Business News

Pregis Announces Third Quarter 2008 Financial Results

Friday 14. November 2008 - Pregis Corporation, a leading international manufacturer, marketer, and supplier of protective packaging products and specialty packaging solutions, today announced its financial results for the third quarter of 2008.

The Company’s net sales in the third quarter were $265.2 million, an increase of 8.2% over net sales of $245.2 million in the third quarter of 2007. Excluding the impact of favorable foreign currency translation and sales from an acquisition made in the fourth quarter of 2007, the quarter’s net sales increased 2.5% compared to the prior year quarter.

Gross profit margin, as a percent of net sales, was 22.4% in the third quarter of 2008, compared to 23.1% in the third quarter of 2007. The decline in gross margin was primarily due to significantly increased costs of resin, fuel and other raw materials in the 2008 period. According to the CMAI indices, resin costs in the U.S. and Europe increased approximately 31% and 17%, respectively, in the third quarter of 2008 compared to the third quarter of 2007. The third quarter gross margin percentage improved 100-basis points compared to the gross profit margin of 21.4% in the second quarter of 2008, reflecting the impact of selling price increases implemented during the quarter as well as the impact of continued cost reduction initiatives.

For the third quarter of 2008, operating income was $10.1 million compared to $10.4 million in the third quarter of 2007, with the reduction driven primarily by pre-tax severance charges totaling $5.2 million relating to the Company’s various productivity and cost reduction programs. The third quarter pre-tax severance charges include $3.9 million relating to the Eerbeek, Netherlands plant closure previously announced.

Commenting on the Company’s results for the third quarter, Mike McDonnell, President and Chief Executive Officer, stated, “Overall, we are pleased with the results we achieved in the third quarter. We made good progress with our pricing actions in the quarter; however, we have yet to recover the significantly higher raw material costs absorbed in the first half of the year. Even as market conditions become more difficult, we will maintain our commitment to pricing discipline.”

Mr. McDonnell continued, “We also remain committed to improving our profitability through aggressive productivity and cost reduction initiatives. During the third quarter, through the significant efforts of our Pregis management and employees, we realized savings of close to $5 million from these programs. Given the very weak general economic conditions within which we are currently operating, including the possibility of a recession in the U.S. and further worldwide economic slowdown, we expect the next few quarters to be challenging. As a result, we are diligently working to identify additional cost reduction opportunities to help mitigate the impact of the weakened economic environment and drive long-term sustainable profit growth.”

For the nine months ended September 30, 2008, net sales grew to $799.7 million, higher by 10.2% compared to net sales of $725.7 million for the comparable 2007 period. Excluding the impact of favorable foreign currency translation and sales from two acquisitions made in the second half of 2007, net sales for the nine months of 2008 were relatively flat compared to the prior year period. Gross profit margin percentage declined to 21.9% for the 2008 nine month period compared to 24.6% for the 2007 period, primarily due to increased costs of resin, fuel and other raw materials, partially offset by the impact from the Company’s cost reduction initiatives.

For the nine month period, operating income was $25.6 million compared to $41.1 million for same period of 2007, with the reduction driven primarily by higher raw material costs as well as pre-tax severance charges totaling $7.8 million relating to its productivity and cost reduction initiatives. The Company expects to incur additional restructuring charges of approximately $3.3 million over the remainder of 2008 and through the first half of 2009 to complete implementation of these initiatives. Combined with the overhead optimization efforts started at the end of 2007, these programs are currently expected to generate annual savings in excess of $25 million.

Segment Performance

Comments on segment net sales performance for the third quarter of 2008 are as follows:

— Net sales of the protective packaging segment increased by $13.9 million, or 8.8%. The 2008 third quarter sales growth was driven by favorable foreign currency translation, as well as the incremental sales generated by the Besin entity acquired in the fourth quarter of 2007. The segment also achieved pricing improvement in its U.S. and European operations, which more than offset the volume declines attributed to the weakened economic conditions in these markets. Excluding the impacts of favorable foreign currency effects and revenue growth from acquisitions, net sales for the segment increased 2.6%.

— Net sales of the flexible packaging segment increased $4.2 million, or 9.4%. The increase was driven by favorable foreign currency translation and favorable pricing, partially offset by lower volumes due mainly to weaker economic conditions in Germany, the segment’s principal market. Excluding the impact of favorable foreign currency, the segment’s 2008 third quarter net sales were relatively flat compared to the prior year period.

— Net sales of the hospital supplies segment increased $2.0 million, or 10.5%, driven by growth in procedure packs as well as the segment’s geographic expansion efforts, partially offset by price erosion resulting from the competitive market environment. Excluding the impact of favorable foreign currency, the segment’s 2008 third quarter net sales were relatively flat compared to the prior year period.

— Net sales of the rigid packaging segment decreased nominally by $0.1 million. Excluding the impact of unfavorable foreign currency effects in the quarter, net sales for the segment increased 6.1% in the quarter, due mainly to higher sales volume of films and thermoformed products, partially offset by price erosion resulting from the competitive market environment.

A summary of a significant measure required by the Company’s indentures is presented in the supplemental information at the end of this release.

Safe Harbor Statement:

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. You can generally identify forward-looking statements by the Company’s use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the Company’s control. For a discussion of key risk factors, please see the risk factors disclosed in the Company’s filings with the Securities & Exchange Commission, including the Company’s annual report on Form 10-K and quarterly reports on Form 10-Q. These risks may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Given these risk and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this press release are made only as of the date hereof. The Company undertakes no duty to update its forward-looking statements.

Pregis Holding II Corporation
Consolidated Balance Sheets
Unaudited
(dollars in thousands, except shares and per share data)

September 30, 2008 December 31, 2007
Assets (Unaudited)
Current assets
Cash and cash equivalents $30,038 $34,989
Accounts receivable
Trade, net of allowances of
$5,366 and $5,313, respectively 157,467 148,045
Other 12,756 18,532
Inventories, net 114,546 108,914
Deferred income taxes 2,971 2,991
Due from Pactiv 607 7,072
Prepayments and other current
assets 9,073 9,187
Total current assets 327,458 329,730
Property, plant and equipment, net 257,777 277,398
Other assets
Goodwill 148,414 150,000
Intangible assets, net 43,592 47,910
Deferred financing costs, net 8,328 10,080
Due from Pactiv, long-term 13,208 12,229
Pension and related assets 25,155 25,659
Other 431 2,313
Total other assets 239,128 248,191
Total assets $824,363 $855,319

Liabilities and stockholder’s equity
Current liabilities
Current portion of long-term debt $2,125 $2,120
Accounts payable 104,326 100,326
Accrued income taxes 7,880 13,900
Accrued payroll and benefits 16,953 19,814
Accrued interest 11,437 6,775
Other 25,462 22,436
Total current liabilities 168,183 165,371
Long-term debt 465,804 475,604
Deferred income taxes 32,342 34,589
Long-term income tax liabilities 10,780 9,585
Pension and related liabilities 8,658 9,389
Other 7,006 7,124
Stockholder’s equity:
Common stock – $0.01 par value; 1,000
shares authorized, 149.0035 shares
issued and outstanding at
September 30, 2008 and
December 31, 2007 – –
Additional paid-in capital 150,337 149,659
Accumulated deficit (37,391) (16,588)
Accumulated other comprehensive
income 18,644 20,586
Total stockholder’s equity 131,590 153,657
Total liabilities and stockholder’s
equity $824,363 $855,319



Pregis Holding II Corporation
Consolidated Statements of Operations
Unaudited
(dollars in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007

Net sales $265,188 $245,163 $799,726 $725,710
Operating costs and expenses:
Cost of sales, excluding
depreciation and
amortization 205,673 188,426 624,443 547,258
Selling, general and
administrative 31,232 32,793 100,407 97,489
Depreciation and amortization 13,584 14,242 40,734 40,736
Other operating expense
(income), net 4,601 (656) 8,500 (840)
Total operating costs and
expenses 255,090 234,805 774,084 684,643
Operating income 10,098 10,358 25,642 41,067
Interest expense 13,392 11,656 37,293 34,777
Interest income (92) (465) (518) (897)
Foreign exchange loss (gain),
net 9,562 (1,805) 6,641 (3,527)
Income (loss) before income
taxes (12,764) 972 (17,774) 10,714
Income tax expense (benefit) (802) 1,535 3,029 8,204
Net income (loss) $(11,962) $(563) $(20,803) $2,510



Pregis Holding II Corporation
Consolidated Statements of Cash Flows
Unaudited
(dollars in thousands)

Nine Months Ended September 30,
2008 2007
Operating activities
Net income (loss) $(20,803) $2,510
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization 40,734 40,736
Deferred income taxes (1,419) 713
Unrealized foreign exchange loss
(gain) 6,814 (3,254)
Amortization of deferred financing
costs 1,781 1,636
Loss (gain) on disposal of property,
plant and equipment (246) (51)
Stock compensation expense 678 334
Impairment of interest rate swap asset 1,299 –
Gain on insurance settlement – (884)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts and other receivables, net (12,024) (14,384)
Due from Pactiv 6,630 9,202
Inventories, net (9,738) (14,249)
Prepayments and other current assets (143) 1,381
Accounts payable 7,568 15,336
Accrued taxes (4,778) (1,551)
Accrued interest 4,577 5,011
Other current liabilities 1,871 1,027
Pension and related assets and
liabilities, net (2,815) (153)
Other, net 177 (2,994)
Cash provided by operating activities 20,163 40,366

Investing activities
Capital expenditures (25,270) (23,162)
Proceeds from sale of assets 1,042 382
Acquisition of business, net of cash
acquired – (8,898)
Insurance proceeds 1,868 884
Other, net (593) (35)
Cash used in investing activities (22,953) (30,829)

Financing activities
Repayment of long-term debt (1,435) (1,360)
Other, net 62 300
Cash used in financing activities (1,373) (1,060)
Effect of exchange rate changes on cash
and cash equivalents (788) 2,748
Increase (decrease) in cash and cash
equivalents (4,951) 11,225
Cash and cash equivalents, beginning of
period 34,989 45,667

Cash and cash equivalents, end of period $30,038 $56,892



Pregis Holding II Corporation
Supplemental Information
(Unaudited)

Calculation of Adjusted EBITDA (“Consolidated Cash Flow”)

Twelve Months Ended September 30,
(dollars in thousands) 2008 2007

Net loss of Pregis Holding II Corporation $(28,092) $(3,553)
Interest expense, net of interest income 48,300 44,818
Income tax expense 2,533 11,801
Depreciation and amortization 55,797 54,717
EBITDA 78,538 107,783

Other non-cash charges (income):
Unrealized foreign currency transaction
losses (gains), net 7,846 (6,109)
Non-cash stock based compensation expense 902 269
Non-cash asset impairment charge 403 –
Other non-cash expenses, primarily fixed
asset disposals and write-offs 427 –
Net unusual or nonrecurring gains or losses:
Restructuring, severance and related
expenses 12,409 5,051
Nonrecurring charges related to
acquisitions and dispositions 4,512 3,044
Other unusual or nonrecurring gains or
losses 123 792
Other adjustments:
Amounts paid pursuant to management
agreement with Sponsor 1,834 1,802
Pro forma earnings and costs savings 454 1,480

Adjusted EBITDA (“Consolidated Cash Flow”) $107,448 $114,112

Note to above:


EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation and amortization. Adjusted EBITDA, referred to as Consolidated Cash Flow within the context of the Company’s indentures, is presented herein because it is a material element of the fixed charge coverage ratio and secured indebtedness leverage ratio included in the Company’s indentures.

Pregis Holding II Corporation
Third Quarter 2008
Supplemental Information
(Unaudited)
(Amounts and percentage changes are approximations due to rounding.)

Gross Margin Calculations

Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2008 2007 Change 2008 2007 Change

Net sales $265.2 $245.2 $20.0 $799.7 $725.7 $74.0
Cost of sales, excluding
depreciation and
amortization (205.7) (188.5) (17.2) (624.4) (547.3) (77.1)
Gross margin $59.5 $56.7 $2.8 $175.3 $178.4 $(3.1)
Gross margin, as a percent
of net sales 22.4% 23.1% (0.7)% 21.9% 24.6% (2.7)%


Net Sales Analysis by Segment

Change Attributable
Three Months Ended to the Following Factors
September 30, Currency
$ % Price/ Acquis- Transl-
2008 2007 Change Change Mix Volume itions ation
(dollars in
millions)
Segment:
Protective
Packaging $172.1 $158.2 $13.9 8.8% 5.5% (2.9)% 3.9% 2.3%
Flexible
Packaging 48.9 44.7 4.2 9.4% 3.7% (3.0)% – 8.7%
Hospital
Supplies 20.7 18.7 2.0 10.5% (1.4)% 2.2% – 9.7%
Rigid
Packaging 25.2 25.3 (0.1) (0.6)% (1.8)% 7.9% – (6.7)%
Intersegment
eliminations (1.7) (1.7) –
Total $265.2 $245.2 $20.0 8.2% 3.9% (1.4)% 2.5% 3.2%


Change Attributable
Nine Months Ended to the Following Factors
September 30, Currency
$ % Price/ Acquis- Transl-
2008 2007 Change Change Mix Volume itions ation
(dollars in
millions)
Segment:
Protective
Packaging $520.3 $469.7 $50.6 10.8% 2.1% (1.0)% 5.4% 4.3%
Flexible
Packaging 148.0 131.3 16.7 12.8% 1.2% (0.6)% – 12.2%
Hospital
Supplies 63.5 55.9 7.6 13.6% (2.4)% 2.6% – 13.4%
Rigid
Packaging 72.7 72.4 0.3 0.5% (1.0)% 3.7% – (2.2)%
Intersegment
eliminations (4.8) (3.6) (1.2)
Total $799.7 $725.7 $74.0 10.2% 1.3% (0.5)% 3.5% 5.9%