GRAPHIC PACKAGING HOLDING COMPANY
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 001-33988
Graphic Packaging Holding Company
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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26-0405422
(I.R.S. employer
identification no.) |
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814 Livingston Court |
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Marietta, Georgia
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30067 |
(Address of principal executive offices)
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(Zip Code) |
(770) 644-3000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As of July 31, 2008, there were 342,521,411 shares of the registrants Common Stock, par
value $0.01 per share, outstanding.
Information Concerning Forward-Looking Statements
Certain statements regarding the expectations of Graphic Packaging Holding Company (GPHC and,
together with its subsidiaries, the Company), including, but not limited to, statements regarding
inflationary pressures, cost savings from its continuous improvement programs and manufacturing
rationalization, capital spending, interest expense, debt reduction,
pension plan contributions, price increases and freight allowances, in this report constitute
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Such statements are based on currently available operating, financial and competitive information
and are subject to various risks and uncertainties that could cause actual results to differ
materially from the Companys historical experience and its present expectations. These risks and
uncertainties include, but are not limited to, inflation of and volatility in raw material and
energy costs; the Companys substantial amount of debt; continuing pressure for lower cost
products; the Companys ability to implement its business strategies, including productivity
initiatives and cost reduction plans; currency movements and other risks of conducting business
internationally; the impact of regulatory and litigation matters, including those that impact the
Companys ability to protect and use its intellectual property; and the Companys ability to fully
integrate Altivity Packaging, LLC (Altivity) and fully realize anticipated benefits of combining
the operations of Graphic Packaging Corporation (GPC) and Altivity. Undue reliance should not be
placed on such forward-looking statements, as such statements speak only as of the date on which
they are made and the Company undertakes no obligation to update such statements. Additional
information regarding these and other risks is contained in Part I, Item 1A., Risk Factors of
GPCs Annual Report on Form 10-K and in GPC and the Companys other filings with the Securities and
Exchange Commission.
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
In millions, except share and per share amounts |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
15.8 |
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$ |
9.3 |
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Receivables, Net |
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427.0 |
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226.7 |
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Inventories |
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585.5 |
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318.6 |
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Other Current Assets |
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44.9 |
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31.7 |
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Assets Held for Sale |
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20.4 |
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Total Current Assets |
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1,093.6 |
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586.3 |
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Property, Plant and Equipment, Net |
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1,984.1 |
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1,376.2 |
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Goodwill |
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1,173.8 |
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641.5 |
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Intangible Assets, Net |
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687.5 |
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140.4 |
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Other Assets |
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51.0 |
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32.9 |
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Assets Held for Sale |
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28.9 |
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Total Assets |
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$ |
5,018.9 |
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$ |
2,777.3 |
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LIABILITIES |
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Current Liabilities: |
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Short Term Debt and Current Portion of Long Term Debt |
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$ |
23.3 |
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$ |
6.6 |
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Accounts Payable |
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343.1 |
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222.4 |
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Other Accrued Liabilities |
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260.6 |
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177.8 |
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Liabilities Held for Sale |
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21.7 |
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Total Current Liabilities |
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648.7 |
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406.8 |
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Long Term Debt |
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3,084.9 |
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1,871.8 |
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Deferred Tax Liabilities |
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155.2 |
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141.5 |
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Accrued Pension and Postretirement Benefits |
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179.0 |
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170.3 |
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Other Noncurrent Liabilities |
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47.1 |
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42.9 |
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Total Liabilities |
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4,114.9 |
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2,633.3 |
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SHAREHOLDERS EQUITY |
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Preferred Stock, par value $.01 per share; 100,000,000
shares authorized; no shares issued or outstanding |
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Common Stock, par value $.01 per share; 1,000,000,000
shares authorized; 342,253,121 and 200,978,569 shares
issued and outstanding at June 30, 2008 and December
31, 2007, respectively |
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3.4 |
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2.0 |
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Capital in Excess of Par Value |
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1,954.6 |
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1,191.6 |
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Accumulated Deficit |
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(1,003.3 |
) |
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(975.7 |
) |
Accumulated Other Comprehensive Loss |
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(50.7 |
) |
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(73.9 |
) |
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Total Shareholders Equity |
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904.0 |
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144.0 |
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Total Liabilities and Shareholders Equity |
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$ |
5,018.9 |
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$ |
2,777.3 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
In millions, except per share amounts |
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2008 |
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2007 |
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2008 |
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2007 |
Net Sales |
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$ |
1,141.7 |
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$ |
623.1 |
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$ |
1,866.0 |
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$ |
1,207.2 |
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Cost of Sales |
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998.1 |
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541.2 |
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1,635.8 |
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1,069.3 |
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Selling, General and Administrative |
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89.7 |
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43.2 |
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151.0 |
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85.4 |
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Research, Development and Engineering |
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1.9 |
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2.1 |
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3.9 |
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4.5 |
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Other Income, Net |
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(9.9 |
) |
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(2.4 |
) |
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(12.1 |
) |
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(3.8 |
) |
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Income from Operations |
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61.9 |
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39.0 |
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87.4 |
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51.8 |
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Interest Income |
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0.4 |
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0.1 |
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0.5 |
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0.3 |
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Interest Expense |
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(57.5 |
) |
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(43.1 |
) |
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(100.3 |
) |
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(86.4 |
) |
Loss on Early Extinguishment of Debt |
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(9.5 |
) |
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(9.5 |
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Loss before Income Taxes and Equity in Net Earnings of Affiliates |
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4.8 |
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(13.5 |
) |
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(12.4 |
) |
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(43.8 |
) |
Income Tax Expense |
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(9.6 |
) |
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(6.4 |
) |
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(16.0 |
) |
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(13.8 |
) |
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Loss before Equity in Net Earnings of Affiliates |
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(4.8 |
) |
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(19.9 |
) |
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(28.4 |
) |
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(57.6 |
) |
Equity in Net Earnings of Affiliates |
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0.5 |
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0.3 |
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0.8 |
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0.5 |
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Loss from Continuing Operations |
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(4.3 |
) |
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(19.6 |
) |
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(27.6 |
) |
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(57.1 |
) |
Loss from Discontinued Operations, Net of Taxes |
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(1.7 |
) |
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(2.9 |
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Net Loss |
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$ |
(4.3 |
) |
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$ |
(21.3 |
) |
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$ |
(27.6 |
) |
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$ |
(60.0 |
) |
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Loss Per Share Basic
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Continuing Operations |
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$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
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$ |
(0.10 |
) |
|
$ |
(0.28 |
) |
Discontinued Operations |
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|
(0.01 |
) |
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|
(0.02 |
) |
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Total |
|
$ |
(0.01 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.10 |
) |
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$ |
(0.30 |
) |
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Loss Per Share Diluted |
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Continuing Operations |
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$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.28 |
) |
Discontinued Operations |
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|
|
|
|
(0.01 |
) |
|
|
|
|
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|
(0.02 |
) |
|
Total |
|
$ |
(0.01 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.10 |
) |
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$ |
(0.30 |
) |
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|
Weighted Average Number of Shares Outstanding Basic |
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342.9 |
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|
201.8 |
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|
288.7 |
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|
201.5 |
|
Weighted Average Number of Shares Outstanding Diluted |
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342.9 |
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|
201.8 |
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|
288.7 |
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|
201.5 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, |
In millions |
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2008 |
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net Loss |
|
$ |
(27.6 |
) |
|
$ |
(60.0 |
) |
Noncash Items Included in Net Loss: |
|
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Depreciation and Amortization |
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|
117.7 |
|
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|
103.5 |
|
Loss on Early Extinguishment of Debt |
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|
|
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|
9.5 |
|
Deferred Income Taxes |
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|
13.2 |
|
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|
9.2 |
|
Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions |
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|
(20.6 |
) |
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|
6.2 |
|
Amortization of Deferred Debt Issuance Costs |
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|
3.7 |
|
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|
4.2 |
|
Other, Net |
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|
14.4 |
|
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|
4.2 |
|
Changes in Operating Assets & Liabilities |
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|
(84.8 |
) |
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|
(67.8 |
) |
|
Net Cash Provided by Operating Activities |
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|
16.0 |
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|
9.0 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital Spending |
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(83.3 |
) |
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|
(42.6 |
) |
Acquisition Costs Related to Altivity |
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(29.8 |
) |
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|
Cash Acquired Related to Altivity |
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60.2 |
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Proceeds from Disposal of Property |
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0.7 |
|
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|
Other, Net |
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(2.3 |
) |
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|
(1.6 |
) |
|
Net Cash Used in Investing Activities |
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(54.5 |
) |
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(44.2 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from Issuance of Debt |
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|
1,200.0 |
|
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|
1,135.0 |
|
Payments on Debt |
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|
(1,174.5 |
) |
|
|
(1,135.0 |
) |
Borrowings under Revolving Credit Facilities |
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|
381.8 |
|
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|
466.9 |
|
Payments on Revolving Credit Facilities |
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|
(345.9 |
) |
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|
(421.0 |
) |
Debt Issuance Costs |
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|
(16.3 |
) |
|
|
(7.0 |
) |
Other, Net |
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|
(0.6 |
) |
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|
0.5 |
|
|
Net Cash Provided by Financing Activities |
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|
44.5 |
|
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|
39.4 |
|
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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|
0.5 |
|
|
|
0.3 |
|
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|
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|
Net Increase in Cash and Cash Equivalents |
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|
6.5 |
|
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|
4.5 |
|
Cash and Cash Equivalents at Beginning of Period |
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|
9.3 |
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|
7.3 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
15.8 |
|
|
$ |
11.8 |
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
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Accumulated |
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|
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Capital in |
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Other |
|
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|
Common Stock |
|
Excess of |
|
Accumulated |
|
Comprehensive |
|
Comprehensive |
In millions, except share amounts |
|
Shares |
|
Amount |
|
Par Value |
|
Deficit |
|
Income (Loss) |
|
Income (Loss) |
|
Balances at December 31, 2006 |
|
|
200,584,591 |
|
|
$ |
2.0 |
|
|
$ |
1,186.8 |
|
|
$ |
(901.1 |
) |
|
$ |
(106.0 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74.6 |
) |
|
|
|
|
|
|
(74.6 |
) |
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Derivative Instruments Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.5 |
) |
|
|
(2.5 |
) |
Pension Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.2 |
|
|
|
25.2 |
|
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
3.3 |
|
|
|
3.3 |
|
Postemployment Benefit Plans |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
1.5 |
|
Currency Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
|
4.6 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(42.5 |
) |
Issuance of Common Stock |
|
|
393,978 |
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation |
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
200,978,569 |
|
|
$ |
2.0 |
|
|
$ |
1,191.6 |
|
|
$ |
(975.7 |
) |
|
$ |
(73.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27.6 |
) |
|
|
|
|
|
$ |
(27.6 |
) |
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Derivative Instruments Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.6 |
|
|
|
14.6 |
|
Pension Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
|
2.2 |
|
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Postemployment Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
Currency Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4.4 |
) |
Issuance of Common Stock |
|
|
141,274,552 |
|
|
|
1.4 |
|
|
|
764.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation |
|
|
|
|
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008 |
|
|
342,253,121 |
|
|
$ |
3.4 |
|
|
$ |
1,954.6 |
|
|
$ |
(1,003.3 |
) |
|
$ |
(50.7 |
) |
|
|
|
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
7
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 ORGANIZATION
On March 10, 2008, the businesses of Graphic Packaging Corporation (GPC) and Altivity Packaging,
LLC (Altivity) were combined through a series of transactions. A new publicly-traded parent
company, Graphic Packaging Holding Company (GPHC and, together with its subsidiaries, the
Company) was formed, and all of the equity interests in Altivitys parent company were
contributed to GPHC in exchange for 139,445,038 shares of GPHCs common stock, par value $0.01.
Stockholders of GPC received one share of GPHC common stock for each share of GPC common stock held
immediately prior to the transactions. Subsequently, all of the equity interests in Altivitys
parent company were contributed to GPHCs primary operating company, Graphic Packaging
International, Inc. (GPII). Together, these transactions are referred to herein as the Altivity
Transaction.
For accounting purposes, the Altivity Transaction was accounted for as a purchase by GPHC under the
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations, (SFAS No. 141). Under the purchase method of accounting, the
assets and liabilities of Altivity were recorded, as of the date of the closing of the Altivity
Transaction, at their respective fair values and added to those of GPC. The difference between the
purchase price and the fair market values of the assets acquired and liabilities assumed of
Altivity was recorded as goodwill. The historical financial statements of GPC became the
historical financial statements of GPHC. The accompanying consolidated statement of operations for
the six months ended June 30, 2008 includes three months and approximately three weeks of Altivity
and six months of GPCs results. See Note 3 Altivity Transaction.
The Company is a leading provider of packaging solutions for a wide variety of products to food,
beverage and other consumer products companies. Additionally, the Company is one of the largest
producers of folding cartons and holds a leading market position in coated-recycled boxboard and
specialty bag packaging. The Companys customers include some of the most widely recognized
companies in the world. The Company strives to provide its customers with packaging solutions
designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its
low-cost paperboard mills and converting plants, its proprietary carton designs and packaging
machines, and its commitment to customer service.
GPHC conducts no significant business and has no independent assets or operations other than its
ownership of GPC, GPII and Altivity. GPHC fully and unconditionally guarantees substantially all
of the public debt.
NOTE 2 ACCOUNTING POLICIES
Basis of Presentation
The Companys Condensed Consolidated Financial Statements include all subsidiaries in which the
Company has the ability to exercise direct or indirect control over operating and financial
policies. Intercompany transactions and balances are eliminated in consolidation.
In the Companys opinion, the accompanying financial statements contain all normal recurring
adjustments necessary to present fairly the financial position, results of operations and cash
flows for the interim periods. The Companys year end Condensed Consolidated Balance Sheet data was
derived from audited financial statements. The accompanying unaudited financial statements have
been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do
not include all the information required by accounting principles generally accepted in the United
States of America for complete financial statements. Therefore, these financial statements should
be read in conjunction with GPCs Annual Report on Form 10-K for the year ended December 31, 2007.
In addition, the preparation of the Condensed Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements
and the reported amounts of revenues and expenses during the reporting period. Actual amounts could
differ from those estimates and changes in these statements are recorded as known.
8
The Company has reclassified the presentation of certain prior period information to conform to the
current presentation format. This includes the reclassification of warehousing expense from
selling, general and administrative expense to cost of sales and the reclassification of the
amortization of intangibles from other expense (income), net to either selling, general and
administrative expense or cost of sales depending on the nature of the underlying assets. These
reclassifications had no impact on the consolidated balance sheets, operating income, consolidated
statements of shareholders equity or consolidated statements of cash flows and had an immaterial
impact on certain captions on the consolidated statements of operations.
On March 5, 2008, the United States Department of Justice issued a Consent Decree that required the
divesture of two mills, as a condition of the Altivity Transaction. In accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classified the
assets and liabilities related to the mills as Assets Held for Sale and Liabilities Held for Sale.
See Note 13 Subsequent Event.
The results of operations for Graphic Packaging International Sweden (GP-Sweden), the Companys
discontinued operations, have been eliminated from the Companys continuing operations and
classified as discontinued operations for each period presented within the Companys condensed
consolidated statement of operations. The Company has not reclassified assets and liabilities
related to discontinued operations as Assets Held for Sale or Liabilities Held for Sale. See Note
12 Discontinued Operations.
For a summary of the Companys significant accounting policies, please refer to GPCs Annual Report
on Form 10-K for the year ended December 31, 2007.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157).
SFAS No. 157 establishes a common definition for fair value to be applied to US generally accepted
accounting principles requiring use of fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued FASB Staff Position No. 157-2, Partial Deferral of the Effective
Date of Statement 157 (FSP No. 157-2). FSP 157-2 delays the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company has adopted SFAS No. 157 as of
January 1, 2008 related to financial assets and financial liabilities. See Note 10 Fair Value
Measurement. The Company is currently evaluating the impact of SFAS No. 157 related to
nonfinancial assets and nonfinancial liabilities on the Companys financial position, results of
operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115, (SFAS No. 159)
which is effective for fiscal years beginning after November 15, 2007. This statement permits an
entity to choose to measure many financial instruments and certain other items at fair value on
specified election dates. The Company adopted SFAS No. 159 effective January 1, 2008 and did not
elect the fair value option established by SFAS No. 159. As such, the adoption had no impact on
the Companys financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS No.
141R) which is effective for fiscal years beginning after December 15, 2008. SFAS No. 141R
establishes principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. The impact on the Company of adopting SFAS No 141R will depend on the
nature, terms and size of the business combinations completed after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51, (SFAS No. 160) which is effective for fiscal years
beginning after December 15, 2008. SFAS No. 160 amends Accounting Research Bulletin (ARB No. 51)
to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It
9
also amends certain of ARB No. 51s consolidation procedures for consistency with the requirements
of SFAS No. 141R. The Company is currently evaluating the impact of SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133, (SFAS No. 161) which is effective for
fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires enhanced
disclosures of derivative instruments and hedging activities. These requirements include the
disclosure of the fair values of derivative instruments and their gains and losses in a tabular
format.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP No. 142-3). FSP No. 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). The intent of FSP 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141R and other U.S. generally accepted
accounting principles. FSP No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. The Company is
currently evaluating the impact of FSP No. 142-3.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, (SFAS No. 162) which is
effective sixty days following the United States Securities and Exchange
Commissions approval of the Public Company Accounting Oversight Boards amendments to Interim
Auditing Standards (AU) Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with accounting principles generally
accepted in the U.S. The adoption of SFAS No. 162 is not expected to have any impact on the
Companys financial position, results of operations and cash flows.
NOTE 3 ALTIVITY TRANSACTION
On March 10, 2008, the businesses of GPC and Altivity were combined in a transaction accounted for
under SFAS No. 141. Altivity was the largest privately-held producer of folding cartons and a
market leader in all of its major businesses, including coated-recycled boxboard and bag packaging.
Altivity operates six recycled boxboard mills and 51 consumer product packaging facilities in
North America.
In connection with the Altivity Transaction, all of the equity interests in Altivitys parent
company were contributed to GPHC in exchange for 139,445,038 shares of GPHCs common stock, or
approximately 40.6 percent of the Companys outstanding shares of common stock. Stockholders of
GPC received one share of GPHC common stock for each share of GPC common stock held immediately
prior to the transactions. Subsequently, all of the equity interests in Altivitys parent company
were contributed to GPHCs primary operating company, GPII.
The Company determined that the relative outstanding share ownership, voting rights, and the
composition of the governing body and senior management positions require GPC to be the acquiring
entity for accounting purposes, resulting in the historical financial statements of GPC becoming
the historical financial statements of the Company. Under the purchase method of accounting, the
assets and liabilities of Altivity were recorded, as of the date of the closing of the Altivity
Transaction, at their respective fair values and added to those of GPC. The purchase price for the
acquisition was based on the average closing price of the Companys common stock on the NYSE for
two days prior to, including, and two days subsequent to the public announcement of the transaction
of $5.47 per share and capitalized transaction costs. The purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair market values at the date of
the Altivity Transaction. The preliminary purchase price allocation is as follows:
10
|
|
|
|
|
In millions |
|
|
|
|
|
Purchase Price |
|
$ |
762.8 |
|
Acquisition Cost |
|
|
29.8 |
|
Assumed Debt |
|
|
1,167.6 |
|
|
Total Purchase Consideration |
|
$ |
1,960.2 |
|
|
|
|
|
|
|
In millions |
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
60.2 |
|
Receivables, Net |
|
|
181.2 |
|
Inventories |
|
|
263.7 |
|
Prepaids |
|
|
13.1 |
|
Property, Plant and Equipment |
|
|
650.8 |
|
Intangible Assets |
|
|
561.9 |
|
Other Assets |
|
|
4.7 |
|
|
Total Assets Acquired |
|
|
1,735.6 |
|
|
|
|
|
|
Current Liabilities, Excluding Current Portion of Long Term Debt |
|
|
243.7 |
|
Pension and Postemployment Benefits |
|
|
32.8 |
|
Other Noncurrent Liabilities |
|
|
31.2 |
|
|
Total Liabilities Assumed |
|
|
307.7 |
|
|
Net Assets Acquired |
|
|
1,427.9 |
|
|
Goodwill |
|
|
532.3 |
|
|
Total Estimated Fair Value of Net Assets Acquired |
|
$ |
1,960.2 |
|
|
As of June 30, 2008, the preliminary purchase accounting is still subject to final adjustment and
could change materially in subsequent periods. The Company has not finalized its review of all
Altivity environmental matters and other liabilities. The Company has plans to close certain
facilities and has established restructuring reserves that are considered liabilities assumed in
the Altivity Transaction. See Note 11 Restructuring Reserves.
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated
to goodwill. Management believes that the portion of the purchase price attributable to goodwill
represents benefits expected as a result of the acquisition, including 1) significant
cost-reduction opportunities and synergies by combining sales and support functions and eliminating
duplicate corporate functions, 2) diversifying the Companys product line and providing new
opportunities for top-line growth, which will allow the Company to compete effectively in the
global packaging market, and 3) expansion of the Companys manufacturing system which will now
include expanded folding carton converting operations, multi-wall bag facilities, flexible
packaging facilities, ink manufacturing facilities, and label facilities.
The following table shows the allocation of goodwill by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard |
|
Multi-wall |
|
Specialty |
|
|
In millions |
|
Packaging |
|
Bag |
|
Packaging |
|
Total |
|
Balance at June 30, 2008 |
|
$ |
379.8 |
|
|
$ |
60.9 |
|
|
$ |
91.6 |
|
|
$ |
532.3 |
|
|
The Company expects to deduct approximately $440 million of goodwill for tax purposes.
The following table summarizes acquired intangibles:
|
|
|
|
|
In millions |
|
|
|
|
|
Customer Relationships |
|
$ |
546.4 |
|
Non-Compete Agreement |
|
|
9.0 |
|
Trademarks and Patents |
|
|
7.5 |
|
Lease and Supply Contracts |
|
|
(1.0 |
) |
|
Total Fair Market Value of Intangible Assets |
|
$ |
561.9 |
|
|
The fair value of intangible assets will be amortized on a straight-line basis over the remaining
useful life of 17 years for customer relationships, 4 years for trademarks and patents, and the
remaining contractual period for the non-compete, lease and supply contracts. Amortization expense
is estimated to be approximately $34 million for
11
each of the next five years.
The following unaudited pro forma consolidated results of operations assume that the acquisition of
Altivity occurred as of the beginning of the periods presented. This pro forma data is based on
historical information and does not necessarily reflect the actual results that would have
occurred, nor is it indicative of future results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Sales |
|
$ |
1,141.7 |
|
|
$ |
1,115.9 |
|
|
$ |
2,257.1 |
|
|
$ |
2,185.5 |
|
Net Income (Loss) |
|
|
4.8 |
|
|
|
(22.6 |
) |
|
|
(17.0 |
) |
|
|
(70.3 |
) |
Income (Loss) Per Share Basic |
|
|
0.01 |
|
|
|
(0.07 |
) |
|
|
(0.05 |
) |
|
|
(0.21 |
) |
Income (Loss) Per Share Diluted |
|
|
0.01 |
|
|
|
(0.07 |
) |
|
|
(0.05 |
) |
|
|
(0.21 |
) |
|
NOTE 4 STOCK INCENTIVE PLANS
GPC had eight equity compensation plans, all of which were assumed by the Company pursuant to the
Altivity Transaction. The Companys only active plan as of June 30, 2008 is the Graphic Packaging
Corporation 2004 Stock and Incentive Compensation Plan (2004 Plan), pursuant to which the Company
may grant stock options, stock appreciation rights, restricted stock, restricted stock units and
other types of stock-based awards to employees and directors of the Company. Stock options and
other awards granted under all of the Companys plans generally vest and expire in accordance with
terms established at the time of grant.
Stock-based compensation expense for all share-based payment awards granted, after the Companys
adoption of SFAS No. 123R, Share-Based Payment (SFAS No. 123R) on January 1, 2006, is based on
the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.
Stock Options
GPC and the Company have not granted any stock options since 2004. During the six months ended
June 30, 2008, no stock options were exercised and 5,270,056 stock options were cancelled. The
total number of shares subject to options at June 30, 2008 was 7,460,182 at a weighted average
exercise price of $7.18.
Stock Awards, Restricted Stock and Restricted Stock Units
The Companys 2004 Plan permits the grant of stock awards, restricted stock and restricted stock
units (RSUs). All restricted stock and RSUs vest and become unrestricted in one to five years
from date of grant. Upon vesting, RSUs are payable 50% in cash and 50% in shares of common stock.
Data concerning RSUs and stock awards granted in the first six months of 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Grant Date Fair |
|
|
Shares |
|
Value Per Share |
|
RSUs Employees |
|
|
1,128,628 |
|
|
$ |
2.73 |
|
Stock Awards Board of Directors |
|
|
165,407 |
|
|
$ |
2.66 |
|
The value of the RSUs is based on the market value of the Companys common stock on the date of
grant. The RSUs payable in cash are subject to variable accounting and marked to market
accordingly. The RSUs payable in cash are recorded as liabilities, whereas the RSUs payable in
shares are recorded in Shareholders Equity.
The value of stock awards is based on the market value of the Companys common stock at the date of
grant and recorded in Shareholders Equity.
During the first six months of 2008, the Company also issued 25,123 shares of phantom stock,
representing compensation deferred by one of its directors. These shares of phantom stock are fully
vested on the date of grant
12
and are payable upon termination of service as a director. The Company also has an obligation to
issue 57,215 shares in payment of employee deferred compensation.
During the six months ended June 30, 2008 and 2007, $6.4 million and $5.7 million was charged to
compensation expense, respectively. Of the amount charged to expense during 2008, $7.1 million was
attributable to the accelerated vesting of RSUs and other payments triggered by the change of
control resulting from the Altivity Transaction on March 10, 2008.
The unrecognized expense at June 30, 2008 is approximately $2 million and is expected to be
recognized over a weighted average period of two years.
NOTE 5 INVENTORIES
Inventories by major class:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
In millions |
|
2008 |
|
2007 |
|
Finished goods |
|
$ |
320.8 |
|
|
$ |
157.8 |
|
Work in progress |
|
|
56.2 |
|
|
|
27.9 |
|
Raw materials |
|
|
136.8 |
|
|
|
79.8 |
|
Supplies |
|
|
78.7 |
|
|
|
58.9 |
|
|
|
|
|
592.5 |
|
|
|
324.4 |
|
Less Allowances |
|
|
7.0 |
|
|
|
5.8 |
|
|
Total |
|
$ |
585.5 |
|
|
$ |
318.6 |
|
|
NOTE 6 ENVIRONMENTAL AND LEGAL MATTERS
Environmental Matters
The Company is subject to a broad range of foreign, federal, state and local environmental, health
and safety laws and regulations, including those governing discharges to air, soil and water, the
management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the
investigation and remediation of contamination resulting from historical site operations and
releases of hazardous substances, and the health and safety of employees. Compliance initiatives
could result in significant costs, which could negatively impact the Companys financial position,
results of operations or cash flows. Any failure to comply with such laws and regulations or any
permits and authorizations required thereunder could subject the Company to fines, corrective
action or other sanctions.
In addition, some of the Companys current and former facilities are the subject of environmental
investigations and remediations resulting from historical operations and the release of hazardous
substances or other constituents. Some current and former facilities have a history of industrial
usage for which investigation and remediation obligations may be imposed in the future or for which
indemnification claims may be asserted against the Company. Also, potential future closures or
sales of facilities may necessitate further investigation and may result in future remediation at
those facilities.
During the first quarter of 2006, the Company self-reported certain violations of its Title V
permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the Louisiana
Department of Environmental Quality (the LADEQ). The violations relate to the collection,
treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense
in the first quarter of 2006 for compliance costs to correct the technical issues causing the
Title V permit violations. The Company received a consolidated Compliance Order and notice of
potential penalty dated July 5, 2006 from the LADEQ indicating that the Company may be required to
pay civil penalties for violations that occurred from 2001 through 2005. The Company believes that
the LADEQ will assess a penalty of approximately $0.3 million to be paid partially in cash and
partially through the completion of beneficial environmental projects.
At the request of the County Administrative Board of Östergötland, Sweden, the Company conducted a
risk
13
classification of its mill property located in Norrköping, Sweden. Based on the information
collected through this activity, the Company determined that some remediation of the site is
reasonably probable and recorded a $3.0 million reserve in the third quarter of 2007. Pursuant to
the Sale and Purchase Agreement dated October 16, 2007 between Graphic Packaging International
Holding Sweden AB (the Seller) and Lagrumment December nr 1031 Aktiebolg under which the
Companys Swedish operations were sold, the Seller retains liability for certain environmental
claims after the sale.
On October 8, 2007, the Company received a notice from the United States Environmental Protection
Agency (the EPA) indicating that it is a potentially responsible party for the remedial
investigation and feasibility study to be conducted at the Devils Swamp Lake site in East Baton
Rouge Parish, Louisiana. The Company expects to enter into negotiations with the EPA regarding its
potential responsibility and liability, but it is too early in the investigation process to
quantify possible costs with respect to such site.
In connection with the Altivity Transaction, the Company acquired several sites with on-going
administrative proceedings related to air emission and water discharge permit exceedances and soil
contamination issues. The Company is currently in the process of reviewing the facts and status of
such proceedings, but in all cases it is too early in the proceedings to be able to determine
liability and reasonably estimate costs relating to such proceedings. The Company does not
believe, however, that any of the proceedings will result in material liabilities or penalties.
The Company has established reserves for those facilities or issues where liability is probable and
the costs are reasonably estimable. Except for the Title V permit issue, for which a penalty has
been estimated, it is too early in the investigation and regulatory process to make a determination
of the probability of liability and reasonably estimate costs. Nevertheless, the Company believes
that the amounts accrued for all of its loss contingencies, and the reasonably possible loss beyond
the amounts accrued, are not material to the Companys financial position, results of operations or
cash flows. The Company cannot estimate with certainty other future corrective compliance,
investigation or remediation costs, all of which the Company currently considers to be remote.
Costs relating to historical usage or indemnification claims that the Company considers to be
reasonably possible are not quantifiable at this time. The Company will continue to monitor
environmental issues at each of its facilities and will revise its accruals, estimates and
disclosures relating to past, present and future operations as additional information is obtained.
Legal Matters
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business.
Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company
does not believe that disposition of these lawsuits will have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows.
NOTE 7 BUSINESS SEGMENT INFORMATION
As a result of the Altivity Transaction, the Companys reporting segments were revised as follows:
the Companys containerboard/other was combined into the paperboard packaging segment and
additionally, two new segments were created, multi-wall bag and specialty packaging. These
segments are evaluated by the chief operating decision maker based primarily on income from
operations. The Companys reportable segments are based upon strategic business units that offer
different products. The paperboard packaging segment is highly integrated and includes a system of
mills and plants that produces a broad range of paperboard grades convertible into folding cartons.
Folding cartons are used primarily to protect products, such as food, detergents, paper products,
beverages, and health and beauty aids, while providing point of purchase advertising. The
paperboard packaging business segment includes the design, manufacture and installation of
packaging machinery related to the assembly of cartons and the production and sale of linerboard,
corrugating medium and kraft paper from paperboard mills in the U.S. The multi-wall bag business
segment converts kraft and specialty paper into multi-wall bags, consumer bags and specialty retail
bags. The bags are designed to ship and protect a wide range of industrial and consumer products
including fertilizers, chemicals, concrete and pet and food products. The specialty packaging
business segment primarily includes flexible packaging, label solutions, laminations, and ink
coatings. This segment converts a wide variety of technologically advanced films for use in the
food, pharmaceutical and industrial end-markets. Flexible packaging paper and metallicized paper
labels and heat transfer labels are used in a wide range of consumer applications.
14
Segment disclosures contained in this Form 10-Q have been revised to conform to the new
presentation for all reporting periods.
Business segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
NET SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
928.5 |
|
|
$ |
604.7 |
|
|
$ |
1,585.6 |
|
|
$ |
1,169.7 |
|
Multi-wall Bag |
|
|
166.5 |
|
|
|
18.4 |
|
|
|
221.5 |
|
|
|
37.5 |
|
Specialty Packaging |
|
|
46.7 |
|
|
|
|
|
|
|
58.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,141.7 |
|
|
$ |
623.1 |
|
|
$ |
1,866.0 |
|
|
$ |
1,207.2 |
|
|
|
INCOME (LOSS) FROM OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
82.2 |
|
|
$ |
46.4 |
|
|
$ |
141.5 |
|
|
$ |
68.2 |
|
Multi-wall Bag |
|
|
9.3 |
|
|
|
0.9 |
|
|
|
14.0 |
|
|
|
1.8 |
|
Specialty Packaging |
|
|
3.3 |
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
Corporate |
|
|
(32.9 |
) |
|
|
(8.3 |
) |
|
|
(71.8 |
) |
|
|
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
61.9 |
|
|
$ |
39.0 |
|
|
$ |
87.4 |
|
|
$ |
51.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
In millions |
|
2008 |
|
2007 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
3,936.8 |
|
|
$ |
2,676.4 |
|
Multi-wall Bag |
|
|
490.4 |
|
|
|
29.7 |
|
Specialty Packaging |
|
|
219.6 |
|
|
|
|
|
Corporate |
|
|
372.1 |
|
|
|
71.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,018.9 |
|
|
$ |
2,777.3 |
|
|
NOTE 8 PENSIONS AND OTHER POSTRETIREMENT BENEFITS
GPC maintains defined benefit pension plans for substantially all of its North American employees.
Benefits are based on years of service and average base compensation levels over a period of years.
Effective January 1, 2008, the plans were amended to exclude salaried and non-union hourly
employees hired on or after January 1, 2008.
GPC also sponsors various postretirement health care plans that provide medical and life insurance
coverage to eligible salaried and hourly retired employees and their dependents. One of the
salaried plans closed to new employees who began employment after December 31, 1993 and another
salaried plan closed to new employees who began after June 15, 1999.
Altivity sponsors noncontributory defined-benefit pension plans covering substantially all U.S.
hourly employees. Altivity also sponsors noncontributory and contributory defined-benefit plans for
its Canadian operations. Certain salaried and hourly employees also participate in health care and
postretirement defined benefit plans.
The Companys funding policies with respect to its pension plans are to contribute funds to trusts
as necessary to at least meet the minimum funding requirements. Plan assets are invested in
equities, fixed income securities and cash.
15
Pension and Postretirement Expense
The pension and postretirement expenses related to the North American plans consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Postretirement Benefits |
|
|
Three Months |
|
Six Months |
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Service Cost |
|
$ |
4.5 |
|
|
$ |
3.4 |
|
|
$ |
8.3 |
|
|
$ |
6.8 |
|
|
$ |
0.4 |
|
|
$ |
0.3 |
|
|
$ |
0.7 |
|
|
$ |
0.6 |
|
Interest Cost |
|
|
9.9 |
|
|
|
8.7 |
|
|
|
19.2 |
|
|
|
17.4 |
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
1.7 |
|
|
|
1.2 |
|
Expected Return on Plan Assets |
|
|
(10.4 |
) |
|
|
(9.0 |
) |
|
|
(20.4 |
) |
|
|
(18.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial Loss |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
Net Periodic Cost |
|
$ |
5.1 |
|
|
$ |
4.4 |
|
|
$ |
9.4 |
|
|
$ |
8.8 |
|
|
$ |
1.2 |
|
|
$ |
0.9 |
|
|
$ |
2.2 |
|
|
$ |
1.8 |
|
|
The Company made contributions of $30.2 million and $5.4 million to its pension plans during the
first six months of 2008 and 2007, respectively. The Company expects to make contributions of
approximately $60 million for the full year 2008. During 2007, the Company made $24.9 million of
contributions to its U.S. pension plans.
The Company made postretirement benefit payments of $1.1 million and $0.3 million during the first
six months of 2008 and 2007, respectively. The Company estimates its postretirement benefit
payments for the full year 2008 to be approximately $3 million. During 2007, the Company made
postretirement benefit payments of $1.0 million.
NOTE 9 DEBT
On May 16, 2007, the Company entered into a new $1,355 million Credit Agreement (Credit
Agreement). The Credit Agreement provides for a $300 million revolving credit facility due on May
16, 2013 and a $1,055 million term loan facility due on May 16, 2014. The revolving credit facility
bears interest at a rate of LIBOR plus 225 basis points and the term loan facility bears interest
at a rate of LIBOR plus 200 basis points. The facilities under the Credit Agreement replace the
revolving credit facility due on August 8, 2009 and the term loan due on August 8, 2010 under the
Companys previous senior secured credit agreement. The Companys obligations under the new Credit
Agreement are collateralized by substantially all of the Companys domestic assets.
In connection with the May 16, 2007 replacement of the Companys previous revolving credit and term
loan facilities and in accordance with Emerging Issues Task Force (EITF) 96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments and EITF 98-14, Debtors
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements, the Company recorded a
charge of $9.5 million, which represented a portion of the unamortized deferred financing costs
associated with the previous revolving credit and term loan facilities. In connection with the new
Credit Agreement, the Company recorded approximately $7 million of deferred financing costs.
On March 10, 2008, the Company entered into Amendment No.1 and Amendment No.2 to the Credit
Agreement. Under such amendments, the Company obtained (i) a new $1,200 million term loan
facility, due on May 16, 2014, to refinance the outstanding amounts under Altivitys parent
companys existing first and second lien credit facilities and (ii) an increase to the Companys
existing revolving credit facility to $400 million due on May 16, 2013. The Companys existing
$1,055 million term loan facility will remain in place. The new term loan bears interest at LIBOR
plus 275 basis points. The Companys weighted average interest rate on senior secured term debt
will equal approximately LIBOR plus 237.5 basis points. In connection with the new term loan and
revolver increase, the Company recorded approximately $16 million of deferred financing costs.
16
Long-Term Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
In millions |
|
2008 |
|
2007 |
|
Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 |
|
$ |
425.0 |
|
|
$ |
425.0 |
|
Senior Subordinated Notes with interest payable semi-annually at 9.5%,
payable in 2013 |
|
|
425.0 |
|
|
|
425.0 |
|
Senior Secured Term Loan Facility with interest payable at various dates
at floating rates (4.78% at June 30, 2008) payable through 2014 |
|
|
1,010.0 |
|
|
|
1,010.0 |
|
Senior Secured Term Loan Facility with interest payable at various dates
at floating rates (5.53% at June 30, 2008) payable through 2014 |
|
|
1,194.0 |
|
|
|
|
|
Senior Secured Revolving Facility with interest payable at various dates
at floating rates (5.03% at June 30, 2008) payable in 2013 |
|
|
47.3 |
|
|
|
11.0 |
|
Other |
|
|
0.8 |
|
|
|
1.0 |
|
|
|
|
|
3,102.1 |
|
|
|
1,872.0 |
|
Less, current portion |
|
|
17.2 |
|
|
|
0.2 |
|
|
Total |
|
$ |
3,084.9 |
|
|
$ |
1,871.8 |
|
|
At June 30, 2008, the Company and its U.S. and international subsidiaries had the following
commitments, amounts outstanding and amounts available under revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount of |
|
Total Amount |
|
Total Amount |
In millions |
|
Commitments |
|
Outstanding |
|
Available(a) |
|
Revolving Credit Facility |
|
$ |
400.0 |
|
|
$ |
47.3 |
|
|
$ |
319.1 |
|
International Facilities |
|
|
16.8 |
|
|
|
6.1 |
|
|
|
10.7 |
|
|
Total |
|
$ |
416.8 |
|
|
$ |
53.4 |
|
|
$ |
329.8 |
|
|
|
|
|
Note: |
|
(a) |
|
In accordance with its debt agreements, the Companys availability
under its Revolving Credit Facility has been reduced by the amount of
standby letters of credit issued of $33.6 million as of June 30,
2008. These letters of credit are used as security against its
self-insurance obligations and workers compensation obligations.
These letters of credit expire at various dates through 2009 unless
extended. |
The Credit Agreement and the indentures governing the Senior Notes and Senior Subordinated Notes
(the Notes) limit the Companys ability to incur additional indebtedness. Additional covenants
contained in the Credit Agreement, among other things, restrict the ability of the Company to
dispose of assets, incur guarantee obligations, prepay other indebtedness, make dividend and other
restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms
of indentures under which the Notes are issued, engage in mergers or consolidations, change the business conducted by
the Company and its subsidiaries, and engage in certain transactions with affiliates. Such
restrictions, together with the highly leveraged nature of the Company, could limit the Companys
ability to respond to changing market conditions, fund its capital spending program, provide for
unexpected capital investments or take advantage of business opportunities.
As of June 30, 2008, the Company was in compliance with the financial covenant in the Credit
Agreement. The Companys ability to comply in future periods with the financial covenant in the
Credit Agreement will depend on its ongoing financial and operating performance, which in turn will
be subject to economic conditions and to financial, business and other factors, many of which are
beyond the Companys control, and will be substantially dependent on the selling prices for the
Companys products, raw material and energy costs, and the Companys ability to successfully
implement its overall business strategies, and meet its profitability objective. If a violation of
the financial covenant or any of the other covenants occurred, the Company would attempt to obtain a waiver or an amendment from
its lenders, although no assurance can be given that the Company would be successful in this
regard. The Credit Agreement and the indentures governing the Notes have certain cross-default or
cross-acceleration provisions; failure to comply with these covenants in any agreement could result
in a violation of such agreement which could, in turn, lead to violations of other agreements
pursuant to such cross-default or cross-acceleration provisions. If an event of default occurs, the
lenders are entitled to declare all amounts owed to be due and payable immediately.
17
NOTE 10 FAIR VALUE MEASUREMENT
In September 2006, the FASB issued SFAS No. 157, which is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This statement defines fair
value, establishes a framework for measuring fair value and expands the related disclosure
requirements. This statement applies to accounting pronouncements that require or permit fair value
measurements. The statement indicates, among other things, that a fair value measurement assumes
that the transaction to sell an asset or transfer a liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most advantageous market for
the asset or liability. SFAS No. 157 defines fair value based upon an exit price model.
Relative to SFAS No. 157, the FASB issued FASB Staff Position No. 157-1; Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP
No. 157-1), and FSP No. 157-2. FSP No. 157-1 amends SFAS No. 157 to exclude SFAS No. 13,
"Accounting for Leases, and its related interpretive accounting pronouncements that address
leasing transactions, while FSP No. 157-2 delays the effective date of the application of SFAS No.
157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial statements on a
non-recurring basis. Non-recurring nonfinancial assets and nonfinancial liabilities include those
measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured
at fair value for impairment testing, asset retirement obligations initially measured at fair
value, and those assets and liabilities initially measured at fair value in a business combination.
The Company adopted SFAS No. 157 for financial assets and financial liabilities as of January 1,
2008, in accordance with the provisions of SFAS No. 157 and the related guidance of FSP No. 157-1
and FSP No. 157-2. The adoption did not have a significant impact on the Companys financial
position, results of operations or cash flows. The Company intends to utilize the best available
information in measuring fair value. The Company has determined that its financial assets and
financial liabilities are comprised of Level 2 in the fair value hierarchy.
Valuation Hierarchy
SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs quoted prices (unadjusted) in active markets for identical assets or
liabilities.
Level 2 inputs quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument.
Level 3 inputs unobservable inputs based on the Companys own assumptions used to measure
assets and liabilities at fair value. A financial asset or liabilitys classification within
the hierarchy is determined based on the lowest level input that is significant to the fair
value measurement.
18
The following table provides the financial assets and liabilities carried at fair value measured on
a recurring basis as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
Total Carrying |
|
Quoted prices in |
|
Significant other |
|
unobservable |
|
|
Value at |
|
active markets |
|
observable inputs |
|
inputs |
In millions |
|
June 30, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Commodity Contracts |
|
$ |
5.4 |
|
|
|
|
|
|
$ |
5.4 |
|
|
|
|
|
Foreign Currency
Contracts, Net of
Asset |
|
|
(3.8 |
) |
|
|
|
|
|
|
(3.8 |
) |
|
|
|
|
Interest Rate Swap
Agreements, Net of
Asset |
|
|
(6.8 |
) |
|
|
|
|
|
|
(6.8 |
) |
|
|
|
|
|
Total |
|
$ |
(5.2 |
) |
|
|
|
|
|
$ |
(5.2 |
) |
|
|
|
|
|
These financial assets and liabilities can be found in the Other Current Asset and Other Accrued
Liabilities, respectively, on the Companys balance sheets.
During the second quarter of 2008, the Company recorded a favorable $10.7 million mark to market
adjustment for an interest rate swap.
NOTE 11 RESTRUCTURING RESERVES
In conjunction with the Altivity Transaction, the Company formulated plans to close or exit certain
production facilities of Altivity. Restructuring reserves of $17.3 million were established for
employee severance and benefit payments, equipment removal and facility closure costs. These
restructuring reserves were established in accordance with the requirement of Emerging Issues Task
Force (EITF) 95-3 Recognition of Liabilities in Connection with a Purchase Business Combination
and were considered liabilities assumed in the Altivity Transaction.
The Company has announced the closure of two facilities and has committed to seven additional plant
closures. The restructuring activities are expected to be substantially completed by December 31,
2010.
The following table summarizes the transactions within the restructuring reserve and reconciles to
accrued liabilities at June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
Facility |
|
Equipment |
|
|
In millions |
|
Benefits |
|
Closure Costs |
|
Removal |
|
Total |
|
Establish Reserve |
|
$ |
7.0 |
|
|
$ |
8.5 |
|
|
$ |
1.8 |
|
|
$ |
17.3 |
|
Cash Payments |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Total |
|
$ |
7.0 |
|
|
$ |
8.5 |
|
|
$ |
1.5 |
|
|
$ |
17.0 |
|
|
Accelerated or incremental depreciation was recorded for assets that will be removed from service
before the end of their useful lives due to the facility closures. The amount of accelerated
depreciation recorded in the second quarter was $0.5 million.
NOTE 12 DISCONTINUED OPERATIONS
On October 16, 2007, Graphic Packaging International Holding Sweden AB (the Seller), an indirect
wholly-owned subsidiary of the Company, entered into a Sale and Purchase Agreement with Lagrumment
December nr 1031 Aktiebolg, a company organized under the laws of Sweden that will be renamed
Fiskeby International Holding AB (the Purchaser), and simultaneously completed the transactions
contemplated by such agreement. Pursuant to such Purchase and Sales Agreement, the Purchaser
acquired all of the outstanding shares of GP-Sweden. GP-Sweden and its subsidiaries are in the
business of developing, manufacturing and selling paper and packaging boards
19
made from recycled fiber. The Sale and Purchase Agreement specifies that the purchase price is
$8.6 million and contains customary representations and warranties of the Seller.
The Purchaser is affiliated with Jeffery H. Coors, the former Vice Chairman and a member of the
Board of Directors of the Company. The Seller undertook the sale of GP-Sweden to the Purchaser
after a thorough exploration of strategic alternatives with respect to GP-Sweden. The transactions
contemplated by the Sale and Purchase Agreement were approved by the Audit Committee of the Board
of Directors of the Company pursuant to its Policy Regarding Related Party Transactions and by the
full Board of Directors other than Mr. Coors.
The long-lived assets of GP-Sweden comprise operations and cash flows that can be distinguished
from the rest of the Company. Since these cash flows will be eliminated from ongoing operations,
the results of operations were reported in discontinued operations for all periods presented.
Summarized financial information for discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Sales |
|
$ |
|
|
|
$ |
26.2 |
|
|
$ |
|
|
|
$ |
52.8 |
|
Loss before Income Taxes |
|
|
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
(2.9 |
) |
|
GP-Sweden was included in the Paperboard Packaging segment and the Europe geographic area.
NOTE 13 SUBSEQUENT EVENT
On July 8, 2008, GPII signed an agreement with an affiliate of Sun Capital Partners, Inc. to sell
two coated-recycled boxboard mills as required by the U.S. Department of Justice pursuant to the
Consent Decree governing the Altivity Transaction. The mills being sold are located in
Philadelphia, Pennsylvania and in Wabash, Indiana. The transaction is subject to review by the
U.S. Department of Justice and other customary closing conditions.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This managements discussion and analysis of financial conditions and results of operations is
intended to provide investors with an understanding of Graphic Packaging Holding Companys (GPHC
and, together with its subsidiaries, the Company) past performance, its financial condition and
its prospects. The following will be discussed and analyzed:
Ø |
|
Overview of 2008 Results |
Ø |
|
Financial Condition, Liquidity and Capital Resources |
Ø |
|
Critical Accounting Policies |
Ø |
|
New Accounting Standards |
OVERVIEW OF BUSINESS
The Companys objective is to strengthen its position as a leading provider of packaging solutions.
To achieve this objective, the Company offers customers its paperboard, cartons and packaging
machines, either as an integrated solution or separately. Cartons and carriers are designed to
protect and contain products. Product offerings include a variety of laminated, coated and printed
packaging structures that are produced from its CUK board and CRB, as well as other grades of
paperboard that are purchased from third party suppliers. Innovative designs and combinations of
paperboard, films, foils, metallization, holographics, embossing and other are customized to the
individual needs of the customers.
The Company is a leading supplier of multi-wall bags and in addition to a full range of products,
provides customers with value-added graphical and technical support, customized packaging equipment
solutions and packaging workshops to help educate customers.
The specialty packaging business has an established position in end-markets and produces products
such as shingle wrap, batch inclusion bags and film, retort pouches (such as meals ready to go),
medical test kit and transdermal patch overwraps, multilayer laminations for hard-to-hold products
(such as iodine) and plastic bags and films for building materials. In addition, the Companys
label business focuses on two product lines: heat transfer labels and litho labels.
The Company is also implementing strategies (i) to expand market share in its current markets and
to identify and penetrate new markets; (ii) to capitalize on the Companys customer relationships,
business competencies, and mills and converting assets; (iii) to develop and market innovative
products and applications; and (iv) to continue to reduce costs by focusing on operational
improvements. The Companys ability to fully implement its strategies and achieve its objective
may be influenced by a variety of factors, many of which are beyond its control, such as inflation
of raw materials and other costs, which the Company cannot always pass through to its customers,
and the effect of overcapacity in the worldwide paperboard packaging industry.
Significant Factors That Impact The Companys Business
Impact of Inflation. The Companys cost of sales consists primarily of energy (including natural
gas, fuel oil and electricity), pine pulpwood, chemicals, recycled fibers, purchased paperboard,
paper, aluminum foil, ink, plastic films and resins, depreciation expense and labor. The Company
continues to be negatively impacted by inflationary pressures, which increased costs by $50.1
million, compared to the first six months of 2007. The 2008 cost
increases are primarily related to fiber
and outside board purchases ($25.6 million); chemical-based inputs ($13.7 million); labor and
related benefits ($8.3 million); energy costs ($4.2 million), mainly due to the price of natural
gas; and freight ($2.5 million). These increases were offset by other lower costs ($4.2 million).
The Company has entered into
21
contracts designed to manage risks associated with future variability in cash flows caused by
changes in the price of natural gas. As of July 31, 2008, the Company has entered into swaps to
hedge approximately 60% and 15% of its expected natural gas usage for the remainder of year 2008
and for the year 2009, respectively. The Company believes that inflationary pressures, including
higher costs for energy, fiber, wood, chemical-based inputs and freight will continue to negatively impact
its results for 2008. Since negotiated sales contracts and the market largely determine the pricing
for its products, the Company is at times limited in its ability to raise prices and pass through
to its customers all inflationary or other cost increases that the Company may incur, thereby
further exacerbating the inflationary problems.
Substantial Debt Obligations. The Company has $3,108.2 million of outstanding debt obligations as
of June 30, 2008. This debt can have significant consequences for the Company, as it requires a
significant portion of cash flow from operations to be used for the payment of principal and
interest, exposes the Company to the risk of increased interest rates and restricts the Companys
ability to obtain additional financing. Covenants in the Companys Credit Agreement limit the
Companys ability to incur additional indebtedness, restrict the ability of the Company to dispose
of assets, incur guarantee obligations, prepay other indebtedness, make dividend and other
restricted payments, create liens, make equity or debt investments, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company and its subsidiaries, and
engage in certain transactions with affiliates. These restrictions could limit the Companys
flexibility to respond to changing market conditions and competitive pressures. The covenants also
require compliance with a consolidated secured leverage ratio. The Companys ability to comply in future
periods with the financial covenants will depend on its ongoing financial and operating
performance, which in turn will be subject to many other factors, many of which are beyond the
Companys control. See Financial Condition, Liquidity and Capital Resources Liquidity and
Capital Resources for additional information regarding the Companys debt obligations.
Integration Risk. The benefits of combining the operations of
GPC and Altivity, (the Altivity Transaction), may
not be realized, and the Company may face difficulties integrating Altivitys operations. GPC and
Altivitys parent companies entered into the Altivity Transaction with the expectation that it
would result in various benefits, including, among other things, cost synergies and operating
efficiencies. However, the achievement of the anticipated benefits of the transaction, including
the cost synergies, cannot be assured or may take longer than expected. In addition, the Company
may not be able to integrate Altivitys operations with GPCs existing operations without
encountering difficulties, including:
|
|
|
inconsistencies in standards, systems and controls; |
|
|
|
|
difficulties in achieving expected cost savings associated with the transaction; |
|
|
|
|
difficulties in the assimilation of employees and in creating a unified corporate
culture; |
|
|
|
|
challenges in retaining existing customers and obtaining new customers; and |
|
|
|
|
challenges in attracting and retaining key personnel. |
As a result of these risks, the Company may not be able to realize the expected revenue and cash
flow growth and other benefits that it expects to achieve from the transaction. In addition, the
Company may be required to spend additional time or money on integration efforts that would
otherwise have been spent on the development and expansion of its business and services.
Commitment to Cost Reduction. In light of increasing margin pressure throughout the packaging
industry, the Company has programs in place that are designed to reduce costs, improve productivity
and increase profitability. The Company utilizes a global continuous improvement initiative that
uses statistical process control to help design and manage many types of activities, including
production and maintenance. This includes a Six Sigma process focused on reducing variable and
fixed manufacturing and administrative costs. The Company expanded the continuous improvement
initiative to include the deployment of Lean principles into manufacturing and supply chain
services. As the Company strengthens the systems approach to continuous improvement, Lean supports
the
22
efforts to build a high performing culture. During the first six months of 2008, the Company
achieved $25.6 million in cost savings as compared to the first six months of 2007, through its
continuous improvement programs and manufacturing initiatives.
Competition and Market Factors. As some products can be packaged in different types of materials,
the Companys sales are affected by competition from other manufacturers coated unbleached kraft
paperboard, or CUK board, and other substrates solid bleached sulfate, or SBS and recycled clay
coated news, or CCN. Substitute products also include shrink film and corrugated containers. In
addition, the Companys sales historically are driven by consumer buying habits in the markets its
customers serve. New product introductions and promotional activity by the Companys customers and
the Companys introduction of new packaging products also impact its sales. The Companys
containerboard business is subject to conditions in the cyclical worldwide commodity paperboard
markets, which have a significant impact on containerboard sales. In addition, the Companys net
sales, income from operations and cash flows from operations are subject to moderate seasonality,
with demand usually increasing in the spring and summer due to the seasonality of the worldwide
beverage multiple packaging markets.
The Company works to maintain market share through efficiency, product innovation and strategic
sourcing to its customers; however, pricing and other competitive pressures may occasionally result
in the loss of a customer relationship.
OVERVIEW OF 2008 RESULTS
This managements discussion and analysis contains an analysis of Net Sales, Income from Operations
and other information relevant to an understanding of results of operations. To enhance the
understanding of continuing operations, this discussion and analysis excludes discontinued
operations for all periods presented. Information on discontinued operations can be found in Note
12 Discontinued Operations in Part I, Item 1, Notes to Condensed Consolidated Financial
Statements.
|
|
|
Net Sales in the second quarter of 2008 increased by $518.6 million, or 83.2%, to
$1,141.7 million from $623.1 million in the second quarter of 2007 due primarily to $496.4
million volume achieved as a result of the Altivity Transaction. Also contributing to the
increase was improved pricing across the paperboard packaging segment and $9.3 million
relating to the favorable foreign currency exchange rates primarily in Europe, Japan and
Australia. |
|
|
|
|
Income from Operations in the second quarter of 2008 increased by $22.9 million, or
58.7%, to $61.9 million from $39.0 million in the second quarter of 2007. The improved
pricing, the Altivity Transaction, and worldwide continuous improvement programs and other
cost reduction initiatives were partially offset by higher inflation. |
|
|
|
|
In March 2008, GPC combined with Altivity in a transaction accounted for under SFAS
No. 141. Under the purchase method of accounting, the assets and liabilities of Altivity
were recorded, as of the date of the closing of the Altivity Transaction, at their
respective fair values and added to those of the Company. |
RESULTS OF OPERATIONS
The Companys results of operations for the three and six months ended June 30, 2008 include the
results of Altivity from March 10, 2008, the date of the Altivity Transaction, through June 30,
2008. The results of operations for the three and six months ended June 30, 2007 represent the
results of the Companys operations prior to the Altivity Transaction.
23
Segment Information
The Company reports its results in three business segments: paperboard packaging, multi-wall bag
and specialty packaging.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
NET SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
928.5 |
|
|
$ |
604.7 |
|
|
$ |
1,585.6 |
|
|
$ |
1,169.7 |
|
Multi-wall Bag |
|
|
166.5 |
|
|
|
18.4 |
|
|
|
221.5 |
|
|
|
37.5 |
|
Specialty Packaging |
|
|
46.7 |
|
|
|
|
|
|
|
58.9 |
|
|
|
|
|
|
Total |
|
$ |
1,141.7 |
|
|
$ |
623.1 |
|
|
$ |
1,866.0 |
|
|
$ |
1,207.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
82.2 |
|
|
$ |
46.4 |
|
|
$ |
141.5 |
|
|
$ |
68.2 |
|
Multi-wall Bag |
|
|
9.3 |
|
|
|
0.9 |
|
|
|
14.0 |
|
|
|
1.8 |
|
Specialty Packaging |
|
|
3.3 |
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
Corporate |
|
|
(32.9 |
) |
|
|
(8.3 |
) |
|
|
(71.8 |
) |
|
|
(18.2 |
) |
|
Total |
|
$ |
61.9 |
|
|
$ |
39.0 |
|
|
$ |
87.4 |
|
|
$ |
51.8 |
|
|
SECOND QUARTER 2008 COMPARED WITH SECOND QUARTER 2007
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
In millions |
|
2008 |
|
2007 |
|
Increase |
|
Change |
|
Paperboard Packaging |
|
$ |
928.5 |
|
|
$ |
604.7 |
|
|
$ |
323.8 |
|
|
|
53.5 |
% |
Multi-wall Bag |
|
|
166.5 |
|
|
|
18.4 |
|
|
|
148.1 |
|
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
46.7 |
|
|
|
|
|
|
|
46.7 |
|
|
|
N.M. |
(a) |
|
Total |
|
$ |
1,141.7 |
|
|
$ |
623.1 |
|
|
$ |
518.6 |
|
|
|
83.2 |
% |
|
|
|
|
Note: |
|
(a) |
|
Percentage calculation not meaningful since the segment was created as a result of the Altivity
Transaction. |
The components of the change in Net Sales by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
Variances |
|
|
In millions |
|
2007 |
|
Price |
|
Volume/Mix |
|
Exchange |
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
604.7 |
|
|
$ |
12.5 |
|
|
$ |
304.4 |
|
|
$ |
(2.4 |
) |
|
$ |
9.3 |
|
|
$ |
323.8 |
|
|
$ |
928.5 |
|
Multi-wall Bag |
|
|
18.4 |
|
|
|
1.9 |
|
|
|
145.3 |
|
|
|
0.9 |
|
|
|
|
|
|
|
148.1 |
|
|
|
166.5 |
|
Specialty Packaging |
|
|
|
|
|
|
|
|
|
|
46.7 |
|
|
|
|
|
|
|
|
|
|
|
46.7 |
|
|
|
46.7 |
|
|
Total |
|
$ |
623.1 |
|
|
$ |
14.4 |
|
|
$ |
496.4 |
|
|
$ |
(1.5 |
) |
|
$ |
9.3 |
|
|
$ |
518.6 |
|
|
$ |
1,141.7 |
|
|
Paperboard Packaging
The Companys Net Sales from paperboard packaging in the second quarter of 2008 increased by $323.8
million, or 53.5%, to $928.5 million from $604.7 million in 2007 due to the Altivity Transaction,
improved pricing across all product lines, as well as improved product mix primarily in North
American food and consumer cartons. The improvement in pricing reflects negotiated inflationary
cost pass-through and other contractual increases, as well as price increases on open market roll
stock. The improved product mix was primarily in the frozen food, pizza and
24
cereal product lines. This improved mix was partially offset by lower volume as a result of the
Company exiting lower margin businesses and lower open market sales in Europe. Also contributing
to the increase was favorable foreign currency exchange rates primarily in Europe, Japan and
Australia.
Multi-wall Bag
The Companys second quarter Net Sales increased by $148.1 million as a result of the acquisition
of the multi-wall bag segment from the Altivity Transaction and improved pricing and volume. The
improved volume was due to the recapture of product previously lost to a competing substrate. The
Altivity sales are attributed to volume primarily in the plastic and bag packaging markets.
Specialty Packaging
The Companys second quarter Net Sales increased by $46.7 million as a result of the acquisition of
the specialty packaging segment from the Altivity Transaction. These sales are attributed to
volume primarily in the flexible packaging, heat transfer label and ink coating markets.
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
Percent |
In millions |
|
2008 |
|
2007 |
|
(Decrease) |
|
Change |
|
Paperboard Packaging |
|
$ |
82.2 |
|
|
$ |
46.4 |
|
|
$ |
35.8 |
|
|
|
77.2 |
% |
Multi-wall Bag |
|
|
9.3 |
|
|
|
0.9 |
|
|
|
8.4 |
|
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
3.3 |
|
|
|
|
|
|
|
3.3 |
|
|
|
N.M. |
(a) |
Corporate |
|
|
(32.9 |
) |
|
|
(8.3 |
) |
|
|
(24.6 |
) |
|
|
N.M. |
(a) |
|
Total |
|
$ |
61.9 |
|
|
$ |
39.0 |
|
|
$ |
22.9 |
|
|
|
58.7 |
% |
|
|
|
|
Note: |
|
(a) |
|
Percentage calculation not meaningful since the segment was created as a result of the Altivity
Transaction. |
The components of the change in Income (Loss) from Operations by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
Variances |
|
|
|
In millions |
|
2007 |
|
|
Price |
|
|
Volume/Mix |
|
|
Inflation |
|
|
Exchange |
|
|
Other(b) |
|
|
Total |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
46.4 |
|
|
$ |
12.5 |
|
|
$ |
26.8 |
|
|
$ |
0.5 |
|
|
$ |
(21.9 |
) |
|
$ |
0.7 |
|
|
$ |
17.2 |
|
|
$ |
35.8 |
|
|
$ |
82.2 |
|
Multi-wall Bag |
|
|
0.9 |
|
|
|
1.9 |
|
|
|
7.4 |
|
|
|
0.6 |
|
|
|
(1.4 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
8.4 |
|
|
|
9.3 |
|
Specialty Packaging |
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
3.3 |
|
Corporate |
|
|
(8.3 |
) |
|
|
|
|
|
|
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
12.2 |
|
|
|
(24.6 |
) |
|
|
(32.9 |
) |
|
Total |
|
$ |
39.0 |
|
|
$ |
14.4 |
|
|
$ |
3.9 |
|
|
$ |
1.1 |
|
|
$ |
(23.3 |
) |
|
$ |
(2.5 |
) |
|
$ |
29.3 |
|
|
$ |
22.9 |
|
|
$ |
61.9 |
|
|
|
|
|
Note: |
|
(b) |
|
Includes the benefits from the Companys cost reduction initiatives. |
Paperboard Packaging
The Companys Income from Operations from paperboard packaging in the second quarter of 2008
increased by $35.8 million or 77.2%, to $82.2 million from $46.4 million in 2007 due to the
Altivity Transaction, the improved pricing, $12.5 million of continuing cost reduction initiatives,
and decreased depreciation expense. The impact of continuing cost reduction initiatives
particularly benefited the Companys paperboard mills and consisted of projects to reduce natural
gas and electricity usage. Additionally, second quarter 2007 included charges related to the
continued infrastructure upgrades at the West Monroe, LA mill, accelerated depreciation for assets
taken out of service due to efficiency improvements, and higher expenses in Europe, primarily
relating to the start up costs for a
new converting facility in France.
25
These increases were partially offset by charges of $7.6 million related to the planned maintenance
outage at the Macon, GA mill as well as inflationary pressures of
$21.9 million primarily related to fiber and
outside board purchases ($10.7 million); chemical-based inputs ($6.6 million); labor and related
benefits ($4.4 million); energy costs ($3.6 million), mainly due to the price of natural gas; and
freight ($1.9 million). These inflationary pressures were offset by other lower costs ($5.3
million). The Company believes that inflationary pressures, including
higher costs for energy, fiber,
wood, chemical-based inputs, and freight will continue to negatively impact its results for 2008.
Multi-wall Bag
The Companys second quarter Income from Operations increased by $8.4 million primarily as a result
of the acquisition of the multi-wall bag segment from the Altivity Transaction and improved
pricing. Inflation, higher depreciation and higher maintenance costs were partially offset by cost
reduction initiatives. The segments Income from Operations is attributed to volume primarily in
the plastic and bag packaging markets.
Specialty Packaging
The Companys second quarter Income from Operations increased by $3.3 million as a result of the
acquisition of the specialty packaging segment from the Altivity Transaction. The segments Income
from Operations is attributed to volume primarily in the flexible packaging, heat transfer label
and ink coating markets.
Corporate
The Companys Loss from Operations from corporate in the second quarter of 2008 increased primarily
due to Altivity Transaction-related expenses of $7.9 million and the inclusion of Altivity
Corporate of $17.6 million. In addition, the Company recorded $11.9 million in expense related to
the step-up in inventory basis to fair value and $8.4 million of increased intangible amortization
as a result of the Altivity Transaction. These expenses were offset by a favorable $10.7 million
mark to market adjustment for an interest rate swap and lower compensation expenses which were
partially offset by a net foreign currency loss of $3.2 million. The swap was also a result of the
Altivity Transaction.
FIRST SIX MONTHS OF 2008 COMPARED WITH FIRST SIX MONTHS OF 2007
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
In millions |
|
2008 |
|
2007 |
|
Increase |
|
Change |
|
Paperboard Packaging |
|
$ |
1,585.6 |
|
|
$ |
1,169.7 |
|
|
$ |
415.9 |
|
|
|
35.6 |
% |
Multi-wall Bag |
|
|
221.5 |
|
|
|
37.5 |
|
|
|
184.0 |
|
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
58.9 |
|
|
|
|
|
|
|
58.9 |
|
|
|
N.M. |
(a) |
|
Total |
|
$ |
1,866.0 |
|
|
$ |
1,207.2 |
|
|
$ |
658.8 |
|
|
|
54.6 |
% |
|
|
|
|
Note: |
|
(a) |
|
Percentage calculation not meaningful since the segment was created as a result of the Altivity
Transaction. |
26
The components of the change in Net Sales by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
Variances |
|
|
|
|
In millions |
|
2007 |
|
|
Price |
|
|
Volume/Mix |
|
|
Exchange |
|
|
Total |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
1,169.7 |
|
|
$ |
22.5 |
|
|
$ |
371.8 |
|
|
$ |
3.4 |
|
|
$ |
18.2 |
|
|
$ |
415.9 |
|
|
$ |
1,585.6 |
|
Multi-wall Bag |
|
|
37.5 |
|
|
|
2.7 |
|
|
|
178.7 |
|
|
|
2.6 |
|
|
|
|
|
|
|
184.0 |
|
|
|
221.5 |
|
Specialty Packaging |
|
|
|
|
|
|
|
|
|
|
58.9 |
|
|
|
|
|
|
|
|
|
|
|
58.9 |
|
|
|
58.9 |
|
|
Total |
|
$ |
1,207.2 |
|
|
$ |
25.2 |
|
|
$ |
609.4 |
|
|
$ |
6.0 |
|
|
$ |
18.2 |
|
|
$ |
658.8 |
|
|
$ |
1,866.0 |
|
|
Paperboard Packaging
The Companys Net Sales from paperboard packaging in the first six months of 2008 increased by
$415.9 million, or 35.6%, to $1,585.6 million from $1,169.7 million in 2007 due to the Altivity
Transaction, improved pricing across all product lines, as well as improved product mix primarily
in North American food and consumer cartons. The improvement in pricing reflects negotiated
inflationary cost pass-through and other contractual increases, as well as price increases on open
market roll stock. The improved product mix was primarily in the pizza, frozen foods, cereal, and
snack product lines. This improved mix was partially offset by lower volume as a result of the
Company exiting lower margin businesses and lower open market sales in Europe. North American
beverage carton volumes increased due to the introduction of 18 and 20 multi-packs, which was
previously packaged in containerboard, and a significant share gain with a major customer. Also
contributing to the increase was favorable foreign currency exchange rates primarily in Europe,
Japan and Australia.
Multi-wall Bag
The Companys Net Sales in the first six months increased by $184.0 million as a result of the
acquisition of the multi-wall bag segment from the Altivity Transaction, as well as improved
pricing and volume. These sales are attributed to volume primarily in the plastic and bag
packaging markets.
Specialty Packaging
The Companys Net Sales in the first six months increased by $58.9 million as a result of the
acquisition of the specialty packaging segment from the Altivity Transaction. These sales are
attributed to volume primarily in the flexible packaging, heat transfer label and ink coating
markets.
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
Percent |
In millions |
|
2008 |
|
2007 |
|
(Decrease) |
|
Change |
|
Paperboard Packaging |
|
$ |
141.5 |
|
|
$ |
68.2 |
|
|
$ |
73.3 |
|
|
|
107.5 |
% |
Multi-wall Bag |
|
|
14.0 |
|
|
|
1.8 |
|
|
|
12.2 |
|
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
3.7 |
|
|
|
|
|
|
|
3.7 |
|
|
|
N.M. |
(a) |
Corporate |
|
|
(71.8 |
) |
|
|
(18.2 |
) |
|
|
(53.6 |
) |
|
|
N.M. |
(a) |
|
Total |
|
$ |
87.4 |
|
|
$ |
51.8 |
|
|
$ |
35.6 |
|
|
|
68.7 |
% |
|
|
|
|
Note: |
|
(a) |
|
Percentage calculation not meaningful since the segment was created as a result of the Altivity
Transaction. |
The components of the change in Income (Loss) from Operations by segment are as follows:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
Variances |
|
|
|
In millions |
|
2007 |
|
|
Price |
|
|
Volume/Mix |
|
|
Inflation |
|
|
Exchange |
|
|
Other(b) |
|
|
Total |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
68.2 |
|
|
$ |
22.5 |
|
|
$ |
31.5 |
|
|
$ |
3.2 |
|
|
$ |
(47.4 |
) |
|
$ |
1.7 |
|
|
$ |
61.8 |
|
|
$ |
73.3 |
|
|
$ |
141.5 |
|
Multi-wall Bag |
|
|
1.8 |
|
|
|
2.7 |
|
|
|
10.8 |
|
|
|
0.5 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
0.9 |
|
|
|
12.2 |
|
|
|
14.0 |
|
Specialty Packaging |
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
3.7 |
|
Corporate |
|
|
(18.2 |
) |
|
|
|
|
|
|
(63.5 |
) |
|
|
|
|
|
|
|
|
|
|
(3.5 |
) |
|
|
13.4 |
|
|
|
(53.6 |
) |
|
|
(71.8 |
) |
|
Total |
|
$ |
51.8 |
|
|
$ |
25.2 |
|
|
$ |
(17.5 |
) |
|
$ |
3.7 |
|
|
$ |
(50.1 |
) |
|
$ |
(1.8 |
) |
|
$ |
76.1 |
|
|
$ |
35.6 |
|
|
$ |
87.4 |
|
|
|
|
|
Note: |
|
(b) |
|
Includes the benefits from the Companys cost reduction initiatives. |
Paperboard Packaging
The Companys Income from Operations from paperboard packaging in the first six months of 2008
increased by $73.3 million or 107.5%, to $141.5 million from $68.2 million in 2007 due to the
Altivity transaction, the improved pricing, $24.7 million of continuing cost reduction initiatives,
improved product mix, and decreased depreciation expense. The first six months of 2007 included
charges related to the continued infrastructure upgrades at the West Monroe, LA mill, accelerated
depreciation for assets taken out of service due to efficiency improvements, and higher expenses in
Europe, primarily relating to the start up costs for a new converting facility in France. These
increases were partially offset by inflationary pressures of $47.4 million primarily related to
fiber and outside board purchases ($24.9 million); chemical-based inputs ($12.0 million); labor and
related benefits ($8.2 million); energy costs ($4.1 million), mainly due to the price of natural
gas; and freight ($2.3 million). These inflationary pressures were offset by other lower costs
($4.1 million). The Company believes that inflationary pressures, including higher costs for
energy, fiber, wood, chemical-based inputs and freight will continue to negatively impact its results for
2008.
Multi-wall Bag
The Companys first six months Income from Operations increased by $12.2 million as a result of the
acquisition of the multi-wall bag segment from the Altivity Transaction and improved pricing which
was offset by inflation. Cost saving initiatives of $0.9 million also contributed to the increase.
The segments Income from Operations is attributed to volume primarily in the plastic and bag
packaging markets.
Specialty Packaging
The Companys first six months Income from Operations increased by $3.7 million as a result of the
acquisition of the specialty packaging segment from the Altivity Transaction. The segments Income
from Operations is attributed to volume primarily in the flexible packaging, heat transfer label
and ink coating markets.
Corporate
The Companys Loss from Operations from corporate in the first six months of 2008 increased
primarily due to Altivity Transaction-related expenses of $17.6 million and the inclusion of
Altivity Corporate of $23.1 million. In addition, the Company recorded $24.4 million of expense
related to the step-up in inventory basis to fair value and $10.3 million of increased intangible
amortization as a result of the Altivity Transaction. These expenses were offset by a favorable
$10.7 million mark to market adjustment for an interest rate swap and lower compensation expense
partially offset by a net foreign currency loss of $3.5 million. The swap was also a result of the
Altivity Transaction.
28
INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE AND EQUITY IN NET EARNINGS OF AFFILIATES
Interest Income
Interest Income increased to $0.5 million in the first six months of 2008 from $0.3 million in the
first six months of 2007 primarily due to higher average cash balances.
Interest Expense
Interest Expense was $100.3 million and $86.4 million in the first six months of 2008 and 2007,
respectively. Interest Expense increased due to the additional debt acquired as a result of the
Altivity Transaction. As of June 30, 2008, approximately 23% of the Companys total debt was
subject to floating interest rates, after considering interest rate swaps.
Income Tax Expense
During the first six months of 2008, the Company recognized Income Tax Expense of $16.0 million on
Loss before Income Taxes and Equity in Net Earnings of Affiliates of $12.4 million. During the
first six months of 2007, the Company recognized Income Tax Expense of $13.8 million on Loss before
Income Taxes and Equity in Net Earnings of Affiliates of $43.8 million. Income Tax Expense for the
first six months of 2008 and 2007 was primarily due to the noncash expense of $13.6 million and
$9.8 million, respectively, associated with the amortization of goodwill for tax purposes and in
2007, an increase in a liability related to a judgment received in a Swedish tax court.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates was $0.8 million the first six months of 2008 and $0.5 million
in the first six months of 2007 and is related to the Companys equity investment in the joint
venture Rengo Riverwood Packaging, Ltd.
Altivity Transaction
On March 10, 2008, the businesses of GPC and Altivity were combined in a transaction accounted for
under SFAS No. 141. Altivity was the largest privately-held producer of folding cartons and a
market leader in all of its major businesses, including coated-recycled boxboard and bag packaging.
Altivity operates six recycled boxboard mills and 51 consumer product packaging facilities in
North America.
In connection with the Altivity Transaction, all of the equity interests in Altivitys parent
company were contributed to GPHC in exchange for 139,445,038 shares of GPHCs common stock, or
approximately 40.6 percent of the Companys outstanding shares of common stock. Stockholders of
GPC received one share of GPHC common stock for each share of GPC common stock held immediately
prior to the transactions. Subsequently, all of the equity interests in Altivitys parent company
were contributed to GPHCs primary operating company, GPII.
The Company determined that the relative outstanding share ownership, voting rights, and the
composition of the governing body and senior management positions require GPC to be the acquiring
entity for accounting purposes, resulting in the historical financial statements of GPC becoming
the historical financial statements of the Company. Under the purchase method of accounting, the
assets and liabilities of Altivity were recorded, as of the date of the closing of the Altivity
Transaction, at their respective fair values and added to those of GPC. The purchase price for the
acquisition was based on the average closing price of the Companys common stock on the NYSE for
two days prior to, including, and two days subsequent to the public announcement of the transaction
of $5.47 per share and capitalized transaction costs. The purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair market values at the date of
the Altivity Transaction. The preliminary purchase price allocation is as follows:
29
|
|
|
|
|
In millions |
|
|
|
|
|
Purchase Price |
|
$ |
762.8 |
|
Acquisition Cost |
|
|
29.8 |
|
Assumed Debt |
|
|
1,167.6 |
|
|
Total Purchase Consideration |
|
$ |
1,960.2 |
|
|
|
|
|
|
|
In millions |
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
60.2 |
|
Receivables, Net |
|
|
181.2 |
|
Inventories |
|
|
263.7 |
|
Prepaids |
|
|
13.1 |
|
Property, Plant and Equipment |
|
|
650.8 |
|
Intangible Assets |
|
|
561.9 |
|
Other Assets |
|
|
4.7 |
|
|
Total Assets Acquired |
|
|
1,735.6 |
|
|
|
|
|
|
Current Liabilities, Excluding Current Portion of Long Term Debt |
|
|
243.7 |
|
Pension and Postemployment Benefits |
|
|
32.8 |
|
Other Noncurrent Liabilities |
|
|
31.2 |
|
|
Total Liabilities Assumed |
|
|
307.7 |
|
|
Net Assets Acquired |
|
|
1,427.9 |
|
|
Goodwill |
|
|
532.3 |
|
|
Total Estimated Fair Value of Net Assets Acquired |
|
$ |
1,960.2 |
|
|
As of June 30, 2008, the preliminary purchase accounting is still subject to final adjustment and
could change materially in subsequent periods. The Company has not finalized its review of all
Altivity environmental matters and other liabilities. The Company has plans to close certain
facilities and has established restructuring reserves that are considered liabilities assumed in
the Altivity Transaction. See Note 11 Restructuring Reserves.
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated
to goodwill. Management believes that the portion of the purchase price attributable to goodwill
represents benefits expected as a result of the acquisition, including 1) significant
cost-reduction opportunities and synergies by combining sales and support functions and eliminating
duplicate corporate functions, 2) diversifying the Companys product line and providing new
opportunities for top-line growth, which will allow the Company to compete effectively in the
global packaging market, and 3) expansion of the Companys manufacturing system which will now
include expanded folding carton converting operations, multi-wall bag facilities, flexible
packaging facilities, ink manufacturing facilities, and label facilities.
The following table shows the allocation of goodwill by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard |
|
Multi-wall |
|
Specialty |
|
|
In millions |
|
Packaging |
|
Bag |
|
Packaging |
|
Total |
|
Balance at June 30, 2008 |
|
$ |
379.8 |
|
|
$ |
60.9 |
|
|
$ |
91.6 |
|
|
$ |
532.3 |
|
|
The Company expects to deduct approximately $440 million of goodwill for tax purposes.
The following table summarizes acquired intangibles:
|
|
|
|
|
In millions |
|
|
|
|
|
Customer Relationships |
|
$ |
546.4 |
|
Non-Compete Agreement |
|
|
9.0 |
|
Trademarks and Patents |
|
|
7.5 |
|
Lease and Supply Contracts |
|
|
(1.0 |
) |
|
Total Fair Market Value of Intangible Assets |
|
$ |
561.9 |
|
|
30
The fair value of intangible assets will be amortized on a straight-line basis over the remaining
useful life of 17 years for customer relationships, 4 years for trademarks and patents, and the
remaining contractual period for the non-compete, lease and supply contracts. Amortization expense
is estimated to be approximately $34 million for each of the next five years.
The following unaudited pro forma consolidated results of operations assume that the acquisition of
Altivity occurred as of the beginning of the periods presented. This pro forma data is based on
historical information and does not necessarily reflect the actual results that would have
occurred, nor is it indicative of future results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Sales |
|
$ |
1,141.7 |
|
|
$ |
1,115.9 |
|
|
$ |
2,257.1 |
|
|
$ |
2,185.5 |
|
Net Income (Loss) |
|
|
4.8 |
|
|
|
(22.6 |
) |
|
|
(17.0 |
) |
|
|
(70.3 |
) |
Income (Loss) Per Share - Basic |
|
|
0.01 |
|
|
|
(0.07 |
) |
|
|
(0.05 |
) |
|
|
(0.21 |
) |
Income (Loss) Per Share - Diluted |
|
|
0.01 |
|
|
|
(0.07 |
) |
|
|
(0.05 |
) |
|
|
(0.21 |
) |
|
Restructuring Reserves
In conjunction with the Altivity Transaction, the Company formulated plans to close or exit certain
production facilities of Altivity. Restructuring reserves of $17.3 million were established for
employee severance and benefit payments, equipment removal and facility closure costs. These
restructuring reserves were established in accordance with the requirement of Emerging Issues Task
Force (EITF) 95-3 Recognition of Liabilities in Connection with a Purchase Business Combination
and were considered liabilities assumed in the Altivity Transaction.
The Company has announced the closure of two facilities and has committed to seven additional plant
closures. The restructuring activities are expected to be substantially completed by December 31,
2010.
The following table summarizes the transactions within the restructuring reserve and reconciles to
accrued liabilities at June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
Facility |
|
Equipment |
|
|
In millions |
|
Benefits |
|
Closure Costs |
|
Removal |
|
Total |
|
Establish Reserve |
|
$ |
7.0 |
|
|
$ |
8.5 |
|
|
$ |
1.8 |
|
|
$ |
17.3 |
|
Cash Payments |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Total |
|
$ |
7.0 |
|
|
$ |
8.5 |
|
|
$ |
1.5 |
|
|
$ |
17.0 |
|
|
Accelerated or incremental depreciation was recorded for assets that will be removed from service
before the end of their useful lives due to the facility closures. The amount of accelerated
depreciation recorded in the second quarter was $0.5 million.
DISCONTINUED OPERATIONS
On October 16, 2007, Graphic Packaging International Holding Sweden AB (the Seller), an indirect
wholly-owned subsidiary of the Company, entered into a Sale and Purchase Agreement with Lagrumment
December nr 1031 Aktiebolg, a company organized under the laws of Sweden that will be renamed
Fiskeby International Holding AB (the Purchaser), and simultaneously completed the transactions
contemplated by such agreement. Pursuant to such Purchase and Sales Agreement, the Purchaser
acquired all of the outstanding shares of GP-Sweden. GP-Sweden and its subsidiaries are in the
business of developing, manufacturing and selling paper and packaging boards made from recycled
fiber. The Sale and Purchase Agreement specifies that the purchase price is $8.6 million and
31
contains customary representations and warranties of the Seller.
The Purchaser is affiliated with Jeffery H. Coors, the former Vice Chairman and a member of the
Board of Directors of the Company. The Seller undertook the sale of GP-Sweden to the Purchaser
after a thorough exploration of strategic alternatives with respect to GP-Sweden. The transactions
contemplated by the Sale and Purchase Agreement were approved by the Audit Committee of the Board
of Directors of the Company pursuant to its Policy Regarding Related Party Transactions and by the
full Board of Directors other than Mr. Coors.
The long-lived assets of GP-Sweden comprise operations and cash flows that can be distinguished
from the rest of the Company. Since these cash flows will be eliminated from ongoing operations,
the results of operations were reported in discontinued operations for all periods presented.
Summarized financial information for discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In millions |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Sales |
|
$ |
|
|
|
$ |
26.2 |
|
|
$ |
|
|
|
$ |
52.8 |
|
Loss before Income Taxes |
|
|
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
(2.9 |
) |
|
GP-Sweden was included in the Paperboard Packaging segment and the Europe geographic area.
32
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient funds from both
internal and external sources to meet its obligations and commitments. In addition, liquidity
includes the ability to obtain appropriate debt and equity financing and to convert into cash those
assets that are no longer required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives and meeting debt
service commitments.
Cash Flows
Cash provided by operating activities in the first six months of 2008 totaled $16.0 million,
compared to $9.0 million in 2007. The increase was due to higher net income and higher net
non-cash add-backs, partially offset by higher pension contributions and a decrease in working
capital. The decrease in working capital was primarily due to an increase in inventory resulting
from reduced demand due to the slowing of the economy, a decrease in other non-current liabilities
due to accelerated vesting of restricted stock units and other payments triggered by the change of
control resulting from the Altivity Transaction, and an increase in accounts receivable mainly due
to higher year-to-date sales. These decreases in working capital were partially offset by
increases in working capital due to higher debt interest accruals resulting primarily from higher
average debt balances and higher accounts payable due to the timing of payments.
Cash used in investing activities in the first six months of 2008 totaled $54.5 million, compared
to $44.2 million in 2007. The increase in cash usage was due primarily to higher capital
expenditures in the first six months of 2008 (see discussion in Capital Investment section below)
and the payment of $29.8 million in acquisition related fees. This increase was partially offset
by the Altivity Transaction through which the Company acquired $60.2 million of cash. Cash
provided by financing activities in the first six months in 2008 totaled $44.5 million, compared to
$39.4 million in 2007. This increase was due to higher debt proceeds, partially offset by higher
debt payments, lower net borrowings under the Companys revolving credit facilities, and higher
debt issuance costs.
Liquidity and Capital Resources
The Companys liquidity needs arise primarily from debt service on its substantial indebtedness and
from the funding of its capital expenditures, ongoing operating costs and working capital. The
Company believes that cash generated from operations, together with the amounts available under the
revolving credit facility will be adequate to meet its debt service, capital expenditures, ongoing
operating costs and working capital needs.
On May 16, 2007, the Company entered into a new $1,355 million Credit Agreement (Credit
Agreement). The Credit Agreement provides for a $300 million revolving credit facility due on May
16, 2013 and a $1,055 million term loan facility due on May 16, 2014. The revolving credit facility
bears interest at a rate of LIBOR plus 225 basis points and the term loan facility bears interest
at a rate of LIBOR plus 200 basis points. The facilities under the Credit Agreement replace the
revolving credit facility due on August 8, 2009 and the term loan due on August 8, 2010 under the
Companys previous senior secured credit agreement. The Companys obligations under the new Credit
Agreement are collateralized by substantially all of the Companys domestic assets.
In connection with the May 16, 2007 replacement of the Companys previous revolving credit and term
loan facilities and in accordance with Emerging Issues Task Force (EITF) 96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments and EITF 98-14, Debtors
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements, the Company recorded a
charge of $9.5 million, which represented a portion of the unamortized deferred financing costs
associated with the previous revolving credit and term loan facilities. In connection with the new
Credit Agreement, the Company recorded approximately $7 million of deferred financing costs.
On March 10, 2008, the Company entered into Amendment No.1 and Amendment No.2 to the Credit
Agreement. Under such amendments, the Company obtained (i) a new $1,200 million term loan
facility, due on May 16, 2014, to refinance the outstanding amounts under Altivitys parent
companys existing first and second lien credit facilities and (ii) an increase to the Companys
existing revolving credit facility to $400 million due on May 16, 2013. The Companys existing
$1,055 million term loan facility will remain in place. The new term loan bears interest at LIBOR
plus 275 basis points. The Companys weighted average interest rate on senior secured term debt
will equal
33
approximately LIBOR plus 237.5 basis points. In connection with the new term loan and revolver
increase, the Company recorded approximately $16 million of deferred financing costs.
Long-Term Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
In millions |
|
2008 |
|
2007 |
|
Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 |
|
$ |
425.0 |
|
|
$ |
425.0 |
|
Senior Subordinated Notes with interest payable semi-annually at 9.5%,
payable in 2013 |
|
|
425.0 |
|
|
|
425.0 |
|
Senior Secured Term Loan Facility with interest payable at various dates
at floating rates (4.78% at June 30, 2008) payable through 2014 |
|
|
1,010.0 |
|
|
|
1,010.0 |
|
Senior Secured Term Loan Facility with interest payable at various dates
at floating rates (5.53% at June 30, 2008) payable through 2014 |
|
|
1,194.0 |
|
|
|
|
|
Senior Secured Revolving Facility with interest payable at various dates
at floating rates (5.03% at June 30, 2008) payable in 2013 |
|
|
47.3 |
|
|
|
11.0 |
|
Other |
|
|
0.8 |
|
|
|
1.0 |
|
|
|
|
|
3,102.1 |
|
|
|
1,872.0 |
|
Less, current portion |
|
|
17.2 |
|
|
|
0.2 |
|
|
Total |
|
$ |
3,084.9 |
|
|
$ |
1,871.8 |
|
|
At June 30, 2008, the Company and its U.S. and international subsidiaries had the following
commitments, amounts outstanding and amounts available under revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount of |
|
Total Amount |
|
Total Amount |
In millions |
|
Commitments |
|
Outstanding |
|
Available (a) |
|
Revolving Credit Facility |
|
$ |
400.0 |
|
|
$ |
47.3 |
|
|
$ |
319.1 |
|
International Facilities |
|
|
16.8 |
|
|
|
6.1 |
|
|
|
10.7 |
|
|
Total |
|
$ |
416.8 |
|
|
$ |
53.4 |
|
|
$ |
329.8 |
|
|
|
|
|
Note: |
|
(a) |
|
In accordance with its debt agreements, the Companys availability
under its revolving credit facility has been reduced by the amount of
standby letters of credit issued of $33.6 million as of June 30,
2008. These letters of credit are used as security against its
self-insurance obligations and workers compensation obligations.
These letters of credit expire at various dates through 2009 unless
extended. |
Principal and interest payments under the term loan facility and the revolving credit facility,
together with principal and interest payments on the Senior Notes and the Senior Subordinated Notes
(the Notes), represent significant liquidity requirements for the Company. Based upon current
levels of operations, anticipated cost-savings and expectations as to future growth, the Company
believes that cash generated from operations, together with amounts available under its revolving
credit facility and other available financing sources, will be adequate to permit the Company to
meet its debt service obligations, necessary capital expenditure program requirements, ongoing
operating costs and working capital needs, although no assurance can be given in this regard. The
Companys future financial and operating performance, ability to service or refinance its debt and
ability to comply with the covenants and restrictions contained in its debt agreements will be
subject to future economic conditions and to financial, business and other factors, many of which
are beyond the Companys control and will be substantially dependent on the selling prices and
demand for the Companys products, raw material and energy costs, and the Companys ability to
successfully implement its overall business and profitability strategies.
Effective as of June 30, 2008, the Company had approximately $1.4 billion of net operating loss
carryforwards (NOLs) for U.S. federal income tax purposes. These NOLs generally may be used by
the Company to offset taxable income earned in subsequent taxable years. However, the Companys
ability to use these NOLs to offset its future taxable income may be subject to significant
limitation as a result of certain shifts in ownership due to direct or indirect transfers of the
Companys common stock by one or more 5 percent stockholders, or issuances or redemptions of the
Companys common stock, which, when taken together with previous changes in ownership of the
Companys common stock, constitute an ownership change under the Internal Revenue Code. Imposition
of any such limitation on the use of NOLs could have an adverse effect on the Companys future
after tax free cash flow.
34
Covenant Restrictions
The Credit
Agreement and the indentures governing the Notes limit the
Companys ability to incur additional indebtedness. Additional
covenants contained in the Credit Agreement, among other things,
restrict the ability of the Company to dispose of assets, incur guarantee obligations,
prepay other indebtedness, make dividend and other restricted payments, create liens, make equity
or debt investments, make acquisitions, modify terms of the indentures under which the Notes are
issued, engage in mergers or consolidations, change the business conducted by the Company and its
subsidiaries, and engage in certain transactions with affiliates. Such restrictions, together with
the highly leveraged nature of the Company, could limit the Companys ability to respond to
changing market conditions, fund its capital spending program, provide for unexpected capital
investments or take advantage of business opportunities.
Under the terms of the Credit Agreement, as long as any commitment remains outstanding under the
revolving credit facility, the Company must comply with a maximum consolidated secured leverage
ratio, which is defined as the ratio of: (a) total long-term and short-term indebtedness of the
Company and its consolidated subsidiaries as determined in accordance with generally accepted
accounting principles in the United States (GAAP), plus the aggregate cash proceeds received by
the Company and its subsidiaries from any receivables or other securitization but excluding there
from (i) all unsecured indebtedness, (ii) all subordinated indebtedness permitted to be incurred
under the Credit Agreement and (iii) all secured indebtedness of foreign subsidiaries to (b)
Adjusted EBITDA, which we refer to as Credit Agreement EBITDA(a). Pursuant to this
financial covenant, the Company must maintain a maximum consolidated secured leverage ratio of less
than the following:
|
|
|
|
|
|
|
Maximum Consolidated Secured |
|
|
Leverage Ratio (a) |
|
January 1, 2008 September 30, 2008 |
|
5.25 to 1.00 |
October 1, 2008 September 30, 2009 |
|
|
5.00 to 1.00 |
|
October 1, 2009 and thereafter |
|
|
4.75 to 1.00 |
|
|
|
|
|
(a) |
|
Credit Agreement EBITDA is defined in the Credit Agreement as consolidated net income
before consolidated net interest expense, non-cash expenses and charges, total income tax
expense, depreciation expense, expense associated with amortization of intangibles and other
assets, non-cash provisions for reserves for discontinued operations, extraordinary, unusual
or non-recurring gains or losses or charges or credits, gain or loss associated with sale or
write-down of assets not in the ordinary course of business, any income or loss accounted for
by the equity method of accounting, and projected run rate cost savings, prior to or within a
twelve month period. |
At June 30, 2008, the Company was in compliance with the financial covenant in the Credit Agreement
and the ratio was as follows:
Consolidated Secured Leverage Ratio 3.28 to 1.00
The Companys management believes that the presentation of the consolidated secured leverage ratio
and Credit Agreement EBITDA herein provides useful information to investors because borrowings
under the Credit Agreement are a key source of the Companys liquidity, and the Companys ability
to borrow under the Credit Agreement is dependent on, among other things, its compliance with this
financial covenant. Any failure by the Company to comply with this financial covenant could result
in an event of default, absent a waiver or amendment from the lenders under such agreement, in
which case the lenders may be entitled to declare all amounts owed to be due and payable
immediately.
Credit Agreement EBITDA is a financial measure not calculated in accordance with GAAP, and is not a
measure of net income, operating income, operating performance or liquidity presented in accordance
with GAAP. Credit Agreement EBITDA should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.
In addition, our Credit Agreement EBITDA may not be comparable to EBITDA or similarly titled
measures utilized by other companies since such other companies may not calculate Credit Agreement
EBITDA in the same manner as we do.
35
The calculations of the components of the maximum consolidated secured leverage ratio for and as of
the period ended June 30, 2008 are listed below:
|
|
|
|
|
|
|
Twelve Months Ended |
In millions |
|
June 30, 2008(a) |
|
Pro Forma Net Loss |
|
$ |
(74.7 |
) |
Income Tax Expense |
|
|
28.0 |
|
Interest Expense, Net |
|
|
246.0 |
|
Depreciation and Amortization |
|
|
289.6 |
|
Dividends Received, Net of Earnings of Equity Affiliates |
|
|
(1.2 |
) |
Non-Cash Provisions for Reserves for Discontinued Operations |
|
|
23.7 |
|
Other Non-Cash Charges |
|
|
6.8 |
|
Merger Related Expenses |
|
|
35.9 |
|
Gains/Losses Associated with Sale/Writedown of Assets |
|
|
(0.2 |
) |
Other Non-Recurring/Extraordinary/Unusual Items |
|
|
69.6 |
|
Projected Run Rate Cost Savings |
|
|
62.4 |
|
|
Credit Agreement EBITDA |
|
$ |
685.9 |
|
|
|
|
|
As of |
In millions |
|
June 30, 2008 |
|
Short Term Debt |
|
$ |
23.3 |
|
Long Term Debt |
|
|
3,084.9 |
|
|
Total Debt |
|
$ |
3,108.2 |
|
Less
Adjustment (b) |
|
|
856.8 |
|
|
Consolidated Secured Indebtedness |
|
$ |
2,251.4 |
|
|
|
|
|
(a) |
|
As defined by the Credit Agreement, this calculation includes the historical results of
Altivity for the last twelve months. |
|
|
|
As defined by the Credit Agreement, represents projected cost savings expected by the
Company to be realized as a result of specific actions taken or expected to be taken
prior to or within twelve months of the period in which Credit Agreement EBITDA is to be
calculated, net of the amount of actual benefits realized or expected to be realized
from such actions. |
|
|
|
The terms of the Credit Agreement limit the amount of projected run rate cost savings
that may be used in calculating Credit Agreement EBITDA by stipulating that such amount
may not exceed the lesser of (i) ten percent of EBITDA as defined in the Credit
Agreement for the last twelve-month period (before giving effect to projected run rate
cost savings) and (ii) $100 million. |
|
|
|
As a result, in calculating Credit Agreement EBITDA above, the Company used projected
run rate cost savings of $62.4, or ten percent of EBITDA as calculated in accordance
with the Credit Agreement, which amount is lower than total projected cost savings
identified by the Company, net of actual benefits realized for the twelve month period
ended June 30, 2008. Projected run rate cost savings were calculated by the Company
solely for its use in calculating Credit Agreement EBITDA for purposes of determining
compliance with the maximum consolidated secured leverage ratio contained in the Credit
Agreement and should not be used for any other purpose. |
|
(b) |
|
Represents consolidated indebtedness/securitization that is either (i) unsecured, or (ii)
Permitted Subordinated Indebtedness as defined in the Credit Agreement, or secured
indebtedness permitted to be incurred by the Companys foreign subsidiaries per the Credit
Agreement. |
The Companys ability to comply in future periods with the financial covenant in the Credit
Agreement will depend on its ongoing financial and operating performance, which in turn will be
subject to economic conditions and to financial, business and other factors, many of which are
beyond the Companys control, and will be substantially dependent on the selling prices for the
Companys products, raw material and energy costs, and the Companys ability to successfully
implement its overall business strategies, and meet its profitability objective. If a violation of
the financial covenant or any of the other covenants occurred, the Company would attempt to obtain
a waiver or an amendment from its lenders, although no assurance can be given that the Company
would be successful in this regard. The Credit Agreement and the indentures governing the Notes
have certain cross-default or cross-acceleration provisions; failure to comply with these covenants
in any agreement could result in a violation of such agreement which could, in turn, lead to
violations of other agreements pursuant to such cross-default or cross-acceleration provisions. If
an event of default occurs, the lenders are entitled to declare all amounts owed to be due
36
and payable immediately.
Capital Investment
The Companys capital investment in the first six months of 2008 was $83.3 million (including $21.7
million for Altivity since the acquisition), compared to $42.6 million in the first six months of
2007. During the first six months of 2008, the Company had capital spending of $62.2 million for
improving process capabilities, $9.9 million for capital spares and $11.2 million for manufacturing
packaging machinery.
Environmental Matters
The Company is subject to a broad range of foreign, federal, state and local environmental, health
and safety laws and regulations, including those governing discharges to air, soil and water, the
management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the
investigation and remediation of contamination resulting from historical site operations and
releases of hazardous substances, and the health and safety of employees. Compliance initiatives
could result in significant costs, which could negatively impact the Companys financial position,
results of operations or cash flows. Any failure to comply with such laws and regulations or any
permits and authorizations required thereunder could subject the Company to fines, corrective
action or other sanctions.
In addition, some of the Companys current and former facilities are the subject of environmental
investigations and remediations resulting from historical operations and the release of hazardous
substances or other constituents. Some current and former facilities have a history of industrial
usage for which investigation and remediation obligations may be imposed in the future or for which
indemnification claims may be asserted against the Company. Also, potential future closures or
sales of facilities may necessitate further investigation and may result in future remediation at
those facilities.
During the first quarter of 2006, the Company self-reported certain violations of its Title V
permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the Louisiana
Department of Environmental Quality (the LADEQ). The violations relate to the collection,
treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense
in the first quarter of 2006 for compliance costs to correct the technical issues causing the
Title V permit violations. The Company received a consolidated Compliance Order and notice of
potential penalty dated July 5, 2006 from the LADEQ indicating that the Company may be required to
pay civil penalties for violations that occurred from 2001 through 2005. The Company believes that
the LADEQ will assess a penalty of approximately $0.3 million to be paid partially in cash and
partially through the completion of beneficial environmental projects.
At the request of the County Administrative Board of Östergötland, Sweden, the Company conducted a
risk classification of its mill property located in Norrköping, Sweden. Based on the information
collected through this activity, the Company determined that some remediation of the site is
reasonably probable and recorded a $3.0 million reserve in the third quarter of 2007. Pursuant to
the Sale and Purchase Agreement dated October 16, 2007 between Graphic Packaging International
Holding Sweden AB (the Seller) and Lagrumment December nr 1031 Aktiebolg under which the
Companys Swedish operations were sold, the Seller retains liability for certain environmental
claims after the sale.
On October 8, 2007, the Company received a notice from the United States Environmental Protection
Agency (the EPA) indicating that it is a potentially responsible party for the remedial
investigation and feasibility study to be conducted at the Devils Swamp Lake site in East Baton
Rouge Parish, Louisiana. The Company expects to enter into negotiations with the EPA regarding its
potential responsibility and liability, but it is too early in the investigation process to
quantify possible costs with respect to such site.
In connection with the Altivity Transaction, the Company acquired several sites with on-going
administrative proceedings related to air emission and water discharge permit exceedances and soil
contamination issues. The Company is currently in the process of reviewing the facts and status of
such proceedings, but in all cases it is too early in the proceedings to be able to determine
liability and reasonably estimate costs relating to such proceedings.
37
The Company does not believe, however, that any of the proceedings will result in material
liabilities or penalties.
The Company has established reserves for those facilities or issues where liability is probable and
the costs are reasonably estimable. Except for the Title V permit issue, for which a penalty has
been estimated, it is too early in the investigation and regulatory process to make a determination
of the probability of liability and reasonably estimate costs. Nevertheless, the Company believes
that the amounts accrued for all of its loss contingencies, and the reasonably possible loss beyond
the amounts accrued, are not material to the Companys financial position, results of operations or
cash flows. The Company cannot estimate with certainty other future corrective compliance,
investigation or remediation costs, all of which the Company currently considers to be remote.
Costs relating to historical usage or indemnification claims that the Company considers to be
reasonably possible are not quantifiable at this time. The Company will continue to monitor
environmental issues at each of its facilities and will revise its accruals, estimates and
disclosures relating to past, present and future operations as additional information is obtained.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of net sales and expenses during the reporting period. Actual results could differ from
these estimates, and changes in these estimates are recorded when known. The critical accounting
policies used by management in the preparation of the Companys consolidated financial statements
are those that are important both to the presentation of the Companys financial condition and
results of operations and require significant judgments by management with regard to estimates
used.
The Companys most critical accounting policies which require significant judgment or involve
complex estimations are described in GPCs Annual Report on Form 10-K for the year ended
December 31, 2007.
NEW ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting the Company, see Note 2 in Part I,
Item 1, Notes to Condensed Consolidated Financial Statements.
BUSINESS OUTLOOK
The
Company expects inflationary pressures for production inputs,
including higher costs for energy, fiber,
wood and chemical-based inputs, to continue to impact results in 2008. To help offset inflation in
2008, the Company expects to realize year over year operating cost savings from its continuous
improvement programs, including Lean manufacturing projects. In addition, contractual price
escalators and price increases in 2007 for coated board and cartons should favorably impact 2008.
To partially offset increased input costs for fiber, energy and chemicals, the Company announced
in July 2008 a $50 per ton price increase for its coated recycled board (CRB) and uncoated recycled
board (URB) and a $40 per ton price increase for coated unbleached kraft (CUK) grades. The Company
also announced that it would set new freight allowances for these products. The price increase for
the coated recycled board (CRB) and uncoated recycled board (URB) will be effective with shipments
on or after July 28, 2008. The price increase for the coated unbleached kraft (CUK) grades will be
effective with shipments on or after August 1, 2008.
Total capital investment for 2008 is expected to be between approximately $180 million and
$200 million and is expected to relate principally to the Companys process capabilities
improvements and for maintaining compliance with environmental laws and regulations, including
manufacturing cost reductions, the production of packaging machinery and the acquisition of capital
spares.
38
The Company also expects the following in 2008:
|
|
|
Interest expense of $210 million to $220 million, including
approximately $8 million of non-cash interest expense associated with
amortization of debt issuance costs. |
|
|
|
|
Debt reduction of $120 million to $140 million. |
|
|
|
|
Capital spending of $180 million to $200 million. |
|
|
|
|
Pension plan contributions of $55 million to $60 million. |
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see Part II, Item 7A,
Quantitative and Qualitative Disclosure about Market Risk, in GPCs Annual Report on Form 10-K
for the year ended December 31, 2007. There have been no significant developments with respect to
derivatives or exposure to market risk during the first six months of 2008; for a discussion of the
Companys Financial Instruments, Derivatives and Hedging Activities, see Note 11 in Notes to
Consolidated Financial Statements in GPCs Annual Report on Form 10-K for the year ended
December 31, 2007 and Managements Discussion and Analysis of Financial Condition and Results of
Operations -Financial Condition, Liquidity and Capital Resources.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Companys management has carried out an evaluation, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended.
Based upon such evaluation, management has concluded that the Companys disclosure controls and
procedures were effective as of June 30, 2008.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the fiscal quarter ended June 30, 2008 that has materially affected, or is likely to affect,
the Companys internal control over financial reporting.
40
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business.
Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company
does not believe that disposition of these lawsuits will have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows. For more
information see Managements Discussion and Analysis of Financial Condition and Results of
Operations Environmental Matters.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in GPCs Form 10-K
for the year ended December 31, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Companys Annual Meeting of Stockholders held on May 20, 2008, the stockholders elected the
following nominees to the Board of Directors to serve a three-year term. The votes cast were as
follows:
|
|
|
|
|
|
|
|
|
Director |
|
FOR |
|
WITHHELD |
G. Andrea Botta |
|
|
304,328,990 |
|
|
|
18,704,882 |
|
Jeffrey H. Coors |
|
|
300,076,800 |
|
|
|
22,957,072 |
|
Kevin J. Conway |
|
|
300,048,848 |
|
|
|
22,985,024 |
|
Kelvin L. Davis |
|
|
300,069,498 |
|
|
|
22,964,374 |
|
David W. Scheible |
|
|
303,997,415 |
|
|
|
19,036,457 |
|
The terms of George V. Bayly, John D. Beckett, Jack A. Fusco, Jeffrey Liaw, Harold R. Logan, Jr.,
Michael G. MacDougall, John R. Miller, and Robert W. Tieken continued after the Annual Meeting of
Stockholders. No matters other than the election of directors were submitted to the stockholders
of the Company at the Annual Meeting.
ITEM 6. EXHIBITS
a) Exhibit Index
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
31.1
|
|
Certification required by Rule 13a-14(a). |
|
|
|
|
|
|
31.2
|
|
Certification required by Rule 13a-14(a). |
|
|
|
|
|
|
32.1
|
|
Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
|
|
|
|
|
|
32.2
|
|
Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GRAPHIC PACKAGING HOLDING COMPANY
(Registrant)
|
|
|
|
|
|
|
|
|
|
/s/ STEPHEN A. HELLRUNG
|
|
Senior Vice President, General
|
|
August 7, 2008 |
|
|
|
|
|
Stephen A. Hellrung
|
|
Counsel and Secretary |
|
|
|
|
|
|
|
/s/ DANIEL J. BLOUNT
|
|
Senior Vice President and
|
|
August 7, 2008 |
|
|
|
|
|
Daniel J. Blount
|
|
Chief Financial Officer (Principal |
|
|
|
|
Financial Officer)
|
|
|
|
|
|
|
|
/s/ DEBORAH R. FRANK
|
|
Vice President and Chief
Accounting Officer
|
|
August 7, 2008 |
|
|
|
|
|
Deborah R. Frank
|
|
(Principal Accounting Officer) |
|
|
42