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 September 30, 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
incorporation or organization)
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(IRS Employer
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 November 10, 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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September 30, |
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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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$ |
2,490 |
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$ |
2,469 |
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Accounts receivable, net |
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42,913 |
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39,054 |
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Inventories, net |
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37,453 |
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44,058 |
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Prepaid expenses and other current assets |
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7,836 |
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7,896 |
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Deferred income taxes |
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1,973 |
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Assets held for sale |
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2,516 |
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Restricted cash |
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7,589 |
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Total current assets |
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95,181 |
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101,066 |
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Property, plant and equipment, net |
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127,418 |
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151,526 |
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Goodwill |
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73,282 |
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118,682 |
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Intangible assets, net |
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23,866 |
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31,398 |
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Other assets |
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5,418 |
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3,592 |
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Total assets |
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$ |
325,165 |
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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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$ |
10,354 |
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$ |
5,000 |
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Accounts payable |
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42,944 |
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59,128 |
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Accrued expenses and other current liabilities |
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26,422 |
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25,253 |
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Deferred income taxes |
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1,222 |
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Total current liabilities |
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79,720 |
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90,603 |
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Long-term debt |
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184,717 |
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167,919 |
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Pension and postretirement liabilities |
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28,200 |
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31,105 |
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Deferred income taxes |
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12,916 |
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23,531 |
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Other liabilities |
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15,275 |
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14,503 |
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Total liabilities |
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320,828 |
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327,661 |
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Commitments and contingencies (Note 12) |
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Stockholders Equity: |
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Common stock, $.01 par value, 75,000 shares authorized, 1,750 shares
issued and outstanding at September 30, 2010 and December 31, 2009 |
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18 |
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18 |
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Additional paid-in capital |
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101,466 |
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101,466 |
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Accumulated other comprehensive loss, net of tax |
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(2,324 |
) |
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(1,769 |
) |
Accumulated deficit |
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(94,823 |
) |
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(21,112 |
) |
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Total stockholders equity |
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4,337 |
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78,603 |
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Total liabilities and stockholders equity |
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$ |
325,165 |
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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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Three Months |
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Three Months |
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Ended |
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Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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Net sales |
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$ |
146,843 |
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$ |
158,630 |
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Cost of products sold, excluding depreciation |
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132,143 |
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141,148 |
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Depreciation and amortization |
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9,294 |
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12,932 |
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Gross profit |
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5,406 |
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4,550 |
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Selling and administrative expenses |
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4,177 |
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4,897 |
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Goodwill impairment |
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12,900 |
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Impairment of intangible asset |
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1,300 |
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Research and technology expenses |
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1,531 |
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1,865 |
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Provision for restructuring |
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67 |
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816 |
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Gain on disposal of assets |
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(270 |
) |
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(223 |
) |
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Total operating expenses |
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19,705 |
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7,355 |
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Operating loss |
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(14,299 |
) |
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(2,805 |
) |
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Interest expense |
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(9,038 |
) |
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(8,606 |
) |
Reorganization items, net |
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(504 |
) |
Other expense, net |
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(1,401 |
) |
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(1,818 |
) |
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Loss from continuing operations before income taxes |
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(24,738 |
) |
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(13,733 |
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Benefit from income taxes |
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413 |
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3,557 |
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Loss from continuing operations |
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(24,325 |
) |
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(10,176 |
) |
Loss from discontinued operations, net of taxes |
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(120 |
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(30 |
) |
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Net loss |
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$ |
(24,445 |
) |
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$ |
(10,206 |
) |
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Basic and diluted loss per common share: |
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Continuing operations |
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$ |
(13.90 |
) |
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$ |
(5.81 |
) |
Discontinued operations |
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(0.07 |
) |
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(0.02 |
) |
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Net loss per share |
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$ |
(13.97 |
) |
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$ |
(5.83 |
) |
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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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1,750 |
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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 Operations
(In thousands, except per share data)
(Unaudited)
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Successor |
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Predecessor |
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Nine Months |
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Five Months |
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Four Months |
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Ended |
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Ended |
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Ended |
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September 30, |
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September 30, |
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April 30, |
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2010 |
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2009 |
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2009 |
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Net customer sales |
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$ |
439,020 |
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$ |
280,148 |
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$ |
214,204 |
|
Net affiliate sales |
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3,256 |
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Net sales |
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439,020 |
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280,148 |
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|
217,460 |
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Cost of products sold, excluding depreciation |
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395,271 |
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|
245,518 |
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|
189,816 |
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Depreciation and amortization |
|
|
27,848 |
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|
19,996 |
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|
9,733 |
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Gross profit |
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15,901 |
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|
14,634 |
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|
17,911 |
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Selling and administrative expenses |
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16,288 |
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|
8,036 |
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|
7,005 |
|
Goodwill impairment |
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45,400 |
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Impairment of intangible asset |
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6,400 |
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Research and technology expenses |
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|
4,855 |
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|
3,094 |
|
|
|
|
2,698 |
|
Provision for restructuring |
|
|
704 |
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|
1,081 |
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|
648 |
|
Gain on disposal of assets |
|
|
(924 |
) |
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|
(226 |
) |
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(396 |
) |
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Total operating expenses |
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|
72,723 |
|
|
|
11,985 |
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|
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|
9,955 |
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Operating income (loss) |
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|
(56,822 |
) |
|
|
2,649 |
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|
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|
7,956 |
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|
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|
|
|
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Interest expense |
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(26,862 |
) |
|
|
(14,394 |
) |
|
|
|
(5,512 |
) |
Interest expense related party |
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|
|
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|
(54 |
) |
Reorganization items, net |
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|
(1,671 |
) |
|
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|
144,168 |
|
Other income (expense), net |
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|
(3,302 |
) |
|
|
1,590 |
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|
|
|
1,543 |
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|
|
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Income (loss) from continuing operations before income taxes |
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|
(86,986 |
) |
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|
(11,826 |
) |
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|
148,101 |
|
(Provision for) benefit from income taxes |
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|
13,302 |
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|
|
4,362 |
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|
(37,807 |
) |
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|
|
|
|
|
|
|
|
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Income (loss) from continuing operations |
|
|
(73,684 |
) |
|
|
(7,464 |
) |
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|
110,294 |
|
Loss from discontinued operations, net of taxes |
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|
(27 |
) |
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|
(90 |
) |
|
|
|
(96 |
) |
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Net income (loss) |
|
$ |
(73,711 |
) |
|
$ |
(7,554 |
) |
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|
$ |
110,198 |
|
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Basic and diluted earnings (loss) per common share: |
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|
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|
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|
|
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Continuing operations |
|
$ |
(42.11 |
) |
|
$ |
(4.27 |
) |
|
|
$ |
8.86 |
|
Discontinued operations |
|
|
(0.02 |
) |
|
|
(0.05 |
) |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
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Net earnings (loss) per share |
|
$ |
(42.13 |
) |
|
$ |
(4.32 |
) |
|
|
$ |
8.85 |
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|
|
|
|
|
|
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Weighted average common shares outstanding: |
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|
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|
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|
|
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Basic and diluted |
|
|
1,750 |
|
|
|
1,750 |
|
|
|
|
12,455 |
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
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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Nine Months |
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Five Months |
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Four Months |
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|
Ended |
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Ended |
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Ended |
|
|
|
September 30, |
|
|
September 30, |
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|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(73,711 |
) |
|
$ |
(7,554 |
) |
|
|
$ |
110,198 |
|
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
28,416 |
|
|
|
20,073 |
|
|
|
|
10,060 |
|
Impairment of goodwill and intangible assets |
|
|
51,800 |
|
|
|
|
|
|
|
|
|
|
Debt accretion expense |
|
|
16,798 |
|
|
|
8,392 |
|
|
|
|
|
|
Bad debt expense (recoveries) |
|
|
126 |
|
|
|
328 |
|
|
|
|
(483 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
591 |
|
Gain on disposal of assets and ARO settlements |
|
|
(924 |
) |
|
|
(226 |
) |
|
|
|
(396 |
) |
Deferred income taxes |
|
|
(13,425 |
) |
|
|
(4,614 |
) |
|
|
|
37,835 |
|
Gain on interest rate swap |
|
|
(1,247 |
) |
|
|
|
|
|
|
|
|
|
Fresh start accounting adjustments |
|
|
|
|
|
|
|
|
|
|
|
(68,109 |
) |
Reorganization items, net |
|
|
|
|
|
|
(6,489 |
) |
|
|
|
(79,299 |
) |
Changes in working capital and other |
|
|
(13,398 |
) |
|
|
(14,146 |
) |
|
|
|
7,104 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(5,565 |
) |
|
|
(4,236 |
) |
|
|
|
17,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
7,589 |
|
|
|
1,738 |
|
|
|
|
(9,327 |
) |
Purchases of property, plant and equipment |
|
|
(6,412 |
) |
|
|
(5,056 |
) |
|
|
|
(5,723 |
) |
Proceeds from sale of property, plant, and equipment |
|
|
1,128 |
|
|
|
6 |
|
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
2,305 |
|
|
|
(3,312 |
) |
|
|
|
(14,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with debt financing |
|
|
(1,937 |
) |
|
|
(200 |
) |
|
|
|
|
|
Proceeds from short-term financing |
|
|
442,393 |
|
|
|
306,000 |
|
|
|
|
212,723 |
|
Repayment of short-term financing |
|
|
(437,176 |
) |
|
|
(298,412 |
) |
|
|
|
(227,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
3,280 |
|
|
|
7,388 |
|
|
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1 |
|
|
|
93 |
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
21 |
|
|
|
(67 |
) |
|
|
|
(12,408 |
) |
Cash and cash equivalents at beginning of period |
|
|
2,469 |
|
|
|
1,884 |
|
|
|
|
14,292 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,490 |
|
|
$ |
1,817 |
|
|
|
$ |
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
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 (in addition, 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 22 Discontinued Operations
for further discussion. Unless otherwise indicated, amounts provided throughout this report relate
to continuing operations only.
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.
Where right of offset does not exist, book overdrafts representing outstanding checks are
included in accounts payable in the accompanying consolidated balance sheets since the Company is
not relieved of its obligations to vendors until the outstanding checks have cleared the bank. The
change in outstanding book overdrafts is considered an operating activity and is presented as such
in the consolidated statement of cash flows. When outstanding checks are presented for payment
subsequent to the balance sheet date, the Company deposits funds (subsequent to the balance sheet
date) in the disbursement account from cash either available from other
accounts or a combination of cash available from other accounts and from funds from the
Companys available credit facilities (subsequent to the balance sheet date). The amount of book
overdrafts included in accounts payable was $11,918 and $10,269 at September 30, 2010 and
December 31, 2009, respectively.
7
Certain reclassifications have been made to prior year balances in order to conform these
balances to the current years presentation.
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 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:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Professional fees associated with bankruptcy proceedings |
|
$ |
|
|
|
$ |
(642 |
) |
Other, net |
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
Total reorganization items, net |
|
$ |
|
|
|
$ |
(504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months |
|
|
Five Months |
|
|
|
Four Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
April 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
2009 |
|
Gain from discharge of debt |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
84,745 |
|
Gain from fresh-start accounting adjustments |
|
|
|
|
|
|
|
|
|
|
|
68,109 |
|
Contract termination expenses |
|
|
|
|
|
|
|
|
|
|
|
(523 |
) |
Professional fees associated with bankruptcy proceedings |
|
|
|
|
|
|
(1,669 |
) |
|
|
|
(6,905 |
) |
Debtor-in-possession and Exit Financing fees |
|
|
|
|
|
|
|
|
|
|
|
(100 |
) |
Other, net |
|
|
|
|
|
|
(2 |
) |
|
|
|
(1,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total reorganization items, net |
|
$ |
|
|
|
$ |
(1,671 |
) |
|
|
$ |
144,168 |
|
|
|
|
|
|
|
|
|
|
|
|
8
The Successor Company made cash payments of $0.1 million and $8.3 million for the nine months
ended September 30, 2010 and the five months ended September 30, 2009, respectively, and the
Predecessor Company made cash payments of $3.0 million for the four months ended April 30, 2009
related to reorganization items.
4. Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Trade accounts receivable |
|
$ |
37,861 |
|
|
$ |
35,427 |
|
Less: allowance for doubtful accounts |
|
|
(300 |
) |
|
|
(322 |
) |
|
|
|
|
|
|
|
Net trade accounts receivable |
|
|
37,561 |
|
|
|
35,105 |
|
Value added taxes recoverable |
|
|
4,673 |
|
|
|
2,202 |
|
Miscellaneous receivables |
|
|
679 |
|
|
|
1,747 |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
42,913 |
|
|
$ |
39,054 |
|
|
|
|
|
|
|
|
5. Inventories
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Finished goods |
|
$ |
22,941 |
|
|
$ |
28,900 |
|
Raw materials and supplies |
|
|
15,602 |
|
|
|
16,343 |
|
|
|
|
|
|
|
|
Total |
|
|
38,543 |
|
|
|
45,243 |
|
Less: reserves for obsolete and slow-moving inventories |
|
|
(1,090 |
) |
|
|
(1,185 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
37,453 |
|
|
$ |
44,058 |
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Land and improvements |
|
$ |
15,601 |
|
|
$ |
15,812 |
|
Buildings and improvements |
|
|
46,361 |
|
|
|
50,708 |
|
Machinery and equipment |
|
|
126,996 |
|
|
|
121,975 |
|
|
|
|
|
|
|
|
|
|
|
188,958 |
|
|
|
188,495 |
|
Less: accumulated depreciation and amortization |
|
|
(64,585 |
) |
|
|
(40,303 |
) |
|
|
|
|
|
|
|
|
|
|
124,373 |
|
|
|
148,192 |
|
Construction in progress |
|
|
3,045 |
|
|
|
3,334 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
127,418 |
|
|
$ |
151,526 |
|
|
|
|
|
|
|
|
The Company accelerated the depreciation of machinery and equipment idled during the periods
that resulted in charges of $0.6 million and $1.7 million for the three and nine months ended
September 30, 2010, respectively.
7. Assets Held for Sale
An asset or business is classified as held for sale when (i) management commits to a plan to
sell and it is actively marketed; (ii) it is available for immediate sale and the sale is expected
to be completed within one year; and (iii) it is unlikely significant changes to the plan will be
made or that the plan will be withdrawn. Upon being classified as held for sale the assets are
reported at the lower of the carrying value or fair value less cost to sell and the assets are no
longer depreciated or amortized.
9
The following table summarizes by category assets held for sale:
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
(In thousands) |
|
2010 |
|
Buildings and improvements |
|
$ |
1,974 |
|
Machinery and equipment |
|
|
542 |
|
|
|
|
|
|
|
|
2,516 |
|
|
|
|
|
8. Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be held and used whenever
events or changes in circumstances indicate the carrying value may not be recoverable. The carrying
amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual disposition. In that event, an
impairment loss is recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset or asset group.
During the third quarter of 2010, as a result of sequential declines in sales and unit
volumes, the Company revised its estimates of future cash flow and earnings projections downward.
In addition, as previously disclosed in the second quarter of 2010, based on communications from
the Companys largest U.S. customer, the Company expects this customer to increase its
self-manufacturing of conventional containers. The Company does not expect this increase to
materially impact the Companys financial results in 2010. The Company expects that in 2011 this
action will reduce its U.S. bottle volumes by approximately 20%-25% as compared to estimated 2010
bottle volumes. The Company anticipates an increase in preform volumes to this customer to
partially offset the loss of conventional bottle volume. The change in sales mix will negatively
impact the Companys results of operations and cash flows as preforms generally carry lower
variable per unit profitability than bottles. Consequently, during the second and third quarters of
2010, the Company performed interim impairment tests of its U.S. long-lived asset group, including
its finite-lived intangible assets. The results of the tests indicated that no impairment of
long-lived assets existed at September 30, 2010 and June 30, 2010, since the sum of the
undiscounted cash flows of the asset group exceeded its carrying amount. Therefore, the Company did
not measure the asset groups fair value to determine whether an impairment loss should be
recognized. At September 30, 2010, if projected cash flows were decreased by 15% the carrying value
of the U.S. long-lived asset group would exceed the sum of the undiscounted cash flows.
9. Goodwill and Intangible Assets
During the second and third quarters of 2010 the Company performed interim goodwill impairment
assessments since the aggregate trading value of its common stock was significantly less than the
carrying value of its stockholders equity.
Since the Company adopted fresh-start accounting on May 1, 2009 through the first quarter of
2010, the Company used discounted cash flow analysis and a market multiple method to estimate the
fair value of its single reporting unit. For the impairment tests performed during the second and
third quarters of 2010 the Company added an additional component to the enterprise fair value
estimate by including the fair value of the Company based upon quoted market prices. The Company
updated its method of valuation since the Companys common stock was listed on the NASDAQ Capital
Market on April 9, 2010 and the Company believed that sufficient time had elapsed and trading had
occurred for the market in Constars stock to have more fully developed. Therefore, the Company
believed that quoted market prices had become an appropriate component in the estimated fair value
of the Company. In the third quarter of 2010 the Company increased the weighting of the fair value
based upon quoted market prices due to an increase in trading volumes with corresponding decreased
weightings of the discounted cash flow analysis and a market multiple method. A discussion of the
discounted cash flow and market multiple valuation methods and the underlying assumptions of these
methods are presented below.
|
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
discounts 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 2.75% growth rate to estimate the terminal value of the
business. Cash flows were discounted at a rate of 10.6%. |
10
|
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 the multiple to reflect favorable or
unfavorable comparisons. The resulting multiple is then applied to the company being
valued to arrive at an estimate of its total enterprise value. An equity value is 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 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 5.2 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. No control premium was assumed to determine the Companys equity value. |
The Company reviewed the assumptions and results of the valuation described above and
concluded that the estimated fair value of its reporting unit was reasonable when compared to the
market capitalization of the Company.
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 significant assumptions used would have on the estimated fair value of the Companys
reporting unit as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
Assumed |
|
|
Decrease in |
|
Valuation Method |
|
Assumption |
|
|
Change |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted cash flow |
|
Projected cash flows |
|
|
10% decrease |
|
|
$ |
(9.6 |
) |
Discounted cash flow |
|
Terminal year growth rate |
|
|
100 basis point decrease |
|
|
$ |
(1.0 |
) |
Discounted cash flow |
|
Discount rate |
|
|
100 basis point increase |
|
|
$ |
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Market approach |
|
Projected cash flows |
|
|
10% decrease |
|
|
$ |
(4.0 |
) |
Market approach |
|
Market multiple |
|
|
20% discount to peer average |
|
|
$ |
(4.4 |
) |
Based upon the analyses performed during the second and third quarters of 2010, the Company
failed Step 1 of the interim goodwill impairment tests. The change in the fair value of the
Companys single reporting unit that caused the Company to fail Step 1 was predominately
attributable to lower actual and projected cash flows. Consequently, the Company performed
hypothetical purchase price allocations to determine the amount of goodwill impairment. The primary
adjustments from book values to the fair values used in the hypothetical purchase price allocation
were to property, plant and equipment, amortizable intangible assets, long-term debt and pension
and postretirement liabilities. The adjustments to measure the assets and liabilities 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.
11
The second step of the goodwill impairment test performed during the second and third quarters
of 2010 resulted in implied fair values of $86.2 million and $73.3 million, respectively, and
therefore the Company recognized pre-tax impairment charges of $12.9 million and $45.4 million for
the three and nine months ended September 30, 2010, respectively. If the Companys fair value
continues to decline in the future, the Company may experience additional material impairment
charges to the carrying amount of its goodwill. 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. Recognition of 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. Further, if additional impairment charges are recorded in the future that result in a
decline in stockholders equity below $2.5 million the Companys common stock would be delisted
from the NASDAQ Capital Market, which could negatively impact the market value and liquidity of the
Companys common stock and the Companys ability to access the capital markets.
The following table presents a summary of the activity related to the carrying value of
goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
Predecessor |
|
|
|
Nine Months |
|
|
Five Months |
|
|
|
May 1, 2009 |
|
|
Four Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
Fresh-start |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
Accounting |
|
|
April 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
Adjustments |
|
|
2009 |
|
Beginning balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
118,682 |
|
|
$ |
117,313 |
|
|
|
$ |
381,872 |
|
|
$ |
381,872 |
|
Accumulated impairment losses |
|
|
|
|
|
|
|
|
|
|
|
(233,059 |
) |
|
|
(233,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,682 |
|
|
|
117,313 |
|
|
|
|
148,813 |
|
|
|
148,813 |
|
Fresh-start accounting adjustments, net |
|
|
|
|
|
|
|
|
|
|
|
(31,500 |
) |
|
|
|
|
Impairment charges |
|
|
(45,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
118,682 |
|
|
|
117,313 |
|
|
|
|
117,313 |
|
|
|
381,872 |
|
Accumulated impairment losses |
|
|
(45,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
(233,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73,282 |
|
|
$ |
117,313 |
|
|
|
$ |
117,313 |
|
|
$ |
148,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2010, as a result of sequential declines in sales and unit volumes
the Company revised its estimates of future cash flow and earnings projections downward. In
addition, as previously disclosed in the second quarter of 2010, the Company expects its largest
U.S. customer to increase its self-manufacturing of conventional containers. The Company does not
expect this increase to materially impact the Companys financial results in 2010. The Company
expects that in 2011 this action will reduce its U.S. bottle volumes by approximately 20%-25% as
compared to estimated 2010 bottle volumes. The Company anticipates an increase in preform volumes
to this customer to partially offset the loss of conventional bottle volume. The change in sales
mix will negatively impact the Companys results of operations and cash flows as preforms generally
carry lower variable per unit profitability than bottles. Consequently, during the second and third
quarters of 2010 the Company performed interim impairment tests of its indefinite-lived intangible
asset, consisting exclusively of its trade name. An impairment of the carrying value of an
indefinite-lived intangible asset is recognized whenever its carrying value exceeds its fair value.
The amount of impairment recognized is the difference between the carrying value of the asset and
its fair value.
The Company estimated the fair value of its trade name by performing a discounted cash flow
analysis using the relief-from-royalty method. This approach treats the trade name as if it were
licensed by the Company rather than owned, and calculates its value based on the discounted cash
flow of the projected license payments. The relief-from-royalty method is the same method the
Company employed in prior periods and the method employed to initially value the trade name upon
the adoption of fresh-start accounting on May 1, 2009. Fair value estimates are based on
assumptions concerning the amount and timing of estimated future cash flows and assumed discount
and growth rates, reflecting varying degrees of perceived risk. Significant estimates and
assumptions used to estimate the fair value of the Companys trade name were internal sales
projections, a long-term growth rate of 2.75%, and a discount rate of 13.9%. Based on these
evaluations the Company recorded impairment charges related to its trade name intangible asset of
$1.3 million and $6.4 million for the three and nine months ended September 30, 2010, respectively.
These impairment charges are included within operating expenses in the accompanying condensed
consolidated statement of operations.
12
The following table presents a summary of the carrying value of indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Trade name |
|
|
25,500 |
|
|
|
25,500 |
|
Accumulated impairment losses |
|
|
(10,400 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
15,100 |
|
|
$ |
21,500 |
|
|
|
|
|
|
|
|
The following table presents a summary of finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
September 30, 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 |
|
|
$ |
(1,712 |
) |
|
$ |
7,988 |
|
|
$ |
9,700 |
|
|
$ |
(805 |
) |
|
$ |
8,895 |
|
Leasehold interests |
|
|
4 |
|
|
|
1,204 |
|
|
|
(426 |
) |
|
|
778 |
|
|
|
1,204 |
|
|
|
(201 |
) |
|
|
1,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
10,904 |
|
|
$ |
(2,138 |
) |
|
$ |
8,766 |
|
|
$ |
10,904 |
|
|
$ |
(1,006 |
) |
|
$ |
9,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $377 and $1,132 for the three and nine months ended September 30,
2010, respectively, and $376 and $628 for the three and five months ended September 30, 2009,
respectively. Amortization expense 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) |
|
|
|
|
Three months ended December 31, 2010 |
|
$ |
378 |
|
2011 |
|
|
1,509 |
|
2012 |
|
|
1,509 |
|
2013 |
|
|
909 |
|
2014 |
|
|
608 |
|
After 2014 |
|
|
3,853 |
|
|
|
|
|
|
|
$ |
8,766 |
|
|
|
|
|
13
10. Debt
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Short-term debt: |
|
|
|
|
|
|
|
|
GE Credit Agreement |
|
$ |
6,394 |
|
|
$ |
|
|
ING Credit Agreements |
|
|
3,960 |
|
|
|
|
|
Exit Facility |
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
Total short-term debt |
|
$ |
10,354 |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
Secured Notes |
|
$ |
184,717 |
|
|
$ |
167,919 |
|
|
|
|
|
|
|
|
At September 30, 2010, there were $4.1 million in letters of credit outstanding under the
Companys current credit agreement and 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 with General
Electric Capital Corporation (Agent) and terminated its previous credit agreement. On August 12,
2010 the Company entered into an amended credit agreement with the Agent (as amended, the GE
Credit Agreement) that included changes to certain terms, covenants, applicable interest rate
margins and the sublimit for letters of credit.
The following discussion is not a complete description of the GE Credit Agreement or its
recent amendment. The amendment is filed as an exhibit to the Companys 2010 second quarter Form
10-Q filed on August 16, 2010, and the original agreement was filed with Form 8-K on February 17,
2010.
The GE Credit Agreement provides for up to $75.0 million of available credit, with a sublimit
of up to $20.0 million for the issuance of letters of credit. Available credit under the GE 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) |
|
$5.0 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. |
As of September 30, 2010 the Companys borrowing base under the GE Credit Agreement was $45.2
million and its excess availability was $21.9 million. For the period from October 1, 2010 to
November 12, 2010 excess availability ranged between $11.0 million and $23.3 million but at no time
did it fall below $12.5 million for five consecutive days.
Largely driven by declining sales volumes, a lower borrowing base due to the seasonal nature
of the Companys working capital levels, and certain vendors requiring the Company to pay for
purchases in advance or upon delivery, the Company expects that liquidity will remain constrained
at least through the first half of 2011 when the Company expects the amount of accounts receivable
and inventory levels to increase as the Company begins to enter its traditionally higher seasonal
sales period. The Company currently projects that it will have adequate liquidity through the next
12 months. A shortfall in actual trailing twelve month EBITDA of approximately 5% as compared to
the Companys projections would cause the Company to not meet its debt covenants during this
period. The Companys projected available credit may be impacted by, among other things, unit
volume changes (including the
14
expected increase in self-manufacturing by the Companys largest
customer as discussed in Note 8 Impairment of Long-Lived Assets), 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. Customers and suppliers who
are not under contract may seek to change the terms of their respective economic relationships with
the Company. If such a change is material, it could reduce or eliminate the Companys projected
liquidity. Should such a material change occur, the Company would have to seek other forms of
financing and there can be no assurance that such financing would be available on satisfactory
terms or at all. If the Company is not successful in any or all of these actions, the Company would
have to seek protection under the federal bankruptcy laws.
The GE Credit Agreements scheduled expiration date is February 11, 2013. However, the GE
Credit Agreement may terminate earlier if the Companys $220 million of Senior Secured Floating
Rate Notes (the Secured Notes) are not refinanced at least 90 days prior to their scheduled due
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 GE 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. The interest rate at September 30, 2010 was 6.5%. 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 GE Credit Agreement. Collateral securing the obligations under the GE Credit
Agreement consists of all of the stock of the Companys domestic subsidiaries and United Kingdom
subsidiary, 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 subsidiaries and United Kingdom subsidiary.
The GE Credit Agreement contains certain financial covenants that include limitations on
yearly capital expenditures, available credit and a minimum Fixed Charge Coverage Ratio, as defined
in the GE Credit agreement. The GE Credit Agreement contains other customary covenants and events
of default. If an event of default should occur and be continuing, the Agent may, among other
things, accelerate the maturity of the GE Credit Agreement. The GE 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 GE Credit Agreement as of
September 30, 2010.
Under the GE Credit Agreement, if the amount of available credit less all outstanding loans
and letters of credit is less than $12.5 million for any period of five consecutive business days
during any fiscal month or less than $7.5 million at any time, the Company is required to maintain
a minimum Fixed Charge Coverage Ratio of 1.0:1.0. The minimum Fixed Charge Coverage Ratio is
defined as consolidated EBITDA (which is an adjusted measure of earnings defined in the GE Credit
Agreement) divided by the sum of interest expense (excluding non-cash accretion of interest on the
Secured Notes), cash capital expenditures net of cash proceeds from the disposition of capital
assets, scheduled payments of principal, income taxes paid in cash, and cash dividends and other
equity distributions calculated on a trailing twelve month basis as of the last day of the then
immediately preceding fiscal month.
Based upon its most recent earnings and financial projections, the Company expects to be in
compliance with its debt covenants during 2010. The Companys projected available credit will
likely fall below $12.5 million for five consecutive business day periods in the fourth quarter of
2010, however, the minimum Fixed Charge Coverage Ratio is expected to remain narrowly above 1:0 to
1:0 during this period. In response, the Company has begun to delay certain capital expenditures,
reduce inventories, and institute cost reduction initiatives (see Note 24 Subsequent Events).
If the Company does not meet its projections and the actions described above are not sufficient to
maintain the Companys compliance with its debt covenants, the Company would seek a waiver of the
covenants or alternative financing. There can be no assurance that such actions would be
successful. If the Company is not successful in any or all of these actions, the Company would have
to seek protection under the federal bankruptcy laws.
15
On April 29, 2010, Constar International Holland (Plastics) B.V. (Constar Holland), which is
an indirect 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 can fluctuate and
is subject to limitations and exclusions that the Lender may impose in its discretion and other
limitations. At September 30, 2010 the Company had borrowed $4.0 million, the maximum amount then
available under the ING Credit Agreements. Although the amount of financing available under the ING
Credit Agreements will fluctuate as described above, the Company does not anticipate borrowing in
excess of $5 million because this would require ING to accede to a subordination agreement in favor
of the Agent of the GE Credit Agreement.
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.
The Companys outstanding long-term debt at September 30, 2010 and December 31, 2009,
consisted 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.
16
Upon the adoption of fresh-start accounting, the Company adjusted the carrying value of its
Secured Notes to fair value of $154.3 million based upon their quoted market price at April 30,
2009; however, the total amount due at maturity remains $220.0 million. The Company currently
expects to record accretion expense of approximately $6.0 million for the remainder of 2010,
$25.8 million in 2011 and $3.5 million in 2012. For the three and nine months ended September 30,
2010, the Company recorded accretion expense of $5.8 million and $16.8 million, respectively. For
the three and five months ended September 30, 2009 the Company recorded accretion expense of $5.1
million and $8.4 million, respectively. Accretion expense is included in interest expense in the
accompanying condensed consolidated statements of operations.
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 September 30, 2010. If an event of default shall occur
and be continuing under the indenture, including without limitation as a result of the acceleration
of indebtedness under the GE Credit Agreement upon an event of default, either the trustee or
holders of a specified percentage of the applicable notes may accelerate the maturity of such
notes.
As previously disclosed, the Company does not anticipate generating sufficient funds to repay
the Secured Notes. The Company has retained a financial advisor to assist in exploring strategic
alternatives, which may include, among other things, exchanging the Secured Notes for equity and/or
new debt, a negotiated or bankruptcy court supervised restructuring, or a sale of the Company or
specific assets. Any such transaction could cause substantial dilution to, or cancellation or
delisting of, the Companys common stock. The Company is currently engaged in discussions with
holders of the Companys Secured Notes regarding these
alternatives. While the current focus of such discussions is a debt
for equity exchange, there can be no assurance that
any particular alternative will be available or, if available, the timing or ultimate terms. The
Companys interim financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts nor the amounts and reclassifications
of liabilities that may result from such actions.
11. 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. These restructuring actions were completed in the third
quarter of 2010.
In connection with the restructuring actions described above, the Company incurred total
charges of $13.3 million. The total charges included (i) $4.1 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 during
the nine months ended September 30, 2010 related to the Salt Lake City shut-down.
17
In addition to the actions described above, on October 6, 2010, the Companys Board of
Directors approved a plan to consolidate the Companys plant operations by closing its Orlando,
Florida and Kansas City, Kansas facilities, as well as taking salaried headcount reductions in its
corporate ranks. See Note 24 Subsequent Events for further details.
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 |
|
|
|
|
|
|
334 |
|
|
|
370 |
|
|
|
704 |
|
Payments |
|
|
|
|
|
|
(380 |
) |
|
|
(602 |
) |
|
|
(982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 (Successor) |
|
$ |
14 |
|
|
$ |
|
|
|
$ |
97 |
|
|
$ |
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. 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.
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 reserve
established by the Company for estimated costs associated with completing the required remediation
activities was $0.2 million as of September 30, 2010 and December 31, 2009. 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 accruals for other
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 with respect to these
identified sites will have a material adverse effect on the Companys financial position, cash
flows or results of operations.
For the nine months ended September 30, 2010, the Company recorded revenue of $0.9 million as
a result of the settlement of a dispute with a former customer.
18
13. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Pre-tax |
|
|
(Expense) |
|
|
After-tax |
|
|
Pre-tax |
|
|
(Expense) |
|
|
After-tax |
|
(In thousands) |
|
Amount |
|
|
Benefit |
|
|
Amount |
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
Net loss |
|
|
|
|
|
|
|
|
|
$ |
(24,445 |
) |
|
|
|
|
|
|
|
|
|
$ |
(10,206 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension curtailment |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension remeasurement |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement amortization |
|
|
(16 |
) |
|
|
6 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash-flow hedge |
|
|
(95 |
) |
|
|
37 |
|
|
|
(58 |
) |
|
|
(344 |
) |
|
|
104 |
|
|
|
(240 |
) |
Foreign currency translation adjustments |
|
|
1,298 |
|
|
|
|
|
|
|
1,298 |
|
|
|
1,042 |
|
|
|
|
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
1,190 |
|
|
|
43 |
|
|
|
1,233 |
|
|
|
698 |
|
|
|
104 |
|
|
|
802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
$ |
(23,212 |
) |
|
|
|
|
|
|
|
|
|
$ |
(9,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months Ended |
|
|
Five Months Ended |
|
|
|
Four Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
April 30, 2009 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Pre-tax |
|
|
(Expense) |
|
|
After-tax |
|
|
Pre-tax |
|
|
(Expense) |
|
|
After-tax |
|
|
|
Pre-tax |
|
|
(Expense) |
|
|
After-tax |
|
(In thousands) |
|
Amount |
|
|
Benefit |
|
|
Amount |
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
$ |
(73,711 |
) |
|
|
|
|
|
|
|
|
|
$ |
(7,554 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
110,198 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension curtailment |
|
|
617 |
|
|
|
|
|
|
|
617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension remeasurement |
|
|
(127 |
) |
|
|
|
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement amortization |
|
|
(46 |
) |
|
|
18 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919 |
|
|
|
|
|
|
|
1,919 |
|
Cash-flow hedge |
|
|
(794 |
) |
|
|
306 |
|
|
|
(488 |
) |
|
|
391 |
|
|
|
(153 |
) |
|
|
238 |
|
|
|
|
951 |
|
|
|
|
|
|
|
951 |
|
Foreign currency translation adjustments |
|
|
(529 |
) |
|
|
|
|
|
|
(529 |
) |
|
|
553 |
|
|
|
|
|
|
|
553 |
|
|
|
|
(1,134 |
) |
|
|
|
|
|
|
(1,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(879 |
) |
|
|
324 |
|
|
|
(555 |
) |
|
|
944 |
|
|
|
(153 |
) |
|
|
791 |
|
|
|
|
1,736 |
|
|
|
|
|
|
|
1,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
$ |
(74,266 |
) |
|
|
|
|
|
|
|
|
|
$ |
(6,763 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
111,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Pension and post-retirement liabilities, net of tax |
|
$ |
(1,998 |
) |
|
$ |
(2,460 |
) |
Cash-flow hedge, net of tax |
|
|
174 |
|
|
|
662 |
|
Foreign currency translation adjustments |
|
|
(500 |
) |
|
|
29 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(2,324 |
) |
|
$ |
(1,769 |
) |
|
|
|
|
|
|
|
14. Stock-Based Compensation
There have been no awards issued for the nine months ended September 30, 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.
19
The following table summarizes total stock-based compensation expense included in the
Predecessors consolidated statements of operations:
|
|
|
|
|
|
|
Predecessor |
|
|
|
Four Months Ended |
|
(In thousands) |
|
April 30, 2009 |
|
Restricted stock |
|
$ |
597 |
|
Restricted stock units |
|
|
(6 |
) |
|
|
|
|
|
|
$ |
591 |
|
|
|
|
|
15. 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 for any period presented.
16. Pension and Other Postretirement Benefits
Pension Benefits
The components of net periodic pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
(In thousands) |
|
U.S. |
|
|
Europe |
|
|
Total |
|
|
U.S. |
|
|
Europe |
|
|
Total |
|
Service cost |
|
$ |
159 |
|
|
$ |
60 |
|
|
$ |
219 |
|
|
$ |
133 |
|
|
$ |
128 |
|
|
$ |
261 |
|
Interest cost |
|
|
1,304 |
|
|
|
181 |
|
|
|
1,485 |
|
|
|
1,352 |
|
|
|
152 |
|
|
|
1,504 |
|
Expected return on plan assets |
|
|
(1,361 |
) |
|
|
(185 |
) |
|
|
(1,546 |
) |
|
|
(1,136 |
) |
|
|
(139 |
) |
|
|
(1,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension expense |
|
$ |
102 |
|
|
$ |
56 |
|
|
$ |
158 |
|
|
$ |
349 |
|
|
$ |
141 |
|
|
$ |
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months Ended |
|
|
Five Months Ended |
|
|
|
Four Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
April 30, 2009 |
|
(In thousands) |
|
U.S. |
|
|
Europe |
|
|
Total |
|
|
U.S. |
|
|
Europe |
|
|
Total |
|
|
|
U.S. |
|
|
Europe |
|
|
Total |
|
Service cost |
|
$ |
478 |
|
|
$ |
267 |
|
|
$ |
745 |
|
|
$ |
222 |
|
|
$ |
222 |
|
|
$ |
444 |
|
|
|
$ |
207 |
|
|
$ |
168 |
|
|
$ |
375 |
|
Interest cost |
|
|
3,910 |
|
|
|
539 |
|
|
|
4,449 |
|
|
|
2,253 |
|
|
|
265 |
|
|
|
2,518 |
|
|
|
|
1,752 |
|
|
|
171 |
|
|
|
1,923 |
|
Expected return on plan assets |
|
|
(4,083 |
) |
|
|
(548 |
) |
|
|
(4,631 |
) |
|
|
(1,893 |
) |
|
|
(243 |
) |
|
|
(2,136 |
) |
|
|
|
(1,504 |
) |
|
|
(168 |
) |
|
|
(1,672 |
) |
Amortization of net loss |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,585 |
|
|
|
106 |
|
|
|
1,691 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
(12 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension expense |
|
$ |
306 |
|
|
$ |
258 |
|
|
$ |
564 |
|
|
$ |
582 |
|
|
$ |
244 |
|
|
$ |
826 |
|
|
|
$ |
2,058 |
|
|
$ |
265 |
|
|
$ |
2,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 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 $2.9 million was paid during the nine months ended September
30, 2010.
20
Other Postretirement Benefits
The components of other postretirement benefits expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
(In thousands) |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Interest cost |
|
$ |
64 |
|
|
$ |
87 |
|
Amortization of net (gain) loss |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other postretirement benefits expense |
|
$ |
48 |
|
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months Ended |
|
|
Five Months Ended |
|
|
|
Four Months Ended |
|
(In thousands) |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
April 30, 2009 |
|
Interest cost |
|
$ |
191 |
|
|
$ |
145 |
|
|
|
$ |
109 |
|
Amortization of net (gain) loss |
|
|
(47 |
) |
|
|
|
|
|
|
|
261 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other postretirement benefits expense |
|
$ |
144 |
|
|
$ |
145 |
|
|
|
$ |
268 |
|
|
|
|
|
|
|
|
|
|
|
|
17. 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.
For the nine months ended September 30, 2010 the effective tax rate differed from the federal
statutory rate primarily due to the non-deductible goodwill impairment charge, state taxes, and
changes in the valuation allowances. For the nine months ended September 30, 2009 the difference is
mainly due to non-deductible costs related to the Companys bankruptcy proceedings.
Income tax (expense) benefit was $0.4 million for the three months ended September 30, 2010
and $3.6 million for the three months ended September 30, 2009. Income tax (expense) benefit was
$13.3 million for the nine months ended September 30, 2010 and $(33.4) million for the nine months
ended September 30, 2009 ($(37.8) million for the four months ended April 30, 2009 and $4.4 million
for the five months ended September 30, 2009). The Company has a net deferred tax liability at
September 30, 2010 of $10.9 million principally in relation to the excess of the basis of its
assets pursuant to fresh-start accounting over their historic tax bases.
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 $3.2 million. The Company intends to
defend against this matter vigorously. The Company has commenced proceedings to wind up its Italian
subsidiary.
Total unrecognized income tax benefits as of September 30, 2010 and December 31, 2009 were
$0.6 million and $0.7 million, respectively, 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 September 30, 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.
21
18. 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.
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 $0.1 million 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 Company expects to record reclassifications from accumulated other comprehensive loss
to earnings within the next twelve months in the amount of $0.3 million.
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.
The fair value of derivative contracts is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Derivative Liabilities |
|
(In thousands) |
|
Balance |
|
|
Fair Value |
|
Derivatives designated as |
|
Sheet |
|
|
September 30, |
|
|
December 31, |
|
hedging instruments |
|
Location |
|
|
2010 |
|
|
2009 |
|
Interest rate swap |
|
Other liabilities |
|
|
$ |
6,032 |
|
|
$ |
6,485 |
|
22
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 September 30, 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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
Amount of |
|
|
Amount of Pre-tax |
|
|
|
|
|
|
|
Gain or (Loss) |
|
|
Gain or (Loss) |
|
|
|
|
|
|
|
Recognized in OCI |
|
|
Reclassified from |
|
(In thousands) |
|
|
|
|
|
on Derivative, |
|
|
Accumulated |
|
Derivatives in cash flow |
|
|
|
|
|
Net of Tax |
|
|
OCI into Income |
|
hedging relationships |
|
(Effective Portion) |
|
|
(Effective Portion) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
$ |
(240 |
) |
|
$ |
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Nine Months Ended September 30, 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 |
|
$ |
|
|
|
$ |
116 |
|
|
$ |
883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
Amount of Pre-tax Gain or (Loss) |
|
|
|
Recognized in OCI on Derivative, |
|
|
Reclassified from Accumulated OCI |
|
|
|
Net of Tax (Effective Portion) |
|
|
into Income (Effective Portion) (a) |
|
|
|
Successor |
|
|
|
Predecessor |
|
|
Successor |
|
|
|
Predecessor |
|
(In thousands) |
|
Five Months |
|
|
|
Four Months |
|
|
Five Months |
|
|
|
Four Months |
|
Derivatives in cash flow |
|
Ended |
|
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
hedging relationships |
|
September 30, 2009 |
|
|
|
April 30, 2009 |
|
|
September 30, 2009 |
|
|
|
April 30, 2009 |
|
Interest rate swap |
|
$ |
238 |
|
|
|
$ |
951 |
|
|
$ |
1,115 |
|
|
|
$ |
974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are included in interest expense on the condensed consolidated statements of
operations. |
23
19. 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 |
|
|
|
September 30, 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 |
|
$ |
|
|
|
$ |
6,032 |
|
|
$ |
|
|
|
$ |
6,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
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 measurement 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.
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 |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
(In thousands) |
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
Asset (liability) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Senior Notes |
|
|
(184,717 |
) |
|
|
(188,100 |
) |
|
|
(167,919 |
) |
|
|
(182,050 |
) |
The following table presents assets that were measured at fair value on a nonrecurring
basis during the three and nine months ended September 30, 2010 by the type of inputs applicable to
the fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Quoted |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
|
|
Prices |
|
|
Inputs |
|
|
Inputs |
|
|
Fair |
|
(In thousands) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
$ |
73,282 |
|
|
$ |
73,282 |
|
Trade name |
|
|
|
|
|
|
|
|
|
|
15,100 |
|
|
|
15,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
88,382 |
|
|
$ |
88,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
As a result of the Companys interim impairment tests, the Company recorded impairment
charges of $45.4 million and $6.4 million related to its goodwill and trade name, respectively,
during the nine months ended September 30, 2010. See Note 9 Goodwill and Intangible Assets for
a description of the significant assumptions regarding fair value estimates for the Companys
goodwill and trade name. The Company has determined that the majority of the inputs used to value
its goodwill and indefinite-lived intangible assets are unobservable inputs that fall within Level
3 of the fair value hierarchy.
20. Other Income (Expense)
Other income (expense) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Foreign exchange gains (losses) |
|
$ |
389 |
|
|
$ |
(1,819 |
) |
Royalty income |
|
|
172 |
|
|
|
187 |
|
Royalty expense |
|
|
(1,497 |
) |
|
|
(185 |
) |
Interest income |
|
|
23 |
|
|
|
12 |
|
Other income (expense) |
|
|
(488 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
(1,401 |
) |
|
$ |
(1,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months |
|
|
Five Months |
|
|
|
Four Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
April 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
2009 |
|
Foreign exchange gains (losses) |
|
$ |
(1,667 |
) |
|
$ |
1,527 |
|
|
|
$ |
1,321 |
|
Royalty income |
|
|
427 |
|
|
|
296 |
|
|
|
|
418 |
|
Royalty expense |
|
|
(1,621 |
) |
|
|
(240 |
) |
|
|
|
(185 |
) |
Interest income |
|
|
50 |
|
|
|
20 |
|
|
|
|
12 |
|
Other income (expense) |
|
|
(491 |
) |
|
|
(13 |
) |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
(3,302 |
) |
|
$ |
1,590 |
|
|
|
$ |
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2010 the Company settled a patent dispute
that resulted in royalty expense of $1.4 million
21. 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.
25
Net sales by country were as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three months |
|
|
Three months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
United States |
|
$ |
106,229 |
|
|
$ |
121,874 |
|
United Kingdom |
|
|
30,359 |
|
|
|
31,632 |
|
Holland |
|
|
10,255 |
|
|
|
5,124 |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
146,843 |
|
|
$ |
158,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine months |
|
|
Five months |
|
|
|
Four months |
|
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
April 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
2009 |
|
United States |
|
$ |
327,733 |
|
|
$ |
217,127 |
|
|
|
$ |
180,086 |
|
United Kingdom |
|
|
86,171 |
|
|
|
54,911 |
|
|
|
|
33,733 |
|
Holland |
|
|
25,116 |
|
|
|
8,110 |
|
|
|
|
3,641 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
439,020 |
|
|
$ |
280,148 |
|
|
|
$ |
217,460 |
|
|
|
|
|
|
|
|
|
|
|
|
22. 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 condensed consolidated statements of operations for
all periods presented. The Company has commenced proceedings to wind up this entity.
The following summarizes the assets and liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Assets of Discontinued Operations: |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
332 |
|
|
$ |
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Discontinued Operations: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
108 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations |
|
|
108 |
|
|
|
44 |
|
Other liabilities |
|
|
839 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations |
|
$ |
947 |
|
|
$ |
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.
26
The following summarizes the results of operations for discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
|
(120 |
) |
|
|
(28 |
) |
Provision for income taxes |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(120 |
) |
|
$ |
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Nine Months |
|
|
Five Months |
|
|
|
Four Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
April 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
2009 |
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
|
(27 |
) |
|
|
(87 |
) |
|
|
|
(17 |
) |
Provision for income taxes |
|
|
|
|
|
|
(3 |
) |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(27 |
) |
|
$ |
(90 |
) |
|
|
$ |
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
23. 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.
27
Condensed Consolidating Balance Sheet
September 30, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Reclassifications/ |
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
1,298 |
|
|
$ |
1,192 |
|
|
$ |
|
|
|
$ |
2,490 |
|
Intercompany receivables |
|
|
|
|
|
|
242,240 |
|
|
|
441 |
|
|
|
(242,681 |
) |
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
37,038 |
|
|
|
5,875 |
|
|
|
|
|
|
|
42,913 |
|
Inventories, net |
|
|
|
|
|
|
33,767 |
|
|
|
3,686 |
|
|
|
|
|
|
|
37,453 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
6,969 |
|
|
|
867 |
|
|
|
|
|
|
|
7,836 |
|
Deferred taxes |
|
|
533 |
|
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
|
1,973 |
|
Asset held for sale |
|
|
|
|
|
|
2,516 |
|
|
|
|
|
|
|
|
|
|
|
2,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
533 |
|
|
|
325,268 |
|
|
|
12,061 |
|
|
|
(242,681 |
) |
|
|
95,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
117,875 |
|
|
|
9,543 |
|
|
|
|
|
|
|
127,418 |
|
Goodwill and intangible assets |
|
|
|
|
|
|
97,148 |
|
|
|
|
|
|
|
|
|
|
|
97,148 |
|
Investment in subsidiaries |
|
|
348,309 |
|
|
|
20,388 |
|
|
|
|
|
|
|
(368,697 |
) |
|
|
|
|
Deferred income taxes |
|
|
69,122 |
|
|
|
|
|
|
|
|
|
|
|
(69,122 |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
5,132 |
|
|
|
286 |
|
|
|
|
|
|
|
5,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
417,964 |
|
|
$ |
565,811 |
|
|
$ |
21,890 |
|
|
$ |
(680,500 |
) |
|
$ |
325,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
|
|
|
$ |
6,394 |
|
|
$ |
3,960 |
|
|
$ |
|
|
|
$ |
10,354 |
|
Accounts payable and accrued liabilities |
|
|
1,523 |
|
|
|
60,913 |
|
|
|
6,930 |
|
|
|
|
|
|
|
69,366 |
|
Intercompany payable |
|
|
221,355 |
|
|
|
33,654 |
|
|
|
(12,328 |
) |
|
|
(242,681 |
) |
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
222,878 |
|
|
|
100,961 |
|
|
|
(1,438 |
) |
|
|
(242,681 |
) |
|
|
79,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
184,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,717 |
|
Pension and postretirement liabilities |
|
|
|
|
|
|
27,271 |
|
|
|
929 |
|
|
|
|
|
|
|
28,200 |
|
Deferred income taxes |
|
|
|
|
|
|
80,866 |
|
|
|
1,172 |
|
|
|
(69,122 |
) |
|
|
12,916 |
|
Other liabilities |
|
|
6,032 |
|
|
|
8,404 |
|
|
|
839 |
|
|
|
|
|
|
|
15,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
413,627 |
|
|
|
217,502 |
|
|
|
1,502 |
|
|
|
(311,803 |
) |
|
|
320,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit) |
|
|
4,337 |
|
|
|
348,309 |
|
|
|
20,388 |
|
|
|
(368,697 |
) |
|
|
4,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity (deficit) |
|
$ |
417,964 |
|
|
$ |
565,811 |
|
|
$ |
21,890 |
|
|
$ |
(680,500 |
) |
|
$ |
325,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
136,588 |
|
|
$ |
10,255 |
|
|
$ |
|
|
|
$ |
146,843 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
122,809 |
|
|
|
9,334 |
|
|
|
|
|
|
|
132,143 |
|
Depreciation and amortization |
|
|
|
|
|
|
9,038 |
|
|
|
256 |
|
|
|
|
|
|
|
9,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
4,741 |
|
|
|
665 |
|
|
|
|
|
|
|
5,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
3,872 |
|
|
|
305 |
|
|
|
|
|
|
|
4,177 |
|
Goodwill impairment |
|
|
|
|
|
|
12,900 |
|
|
|
|
|
|
|
|
|
|
|
12,900 |
|
Impairment of intangible assets |
|
|
|
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
1,300 |
|
Research and technology expenses |
|
|
|
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
1,531 |
|
Provision for restructuring |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
67 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(213 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
(270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
19,457 |
|
|
|
248 |
|
|
|
|
|
|
|
19,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(14,716 |
) |
|
|
417 |
|
|
|
|
|
|
|
(14,299 |
) |
Interest expense |
|
|
(8,475 |
) |
|
|
(726 |
) |
|
|
163 |
|
|
|
|
|
|
|
(9,038 |
) |
Other income (expense), net |
|
|
|
|
|
|
(1,508 |
) |
|
|
107 |
|
|
|
|
|
|
|
(1,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(8,475 |
) |
|
|
(16,950 |
) |
|
|
687 |
|
|
|
|
|
|
|
(24,738 |
) |
(Provision for) benefit from income taxes |
|
|
3,070 |
|
|
|
(2,531 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(5,405 |
) |
|
|
(19,481 |
) |
|
|
561 |
|
|
|
|
|
|
|
(24,325 |
) |
Equity earnings |
|
|
(19,040 |
) |
|
|
441 |
|
|
|
|
|
|
|
18,599 |
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(24,445 |
) |
|
$ |
(19,040 |
) |
|
$ |
441 |
|
|
$ |
18,599 |
|
|
$ |
(24,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
153,506 |
|
|
$ |
5,124 |
|
|
$ |
|
|
|
$ |
158,630 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
136,526 |
|
|
|
4,622 |
|
|
|
|
|
|
|
141,148 |
|
Depreciation and amortization |
|
|
|
|
|
|
12,761 |
|
|
|
171 |
|
|
|
|
|
|
|
12,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
4,219 |
|
|
|
331 |
|
|
|
|
|
|
|
4,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
4,911 |
|
|
|
(14 |
) |
|
|
|
|
|
|
4,897 |
|
Research and technology expenses |
|
|
|
|
|
|
1,865 |
|
|
|
|
|
|
|
|
|
|
|
1,865 |
|
Provision for restructuring |
|
|
|
|
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
816 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
7,369 |
|
|
|
(14 |
) |
|
|
|
|
|
|
7,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(3,150 |
) |
|
|
345 |
|
|
|
|
|
|
|
(2,805 |
) |
Interest expense |
|
|
(8,606 |
) |
|
|
(158 |
) |
|
|
158 |
|
|
|
|
|
|
|
(8,606 |
) |
Reorganization items, net |
|
|
866 |
|
|
|
(1,370 |
) |
|
|
|
|
|
|
|
|
|
|
(504 |
) |
Other income (expense), net |
|
|
|
|
|
|
(1,855 |
) |
|
|
37 |
|
|
|
|
|
|
|
(1,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(7,740 |
) |
|
|
(6,533 |
) |
|
|
540 |
|
|
|
|
|
|
|
(13,733 |
) |
(Provision for) benefit from income taxes |
|
|
5,790 |
|
|
|
(2,154 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
3,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,950 |
) |
|
|
(8,687 |
) |
|
|
461 |
|
|
|
|
|
|
|
(10,176 |
) |
Equity earnings |
|
|
(8,256 |
) |
|
|
431 |
|
|
|
|
|
|
|
7,825 |
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,206 |
) |
|
$ |
(8,256 |
) |
|
$ |
431 |
|
|
$ |
7,825 |
|
|
$ |
(10,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
413,904 |
|
|
$ |
25,116 |
|
|
$ |
|
|
|
$ |
439,020 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
371,719 |
|
|
|
23,552 |
|
|
|
|
|
|
|
395,271 |
|
Depreciation and amortization |
|
|
|
|
|
|
27,199 |
|
|
|
649 |
|
|
|
|
|
|
|
27,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
14,986 |
|
|
|
915 |
|
|
|
|
|
|
|
15,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
15,618 |
|
|
|
670 |
|
|
|
|
|
|
|
16,288 |
|
Goodwill impairment |
|
|
|
|
|
|
45,400 |
|
|
|
|
|
|
|
|
|
|
|
45,400 |
|
Impairment of intangible assets |
|
|
|
|
|
|
6,400 |
|
|
|
|
|
|
|
|
|
|
|
6,400 |
|
Research and technology expenses |
|
|
|
|
|
|
4,855 |
|
|
|
|
|
|
|
|
|
|
|
4,855 |
|
Provision for restructuring |
|
|
|
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
704 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(867 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
(924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
72,110 |
|
|
|
613 |
|
|
|
|
|
|
|
72,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(57,124 |
) |
|
|
302 |
|
|
|
|
|
|
|
(56,822 |
) |
Interest expense |
|
|
(25,101 |
) |
|
|
(2,180 |
) |
|
|
419 |
|
|
|
|
|
|
|
(26,862 |
) |
Other income (expense), net |
|
|
|
|
|
|
(3,193 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
(3,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(25,101 |
) |
|
|
(62,497 |
) |
|
|
612 |
|
|
|
|
|
|
|
(86,986 |
) |
Provision for (benefit from) income taxes |
|
|
8,785 |
|
|
|
4,625 |
|
|
|
(108 |
) |
|
|
|
|
|
|
13,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(16,316 |
) |
|
|
(57,872 |
) |
|
|
504 |
|
|
|
|
|
|
|
(73,684 |
) |
Equity earnings |
|
|
(57,395 |
) |
|
|
477 |
|
|
|
|
|
|
|
56,918 |
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(73,711 |
) |
|
$ |
(57,395 |
) |
|
$ |
477 |
|
|
$ |
56,918 |
|
|
$ |
(73,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Condensed Consolidating Statement of Operations
For the five months ended September 30, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
272,038 |
|
|
$ |
8,110 |
|
|
$ |
|
|
|
$ |
280,148 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
238,629 |
|
|
|
6,889 |
|
|
|
|
|
|
|
245,518 |
|
Depreciation and amortization |
|
|
|
|
|
|
19,741 |
|
|
|
255 |
|
|
|
|
|
|
|
19,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
13,668 |
|
|
|
966 |
|
|
|
|
|
|
|
14,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
7,912 |
|
|
|
124 |
|
|
|
|
|
|
|
8,036 |
|
Research and technology expenses |
|
|
|
|
|
|
3,094 |
|
|
|
|
|
|
|
|
|
|
|
3,094 |
|
Provision for restructuring |
|
|
|
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
1,081 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
11,861 |
|
|
|
124 |
|
|
|
|
|
|
|
11,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
1,807 |
|
|
|
842 |
|
|
|
|
|
|
|
2,649 |
|
Interest expense |
|
|
(14,394 |
) |
|
|
(264 |
) |
|
|
264 |
|
|
|
|
|
|
|
(14,394 |
) |
Reorganization items, net |
|
|
(1,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,671 |
) |
Other income (expense), net |
|
|
|
|
|
|
1,502 |
|
|
|
88 |
|
|
|
|
|
|
|
1,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(16,065 |
) |
|
|
3,045 |
|
|
|
1,194 |
|
|
|
|
|
|
|
(11,826 |
) |
(Provision for) benefit from income taxes |
|
|
5,790 |
|
|
|
(1,124 |
) |
|
|
(304 |
) |
|
|
|
|
|
|
4,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(10,275 |
) |
|
|
1,921 |
|
|
|
890 |
|
|
|
|
|
|
|
(7,464 |
) |
Equity earnings |
|
|
2,721 |
|
|
|
800 |
|
|
|
|
|
|
|
(3,521 |
) |
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,554 |
) |
|
$ |
2,721 |
|
|
$ |
800 |
|
|
$ |
(3,521 |
) |
|
$ |
(7,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Condensed Consolidating Statement of Income
For the four months ended April 30, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Net sales |
|
$ |
|
|
|
$ |
213,819 |
|
|
$ |
3,641 |
|
|
$ |
|
|
|
$ |
217,460 |
|
Cost of products sold, excluding depreciation |
|
|
|
|
|
|
185,975 |
|
|
|
3,841 |
|
|
|
|
|
|
|
189,816 |
|
Depreciation and amortization |
|
|
|
|
|
|
9,507 |
|
|
|
226 |
|
|
|
|
|
|
|
9,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
18,337 |
|
|
|
(426 |
) |
|
|
|
|
|
|
17,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
6,802 |
|
|
|
203 |
|
|
|
|
|
|
|
7,005 |
|
Research and technology expenses |
|
|
|
|
|
|
2,698 |
|
|
|
|
|
|
|
|
|
|
|
2,698 |
|
Provision for restructuring |
|
|
|
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
648 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
9,752 |
|
|
|
203 |
|
|
|
|
|
|
|
9,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
8,585 |
|
|
|
(629 |
) |
|
|
|
|
|
|
7,956 |
|
Interest expense |
|
|
(5,566 |
) |
|
|
(204 |
) |
|
|
204 |
|
|
|
|
|
|
|
(5,566 |
) |
Reorganization items, net |
|
|
77,853 |
|
|
|
61,679 |
|
|
|
4,636 |
|
|
|
|
|
|
|
144,168 |
|
Other income (expense), net |
|
|
|
|
|
|
1,546 |
|
|
|
(3 |
) |
|
|
|
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes |
|
|
72,287 |
|
|
|
71,606 |
|
|
|
4,208 |
|
|
|
|
|
|
|
148,101 |
|
Provision for income taxes |
|
|
|
|
|
|
(36,944 |
) |
|
|
(863 |
) |
|
|
|
|
|
|
(37,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
72,287 |
|
|
|
34,662 |
|
|
|
3,345 |
|
|
|
|
|
|
|
110,294 |
|
Equity earnings |
|
|
37,911 |
|
|
|
3,249 |
|
|
|
|
|
|
|
(41,160 |
) |
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(96 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
110,198 |
|
|
$ |
37,911 |
|
|
$ |
3,249 |
|
|
$ |
(41,160 |
) |
|
$ |
110,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2010
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(73,711 |
) |
|
$ |
(57,395 |
) |
|
$ |
477 |
|
|
$ |
56,918 |
|
|
$ |
(73,711 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
27,740 |
|
|
|
676 |
|
|
|
|
|
|
|
28,416 |
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
|
51,800 |
|
|
|
|
|
|
|
|
|
|
|
51,800 |
|
Debt accretion |
|
|
16,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,798 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(867 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
(924 |
) |
Equity earnings |
|
|
57,395 |
|
|
|
(477 |
) |
|
|
|
|
|
|
(56,918 |
) |
|
|
|
|
Changes in operating assets and liabilities |
|
|
(14,391 |
) |
|
|
(23,557 |
) |
|
|
10,004 |
|
|
|
|
|
|
|
(27,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(13,909 |
) |
|
|
(2,756 |
) |
|
|
11,100 |
|
|
|
|
|
|
|
(5,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
7,589 |
|
|
|
|
|
|
|
|
|
|
|
7,589 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(5,680 |
) |
|
|
(732 |
) |
|
|
|
|
|
|
(6,412 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
1,053 |
|
|
|
75 |
|
|
|
|
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
2,962 |
|
|
|
(657 |
) |
|
|
|
|
|
|
2,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with exit facility |
|
|
|
|
|
|
(1,937 |
) |
|
|
|
|
|
|
|
|
|
|
(1,937 |
) |
Proceeds from short-term financing |
|
|
|
|
|
|
420,650 |
|
|
|
21,743 |
|
|
|
|
|
|
|
442,393 |
|
Repayment of short-term financing |
|
|
|
|
|
|
(419,256 |
) |
|
|
(17,920 |
) |
|
|
|
|
|
|
(437,176 |
) |
Net change in intercompany loans |
|
|
13,909 |
|
|
|
(383 |
) |
|
|
(13,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
13,909 |
|
|
|
(926 |
) |
|
|
(9,703 |
) |
|
|
|
|
|
|
3,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
(4 |
) |
|
|
5 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(724 |
) |
|
|
745 |
|
|
|
|
|
|
|
21 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
2,022 |
|
|
|
447 |
|
|
|
|
|
|
|
2,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,298 |
|
|
$ |
1,192 |
|
|
$ |
|
|
|
$ |
2,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Condensed Consolidating Statement of Cash Flows
For the five months ended September 30, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,554 |
) |
|
$ |
2,721 |
|
|
$ |
800 |
|
|
$ |
(3,521 |
) |
|
$ |
(7,554 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13 |
|
|
|
19,714 |
|
|
|
346 |
|
|
|
|
|
|
|
20,073 |
|
Debt accretion |
|
|
8,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,392 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
(226 |
) |
Reorganization items |
|
|
(6,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,489 |
) |
Equity earnings |
|
|
(2,721 |
) |
|
|
(800 |
) |
|
|
|
|
|
|
3,521 |
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
(8,122 |
) |
|
|
(7,781 |
) |
|
|
(2,529 |
) |
|
|
|
|
|
|
(18,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
(16,481 |
) |
|
|
13,628 |
|
|
|
(1,383 |
) |
|
|
|
|
|
|
(4,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
1,738 |
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
(4,676 |
) |
|
|
(380 |
) |
|
|
|
|
|
|
(5,056 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(2,932 |
) |
|
|
(380 |
) |
|
|
|
|
|
|
(3,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with Exit Facility |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
Proceeds from short-term financing |
|
|
306,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306,000 |
|
Repayment of short-term financing |
|
|
(298,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(298,412 |
) |
Net change in intercompany loans |
|
|
9,093 |
|
|
|
(10,642 |
) |
|
|
1,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
16,481 |
|
|
|
(10,642 |
) |
|
|
1,549 |
|
|
|
|
|
|
|
7,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
60 |
|
|
|
33 |
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
114 |
|
|
|
(181 |
) |
|
|
|
|
|
|
(67 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
1,317 |
|
|
|
567 |
|
|
|
|
|
|
|
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,431 |
|
|
$ |
386 |
|
|
$ |
|
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Condensed Consolidating Statement of Cash Flows
For the four months ended April 30, 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
Parent |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Company |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
110,198 |
|
|
$ |
37,911 |
|
|
$ |
3,249 |
|
|
$ |
(41,160 |
) |
|
$ |
110,198 |
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
317 |
|
|
|
9,514 |
|
|
|
229 |
|
|
|
|
|
|
|
10,060 |
|
Stock-based compensation |
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
591 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
(396 |
) |
Reorganization items |
|
|
(79,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,299 |
) |
Fresh-start accounting adjustments |
|
|
2,654 |
|
|
|
(66,127 |
) |
|
|
(4,636 |
) |
|
|
|
|
|
|
(68,109 |
) |
Equity earnings |
|
|
(37,911 |
) |
|
|
(3,249 |
) |
|
|
|
|
|
|
41,160 |
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
(46 |
) |
|
|
42,547 |
|
|
|
1,955 |
|
|
|
|
|
|
|
44,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
(4,087 |
) |
|
|
20,791 |
|
|
|
797 |
|
|
|
|
|
|
|
17,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
(9,327 |
) |
|
|
|
|
|
|
|
|
|
|
(9,327 |
) |
Purchases of property, plant and equipment |
|
|
|
|
|
|
(5,557 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
(5,723 |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(14,735 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
(14,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term financing |
|
|
212,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,723 |
|
Repayment of short-term financing |
|
|
(227,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,723 |
) |
Net change in intercompany loans |
|
|
19,087 |
|
|
|
(18,680 |
) |
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
4,087 |
|
|
|
(18,680 |
) |
|
|
(407 |
) |
|
|
|
|
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
8 |
|
|
|
(16 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(12,616 |
) |
|
|
208 |
|
|
|
|
|
|
|
(12,408 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
13,933 |
|
|
|
359 |
|
|
|
|
|
|
|
14,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,317 |
|
|
$ |
567 |
|
|
$ |
|
|
|
$ |
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
24. Subsequent Events
On October 6, 2010, the Companys Board of Directors approved consolidating the Companys
plant operations by closing its Orlando, Florida and Kansas City, Kansas facilities, as well as
taking salaried headcount reductions in its corporate ranks. In total, approximately 250 employees
are affected by these actions.
In connection with the restructuring actions described above, the Company expects to incur
total pre-tax restructuring charges of approximately $7 $10 million with approximately $6
million expected to be recorded in the fourth quarter of 2010 and the remainder to be recorded over
the next several subsequent quarters. The total charges include (i) an estimated $5 million related
to contract termination costs, (ii) an estimated $1 million related to employee severance and other
termination benefits, and (iii) an estimated $3 million of other associated costs. In addition to
these estimated cash charges, the Company expects to record total accelerated depreciation and
other non-cash charges of approximately $18 million with approximately $15 million recorded in the
fourth quarter of 2010 and the remainder to be recorded in 2011. The majority of the restructuring
actions are expected to be completed by the end of 2011. The Company is taking these actions in
light of volume declines and, upon completing these actions, the Company estimates annual cost
savings of approximately $22 million.
On November 12, 2010, the Company entered into an agreement with its former President and
Chief Executive Officer to reduce his severance payment from $2.2 million to $0.3 million.
38
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
As previously disclosed, the Company does not anticipate generating sufficient funds to repay
the Secured Notes and the GE Credit Agreement may terminate if the Secured Notes are not refinanced
by November 15, 2011. The Company has retained a financial advisor to assist in exploring strategic
alternatives, which may include, among other things, exchanging the Secured Notes for equity and/or
new debt, a negotiated or bankruptcy court supervised restructuring, or a sale of the Company or
specific assets. Any such transaction could cause substantial dilution to, or cancellation or
delisting of, the Companys common stock. The Company is currently engaged in discussions with
holders of the Companys Secured Notes regarding these
alternatives. While the current focus of such discussions is a debt
for equity exchange, there can be no assurance that
any particular alternative will be available or, if available, the timing or ultimate terms. The
Companys interim financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts nor the amounts and reclassifications
of liabilities that may result from such actions.
The Company is a manufacturer of PET plastic containers, preforms, and plastic closures used
for the packaging of beverages, food and other consumer end-use applications. Containers, preforms,
and closures represented 62%, 32%, and 6%, respectively, of net sales in the first nine months of
2010. The Company has operations in the United States, United Kingdom and Holland. Approximately
75% of the Companys revenues in the first nine months of 2010 were generated in the United States,
with the remainder attributable to its European operations. During the first nine months of 2010,
Pepsi accounted for approximately 32% of the Companys net sales and the top ten customers
accounted for an aggregate of approximately 73% 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 69% of the Companys net sales in the first nine
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. The Company expects the trend of
self-manufacturing of CSD packages 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. As previously disclosed in
the second quarter of 2010, the Company expects its largest U.S. customer to increase
self-manufacturing of conventional containers, resulting in a reduction of 2011 U.S. bottle volumes
of approximately 20%-25% as compared to estimated 2010 bottle volumes. In addition, sales volumes
have continued to decline generally and the Company has not been able to offset decreases to
conventional business by increasing its custom business. As a result of these and other factors,
the Companys liquidity is constrained, which has caused certain vendors to require that the
Company pay for purchases in advance or upon delivery or to require letters of credit, further
constraining the Companys liquidity. Liquidity constraints, in turn, make it difficult to renew
contracts or obtain new business, further constraining the Companys liquidity. In addition, the
liquidity provided by the GE Credit Agreement may not be available to the Company if it fails to
meet the minimum fixed charge coverage ratio required by the GE Credit Agreement. 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. 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.
Over the past several years the Company has tried to mitigate the trend in conventional
products discussed above by increasing its sales of custom products which has proven to be less
successful than expected with custom sales volumes declining slightly over the same period. In
response, the Company engaged outside consultants to assist the Company in evaluating the Companys
commercial strategies. In the last several months the Company has hired Grant Beard, who became the
Companys new President and Chief Executive Officer in September 2010, and added several new senior
managers. This new management team is developing an implementation strategy.
39
On October 6, 2010, the Companys Board of Directors approved consolidating the Companys
plant operations by closing its Orlando, Florida and Kansas City, Kansas facilities, as well as
taking salaried headcount
reductions in its corporate ranks. In total, approximately 250 employees are affected by these
actions. In connection with the restructuring actions described above, the Company expects to incur
total pre-tax restructuring charges of approximately $7 $10 million with approximately $6
million expected to be recorded in the fourth quarter of 2010 and the remainder to be recorded over
the next several subsequent quarters. The total charges include (i) an estimated $5 million related
to contract termination costs, (ii) an estimated $1 million related to employee severance and other
termination benefits, and (iii) an estimated $3 million of other associated costs. In addition to
these estimated cash charges, the Company expects to record total accelerated depreciation and
other non-cash charges of approximately $18 million with approximately $15 million recorded in the
fourth quarter of 2010 and the remainder to be recorded in 2011. The majority of the restructuring
actions are expected to be completed by the end of 2011. The Company is taking these actions in
light of volume declines and, upon completing these actions, the Company estimates annual cost
savings of approximately $22 million. If the Company cannot offset decreases to its conventional
business or succeed in growing its custom business, the Company may have to continue to close
plants and undertake other cost containment activities. There can be no assurance that these
actions will be successful.
Approximately 26% of the Companys net sales in the first nine months of 2010 related to
custom PET containers with approximately 32% of these net sales containing the Companys
DiamondClear® or earlier generation Oxbar oxygen scavenging technologies.
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. The Companys hot-fill
capabilities, oxygen barrier technology and innovative bottle designs such as our X-4 and vertical
compensation technology (VCT) add value that generally results in higher margins than
conventional products.
The Company believes that it could continue to face pricing pressure. One source of pricing
pressure may come as a result of excess capacity in the industry driven by self-manufacturing. 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.
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 14% 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. 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 a
meaningful indicator of actual performance. 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 percentage 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 percentage of net sales to increase. As a result, the Company believes that
absolute gross profit trends are better indicators of the Companys performance.
40
As a result of lower fair value estimates, during the nine months ended September 30, 2010 the
Company recorded total impairment charges of $51.8 million of which $45.4 million and $6.4 million
related to its goodwill and trade name, respectively. The change in the estimated fair values that
caused the goodwill and trade name impairments were predominately attributable to lower actual cash
flows and lower projected cash flows and sales primarily due to the estimated impact of its largest
U.S. customers intention to increase its self-manufacturing of conventional containers.
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.
For discussions on the results of operations, the Company has combined the results of
operations for the four months ended April 30, 2009 with the results of operations for the five
months ended September 30, 2009. The combined periods have been compared to the results of
operations for the three and nine months ended September 30, 2010. The Company believes that these
combined financial results provide management and investors a more meaningful analysis of the
Companys performance and trends for comparative purposes.
The Company has classified the results of operations of its Italian operation beginning in
2006 as a discontinued operation in the condensed 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
22 Discontinued Operations for further details. Unless otherwise indicated, amounts provided
throughout this Form 10-Q relate to continuing operations only.
The following discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements
in Part 1, Item 1 of this report.
Results of Operations
Net Sales
Three Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
% |
|
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
United States |
|
$ |
106.2 |
|
|
$ |
121.9 |
|
|
$ |
(15.7 |
) |
|
|
(12.9 |
)% |
Europe |
|
|
40.6 |
|
|
|
36.7 |
|
|
|
3.9 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
146.8 |
|
|
$ |
158.6 |
|
|
$ |
(11.8 |
) |
|
|
(7.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
41
The decrease in United States net sales in the third quarter of 2010 as compared to the
same period in 2009 was driven primarily by lower volumes and a change in product mix of $17.5
million and lower pricing of $2.6 million, offset in part by the pass through of higher resin costs
to customers of $4.4 million. Total U.S. PET unit volume decreased 10.8% in the third quarter of
2010 as compared to the same period in 2009. This decrease reflects a conventional unit volume
decline of 4.9% and a custom unit volume decline of 26.2%. The decline in conventional volume is
primarily due to self-manufacturing and customer losses. 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 third quarter of 2010 as compared to the same period
in 2009 was primarily due to the pass through of higher resin costs to customers of $3.4 million
and a favorable change in volumes and product mix of $3.5 million, partially offset by unfavorable
foreign currency translation of $3.0 million. European PET volume increased 12.6% while closure
volume decreased 3.4% in the third quarter of 2010 as compared to the same period in 2009.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
September 30, |
|
|
Increase |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
United States |
|
$ |
3.4 |
|
|
$ |
2.6 |
|
|
$ |
0.8 |
|
Europe |
|
|
2.0 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5.4 |
|
|
$ |
4.6 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales |
|
|
3.7 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the United States, the increase in gross profit in the third quarter of 2010 as
compared to the same period in 2009 is primarily due to the impact of lower manufacturing costs of
$5.3 million, offset in part by reduced pricing of $2.6 million and lower sales volume of $1.8
million. The decrease in manufacturing expenses was primarily due to lower depreciation of $3.7
million and cost reductions from the Companys restructuring programs of $2.7 million partially
offset by a $0.7 million increase in energy costs. During the three months ended September 30, 2010
and 2009 the Company accelerated depreciation on idled equipment resulting in charges of $0.6
million and $2.0 million, respectively.
Gross profit in Europe was flat due to increased manufacturing costs of $4.9 million and
unfavorable foreign currency translation of $2.6 million offset by increased resin pricing that was
passed through to customers of approximately $7.6 million.
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 14.3% to $4.2 million in the third quarter of
2010 from $4.9 million in the same period in 2009 driven primarily by lower bad debt expense of
$0.3 million, travel expenses of $0.2 million, professional fees of $0.1 million and salaries of
$0.1 million.
42
Goodwill and Intangible Asset Impairments
In the third quarter of 2010, the Company recorded impairment charges of $12.9 million and
$1.3 million related to its goodwill and trade name intangible asset, respectively. See Note 9 -
Goodwill and Intangible Assets in the notes to the accompanying condensed consolidated financial
statements for additional information.
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 $1.5 million in the third quarter of 2010 and
$1.9 million in the third quarter of 2009. This decrease was primarily driven primarily by lower
payroll expenses.
Provision for Restructuring
Restructuring charges were $0.1 million in the third quarter of 2010 compared to $0.8 million
in the third 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. These restructuring actions were completed in the third quarter of
2010. See Note 11 Restructuring in the notes to the accompanying condensed consolidated
financial statements for additional information.
On October 6, 2010, the Companys Board of Directors approved consolidating the Companys plant
operations by closing its Orlando, Florida and Kansas City, Kansas facilities, as well as taking
salaried headcount reductions in its corporate ranks. See Note 24 Subsequent Events for
additional information.
Interest Expense
Interest expense increased $0.4 million to $9.0 million in the third quarter of 2010 from $8.6
million in the third quarter of 2009 primarily due to an $0.7 million increase of non-cash
accretion of the fair market value of the Companys Secured Notes to their face value at maturity
and an increase in amortization of deferred financing fees of $0.2 million, offset in part by
changes in the fair value of the interest rate swap that represent hedge ineffectiveness of $0.5
million.
Reorganization Items, net
During the third quarter of 2009, the Company incurred certain professional fees and other
expenses directly associated with the bankruptcy proceedings. See Note 3 Reorganization Items
in the notes to the accompanying condensed consolidated financial statements for additional
information.
Other Income (Expense), net
Other income (expense), net primarily includes gains and losses on foreign currency
transactions, royalty income and expense, and interest income.
Other expense, net was $1.4 million in the third quarter of 2010 compared to other expense,
net of $1.8 million in the third quarter of 2009. The decrease in other expense primarily resulted
from a $2.2 million favorable foreign currency impact offset in part by higher royalty expense of
$1.3 million and other expenses of $0.5 million. The increase in royalty expense was primarily due
to a patent dispute that resulted in a settlement of $1.4 million during the third quarter of 2010.
Provision for Income Taxes
Income tax (expense) benefit was $0.4 million for the three months ended September 30, 2010
and $3.6 million for the three months ended September 30, 2009. The loss from continuing operations
before taxes was $24.7
million in the third quarter of 2010 as compared to a loss from continuing operations before
taxes of $13.7 million in the third quarter of 2009. The Companys effective tax rate for the full
year 2010 is expected to be approximately 16%.
43
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 $3.2 million. The Company intends to
defend against this matter vigorously. The Company has commenced proceedings to wind up its Italian
subsidiary.
Total unrecognized income tax benefits as of September 30, 2010, and December 31, 2009 were
$0.6 million and $0.7 million, respectively, 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 September 30, 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.
Nine Months Ended September 30, 2010 and 2009
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
% |
|
|
|
September 30, |
|
|
Increase |
|
|
Increase |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
United States |
|
$ |
327.7 |
|
|
$ |
397.2 |
|
|
$ |
(69.5 |
) |
|
|
(17.5 |
)% |
Europe |
|
|
111.3 |
|
|
|
100.4 |
|
|
|
10.9 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
439.0 |
|
|
$ |
497.6 |
|
|
$ |
(58.6 |
) |
|
|
(11.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in U.S. net sales for the nine months ended September 30, 2010 as compared to the
same period in 2009 was driven primarily by lower volumes and an unfavorable change in product mix
of $75.9 million and lower pricing of $6.5 million, offset in part by the pass through of higher
resin costs to customers of $12.9 million. Total U.S. PET unit volume decreased 16.5% for the nine
months ended September 30, 2010 as compared to the same period in 2009. This decrease reflects a
conventional unit volume decline of 13.5% and a custom unit volume decline of 24%. The decline in
conventional volume is primarily due to self-manufacturing and customer losses. The decline in
custom unit volume is primarily 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 for the nine months ended September 30, 2010 as compared to
the same period in 2009 was primarily due to the pass through of higher resin costs to customers of
$7.5 million, higher volumes and a favorable change in product mix of $7.0 million, offset in part
by a weakening of the British Pound and Euro against the U.S. Dollar of $3.6 million. European PET
volume increased 7.0% and closure volume decreased 6.4% for the nine months ended September 30,
2010 as compared to the same period in 2009.
44
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Increase |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
United States |
|
$ |
11.1 |
|
|
$ |
27.3 |
|
|
$ |
(16.2 |
) |
Europe |
|
|
4.8 |
|
|
|
5.2 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15.9 |
|
|
$ |
32.5 |
|
|
$ |
(16.6 |
) |
|
|
|
|
|
|
|
|
|
|
Percent of net sales |
|
|
3.6 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in U.S. gross profit for the nine months ended September 30, 2010 as compared to
the same period in 2009 is primarily due to lower sales volume of $11.0 million, reduced pricing of
$6.5 million, higher manufacturing costs of $7.3 million and a one-time benefit of $1.4 million
recorded in 2009 to reverse an accrual for the estimated cost of a price reduction in a sales
contract that did not occur, offset in part by cost reductions from the Companys restructuring
programs of $6.0 million, lower depreciation of $1.5 million and a settlement with a former
customer of $0.9 million. In addition, gross profit in 2009 was negatively impacted by a $1.6
million adjustment to inventory as a result of the adoption of fresh-start accounting.
Approximately 14% of the increase in manufacturing costs was due to a customer audit that occurred
during the first nine months of 2010. The audit has been resolved at the affected locations. The
related expenses the Company incurred during the nine months ended September 30, 2010 may not be
indicative of future expenditures. The remainder of the manufacturing cost increase was primarily
due to the impact of lower volumes on overhead absorption. During the nine months ended September
30, 2010 and 2009 the Company accelerated depreciation on idled equipment resulting in charges of
$1.7 million and $2.0 million, respectively.
The gross profit decrease in Europe was driven primarily by higher manufacturing costs of
approximately $13.0 million and unfavorable foreign currency translation of $3.1 million, offset in
part by increased resin pricing that was passed through to customers of approximately $15.7
million.
Selling and Administrative Expenses
Selling and administrative expenses increased 8.7% to $16.3 million for the nine months ended
September 30, 2010 from $15.0 million for the same period in 2009 driven primarily by accrued
severance payments of $2.4 million and increased professional fees of $0.2 million, offset in part
by reduced payroll expenses of $1.3 million. Accrued severance payments primarily relate to
payments due under an employment agreement with the Companys former chief executive officer.
Goodwill and Intangible Asset Impairments
For the nine months ended September 30, 2010, the Company recorded impairment charges of $45.4
million and $6.4 million related to its goodwill and trade name intangible asset, respectively. See
Note 9 Goodwill and Intangible Assets in the notes to the accompanying condensed consolidated
financial statements for additional information.
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 $4.9 million for the nine months ended September
30, 2010 and $5.8 million for the same period in 2009. This decrease was primarily driven primarily
by lower payroll expenses.
45
Provision for Restructuring
Restructuring charges were $0.7 million for the nine months ended September 30, 2010 compared
to $1.7 million for the same period in 2009. The restructuring charges recorded for the nine months
ended September 30, 2010 primarily relate to the restructuring actions taken due to the impact of
the Pepsi supply agreement and the 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. These restructuring actions were
completed in the third quarter of 2010. See Note 11 Restructuring in the notes to the
accompanying condensed consolidated financial statements for additional information.
On October 6, 2010, the Companys Board of Directors approved consolidating the Companys plant
operations by closing its Orlando, Florida and Kansas City, Kansas facilities, as well as taking
salaried headcount reductions in its corporate ranks. See Note 24 Subsequent Events for
additional information.
Interest Expense
Interest expense increased $7.0 million to $26.9 million for the nine months ended September
30, 2010 from $19.9 million for the same period in 2009 primarily due to an $8.4 million increase
of non-cash accretion of the fair market value of the Companys Secured Notes to their face value
at maturity and an increase in amortization of deferred financing costs of $0.2 million, offset in
part by lower interest rates which reduced interest expense by $0.7 million, changes in the fair
value of the interest rate swap that represent hedge ineffectiveness of $0.9 million and
reclassification adjustments related to the Companys previous interest rate swap of $0.4 million.
Reorganization Items, net
During the nine months ended September 30, 2009, the Company incurred certain professional
fees and other expenses directly associated with the bankruptcy proceedings. In addition, the
Company recorded the gain on the conversion of the Senior Subordinated Notes to common stock and
the net impact of fresh-start accounting. See Note 3 Reorganization Items in the notes to the
accompanying condensed consolidated financial statements for additional information.
Other Expense (Income), net
Other expense, net was $3.3 million for the nine months ended September 30, 2010 compared to
other income, net of $3.1 million for the same period in 2009. The expense for the nine months
ended September 30, 2010 primarily resulted from a $1.6 million unfavorable foreign currency impact
and royalty expense of $1.6 million. The increase in royalty expense was primarily due to a patent
dispute that resulted in a settlement of $1.4 million during the nine months ended September 30,
2010.
Provision for Income Taxes
Income tax (expense) benefit was $13.3 million for the nine months ended September 30, 2010
and $(33.4) million for the nine months ended September 30, 2009 ($(37.8) million for the four
months ended April 30, 2009 and $4.4 million for the five months ended September 30, 2009). Loss
from continuing operations before taxes was $87.0 million for the nine months ended September 30,
2010 as compared to income of $136.3 million for the nine months ended September 30, 2009.
Total unrecognized income tax benefits as of September 30, 2010 and December 31, 2009 were
$0.6 million and $0.7 million, respectively, 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 September 30, 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 has commenced proceedings to wind up its Italian subsidiary. 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.
46
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Increase |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
Net cash provided by (used in) operating activities |
|
$ |
(5.6 |
) |
|
$ |
13.3 |
|
|
$ |
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
$ |
2.3 |
|
|
$ |
(18.2 |
) |
|
$ |
20.5 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
3.3 |
|
|
$ |
(7.6 |
) |
|
$ |
10.9 |
|
|
|
|
|
|
|
|
|
|
|
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 facilities to meet
its short-term liquidity needs.
Net cash provided by operations for the nine months ended September 30, 2010 decreased
compared to the same period in 2009 principally due to a higher net loss and net changes in working
capital of $6.4 million. The change in working capital was primarily due a decrease in accounts
payable primarily due to certain vendors requiring the Company to pay for purchases in advance or
upon delivery.
The increase in net cash provided by investing activities for the nine months ended September
30, 2010 was driven by the return of cash collateral for the interest rate swap to the Company of
$7.6 million as compared to a payment of cash collateral of $7.6 million for the nine months ended
September 30, 2009, a decrease in capital expenditures of $4.4 million and an increase in proceeds
from the sale of property, plant, and equipment of $1.0 million.
The increase in net cash provided by financing activities for the nine months ended September
30, 2010 was driven by net short-term borrowings of $5.2 million for the nine months ended
September 30, 2010, as compared to net short-term debt repayments of $7.4 million for the nine
months ended September 30, 2009. In addition, the Company paid $1.9 million in 2010 for costs
related to obtaining its new GE Credit Agreement.
Liquidity, defined as cash and borrowing availability under the Companys credit facilities,
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
facilities will be sufficient to finance its operations over the next 12 months. A shortfall in
actual trailing twelve month EBITDA of approximately 5% as compared to the Companys projections
would cause the Company to not meet its debt covenants during this period. A lack of sufficient
liquidity may make it difficult to renew contracts or obtain new business. In addition, the
Companys financial condition has resulted in certain vendors requiring the Company to pay for
purchases in advance or upon delivery or requiring letters of credit.
Largely driven by declining sales volumes, a lower borrowing base due to the seasonal nature
of the Companys working capital levels, and certain vendors requiring the Company to pay for
purchases in advance or upon delivery or requiring letters of credit, the Company expects that
liquidity will remain constrained at least through the first half of 2011 when the Company expects
the amount of accounts receivable and inventory levels to increase as the Company begins to enter
its traditionally higher seasonal sales period. The Companys projected available credit may be
impacted by, among other things, unit volume changes (including the expected increase in
self-manufacturing by the Companys largest customer as discussed above), resin price changes,
changes in
47
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. Customers and suppliers
who are not under contract may seek to change the terms of their respective economic
relationships with the Company. If such a change is material, it could reduce or eliminate the
Companys projected liquidity. Should such a material change occur, the Company would have to seek
other forms of financing and there can be no assurance that such financing would be available on
satisfactory terms or at all. Without financing the Company would have to seek protection under the
federal bankruptcy laws.
On February 11, 2010, the Company entered into a revolving credit facility with General
Electric Capital Corporation (Agent) and terminated its previous credit agreement. On August 12,
2010 the Company entered into an amended credit agreement with the Agent (as amended, the GE
Credit Agreement) as summarized in the table below, that included changes to certain terms,
covenants, applicable interest rate, margins and the sublimit for letters of credit. The following
discussion is not a complete description of the GE Credit Agreement or its recent amendment. The
amendment is filed as an exhibit to the Companys 2010 second quarter Form 10-Q filed on August 16,
2010 and the original agreement was filed with a Form 8-K on February 17, 2010.
|
|
|
|
|
Term |
|
Original GE Credit Agreement |
|
Amendment |
Minimum available credit less
outstanding loans and letters of
credit
|
|
$15.0 million for any period of five consecutive
business days during any fiscal quarter
|
|
$12.5 million for any period of five
consecutive business days during any fiscal
month or $7.5 million at any time |
|
|
|
|
|
Minimum consolidated EBITDA for
trailing twelve months
|
|
$40.0 million, if minimum available credit less
outstanding loans and letters of credit are not
maintained
|
|
N/A |
|
|
|
|
|
Minimum Fixed Charge Coverage Ratio
for trailing twelve months
|
|
N/A
|
|
1.0:1.0, if minimum available credit less
outstanding loans and letters of credit are
not maintained |
|
|
|
|
|
Letters of Credit sublimit
|
|
$15.0 million
|
|
$20.0 million |
|
|
|
|
|
EBITDA annual cash expense add-backs
|
|
$1.5 million annually for cash restructuring expense
|
|
$3.0 million annually for cash restructuring
expense for fiscal years ended December 31,
2010 and 2011, $1.5 million for fiscal year
ended December 31, 2012 |
|
|
|
|
|
Availability Block
|
|
$2.5 million
|
|
$5.0 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR |
|
Base |
|
Fixed Charge |
|
LIBOR |
|
Base |
|
|
Usage |
|
Spread |
|
Spread |
|
Coverage |
|
Spread |
|
Spread |
Interest rate either LIBOR or a Base Rate plus a spread |
|
<$30M |
|
|
|
3.75 |
% |
|
|
2.75 |
% |
|
>1.2:1.0 |
|
|
|
3.75 |
% |
|
|
2.75 |
% |
|
|
$30 $50M |
|
|
|
4.00 |
% |
|
|
3.00 |
% |
|
1.0 1.2:1.0 |
|
|
|
4.00 |
% |
|
|
3.00 |
% |
|
|
>$50M |
|
|
|
4.25 |
% |
|
|
3.25 |
% |
|
<1.0:1.0 |
|
|
|
4.25 |
% |
|
|
3.25 |
% |
The GE Credit Agreement provides for up to $75.0 million of available credit. Available credit
under the GE Credit Agreement is limited to a borrowing base calculated as a sum of eligible
accounts receivable plus eligible inventory value less certain reserves and adjustments.
The minimum Fixed Charge Coverage Ratio is defined as consolidated EBITDA (which is an
adjusted measure of earnings defined in the GE Credit Agreement) divided by the sum of interest
expense (excluding non-cash accretion of interest on the Secured Notes), cash capital expenditures
net of cash proceeds from the disposition of capital assets, scheduled payments of principal,
income taxes paid in cash, and cash dividends and other equity distributions calculated on a
trailing twelve month basis as of the last day of the then immediately preceding fiscal month.
48
The ability to borrow under our GE Credit Agreement fluctuates from time to time and is
primarily driven by borrowing base limitations. The GE 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 while a strengthening U.S. dollar has
the opposite effect. Because the GE Credit Agreements borrowing base increases and decreases based
upon varying levels of accounts receivable and inventory, the ability to borrow under the GE 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 GE 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 September 30, 2010 the Companys borrowing base under the GE Credit Agreement was $45.2
million and its excess availability was $21.9 million. For the period from October 1, 2010 to
November 12, 2010 excess availability ranged between $11.0 million and $23.3 million but at no time
did it fall below $12.5 million for five consecutive days.
The GE Credit Agreements scheduled expiration date is February 11, 2013. However, the GE
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 GE Credit Agreement. Loans will bear interest at the rates presented in the above table. The
interest rate at September 30, 2010 was 6.5%. 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 GE Credit Agreement. Collateral securing the obligations under the GE 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
certain intangibles of the Company and its domestic and United Kingdom subsidiaries.
The GE Credit Agreement contains certain financial covenants that include limitations on
yearly capital expenditures, available credit and a minimum Fixed Charge Coverage Ratio. The Credit
Agreement contains other customary covenants and events of default. If an event of default should
occur and be continuing, the Agent may, among other things, accelerate the maturity of the GE
Credit Agreement. The GE 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 GE Credit Agreement as of September 30, 2010.
Based upon its most recent earnings and financial projections, the Company expects to be in
compliance with its debt covenants during 2010. The Companys projected available credit will
likely fall below $12.5 million for five consecutive business day periods in the fourth quarter of
2010, however, the minimum Fixed Charge Coverage Ratio is expected to remain narrowly above 1:0 to
1:0 during this period. In response, the Company has begun to delay certain capital expenditures,
reduce inventories, and institute cost reduction initiatives (see Note 24 Subsequent Events for
additional details). If the Company does not meet its projections and the actions described above
are not sufficient to maintain the Companys compliance with its debt covenants, the Company would
seek a waiver of the covenants or alternative financing. There can be no assurance that such
actions would be successful. If the Company is not successful in any or all of these actions, the
Company would have to seek protection under the federal bankruptcy laws.
On April 29, 2010, Constar International Holland (Plastics) B.V. (Constar Holland), which is
an indirect 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.
49
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 can fluctuate and
is subject to limitations and exclusions that the Lender may impose in its discretion and other
limitations. At September 30, 2010 the Company had borrowed $4.0 million, the maximum amount then
available under the ING Credit Agreements. Although the amount of financing available under the ING
Credit Agreements will fluctuate as described above, the Company does not anticipate borrowing in
excess of $5 million because this would require ING to accede to a subordination agreement in favor
of the Agent of the GE Credit Agreement.
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.
The Companys outstanding long-term debt at September 30, 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.
50
Upon the adoption of fresh-start accounting, the Company adjusted the carrying value of its
Secured Notes to fair value of $154.3 million based upon their quoted market price at April 30,
2009; however, the total amount due at maturity remains $220.0 million. The Company currently
expects to record accretion expense of approximately $6.0 million for the remainder of 2010,
$25.8 million in 2011, and $3.5 million in 2012. For the three and nine months ended September 30,
2010, the Company recorded accretion expense of $5.8 million and $16.8 million, respectively. For
the three and five months ended September 30, 2009 the Company recorded accretion expense of $5.1
million and $8.4 million, respectively. Accretion expense is included in interest expense in the
accompanying condensed consolidated statements of operations.
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 September 30, 2010. If an event of default shall occur
and be continuing under the indenture, including without
limitation as a result of the acceleration of indebtedness under the GE Credit Agreement upon
an event of default, either the trustee or holders of a specified percentage of the applicable
notes may accelerate the maturity of such notes.
As previously disclosed, the Company does not anticipate generating sufficient funds to repay
the Secured Notes and the GE Credit Agreement may terminate if the Senior Secured Notes are not
refinanced by November 15, 2011. The Company has retained a financial advisor to assist in
exploring strategic alternatives, which may include, among other things, exchanging the Secured
Notes for equity and/or new debt, a negotiated or bankruptcy court supervised restructuring, or a
sale of the Company or specific assets. Any such transaction could cause substantial dilution to,
or cancellation or delisting of, the Companys common stock. The Company is currently engaged in
discussions with holders of the Companys Secured Notes
regarding these alternatives. While the current focus of such
discussions is a debt for equity exchange, there can be
no assurance that any particular alternative will be available or, if available, the timing or
ultimate terms. The Companys interim financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts nor the amounts and
reclassifications of liabilities that may result from such actions.
Capital Expenditures
Capital expenditures decreased to $6.4 million for the nine months ended September 30, 2010 as
compared to capital expenditures of $10.8 million for the same period in 2009. The decrease was
driven by lower production volumes in 2010 and non-recurring expenditures made in 2009 related to
the Companys restructuring plans. Based on information currently available, the Company estimates
2010 capital spending will be lower than 2009 capital expenditures.
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 nine months ended September 30, 2010, the Company made
pension plan contributions of $2.9 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.
51
Commitments and Contingent Liabilities
Information regarding the Companys contingent liabilities appears in Note 12 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.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be held and used when events
or changes in circumstances indicate the carrying value may not be recoverable. Such circumstances
would include items such as a significant decrease in the market price of the long-lived asset, a
significant adverse change in the manner in which the asset is being used or in its physical
condition or a history of operating cash flow losses associated with use of the asset. The carrying
amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual disposition. The Company
monitors its assets for potential impairment on a quarterly basis.
For purposes of recognition and measurement of an impairment loss, long-lived assets such as
property, plant and equipment, are grouped with other assets at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets. Based upon these
criteria, the Company has identified three asset groups with one each in the U.S., U.K., and
Holland. In the case where the carrying amount of an asset or asset group is not recoverable, an
impairment loss is recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. The key variables that the Company must estimate include
assumptions regarding future sales volume, prices, and other economic factors. Significant
management judgment is involved in estimating these variables, and they include inherent
uncertainties since it is a forecast of future events. If such assets are considered impaired, they
are written down to fair value as appropriate.
During the third quarter of 2010, as a result of sequential declines in sales and unit volumes
the Company revised its estimates of future cash flow and earnings projections downward. In
addition, as previously disclosed in the second quarter of 2010, based on communications from the
Companys largest U.S. customer, the Company expects this customer to increase its
self-manufacturing of conventional containers. The Company does not expect this increase to
materially impact the Companys financial results in 2010. The Company expects that in 2011 this
action will reduce its U.S. bottle volumes by approximately 20%-25% as compared to estimated 2010
bottle volumes. The Company anticipates an increase in preform volumes to this customer to
partially offset the loss of conventional bottle volume. The change in sales mix will negatively
impact the Companys results of operations and cash flows as preforms generally carry lower
variable per unit profitability than bottles. Consequently, during the second and third quarters of
2010, the Company performed interim impairment tests of its U.S. long-lived asset group, including
its finite lived intangible assets. The results of the tests indicated that no impairment of
long-lived assets existed at September 30, 2010 and June 30 2010, since the sum of the undiscounted
cash flows of the asset group exceeded its carrying amount. Therefore, the Company did not measure
the asset groups fair value to determine whether an impairment loss should be recognized. At
September 30, 2010, if projected cash flows were decreased by 15% the carrying value of the U.S.
long-lived asset group would exceed the sum of the undiscounted cash flows. In the event a fair
value analysis would be required, the Company would rely on appraisals and discounted cash flow
analyses in order to estimate the fair value of assets. Significant assumptions for discounted cash
flow purposes are the life of the assets, the discount rate and cash flow projections.
52
Goodwill Impairment
The Company performed an interim goodwill impairment assessment during the second and third
quarters of 2010, since the aggregate trading value of its common stock was significantly less than
the carrying value of its stockholders equity.
Since the Company adopted fresh-start accounting on May 1, 2009 through the first quarter of
2010 the Company used discounted cash flow analysis and a market multiple method to estimate the
fair value of its single reporting unit. For the impairment tests performed subsequent to the first
quarter of 2010, the Company added an additional component to the enterprise fair value estimate by
including the fair value of the Company based upon quoted market prices. The Company updated its
method of valuation since the Companys common stock was listed on the NASDAQ Capital Market on
April 9, 2010 and the Company believed that sufficient time had elapsed and trading had occurred
for the market in Constars stock to have more fully developed. Therefore the Company believed that
quoted market prices had become an appropriate component in the estimated fair value of the
Company. In the second quarter of 2010 the Company assigned a lower weight to the fair value based
upon quoted market prices since trading volumes were low and inconsistent, with the remainder
divided equally between the discounted cash flow analysis and a market multiple method. In the
third quarter of 2010 the Company increased the weighting of the fair value based upon quoted
market prices due to an increase in trading volumes with
corresponding decreased weightings of the discounted cash flow analysis and a market multiple
method. For a discussion of the discounted cash flow and market multiple valuation methods and the
underlying assumptions of these methods see Note 9 Goodwill and Intangible Assets in the notes
to the accompanying Condensed Consolidated Financial Statements.
Based upon the analyses performed during the second and third quarters of 2010, the Company
failed Step 1 of the goodwill impairment tests. The change in the fair value of the Companys
single reporting unit that caused the Company to fail Step 1 was predominately attributable to
lower actual and projected cash flows. Consequently, the Company performed hypothetical purchase
price allocations to determine the amount of goodwill impairment. The primary adjustments from book
values to fair values used in the hypothetical purchase price allocation were to property, plant
and equipment, amortizable intangible assets, long-term debt, and pension and postretirement
liabilities. The adjustments to measure the assets and liabilities 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 assumptions and methodologies for valuing our assets and
liabilities have been applied consistently during the reporting periods included in this report.
The second step of the goodwill impairment test resulted in an implied fair value of $73.3
million and $86.2 million as of September 30, 2010 and June 30, 2010, respectively. The Company
recognized a pre-tax impairment charge of $12.9 million and $45.4 million for the three and nine
months ended September 30, 2010, respectively. If the Companys fair value continues to decline in
the future, the Company may experience additional material impairment charges to the carrying
amount of its goodwill. Recognition of 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. Further, if additional impairment charges are recorded in the future
that result in a decline in stockholders equity below $2.5 million the Companys common stock
would be delisted from the NASDAQ Capital Market, which could negatively impact the market value
and liquidity of the Companys common stock and the Companys ability to access the capital
markets.
Impairment of Indefinite-Lived Intangible Assets
During the third quarter of 2010, as a result of sequential declines in sales and unit volumes
the Company revised its estimates of future cash flow and earnings projections downward. In
addition (as discussed above), the Companys expects its largest U.S. customer to increase its
self-manufacturing of conventional containers Consequently, during the second and third quarters of
2010 the Company performed interim impairment tests of its indefinite-lived intangible asset,
consisting exclusively of its trade name. An impairment of the carrying value of an
indefinite-lived intangible asset is recognized whenever its carrying value exceeds its fair value.
The amount of impairment recognized is the difference between the carrying value of the asset and
its fair value.
53
The Company estimated the fair value of its trade name by performing a discounted cash flow
analysis using the relief-from-royalty method. This approach treats the trade name as if it were
licensed by the Company rather than owned, and calculates its value based on the discounted cash
flows of the projected license payments. The relief-from-royalty method is the same method the
Company employed in prior periods and the method employed to initially value the trade name upon
the adoption of fresh-start accounting on May 1, 2009. Fair value estimates are based on
assumptions concerning the amount and timing of estimated future cash flows and assumed discount
and growth rates, reflecting varying degrees of perceived risk. Significant estimates and
assumptions used to estimate the fair value of the Companys trade name were internal sales
projections, a long-term growth rate of 2.75%, and a discount rate of 13.9%. Based on this
evaluation the Company recorded impairment charges related to its trade name intangible asset of
$1.3 million and $6.4 million for the three and nine months ended September 30, 2010, respectively.
These impairment charges are included within operating expenses in the accompanying condensed
consolidated statement of operations for the three and nine months ended September 30, 2010. The
primary factor contributing to the impairment charge were reductions in sales expectations from the
Companys previous projections.
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.
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.
54
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 September 30, 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 September 30, 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 12 Commitments and Contingencies to the Condensed
Consolidated Financial Statements, which information is incorporated herein by reference.
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.
See the risk factors below for a discussion of new risks regarding our common stock.
55
The following risk factors have been updated or added:
As a result of liquidity constraints and the upcoming maturity of our Secured Notes, we are
pursuing strategic alternatives, particularly a restructuring of the Secured Notes. A restructuring
of our Secured Notes may result in substantial dilution to, or cancellation or delisting of, our
currently outstanding common stock.
We expect our largest U.S. customer to increase self-manufacturing of conventional containers,
resulting in a reduction of 2011 U.S. bottle volumes of approximately 20%-25% as compared to
estimated 2010 bottle volumes. In addition, sales volumes have continued to decline generally and
we have not been able to offset decreases to conventional business by increasing our custom
business. As a result of these and other factors, our liquidity is constrained, which has caused
certain vendors to require that we pay for purchases in advance or upon delivery or to require
letters of credit, further constraining our liquidity. Liquidity constraints, in turn, make it
difficult to renew contracts or obtain new business, further constraining our liquidity. Our lack
of liquidity may also limit our ability to make capital expenditures required by our supply
contracts. In addition, the liquidity provided by our GE Credit Agreement may not be available to
us if we fail to meet the minimum fixed charge coverage ratio required by the GE Credit Agreement.
As previously disclosed, we do not anticipate generating sufficient funds to repay the Secured
Notes and the GE Credit Agreement may terminate if the Secured Notes are not refinanced by November
15, 2011.
As a result of these liquidity and indebtedness issues, we have retained a financial advisor
to assist in exploring strategic alternatives, which may include, among other things, exchanging
the Secured Notes for equity and/or new debt, a negotiated or bankruptcy court supervised
restructuring, or a sale of the Company or specific assets. Any such transaction could cause
substantial dilution to, or cancellation or delisting of, our common stock.
We are currently engaged in discussions with holders of our Secured Notes regarding these
alternatives. While the current focus of such
discussions is a debt for equity exchange, there can be no assurance that any particular alternative will be available or, if
available, the timing or ultimate terms.
We have incurred, and may in the future incur, significant impairment charges, which result in
lower reported net income (or higher net losses) and a reduction to stockholders equity.
Under accounting principles generally accepted in the United States, we are required to
evaluate our long-lived assets and goodwill for impairment whenever a triggering event occurs that
indicates the carrying value may not be recoverable. Goodwill is also required to be tested at
least annually and we have selected October 1 as our annual testing date.
During the nine months ended September 31, 2010 we wrote off $45.4 million of goodwill and
$6.4 million related to our trade name intangible asset. Following the write off we had $151.3
million of long-lived assets and $73.3 million of goodwill. We may in the future record additional
significant impairment charges to earnings in the period in which any impairment of our long-lived
assets or goodwill is determined. Such charges have resulted, and could in the future result, in
significantly lower reported net income (or higher net losses) and a reduction to stockholders
equity.
We must comply with financial and other covenants in our GE Credit Agreement and other debt
agreements.
The GE Credit Agreement contains a financial covenant that requires us to maintain a fixed
charge coverage ratio of 1.0:1.0 if our available credit under that facility falls below $12.5
million for any period of five consecutive business days during any fiscal month or $7.5 million at
any time. This ratio is defined as consolidated EBITDA (which is an adjusted measure of earnings
defined in the GE Credit Agreement) divided by the sum of interest expense (excluding non-cash
accretion of interest on the Secured Notes), cash capital expenditures net of cash proceeds from
the disposition of capital assets, scheduled payments of principal, income taxes paid in cash, and
cash dividends and other equity distributions and is calculated on a trailing twelve month basis as
of the last day of the then immediately preceding fiscal month. The Companys projected available
credit, consolidated EBITDA and compliance with the fixed charge coverage ratio may be impacted by,
among other things, unit volume changes, resin price changes, movements in foreign currency,
working capital changes, vendor demands for letters of credit, changes in product mix, factors
impacting the value of the borrowing base, and other factors including those in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Overview.
56
The Companys projected available credit will likely fall below $12.5 million for five
consecutive business day periods in the fourth quarter of 2010, however, the minimum Fixed Charge
Coverage Ratio is expected to remain narrowly above 1:0 to 1:0 during this period. In response, the
Company has begun to delay certain capital expenditures, reduce inventories, and institute cost
reduction initiatives (see Note 24 Subsequent Events for additional details). If the Company
does not meet its projections and the actions described above are not sufficient to maintain the
Companys compliance with its debt covenants, the Company would seek a waiver of the covenants or
alternative financing. There can be no assurance that such actions would be successful or that such
actions would not have a material adverse effect on our business, results of operations or
liquidity. If the Company is not successful in any or all of these actions, the Company would have
to seek protection under the federal bankruptcy laws.
In addition, our credit facility limits our capital expenditures to $25.0 million per year,
net of cash proceeds from the disposition of capital assets, with a carryover permitted into the
immediately following year of 75% of any unused portion. Our credit facility and the indenture
governing our Secured Notes also contain covenants customary for such financings that, among other
things, restrict our ability to sell assets, incur debt, incur liens and engage in certain
transactions. These restrictions may limit our operating flexibility or our ability to take
advantage of potential business opportunities as they arise. These covenants may have a material
adverse impact on our operations.
Our failure to comply with any of these covenants may constitute an event of default. Our
credit facility and indenture also contain other events of default customary for such financings.
If an event of default was to occur and we are unable to obtain an amendment or waiver, the lenders
could declare outstanding borrowings immediately due
and payable, discontinue further lending to us, apply any of our cash to repay outstanding
loans, or foreclose on assets. We cannot provide assurance that we would have sufficient liquidity
to repay or refinance borrowings upon an event of default. In addition, the credit facility and
indenture contain provisions under which a default or acceleration of one of such documents may
result in a cross acceleration of the other.
We expect our largest U.S. customer to increase its self-manufacturing of conventional
containers, which we expect will result in significant volume loss.
We expect that increased self-manufacturing by our largest U.S. customer will reduce its U.S.
bottle purchases from us by approximately 20%-25% as compared to estimated 2010 bottle volumes. The
Company anticipates an increase in preform volumes to this customer to partially offset the loss of
conventional bottle volume. The change in sales mix will negatively impact the Companys results of
operations and cash flows as preforms generally carry lower variable per unit profitability than
bottles. Increased self-manufacturing may have several effects on the Company, including but not
limited to a reduced borrowing base under the GE Credit Agreement. In response we have announced
the closure of a manufacturing facility and we are evaluating additional actions that we may take
in response to this expected volume loss, including potential cost reductions, additional plant
closures and obtaining replacement preform volume. There can be no assurance that any such actions
would be successful or that such actions would avert a material adverse effect on our business,
results of operations, financial position, cash flows or liquidity. Customers self-manufacturing
plans are not within our control and such plans may change from time to time.
Our declining stockholders equity may cause our common stock to be delisted from the NASDAQ
Capital Market, which could negatively impact the market value and liquidity of our common stock
and our ability to access the capital markets.
Stockholders equity at September 30, 2010 was approximately $4.3 million. In order to
maintain our listing on the NASDAQ Capital Market, we must maintain minimum stockholders equity of
$2.5 million which could be reduced by write-offs (such as those we took during the second and
third quarters of 2010) and other factors. If we cannot meet this standard or any of the
alternative listing standards, then NASDAQ may commence proceedings to delist our common stock. If
a delisting of our common stock were to occur, we would expect any trading of our common stock to
take place only in the over-the-counter market. Accordingly, we would expect the market value and
liquidity of our common stock and our ability to access the capital markets to be adversely
impacted. There may be other negative implications, including the potential loss of confidence by
actual or potential customers, suppliers and employees and the loss of institutional investor
interest.
If our auditors issue a going concern opinion in early 2011 we would be in default under our
Credit Agreement.
If our auditors opinion delivered in connection with our 2010 Annual Report on Form 10-K
includes any explanatory paragraph expressing substantial doubt as to our going concern status
(other than as a result of the failure to refinance or extend the final maturity date of the
Secured Notes and the Secured Notes and the debt evidenced thereby consequently being characterized
as current liabilities), then we will be in default under our Credit Agreement.
57
Our ability to attract and retain employees may decline.
The Companys continued losses may impact our ability to attract and retain employees. A lack
of skilled and experienced employees may have an adverse impact on our results of operations.
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 our 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.
Item 6. Exhibits
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10.1
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Executive Employment Agreement, by and between the Company and Grant H. Beard, dated as of
September 13, 2010 (incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K, filed on September 14, 2010). |
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the SarbanesOxley Act of 2002. |
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32.2
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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. |
58
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.
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Constar International Inc.
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Dated: November 15, 2010 |
By: |
/s/ J. Mark Borseth
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J. Mark Borseth |
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Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer) |
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59