Form 10-Q for the quarterly period ended January 2, 2005
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:

January 2, 2005

 

001-12415

(Commission File Number)

 


 

BWAY CORPORATION

(Exact name of registrant as specified in its charter)

 


 

DELAWARE

(State of incorporation)

 

36-3624491

(IRS Employer Identification No.)

 

8607 Roberts Drive, Suite 250

Atlanta, Georgia

(Address of principal executive offices)

 

30350-2237

(Zip Code)

 

(770) 645-4800

(Registrant’s telephone number)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of February 14, 2005, there were 1,000 shares of BWAY Corporation’s Common Stock outstanding.

 



Table of Contents

BWAY CORPORATION

Quarterly Report on Form 10-Q

For the quarterly period ended January 2, 2005

 

INDEX

 

         

Page

Number


     PART I – FINANCIAL INFORMATION     

Item 1.

  

Financial Statements

    
    

Consolidated Balance Sheets at January 2, 2005 and October 3, 2004 (Unaudited)

   1
    

Consolidated Statements of Operations for the Three Months Ended January 2, 2005 and January 4, 2004 (Unaudited)

   2
    

Consolidated Statements of Cash Flows for the Three Months Ended January 2, 2005 and January 4, 2004 (Unaudited)

   3
    

Notes to the Consolidated Financial Statements (Unaudited)

   4

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   22

Item 4.

  

Controls and Procedures

   22
     PART II – OTHER INFORMATION     

Item 1.

  

Legal Proceedings

   22

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   22

Item 3.

  

Defaults Upon Senior Securities

   22

Item 4.

  

Submission of Matters to a Vote of Security Holders

   22

Item 5.

  

Other Information

   22

Item 6.

  

Exhibits

   22


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BWAY Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

 

($ in thousands)


   January 2,
2005


    October 3,
2004


 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 6,899     $ 27,325  

Accounts receivable, net of allowance for doubtful accounts of $1,501 and $1,654

     74,703       81,039  

Inventories, net

     75,492       59,275  

Current income taxes receivable

     3,129       1,948  

Deferred tax assets

     8,839       8,839  

Other

     3,756       4,244  
    


 


Total current assets

     172,818       182,670  
    


 


Property, plant and equipment, net

     151,852       155,395  

Other assets

                

Goodwill

     220,297       220,297  

Other intangibles, net

     165,648       168,613  

Deferred financing costs, net of accumulated amortization of $2,496 and $1,965

     12,195       12,726  

Other

     1,620       1,703  
    


 


Total other assets

     399,760       403,339  
    


 


Total Assets

   $ 724,430     $ 741,404  
    


 


Liabilities and Stockholder’s Equity

                

Current liabilities

                

Accounts payable

   $ 75,863     $ 66,301  

Accrued salaries and wages

     7,329       8,604  

Accrued interest

     5,589       10,625  

Accrued rebates

     9,197       7,364  

Current portion of long-term debt

     —         19,700  

Other

     16,637       17,694  
    


 


Total current liabilities

     114,615       130,288  
    


 


Long-term debt

     395,300       395,300  

Other long-term liabilities

                

Deferred tax liabilities

     82,532       82,532  

Other

     18,867       18,279  
    


 


Total other long-term liabilities

     101,399       100,811  
    


 


Commitments and contingencies (Note 7)

                

Stockholder’s equity

                

Preferred stock, $.01 par value, shares authorized 5,000,000; none issued

     —         —    

Common stock, $.01 par value, shares authorized 24,000,000; shares issued 1,000

     —         —    

Additional paid-in capital

     104,022       104,022  

Retained earnings

     9,683       11,572  

Accumulated other comprehensive loss

     (589 )     (589 )
    


 


Total stockholder’s equity

     113,116       115,005  
    


 


Total Liabilities and Stockholder’s Equity

   $ 724,430     $ 741,404  
    


 


 

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

 

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Table of Contents

BWAY Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

     Three Months Ended

 

($ in thousands)


   January 2,
2005


    January 4,
2004


 

Net sales

   $ 174,707     $ 131,038  
    


 


Costs, expenses and other:

                

Cost of products sold (excluding depreciation and amortization)

     155,938       112,817  

Depreciation and amortization

     10,100       9,253  

Selling and administrative expenses

     4,072       3,385  

Restructuring charge

     351       62  

Interest expense, net

     7,705       6,472  

Financial advisory fees

     124       124  

Other, net

     (567 )     (39 )
    


 


Total costs, expenses and other

     177,723       132,074  
    


 


Loss before income taxes

     (3,016 )     (1,036 )

Income tax benefit

     (1,127 )     (519 )
    


 


Net loss

   $ (1,889 )   $ (517 )
    


 


 

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

 

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BWAY Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

     Three Months Ended

 

($ in thousands)


   January 2,
2005


    January 4,
2004


 

Cash flows from operating activities:

                

Net loss

   $ (1,889 )   $ (517 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                

Depreciation

     7,135       7,634  

Amortization of other intangibles

     2,965       1,619  

Amortization of deferred financing costs

     531       495  

Provision for doubtful accounts

     (153 )     (62 )

Restructuring charge

     351       62  

Gain on disposition of property, plant and equipment

     (469 )     (84 )

Stock-based compensation

     314       121  

Changes in assets and liabilities:

                

Accounts receivable

     6,489       6,137  

Inventories

     (16,217 )     (8,574 )

Other assets

     167       (681 )

Accounts payable

     10,387       (2,595 )

Accrued and other liabilities

     (5,976 )     (7,981 )

Income taxes, net

     (1,181 )     (1,149 )
    


 


Net cash provided by (used in) operating activities

     2,454       (5,575 )
    


 


Cash flows from investing activities:

                

Capital expenditures

     (4,447 )     (6,890 )

Proceeds from disposition of property, plant and equipment

     244       78  

Proceeds from disposition of assets held for sale

     653       —    
    


 


Net cash used in investing activities

     (3,550 )     (6,812 )
    


 


Cash flows from financing activities:

                

Net borrowings under revolving credit facility

     —         21,720  

Repayments of term loan

     (19,700 )     —    

Increase (decrease) in unpresented bank drafts in excess of cash available for offset

     435       (9,181 )

Principal payments under capital leases

     (65 )     (22 )

Financing costs incurred

     —         (303 )
    


 


Net cash (used in) provided by financing activities

     (19,330 )     12,214  
    


 


Net decrease in cash and equivalents

     (20,426 )     (173 )

Cash and equivalents, beginning of period

     27,325       248  
    


 


Cash and equivalents, end of period

   $ 6,899     $ 75  
    


 


Supplemental disclosures of cash flow information:

                

Cash paid during the period for:

                

Interest

   $ 12,249     $ 10,768  
    


 


Income taxes

   $ 54     $ 630  
    


 


Non-cash investing and financing activities:

                

Amounts owed for capital expenditures

   $ 237     $ 1,040  
    


 


 

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

 

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BWAY Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

1. GENERAL

 

BWAY Corporation (“BWAY”), including its principal subsidiary, North America Packaging Corporation (“NAMPAC”), and each of their lesser subsidiaries (collectively the “Company”, “we”, “our” or “us”), is a leading North American manufacturer of metal and rigid plastic containers for paint and certain other consumer and industrial products. We operate the company as two divisions. Our BWAY Packaging Division focuses on metal containers and sells and markets its products under the BWAY Corporation name and our NAMPAC Division focuses on plastic containers and sells and markets its products under the NAMPAC name. Our product offerings include a wide variety of steel containers such as paint, aerosol and specialty cans that are used by our customers to package a diverse range of end-use products which, in addition to paint, include household and personal care products, automotive after-market products, paint thinners and driveway and deck sealants. Our plastic containers include injection molded plastic pails and blow-molded tight head containers and drums. Our end-use markets have historically exhibited stable demand characteristics and our customer base includes leading participants in these markets.

 

BWAY is a wholly-owned subsidiary of BCO Holding Company, an affiliate of Kelso & Company, L.P., a private equity firm, as a result of a transaction whereby all outstanding shares of the BWAY’s common stock, with certain exceptions, were acquired on February 7, 2003 (the “Transaction”) by affiliates of Kelso and certain members of management. Effective with the Transaction, BWAY became a privately held company.

 

On July 7, 2004, we acquired all of the stock of NAMPAC from MVOC, LLC, a Delaware limited liability company and sole owner of the common shares of NAMPAC (the “NAMPAC Acquisition”). As a result of the acquisition, NAMPAC became a wholly owned subsidiary of BWAY. We paid approximately $213.8 million in cash for the acquisition, which was funded by a $30.0 million equity contribution from Kelso and certain members of our senior management and from a portion of the proceeds from a $225.0 million term loan facility. The results of operations related to this acquisition are included in the consolidated financial statements from the date of acquisition. Included in the purchase price is approximately $2.0 million in transaction costs associated with the acquisition.

 

We operate on a 52/53-week fiscal year ending on the Sunday closest to September 30. The first three quarterly fiscal periods end on the Sunday closest to December 31, March 31 or June 30 of the applicable quarter. Fiscal 2004 was a 53-week fiscal year with the additional week occurring in the first fiscal quarter, which ended January 4, 2004. Our NAMPAC subsidiary reports its operations on a calendar month basis and its financial position and results of operations are consolidated in the accompanying financial statements as of and for the three months ended December 31, 2004. The balance sheet dated October 3, 2004 includes NAMPAC as of September 30, 2004. There were no material transactions between September 30, 2004 and October 3, 2004 or between December 31, 2004 and January 2, 2005 related to NAMAPC that required adjustment in the consolidated financial statements.

 

We have prepared the accompanying consolidated financial statements without audit. Certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The consolidated financial statements as of January 2, 2005 and October 3, 2004 and for the three months ended January 2, 2005 and January 4, 2004 include all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the three months ended January 2, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements and the accompanying notes should be read in conjunction with our Annual Report on Form 10-K for the year ended October 3, 2004 (the “Annual Report”).

 

Stock-Based Compensation

 

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations (“APB 25”). Accordingly, we are not required to record compensation expense when the exercise price of stock options granted to employees or directors is equal to or greater than the fair market value of the stock when the option is granted. If compensation expense for our stock-based compensation plan had been determined based on the calculated fair value of the option awards determined at the applicable grant dates, our net loss would be as follows:

 

     Three Months Ended

 

($ in thousands)


   January 2,
2005


    January 4,
2004


 

Net loss, as reported

   $ (1,889 )   $ (517 )

Stock-based compensation included in net loss, net of tax (1)

     193       74  

Pro forma stock-based compensation under SFAS 123, net of tax

     (667 )     (570 )
    


 


Pro forma net loss

   $ (2,363 )   $ (1,013 )
    


 



(1) The $193 thousand and $74 thousand of stock-based compensation, net of tax, recorded in the first quarter of fiscal 2005 and 2004, respectively, relates to stock options issued pursuant to the BCO Holding Stock Incentive Plan.

 

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2. INVENTORIES

 

Inventories consist of the following:

 

($ in thousands)


   January 2,
2005


    October 3,
2004


 

Inventories at FIFO cost:

                

Raw materials

   $ 23,666     $ 15,405  

Work-in-process

     34,785       27,081  

Finished goods

     25,091       21,324  
    


 


       83,542       63,810  

LIFO reserve

     (8,050 )     (4,535 )
    


 


Inventories, net

   $ 75,492     $ 59,275  
    


 


 

During the first quarter of fiscal 2005, the LIFO reserve increased $3.5 million as a result of rising steel and plastic resin costs. Approximately $2.2 million of the increase was recorded to cost of products sold during the quarter and the difference of approximately $1.3 million was recorded against the reserve for standard cost changes to eliminate the impact of our standard cost revaluation at the beginning of the fiscal year.

 

3. GOODWILL AND OTHER INTANGIBLES

 

We amortize finite-lived, identifiable intangible assets over their remaining useful lives, which range from 3 to 18 years. These finite-lived intangibles are amortized in proportion to the underlying cash flows that were used in determining their initial valuation. We periodically review the underlying cash flow assumptions to determine if they remain reasonable. The portion of these intangibles associated with the carryover basis from Predecessor (as defined in the Annual Report) continues to be amortized on a straight-line basis.

 

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The following table sets forth the identifiable intangible assets by major asset class:

 

     January 2, 2005

   October 3, 2004

($ in thousands)


   Gross
Carrying
Amount


   Accumulated
Amortization


    Net

   Gross
Carrying
Amount


   Accumulated
Amortization


    Net

Amortized intangible assets

                                           

Customer relationships (1)

   $ 158,060    $ (14,307 )   $ 143,753    $ 158,060    $ (11,768 )   $ 146,292

Tradenames (2)

     22,833      (1,915 )     20,918      22,833      (1,504 )     21,329

Non-compete agreements (3)

     401      (37 )     364      401      (22 )     379
    

  


 

  

  


 

Total amortized intangible assets

   $ 181,294    $ (16,259 )   $ 165,035    $ 181,294    $ (13,294 )   $ 168,000
    

  


 

  

  


 

Unamortized intangible assets

                                           

Technology

   $ 613    $ —       $ 613    $ 613    $ —       $ 613
    

  


 

  

  


 

Total identifiable intangible assets

   $ 181,907    $ (16,259 )   $ 165,648    $ 181,907    $ (13,294 )   $ 168,613
    

  


 

  

  


 


(1) Useful lives range between 14 and 18 years.
(2) Useful lives range between 10 and 15 years.
(3) Useful lives range between 3 and 4 years.

 

Expected amortization expense by fiscal year is as follows:

 

($ in thousands)     

Fiscal Year Ending:


   Amount

2005

   $ 11,862

2006

     13,003

2007

     13,405

2008

     12,900

2009

     12,510

Thereafter

     104,320
    

     $ 168,000
    

 

In the first quarter of fiscal 2005, we recorded $3.0 million of the $11.9 million of amortization expense expected for fiscal year 2005. In the first quarter of fiscal 2004, we recorded amortization expense of $1.6 million.

 

There were no changes in the gross carrying amount of goodwill and other intangible assets during the first quarter of fiscal 2005.

 

4. LONG-TERM DEBT

 

Long-term debt consists of the following ($ in thousands):

 

($ in thousands)


   January 2,
2005


   October 3,
2004


10% senior subordinated notes, due 2010

   $ 200,000    $ 200,000

Senior credit facility: Term loan

     195,300      215,000
    

  

Long-term debt

     395,300      415,000

Less: Current portion

     —        19,700
    

  

Long-term debt

   $ 395,300    $ 395,300
    

  

 

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10% Senior Subordinated Notes Due 2010

 

On November 27, 2002, BWAY Finance completed a private offering of $200.0 million principal amount of 10% Senior Subordinated Notes due 2010, which we assumed on February 7, 2003 in connection with the Transactions. In December 2003, we exchanged the notes for new notes registered under the Securities Act in an equal principal amount (the “Notes”). The Notes mature on October 15, 2010.

 

The Notes are unsecured senior subordinated obligations of the Company and are effectively subordinated to all senior debt obligations (as defined in the indenture) of the Company. Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year.

 

Except in certain cases following an equity offering, as described below, we cannot redeem these notes until October 15, 2006. Thereafter, we may redeem some or all of these notes at the redemption prices specified in the indenture to the notes (105.0% on October 15, 2006 declining annually to 100% on October 15, 2009), plus accrued and unpaid interest to the date of redemption.

 

At any time before October 15, 2005, we can choose to redeem up to 35% of these outstanding notes with money that we raise in one or more equity offerings, as long as: we pay 110% of the face amount of the notes, plus interest; we redeem the notes within 90 days of completing the equity offering; and at least 65% of the aggregate principal amount of notes issued remains outstanding afterwards.

 

Upon the occurrence of a Change in Control (as defined in the indenture) the holders of these notes could require us to repurchase the notes at 101% of the principal amount plus accrued and unpaid interest to the date of repurchase.

 

The indenture governing these notes contains covenants that, among other things, limit our ability (and some or all of our subsidiaries) to: incur additional debt, pay dividends or distributions on our capital stock or to repurchase our capital stock, make certain investments, create liens on our assets to secure debt, engage in transactions with affiliates, merge or consolidate with another company and transfer and sell assets. These covenants are subject to a number of important limitations and exceptions. At January 2, 2005, we were in compliance will all applicable covenants contained in the indenture.

 

Under the terms of the indenture and in connection with its guarantee of our Credit Facility, NAMPAC and its subsidiaries have fully and unconditionally guaranteed the Notes. The indenture requires any current or future subsidiary of the Company that guarantees certain indebtedness of the Company to guarantee the Notes.

 

We incurred and have deferred approximately $8.0 million in financing costs related to the underwriting and registration of these notes. We are amortizing these deferred costs to interest expense over the remaining term of the notes. At October 3, 2004 and September 28, 2003, approximately $6.3 million and $7.0 million, respectively, of the deferred costs were unamortized.

 

Credit Facility

 

Our current credit facility consists of (a) a $225.0 million term loan facility (the “Term Loan”), which matures June 30, 2011 (or April 15, 2010 under certain conditions) and (b) a $30.0 million revolving credit facility (the “Revolver”), which matures June 30, 2009 (the Term Loan and Revolver, collectively, the “Credit Facility”).

 

We made voluntary prepayments on the Term Loan of $19.1 million in December 2004. We also made a required prepayment of $0.6 million on the Term Loan in December 2004, which represented the net proceeds from the sale of assets related to our closed Southwest manufacturing facility. As a result of these prepayments, our next scheduled quarterly repayment of approximately $0.1 million becomes due in June 2008. Repayments, whether scheduled or voluntary, permanently reduce the Term Loan.

 

Interest accrues on the Term Loan and the Revolver at an applicable margin plus either (a) a base rate (which is the higher of prime or 0.5% in excess of the overnight federal funds rate) or (b) a Eurodollar rate. For the Term Loan, the applicable margins are initially fixed at 1.25% for base rate loans and at 2.25% for Eurodollar rate loans, and range down to 1.00% and 2.00%, respectively, based upon meeting specified consolidated leverage ratio targets. For the Revolver, the applicable margins are initially fixed at 1.75% for base rate loans and 2.75% for Eurodollar rate loans, and range down to 1.00% and 2.00%, respectively, based upon meeting specified consolidated leverage ratio targets. Borrowing at the base rate or the Eurodollar rate is at our discretion.

 

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After December 31, 2004, rate margins are subject to quarterly change based on our ratio of Consolidated Indebtedness to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), each as defined in the underlying credit agreement.

 

At January 2, 2005, we were in compliance will all applicable credit agreement covenants related to the Credit Facility.

 

BCO Holding and each of our subsidiaries, including NAMPAC and its subsidiaries, have guaranteed our obligations under the Credit Facility, which is secured by substantially all of our assets and the assets of BCO Holding. In addition, we have pledged as collateral all of the issued and outstanding stock of our subsidiaries, which are wholly-owned by BWAY.

 

At January 2, 2005, we had $6.5 million in standby letter of credit commitments that reduced our available borrowings under the Revolver to $23.5 million. At January 2, 2005, we did not have any outstanding Revolver borrowings. The borrowing rate on the Term Loan borrowings as of January 2, 2005 was approximately 4.5%.

 

Scheduled maturities of long-term debt as of January 2, 2005 are as follows:

 

($ in thousands)

      

Fiscal Year Ending:


   Amount

2005

   $ —  

2006

     —  

2007

     —  

2008

     94

2009

     992

Thereafter

     394,214
    

     $ 395,300
    

 

5. EMPLOYMENT BENEFIT OBLIGATIONS

 

The following table summarizes our employee benefit obligation liabilities as of January 2, 2005 and as of October 3, 2004.

 

($ in thousands)


   January 2,
2005


   October 3,
2004


Defined benefit pension liability

   $ 4,332    $ 4,264

Retiree medical and other postretirement benefits

     5,007      4,912

Deferred compensation

     5,770      5,658
    

  

     $ 15,109    $ 14,834
    

  

 

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The following table summarizes the components of net periodic benefit cost. Net periodic pension costs relate to a defined benefit plan that we acquired in July 2004. Accordingly, there was no net periodic pension cost for the three months ended January 4, 2004. The defined benefit plan was frozen effective October 31, 2004.

 

     Defined
Benefit
Pension Plan


    Other Postretirement
Benefits


     Three Months Ended

($ in millions)


   January 2,
2005


    January 2,
2005


   January 4,
2004


Service cost

   $ 71     $ 1    $ 1

Interest cost

     147       83      69

Expected return on plan assets

     (150 )     —        —  

Recognized net actuarial loss

     —         11      10
    


 

  

Net periodic benefit costs

   $ 68     $ 95    $ 80
    


 

  

 

6. RESTRUCTURING AND EXIT LIABILITY

 

The following table sets forth changes in our restructuring and exit liabilities from October 3, 2004 to January 2, 2005. The nature of the liabilities has not changed from that previously reported in the Annual Report. The restructuring and exit liabilities are included in other current liabilities.

 

($ in millions)


   Balance
October 3,
2004


   Additions

   Expenditures

    Balance
January 2,
2005


Restructuring liability:

                            

Facility closure costs

   $ 0.1    $ 0.4    $ (0.3 )   $ 0.2
    

  

  


 

Exit liability:

                            

Facility closure costs

   $ 0.2    $ —      $ (0.1 )   $ 0.1
    

  

  


 

 

All of the exit liability relates to our plastics packaging segment. The restructuring liability by segment is as follows.

 

($ in millions)


   Balance
October 3,
2004


   Additions

   Expenditures

    Balance
January 2,
2005


Restructuring liability:

                            

Metal packaging segment

   $ 0.1    $ 0.1    $ (0.1 )   $ 0.1

Plastics packaging segment

     —        0.3      (0.2 )     0.1
    

  

  


 

Total restructuring liability

   $ 0.1    $ 0.4    $ (0.3 )   $ 0.2
    

  

  


 

 

Restructuring Charge

 

During the first quarter of fiscal 2005, we recorded a restructuring charge of $0.4 million primarily related to costs associated with the removal of equipment from a plastics manufacturing facility closed at the end of the fourth quarter of fiscal 2004. In addition, we recorded approximately $1.0 million of additional depreciation associated with the shortened useful lives of equipment at other facilities to be taken out of service in association with the planned closure of certain of our plastics manufacturing facilities, as discussed below.

 

In October 2004, our Board approved a plan to close certain plastics manufacturing facilities that became redundant as a result of the NAMPAC Acquisition. We ceased operations at one of the facilities at the end of fiscal 2004, and we expect the remaining facility closures to occur by the end of fiscal 2005. Approximately 83 hourly and approximately 18 salaried employees will be affected by the facility closures. The consolidation of existing business into our NAMPAC facilities will result in lower overall manufacturing costs and improved manufacturing capacity.

 

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We expect to incur restructuring charges of approximately $0.4 million related to severance benefits and $3.5 million related to facility shutdown and holding costs, which include approximately $1.8 million related to long-term lease obligations, net of estimated sublease proceeds, on the closed facilities.

 

We expect to record additional depreciation expense in the first half of fiscal 2005 of approximately $2.6 million related to the shortened expected useful lives of certain assets, primarily leasehold improvements and infrastructure located at the facilities to be closed. We estimate that approximately $2.7 million in manufacturing assets will be reclassified from property, plant and equipment to assets held for sale and approximately $3.1 million will be relocated to various NAMPAC facilities. We expect to expend approximately $2.6 million in capital in fiscal 2005 related to the relocated assets.

 

The total estimated cost of the plan is approximately $9.1 million. We estimate approximately $3.9 million of that amount will consist of non-capital cash expenditures, approximately $2.6 million of capital cash expenditures and approximately $2.6 million of non-cash charges. Of the $6.5 million in cash expenditures, we expect to expend approximately $4.4 million in fiscal 2005 and approximately $2.1 million over the period of fiscal 2006 through fiscal 2008.

 

7. COMMITMENTS AND CONTINGENCIES

 

Environmental

 

We are subject to a broad range of federal, state and local environmental, health and safety laws, including those governing discharges to air, soil and water, the handling and disposal of hazardous substances and the investigation and remediation of contamination resulting from the release of hazardous substances. We believe that we are currently in compliance with all applicable environmental, health and safety laws, though future expenditures may be necessary in order to maintain such compliance, including compliance with air emission control requirements for volatile organic compounds. In addition, in the course of our operations we use, store and dispose of hazardous substances. Some of our current and former facilities are currently involved in environmental investigations and remediation resulting from releases of hazardous substances or the presence of other constituents. While we do not believe that any investigation or identified remediation obligations will have a material adverse effect on our operating results or financial condition, there are no assurances that such obligations will not arise in the future. Many of our facilities have a history of industrial usage for which investigation and remediation obligations could arise in the future and which could have a material adverse effect on our operating results or financial condition.

 

We believe future expenditures will be necessary in order to comply with the recently enacted federal Maximum Achievable Control Technology (“MACT”) regulations that become effective in November 2006 related to air emission control requirements for Hazardous Air Pollutants (“HAP”) and volatile organic compounds.

 

In the first quarter of fiscal 2004, we received information indicating that the State of Georgia may consider the Company a potentially responsible party (“PRP”) at a waste disposal site in Georgia. The basis for the our possible PRP status is based on documents indicating that waste materials were transported to the site from our Homerville, Georgia facility prior to our acquisition of the facility in 1989. Presently, we are unable to determine the amount or likelihood of any liability as a result of this information or the extent to which, if necessary, we are covered by the indemnification agreement of the prior owner of the facility.

 

From time to time, we receive requests for information or are identified as a PRP pursuant to the Federal Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws with respect to off-site waste disposal sites utilized by our current or former facilities or our predecessors in interest. We do not believe that any of these identified matters will have a material adverse effect on our operating results or financial condition.

 

We record reserves for environmental liabilities when environmental investigation and remediation obligations are probable and related costs are reasonably estimable. We had reserves of approximately $0.2 million for environmental investigation and remediation obligations as of January 2, 2005 and October 3, 2004; however, we cannot guarantee that future expenditures will not exceed the amount reserved.

 

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Table of Contents

Litigation

 

We are involved in legal proceedings from time to time in the ordinary course of business. We believe that the outcome of these proceedings will not have a material effect on our financial condition or results of operations. At January 2, 2005 and October 3, 2004, we had accrued approximately $0.6 million and $0.7 million, respectively, related to pending litigation matters.

 

Letters of Credit

 

At January 2, 2005, a bank had issued standby letters of credit on our behalf in the aggregate amount of $6.5 million in favor of our workers’ compensation insurers and purchasing card vendor.

 

Commodity Risk

 

We are subject to various risks and uncertainties related to changing commodity prices for and the availability of the materials used in the manufacture of our products (primarily steel and resin).

 

8. BUSINESS SEGMENTS

 

Our operations are organized and reviewed by management along our products lines in two reportable segments —Metal Packaging and Plastics Packaging. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the products and services they offer. The primary raw material and manufacturing process are unique for each segment. A further description of each business segment and of our Corporate services area follows:

 

Metal Packaging. Metal Packaging includes the metal packaging products and material center services that we have historically offered. Primarily products in this segment include paint cans, aerosol containers, ammunition boxes and other general line containers made from steel. Metal Packaging is a separate division of the Company with management and production facilities and processes distinct from our Plastics Packaging Division.

 

Plastics Packaging. Plastics Packaging includes the plastics packaging products manufactured and distributed by NAMPAC and, to a lesser extent, those resulting from the acquisition of SST Industries in fiscal 2003 (the “SST Acquisition”). Principal products in this segment include open- and tight-head pails and drums and other multi-purpose rigid industrial plastic packaging. Plastics Packaging is a separate division of the Company with management and production facilities and processes distinct from our Metal Packaging Division.

 

Corporate. Corporate includes accounting and finance, information technology, payroll and human resources and various other overhead charges, each to the extent not allocated to the divisions.

 

Segment asset disclosures include, among other things, inventories, property, plant and equipment, goodwill and other intangible assets. The accounting policies of our segments have not changed from those described in the Annual Report. There were no intersegment sales in the periods presented. Management’s evaluation of segment performance is principally based on EBITDA.

 

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The following sets forth certain financial information attributable to our business segments for three months ended January 2, 2005 and January 4, 2004.

 

     Three months ended

 

($ in thousands)


   January 2,
2005


    January 4,
2004


 

Net sales

                

Metal packaging

   $ 110,039     $ 123,487  

Plastics packaging

     64,668       7,551  
    


 


Consolidated net sales

   $ 174,707     $ 131,038  
    


 


Loss before income taxes

                

Metal packaging

   $ 12,530     $ 15,503  

Plastics packaging

     3,417       668  
    


 


Segment earnings

     15,947       16,171  

Corporate undistributed expenses

     1,374       1,459  

Depreciation and amortization (see below)

     10,100       9,253  

Restructuring charge

     351       62  

Interest expense, net

     7,705       6,472  

Other, net

     (567 )     (39 )
    


 


Consolidated loss before income taxes

   $ (3,016 )   $ (1,036 )
    


 


Depreciation and amortization

                

Metal packaging

   $ 5,122     $ 8,224  

Plastics packaging

     4,469       445  
    


 


Segment depreciation and amortization

     9,591       8,669  

Corporate

     509       584  
    


 


Consolidated depreciation and amortization

   $ 10,100     $ 9,253  
    


 


 

The following table sets forth total assets attributable to our business segments as of January 2, 2005 and October 3, 2004.

 

($ in thousands)


   January 2,
2005


   October 3,
2004


Total assets

             

Metal packaging

   $ 328,218    $ 318,942

Plastics packaging

     287,690      284,740
    

  

Segment assets

     615,908      603,682

Corporate

     108,522      137,722
    

  

Consolidated total assets

   $ 724,430    $ 741,404
    

  

 

9. SUPPLEMENTAL GUARANTOR SUBSIDIARIES INFORMATION

 

Our 10% Senior Subordinated Notes due 2010 and Term Loan are guaranteed on a full, unconditional joint and several basis by our wholly owned subsidiaries. The following condensed, consolidating financial information presents the consolidating financial statements of BWAY and its subsidiaries, all of which have guaranteed the Notes and Term Loan, as of and for the three months ended January 2, 2005. Separate financial statements of the guarantor subsidiaries are not presented because we have determined that they would not be material to investors.

 

Prior to the refinancing of our revolving credit facility and the acquisition of NAMPAC, each of which occurred in July 2004, BWAY and each of its subsidiaries were borrowers under our revolving credit facility then in effect. Prior to its merger with and into BWAY during fiscal 2004, BWAY Manufacturing, Inc. was a guarantor of the Notes. Prior to the merger of BWAY and BWAY Manufacturing, Inc., BWAY was a holding company with no independent operations.

 

Effective with the refinancing of the revolving credit facility and the Term Loan borrowing, BWAY is the sole

 

12


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borrower under the Credit Facility and each of its subsidiaries, including NAMPAC, are guarantors. In addition, all of BWAY’s direct and indirect subsidiaries, including NAMPAC, have guaranteed the Notes.

 

Based on the above events, we have not presented condensed, consolidating financial information for the periods preceding July 2004, as we believe such consolidating information is not required.

 

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Table of Contents

BWAY Corporation and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

January 2, 2005

 

     BWAY
Corporation


    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 
Assets                                 

Current Assets

                                

Cash and cash equivalents

   $ 6,341     $ 558     $ —       $ 6,899  

Accounts receivable, net

     50,185       24,518       —         74,703  

Inventories, net

     54,466       21,026       —         75,492  

Current income taxes receivable

     4,201       (1,072 )     —         3,129  

Deferred tax assets

     7,717       1,122       —         8,839  

Other

     2,549       1,207       —         3,756  
    


 


 


 


Total current assets

     125,459       47,359       —         172,818  

Property, plant and equipment, net

     102,041       49,811       —         151,852  

Other assets

                                

Goodwill

     120,259       100,038       —         220,297  

Other intangibles, net

     63,185       102,463       —         165,648  

Deferred financing fees, net

     12,195       —         —         12,195  

Other

     1,059       561       —         1,620  

Investment in subsidiaries

     213,186       —         (213,186 )     —    
    


 


 


 


Total other assets

     409,884       203,062       (213,186 )     399,760  
    


 


 


 


Total Assets    $ 637,384     $ 300,232     $ (213,186 )   $ 724,430  
    


 


 


 


Liabilities and Stockholder’s Equity                                 

Current liabilities

                                

Accounts payable

   $ 50,872     $ 24,991     $ —       $ 75,863  

Accrued salaries and wages

     5,591       1,738       —         7,329  

Accrued interest

     5,589       —         —         5,589  

Accrued rebates

     8,575       622       —         9,197  

Other

     13,242       3,395       —         16,637  
    


 


 


 


Total current liabilities

     83,869       30,746       —         114,615  

Long-term debt

     395,300       —         —         395,300  

Other long-term liabilities

                                

Deferred tax liabilities

     33,818       48,714       —         82,532  

Intercompany

     (3,088 )     3,088       —         —    

Other

     14,369       4,498       —         18,867  
    


 


 


 


Total other long-term liabilities

     45,099       56,300       —         101,399  

Stockholder’s equity

                                

Common stock

     —         1       (1 )     —    

Additional paid-in capital

     104,022       213,845       (213,845 )     104,022  

Retained earnings

     9,683       (71 )     71       9,683  

Accumulated other comprehensive loss

     (589 )     (589 )     589       (589 )
    


 


 


 


Total stockholder’s equity

     113,116       213,186       (213,186 )     113,116  
    


 


 


 


Total Liabilities and Stockholder’s Equity    $ 637,384     $ 300,232     $ (213,186 )   $ 724,430  
    


 


 


 


 

 

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Table of Contents

BWAY Corporation and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

October 3, 2004

 

     BWAY
Corporation


    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Current Assets

                                

Cash and cash equivalents

   $ 22,800     $ 4,525     $ —       $ 27,325  

Accounts receivable

     52,618       28,421       —         81,039  

Inventories, net

     43,544       15,731       —         59,275  

Current income taxes receivable

     3,024       (1,076 )     —         1,948  

Deferred tax assets

     7,717       1,122       —         8,839  

Other

     2,921       1,323       —         4,244  
    


 


 


 


Total current assets

     132,624       50,046       —         182,670  

Property, plant and equipment, net

     106,625       48,770       —         155,395  

Other assets

                                

Goodwill

     120,259       100,038       —         220,297  

Other intangibles, net

     64,899       103,714       —         168,613  

Deferred financing fees, net

     12,726       —         —         12,726  

Other

     1,140       563       —         1,703  

Investment in subsidiaries

     213,037       —         (213,037 )     —    
    


 


 


 


Total other assets

     412,061       204,315       (213,037 )     403,339  
    


 


 


 


Total Assets    $ 651,310     $ 303,131     $ (213,037 )   $ 741,404  
    


 


 


 


Current liabilities

                                

Accounts payable

   $ 36,713     $ 29,588     $ —       $ 66,301  

Accrued salaries and wages

     6,544       2,060       —         8,604  

Accrued interest

     10,625       —         —         10,625  

Accrued rebates

     6,974       390       —         7,364  

Current portion of long-term debt

     19,700       —         —         19,700  

Other

     15,072       2,622       —         17,694  
    


 


 


 


Total current liabilities

     95,628       34,660       —         130,288  
    


 


 


 


Long-term debt

     395,300       —         —         395,300  

Other long-term liabilities

                                

Deferred tax liabilities

     33,818       48,714       —         82,532  

Intercompany

     (2,347 )     2,347       —         —    

Other

     13,906       4,373       —         18,279  
    


 


 


 


Total other long-term liabilities

     45,377       55,434       —         100,811  
    


 


 


 


Stockholder’s equity

                                

Common stock

     —         1       (1 )     —    

Additional paid-in capital

     104,022       213,845       (213,845 )     104,022  

Retained earnings

     11,572       (220 )     220       11,572  

Accumulated other comprehensive loss

     (589 )     (589 )     589       (589 )
    


 


 


 


Total stockholder’s equity

     115,005       213,037       (213,037 )     115,005  
    


 


 


 


Total Liabilities and Stockholder’s Equity    $ 651,310     $ 303,131     $ (213,037 )   $ 741,404  
    


 


 


 


 

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Table of Contents

BWAY Corporation and Subsidiaries

Supplemental Condensed Consolidating Statement of Operations

For the three months ended January 2, 2005

 

     BWAY
Corporation


    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net sales

   $ 115,381     $ 59,326     $ —       $ 174,707  
    


 


 


 


Costs, expenses and other

                                

Cost of products sold (excluding depreciation and amortization)

     101,385       54,731       (178 )     155,938  

Depreciation and amortization

     6,576       3,524       —         10,100  

Selling and administrative expenses

     2,890       1,182       —         4,072  

Restructuring charge

     351       —         —         351  

Interest expense, net

     7,705       —         —         7,705  

Financial advisory fees

     124       —         —         124  

Other, net

     (399 )     (346 )     178       (567 )
    


 


 


 


Total costs, expenses and other

     118,632       59,091       —         177,723  
    


 


 


 


(Loss) income before taxes

     (3,251 )     235       —         (3,016 )

Income tax (benefit) provision

     (1,213 )     86       —         (1,127 )

Equity in income of subsidiaries

     149       —         (149 )     —    
    


 


 


 


Net (loss) income

   $ (1,889 )   $ 149     $ (149 )   $ (1,889 )
    


 


 


 


BWAY Corporation and Subsidiaries

Supplemental Condensed Consolidating Statement of Cash Flows

For the three months ended January 2, 2005

 

 

 

     BWAY
Corporation


    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net cash provided by (used in) operating activities

   $ 5,055     $ (2,601 )   $ —       $ 2,454  
    


 


 


 


Cash Flows from Investing Activities

                                

Capital expenditures

     (2,178 )     (2,269 )     —         (4,447 )

Other

     897       —         —         897  
    


 


 


 


Net cash used in investing activities

     (1,281 )     (2,269 )     —         (3,550 )
    


 


 


 


Cash Flows from Financing Activities

                                

Repayments of term loan

     (19,700 )     —         —         (19,700 )

Other

     (533 )     903       —         370  
    


 


 


 


Net cash (used in) provided by financing activities

     (20,233 )     903       —         (19,330 )
    


 


 


 


Net decrease in cash and cash equivalents

     (16,459 )     (3,967 )     —         (20,426 )

Cash and cash equivalents, beginning of period

     22,800       4,525       —         27,325  
    


 


 


 


Cash and cash equivalents, end of period

   $ 6,341     $ 558     $ —       $ 6,899  
    


 


 


 


 

 

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Table of Contents

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

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, which often require the judgment of management in the selection and application of certain accounting principles and methods. We believe that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions. The following discussion should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of this report.

 

NAMPAC Acquisition. On July 7, 2004, we acquired all of the issued and outstanding shares of stock of NAMPAC, a manufacturer of rigid plastic containers for industrial packaging markets. We paid approximately $213.8 million in cash for the acquisition, which was funded by a $30.0 million equity contribution from Kelso and certain members of our senior management and from a portion of the proceeds from a $225.0 million term loan facility. The results of operations related to this acquisition are included in the consolidated financial statements from the date of acquisition.

 

Results of Operations

 

Our operations are organized and reviewed by management along our products lines in two reportable segments —Metal Packaging and Plastics Packaging. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the products and services they offer. The primary raw material and manufacturing process are unique for each segment. In addition to the business segments, we report certain items as “corporate,” which relate to corporate services including accounting and finance, information technology, payroll and human resources and various other overhead charges, each to the extent not allocated to the divisions.

 

Metal Packaging. Metal Packaging includes our metal packaging products and material center services. Principal products in this segment include paint cans, aerosol containers, ammunition boxes and other general line containers made from steel. Metal Packaging is a separate division of the Company with management and production facilities and processes distinct from our Plastics Packaging Division.

 

Plastics Packaging. Plastics Packaging includes the plastics packaging products manufactured and distributed by NAMPAC and, to a lesser extent, those resulting from the SST Acquisition in fiscal 2003. Principal products in this segment include open- and tight-head pails and drums and other multi-purpose rigid industrial plastic packaging. Plastics Packaging is a separate division of the Company with management and production facilities and processes distinct from our Metal Packaging Division.

 

The following table set forth changes in our statements of operations and line items as a percentage of net sales for the three months ended January 2, 2005 and January 4, 2004.

 

     Three Months Ended

    Change

    As a % of Net Sales
Three Months Ended


 

($ in thousands)


   January 2,
2005


    January 4,
2004


    $

    %

    January 2,
2005


    January 4,
2004


 

Net sales

   $ 174,707     $ 131,038     $ 43,669     33.3 %   100.0 %   100.0 %

Cost of products sold (excluding depreciation and amortization

     155,938       112,817       43,121     38.2 %   89.3 %   86.1 %
    


 


 


 

 

 

Gross margin

     18,769       18,221       548     3.0 %   10.7 %   13.9 %
    


 


 


 

 

 

Depreciation and amortization

     10,100       9,253       847     9.2 %   5.8 %   7.1 %

Selling and administrative expenses

     4,072       3,385       687     20.3 %   2.3 %   2.6 %

Restructuring charge

     351       62       289     466.1 %   0.2 %   —    

Interest expense, net

     7,705       6,472       1,233     19.1 %   4.4 %   4.9 %

Financial advisory fees

     124       124       —       —       0.1 %   0.1 %

Other, net

     (567 )     (39 )     (528 )   —       (0.3 )%   —    
    


 


 


 

 

 

Loss before income taxes

     (3,016 )     (1,036 )     (1,980 )   191.1 %   (1.7 )%   (0.8 )%

Income tax benefit

     (1,127 )     (519 )     (608 )   117.1 %   (0.6 )%   (0.4 )%
    


 


 


 

 

 

Net loss

   $ (1,889 )   $ (517 )   $ (1,372 )   265.4 %   (1.1 )%   (0.4 )%
    


 


 


 

 

 

 

17


Table of Contents

Net Sales

 

                           As a % of the Total

 

Net Sales by Segment

($ in thousands)


   Three Months Ended

   Change

    Three Months Ended

 
   January 2,
2005


   January 4,
2004


   $

    %

    January 2,
2005


    January 4,
2004


 

Metal packaging

   $ 110,039    $ 123,487    $ (13,448 )   (10.9 )%   63.0 %   94.2 %

Plastics packaging

     64,668      7,551      57,117     756.4 %   37.0 %   5.8 %
    

  

  


 

 

 

Consolidated net sales

   $ 174,707    $ 131,038    $ 43,669     33.3 %   100.0 %   100.0 %
    

  

  


 

 

 

 

The decrease in metal packaging segment net sales is primarily related to the loss of the Folgers coffee can business in fiscal 2004 and voluntary reductions in material center sales as capacity was redirected to meet internal needs, partially offset by volume gains in other products. The increase in plastics packaging segment net sales is attributable to the NAMPAC Acquisition.

 

Cost of Products Sold

 

                           As a % of the Total

 

Cost of Products Sold by Segment

(excluding depreciation and amortization)

($ in thousands)


   Three Months Ended

   Change

    Three Months Ended

 
   January 2,
2005


   January 4,
2004


   $

    %

    January 2,
2005


    January 4,
2004


 

Metal packaging

   $ 95,978    $ 106,162    $ (10,184 )   (9.6 )%   61.5 %   94.1 %

Plastics packaging

     59,902      6,632      53,270     803.2 %   38.4 %   5.9 %
    

  

  


 

 

 

Segment cost of products sold

   $ 155,880    $ 112,794    $ 43,086     38.2 %   100.0 %   100.0 %
    

  

  


 

 

 

Corporate undistributed expenses

     58      23      35     152.2 %   0.0 %   0.0 %
    

  

  


 

 

 

Consolidated cost of products sold

   $ 155,938    $ 112,817    $ 43,121     38.2 %   100.0 %   100.0 %
    

  

  


 

 

 

 

The decrease in cost of products sold, excluding depreciation and amortization, (“CPS”) for the metal packaging segment is primarily due to the decrease in segment net sales, as discussed above, partially offset by an additional expense of approximately $0.4 million in the first quarter of fiscal 2005 related to an increase in the LIFO reserve resulting from higher cost of steel. Metal packaging segment CPS as a percentage of segment net sales increased to 87.2% in the first quarter of fiscal 2005 from 85.9% in the first quarter of fiscal 2004 primarily as a result of reduced steel availability, which created scheduling difficulties and associated limitations in manufacturing efficiency. Additionally, metal packaging segment CPS as a percentage of segment net sales was impacted by the timing of steel price increases and the pass through of steel surcharges to customers, combined with the higher cost of steel purchases on the spot market in order to meet our customer commitments.

 

The increase in CPS for the plastics packaging segment is primarily due to the NAMPAC Acquisition. Plastics packaging segment CPS as a percentage of segment net sales increased to 92.6% in the first quarter of fiscal 2005 from 87.8% in the first quarter of fiscal 2004 primarily as a result of higher administrative costs associated with the NAMPAC Acquisition and to higher raw material costs for plastic resin and an increase to segment CPS of approximately $1.8 million related to an increase in the LIFO reserve resulting from increased raw material costs.

 

Depreciation and Amortization

 

                           As a % of the Total

 

Depreciation and Amortization by Segment

($ in thousands)


   Three Months Ended

   Change

    Three Months Ended

 
  

January 2,

2005


   January 4,
2004


   $

    %

    January 2,
2005


    January 4,
2004


 

Metal packaging

   $ 5,122    $ 8,224    $ (3,102 )   (37.7 )%   50.7 %   88.9 %

Plastics packaging

     4,469      445      4,024     904.3 %   44.2 %   4.8 %
    

  

  


 

 

 

Segment depreciation and amortization

   $ 9,591    $ 8,669    $ 922     10.6 %   95.0 %   93.7 %
    

  

  


 

 

 

Corporate

     509      584      (75 )   (12.8 )%   5.0 %   6.3 %
    

  

  


 

 

 

Consolidated depreciation and amortization

   $ 10,100    $ 9,253    $ 847     9.2 %   100.0 %   100.0 %
    

  

  


 

 

 

 

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The decrease in metal packaging segment depreciation and amortization expense relates primarily to additional depreciation expense in the first quarter of fiscal 2004 related to the shortened useful lives of assets disposed of following the closure of our Picayune, Mississippi manufacturing facility in the second half of fiscal 2004. In the first quarter of fiscal 2005, plastics packaging segment depreciation and amortization includes approximately $3.3 million related to assets acquired in connection with the NAMPAC Acquisition and approximately $1.0 million of additional depreciation associated with the shortened useful lives on certain assets, primarily equipment, to be disposed of in connection with the planned closure of certain of our plastics manufacturing facilities.

 

Selling and Administrative Expenses

 

Selling and Administrative Expenses

($ in thousands)


              As a % of the Total

 
   Three Months Ended

   Change

    Three Months Ended

 
   January 2,
2005


  

January 4,

2004


   $

    %

    January 2,
2005


    January 4,
2004


 

Metal packaging

   $ 1,531    $ 1,822    $ (291 )   (16.0 )%   37.6 %   53.8 %

Plastics packaging

     1,349      251      1,098     437.5 %   33.1 %   7.4 %
    

  

  


 

 

 

Segment selling and administrative expenses

   $ 2,880    $ 2,073    $ 807     38.9 %   70.7 %   61.2 %
    

  

  


 

 

 

Corporate undistributed expenses

     1,192      1,312      (120 )   (9.1 )%   29.3 %   38.8 %
    

  

  


 

 

 

Consolidated selling and administrative expenses

   $ 4,072    $ 3,385    $ 687     20.3 %   100.0 %   100.0 %
    

  

  


 

 

 

 

The decrease in metal packaging segment selling and administrative expenses from the first quarter of fiscal 2004 relates primarily to the elimination of certain costs during the 2004 fiscal year. The increase in plastics packaging segment selling and administrative expenses is primarily related to higher costs associated with the NAMPAC Acquisition in the fourth quarter of fiscal 2004. The decrease in corporate undistributed selling and administrative expenses relates primarily to a recovery of a previously written-off note receivable, offset by higher stock based compensation and professional fees in the first quarter of fiscal 2005.

 

Interest, Taxes and Other

 

Interest Expense, Net. Interest expense, net, increased $1.2 million to $7.7 million in the first quarter of fiscal 2005 from $6.5 million in the first quarter of fiscal 2004. The increase is primarily attributable to the higher debt associated with the NAMPAC Acquisition in the fourth quarter of fiscal 2004.

 

Income Tax Benefit. The income tax benefit increased $0.6 million to a benefit of $1.1 million in the first quarter of fiscal 2005 from a benefit of $0.5 million in the first quarter of fiscal 2004. The effective tax rate decreased in the first quarter of fiscal 2005 from the first quarter in 2004 due primarily to additional benefits relating to the timing of tax provision adjustments in the first quarter of fiscal 2004 associated with the filing of the preceding year’s tax return and to the impact on the effective rate associated with the NAMPAC Acquisition.

 

Other, Net. Other, net, in the first quarter of fiscal 2005 relates primarily to gains on the sale of idled equipment and a vacant manufacturing facility in Dallas, Texas.

 

Liquidity and Capital Resources

 

Our cash requirements for operations and capital expenditures during the first quarter of fiscal 2005 were primarily financed through operations. During the first quarter of fiscal 2005, cash and cash equivalents decreased $20.4 million, primarily to repay borrowings outstanding under our Term Loan. During the first quarter of fiscal 2004, we borrowed $21.7 million under our revolving credit facility and cash and cash equivalents decreased $0.2 million.

 

The $19.7 million reduction in the Term Loan during the first quarter of fiscal 2005 consists of voluntary prepayments of $19.1 million and a required prepayment of $0.6 million. The required repayment represented the net proceeds from the sale of assets related to our closed Southwest manufacturing facility. As a result of these prepayments, our next scheduled quarterly repayment of approximately $0.1 million becomes due in June 2008. Repayments, whether scheduled or voluntary, permanently reduce the Term Loan.

 

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At January 2, 2005, we had $23.5 million in revolving credit available after taking into consideration $6.5 million in standby letters of credit, which reduce available borrowings under the $30.0 million Term Loan. We were in compliance with all debt covenants at January 2, 2005 related to the Credit Facility and the Notes.

 

Net cash provided by operating activities was $2.5 million during the first quarter of fiscal 2005 compared to net cash used of $5.6 million during the first quarter of fiscal 2004. During the first quarters of fiscal 2005 and fiscal 2004, cash from operating activities was primarily provided by net income before depreciation and amortization and reductions in accounts receivable. During the first quarter of fiscal 2005, cash provided by operating activities was also provided by an increase in accounts payable. During each of the first quarters of fiscal 2005 and 2004, cash was primarily used to increase inventories and to reduce accrued liabilities including interest. Net cash interest paid during the first quarter of fiscal 2005 was $12.2 million compared to $10.8 million paid during the first quarter of fiscal 2003. The increase in cash interest paid relates primarily to increased debt related to the NAMPAC Acquisition in the fourth quarter of fiscal 2004.

 

Net cash used in investing activities was $3.6 million during the first quarter of fiscal 2005 compared to $6.8 million during the first quarter of fiscal 2004. Net cash used in investing activities was primarily used for capital expenditures during the first quarter of each fiscal year. Capital expenditures decreased $2.4 million in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 primarily related to higher capital expenditures in the first quarter of fiscal 2004 related to the planned opening of our Sturtevant, Wisconsin manufacturing facility. Net cash used in investing activities in the first quarter of fiscal 2005 was reduced by $0.9 million related to proceeds from the sale of property, plant and equipment and assets held for sale.

 

Net cash used in financing activities was $19.3 million during the first quarter of fiscal 2005 compared to net cash provided by financing activities of $12.2 million during the first quarter of fiscal 2004. In the first quarter of fiscal 2005, $19.7 million was used to repay outstanding Term Loan borrowings whereas in the first quarter of fiscal 2004, $21.7 million was borrowed under the revolving credit facility. There were no outstanding revolving credit facility borrowings during the first quarter of fiscal 2005. Increases in unpresented bank drafts in excess of cash available for offset provided cash of $0.4 million in the first quarter of fiscal 2005 and decreases in unpresented bank drafts in excess of cash available for offset used cash of $9.2 million 2004, respectively.

 

We expect that cash provided from operations and available borrowings under our revolving credit facility will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements, including debt service on the 10% senior subordinated notes, in the next 12 months. We cannot provide assurance, however, that our business will generate sufficient cash flows or that future borrowings will be available in an amount sufficient to enable us to service our debt, including the senior subordinated notes, or to fund our other liquidity needs in the long term.

 

Interest Rate Risk

 

The interest rate on our outstanding 10% senior subordinated notes is fixed. As such, our cash flows and earnings related to these notes are not exposed to the market risk of interest rate changes. In addition, the fair value of these notes is exposed to market risk associated with interest rate changes.

 

Interest accrues on the Credit Facility (Term Loan and Revolver) at an applicable margin plus either (a) a base rate (which is the higher of prime or 0.5% in excess of the overnight federal funds rate) or (b) a Eurodollar rate. For the Term Loan, the applicable margins are initially fixed at 1.25% for base rate loans and at 2.25% for Eurodollar rate loans, and range down to 1.00% and 2.00%, respectively, based upon meeting specified consolidated leverage ratio targets. For the Revolver, the applicable margins are initially fixed at 1.75% for base rate loans and 2.75% for Eurodollar rate loans, and range down to 1.00% and 2.00%, respectively, based upon meeting specified consolidated leverage ratio targets. Borrowing at the base rate or the Eurodollar rate is at our discretion.

 

After December 31, 2004, rate margins are subject to quarterly change based on our ratio of Consolidated Indebtedness to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), each as defined in the underlying credit agreement.

 

At January 2, 2005, we have Credit Facility borrowings of $195.3 million that are subject to interest rate risk. Each 100 basis point increase in interest rates on these borrowings would reduce quarterly pretax earnings and cash flows by approximately $0.5 million based on the balance at January 2, 2005.

 

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Table of Contents

Commodity Risk

 

We are subject to various risks and uncertainties related to changing commodity prices for and the availability of the materials used in the manufacture of our products (primarily steel and resin).

 

Critical Accounting Policies

 

For a summary of our critical accounting policies, see management’s discussion and analysis in Item 7 of the Annual Report. The critical accounting policies have not changed since October 3, 2004.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Contractual Obligations

 

For a summary of our significant contractual obligations, see the “Contractual Obligations and Commercial Commitments” section of Item 7 in the Annual Report. The nature of the obligations has not materially changed since October 3, 2004.

 

At January 2, 2005, a bank had issued standby letters of credit on our behalf in the aggregate amount of $6.5 million in favor of our workers’ compensation insurers and purchasing card vendor.

 

Environmental Matters

 

We are subject to a broad range of federal, state and local environmental, health and safety laws, including those governing discharges to air, soil and water, the handling and disposal of hazardous substances and the investigation and remediation of contamination resulting from the release of hazardous substances. We believe that we are currently in compliance with all applicable environmental, health and safety laws, though future expenditures may be necessary in order to maintain such compliance, including compliance with air emission control requirements for volatile organic compounds. In addition, in the course of our operations we use, store and dispose of hazardous substances. Some of our current and former facilities are currently involved in environmental investigations and remediation resulting from releases of hazardous substances or the presence of other constituents. While we do not believe that any investigation or identified remediation obligations will have a material adverse effect on our operating results or financial condition, there are no assurances that such obligations will not arise in the future. Many of our facilities have a history of industrial usage for which investigation and remediation obligations could arise in the future and which could have a material adverse effect on our operating results or financial condition.

 

We believe future expenditures will be necessary in order to comply with the recently enacted federal Maximum Achievable Control Technology (“MACT”) regulations that become effective in November 2006 related to air emission control requirements for Hazardous Air Pollutants (“HAP”) and volatile organic compounds.

 

In the first quarter of fiscal 2004, we received information indicating that the State of Georgia may consider the Company a potentially responsible party (“PRP”) at a waste disposal site in Georgia. The basis for the our possible PRP status is based on documents indicating that waste materials were transported to the site from our Homerville, Georgia facility prior to our acquisition of the facility in 1989. Presently, we are unable to determine the amount or likelihood of any liability as a result of this information or the extent to which, if necessary, we are covered by the indemnification agreement of the prior owner of the facility.

 

From time to time, we receive requests for information or are identified as a PRP pursuant to the Federal Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws with respect to off-site waste disposal sites utilized by our current or former facilities or our predecessors in interest. We do not believe that any of these identified matters will have a material adverse effect on our operating results or financial condition.

 

We record reserves for environmental liabilities when environmental investigation and remediation obligations are probable and related costs are reasonably estimable. We had reserves of approximately $0.2 million for environmental investigation and remediation obligations as of January 2, 2005 and October 3, 2004, respectively; however, we cannot guarantee that future expenditures will not exceed the amount reserved.

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We do not purchase, sell or hold derivatives or other market risk-sensitive instruments to hedge interest or exchange rate risks or for trading purposes. For a discussion of interest rate risk and its relation to our indebtedness see “Liquidity and Capital Resources” in Item 2 above.

 

Item 4. Controls and Procedures

 

We periodically review the design and effectiveness of our disclosure controls and internal control over financial reporting, including compliance with various laws and regulations that apply to our operations. We make modifications to improve the design and effectiveness of our disclosure controls and internal control structure, and may take other corrective action, if our reviews identify a need for such modifications or actions. In designing and evaluating the disclosure controls and procedures and internal control for financial reporting, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

An evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of January 2, 2005, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and timely reported as provided in the Securities and Exchange Commission rules and forms. No changes occurred during the quarter ended January 2, 2005 in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There were no events to report under this item for the quarter ended January 2, 2005.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no events to report under this item for the quarter ended January 2, 2005.

 

Item 3. Defaults Upon Senior Securities

 

There were no events to report under this item for the quarter ended January 2, 2005.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

There were no events to report under this item for the quarter ended January 2, 2005.

 

Item 5. Other Information

 

There were no events to report under this item for the quarter ended January 2, 2005.

 

Item 6. Exhibits

 

See Index to Exhibits.

 

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Table of Contents

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements contained in this document, other than historical information, are forward-looking statements. These statements represent management’s current judgment on what the future holds. A variety of factors could cause business conditions and the Company’s actual results to differ materially from those expected by the Company or expressed in the Company’s forward-looking statements. These factors include, without limitation, competitive risks from substitute products and other container manufacturers, termination of the Company’s customer contracts, loss or reduction of business from key customers, dependence on key personnel, changes in steel, resin and other raw material costs or availability, labor unrest, catastrophic loss of one of the Company’s manufacturing facilities, environmental exposures, management’s inability to identify or execute selective acquisitions, failures in the Company’s computer systems, unanticipated expenses, delays in implementing cost reduction initiatives, potential equipment malfunctions and the other factors discussed in the Company’s filings with the Securities and Exchange Commission. The Company takes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrences of unanticipated events or changes to future operating results.

 

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    BWAY Corporation
    (Registrant)
Date: February 16, 2005   By:  

/s/ Jean-Pierre M. Ergas


        Jean-Pierre M. Ergas
        Chairman and
        Chief Executive Officer
        (Principal Executive Officer)
Date: February 16, 2005   By:  

/s/ Kevin C. Kern


        Kevin C. Kern
       

Vice President, Administration and

Chief Financial Officer

       

(Principal Financial Officer and

Chief Accounting Officer)


Table of Contents

INDEX TO EXHIBITS

 

Exhibit No.

 

Description of Document


31.1   Certification of Chief Executive Officer required by Rule 13a-14(a) (17 C.F.R. 240.13a-14(a)).
31.2   Certification of Chief Financial Officer required by Rule 13a-14(a) (17 C.F.R. 240.13a-14(a)).
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.