Covalence Specialty Materials Reports Third Fiscal Quarter 2006 Results
PRINCETON, N.J., Aug. 14 - Covalence Specialty Materials Corp. ("Covalence" or the "Company") today announced its third fiscal quarter 2006 results for the period ended June 30, 2006.
The Company reported net revenue for the three months ended June 30, 2006 of $441 million and a net loss for the same period of $11 million. After giving effect to the Acquisition Transaction (as defined below), Adjusted EBITDA (as defined below under "Non-GAAP Financial Measures") for the third fiscal quarter of 2006 was $29 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 nine months ended June 30, 2006, the Company reported net revenue of $1.315 billion and a net loss for the same period of $2 million. After giving effect to the Acquisition Transaction, pro forma Adjusted EBITDA for the nine months ended June 30, 2006 was $103 million.
"The challenging industry conditions in our Plastics segment that existed during our second fiscal quarter also persisted in the third quarter," said Kip Smith, President and Chief Executive Officer. "Continued inflated inventory levels at our customers, together with increases in certain non-resin raw materials, freight and other conversion costs, resulted in a challenging environment. Our Adhesives and Flexible Packaging segments, however, produced strong sequential quarterly growth in Adjusted EBITDA."
"Consistent with our second fiscal quarter performance, we continue to be significantly ahead of our planned cash generation, having produced over $140 million of cash from the closing of the Acquisition Transaction through the end of our third fiscal quarter," continued Mr. Smith. "The combination of solid cash flow from operations, assertive working capital management and the settlement of the working capital adjustment with Tyco contributed to this strong cash flow performance."
"Having joined the business as CEO in June 2006, I am excited about the future prospects for Covalence," concluded Mr. Smith. "The business has very strong industry positions, a loyal and diverse set of customers and a dedicated and passionate workforce. We are harnessing these core strengths to return the business to a level of profitability in the fourth fiscal quarter that is more in line with historical norms and befitting a business with the scale and leadership positions of Covalence."
Results of Operations - Third Fiscal Quarter Ended June 30, 2006
Net revenue for the three months ended June 30, 2006 was $441 million, an increase of $17 million, or 4%, compared to $424 million in the third quarter of fiscal 2005. The increase was primarily due to higher selling prices implemented to offset inflation in raw materials, particularly in polyethylene resin, and volume growth in our Adhesives operating segment, partially offset by slightly lower volume in our Plastics operating segment.
Gross profit for the three months ended June 30, 2006 was $47 million, a decrease of $7 million, or 13%, compared to $54 million in the third quarter of fiscal 2005. The decrease in gross profit was due to a $3 million increase in depreciation resulting from the purchase method of accounting attributable to the Acquisition Transaction and significant raw material inflation in the fiscal 2006 period. Partially offsetting these cost increases were the continued benefits of the Company's cost reduction programs and pricing actions. Our management actions resulted in margin improvement in our Adhesives and Flexible Packaging operating segments. Excluding the purchase accounting adjustments described above, gross profit for the three months ended June 30, 2006 would have been $50 million, or 7% lower than the third quarter of fiscal 2005.
Selling, general and administrative expenses for the three months ended June 30, 2006 were $43 million, an increase of $13 million compared to $30 million for the third quarter of fiscal 2005. The increase was mainly a result of $8 million of additional depreciation and amortization expense from the purchase method of accounting attributable to the Acquisition Transaction. The increase was also attributable to additional corporate support expenses required by the Acquisition Transaction, severance costs and general inflation. These increases were partially offset by the July 2005 cost reduction program, consisting mainly of employee terminations to streamline operational functions and costs incurred in fiscal 2005 in connection with the Company's initial Sarbanes-Oxley compliance implementation efforts.
Operating income for the three months ended June 30, 2006 was $4 million, a $6 million decrease compared to $10 million in the third quarter of fiscal 2005. The decrease was primarily driven by the factors described above as well as certain temporary operational inefficiencies in the Plastics operating segment as compared to the third quarter of fiscal 2005. This decrease was partially offset by the elimination of charges and allocations from Tyco. Excluding the purchase accounting adjustments and severance costs described above, operating income for the three months ended June 30, 2006 would have been $18 million, or 80% higher than the third quarter of fiscal 2005.
Results of Operations - Nine Months Ended June 30, 2006
Net revenue for the nine months ended June 30, 2006 was $1.315 billion, an increase of $28 million, or 2%, compared to $1.287 billion in the first nine months of fiscal 2005. The increase was primarily due to higher selling prices implemented to offset inflation in raw materials, particularly in polyethylene resin.
Gross profit for the nine months ended June 30, 2006 was $149 million, a decrease of $31 million, or 17%, compared to $180 million in the first nine months of fiscal 2005. The decrease in gross profit was principally driven by raw material inflation and the previously discussed impact of purchase accounting attributable to the Acquisition Transaction. Partially offsetting these cost increases were the continuing benefits of the Company's cost reduction programs and pricing actions. Our management actions resulted in margin improvement in our Adhesives and Flexible Packaging operating segments. Excluding the purchase accounting adjustments, gross profit for the nine months ended June 30, 2006 would have been $160 million, or 11% lower than the first nine months of fiscal 2005.
Selling, general and administrative expenses for the nine months ended June 30, 2006 were $109 million, an increase of $11 million compared to $98 million for the first nine months of fiscal 2005. The increase was mainly a result of increased depreciation and amortization expense from the purchase accounting adjustments attributable to the Acquisition Transaction. The increase was also driven by additional corporate support expenses required by the Acquisition Transaction, severance costs and general inflation. These increases were partially offset by the July 2005 cost reduction program, consisting mainly of employee terminations to streamline operational functions and costs incurred in fiscal 2005 in connection with the Company's initial Sarbanes-Oxley compliance implementation efforts.
Operating income for the nine months ended June 30, 2006 was $29 million, an increase of $1 million compared to $28 million for the first nine months of fiscal 2005. The increase was driven by elimination of charges and allocations from Tyco offset by raw material inflation as well as higher expenses as a result of purchase accounting adjustments attributable to the Acquisition Transaction. Excluding the purchase accounting adjustments and severance costs described above, operating income for the nine months ended June 30, 2006 would have been $56 million, or 100% higher than the first nine months of fiscal 2005.
The Acquisition Transaction and Subsequent Financing
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 (the "Acquisition Transaction"). On May 18, 2006, the Company repaid $40 million of its term loan and amended and restated its secured credit agreement to provide for a $200 million asset based revolver and $300 million term loan.
Non-GAAP Financial Matters
In addition to disclosing financial results that are determined in accordance with GAAP, Covalence discloses Segment EBITDA and Adjusted EBITDA, all 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 ("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.
Third Fiscal Quarter 2006 Conference Call
Management will host its third fiscal quarter 2006 conference call on Monday, August 14, 2006, at 11:00am EDT. The toll-free number for the call is (888) 455-3614 (Passcode: Covalence). A replay of the call will be available until Monday, August 28, 2006, by dialing (800) 308-7861.
About Covalence
Covalence, with a workforce of approximately 7,000 people 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(R) and Rhino-X(R) trash bags; Film-Gard(R) plastic sheeting; Nashua(R) tapes; Covalence Raychem(R) (Raychem(R) is a trademark of Tyco Electronics Corporation and Nashua(R) is a trademark of Nashua Corporation; each are used under license by Covalence) heat-shrinkable coatings; Polyken(R) pipeline coatings; Thermo-ply(R) and Energy-Brace(R) wall sheathing; as well as R-Wrap(R) and Barricade(R) housewraps. For more information, please visit http://www.covcorp.com.
Investor Relations Contact:
David S. Graziosi
Chief Financial Officer
609-806-2347
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, industry acceptance of price increases, national and regional trends, level of competition within its industry, availability of alternative plastics film products, its level of indebtedness, costs of environmental compliance, increase in capital expenditure requirements, shifts in industry 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, In Millions)
Three Months Ended Nine Months Ended
July 1, June 30, July 1, June 30,
2005 2006 2005 2006
Net revenue $423.7 $440.5 $1,287.3 $1,315.2
Cost of goods sold 369.7 393.3 1,107.2 1,166.5
Gross profit 54.0 47.2 180.1 148.7
Charges and allocations
from Tyco 13.7 - 55.1 10.4
Selling, general and
administrative expenses 30.2 43.3 97.5 108.6
Restructuring and impairment
charges (credits), net (0.3) 0.2 (0.1) 0.9
Operating income 10.4 3.7 27.6 28.8
Other expense - (0.7) - (0.6)
Interest expense, net 0.9 21.0 3.6 35.3
Interest expense, net - Tyco 2.7 - 8.3 5.5
Income (loss) before
income tax expense 6.8 (16.6) 15.7 (11.4)
Income tax expense (benefit) 1.1 (5.6) 3.3 (9.4)
Net income (loss) $5.7 $(11.0) $12.4 $(2.0)
COVALENCE SPECIALTY MATERIALS CORP.
RECONCILIATION OF NET INCOME TO SEGMENT EBITDA (*)
(Unaudited, In Millions)
Three Months Ended Nine Months Ended
July 1, June 30, July 1, June 30,
2005 2006 2005 2006
Net Income (Loss) $5.7 $(11.0) $12.4 $(2.0)
Add:
Depreciation and
amortization 10.3 17.6 30.8 43.3
Income tax expense
(benefit) 1.1 (5.6) 3.3 (9.4)
Interest expense, net 3.6 20.3 11.9 40.2
Tyco charges 13.7 - 55.1 10.4
Restructuring and impairment
charges (credits) (0.3) 0.2 (0.1) 0.9
Segment EBITDA $34.1 $21.5 $113.4 $83.4
(*) 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, In Millions)
Three Months Ended Nine Months Ended
July 1, June 30, July 1, June 30,
2005 2006 2005 2006
Segment EBITDA $34.1 $21.5 $113.4 $83.4
Add:
Headcount reductions
savings 2.5 - 7.5 -
Inventory fair value
step-up - - - 7.0
Estimated stand-alone
costs (1.9) - (5.7) (2.9)
Korean Adhesives business - 0.4 0.3 1.3
Non-cash equity-based
compensation 2.5 - 3.5 2.0
Monitoring fee - 0.9 - 1.5
Severance costs - 2.9 - 2.9
Other, net (0.7) 2.8 1.5 7.6
Adjusted EBITDA $36.5 $28.5 $120.5 $102.8
(*) 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, In Millions)
As of
June 30, 2006
Cash & Cash Equivalents $90.5
Accounts Receivable, net 198.9
Inventory 214.0
Accounts Payable 175.0
Accrued Liabilities 79.7
Total Debt 740.0
Investor Relations:
David Graziosi
Chief Financial Officer, Covalence Specialty Materials Corp.,
+1 (609) 806-2347
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