates that its expected total contributions to its pension plans for 2010 will
be approximately $4.0 million of which $1.0 million was paid during the three months ended March
31, 2010.
15
Other Postretirement Benefits
The components of other postretirement benefits expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
(In thousands) |
|
March 31, 2010 |
|
|
|
March 31, 2009 |
|
Interest cost |
|
$ |
64 |
|
|
|
$ |
82 |
|
Amortization of net (gain) loss |
|
|
(16 |
) |
|
|
|
196 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
Total other postretirement benefits expense |
|
$ |
48 |
|
|
|
$ |
201 |
|
|
|
|
|
|
|
|
|
15. Income Taxes
For interim reporting periods the Company estimates the effective tax rate expected to be
applicable for the full fiscal year and uses that rate to determine its provision for income taxes.
The Company also recognizes the tax impact of certain discrete (unusual or infrequently occurring)
items, including changes in judgment about valuation allowances, changes in judgment regarding
uncertain tax positions, and effects of changes in tax laws or rates, in the interim period in
which they occur.
The Successor Company recorded a benefit from income taxes of $5.4 million for the three
months ended March 31, 2010. The Company has a net deferred tax liability at March 31, 2010 of $19.2
million principally in relation to the excess of the basis of its assets pursuant to fresh-start
accounting over their historic tax bases. The Predecessor Company recorded a benefit from income
taxes of $18 thousand for the three months ended March 31, 2009.
The Company is in discussions with the Italian tax authorities regarding the tax returns filed
by the Companys Italian subsidiary for fiscal years 2002-2004. The Company estimates its maximum
exposure, including interest and penalties, at approximately $3.3 million. The Company intends to
defend against this matter vigorously.
Total unrecognized income tax benefits as of March 31, 2010 and December 31, 2009 were $0.7
million and are included in other liabilities on the condensed consolidated balance sheets. In
addition, the Company had accrued approximately $0.2 million for estimated penalties and interest
on uncertain tax positions as of March 31, 2010 and December 31, 2009. Substantially all of the
unrecognized income tax benefits and related estimated penalties and interest relate to the
Companys discontinued operation in Italy. The Company believes that it has adequately provided for
any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves as events
require. The Company believes it is reasonably possible that the tax matters related to its
discontinued operation will be settled in the next twelve months. The settlement amount may differ
materially from the Companys current estimate. To the extent that the ultimate results differ from
the original or adjusted estimates of the Company, the effect will be recorded in the provision for
income taxes.
16. Derivative Financial Instruments
The Company may enter into a derivative instrument by approval of the Companys executive
management based on guidelines established by the Companys Board of Directors or a duly authorized
Board committee. The primary risk managed by using derivative instruments is interest rate risk.
Market and credit risks associated with derivative instruments are regularly reviewed by the
Companys executive management.
In 2005, an interest rate swap with a notional amount of $100 million was entered into to
manage interest rate risk associated with the Companys variable-rate debt. The objective and
strategy for undertaking this interest rate swap was to hedge the Companys exposure to variability
in expected future cash flows as a result of the floating interest rate associated with the Secured
Notes. By entering into the interest rate swap agreement, the Company effectively exchanged a
floating interest rate of LIBOR plus 3.375% for a fixed interest rate of 7.9% over the remaining
term of the underlying notes. On February 11, 2010, the counterparty to the Companys interest rate
swap agreement novated its rights under the swap agreement to a third party and the fixed interest
rate payment of the
interest rate swap agreement was modified from the previous fixed interest rate of 7.9% to a
new fixed interest rate of 8.17%. The Company accounted for the novation as a termination of the
original interest rate swap agreement and for accounting purposes the original hedging relationship
was discontinued.
16
When a cash flow hedge is discontinued, gains or losses that are deferred in accumulated other
comprehensive income are reclassified to earnings in the period the forecasted transaction impacts
earnings. To the extent that a forecasted transaction is considered not probable of occurring,
then reclassification of deferred gains or losses into earnings is recorded immediately. The
Company reclassified $116 of accumulated other comprehensive income related to the interest rate
swap into earnings related to forecasted interest payments no longer considered probable of
occurring. The reclassification adjustments resulted in a decrease to interest expense for the
period.
The new interest rate swap agreement was designated as a cash flow hedge. As a result, the
effective portion of the change in fair value of the interest rate swap is reported as a component
of other comprehensive income and reclassified into earnings in the same periods during which the
hedged transactions affect earnings. Changes in the fair value of the interest rate swap that
represent hedge ineffectiveness are recognized in earnings immediately. For the period February 11,
2009 (inception) to March 31, 2010 ineffectiveness related to the new interest rate swap was $243
which resulted in an increase to interest expense.
The fair value of derivative contracts is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Derivative Liabilities |
|
(In thousands) |
|
Balance |
|
Fair Value |
|
Derivatives designated as |
|
Sheet |
|
March 31, |
|
|
December 31, |
|
hedging instruments |
|
Location |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other liabilities |
|
$ |
7,043 |
|
|
$ |
6,485 |
|
The effect of derivative contracts on the statement of operations and on accumulated other
comprehensive income (loss) is summarized in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Amount of |
|
|
Amount of Pre-tax |
|
|
|
|
|
|
Gain or (Loss) |
|
|
Gain or (Loss) |
|
|
Amount of Pre-tax |
|
|
|
Recognized in OCI |
|
|
Reclassified from |
|
|
Gain or (Loss) |
|
(In thousands) |
|
on Derivative, |
|
|
Accumulated |
|
|
Recognized in Income |
|
Derivatives in cash flow |
|
Net of Tax |
|
|
OCI into Income |
|
|
on Derivative |
|
hedging relationships |
|
(Effective Portion) |
|
|
(Effective Portion) (a) |
|
|
(Ineffective Portion) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(298 |
) |
|
$ |
(1,110 |
) |
|
$ |
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are included included in interest expense on the condensed consolidated statements of operations. |
17
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
Amount of |
|
|
|
Amount of |
|
|
Gain or (Loss) |
|
|
|
Gain or (Loss) |
|
|
Reclassified |
|
|
|
Recognized |
|
|
from |
|
(In thousands) |
|
in OCI on |
|
|
Accumulated |
|
Derivatives in cash flow |
|
Derivative |
|
|
OCI into Income |
|
hedging relationships |
|
(Effective Portion) |
|
|
(Effective Portion) (a) |
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
208 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are included included in interest expense on the condensed consolidated statements of operations. |
The Company expects to record reclassifications from accumulated other comprehensive loss to
earnings within the next twelve months in the amount of $4,316.
17. Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis are summarized in
the following tables by the type of inputs applicable to the fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted |
|
|
Significant Other |
|
|
Unobservable |
|
|
Total |
|
|
|
Prices |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Fair |
|
(In thousands) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
|
|
|
$ |
7,043 |
|
|
$ |
|
|
|
$ |
7,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted |
|
|
Significant Other |
|
|
Unobservable |
|
|
Total |
|
|
|
Prices |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Fair |
|
(In thousands) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
|
|
|
$ |
6,485 |
|
|
$ |
|
|
|
$ |
6,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value measurements of the Companys interest rate swap is a model-derived valuation
as of a given date in which all significant inputs are observable in active markets including
certain financial information and certain assumptions regarding past, present and future market
conditions, such as LIBOR yield curves. The Company does not believe that changes in the fair value
of its interest rate swap will materially differ from the amounts that could be realized upon
settlement or maturity.
18
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and
short-term debt approximate fair value. The fair value of debt is based on quoted market prices.
The following table presents the estimated fair value of the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
(In thousands) |
|
Carrying |
|
|
|
|
|
Carrying |
|
|
|
|
Asset (liability) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Senior Notes |
|
|
(173,341 |
) |
|
|
(192,500 |
) |
|
|
(167,919 |
) |
|
|
(182,050 |
) |
18. Other Income (Expense)
Other income (expense) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months |
|
|
|
Three months |
|
|
|
Ended |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
|
2009 |
|
Foreign exchange gains (losses) |
|
$ |
(837 |
) |
|
|
$ |
115 |
|
Royalty income |
|
|
113 |
|
|
|
|
53 |
|
Royalty expense |
|
|
(69 |
) |
|
|
|
(31 |
) |
Interest income |
|
|
14 |
|
|
|
|
22 |
|
Other income (expense) |
|
|
(7 |
) |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
(786 |
) |
|
|
$ |
161 |
|
|
|
|
|
|
|
|
|
19. Supplemental Sales Information
The Company has only one operating segment and one reporting unit. The Company has operating
plants in the United States and Europe.
Net sales by country were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three months |
|
|
|
Three months |
|
|
|
Ended |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
|
2009 |
|
United States |
|
$ |
104,581 |
|
|
|
$ |
133,303 |
|
United Kingdom |
|
|
24,187 |
|
|
|
|
23,847 |
|
Holland |
|
|
4,823 |
|
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
133,591 |
|
|
|
$ |
159,450 |
|
|
|
|
|
|
|
|
|
20. Discontinued Operations
In 2006, the Company closed its Italian operation due to the loss of its principal customer.
Accordingly, the assets and related liabilities of the entity have been classified as assets and
liabilities of discontinued operations and the results of operations of the entity have been
classified as discontinued operations in the consolidated statements of operations for all periods
presented.
19
The following summarizes the assets and liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Assets of Discontinued Operations: |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
317 |
|
|
$ |
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Discontinued Operations: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
57 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations |
|
|
57 |
|
|
|
44 |
|
Other liabilities |
|
|
831 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations |
|
$ |
888 |
|
|
$ |
925 |
|
|
|
|
|
|
|
|
Assets of discontinued operations are included in prepaid expenses and other current assets.
Total current liabilities of discontinued operations are included in accrued expenses and other
current liabilities and other liabilities of discontinued operations are included in other
liabilities on the accompanying condensed consolidated balance sheets.
The following summarizes the results of operations for discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Three Months |
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
|
2009 |
|
Net sales |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations before income taxes |
|
|
29 |
|
|
|
|
2 |
|
(Provision for) benefit from income taxes |
|
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
29 |
|
|
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
21. Condensed Consolidating Financial Information
Each of the Companys domestic and United Kingdom subsidiaries guarantees the Secured Notes,
on a senior secured basis. Prior to the cancellation of the Senior Subordinated Notes pursuant to
the Companys Chapter 11 Plan of Reorganization, the Companys domestic and United Kingdom
subsidiaries also guaranteed the Subordinated Notes, on an unsecured senior subordinated basis. The
guarantor subsidiaries are 100% owned and the guarantees are made on a joint and several basis and
are full and unconditional. The following guarantor and non-guarantor condensed financial
information gives effect to the guarantee of the Secured Notes by each of our domestic and United
Kingdom subsidiaries. The following condensed consolidating financial statements are required in
accordance with Regulation S-X Rule 3-10.
20
Condensed Consolidating Balance Sheet
March 31, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Reclassifications/ |
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
1,436 |
|
|
$ |
778 |
|
|
$ |
|
|
|
$ |
2,214 |
|
Intercompany receivables |
|
|
|
|
|
|
182,956 |
|
|
|
7,882 |
|
|
|
(190,838 |
) |
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
43,448 |
|
|
|
4,563 |
|
|
|
|
|
|
|
48,011 |
|
Inventories, net |
|
|
|
|
|
|
43,445 |
|
|
|
4,262 |
|
|
|
|
|
|
|
47,707 |
|
Prepaid expenses and other current assets |
|
|
12 |
|
|
|
7,274 |
|
|
|
685 |
|
|
|
|
|
|
|
7,971 |
|
Deferred income taxes |
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
(330 |
) |
|
|
|
|
Restricted cash |
|
|
|
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
342 |
|
|
|
280,049 |
|
|
|
18,170 |
|
|
|
(191,168 |
) |
|
|
107,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
133,462 |
|
|
|
9,774 |
|
|
|
|
|
|
|
143,236 |
|
Goodwill and intangible assets |
|
|
|
|
|
|
149,702 |
|
|
|
|
|
|
|
|
|
|
|
149,702 |
|
Investment in subsidiaries |
|
|
342,383 |
|
|
|
19,427 |
|
|
|
|
|
|
|
(361,810 |
) |
|
|
|
|
Deferred income taxes |
|
|
63,066 |
|
|
|
|
|
|
|
|
|
|
|
(63,066 |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
5,146 |
|
|
|
314 |
|
|
|
|
|
|
|
5,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
405,791 |
|
|
$ |
587,786 |
|
|
$ |
28,258 |
|
|
$ |
(616,044 |
) |
|
$ |
405,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
|
|
|
$ |
9,065 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,065 |
|
Accounts payable and accrued liabilities |
|
|
944 |
|
|
|
84,080 |
|
|
|
5,388 |
|
|
|
|
|
|
|
90,412 |
|
Intercompany payable |
|
|
162,411 |
|
|
|
27,847 |
|
|
|
580 |
|
|
|
(190,838 |
) |
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
163,355 |
|
|
|
122,214 |
|
|
|
5,968 |
|
|
|
(190,838 |
) |
|
|
100,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
173,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,341 |
|
Pension and postretirement liabilities |
|
|
|
|
|
|
28,879 |
|
|
|
784 |
|
|
|
|
|
|
|
29,663 |
|
Deferred income taxes |
|
|
|
|
|
|
80,132 |
|
|
|
1,248 |
|
|
|
(63,396 |
) |
|
|
17,984 |
|
Other liabilities |
|
|
|
|
|
|
14,178 |
|
|
|
831 |
|
|
|
|
|
|
|
15,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
336,696 |
|
|
|
245,403 |
|
|
|
8,831 |
|
|
|
(254,234 |
) |
|
|
336,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit) |
|
|
69,095 |
|
|
|
342,383 |
|
|
|
19,427 |
|
|
|
(361,810 |
) |
|
|
69,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$ |
405,791 |
|
|
$ |
587,786 |
|
|
$ |
28,258 |
|
|
$ |
(616,044 |
) |
|
$ |
405,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Condensed Consolidating Balance Sheet
December 31, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantor |
|
|
Eliminations |
|
|
Company |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
2,022 |
|
|
$ |
447 |
|
|
$ |
|
|
|
$ |
2,469 |
|
Intercompany receivables |
|
|
|
|
|
|
216,779 |
|
|
|
10,821 |
|
|
|
(227,600 |
) |
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
36,785 |
|
|
|
2,269 |
|
|
|
|
|
|
|
39,054 |
|
Inventories, net |
|
|
|
|
|
|
40,284 |
|
|
|
3,774 |
|
|
|
|
|
|
|
44,058 |
|
Prepaid expenses and other current assets |
|
|
12 |
|
|
|
7,218 |
|
|
|
666 |
|
|
|
|
|
|
|
7,896 |
|
Restricted cash |
|
|
|
|
|
|
7,589 |
|
|
|
|
|
|
|
|
|
|
|
7,589 |
|
Deferred income taxes |
|
|
2,098 |
|
|
|
|
|
|
|
|
|
|
|
(2,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,110 |
|
|
|
310,677 |
|
|
|
17,977 |
|
|
|
(229,698 |
) |
|
|
101,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
141,521 |
|
|
|
10,005 |
|
|
|
|
|
|
|
151,526 |
|
Goodwill and intangible assets |
|
|
|
|
|
|
150,080 |
|
|
|
|
|
|
|
|
|
|
|
150,080 |
|
Investment in subsidiaries |
|
|
405,700 |
|
|
|
20,910 |
|
|
|
|
|
|
|
(426,610 |
) |
|
|
|
|
Deferred Income Taxes |
|
|
58,772 |
|
|
|
|
|
|
|
|
|
|
|
(58,772 |
) |
|
|
|
|
Other assets |
|
|
552 |
|
|
|
2,728 |
|
|
|
312 |
|
|
|
|
|
|
|
3,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
467,134 |
|
|
$ |
625,916 |
|
|
$ |
28,294 |
|
|
$ |
(715,080 |
) |
|
$ |
406,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
5,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,000 |
|
Accounts payable and accrued liabilities |
|
|
1,681 |
|
|
|
79,325 |
|
|
|
3,375 |
|
|
|
|
|
|
|
84,381 |
|
Intercompany payable |
|
|
207,446 |
|
|
|
19,325 |
|
|
|
829 |
|
|
|
(227,600 |
) |
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
3,320 |
|
|
|
|
|
|
|
(2,098 |
) |
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
214,127 |
|
|
|
101,970 |
|
|
|
4,204 |
|
|
|
(229,698 |
) |
|
|
90,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
167,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,919 |
|
Pension and postretirement liabilities |
|
|
|
|
|
|
30,053 |
|
|
|
1,052 |
|
|
|
|
|
|
|
31,105 |
|
Deferred income taxes |
|
|
|
|
|
|
81,056 |
|
|
|
1,247 |
|
|
|
(58,772 |
) |
|
|
23,531 |
|
Other liabilities |
|
|
6,485 |
|
|
|
7,137 |
|
|
|
881 |
|
|
|
|
|
|
|
14,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
388,531 |
|
|
|
220,216 |
|
|
|
7,384 |
|
|
|
(288,470 |
) |
|
|
327,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit) |
|
|
78,603 |
|
|
|
405,700 |
|
|
|
20,910 |
|
|
|
(426,610 |
) |
|
|
78,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$ |
467,134 |
|
|
$ |
625,916 |
|
|
$ |
28,294 |
|
|
$ |
(715,080 |
) |
|
$ |
406,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
128,770 |
|
|
$ |
4,821 |
|
|
$ |
|
|
|
$ |
133,591 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
118,040 |
|
|
|
4,746 |
|
|
|
|
|
|
|
122,786 |
|
Depreciation and amortization |
|
|
|
|
|
|
9,620 |
|
|
|
171 |
|
|
|
|
|
|
|
9,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
1,110 |
|
|
|
(96 |
) |
|
|
|
|
|
|
1,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
4,378 |
|
|
|
179 |
|
|
|
|
|
|
|
4,557 |
|
Research and technology expenses |
|
|
|
|
|
|
1,701 |
|
|
|
|
|
|
|
|
|
|
|
1,701 |
|
Provision for restructuring |
|
|
|
|
|
|
365 |
|
|
|
|
|
|
|
|
|
|
|
365 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
5,898 |
|
|
|
179 |
|
|
|
|
|
|
|
6,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
|
|
|
|
(4,788 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
(5,063 |
) |
Interest expense |
|
|
(7,422 |
) |
|
|
(1,864 |
) |
|
|
159 |
|
|
|
|
|
|
|
(9,127 |
) |
Other income (expense), net |
|
|
|
|
|
|
(664 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
(786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes |
|
|
(7,422 |
) |
|
|
(7,316 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
(14,976 |
) |
Benefit from income taxes |
|
|
2,526 |
|
|
|
2,778 |
|
|
|
67 |
|
|
|
|
|
|
|
5,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(4,896 |
) |
|
|
(4,538 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
(9,605 |
) |
Equity earnings |
|
|
(4,680 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
4,822 |
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,576 |
) |
|
$ |
(4,680 |
) |
|
$ |
(142 |
) |
|
$ |
4,822 |
|
|
$ |
(9,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
157,151 |
|
|
$ |
2,299 |
|
|
$ |
|
|
|
$ |
159,450 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
139,209 |
|
|
|
2,712 |
|
|
|
|
|
|
|
141,921 |
|
Depreciation |
|
|
|
|
|
|
7,059 |
|
|
|
197 |
|
|
|
|
|
|
|
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
|
|
|
|
10,883 |
|
|
|
(610 |
) |
|
|
|
|
|
|
10,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
5,019 |
|
|
|
154 |
|
|
|
|
|
|
|
5,173 |
|
Research and technology expenses |
|
|
|
|
|
|
1,866 |
|
|
|
|
|
|
|
|
|
|
|
1,866 |
|
Provision for restructuring |
|
|
|
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
515 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
7,080 |
|
|
|
154 |
|
|
|
|
|
|
|
7,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
3,803 |
|
|
|
(764 |
) |
|
|
|
|
|
|
3,039 |
|
Interest expense |
|
|
(3,819 |
) |
|
|
(628 |
) |
|
|
151 |
|
|
|
|
|
|
|
(4,296 |
) |
Reorganization costs |
|
|
(3,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,555 |
) |
Other income (expense), net |
|
|
|
|
|
|
166 |
|
|
|
(5 |
) |
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before
income taxes |
|
|
(7,374 |
) |
|
|
3,341 |
|
|
|
(618 |
) |
|
|
|
|
|
|
(4,651 |
) |
Benefit from income taxes |
|
|
|
|
|
|
6 |
|
|
|
12 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(7,374 |
) |
|
|
3,347 |
|
|
|
(606 |
) |
|
|
|
|
|
|
(4,633 |
) |
Equity earnings |
|
|
2,664 |
|
|
|
(683 |
) |
|
|
|
|
|
|
(1,981 |
) |
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,710 |
) |
|
$ |
2,664 |
|
|
$ |
(683 |
) |
|
$ |
(1,981 |
) |
|
$ |
(4,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(9,576 |
) |
|
$ |
(4,680 |
) |
|
$ |
(142 |
) |
|
$ |
4,822 |
|
|
$ |
(9,576 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
150 |
|
|
|
9,624 |
|
|
|
216 |
|
|
|
|
|
|
|
9,990 |
|
Debt accretion |
|
|
5,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,422 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of assets |
|
|
|
|
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
(546 |
) |
Equity earnings |
|
|
4,680 |
|
|
|
142 |
|
|
|
|
|
|
|
(4,822 |
) |
|
|
|
|
Changes in operating assets and liabilities |
|
|
(11,669 |
) |
|
|
(1,608 |
) |
|
|
1,644 |
|
|
|
|
|
|
|
(11,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(10,993 |
) |
|
|
2,932 |
|
|
|
1,718 |
|
|
|
|
|
|
|
(6,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
6,099 |
|
|
|
|
|
|
|
|
|
|
|
6,099 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(2,202 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
(2,792 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
4,467 |
|
|
|
(590 |
) |
|
|
|
|
|
|
3,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with exit facility |
|
|
|
|
|
|
(1,772 |
) |
|
|
|
|
|
|
|
|
|
|
(1,772 |
) |
Proceeds from Revolver loan |
|
|
150,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,265 |
|
Repayment of Revolver loan |
|
|
(146,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,200 |
) |
Net change in intercompany loans |
|
|
6,928 |
|
|
|
(6,164 |
) |
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
10,993 |
|
|
|
(7,936 |
) |
|
|
(764 |
) |
|
|
|
|
|
|
2,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
(49 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(586 |
) |
|
|
331 |
|
|
|
|
|
|
|
(255 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
2,022 |
|
|
|
447 |
|
|
|
|
|
|
|
2,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,436 |
|
|
$ |
778 |
|
|
$ |
|
|
|
$ |
2,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,710 |
) |
|
$ |
2,664 |
|
|
$ |
(683 |
) |
|
$ |
(1,981 |
) |
|
$ |
(4,710 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
238 |
|
|
|
7,076 |
|
|
|
173 |
|
|
|
|
|
|
|
7,487 |
|
Stock-based compensation |
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
(320 |
) |
Equity earnings |
|
|
(2,664 |
) |
|
|
683 |
|
|
|
|
|
|
|
1,981 |
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
805 |
|
|
|
4,442 |
|
|
|
1,525 |
|
|
|
|
|
|
|
6,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
(6,331 |
) |
|
|
14,674 |
|
|
|
1,015 |
|
|
|
|
|
|
|
9,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
(9,327 |
) |
|
|
|
|
|
|
|
|
|
|
(9,327 |
) |
Purchases of property, plant and equipment |
|
|
|
|
|
|
(4,299 |
) |
|
|
|
|
|
|
|
|
|
|
(4,299 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(13,527 |
) |
|
|
|
|
|
|
|
|
|
|
(13,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Revolver loan |
|
|
159,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,723 |
|
Repayment of Revolver loan |
|
|
(167,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,459 |
) |
Net change in intercompany loans |
|
|
14,067 |
|
|
|
(13,591 |
) |
|
|
(476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
6,331 |
|
|
|
(13,591 |
) |
|
|
(476 |
) |
|
|
|
|
|
|
(7,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(12,453 |
) |
|
|
530 |
|
|
|
|
|
|
|
(11,923 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
13,933 |
|
|
|
359 |
|
|
|
|
|
|
|
14,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,480 |
|
|
$ |
889 |
|
|
$ |
|
|
|
$ |
2,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
22. Subsequent Events
On April 29, 2010, Constar International Holland (Plastics) B.V. (Constar Holland), which is
a subsidiary of the Company organized under the laws of the Netherlands, entered into a receivables
financing agreement and an inventory financing agreement (the ING Credit Agreements) with ING
Commercial Finance B.V., a company organized under the laws of the Netherlands (Lender).
The receivables financing agreement provides for advances of up to 85% (subject to certain
exclusions and limitations) of the face amount of Constar Hollands approved receivables. The
inventory financing agreement provides for advances of up to 50% (subject to certain exclusions and
limitations) of the acquisition cost of Constar Hollands raw materials in inventory, including a
margin for overhead.
The actual amount of financing available under the ING Credit Agreements will fluctuate from
time to time because it depends on inventory and accounts receivable values that fluctuate from
time to time and is subject to limitations and exclusions that the Lender may from time to time
impose in its discretion and other limitations. Although the amount of financing under the ING
Credit Agreements will fluctuate as described above, the Company currently anticipates that
generally at least $5 million will be available under the ING Credit Agreements, which is the
maximum amount that the Company currently anticipates that it would borrow under the ING Credit
Agreements.
Advances under each ING Credit Agreement bear interest at EURIBOR plus 2% per year and a
credit commission of 1/24% per month. A turnover commission of 0.20% is also applicable to the
receivables financing agreement.
The initial duration of each ING Credit Agreement is for two years. At the end of this period,
the ING Credit Agreements automatically renew for successive one-year periods unless at least
90 days notice of earlier termination is given by either party. In addition, the ING Credit
Agreements may terminate earlier in the case of an event of default. If Constar Holland terminates
the ING Credit Agreements early (other than as a result of certain changes to the terms made by the
Lender), or there is a termination due to an event of default, Constar Holland must pay the total
amount of interest and commissions that the Lender would have received if the ING Credit Agreements
had continued for the remaining agreed upon term.
Constar Hollands obligations under the financing agreements are secured by its receivables
and inventory and related rights.
The ING Credit Agreements and related agreements with the Lender contain covenants,
representations and warranties and events of default. Events of default include, but are not
limited to:
|
|
|
a dividend or other distribution from Constar Holland causing its
equity capital to amount to less than 35% of total assets; |
|
|
|
a breach of a covenant, representation, warranty or certification made
in connection with an ING Credit Agreement, including a default in the
payment of any amount due under the ING Credit Agreements; |
|
|
|
a default or acceleration with respect to financing or guarantee
agreements of Constar Holland of more than 50,000 or the occurrence
of certain insolvency events; and |
|
|
|
Constar Holland becoming subject to certain judgments. |
If an event of default shall occur and be continuing under an ING Credit Agreement, the Lender
may, among other things, accelerate the maturity of the ING Credit Agreements.
Effective as of April 28, 2010, Michael J. Hoffman resigned from his positions as President
and Chief Executive Officer of the Company and from the Board of Directors of the Company. Pursuant
to Mr. Hoffmans employment agreement, in connection with his resignation Mr. Hoffman will be
entitled to (i) base salary earned but unpaid as of the date of the termination; (ii) a lump sum
payment equal to $2.2 million, paid in the seventh month
following his termination; (iii) continuation of medical benefits in effect as of the date of
termination for a period of two years following the date of termination at an estimated cost for
premiums of approximately $47 thousand; (iv) payment of approximately $81 thousand in respect of
the deferred portion of his 2009 Annual Incentive Plan award, paid in the seventh month following
his termination; and (v) immediate payment of any unused accrued vacation days.
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a manufacturer of PET plastic containers, preforms, and plastic closures used
for the packaging of food and beverages. Containers, preforms, and closures represented 66%, 29%,
and 5%, respectively, of net sales in the first three months of 2010. The Company has operations in
the United States, United Kingdom and Holland. Approximately 78% of the Companys revenues in the
first three months of 2010 were generated in the United States, with the remainder attributable to
its European operations. During the first three months of 2010, Pepsi accounted for approximately
36% of the Companys net sales and the top ten customers accounted for an aggregate of
approximately 77% of the Companys net sales.
There are two primary market categories within the PET market, conventional and custom.
Conventional PET containers are primarily used for packaging carbonated soft drinks (CSD) and
bottled water. The conventional market is the largest market category for PET packaging.
Conventional products represented approximately 67% of the Companys net sales in the first three
months of 2010. Over the last few years, demand for the Companys conventional PET products has
decreased significantly due to a shift to self-manufacturing by beverage companies. The Company
expects the trend of self-manufacturing of CSD packages by large beverage companies to continue.
The Company expects a transition over time at locations where independent producers transportation
costs are high, and where large volume, low complexity and available space to install blow-molding
equipment exists. The Company believes that in most cases, customers will continue to purchase
water and CSD preforms from independent producers to support their in-house blow-molding
operations. Preforms generally carry lower per unit profitability than bottles. The Company plans
to continue its efforts to offset the potential financial impact on the Company of customers
blowing their own bottles through cost reductions, plant consolidations and retaining the
replacement preform volume at acceptable margins. Other factors that have contributed to an overall
decline in demand for CSD packaging in the United States include consumers shifting their
preferences to alternative beverages such as teas, juices and energy drinks, and the negative
impact that prevailing economic conditions are having on the convenience store and gas station
distribution channels. The Company expects these trends to continue.
The Companys strategy is to increase its presence in the custom category of the market. On
average, the variable profit margin of the custom category is higher than the conventional
category. In addition, oxygen barrier technology and innovative bottle designs add value that
generally results in higher margins than custom products produced from commonly available
technology. For custom products that require oxygen barrier technology, the Company believes its
oxygen scavenging technology, DiamondClear, is the best performing oxygen barrier technology in
the market today. The Company believes that there are growth opportunities for its DiamondClear
technology where it replaces less effective oxygen barrier technology and in the conversion of
oxygen sensitive products packaged in glass and other packaging materials. Approximately 27% of the
Companys net sales in the first three months of 2010 related to custom PET containers with
approximately 33% of these net sales containing the Companys DiamondClear or earlier generation
Oxbar oxygen scavenging technologies.
In negotiations with certain customers for the continuation and the extension of supply
agreements, the Company has historically agreed to price concessions. In 2010, the impact of
contractual price reductions, assuming 2009 constant volume, is expected to be between $10-12
million. There can be no assurance that this amount will not change as contracts are renegotiated
in 2010. The Company plans to offset the impact of these price reductions through custom unit
growth and cost savings.
The Company believes that it will continue to face several sources of pricing pressure. One
source is customer consolidation. When customers aggregate their purchasing power by combining
their operations with other customers or purchasing through buying cooperatives, the profitability
of the Companys business tends to decline. Another source of pricing pressure may come as a result
of excess capacity in the industry driven by self manufacturing and declining demand for products
sold in the convenience store and gas station channels of
distribution. In addition, certain contracts permit customers to terminate contracts if the
customer receives an offer from another manufacturer that the Company chooses not to match.
28
As is common in its industry, the Companys contracts are generally requirements-based,
granting it all or a percentage of the customers actual requirements for a particular period of
time, instead of a specific commitment of unit volume. The typical term for the Companys customer
supply contracts is three to four years. Thus, while there may be variations from year to year, in
any given year between 15-40% of our customer contracts may be scheduled to expire. The Companys
contract with Pepsi, its largest customer, expires on December 31, 2012. Customers often put
expiring contracts out for competitive bidding, which means that the Company may not retain the
business, or may be forced to make price concessions in order to retain the business. Currently,
approximately 22% of the Companys U.S. estimated 2010 volume is not under contract.
The primary raw material and component cost of the Companys products is PET resin, which is a
commodity available globally. The price the Company pays for PET resin is subject to frequent
fluctuations resulting from changes in the cost of raw materials used to make PET resin, which are
affected by prices of oil and its derivatives in the United States and overseas markets, normal
supply and demand influences, and seasonal demand effects. Substantially all of the Companys sales
are made pursuant to mechanisms that allow for the pass-through of changes in the price of PET
resin to its customers. The timing of these adjustments to selling prices typically lags 30-90 days
behind a change in the price of resin. The Company believes that the impact of this lag is
immaterial over time. In addition to PET resin, the Company has the ability to pass through changes
in transportation and energy costs on the majority of its volume.
As a result of the Companys ability to pass through certain costs to its customers, the
Company may experience a change in net sales without a corresponding change in gross profit.
Therefore, period to period comparisons of gross profit as a percentage of net sales may not be
meaningful indicators of actual performance because the effects of the pass-through mechanisms are
affected by the magnitude and timing of these changes. For example, assuming gross profit is a
constant, when pass through related costs increase, the Companys net sales will increase as a
result of the costs passed through to customers, and gross profit as a percent of net sales will
decline. The opposite is true during periods of decreasing costs; the Companys net sales will be
lower causing gross profit as a percent of net sales to increase. As a result, the Company believes
that volume trends and absolute gross profit trends are better indicators of the Companys
performance.
Basis of Presentation
As of May 1, 2009, the Company adopted fresh-start accounting. The adoption of fresh-start
accounting resulted in the Company becoming a new entity for financial reporting purposes.
Accordingly, the financial statements prior to May 1, 2009 are not comparable with the financial
statements for periods on or after May 1, 2009. References to Successor or Successor Company
refer to the Company on or after May 1, 2009, after giving effect to the cancellation of Constar
common stock issued prior to the effective date of the Companys emergence from Chapter 11, the
issuance of new Constar common stock in accordance with the related Plan of Reorganization, and the
application of fresh-start accounting. References to Predecessor or Predecessor Company refer
to the Company prior to May 1, 2009. For further information, see Note 4 Fresh-Start Accounting
of the notes to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009.
The Company has classified the results of operations of its Italian operation beginning in
2006 as a discontinued operation in the consolidated statements of operations for all periods
presented. The assets and related liabilities of this entity have been classified as assets and
liabilities of discontinued operations on the condensed consolidated balance sheets. See Note 20
Discontinued Operations for further details. Unless otherwise indicated, amounts provided
throughout this Form 10-Q relate to continuing operations only.
29
The following discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements
for the three months ended March 31, 2010 and 2009.
Results of Operations
Net Sales
Three Months Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
% |
|
|
|
March 31, |
|
|
Increase |
|
|
Increase |
|
(dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
United States |
|
$ |
104.6 |
|
|
$ |
133.5 |
|
|
$ |
(28.9 |
) |
|
|
(21.6 |
)% |
Europe |
|
|
29.0 |
|
|
|
26.0 |
|
|
|
3.0 |
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
133.6 |
|
|
$ |
159.5 |
|
|
$ |
(25.9 |
) |
|
|
(16.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in United States net sales in the first quarter of 2010 as compared to the first
quarter of 2009 was driven primarily by lower volumes and the negative impact of the mix shift to
preforms from bottles of $31.8 million offset in part by the pass through of higher resin costs to
customers of $2.8 million. Total U.S. PET unit volume decreased 21.2% in the first quarter of 2010
as compared to the first quarter of 2009. This decrease reflects a conventional unit volume decline
of 20.4% and a custom unit volume decline of 23.3%. The decline in conventional volume is primarily
due to reduced volume under the Pepsi cold-fill agreement that went into effect on January 1, 2009,
the continued movement of water bottlers to self-manufacturing and the impact of the general
economic conditions in the United States. The decline in custom unit volume is due to the loss of a
customer contract for custom preforms. Excluding this loss, custom unit volume was flat as
compared to the same period last year.
The increase in European net sales in the first quarter of 2010 was primarily due to a
strengthening of the British Pound and Euro against the U.S. Dollar of $1.4 million and the pass
through of higher resin costs to customers of $1.6 million. European PET volume decreased 0.3%
while closure volume decreased 5.6% in the first quarter of 2010 as compared to the first quarter
of 2009.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
Increase |
|
(dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
United States |
|
$ |
0.2 |
|
|
$ |
10.2 |
|
|
$ |
(10.0 |
) |
Europe |
|
|
0.8 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.0 |
|
|
$ |
10.3 |
|
|
$ |
(9.3 |
) |
|
|
|
|
|
|
|
|
|
|
Percent of net sales |
|
|
0.7 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the United States, the decline in gross profit in the first quarter of 2010 as compared to
the first quarter of 2009 is primarily due to the impact of lower sales of $6.6 million, increased
depreciation expense of $2.8 million, and reduced pricing of $1.7 million, offset in part by cost
reductions from the Companys restructuring programs of $1.3 million. The increase in depreciation
was primarily due to the revaluation of the Companys assets as a result of its adoption of
fresh-start accounting as well as accelerated depreciation on idled machinery and equipment
resulting in a non-recurring charge of $0.9 million.
The gross profit improvement in Europe was driven primarily by reduced electricity costs of
approximately $0.3 million and reduced depreciation expense of $0.3 million.
30
Selling and Administrative Expenses
Selling and administrative expense includes compensation and related expenses for employees in
the selling and administrative functions as well as other operating expenses not directly related
to manufacturing or research, development and engineering activities.
Selling and administrative expenses decreased $0.6 million in the first quarter of 2010 as
compared to the first quarter of 2009 driven primarily by reduced payroll expenses of $1.1 million
and reduced insurance expenses of $0.1 million, offset in part by increased professional fees of
$0.3 million and a decrease in bad debt recoveries of $0.4 million.
Research and Technology Expenses
Research and technology expenses, which include engineering and development costs related to
developing new products and designing significant improvements to existing products, are expensed
as incurred. Research and technology expenses were $1.7 million in the first quarter of 2010 and
$1.9 million in the first quarter of 2009. This decrease was primarily driven by lower payroll
expenses.
Provision for Restructuring
Restructuring charges were $0.4 million in the first quarter of 2010 compared to $0.5 million
in the first quarter of 2009. The restructuring charges recorded in 2010 primarily relate to the
restructuring actions taken due to the impact of the Pepsi supply agreement, including the closure
of three U.S. manufacturing facilities and a reduction of operations in three other manufacturing
facilities, and the 2008 shutdown of the Companys Houston, Texas facility as a result of
previously disclosed customer losses and a strategic decision to exit the Companys limited
extrusion blow-molding business. The restructuring charges in 2010 consist primarily of facility
exit costs. See Note 9 Restructuring in the notes to the accompanying condensed consolidated
financial statements for additional information.
Interest Expense
Interest expense increased $4.8 million to $9.1 million in the first quarter of 2010 from $4.3
million in the first quarter of 2009 due to $5.4 million of non-cash accretion of the fair market
value of the Companys Secured Notes to their face value at maturity offset in part by lower
interest rates which reduced interest expense by $0.6 million and a decrease in amortization of
deferred financing fees of $0.1 million.
Reorganization Items, net
The Company has recorded all costs directly related to its Chapter 11 filing as reorganization
expenses. During the first quarter of 2009, the Company incurred professional fees and other
expenses directly associated with the bankruptcy cases. These reorganization items resulted in an
expense of $3.6 million for the three months ended March 31, 2009. See Note 3 Reorganization
Items to the condensed consolidated financial statements for further discussion of reorganization
items.
Other Income (Expense), net
Other income (expense), net primarily includes gains and losses on foreign currency
transactions including the impact of foreign currency transaction gains and losses and currency
fluctuations on intra-company loan balances, royalty income and expense, and interest income.
Other expense, net was $0.8 million in the first quarter of 2010 compared to other income, net
of $0.2 million in the first quarter of 2009. The increase in other expense primarily resulted from
a $1.0 million negative impact of foreign currency transaction gains and losses and the translation
of intra-company balances.
31
Provision for Income Taxes
In the first quarter of 2010, the Company recorded a benefit from income taxes related to
continuing operations of $5.4 million compared to a benefit from income taxes of $-0- in the first
quarter of 2009. The loss from
continuing operations before taxes was $15.0 million in the first quarter of 2010 compared to a
loss of $4.7 million in the first quarter of 2009. The Companys effective tax rate for the full
year 2010 is expected to be approximately 38%.
The Company is in discussions with the Italian tax authorities regarding the tax returns filed
by the Companys Italian subsidiary for fiscal years 2002-2004. The Company estimates its maximum
exposure, including interest and penalties, at approximately $3.3 million. The Company intends to
defend against this matter vigorously.
Total unrecognized income tax benefits as of March 31, 2010, and December 31, 2009 were $0.7
million and are included in other liabilities on the condensed consolidated balance sheets. In
addition, the Company had accrued approximately $0.2 million for estimated penalties and interest
on uncertain tax positions as of March 31, 2010 and December 31, 2009. Substantially all of the
unrecognized income tax benefits and related estimated penalties and interest relate to the
Companys discontinued operation in Italy. The Company believes that it has adequately provided for
any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves as events
require. The Company believes it is reasonably possible that the tax matters related to its
discontinued operation will be settled in the next twelve months. The settlement amount may differ
materially from the Companys current estimate. To the extent that the ultimate results differ from
the original or adjusted estimates of the Company, the effect will be recorded in the provision for
income taxes.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
Increase |
|
(dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
Net cash provided by (used in) operating activities |
|
$ |
(6.3 |
) |
|
$ |
9.4 |
|
|
$ |
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
$ |
3.9 |
|
|
$ |
(13.5 |
) |
|
$ |
17.4 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
2.3 |
|
|
$ |
(7.7 |
) |
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
The primary factors that impact cash generated from operations are the seasonality of the
Companys sales, profit margins, and changes in working capital. Working capital is impacted by the
normal timing of purchases to meet customer demand and the timing of payments to vendors in
accordance with negotiated terms that may vary from year to year and during the year. The Company
primarily uses cash generated from operations and borrowings under its credit facility to meet its
short-term liquidity needs. Net cash used in operations for first quarter of 2010 increased
compared to first quarter of 2009 principally due to a higher net loss and an increase in working
capital items of $6.4 million.
The increase in net cash provided by investing activities in the first quarter of 2010 was driven
by the return of cash collateral for the interest rate swap to the Company of $6.1 million as
compared to a payment of cash collateral of $9.3 million in the first quarter of 2009, a decrease
in capital expenditures of $1.5 million and an increase in proceeds from the sale of property,
plant, and equipment of $0.5 million.
Net cash provided by financing activities in the first quarter of 2010 was $2.3 million as the
Company had net short-term borrowings of $4.1 million as compared to net short-term debt repayments
of $7.7 million in the first quarter of 2009. In addition, the Company paid $1.8 million for costs
related to obtaining its new Credit Agreement.
32
Liquidity, defined as cash and borrowing availability under the Credit Agreement, will vary on
a daily, monthly and quarterly basis based upon the seasonality of the Companys sales as well as
the impact of changes in the price of resin, the Companys cash generated from operating
activities, the change in the value of the U.S. dollar as compared to the British pound, reserves
and revaluations imposed by the administrative agent and other factors.
The Companys cash requirements are typically greater during the first six to nine months of
the year because of the build-up of inventory levels in anticipation of the seasonal sales increase
during the warmer months and the collection cycle from customers following the higher seasonal
sales. Based upon the terms and conditions of the Companys debt obligations and the Companys most
recent projections the Company believes that cash generated from operations and amounts available under
its Credit Agreement will be sufficient to finance its operations over the next 12 months.
On February 11, 2010, the Company entered into the Credit Agreement with General Electric
Capital Corporation (Agent) and terminated its previous credit agreement. The Credit Agreement
provides for up to $75.0 million of available credit, with a sublimit of up to $15.0 million for
the issuance of letters of credit. Available credit under the Credit Agreement is limited to a
borrowing base consisting of the sum of:
|
(a) |
|
up to 85% of the dollar equivalent of the book value of eligible accounts receivable; plus |
|
|
(b) |
|
subject to certain limitations, the lesser of (i) 65% of the dollar equivalent of the
book value of eligible inventory valued at the lower of cost on a first-in, first-out
basis or market, and (ii) up to 85% of the dollar equivalent of the book value of the net
orderly liquidation value of eligible inventory; minus |
|
|
(c) |
|
$2.5 million; minus |
|
|
(d) |
|
such reserves as the Agent may from time to time establish in its discretion in
connection with hedging arrangements; minus |
|
|
(e) |
|
such reserves as the Agent may from time to time establish in its discretion. |
The ability to borrow under our Credit Agreement fluctuates from time to time and is primarily
driven by borrowing base limitations. The Credit Agreement borrowing base is impacted by changes in
resin prices and the foreign currency exchange rate of the British pound. An increase in resin
prices results in higher book values of our inventory that also result in an increase to the
borrowing base limit. A weakening U.S. dollar versus the British pound causes an increase in the
value of our U.K. inventory when its value is translated into U.S. dollars. Consequently, a
weakening U.S. dollar tends to increase our borrowing base and a strengthening U.S. dollar tends to
decrease our borrowing base. Because the Credit Agreements borrowing base increases and decreases
based upon varying levels of accounts receivable and inventory, the ability to borrow under the
Credit Agreement tends to increase when the Companys cash needs are the highest such as when we
are building inventories. Also, available credit under the Credit Agreement will fluctuate because
it depends on inventory and accounts receivable values that fluctuate and is subject to
discretionary reserves and revaluation adjustments that may be imposed by the Agent from time to
time and other limitations.
As of March 31, 2010 the Companys borrowing base under the Credit Agreement was $45.0 million
and its available credit was $34.2 million.
The Credit Agreements scheduled expiration date is February 11, 2013. However, the Credit
Agreement may terminate earlier if the Companys Secured Notes are not refinanced at least 90 days
prior to their scheduled maturity date of February 15, 2012, or in the case of an event of default.
The Company will pay monthly a commitment fee equal to 0.75% per year on the undrawn portion
of the Credit Agreement. Loans will bear interest, at the option of the Company, at one of the
following rates: (i) a fluctuating base rate of not less than 3.5% plus a margin ranging from 2.75%
to 3.25% per year, or (ii) a fluctuating LIBOR base rate of not less than 2.5% plus a margin
ranging from 3.75% to 4.25% per year. Letters of credit carry an issuance fee of 0.25% per annum of
the outstanding amount and a monthly fee accruing at a rate per year of 4% of the average daily
amount outstanding.
The Company, its U.S. subsidiaries and its UK subsidiary jointly and severally guarantee the
obligations under the Credit Agreement. Collateral under the Credit Agreement is composed of all of
the stock of the Companys domestic and United Kingdom subsidiaries, 65% of the stock of the
Companys other foreign subsidiaries, and all of the inventory, accounts receivable, investment
property, instruments, chattel paper, documents, deposit accounts and certain intangibles of the
Company and its domestic and United Kingdom subsidiaries.
33
The Credit Agreement contains certain financial covenants. Capital expenditures may not exceed
$25 million in any fiscal year plus the carry over of up to 75% of such amount from the immediately
preceding fiscal year if not used in that year. In addition, if the amount of available credit less
all outstanding loans and letters of credit during any fiscal quarter is less than $15.0 million
for any period of five consecutive business days, the Company must maintain Consolidated EBITDA, as
defined in the Credit Agreement (which the Company refers to as Adjusted EBITDA), of not less
than $40.0 million, calculated on a trailing four quarters basis as of the last day of the then
immediately preceding fiscal quarter.
Based
upon its current projections, the Company expects to be in compliance with its debt
covenants during 2010. The Companys projected available credit, based upon its most recent earnings
and financial projections, will exceed $15.0 million for all five consecutive business day periods
in 2010.
The Company believes that its trailing four fiscal quarters Adjusted EBITDA will fall below
$40.0 million for the second and third quarters of 2010 and will marginally exceed $40.0 million
for the full year 2010, however the Company will remain in compliance with this covenant because
available credit will not fall below $15.0 million for any five consecutive business day periods in
2010. The Companys projected availability and Adjusted EBITDA may be impacted by unit volume
changes, resin price changes, changes in foreign currency exchange rates, working capital changes,
vendor demands for letters of credit, changes in product mix, factors impacting the value of the
borrowing base, and other factors such as those disclosed in Managements Discussion and Analysis
of Financial Condition and Results of Operations Overview. In the event that it appeared to the
Company that the debt covenants would not be met, the Company would plan to delay or eliminate
certain capital expenditures, reduce its inventory, institute cost reduction initiatives, seek
additional funding related to its unsecured assets or seek a waiver
of the debt covenants. There can be
no assurance that such actions would be successful.
The Credit Agreement contains other customary covenants and events of default. If an event of
default should occur and be continuing, the Lender may, among other things, accelerate the maturity
of the Credit Agreement. The Credit Agreement also contains cross-default provisions if there is an
event of default under the Secured Notes that has occurred or is continuing. The Company was in
compliance with the covenants of the Credit Agreement as of March 31, 2010.
Adjusted EBITDA generally consists of consolidated net income (loss) adjusted to exclude
income tax expense, interest expense, loss from extraordinary items, depreciation and amortization
expense, certain transaction expenses, certain cash restructuring charges and certain non-cash
items. Adjusted EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be used as an alternative to net income as
an indicator or operating performance or to cash flow as a measure of liquidity. The Companys
management believes that the inclusion of Adjusted EBITDA in this report is appropriate to provide
additional information to investors about the calculation of a financial covenant in the Credit
Agreement that we believe is a material term of the Credit Agreement. Adjusted EBITDA has
limitations as an analytical tool. Some of these limitations are:
|
|
|
Adjusted EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments; |
|
|
|
Adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs; |
|
|
|
Adjusted EBITDA does not reflect the significant interest expense, or
the cash requirements necessary to service interest or principal
payments, on our debts; |
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be replaced
in the future, and Adjusted EBITDA does not reflect any cash
requirements for such replacements; |
|
|
|
non-cash compensation may be a part of our overall long-term incentive
compensation package, although we exclude it as an expense when
evaluating our ongoing operating performance for a particular period; |
|
|
|
Adjusted EBITDA does not reflect the impact of certain cash charges;
and |
|
|
|
other companies may calculate Adjusted EBITDA differently than we do,
limiting its usefulness as a comparative measure. |
34
Reconciliation of net income to EBITDA
|
|
|
|
|
|
|
Four Quarters |
|
|
|
Ended |
|
(in thousands) |
|
March 31, 2010 |
|
|
|
|
|
|
Net income |
|
$ |
84,220 |
|
Interest expense |
|
|
33,676 |
|
Income taxes |
|
|
20,638 |
|
Depreciation and amortization |
|
|
45,407 |
|
|
|
|
|
EBITDA |
|
$ |
183,941 |
|
|
|
|
|
Reconciliation of EBITDA to Adjusted EBITDA
|
|
|
|
|
|
|
Four Quarters |
|
|
|
Ended |
|
(in thousands) |
|
March 31, 2010 |
|
|
|
|
|
|
EBITDA |
|
$ |
183,941 |
|
Cash restructuring charges |
|
|
2,082 |
|
Cash reorganization charges |
|
|
6,106 |
|
Gain from discharge of debt |
|
|
(84,745 |
) |
Gain from fresh-start accounting
adjustments |
|
|
(68,109 |
) |
Other non-cash charges (i) |
|
|
1,532 |
|
|
|
|
|
Adjusted EBITDA |
|
$ |
40,807 |
|
|
|
|
|
|
|
|
(i) |
|
Includes foreign currency translation gains/losses and non-cash charges |
Upon the adoption of fresh-start accounting, the Company adjusted the Secured Notes to fair value
based upon their quoted market price at April 30, 2009. The Company currently expects to record accretion
expense of approximately $22.8 million in 2010, $25.8 million in 2011 and $3.5 million in 2012. For the
three months ended March 31, 2010, the Company recorded $5.4 million of accretion expense which is
included in interest expense in the accompanying condensed consolidated statement of operations.
The Companys outstanding long-term debt at March 31, 2010 and December 31, 2009, consists of
$220.0 million face value of Secured Notes due February 15, 2012. The Secured Notes bear interest at the
rate of three-month LIBOR plus 3.375% per annum. Interest on the Secured Notes is reset and payable
quarterly on each February 15, May 15, August 15 and November 15. In 2005 the Company entered into an
interest rate swap for a notional amount of $100 million under which the Company exchanged its floating
interest rate for a fixed rate of 7.9%. On February 11, 2010, the counterparty to the interest rate swap
novated its rights under the swap agreement to a third party. The fixed payment of the swap agreement was
also modified from the previous fixed rate of 7.9% to a new fixed rate of 8.17%. The interest rate swap
agreement terminates on February 15, 2012. The Company may redeem some or all of the Secured Notes at
any time under the circumstances and at the prices described in the indenture governing the Secured Notes.
The indenture governing the Secured Notes contains provisions that require the Company to make
mandatory offers to purchase outstanding Secured Notes in connection with a change in control, asset sales
and events of loss. The Secured Notes are guaranteed by all of the Company's U.S. subsidiaries and its
U.K. subsidiary. Substantially all of the Company's property, plant, and equipment are pledged as collateral
for the Secured Notes. The Company does not have sufficient funds to repay the Secured Notes and intends
to refinance them prior to their maturity.
There are no financial covenants related to the Secured Notes. The Secured Notes contain certain
non-financial covenants that, among other things, restrict the Companys ability to incur indebtedness,
create liens, sell assets, and enter into transactions with affiliates. The Company was in compliance with
these covenants at March 31, 2010. If an event of default shall occur and be continuing under the indenture,
either the trustee or holders of a specified percentage of the applicable notes may accelerate the maturity of
such notes. If there is an event of default under the Credit Agreement that has occurred or is continuing, the
trustee may accelerate the maturity of the Secured Notes.
Capital Expenditures
Capital expenditures decreased to $2.8 million in the first quarter of 2010 from $4.3 million
in the first quarter of 2009. The decrease was primarily in response to the decline in production
volumes. Based on information currently available, the Company estimates 2010 capital spending will
be similar to 2009 capital expenditures.
35
Pension Funding
Under current funding rules, we estimate that the funding requirements under our pension plans
for 2010 will be approximately $4.0 million. If the return on plan assets is less than expected or
if discount rates decline from current levels, plan contribution requirements could increase
significantly in the future. During the three months ended March 31, 2010, the Company made pension
plan contributions of $1.0 million.
Accounting for pension plans requires the use of estimates and assumptions regarding numerous
factors, including discount rates, rates of return on plan assets, compensation increases,
mortality rates, and employee turnover. Actual results may differ from the Companys actuarial
assumptions, which may have an impact on the amount of reported expense or liability for pensions.
Commitments and Contingent Liabilities
Information regarding the Companys contingent liabilities appears in Note 10 Commitments
and Contingencies in the notes to the accompanying Condensed Consolidated Financial Statements,
which information is incorporated herein by reference.
Critical Accounting Policies and Estimates
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States which require that management
make numerous estimates and assumptions. Actual results could differ from these estimates and
assumptions, impacting the reported results of operations and financial condition of the Company.
For a discussion of the Companys critical accounting policies, see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations in the Companys Form 10-K filed on
March 24, 2010.
The Company completed an interim impairment assessment as of March 31, 2010 and does not
believe that the Companys goodwill balance was impaired, however, an approximate 6% decline in the
estimated fair value of the Companys reporting unit would have resulted in an impairment charge.
In addition, there can be no assurances that the Company will not be required to recognize an
impairment of goodwill in the future due to market conditions or other factors related to the
Companys performance. These market events could include a decline over a period of time of the
Companys stock price, a decline over a period of time in valuation multiples of comparable
packaging companies, the lack of an increase in the Companys market price consistent with its peer
companies or decreases in control premiums. A decline in the forecasted results in our business
plan, such as changes in forecasted on-going profitability or capital investment budgets or changes
in our interest rates, could also result in an impairment charge. Recognition of an impairment of a
significant portion of goodwill would negatively affect the Companys reported results of
operations and total capitalization, the effect of which could be material and could have a
negative impact on the Companys ability to raise capital on attractive terms.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires
additional disclosures about fair value measurements including transfers in and out of Levels 1 and
2 and a higher level of disaggregation for the different types of financial instruments. For the
reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances
and settlements are presented separately. This standard is effective for interim and annual
reporting periods beginning after December 15, 2009 with the exception of revised Level 3
disclosure requirements which are effective for interim and annual reporting periods beginning
after
December 15, 2010. Comparative disclosures are not required in the year of adoption. The
Company adopted the provisions of the standard on January 1, 2010. The adoption of these new
requirements did not have a material impact on the Companys results of operations or financial
condition.
36
Forward-Looking Statements
Statements included herein that are not historical facts (including, but not limited to, any
statements concerning plans and objectives of management for future operations or economic
performance, or assumptions related thereto), are forward-looking statements within the meaning
of the federal securities laws. In addition, the Company and its representatives may from time to
time make other oral or written statements which are also forward-looking statements.
These forward-looking statements are based on the Companys current expectations and
projections about future events. Statements that include the words expect, believe, intend,
plan, anticipate, project, will, may, could, should, pro forma, continues,
estimates, potential, predicts, goal, objective and similar statements of a future nature
identify forward-looking statements. These forward-looking statements and forecasts are subject to
risks, uncertainties and assumptions. The Company cautions that forward-looking statements are not
guarantees and that actual results could differ materially from those expressed or implied in the
forward-looking statements. The Company does not intend to review or revise any particular
forward-looking statement or forecast in light of future events.
A discussion of important factors that could cause the actual results of operations or
financial condition of the Company to differ from expectations has been set forth in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 under the captions Cautionary
Statement Regarding Forward Looking Statements and Item 1.A Risk Factors and is incorporated
herein by reference. Some of the factors are also discussed elsewhere in this Form 10-Q and have
been or may be discussed from time to time in the Companys other filings with the Securities and
Exchange Commission.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures for financial reporting
that are designed to give reasonable assurance that information required to be disclosed in the
Companys reports submitted under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. These controls and procedures also give
reasonable assurance that information required to be disclosed in such reports is accumulated and
communicated to management to allow timely decisions regarding required disclosures.
As of March 31, 2010, the Companys Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), together with management, conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the
Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls
and procedures are effective.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred
during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART IIOther Information
Item 1. Legal Proceedings
Information regarding legal proceedings involving the Company appears in Part I within Item 1
of this quarterly report under Note 10 Commitments and Contingencies to the Condensed
Consolidated Financial Statements, which information is incorporated herein by reference.
37
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for the year ended December 31, 2009, which could materially affect the Companys business,
financial condition or future results. The risks described in the Companys Annual Report on Form
10-K are not the only risks facing the Company. Additional risk and uncertainties not currently
known to the Company or that it currently deems to be immaterial also may materially adversely
affect the Companys business, financial condition or operating results.
The following risk factor from the Companys Annual Report on Form 10-K is deleted: Our stock
is not listed on a national securities exchange. It will likely be more difficult for stockholders
and investors to sell our common stock or to obtain accurate quotations of the share price of our
common stock.
The following additional risk factors have been identified:
Legislative changes could reduce demand for our products.
Our business model is dependent on the demand for our customers products in multiple channels
and locations. Taxes on the sale of our customers products could result in decreased demand for
our products, which could negatively impact our business, prospects, financial condition and
results of operations. In 2009, members of the U.S. Congress raised the possibility of a federal
tax on the sale of certain sugar beverages, including non-diet soft drinks, fruit drinks, teas and
flavored water, to help pay the cost of healthcare reform. Some state and local governments are
considering similar taxes. If enacted, such taxes could result in decreased demand for our
products and negatively impact our business, prospects, financial condition and results of
operations.
In addition, certain state and local governments have considered laws that would restrict our
customers ability to distribute their sweetened beverage products in schools and other venues. If
enacted, these restrictions could result in decreased demand for our products and negatively impact
our business, prospects, financial condition and results of operations.
Recent federal health care legislation could increase our expenses.
We are self-insured with respect to out healthcare coverage and do not purchase third party
insurance for the health insurance benefits provided to employees. We are currently assessing the
potential impact of federal health care legislation which could adversely affect our financial
condition through increased costs. In March 2010, the Patient Protection and Affordable Care Act
(the Act) and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act)
were signed into law. The Act, as modified by the Reconciliation Act, includes a large number of
healthcare provisions to take effect over the next four years, including expanded dependent
coverage, incentives for businesses to provide health care benefits, a prohibition on the denial of
coverage and denial of claims on pre-existing conditions, a prohibition on limits on essential
benefits, and other expansions of health care benefits and coverage. The costs of these provisions
are expected to be funded by a variety of taxes and fees. Some of these taxes and fees, as well as
certain health care changes required by these acts, are expected to result, directly or indirectly,
in increased health care costs for us. For example, the requirement to provide coverage for
children up to the age of twenty-six and the prohibition on limits on essential benefits (whereas
we currently cap health-related benefits) could result in increased costs to us. At this time, we
cannot quantify the impact, if any, that the legislation may have on us. There is no assurance
that we will be able to absorb and/or pass through the costs of such legislation in a manner that
will not adversely impact our business, prospects, financial condition and results of operations.
38
Item 6. Exhibits
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
|
Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer Pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
|
|
Constar International Inc. |
|
|
|
|
|
|
|
|
|
Dated: May 12, 2010
|
|
By:
|
|
/s/ J. Mark Borseth
J. Mark Borseth
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
(duly authorized officer and principal financial officer) |
|
|
40