Covalence Specialty Materials Reports Fiscal 2006 Second Quarter Financial Results
- Company Made Voluntary $10 Million Prepayment to Term Loan
- Additional Term Loan Reduction of $40 Million Expected Upon Completion of Refinancing
PRINCETON, N.J., May 4 -- Covalence Specialty Materials Corp.
("Covalence" or the "Company") today announced its fiscal 2006 second quarter
results for the period ended March 31, 2006. Affiliates of Apollo Management,
L.P. ("Apollo"), together with management, completed their acquisition of
substantially all of the assets and liabilities of the Company from Tyco
International, Ltd. ("Tyco") on February 16, 2006 (the "Acquisition
Transaction").
The Company reported net revenue for the three months ended March 31, 2006
of $420.6 million and net income for the same period of $0.2 million. After
giving effect to the Acquisition Transaction, pro forma Adjusted EBITDA (as
defined below under "Non-GAAP Financial Measures") for the second fiscal
quarter of 2006 was $31.0 million. Management believes that presenting this
non-GAAP measure is important for investors to better understand the Company's
underlying operational and financial performance to facilitate comparison of
results between periods and to monitor the Company's compliance with certain
financial covenants in its credit facilities. For the six months ended March 31, 2006, the Company reported net revenue
of $866.8 million and net income for the same period of $16.6 million. After
giving effect to the Acquisition Transaction, pro forma Adjusted EBITDA for
the six months ended March 31, 2006 was $74.3 million. "Our second fiscal quarter's performance was in line with expectations,"
said Terry Sutter, President and Chief Executive Officer. "Volume was
negatively impacted by both the lingering affects of Hurricanes Katrina and
Rita, which caused higher than normal inventory levels at our customers coming
into the quarter, as well as some postponement in orders as customers
anticipated lower product prices as polyethylene resin fell throughout the
quarter." "We are significantly ahead of our planned free cash flow generation,
having generated over $65 million of cash from the closing of the Acquisition
Transaction through the end of our second fiscal quarter," continued Mr.
Sutter. "The combination of strong cash from operations, prudent working
capital management and a favorable cash position as a result of the
Acquisition Transaction contributed to this strong cash flow performance." "With the closing of the Acquisition Transaction, we are well-positioned
to capitalize on the abundant opportunities in our marketplaces," concluded
Mr. Sutter. "We will continue to work to maintain our leading positions, to
expand our diverse product portfolio and customer base, and to strengthen our
cost positions in both purchasing and manufacturing in order to deliver both
quality products and service to our customers, as well as strong free cash
flow and financial results." Results of Operations - 2006 Second Fiscal Quarter Net revenue for the three months ended March 31, 2006 was $420.6 million,
a decrease of $8.4 million from the $429.0 million recorded in the same period
in fiscal 2005. The decrease was primarily due to lower volume as a result of
both higher than normal customer inventory levels following Hurricanes Katrina
and Rita as well as some postponement of orders as customers anticipated
declines in product prices as our raw material prices declined throughout the
quarter. This decline was partially offset by companywide pricing actions and
volume growth in our Adhesives operating segment. Gross profit for the three months ended March 31, 2006 was $45.9 million,
a decrease of $12.2 million from $58.1 million for the same period in fiscal
2005. The decrease in gross profit was due to volume reductions in certain of
the Company's Plastics businesses and significant raw material inflation
across our three operating segments. Partially offsetting this gross profit
decline were the continuing benefits of the Company's cost reduction and
manufacturing efficiency programs as well as continued strong performance and
margin improvement in our Adhesives operating segment. Selling, general and administrative expenses decreased by $5.7 million to
$27.4 million for the three months ended March 31, 2006 compared with $33.1
million for the same period in fiscal 2005. The decrease was primarily a
result of the July 2005 cost reduction program. These cost reductions were
partially offset by transition costs associated with the Acquisition
Transaction, general inflation and targeted headcount additions in the
Adhesives operating segment for sales and technical marketing resources to
capitalize on organic growth opportunities. Operating income for the three months ended March 31, 2006 increased $10.1
million to $17.5 million from $7.4 million for the same period in fiscal 2005.
The increase was primarily driven by the elimination of charges and
allocations from Tyco upon the consummation of the Acquisition Transaction,
and lower selling, general and administrative expenses partially offset by
lower gross profit. Results of Operations - 2006 First Six Months Net revenue for the six months ended March 31, 2006 was $866.8 million, an
increase of $10.7 million from the $856.1 million recorded in the same period
in fiscal 2005. The increase was primarily due to higher product prices
companywide as well as increased volume in our Adhesives operating segment,
offset by volume declines in the Company's Plastics operating segment. Gross profit for the six months ended March 31, 2006 was $110.8 million, a
decrease of $15.3 million from $126.1 million for the same period in fiscal
2005. The decrease in gross profit was due to volume reductions in certain of
the Company's Plastics businesses and significant raw material inflation.
Partially offsetting these gross profit shortfalls were the continuing
benefits of the Company's cost reduction and manufacturing efficiency programs
and profit growth in our Adhesives operating segment due to volume and margin
improvement. Selling, general and administrative expenses decreased by $6.1 million to
$60.6 million for the six months ended March 31, 2006 compared with $66.7
million for the same period in fiscal 2005. The decrease was primarily a
result of the July 2005 cost reduction program. Operating income for the six months ended March 31, 2006 increased $21.3
million to $39.1 million from $17.8 million for the same period in fiscal
2005. The increase was primarily driven by the elimination of charges and
allocations from Tyco upon the consummation of the Acquisition Transaction,
and lower selling, general and administrative expenses partially offset by
lower gross profit. The Acquisition Transaction Through a holding company, affiliates of Apollo and senior management of
the Company completed their acquisition of substantially all of the assets and
liabilities of the Company from Tyco on February 16, 2006. In connection with
the Acquisition Transaction, affiliates of Apollo, together with management,
invested approximately $197.5 million in preferred and common equity of the
holding company, of which the Company is a wholly-owned subsidiary.
Concurrently, the Company issued $265 million of 10-1/4% senior subordinated
notes due 2016 in a private placement under Rule 144A and Regulation S of the
Securities Act. The Company also entered into a 2nd priority secured loan,
bearing interest at LIBOR plus 3.25%, in an aggregate principal amount of $175
million and senior secured credit facilities consisting of a term loan in the
principal amount of $350 million and a revolving credit facility in an
aggregate amount of $175 million. Upon closing of the Acquisition
Transaction, the Company borrowed the full amount under the term loan, the 2nd
priority secured loan and the senior subordinated notes and had approximately
$22 million of cash and cash equivalents. On March 31, 2006, the Company made a voluntary prepayment of its term
loan totaling $10 million from cash on hand. The Company has obtained a commitment from Bank of America, N.A. for a new
asset based revolving credit facility which will replace the Company's
existing revolving credit facility and is amending and restating its existing
senior secured credit agreement to provide for a new senior secured term loan
facility, the proceeds of which, together with cash, will be used to repay in
full the Company's existing senior secured term loan facility. Upon closing
of the new revolver and term loan facility, the Company will have reduced term
loan borrowings by $50 million since closing the Acquisition Transaction. The
Company expects to close the new financing in May 2006. Non-GAAP Financial Matters In addition to disclosing financial results that are determined in
accordance with GAAP, Covalence discloses Segment EBITDA and Adjusted EBITDA,
both of which are non-GAAP measures. You should not consider Segment EBITDA
or Adjusted EBITDA as an alternative to operating or net income, determined in
accordance with GAAP, as an indicator of Covalence's operating performance, or
as an alternative to cash flows from operating activities, determined in
accordance with GAAP, as an indicator of cash flows, or as a measure of
liquidity. Segment EBITDA is calculated by the sum of earnings before interest,
taxes, historical charges from Tyco, restructuring and impairment charges,
minority interest and depreciation and amortization. Segment EBITDA is
commonly used in the financial community, and Covalence presents Segment
EBITDA to enhance your understanding of its operating performance. Covalence
uses Segment EBITDA as one criterion for evaluating its performance relative
to that of its peers. Covalence believes that Segment EBITDA is an operating
performance measure, and not a liquidity measure, that provides investors and
analysts with a measure of operating results unaffected by differences in
capital structures, capital investment cycles and ages of related assets among
otherwise comparable companies. However, Segment EBITDA is not a measurement
of financial performance under accounting principles generally accepted in the
United States, and Covalence's Segment EBITDA may not be comparable to
similarly titled measures of other companies. The Company's credit facilities have certain covenants that use ratios
utilizing a measure referred to as Adjusted EBITDA. The supplementary
adjustments to Segment EBITDA to derive Adjusted EBITDA may not be in
accordance with current SEC practices or the rules and regulations adopted by
the SEC that apply to periodic reports filed under the Securities Exchange Act
of 1934. Accordingly, the SEC may require that Adjusted EBITDA be presented
differently in filings made with the SEC than as presented in this release, or
not be presented at all. The most directly comparable GAAP measure to Segment EBITDA and Adjusted
EBITDA is net income (loss). Included in this release are a reconciliation of
net income (loss) to Segment EBITDA and a reconciliation of Segment EBITDA to
Adjusted EBITDA. Second Fiscal Quarter Conference Call Management will host its second fiscal quarter earnings conference call on
Friday, May 5, 2006, at 11:00am Eastern Time. The toll-free number for the
call is (888) 396-9927. The passcode for the call is "Covalence." A
replay of the call will be available until Friday, May 19, 2006, by dialing
(800) 685-9394.
About Covalence Covalence, with a workforce of over 7,000 employees in 38 manufacturing
facilities, is a major producer of a wide range of products, including
polyethylene-based films, industrial tapes, medical specialties, packaging,
heat-shrinkable coatings and specialty laminates. Covalence is the number one
producer domestically of trash bags, duct tape and niche laminated and coated
products. Among its leading brands are Ruffies and Rhino-X trash bags; Film-
Gard plastic sheeting; Nashua tapes, Covalence Raychem (Raychem is a trademark of Tyco Electronics Corporation and used under license by Covalence Specialty Materials Corporation) heat-shrinkable coatings; Polyken
pipeline coatings; Thermo-Ply and Energy-Brace wall sheathing; as well as R-
Wrap and Barricade housewraps. This press release contains certain forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995)
relating to Covalence that are based on the beliefs of Covalence's management.
When used in this press release, the words "may," "will," "should," "expect,"
"intend," "estimate," "anticipate," "believe," "predict," "potential" or
"continue" or similar expressions identify forward-looking statements. Such
statements reflect the current views of Covalence's management with respect to
the Company's operations and results of operations regarding the plastic film
industry, economy, interest rates, availability of consumer credit, employment
trends, levels of consumer confidence, consumer preferences, raw material
costs and availability, market acceptance of price increases, national and
regional trends, level of competition within its market, availability of
alternative plastics film products, its level of indebtedness, costs of
environmental compliance, increase in capital expenditure requirements, shifts
in market demand, and general economic conditions. These statements are
subject to certain risks and uncertainties. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions or estimates
prove incorrect, actual results may vary materially from those described
herein as expected, intended, estimated, anticipated, believed or predicted.
COVALENCE SPECIALTY MATERIALS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
April 1, March 31, April 1, March 31,
2005 2006 2005 2006
(in millions)
Net revenue $429.0 $420.6 $856.1 $866.8
Cost of goods sold 370.9 374.7 730.0 756.0
Gross profit 58.1 45.9 126.1 110.8
Charges and allocations
from Tyco International 18.1 0.3 41.4 10.4
Selling, general and
administrative expenses 33.1 27.4 66.7 60.6
Restructuring and
impairment charges (credits) (0.5) 0.7 0.2 0.7
Operating income 7.4 17.5 17.8 39.1
Other expense - 0.1 - 0.1
Interest expense, net 1.0 13.2 2.7 14.3
Interest expense, net -
Tyco International 1.7 2.6 5.6 5.5
Income before provision
for income taxes 4.7 1.6 9.5 19.2
Income tax provision 1.4 0.6 2.2 1.3
Income from
continuing operations 3.3 1.0 7.3 17.9
Loss from
discontinued operations (0.3) (0.8) (0.6) (1.3)
Net income $3.0 $0.2 $6.7 $16.6
Fiscal 2006 results exclude the impact of the purchase method of
accounting for the Acquisition Transaction.
COVALENCE SPECIALTY MATERIALS CORP.
RECONCILIATION OF NET INCOME TO SEGMENT EBITDA (*)
(Unaudited)
Three Months Ended Six Months Ended
April 1, March 31, April 1, March 31,
2005 2006 2005 2006
(in millions)
Net Income $3.0 $0.2 $6.7 $16.6
Add:
Depreciation and
amortization 10.5 9.8 20.7 20.1
Provision for income taxes 1.4 0.6 2.2 1.3
Interest expense, net 2.9 15.8 8.5 19.8
Tyco International charges 18.1 0.3 41.4 10.4
Minority interest - 0.1 - 0.1
Restructuring and
impairment charges
(credits) (0.5) 0.7 0.2 0.8
Segment EBITDA $35.4 $27.5 $79.7 $69.1
Fiscal 2006 results exclude the impact of the purchase method of
accounting for the Acquisition Transaction.
(*) Segment EBITDA is a non-GAAP financial measure. For more
information regarding Segment EBITDA and non-GAAP financial
measures, generally, see "Non-GAAP Financial Measures."
RECONCILIATION OF SEGMENT EBITDA TO ADJUSTED EBITDA (*)
(Unaudited)
Three Months Ended Six Months Ended
April 1, March 31, April 1, March 31,
2005 2006 2005 2006
(in millions)
Segment EBITDA $35.4 $27.5 $79.7 $69.1
Add:
Headcount reduction savings 2.5 - 5.0 -
Estimated stand-alone costs (2.0) (1.0) (3.9) (2.9)
Korea discontinued
operation 0.1 0.7 0.3 0.9
Non-cash equity
based compensation 0.5 0.4 1.0 2.0
Monitoring fee - 0.6 - 0.6
Transition costs and
other, net 1.3 2.8 1.9 4.6
Adjusted EBITDA $37.8 $31.0 $84.0 $74.3
Fiscal 2006 results exclude the impact of the purchase method of
accounting for the Acquisition Transaction.
(*) Each of Segment EBITDA and Adjusted EBITDA is a non-GAAP financial
measure. For more information regarding Segment EBITDA, Adjusted
EBITDA and non-GAAP financial measures, generally, see "Non-GAAP
Financial Measures."
COVALENCE SPECIALTY MATERIALS CORP.
SELECTED BALANCE SHEET DATA
(Unaudited)
Period Ended
March 31, 2006
(in $ millions)
Cash and Cash Equivalents 55.6
Accounts Receivable, net 190.1
Inventory 228.6
Accounts Payable 137.9
Accrued Liabilities 34.0
Total Debt 780.0
Balances exclude the impact of the purchase method of accounting for the
Acquisition Transaction.
Contact:
David Graziosi
Chief Financial Officer of Covalence Specialty Materials Corp.
+1 (609) 720-5442
|
