VISKASE COMPANIES, INC.
ANNUAL REPORT 2012
This report has been prepared in accordance with Section 4.19 of the Indenture dated
as of December 21, 2009 among Viskase Companies, Inc. (the “Company”) and U.S.
Bank National Association as trustee and as collateral agent (the “Trustee”).
1
VISKASE COMPANIES, INC.
Table of Contents
Section 1.
Cautionary Statement Regarding Forward-Looking Statements
Section 2.
Risk Factors
Section 3.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Section 4.
Consolidated Financial Statements
Page
3
4
10
17
SECTION 1.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements.” Forward-looking statements are those that do not
relate solely to historical fact. Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to
future events or our future financial performance and implicate known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or levels of activity of our business or
our industry to be materially different from that expressed or implied by any such forward-looking
statements and are not guarantees of future performance. They include, but are not limited to, any
statement that may predict, forecast, indicate or imply future results, performance, achievements or
events. In some cases, you can identify forward-looking statements by use of words such as “believe,”
“anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” “would,” “could,” “predict,” “propose,”
“potential,” “may” or words or phrases of similar meaning. Statements concerning our financial position,
business strategy and measures to implement that strategy, including changes to operations,
competitive strengths, goals, plans, references to future success and other similar matters are forward-
looking statements. Although it is not possible to identify all of the factors that may affect our financial
position, business strategy and measures to implement that strategy, such factors may include, among
others, the following:
•
•
our ability to meet liquidity requirements and to fund necessary capital expenditures;
the strength of demand for our products, prices for our products and changes in overall demand;
• market and industry conditions and changes in the relative market shares of industry participants;
•
•
•
•
•
•
consumption patterns and consumer preferences in our markets;
the effects of competition;
our ability to efficiently respond to industry changes with respect to technologies affecting our
products;
our ability to realize operating improvements and anticipated cost savings;
pending or future legal proceedings and regulatory matters, or the impact of any adverse outcome
of any currently pending or future litigation on the adequacy of our reserves, our financial condition
or the ability to sell our products;
general economic conditions and their effect on our business both in the United States and in
global markets;
• continued expansion of the middle class and an increasing shift towards protein-rich diets in the
emerging markets in which we compete;
•
•
•
•
•
•
changes in the cost or availability of raw materials and changes in other costs;
pricing pressures for our products;
the cost of and compliance with environmental laws and other governmental regulations;
our ability to engage in capital markets transactions;
our ability to protect our intellectual property; and
our ability to implement our strategy for the future, including capitalizing on opportunities that may
be presented to and pursued by us.
3
SECTION 2. RISK FACTORS
You should read the following risk factors related to our business carefully in connection with evaluating
our business. While we believe we have identified and discussed below the key risk factors affecting
our business, there may be additional risks and uncertainties that are not presently known or that are
not currently believed to be significant that may adversely affect our business, performance or financial
condition in the future.
We face competitors that are better capitalized than we are, and the continuous-flow nature of
the casings manufacturing process forces competitors to compete based on price in order to
maintain volume, which could adversely affect our revenues and results.
We face competition in the United States and internationally from competitors that may have
substantially greater financial resources than we have. The cellulosic casings industry includes
competitors that are larger and better capitalized than we are. Currently, our primary competitors
include Viscofan, S.A., Kalle Nalo GmbH, and VT Holding Group, although new competitors could enter
the market or competing products could be introduced. Although prices for small diameter cellulosic
casings have experienced annual increases in recent years, and we believe that the current output in
our industry is generally in balance with global demand and that levels of capacity utilization are high,
the continuous-flow nature of the casings manufacturing process has historically required competitors in
our industry to compete based on price in order to maintain volume, which could result in lower pricing
in future years. We attempt to differentiate our products on the basis of product quality and
performance, product development, service, sales and distribution, but we and competitors in our
industry have used price as a competitive factor in an attempt to obtain greater volumes. If prices
decline, we may not be able to achieve profitability, whereas certain of our competitors who are better
capitalized may be positioned to absorb such price declines. Any of these factors could result in a
material reduction of our revenue, gross profit margins and operating results.
Deteriorations of national and global general economic conditions or disruptions in credit and
other financial markets could adversely affect our business.
Our results of operations are affected by many economic factors, including the strength of economic
conditions and level of economic development in the markets in which we operate. Deterioration of
national and global economic conditions or disruptions in credit and other financial markets could result
in a number of adverse effects to our business and our results of operations, including, among other
things:
•
•
•
•
making it more difficult or costly for us to obtain financing for our operations;
impairing the financial condition of some of our customers or suppliers, thereby increasing bad
debts or non-performance;
negatively impacting the demand for protein products, which could result in a reduction of sales,
operating income and cash flows; and
impairing the financial viability of our insurers.
We receive our raw materials from a limited number of suppliers, and problems with our
suppliers could impair our ability to meet our customers’ product demands.
Our principal raw materials, paper and pulp, constitute an important aspect and cost factor of our
operations. We generally purchase our paper and pulp from a single source or a small number of
suppliers. Any inability of our suppliers to timely deliver raw materials or any unanticipated adverse
change in our suppliers could be disruptive and costly to us. Our inability to obtain raw materials from
our suppliers would require us to seek alternative sources. These alternative sources may not be
adequate for all of our raw material needs, nor may adequate raw material substitutes exist in a form
that our processes could be modified to use. These risks could materially and adversely affect our
sales volume, revenues, costs of goods sold and, ultimately, profit margins.
4
Our failure to efficiently respond to industry changes in casings technology could jeopardize
our ability to retain our customers and maintain our market share or product volumes.
We and other participants in our industry have considered alternatives to cellulosic casings for many
years. As resin technology improves or other technologies develop, alternative casings or other
manufacturing methods may be developed that threaten the long-term sustainability and profitability of
our cellulosic casings, which is our core product, and our fibrous casings. Our failure to anticipate,
develop or efficiently and timely integrate or respond to new technologies that provide viable
alternatives to cellulosic casings, including plastic and film alternatives and co-extrusion technologies,
may cause us to lose customers, market share or product volumes, which, in turn, would negatively
impact our revenues and operating results.
Sales of our products could be negatively affected by problems or concerns with the safety and
quality of food products.
We could be adversely affected if consumers in the food markets were to lose confidence in the safety
and quality of meat or poultry products, particularly with respect to processed meat or poultry products
for which casings are used, such as hot dogs, deli meats and sausages. Outbreaks of, or even adverse
publicity about the possibility of, diseases such as avian influenza and “mad cow disease,” food-borne
pathogens such as E. coli and listeria and any other food safety problems or concerns relating to meat
and poultry products may discourage consumers from buying such products. These risks could also
result in additional governmental regulations, or cause production and delivery disruptions or product
recalls. Each of these risks could adversely affect the demand for our products, and consequently, our
sales volumes and revenues.
Changing dietary trends and consumer preferences could weaken the demand for our products.
Various medical studies detailing the health-related attributes of particular foods, including meat and
poultry products, affect the purchasing patterns, dietary trends and consumption preferences of
consumers. These patterns, trends and preferences are routinely changing. For example, general
dietary concerns about meat products, such as the cholesterol, calorie, sodium and fat content of such
products, could result in reduced demand for such products, which would, in turn, cause a reduction in
the demand for our products and a decrease in our sales volume and revenue.
Our facilities are capital intensive, and we may not be able to obtain financing to fund necessary
capital expenditures.
Our business is capital intensive. We operate eight manufacturing facilities, ten distribution centers and
two service centers as part of our business. We are required to make substantial capital expenditures
and substantial repair and maintenance expenditures to maintain, repair, upgrade and expand existing
equipment and facilities to keep pace with competitive developments. In addition, we are required to
invest in technological advances to maintain compliance with safety standards and environmental laws
or regulations. We spent approximately $38.6 million for capital expenditures in 2012 and expect to
spend approximately $20.2 million in 2013. Depending on our use of cash and other liquidity
considerations, we may be required to obtain additional financing to fund future capital expenditures. If
we need to obtain additional funds, we may not be able to do so on terms favorable to us, or at all,
which would ultimately negatively affect our production and operating results.
Business interruptions at any of our production facilities could increase our operating costs,
decrease our sales or cause us to lose customers.
The reliability of our production facilities is critical to the success of our business. In recent years, we
have streamlined our production capacity to be better aligned with our sales volumes. At current
operating levels, we have little or no excess production capacity for certain products. If the operations
of any of our manufacturing facilities were interrupted or significantly delayed for any reason, including
labor stoppages, we may be unable to shift production to another facility without incurring a significant
drop in production. Such a drop in production would negatively affect our sales and our relationships
with our customers.
5
We are subject to significant minimum contribution requirements and to market exposure with
respect to our U.S. defined benefit plan, both of which could adversely affect our cash flow.
We continue to have a substantial funding liability with respect to our U.S. defined benefit pension plan.
As of December 31, 2012, our aggregate minimum funding contribution requirement for our U.S.
defined benefit plan from 2013 through 2017 is approximately $29.3 million and our unfunded pension
liability was $59.0 million. These amounts could increase or decrease due to market factors, including
actual and expected returns on plan assets, and the discount rate used to measure the liability.
Our international sales and operations expose us to political and economic risks in foreign
countries, as well as to risks related to currency fluctuations, all of which could impair our
ability to do business at the international level.
We currently have manufacturing or sales and distribution centers in eight foreign countries: Brazil,
Canada, France, Germany, Italy, Mexico, Philippines and Poland. Our international sales and
operations may be subject to various political and economic risks including, but not limited to: possible
unfavorable exchange rate fluctuations or hyperinflation; changes in a country’s or region’s political or
economic conditions; governmental regulations, including import and export controls; tariffs; limits on
the repatriation of funds; and taxes. Our sales to customers located outside the United States generally
are subject to taxes on the repatriation of funds. In addition, international operations in certain parts of
the world may be subject to international balance of payments difficulties that may raise the possibility
of delay or loss in the collection of accounts receivable from sales to customers in those countries. Net
sales to customers located outside the United States represented approximately 70% of our total net
sales in 2012 and approximately 71% of our total net sales in 2011.
Should any of these risks occur, it could impair our ability to export our products or conduct sales to
customers located outside of the United States and result in a loss of sales and profits from our
international operations.
Continued consolidation of our customers and increasing competition for those customers may
put pressure on our sales volumes and revenues.
In recent years, the trend among our customers has been towards consolidation within the meat
processing industry. These consolidations have enhanced the purchasing power of our customers
who, not being contractually obligated to purchase our products, tend to exert increased pressure with
respect to pricing terms, product quality and new products. As our customer base continues to
consolidate, the already high level of competition for the business of fewer customers is expected to
intensify. If we do not continue to enhance the value of our product offering in a way that provides
greater benefit to our customers, our sales volumes and revenues could decrease.
If we engage in strategic transactions, the terms of such transactions may not be advantageous
to our business or we may be unable to effectively integrate a new business.
In connection with our business strategies and goals of growth of our operations and market share, we
may seek to acquire, merge with, enter into partnerships with or enter into other similar transactions
with, other companies, including companies that complement our existing products, technologies or
distribution, or lower our costs, and we regularly engage in discussions with other companies or their
representatives with respect to such transactions. Nonetheless, we may be unable to identify and
successfully acquire, merge with, partner with or enter into other similar transactions with suitable
companies under terms advantageous to our business. If we do enter into such transactions, we may
be unable to efficiently and effectively integrate our business and achieve the anticipated synergies.
The integration of the businesses may also result in unforeseen difficulties that require a
disproportionate amount of our management’s attention and other resources, which, in turn, may
negatively affect our profitability.
Our intellectual property rights may be inadequate or violated, or we may be subject to claims of
infringement, both of which could negatively affect our financial condition.
We rely on a combination of trademarks, patents, trade secret rights and other rights to protect our
intellectual property. Our trademark or patent applications may not be approved and our trademarks or
6
patents may be challenged by third parties. We cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws
may not protect our rights as fully as the laws of the United States. From time to time, it has been
necessary for us to enforce our intellectual property rights against infringements by third parties, and we
expect to continue to do so in the ordinary course of our business. We also may be subjected to claims
by others that we have violated their intellectual property rights. Even if we prevail, third party-initiated
or company-initiated claims may be time consuming and expensive to resolve, and may result in a
diversion of our time and resources. The occurrence of any of these factors could diminish the value of
our trademark, patent and intellectual property portfolio, increase competition within our industry and
negatively impact our sales volume and revenues.
Continued compliance with environmental regulations may result in significant costs, which
could negatively affect our financial condition.
Our operations are subject to extensive and increasingly stringent environmental, health and safety
laws and regulations pertaining to the discharge of substances into the environment, the handling and
disposition of wastes and land reclamation and remediation of hazardous substances. We are also
subject to differing environmental regulations and standards due to the fact that we operate in many
different countries. Present and future environmental laws and regulations applicable to our operations
may require substantial capital expenditures and may have a material adverse effect on our business,
financial condition and results of operations.
Failure to comply with environmental laws and regulations can have serious consequences for us,
including criminal as well as civil and administrative penalties and negative publicity. Liability under
these laws and regulations involves inherent uncertainties. In addition, continued government and
public emphasis on environmental issues can be expected to result in increased future investments for
environmental controls at ongoing operations, which will be charged against income from future
operations.
We have incurred, and will continue to incur, significant capital and operating expenditures to comply
with various environmental laws and regulations. Additional environmental requirements imposed in
the future, including pending legislation and regulations in the United States concerning the emission of
carbon dioxide and other greenhouse gases, could require currently unanticipated investigations,
assessments or expenditures and may require us to incur significant additional costs. As the nature of
these potential requirements and future charges is unknown, management is not able to estimate the
magnitude of future costs, and we have not accrued any reserve for any potential future costs. At this
time we cannot be certain that such legislation or regulations will not have a material adverse effect on
our business, financial condition or results of operations.
Some of our facilities have been in operation for many years. During that time, we and previous owners
of these facilities may have generated and disposed of wastes that are or may be considered
hazardous or may have polluted the soil or groundwater at our facilities, including adjacent properties.
Some environmental regulations impose liability on certain categories of persons who are deemed to be
responsible for the release of “hazardous substances” or other pollutants into the environment, without
regard to fault or to the legality of such person’s conduct. Under certain circumstances, a party may be
required to bear more than its proportional share of cleanup costs at a contaminated site for which it
has liability if payments sufficient to remediate the site cannot be obtained from other responsible
parties.
Our substantial level of indebtedness could adversely affect our results of operations, cash
flows and ability to compete in our industry, which could, among other things, prevent us from
fulfilling our obligations under our debt agreements.
We have substantial indebtedness. In addition, subject to restrictions in the indenture (the “Indenture”)
governing our 9.875% Senior Secured Notes due 2018 (the “9.875% Senior Secured Notes”) and the
credit agreement governing our revolving credit facility, we may incur additional indebtedness. As of
December 31, 2012, we had approximately $214.7 million of total debt, exclusive of additional
indebtedness that we may borrow under our revolving credit facility.
Our high level of indebtedness has important implications, including the following:
7
•
•
•
if we fail to satisfy our obligations under our indebtedness, or fail to comply with the restrictive
covenants contained in the Indenture or our revolving credit facility, it may result in an event of
default, all of our indebtedness could become immediately due and payable, and our lenders
could foreclose on our assets securing such indebtedness following the occurrence and during
the continuance of an event of default;
a default under either the Indenture or our revolving credit facility could trigger cross-defaults
under other key agreements or leases; and
repayment of our indebtedness may require us to dedicate a substantial portion of our cash flow
from our business operations, thereby reducing the availability of cash flow to fund working
capital, capital expenditures, development projects, general operational requirements and other
purposes.
We expect to obtain the funds to pay our expenses and to repay our indebtedness primarily from our
operations and, in the case of our indebtedness, from refinancings thereof. Our ability to meet our
expenses and make these payments thus depends on our future performance, which will be affected by
financial, business, economic and other factors, many of which we cannot control. Our business may
not generate sufficient cash flow from operations in the future and our currently anticipated growth in
revenue and cash flow may not be realized, either or both of which could result in our being unable to
repay indebtedness, or to fund other liquidity needs. If we do not have enough funds, we may be
required to refinance all or part of our then existing debt, sell assets or borrow more funds, which we
may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or
future debt agreements may restrict us from pursuing any of these alternatives.
Despite current indebtedness levels, we and our subsidiaries may still be able to incur
substantially more debt. This could further exacerbate the risks associated with our substantial
leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future.
Although the Indenture and our revolving credit facility contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and
the indebtedness incurred in compliance with these restrictions could be substantial. For example, we
have the ability to borrow up to $25 million under our revolving credit facility, which is secured by liens
on substantially all of our personal and real property assets, with certain exceptions. We may not be
able to generate the significant amount of cash needed to pay interest and principal amounts on our
debt, including the 9.875% Senior Secured Notes, which could result in our inability to fulfill our
obligations under our indebtedness.
A substantial portion of our business is conducted through foreign subsidiaries, and our failure
to generate sufficient cash flow from these subsidiaries, or otherwise repatriate or receive cash
from these subsidiaries, could result in our inability to repay our indebtedness.
Our sales to customers located outside the United States are conducted primarily through subsidiaries
organized under the laws of jurisdictions outside of the United States. For the year ended December
31, 2012, our foreign restricted subsidiaries contributed approximately 52% of our consolidated
revenues. As of December 31, 2012, 48% of our consolidated assets, based on carrying value, were
held by foreign subsidiaries. Our ability to meet our debt service obligations with cash from foreign
subsidiaries will depend upon the results of operations of these subsidiaries and may be subject to
contractual or other restrictions and other business considerations. In particular, to the extent our
foreign subsidiaries incur additional indebtedness to expand their operations, the ability of our foreign
subsidiaries to provide us cash may be limited. In addition, dividend and interest payments to us from
our foreign subsidiaries may be subject to foreign withholding taxes, which would reduce the amount of
funds we receive from such foreign subsidiaries. Dividends and other distributions from our foreign
subsidiaries may also be subject to fluctuations in currency exchange rates and restrictions on
repatriation, which could further reduce the amount of funds we receive from such foreign subsidiaries.
The Indenture and agreements governing our other indebtedness impose significant operating
and financial restrictions, which may prevent us from pursuing certain business opportunities
and may hamper our operations.
8
The Indenture and the credit agreement governing our revolving credit facility impose significant
operating and financial restrictions on us. These restrictions restrict our ability to take advantage of
potential business opportunities as they arise and may adversely affect the conduct of our current
business. More specifically, they restrict our ability to, among other things:
•
•
•
•
•
•
•
•
•
•
incur additional indebtedness or issue disqualified capital stock;
pay dividends, redeem subordinated debt or make other restricted payments;
make certain investments or acquisitions;
issue stock of subsidiaries;
grant or permit certain liens on our assets;
enter into certain transactions with affiliates;
merge, consolidate or transfer substantially all of our assets;
incur payment restrictions affecting certain of our subsidiaries;
transfer, sell or acquire assets, including capital stock of our subsidiaries; and
change the business we conduct.
The credit agreement governing our revolving credit facility also requires us to meet a number of
financial ratios and tests. Compliance with these financial ratios and tests may adversely affect our
ability to adequately finance our operations or capital needs in the future or to pursue attractive
business opportunities that may arise in the future. Our ability to meet these ratios and tests and to
comply with other provisions governing our indebtedness may be adversely affected by our operations
and by changes in economic or business conditions or other events beyond our control. Our failure to
comply with our debt-related obligations could result in an event of default under our indebtedness,
resulting in accelerated repayment obligations and giving our secured creditors certain rights against
our collateral.
The interests of our controlling stockholder may be not aligned with the interests of other
stockholders or the interests of the holders of the 9.875% Senior Secured Notes.
To our knowledge, Icahn Enterprises, L.P. holds a total of approximately 71.4% of our outstanding
shares of common stock. As a result, Icahn Enterprises presently has and will continue to have voting
power sufficient to control the election of our board of directors and stockholder voting on decisions
relating to fundamental corporate actions, including potential mergers, consolidations or sales of all or
substantially all of our assets. Currently, five employees of Icahn Enterprises or affiliates of Icahn
Enterprises are designated members of our board of directors, which is comprised of nine directors. In
addition, Icahn Enterprises is the lender under our revolving credit facility. It is possible that the
interests of Icahn Enterprises and its affiliates could conflict in certain circumstances with the interests
of our other stockholders or the interests of the holders of the 9.875% Senior Secured Notes.
Our business operations could be significantly disrupted if members of our senior management
team were to leave.
Our success depends to a significant degree upon the continued contributions of our senior
management team. Our senior management team has extensive manufacturing, finance and
engineering experience as well as longstanding contacts in the industry and with our customers, and
we believe that the depth of our management team is instrumental to our continued success. While we
have entered into an employment agreement with our chief executive officer, the loss of any of the
members of our senior management team in the future could significantly impede our ability to
successfully implement our business strategy, financial plans, new product offerings, marketing and
other objectives.
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SECTION 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read
in conjunction with our audited consolidated financial statements and related notes included elsewhere
in this report. The statements in this discussion regarding market conditions and outlook, our
expectations regarding our future performance, liquidity and capital resources and other non-historical
statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and
uncertainties described under “Cautionary Statement Regarding Forward-Looking Statements.” Our
actual results may differ materially from those contained in or implied by any forward-looking
statements.
Company Overview
Viskase Companies, Inc. (“we” or the “Company”) is a worldwide leader in the production and sale of
cellulosic, fibrous and plastic casings for the processed meat and poultry industry. We currently operate
eight manufacturing facilities and ten distribution centers in North America, Europe, South America and
Asia and we derive approximately 70% of total net sales from customers located outside the United
States. The Company has completed the construction of a shirring plant in the Philippines to serve the
Asian market. The plant is operating on a limited basis and is expected to be scaled up over several
years in accordance with our growth expectations for the Asian market. Capital investment for 2012,
including machinery, was $7 million for the Philippines project, with total capital investment to date of
$13.6 million on the project. We anticipate that an additional $2 million of equipment will be added
during the period from 2013 through 2016.
We believe we are one of the two largest manufacturers of non-edible cellulosic casings for processed
meats and one of the three largest manufacturers of non-edible fibrous casings. Our management
believes that the factors most critical to the success of our business are:
• maintaining and building upon our reputation for providing a high level of customer and technical
services;
• maintaining and building upon our long-standing customer relationships, many of which have
continued for decades;
• developing additional sources of revenue through new products and services;
• penetrating new regional markets; and
• continuing to streamline our cost structure.
Our net sales are driven by consumer demand for processed meat and poultry products and the level of
demand for casings by processed meat manufacturers, as well as the average selling prices of our
casings and competitive activity. Specifically, demand for our casings is dependent on population
growth, overall consumption of processed meat and poultry products and the types of meat and poultry
products purchased by consumers. Average selling prices are dependent on overall supply and
demand for casings, our product mix and competitive activity.
Factors Affecting Operating Results and Outlook
The following is a discussion of some of the key factors that have in the past and are likely in the future
to affect operating results.
Selling price. Selling price is the biggest driver of our operating income. Accordingly, management
focuses intensely on the selling prices of our products to ensure that pricing remains competitive.
Effect of Changes in Exchange Rates. Our results of operations are affected by changes in foreign
exchange rates. In addition to those markets in which we price our products in U.S. dollars, we price
products in certain of our foreign operations in Euros and Brazilian Reals. As a result, a decline in the
10
value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a
favorable effect on our profitability, and an increase in the value of the U.S. dollar relative to the local
currencies of profitable foreign subsidiaries can have a negative effect on our profitability.
Labor costs. In recent years, we have taken many actions to reduce our labor costs to the minimum
sustainable level. We have made our defined contribution plan payments variable to financial
performance targets. We have moved manufacturing facilities to lower cost countries. We have
increased medical care deductibles and other employee costs, and we have cut our workforce levels.
We believe that our labor costs as a percentage of sales will be maintained for the foreseeable future.
Raw material and energy costs. While labor is the highest cost component of our product, materials
and energy are nearly as important. We experienced price increases for certain key raw materials in
2012 following similar increases in 2011. We continue to look for additional suppliers for our key
materials in order to obtain the lowest prices available.
Results of Operations Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended
December 31, 2011.
The following discussion compares the results of operations for the fiscal year ended December 31,
2012 to the results of operations for the fiscal year ended December 31, 2011. We have provided the
following table in order to facilitate an understanding of this discussion (dollars in millions):
Year
Ended
December 31,
2012
%
Change
Over
2011
Year
Ended
December 31,
2011
%
Change
Over
2010
Year
Ended
December 31,
2010
NET SALES
$342.5
0.9%
$339.4
7.3%
$316.2
COST AND EXPENSES
Cost of sales
Selling, general and administrative
Amortization of intangibles
Restructuring expense
OPERATING INCOME
Interest income
Interest expense
Other (expense) income, net
Post retirement benefits curtailment gain
Income tax expense
NET INCOME
261.3
45.3
.5
.6
34.9
-
21.0
(1.4)
-
4.7
$7.9
0.1%
6.3%
0.0%
NM
-0.9%
NM
-1.1%
53.6%
NM
-12.6%
-0.9%
261.1
42.6
.5
-
35.3
.2
21.2
(.9)
-
5.4
$7.9
12.1%
-7.0%
0.0%
NM
-4.7%
-36.4%
2.1%
NM
NM
223.8%
-49.1%
233.0
45.8
.5
-
37.0
.3
20.8
.1
.6
1.7
$15.6
NM = Not meaningful when comparing positive to negative numbers or to zero.
Net Sales. Our net sales for fiscal 2012 were $342.5 million, which represents a increase of $3.1
million, or 0.9%, from fiscal 2011. Net sales increased of $7.7 million due to volume and $13.2 million
due to price and product mix, partially offset by an decrease of $17.8 million due to foreign currency
translation.
Cost of Sales. Cost of sales for fiscal 2012 increased $0.2 million, or 0.1% over fiscal 2011. Cost of
sales increased due to growth in unit volume, higher raw material costs, energy prices, depreciation
and pension expense, partically offset by foreign currency translation and improved manufacturing
efficiencies.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
from $42.6 million to $45.3 million for fiscal 2012. The increase in expense during fiscal 2012 is
primarily from higher one-time employee costs, infrastructure spending for developing markets and
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pension expense. This was partially offset by a $1.1 million decrease in legal expense related to patent
litigation and by foreign currency translation.
Restructuring Expenses. Restructuring expenses of $0.6 million were recognized during fiscal 2012.
The Company recognized the expense with the restructuring of its German subsidiary.
Operating Income. The operating income for fiscal 2012 decreased 0.9%, or $0.4 million, from fiscal
2011. The decrease in operating income resulted primarily from foreign currency translation, one-time
employee costs, depreciation, pension expense and infrastructure spending in developing markets.
Interest Expense. Interest expense for fiscal 2012 totaled $21.0 million, which is a decrease of $0.2
million compared to fiscal 2011. The decrease is principally due to higher capitalized interest.
Other Expense. Other expense, net of other income, of approximately $1.4 million for fiscal 2012
increased $0.5 million compared to fiscal 2011. The increase is due principally to losses from foreign
currency transactions.
Income Tax Provision. Income tax expense for fiscal 2012 decreased $0.7 million over fiscal 2011. The
decrease was principally related to income tax expense on the results of operations of foreign
subsidiaries.
Primarily as a result of the factors discussed above, net income for fiscal 2012 and fiscal 2011 was $7.9
million.
Fiscal Year Ended December 31, 2011 Compared to Fiscal Year Ended December 31, 2010
The following discussion compares the results of operations for the fiscal year ended December 31,
2011 to the results of operations for the fiscal year ended December 31, 2010.
Net Sales. Our net sales for fiscal 2011 increased 7.3%, or $23.2 million, from fiscal 2010. Net sales
increased $19.3 million due to volume and $8.2 million due to foreign currency translation, partially
offset by a decrease of $4.3 million due to product mix and price.
Cost of Sales. Cost of sales for fiscal 2011 increased 12.1%, or $28.1 million, over fiscal 2010. Cost of
sales increased due to growth in unit volume, higher raw material costs and foreign currency
translation.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased
$3.2 million to $42.6 for fiscal 2011, primarily as the result of a decrease in legal expense of $3.6 million
in fiscal 2011 compared to fiscal 2010.
Operating Income. The operating income for fiscal 2011 decreased 4.7%, or $1.7 million, from fiscal
2010. The decrease in the operating income resulted primarily from the decreased gross margin on
higher sales volume offset by lower selling, general and administrative expenses.
Interest Expense. Interest expense for fiscal 2011 totaled $21.2 million, which is an increase of $0.4
from the prior year period. The increase is principally due to higher long term borrowing for 2011 offset
by increased capitalized interest.
Other (Expense) Income. Other expense, net of other income, was approximately $0.9 million for fiscal
2011 compared to other income of $0.1 million for fiscal 2010. The increase in expense for 2011 is due
principally to losses on foreign currency translation compared to the gain on foreign currency translation
in 2010.
Post Retirement Benefits Curtailment Gain. During fiscal 2010, an estimated curtailment gain of $0.6
million was recognized for the freeze of the defined benefit pension plan for U.S. employees covered by
a collective bargaining agreement.
Income Tax Expense. During fiscal 2011, a tax provision of $5.4 million was recorded against pretax
book income of $13.4 million. During fiscal 2010, a tax provision of $1.7 million was recorded against
12
pretax book income of $17.3 million. The tax provisions are principally relating to income tax expense
on the results of operations of foreign subsidiaries.
Primarily as a result of the gross margin decrease, other expense and tax provision discussed above,
net income for fiscal 2011 was $7.9 million compared to net income of $15.6 million for fiscal 2010.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing, or other relations with unconsolidated
entities or other persons, except for operating leases included in the contractual obligations table set
forth below under “Liquidity and Capital Resources”.
Contingencies
During 2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax assessments by
São Paulo tax authorities with respect to Viskase Brazil’s alleged failure to pay Value Added and Sales
and Services Tax (“ICMS”) levied on the importation of raw materials, and sales of goods in and out of
the State of São Paulo, and alleged improper credits taken, from 2000 through 2005. In late December
2012, São Paulo issued a Decree announcing a Special Installment Program (“PEP Program”) for
eligible companies that wish to settle alleged ICMS liabilities arising prior to July 31, 2012. The PEP
Program offers significant reductions in interest and penalties to companies that choose to participate.
Viskase Brazil is currently reviewing the terms of the PEP Program. Viskase Brazil has vigorously
defended against these assessments in administrative and/or judicial proceedings since receipt, and
continues to do so.
In addition, the Company from time to time is involved in various other legal proceedings, none of which
are expected to have a material adverse effect upon results of operations, cash flows or financial
condition.
Effect of Changes in Exchange Rates
In general, our results of operations are affected by changes in foreign exchange rates. In addition to
those markets in which we price our products in U.S. dollars, we price products in certain of our foreign
operations in Euros and Brazilian Reals. As a result, a decline in the value of the U.S. dollar relative to
the local currencies of profitable foreign subsidiaries can have a favorable effect on our profitability, and
an increase in the value of the U.S. dollar relative to the local currencies of profitable foreign
subsidiaries can have a negative effect on our profitability.
Financial Instruments
The Company routinely enters into fixed price natural gas agreements which require us to purchase a
portion of our natural gas each month at fixed prices. These fixed price agreements qualify for the
“normal purchases” scope exception under derivative and hedging standards, and therefore the natural
gas purchases under these contracts are expensed as incurred and included within cost of sales. As of
December 31, 2012, future annual minimum purchases remaining under the agreements are $0.8
million.
Liquidity and Capital Resources
As of December 31, 2012, the Company had unrestricted cash and cash equivalents of $31.1 million
and restricted cash of $1.1 million, which secures letters of credit. For the year ended December 31,
2012, cash flows provided by operating activities were $2.8 million, cash flows used in investing
activities were $38.5 million, and cash flows provided by financing activities were $0.7 million. Cash
flows used in operating activities were principally attributable to the changes in operating assets of the
Company. Cash flows used in investing activities were principally attributable to capital expenditures.
As of December 31, 2012 and December 31, 2011, cash held in foreign banks was $12,905 and
$13,551, respectively.
Set forth below is a table of our material capital expenditures and research and development costs for
fiscal 2011 and 2012 and projected commitments for fiscal 2013:
13
Project
Projected
2011
2012
2013
(millions)
(millions)
(millions)
Manufacturing growth capital expenditures
$ 25.7
$ 27.1
$ 8.5
Other capital expenditures
Research and development costs
$ 11.6
$ 11.5
$ 11.7
$ 3.7
$ 3.8
$ 4.2
Management believes that the existing resources available to the Company will be adequate to satisfy
current and planned operations for at least the next twelve months.
The following table details the contractual cash obligations for long-term debt and related interest,
pension obligations, operating leases and capital leases as of December 31, 2012. (in millions of
dollars):
Payment Due by Pay Period
Less than
More than
Contractual Obligations
Long-term debt (1)
Cash interest obligations
Pension obligations
Operating leases
Capital leases
Total
Total
1 year
Year 2
Year 3
Year 4
Year 5
5 years
$216.1
116.6
65.6
23.0
0.9
$422.2
-
21.2
4.3
4.5
0.5
$30.5
-
21.2
7.0
3.3
0.3
$31.8
-
21.2
6.0
2.5
0.1
$29.8
-
21.2
5.0
2.3
-
$28.5
-
21.2
7.0
1.1
-
$29.3
$216.1
10.6
36.3
9.3
-
$272.3
The aggregate maturities of debt represent amounts to be paid at maturity and not
(1)
the current carrying value of the debt.
Critical Accounting Policies
The preparation of financial statements includes the use of estimates and assumptions that affect a
number of amounts included in the Company’s financial statements, including, among other things,
pensions and other postretirement benefits and related disclosures, reserves for excess and obsolete
inventory, allowance for doubtful accounts, and income taxes. Management bases its estimates on
historical experience and other assumptions that it believes are reasonable. If actual amounts are
ultimately different from previous estimates, the revisions are included in the Company’s results for the
period in which the actual amounts become known. Historically, the aggregate differences, if any,
between the Company’s estimates and actual amounts in any year have not had a significant effect on
the Company’s consolidated financial statements.
Revenue Recognition
Revenues are recognized at the time products are shipped to the customer, under F.O.B shipping point
or F.O.B port terms, which is the point at which title is transferred, the customer has the assumed risk of
loss, and when payment has been received or collection is reasonably assumed. Revenues are net of
discounts, rebates and allowances. Viskase records all labor, raw materials, in-bound freight, plant
receiving and purchasing, warehousing, handling and distribution costs as a component of costs of
goods sold.
Allowance for Doubtful Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in
the future. This estimated allowance is primarily based upon our evaluation of the financial condition of
each customer, each customer’s ability to pay and historical write-offs.
14
Allowance for Obsolete and Slow Moving Inventories
Inventories are valued at the lower of cost or market. The inventories have been reduced by an
allowance for slow moving and obsolete inventories. The estimated allowance is based upon
management’s estimate of specifically identified items, the age of the inventory and historical write-offs
of obsolete and excess inventories.
Income Taxes
Deferred tax assets and liabilities are measured using enacted tax laws and tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are not expected to be
realized on a more likely than not basis. Interest and penalties related to unrecognized tax benefits are
included as a component of tax expense.
Pension Plans and Other Postretirement Benefit Plans
Using appropriate actuarial methods and assumptions, the Company’s defined benefit pension plans
and non-pension postretirement benefits are accounted for in accordance with generally accepted
accounting principles (“GAAP”) in the United States of America.
Actual results that differ from assumptions used are accumulated and amortized over future periods
and, accordingly, generally affect recognized expense and the recorded obligation in future periods.
Therefore, assumptions used to calculate benefit obligations as of the end of a fiscal year directly
impact the expense to be recognized in future periods. The primary assumptions affecting the
Company’s accounting for employee benefits under GAAP as December 31, 2012 are as follows:
•
•
Long-term rate of return on plan assets: The required use of the expected long-term rate of
return on plan assets may result in recognized returns that are greater or less than the actual
returns on those plan assets in any given year. Over time, however, the expected long-term rate
of return on plan assets is designed to approximate actual earned long-term returns. The
Company uses long-term historical actual return information, the mix of investments that
comprise plan assets, and future estimates of long-term investment returns by reference to
external sources to develop an assumption of the expected long-term rate of return on plan
assets. The expected long-term rate of return is used to calculate net periodic pension cost. In
determining its pension obligations, the Company is using a long-term rate of return on U.S. plan
assets of 7.75% for 2012. The Company is using a long-term rate of return on French plan
assets of 3.50% for 2012. The German pension plan has no assets.
Discount rate: The discount rate is used to calculate future pension and postretirement
obligations. The Company is using a Mercer Bond yield curve in determining its pension
obligations. The Company is using a discount rate of 4.18% for 2012. The Company is using a
weighted average discount rate of 3.69% on its non-U.S. pension plans for 2012.
Fair Value Measurements
Financial Accounting Standards Board (“FASB”) guidance establishes a three-tiered hierarchy of inputs
to establish a classification of fair value measurements for disclosure purposes. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB guidance are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. An active market for the asset or
liability is a market in which transactions for the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
15
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including:
•
•
•
•
Quoted prices for similar assets or liabilities in active markets.
Quoted prices for identical or similar assets or liabilities in inactive markets.
Inputs other than quoted prices that are observable for the assets or liabilities (including
volatilities).
Inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable
for substantially the full term of the asset or liability.
Level 3 - Inputs are unobservable for the asset or liability (including the entity's own assumptions about
the assumptions that market participants would use in pricing the asset or liability) and significant to the
fair value measurement.
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company uses fair value measurements in determing the value of its pension plan assets.
Property, Plant and Equipment
The Company carries property, plant and equipment at cost less accumulated depreciation. Property
and equipment additions include acquisition of property and equipment and costs incurred for computer
software purchased for internal use including related external direct costs of materials and services and
payroll costs for employees directly associated with the project. Depreciation is computed on the
straight-line method using a half year convention over the estimated useful lives of the assets ranging
from (i) building and improvements - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii)
furniture and fixtures - 3 to 12 years, (iv) auto and trucks - 2 to 5 years and (v) leasehold improvements
- shorter of lease or useful life. Upon retirement or other disposition, cost and related accumulated
depreciation are removed from the accounts, and any gain or loss is included in results of operations.
In the ordinary course of business, we lease certain equipment, and certain real property, consisting of
manufacturing and distribution facilities and office facilities. Most of such leases as of December 31,
2012 were operating leases, with the majority of those leases requiring us to pay maintenance,
insurance and real estate taxes.
Long-Lived Assets
The Company continues to evaluate the recoverability of long-lived assets including property, plant and
equipment and patents. Impairments are recognized when the expected undiscounted future operating
cash flows derived from long-lived assets are less than their carrying value. If impairment is identified,
valuation techniques deemed appropriate under the particular circumstances will be used to determine
the asset’s fair value. The loss will be measured based on the excess of carrying value over the
determined fair value. The review for impairment is performed whenever events or changes in
circumstances indicate that the carrying amount of assets may not be recoverable.
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements
during the year ended December 31, 2012 that are of significance or potential significance to the
Company.
16
SECTION 4. CONSOLIDATED FINANCIAL STATEMENTS OF VISKASE COMPANIES, INC. AND
SUBSIDIARIES
1.
Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Income for the years ended December 31, 2012,
2011 and 2010
Consolidated Statements of Comprehensive (Loss) Income for the years ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012,
2011 and 2010
2.
Notes to Consolidated Financial Statements
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Audit (cid:150) Tax (cid:150) Advisory
Grant Thornton LLP
175 W Jackson Boulevard, 20th Floor
Chicago, IL 60604-2687
T 312.856.0200
F 312 565 4719
www.GrantThornton.com
Board of Directors
Viskase Companies, Inc.
We have audited the accompanying consolidated financial statements of Viskase Companies,
Inc. (a Delaware corporation) and Subsidiaries, which comprise the consolidated balance sheets
as of December 31, 2012 and 2011, and the related consolidated statements of income,
comprehensive income (loss), changes in stockholders’ equity (deficit) and cash flows for the
years then ended, and the related notes to the consolidated financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An
audit also includes evaluating the appropriateness of accounting policies used and the
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
2
reasonableness of significant accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Viskase Companies, Inc. and Subsidiaries as of
December 31, 2012 and 2011, and the results of their operations and their cash flows for the
years then ended in accordance with accounting principles generally accepted in the United
States of America.
Chicago, Illinois
April 10, 2013
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Number of Shares)
December 31, 2012
December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Receivables, net
Inventories
Other current assets
Deferred income taxes
Total current assets
Property, plant and equipment
Less accumulated depreciation
Property, plant and equipment, net
Asset held for sale
Deferred financing costs, net
Other assets, net
Deferred income taxes
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of capital lease obligations
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt, net of current maturities
Capital lease obligations
Accrued employee benefits
Deferred income taxes
Stockholders’ equity:
Common stock, $0.01 par value; 36,901,249 shares issued and
36,095,979 shares outstanding at December 31, 2012 and 36,734,748 shares
issued and 35,929,478 shares outstanding at December 31, 2011
Paid in capital
Retained earnings
Less 805,270 treasury shares, at cost
Accumulated other comprehensive loss
Total stockholders' deficit
$31,112
1,058
61,664
61,144
21,959
3,846
180,783
252,542
95,757
156,785
500
5,685
1,734
774
$65,925
2,119
53,101
53,279
17,679
3,632
195,735
214,286
79,888
134,398
500
6,585
2,468
132
$346,261
$339,818
$382
27,798
41,390
69,570
214,692
396
65,646
4,897
369
32,791
24,462
(298)
(66,264)
(8,940)
$573
29,245
40,563
70,381
214,578
454
56,239
5,336
367
32,806
16,587
(298)
(56,632)
(7,170)
Total Liabilities and Stockholders' Deficit
$346,261
$339,818
See notes to consolidated financial statements.
20
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands,Except for Per Share Amounts)
NET SALES
Cost of sales
GROSS MARGIN
Selling, general and administrative
Amortization of intangibles
Restructuring expense
OPERATING INCOME
Interest income
Interest expense
Other (expense) income, net
Post retirement benefits curtailment gain
INCOME BEFORE INCOME TAXES
Income tax provision
NET INCOME
WEIGHTED AVERAGE COMMON SHARES
- BASIC
PER SHARE AMOUNTS:
EARNINGS PER SHARE
- BASIC
WEIGHTED AVERAGE COMMON SHARES
- DILUTED
PER SHARE AMOUNTS:
EARNINGS PER SHARE
- DILUTED
Year
Ended
December
31, 2012
Year
Ended
December
31, 2011
Year
Ended
December
31, 2010
$342,523
$339,371
$316,215
261,261
261,079
232,955
81,262
45,265
460
600
34,937
46
20,966
(1,396)
-
12,621
4,746
$7,875
78,292
42,565
460
-
35,267
222
21,206
(909)
-
13,374
5,430
$7,944
83,260
45,783
460
-
37,017
349
20,771
139
562
17,296
1,677
$15,619
36,024,298
35,868,890
35,787,071
$0.22
$0.22
$0.44
36,771,801
37,010,141
37,119,990
$0.21
$0.21
$0.42
See notes to consolidated financial statements.
21
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In Thousands)
Net income
Other comprehensive (loss) income, net of tax
Pension liability adjustment
Foreign currency translation adjustment
Other comprehensive loss, net of tax
Comprehensive (loss) income
Year
Ended
December
31, 2012
Year
Ended
December
31, 2011
Year
Ended
December
31, 2010
$7,875
$7,944
$15,619
(11,179)
1,544
(9,635)
($1,760)
(17,709)
(2,634)
(20,343)
(928)
(3,982)
(4,910)
($12,399)
$10,709
See notes to consolidated financial statements.
22
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands)
Balance December 31, 2009
Net income
Foreign currency translation adjustment
Pension liability adjustment, net of tax
Stock option expense
Common
stock
$366
Paid in
capital
$32,474
Treasury
stock
($298)
Retained earnings
(Accumulated deficit)
($6,976)
Accumulated other
comprehensive
loss
($31,379)
Total
stockholders’
(deficit) equity
($5,813)
324
15,619
(3,982)
(928)
15,619
(3,982)
(928)
324
Balance December 31, 2010
$366
$32,798
($298)
$8,643
($36,289)
$5,220
Net income
Foreign currency translation adjustment
Pension liability adjustment, net of tax
Issuance of common stock
Stock option expense
1
(1)
9
7,944
(2,634)
(17,709)
7,944
(2,634)
(17,709)
-
9
Balance December 31, 2011
$367
$32,806
($298)
$16,587
($56,632)
($7,170)
Net income
Foreign currency translation adjustment
Pension liability adjustment, net of tax
Issuance of common stock
2
(15)
7,875
1,547
(11,179)
7,875
1,547
(11,179)
(13)
Balance December 31, 2012
$369
$32,791
($298)
$24,462
($66,264)
($8,940)
See notes to consolidated financial statements.
23
VISKASE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flow s from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Stock-based compensation
Amortization of intangibles
Amortization of deferred financing fees
Deferred income taxes
Loss on disposition of assets
Bad debt and accounts recievable provision
Postretirement curtailment gain
Non-cash interest on notes
Changes in operating assets and liabilities:
Receivables
Inventories
Other current assets
Accounts payable
Accrued liabilities
Accrued employee benefits
Other
Total adjustments
Net cash provided by operating activities
Cash flow s from investing activities:
Capital expenditures
Proceeds from disposition of assets
Net cash used in investing activities
Cash flow s from financing activities:
Deferred financing costs
Proceeds from revolving loan
Proceeds from capital lease
Proceeds from long-term debt
Repayment of short-term debt
Repayment of capital lease
Restricted cash
Net cash provided by (used in) financing activities
Effect of currency exchange rate changes on cash
Net (decrease) increase in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
Supplemental cash flow information:
Interest paid less capitalized interest
Income taxes paid (refunded)
Year
Ended
December
31, 2012
Year
Ended
December
31, 2011
Year
Ended
December
31, 2010
$7,875
$7,944
$15,619
16,173
1
460
1,024
(1,400)
110
(390)
-
84
(7,493)
(7,308)
(4,169)
(1,699)
618
(1,501)
405
(5,085)
2,790
(38,603)
106
(38,497)
(125)
-
351
-
-
(615)
1,061
672
222
(34,813)
65,925
$31,112
$20,035
$6,995
13,977
9
460
904
29
91
448
-
83
(6,179)
884
(863)
4,497
2
(4,921)
(414)
9,007
16,951
(37,269)
67
(37,202)
(141)
-
74
-
-
(842)
64
(845)
(537)
(21,633)
87,558
$65,925
$20,349
$2,978
12,359
324
460
944
1,261
139
109
(562)
56
(3,426)
(4,354)
1,569
2,386
5,164
(1,855)
862
15,436
31,055
(19,738)
99
(19,639)
(1,324)
870
819
40,400
(1,132)
(893)
100
38,840
(346)
49,910
37,648
$87,558
$12,040
($1,568)
See notes to consolidated financial statements.
24
1. Summary of Significant Accounting Policy
Nature of Operations
Viskase Companies, Inc. together with its subsidiaries (“we” or the “Company”) is a producer of non-
edible cellulosic, fibrous and plastic casings used to prepare and package processed meat products,
and provides value-added support services relating to these products, for some of the largest global
consumer products companies. The Company operates eight manufacturing facilities and ten
distribution centers in North America, Europe, South America,and Asia and, as a result, is able to
sell its products in most countries throughout the world.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. Intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The financial statements are prepared in accordance with generally accepted accounting principles
(“GAAP”) in the United States of America and include the use of estimates and assumptions that
affect a number of amounts included in the Company’s financial statements, including, among other
things, pensions and other postretirement benefits and related disclosures, reserves for excess and
obsolete inventory, allowance for doubtful accounts, and income taxes. Management bases its
estimates on historical experience and other assumptions that we believe are reasonable. If actual
amounts are ultimately different from previous estimates, the revisions are included in the
Company’s results for the period in which the actual amounts become known. Historically, the
aggregate differences, if any, between the Company’s estimates and actual amounts in any year
have not had a significant effect on the Company’s consolidated financial statements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash equivalents to consist of
all highly liquid debt investments purchased with an initial maturity of approximately three months or
less. Due to the short-term nature of these instruments, the carrying values approximate the fair
market value. Cash equivalents include $198 and $196 of short-term investments at December 31,
2012 and December 31, 2011, respectively. Of the cash held on deposit, essentially all of the cash
balance was in excess of amounts insured by the Federal Deposit Insurance Corporation or other
foreign provided bank insurance. The Company performs periodic evaluations of these institutions
for relative credit standing and has not experienced any losses as a result of its cash concentration.
Consequently, no significant concentrations of credit risk are considered to exist.
Receivables
Trade accounts receivable are classified as current assets and are reported net of allowance for
doubtful accounts and a reserve for returns. This estimated allowance is primarily based upon our
evaluation of the financial condition of each customer, each customer’s ability to pay and historical
write-offs.
Inventories
Inventories are valued at the lower of first-in, first-out (“FIFO”) cost or market.
Property, Plant and Equipment
The Company carries property, plant and equipment at cost less accumulated depreciation. Property
and equipment additions include acquisition of property and equipment and costs incurred for
computer software purchased for internal use including related external direct costs of materials and
services and payroll costs for employees directly associated with the project. Upon retirement or
other disposition, cost and related accumulated depreciation are removed from the accounts, and
25
any gain or loss is included in results of operations. Depreciation is computed on the straight-line
method using a half year convention over the estimated useful lives of the assets ranging from (i)
building and improvements - 10 to 32 years, (ii) machinery and equipment - 4 to 12 years, (iii)
furniture and fixtures - 3 to 12 years, (iv) auto and trucks - 2 to 5 years, and (v) leasehold
improvements - shorter of lease or useful life.
In the ordinary course of business, we lease certain equipment, and certain real property, consisting
of manufacturing and distribution facilities and office facilities.
Deferred Financing Costs
Deferred financing costs are amortized as expense using the effective interest rate method over the
expected term of the related debt agreement. Amortization of deferred financing costs is classified
as interest expense.
Patents and Trademarks
Patents and trademarks are amortized on the straight-line method over an estimated average useful
life of 10 years.
Long-Lived Assets
The Company continues to evaluate the recoverability of long-lived assets including property, plant
and equipment and patents. Impairments are recognized when the expected undiscounted future
operating cash flows derived from long-lived assets are less than their carrying value. If impairment
is identified, valuation techniques deemed appropriate under the particular circumstances will be
used to determine the asset’s fair value. The loss will be measured based on the excess of carrying
value over the determined fair value. The review for impairment is performed whenever events or
changes in circumstances indicate that the carrying amount of assets may not be recoverable.
Shipping and Handling
The Company periodically bills customers for shipping charges. These amounts are included in net
revenue, with the associated costs included in cost of sales.
Pensions and Other Postretirement Benefits
The Company uses appropriate actuarial methods and assumptions in accounting for its defined
benefit pension plans and non-pension postretirement benefits.
Actual results that differ from assumptions used are accumulated and amortized over future periods
and, accordingly, generally affect recognized expense and the recorded obligation in future periods.
Therefore, assumptions used to calculate benefit obligations as of the end of a fiscal year directly
impact the expense to be recognized in future periods. The primary assumptions affecting the
Company’s accounting for employee benefits as of December 31, 2012 are as follows:
• Long-term rate of return on plan assets: The required use of the expected long-term rate of
return on plan assets may result in recognized returns that are greater or less than the actual
returns on those plan assets in any given year. Over time, however, the expected long-term
rate of return on plan assets is designed to approximate actual earned long-term returns. The
Company uses long-term historical actual return information, the mix of investments that
comprise plan assets, and future estimates of long-term investment returns by reference to
external sources to develop an assumption of the expected long-term rate of return on plan
assets. The expected long-term rate of return is used to calculate net periodic pension cost. In
determining its pension obligations, the Company is using a long-term rate of return on U.S.
plan assets of 7.75% for 2012. The Company is using a long-term rate of return on French
plan assets of 3.50% for 2012. The German pension plan has no assets.
• Discount rate: The discount rate is used to calculate future pension and postretirement
obligations. The Company is using a Mercer Bond yield curve in determining its pension
26
obligations. The Company is using a discount rate of 4.18% for 2012. The Company is using a
weighted average discount rate of 3.69% on its non-U.S. pension plans for 2012.
Income Taxes
Deferred tax assets and liabilities are measured using enacted tax laws and tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is
recognized in income in the period that includes the enactment date. In addition, the amounts of any
future tax benefits are reduced by a valuation allowance to the extent such benefits are not expected
to be realized on a more likely than not basis. Interest and penalties related to unrecognized tax
benefits are included as a component of tax expense.
Other Comprehensive Income
Comprehensive income includes all other non-stockholder changes in equity. Changes in other
comprehensive income in 2012 and 2011 resulted from changes in foreign currency translation and
minimum pension liability.
Revenue Recognition
Revenues are recognized at the time products are shipped to the customer, under F.O.B shipping
point or F.O.B port terms, which is the point at which title is transferred, the customer has the
assumed risk of loss, and when payment has been received or collection is reasonably assumed.
Revenues are net of discounts, rebates and allowances. Viskase records all labor, raw materials, in-
bound freight, plant receiving and purchasing, warehousing, handling and distribution costs as a
component of costs of goods sold.
Accounting for Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on fair value of the award and
is recognized as an expense on a straight-line basis over the requisite service period, which is the
vesting period. Included in net income is a non-cash compensation expense of $1 in 2012, $9 in
2011, and $324 in 2010.
Financial Instruments
The Company routinely enters into fixed price natural gas agreements which require us to purchase
a portion of our natural gas each month at fixed prices. These fixed price agreements qualify for the
“normal purchases” scope exception under derivative and hedging standards, therefore the natural
gas purchases under these contracts were expensed as incurred and included within cost of sales.
Future annual minimum purchases remaining under the agreement are $827 for 2012. During 2012
and 2011, the Company’s total purchases under the agreements were $1,246 and $1,278,
respectively.
The Company’s financial instruments include cash and cash equivalents, accounts receivable and
accounts payable. The carrying amounts of these financial assets and liabilities approximate fair
value due to the short maturities of these instruments. The fair value of the Company’s Senior
Secured Notes is estimated by discounting the future cash flow using the Company’s current
borrowing rates for similar types and maturities of debt.
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements
during the year ended December 31, 2012 that are of significance or potential significance to the
Company.
27
2. Cash and cash equivalents
Cash and cash equivalents
Restricted cash
December 31, 2012
December 31, 2011
$31,112
1,058
$32,170
$65,925
2,119
$68,044
As of December 31, 2012 and December 31, 2011, cash held in foreign banks was $12,905 and
$13,551, respectively.
Letters of credit in the amount of $1,058 as of December 31, 2012 were outstanding under facilities
with a commercial bank, and were cash collateralized in a restricted account.
3. Receivables, net
December 31, 2012
December 31, 2011
Accounts receivable, gross
Less allowance for doubtful accounts
Less allowance for sales returns
Receivables reserve activity:
$63,718
(1,970)
(84)
$61,664
$55,543
(1,799)
(643)
$53,101
December 31, 2012
December 31, 2011
December 31, 2010
Beginning balance
(Recoveries) provision
Write-offs
Foreign translation
Ending balance
$2,442
(390)
(19)
21
$2,054
$2,203
448
(124)
(85)
$2,442
$2,152
109
(22)
(36)
$2,203
4. Inventory
Inventory consisted of:
Raw materials
Work in process
Finished products
December 31, 2012
December 31, 2011
$11,688
27,071
22,385
$13,622
18,627
21,030
$61,144
$53,279
28
5. Property, Plant and Equipment, Net
Land and improvements
Buildings and improvements
Machinery and equipment
Construction in progress
December 31, 2012
December 31, 2011
$2,237
36,084
207,800
6,421
$2,125
22,359
171,247
18,555
$252,542
$214,286
Accumulated depreciation consisted of:
December 31, 2012
December 31, 2011
Land and improvements
Buildings and improvements
Machinery and equipment
$233
7,349
88,175
$209
6,135
73,544
$95,757
$79,888
Capitalized interest for 2012, 2011, and 2010 totaled $1,902, $1,580, and $518, respectively.
Maintenance and repairs charged to costs and expenses for 2012, 2011, and 2010 aggregated
$19,428, $19,222 and $18,882, respectively.
6. Assets Held For Sale
During December 2009, the Company recognized an impairment loss on a plastic extruder in its
Monterrey, Mexico plant due to a change in the mix of the Company’s product line. The Company
wrote down the asset to the realizable market value based on potential resale value and changed its
classification to an asset held for sale in the amount of $500.
7. Other Assets
Patents and Trademarks
Less: Accumulated amortization
Patents, net
Miscellaneous
December 31, 2012
December 31, 2011
$4,720
(4,484)
236
1,498
$1,734
$4,598
(4,024)
574
1,894
$2,468
Amortization of patents for fiscal years 2013 and 2014 will be approximately $127 and $12,
respectively.
29
8. Accrued Liabilities
Accrued liabilities consisted of:
Compensation and employee benefits
Taxes payable
Accrued volume and sales discounts
Accrued interest
Other
December 31, 2012
December 31, 2011
$16,259
8,572
2,435
9,798
4,326
$41,390
$14,482
11,451
1,402
9,798
3,430
$40,563
9. Debt Obligations
Outstanding long-term debt consisted of:
Long-term debt:
9.875% Senior secured notes, net of discount
Other
Total long-term debt
Revolving Credit Facility
December 31, 2012
December 31, 2011
$214,412
280
$214,692
$214,328
250
$214,578
The Company is a party to a $25,000 secured revolving credit facility (“Revolving Credit Facility”) with
Icahn Enterprises L.P. Borrowings under the loan and security agreement governing the Revolving
Credit Facility are subject to a borrowing base formula based on percentages of eligible domestic
receivables and eligible domestic inventory. Under the Revolving Credit Facility, the interest rate
option is LIBOR plus a margin of 2.00% currently (which margin will be subject to performance based
increases up to 2.50%); provided that the minimum interest rate shall be at least equal to 3.00%. The
Revolving Credit Facility also provides for an unused line fee of 0.375% per annum. On April 8, 2013,
the Company entered into the Seventh Amendment to Loan and Security Agreement with Icahn
Enterprises L.P., extending the maturity date of the Revolving Credit Facility from January 31, 2014 to
July 31, 2015. The amendment included a fee of $125 for the extension.
There were no borrowings under the Revolving Credit Facility at December 31, 2012.
Indebtedness under the Revolving Credit Facility is secured by liens on substantially all of the
Company’s domestic and Mexican assets, with liens on (i) inventory, accounts receivable, lockboxes,
and deposit accounts (the “RCF Priority Collateral’) to be contractually senior to the liens securing the
9.875% Senior Secured Notes and the related guarantees pursuant to an intercreditor agreement, (ii)
real property, fixtures and improvements thereon, equipment and proceeds thereof (the “Notes
Priority Collateral”), to be contractually subordinate to the liens securing the 9.875% Senior Secured
Notes and such guarantees pursuant to such intercreditor agreement, and (iii) all other assets, to be
contractually pari passu with the liens securing the 9.875% Senior Secured Notes and such
guarantees pursuant to such intercreditor agreement.
The Revolving Credit Facility contains various covenants which restrict the Company’s ability to,
among other things, incur indebtedness, enter into mergers or consolidation transactions, dispose of
assets (other than in the ordinary course of business), acquire assets, make certain restricted
payments, create liens on our assets, make investments, create guarantee obligations and enter into
sale and leaseback transactions and transactions with affiliates, in each case subject to permitted
exceptions. The Revolving Credit Facility also requires that we comply with various financial
covenants, including meeting a minimum EBITDA requirement and limitations on capital expenditures
in the event our usage of the Revolving Credit Facility exceeds 30% of the facility amount. The
Company is in compliance with the Revolving Credit Facility covenants as of December 31, 2012.
30
In its foreign operations, the Company has unsecured lines of credit with various banks providing
approximately $8,000 of availability. There were no borrowings under the lines of credit at December
31, 2012.
9.875% Senior Secured Notes due 2018
The Company has $215,000 principal amount of 9.875% Senior Secured Notes due 2018 (“9.875%
Senior Secured Notes”) outstanding. The 9.875% Senior Secured Notes bear interest at a rate of
9.875% per annum, payable semi-annually in cash on January 15 and July 15. The 9.875% Senior
Secured Notes have a maturity date of January 15, 2018.
The 9.875% Senior Secured Notes and related guarantees by any of our future domestic restricted
subsidiaries will be secured by substantially all of our and those domestic restricted subsidiaries’
current and future tangible and intangible assets, including all or a portion of the stock of our and their
subsidiaries (except that no more than 65% of the voting stock of any foreign subsidiary will constitute
collateral). The liens on our assets and the assets of those domestic restricted subsidiaries that
secure the 9.875% Senior Secured Notes and any such guarantees will (i) in the case of the RCF
Priority Collateral be contractually subordinated, pursuant to an intercreditor agreement, to the liens
thereon securing the Revolving Credit Facility, (ii) in the case of Notes Priority Collateral be
contractually senior, pursuant to such intercreditor agreement, to the liens thereon securing the
Revolving Credit Facility, (iii) in the case of all other assets, be contractually pari passu, pursuant to
such intercreditor agreement, with the liens securing the Revolving Credit Facility, and (iv) in each
such case, be subject to certain prior liens. The indenture governing the 9.875% Senior Secured
Notes permits us to incur other senior secured indebtedness and to grant liens on our assets under
certain circumstances.
Prior to January 15, 2014, we may redeem, at our option, up to 35% of the aggregate principal
amount of the 9.875% Senior Secured Notes issued under the indenture with the net proceeds of any
equity offering, at 109.875% of their principal amount, plus accrued and unpaid interest to the date of
redemption, provided that at least 65% of the aggregate principal amount of the 9.875% Senior
Secured Notes issued under the indenture agreement governing the 9.875% Senior Secured Notes
remains outstanding immediately following the redemption.
Letter of Credit Facility
Letters of credit in the amount of $1,058 were outstanding under facilities with a commercial bank,
and were cash collateralized at December 31, 2012.
Debt Maturity
The aggregate maturities of debt (1) for each of the next five years are:
2013
2014
2015
2016
2017
Thereafter
9.875% Senior Secured Notes
-
-
-
-
-
$215,000
Other
-
-
-
-
-
$1,061
-
-
-
-
-
$216,061
(1) The aggregate maturities of debt represent amounts to be paid at maturity and not
the current carrying value of the debt.
10. Capital Lease Obligations
The Company has entered into capital lease obligations to acquire certain equipment and building
improvements for its manufacturing facilities. The equipment leases have a term of 3 to 5 years and
the bu ilding improvement lease has a term of 5 years. The Company has determined that
automobiles leased by the Company are capital leases with an average term of 4 years. The
depreciation of capital leases is included in depreciation expense.
31
The following is an analysis of leased property under capital leases by major classes.
Building and improvements
Machinery and equipment
Less: Accumulated depreciation
2012
$518
2,896
(2,492)
$922
2011
$507
2,678
(2,057)
$1,128
The following is a schedule by years of minimum future lease payments as of December 31, 2012.
Year ending December 31,
2013
2014
2015
2016
2017
Thereafter
Total minimum payments required
Less amount representing interest
$526
287
82
11
-
-
906
(128)
Present value of net minimum lease payments
$778
11. Operating Leases
The Company has operating lease agreements for machinery, equipment and facilities. The majority
of the facility leases require the Company to pay maintenance, insurance and real estate taxes.
Certain of these leases contain escalation clauses and renewal options.
Future minimum lease payments for operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2012, are:
2013
2014
2015
2016
2017
Total thereafter
$4,488
3,301
2,496
2,328
1,081
9,327
Total minimum lease payments
$23,021
Total rent expense during 2012, 2011 and 2010 amounted to $4,343, $3,245 and $3,262
respectively.
12. Retirement Plans
The Company and its subsidiaries have defined contribution and defined benefit plans varying by
country and subsidiary.
The Company’s operations in the United States, France, Germany and Canada historically offered
defined benefit retirement plans and postretirement health care and life insurance benefits to their
employees. Most of these benefits have been terminated, resulting in various reductions in liabilities
and curtailment gains.
32
On September 30, 2010, employees in the U.S. covered by a collective bargaining agreement
ratified a new agreement that, among other things, freezes the defined benefit pension plan as of
December 31, 2010. All other participation in the plans had previously been frozen.
Included in accumulated other comprehensive income, net of tax, as of December 31, 2012 are the
following amounts not yet recognized in net periodic benefit cost:
Net actuarial loss
Prior service credit
($55,083)
$5
($1,736)
$11
U.S. Pension Benefits
Non U.S. Pension Benefits
Amounts included in other comprehensive income expected to be recognized as a component of net
periodic benefit cost for the year ending December 31, 2013 are:
Net actuarial loss
($4,240)
$15
U.S. Pension Benefits
Non U.S. Pension Benefits
The measurement date for all defined benefit plans is December 31. The year end status of the
plans is as follows:
U.S. Pension Benefits
2012
2011
Non U.S. Pension Benefits
2012
2011
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Currency translation
$147,023
$136,666
-
6,965
17,041
(7,873)
-
-
7,320
10,958
(7,921)
-
$8,751
331
434
1,476
(594)
172
$8,463
316
439
96
(296)
(267)
Estimated benefit obligation at end of year
$163,156
$147,023
$10,570
$8,751
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Currency translation
$95,685
11,285
5,017
(7,873)
-
$98,314
(797)
6,089
(7,921)
-
$5,407
178
-
-
107
$4,683
166
833
(127)
(148)
Fair value of plan assets at end of year
$104,114
$95,685
$5,692
$5,407
Unfunded status of the plan
($59,042)
($51,338)
($4,878)
($3,344)
33
Net amount recognized
Amounts recognized in statement of financial
position:
Current liabilities
Noncurrent liabilities
Net amount recognized
U.S. Pension Benefits
Non U.S. Pension Benefits
2012
2011
2012
2011
($82)
(58,960)
($62)
(51,276)
($166)
(4,713)
($59,042)
($51,338)
($4,879)
($127)
(3,217)
($3,344)
The funded status of these pension plans as a percentage of the projected benefit obligation was 59
percent in 2012 compared to 65 percent in 2011.
U.S. Pension Benefits
Non U.S. Pension Benefits
2012
2011
2012
2011
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$163,156
$163,156
$104,114
$147,023
$147,003
$95,685
$10,570
$8,387
$5,692
$8,751
$7,279
$5,407
Components of net periodic benefit cost for the years ended December 31:
U.S. Pension Benefits
2011
2010
2012
Non U.S. Pension Benefits
2011
2012
2010
Component of net period benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of actuarial loss
Curtailment Income
-
$6,965
(7,321)
(1)
3,429
-
$3,072
-
$7,320
(7,742)
-
1,667
-
$1,245
$303
7,510
(7,411)
(131)
1,629
(562)
$1,338
$323
423
(178)
-
12
-
$580
$338
470
(191)
-
37
-
$654
$259
404
(180)
-
77
-
$560
Weighted average assumptions used to determine the benefit obligation and net periodic benefit cost as
of December 31:
Discount rate
Expected return on plan assets
Rate of compensation increase
U.S. Pension Benefits
Non U.S. Pension Benefits
2012
2011
2012
2011
4.18%
7.75%
N/A
4.89%
8.00%
N/A
3.69%
3.50%
3.00%
4.99%
3.50%
3.00%
The Company evaluates its discount rate assumption annually as of December 31 for each of its
retirement-related benefit plans. The Company is using a Mercer bond model for determining its
U.S. pension benefits. The Company is using a weighted average discount rate of 3.69% on its non
U.S. pension plans for 2012.
The Company’s expected return on plan assets is evaluated annually based upon a study which
includes a review of anticipated future long-term performance of individual asset classes, and
consideration of the appropriate asset allocation strategy to provide for the timing and amount of
benefits included in the projected benefit obligation. While the study gives appropriate consideration
to recent fund performance and historical returns, the assumption is primarily a long-term
prospective rate.
34
The Company’s overall investment strategy is to achieve growth through a mix of approximately 75
percent of investments for long-term growth and 25 percent for near-term benefit payments with a
wide diversification of asset types, fund strategies, and fund managers. The target allocations for
plan assets are 47 percent equity securities, 28 percent hedge funds and 25 percent to fixed income
investments. Equity securities primarily include investments in large-cap, mid-cap and small-cap
companies primarily located in the United States and international developed markets. Fixed income
securities include corporate bonds of companies from diversified industries, mortgage-backed
securities, and U.S. Treasuries. Other types of investments include investments in hedge funds that
follow several different strategies.
In accordance with FASB guidance, Plan management uses the following methods and significant
assumptions to estimate fair value of investments.
Mutual funds - Valued at the net asset value (“NAV”) of shares held by the Plan at year-end, which is
obtained from an active market.
Collective trust funds - Value provided by the administrator of the fund. The NAV is based on the
value of the underlying assets owned by the fund, minus its liabilities, and then divided by the
number of shares outstanding. The NAV's unit price is quoted on a private market that is not active.
Hedge funds - Value provided by the administrator of the fund. The pricing for these funds is
provided monthly by the fund to determine the quoted price.
The fair values of the Company’s pension plan asset allocation at December 31, 2012 and 2011, by
asset category are as follows:
Fair Value Measurement at
December 31, 2012
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Total
$5,671
$5,671
13,797
3,813
-
10,077
8,215
7,646
7,383
3,315
10,098
10,200
13,797
3,813
-
-
-
-
7,383
-
-
10,200
29,520
71
$109,806
-
71
$40,935
Total
Significant
Observable
Inputs
(Level 2)
$
-
Significant
Unobservable
Inputs
(Level 3)
$
-
-
-
-
10,077
8,215
7,646
-
3,315
10,098
-
-
-
-
-
-
-
-
-
-
-
-
-
29,520
$39,351
$29,520
Asset Category
Cash equivalents
Equity securities:
U.S. companies
International companies
U.S-Small Cap Growth
U.S-Large Cap Enhanced Core
U.S-Large Cap Equity Growth
U.S-Mutual Funds
Fixed income securities:
Government Treasuries
Mortgage-backed securities
Aggregate bond fund
High yield fund
Other types of investments:
Hedge funds
Real Estate
35
Fair Value Measurements
Using Significant Unobservable
Inputs (Level 3)
Combined Hedge Funds
Beginning balance at December 31, 2011
Total realized loss
Change in unrealized depreciation
Cost of purchases
Proceeds from sales
Ending balance at December 31, 2012
$26,568
(32)
2,984
(294)
294
$29,520
Fair Value Measurement at
December 31, 2011
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Total
$2,523
$2,523
10,458
3,828
1,756
10,664
8,262
8,397
6,639
2,693
8,974
10,330
10,458
3,828
-
-
-
-
6,639
-
-
10,330
Significant
Observable
Inputs
(Level 2)
$
-
Significant
Unobservable
Inputs
(Level 3)
$
-
-
-
1,756
10,664
8,262
8,397
-
2,693
8,974
-
-
-
-
-
-
-
-
-
-
-
Total
26,568
$101,092
-
-
$33,778
$40,746
26,568
$26,568
Asset Category
Cash equivalents
Equity securities:
U.S. companies
International companies
U.S-Small Cap Growth
U.S-Large Cap Enhanced Core
U.S-Large Cap Equity Growth
U.S-Mutual Funds
Fixed income securities:
Government Treasuries
Mortgage-backed securities
Aggregate bond fund
High yield fund
Other types of investments:
Hedge funds
Beginning balance at December 31, 2010
Total realized loss
Change in unrealized depreciation
Cost of purchases
Proceeds from sales
Ending balance at December 31, 2011
Fair Value Measurements
Using Significant Unobservable
Inputs (Level 3)
Combined Hedge Funds
$27,582
(4)
(1,004)
(299)
293
$26,568
The following table provides a summary of the estimated benefit payments for the postretirement
plans for the next five fiscal years individually and for the following five fiscal years in the aggregate.
36
Total Estimated Benefit
Payments
U.S.
Non-U.S
2013
2014
2015
2016
2017
2018-2022
$8,614
8,737
8,870
9,069
9,141
47,820
$619
553
549
414
561
3,549
The Company’s expected contribution for the 2013 fiscal year is $4,125 for the U.S. and $166 for
non-U.S. pension plans.
Savings Plans
The Company also has defined contribution savings and similar plans for eligible employees, which
vary by subsidiary. The Company’s aggregate contributions to these plans are based on eligible
employee contributions and certain other factors. The Company expense for these plans was $875,
$1,049 and $961 in 2012, 2011 and 2010, respectively.
International Plans
The Company maintains various pension and statutory separation pay plans for its European
employees. The expense, not including the French and German pension plan, in 2012, 2011, and
2010 was $825, $864 and $1,021, respectively. As of their most recent valuation dates, for those
plans where vested benefits exceeded plan assets, the actuarially computed value of vested benefits
exceeded those plans’ assets by approximately $1,714.
13. Capital Stock, Treasury Stock and Paid in Capital
Authorized shares of preferred stock ($0.01 par value per share) and common stock ($0.01 par
value per share) for the Company are 50,000,000 shares and 50,000,000 shares, respectively.
In 2004, the Company purchased 805,270 shares of its common stock from the underwriter for a
purchase price of $298. The common stock has been accounted for as treasury stock.
14. Income Taxes
Income tax provision (benefit) consisted of:
Current
Domestic
Foreign
Total current
Deferred
Domestic
Foreign
Total deferred
Total
2012
2011
2010
$123
6,023
($136)
5,537
$295
111
6,146
5,401
406
-
(1,400)
(1,400)
-
29
29
-
1,271
1,271
$4,746
$5,430
$1,677
37
The reconciliation of income tax provision (benefit) attributable to earnings differed from the amounts
computed by applying the U.S. Federal statutory income tax rate to earnings by the following
amounts:
Income (loss) before income taxes:
Domestic
Foreign
2012
2011
2010
$5,738
6,886
($335)
13,709
$1,192
16,104
Total
$12,624
$13,374
$17,296
Computed income tax provision
State and local taxes, net of federal tax
Foreign taxes, net
Valuation allowance
Uncertain tax positions - expense (benefit)
Other, net
Total income tax expense
Computed income tax provision
State and local taxes, net of federal tax
Foreign taxes, net
Valuation allowance
Uncertain tax positions - expense (benefit)
Other, net
Effective income tax rate
$4,292
244
1,246
(2,630)
1,317
277
$4,746
34.0%
1.9%
9.9%
-20.8%
10.4%
2.2%
37.6%
$4,681
(3)
344
528
64
(184)
$5,430
35.0%
0.0%
2.6%
3.9%
0.5%
-1.4%
40.6%
$6,053
127
(106)
(1,987)
(2,680)
270
$1,677
35.0%
0.7%
-0.6%
-11.5%
-15.5%
1.6%
9.7%
Temporary differences and net operating loss carryforwards that give rise to a significant portion of
deferred tax assets and liabilities for 2012 and 2011 are as follows:
Deferred tax asset
Provisions not currently deductible
Inventory basis differences
Foreign exchange and other
Stock options
Pension and healthcare
Net operating loss carryforwards
Valuation allowance
Total deferred tax asset
Deferred tax liability
Property, plant, and equipment
Intangible asset
Foreign exchange and other
Total deferred tax liability
2012
2011
$3,942
3,320
34
841
22,532
36,572
(51,102)
$16,139
($12,737)
(89)
(3,590)
($16,416)
($277)
$3,792
3,767
11
865
19,898
36,811
(49,486)
$15,658
($12,600)
(221)
(4,409)
($17,230)
($1,572)
In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either
current or non-current based on the classification of the related liability or asset for financial
reporting. A deferred tax asset or liability that is not related to an asset or liability for financial
reporting, including deferred taxes related to carryforwards, is classified according to the expected
reversal date of the temporary differences as of the end of the year.
38
A valuation allowance is provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. A U.S. based valuation allowance of $51,005 has been
recorded at December 31, 2012, as management believes that it is more likely than not that all
deferred tax assets will not be fully realized based on the expectation of taxable income in future
years.
There were gross U.S. federal net operating loss carryforwards at December 31, 2012 and
December 31, 2011 of $96,897 and $94,749, respectively, with amounts beginning to expire in the
year 2024. The Company has gross foreign net operating loss carryforwards at December 31, 2012
and December 31, 2011 of $926 and $1,092, respectively. The amount of $325 will begin to expire
in 2015 and the remainder has an unlimited carryforward period for the foreign net operating losses.
Viskase did not record taxes on its undistributed earnings from foreign subsidiaries since these
earnings are considered to be permanently reinvested. If at some future date, these earnings cease
to be permanently reinvested, Viskase may be subject to U.S. income taxes and foreign withholding
taxes on such amounts. Determining the unrecognized deferred tax liability on the potential
distribution of these earnings is not practicable as such liability, if any, is dependent on
circumstances existing when remittance occurs.
The Company joins in filing a United States consolidated Federal income tax return including all of
its domestic subsidiaries.
Uncertainty in Income Taxes
The uncertain tax positions as of December 31, 2012 totaled $7,770. The following table
summarizes the activity related to the unrecognized tax benefits.
(in thousands)
Unrecognized tax benefits as of January 1, 2012
Increases in positions taken in a prior period
Decreases in positions taken in a prior period
Increases in positions taken in a current period
Decreases in positions taken in a current period
Decreases due to settlements
Decreases due to lapse of statute of limitations
Unrecognized tax benefits as of December 31, 2012
December 31, 2012
$9,555
539
(2,780)
1,131
-
(150)
(525)
$7,770
The Company's continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company recorded adjustments for interest and potential
penalties related to these unrecognized tax benefits, and in total, as of December 31, 2012, the
Company has recorded a liability for interest and potential penalties of $877.
Approximately $3,800 of the total unrecognized tax benefits represents the amount that, if
recognized, would affect the effective income tax rate in future periods. The Company and its
subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. The Company has been audited by the IRS through 2010 which resulted in no
tax liability. The Company will contine to utilize net operating loss carryforwards from periods prior
to 2010. Substantially all material state and local and foreign income tax matters have been
concluded for years through 2008. U.S. federal income tax returns for 2011 are currently open for
examination. Based on the expiration of the statute of limitations for certain jurisdictions, it is
reasonably possible that the unrecognized tax benefits will decrease in the next twelve months by
approximately $112.
15. Contingencies
During 2005, Viskase Brasil Embalagens Ltda. (“Viskase Brazil”) received three tax assessments by
São Paulo tax authorities with respect to Viskase Brazil’s alleged failure to pay Value Added and
Sales and Services Tax (“ICMS”) levied on the importation of raw materials, and sales of goods in
and out of the State of São Paulo, and alleged improper credits taken, from 2000 through 2005. In
39
late December 2012, São Paulo issued a Decree announcing a Special Installment Program (“PEP
Program”) for eligible companies that wish to settle alleged ICMS liabilities arising prior to July 31,
2012. The PEP Program offers significant reductions in interest and penalties to companies that
choose to participate. Viskase Brazil is currently reviewing the terms of the PEP Program. Viskase
Brazil has vigorously defended against these assessments in administrative and/or judicial
proceedings since receipt, and continues to do so.
In addition, the Company from time to time is involved in various other legal proceedings, none of
which are expected to have a material adverse effect upon results of operations, cash flows or
financial condition.
16. Earnings Per Share
Following are the reconciliations of the numerators and denominators of the basic and
diluted EPS (in thousands, except for number of shares and per share amounts):
NUMERATOR:
Net income
Net income for basic and diluted EPS
DENOMINATOR:
Weighted average shares outstanding
for basic EPS
December
31, 2012
December
31, 2011
December
31, 2010
$7,875
$7,875
$7,944
$7,944
$15,619
$15,619
36,024,298
35,869,890
35,787,071
Effect of dilutive securities
747,503
1,140,251
1,332,919
Weighted average shares outstanding
for diluted EPS
36,771,801
37,010,141
37,119,990
Common stock equivalents, consisting of warrants and granted employee stock options
are dilutive and the effect of these dilutive securities has been included in weighted
average shares for diluted EPS using the treasury method for the Company.
17. Stock-Based Compensation (Dollars in Thousands, Except Per Share Amounts)
Stock-based compensation cost is measured at the grant date based on fair value of the award and
is recognized as an expense on a straight-line basis over the requisite service period, which is the
vesting period. Included in net income is a non-cash compensation expense of $1 for the year
ended December 31, 2012, $9 for the year ended December 31, 2011 and $324 for the year ended
December 31, 2010.
The fair values of the options granted during 2009, 2007 and 2005 were estimated on the date of
grant using the binomial option pricing model. The assumptions used and the estimated fair values
are as follows:
Estimate Fair Values
Expected term
Expected stock volatility
Risk-free interest rate
Expected forfeiture rate
Fair value per share
2009
10 years
35.10%
2.87%
0.00%
$0.09
2007
10 years
23.04%
4.39%
14.00%
$0.77
2005
10 years
14.88%
4.17%
35.00%
$1.09
40
In February 2009, the Company granted non-qualified stock options to its former chief financial
officer for the purchase of 300,000 shares of its common stock. Options were granted at the fair
market value at date of grant and are fully vested. The options were exercised during the second
quarter of 2012.
In October 2007, the Company granted non-qualified stock options to its current chief executive
officer for the purchase of 1,500,000 shares of its common stock under an employment agreement.
Options were granted at the fair market value at date of grant and are fully vested. The options for
the chief executive officer expire on October 29, 2017.
The Company has outstanding non-qualified stock options granted to other members of
management for the purchase of 255,000 shares of its common stock. Options were granted at, or
above, the fair market value at date of grant and are fully vested. The options granted to other
members of management expire ten years from the date of grant.
The Company's outstanding options were:
Weighted Average Weighted Average
Shares Under Weighted Average
Exercise Price
$
$
Outstanding, December 31, 2010
Vested and exercisable at Dec. 31, 2010
Granted
Exercised
Forfeited
Outstanding, December 31, 2011
Vested and exercisable at Dec. 31, 2011
Granted
Exercised
Forfeited
Outstanding, December 31, 2012
Vested and exercisable at Dec. 31, 2012
Option
2,055,000
1,855,000
-
-
-
2,055,000
1,955,000
-
350,000
5,000
1,700,000
1,700,000
Remaining
Contractual Life
93 months
80 months
-
-
-
68 months
67 months
-
-
-
54 months
54 months
Grant-Date
Fair Value
$
$
$
$
$
$
0.61
0.67
-
-
-
0.61
0.64
-
-
-
0.70
0.70
1.85
1.86
-
-
-
1.85
1.86
-
1.87
2.90
1.84
1.84
$
$
$
$
$
$
All stock options are vested and exercisable options as of December 31, 2012.
18. Research and Development Costs
Research and development costs are expensed as incurred and totaled $3,845, $3,718 and $3,569
for 2012, 2011, and 2010, respectively.
19. Related-Party Transactions
On January 15, 2010, Icahn Enterprises L.P. acquired approximately 71.4% of our outstanding
common stock from other affiliates of Carl C. Icahn.
Icahn Sourcing, LLC ("Icahn Sourcing") is an entity formed and controlled by Mr. Icahn in order to
maximize the potential buying power of a group of entities with which Mr. Icahn has a relationship in
negotiating with a wide range of suppliers of goods, services and tangible and intangible property at
negotiated rates. Viskase was a member of the buying group in 2012. Prior to December 31, 2012
Viskase did not pay Icahn Sourcing any fees or other amounts with respect to the buying group
arrangement.
In December, 2012, Icahn Sourcing advised Icahn Enterprises that effective January 1, 2013 it
would restructure its ownership and change its name to Insight Portfolio Group LLC (“Insight
Portfolio Group”). In connection with the restructuring, Viskase acquired a minority equity interest in
Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses
in 2013. A number of other entities with which Mr. Icahn has a relationship also acquired equity
interests in Insight Portfolio Group and also agreed to pay certain of Insight Portfolio Group’s
operating expenses in 2013.
41
During the years ended December 31, 2012, December 31, 2011 and December 31, 2010, the
Company purchased $60, $43 and $31, respectively, in telecommunication services in the ordinary
course of business from XO Communications, Inc., an affiliate of Icahn Enterprises L.P. The
Company believes that the purchase of the telecommunications services were on terms at least as
favorable as those that the Company would expect to negotiate with an unaffiliated party.
Icahn Enterprises L.P. was the lender on the Company’s Revolving Credit Facility as of December
31, 2012. The Company paid Icahn Enterprises L.P. service and unused commitment fees of $124
during each of the years ended December 31, 2010, 2011 and 2012. The Company believes that
the terms of the Revolving Credit Facility are at least as favorable as those that the Company would
expect to negotiate with an unaffiliated party. On April 8, 2013, the Company entered into the
Seventh Amendment to Loan and Security Agreement with Icahn Enterprises L.P., extending the
maturity date of the Viskase Revolving Credit Facility from January 31, 2014 to July 31, 2015. The
amendment included a fee of $125 for the extension.
20. Business Segment Information and Geographic Area Information
The Company primarily manufactures and sells cellulosic food casings. The Company’s operations
are primarily in North America, South America, Europe and Asia. Intercompany sales and charges
(including royalties) have been reflected as appropriate in the following information. Certain items
are maintained at the Company’s corporate headquarters and are not allocated geographically. They
include most of the Company’s debt and related interest expense and income tax benefits.
Reporting Segment Information:
Net sales
North America
South America
Europe
Asia
Other and eliminations
Operating income
North America
South America
Europe
Asia
Identifiable assets
North America
South America
Europe
Asia
2012
2011
2010
$188,514
47,059
140,891
7,122
(41,063)
$173,680
44,750
149,200
449
(28,708)
$166,222
38,356
135,651
-
(24,014)
$342,523
$339,371
$316,215
$23,532
1,420
9,550
435
$34,937
$18,007
3,948
13,918
(606)
$35,267
$18,968
4,101
13,948
-
$37,017
$177,862
36,757
108,383
23,259
$203,208
27,306
101,992
7,312
$212,894
25,030
99,051
-
$346,261
$339,818
$336,975
42
Net Sales by market
Emerging
Mature
Net Sales by country
United States
Brazil
Italy
Germany
France
Other international
2012
2011
2010
$158,477
184,046
$149,557
190,174
$132,775
183,440
$342,523
$339,731
$316,215
$101,632
28,115
30,996
12,318
13,078
156,384
$99,023
33,068
33,667
14,482
13,884
145,247
$98,738
25,619
29,461
14,134
12,252
136,011
$342,523
$339,371
$316,215
21. Interest Expense, Net
Net interest expense consisted of:
Interest expense
Less Capitalized interest
Interest expense, net
December 31, 2012
December 31, 2011
December 31, 2010
$22,868
(1,902)
$20,966
$22,786
(1,580)
$21,206
$21,289
(518)
$20,771
22. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of:
Minimum pension liability adjustment
Foreign currency translation adjustment
Accumulated other comprehensive loss
23. Subsequent Events
December 31, 2012
December 31, 2011
($57,504)
(8,760)
($66,264)
($46,360)
(10,272)
($56,632)
Viskase evaluated its December 31, 2012 consolidated financial statements for subsequent events
through April 10, 2013, the date the consolidated financial statements were available to be issued.
There were no subsequent events requiring disclosure identified.
43