COVERIS HOLDINGS S.A.
TABLE OF CONTENTS
ANNUAL REPORT
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SECTION I
Cautionary Note Regarding Forward-Looking Statements
Risk Factors
Our Business
SECTION II
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SECTION III
Index to Consolidated Financial Statements
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
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SECTION I
(in thousands of U.S. dollars)
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report of Coveris Holdings S.A., (the "Company") for the fiscal year ended December 31, 2015, including
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements.
These statements include, but are not limited to, any statement that may predict, forecast, indicate or imply future results,
performance, achievements or events. These forward-looking statements address matters that involve risks and uncertainties as
described in Section I of this report. You can often identify these and other forward-looking statements by the use of the words
such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “potential,”
“projected,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include
the assumptions underlying or relating to any of the foregoing statements. These statements are based on current expectations and
assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other
factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed or implied by these statements.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We will assume no obligation to update any of the forward-looking
statements after the date of this report to conform these statements to actual results or changes in our expectations, except as
required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this
report.
Except as otherwise indicated, references to "we," "our," "us," "the Group," and "the Company" refer to Coveris Holdings S.A.
and our subsidiaries.
You should carefully consider the risks described below as well as the other information contained in this annual report before
making an investment decision. Any of the following risks may have a material adverse effect on our business, results of operations,
financial condition and cash flows, and as a result you may lose all or part of your original investment. The risks described below
are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
may also have a material adverse effect on our business, results of operations, financial condition and cash flows.
RISK FACTORS
Our business operations and the implementation of our business strategy are subject to significant risks inherent in our business,
including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or
uncertainties described below could have a material adverse effect on our consolidated balance sheet, statement of operations and
cash flows and could cause actual results to differ materially from our historical results. While we believe we have identified and
discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently
known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial
position and financial performance in the future. Because of the following risks and uncertainties, as well as other variables affecting
our operating results, past financial performance should not be considered a reliable indicator of future performance and historical
trends may not be consistent with results or trends in future periods. Our consolidated financial statements and the notes thereto
and the other information contained in this annual report should be read in connection with the risk factors discussed below.
We are exposed to changes in market conditions for our products and such conditions are dependent upon factors beyond our
control.
Macroeconomic factors in the geographies in which we operate affect our results of operations. The market for plastic-based film
and packaging products is generally mature in most of the geographies in which we operate, and consequently there is a close
correlation between consumer consumption levels and demand for our products. The revenues we generate each period are affected
by factors such as unemployment levels, consumer spending, credit availability and business and consumer confidence. Certain
of our products are considered discretionary, and as a result consumers generally purchase less of these products during economic
downturns. In addition, for both discretionary and non-discretionary products, as economic conditions slow, retailers often seek
to manage inventory levels and slow their rate of product purchases as they try to sell product already in stock. Our customers also
seek to reduce working capital during a slowdown, and consequently they seek to manage inventory levels, revise trade credit
terms and aggressively negotiate prices. As a result, an economic slowdown may adversely affect our financial position, results
of operations and our ability to fund our operations.
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Deterioration in economic conditions or disruptions in credit markets also pose a risk to our commercial relationships with our
customers, suppliers and creditors. If economic conditions deteriorate significantly, or if our customers or raw material suppliers
are not able to refinance their existing credit lines or otherwise are forced to cease doing business, our business would be materially
adversely affected. The financial condition of some of our customers may expose us to credit risk. If our customers suffer financial
difficulty, they may not be able to pay us, which could have a material adverse effect on our results of operations. In addition, if
we are not able to secure sufficient funding required for our working capital and capital investment requirements in excess of
borrowings available under our current financing arrangements due to a lack of availability of credit, we may not be able to pay
our suppliers who may cease doing business with us, which could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Furthermore, the economic outlook in Europe is adversely affected by continued weakness in various European economies in
which we sell our products, the possibility of continued or increased weakness and the risk that one or more euro zone countries
could come under increasing pressure to leave the European Monetary Union. Any of these developments, or the perception that
any of these developments are likely to occur, could have a material adverse effect on the economic development of the affected
countries and could lead to severe economic recession or depression, and a general anticipation that such risks will materialize in
the future could jeopardize the stability of financial markets or the overall financial and monetary system. This, in turn, would
have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our business may be negatively affected by increases in raw materials or energy prices that we are unable to pass on to our
customers, our inability to retain or replace our key suppliers and supply chain disruptions.
Our margins are largely driven by the prices we charge for our products and the costs of the raw materials we require to make our
products. Raw materials costs represent the single largest component of our operating costs. The raw materials we depend on in
our production are primarily polymers, paper, films, inks, adhesives, additives and transit packaging materials. Many of the raw
materials we use in our manufacturing processes are commodities, which are subject to significant price volatility. The price of
polymers and the other raw materials that we use is a function of supply and demand, suppliers’ capacity utilization, industry and
consumer sentiment and prices for crude oil, natural gas and other raw materials. The price for polymers fluctuates substantially
as a result of changes in petroleum and natural gas prices, industry demand and the capacities of the companies that produce
polymers to meet market needs. Prices for paper depend on the industry’s capacity utilization and the costs of raw materials.
Polymer prices continued to be volatile during from 2012 through 2015. Price fluctuations, in particular with respect to polymers,
may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our ability to pass on increases in the cost of raw materials to our customers is dependent on the pricing methodology agreed to
with our customers. We seek to include price escalation clauses in our framework sales agreements that allow us to increase prices
for our products if our raw material prices increase. A significant portion of our total net sales are made pursuant to framework
contractual agreements and a significant portion of these framework sales agreements contained a price escalation clause. These
price escalation clauses typically pass through our raw material price changes in our plastic and paper production in 30 to 90 days
and 90 to 120 days, respectively. However, these clauses may not in all cases be effective to offset our increased costs. We also
sell a substantial portion of our products under purchase orders, in which pricing is based on pricing sheets that we have previously
sent to our customers. We may not be able to increase prices for these purchases if customers do not agree to a price escalation,
in particular in our markets where competition is intense. If we chose to increase prices in such circumstances, we would risk
volume loss. As a result, if our cost of raw materials increases, our margins may be negatively impacted. Increases in energy prices,
particularly in the price of electricity, also increase our cost of sales, and energy costs.
As a result of operating large manufacturing facilities, the fuels necessary to power our facilities and operations constitute a
significant portion of our cost of sales. We use large amounts of electricity, natural gas and oil in our production. Prices for these
fuels have been volatile in recent years and have generally risen since 2005. However, during 2014 and 2015, oil prices decreased
by more than 50% compared to 2013. While this decrease in oil prices might lead to a temporary reduction in fuel costs, any future
increase in energy prices may adversely affect our business to the extent that we are unable to pass these increased costs on to our
customers.
The raw materials and energy that we use have historically been available in adequate supply from multiple sources. However,
volatility in global economic conditions, fluctuations in oil prices and plastic resin demand, production constraints, temporary
severe weather conditions and other factors could result in temporary shortages of raw materials. If any of our suppliers is subject
to a major production disruption or is unable to meet its obligations under present supply agreements, we may be forced to pay
higher prices to obtain the necessary raw materials and may not be able to increase the prices of our finished products. Therefore,
interruptions in supply could increase pressure on our margins and reduce our cash flows or could harm our ability to deliver our
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products to our customers on a timely basis, which could adversely affect our business, financial condition and results of operations.
In addition, consolidation could occur among our suppliers, and such consolidation could hinder our ability to obtain adequate
supplies of raw materials, which could lead to higher prices for the type of plastic resins we use. Failure to obtain adequate supplies
of raw materials or future price increases could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
Significant competition in our markets may adversely affect our competitive position, sales and overall operations.
The packaging industry is highly competitive. The markets for our products are mature in Europe and the Americas, and there are
many competing manufacturers that produce similar and other types of packaging. Additionally, we compete, to a certain extent,
with our customers if they have in-house packaging-making capabilities.
Some of our competitors have extensive production facilities, well developed sales and marketing staffs and greater geographic
reach or financial resources than we have. For example, some of our key competitors include Amcor, Mondi Group, Bemis Company,
Inc., Berry Plastics Corporation, Sealed Air, Inc. and Sonoco Products Co., each of which has substantial financial, marketing and
other resources and established brand names. Our competitors could use their significant resources to increase their marketing,
develop new products or reduce their prices in a manner that adversely impacts our ability to sell our products at prices that generate
the same margins we have earned in the past, or at all. Certain products are also available from a number of local manufacturers
specializing in the production of a limited group of products. These local manufacturers may have existing relationships with local
customers and may be more familiar with local preferences than we are. It may be possible for our current or future competitors
to develop new product manufacturing technology or processes that may allow them to offer packaging products at a cost or quality
that has a significant advantage over our products, and we may not have sufficient resources or capital to match such innovation.
If competition in our high margin businesses increases, our overall margins could be substantially reduced. We cannot assure you
that we will continue to be able to compete successfully against existing or future competitors.
While the principal drivers for competition for our products include quality, product performance and characteristics and service,
price is also an important aspect of our ability to compete. We currently manufacture our products in 20 countries, including the
United Kingdom, the United States, France, Germany, Hungary, Canada, Finland, Netherlands, Poland, Austria, Bulgaria, Egypt,
Romania, Serbia, Turkey, China, New Zealand, Mexico and Guatemala. We may face competition from producers who manufacture
a higher percentage of their products in countries with significantly lower labor costs than we do. If one or more of our competitors
with manufacturing facilities in such lower cost countries offers products of sufficient quality in our markets at lower prices, we
may be forced to lower our prices to maintain our competitiveness, or we may be unable to continue to sell our products. In either
case, our sales and our gross profit could decline and such decline could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
The profitability of plastic packaging companies is heavily influenced by the supply of, and demand for, plastic packaging. The
plastic packaging market has historically been characterized by steady growth of manufacturing capacity and demand. If plastic
packaging capacity increases and there is no corresponding increase in demand, the prices we receive for our products could
materially decline, which could have a material adverse effect on our business, results of operations, financial condition and cash
flows.
We are exposed to the risk of product substitution.
We derive the majority of our total net sales from sales of flexible and rigid plastic packaging products. Plastic packaging products
compete with other forms of packaging, principally paper and metal packaging. Customer preference for a particular type of
packaging can be driven by cost, appearance, functional considerations or other factors. In addition, consumer preference can be
affected by environmental considerations, including whether packaging can be recycled or re-used. Although consumer demand
has led to increasing substitution of plastic packaging for other forms of packaging over the last several years, there can be no
assurance that demand for plastic packaging will continue to increase.
Our sales may also be impacted by variations in customer preference driven by the cost of associated packaging products. Difficult
economic conditions may result in consumers’ preference for less expensive and less elaborate forms of packaging. We cannot
assure you that our products will continue to be preferred by our customers or our customers’ end-consumers and that consumer
preference will not shift from plastic-based packaging to non-plastic packaging. A material shift in consumer preference from our
packaging types could result in a decline in sales volume or pricing pressure that would have a material adverse effect on our
business, results of operations, financial condition and cash flows.
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We may be adversely affected by the loss of key customers for our products, and our customer concentration could increase
due to industry consolidation.
Our commercial relations with most of our customers are conducted through short term framework agreements or purchase orders.
These arrangements generally provide for guaranteed minimum orders and there can be no assurance that we would continue to
be able to sell our products to our customers or sell on terms as favorable as in the past, or at all. We cannot assure you that we
will be able to maintain our existing relationships with our customers.
There is also the risk that our customers may shift their production operations to locations in which we do not currently have a
presence. The loss of one or more of these customers, a significant reduction in sales to these customers or a significant change
in the commercial terms of our relationship with these customers could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Additionally our customers may decide to in-source the production of their packaging which we currently supply, or otherwise
elect not to do business with us. Loss of key contracts could have a material impact on our business, results of operations, financial
condition and cash flows.
Historically over time, customer consolidation has increased the concentration of our revenues with our largest customers. In many
cases, such consolidation may be accompanied by increased customer bargaining power and pressure from customers for price
reduction. In addition, this consolidation may lead manufacturers to rely on a reduced number of suppliers. If, following the
consolidation of one of our customers with another company, a competitor was to be the main supplier to the consolidated companies,
this could have a material adverse effect on our business, financial condition or results of operations. Increased pricing pressures
from our customers that may result from such a consolidation may also have a material adverse effect on our business, results of
operations, financial condition and cash flows.
We may fail to keep up with product innovation.
Our business is subject to frequent and sometimes significant changes in technology and if we do not keep up with these changes,
our sales and profits may decline. Product development and engineering requires significant investment. Some of our competitors
may have greater access to financial resources than we do and may increase their competitiveness by investing more in research
and development activities and making strategic capital expenditures with respect to key products. Additionally, some of our
competitors may be more capable of accessing synergies in product and technology development and market activities.
We cannot assure you that our product development and engineering efforts and capital expenditures will continue to deliver
competitive products that will translate into sales to customers or that we will consistently be able to renew our production lines
as our customers stop using those products. We may not be able to replace outdated technologies, replace them as quickly as our
competitors or develop and market new and better products in the future. We may enter new markets, which may not have the
economics or customer acceptance of new technology that we had anticipated. If we fail to keep pace with the evolving technological
innovations in our markets or we fail to maintain our key competencies, we may experience a material adverse effect on our
business, results of operations, financial condition and cash flows.
We may not be able to meet the demands of our customers.
Some of our customers’ products can experience higher demand as part of their launch or as a result of promotions and advertising
campaigns. Although our production capacity is usually not constrained, in some cases it can be constrained by line capacity,
particularly for bespoke products or products that in new technologies. We may be unable to deliver production at the level required
by our customers during periods of strong sales to end-customers, which may lead us to lose potential revenues or face claims
from customers. To service supply shortfall, our customers may turn to our competitors, which could lead to our relationship with
such customers being jeopardized and a reduction in or termination of our business with such customers.
Any interruption in the operations of our manufacturing facilities may adversely affect our business.
Due to the operating conditions inherent in some of our manufacturing processes, we cannot assure that we will not incur unplanned
business interruptions or that such interruptions will not have an adverse impact on our business, financial condition and results
of operations. There can be no assurance that alternative production capacity will be available in the future in the event of a major
disruption or, if it is available, that it could be obtained on favorable terms. To the extent that we experience any breakdown of
key manufacturing equipment or similar manufacturing problems, we will be required to make capital expenditures that may make
it difficult for us to meet customer demand, which would result in a loss of revenues, and could impair our liquidity. In addition,
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the rationalization of our manufacturing base in an effort to realize cost synergies exacerbates this risk because our manufacturing
activities become more concentrated and plant disruptions impact larger production operations.
Our manufacturing operations are subject to risks relating to plastics conversion and printing operations and the related use, storage,
transportation and disposal of polymers, inks and lacquers, products and wastes, including but not limited to:
• pipeline leaks and ruptures;
• fires and explosions;
• accidents;
• severe weather and natural disasters (such as hurricanes);
• mechanical failures;
• unscheduled downtimes;
• labor disputes;
• transportation interruptions;
• other environmental risks; and
• sabotage or terrorist attacks.
These risks can cause personal injury and loss of life, catastrophic damage to, or destruction of, property and equipment and
environmental damage, and may result in a suspension of operations, litigation exposures, loss of market share and the imposition
of civil or criminal penalties. Unplanned outages can impact our operating results, even if such outages are covered by insurance.
We mainly use electrical power and natural gas to manufacture our products. These energy sources are essential to our operations
and we rely on their continuous supply to conduct our business. Frequent or prolonged power interruptions may have a material
adverse effect on our operations.
Because we rely on external transportation and warehousing providers to deliver our products, any disruption in their services
could adversely affect our business.
The success of our business depends, in large part, upon the maintenance of a strong distribution network. We rely on independent
transportation and warehousing companies to store and deliver our products to our customers. Strikes, slowdowns, transportation
disruptions, such as severe weather, and other conditions in the transportation industry, such as increases in fuel prices, could
increase our costs and disrupt our operations. If any subcontractor fails to properly store or timely deliver our products to our
customers, the results of our operations could be adversely affected. There can be no guarantee that we will maintain relationships
with our current independent transportation and warehousing providers. A delay in distribution could, among other things, have
an adverse impact on our reputation, result in return of an amount of our products that could not be shipped in a timely manner or
require us to contract with alternative, and possibly more expensive, distributors. In addition, our current distributors have storage
facilities located near our manufacturing plants, which provide us with convenient facilities in which to store our products and
which reduce our costs of transportation. If we were required to change distributors, it would be disruptive to our business, which
could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our business requires high levels of capital investments.
Our business requires high levels of capital investments, including maintenance and growth expenditures. We invested $157,807
and $116,497 toward capital expenditures during the years ended December 31, 2015 and December 31, 2014, respectively. We
will continue to require capital expenditures to improve efficiencies in our manufacturing base by potentially consolidating and
relocating facilities, investing in programs and technology to consolidate our procurement, sales and marketing and back office
functions. We may not be able to make such capital expenditures if we do not generate sufficient cash flow from operations, have
funds available for future borrowings under our existing credit facilities, are restricted from incurring additional debt or as a result
of a combination of these factors. In particular, due to global economic conditions, the availability of funds from debt capital
markets may diminish significantly. If we are unable to meet our capital expenditure plans, we may not be able to maintain our
manufacturing capacity, which may negatively impact our competitive position and ultimately, our revenues and profitability. In
addition, we are required to make injection molds or new toolings when we make new products for our customers. We use these
molds and toolings throughout the life span of these products and generally make new molds as these products cease to be produced
and new products take their place. This involves a significant amount of capital expenditures on our part. Any failure to meet our
capital expenditure plans may have a material adverse effect on our business, results of operations, financial condition and cash
flows.
We are subject to risks from legal and arbitration proceedings, which could adversely affect our financial results and condition.
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From time to time we are involved in labor, tax, commercial and other legal and arbitration proceedings, the outcomes of which
are difficult to predict. We could become involved in legal and arbitration disputes in the future which may involve substantial
claims for damages or other payments. Although individually these proceedings do not typically involve substantial amounts, in
the aggregate such proceedings or any increase in the number of such proceedings may have a material adverse effect on our
business, results of operations and financial condition.
In the event of a negative outcome of any material legal or arbitration proceeding, whether based on a judgment or a settlement
agreement, we could be obligated to make substantial payments, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, the costs related to litigation and arbitration proceedings may be significant.
Even if there is a positive outcome in such proceedings, we may still have to bear part or all of our advisory and other costs to the
extent they are not reimbursable by other litigants, insurance or otherwise, which could have a material adverse effect on our
business, results of operations and financial condition.
Failure to maintain good employee relations may affect our operations and the success of our business.
As of December 31, 2015, we had 10,530 employees located in 20 countries. As we are continuously restructuring our workforce
to achieve productivity gains, maintaining good relationships with our employees, unions and other employee representatives is
crucial to our ability to successfully implement such restructurings. As a result, any deterioration of the relationships with our
employees, unions and other employee representatives could have an adverse effect on our business, results of operations and
financial condition.
The majority of our employees are covered by national collective bargaining agreements and company-level agreements specific
to our Company. These agreements typically complement applicable statutory provisions in respect of, among other things, the
general working conditions of our employees such as working time, holidays, termination, retirement, welfare and incentives.
National collective bargaining agreements and Company-specific agreements also contain provisions that could affect our ability
to restructure our operations and facilities, terminate employees or outsource certain services.
We may not be able to extend existing Company-specific agreements, renew them on their current terms, or, upon the expiration
of such agreements, negotiate such agreements in a favorable and timely manner or without work stoppages, strikes or similar
industrial actions. We may also become subject to additional Company-specific agreements or amendments to the existing national
collective bargaining agreements. Such additional Company-specific agreements or amendments may increase our operating costs
and have an adverse effect on our business, results of operations and financial condition.
In addition, we are required to consult and seek the advice of our employee works councils with respect to a broad range of matters,
which could prevent or delay the completion of certain corporate transactions.
Consultations with works councils, strikes, similar industrial actions or other disturbances by our workforce, particularly where
there are union delegates, could disrupt our operations, result in a loss of reputation, increased wages and benefits or otherwise
have a material adverse effect on our business, results of operations and financial condition.
We are exposed to risks related to conducting operations in several different countries.
We currently have manufacturing facilities located in 20 countries, including the United Kingdom, the United States, France,
Germany, Hungary, Canada, Finland, Netherlands, Poland, Austria, Bulgaria, Egypt, Romania, Serbia, Turkey, China, New Zealand,
Mexico and Guatemala. As a result, our business is subject to risks related to the differing legal, political, social and regulatory
requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following:
• general economic, social or political conditions in the countries in which we operate could have an adverse effect on
our earnings from operations in those countries;
• compliance with a variety of laws and regulations in various jurisdictions may be burdensome;
• unexpected or adverse changes in laws or regulatory requirements in various jurisdictions may occur, including in
particular the introduction of more stringent regulations relating to packaging that comes into contact with food;
• the imposition of withholding taxes or other taxes or royalties on our income, or the adoption of other restrictions on
foreign trade or investment, including currency exchange controls;
• adverse changes in export duties, quotas and tariffs and difficulties in obtaining export licenses;
• intellectual property rights may be more difficult to enforce;
• transportation and other shipping costs may increase;
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• staffing difficulties, national or regional labor strikes or other labor disputes;
• the imposition of any price controls or nationalization programs; and
• difficulty enforcing agreements and collecting receivables.
Our international sales are also subject to various sanction, export control and anti-corruption laws and regulations and we may
be subject to significant penalties for violating such laws. We can also be in violation of such laws for the actions of our affiliates,
employees and agents. In recent years there has been an increase in both the frequency and severity of enforcement under such
laws. While we have adopted policies and controls since the completion of the combination of the five flexible and rigid packaging
portfolio businesses in North America and Europe, including the Exopack Business, Britton Business, Paccor Business, Kobusch
Business and Paragon Business under Coveris Holdings, S.A. in May 2013 (the "Combination") to help mitigate such risks, and
we are currently reviewing and updating these policies and controls and are in the process of implementing a compliance program
with our subsidiaries, employees and agents to further mitigate the risk of non-compliance, there can be no assurance that such
controls have been or will be effective in ensuring that we, our employees and our agents have complied or will comply with such
laws. The size and extent of our operations, and the size of our group structure, increase the risks that violations, such as sales to
customers in sanctioned jurisdictions, would not adequately identified with our controls. If an enforcement action were to be
brought against us for a violation of these laws, we could be exposed to civil and criminal prosecution or penalties, the imposition
of export or economic sanctions against us and reputational damage.
Any of these factors could require us to change our current operational structure and could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
We are exposed to currency fluctuation risks in several different countries that could adversely affect our profitability.
We currently operate our facilities in 20 different countries. As a result, our business is subject to currency fluctuation risks. Our
results of operations may be affected by both the transaction effects and the translation effects of foreign currency exchange rate
fluctuations. When we are required to pay our debt, purchase raw materials, meet our fixed costs or pay for services, in currencies
outside of our respective operations' jurisdictions, we are exposed to unrealized and realized gains and losses due to foreign
exchange, depending on fluctuations in exchange rates. A high percentage of our production facilities are currently located in the
euro zone and the United Kingdom. As a result, a large proportion of our manufacturing costs and our selling, general and
administrative expenses are incurred in currencies other than the U.S. dollar, reflecting the location of our production sites. Where
we are unable to match sales received in foreign currencies with costs paid in the same currency, our results of operations are
consequently impacted by currency exchange rate fluctuations. In addition, our business may be negatively affected if foreign
currency movements provide non-local suppliers with competitive pricing advantages.
We are also exposed to foreign exchange risk through the translation of the financial statements from our functional currencies to
the U.S. dollar. Our income and expenses are reported in the relevant local currency and translated into U.S. dollars at the applicable
currency exchange rate for inclusion in our consolidated financial statements. Therefore, our financial results in any given period
are materially affected by fluctuations in the value of the U.S. dollar relative to the other currencies in which we have costs and
expenses. These translations could significantly affect the comparability of our results between financial periods and/or result in
significant changes to the carrying value of our assets, liabilities and stockholders’ equity.
During 2015, the U.S. dollar continued to strengthen against several other currencies of countries where we conduct business. The
U.S. dollar's relative strength against the currencies in other countries in which we conduct business means that, among other
things, our foreign sales and EBITDA, which are reported to our investors in U.S. dollars, will be lower than if the U.S. dollar
were weaker relative to those currencies. The Group employs various hedging strategies to offset the impact of foreign currency
fluctuations on our cash flows and/or earnings. Hedging involves speculation and significant judgment. Hedging activities, if not
applied appropriately, can have a material adverse effect on our business, results of operations, financial condition and cash flows.
Current and future environmental and other workplace, health and safety requirements could adversely affect our financial
condition and our ability to conduct our business.
Our operations, properties and products are subject to international, EU, U.S. federal and state national and local environmental
laws and regulations that impose limitations on the discharge of pollutants into the air, soil and water, establish standards for the
treatment, storage and disposal of solid and hazardous wastes, and require investigation and clean-up of contaminated sites, and
establish environmental standards for our products and raw materials inputs to our product processes, as well as determine the
guidelines for workplace health and safety. Certain environmental laws in the jurisdictions in which we operate, including the
Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, in the United States, impose joint and
several liability for cleanup costs, without regard to fault, on current and former owners and operators of property that has been
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impacted by a release of hazardous substance or on persons who have disposed of, arranged for the disposal of or released hazardous
substances into the environment.
We cannot predict with any certainty our future capital expenditure requirements necessary to comply with applicable environmental
laws and regulations due to changing environmental technologies and continually changing compliance standards which have
tended to become increasingly strict. From time to time, we could be subject to requests for information, notices of violation or
investigations initiated by environmental regulatory agencies relating to our operations and properties. Furthermore, violations or
contaminated sites we do not know about (including contamination caused by prior owners and operators of such sites or newly
discovered information) could result in additional compliance or remediation costs or other liabilities, which could be material.
We may also assume significant environmental liabilities in future acquisitions. In addition, EU, U.S. federal and state, national
and local governments could enact laws or regulations concerning environmental matters that increase the cost of production, or
otherwise adversely affect the demand, for plastic products.
Legislation that would prohibit, tax or restrict the sale or use of certain types of plastic and other containers, and would require
diversion of solid wastes such as packaging materials from disposal in landfills, has been or may be introduced in the U.S. Congress,
U.S. state legislatures, the European Union or certain member states thereof, and other legislative bodies. Container legislation
has been adopted in a few jurisdictions and similar legislation has been defeated in public referenda in several states, local elections
and many state and local legislative sessions. There can be no assurance that future legislation or regulation would not have a
material adverse effect on our business, results of operations, financial condition and cash flows.
We are also subject to regulation that establishes specific requirements for the manufacture and marketing of plastic materials that
are intended to or may come into contact with food. These regulations typically set out a list of authorized substances (some of
which, due to specific restrictions, must be of specific purity and quality) that may be used in the manufacture of plastic materials.
Regulations also typically establish a limit on the transfer constituent elements from the plastic to food. We may be required to
incur additional costs or change raw materials or production process to comply with future food packaging legislation or regulation.
Additionally, our products and the raw materials we use in our production processes are subject to numerous environmental laws
and regulations, including the European Union’s Regulation on Registration, Evaluation, Authorization and Restriction of Chemical
substances (“REACH”) (EC 1907/2006), which requires a costly and time-consuming registration, safety analysis, and in some
cases, authorization process for chemicals made or imported into the European Union. REACH may also require the phase-out or
substitution of certain chemicals deemed to be dangerous with suitable alternatives. The European Union is continuously adopting
additional requirements related to product safety. Although REACH compliance is primarily the responsibility of our suppliers or
the producers of chemical raw materials, we are also affected by REACH as a “downstream” user of REACH-regulated substances.
It is possible that the authorization process or the marketing and use restrictions imposed by REACH could increase the cost of
or affect the supplies of some chemicals that we use as raw materials or that are manufactured and/or imported into the European
Union by us or our suppliers, or require us to substitute current raw materials with alternative substances, and the failure to comply
with these requirements could result in fines and penalties. Although we have systems in place to track and monitor the REACH
status of our raw materials and believe that our suppliers have made the required registrations and are in material compliance with
REACH, there can be no assurance that current or future REACH or similar regulations would not have a material adverse effect
on our business, results of operations, financial condition and cash flows.
The presence of hazardous materials at our facilities or in our products may expose us to potential liabilities associated with
the cleanup of contaminated soil and groundwater or other types of damages, which could adversely affect our financial
condition and our ability to conduct our business.
The presence of hazardous materials at our facilities may expose us to potential liabilities associated with the cleanup of
contaminated soil and groundwater, and we could be liable for the costs of responding to and remediating releases of hazardous
materials and the restoration of natural resources damaged by such releases, among other things. In order to address such hazardous
material releases, we may need to spend substantial amounts of money and other resources from time to time to undertake
investigative or remedial actions, construct and maintain remedial equipment, and clean up and/or decommission waste management
facilities. If we do not comply with such environmental requirements, regulatory agencies could seek to impose civil, administrative
and/or criminal liabilities. Under some circumstances, private parties could also seek to impose civil fines or penalties for violations
of environmental law or recover monetary damages, including those relating to property damage or personal injury or illnesses or
injuries allegedly related to exposure to hazardous substances at our facilities or in our products.
Changes in product requirements and their enforcement may have a material impact on our operations.
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Changes in laws and regulations relating to the materials allowed for use in packaging and to the recycling of plastic packaging
could adversely affect our business if implemented on a large scale in the major markets in which we operate. Changes in laws
and regulations laying down restrictions on, and conditions for use of, food, beverage, pharmaceutical, agricultural or other products
and the materials in contact with them, or on the use of materials and agents in the production of our products could also adversely
affect our business. A number of governmental authorities, both in the United States and abroad, have considered or are expected
to consider legislation aimed at reducing the amount of plastic wastes. Programs have included, mandating certain rates of recycling
and/or the use of recycled materials, imposing deposits or taxes on plastic packaging material and requiring retailers or manufacturers
to take back packaging used for their products. Legislation, as well as voluntary initiatives similarly aimed at reducing the level
of plastic wastes, could reduce the demand for certain plastic packaging, result in greater costs for plastic packaging manufacturers
or otherwise impact our business. Some consumer products companies, including some of our customers, have responded to these
governmental initiatives and to perceived environmental concerns of consumers by using containers made in whole or in part of
recycled plastic. Future legislation and initiatives could adversely affect us in a manner that could be material.
The failure of our patents, trademarks, models and confidentiality agreements to protect our intellectual property could adversely
affect our business.
Proprietary protection of our processes, apparatuses and other technology is important to our business. Our actions to protect our
proprietary rights may be insufficient to prevent others from developing similar products to ours. In addition, the laws and their
enforcement in many countries do not protect our intellectual property rights to the same extent as the laws of the European Union
and the United States. Furthermore, any pending patent application filed by us may not result in an issued patent, or if patents are
issued to us, such patents may not provide meaningful protection against competitors and customers or against competitive
technologies. In addition, our competitors and any other third parties may obtain patents that restrict or preclude our ability to
lawfully manufacture and market our products in a competitive manner, which could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
We also rely upon unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop
and maintain our competitive position. There can be no assurance that our confidentiality agreements will not be breached or will
provide meaningful protection for our trade secrets or proprietary know-how and adequate remedies in the event of an unauthorized
use or disclosure of these trade secrets and know-how. In addition, there can be no assurance that others will not obtain knowledge
of these trade secrets through independent development or other access by legal means.
If we are unable to maintain the proprietary nature of our technologies, our profit margin could be reduced as competitors imitating
our products could compete aggressively against us in the pricing of certain products and our business, results of operations,
financial condition and cash flows may be materially adversely affected.
Any material pending litigation against us regarding any intellectual property claims, with or without merit, could subject us to
costly litigation and divert our technical and management personnel from their regular responsibilities. Furthermore, if such claims
are adversely determined against us, we could be forced to suspend the manufacture of products using the contested invention or
negotiate royalty payments for the usage of such invention and our business, financial condition, results of operations and cash
flows could be adversely affected if any such products are material to our business.
Fluctuations in the financial markets will likely adversely affect our pension plan assets and our future cash flows.
We operate certain defined benefit pension plans at our U.S., Canadian and European operations. Continued disruption in global
credit and financial markets could adversely affect the market value of our pension plan assets, which would likely increase our
pension costs and cause a corresponding decrease in our cash flow. Our pension costs are dependent upon numerous factors resulting
from actual plan experience and assumptions of future experience. Pension plan assets are primarily made up of equity and fixed
income investments. Accordingly, fluctuations in actual equity market returns as well as changes in general interest rates may
result in increased or decreased pension costs in future periods. In addition, changes in assumptions regarding current discount
rates and expected rates of return on plan assets could also increase or decrease pension costs. A decline in our pension plan assets
as a result of volatile equity market returns would significantly increase future minimum required pension contributions in 2016
and future years which would have an adverse impact on our cash flows.
Failure of control measures and systems resulting in faulty or contaminated products could have a material adverse effect on
our business.
Although we have not been subject to any material litigation regarding damages for defective products or substantial product
recalls or other material corrective actions in the recent past, these events may occur in the future. Failure to meet control measures
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and quality and safety standards, due to, among other things, accidental or malicious raw material contamination or due to supply
chain contamination carried by human error or equipment failure may result in adverse effects on consumer health, litigation
exposure, loss of market share, reputational damage, financial costs and loss of revenue.
In addition, if our products fail to meet our standards, we may be required to incur substantial costs in taking appropriate corrective
action (including recalling products from consumers) and to reimburse customers and/or end consumers for losses that they suffer
as a result of this failure. Customers and end consumers may seek to recover these losses through litigation and, under applicable
legal rules, may succeed in any such claim even if there is no negligence or other fault on our part. Placing an unsafe product on
the market, failing to notify the regulatory authorities of a safety issue, failing to take appropriate corrective action and failing to
meet other regulatory requirements relating to product safety could lead to regulatory investigation, enforcement action and/or
prosecution. Any product quality or safety issue may also result in adverse publicity, which may damage our reputation. Any
liability resulting from a product defect, if it were to be established in relation to a sufficient volume of claims or to claims for
sufficiently large amounts, could have a material adverse effect on our business, results of operations, financial condition and cash
flows.
Interruption in the operation of our information and communication technology may affect us adversely.
The operation of our manufacturing facilities as well as our sales and service activities depend on the efficient and uninterrupted
operation of complex and sophisticated computer, telecommunication and data processing systems. Information and communication
technology-related risks are particularly relevant since our information technology landscape is fragmented and mainly locally
driven, due in part to our history of acquisitions of businesses which operated proprietary information technology systems. Some
of the software used by us is end user-developed by local personnel. As a consequence, the different platforms in use for key
processes may lead to inefficiencies, such as problems with interoperability, malfunctions and higher cost. Our computer and data
processing systems and related infrastructure (data center, hardware and wide and local area networks) are generally exposed to
the risk of disturbances, damage, electricity failures, computer viruses, fire, other disasters, hacker attacks and similar events.
Disruptions to operations or interruptions in operations involving the systems have occurred in individual cases in the past and
may occur in the future. Although administration and production networks are separated, an interruption in the operations of
computer or data processing could adversely affect our ability to efficiently maintain our production processes and to ensure
adequate controls. Disruptions to or interruptions in operations could lead to production downtime which, in turn, could result in
lost net sales. Any one or more of these risks, if they were to materialize, could materially adversely affect our business, financial
condition and results of operations.
Our insurance coverage may not be sufficient to cover the risks inherent in our business and future coverage may be difficult
to obtain replacement insurance on acceptable terms or at all.
Our insurance policies may not provide adequate coverage for the risks inherent in our business, as these insurance policies typically
exclude certain risks and are subject to certain thresholds and limits. We cannot assure you that our property, plant and equipment
and inventories will not suffer damages due to unforeseen events or that our products may not be defective. Further, the proceeds
available from our insurance policies may not be sufficient to protect us from all possible loss or damage resulting from such
events. As a result, our insurance coverage may prove to be inadequate for events that may cause significant disruption to our
operations, which may have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may suffer indirect losses, such as the disruption of our business or third-party claims of damages, as a result of an insured
risk event. Our business interruption insurance and general liability insurance policies, including our product liability insurance,
are subject to limitations, thresholds and limits, and may not fully cover all of our indirect losses.
Among other factors, adverse political developments, security concerns and natural disasters in any country in which we operate
may materially adversely affect available insurance coverage and result in increased premiums for available coverage and additional
exclusions from coverage.
Higher employment costs may have a material adverse effect on our business, financial condition and results of operations.
Labor costs represent a significant portion of our cost of goods sold. Labor costs have been increasing steadily in all of our locations
over the past several years, with higher growth in “low-cost countries” where we manufacture products for export to U.S. and
European customers. Our labor costs may rise faster than expected in the future as a result of increased workforce activism,
government decrees and changes in social and pension contribution rules. We face resistance from customers to price increases
motivated by increased labor costs. The continued and sustained increase in labor costs may make some of our plants less competitive
against manufacturers operating from countries with lower salary levels, particularly if we do not manage to offset the increase in
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labor costs through productivity gains. If employment costs increase further, and we cannot recover these costs from our customers
through increased selling prices or offset them through productivity gains, our operating costs will increase, which could have a
material adverse effect on our business, results of operations, financial condition and cash flows.
We may pursue and execute acquisitions, which could adversely affect our business.
We continually evaluate potential acquisition opportunities in the ordinary course of business, including those that could be material
in size and to our operations. Acquisitions involve a number of special risks, including:
• the diversion of management’s attention and resources to the assimilation of the acquired companies and their employees
and to the management of expanding operations;
• the incorporation of acquired products into our product line;
• problems associated with maintaining relationships with employees, suppliers and customers of acquired businesses;
• the increasing demands on our operational systems;
• possible adverse effects on our reported operating results, particularly during the first several reporting periods after
such acquisitions are completed; and
• the loss of key employees and the difficulty of presenting a unified corporate image.
We may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due
diligence in connection with historical acquisitions and any future acquisitions. We have typically required selling stockholders
to indemnify us against certain undisclosed liabilities. However, we cannot assure you that indemnification rights we have obtained,
or will in the future obtain, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible
liabilities associated with the business or property acquired. Any of these liabilities, individually or in the aggregate, could have
a material adverse effect on our business, financial condition and results of operations.
In addition, we may not be able to successfully integrate future acquisitions without substantial costs, delays or other problems.
The costs of such integration could have a material adverse effect on our operating results and financial condition. Although we
conduct what we believe to be a prudent level of investigation regarding the businesses we purchase, in light of the circumstances
of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. Until we actually
assume operating control of such businesses and their assets and operations, we may not be able to ascertain the actual value or
understand the potential liabilities of the acquired entities and their operations. Furthermore, we may not realize all of the cost
savings and synergies we expect to achieve from our current strategic initiatives due to a variety of risks, including, but not limited
to, difficulties in integrating shared services with our business, higher than expected employee severance or retention costs, higher
than expected overhead expenses, delays in the anticipated timing of activities related to our cost-saving plans and other unexpected
costs associated with operating our business. If we are unable to achieve the cost savings or synergies that we expect to achieve
from our strategic initiatives, it could adversely affect our business, financial condition and results of operations.
An affiliate of Sun Capital controls us and may have conflicts of interest with us.
An affiliate of Sun Capital indirectly controls us. Such affiliate of Sun Capital, therefore, has the power to take actions that affect
us, including appointing management and approving mergers, a sale of substantially all of our assets and other extraordinary
transactions. For example, such affiliate of Sun Capital could cause us to make acquisitions that increase the amount of our
indebtedness or to sell revenue-generating assets, impairing our ability to make payments under our debt agreements. Such affiliate
of Sun Capital could also receive certain fees in connection with such acquisitions and other corporate events under a management
services agreement with us. Additionally, such affiliate of Sun Capital is in the business of making investments in companies and
may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Such affiliate of Sun
Capital may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition
opportunities may not be available to us.
Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among our
subsidiaries, and the tax laws to which we are subject could change in a manner adverse to us.
The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We
have taken and will continue to take tax positions based on our interpretation of such tax laws. There can be no assurance that a
taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Similarly, the tax
laws to which we are subject could change in a manner unfavorable to us. Additionally, in certain circumstances, we use estimates
when calculating our tax liabilities. For example, because we conduct operations, including intercompany transactions, through
subsidiaries in numerous tax jurisdictions around the world, we must establish a transfer pricing methodology to account for
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intercompany transactions. While the transfer pricing methodology we utilize is based on economic studies, it could be challenged
by various tax authorities resulting in additional tax liability, interest and penalties. We are regularly under audit by tax authorities,
and although we believe our interpretation of applicable tax laws is correct and our tax estimates are reasonable, the final
determinations of such audits could be materially different than those which are reflected in our historical financial statements
provided elsewhere in this offering memorandum. Any imposition of additional tax liability for historical periods or any change
in interpretations, law or our use of estimates in current and future tax periods could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
We are subject to anti-trust and similar legislation in the jurisdictions in which we operate.
We are subject to a variety of anti-trust and similar legislation in the jurisdictions in which we operate. Future acquisitions may
be subject to merger control approval. In addition, we are subject to legislation in many of the jurisdictions in which we operate
relating to unfair competitive practices and similar behavior. There can be no assurance that we will not be subject to allegations
of, or regulatory investigations or proceedings into, such practices. In the event that such allegations are made or investigations
or proceedings initiated (irrespective of merit), we may be required to devote significant management resources to defending such
allegations. In the event that such allegations are proved, we may be subject to significant fines, damages awards and other expenses.
For example, in December 2013, Paccor Packaging Spain, S.A. (subsequently renamed Coveris Rigid Spain S.A., "Paccor Spain")
received a demand letter from the counsel for SUCA, S.C.A. y de Asociacion de Organizaciones de Productores de Frutas y
Hortalizas de Almeria—Coexphal (“SUCA”) alleging that a Paccor Spain predecessor business, Autobar Packaging Spain S.A.
(“Autobar”) participated in price fixing activities with respect to packaging products sold in Spain between 1999 and 2007. The
Autobar business was sold as a going concern to Group Guillin in 2006 and was contributed into Group Guillin’s subsidiary,
Veripack. The demand letter claims damages “preliminary estimated” at €13,500,000 (made against all cartel participants and not
just Paccor Spain), together with interest and costs. The demand letter also references a second legal action pending before an
Italian court in Bologna, Italy, and notifies Paccor Spain that SUCA has named Paccor Spain as a co-defendant in the Italian action,
for which formal notice was received in January 2014. An indemnification/guarantee has been granted to the Purchaser of Coveris
Rigid Spain S.A. by both Coveris Holdings SA and Coveris Rigid Polska (formerly, Paccor Polska) for any losses and costs arising
from the SUCA claim, and the Coveris Group remains responsible for handling the defense in this case. See “Legal Proceedings”
for additional information on these proceedings. Any imposition of fines or damage awards and expenses which would invoke the
indemnity granted by the Group, could have a material adverse effect on our business, results of operations, financial condition
or cash flow.
We may not be able to retain key members of our senior management team.
Our success depends upon the continued service of our directors and senior management. In addition, our future growth and success
also depends on our ability to attract, train, retain and motivate skilled managerial, sales, administration, operating and technical
personnel. The number of people with the necessary skills to serve in these positions is limited.
Any loss in the continued service of certain key personnel may have a material adverse effect on our business. In connection with
the Combination, we have also hired new management personnel in order to effectively manage the Company. Failure to successfully
retain our key management team, integrate new management personnel and attract the talent necessary to manage the Company
could have a material adverse effect on our business.
Our high leverage and debt service obligations could adversely affect our business and prevent us from fulfilling our obligations
with respect to our indebtedness.
Our high leverage and debt service obligations could adversely affect our business and prevent us from fulfilling our obligations
with respect to our indebtedness. We anticipate that our high leverage will continue for the foreseeable future. Our high leverage
could have material adverse consequences, including, but not limited to:
• making it more difficult for us to satisfy our debt obligations;
• increasing our vulnerability to a continuing downturn in our business or economic and industry conditions;
• limiting our ability to obtain additional financing and increasing the cost of any such financing to fund future working
capital requirements, capital expenditures, business opportunities and other corporate requirements;
• requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and
interest on, our indebtedness, which means that this cash flow would not be available to fund our operations and for
other corporate purposes;
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• limiting our flexibility in planning for, or reacting to, changes in our business, the competitive environment and our
industry; and
• placing us at a competitive disadvantage relative to a competitor with less leverage.
Any of these or other consequences or events could have a material adverse effect on our ability to satisfy our debt obligations.
Moreover, we may incur substantial additional indebtedness in the future. If we incur additional indebtedness, the related risks
that we now face, as described above and elsewhere in these “Risk Factors,” could intensify.
We are subject to restrictive debt covenants, which may limit our operating flexibility.
Our indebtedness contains covenants which impose significant restrictions on the way we can operate, including restrictions on
the ability to:
•
•
•
•
•
•
•
borrow or guarantee additional indebtedness and issue certain preferred shares;
layer debt;
pay dividends, repurchase shares, and make distributions and certain other payments and investments;
redeem or repurchase indebtedness junior to the Notes;
create liens;
merge or consolidate with other entities;
create encumbrances or restrictions on the payment of dividends or other amounts to each Issuer from any of its restricted
subsidiaries;
• enter into certain transactions with affiliates;
• sell, lease or transfer certain assets, including shares of any restricted subsidiary of the Company; and
• provide guarantees of other debt.
These covenants could limit our ability to finance our future operations and capital needs and our ability to pursue acquisitions
and other business activities that may be in our interest. A breach of any of our covenants or restrictions could result in an event
of default under such agreements. Upon the occurrence of any event of default under these facilities, subject to applicable cure
periods and other limitations on acceleration or enforcement, the relevant creditors could cancel the availability of the facility and/
or elect to declare all amounts outstanding under these facilities, together with accrued interest, immediately due and payable. In
addition, any default under these facilities could lead to an event of default and acceleration under other debt instruments that
contain cross default or cross acceleration provisions.
We may not have enough cash available to service our debt and to sustain our operations.
Our ability to make scheduled payments to meet our debt service obligations when due and to fund our ongoing operations or to
refinance our debt, depends on our future operating and financial performance and our ability to generate cash, which will be
affected by our ability to successfully implement our business strategy as well as general economic, financial, competitive,
regulatory, legal, technical and other factors, including those discussed in these “Risk Factors”, beyond our control. If we cannot
generate sufficient cash to meet our debt service requirements, we may, among other things, need to refinance all or a portion of
our debt, including the Notes, obtain additional financing, delay planned capital expenditures or sell assets. If we are not able to
refinance any of our debt, obtain additional financing or sell assets on commercially reasonable terms or at all, we may not be able
to satisfy our obligations with respect to our debt. In that event, borrowings under other debt agreements or instruments that contain
cross-default or cross-acceleration provisions may become payable on demand, and we may not have sufficient funds to repay all
of our debts.
Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our
control, could result in an event of default that could materially and adversely affect our results of operations and our financial
condition.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted
debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that
our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon
an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders
of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of
acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.
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OUR BUSINESS
We are a leading global manufacturer of plastic and other value-added packaging products, based on net sales. We offer a broad
range of flexible and rigid plastic, paper packaging, and coatings products that include primary packaging (such as bags, pouches,
cups, lids and trays), films, laminates, sleeves and labels. As of December 31, 2015, we produced our products in 66 strategically
located production facilities in North and Central America, Europe, Asia, Australasia and the Middle East. Our broad product
offering and geographic reach allow us to serve as a “one-stop-shop” for our customers who increasingly demand a single source
of supply that can be reliably and consistently delivered throughout the world. Our products are used in a diverse range of growing
and resilient end markets, including the food, beverage, pet food, household, personal care, medical and industrial end markets.
We have benefited from significant plastic packaging growth in our strategic end markets in North America and Europe, which
has on average over the last ten years exceeded gross domestic product growth due in part to resilient demand for consumer goods
and a shift from metal, paper and glass packaging to plastic packaging. During the past three years, we have taken significant steps
towards becoming a global packaging company with broad technological capabilities and a diverse manufacturing, development
and sales platform that we can use to leverage customer relationships, product lines, manufacturing technologies and purchasing
scale.
We currently have a diversified base of over 3,000 customers, ranging from leading international blue-chip customers to smaller
regional businesses who we believe look to us for packaging solutions that have high consumer impact in terms of form, function
and branding. Our diverse customer base includes some of the largest consumer products companies in the world such as Procter &
Gamble, Coca-Cola, Nestle, Kellogg, Kraft Foods, Mondelez, Nestle, Mars, Pepsi, Unilever, Chiquita, Dole and Del Monte. We
have developed longstanding relationships with our customers spanning, in many cases, over 15 years. For the years ended
December 31, 2015 and 2014, no single customer represented more than 6% of net sales, and our top ten customers represented
approximately 21% and 21% of net sales, respectively. Effective packaging is key to the success of our customers’ products, and
we work closely with these customers to design value-added packaging that complements and enhances the functionality and shelfappeal of their product line. We have product innovation teams located throughout our markets that enable us to serve our customers
locally, and we solidify our relationships with our customers by working with them to develop, commercialize and efficiently
produce innovative new product packaging. We believe that the Combination will enable us to expand our business by crossselling to our large existing customer base and by offering new customers broad distribution of technically advanced products with
consistent quality that cover a broad range of our customers’ value chain. We believe that our efforts in this area have begun to
gain traction with some of our large customers during the year ended December 31, 2015.
As of December 31, 2015, we operated 66 production facilities worldwide which allow us to supply global customers reliably,
quickly and efficiently across multiple regions. As of that date, 20 of our production facilities were located in North and Central
America, 43 production facilities were located across Europe, one production facility was located in Australasia and two were
strategically located in the Middle East and China. We believe this provides us with a competitive advantage over most of our
competitors, which in general are smaller and only offer regional distribution. Our manufacturing platform benefits from several
years of facility upgrades, footprint rationalization and modernization. During the year ended December 31, 2015, we made
significant capital investments, which have provided us with a modern and efficient portfolio of facilities to produce our products.
We have also benefited from sharing and implementing best practices and procedures across our businesses in order to leverage
our technological expertise and improve efficiency throughout our group. Furthermore, we have achieved synergies and cost
savings at our production facilities, primarily as a result of (i) leveraging economies of scale and improving supplier performance
management in our procurement and (ii) the rationalization of our footprint and the improvement of efficiencies through lean
manufacturing.
We conduct our business principally through two operating segments: Flexible and Rigid. In our Flexible packaging segment we
manufacture a variety of flexible and semi-rigid plastic and paper products, including bags, pouches, roll stocks, films, laminates,
sleeves and labels. We sell these products primarily in North America, Europe, Central America and Australasia. In our Rigid
packaging segment we manufacture thermoformed and decorated rigid plastic and paper packaging solutions, including bowls,
cups, lids and trays. We sell these products primarily in Europe and North America.
Our Strengths
We believe our key competitive strengths are:
Leading Positions in Attractive End Markets. We are a leading global manufacturer of flexible and rigid plastic packaging based
on net sales and hold strong positions in both North America and Europe with sales into attractive end markets and product types
across our global portfolio. For example, we believe that we are the largest provider of paper-based pet food packaging in North
America, the second largest provider of pet food and cheese packaging in North America, a leader in the printed beverage shrink
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market in North America, a leading provider of unit dose laundry detergent packaging in North America, the second largest provider
for printed shrink (collation) films in North America and a leading provider of private labels in the United Kingdom, as well as
among the largest thin wall rigid packaging producers by volume in Europe. We hold these leading positions in some of the most
favorable segments and geographies in terms of market size and expected demand growth in the global packaging market. During
the last ten years, according to the industry data to which we subscribe, plastic packaging has been the fastest growing segment
of the packaging market, and sales growth in our markets during the last ten years has exceeded gross domestic product growth,
due in part to increasing demand for consumer goods, a shift from metal, paper and glass containers to plastics, and increasing
wealth levels in emerging economies leading to the establishment of a “middle class.” According to Smithers Pira, the global
flexible and rigid plastic packaging industries are expected to grow at a compound annual growth rate of approximately 4.5% and
5.3%, respectively, from 2013 to 2018.
Broad Geographic Reach. Our industry is heavily influenced by large, global customers who require that their suppliers are able
to deliver products globally, in a timely manner, and based on defined product specifications. We have an extensive manufacturing
base in North America, Europe, Central America, Australasia and strategically located production facilities in Asia and the Middle
East, which allow us to supply global customers quickly and efficiently across multiple regions. The flexible packaging market is
highly fragmented in North America and Europe, and we believe that large, global customers have historically been underserved
by smaller manufacturers that can only provide products on a regional basis. We are able to produce products in various regions
of the world that have the same quality and appearance, which helps our customers provide a consistent product and brand throughout
their markets. Moreover, customers desire a packaging provider certified and able to meet applicable government food and safety
standards, which we believe gives larger market participants, such as us, an advantage over small market participants. Our
strategically located production facilities allow us to manufacture products in close proximity to our customers’ facilities, reducing
supply chain complexity, minimizing shipping costs and allowing for just-in-time delivery. Our broad geographic reach also exposes
us to a wide variety of products and technologies, which we can scale up and introduce quickly throughout all of our markets.
Resilient and Diversified Business Model. We offer a diverse range of flexible and rigid plastic and paper packaging solutions
for use in consumer staples such as foods and beverages, other consumer staples, including detergent and pet food, household care
and hygiene products, medical devices and other construction and electronics products. We also produce packaging labels and can
provide customized printing services for our customers’ products. We believe that we have one of the broadest product portfolios
in the plastic packaging industry, which reduces our exposure to changes in consumer preferences for particular packaging solutions.
Further, demand for consumer staples, and by extension demand for our products, is generally more resilient across economic
cycles than other discretionary consumer or industrial products. For the years ended December 31, 2015 and 2014, we generated
a significant portion of our net sales from sales of packaging for food, beverages and pet and household care. Each of these end
markets has exhibited resilience during recent adverse economic conditions. We also sell our products in over 105 countries, which
reduces our exposure to individual geographic regions. Our customer base is well diversified with no individual customer
representing more than 6% of sales and with the top ten customers only representing a combined 21% for the year ended
December 31, 2015. We believe that our broad product portfolio and diverse end markets, customer base and geographic markets
make us less susceptible to regional economic shocks, changing demand dynamics or shifting customer preferences.
Established Relationships with Blue-Chip Customers. We have a large and expanding customer base of over 3,000 customers
that includes some of the largest consumer products companies in the world, including Procter & Gamble, Coca-Cola, Nestle,
Kellogg, Kraft Foods, Mars, Mondelez, Pepsi, Unilever, Chiquita, Dole and Del Monte. In addition, many of the world’s largest
retailers, including Tesco, Walmart (Asda), Marks & Spencer and J Sainsbury’s, use our packaging and labels for their store-brand
products. We have long-standing relationships with many of these customers. Our technology and design teams work closely with
our customers, and are in some instances located at our clients’ facilities, to design packaging that complements and enhances the
functionality and shelf-appeal of their product line, and our production teams also work closely with our customers, including in
many cases at the customers’ production facility, to produce and deliver products according to their specifications and to ensure
that our products are integrated into their assembly line. We believe that our record for reliably providing high quality products
has created customer trust and loyalty. In addition, we believe that we benefit from high switching costs due to our knowledge of
our customers’ products and processes, the costs involved with certifying facilities and developing packaging that complies with
specific product requirements, in particular with food and healthcare packaging and the significant set-up time required to install
production capacity for customized products. As a result, we are a preferred supplier to many of our customers. Furthermore, we
believe that the Combination will enable us to expand our business by cross-selling to our large existing customer base and by
offering new customers broad distribution of technically advanced products with consistent quality that cover a broad range of
our customers’ value chain. We believe that our efforts in this area have begun to gain traction with some of our large customers.
Proven Capabilities in Developing and Commercializing New Technologies. We seek to develop innovative, sustainable and
value-added products that improve the shelf-appeal of our customers’ products and enhance product functionality by delivering
unique performance characteristics. We focus our research efforts on projects with the potential to command a sustainable price
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premium, develop customer loyalty and support our overall profitability. We believe we have a track record of commercializing
new products that generate incremental organic profitability. Recent product innovations include Envio™, a new generation of
forming and non-forming films that deliver unsurpassed clarity, material uniformity and roll confirmation for processed meat
applications, and the Versaflex™ machine, which is designed to work seamlessly with our customers’ existing meat packing
systems to cut bags to custom lengths from tubestock, reducing or eliminating the need for large premade bag inventory. In 2014,
we received awards from, among others, the European Flexographic Industry Association, FlexoTech Magazine, The Café Life,
and the Packaging News. In 2015, we were awarded the Flexible Packaging Association’s 2015 Highest Achievement Award for
our Intervoid® Sterile line of security bags, a tamper-evident, sterile sampling solution for pharmaceutical tracking and serialization,
medical testing and high-tech sectors.
Large Scale Provides Opportunities for Cost Savings. We benefit from economies of scale in raw material procurement,
manufacturing and distribution. We are one of the largest purchasers of plastic resins globally, which provides us with considerable
purchasing power. We have achieved cost benefits relating to the procurement of raw materials by using our scale to obtain better
pricing in key raw materials purchases, including improved pricing of resin, paper, film, ink and masterbatch.
Our large scale provides us with significant free cash flow that has allowed us to make improvements in our production capabilities.
For example, we have recently invested in obtaining capacity enhancing presses and/or extrusion lines in our facilities in several
of our facilities in North America. We believe that our combined scale provides significant opportunities to realize further savings
in procurement, manufacturing and overhead costs. Our large manufacturing base also allows us to enhance capacity utilization,
optimize transportation costs and realize distribution efficiencies. We constantly review and optimize our manufacturing footprint.
Stable Earnings. Our diversified product portfolio, resilient end markets and focus on cost savings initiatives has allowed us to
generate stable adjusted EBITDA margins despite challenging macroeconomic conditions and significant resin price changes in
recent years. We have benefited from strong plastic packaging industry growth in North America and Europe, our main geographic
markets and continued growth in the end markets for our products such as packaging for foods and beverages, which have been
resilient during periods of adverse economic conditions. We seek to stabilize our earnings by managing our exposure to fluctuations
in raw material prices through long-term arrangements with preferred suppliers, with various raw material pass-through mechanisms
and by managing our mix of contracted and spot sales. A significant portion of our net sales are made pursuant to agreements
indexed to raw material prices with escalator and de-escalator mechanisms, which typically adjust plastic packaging raw material
prices within 30 to 90 days and paper raw material prices within 90 to 120 days. Our rationalization efforts have contributed to
our ability to make significant capital investment in our production facilities and machinery, which we believe will help reduce
our future maintenance capital expenditure requirements, allowing us to produce products more efficiently and enhance future
free cash flows.
Experienced Management Team with Successful Track Record. Our senior management team has extensive experience in the
packaging industry and a track record of successfully integrating acquisitions. Our senior management team is led by our Chief
Executive Officer, Gary Masse, who assumed his role as CEO effective April 14, 2014. Mr. Masse has more than 25 years of
experience in the manufacturing sector, most recently serving as CEO of Precision Partners Inc., a $500 million engineering and
manufacturing company. Prior to Precision, Mr. Masse was Group President for Cooper Industries, where he managed the $800
million Cooper Tools global business which had more than 50% of its sales outside of the United States. During Mr. Masse’s tenure
as President, Cooper achieved profitable growth through global expansion and expanded margins by implementing lean
manufacturing procedures in the operations and back office. Mr. Masse has also held executive and senior management positions
at Danaher Corporation and General Electric. Mike Alger, our Chief Financial Officer, who has over 35 years of experience in
senior finance and operations roles, previously served as Group Chief Financial Officer of a diverse group of Sun Capital portfolio
companies. Mr. Alger has significant acquisition and integration experience from prior business ventures. Mr. Alger and several
other members of our current management team led the integration of the Sun Capital portfolio companies that comprised the
Exopack Business into the Group and have successfully increased our EBITDA margin since the Combination through integration
and cost-savings initiatives.
Our Strategy
In connection with the Combination we have created a number of strategic plans for the future development of our business. We
intend to develop our business through continued investment in world-class technologies and employees with the vision to become
the global leader for innovative and sustainable packing solutions and are striving for excellence in safety, product quality, customer
service and operations. Building upon our core strengths, we pursue the following strategies:
Leverage Our Customer Relationships to Organically Grow Our Business. We enjoy long-standing relationships with many of
our customers. We work closely with these customers to design packaging that complements and enhances the functionality, product
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quality and shelf-appeal of their product lines. We seek to continue to offer enhanced service and support to customers, anticipating
their needs and providing value-added solutions to their problems. We intend to continue to focus on delivering high quality
customer service and value-added products and seek to leverage the long-standing customer relationships of our businesses to
increase sales to our largest customers. We believe that the Combination provides us the opportunity to cross-sell our complete
product line to customers in all of our markets, and thus expand our share of the value chain with our existing customers. For
example, since the Combination, we have been working to leverage our leading market positions and technological expertise in
rigid packaging and labels in Europe to build market share for these products in North America. We believe that the Combination
also provides our European Flexibles business with the opportunity to leverage our longstanding North American relationships
with major pet food companies to which we provide multiple substrates and product types. We believe that our customers will
recognize the advantages of our global scale and the opportunity to use technology exchange and best practices to deliver the
highest quality and most consistent packaging. In addition, leveraging relationships across the Group have allowed us to capture
new technology and market opportunities. For example, teams in our Americas Food business unit and our UK Food & Consumer
business unit are currently collaborating to sell Duralite™, a proprietary light weight shrink film, to a key customer, from our
United Kingdom plants to the United States, where the customer is located. The related Duralite™ technology is also being shared
between the United Kingdom and the United States.
Achieve Further Integration and Cost Savings from the Combination. We intend to continue to integrate all organizational and
operational functions across our Company by leveraging our management’s collective experience in business integration and
knowledge of each of our legacy businesses. We believe the Combination and our increased scale allows us to secure improved
volume pricing from our suppliers and continue to streamline procurement. We plan to continue to develop our company-wide
purchasing programs to enhance our pricing capabilities, to allow global purchasing from preferred suppliers. We plan to expand
the role of Procurement group in our raw materials procurement in order to continue to expand upon the procurement savings that
we realized in 2015 and 2014. We also intend to continue to rationalize our manufacturing footprint where opportunities exist to
streamline production and utilize more efficient sites, and to institute company-wide operational and manufacturing best practices.
Finally, we are consolidating our management and back office functions where systems and language capabilities allow.
Continue to Enhance our Products Through Advanced Technology. We intend to continue developing innovative products for
distribution in attractive markets to further enhance the value we provide our customers and drive best practices through
harmonization and standardization of equipment, and we are focused on working together with our customers to increase the
functionality, product quality and shelf-appeal of our products by developing and applying innovative new technologies. To enhance
the convenience of our products, we intend to continue to develop complementary product features such as high definition graphics,
fitments, easy open, advanced package re-closure systems and barrier technology. We believe that the integration of the Group
improves our development capabilities, and have commenced the harmonization of our global R&D centers to design and expedite
the production of innovative products. We produce a wide variety of products and use multiple different technologies across our
businesses, and we intend to leverage our scale to introduce new products quickly throughout all of our markets maintaining our
focus on safety, product quality, customer service and operations. In 2015, we intend to increase the coordination of our technology
teams, in line with the overall commercial strategy we have been developing and refining since the Combination.
Increase Share of the Value Chain. We intend to leverage our global manufacturing capabilities, broad product portfolio and
advanced packaging technologies to continue to expand our share of the value chain with our existing customers and to increase
our market share in select product categories for which we believe we can offer the greatest range of value-added services. We
currently provide products and services that cover a wide range of the value chain, ranging from converting raw materials into
packaging products to printing and labeling those products. For instance, our plastic quad sealed bags used for the packaging of
pet food cover the full packaging value chain: we form the basis of the product by extruding cast nylon and film, followed by
lamination, printing and the addition of a slider zipper, as well as comprehensive field technical support to the pet food manufacturer.
We believe that we are well-positioned following the Combination to increase our overall market share in attractive product
categories by leveraging the leadership positions of our businesses at different points in the value chain, and we recently hired two
category managers to facilitate our efforts. We intend to continue to focus our research and development and coordinated sales
efforts on select products in which we believe we can offer the greatest range of value-added services. For example, our recent
investments in additional ClearShield lines (a water quench line for forming webs) and a Mark Andy printing press, demonstrate
our focus on critical markets, such as meat products, where we have strong market share and intellectual property.
Selectively Pursue Strategic Acquisition Opportunities. In addition to the growth in net sales, operating income and cash flow
that we are targeting through organic sales volume growth and cost savings, we believe that our platform is well positioned for
additional strategic acquisition opportunities. We believe that our increased size resulting from the Combination creates an
opportunity for us to consider a broader range of potential targets as a result of our greater resources and increased geographic
reach. For example, one of our customers has asked us to expand into Africa, and we believe that other customers may make similar
requests. In addition, our broad geographic reach allows us to selectively expand into adjacent markets that we believe can be
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managed from and integrated with our existing operations. We believe that we have demonstrated our ability to successfully
integrate acquisitions and achieve operating efficiencies. We intend to pursue a selective and disciplined acquisition strategy to
expand into new markets to serve demand from our existing customer base.
Our Segments
Our business is divided into two reportable segments, Flexible and Rigid, based on the type of products manufactured. Our Flexible
segment and our Rigid segment generated sales of $1,978,488 and $627,760 in the twelve months ended December 31, 2015,
respectively.
As of December 31, 2015, our Flexible segment operates 47 production facilities: 18 in North and Central America, 26 in Europe,
one in Australasia, one in Egypt and one in China, through which we manufacture and sell value-added flexible, plastic and paper
-based packaging and film products used in a wide variety of end markets, including food and beverage, healthcare and hygiene,
pet food, agriculture and horticulture, electronics, building materials and chemicals, and banking and security. We offer a wide
range of packaging styles, graphics, special features and coatings to suit particular customer needs. In addition to a complete
existing product line, we have sophisticated in-house product development departments located throughout our markets, which
allow us to integrate ourselves into, and, we believe, add significant value to, our customers’ packaging design processes. We
continually develop our product portfolio in response to our customers’ changing needs and we believe that our product development
capabilities help solidify our relationships with our customers.
As of December 31, 2015, our Rigid segment operates 19 production facilities: 2 in North America and 17 in Europe, in close
proximity to customers and in geographies with favorable underlying growth rates. Our Rigid segment produces thermoformed
and decorated rigid plastic and plastic/paper packaging solutions for a variety of end-markets including food and foodservice,
healthcare, home and personal care and hygiene. Our Rigid facilities have advanced technological capabilities, enabling us to
concentrate on value-added packaging solutions including sophisticated decorating capabilities.
History
On May 31, 2013, Sun Capital Partners V, L.P., an affiliate of Sun Capital completed the Combination of five of their flexible and
rigid packaging portfolio businesses in North America and Europe, including the Exopack Business, Britton Business, Paccor
Business, Kobusch Business and Paragon Business under Coveris Holdings, S.A., a Luxembourg public limited liability company
(société anonyme).
Following the completion of the Combination, the Group has been combined into a single business, added seven acquisitions and
taken significant steps to integrate the Company’s businesses in order to leverage their complementary product lines, customer
bases, procurement requirements, technologies and geographic reach. For example, we have focused on coordinating product
development and sales efforts across the businesses to leverage our combined product line and integrate new product technologies
throughout our Company. We have also instituted cost savings initiatives across the Company, including company-wide
procurement initiatives and manufacturing rationalizations.
Product Overview
Flexible Products
Our Flexible segment manufactures and sells value-added flexible, plastic-based packaging and film products used in a wide
variety of end markets, including food and beverage, healthcare and hygiene, pet food, agriculture and horticulture, electronics,
building materials and chemicals, and banking and security. We offer a wide range of packaging styles, graphics, special features
and coatings to suit particular customer needs. In addition to a complete existing product line, we have sophisticated in-house
product development departments located throughout our markets, which allow us to integrate ourselves into, and, we believe,
add significant value to, our customers’ packaging design processes. We continually develop our product portfolio in response to
our customers’ changing needs and we believe that our product development capabilities help solidify our relationships with our
customers.
The following table provides an overview of the types of products in our Flexible segment as well as their features:
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Types of
Products
Examples of
Products
Offered
Bags, sacks,
pouches
Shipping Sacks
-Constructed of heavy-gauge plastic, extruded in a tube
and heat or adhesive-sealed.
-Primary application: salt, plastic, sand and other
industrial materials.
Stand-Up
Pouches
-Flexible alternative to traditional rigid packaging.
-Large surface area which allows for more room for
graphics.
-Thin, light structure facilitates product storage and
reduces shipping costs.
-Primary application: food, pet food and household
hygiene (detergents).
Pinch Bags
-Presentation and functionality advantages for consumer applications that require
packaging which lies flat or stands upright and is sift resistant.
Product Features
-Used to package light to medium density products.
-Unsealed at one end after production and offer
convenient filling and sealing features for customers.
-Multiple layers of paper, film and other barrier
materials.
-Primary application: sugar, flour, pet food, livestock
feed and smaller lawn and garden products and
chemical products.
Pasted Valve
Bags
-Constructed of heavy-gauge, multi-wall paper.
-Used in the construction market, extremely durable and
strong enough to hold significant weights and volume.
-Attached valve designed to work with specific filling
equipment.
-Primary application: cement, clay, chemicals and
sand.
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Types of
Products
Examples of
Products
Offered
Product Features
Self-Opening
Sacks
-Utilize paper and plastic multi-wall construction combinations to suit barrier
performance requirements (moisture or oxygen resistance).
-Easily re-closable by the end consumer.
-Convenient for smaller pet food, charcoal, animal litter, coffee, sugar and flour
packaging products.
-Primary application: pet food, charcoal, animal litter, coffee, sugar and flour.
Shrink Bags
-High strength shrink bags for meat and cheese.
-Specifically designed for fresh meats, bone-in and boneless shrink bags provide durable
protection and outstanding seal integrity and reduce leaker rates.
-Available plain or printed, these coextruded packages are ideal solutions for most fresh
beef, pork, lamb and veal applications.
-Primary application: meat, cheese, poultry.
Film products Rollstock Film
Flow Wrap
-Tubular and single-wound sheet rollstock film products tailored to customer
preferences.
-Produced in rolls designed for use in automated machinery to seal end products,
providing a longer life-span and tamper-evident protection to the end product.
-Available in several varieties, including mono-layer, co-extrusion or laminated film,
and can be delivered plain or with printing.
-Primary application: resin, food, beverage and lawn and garden wraps.
-Used for various food applications using a horizontal form fill and seal machine.
-High speed, high volume production, quick turnaround.
-Primary application: various food products.
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Types of
Products
Coated
products
Examples of
Products
Offered
Product Features
Multi-Layer
Laminations
-Multi-layer lamination.
-Strength, machinability and above-average barrier protection and shelf life.
-Primary application: food (dairy products), pet food and personal care.
Medical
Packaging Films
and/or Bags
-Manufactured in sterile, clean room facilities.
-Portfolio includes intravenous drain bags, multi-chamber infusion bags and envelopes
for the safe transportation of medical samples.
-Primary application: healthcare.
Coated/
Laminated
Substrates
-Precise manufacturing methods and conditions are required for the process of applying
complex coatings to these products, which include a variety of films and foils.
-Primary application: medical electrodes, electronic whiteboards, energy storage (e.g.,
batteries).
Specialty
Coatings
-High precision coatings for a wide variety of critical applications.
-Primary application: scratch-resistant hardcoats, low gloss dry erase and projection
surfaces, digital printing.
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Types of
Products
Examples of
Products
Offered
Product Features
Breathable Films
and Foams
-Incorporates anti-microbial silver properties.
-Primary application: professional wound dressings, antibacterial films and adhesives.
Coated Polyester
Film
-Primary application: security, electronic (pcb) imaging, protective films.
-Substrates used in the printed circuit, batteries and advanced fuel cells segment.
Coated and
-Primary application: window safety films, anti-graffiti films, optical adhesives,
Laminated
Flexible Materials electronics.
Labels
Self-Adhesive
Printed Labels
-Printed using HD or regular flexographic technology.
-Value-added features include re-closable applications, tactile and specialist finishes,
braille for pharmaceutical applications, random and sequential numbering, screen
printing and embossing.
-Primary application: food (ready meals, bottled salad dressings, fresh fruit), beverages
and pharmaceutical.
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Types of
Products
Agriculture
Solutions
Examples of
Products
Offered
Product Features
Linerless Labels
-Available in both paper and plastic.
-No release liner which results in a more efficient, cost-effective and environmentally
conscious labeling solution than conventional labels and sleeves.
-Primary application: food (ready meals, fresh meat, dips).
Bottle Labels
-Printed using flexographic and digital printing technology, high-density inks and
specialist varnishes.
-Value-added features include foil blocking.
-Customers include both major branded producers and retailers for use on their private
label products.
-Primary application: alcoholic and non-alcoholic beverages.
Peel and Reseal
Labels
-Ideal for use on packaging that provides limited surface
for conveying information such as product-related
recipe ideas or promotions.
-Primary application: food.
Tamper-Evident
and Security
Labels.
-Manufactured using paper and film labels, destructible films, cipher labels; UVfluorescent coatings, heat-shrinkable labels, 2D and 3D holographic and diffraction
materials and foils.
-Integration of RF and RFID tags for use in stores equipped with electronic theft
detection systems.
-Primary application: products where brand security or product integrity assurance is a
key concern.
Banana Treebags
-Specially ventilated polyethylene (PE) untreated and
insecticide treated bags to cover and protect banana
bunches during growing cycle.
-Improved micro-environment within banana bunches,
improved growth and yield, and reduced insect and pest
spoilage.
-Primary application: agriculture.
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Types of
Products
Examples of
Products
Offered
Product Features
Greenhouse Films -Greenhouse covers films produced with various thickness, additives and weather
resistant properties, including: anti-fungus, anti-fog and light diffusers. All greenhouse
films can be tailored to the specific requirements of individual crops.
-Tailored specifications to suit crop type, improved quality and process, increased
production, and reduced waste.
-Primary application: agriculture.
Other valueadded
solutions
Mulch Films
-Polyethylene (PE) films used in row crops for water, fertilizer, and weed control.
Includes high-barrier solutions with the addition of EVOH inner layer to increase gas
barrier for fumigation purposes increasing productivity and reducing losses to the
environment.
-Excellent barrier properties, increased yields, superior crop quality and reduced waste
and environmental impact.
-Primary application: agriculture.
Silage/Waste
Wrap
-Exceptional bale alternative to traditional agristretch wrap for field harvest and
landscaping applications.
-Ideal for effectively bundling, storing and transporting refuse and waste materials.
-Convenient solutions for construction, landfill and municipal waste.
-Primary application: agriculture.
Banana
Packaging
-Ventilated polyethylene HDPE and LLDPE bags (PE)
to reduce spoilage across the supply-chain and to
increase banana greenlife.
-Ensures freshness, greenlife, reduced spoilage, and
product quality during transit with long distance
markets.
-Primary application: agriculture.
Melon Packaging
-Specially designed atmosphere controlled transit bags to enhance shelf-life and
freshness, and prevent fungal growth within transit.
-Improve moisture retention to reduce weight loss caused by dehydration and improve
yields throughout the supply chain.
-Primary application: agriculture.
Ovenable and
Dual-Ovenable
Films
-Ovenable from frozen to 200 C for one hour.
-Primary application: food (ready meals).
Modified Moisture -Manufactured using micro-perforation technology to regulate in-pack moisture levels
and preserve the freshness, appearance and life of the end-product.
Packaging
-Primary application: food (fresh produce and dairy).
Intervoid® Sterile Intervoid® Sterile bag is a patented multi-industry
sampling package innovation that combines ultra-sterile,
ultra-secure, composite sampling systems. Leveraging
highly technical conversion methods, the sterile bag
combines:
-Unique track and trace identification.
-Patented tamper evident closure and tape.
-Perforation.
-Secondary gamma sterilization and leak-resistant
properties.
Re-close
Applications
-Die-cut label system integrated with a film construct to facilitate consumption, prolong
open product life and enhance portion control.
-Primary application: food.
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Types of
Products
Examples of
Products
Offered
Sleeves
Product Features
-Partial board solutions used for the packaging of food end-products.
-Easily removable, thus offer convenient functionality.
-Printed using flexographic and lithographic technologies, which drives volume and
value advantages.
-Primary application: various food products.
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Rigid Products
Our Rigid segment produces thermoformed and decorated rigid plastic and plastic/paper packaging solutions for a variety of endmarkets including food and foodservice, healthcare, home and personal care and hygiene. Our Rigid facilities have advanced
technological capabilities, enabling us to concentrate on value-added packaging solutions including sophisticated decorating
capabilities.
The following table provides an overview of the types of products in our Rigid segment as well as their features:
Types of
Products
Bowls, cups,
lids and trays
Examples of
Products
Offered
Product Features
Thermoformed
and InjectionMolded Cups and
Lids
-Manufactured using PS, PP, PET and biopolymers.
-Value-added features include sleeving, dry-offset
printing, labeling and embossing.
-Primary application: dairy products and other food
and non-food end products.
DuoSmart® Cups
-The outer paper layer provides room for decorative options, while the inner plastic layer
achieves necessary barrier properties.
-Environmentally sound.
-Primary application: food (dairy products, desserts).
ProMeat PP Trays -Value-added features include absorbent pads and MAP-capability.
-Portfolio includes a range of both round and rectangular PP tubs and snap-on lids for
the packaging of salads.
-Primary application: food (fresh meat, poultry, fish and vegetables).
Pedestal Bowl
-Incorporates a unique internal base plinth, which elevates the packaged food product
for enhanced on-shelf presentation.
-Internal base plinth also incorporates a narrow channel around the base, which can act
as a reservoir for collecting excess liquid leaking from the packaged food, which
prolongs shelf life.
-Primary application: food (fresh cut fruit).
Deli Pot Toppers
-Manufactured using PET.
-Two stacking compartments which can store different ingredients without leakage or
mixing, allowing for the easier transportation of foods without becoming soggy prior to
consumption.
-Primary application: food (yogurt and granola, salads and dressings).
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Types of
Products
Examples of
Products
Offered
Product Features
Boards
Lined Board
Solutions
-Portfolio includes pre-glued sandwich skillets and post-glued nested trays.
-Enhance shelf-appeal and prolong shelf life beyond typical cycles.
-Primary application: various food products.
Other valueadded
solutions
Microwaveable/
Ovenable Trays
and Platters
-Rigid plastic trays and platters with heat-resistant properties.
-Primary application: food (ready meals).
Sealable, Peelable -Patented technology.
and Re-Closable -The sealable, peelable and re-closable (“SPR”) hinged lid remains partially fixed on the
cup after opening and can be re-closed without losing the lid.
Lids
-Sold in combination with our thermoformed and injection-molded cups or DuoSmart
cups.
-Primary application: pet food.
In-Mold Labels
-Developed in collaboration with Unilever.
-In-mold labels are 38µ thick and thus allow our
customers to reduce loading time during injection
molding and save on transportation costs.
-Primary application: food (high-fat products, cheese,
ice cream), household hygiene (washing liquid bottles).
Purchasing
The principal raw materials we use to manufacture our products are plastic resin, paper, inks, adhesives and transit packaging
materials. The plastic resins we most commonly use in the production of our products are polyethylene, polypropylene and
polystyrene. We also purchase plastic films from third parties in certain cases, including at locations where we do not have extrusion
capacity.
Many of the raw materials we use in our manufacturing processes are commodities, which are subject to significant price volatility.
The price of plastic resins and the other raw materials that we use is a function of supply and demand, suppliers’ capacity utilization,
industry and consumer sentiment and prices for crude oil, natural gas and other raw materials. The price for plastic resin fluctuates
substantially as a result of changes in petroleum and natural gas prices, demand and the capacities of the companies that produce
plastic resin to meet market needs.
Films constitute a significant portion of our raw material purchases. We currently extrude our own film when it is economically
efficient for us to do so. We may in the future further expand our in-house extrusion capabilities to continue to decrease our cost
of raw materials.
Except for the plastic film we extrude in-house, we source all of our raw material needs from third-party suppliers. We purchase
a significant portion of our total raw material needs under framework agreements we enter into with suppliers. These framework
agreements typically stipulate pricing mechanisms, invoicing terms, volume requirement forecasts and terms relating to the point
of delivery and passing of risk. Framework agreements typically do not include minimum purchase requirements. Certain of our
customers operating in the fast-moving consumer goods segment in particular in the food consumer markets, including Kellogg,
require that we use the raw material suppliers that they have formally approved.
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We have a highly diversified supplier base. We estimate that our largest supplier represented approximately 5% of our total raw
material costs and that our top 10 suppliers represented less than 31% of our total raw material costs for the year ended December 31,
2015.
For most of the raw materials we use we employ a single- or dual-sourcing strategy in order to achieve cost savings through rebates.
If a supplier fails to deliver our requirements as agreed, we discuss the use of an alternative supplier or raw material with our
customers and we believe we are able to easily switch to a different supplier at no material extra cost.
Our contingency plans, which we have successfully implemented in the past, include safety stocks, anticipation of delivery
requirements and substitution in the face of events outside of our control. Because we operate large production facilities, we use
large quantities of electricity and natural gas in our production. As such, fluctuations in energy prices impact our cost of operations.
Customers
Our diversified customer base includes more than 3,000 customers. Our customers range in size from Fortune 100 companies to
smaller regional businesses, and come from a variety of end markets, including food and beverages, chemical, agriculture, medical,
pet food, building materials, electronics, lawn and garden and personal care and hygiene products. We have a blue-chip customer
base and have strong longstanding relationships with our top clients, including Procter & Gamble, Coca-Cola, Kellogg, Kraft
Foods, Mondelez, Nestle, Mars, Pepsi, Unilever, Tesco, Walmart (Asda), Marks & Spencer and Sainsbury’s. For the years ended
December 31, 2015 and 2014, our top ten customers represented 21% and 21%, respectively, of our net sales. We supply many
customers across various geographic regions and have relationships with those customers across numerous product lines and types
which helps strengthen the stability of our relationships with these customers.
In most of our product lines, we utilize our extensive manufacturing network to produce products in the same geographic region
as our customers, which allows us to produce and deliver our products quickly in order to ensure a minimized lead time. We
manufacture certain of our other products both at central locations and throughout our network of production facilities depending
on the particular customer needs. We seek to manufacture our products as close as possible to our customers’ premises in order to
streamline transportation costs and provide just-in-time delivery.
Customer Agreements, Pricing and Raw Material Cost Pass-Through Mechanisms
Sales arrangements with our customers vary by customer and product supplied, and may include purchase order arrangements,
long-term framework agreements and exclusive supply contracts. Our agreements and purchase orders with customers typically
stipulate specific price ranges and pricing mechanisms, volume forecasts, quality standards and other commercial terms. Our
framework agreements with customers generally have terms ranging from one to three years, with certain agreements with
significant customers having longer periods. These framework agreements do not typically require our customers to purchase any
minimum number of our products or to continue to purchase some or all of their requirements from us for any specific period of
time. Historically, we have generally entered into similar agreements with updated terms upon the expiration of the existing
agreements. A significant portion of our total sales are made under long-term framework agreements.
In order to mitigate our exposure to raw material price volatility, we seek to include a raw material cost pass-through provision in
each of our framework agreements, which automatically adjusts our selling prices as a result of changes in the price we pay for
the major raw materials we use in our production process. There is typically a time lag between changes in the market price for
raw materials and the corresponding changes in our selling prices under contracts containing pass-through provisions, which ranges
from 30 to 90 days in the case of plastic packaging contracts and 90 to 120 days in the case of paper packaging contracts. For the
years ended December 31, 2015 and 2014, a significant portion of our sales were made under framework agreements or purchase
orders that contain a raw material cost pass-through provision.
Unless otherwise contractually agreed, our ability to pass through changes in the market price for raw materials is generally subject
to competitive market conditions at that time. As raw material prices rise, we seek to immediately update our internal quote
management system used in connection with purchase orders to reflect these changes. These updates ensure that changes are
quickly fed through to our sales teams in charge of negotiating our purchase order contracts. In addition, our purchasing strategy
includes an effort to take advantage of seasonal pricing variations.
Research and Development, Patents, Trademarks and Licenses
Our innovation and research and development capabilities are a key element of our success. As a result, we are required to
continuously invest in innovation and research and development as well as capital expenditures to update our facilities with the
equipment needed to produce new products. We work with our customers to develop new products in connection with their product
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launches and we also organically develop products to sell to our existing customers. Periods in which we and our customers have
successfully anticipated trends generally have had more favorable results. If a release is successful, this will have a positive impact
on our sales until consumer preferences change or until those items are replaced by new items. If the product is not successful, we
will not be able to fully load our lines and our operating results will be negatively impacted temporarily. A majority of research
and development efforts in the plastic packaging space are currently devoted to innovations that help to differentiate products,
such as convenience packaging, improved barrier protection, packaging design initiatives, smart packaging, and environmentallyfriendly alternatives. Our ability to accurately predict consumer trends and needs and focus our development efforts accordingly
will impact our product sales.
We consider innovation and research and development to be a key factor in the success of our product offerings. Technicians
employed by our product development and process engineering organization, together with our operations, marketing and sales
teams, work closely with current and potential customers to develop customized products that meet their specific performance
requirements and to assist them in processing our products on their machinery. In addition, we work closely with some key suppliers,
especially on additives and specialty polymers, to develop products that offer differentiation to our customers’ end products. We
believe that continued research and development activities in innovation, rationalization and automation will help to ensure that
we maintain a leading position in product and production technology.
Our research and development capabilities are currently located in different centers based on our various businesses. Our most
significant innovation centers are located at Stanley, United Kingdom, Zell, Germany, Menasha, Wisconsin, and Halle, Germany,
and our graphics design centers are located in Menasha, Wisconsin and Spalding, United Kingdom. As part of the integration of
our businesses during the past two years, we have sought to streamline our R&D capabilities in order to provide for companywide support where possible. For example, we developed our Duralite technology, which allows our customers to heavily downgauge shrink film, in Europe, and later proceeded to introduce the same technology in our North American operations, which we
believe will give us a competitive advantage in the region. Further, we introduced our peel and reseal technology in the processed
meat and cheese packaging markets in Europe and leveraged our expertise to bring the same technology to our U.S. customers.
We plan to continue the integration of our R&D capabilities, and to share product developments and best practices throughout our
group. We believe that this will allow us to create a more efficient R&D structure that can leverage our scale to develop products
that meet and anticipate our customers’ needs. As a result of the Combination, we have additional technical capabilities in different
regions of the world, which are beneficial to offer a complete suite of packaging solutions to our clients, to help reduce costs and
to expedite services and product delivery for our customers.
We are able to use our broad product offerings and state-of-the-art technology to transfer technological innovations from one end
market to another. For example, our expertise in producing zippered stand-up pouches for the food consumer market has helped
us to develop and commercialize a patented re-closable feature on multi-wall bags for pet food. We have also successfully developed
our RAVE™ composite line of premade bags. Through unique substrate combinations these robust bags offer less damage to the
retailer and lower overall cost for the packaged goods company.
Our policy is to protect all of our significant technologies by seeking patents and where appropriate, defending and enforcing our
intellectual property rights. We believe that this strategy allows us to preserve the advantages of the products we sell and the
technologies we use and license, and helps us to maximize the return on our investment in research and development. Our patents
are granted in a number of jurisdictions worldwide, including in the United States, the United Kingdom and several other European
countries.
When appropriate, we license a portion of the technology that we use in certain of our products. Our license agreements are typically
non-exclusive.
Sales and Marketing
Our overall sales and marketing strategy is to deliver levels of quality, consistency, innovation, reliability and customer service
that establishes us as a critical supplier to our customers, in particular in value-added market segments. We seek to provide innovative
and customized products to customers. Our key differentiators include strong technical resources, customer service and support
capabilities and broad geographic reach with large-scale production capabilities. It is critical in our industry to provide superior
service, and therefore we approach sales and marketing with interdisciplinary teams comprised of a sales force with specialized
product and market knowledge and research and development engineers who together coordinate sales and production activities
to meet specific customer and market demands. Our engineers also provide customers with on-going technical assistance and
advice concerning the most efficient method of processing of our packaging products on their machines. We believe that our full
service, “one-stop-shop” resources enable us to provide industry-leading services and products to a wide range of customers,
including international blue chip companies and smaller, regional accounts. Our scale enables us to dedicate certain sales and
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marketing efforts to particular products, customers or geographic regions, enabling us to develop expertise that is valued by our
customers.
We strive to maintain close relationships with our customers, collaborating on technological advancements and demand planning.
Historically, our individual businesses have conducted their own sales and marketing efforts and have managed their own
relationships with their customers. As part of the integration of our businesses during the last two years, we have sought to manage
our large customer relationships on a group-wide basis, in order to take advantage of cross-selling opportunities, while still
maintaining valuable local relationships. Our sales representatives are currently generally divided between regional and national
accounts. Regional representatives target smaller accounts, while national representatives focus on customers requiring service
from multiple facilities. We have in the past maintained a single sales personnel and customer service contact with each customer
except our large, multinational customers who, due to their organizational set-up, require several points of contact in the countries
and regions in which they operate. We believe that this model facilitates clear communication and fosters close personal
relationships. In connection with the Combination we are able to consolidate duplicative sales relationships so that we can have
a single dedicated sales representative or team focused on selling products produced by our group, rather than a specific business
unit, to our customers.
Our products consist of those that we develop ourselves, and market to our customers, and those that we develop in coordination
with our customers to meet their specific product needs. We actively seek to identify and pursue joint development opportunities
with customers, leveraging our market and technical expertise to meet customer needs, regardless of segment or packaging
configuration. Certain of our product lines are highly specified to customers’ individual requirements, and as a result we are closely
involved with our customers planning for new products. We believe these efforts enhance the integration of our business with our
customers’ operations and position us as a critical supplier. As a part of these development opportunities, our manufacturing,
engineering and food science personnel work closely with field sales personnel and customer service representatives to satisfy
customers’ needs through the production of high-quality, value-added products and on-time deliveries. Certain of our clients operate
in extensive regulatory frameworks and are required to subject their suppliers to long approval and qualification processes. We
believe that switching suppliers would impose significant extra cost on these customers and that this constitutes a barrier to entry
into our markets, strengthening our position as a critical supplier of our customers.
In addition to product development, our marketing teams are also responsible for establishing product pricing processes and metrics
and margin management tools and measurements, developing innovation metrics and assessing new markets that offer growth
prospects.
Our sales representatives are trained to focus on specific product categories, while maintaining a general familiarity with all of
our products in order to take advantage of cross-selling opportunities. As a result, we believe that our sales personnel have developed
a deep understanding of our product lines, in addition to the specific operations and needs of the individual customers that each
representative services. We believe that this expertise enables us to cultivate new business, develop highly-effective partnering
initiatives with key customers, meet or exceed customer needs and expectations as to product quality and innovation, and
differentiate our products from those of our competition. For example, our labels business line in our Flexible segment is highly
integrated with our customers, including a number of employees located at retailers’ sites where their primary responsibility is to
carry out on-site project management. Each implanted employee serves as a single point of contact to the retailer and manages
complex work streams such as supply chain arrangements on behalf of the retailer, thereby streamlining the production process.
On-site project management carried out by our implanted employees also provides us additional customer access to cross-sell
other product lines. We believe we are well-positioned to continue to increase our market share as retailers and manufacturers look
to consolidate supply chains to ensure reliability, quality and consistency of packaging material.
Manufacturing Operations, Production Facilities and Equipment
Our production facilities are located in 20 countries, including the United Kingdom, the United States, France, Germany, Hungary,
Canada, Finland, Netherlands, Poland, Austria, Bulgaria, Egypt, Romania, Serbia, Turkey, China, New Zealand, Mexico and
Guatemala. We have 66 principal production facilities totaling approximately 900,000 square meters. We believe that our facilities
are suitable and adequate for our business purposes for the foreseeable future.
We maintain an expansive array of packaging machinery and specialized equipment at our various facilities, which enables us to
offer a wide variety of products and maintain a high degree of flexibility in meeting customer demands. Our diverse production
capabilities allow us to serve a large portion of the packaging value chain and are a key element of our ability to serve as a “onestop-shop” for our customers. Product conformance to customer standards is continually monitored and maintained by our
supervisors and our key equipment and critical operations are administered by trained, experienced operators. Investments in
equipment are driven by industry trends, developing technologies, customer needs and cost containment.
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We use state of the art equipment at our production facilities to manufacture plastic products. Our key manufacturing technologies
are known as “extrusion,” “lamination” and “coating.” In extrusion, plastic resins with various properties are blended with additives
to create a specified performance compound, the nature of which is dependent on end-market use and customer preference. Blended
resin compounds are then shaped under heat and pressure to create plastic sheet material or film. The manufacturing inputs and
process, including the combination of resin and extrusion methods, may be varied to produce differences in color, clarity, tensile
strength, toughness, thickness, shrinkability, surface friction, transparency, sealability and permeability. If a product needs the
protection of more than a single plastic film, additional layers consisting of materials, such as oriented polyester or OPP, are bonded
to it, in a lamination process. These materials are stiffer, harder to tear and heat sealable. The film layers are brought together by
applying an adhesive or by extruding a layer of molten polymer to bind two film layers into one. Extruded plastic film, foil, and
paper can be coated using slot die, direct gravure, reverse gravure and proprietary coating methods, using liquid crystal, exotic
filled ceramics and polyamides, and some can be used over printed products for gloss, print protection or surface dynamic control.
In most of our production facilities, we also have various types of printing capabilities that allows us to print directly on the products
we produce, allowing us to provide an additional process in the value chain.
We use thermoforming, injection molding and blow molding techniques in the production of rigid plastic packaging. Thermoforming
transforms thermoplastic sheet material into a new geometry using heat to soften the material and forcing it into or onto a mold
where it is cooled and “frozen” into the new geometry. Injection molding is the technique of injecting molten plastic into a cold
mold and forming a part. Blow molding is the technique of injecting plastic material into a tube and then using pressurized air to
conform it to a required hollow shape.
We employ a wide variety of other production processes that allow us to meet a wide range of customer needs.
In recent years as we have acquired the entities that comprise the Company, we have continuously expanded our manufacturing
footprint and improved our operational efficiency and streamlined our broader business. We will continue to improve our
manufacturing footprint now that we have integrated our businesses in the Combination. Our improvement plan includes evaluating
the rationalization of our production facilities, capital investments to reduce production costs, manufacturing technology
development, targeted sales growth projects and pricing-point improvements, with a focus on projects we believe would return
our investment within three years or less. Also, we have upgraded the operating processes at each of our facilities, reducing our
fixed costs and improving our profit margins. We plan to undertake similar upgrades at other facilities now that we have integrated
our businesses following the Combination. We develop and maintain our facilities with modern equipment and extensive technical
capabilities. Our production lines are developed with industry leading machine suppliers and assemblers, and in many cases, our
own specialist engineers carry out extensive customization of the base equipment to create a proprietary manufacturing process.
We perform on-going and regularly scheduled maintenance on each of our facilities and since being acquired by Sun Capital, we
have not experienced any unplanned plant shut-down or material interruption in our operations due to equipment failures that
affected our customers.
Our customers are increasingly expanding their global presence and rely on us to provide regional or local supply solutions, and
as a result we believe the Combination allows us to solidify our position as a key supplier to those global customers. Our ability
to manufacture products in various regions allows us to serve markets where delivery times and transportation and other costs
such as import duties may be prohibitive. We believe that we have a flexible manufacturing base that allows us to effectively
respond to changing customer needs, for example by modifying production lines in response to customer specifications.
Logistics
Our products are generally delivered to our customers using third-party transportation and warehousing providers. We believe this
arrangement allows us to limit the capital commitment required to maintain our own distribution capabilities, such as a transportation
fleet and distribution warehouses and to minimize the time required for us to deliver our products to our customers.
We manufacture products for some of our customers based on their purchase orders, thereby removing the need to hold any
significant inventory. Finished products for these customers are typically shipped immediately following production. For some of
our retailer customers, we receive a binding seasonal order plan and we deliver finished products on a weekly or monthly basis
based on purchase orders submitted by these customers in fulfillment of the order plan. We produce the products set forth in the
seasonal order plan in a manner that is designed to maximize our production efficiency and, accordingly, in most cases the production
for our retailer customers is “made for stock.” Our retailer customers are obliged to pay for the stock that has been produced to
satisfy their order plan, whether or not they request the products be delivered. We maximize our flexibility and service level offered
to our retailer customers by using a mixture of leased warehouses and warehouses operated by third parties and by engaging third
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party transport companies to transport products from our manufacturing plants to the relevant warehouse, and to then deliver such
products to our retailer customers upon receipt of their purchase orders.
Insurance
We maintain comprehensive insurance policies with respect to property damage, business interruption, employers’ liability, public
and product liability, recall, workers’ compensation and contract works. All of our policies are underwritten with reputable insurance
providers, and we conduct periodic reviews of our insurance coverage, both in terms of coverage limits and deductibles. We believe
that we maintain a level of insurance that is appropriate for the risks of our business and is comparable to that maintained by other
companies in the packaging industry.
Employees
As of December 31, 2015, we had 10,530 employees worldwide, with 3,100 in North and Central America, 4,158 in Europe, 2,892
in the United Kingdom and 380 in the Middle East and China.
In Europe, our employees in the United Kingdom, France, Germany, Poland, Finland and the Netherlands are represented by trade
unions or works councils. In the United States, as of December 31, 2015, 481 of our employees were covered by five separate
collective bargaining agreements with various expiration dates up through February 2021. For a description of our pension
obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Liabilities
and Financing Agreements-Pension Plans.”
Historically, we have enjoyed good labor relations and we are committed to maintaining these relationships. There have been no
work stoppages or strikes at any of our facilities during the past five years. We take a constructive approach to union relationships
where there are unionized facilities, and have been able to secure the cooperation of our unions and our workforce with regard to
significant changes at those facilities.
We continuously invest in training our employees on all levels to ensure they increase production efficiency by becoming acquainted
with the latest manufacturing technologies. Training is custom-developed and is typically organized on-site at each of our production
facilities. When new technology is installed at a facility, our relevant employees undertake training at one of our other facilities
where such technology is already installed and operating. We have also established an employee development program in order
to identify and foster high-potential employees and to build a talent pool of potential future management.
Legal Proceedings
In the normal course of business, we are party to various lawsuits, legal proceedings and claims arising out of our business. We
cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. However, we believe that the outcome
of any existing or known threatened proceedings, even if determined adversely, would not have a material adverse effect on our
financial condition. The most significant of these proceedings of which we are aware is listed below.
Autobar Packaging Spain S.A. Price Fixing Allegations
In December 2013, Paccor Packaging Spain, S.A. (subsequently renamed Coveris Rigid Spain S.A., "Paccor Spain") received a
demand letter from the counsel for SUCA, S.C.A. (“SUCA”) and Asociacion de Organizaciones de Productores de Frutas y
Hortalizas de Almeria-Coexphal (“COEXPHAL”). The demand letter alleges that a Paccor Spain predecessor business, Autobar
Packaging Spain S.A. (“Autobar”) participated in price fixing activities with respect to packaging products sold in Spain between
1999 and 2007. The Autobar business was sold as a going concern to Group Guillin in 2006 and was contributed into Group
Guillin’s subsidiary, Veripack. The demand letter claims damages “preliminarily estimated” at €13,500 (made against all cartel
participants and not just Paccor Spain), together with interest and costs.
The demand letter also referenced a second legal action pending before an Italian court in Bologna, Italy, and notified Paccor Spain
that SUCA has named Paccor Spain as a co-defendant in the Italian action, on the basis of a decision rendered by the Spanish
Competition Authority (“CNC”) in 2011 stating that price-fixing activities have been undertaken by some parties, including
Veripack, the successor of the relevant business unit of Paccor Spain. Coveris purchased Autobar in May 2013, without the business
unit allegedly involved in the Cartel, which had been transferred to Group Guillin/Veripack. Under Spanish law, which Coveris
believes should apply since all the companies allegedly damaged by the cartel are Spanish entities, a one-year term of limitation
applies to tort claims. The CNC decision was rendered on December 2, 2011 and the first request for damages addressed to Paccor
Spain was dated November 28, 2013, after the limitation period had expired. Under Spanish law there is no longer any possibility
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for the damaged parties to include Paccor Spain in the proceedings or request for damages. However, in the Bologna, Italy
proceedings, SUCA and COEXPHAL are alleging that Italian law should apply, under which the term of limitations is 5 years.
On January 23, 2014, Paccor Spain received formal notice of the Italian action. A hearing on this matter was held in November
2014, in which we raised (a) procedural objections, (b) objections on the merits, (c) an indemnity claim against Groupe Guillin
and Veripack on ground that they should be held exclusively liable for any possible damage since they are the exclusive successors
of the Autobar business unit allegedly involved in the Cartel, and (d) alternatively, an action in recourse against all Cartelists.
Groupe Guillin and Veripack have denied any liability on the grounds that Coveris, being the successor to Autobar, should be held
exclusively liable for the whole period investigated by the CNC. The other cartelists have also claimed an action in recourse against
the other cartelists (including Coveris).
Since some of the summoned parties (including some of the cartelists) did not appear before the Court, the Judge directed the
separation of the proceedings involving the action in recourse with respect to the defaulting parties, authorizing us to summon the
defaulting parties in the separate proceedings. Accordingly our indemnity claim against Groupe Guillin and Veripack, as well as
our action in recourse against the other cartelist which have appeared in the Bologna proceedings remain part of the main proceedings
while our action in recourse against those cartelists that have not appeared were initially set for separate proceedings. The defaulting
parties, however, failed to appear at two consecutive hearings in the separate proceedings, after which the case was stricken from
the Court's role due to non-appearance of the parties. Among the two cartelists who failed to appear in the main proceedings, one
is bankrupted and the other has limited assets. In light of this fact, and to avoid further costs, we decided not to pursue the separate
claim and to send them a letter to reserve the right to act in recourse at a later stage in the event of an unfavorable judgment.
As to the main proceedings, the Judge set a briefing schedule through March 30, 2015, which has been completed. At a hearing
on October 22, 2015 to discuss the parties' evidentiary requests, the Judge appointed a Court Expert. Questions have since been
submitted to the Court Expert and the initial report of the Court Expert is expected in October 2016, after which the parties will
have 60 days to submit comments. A hearing has been scheduled for April 13, 2017 to consider the Court Expert’s final report.
Coveris Spain was sold to a third party on July 22, 2014. An indemnification/guarantee has been granted to the Purchaser of Coveris
Spain by both Coveris Holdings SA and Coveris Rigid Polska (formerly, Paccor Polska) for any losses and costs arising from the
SUCA claim, and the Coveris Group remains responsible for handling the defense in this case. Any imposition of fines or damage
awards and expenses which would invoke the indemnity granted by the Group, could have a material adverse effect on our business,
results of operations, financial condition or cash flow.
The Company has not recorded any contingent liability related to this matter as this contingency is not probable and estimable due
to the underlying circumstances at this time.
Huhtamaki France S.A.S. European Commission Investigation
Two of our subsidiaries Paccor France S.A.S. (formerly known as Huhtamaki France S.A.S. and now Coveris Rigid (Auneau)
France S.A.S.) and Island Lux S.a.r.l. & Partners S.C.A. ("Island Lux SCA"), received a Statement of Objections from the European
Commission on September 28, 2012, alleging that Paccor France S.A.S. participated in a cartel involving foam trays used for retail
food packaging between September 3, 2004 and June 19, 2006. In the Statement of Objections, which constitutes an intermediate
step in the proceedings, the European Commission indicated that it intends to levy a fine against the addressees of the Statement
of Objections, including Coveris Rigid (Auneau) France S.A.S. The EU Competition Authority has issued its decision on June 24,
2015, imposing a fine on Coveris Rigid (Auneau) France SAS, jointly responsible with Huhtamaki Oyi, in the amount of €4,756.
Coveris believes that the fine levied upon Coveris Rigid (Auneau) France SAS will be indemnified by Huhtamaki Oyj, the previous
owner of the company, under the Sale and Purchase Agreement dated September 22, 2010. The claim has been accepted by
Huhtamaki Oyi by fax dated October 9, 2012, and they have since confirmed in writing that they will indemnify the full amount
awarded under the decision. Huhtamaki Oyi has since appealed the decision of the Competition Authority before the EU General
Court.
We have not recorded any contingent liability related to this matter as this contingency is not likely to be settled directly by us due
to the underlying circumstances.
PerfoTec BV
On December 29, 2014, Coveris Flexibles US LLC received notice that PerfoTec BV had filed a suit in The Netherlands (District
Court of the Hague) against Coveris Flexibles US LLC (“Coveris US”), Coveris Germany Holding GmbH and Coveris Flexibles
Deutschland GmbH (together with Coveris Germany Holding GmbH, “Coveris Germany”). The complaint alleged breach of two
license agreements signed by each of Coveris US and Coveris Germany, as well as several purchase order confirmations issued
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by PerfoTec (but generally not signed by Coveris US or Coveris Germany) (collectively, the “License and Purchase Agreements”).
Specifically, PerfoTec alleged breach of the obligations of (i) Coveris US to pay €200, representing the 50% unpaid balance for
four PerfoTec systems, to be increased by statutory commercial interest as of June 1, 2013, (ii) Coveris Germany to pay €70 for
the purchase of a third PerfoTec laser, to be increased by statutory commercial interest as of June 1, 2013, and (iii) both Coveris
US and Coveris Germany to comply with obligations to use commercially reasonable efforts to promote the PerfoTec laser system
in conjunction with a packaging machine or converting machine, including promotion as a premium product at two significant
trade shows each year for three years. PerfoTec alleged that it suffered damages of €20 million because Coveris US and Coveris
Germany failed to comply with their obligations under the license agreements. PerfoTec also sought an order of specific
performance for the defendants to comply with the License and Purchase Agreements (including the promotion obligations), subject
to forfeiture of a penalty of €1,000 per day or partial day of non-compliance with the order, an unspecified amount to compensate
for losses incurred by PerfoTec resulting from non-compliance with the License and Purchase Agreements, and an award of costs.
PerfoTec filed its statement of claim with the court on April 1, 2015. Coveris US and Coveris Germany filed their statement of
reply on May 27, 2015. In the statement of reply, a counterclaim amounting to €1,058 and $522, plus statutory interest, was made.
These amounts were paid by the Coveris entities in connection with the acquisition of the systems and recovery is sought based
on termination of the agreements.
An initial hearing in this matter was held on November 20, 2015. At that hearing, the parties reached agreement on settlement of
this matter and the case has since been dismissed. The terms of settlement are confidential and were not material to Coveris.
Regulatory Matters
Overview
Our businesses are highly regulated in all of the jurisdictions in which we operate. Our production facilities and operations are
subject to both national and international regulatory regimes. In the member states of the European Union (the “Member States”),
the regulatory environment of our business activities is shaped by EU directives and regulations, which are either implemented in
the individual Member States through national legislation or have direct application to the states or individuals. In the United
States, our facilities are subject to the local, state and federal laws and regulations of the U.S. federal government. Regulations
that affect our operations mostly relate to areas of environmental protection, product safety and quality, occupational health and
safety, industrial hygiene and plant safety.
Environmental, health and safety (“EHS”) laws and regulations govern our facilities and our operations, including: (i) the storage,
handling and treatment of hazardous substances and wastes; (ii) water discharges; (iii) air emissions; (iv) human health and safety;
(v) the clean-up and remediation of contaminated facilities; and (vi) the sale and use of the products we manufacture. Many of our
operations require permits and controls to monitor or prevent pollution. We have incurred, and will continue to incur, substantial
on-going capital and operating expenditures to ensure compliance with current and future EHS laws and regulations, which tend
to become more stringent over time.
Our environmental management systems, are intended to ensure that we both comply with applicable environmental requirements
and minimize environmental risk by promoting environmental protection activities and initiatives. We actively address legal and
environmental compliance issues in connection with our operations and properties, and we believe that we have systems in place
to ensure that environmental costs and liabilities will not have a material adverse impact on us. Nevertheless, estimates of future
environmental costs and liabilities are inherently imprecise, and the imposition of new or unanticipated costs or obligations could
have a material adverse effect on our business, financial condition or results of operations.
European Regulations
REACH Regulation and the Classification, Labeling and Packaging Regulation
The European Union requires control of the use of chemical products within the European Union by imposing on all affected
industries the responsibility for ensuring and demonstrating the safe manufacture, use and disposal of chemicals. The Regulation
on Registration, Evaluation, Authorization and Restriction of Chemical substances (the “REACH regulation”) requires the
registration of all chemicals manufactured in or imported into the European Union (either alone, in mixtures or in articles) with
the European Chemicals Agency (“ECHA”). The regulation requires formal documentation of the relevant data required for hazard
assessments for each substance registered as well as development of risk assessments for their registered uses. Most uses of high
hazard substances such as carcinogens will require authorization by ECHA.
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In parallel with the REACH regulation, the European Union has adopted the Regulation on Classification, Labeling and Packaging
of Substances and Mixtures (the “CLP regulation”) to harmonize the European Union’s system of classifying, labeling and packaging
chemical substances with the United Nation’s Globally Harmonized System, an internationally-agreed tool for chemical hazard
communication, incorporating harmonized chemical hazard classification criteria and provisions for standardized labels and safety
data sheets. The CLP regulation is expected to further this objective by promoting regulatory efficiency. It introduces new
classification criteria, hazard symbols and labeling phrases, while taking account of elements that are part of the current
EU legislation.
We believe we are in material compliance with these regulations and are participating in a collaborative industry effort to comply
with future requirements under these regulations. We are not required to register any raw materials. However, we require
confirmation of registration under the REACH regulation from our suppliers. In addition, ECHA, depending on the outcome of
its on-going and/or future analyses, may designate a few of the chemicals we use in our production processes as “substances of
very high concern” and thereby require authorization and a strict safety evaluation for them under the REACH regulation. Our
cost estimates assume that none of the chemicals we use in our production processes will be designated as a “substance of very
high concern” under the REACH regulation.
EU Emissions Trading System
Our business is subject to the EU Emissions Trading System (the “EU ETS”), which is an EU-wide system of trading allowances
that are issued by Member States to cover industrial greenhouse gas emissions and which has been implemented in Germany by
the Greenhouse Gas Emission Trading Act (Treibhausemissionshandelsgesetz) (“TEHG”). Industrial facilities to which the EU ETS
applies receive a certain number of allowances to emit greenhouse gases and must surrender one allowance for each ton of
greenhouse gases emitted. Facilities that emit fewer tons of greenhouse gases than their allowances cover are able to sell the excess
allowances in the open market, whereas those that emit more must buy additional allowances through the EU ETS. Phases I and
II of the EU ETS covered emissions in calendar years 2005 to 2007, and 2008 to 2012, respectively, and the current Phase III
covers the period from 2013 to 2020. None of our production facilities or operations is presently restricted pursuant to the EU ETS
or TEHG.
Environmental Remediation and Closure Liabilities
Some of our facilities have an extended history of industrial chemical processing, storage and related activities. Under the
requirements of permits granted under laws implementing the IPPC or IED Directives, we may be required to investigate and
remediate contamination at facilities which we use or have used in the past, particularly if we close an operational facility. In
connection with contaminated properties, as well as our operations generally, we also could be subject to claims by government
authorities, individuals and other third parties seeking damages for alleged personal injury or property damage resulting from
hazardous substance contamination or exposure caused by our operations, facilities or products.
Some of our facilities have been the subject of limited investigations for contamination in the past. Based on current knowledge
of facility conditions and existing law and practice, we do not believe we currently have any material obligations or costs for
investigation or remediation activities at our facilities. Nevertheless, the discovery of previously unknown contamination, or the
imposition of new obligations to investigate or remediate contamination at our facilities, could result in substantial unanticipated
costs. While we are protected by contractual indemnities from prior owners or operators against some remediation costs related
to known contamination, we cannot guarantee that we will be able to recover under such indemnity provisions in all cases. We
could be required to establish or substantially increase financial reserves for such obligations or liabilities and, if we fail to accurately
predict the amount or timing of such costs, the related impact on our business, financial condition or results of operations in any
period in which those costs need to be incurred could be material.
Laws and regulations of many of the jurisdictions in which we operate oblige us to prevent contamination of the soil by taking
adequate precautions. The competent authorities may require each of the persons responsible to take remediation measures, or do
so themselves, placing the costs for such action on the person responsible.
Food Packaging Regulation
Our products are subject to the European Commission Regulation on Plastic Materials and Articles Intended to Come into Contact
with Food (Regulation (EU) No 10/2011) (the “Food Packaging Regulation”), which is directly applicable to all Member States
without transposition into national law. This regulation establishes specific requirements for the manufacture and marketing of
plastic materials and articles that are intended to come into contact with food, are already in contact with food or can reasonably
be expected to come into contact with food. The Food Packaging Regulation sets out the rules to follow in order to be able to
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launch food packaging products on the market. Many of these rules originate from rules under pre-existing EU regulations including,
among others, the provisions of Regulation (EC) No 1935/2004 on intended and foreseeable use, the labeling requirements set out
in Regulation (EC) No 1935/2004, the traceability requirements set out in Regulation (EC) No 1935/2004 and the “good
manufacturing practice” requirements as set out in Commission Regulation (EC) No 2023/2006.
The Food Packaging Regulation sets out a list of authorized substances (some of which, due to specific restrictions, must be of a
specific purity and quality) which may be used in the manufacture of plastic layers in plastic materials and articles. Additionally,
plastic materials and articles must not transfer their constituents to food in quantities exceeding the specific migration limits, as
provided by the Food Packaging Regulation.
U.S. Regulations
Toxic Substances
The Toxic Substances Control Act (the “TSCA”), is designed to ensure that chemicals manufactured, imported, processed, or
distributed in commerce, or used or disposed of in the United States do not pose unreasonable risks to human health or the
environment. The TSCA registry, maintained by the U.S. Environmental Protection Agency (“EPA”), lists over 83,000 covered
chemicals; chemicals not listed on the TSCA registry or otherwise exempted cannot be imported into or sold in the United States
until registered with the EPA. The TSCA sets forth specific reporting, record-keeping, and testing rules for chemicals (including
requirements for the import and export of certain chemicals), as well as other restrictions relevant to our business.
Pursuant to the TSCA, the EPA from time to time issues “Significant New Use Rules” when it identifies new uses of chemicals
that could pose risks. Any manufacturer, importer, processor, or distributor of a chemical substance or mixture who has information
reasonably suggesting a substantial risk of injury to health or the environment is required to notify the EPA immediately.
There have been proposals in the United States to enhance the requirements under the TSCA to register and analyze the safety of
substances and chemicals such as those we use in our production processes. If finalized, these proposals could result in an obligation
to demonstrate that the health or environmental risks of the substances we handle and process are adequately controlled.
Contamination
The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and similar state laws govern the
investigation and remediation of contaminated sites and establish strict, joint and several liability for site owners and individuals
and entities responsible for disposing of or releasing hazardous substances at, or operating, such sites. In some cases, a party that
sent waste to a contaminated site can be held liable for the entire cost of remediation regardless of fault, the lawfulness of disposal
or the actions of other parties. CERCLA also requires certain facilities to maintain a minimum level of financial responsibility for
accidents.
Food Packaging Regulation
The Food and Drug Administration (“FDA”) regulates the material content of direct-contact food and drug packages, including
certain packages we manufacture pursuant to the Federal Food, Drug and Cosmetics Act. Certain of our products are also regulated
by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety
Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to
repurchase or recall such products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states
and cities. In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals, imposing
fines and penalties for non-compliance. Although we use FDA approved resins and pigments in our products that directly contact
food and drug products and believe our products are in material compliance with all applicable FDA regulations and other
requirements, we remain subject to the risk that our products could be found not to be in compliance with such requirements.
Canadian Regulations
Our Canadian facilities are subject to Canadian federal and provincial legislation and to municipal (local) by-laws covering human
health and safety and the protection of the environment. Federal regulations generally address these matters at the international,
national or inter-provincial level but also deal with the protection of certain navigable waters and other matters within federal
jurisdiction. The provinces take the lead at the operational level and so have the greatest day-to-day impact on environmental
matter at our facilities. There is an attempt to harmonize federal and provincial regulations but often the effect is cumulative with
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the combined outcome often adding an addition level of regulatory oversight. Municipalities have powers granted by the provinces
to ratify local nuisance, water and sewage and waste by-laws.
Federally, amongst the laws to which our facilities are subject are the Canadian Environmental Protection Act, under which is
found the National Pollutant Reporting Release Inventory (“NPRI”) requirements and the New Substance Notification Regulations;
the Fisheries Act, which addresses the protection of fish habitat; and the Transportation of Dangerous Goods Act, which deals
with the trans-border or inter-provincial shipment of dangerous goods.
Our Ontario facilities are subject to the Environmental Protect Act (“EPA”), which regulates the discharge of all contaminants into
the natural environment through directly prohibiting the release of any contaminant or by limiting or approving the release of a
contaminant. For example, the industrial emission of Nitrogen Oxides and Sulphur Oxides are regulated under Ontario Regulation
(“O. Reg.”) 194/05 and ozone depleting substances and other halocarbons are regulated under O. Reg. 463/10. The discharge of
contaminants to air are generally regulated under O. Reg. 419/05 (Air Pollution - Local Air Quality) and discharges to surface
waters are regulated by imposing effluent monitoring and effluent limits through a number of regulations dealing with different
industrial sectors such as organic (O. Reg. 63/95) and inorganic (O. Reg. 64/95) chemical manufacturing and the pulp and paper
(O.Reg. 760/93) sectors. The effluent monitoring and effluent limits regulations also impact what can be released to municipal
sewers although local by-laws often place greater restrictions on what can be released into the municipal sewer system. The
classification and any treatment or disposal of wastes are regulated under Regulation 347 (General-Waste Management), while
the regulation of the transport and the treatment or disposal of the waste occurs by way of approvals issued under the EPA. Waste
reduction and recycling is compelled by Ontario Regulations 101/94 (Recycling and Composting of Municipal Waste), 102/94
(Waste Audits and Waste Reduction Plans), 103/94 (Industrial, Commercial and Institutional Source Separation Program) and
104/94 (Packaging Audits and Packaging Reduction Plans), and is intended to be facilitated through the charging of “eco-fees” to
producers to offset the costs of recycling under the proposed Waste Diversion Strategy Act. The Toxics Reduction Act, 2009, requires
an annual assessment of the facility’s operations and the development of a plan to reduce the use of the same toxic substances that
are reported under the federal NPRI. The Ontario Water Resources Act is intended to conserve, protect and manage Ontario’s
waters by prohibiting the discharge of polluting materials where these could impair the quality of the water and prohibits or regulates
the discharge of sewage and regulates the taking of groundwater. Ontario’s Dangerous Goods Transportation Act regulates the
transportation and shipment of dangerous goods within Ontario and Ontario’s Occupational Health and Safety Act has the object
of ensuring a safe and healthy workplace by means of a number regulations which regulate such workplace issues as worker
exposure to chemical agents (Regulation 833), the identification and safe handling of designated substances, including asbestos
(O. Reg. 278/05) and acrylonitrile, lead, mercury and silca (O.Reg. 490/09), and by implementing the Workplace Hazardous
Materials Information System (WHMIS) (Regulation 860).
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SECTION II
(in thousands of U.S. dollars)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our
consolidated financial statements, including the notes thereto, included elsewhere in this report.
We are one of the largest manufacturers of plastic and other value-added packaging products in the world. We offer a broad range
of value-added flexible and rigid plastic and paper packaging products that include primary packaging (such as bags, pouches,
cups, tubs, lids and trays), films, laminates, sleeves and labels. We operate 66 production and warehousing facilities in 20 countries,
including the United States, the United Kingdom, France and Germany, which allows us to supply global customers reliably,
quickly and efficiently across multiple regions. We operate 20 facilities in North and Central America, 43 facilities across Europe,
one facility in Australasia, as well as two strategically located facilities in the Middle East and China.
We currently have a diversified base of over 3,000 customers, ranging from leading international blue-chip customers to smaller
regional businesses, who we believe look to us for packaging solutions that have high consumer impact in terms of form, function
and branding. Our products are used in a diverse range of growing and resilient end markets, including the food, industrial, beverage,
pet and household care and medical end markets. Our diverse customer base includes some of the largest consumer products
companies in the world such as Procter & Gamble, Coca-Cola, Kellogg, Kraft Foods, Mondelez, Nestle, Mars, Pepsi, Unilever,
Chiquita, Dole and Del Monte. We have developed longstanding relationships with our customers spanning, in many cases, over
15 years.
We have invested approximately $400 million in capital spending over the last 3 years on maintenance, safety, compliance, growth
and cost reduction projects. The growth and cost reduction projects were for new equipment or to upgrade existing equipment to
add new capabilities and allow us to enter new markets. These projects which were done in Europe and North America are expected
to reduce costs and drive volume gains through access to new markets and higher throughput.
We have invested in restructuring projects, both before and after the combination, to consolidate plants, exit unprofitable product
lines, develop social programs, and reduce SG&A headcount. These programs were intended to increase our operating efficiency,
realize synergies from redundant operations and to take advantage of our size and scale. We expect to continue to invest in these
programs to drive operating income performance.
We conduct our business principally through two operating segments: Flexible and Rigid. In our Flexible packaging segment we
manufacture a variety of flexible and semi-rigid plastic and paper products, including bags, pouches, roll stocks, films, laminates,
sleeves and labels. We sell these products primarily in North America, Europe, Central America and Australasia. In our Rigid
packaging segment we manufacture injection molded or thermoformed and decorated rigid plastic and paper packaging solutions,
including bowls, cups, tubs, lids and trays. We sell these products primarily in Europe and North America.
Beginning in 2014, we have implemented the Coveris Business System ("CBS") in order to achieve our strategic goals and priorities.
CBS starts with a foundation of our values, mission and culture, which are based around Commercial Excellence, Operational
Excellence, Talent and Leadership and Acquisition Integration. Within the foundation and principles of CBS, we are implementing
lean manufacturing techniques within the framework of the Coveris Performance System ("CPS").
Recent Developments
In January 2016, we announced the Coveris Advanced Coatings goodwill reporting unit will be integrated into the Americas Food
and Consumer reporting unit in order to align strategic roles within the organization. We will assess the impact of this reorganization
on the goodwill reported during the quarter ended March 31, 2016.
On February 19, 2016, we settled our GBP cross currency swap for $16,926. As of December 31, 2015, the GBP cross currency
swap had a fair value of $7,628.
During February 2016, the minority shareholder of Coveris Rigid Ukraine LLC seized control of the facility in the Ukraine and
obtained full ownership of this company. We have withdrawn all operations and funding from Coveris Rigid Ukraine LLC and
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are supplying customers from other Coveris facilities. Coveris Rigid Ukraine had net sales of $7,316 for the year ended December
31, 2015 and net assets of $616 as of December 31, 2015.
During March 2016, a related party of Coveris Holdings S.A. completed the acquisition of Supraplast. Supraplast is a shrink sleeve
and adhesive label technologies company based in Guayaquil, Ecuador. Coveris Holding Corp. and Coveris Flexibles US LLC,
subsidiaries of Coveris Holdings S.A., have entered into a Management Services Agreement ("MSA") with Supraplast. The MSA
will afford us an opportunity for expansion and growth in the South American region. The financial results of Supraplast will not
be included in our consolidated financial statements for the foreseeable future.
Key Factors Affecting Our Business and Operations
General Economic Conditions in our Markets
Macroeconomic factors in the geographies in which we operate affect our results of operations. The market for plastic-based film
and packaging products is generally mature in most of the markets in which we operate, and as such there is a close correlation
between consumer consumption levels and demand for our products. As a result, the revenues we generate each period are affected
by factors such as unemployment levels, consumer spending, credit availability and business and consumer confidence. Certain
of our products are considered discretionary and as a result consumers generally purchase less of these products during economic
downturns. A large portion of our products are used in fast-moving consumer goods markets. Consumption of these products has
shown resilience over time and less volatility compared to gross domestic product indexes. However, as economic conditions slow,
retailers often seek to manage inventory levels and slow their rate of product purchases as they try to sell product already in stock.
Our customers also seek to reduce working capital during a slowdown and as a result they seek to manage inventory levels, revise
trade credit terms and aggressively negotiate prices. Historically, the primary impact on our revenues during economic downturns
has been reduced demand due to the destocking efforts by our customers.
Changes in Prices of Raw Materials and Fuels
Raw materials costs represent the single largest component of our operating costs. Given the significance of raw materials costs
to our operating expenses and our limited ability to control raw materials costs as compared to other operating costs, volatility in
raw materials prices can materially affect our margins and results of operations.
The principal raw materials we use to manufacture our products are resins, polymers, paper, films, inks, adhesives, masterbatches
and transit packaging materials. Many of the raw materials we use in our manufacturing processes are commodities, which are
subject to significant price volatility. The price of polymers and the other raw materials that we use is a function of supply and
demand, suppliers’ capacity utilization, industry and consumer sentiment and prices for crude oil, natural gas and other raw
materials. Prices for paper depend on the industry’s capacity utilization and the costs of raw materials. After rapid polyethylene
price rises from 2009 to 2011, reaching a peak in 2011, polyethylene prices continued to be volatile from 2012 through 2015,
driven by changes in oil prices and periodic supply disruptions. Similarly, polymer prices increased between 2009 and 2011, and
remain volatile through 2015, mainly due to changing oil prices and supply disruptions caused by unplanned outages at the
production facilities of polymer producers. Changes in prices of raw materials may have an impact on our profitability in the future.
In addition, should the U.S. dollar continue to strengthen versus the euro and British pound, it may present opportunities for us to
further improve our cost of raw materials, through the import or export of raw materials and/or finished goods to various geographies.
As a result of operating large manufacturing facilities, the fuels necessary to power our facilities and operations constitute a
significant portion of our cost of sales. We use large amounts of electricity, natural gas and oil in our production. Prices for these
fuels have been highly volatile in recent years and have generally risen since 2005. However, during 2014 and 2015, oil prices
decreased by more than 50% compared to 2013. While this decrease in oil prices might lead to a temporary reduction in fuel costs,
any future increase in energy prices may adversely affect our business to the extent that we are unable to pass these increased costs
on to our customers.
We take various actions to reduce overall raw materials and energy expense and exposure to price fluctuations. Most of our raw
materials are purchased at market prices and so our costs are exposed to changes in price. We generally seek to pass increased
materials costs to our customers through a variety of means. In certain of our customer contracts we have price modification
mechanisms based on increases in our raw materials prices and in other cases we seek to revise prices based on costs as new
customer agreements are negotiated or purchase orders are placed. These mechanisms generally pass through raw material price
changes in our plastic and paper production in 30 to 90 days and 90 to 120 days, respectively. For our remaining sales, which are
primarily made through purchase orders, we seek to pass through raw material price increases by increasing the price of our
products. In addition, a proportion of the materials we purchase are sourced from suppliers that are imposed on us by our fast39
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moving consumer goods customers, who are responsible for any variance in such suppliers’ costs. Furthermore, we seek to take
advantage of decreases in raw material prices by keeping our sales prices at the same levels until price terms of the contract are
renegotiated.
Our product mix and ability to create innovative products that use raw materials efficiently also impacts the amount of raw materials
we use to produce our products. If we are able to produce products that use less resin, or use a mix of raw materials that are less
subject to price fluctuation, we will reduce our raw material price exposure.
Foreign Currency Exchange Rates
Our reported results of operations and financial condition are affected by exchange rate fluctuations, and we are exposed to both
transactional and translational risk due to these fluctuations.
Transactional risk arises when our subsidiaries execute transactions in a currency other than their functional currency. We currently
operate facilities in 20 different countries, and sell our products into approximately 105 countries. As a result, we generate a
significant portion of our sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. The primary
currencies in which we generate revenues are the euro, the U.S. dollar and the British pound sterling. Where we are unable to
match sales received in foreign currencies with costs paid in the same currency, our results of operations are impacted by currency
exchange rate fluctuations. For example, a stronger U.S. dollar will increase the cost of U.S. dollar supplies for our non-U.S.
businesses and conversely decrease the cost of non-U.S. dollar supplies for our U.S. dollar businesses. Our subsidiaries generally
execute their sales and incur most of their materials costs in the same currency. We have entered into a series of cross currency
swaps, forward contracts and foreign currency options in an effort to reduce the effect of exchange rate fluctuations on our financial
statements related to our future debt principal and interest payments in U.S. dollars from cash flows largely generated in British
pounds and euros. We have elected to not pursue effective hedge accounting treatment on these forward contracts and will record
changes in the fair value of the contracts to the consolidated statement of operations. See “Quantitative and Qualitative Information
Regarding Market and Operating Risks-Foreign Exchange Risk.”
We present our consolidated financial statements in U.S. dollars. As a result, we must translate the assets, liabilities, revenue and
expenses of all of our operations with a functional currency other than the U.S. dollars into U.S. dollars at then-applicable exchange
rates. Consequently, increases or decreases in the value of these currencies against the U.S. dollar may affect the value of our
assets, liabilities, revenue and expenses with respect to our non-U.S. dollar businesses in our consolidated financial statements,
even if their value has not changed in their original currency, which creates translation risk. These translations could significantly
affect the comparability of our results between financial periods and result in significant changes to the carrying value of our assets,
liabilities and stockholders’ equity.
Competition and Market Trends
The packaging industry is highly competitive, and levels of competition, pricing and other activities by our competitors impact
our results in each period. The markets for our products are mature in Europe and North America, and there are many competing
manufacturers that produce similar and other types of packaging. While the principal drivers for competition for our products
include quality, product performance and characteristics and service, price is also an important aspect of our ability to compete.
In the flexible packaging segment, the market leaders have a strong presence in high volume product lines over which to spread
the fixed costs of capital investments. Larger players gain a competitive advantage in these areas through operational efficiency
and investment in processing technology and capabilities. Although the largest players will continue to dominate the high-volume
product areas, small and mid-size companies have often found success by carving out unique market niches with customers. Bags
and film products used in custom applications that require fast turnaround times are better served by smaller manufacturers, and
there are numerous small players that deal only in these markets. In the rigid plastic packaging segment, cost pressures in rigid
packaging make it difficult for small players to compete on high-volume products, but small- and medium-sized competitors
frequently focus on niche products for household chemicals, personal care products, food, or automotive retail products. Smaller
players can differentiate themselves in these areas through value-added services such as shrink-sleeve labeling and custom design.
We currently manufacture most of our products in the United States, Canada, Central America, the United Kingdom, Germany
and certain other European countries. Our competitors include producers who manufacture a higher percentage of their products
in countries with significantly lower labor costs than we do. If one or more of our competitors with manufacturing facilities in
such lower cost countries offers products of sufficient quality in our markets at lower prices, we may be forced to lower our prices
to maintain our competitiveness, or we may be unable to continue to sell our products. In either case, our sales and our gross profit
could decline. Additionally, we compete, to a certain extent, with our customers if they have in-house packaging-making capabilities.
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We are also impacted by packaging trends, which change based on product cost, environmental impact and consumer demand.
During the last ten years the packaging industry has experienced a general shift toward plastic products. Plastic packaging has
been the fastest growing segment of the packaging market, and sales growth in our markets during the last ten years has exceeded
gross domestic product growth, due in part to increasing demand for consumer goods and a shift from metal, paper and glass
containers to plastics.
Success of New Products
Our innovation and research and development capabilities are a key element of our success. As a result, we are required to
continuously invest in innovation and research and development as well as capital expenditures to update our facilities with the
equipment needed to produce new products. We work with our customers to develop new products in connection with their product
launches and we also organically develop products to sell to our existing customers. Periods in which we and our customers have
successfully anticipated trends generally have had more favorable results. If a release is successful, this will have a positive impact
on our sales until consumer preferences change or until those items are replaced by new items. If the product is not successful, we
will not be able to fully load our lines and our operating results will be negatively impacted temporarily. A majority of research
and development efforts in the plastic packaging space are currently devoted to innovations that help to differentiate products,
such as convenience packaging, improved barrier protection, packaging design initiatives, smart packaging and environmentallyfriendly alternatives. Our ability to accurately predict consumer trends and needs and focus our development efforts accordingly
will impact our product sales.
Changes in Product Mix
Our results of operations have in the past been, and will continue to be in the future, impacted by changes in our product mix. We
manufacture and sell flexible and rigid plastic products with a focus on the production of technologically advanced packaging
solutions and films and on innovation and customization. Our products have different average selling prices and gross margins.
In general, our products in technically demanding product areas have higher average selling prices and gross margins as compared
to our products used in less demanding applications. The difference in margins is driven by applications and the levels of innovation
and customization required for those products. Our exposure to cyclical end markets (including industrial, building products and
retail) makes our flexible-packaging business slightly less predictable than our consumer- and food-oriented rigid-packaging
operations.
Our strategy is to continue to innovate and improve existing products and technologies, as well as to develop new products to
prevent commoditization and replace our existing lower valued-added products with more technically advanced products. Factors
that influence our product mix in a particular period include the timing and roll-out of new products, the demand for existing
products and demand growth for various types of packaging. For example, rigid plastic packaging sales in our markets have
increased in the past ten years at a rate higher than flexible plastic products, as consumer goods sellers have switched from packaging
solutions, such as Styrofoam, to rigid plastic.
Weather
Our results of operations are also affected by weather conditions in the various geographic markets in which we operate, to the
extent that weather conditions affect demand for products utilized in our packaging. For example, a significant weather event,
such as a hurricane in the United States, may increase demand for our products used in the construction end market, while abnormally
wet summer weather in Europe may dampen demand for packaging for fresh foods used in picnics or farm products.
Debt Refinancing
On November 8, 2013, we issued $325,000 in aggregate principal amount of Senior Notes and entered into a Term Loan with a
syndicate of financial institutions, in which the proceeds were segregated into two tranches of varying principal amounts and
currency denominations: (1) $435,000 and (2) €175,000. The proceeds from the Senior Notes and Term Loan were used to pay
off much of our existing debt structure in Europe as well as the legacy $350,000 Term Loan Facility from Exopack. We refinanced
our legacy debt structure with a new bond issuance and term loan structure in order to establish a sustainable credit structure,
strategically position our business for future growth and fund current working capital needs across all of our jurisdictions. Also
on November 8, 2013, subsequent to the issuance of the Senior Notes, we amended the NA ABL Facility and entered into receivables
and inventory financing arrangements in each of France, Germany and the United Kingdom. On February 17, 2015 and June 16,
2015, we issued the Additional Notes under the Indenture with the same terms and conditions as the Senior Notes and will constitute
a single series with, and will be consolidated and fungible with, the Senior Notes for all purposes under the Indenture, including,
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without limitation, waivers, amendments, redemptions and offers to purchase. In addition, on May 22, 2015, the Company entered
into the First Amendment to the Term Loan. The First Amendment reduces our annual interest rates by 75 bps on the Term Loan
- USD Tranche and by 125 bps on the Term Loan - EUR Tranche. In addition, we have increased the Term Loan - EUR Tranche
to €247,800 and decreased the Term Loan - USD Tranche by a U.S. dollar equivalent amount.
Acquisitions
We have acquired control over various companies through a series of separate transactions completed between August 5, 2010
and June 17, 2015. Except for the acquisition of Rose HPC Holding, LLC and its subsidiaries (collectively referred to as "KubeTech")
as described below, we have accounted for each of these acquisitions using the purchase method of accounting prescribed in ASC
805. Under these standards, as of the date of each acquisition, we have conducted a formal valuation analysis of the identifiable
assets and liabilities of the applicable acquired entity, made corresponding adjustments to such entity’s pre-acquisition carrying
values and allocated any positive or negative difference between the cost of each acquisition and the fair value of the related
identifiable net assets to goodwill or other intangible assets or to gains on bargained purchases, as the case may be.
We have accounted for the acquisition of KubeTech under the guidance for common control transactions as both the Company
and KubeTech are indirectly majority-owned by Sun Capital Partners V, L.P. According to ASC 805, business combinations between
entities under common control are accounted for at the historical carrying values of the assets and liabilities transferred at the date
of the transaction and retrospectively presented in the financial statements for the prior periods through the date under which the
entities came under common control.
Acquisitions affect our results of operations in several ways. First, our results for the period during which an acquisition takes
place are affected by the inclusion of the results of the acquired entity into our consolidated results. Second, the results of the
acquired businesses after their acquisition may be positively affected by synergies. Additionally, we may experience an increase
in operating expenses, including staff costs, as we integrate the acquired business into our network. Finally, because acquired
entities are consolidated from their date of acquisition, unless the acquiree is under common control, the full impact of an acquisition
or disposition is only reflected in our financial statements in the subsequent period.
Factors Affecting Comparability
We have completed a number of selective acquisitions since January 1, 2014 to complement the growth in net sales, operating
income and cash flow that we are targeting through organic sales volume growth and cost savings. The acquisitions since January
1, 2014 are as follows:
•
•
•
•
•
KubeTech. On May 30, 2014, we acquired 100% of the equity interest of KubeTech. KubeTech was indirectly, wholly
owned by Sun Capital Partners V, L.P., the ultimate majority shareholder of the Company. We incorporated KubeTech
into our Rigid segment. We have consolidated KubeTech in our financial statements from the date of its acquisition by
Sun Capital Partners V, L.P. on December 31, 2012, as KubeTech was accounted for as a business combination under
common control.
St. Neots. On June 12, 2014, we purchased 100% of the share capital of St. Neots Holdings Limited (“St. Neots”). St.
Neots consists of two manufacturing facilities located in the UK with a sourcing office in Hong Kong. St. Neots is a
leading manufacturer of cartonboard solutions for the food-to-go and convenience markets. We have consolidated St.
Neots in our financial statements from the date of its acquisition and include its results in our Flexible reporting segment.
Learoyd. On August 21, 2014, we acquired the shares of Learoyd Packaging Limited (“Learoyd”), which is one of the
UK’s leading flexographic print specialists supplying flexible packaging solutions to major supermarkets, own brands
and food manufacturers and retailers. We believe that the acquisition of Learoyd supports and strengthens our UK flexible
packaging offering through advanced processes and technologies in addition to providing access to new customer and
product markets. We have consolidated Learoyd in our financial statements from the date of its acquisition and include
its results in our Flexible reporting segment.
Coveris Australasia. On May 29, 2015, we acquired the shares of Coveris Australasia, which expands our global footprint
into the Australasian region of the world and will allow us to channel for expansion of several existing product lines. We
have consolidated Coveris Australasia in our financial statements from the date of its acquisition and include its results
within our Flexible reporting segment.
Olefinas. On June 17, 2015, we acquired the shares of Olefinas, a leading agricultural plastics manufacturer with operations
in Guatemala and Mexico. Entering Latin America supports our initiative to provide a full range of packaging solutions
for agricultural products, including tree bags, twine and aging ribbons for the banana industry, as well as mulch and
fumigation films, insect traps, modified atmospheric packaging and shrink films. We have consolidated Olefinas in our
financial statements from the date of its acquisition and include the results within our Flexible reporting segment.
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As we included the results of operations of each acquired business in our consolidated financial statements from the date of their
respective acquisition, results for the years ended December 31, 2015 and 2014 are not comparable.
Description of Key Line Items in Our Income Statements
Net sales
We recognize sales revenue when all of the following conditions are met: persuasive evidence of an agreement exists, delivery
has occurred, our price to the buyer is fixed and determinable and collectability is reasonably assured. Sales and related cost of
sales are principally recognized upon transfer of title to the customer, which generally occurs upon shipment of products. Our
stated shipping terms are generally FOB shipping point unless otherwise noted in the customer contract. Sales to certain customers
are on consignment and revenue is recognized when the customer uses the products. Provisions for estimated returns and allowances
and customer rebates are recorded when the related products are sold.
Cost of sales
Our cost of sales represent amount paid for direct costs of running the business including amounts due to external third parties for
service directly related to revenue. These costs include direct and indirect materials costs, direct and indirect labor costs, including
fringe benefits, supplies, utilities, depreciation, amortization, insurance, pension and post-retirement benefits and other
manufacturing related costs. The largest component of our costs of sales is the cost of materials, and the most significant component
of this is plastic resin.
We also lease various buildings, machinery and equipment from third parties under operating lease agreements. Rent expense
under the operating lease agreements is included in cost of sales or selling and administrative expenses depending on the nature
of the leased assets.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily include sales and marketing, finance and administration and information
technology costs. Our major cost elements include salary and wages, fringe benefits, travel, depreciation of non-manufacturing
related property, plant and equipment and amortization of intangible assets.
Interest expense
Our interest expense relates mainly to interest expenses, amortization of deferred finance costs and unused facility and letter of
credit fees on financial debt and other finance costs.
Other income (expense), net
Our other income (expense), net generally consists of gains and losses on the disposal or sale of assets and other items that relate
to ancillary business activities.
Foreign currency exchange gain (loss)
Our foreign currency exchange gain or loss generally consists of realized and unrealized gains on foreign currency transactions.
A significant driver in this line item is the unrealized foreign exchange gain or loss on the remeasurement of our U.S. dollar
denominated Term Loan and Senior Notes that are maintained by a euro functional currency entity. Additionally, included in this
line item are the changes in the fair value of derivative instruments not designated as hedges.
Income tax benefit (provision)
Income tax expense includes current and deferred tax. Taxes are recognized in the income statement except where the underlying
transaction is recognized in comprehensive income, in which case the tax effect is recognized in comprehensive income. Current
tax is tax paid or received during the current year and includes adjustments of current tax for prior periods.
Results of Operations
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Basis of Presentation
These consolidated financial statements include the accounts of all the entities and their subsidiaries. Material intercompany
balances and transactions among the consolidated entities have been eliminated. Results of operations of companies acquired are
included from their respective dates of acquisition.
Selected Financial Data
(in thousands of U.S. dollars)
Year Ended
December 31, 2015
$
% of Net Sales
Statement of Operations Data:
Net sales
Cost of sales
$
Gross margin
Selling, general and administrative expenses
Operating income (loss)
Interest expense, net
Other income (expense), net
Foreign currency exchange gain (loss)
Income (loss) before taxes
Income tax benefit (provision)
Net income (loss)
2,606,248
(2,221,163)
385,085
(308,570)
76,515
(128,991)
1,187
(16,855)
(68,144)
9,442
(58,702)
$
100 % $
-85.2 %
14.8 %
-11.8 %
2.9 %
-4.9 %
—%
-0.6 %
-2.6 %
0.4 %
-2.3% $
Year Ended
December 31, 2014
$
% of Net Sales
2,759,257
(2,379,728)
100 %
-86.2 %
379,529
13.8 %
(330,994)
-12.0 %
1.8 %
-4.7 %
-0.2 %
-1.2 %
-4.3 %
0.6 %
-3.7%
48,535
(128,753)
(5,740)
(31,829)
(117,787)
16,596
(101,191)
Net Sales. Net sales for the year ended December 31, 2015 decreased $153,009 or 5.5% from the prior year. Foreign exchange
had an unfavorable impact of $268,735, partially offset by the acquisitions of St. Neots (June 12, 2014), Learoyd (August 21,
2014), Coveris Australasia (May 29, 2015) and Olefinas (June 17, 2015). Acquisitions contributed $136,008 to net sales. Excluding
the impact of foreign currency and acquisitions, net sales decreased $20,282 or 0.7%, primarily due to customer pass through of
decreased resin costs from the prior year and lower volumes in our Coatings and Rigid business units. For a more detailed discussion
of the change in net sales from the year ended December 31, 2014, please see our analysis by reportable segment below.
Cost of Sales. Cost of sales for the year ended December 31, 2015 decreased $158,565 or 6.7% from the prior year, primarily due
to favorable foreign exchange impact of $236,627, partially offset by the acquisitions of St. Neots (June 12, 2014), Learoyd (August
21, 2014), Coveris Australasia (May 29, 2015) and Olefinas (June 17, 2015). Acquisitions contributed $110,434 to cost of sales.
Excluding the impact of foreign currency and acquisitions, cost of sales decreased $32,372. As a percentage of sales, cost of sales
decreased 102 basis points ("bps"). The favorable change in cost of sales percentage is primarily driven by favorable operational
efficiencies and cost savings initiatives, such as CBS, CPS and restructuring activities. For a more detailed discussion of our results
of operations compared to the year ended December 31, 2014, please see our analysis by reportable segment below.
Selling, General and Administrative (“SG&A”) expenses. SG&A expenses for the year ended December 31, 2015 decreased
$22,424 or 6.8% from the prior year, primarily due to favorable foreign exchange impact of $32,262, partially offset by the
acquisitions of St. Neots (June 12, 2014), Learoyd (August 21, 2014), Coveris Australasia (May 29, 2015) and Olefinas (June 17,
2015). Acquisitions contributed $11,342 to SG&A. Excluding foreign currency and acquisitions, SG&A decreased $1,504 from
the year ended December 31, 2014, primarily due to cost savings initiatives across the group.
Interest expense, net. Interest expense, net for the year ended December 31, 2015 increased $238 from the year ended December 31,
2014, primarily due to higher average debt balances, partially offset by reduced interest as a result of entering into the First
Amendment Agreement ("First Amendment") to the Term Loan in May 2015, which reduced the interest rate on the Term Loan
by 75 bps for the USD Tranche and 125 bps for the EUR Tranche.
Other income (expense), net. Other income, net of $1,187 for the year ended December 31, 2015 increased from other expense,
net of $5,740 in the prior year. The change is primarily due to significant losses in the prior year related to the disposal of the sale
of our Sopelana, Spain facility and the disposal of fixed assets related to the Delaware closure.
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Foreign Currency Exchange Gain (Loss). Our foreign currency loss decreased $14,974 from the year ended December 31, 2015.
The U.S. dollar continued to strengthen in 2015 at a decreased rate compared to 2014. This change was primarily due to two cross
currency swaps entered into during 2015 to mitigate exposure of foreign currency risk on cash flows generated in GBP and euro
in order to service the Senior Notes and Term Loans. Additionally, remeasurement of intercompany loans denominated in functional
currencies outside of their respective reporting currencies partially offset our unrealized loss on the foreign currency remeasurement
of our USD denominated debt maintained in a euro functional currency entity. Partially offsetting these decreases was a realized
foreign exchange loss of $5,801 on the repayment of our GBP Revolving Credit Facility.
Income tax benefit (provision). Income tax benefit decreased $7,154 from the year ended December 31, 2014 primarily due to
decreases in overall tax benefit related to the reduction of profits before tax in 2015 and the recording of a valuation allowance
during 2015 against deferred tax assets in certain jurisdictions.
Reportable Segments
Net sales by segment for the years ended December 31, 2015 and 2014 are as follows:
Year Ended
December 31,
December 31,
2015
2014
Net sales from external customers:
Flexible
Rigid
Total net sales
$
$
1,978,488
627,760
2,606,248
$
1,986,679
772,578
2,759,257
$
$ Change
$
$
(8,191)
(144,818)
(153,009)
% Change
(0.4 )%
(18.7 )%
(5.5)%
Operating income (loss) by segment for the years ended December 31, 2015 and 2014 is as follows:
Year Ended
December 31,
December 31,
2015
2014
Operating income (loss):
Flexible
Percentage of Flexible net sales
$
Rigid
Percentage of Rigid net sales
Corporate/Eliminations
Total operating income (loss)
Percentage of total net sales
66,062
$
3.3%
65,726
$
3.3 %
4,883
0.8%
$
5,570
76,515
$
2.9%
$ Change
% Change
336
0.5 %
(12,509)
(1.6)%
17,392
(139.0)%
(4,682)
48,535
1.8 %
10,252
(>100%)
Flexible
The Flexible segment includes a variety of flexible and semi-rigid plastic and paper products, including bags, pouches, roll stocks,
films, laminates, sleeves and labels. We sell these products primarily in North America, Europe, Central America and Australasia.
Our Flexible segment net sales for the year ended December 31, 2015 decreased $8,191 or 0.4% from the prior year, primarily
due to an unfavorable foreign exchange impact of $160,173, partially offset by the acquisitions of St. Neots (June 12, 2014),
Learoyd (August 21, 2014), Coveris Australasia (May 29, 2015) and Olefinas (June 17, 2015). Acquisitions contributed $136,008
to net sales. Excluding the impact of foreign currency and acquisitions, net sales increased $15,974. This organic growth is largely
attributable to increased volumes in our food packaging applications in North America as well as market share gains in our label
and film product lines in the United Kingdom. The volume increase was partially offset by customer pass through of lower resin
costs.
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For the year ended December 31, 2015, our Flexible segment operating income increased $336 or 0.4% from the prior year. The
change in operating income from prior year includes a favorable foreign exchange impact of $1,402 and increases due to the
acquisitions of St. Neots (June 12, 2014), Learoyd (August 21, 2014), Coveris Australasia (May 29, 2015) and Olefinas (June 17,
2015). Acquisitions contributed $14,232 to operating income. Excluding the impact of foreign currency and acquisitions, operating
income decreased $15,298 primarily due to increased selling, general and administrative costs in the current year related to various
business restructurings, spending on governance and process improvement initiatives across the group as well as increased costs
related to acquisitions in the current year.
Rigid
The Rigid segment includes injection molded or thermoformed and decorated rigid plastic and paper packaging solutions, including
bowls, cups, tubs, lids and trays. We sell these products primarily in Europe and North America.
Our Rigid segment net sales for the year ended December 31, 2015 decreased $144,818 from the prior year. The decrease is
primarily attributable to an unfavorable foreign exchange impact of $108,562. Excluding the impact of foreign currency, net sales
decreased $36,256, primarily due to customer pass through of declining resin costs.
For the year ended December 31, 2015, the Rigid segment had operating income of $4,883 compared to an operating loss of
$12,509 in the prior period, resulting in a $17,392 improvement. The increase is primarily attributable to lower SG&A expense
in the current year resulting from prior restructuring activities and cost alignment initiatives, in conjunction with CBS and CPS to
better leverage our existing resources and improve operating results. Partially offsetting these increases is an unfavorable foreign
exchange impact of $1,250 and a decline in volumes driven by plant closures in the prior year.
Unaudited Non-GAAP Information
The following tables present certain operating metrics derived by combining the historical consolidated net sales and gross margin
of the Company with the historical unaudited financial information for the pre-acquisition period of each company not combined
for GAAP reporting purposes in our annual report for the years ended December 31, 2015 and 2014, which includes the legacy
St Neots, Learoyd, Coveris Australasia and Olefinas businesses. The following unaudited pro forma information for the years
ended December 31, 2015 and 2014 gives effect to the acquisitions St Neots (acquired June 12, 2014), Learoyd (acquired August
21, 2014), Coveris Australasia (acquired May 29, 2015) and Olefinas (acquired June 17, 2015), as if they were acquired on
January 1, 2014.
Adjusted net sales for the Company are as follows:
Year ended December 31,
*2015
*2014
Rigid
Flexible
Total net sales
$
$
627,760
2,046,387
2,674,147
$
$
772,578
2,192,333
2,964,911
* Adjusted net sales for the years ended December 31, 2015 and 2014 includes the impact of combining the results of St. Neots, Learoyd, Coveris Australasia
and Olefinas as if they had been acquired on January 1, 2014.
Adjusted gross margin percentage is as follows:
Year ended December 31,
*2015
*2014
14.9%
14.1%
Gross margin percentage
* Adjusted gross margin percentage for the years ended December 31, 2015 and 2014 includes the impact of combining the results of St. Neots, Learoyd,
Coveris Australasia and Olefinas as if they had been acquired on January 1, 2014.
When analyzing, evaluating and monitoring the operating performance of our business, we also take into account our adjusted
earnings before interest, taxes, depreciation and amortization, as adjusted for non-operational items, special items and acquisitions
as if they were acquired on January 1, 2014 ("Adjusted EBITDA"), except for the retrospective application of purchase price
allocation adjustments. Adjusted EBITDA is a non-GAAP measure.
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We present herein the Group’s Non-GAAP Adjusted EBITDA for the years ended December 31, 2015 and 2014, which gives
effect to the acquisition of St Neots, which was acquired on June 12, 2014, Learoyd, which was acquired on August 21, 2014,
Coveris Australasia, which was acquired on May 29, 2015, and Olefinas, which was acquired on June 17, 2015, as if they were
acquired on January 1, 2014. Non-GAAP Adjusted EBITDA for the years ended December 31, 2015 and 2014 is presented for
information purposes only and is not intended to represent or be indicative of the Non-GAAP Adjusted EBITDA that we would
have reported had the acquisitions of St Neots, Learoyd, Coveris Australasia and Olefinas been completed as of the dates and for
the periods presented herein, should not be taken as representative of our Non-GAAP Adjusted EBITDA going forward and should
not be unduly relied upon.
Non-GAAP Adjusted EBITDA is not a measurement of performance under GAAP and you should not consider Non-GAAP
Adjusted EBITDA as an alternative to (a) total operating income (as determined in accordance with GAAP) as a measure of our
operating performance, (b) cash flows from operating, investing and financing activities as a measure of our ability to meet our
cash needs or (c) any other measures of performance under GAAP. We believe Non-GAAP Adjusted EBITDA is a useful indicator
of our ability to incur and service our indebtedness and can assist securities analysts, investors and other parties in evaluating our
business. Non-GAAP Adjusted EBITDA is used by different companies for varying purposes and is often calculated in ways that
reflect the circumstances of those companies. You should exercise caution in comparing Non-GAAP Adjusted EBITDA as reported
by us to Non-GAAP Adjusted EBITDA of other companies. Non-GAAP Adjusted EBITDA has important limitations as an analytical
tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP.
For example, Non-GAAP Adjusted EBITDA: (i) does not reflect our cash expenditures or future requirements for capital
expenditures; (ii) does not reflect changes in, or cash requirements for, our working capital needs; (iii) does not reflect the interest
expense or cash requirements necessary to service interest or principal payments on our debt; (iv) does not reflect any cash income
taxes we may be required to pay; and (v) does not reflect the impact of earnings or charges resulting from certain matters we
consider not to be indicative of our ongoing operations.
The following table reconciles Non-GAAP Adjusted EBITDA to its most directly comparable GAAP financial measure, which is
net income (loss), for the years ended December 31, 2015 and 2014:
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U.S. GAAP Net income (loss)
Year ended December 31,
2015
2014
(58,702) $
(102,049)
$
Interest expense, net
(Benefit) provision for income taxes
Depreciation and amortization
Non-GAAP EBITDA
128,991
(9,442)
128,753
(16,596)
148,394
209,241
156,318
166,426
—
—
3,037
2,279
(534)
8,266
7,732
2,700
16,400
24,416
3,998
1,533
1,202
16,058
22,791
2,287
5,364
1,107
28,599
37,357
38,204
8,584
7,825
27,297
14,299
335,973
45,094
9,797
10,128
20,727
26,711
340,656
Acquisition Adjustments: (a)
Unadjusted St. Neots EBITDA prior to Fund V acquisition
Unadjusted Learoyd EBITDA prior to Fund V acquisition
Unadjusted Coveris Australasia EBITDA prior to Fund V
acquisition
Unadjusted Olefinas EBITDA prior to Fund V acquisition
Total Acquisition Adjustments
Non-Operational Adjustments:
Accounting Manual Compliance
(Gain) loss on disposal of assets
Pension revaluation
Foreign currency exchange (gain) loss
Total Non-Operational Adjustments
Special Items:
Restructuring and related relocation costs (b)
Management fees and expenses
Transaction related expenses (c)
Business improvement consulting cost
Other expenses (d)
Non-GAAP Adjusted EBITDA
$
$
(a) Adjustments to retrospectively include results of certain entities prior to the Company's acquisition of the entity.
(b) Costs associated primarily with various restructuring activities, employee relocation expenses or employee severance costs.
(c) Costs associated with transaction and acquisition costs.
(d) Costs associated with information technology, consulting, rebranding and other infrequent expenses.
Actual results may differ materially from the assumptions within the accompanying unaudited non-GAAP information. The
unaudited non-GAAP information has been prepared by management and is not necessarily indicative of the actual results that
would have been realized had the transactions contemplated above as of the dates indicated, nor is it meant to be indicative of any
future results of operations that we will experience going forward.
Liquidity, Liabilities and Financing Agreements
Liquidity and Capital Resources
Our ability to generate cash from our operations depends on our future operating performance, which is in turn dependent, to some
extent, on general economic, financial, competitive, market, legislative, regulatory and other factors, many of which are beyond
our control.
We continuously undertake capital expenditure projects in order to increase our efficiency and production capacity. Many of our
capital expenditures have been made to rationalize our manufacturing footprint in order to optimize our resources in each geographic
region in which we operate.
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On November 8, 2013, we refinanced our legacy debt structure with a new bond issuance and term loan structure in order to
establish a sustainable credit structure, strategically position our business for future growth and fund current working capital needs
across all of our jurisdictions. Furthermore, on February 17, 2015 and June 16, 2015, we issued the Additional Notes to refinance
certain of our outstanding indebtedness. The Additional Notes have the same terms and conditions as the Senior Notes issued on
November 8, 2013, and constitute a single series with, and will be consolidated and fungible with our Senior Notes.
North American ABL Facility
On May 31, 2013, we assumed the North American asset-backed lending facility (the "NA ABL Facility") in conjunction with the
Exopack acquisition. The NA ABL Facility provides a maximum credit facility of $75,000, which includes a Canadian dollar subfacility available to our Canadian subsidiaries for up to $15,000 (the Canadian dollar equivalent). The NA ABL Facility also
provides our United States and Canadian subsidiaries with letter of credit sub-facilities. Availability under the NA ABL Facility
is subject to borrowing base limitations for both U.S. and Canadian subsidiaries, as defined in the loan agreement. In general, in
the absence of an event of default, the NA ABL Facility matures on November 8, 2018.
On May 2, 2014, we entered into an agreement with the Company's lender to engage the $25,000 accordion feature under the NA
ABL Facility. In addition, the Company entered into an agreement on July 18, 2014, to increase the available borrowings under
the NA ABL Facility from $100,000 to $110,000 through the collateralization of KubeTech accounts receivable and inventory.
The increase in borrowing availability gives the Company flexibility to fund incremental working capital needs as the Company
continues to expand.
Availability under the NA ABL Facility is capped at the lesser of the then-applicable commitment and the borrowing base. The
borrowing base consists of a percentage of eligible trade receivables and eligible inventory owned by U.S. borrowers, in the case
of U.S. borrowings, or Canadian borrowers, in the case of Canadian borrowings. Under the terms of a lock box arrangement,
remittances automatically reduce the revolving debt outstanding on a daily basis and therefore the NA ABL Facility is included
in the current portion of interest-bearing debt and capital leases on the Company's consolidated balance sheets as of December 31,
2015 and 2014.
Interest accrues on amounts outstanding under the U.S. facility at a variable annual rate equal to the US Index Rate plus 1.00% to
1.25%, depending on the utilization of the NA ABL Facility, or at our election, at an annual rate equal to the LIBOR Rate (as
defined therein) plus 2.00% to 2.25%, depending on utilization. In general, interest will accrue on amounts outstanding under the
Canadian sub-facility subsequent at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.00% to 1.25%,
depending upon utilization, at our election, at an annual rate equal to the BA Rate (as defined therein) plus 2.00% to 2.25%,
depending upon utilization. Pricing will increase by an additional 50 basis points above the rates described in the foregoing sentences
on any loans made against the last 5.00% of eligible accounts receivable and eligible inventory. The NA ABL Facility also includes
unused facility, ticking and letter-of-credit fees which are reflected in interest expense. The weighted average interest rate on
borrowings outstanding under the NA ABL Facility was 2.67% as of December 31, 2015.
The NA ABL Facility is secured by the accounts receivable, inventory, proceeds therefrom and related assets of the Exopack
Business on a first lien basis (subject to permitted liens) and by substantially all other asset of the Exopack Business on a second
lien basis (subject to permitted liens). However, the assets of any non-U.S. entities in the Exopack Business do not secure the
obligations under the U.S. facility.
The NA ABL Facility contains certain customary affirmative and negative covenants that restrict our ability to, among other things,
incur additional indebtedness, grant liens, engage in mergers, acquisitions and asset sales, declare dividends and distributions,
redeem or repurchase equity interests, incur contingent obligations, prepay certain subordinated indebtedness, make loans, certain
payments and investments and enter into transactions with affiliates. As of December 31, 2015, we were in compliance with these
covenants.
As of December 31, 2015, $55,269 was outstanding and $29,691 was available for additional borrowings, net of outstanding letters
of credit of $8,365 under the NA ABL Facility.
European ABL Facility
On November 8, 2013, we entered into receivables and inventory financing arrangements in each of France, Germany and the
United Kingdom whereby cash is made available to the Company in consideration for inventory and certain trade receivables
generated in these respective countries. The aggregate of any advances or borrowings under the GE French Facilities, the GE
Germany Facilities and the GE UK Facility is limited to $175,000 (equivalent).
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As of December 31, 2015, $97,046 was outstanding, $38,988 was the net amount available for additional borrowings and the
weighted average interest rate on borrowings outstanding under the European ABL Facility was 2.77%.
France
Under the French Facilities with GE Factofrance and Cofacredit (the “Factors”), certain wholly-owned subsidiaries shall sell and
assign to the Factors certain debts which, subject to the terms and conditions of the French Facilities, the assignees are obliged to
buy and accept. The sale price for the assigned debt is approximately 85%. The facilities are non-recourse facilities. The maximum
aggregate funded amount under the French Facilities is limited to €48,000. The French Facilities have an unfixed term with a five
year commitment period under which the Factors shall not be entitled to terminate the contracts except upon the occurrence of (i)
a breach of any of the covenants listed under the French Facilities, (ii) an event of default under any facility granted by a GE
Capital entity or (iii) a revocation of the mandates as defined under the contracts. Apart from the commitment period, any termination
of the contracts requires three months’ prior notice, save that (i) the Factors may terminate at any time without prior notice upon
the occurrence of certain events described under the French Facilities, (ii) the parties may terminate if Coveris Holdings S.A ceases
to directly or indirectly own at least 51% of the equity interests of the Company, (iii) the Factors may terminate the contracts with
a ten (10) working days prior notice, and with immediate effect in the event any representation or warranty made by Coveris
Holdings S.A. pursuant to the Side Letter is not complied with or proves to have been incorrect or misleading when made or
deemed to be made and is not remedied within the above notice period by any means or party. Within the frame of the French
Facilities, certain wholly-owned subsidiaries have pledged to the benefit of the Factors, the receivables held over the Factors on
the current accounts opened in their books, in order to secure the obligations under the terms of the French Facilities.
Germany
Under the German facilities with GE Capital Bank AG, to be entered into by certain wholly-owned subsidiaries as originators and
GE Capital Bank AG as factoring bank (the “GE Germany Facilities”), certain wholly-owned subsidiaries may sell and assign to
GE Capital Bank AG certain receivables which, subject to the terms and conditions of the GE Germany Facilities, the assignee is
obliged to buy and accept. It is further intended that certain wholly-owned subsidiaries provide certain limited cross guarantees
for the benefit of GE Capital Bank AG to guarantee their obligations under the GE Germany Facilities. The factoring fee for the
GE Germany Facilities is 0.15% calculated as a multiple of the gross turnover of assigned receivables and bears interest at 3M
EURIBOR +2.25%. The facilities are non-recourse facilities. The maximum aggregate funded amount under the GE Germany
Facilities is limited to €25,000. The GE Germany Facilities have a five year term and any termination of the contract requires three
months’ prior notice to the second, third, or fourth anniversary of the relevant commencement date, save that GE Capital Bank
AG may terminate at any time if one of the following termination events, amongst others, occurs: a change of control, a crossdefault and breach of the relevant fixed charge coverage.
United Kingdom
Under the GE UK Facility with GE Capital Bank Limited (“GE”), certain wholly-owned subsidiaries (the “Clients”) assign to GE
Capital Bank Limited certain debts which, subject to customary conditions, GE is obliged to buy and accept. Certain wholly-owned
subsidiaries are guarantors under the GE UK Facility (the “UK Obligors”). The Clients and UK Obligors have granted security in
favor of GE over non-vesting debts and a floating charge over all assets subject to the terms of the Intercreditor Agreement. The
GE UK Facility is comprised of an invoice finance facility for which the aggregate loan advance limit is £69,000 (the “Invoice
Facility”) and a revolving inventory finance facility for which the aggregate current account limit is £20,000 (the “Revolving
Inventory Facility”). Under the Invoice Facility, the advance percentage for the assigned debts is 90% of the nominal amount of
the debt, subject to reduction in respect of the discount rate, service charges and other liabilities. Under the Revolving Inventory
Facility, the loan advance percentage of the eligible inventory is 80% of the net orderly liquidation value of that inventory, subject
to reduction in respect of certain customary reserves. The GE UK Facility has recourse terms where the Clients and UK Obligors
bear the credit risk of the transactions (including where the underlying debtor fails to pay). The GE UK Facility has a term of five
years and any termination of the contract requires either three months’ prior notice where there is a refinancing or one month’s
prior notice where there is a sale of the Company. Customary representations and warranties are included in the GE UK Facility
and customary restrictions on disposals of assets and granting liens are also included. Events of default include failure to pay,
misrepresentation, insolvency, insolvency proceedings, breach of obligations and cross-acceleration and cross-default to other
indebtedness of the Clients or the UK Obligors. A mandatory prepayment is required upon the change of control of a Client or UK
Obligor subject to minimum thresholds in respect of EBITDA, gross assets or turnover being satisfied. In addition, if the availability
under the Invoice Facility plus the availability under the Revolving Inventory Facility plus the equivalent concept of availability
under the GE Germany Facility and the GE French Facilities is less than $14,583, the Clients shall not permit the ratio of operating
cash flow of the Company to the fixed charges of the Company to be less than 1.00:1.00.
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Senior 7 7/8% Notes
On November 8, 2013 we issued $325,000 in aggregate principal amount 7 7/8% Senior Notes (the “Senior Notes”). On February
17, 2015 and June 16, 2015, respectively, we issued an additional $85,000 and $155,000 in aggregate principal amount 7 7/8%
Senior Notes (the "Additional Notes" and together with the Senior Notes, the "Notes"). The Additional Notes were issued under
the indenture, dated as of November 8, 2013 (the "Indenture"), governing our existing Senior Notes and have the same terms and
conditions as the Senior Notes for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions
and offers to purchase. The Notes mature on November 1, 2019 and pay interest on the Senior Notes semi-annually on each
November 1 and May 1. The $85,000 Additional Notes were issued at a premium of $850, and the $155,000 Additional Notes
were issued at a discount of $194. The premium and discount will be amortized over the remaining term of such notes. The Notes
are senior unsecured obligations of the Company, ranking senior in right of payment to all of our future debt that is expressly
subordinated in right of payment to the Notes and rank pari passu in right of payment with our existing and future debt that is not
so subordinated, including our obligations under the Term Loan, the European ABL Facilities, the NA ABL Facility and the Exopack
Notes.
The Notes are guaranteed on a senior unsecured basis (the “Guarantees”) by certain subsidiaries (the “Guarantors”). Each of the
Guarantees ranks senior in right of payment to the applicable Guarantor’s future debt that is expressly subordinated in right of
payment to such Guarantee and ranks pari passu in right of payment with such Guarantor’s existing and future debt that is not so
subordinated, including the applicable Guarantor’s obligations under the Term Loan, the European ABL Facilities, the NA ABL
Facility and the Exopack Notes, as applicable. The validity and enforceability of the Guarantees and the liability of each Guarantor
is subject to certain limitations described in the $325,000 7 7/8% Senior Notes due 2019 Offering Memorandum dated October
24, 2013, the $85,000 7 7/8% Senior Notes due 2019 Offering Memorandum dated February 10, 2015, and the $155,000 7 7/8%
Senior Notes due 2019 Offering Memorandum dated June 11, 2015. The Notes and Guarantees are structurally subordinated to
all obligations of our subsidiaries that do not guarantee the Notes and effectively subordinated to any existing and future secured
debt of the Company and its subsidiaries, to the extent of the value of the property and assets securing such debt.
At any time prior to November 1, 2016, we may on any one or more occasions redeem up to 40% of the aggregate principal amount
of the Notes issued under the Indenture, upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to
107.875% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and Additional Amounts, if any, to the
date of redemption, with the net cash proceeds of an Equity Offering of (i) the Company or (ii) any Parent Holdco of the Company
to the extent the proceeds from such Equity Offering are contributed to the Company’s common equity capital or are paid to the
Company as consideration for the issuance of ordinary shares; provided that:
(1)
(2)
at least 60% of the aggregate principal amount of the Notes originally issued under the Indenture (excluding Notes
held by the Company and its Subsidiaries) remains outstanding immediately after the occurrence of such redemption;
and
the redemption occurs within 120 days of the date of the closing of such Equity Offering.
Further, at any time prior to November 1, 2016, we may on any one or more occasions redeem all or a part of the Notes upon not
less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of such Notes redeemed
plus the Applicable Premium, as defined in the Indenture governing the Senior Notes, as of, and accrued and unpaid interest and
Additional Amounts, as defined in the Indenture, if any, to the date of redemption.
On or after November 1, 2016, we may on any one or more occasions redeem all or a part of the Notes upon not less than 30 nor
more than 60 days’ notice (subject to such longer period as may be determined by the Company, in the case of a defeasance of the
Notes or a satisfaction and discharge of the Indenture), at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest and Additional Amounts, if any, on the Notes redeemed, to the applicable date
of redemption, if redeemed during the twelve-month period beginning on November 1 of the years indicated below:
Year
2016
2017
2018 and thereafter
Redemption Price
103.938%
101.969%
100.000%
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Unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Notes or portions thereof
called for redemption on the applicable redemption date.
Any redemption and notice may, in our discretion, be subject to the satisfaction of one or more conditions precedent.
The Notes require us to comply with customary covenants applicable to our Company and its restricted subsidiaries. Set forth
below is a brief description of the affirmative and negative covenants, all of which will be subject to customary exceptions,
materiality thresholds and qualifications, including, in the case of certain negative covenants, the ability to grow baskets with
retained excess cash flow, the proceeds of qualified equity issuances and certain other amounts:
•
•
The affirmative covenants include the following: (i) delivery of financial statements and other customary financial
information; (ii) notices of events of default and other material events; (iii) maintenance of existence, ability to conduct
business, properties, insurance and books and records; (iv) additional collateral and guarantor requirements; and
(v) designation of unrestricted subsidiaries.
The negative covenants include limitations on: (i) indebtedness and the issuance of preferred stock; (ii) restricted
payments; (iii) liens; (iv) dividend and other payment restrictions; (v) layered debt; (vi) mergers, consolidation or sale of
assets and (vii) transactions with affiliates.
As of December 31, 2015, the Company was in compliance with all of these covenants.
10% Exopack Notes
On May 31, 2013, we assumed the 10% Notes (the "Exopack Notes") in conjunction with the Exopack acquisition. The Exopack
Notes were issued pursuant to the indenture dated May 31, 2011, between, among others, Exopack and The Bank of New York
Mellon Trust Company, N.A., as trustee. Exopack issued $235,000 in aggregate principal amount of unregistered senior notes.
The Exopack Notes mature on June 1, 2018 and accrue interest at the rate of 10% per annum and payable semi-annually on each
June 1 and December 1.
The Exopack Notes are senior unsecured obligations and rank equally in right of payment with all existing and future senior
indebtedness of Exopack, rank senior in right of payment to any future subordinated indebtedness of Exopack, and are effectively
subordinated to any secured indebtedness of Exopack up to the value of the collateral securing such indebtedness. The Exopack
Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by all of Exopack's subsidiaries incorporated in the
United States as well as certain subsidiaries that also guarantee the Senior Notes. The guarantees of the Exopack Notes rank equally
in right of payment with all existing and future senior indebtedness of the guarantors, rank senior in right of payment to any future
subordinated indebtedness of the guarantors, and are effectively subordinated to any secured indebtedness of the guarantors,
including the Term Loan), up to the value of the collateral securing such indebtedness. The guarantees of the Exopack Notes may
be released under certain conditions, including the sale or other disposition of all or substantially all of the guarantor subsidiary’s
assets, the sale or other disposition of all the capital stock of the guarantor subsidiary, change in the designation of any restricted
subsidiary as an unrestricted subsidiary by Exopack, or upon legal defeasance or satisfaction and discharge of the Exopack Notes.
Exopack is not required to make mandatory redemption or sinking fund payments with respect to the Exopack Notes.
If Exopack experiences a change of control, Exopack must offer to repurchase the Exopack Notes at a price equal to 101% of the
aggregate principal amount of the Exopack Notes, plus accrued and unpaid interest and additional amounts, if any, to the date of
purchase.
The Exopack Notes Indenture contains customary events of default, including, without limitation, payment defaults, covenant
defaults, certain cross-defaults to mortgages, indentures or other instruments, certain events of bankruptcy and insolvency, and
judgment defaults.
The Exopack Notes Indenture contains covenants for the benefit of the holders of the Exopack Notes substantially similar to the
covenants that govern the Notes. As of December 31, 2015, the Company was in compliance with all of these covenants.
Term Loan
On November 8, 2013, we entered into a credit agreement (the “Term Loan”) with Goldman Sachs Bank USA, as administrative
and collateral agent and the certain financial institutions and other persons party thereto as lenders from time to time. The Company
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borrowed a single draw dollar denominated term loan of approximately $435,000 (the "Term Loan - USD Tranche") in principal
amount and a single draw euro denominated term loan of approximately €175,000 (the "Term Loan - EUR Tranche") in principal
amount pursuant to the Term Loan Facility Agreement. On May 22, 2015, we entered into the First Amendment Agreement to the
Term Loan with Goldman Sachs Bank USA, as administrative and collateral agent, amongst others. The First Amendment reduced
our annual interest rates by 75 bps on the Term Loan - USD Tranche and by 125 bps on the Term Loan - EUR Tranche. In addition,
we have increased the Term Loan - EUR Tranche to €247,800 and decreased the Term Loan - USD Tranche by a U.S. dollar
equivalent.
The Term Loan matures on May 8, 2019. Should the maturity of the Exopack Notes not be extended (and the Exopack Notes
remain outstanding at the time), the maturity of the Term Loan will be automatically shortened to the date that is 91 days prior to
the maturity date of the Exopack Notes. The Term Loan shall be repayable in equal quarterly installments of 1.00% per annum of
the original principal amounts.
We may also incur an incremental term loan under the Term Loan from time to time in an amount not to exceed $50,000 plus an
unlimited amount subject to meeting a secured net leverage ratio approximately equal to the secured net leverage ratio as of
November 8, 2013. The incurrence of an incremental term loan is subject to various customary conditions, including locating a
lender or lenders willing to provide it.
The Term Loan, at our option, will from time to time bear interest at either (i) with respect to loans denominated in dollars, (a)
3.25% in excess of the alternate base rate (i.e., the greatest of the prime rate, the federal funds effective rate in effect on such day
plus 1/2 of 1%, and the London interbank offer rate (after giving effect to any floor for an interest period of one month) in effect
from time to time, or (b) 3.50% in excess of the London interbank offer rate (adjusted for maximum reserves), and (ii) with respect
to loans denominated in euros, 3.50% in excess of the euro interbank offer rate (adjusted for maximum reserves). The London
interbank offer rate and the euro interbank offer rate will be subject to a floor of 1.00% and the alternate base rate will subject to
a floor of 2.00%. Interest will be payable quarterly in arrears and at maturity.
All obligations under the Term Loan and any secured hedging arrangements and secured cash management agreements provided
by lenders or affiliates thereof will be unconditionally guaranteed by the Guarantors.
Subject to customary agreed security principles, certain excluded ABL collateral under the GE Germany Facilities and the French
Facilities and the lien priorities, the New Term Loan Facility will be secured by substantially all if our assets and the Guarantors.
The Term Loan Facility Agreement does not include any financial covenants.
The Term Loan has customary events of default (subject to materiality thresholds and standstill and grace periods), including:
(a) non-payment of obligations (subject to a five business day grace period in the case of interest and fees); (b) breach of
representations, warranties and covenants (subject to a thirty-day grace period following written notice in the case of certain
covenants); (c) bankruptcy (voluntary or involuntary); (d) inability to pay debts as they become due; (e) cross default and cross
acceleration to material indebtedness; (f) the Employee Retirement Income Security Act ("ERISA") events; (g) change in control;
(h) invalidity of liens, guarantees, subordination agreements; and (i) judgments.
The Term Loan requires us to comply with customary affirmative and negative covenants. Set forth below is a brief description
of the affirmative and negative covenants, all of which will be subject to customary exceptions, materiality thresholds and
qualifications, including, in the case of certain negative covenants, the ability to grow baskets with retained excess cash flow, the
proceeds of qualified equity issuances and certain other amounts:
•
•
The affirmative covenants include the following: (i) delivery of financial statements and other customary financial
information; (ii) notices of events of default and other material events; (iii) maintenance of existence, ability to conduct
business, properties, insurance and books and records; (iv) payment of certain obligations; (v) inspection rights;
(vi) compliance with laws, including employee benefits and environmental laws; (vii) use of proceeds; (viii) further
assurances; (ix) additional collateral and guarantor requirements; (x) maintenance of ratings; (xi) designation of
unrestricted subsidiaries; (xii) information regarding collateral; and (xii) post-closing matters.
The negative covenants include limitations on: (i) liens; (ii) debt (including guaranties); (iii) fundamental changes;
(iv) dispositions (including sale leasebacks); (v) affiliate transactions; (vi) investments (vii) restrictive agreements, and
no negative pledges; (viii) restricted payments; (ix) voluntary prepayments of unsecured and subordinated debt;
(x) amendments to certain debt agreements and organizational documents; (xi) changes of business, center of main
interests or fiscal years; and (xii) anti-terrorism and sanctions related matters.
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As of December 31, 2015, we were in compliance with all of these covenants.
GBP Revolving Credit Facility
On October 18, 2013, we entered into a Loan Authorization Agreement (the "GBP Revolving Credit Facility") with Bank of
Montreal Ireland P.L.C.
Borrowings on the GBP Revolving Credit Facility are payable on demand; provided that to the extent funds are not immediately
available, we shall have ten business days to honor any demand for payment requested by Bank of Montreal Ireland P.L.C.
Borrowings are guaranteed by a related party parent, Sun Capital Partners V, L.P.
As of December 31, 2015, there was $0 outstanding on our GBP Revolving Credit Facility.
Shareholder loans
As of December 31, 2015 and December 31, 2014, we had related party shareholder loans which are PECs, ALPECs, or YFPECs.
PEC Shareholder Loans
Our shareholders have provided interest-bearing PECs with a term of 49 years. Principal is payable on the PECs at maturity and
interest is accrued annually on December 31. The applicable interest rate for each of these instruments is equal to the arm's length
market rate of interest per annum as agreed between the parties to the agreement from time to time. The PECs include an optional
redemption feature, at par value plus any accrued interest. The PECs are not secured by any assets but receive priority in liquidation
over common shareholders.
ALPEC Shareholder Loans
Our shareholders have issued ALPECs with a term of 49 years. ALPECs accrue interest based on the value of a linked asset and
not necessarily based on the corresponding obligation amount. Holders of the ALPECs shall receive a return, or yield, based on
the business unit yield as defined in the contract net of the applicable margin. Principal is payable on the ALPECs at maturity and
interest is accrued annually on December 31. The ALPECs include an optional redemption feature, at par value plus any accrued
interest and unpaid yield. The ALPECs receive priority in liquidation over common shareholders.
YFPEC Shareholder Loan
Our shareholders have provided a YFPEC with a term of 49 years. The principal on the YFPEC is payable at maturity. The YFPEC
includes an optional redemption feature at par value. The YFPEC is not secured by any of the assets of the Company but receives
priority in liquidation over common shareholders.
Liquidity Discussion
As of December 31, 2015, we had approximately $29,691 of available borrowing capacity under our North American ABL Facility
and $38,988 under our European ABL Facilities. On May 2, 2014, we entered into a commitment increase with our lender to
engage the $25,000 accordion feature with the NA ABL Facility. This commitment increase gives us the flexibility to fund
incremental working capital needs as we continue to expand. We believe our future operating cash flow and available liquidity
will be sufficient to support our operations, funds our working capital and capital expenditure needs, as well as provide for scheduled
interest and principal payments for the next twelve months.
As of December 31, 2015, we had $1,631,092 of third party, interest-bearing debt (including capital lease obligations). As of
December 31, 2015, we had $46,455 in cash and cash equivalents on hand. We expect that our principal sources of liquidity will
be borrowings with our North American ABL Facility, European ABL Facility, factoring lines, cash flow from operations and
reduced capital spending.
Net working capital (current assets less current liabilities) increased $63,496 to $107,802 as of December 31, 2015 from $44,306
as of December 31, 2014. The increase from the prior year end is largely attributable to the repayment of our GBP Revolving
Credit Facility from the proceeds of the Additional Notes.
Cash decreased $5,224 from December 31, 2014, compared to a $17,808 decrease from December 31, 2013 to December 31, 2014.
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Cash provided by operating activities were $121,689 for the year ended December 31, 2015 and $77,636 for the year ended
December 31, 2014, or an increase of $44,053. The increase in operating cash flows is primarily due to the company’s improved
performance and decreased accounts receivable and inventory balances.
Cash used in investing activities for the years ended December 31, 2015 and 2014 was $289,508 and $139,122, respectively. The
increase is primarily due to the acquisition of Olefinas and Coveris Australasia in 2015, which were significantly larger than the
acquisitions completed in the comparative period. Additionally, we have increased capital expenditures in the current year as we
invest in various plant modernization efforts, as well as capacity.
Cash provided by financing activities for the year ended December 31, 2015 was $162,310 compared to $47,580 for the year ended
December 31, 2014. The increase is primarily comprised of the proceeds from the issuance of our Additional Notes and the
repayments of legacy debt of acquired companies in the prior year, partially offset by the repayment of the GBP Revolving Credit
Facility, decreased borrowings, net of repayments, on our North American and European ABL Facilities, and deferred financing
costs related to the Additional Notes. See Note 7. Financing Arrangements for further discussion of our debt structure.
Contractual Obligations
The following table summarizes the scheduled payments and obligations under our contractual and other commitments as of
December 31, 2015:
Contractual Obligations(1)
Shareholder Loans
Senior 7 7/8 % Notes
10% Exopack Notes
Term Loans - USD
Term Loans - EUR
North American ABL Facility
European ABL Facility
Other interest-bearing debt
Capital leases
Total principal maturities
Total
2016
2017
$ 181,648 $
— $
565,000
—
235,000
—
343,906
3,509
268,212
2,737
55,269
55,269
97,046
97,046
4,951
4,951
74,255
16,360
1,825,287
179,872
2018
2019
— $
— $
— $
—
—
565,000
—
235,000
—
3,509
3,509
333,379
2,737
2,737
260,001
—
—
—
—
—
—
—
—
—
14,236
10,037
8,968
20,482
251,283 1,167,348
2020
Beyond
2021
— $ 181,648
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,259
21,395
3,259
203,043
(1) Future maturities disclosed in this table only include repayment of principal, except for capital leases, which include principal and
interest payments.
Employee Benefit Plans
The measurement date for defined benefit plan assets and liabilities is December 31, the Company’s fiscal year end. A summary
of the elements of key employee benefit plans is as follows:
US Plans
The collective pension assets and obligations (collectively the "US Plans") of the Retirement Plan of Coveris Flexibles US, LLC
(the "US Retirement Plan") and the pension obligations of the Coveris Flexibles US, LLC Pension Restoration Plan for Salaried
Employees (the "US Restoration Plan") were transferred to and assumed by the Company in connection with the acquisition of
Exopack. The US Plans were frozen prior to the Exopack acquisition. Accordingly, the employees’ final benefit calculation under
the US Plans was the benefit they had earned under the US Plans as of the freezing date. This benefit will not be diminished,
subject to certain terms and conditions, which will remain in effect.
UK Plans
The Company has two defined benefit pension plans in the United Kingdom (UK). Members of UK plans are entitled to a lifelong
pension or a one-off payment on retirement which is based on the final pensionable salary and length of service. The plans are
wholly funded. The plan assets are held in a trust fund which is administered by trustees.
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Netherlands Plan
The Company also has a defined benefit pension plan in the Netherlands. Members of this plan are entitled to pension benefits on
retirement.
Other Defined Benefit Plans
The Company has other smaller defined benefit (“Other DB”) pension plans in Germany and France. These plans provide lifelong
pensions to its current members based on employee pensionable remuneration and length of service. The plans are closed to new
members and all plans are unfunded.
Other Post Employment Benefit Plans
The Company maintains other post-employment benefit ("Other OPEB") plans in Poland, Germany, Austria, France and Turkey
where there are obligations for termination indemnities and other benefits to be paid to employees at the date of retirement or other
early retirement incentives. The entitlement to these benefits is based upon the employees’ final salary and length of service, subject
to the completion of a minimum service period.
During the year ended December 31, 2015 we recorded a net periodic pension cost of $615, which included interest cost of $6,888
at assumed rates ranging between of 2.0% and 3.9%, service cost of $1,277, offset by $8,010 of expected returns on plan assets
at assumed rates ranging between 2.2% and 7.0%. During the year ended December 31, 2014, we recorded a net periodic pension
cost of $1,319, which included interest cost of $7,627 at assumed rates ranging between of 1.8% and 4.9%, service cost of $1,268,
partially offset by $8,271 of expected returns on plan assets at assumed rates ranging between 3.7% and 7.0%.
During the year ended December 31, 2015, we recorded net periodic postretirement cost of $660, which included interest cost of
$258 at the assumed rate of 2.5%, service cost of $522 and expected return on plan assets of $4. During the year ended December 31,
2014, we recorded net periodic postretirement cost of $986, which included interest expense of $421 at the assumed rate of 3.5%,
service cost of $623 and expected return on plan assets of $4.
We expect to make contributions of $2,782 to the various pension plans in 2016.
The projected pension liability of these plans will be affected by assumptions regarding inflation, investment returns, market
interest rates, changes in the number of plan participants, changes in the benefit obligations, and laws and regulations pertaining
to benefit obligations. We annually reevaluate assumptions used in projecting the pension and postretirement liabilities and
associated expense (income). These judgments, assumptions and estimates may affect the carrying value of pension plan assets
and pension plan and postretirement plan liabilities and pension and postretirement plan expense (income) in our consolidated
financial statements included elsewhere in this report.
As of December 31, 2015, the fair value of the assets of the various pension plans was $165,483, down from $174,921 at
December 31, 2014. Our minimum required contributions to our pension plans for fiscal year 2015 and thereafter may increase
or decrease depending on volatility with respect to future global stock market valuations.
Critical Accounting Policies and Estimates
For discussion on our critical accounting policies and estimates, please see Section III, Note 1, "Organization and Significant
Accounting Policies" to be read in conjunction with Note 2, "Recent Accounting Pronouncements."
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Quantitative and Qualitative Information Regarding Market and Operating Risks
Our operations are exposed to different financial risks, including foreign exchange risk, interest rate risk and counterparty risk.
Our risk management is coordinated at our headquarters, in close cooperation with our executive committee, and focuses on
securing our short- to medium-term cash flows by minimizing the exposure to financial markets.
Foreign Exchange Risk
Transactional risk arises when our subsidiaries execute transactions in a currency other than their functional currency. We currently
operate facilities in 20 different countries, and sell our products into approximately 105 countries. As a result, we generate a
significant portion of our sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. The primary
currencies in which we generated revenues are the euro, the U.S. dollar and the British pound sterling. Where we are unable to
match sales received in foreign currencies with costs paid in the same currency, our results of operations are impacted by currency
exchange rate fluctuations. For example, a stronger U.S. dollar will increase the cost of U.S. dollar supplies for our non-U.S.
businesses and conversely decrease the cost of non-U.S. dollar supplies for our U.S. dollar businesses. Our subsidiaries generally
execute their sales and incur most of their materials costs in the same currency. We have entered into a series of cross currency
swaps, forward contracts and foreign currency options in an effort to reduce the effect of exchange rate fluctuations on our financial
statements related to our future debt principal and interest payments in U.S. dollars from cash flows largely generated in British
pounds and euros.
We present our consolidated financial statements in U.S. dollars. As a result, we must translate the assets, liabilities, revenue and
expenses of all of our operations with a functional currency other than the U.S. dollars into U.S. dollars at then-applicable exchange
rates. Consequently, increases or decreases in the value of these currencies against the U.S. dollar may affect the value of our
assets, liabilities, revenue and expenses with respect to our non-U.S. dollar businesses in our consolidated financial statements,
even if their value has not changed in their original currency, which creates translation risk.
Interest Rate Risk
Interest rate risk relates to a negative impact on our profits arising from changes in interest rates. Our income and operating cash
flow are also dependent on changes in market interest rates. Some balance sheet items, such as cash and bank balances, interest
bearing investments and borrowings, are exposed to interest rate risk. Borrowings under our Term Loan, NA ABL Facility and
European ABL Facilities bear interest at variable rates. Because these rates may increase or decrease at any time, we are subject
to the risk that they may increase, thereby increasing the interest rates applicable to our borrowings under these facilities. Increases
in the applicable rates would increase our interest expense and reduce our net income or increase our net loss. We do not have any
instruments in place, such as interest rate swaps or caps, which would mitigate our exposure to interest rate risk related to these
borrowings. Based on the amount of borrowings outstanding as of December 31, 2015, the effect of a hypothetical 0.125% increase
in interest rates would increase our annual interest expense on third party variable rate debt by approximately $964.
Borrowings under the Senior Notes and Exopack Notes bear interest at a fixed rate. For fixed rate debt, interest rate changes affect
the fair market value of such debt, but do not impact earnings or cash flow. We currently do not intend to enter into hedging
arrangements with respect to our variable rate borrowings, which will primarily be borrowings under the Term Loan, the NA ABL
Facility and the European ABL Facilities and other local working capital borrowing.
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SECTION III
COVERIS HOLDINGS S.A.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report
F-2
Consolidated Balance Sheets as of December 31, 2015 and 2014
F-3
Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2014
F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015 and 2014
F-5
Consolidated Statements of Shareholders' Equity (Deficiency) for the Years Ended December 31, 2015 and 2014
F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014
F-7
Notes to the Consolidated Financial Statements
F-9
F-1
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Independent Auditor's Report
To the Shareholder of
Coveris Holdings S.A.
We have audited the accompanying consolidated financial statements of Coveris Holdings S.A. and its subsidiaries (together
referred to as the “Group”), which comprise the consolidated balance sheets as of 31 December 2015 and 2014, and the related
consolidated statements of operations, of comprehensive income (loss), of shareholders’ equity (deficiency) and of cash flows for
the two years ended 31 December 2015.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance
of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by Management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Coveris Holdings S.A. at 31 December 2015 and 2014, and the results of its operations and its cash flows for the years then
ended December 31, 2015 in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers, Société coopérative
Luxembourg, March 16, 2016
F-2
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Coveris Holdings S.A.
Consolidated Balance Sheets
*
December 31,
2014
December 31,
2015
(in thousands of U.S. dollars, except share information)
ASSETS
Current assets:
Cash and cash equivalents
Trade accounts receivable (net of allowance for uncollectible accounts of $6,732 and $9,234
as of December 31, 2015 and 2014, respectively)
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Intangible assets, net
Goodwill
Deferred income tax assets
Pension assets
Noncurrent deferred financing costs, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of interest-bearing debt and capital leases
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Noncurrent liabilities:
Long-term debt, less current portion
Capital lease obligations, less current portion
Shareholder loans
Deferred income tax liabilities
Pension and post-retirement obligation
Other liabilities
Total liabilities
Commitments and contingencies - Note 8
Shareholders' invested equity (deficiency):
Ordinary shares of par value EUR 1.00 per share
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss, net
Total shareholders' equity (deficiency)
Non-controlling interest
Total liabilities and shareholders' equity (deficiency)
* Please refer to Note 1, "Organization and Significant Accounting Policies"
The accompanying notes are an integral part of these consolidated financial statements.
F-3
$
46,455
$
364,558
291,411
72,713
775,137
841,968
276,470
512,506
1,890
16,371
39,151
19,831
2,483,324
$
$
174,545
310,468
179,681
2,641
667,335
$
51,679
$
374,951
293,033
62,818
782,481
790,051
309,169
487,652
5,397
12,907
43,395
9,150
2,440,202
$
243,694
303,012
188,813
2,656
738,175
1,406,673
49,874
181,648
52,795
46,776
18,460
2,423,561
1,195,163
48,453
198,242
68,820
53,227
14,054
2,316,134
40
455,362
(360,185)
(35,225)
59,992
(229)
2,483,324 $
40
456,186
(301,451)
(30,964)
123,811
257
2,440,202
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Coveris Holdings S.A.
Consolidated Statements of Operations
Year Ended
December 31,
2015
(in thousands of U.S. dollars)
Net sales
Cost of sales
Gross margin
Operating expenses:
$
*
Year Ended
December 31,
2014
2,606,248 $
(2,221,163)
385,085
2,759,257
(2,379,728)
379,529
Selling, general and administrative expenses
Operating income (loss)
Nonoperating income (expense):
(308,570)
76,515
(330,994)
48,535
Interest expense, net
Other income (expense), net
Foreign currency exchange gain (loss)
Nonoperating income (expense), net
(128,991)
1,187
(16,855)
(144,659)
(128,753)
(5,740)
(31,829)
(166,322)
(68,144)
(117,787)
$
9,442
(58,702) $
16,596
(101,191)
$
—
(58,702) $
(858)
(102,049)
$
32
(58,734) $
(198)
(101,851)
Income (loss) before taxes from continuing operations
Income tax benefit (provision)
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of income tax
expense (benefit) of $0
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to parent
* Please refer to Note 1, "Organization and Significant Accounting Policies"
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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Coveris Holdings S.A.
Consolidated Statements of Comprehensive Income (Loss)
*
Year Ended
Year Ended
December 31,
December 31,
2015
2014
(58,702) $
(102,049)
$
(in thousands of U.S. dollars)
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Actuarial gains (losses) on employee benefit obligations, net of
income taxes of $(428) and $8,646 for the years ended
December 31, 2015 and 2014, respectively
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income (loss) attributable to non-controlling
interest
Comprehensive income (loss) attributable to parent
(10,302)
(3,713)
6,041
(4,261)
(12,655)
(16,368)
$
(62,963) $
(118,417)
$
32
(62,995) $
(182)
(118,235)
* Please refer to Note 1, "Organization and Significant Accounting Policies"
The accompanying notes are an integral part of these consolidated financial statements.
F-5
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Coveris Holdings S.A.
Consolidated Statements of Shareholders’ Equity (Deficiency)
Share Capital
(in thousands of U.S. dollars, except share
information)
Balances as of December 31, 2013*
Predecessor
Combined
Share Capital
$
—
Shares
Additional
Paid-in Capital
Amount
12,500
$
40
$
444,605
Accumulated
Deficit
$
Accumulated
Other
Comprehensive
Income (Loss)
(199,600) $
(14,580) $
230,465
—
(101,851)
NonControlling
Interest
$
439
Total Equity
(Deficiency)
$
(198)
230,904
(102,049)
Net income (loss)
—
—
—
—
Foreign currency translation adjustment
—
—
—
—
—
(3,729)
(3,729)
16
(3,713)
Change in employee benefit obligation, net of tax
—
—
—
—
—
(12,655)
(12,655)
—
(12,655)
Related Party Capital Contribution (1)
—
—
—
11,581
—
—
11,581
Balances as of December 31, 2014*
$
32
(58,702)
—
Foreign currency translation adjustment
—
—
—
—
—
(10,302)
(10,302)
—
(10,302)
Change in employee benefit obligation, net of tax
—
—
—
—
—
6,041
6,041
—
6,041
Balances as of December 31, 2015
$
—
—
—
12,500
40
(58,734)
(130)
—
$
—
(694)
$
455,362
(301,451) $
(58,734)
—
Capital distribution to parent
$
123,811
—
—
456,186
—
12,500
—
—
$
11,581
—
—
40
—
(30,964) $
Net income (loss)
Acquisition of certain noncontrolling interest
$
(101,851)
Total
Shareholders'
Equity
—
$
(360,185) $
—
—
(35,225) $
$
(130)
$
(518)
(694)
59,992
257
—
$
(229) $
124,068
(648)
(694)
59,763
(1) As a part of the acquisition of KubeTech on May 30, 2014, the Company received a capital contribution in the form of loan forgiveness and equipment transfers between KubeTech and a related party.
Refer to Note 5, Business Combinations, for further disclosures regarding the KubeTech acquisition.
* Please refer to Note 1, "Organization and Significant Accounting Policies"
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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Coveris Holdings S.A.
Consolidated Statements of Cash Flows
Year Ended December 31,
*
(in thousands of U.S. dollars)
2015
2014
OPERATING ACTIVITIES
Net income (loss)
$
(58,702) $
(102,049)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
148,394
156,318
Amortization of deferred financing costs and debt premium
10,744
10,942
Foreign exchange loss (gain) on non-operating activities
21,098
32,415
Unrealized loss (gain) on derivative financial instruments
(10,718)
(3,816)
1,533
2,400
Loss (gain) on sale and disposition of property, plant and equipment
Loss (gain) on sale of investments
—
Deferred income tax provision (benefit)
2,964
(20,061)
(24,228)
Receivables, prepaid expenses, and other current assets
15,959
14,052
Inventories
16,944
Accounts payable and accrued and other liabilities
(3,502)
Changes in operating assets and liabilities:
Net cash provided by operating activities
(793)
(10,569)
121,689
77,636
(157,807)
(116,497)
INVESTING ACTIVITIES
Purchases of property, plant and equipment
Proceeds from sales of property, plant and equipment
4,139
Proceeds from sale of investments
5,185
—
5,645
Cash paid for acquisitions, net of cash acquired
(135,840)
(33,455)
Net cash used in investing activities
(289,508)
(139,122)
FINANCING ACTIVITIES
Proceeds from North American ABL Facility
925,454
870,192
Repayments of North American ABL Facility
(944,032)
(809,450)
20,186
31,952
Proceeds from European ABL Facilities, net of borrowings
Proceeds from issuance of 7 7/8% Senior Notes
240,656
—
Repayments of New Term Loan
(6,295)
(6,676)
Proceeds from GBP Revolving Credit Facility
24,385
56,170
Repayments of GBP Revolving Credit Facility
(88,842)
(48,273)
Proceeds (repayments) from Related Party Note
—
(4,174)
Proceeds (repayments) from PNC Credit Agreement, net
—
(9,442)
Repayments of legacy Closures debt
—
(3,286)
—
(18,383)
Repayments of legacy St. Neots and Learoyd debt
Proceeds from other credit facilities
9,384
928
Repayments of other credit facilities and capital lease obligations
(7,780)
(10,705)
Deferred financing costs paid
(9,464)
(1,273)
Purchase of certain noncontrolling interest
(648)
Capital distribution to parent
(694)
Net cash provided by financing activities
—
—
162,310
Effect of exchange rate changes on cash
47,580
285
Increase (decrease) in cash
(3,902)
(5,224)
Beginning cash and cash equivalents
(17,808)
51,679
Ending cash and cash equivalents
$
F-7
46,455
69,487
$
51,679
Table Of Contents
(in thousands of U.S. dollars)
2015
2014
Supplemental cash flow information:
Income taxes paid
$
(5,859) $
(12,698)
Interest paid
$
(104,024) $
(87,639)
* Please refer to Note 1, "Organization and Significant Accounting Policies"
During the years ended December 31, 2015 and 2014, the Company also entered into certain non-cash transactions, which are described in
Note 1, Organization and Significant Accounting Policies, Note 5, Business Combinations and Note 7, Financing Arrangements.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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Coveris Holdings S.A
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars, except share information)
1.
Organization and Significant Accounting Policies
The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses directly attributable to
the operations of Coveris Holdings S.A. and its subsidiaries (collectively referred to as the "Company"). Coveris Holdings S.A.
was formed as a result of the conversion of Exopack Holdings S.a.r.l. into a public limited liability company (société anonyme)
on July 4, 2013 headquartered in Luxembourg. The Company is majority owned by a series of holding companies primarily owned
by Sun Capital Partners V, L.P., an affiliate of Sun Capital Partners Inc. ("Sun Capital").
The Company is one of the largest manufacturers of plastic and other value-added packaging products in the world, offering a
broad range of value-added flexible and rigid plastic and paper packaging products that include primary packaging (such as bags,
pouches, cartonboard, cups, tubs, lids and trays, films, laminates, sleeves and labels). The Company operates through a network
of 66 production and warehousing facilities worldwide, which allows the Company to supply global customers reliably, quickly
and efficiently across multiple regions. The Company operates 20 facilities in North and Central America, 43 facilities across
Europe, one facility in Australasia, as well as two strategically located facilities in the Middle East and China.
The Company conducts business principally through two operating segments: Flexible and Rigid. In the Flexible packaging
segment, the Company manufactures a variety of flexible and semi-rigid plastic and paper products, including bags, pouches, roll
stocks, films, laminates, sleeves and labels. These products are sold primarily in North America, Europe, Central America and
Australasia. In the Rigid packaging segment, the Company manufactures injection molded or thermoformed and decorated rigid
plastic and paper packaging solutions, including bowls, cups, lids and trays. These products are sold primarily in Europe and North
America.
Recast of the Consolidated Financial Statements
During the year ended December 31, 2014, the Flexibles segment disposed of its resin trade business. The Company's resin trade
business consisted of buying and reselling resins from wholesalers to customers. The resin trade business has been discontinued
to further focus the Company's operations around the Company's long-term strategy and organizational goals. The Company has
reclassified all income and expenses for the resin trade business in the prior year's consolidated statement of operations to income
(loss) from discontinued operations for the year ended December 31, 2014, in accordance with ASC 205.
The Company has adopted the provisions of ASU 2015-17, Income Taxes. The deferred tax balances as of December 31, 2014
have been recast to conform to current period presentation on the consolidated balance sheet, resulting in a decrease to current
deferred income tax assets of $7,229, an increase to noncurrent deferred income tax assets of $763, and a decrease to noncurrent
deferred income tax liabilities of $6,466.
During the year ended December 31, 2015, the Company identified certain non-cash prior period adjustments pertaining to reserves
for inventory obsolescence and doubtful accounts that are related to the years ended December 31, 2014 and 2013. These adjustments
increased costs of goods sold and selling, general and administrative expense by $2,009 and $278, respectively, for the year ended
December 31, 2014. Additionally, inventory and accounts receivable decreased by $8,641 and $1,170, respectively, as of
December 31, 2014. Accumulated deficit as of December 31, 2013, increased by $7,590 for the year ended December 31, 2013.
These amounts are not material to the periods presented in these consolidated financial statements.
In addition, certain comparative information has been reclassified to conform to current period presentation throughout these
consolidated financial statements.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"). These consolidated financial statements should be read in conjunction
with the notes thereto.
F-9
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These consolidated financial statements include the accounts of all the entities and their subsidiaries. Material intercompany
balances and transactions among the consolidated entities have been eliminated. Results of operations of companies acquired are
included from their respective dates of acquisition.
Non-controlling interests in subsidiaries not fully owned, but controlled, by the Company are initially valued at fair value if the
non-controlling interests arise from a business combination accounted for using purchase accounting method or at its proportionate
interests in the subsidiaries if the combination is accounted for as a common control transaction. Subsequent to initial measurement
the non-controlling interest is measured at the percentage ownership in the carrying value of the consolidated subsidiary. Net
income (loss) and total comprehensive income (loss) from non-controlling interest is valued at the percentage ownership of the
consolidated subsidiaries’ underlying net income (loss) not held by the Company.
Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and reported amounts of revenues and expenses in preparing these consolidated financial statements.
Actual results could differ from these estimates.
Foreign Currency Translation and Transactions
The presentation currency of these consolidated financial statements is the United States Dollar. Translation of the financial
statements of the Company’s foreign subsidiaries, whose functional currencies are those other than the United States Dollar, are
measured using the current exchange rate at the reporting date for the balance sheet and the weighted-average exchange rate during
the reporting period for results of operations. The resulting currency translation adjustment is accumulated and reported in
"Accumulated other comprehensive income/(loss), net" ("AOCI") on the accompanying consolidated balance sheets and
consolidated statements of stockholders' equity (deficiency). The Company also maintains certain debt instruments and other
balances in currencies other than the entity's functional currency. These balances are remeasured at the balance sheet date and the
resulting gains and losses are included in "Foreign currency exchange gain (loss)" in the consolidated statements of operations
and consolidated statements of comprehensive (loss)/income. Foreign currency exchange gains (losses) amounted to $(16,855)
and $(31,829) for the years ended December 31, 2015 and 2014, respectively. Included in foreign currency gains (losses) is an
unrealized foreign exchange loss due to the remeasurement of the Company's U.S. dollar denominated New Term Loan and Senior
Notes in a euro denominated functional currency entity, the changes in the fair value of derivative instruments not designated as
hedges and the remeasurement of intercompany loans.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, and all other highly liquid investments purchased with an original
or remaining maturity of three months or less at the date of acquisition. Accounts payable in the accompanying consolidated balance
sheets includes approximately $999 and $3,016 in book cash overdrafts as of December 31, 2015 and 2014, respectively.
Accounts Receivable
Accounts receivable are measured at their net realizable value after allowance for doubtful accounts. An allowance for doubtful
accounts is established when there is objective evidence that the Company will not be able to collect all amounts due according
to the original terms of the receivables.
Accounts Receivable Securitization Programs
The Company enters into certain accounts receivable securitization facilities in North America and Europe that expire over varying
maturities.
For facilities that are provided with recourse, the Company accounts for the arrangement as a secured borrowing, maintaining a
gross receivable asset and due to factor liability. Additionally for securitization arrangements with full recourse, the Company
estimates an allowance for factoring fees associated with collections. The actual recognition of such fees may differ from estimates
depending upon the timing of collections.
For accounts receivable securitization facilities that do not provide recourse to the factor and under certain specific criteria, the
Company treats the arrangement as a sale.
F - 10
Table Of Contents
Inventories
Inventories are carried at the lower of cost or market. The cost of inventories is determined primarily by the First-In, First-Out
("FIFO") and weighted average methods. Inventory value is evaluated at each balance sheet date to ensure that it is carried at the
lower of cost or market. This evaluation includes an analysis of historical physical inventory results, a review of excess and obsolete
inventories based on inventory aging, and anticipated future demand. Although infrequent, the Company's policy is to adjust
perpetual inventory records to reflect declines in net realizable value below carrying costs of inventory.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method based on the following estimated
useful lives of 20 - 40 years for buildings and improvements, 3 - 15 years for machinery and equipment, and 2 - 12 years for other
depreciable assets. Property, plant and equipment acquired as part of a business combination are recorded at fair value and
depreciated using the same method and useful life assumptions. Depreciation expense is presented in cost of goods sold or in
operating expenses depending on the operational use of the asset being depreciated.
The cost of property, plant and equipment and related accumulated depreciation are removed from the accounts upon the retirement
or disposal of such assets and the resulting gain or loss is recognized at the time of disposition. Maintenance and repairs that do
not improve efficiency or extend economic life are charged to expense as incurred. Depreciation expense for the years ended
December 31, 2015 and 2014 was $110,035 and $114,848, respectively. No interest was capitalized during any of the periods
presented.
Leases
Leases are reviewed for capital or operating classification at their inception under the guidance of Accounting Standard Codification
(ASC) 840, Leases. The Company uses the lower of its incremental borrowing rate or the implicit rate noted in the lease agreement
in the assessment of lease classification and assumes the initial lease term includes renewal options that are reasonably assured.
For leases classified as operating leases, the Company records rent expense on a straight-line basis, over the lease term beginning
with the date the Company has access to the property, which in some cases is prior to commencement of lease payments. Accordingly,
the amount of rental expense recognized in excess of lease payments is recorded as a deferred rent liability and is amortized to
rental expense over the remaining term of the lease.
Capital leases are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability.
At the commencement of the lease term for new leases where the Company is lessor, amounts due from lessees are recognized as
receivables in the balance sheets at the amount equal to the net investment in the lease, which is the present value of the minimum
lease payment receivable, plus any unguaranteed residual value, each determined at the inception of the lease.
Goodwill
The Company allocates the purchase price of acquired businesses to the identifiable tangible and intangible assets and liabilities
acquired, with any remaining amount being recognized as goodwill. Goodwill is tested for impairment at least annually, as of
October 1, or whenever a triggering event occurs, at the reporting unit level, which is defined as an operating segment or a component
of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by
Management. The Company's two reportable segments are divided into seven reporting units as defined by ASC 350, Intangibles
- Goodwill and Other: (1) Americas Food and Consumer, (2) North America Performance Packaging, (3) Coveris Advance Coatings,
(4) UK Food and Consumer, (5) EMEA Food and Consumer, (6) Coveris Australasia and (7) Global Rigid. See Note 6, "Goodwill
and Other Intangible Assets" for further discussion on the Company's annual impairment test and movements in goodwill.
Intangible Assets
Contractual or separable intangible assets that have finite useful lives are being amortized using the straight-line method over their
estimated useful lives of 3 - 20 years for customer relationships, 3 - 20 years for trademarks and licenses and 3 - 15 years for other
intangible assets. The straight-line method of amortization reflects an appropriate allocation of the costs of the intangible assets
in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company tests finiteF - 11
Table Of Contents
lived assets for impairment whenever there is an impairment indicator. Definite lived intangible assets are tested for impairment
by comparing anticipated related undiscounted future cash flows from operations to the carrying value of the asset.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, other
than goodwill, the Company performs undiscounted operating cash flow analysis to determine if impairment exists. If impairment
is determined to exist, any related impairment loss is calculated based upon comparison of the estimated fair value to the net
carrying value of the assets. Impairment losses on assets held for sale are based on the estimated proceeds to be received, less costs
to sell. There were no impairment losses recorded during the years ended December 31, 2015 and 2014 of long-lived assets.
Revenue Recognition
The Company recognizes sales revenue when all of the following conditions are met: persuasive evidence of an agreement exists,
delivery has occurred, the Company’s price to the buyer is fixed and determinable and collectability is reasonably assured. Sales
and related cost of sales are principally recognized upon transfer of title to the customer, which generally occurs upon shipment
of products. The Company’s stated shipping terms generally pass title and risk of inventory to the buyer at the Company's stated
shipping point, unless otherwise noted in the customer contract. Sales to certain customers are on consignment and revenue is
recognized when the customer uses the products. Provisions for estimated returns and allowances and customer rebates are recorded
when the related products are sold.
Shipping and Handling Costs
Shipping and handling fees billed to customers are included in net sales with the corresponding cost of such services recognized
in cost of sales.
Income Taxes
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in
the countries where the Group operates and generates taxable income. Current income tax relating to items recognized directly in
equity is recognized in equity and not in the statement of profit or loss.
Deferred income taxes are recorded under the asset and liability method whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets
and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities
and the deferred taxes relate to the same taxable entity and the same taxation authority.
The carrying amount of deferred tax assets is reviewed at each reporting date and a valuation allowance is recognized to the extent
that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.
Valuation allowances are re-assessed at each reporting date and are de-recognized to the extent that it has become probable that
future taxable profits will allow the deferred tax asset to be recovered.
The Company recognizes tax benefits from uncertain tax positions only if that tax position is more likely than not to be sustained
on examination by the taxing authorities, based on the technical merits of the position. The Company then measures the tax benefits
recognized in the financial statements from such positions based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. The Company’s policy for recording interest and penalties associated with unrecognized
tax benefits is to record such items as a component of income before taxes. Penalties are recorded in other expense (income), net
and interest is recorded in interest expense, in the accompanying combined statements of operations. There were no significant
interest or penalties associated with unrecognized tax benefits for the years ended December 31, 2015 and 2014.
As of the end of fiscal 2015, we had unremitted earnings from foreign subsidiaries that have been or are intended to be permanently
reinvested for continued use in foreign operations; accordingly, no provision for income taxes has been provided thereon. The
Company also has earnings from certain foreign subsidiaries in the United Kingdom for which it does not assert permanent
reinvestment. Therefore, the Company has provided for deferred income tax on those earnings as of December 31, 2015.
F - 12
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Pension Plans
Employees of the Company participate in defined contribution pension plans, defined benefit pension plans and other postretirement
employment benefit ("OPEB") plans. Contributions made by the Company to defined contribution pension plans are expensed in
the period in which they occur. Assets held by the Company’s defined benefit plans are held in trust outside of the control of the
Company. The Company records annual amounts relating to its defined benefit pension plans based on calculations which include
various actuarial assumptions, including discount rates, mortality rates and annual rates of return on plan assets. These estimates
are highly susceptible to change from period to period based on the performance of plan assets, actuarial valuations and market
conditions. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based
on current rates and trends. The Company believes that the assumptions used in recording its pension obligation are reasonable
based on its experience, market conditions and input from its third party actuary and investment adviser.
Equity Incentive Plans
In October 2013, the Company executed its 2013 Long-Term Incentive Plan (the "2013 LTIP") between a holding company of
Coveris Holdings S.A. and certain key employees. Under this plan, various classes of shareholders vest ratably over a five year
period in the right to participate in a waterfall distribution of proceeds generated from a liquidating distribution event, such as a
an equity offering, sale of the Company or other change in control. This plan shares other characteristics that yield the plan to a
compensation plan treated as a liability. A liability will be recognized when it is probable that there will be a distribution made to
employees based on vested interests. This liability shall be measured at each reporting period, predicated by the probable likelihood
of an estimable cash payout. As there is no probable payout event at the time of this report, no liability has been recorded or expense
incurred to the Company's consolidated balance sheets as of December 31, 2015 or 2014 or consolidated statement of operations
for the years ended December 31, 2015 or 2014, respectively, attributable to the 2013 LTIP.
Fair Value Measurements of Financial Instruments
In determining fair value of financial instruments, the Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in assessing fair
value. The Company determines fair value of financial instruments based on assumptions that market participants would use in
pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in
fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are
categorized in one of the following levels:
•
•
•
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting
entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs
are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at
measurement date.
The Company's fair value measurements are subjective and involve uncertainties and matters of significant judgment. Changes in
assumptions could significantly affect our estimates. See Note 14, “Fair Value of Debt Instruments,” for further details on our fair
value measurements.
Derivatives and Hedging Activities
The Company may use financial instruments, such as cross currency swaps, interest rate swaps, and foreign currency exchange
forward contracts and options relating to our borrowing and trade activities. The Company may use these financial instruments
from time to time to manage exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does
not purchase, hold or sell derivative financial instruments for trading purposes. We face credit risk if the counterparties to these
transactions are unable to perform their obligations.
The Company reports derivative instruments at fair value and establishes criteria for designation and effectiveness of transactions
entered into for hedging purposes.
The Company accounts for derivative instruments as hedges of underlying risks if the derivative instruments are designated as
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hedges and the derivative instruments are effective as hedges of recognized assets or liabilities, forecasted transactions, unrecognized
firm commitments or forecasted intercompany transactions.
As of December 31, 2015, the Company had outstanding cross currency swaps, forward contracts and options to mitigate foreign
currency risk. The Company has elected to not pursue effective hedge accounting treatment on these instruments. Accordingly,
the Company recognizes changes to fair value through the consolidated statement of operations as a part of "Foreign currency
exchange gain (loss)."
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade
accounts receivable. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The
Company does not require collateral for trade accounts receivable. Concentrations of credit risk with respect to trade receivables
are limited due to the wide variety of customers and markets into which the Company’s products are sold, as well as their dispersion
across many different geographic areas. There were no individual customers that accounted for more than 10% of the total accounts
receivable as of December 31, 2015 and 2014.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, and accordingly, the assets and
liabilities of the acquired businesses are recorded at their estimated fair values at the date of acquisition. The excess of the purchase
price over the estimated fair values is recorded as goodwill. Gain on bargain purchase is recognized through a business combination
where the fair value of the assets and liabilities acquired is in excess of the purchase price paid. When a gain on bargain purchase
occurs in a business combination, the Company recognizes a gain through the consolidated statements of operations within the
appropriate measurement period as defined by ASC 805. Any changes in the estimated fair values of the net assets recorded for
acquisitions, will change the amount of the purchase prices allocable to goodwill. All restructuring charges associated with a
business combination are expensed subsequent to the acquisition date. The results of operations of acquired businesses are included
in the consolidated financial statements from the acquisition date. See Note 5, "Business Combinations" for further disclosures
regarding business combinations executed during the years ended December 31, 2015 and 2014.
Shareholder Loans
The Company has a number of loans from immediate parent companies. These shareholder loans are in the form of preferred
equity certificates ("PECs"), asset linked preferred equity certificates ("ALPECs") and yield free preferred equity certificates
("YFPECs"). All of these instruments are subordinated to third party senior lenders. The Company accounts for these instruments
as debt as they do not meet the criteria of equity under US GAAP. The shareholder loans are recorded at their face value and
interest expense recognized over the terms of the loans under the effective interest method.
Deferred Financing Costs
Costs related to the issuance and modification of debt (including any premium or discount paid), are amortized as a component
of interest expense over the term of the related debt using the straight-line method, which approximates the effective interest
method. Noncurrent deferred financing costs are presented separately and the current portion of deferred financing costs are
presented net of accumulated amortization within prepaid expenses and other current assets in the Company's consolidated balance
sheets. Amortization of these deferred costs is included in interest expense, net in the consolidated statements of operations.
In the event of an extinguishment of debt, the Company records a loss due to the accelerated de-recognition of the net book value
of the extinguished debt’s deferred financing costs on the date of extinguishment. In the event of a modification of debt, the
Company recognizes the additional costs to deferred financing costs on the consolidated balance sheet and amortizes the revised
balance over the remaining term of the debt.
Restructuring Costs
The Company accounts for restructuring activities in accordance with ASC 420, Exit or Disposal Cost Obligations. Under the
Guidance, for the cost of restructuring activities that do not constitute a discontinued operation, the liability for the current period
and fair value of expected future costs associated with such restructuring activity are recognized in the period in which the liability
is incurred. The Company recognizes the costs of restructuring activities ratably over the remaining service period of affected
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personnel pursuant to a formal management approved restructuring plan, which has been communicated to affected employees
and primarily includes costs associated with employee redundancies.
Research and Development Expenses
Research and development expenses include direct research related overhead costs for internal projects, which are expensed as
incurred. Costs to acquire technologies that are utilized in research and development that have no alternative future use are expensed
when incurred. Research and development costs are included in operating income (loss) on the consolidated statements of operations.
Environmental Liabilities
Various state and federal regulations relating to health, safety and the environment govern the flexible packaging and plastic films
and coated products industries, and the Company has invested substantial effort to prepare for and meet these requirements. While
these requirements are continually changing, the Company believes that its operations are in substantial compliance with applicable
health, safety and environmental regulations.
Costs associated with cleaning up existing environmental contamination caused by past operations and costs which do not benefit
future periods are expensed. The Company records undiscounted liabilities for environmental costs when a loss is probable and
can be reasonably estimated. At December 31, 2015 and 2014, management believes there were no material obligations related to
environmental matters. Environmental expenses incurred in all of the periods presented herein were insignificant.
2.
Recent Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In ASU 2014-09, FASB amends
the Accounting Standards Codification and creates a new Topic 606, Revenues from Contracts with Customers. The core principle
of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
Company is evaluating the impact of this ASU on the Company's consolidated financial statements. The ASU will become effective
for annual periods beginning on or after December 15, 2017, and for interim periods within annual periods beginning on or after
December 15, 2018.
In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Topic 205-40). Prior to this
ASU, US GAAP did not contain guidance on management's responsibility to evaluate whether there is substantial doubt about an
entity's ability to continue as a going concern or to provide related footnote disclosures. This ASU requires management to assess
an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently U.S.
auditing standards and requires certain disclosures when substantial doubt exists. The ASU will become effective for annual periods
ending on or after December 15, 2016, and for interim periods thereafter. This ASU is not expected to have a material impact on
the Company's consolidated financial statements.
In April 2015, FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30). The amendments in this Update
require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability
effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years
beginning after December 15, 2016. The ASU will be retrospectively implemented in the Company's consolidated balance sheets
in the consolidated financial statements for the year ending December 31, 2016. This ASU will result in a reclassification from
prepaid expenses and other current assets to current portion of interest-bearing debt and capital leases of $2,357, as well as a
reclassification from noncurrent deferred financing costs to long-term debt, less current portion of $39,151 on the Company's
consolidated balance sheet as of December 31, 2015.
In April 2015, FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This ASU
provides guidance about accounting for fees paid in a cloud computing arrangement. The ASU gives clear guidance in the
determination of whether an arrangement includes the sale or license of software based on whether a cloud computing arrangement
includes a software license. The Company is currently assessing the impact of this ASU. The amendments will be effective for
annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016.
In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 changes the
measurement of inventory for entities using first-in, first-out (FIFO) and average cost. The Update changes the measurement of
these inventory methods, from lower of cost or market to lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The
F - 15
ASU will become effective for annual periods beginning on or after December 15, 2016, and for interim periods with in annual
period beginning on or after December 15, 2017. This ASU is not expected to have a material impact on the Company's consolidated
financial statements.
In July 2015, FASB issued ASU 2015-12 regarding plan accounting for defined benefit pension plans (Topic 960), defined
contribution pension plans (topic 962), and health and welfare benefit plans (topic 965). ASU 2015-12 eliminates requirements
that employee benefit plans measure the fair value of fully benefit-responsive investment contracts and provide the related
disclosures and simplifies other fair value investment disclosures related to employee benefit plans. The ASU will be effective for
annual periods beginning on or after December 15, 2015. This ASU is not expected to have a material impact on the Company's
consolidated financial statements.
In August 2015, FASB issued ASU 2015-15, Imputation of interest. The ASU clarifies the guidance for issuance costs related to
line-of-credit arrangements, the SEC staff has no objection to entities deferring issuance costs and presenting these costs as an
asset amortized ratably over the term of the line-of-credit arrangement, regardless of the outstanding borrowings on the line-ofcredit arrangement. This ASU is not expected to have a material impact on the Company's consolidated financial statements.
In September 2015, FASB issued ASU 2015-16, Business Combinations (Topic 805). ASU 2015-16 changes the requirement for
an acquirer to retrospectively adjust changes to provisional amounts during the measurement period after acquiring a business.
Instead, an acquirer is now required to recognize adjustments to provisional amounts during the measurement period in the reporting
period in which the adjustment amount is determined. The acquirer must also record effects on earnings due to changes in
depreciation, amortization, and other income effects as a result of changes in the provisional amounts, in the same period’s financial
statements. The ASU will become effective for annual periods beginning on or after December 15, 2016, and for interim periods
within annual periods beginning on or after December 15, 2017. The Company has elected early adoption as permitted by this
ASU. The impact of this ASU is not material to the consolidated financial statements.
In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740). ASU 2015-17 simplifies the requirements related to
the reporting of deferred income tax assets and liabilities. Current standards require that deferred income tax assets and liabilities
be classified in the statement of financial position as current and noncurrent amounts. ASU 2015-17 amends this standard by
requiring that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position as the
previous requirement was deemed to add no value to the users of the financial statements. The ASU will become effective for
annual periods beginning after December 31, 2017, and interim periods within annual periods beginning after December 15, 2018.
The Company has elected early adoption as permitted by this ASU and has retrospectively included the impact of the guidance
from the ASU in these consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 increases transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease
arrangements. The ASU updates current guidance to require the recognition of lease assets and lease liabilities by the lessee for
leases classified as operating leases under previous US GAAP. The ASU retains a distinction between finance leases and operating
leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The amendments
in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. The Company is evaluating the impact of this ASU on the Company's consolidated financial statements.
3.
Balance Sheet Information
The major components of certain balance sheet accounts at December 31, 2015 and 2014 are as follows:
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(in thousands of U.S. dollars)
Assets
Inventories
December 31,
2015
2014
Raw materials and supplies
Work in progress
Finished goods
Total inventories
$
101,931
35,293
154,187
291,411
$
$
$
97,033
45,735
150,265
293,033
Property, plant and equipment
Land and land improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Gross property, plant and equipment
Less: Accumulated depreciation
Net property, plant and equipment
$
36,770 $
179,148
946,968
85,063
1,247,949
(405,981)
$
841,968
$
35,310
174,629
886,456
49,991
1,146,386
(356,335)
790,051
Depreciation expense for the years ended December 31, 2015 and 2014 was $110,035 and $114,848, respectively.
4.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss, adjustments due to actuarial gains (losses) on employee benefit obligations, and
unrealized gains and losses on foreign currency translation.
The following table represents the components of accumulated other comprehensive income (loss):
(in thousands of U.S. dollars)
Balance at December 31, 2013
Change during 2014
Balance at December 31, 2014
Change during 2015
Balance at December 31, 2015
5.
Foreign Currency
Translation
Adjustments
$
Pension and
OPEB
Plans Liability
(10,249)
(3,713)
(13,962)
(10,302)
(24,264) $
Cumulative Deferred
Tax Effect on Pension
and OPEB Liability
(3,996)
(21,301)
(25,297)
6,469
(18,828) $
(642)
8,646
8,004
(428)
7,576 $
Accumulated
Other
Comprehensive
Income (Loss)
(14,887)
(16,368)
(31,255)
(4,261)
(35,516)
Business Combinations
KubeTech
On May 30, 2014, the Company acquired 100% of the equity interest of KubeTech. KubeTech was indirectly, wholly owned by
Sun Capital Partners V, L.P., the ultimate majority shareholder of the Company. As such, the Company has accounted for this
acquisition as a business combination under common control and has recorded the assets and liabilities transferred at the date of
the transaction at their historical carrying values. The Company has presented this information retrospectively in the financial
statements for the prior periods through the date under which both entities came under common control through the formation of
KubeTech by Sun Capital Partners V, L.P. on December 31, 2012.
In the original transaction on December 31, 2012, KubeTech was acquired for total purchase consideration of $45,178, satisfied
by capital contributions of $27,178 and a loan from Albea, a related party, in the amount of $18,000. The Company has accounted
for this acquisition on December 31, 2012 under the purchase method of accounting prescribed in ASC 805. Accordingly, the
purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of the original
transaction date.
F - 17
Subsequent to May 30, 2014, KubeTech's long-term debt liabilities were paid off for total consideration of $21,046 (including
accrued interest of $799). In addition, the related party note in the amount of $11,581 was forgiven, which was treated as a capital
contribution. KubeTech has been incorporated into the Company's Rigid reporting segment.
St. Neots
On June 12, 2014, the Company purchased 100% of the share capital of St. Neots Holdings Limited ("St. Neots"). St. Neots consists
of two manufacturing facilities located in the UK with a sourcing office in Hong Kong. St. Neots is a leading manufacturer of
cartonboard solutions for the food-to-go and convenience markets. The Company purchased St. Neots for purchase consideration
of £13,301 ($22,195), net of cash acquired. The Company completed the purchase price allocation during the first quarter of 2015
and has recorded goodwill of £8,259 ($12,251). In addition, the Company has recorded identifiable intangible assets consisting
of customer relationships valued at £2,597 ($3,852) and technology assets valued at £1,795 ($2,663). The financial results of St.
Neots subsequent to the acquisition date are included within the Company's Flexible reporting segment. Other business combination
disclosures have been omitted due to the immaterial nature of this acquisition.
Learoyd
On August 21, 2014, the Company acquired the shares of Learoyd Packaging Limited ("Learoyd") for purchase consideration of
£6,745 ($11,260), net of cash acquired. Learoyd is one of the UK's leading flexographic print specialists supplying flexible packaging
solutions to major supermarkets, own brands and food manufacturers and retailers. The acquisition of Learoyd supports and
strengthens Coveris' UK flexible packaging offering through advanced processes and technologies in addition to providing access
to new customer and product markets. The Company completed the purchase price allocation during the second quarter of 2015
and has recorded goodwill of £103 ($162) as of December 31, 2015 and customer relationships valued at £903 ($1,419). The
financial results of Learoyd subsequent to the acquisition date are included within the Company's Flexible reporting segment.
Other business combination disclosures have been omitted due to the immaterial nature of this acquisition.
Coveris Australasia
On May 29, 2015, the Company acquired the shares of Elldex Holdings Limited and subsidiaries (collectively referred to as
"Coveris Australasia"). Coveris Australasia consists of a manufacturing facility in New Zealand and a sales office located in
Australia. The acquisition expands Coveris' global footprint into the Australasian region of the world and will allow the Company
to channel for several existing product lines for expansion. Coveris Australasia is a manufacturer and importer of High Density
Polyethylene ("HDPE") and Low Density Polyethylene ("LDPE") flexible plastic packaging, providing solutions in the meat,
dairy, seafood, horticulture and agricultural sectors. The Company purchased the shares of Coveris Australasia for initial purchase
consideration of NZD27,316 or $20,214, net of cash acquired. In the third quarter of 2015, the Company finalized the working
capital settlement for additional consideration of NZD2,480 or $1,571. As of the date of this report, the Company has not finalized
the purchase price allocation. The final purchase accounting is pending the Company's valuation of identified intangible assets
and corresponding deferred tax balances. The purchase price provisionally exceeds net assets acquired by NZD9,737 or $7,206
as of December 31, 2015. The financial results of Coveris Australasia subsequent to the acquisition date are included within the
Company's Flexible reporting segment. Other business combination disclosures have been omitted due to the immaterial nature
of the acquisition.
Olefinas
On June 17, 2015, the Company acquired 100% of the shares of McNeel International Corp., a Delaware corporation previously
doing business as Olefinas, and subsidiaries (collectively referred to as "Olefinas") for initial cash consideration of $116,046, net
of cash acquired of $630. In third quarter of 2015, the Company finalized the working capital settlement for Olefinas for $1,991,
which has been provisionally allocated to goodwill. In addition, the Company has adjusted the amount of the original purchase
price allocated to inventories, other noncurrent assets and accrued liabilities due to the alignment of Olefinas accounting policies
with the Company's accounting policies. Olefinas is a leading agricultural plastics manufacturer with operations in Guatemala and
Mexico. Entering Latin America supports Coveris' initiative to provide a full range of packaging solutions for agricultural products,
including tree bags, twine and aging ribbons for the banana industry, as well as mulch and fumigation films, insect traps, modified
atmospheric packaging and shrink films. The financial results of Olefinas subsequent to the acquisition date are included within
the Company's Flexible reporting segment.
The Company has allocated the purchase price to the following assets acquired and liabilities assumed as of the timing of this
report as follows:
F - 18
Initial Purchase
Price Allocation
(in thousands of U.S. dollars)
Purchase price for Olefinas, net of cash acquired of $630
$
116,046
Adjusted
Purchase Price
Purchase Price
Adjustments
Allocation
(1,991) $
$
114,055
Assets acquired:
Trade accounts receivable
Inventories
Deferred income taxes, current
Prepaid expenses and other current assets
Property, plant and equipment, net
Intangible assets, net
Deferred income taxes, noncurrent
Other noncurrent assets
Total assets acquired, net of cash
(759)
(7,313)
(2,955)
(450)
18,565
29,322
2,955
13,993
23,311
—
192
1,644
89,982
18,622
11,692
(192)
(696)
17,949
17,806
22,009
—
13,543
41,933
11,692
—
948
107,931
Liabilities assumed:
(48)
(905)
Accounts payable
Accrued liabilities
Deferred income taxes, noncurrent
Other noncurrent liabilities
Total liabilities assumed
12,311
7,931
1,203
167
21,612
4,511
—
3,558
12,263
7,026
5,714
167
25,170
Net assets acquired
68,370
14,391
82,761
Purchase price in excess of net assets acquired (Provisional)
$
47,676
$
(16,382) $
31,294
The Company has provisionally allocated the purchase price and recorded goodwill of $31,294 pending the finalization of the
valuation of the identified intangible assets as well as facts and circumstances pertaining to certain local tax contingencies and
other indemnifiable costs. The goodwill arising from the acquisition is primarily attributable to synergies from merging with the
Coveris Holdings S.A. business. In addition, the Company has estimated identifiable intangible assets consisting of customer
relationships valued at $5,745 and technologies, patents and licenses valued at $5,947. The goodwill arising from this acquisition
is not deductible for tax purposes.
In order to determine the fair value of the customer relationships acquired, the Company adopted the multi-period excess earnings
method (level 3) based on forecasted revenues. Revenues were forecasted using a long-term growth rate of 2.0% and a customer
retention rate of 90.0%. After-tax contributory charges for the use of net working capital, fixed assets, and the assembled work
force were calculated based on projected requirements and depreciation. After-tax earnings of customer revenues in excess of the
estimated contributory asset charges were then discounted using discount rates ranging from 12.0% to 15.0%.
In order to determine the fair value of technologies, patents and licenses, the Company adopted the relief from royalty method
(level 3) based on forecasted revenues. The Company then applied a royalty rate of 3.0% in determining royalty savings. The
Company then discounted after-tax royalty savings using discount rates ranging from 12.5% to 14.5%.
Since the date of acquisition, Olefinas has generated $70,499 of net sales and $12,822 of operating income. Additionally, the
Company has incurred $5,384 of transactions costs in conjunction with the acquisition. These transaction costs are recorded in
selling, general and administrative expenses.
6.
Goodwill and Other Intangible Assets
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Table Of Contents
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. The
Company's two reportable segments are divided into seven reporting units as defined by ASC 350, Intangibles - Goodwill and
Other: Americas Food and Consumer, North America Performance Packaging, Coveris Advance Coatings, UK Food and Consumer
and EMEA Food and Consumer within the Flexibles segment, as well as the Global Rigid segment. The Company reviews goodwill
for impairment on a reporting unit basis annually as of October 1 of each year and whenever events or changes in circumstances
indicate the carrying value of goodwill may not be recoverable. While the Company is permitted to conduct a qualitative assessment
to determine whether it is necessary to perform a two-step quantitative goodwill impairment test, for the annual goodwill impairment
tests as of October 1, 2015 and 2014, the Company performed a quantitative test for all reporting units.
The goodwill impairment test involves a two-step process. In step one, the Company compares the fair value of each reporting
unit to its carrying value, including the goodwill allocated to the reporting unit. If the fair value of the reporting unit exceeds its
carrying value, there is no indication of impairment and no further testing is required. If the fair value of the reporting unit is less
than the carrying value, the Company must perform step two of the impairment test to measure the amount of impairment loss, if
any. In the step two, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as
if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less
than the carrying value, the difference is recorded as an impairment loss. Considerable judgment is necessary in estimating future
cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including operating and
macroeconomic factors.
Effective March 1, 2014, the Europe Industrials reporting unit was consolidated into the UK Food and Consumer reporting unit
and the EMEA Food and Consumer reporting unit. Management elected to consolidate the Europe Industrial reporting unit in order
to leverage shared services in the Company's European operations and better align the two reporting units for strategic growth and
effective performance evaluation.
Effective April 1, 2015, the Company moved two production facilities from the Americas Food and Consumer reporting unit to
the North America Performance Packaging reporting unit in order to better align product lines and strategic direction. In addition,
the North America Rigid and Europe Rigid reporting units were combined into a single Global Rigid reporting unit during the
second quarter of 2015. The integration of the Rigid reporting unit is designed to accelerate growth and leverage global market
and customer knowledge.
Annual Impairment Test
For the annual goodwill impairment test performed as of October 1, 2015, the Company estimated the fair value of these reporting
units using the discounted cash flow, guideline company and similar transaction methods. The discounted cash flow method was
weighted the heaviest for this test. These cash flow projections are based on management's estimates of revenue growth rates and
operating margins, taking into consideration industry and market conditions. The discount rates used are based on a weighted
average cost of capital ("WACC") which reflects relevant risk factors. For the 2015 impairment test, the Company used WACCs
ranging from 9.0% to 12.0% (compared to a range of 9.0% to 11.5% in 2014) across the Company's goodwill reporting unit and
a universal terminal growth rate of 2.5% (compared to 2.5% in 2014).
Based on the impairment testing performed in 2015 and 2014, the Company concluded that the fair values of its reporting units
were above their carrying values and, therefore, there was no indication of impairment.
Allocation of Goodwill to Reporting Segments
The changes in the Company's goodwill balances by reporting segment for the years ended December 31, 2015 and 2014 are as
follows:
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Table Of Contents
(in thousands of U.S. dollars)
Flexible Goodwill
Balance as of December 31, 2013
$
478,197
PPA adjustments(1)
(2)
Additions to goodwill acquired through acquisitions
Foreign currency translation
Balances as of December 31, 2014
Rigid Goodwill
$
18,931
(7,531)
—
13,216
—
(14,060)
(1,101)
469,822
17,830
PPA adjustments(3)
(224)
(4)
Additions to goodwill acquired through acquisitions
Foreign currency translation
Balance as of December 31, 2015
$
—
38,500
—
(12,584)
(838)
495,514
$
16,992
(1) This ASC 805 measurement period adjustment to the goodwill balance of the Flexibles segment is driven mainly by the purchase price allocation of the
Intelicoat acquisition.
(2) The $13,216 of additions during the year ended December 31, 2014, to the Flexibles segment are due to the acquisitions of St Neots and Learoyd. Please
see Note 5, Business Combinations for further details.
(3) This ASC 805 measurement period adjustment to goodwill is driven by the finalization of the purchase price allocation for the Learoyd acquisition.
(4) The additions during the year ended December 31, 2015, to the Flexibles segment are due to the acquisition of Olefinas on June 17, 2015, and the acquisition
of Coveris Australasia on May 29, 2015. Please see Note 5, Business Combinations for further details.
Intangible assets
Contractual or separable intangible assets that have finite useful lives are being amortized using the straight-line method over their
estimated useful lives of 3 - 20 years for customer relationships, 3 - 20 years for trademarks and licenses and 3 - 15 years for other
intangible assets. The straight-line method of amortization reflects an appropriate allocation of the costs of the intangible assets
in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company tests finitelived assets for impairment whenever there is an impairment indicator. Finite lived intangible assets are tested for impairment by
comparing anticipated related undiscounted future cash flows from operations to the carrying value of the asset. The Company's
intangible assets at December 31, 2015 and 2014 consisted of the following:
December 31, 2015
Gross
Carrying
Amount
(in thousands of U.S. dollars)
Customer relationships
$
343,261
$
396,700
Technologies, patents and
licenses
Gross Intangible Assets
Accumulated
Amortization
$
(95,905) $
$
(120,230) $
53,439
(24,325)
December 31, 2014
Gross
Carrying
Amount
Net Book
Value
247,356
$
349,098
$
397,291
29,114
276,470
Accumulated
Amortization
$
48,193
(71,577) $
(16,545)
$
(88,122) $
Net Book
Value
277,521
31,648
309,169
Amortization expense for definite-lived assets for the years ended December 31, 2015 and 2014 was $38,359 and $41,470,
respectively.
Estimated future amortization expense is as follows:
(in thousands of U.S. dollars)
Year Ending December 31,
2016
2017
2018
2019
2020
2021 and thereafter
Total
$
35,414
34,673
34,121
32,582
30,283
109,397
$ 276,470
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7.
Financing Arrangements
As of December 31, 2015 and 2014, the Company had the following third party debt facilities and financing arrangements
outstanding:
(in thousands of U.S. dollars)
December 31, 2015
December 31, 2014
Credit facilities and bank loans
North American ABL Facility
$
European ABL Facility
55,269
$
73,853
97,046
89,642
Senior 7 7/8 % Notes
565,517
325,000
10% Exopack Notes
235,284
235,402
New Term Loan - USD Tranche
343,906
430,650
New Term Loan - EUR Tranche
268,212
210,585
—
65,679
GBP Revolving Credit Facility
Other interest-bearing debt
Capital lease liabilities
Total third party debt and financing arrangements
Less: current portion
Total long term third party debt and capital leases
4,951
—
60,907
56,499
1,631,092
1,487,310
(174,545)
$
1,456,547
(243,694)
$
1,243,616
North American ABL Facility
On May 31, 2013, the Company entered into the North American asset-backed lending facility (the "NA ABL Facility") in
conjunction with the Exopack acquisition. The NA ABL Facility provides a maximum credit facility of $75,000, which includes
a Canadian dollar sub-facility available to the Company’s Canadian subsidiaries for up to $15,000 (the Canadian dollar equivalent).
The NA ABL Facility also provides the Company’s United States and Canadian subsidiaries with letter of credit sub-facilities.
Availability under the NA ABL Facility is subject to borrowing base limitations for both the U.S. and the Canadian subsidiaries,
as defined in the loan agreement. In general, in the absence of an event of default, the NA ABL Facility matures on November 8,
2018.
On May 2, 2014, the Company entered into an agreement with the Company's lender to engage the $25,000 accordion feature
under the NA ABL Facility. In addition, the Company entered into an agreement on July 18, 2014, to increase the available
borrowings under the NA ABL Facility from $100,000 to $110,000 through the collateralization of KubeTech accounts receivable
and inventory. The increase in borrowing availability gives the Company flexibility to fund incremental working capital needs as
the Company continues to expand.
Availability under the NA ABL Facility is capped at the lesser of the then-applicable commitment and the borrowing base. The
borrowing base consists of a percentage of eligible trade receivables and eligible inventory owned by U.S. borrowers, in the case
of U.S. borrowings, or Canadian borrowers, in the case of Canadian borrowings. Under the terms of a lock box arrangement,
remittances automatically reduce the revolving debt outstanding on a daily basis and therefore the NA ABL Facility is included
in the current portion of interest-bearing debt and capital leases on the Company's consolidated balance sheets as of December 31,
2015 and 2014.
Interest accrues on amounts outstanding under the U.S. facility at a variable annual rate equal to the US Index Rate plus 1.00% to
1.25%, depending on the utilization of the NA ABL Facility, or at the Company's election, at an annual rate equal to the LIBOR
Rate (as defined therein) plus 2.00% to 2.25%, depending on utilization. In general, interest will accrue on amounts outstanding
under the Canadian sub-facility subsequent at a variable rate equal to the Canadian Index Rate (as defined therein) plus 1.00% to
1.25%, depending upon utilization, at the Company's election, at an annual rate equal to the BA Rate (as defined therein) plus
2.00% to 2.25%, depending upon utilization. Pricing will increase by an additional 50 basis points above the rates described in
the foregoing sentences on any loans made against the last 5.00% of eligible accounts receivable and eligible inventory. The NA
ABL Facility also includes unused facility, ticking and letter-of-credit fees which are reflected in interest expense. The weighted
average interest rate on borrowings outstanding under the NA ABL Facility was 2.67% for the year ended December 31, 2015
(compared to 2.70% for the year ended December 31, 2014).
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The NA ABL Facility is secured by the accounts receivable, inventory, proceeds therefrom and related assets of the Exopack
Business on a first lien basis (subject to permitted liens) and by substantially all other asset of the legacy Exopack business on a
second lien basis (subject to permitted liens). However, the assets of any non-U.S. entities in the legacy Exopack business do not
secure the obligations under the U.S. facility.
The NA ABL Facility contains certain customary affirmative and negative covenants restricting the Company’s and its subsidiaries’
ability to, among other things, incur additional indebtedness, grant liens, engage in mergers, acquisitions and asset sales, declare
dividends and distributions, redeem or repurchase equity interests, incur contingent obligations, prepay certain subordinated
indebtedness, make loans, certain payments and investments and enter into transactions with affiliates. As of December 31, 2015,
the Company was in compliance with all of these covenants.
As of December 31, 2015, $55,269 was outstanding and $29,691 was available for additional borrowings, net of outstanding letters
of credit of $8,365 under the NA ABL Facility.
The Company recognized $720 in deferred financing costs related to the amendment of the NA ABL Facility in 2013, which are
being amortized on a straight-line basis over the term of the NA ABL Facility.
European ABL Facility
On November 8, 2013, the Company entered receivables and inventory financing arrangements in each of France, Germany and
the United Kingdom whereby cash is made available to the Company in consideration for inventory and certain trade receivables
generated in these respective countries. The aggregate of any advances or borrowings under the GE French Facilities, the GE
Germany Facilities and the GE UK Facility is limited to $175,000 (equivalent). The GE French Facilities, the GE Germany Facilities
and the GE UK Facility and the security and guarantees granted in respect thereof are, in the cases of the GE French Facilities and
the GE UK Facility, subject to the terms of the Intercreditor Agreement.
As of December 31, 2015, $97,046 was outstanding and approximately $38,988 was available for additional borrowings under
the European ABL Facility. The weighted average interest rate on borrowings outstanding under the European ABL Facility was
2.77% for the year ended December 31, 2015 (compared to 2.95% for the year ended December 31, 2014).
France
Under the French Facilities with GE Factofrance and Cofacredit (the “Factors”), certain wholly-owned subsidiaries shall sell and
assign to the Factors certain debts which, subject to the terms and conditions of the French Facilities, the assignees are obliged to
buy and accept. The sale price for the assigned debt is approximately 85%. The facilities are non-recourse facilities. The maximum
aggregate funded amount under the French Facilities is limited to €48,000. The French Facilities have an unfixed term with a five
year commitment period under which the Factors shall not be entitled to terminate the contracts except upon the occurrence of (i)
a breach of any of the covenants listed under the French Facilities, (ii) an event of default under any facility granted by a GE
Capital entity or (iii) a revocation of the mandates as defined under the contracts. Apart from the commitment period, any termination
of the contracts requires three months’ prior notice, save that (i) the Factors may terminate at any time without prior notice upon
the occurrence of certain events described under the French Facilities, (ii) the parties may terminate if Coveris Holdings S.A ceases
to directly or indirectly own at least 51% of the equity interests of the Company, (iii) the Factors may terminate the contracts with
a ten (10) working days prior notice, and with immediate effect in the event any representation or warranty made by Coveris
Holdings S.A. pursuant to the Side Letter is not complied with or proves to have been incorrect or misleading when made or
deemed to be made and is not remedied within the above notice period by any means or party. Within the frame of the French
Facilities, certain wholly-owned subsidiaries have pledged to the benefit of the Factors, the receivables held over the Factors on
the current accounts opened in their books, in order to secure the obligations under the terms of the French Facilities.
Germany
Under the German facilities with GE Capital Bank AG, to be entered into by certain wholly-owned subsidiaries as originators and
GE Capital Bank AG as factoring bank (the “GE Germany Facilities”), certain wholly-owned subsidiaries may sell and assign to
GE Capital Bank AG certain receivables which, subject to the terms and conditions of the GE Germany Facilities, the assignee is
obliged to buy and accept. It is further intended that certain wholly-owned subsidiaries provide certain limited cross guarantees
for the benefit of GE Capital Bank AG to guarantee their obligations under the GE Germany Facilities. The factoring fee for the
GE Germany Facilities is 0.15% calculated as a multiple of the gross turnover of assigned receivables and bears interest at 3M
EURIBOR +2.25%. The facilities are non-recourse facilities. The maximum aggregate funded amount under the GE Germany
Facilities is limited to €25,000. The GE Germany Facilities have a five year term and any termination of the contract requires three
F - 23
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months’ prior notice to the second anniversary, the third anniversary or the fourth anniversary of the relevant commencement date,
save that GE Capital Bank AG may terminate at any time if one of the following termination events, amongst others, occurs: a
change of control, a cross-default and breach of the relevant fixed charge coverage.
United Kingdom
Under the GE UK Facility with GE Capital Bank Limited (“GE”), certain wholly-owned subsidiaries (the “Clients”) assign to GE
Capital Bank Limited certain debts which, subject to customary conditions, GE is obliged to buy and accept. Certain wholly-owned
subsidiaries are guarantors under the GE UK Facility (the “UK Obligors”). The Clients and UK Obligors have granted security in
favor of GE over non-vesting debts and a floating charge over all assets subject to the terms of the Intercreditor Agreement. The
GE UK Facility is comprised of an invoice finance facility for which the aggregate loan advance limit is £69,000 (the “Invoice
Facility”) and a revolving inventory finance facility for which the aggregate current account limit is £20,000 (the “Revolving
Inventory Facility”). Under the Invoice Facility, the advance percentage for the assigned debts is 90% of the nominal amount of
the debt, subject to reduction in respect of the discount rate, service charges and other liabilities. Under the Revolving Inventory
Facility, the loan advance percentage of the eligible inventory is 80% of the net orderly liquidation value of that inventory, subject
to reduction in respect of certain customary reserves. The GE UK Facility has recourse terms where the Clients and UK Obligors
bear the credit risk of the transactions (including where the underlying debtor fails to pay). The GE UK Facility has a term of five
years and any termination of the contract requires either three months’ prior notice where there is a refinancing or one month’s
prior notice where there is a sale of the Company. Customary representations and warranties are included in the GE UK Facility
and customary restrictions on disposals of assets and granting liens are also included. Events of default include failure to pay,
misrepresentation, insolvency, insolvency proceedings, breach of obligations and cross-acceleration and cross-default to other
indebtedness of the Clients or the UK Obligors. A mandatory prepayment is required upon the change of control of a Client or UK
Obligor subject to minimum thresholds in respect of EBITDA, gross assets or turnover being satisfied. In addition, if the availability
under the Invoice Facility plus the availability under the Revolving Inventory Facility plus the equivalent concept of availability
under the GE Germany Facility and the GE French Facilities is less than $14,583, the Clients shall not permit the ratio of operating
cash flow of the Company to the fixed charges of the Company to be less than 1.00:1.00.
Senior 7 7/8% Notes
On November 8, 2013 the Company issued $325,000 in aggregate principal amount 7 7/8% Senior Notes (the “Senior Notes”).
The Company issued an additional $85,000 and $155,000 in aggregate principal amount 7 7/8 % Senior Notes (the "Additional
Notes" and together with the Senior Notes, the "Notes") on February 17, 2015 and June 16, 2015, respectively. The Additional
Notes were issued under the indenture, dated as of November 8, 2013 (the “Indenture”), governing our existing Senior Notes and
have the same terms and conditions as the Senior Notes and will constitute a single series with, and will be consolidated and
fungible with, the Senior Notes for all purposes under the Indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. The Notes mature on November 1, 2019, and pay interest semi-annually on each November
1 and May 1. The $85,000 Additional Notes were issued at a premium of $850, and the $155,000 Additional Notes were issued
at a discount of $194. The premium and discount will be amortized over the remaining term of such notes. The Notes are senior
unsecured obligations of the Company, ranking senior in right of payment to all of the Company's future debt that is expressly
subordinated in right of payment to the Notes and rank pari passu in right of payment with the Company's existing and future debt
that is not so subordinated, including the Company's obligations under the Term Loan, the European ABL Facilities, the NA ABL
Facility and the Exopack Notes.
As of December 31, 2015, the Company has recognized $6,386 of incremental deferred financing costs related to the issuance of
the Additional Notes, which are being amortized on a straight-line basis over the terms of the Notes.
The Notes are guaranteed on a senior unsecured basis (the “Guarantees”) by certain subsidiaries (the “Guarantors”). Each of the
Guarantees ranks senior in right of payment to the applicable Guarantor’s future debt that is expressly subordinated in right of
payment to such Guarantee and ranks pari passu in right of payment with such Guarantor’s existing and future debt that is not so
subordinated, including the applicable Guarantor’s obligations under the Term Loan, the European ABL Facilities, the NA ABL
Facility and the Exopack Notes, as applicable. The validity and enforceability of the Guarantees and the liability of each Guarantor
is subject to certain limitations described in the $325,000 77/8 % Senior Notes due 2019 Offering Memorandum dated October 24,
2013, the $85,000 77/8 % Senior Notes due 2019 Offering Memorandum dated February 10, 2015, and the $155,000 77/8 % Senior
Notes due 2019 Offering Memorandum dated June 11, 2015. The Notes and Guarantees are structurally subordinated to all
obligations of the Company's subsidiaries that do not guarantee the Notes and effectively subordinated to any existing and future
secured debt of the Company and its subsidiaries, to the extent of the value of the property and assets securing such debt.
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At any time prior to November 1, 2016, the Company may on any one or more occasions redeem up to 40% of the aggregate
principal amount of the Notes issued under the Indenture, upon not less than 30 nor more than 60 days’ notice, at a redemption
price equal to 107.875% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and Additional Amounts,
if any, to the date of redemption, with the net cash proceeds of an Equity Offering of (i) the Company or (ii) any Parent Holdco
of the Company to the extent the proceeds from such Equity Offering are contributed to the Company’s common equity capital
or are paid to the Company as consideration for the issuance of ordinary shares; provided that:
(1)
(2)
at least 60% of the aggregate principal amount of the Notes originally issued under the Indenture (excluding Notes
held by the Company and its Subsidiaries) remains outstanding immediately after the occurrence of such redemption;
and
the redemption occurs within 120 days of the date of the closing of such Equity Offering.
Further, at any time prior to November 1, 2016, the Company may on any one or more occasions redeem all or a part of the Notes
upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of such Notes
redeemed plus the Applicable Premium, as defined in the Indenture governing the Senior Notes, as of, and accrued and unpaid
interest and Additional Amounts, as defined in the Indenture, if any, to the date of redemption.
On or after November 1, 2016, the Company may on any one or more occasions redeem all or a part of the Notes upon not less
than 30 nor more than 60 days’ notice (subject to such longer period as may be determined by the Company, in the case of a
defeasance of the Notes or a satisfaction and discharge of the Indenture), at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and Additional Amounts, if any, on the Notes redeemed, to the
applicable date of redemption, if redeemed during the twelve-month period beginning on November 1 of the years indicated below:
Year
2016
2017
2018 and thereafter
Redemption Price
103.938%
101.969%
100.000%
Unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Notes or portions thereof
called for redemption on the applicable redemption date.
Any redemption and notice may, in the Company's discretion, be subject to the satisfaction of one or more conditions precedent.
The Notes require the Company to comply with customary covenants applicable to the Company and its restricted subsidiaries.
Set forth below is a brief description of the affirmative and negative covenants, all of which will be subject to customary exceptions,
materiality thresholds and qualifications, including, in the case of certain negative covenants, the ability to grow baskets with
retained excess cash flow, the proceeds of qualified equity issuances and certain other amounts:
•
•
The affirmative covenants include the following: (i) delivery of financial statements and other customary financial
information; (ii) notices of events of default and other material events; (iii) maintenance of existence, ability to conduct
business, properties, insurance and books and records; (iv) additional collateral and guarantor requirements; and
(v) designation of unrestricted subsidiaries.
The negative covenants include limitations on: (i) indebtedness and the issuance of preferred stock; (ii) restricted
payments; (iii) liens; (iv) dividend and other payment restrictions; (v) layered debt; (vi) mergers, consolidation or sale of
assets and (vii) transactions with affiliates.
As of December 31, 2015, the Company was in compliance with all of these covenants.
10% Exopack Notes
On May 31, 2013, the Company assumed the 10% Exopack Notes (the "Exopack Notes") in conjunction with the Exopack
acquisition. The Exopack Notes were issued pursuant to the indenture dated May 31, 2011, between, among others, Exopack and
The Bank of New York Mellon Trust Company, N.A., as trustee. Exopack issued $235,000 in aggregate principal amount of
unregistered senior notes. Included in the carrying value of the Exopack notes is an unamortized note premium of $314 recorded
in conjunction with the purchase price allocation of the Exopack acquisition. This debt premium to record the Exopack Notes at
fair value on the acquisition date is amortized on a straight line basis from the acquisition date through the maturity date of June 1,
2018.
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Table Of Contents
The Exopack Notes accrue interest at the rate of 10% per annum and payable semi-annually on each June 1 and December 1.
The Exopack Notes are senior unsecured obligations of the Company and rank equally in right of payment with all existing and
future senior indebtedness of Exopack, rank senior in right of payment to any future subordinated indebtedness of Exopack, and
are effectively subordinated to any secured indebtedness of Exopack up to the value of the collateral securing such indebtedness.
The Exopack Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by the Guarantors that also guarantee
the Senior Notes (except for the subsidiaries of Exopack that are organized outside of the United States). The guarantees of the
Exopack Notes rank equally in right of payment with all existing and future senior indebtedness of the guarantors, rank senior in
right of payment to any future subordinated indebtedness of the guarantors, and are effectively subordinated to any secured
indebtedness of the guarantors, including the New Term Loan), up to the value of the collateral securing such indebtedness. The
guarantees of the Exopack Notes may be released under certain conditions, including the sale or other disposition of all or
substantially all of the guarantor subsidiary’s assets, the sale or other disposition of all the capital stock of the guarantor subsidiary,
change in the designation of any restricted subsidiary as an unrestricted subsidiary by Exopack, or upon legal defeasance or
satisfaction and discharge of the Exopack Notes.
The Company is not required to make mandatory redemption or sinking fund payments with respect to the Exopack Notes.
If Exopack experiences a change of control, Exopack must offer to repurchase the Exopack Notes at a price equal to 101% of the
aggregate principal amount of the Exopack Notes, plus accrued and unpaid interest and additional amounts, if any, to the date of
purchase.
The Exopack Notes Indenture contains customary events of default, including, without limitation, payment defaults, covenant
defaults, certain cross-defaults to mortgages, indentures or other instruments, certain events of bankruptcy and insolvency, and
judgment defaults. The Exopack Notes Indenture contains covenants for the benefit of the holders of the Exopack Notes substantially
similar to the covenants that govern the Notes. As of December 31, 2015 the Company was in compliance with all of these covenants.
Term Loan
On November 8, 2013, the Company entered into a credit agreement (the “Term Loan”) with Goldman Sachs Bank USA, as
administrative and collateral agent and the certain financial institutions and other persons party thereto as lenders from time to
time. The Company borrowed a single draw dollar denominated term loan of approximately $435,000 (the "Term Loan - USD
Tranche") in principal amount and a single draw euro denominated term loan of approximately €175,000 (the "Term Loan - EUR
Tranche") in principal amount pursuant to the Term Loan Facility Agreement. On May 22, 2015, the Company entered into the
First Amendment Agreement ("First Amendment") to the Term Loan with Goldman Sachs Bank USA, as administrative and
collateral agent, amongst others. The First Amendment reduces the Company's annual interest rates by 75 bps on the Term Loan
- USD Tranche and by 125 bps on the Term Loan - EUR Tranche. In addition, the Company has increased the Term Loan - EUR
Tranche to €247,800 and decreased the Term Loan - USD Tranche by a U.S. dollar equivalent amount.
The Term Loan matures on May 8, 2019. Should the maturity of the Exopack Notes not be extended (and the Exopack Notes
remain outstanding at the time), the maturity of the Term Loan will be automatically shortened to the date that is 91 days prior to
the maturity date of the Exopack Notes. The Term Loan shall be repayable in equal quarterly installments of 1.00% per annum of
the original principal amounts.
The Company may also incur an incremental term loan under the Term Loan from time to time in an amount not to exceed $50,000
plus an unlimited amount subject to meeting a secured net leverage ratio approximately equal to the secured net leverage ratio as
of November 8, 2013. The incurrence of an incremental term loan is subject to various customary conditions, including locating
a lender or lenders willing to provide it.
The Term Loan, at the Company’s option, will from time to time bear interest at either (i) with respect to loans denominated in
dollars, (a) 3.25% in excess of the alternate base rate (i.e., the greatest of the prime rate, the federal funds effective rate in effect
on such day plus 1/2 of 1%, and the London interbank offer rate (after giving effect to any floor) for an interest period of one
month) in effect from time to time, or (b) 3.50% in excess of the London interbank offer rate (adjusted for maximum reserves),
and (ii) with respect to loans denominated in euros, 3.50% in excess of the euro interbank offer rate (adjusted for maximum
reserves). The London interbank offer rate and the euro interbank offer rate will be subject to a floor of 1.00% and the alternate
base rate will subject to a floor of 2.00%. Interest will be payable quarterly in arrears and at maturity. The interest rate applicable
to amounts outstanding on the Term Loan - USD Tranche was 4.50% as of December 31, 2015. The applicable interest rate
applicable to amounts outstanding on the Term Loan - EUR Tranche was 4.50% as of December 31, 2015.
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All obligations of the Company under the Term Loan and any secured hedging arrangements and secured cash management
agreements provided by lenders or affiliates thereof will be unconditionally guaranteed by the Guarantors.
Subject to customary agreed security principles, certain excluded ABL collateral under the GE Germany Facilities and the French
Facilities and the lien priorities, the Term Loan Facility will be secured by substantially all assets of the Company and the Guarantors.
The Term Loan Facility Agreement does not include any financial covenants.
The Term Loan has customary events of default (subject to materiality thresholds and standstill and grace periods), including:
(a) non-payment of obligations (subject to a five business day grace period in the case of interest and fees); (b) breach of
representations, warranties and covenants (subject to a thirty-day grace period following written notice in the case of certain
covenants); (c) bankruptcy (voluntary or involuntary); (d) inability to pay debts as they become due; (e) cross default and cross
acceleration to material indebtedness; (f) ERISA events; (g) change in control; (h) invalidity of liens, guarantees, subordination
agreements; and (i) judgments.
The Term Loan requires the Company to comply with customary affirmative and negative covenants applicable to the Company
and its restricted subsidiaries. Set forth below is a brief description of the affirmative and negative covenants, all of which will be
subject to customary exceptions, materiality thresholds and qualifications, including, in the case of certain negative covenants, the
ability to grow baskets with retained excess cash flow, the proceeds of qualified equity issuances and certain other amounts:
•
•
The affirmative covenants include the following: (i) delivery of financial statements and other customary financial
information; (ii) notices of events of default and other material events; (iii) maintenance of existence, ability to conduct
business, properties, insurance and books and records; (iv) payment of certain obligations; (v) inspection rights;
(vi) compliance with laws, including employee benefits and environmental laws; (vii) use of proceeds; (viii) further
assurances; (ix) additional collateral and guarantor requirements; (x) maintenance of ratings; (xi) designation of
unrestricted subsidiaries; (xii) information regarding collateral; and (xiv) post-closing matters.
The negative covenants include limitations on: (i) liens; (ii) debt (including guaranties); (iii) fundamental changes;
(iv) dispositions (including sale leasebacks); (v) affiliate transactions; (vi) investments (vii) restrictive agreements, and
no negative pledges; (viii) restricted payments; (ix) voluntary prepayments of unsecured and subordinated debt;
(x) amendments to certain debt agreements and organizational documents; (xi) changes of business, center of main
interests or fiscal years; and (xii) anti-terrorism and sanctions related matters.
As of December 31, 2015, the Company was in compliance with all of these covenants.
GBP Revolving Credit Facility
On October 18, 2013, the Company entered into a Loan Authorization Agreement (the "GBP Revolving Credit Facility") with
Bank of Montreal Ireland P.L.C.
Borrowings on the GBP Revolving Credit Facility are payable on demand; provided that to the extent funds are not immediately
available, the Company shall have ten business days to honor any demand for payment requested by Bank of Montreal Ireland
P.L.C. Borrowings are guaranteed by a related party parent, Sun Capital Partners V, L.P.
As of December 31, 2015, the Company has $0 outstanding on the GBP Revolving Credit Facility.
Shareholder loans
As of December 31, 2015 and December 31, 2014, the Company had related party shareholder loans which are PECs, ALPECs
or YFPECs. The terms and the carrying amount of the shareholder loans are as follows:
F - 27
Table Of Contents
(in thousands of U.S. dollars)
December 31, 2015
€ 66.0 PEC
72,545
€ 37.0 PEC
40,874
€ 17.0 PEC
21,861
€ 7.0 PEC
9,904
€ 28.0 ALPEC
31,512
€ 4.0 ALPEC
1,889
€ 2.0 YFPEC
3,063
80,853
45,555
21,614
9,581
35,121
2,105
3,413
198,242
—
198,242
181,648
Total shareholder loans
Less: Current portion
Total long term shareholder loans
December 31, 2014
—
$
181,648
$
PEC Shareholder Loans
The Company’s shareholders have provided interest-bearing PECs with a term of 49 years. Principal is payable on the PECs at
maturity and interest is accrued annually on December 31. The applicable interest rate for each of these instruments is equal to
the arm's length market rate of interest per annum as agreed between the parties to the agreement from time to time and reduced
by an applicable margin in order to create taxable margin as required by the Luxembourg taxing authorities. The PECs include an
optional redemption feature by the Company, at par value plus any accrued interest. The PECs are not secured by any of the assets
of the Company but receive priority in liquidation over common shareholders.
ALPEC Shareholder Loans
The shareholders of the Company have issued ALPECs with a term of 49 years. ALPECs accrue interest based on the value of a
linked asset and not necessarily based on the corresponding obligation amount. Holders of the ALPECs shall receive a return, or
yield, based on the business unit yield as defined in the contract net of the applicable margin. Principal is payable on the ALPECs
at maturity and interest is accrued annually on December 31. The ALPECs include an optional redemption feature, at par value
plus any accrued interest and unpaid yield. The ALPECs receive priority in liquidation over common shareholders.
YFPEC Shareholder Loan
The Company's shareholders have provided a YFPEC with a term of 49 years. The principal on the YFPEC is payable at maturity.
The YFPEC includes an optional redemption feature by the Company, at par value. The YFPEC is not secured by any of the assets
of the Company but receives priority in liquidation over common shareholders.
Deferred Financing Costs
Deferred financing costs related to financing arrangements in place as of December 31, 2015 and 2014, respectively, were as
follows:
December
31, 2015
(in thousands of U.S. dollars)
Deferred financing costs
Accumulated amortization
Total deferred financing costs, net
Less: current portion of deferred financing costs
Noncurrent deferred financing costs, net
December
31, 2014
$
63,197 $
(21,689)
58,943
(12,302)
$
41,508 $
(2,357)
46,641
(3,246)
$
39,151
43,395
$
Debt Maturities
The table below details the Company's maturities of debt principal for the next five years and thereafter:
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Contractual Obligations(1)
Shareholder Loans
Senior 7 7/8 % Notes
10% Exopack Notes
Term Loans - USD
Term Loans - EUR
North American ABL Facility
European ABL Facility
Other interest-bearing debt
Capital leases
Total debt obligations
Total
2016
2017
$ 181,648 $
— $
565,000
—
235,000
—
343,906
3,509
268,212
2,737
55,269
55,269
97,046
97,046
4,951
4,951
74,255
16,360
1,825,287
179,872
2018
2019
— $
— $
— $
—
—
565,000
—
235,000
—
3,509
3,509
333,379
2,737
2,737
260,001
—
—
—
—
—
—
—
—
—
14,236
10,037
8,968
20,482
251,283 1,167,348
2020
Beyond
2021
— $ 181,648
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,259
21,395
3,259
203,043
(1) Future maturities disclosed in this table only include repayment of principal, except for capital leases, which include principal and
interest payments.
8.
Commitments and Contingencies
Operating Leases
The Company leases certain land, buildings, equipment, vehicles, warehouses, and office space under the terms of non-cancelable
operating leases.
Future annual payments on the operating leases as of December 31, 2015 are as follows:
(in thousands of U.S. dollars)
Year Ending December 31
2016
2017
2018
2019
2020
Thereafter
Total
10,057
10,552
10,097
9,220
5,782
26,333
72,041
Capital Leases
The Company leases certain buildings and equipment under the terms of non-cancelable capital leases.
Future annual payments on the capital leases as of December 31, 2015 are as follows:
(in thousands of U.S. dollars)
Year Ending December 31
2016
2017
2018
2019
2020
Thereafter
Interest portion
Total
16,360
14,236
10,037
8,968
3,259
21,395
(13,348)
60,907
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Table Of Contents
Capital Project Commitments Related to Property, Plant and Equipment
At December 31, 2015 the Company has various capital projects related to property, plant and equipment in progress with
approximately $100,575 in future estimated costs to complete these projects.
Legal Proceedings
From time to time, the Company becomes party to legal proceedings and administrative actions, which are of an ordinary or routine
nature, incidental to the operations of the Company. Although it is difficult to predict the outcome of any legal proceeding, in the
opinion of the Company’s management, such proceedings and actions should not, individually or in the aggregate, have a material
adverse effect on the Company’s consolidated financial statements.
9.
Employee Benefit Plans
The measurement date for defined benefit plan assets and liabilities is December 31, the Company’s fiscal year end. A summary
of the elements of key employee benefit plans is as follows:
Defined Benefit Plans
US Plans
The collective pension assets and obligations (collectively the "US Plans") of the Retirement Plan of Coveris Flexibles US, LLC
(the "US Retirement Plan") and the pension obligations of the Coveris Flexibles US, LLC Pension Restoration Plan for Salaried
Employees (the "US Restoration Plan") were transferred to and assumed by the Company in connection with the acquisition of
Exopack. The US Plans were frozen prior to the Exopack acquisition. Accordingly, the employees’ final benefit calculation under
the US Plans was the benefit they had earned under the US Plans as of the freezing date. This benefit will not be diminished,
subject to certain terms and conditions, which will remain in effect.
UK Plans
The Company has two defined benefit pension plans in the United Kingdom (UK). Members of UK plans are entitled to a lifelong
pension or a one-off payment on retirement which is based on the final pensionable salary and length of service. The plans are
wholly funded. The plan assets are held in a trust fund which is administered by trustees.
Netherlands Plan
The Company also has a defined benefit pension plan in the Netherlands. Members of this plan are entitled to pension benefits on
retirement.
Other Defined Benefit Plans
The Company has other smaller defined benefit (“Other DB”) pension plans in Germany and France. These plans provide lifelong
pensions to its current members based on employee pensionable remuneration and length of service. The plans are closed to new
members and all plans are unfunded.
Other Post Employment Benefit Plans
The Company maintains other post-employment benefit ("Other OPEB") plans in Poland, Germany, Austria, France and Turkey
where there are obligations for termination indemnities and other benefits to be paid to employees at the date of retirement or other
early retirement incentives. The entitlement to these benefits is based upon the employees’ final salary and length of service, subject
to the completion of a minimum service period.
The following table sets forth the information related to the changes in the benefit obligations of the Pension Plans and change in
plan assets of the Retirement Plan and a reconciliation of the funded status of the Pension Plans for the years ended December 31,
2015 and 2014.
F - 30
Table Of Contents
US Plans
(in thousands of U.S.
dollars)
2015
UK Plan
2014
2015
Dutch Plan
2014
2015
Other DB
2014
2015
Other OPEB
2014
2015
2014
Change in benefit obligation
Beginning benefit obligation $ 95,093 $ 75,886 $ 72,531 $ 67,325 $ 23,982 $ 18,590 $ 12,020 $ 11,228 $ 11,615 $ 12,194
Obligations assumed through
business combinations
—
—
—
—
—
—
—
—
—
—
Service cost
—
—
214
387
843
673
220
208
522
623
Interest cost
3,629
3,636
2,577
3,040
477
653
205
353
258
421
—
—
3
16
143
174
—
—
—
—
Employee contributions
Actuarial loss (gain)
(6,770)
18,137
(4,137)
8,454
943
1,280
Benefits paid
(2,755)
(2,566)
(2,283)
(2,292)
(183)
(199)
(482)
(489)
(620)
(1,284)
(4,399)
(2,623)
(2,661)
(1,294)
(1,471)
(1,254)
(1,664)
Foreign currency translation
—
—
(3,289)
Other
—
—
(38)
Ending benefit obligation
(2,852)
—
—
7,127
(375)
(580)
—
2,184
7
(227)
45
$ 89,197 $ 95,093 $ 65,578 $ 72,531 $ 19,787 $ 23,982 $ 10,089 $ 12,020 $ 11,237 $ 11,615
Change in plan assets
Beginning fair value of plan
assets
67,216
Assets acquired through
business combinations
—
Actual return on plan assets
(896)
64,322 $ 85,438 $ 79,354 $ 22,157 $ 17,068 $
—
—
—
3,211
2,261
12,634
— $
— $
—
—
—
—
—
7,243
—
—
7
3
—
(1,769)
110 $
113
Employee contributions
—
—
164
16
143
174
—
—
—
—
Employer contributions
1,350
2,249
348
1,216
419
534
142
—
492
621
(2,755)
(2,566)
(142)
—
(492)
(621)
—
—
(12)
—
(6)
Benefits paid
(2,283)
(2,292)
(183)
(199)
(4,026)
(5,291)
(2,253)
(2,663)
Foreign currency translation
—
—
Other
—
—
47
64,915
67,216
81,949
Ending fair value of plan
assets
Funded (unfunded) status
(199)
85,438
—
—
—
—
—
18,514
22,157
—
—
105
110
$ (24,282) $ (27,877) $ 16,371 $ 12,907 $ (1,273) $ (1,825) $ (10,089) $ (12,020) $ (11,132) $ (11,505)
The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended
December 31, 2015 and 2014 are as follows:
Other changes in plan assets and benefit obligations recognized in OCI
All Plans
(in thousands of dollars)
Beginning AOCI related to pension and OPEB plans
2015
$
2014
(25,297) $
344
Amortization of actuarial gain (loss)
Current year actuarial gain (loss)
(3,996)
641
6,125
(21,942)
Ending AOCI related to pension plans
$
(18,828) $
(25,297)
Total recognized gain (loss) in OCI
$
6,469 $
(21,301)
Total recognized in net periodic benefit cost and OCI
$
7,744 $
(18,996)
The following table sets forth the weighted-average discount rate used to determine the benefit obligation, the weighted-average
discount rate used to determine the benefit cost and the expected rate of return on plan assets for the Pension Plans at December 31,
2015 and 2014. The Company sets its discount rate annually in relationship to movements in published benchmark rates. Benefit
accruals in the Pension Plans are either frozen or determined without regard to compensation, so no weighted-average rate of
compensation increase assumption is used in the determination of benefit obligation.
F - 31
Table Of Contents
US Plans
2015
UK Plan
2014
2015
Dutch Plan
2014
2015
Other DB
2014
2015
Other OPEB
2014
2015
2014
Weighted-average discount
rate used to determine
the benefit obligation
4.3%
3.9%
3.8%
3.7%
2.8%
2.2%
2.3%
2.1%
3.0%
2.5%
Weighted-average discount
rate used to determine
the benefit cost
3.9%
4.9%
3.8%
3.7%
2.2%
3.7%
2.0%
1.8%
2.5%
3.5%
Expected rate of return on
plan assets
7.0%
7.0%
3.9%
4.9%
2.2%
3.7%
N/A
N/A
4.0%
3.5%
The various components of net periodic benefit cost for the years ended December 31, 2015 and 2014, follows:
For the year ended December 31, 2015
(in thousands of U.S. dollars)
Service cost
US Plans
$
Interest cost
Expected return on plan assets
Other DB
Other OPEB
843 $
220 $
522
258
2,577
477
205
(4,606)
(2,953)
(451)
—
(4)
—
178
54
(116)
(162) $
1,047 $
228
$
Dutch Plan
214 $
3,629
Amortization of net actuarial loss
Net periodic pension benefit cost
UK Plan
— $
(749) $
479 $
660
For the year ended December 31, 2014
(in thousands of U.S. dollars)
Service cost
US Plans
$
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Net periodic pension benefit cost
UK Plan
— $
387 $
Other DB
Other OPEB
673 $
208 $
623
3,636
3,040
653
298
421
(4,522)
(3,135)
(614)
—
(4)
268
482
(54)
980 $
988 $
986
(55)
$
Dutch Plan
—
(941) $
292 $
For all funded pension plans, the Company's overall investment strategy is to achieve a mix of investments for long-term growth
and near-term benefit payments through diversification of asset types, fund strategies and fund managers. Investment risk is
measured on an on-going basis through annual liability measurements, periodic asset/liability studies, and quarterly investment
portfolio reviews. The pension plans invest primarily in equity index funds, government debt securities, and high quality corporate
fixed income securities in their respective domestic markets. The equity index funds invested in by the plans seek to achieve a
balance of return and capital stability through investing in equity securities which will provide returns comparable to the primary
domestic equity index. As of December 31, 2015 and 2014, pension investments did not include any direct investments in the
Company’s stock or the Company’s debt.
The majority of the Company's OPEB plans are unfunded. Nominal plan assets are held in cash by two of the Company's plans in
Germany for settlement of short term benefit payments. These assets are classified within level 1of the fair value hierarchy as of
December 31, 2015 and 2014. No assumed return on plan assets is made for these plans.
The weighted-average allocation of plan assets by asset category for the Retirement Plan at December 31, 2015 and 2014 are as
follows:
F - 32
Table Of Contents
US Plans
2015
2014
UK Plan
2015
2014
Dutch Plan
2015
2014
Equity securities
62.0%
61.0%
30.0%
8.1%
Fixed income securities
32.0%
33.0%
40.0%
60.5%
—%
—%
6.0%
6.0%
30.0%
31.4%
100.0%
100.0%
Other
—%
—%
The following tables set forth, by category and within the fair value hierarchy, the estimated fair value of the Company’s pension
assets as of December 31, 2015 and 2014:
December 31, 2015
(in thousands of U.S. dollars)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Total
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset category
Equity securities:
Mutual funds
Management money - equity specialty
Fixed income securities:
Corporate bonds
Government bonds
Other fixed income
Other
Total pension assets
$
$
64,132
$
64,132
$
—
$
—
—
—
—
—
31,516
9,612
17,469
42,754
165,483
21,585
9,612
17,469
386
113,184
9,931
—
—
—
9,931
—
—
—
42,368
42,368
$
$
$
December 31, 2014
(in thousands of U.S. dollars)
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset category
Equity securities:
Mutual funds
Management money - equity specialty
Fixed income securities:
Corporate bonds
Government bonds
Other fixed income
Other
Total pension assets
$
$
47,871
110
73,857
26,853
4,073
22,157
174,921
$
$
47,871
110
22,176
26,853
4,073
—
101,083
$
$
—
—
51,681
—
—
—
51,681
$
$
—
—
—
—
—
22,157
22,157
The fair value of the Level 2 equity and fixed income securities are based on their respective net asset values held at year end,
which are supported by the value of the underlying securities and by the unit prices of actual purchase and sales transactions
occurring as of or close to the financial statement date.
The fair value of the Level 3 insurance contract asset is based on the estimated fair value an annuity based on the defined benefit
obligation using unobservable inputs and assumptions determined by the insurer.
F - 33
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The following table sets forth benefit payments expected to be paid by the Pension Plans for the period indicated:
(in thousands of U.S. dollars)
2016
2017
2018
2019
2020
In aggregate during five-years thereafter
$
$
6,083
6,849
7,655
7,815
8,590
49,310
The Company expects to make the following pension funding contributions to the Company's pension plans during the year ended
2015:
(in thousands of U.S. dollars)
US Plans
UK Plans
Dutch Plan
Other DB
Other OPEB
Total
10.
2015
Contributions
$
$
1,800
352
611
—
19
2,782
Related Party Transactions
Related party transactions as of December 31, 2015 and 2014, respectively, and for the years ended December 31, 2015 and
2014, respectively, were as follows:
Name of related party
Transaction type
Sun Capital Partners IV, LLC
Management fee
Coveris Intermediate Holdings S.a.r.l.
Financing
Totals
11.
Receivable (Payable)
Income/(Expenses)
As of December 31,
Year ended December 31,
2015
$
$
2014
— $
2015
—
$
(8,607) $
2014
(8,500)
(29,740)
(23,776)
(12,429)
(16,287)
(29,740) $
(23,776) $
(21,036) $
(24,787)
Segments
The Company identifies its reportable operating segments in accordance with FASB guidance for disclosures about segments of
an enterprise and related information. In accordance with FASB guidance, the Company reviewed certain qualitative factors in
identifying and determining reportable operating segments. These factors include: 1) the nature of products; 2) the nature of
production processes; 3) major raw material inputs; 4) the class of consumer for each product; and 5) the methods used to distribute
each product. While all of these factors were reviewed, the most relevant factors are the nature of the products and the nature of
production processes. The types of products sold from each segment are similar in nature and have similar production processes,
in addition to conformity with the CODM's review and management objectives for the business.
The Company is organized into the following two reportable segments which are based on products and services and which reflect
the Company's management structure and internal financial reporting:
•
Flexible - this segment contains the Company's businesses which produce a variety of flexible and semi-rigid plastic and
paper products, including bags, pouches, roll stocks, film laminates, sleeves and labels.
F - 34
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•
Rigid - this segment contains the Company's businesses which produce injection molded or thermoformed and decorated
rigid plastic and paper packaging solutions, including bowls, cups, lids and trays.
While sales and transfers between segments are recorded at cost plus a reasonable profit, the effects of intersegment sales are
excluded from the computations of segment net sales and operating income (loss). Intercompany profit is eliminated in consolidation
and is not significant for the periods presented.
The table below presents information about the Company’s reportable segments, excluding discontinued operations, for the years
ended December 31, 2015 and 2014:
Year ended December 31,
2015
2014
(in thousands of U.S. dollars)
Net sales to external customers:
Flexible
Rigid
Total
$
$
1,978,488
627,760
2,606,248
$
66,062
4,883
5,570
76,515
$
65,726
(12,509)
(4,682)
$
48,535
106,456
41,938
148,394
$
107,564
48,754
156,318
106,838
50,969
157,807
$
1,936,581
504,170
42,573
2,483,324
$
$
1,986,679
772,578
2,759,257
Operating income (loss):
Flexible
Rigid
Corporate/Eliminations
Total
$
$
Depreciation and amortization:
Flexible
Rigid
Total
$
$
$
Capital expenditures:
Flexible
Rigid
Total
$
$
65,221
51,276
116,497
$
Identifiable assets:
Flexible
Rigid
Corporate/Eliminations
Total
$
$
$
1,832,273
525,403
82,526
2,440,202
The following geographic information represents the Company’s net sales based on product shipment location for the years ended
December 31, 2015 and 2014 and property, plant and equipment based on physical location as of December 31, 2015, and 2014:
Net Sales by geography
F - 35
Table Of Contents
(in thousands)
Western Europe
Eastern Europe
North and Central America
Other
$
$
Year ended December 31,
2015
2014
1,324,491 $
1,525,641
288,107
272,816
931,507
887,955
62,143
72,845
2,606,248 $
2,759,257
Total Property, Plant and Equipment
(in thousands)
Western Europe
Eastern Europe
North and Central America
Other
$
$
12.
2015
404,891
99,715
315,891
21,471
841,968
$
$
2014
418,638
109,287
247,716
14,410
790,051
Income Taxes
The following tables present components of the (benefit from) provision for income taxes from continuing operations, the principal
items of deferred taxes, and a reconciliation of the statutory income tax rate to the effective income tax rate for the years or dates
indicated, as applicable.
Year ended December 31,
2015
2014
(in thousands of dollars)
(Benefit from) provision for income taxes:
Current
Domestic (Luxembourg)
Foreign
Deferred
Domestic (Luxembourg)
Foreign
Net (benefit from) provision for income taxes
$
$
(213) $
10,832
181
7,451
49
(20,110)
(9,442) $
—
(24,228)
(16,596)
Income tax benefit decreased $7,154 from the year ended December 31, 2014. The primary components of current period deferred
tax relate to amortization of intangible assets and the recognition of additional deferred tax on tax losses, which are expected to
be utilized. The primary reasons for the decrease in overall tax benefit relate to the reduction of profits before tax in 2015 and the
recording of a valuation allowance during 2015 against deferred tax assets in certain jurisdictions.
The components of income (loss) before taxes from continuing operations are as follows for the years ended December 31, 2015
and 2014:
Year ended December 31,
2015
2014
(in thousands of dollars)
Income (loss) before taxes from continuing operations:
Domestic (Luxembourg)
Foreign
Total income (loss) before taxes from continuing operations
$
$
(19,118) $
(49,026)
(68,144) $
(14,970)
(102,817)
(117,787)
The components of deferred income tax assets and liabilities are summarized as follows at December 31, 2015 and 2014:
F - 36
Table Of Contents
December 31,
2015
(in thousands of U.S. dollars)
Gross deferred income tax assets:
Net operating loss carry forwards
Employee benefits
Fixed assets
Accruals
Deferred financing costs
Accruals and other provisions
$
219,995
4,337
2,416
24,856
8,434
14,627
274,665
December 31,
2014
$
194,480
5,740
4,403
12,032
10,104
6,317
233,076
Gross deferred income tax liabilities:
Net fixed asset basis difference
Intangible asset basis differences
Post retirement and pension
Deferred financing costs
61,971
72,637
6,386
9,833
Unrealized foreign currency gains
Other
Gross deferred tax liabilities
Less: valuation allowance
Net deferred income tax liabilities
$
20,436
8,571
179,834
(145,736)
(50,905) $
70,103
82,116
7,249
11,323
19,283
8,286
198,360
(98,139)
(63,423)
As of December 31, 2015, the Company has tax operating loss carryforwards of $840,067, which will be available to offset future
taxable income. Significant losses exist in Luxembourg, ($246,288), France ($152,048), the United States ($142,999 of Federal
and $180,018 of US state), Germany ($29,018), and Austria ($27,596), with the remainder of losses spread throughout various
jurisdictions. The losses within Luxembourg, France, Germany and Austria do not expire and can be carried forward indefinitely.
If losses within the United States are not used, the Federal operating loss carryforwards will expire in future years beginning 2025
through 2035. The US state operating loss carry forwards expire in various amounts over 3 to 20 years. Certain jurisdictions have
statutory limitations on the use of losses against current period taxable income, where relevant, these limitations have been factored
into the recognition of any deferred tax assets.
The Company does not expect to generate sufficient taxable income in the foreseeable future to realize the tax benefits in certain
jurisdictions related to the deferred tax assets. Therefore, the Company has provided a full or partial valuation allowance against
certain of its deferred tax assets
The net deferred income tax liability is recognized as follows in the accompanying consolidated balance sheets at December 31,
2015 and 2014:
December 31,
December 31,
2015
2014
$
1,890 $
5,397
(52,795)
(68,820)
(50,905) $
(63,423)
$
(in thousands of U.S. dollars)
Noncurrent deferred income tax assets
Noncurrent deferred income tax liabilities
Net deferred income tax liability
The reconciliation of the statutory income tax rate to the effective income tax rate is summarized as follows:
F - 37
Table Of Contents
(in thousands of U.S. dollars)
Income (loss) before income taxes from continuing operations
Domestic income tax (benefit) at the Luxembourg statutory rate
$
Permanent differences
Change in valuation allowance
Recognition of uncertain tax positions
Foreign tax rate difference
Year ended December 31,
2015
2014
(68,144) $
(117,787)
(19,912)
(34,163)
(12,494)
2,610
34,415
47
(4,523)
(8,696)
Significant and one-off transactions
Other, net
Net (benefit from) provision for income taxes
13,684
1,200
(4,947)
2,287
2,733
(16,596)
1,721
(9,442) $
$
The change in valuation allowance for 2015 is primarily due to the nonrecognition of deferred tax on unrealized foreign exchange
losses in Luxembourg in the current year. Reflected in significant and one-off transactions is $6,298 of tax benefit recognized in
2015 related to the Company's assertion of permanent reinvestment of earnings in its UK subsidiary for which a deferred tax
liability had been previously recognized.
Unrecognized Tax Benefits
In 2015, the Company increased its uncertain tax provisions by $47 as a result of ongoing tax audits in some international
jurisdictions. If these uncertain tax provisions were recognized, it would not have a material impact on the Company's effective
tax rate. No significant interest or penalties have been recognized in the current year.
13.
Fair Values of Debt Instruments
The following financial instruments are recorded at amounts that approximate fair value: (1) trade receivables, net, (2) certain
other current assets, (3) accounts payable, (4) NA ABL Facility, (5) European ABL Facility, (6) the New Term Loan, (7) GBP
Revolving Credit Facility, (8) PECs and ALPECs, (9) other legacy credit facilities carrying interest rates that fluctuate with market
rates; and (10) certain other current liabilities. The carrying amounts reported on our consolidated balance sheets for the above
financial instruments closely approximate their fair value due to either the short-term nature of the aforementioned assets and
liabilities or due to carrying an interest rate based upon a variable market rate. See Note 10. Employee Benefit Plans and Note 15.
Derivatives and Hedging Activities for additional disclosures regarding the fair value of pension and other post-retirement employee
benefit assets and obligations as well as the fair value of derivative instruments.
The fair values of the Company's other financial instruments for which fair value does not approximate carrying value as of
December 31, 2015 and 2014 are as follows:
(in thousands of U.S. dollars)
Carrying
Value
December 31, 2015
Senior 7 7/8 % Notes
$
$ 235,000 10% Exopack Notes
€ 2,000 YFPEC
Total Fair
Value
565,517
$
497,200
235,284
$
3,063
Level 1
$
223,250
$
151
Level 2
—
$
—
$
Level 3
497,200
$
—
—
$
151
338,000
$
—
$
141
223,250
—
$
—
$
—
(in thousands of U.S. dollars)
Carrying
Value
December 31, 2014
Senior 7 7/8 % Notes
$
$ 235,000 10% Exopack Notes
€ 2,000 YFPEC
$
Total Fair
Value
325,000
$
338,000
235,402
$
249,100
3,413
$
141
F - 38
Level 1
$
Level 2
—
$
—
Level 3
249,100
$
—
—
Table Of Contents
The Company utilizes a market approach to calculate the fair value of the Company's Senior Notes and Exopack Notes. Due to
their limited investor base, they may not be actively traded on the date of the fair value determination. Therefore, the Company
may utilize prices and other relevant information indirectly observable through corroboration with observable market data, which
are considered as Level 2 inputs. As market data is not available for calculating the fair value of the YFPEC, the Company has
developed the inputs using the best information available with regards to the assumptions and believes the inputs are similar to
those which market participants would use when pricing the liability. These inputs are unobservable and, therefore, considered as
Level 3 inputs.
14.
Derivatives and Hedging Activities
The Company’s results of operations could be materially impacted by significant changes in foreign currency exchange rates. In
an effort to manage the exposure to these risks, the Company has entered into a series of forward contracts and foreign currency
options beginning in 2014. The Company’s accounting policies for these instruments are in accordance with US GAAP for
instruments designated as non-hedge instruments as defined in ASC 815. The Company records all derivatives on the balance
sheet at fair value.
The Company’s objective for its contracts is to mitigate foreign currency risk related to future debt principal and interest payments
in U.S. dollars from cash flows largely generated in British pounds and euros. In addition, the Company seeks to mitigate the risk
of foreign currency changes affecting working capital specifically related to transactions conducted in euros for entities operating
in British pounds.
The Company had outstanding forward contracts with notional amounts of $21,400 to exchange foreign currencies as of
December 31, 2015. All forward contracts mature between January 1, 2016 and December 31, 2016. The Company has elected to
not pursue effective hedge accounting treatment on these forward contracts, and accordingly, these instruments are adjusted to fair
value through earnings in foreign currency exchange gain (loss).
In addition, the Company entered into two cross currency swaps in order to address the Company's exposure to foreign currency
risk related to the future principal of the Senior Notes and Term Loan. The GBP-to-USD cross currency swap has a termination
date of May 8, 2019 and a notional amount of $397,487. The EUR-to-USD cross currency swap has a termination date of May 8,
2019 and a notional amount of $225,067. The EUR-to-USD cross currency swap also includes a put option with a strike price of
1.25037 and a notional amount of $123,787 that expires on May 6, 2019, which limits the potential liability should exchange rates
revert to historical averages. The Company has elected to not pursue effective hedge accounting treatment on these cross currency
swaps, and accordingly, these instruments are adjusted to fair value through earnings in foreign currency exchange gain (loss).
Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency
exposures are as follows:
Unrealized foreign currency contract (gains) losses
$
Realized foreign currency contract (gains) losses
Year Ended
Year Ended
December 31, 2015
December 31, 2014
(10,718) $
(3,874)
Net foreign currency contract (gains) losses
$
(14,592) $
(3,816)
(1,212)
(5,028)
Unrealized foreign currency contract gains and losses are the result of unsettled foreign currency contracts as of December 31,
2015. Realized foreign currency contract gains and losses are the result of foreign currency contracts that have been settled during
the period. During the year ended December 31, 2015, the Company has settled foreign currency contracts with aggregate notional
amounts of $46,674. The foreign currency exchange gains and losses are the result of fluctuations in value of the British pound
and euro versus the U.S. dollar.
The Company's derivative instruments are recorded as follows in the consolidated balance sheet as of December 31, 2015 and
2014:
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Table Of Contents
Fair Value of Derivatives Not Designated as
Hedge Instruments (a)
December 31, 2015
December 31, 2014
Derivative assets:
Prepaid expenses and other current assets
$
Other assets
2,450
$
12,409
2,688
1,013
Derivative liabilities:
Other liabilities
$
1,476
$
164
(a)
The derivative instruments are valued based on inputs that are indirectly observable through corroboration with observable market data, which are
considered Level 2 inputs.
15.
Discontinued Operations
During the third quarter of 2014, the Flexibles group has discontinued its resin trade business. The Company's resin trade business
consisted of buying and reselling resins from wholesalers to customers. The resin trade business has been discontinued to further
focus the Company's operations around the Company's long-term strategy and organizational goals. Net sales and net operating
income (loss) from the Company's discontinued operations for the years ended December 31, 2015 and 2014 are as follows:
Years Ended
December 31, 2015
December 31, 2014
Net sales
Operating income (loss)
16.
$
$
—
—
$
$
39,687
(858)
Subsequent Events
In January 2016, the Company announced the Coveris Advanced Coatings goodwill reporting unit will be integrated into the
Americas Food and Consumer reporting unit in order to align strategic roles within the organization. The Company will assess
the impact of this reorganization on the goodwill reported during the quarter ended March 31, 2016.
On February 19, 2016, the Company settled its GBP cross currency swap for a realized gain of $16,926. As of December 31, 2015,
the GBP cross currency swap was a receivable of $7,628.
During February 2016, the minority shareholder of Coveris Rigid Ukraine LLC seized control of the facility in the Ukraine and
obtained full ownership of this company. Coveris has withdrawn all operations and funding from Coveris Rigid Ukraine LLC and
is supplying customers from other Coveris facilities. Coveris Rigid Ukraine had net sales of $7,316 for the year ended December
31, 2015 and net assets of $616 as of December 31, 2015. The Company does not expect the loss of the Ukraine facilities to have
a material impact on the consolidated balance sheet, consolidated statement of operations or consolidated statement of cash flows.
During March 2016, a related party of Coveris Holdings S.A. completed the acquisition of Supraplast. Supraplast is a shrink sleeve
and adhesive label technologies company based in Guayaquil, Ecuador. Coveris Holding Corp. and Coveris Flexibles US LLC,
subsidiaries of Coveris Holdings S.A., have entered into a Management Services Agreement ("MSA") with Supraplast. The MSA
will afford Coveris an opportunity for expansion and growth in the South American region. The financial results of Supraplast
will not be included in the consolidated financial statements of Coveris Holdings S.A. for the foreseeable future.
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