GRAPHIC PACKAGING HOLDING COMPANY
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
|
|
|
o |
|
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)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
26-0405422
(I.R.S. employer
identification no.) |
|
|
|
814 Livingston Court
Marietta, Georgia
(Address of principal executive offices)
|
|
30067
(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o 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):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
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 April 30, 2009, there were 342,590,876 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
the effect of contractual price escalators and price increases for coated paperboard and cartons,
inflationary pressures, cost savings from its continuous improvement programs, capital spending,
depreciation and amortization, interest expense, debt reduction and pension plan contributions 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, the Companys substantial amount of debt,
inflation of and volatility in raw material and energy costs, 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, and the impact of regulatory and litigation matters, including those that impact
the Companys ability to protect and use its intellectual property. 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 the
Companys Annual Report on Form 10-K and in 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
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
In millions, except share and per share amounts |
|
2009 |
|
2008 |
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
181.0 |
|
|
$ |
170.1 |
|
Receivables, Net |
|
|
388.1 |
|
|
|
369.6 |
|
Inventories, Net |
|
|
521.2 |
|
|
|
532.0 |
|
Other Current Assets |
|
|
66.3 |
|
|
|
56.9 |
|
|
Total Current Assets |
|
|
1,156.6 |
|
|
|
1,128.6 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
1,896.5 |
|
|
|
1,935.1 |
|
Goodwill |
|
|
1,211.8 |
|
|
|
1,204.8 |
|
Intangible Assets, Net |
|
|
653.3 |
|
|
|
664.6 |
|
Other Assets |
|
|
45.0 |
|
|
|
50.0 |
|
|
Total Assets |
|
$ |
4,963.2 |
|
|
$ |
4,983.1 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short Term Debt and Current Portion of
Long-Term Debt |
|
$ |
18.9 |
|
|
$ |
18.6 |
|
Accounts Payable |
|
|
304.9 |
|
|
|
333.4 |
|
Compensation and Employee Benefits |
|
|
93.8 |
|
|
|
87.2 |
|
Interest Payable |
|
|
34.5 |
|
|
|
57.8 |
|
Other Accrued Liabilities |
|
|
185.2 |
|
|
|
188.6 |
|
|
Total Current Liabilities |
|
|
637.3 |
|
|
|
685.6 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
3,208.5 |
|
|
|
3,165.2 |
|
Deferred Income Tax Liabilities |
|
|
203.1 |
|
|
|
187.8 |
|
Accrued Pension and Postretirement Benefits |
|
|
380.2 |
|
|
|
375.8 |
|
Other Noncurrent Liabilities |
|
|
45.3 |
|
|
|
43.5 |
|
|
Total Liabilities |
|
|
4,474.4 |
|
|
|
4,457.9 |
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $.01 per share;
100,000,000 shares authorized; no shares
issued or outstanding |
|
|
|
|
|
|
|
|
Common Stock, par value $.01 per share;
1,000,000,000 shares authorized; 342,590,876
and 342,522,470 shares issued and outstanding
at March 31, 2009 and December 31, 2008,
respectively |
|
|
3.4 |
|
|
|
3.4 |
|
Capital in Excess of Par Value |
|
|
1,955.6 |
|
|
|
1,955.4 |
|
Accumulated Deficit |
|
|
(1,103.6 |
) |
|
|
(1,075.4 |
) |
Accumulated Other Comprehensive Loss |
|
|
(366.6 |
) |
|
|
(358.2 |
) |
|
Total Shareholders Equity |
|
|
488.8 |
|
|
|
525.2 |
|
|
Total Liabilities and Shareholders Equity |
|
$ |
4,963.2 |
|
|
$ |
4,983.1 |
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
In millions, except per share amounts |
|
2009 |
|
2008 |
|
Net Sales |
|
$ |
1,019.2 |
|
|
$ |
724.3 |
|
Cost of Sales |
|
|
892.9 |
|
|
|
637.7 |
|
Selling, General and Administrative |
|
|
90.1 |
|
|
|
61.3 |
|
Research, Development and Engineering |
|
|
1.4 |
|
|
|
2.0 |
|
Other Expense (Income), Net |
|
|
1.7 |
|
|
|
(2.2 |
) |
|
Income from Operations |
|
|
33.1 |
|
|
|
25.5 |
|
Interest Income |
|
|
0.1 |
|
|
|
0.1 |
|
Interest Expense |
|
|
(52.3 |
) |
|
|
(42.8 |
) |
|
Loss before Income Taxes and Equity in Net
Earnings of Affiliates |
|
|
(19.1 |
) |
|
|
(17.2 |
) |
Income Tax Expense |
|
|
(9.3 |
) |
|
|
(6.4 |
) |
|
Loss before Equity in Net Earnings of Affiliates |
|
|
(28.4 |
) |
|
|
(23.6 |
) |
Equity in Net Earnings of Affiliates |
|
|
0.2 |
|
|
|
0.3 |
|
|
Net Loss |
|
$ |
(28.2 |
) |
|
$ |
(23.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share Basic and Diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding
Basic and Diluted |
|
|
342.6 |
|
|
|
234.5 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
In millions |
|
2009 |
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(28.2 |
) |
|
$ |
(23.3 |
) |
Noncash Items Included in Net Loss: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
76.4 |
|
|
|
50.6 |
|
Deferred Income Taxes |
|
|
9.3 |
|
|
|
5.1 |
|
Amount of Postemployment Expense Greater (Less) Than Funding |
|
|
12.2 |
|
|
|
(25.6 |
) |
Amortization of Deferred Debt Issuance Costs |
|
|
2.1 |
|
|
|
1.6 |
|
Other, Net |
|
|
3.8 |
|
|
|
16.9 |
|
Changes in Operating Assets & Liabilities |
|
|
(73.7 |
) |
|
|
(100.5 |
) |
|
Net Cash Provided by (Used in) Operating Activities |
|
|
1.9 |
|
|
|
(75.2 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital Spending |
|
|
(36.0 |
) |
|
|
(35.9 |
) |
Acquisition Costs Related to Altivity |
|
|
|
|
|
|
(29.1 |
) |
Cash Acquired Related to Altivity |
|
|
|
|
|
|
60.2 |
|
Proceeds from Sale of Assets, Net of Selling Costs |
|
|
|
|
|
|
0.7 |
|
Other, Net |
|
|
1.0 |
|
|
|
(0.6 |
) |
|
Net Cash Used in Investing Activities |
|
|
(35.0 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from Issuance of Debt |
|
|
|
|
|
|
1,200.0 |
|
Payments on Debt |
|
|
|
|
|
|
(1,168.4 |
) |
Borrowings under Revolving Credit Facilities |
|
|
93.4 |
|
|
|
251.0 |
|
Payments on Revolving Credit Facilities |
|
|
(49.3 |
) |
|
|
(174.8 |
) |
Debt Issuance Costs |
|
|
|
|
|
|
(15.1 |
) |
Other, Net |
|
|
0.4 |
|
|
|
(0.6 |
) |
|
Net Cash Provided by Financing Activities |
|
|
44.5 |
|
|
|
92.1 |
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash |
|
|
(0.5 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
10.9 |
|
|
|
12.6 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
170.1 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
181.0 |
|
|
$ |
21.9 |
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
Other |
|
|
|
|
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, 2007 |
|
|
200,978,569 |
|
|
$ |
2.0 |
|
|
$ |
1,191.6 |
|
|
$ |
(975.7 |
) |
|
$ |
(73.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.7 |
) |
|
|
|
|
|
$ |
(99.7 |
) |
Other Comprehensive Income
(Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60.6 |
) |
|
|
(60.6 |
) |
Pension Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212.2 |
) |
|
|
(212.2 |
) |
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
2.4 |
|
Postemployment Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
1.2 |
|
Currency Translation
Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.1 |
) |
|
|
(15.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(384.0 |
) |
Common Stock Issued for
Acquisition |
|
|
139,445,038 |
|
|
|
1.4 |
|
|
|
761.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and Other Stock-Based
Awards |
|
|
2,098,863 |
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
342,522,470 |
|
|
$ |
3.4 |
|
|
$ |
1,955.4 |
|
|
$ |
(1,075.4 |
) |
|
$ |
(358.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.2 |
) |
|
|
|
|
|
$ |
(28.2 |
) |
Other Comprehensive Income
(Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
0.8 |
|
Pension Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.4 |
|
|
|
5.4 |
|
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Postemployment Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.2 |
|
Currency Translation
Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.6 |
) |
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(36.6 |
) |
Options and Other Stock-Based
Awards |
|
|
68,406 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2009 |
|
|
342,590,876 |
|
|
$ |
3.4 |
|
|
$ |
1,955.6 |
|
|
$ |
(1,103.6 |
) |
|
$ |
(366.6 |
) |
|
|
|
|
|
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 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Graphic Packaging Holding Company (GPHC and, together with its subsidiaries, the Company) is a
leading provider of packaging solutions for a wide variety of products to food, beverage and other
consumer products companies. The Company is the largest producer 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 became a new publicly-traded parent company when, on March 10, 2008, the businesses of Graphic
Packaging Corporation (GPC) and Altivity Packaging, LLC (Altivity) were combined through a
series of transactions. 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 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 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 Condensed Consolidated Statement of Operations for the three
months ended March 31, 2008 includes approximately three weeks of Altivitys results and three
months of GPCs results.
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. 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 Consent Decree. The sale of the mills was completed on September 17, 2008.
The mills that were sold are located in Philadelphia, Pennsylvania and in Wabash, Indiana.
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
GPIIs debt.
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 GPHCs Annual Report on Form 10-K for the year ended December 31, 2008.
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
8
revenues and expenses during the reporting period. Actual amounts could differ from those estimates
and changes in these statements are recorded as known.
For a summary of the Companys significant accounting policies, please refer to GPHCs Annual
Report on Form 10-K for the year ended December 31, 2008.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157
establishes a common definition for fair value to be applied to U.S. generally accepted accounting
principles requiring use of fair value, establishes a framework for measuring fair value and
expands disclosures about such fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007.
In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 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
157-1). FSP 157-1 excludes certain leasing transactions accounted for under FASB Statement No. 13,
Accounting for Leases, from the scope of SFAS 157.
In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157,
(FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years, 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 adopted SFAS 157 as of
January 1, 2008, related to financial assets and financial liabilities, and as of January 1, 2009,
related to nonfinancial assets and nonfinancial liabilities. See Note 8 Financial Instruments and
Fair Value Measurement. The adoption of SFAS 157 did not have a significant impact on the Companys
financial position, results of operations and cash flows.
In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board Opinion (APB)
28-1, Interim Disclosures about Fair Value of Financial Instruments, (FSP 107-1 and APB 28-1)
which is effective for interim periods ending after June 15, 2009. FSP 107-1 and APB 28-1 increase
the frequency of fair value disclosures required by SFAS No. 107, Disclosures About Fair Value of
Financial Instruments. FSP 107-1 and APB 28-1 require fair value disclosures on a quarterly
basis for any financial instruments that are not currently reflected on the balance sheet at fair
value. Prior to the issuance of FSP 107-1 and APB 28-1, fair value of these assets and liabilities
were only required to be disclosed once a year. FSP 107-1 and APB 28-1 are not expected to have an
impact on the Companys financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS
141R) which is effective for fiscal years beginning after December 15, 2008. SFAS 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 Company will assess the impact of adoption when a business combination arises.
In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies, (FSP 141(R)-1).
FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. FSP 141(R)-1 amends and clarifies SFAS
141R to address application issues raised by preparers, auditors, and members of the legal
profession on initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business combination. The
Company will assess the impact of adoption when assets or liabilities arising from contingencies
are acquired in a business combination.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an Amendment of ARB No. 51, (SFAS 160) which is effective for fiscal years
beginning after December 15, 2008. SFAS 160 amends Accounting Research Bulletin 51(ARB 51) to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It also amends certain of ARB 51s consolidation
procedures for consistency with the requirements of
9
SFAS 141R. The adoption of SFAS 160 did not have a material impact on the Companys financial
position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an Amendment of FASB Statement No. 133, (SFAS 161) which is effective for fiscal
years and interim periods beginning after November 15, 2008. SFAS 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. See Note 8
Financial Instruments and Fair Value Measurement. The adoption of SFAS 161 did not have a material
impact on the Companys financial position, results of operations and cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible
Assets, (FSP 142-3). FSP 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 SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142). The intent of FSP 142-3 is
to improve the consistency between the useful life of a recognized intangible asset under SFAS 142
and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R
and other U.S. generally accepted accounting principles. FSP 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 will assess the impact of adoption when additional intangible
assets are acquired or recognized.
In December 2008, the FASB issued FSP No. FAS 132 (R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets, (FSP 132 (R)-1) which is effective for fiscal years ending
after December 15, 2009. FSP 132 (R)-1 requires additional disclosures in plan assets of defined
benefit pension or other postretirement plans. The required disclosures include a description of
investment policies and strategies, the fair value of each major category of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan assets, and the
significant concentrations of risk within plan assets. The adoption of FSP 132 (R)-1 is not
expected to have a material impact on the Companys financial position, results of operations and
cash flows.
NOTE 2 ALTIVITY TRANSACTION
On March 10, 2008, the businesses of GPC and Altivity were combined in a transaction accounted for
under SFAS 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, multi-wall bag and
specialty packaging. Altivity operated recycled boxboard mills and consumer product packaging
facilities in North America.
The Company determined that the relative outstanding share ownership, voting rights, and the
composition of the governing body and senior management positions required 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 values at the date of the
Altivity Transaction. The final purchase price allocation is as follows:
|
|
|
|
|
In millions |
|
|
|
|
|
Purchase Price |
|
$ |
762.8 |
|
Acquisition Costs |
|
|
30.3 |
|
Assumed Debt |
|
|
1,167.6 |
|
|
Total Purchase Consideration |
|
$ |
1,960.7 |
|
|
10
|
|
|
|
|
In millions |
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
60.2 |
|
Receivables, Net |
|
|
181.2 |
|
Inventories |
|
|
265.0 |
|
Prepaids |
|
|
13.1 |
|
Property, Plant and Equipment |
|
|
636.7 |
|
Intangible Assets |
|
|
561.1 |
|
Other Assets |
|
|
4.5 |
|
|
Total Assets Acquired |
|
|
1,721.8 |
|
|
|
|
|
|
Current Liabilities, Excluding Current Portion of Long-Term Debt |
|
|
256.0 |
|
Pension and Postemployment Benefits |
|
|
35.3 |
|
Other Noncurrent Liabilities |
|
|
40.1 |
|
|
Total Liabilities Assumed |
|
|
331.4 |
|
|
Net Assets Acquired |
|
|
1,390.4 |
|
|
Goodwill |
|
|
570.3 |
|
|
Total Estimated Fair Value of Net Assets Acquired |
|
$ |
1,960.7 |
|
|
The Company has plans to close certain facilities of the acquired company and has established
restructuring reserves that are considered liabilities assumed in the Altivity Transaction. See
Note 3 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 March 31, 2009 |
|
$ |
411.0 |
|
|
$ |
61.9 |
|
|
$ |
97.4 |
|
|
$ |
570.3 |
|
|
The Company expects to deduct approximately $430 million of goodwill for tax purposes.
The following table summarizes acquired intangibles:
|
|
|
|
|
In millions |
|
|
|
|
|
Customer Relationships |
|
$ |
546.4 |
|
Non-Compete Agreements |
|
|
8.2 |
|
Trademarks and Patents |
|
|
7.5 |
|
Leases and Supply Contracts |
|
|
(1.0 |
) |
|
Total Estimated Fair Market Value of Intangible Assets |
|
$ |
561.1 |
|
|
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, four 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 and excludes the 2008 results for
the two coated recycled board mills divested in September 2008. 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.
11
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
In millions |
|
2009 |
|
2008 |
|
Net Sales |
|
$ |
1,019.2 |
|
|
$ |
1,096.6 |
|
Net Loss |
|
$ |
(13.3 |
) |
|
$ |
(23.5 |
) |
Loss Per Share Basic and Diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.07 |
) |
|
NOTE 3 RESTRUCTURING RESERVES
In conjunction with the Altivity Transaction, the Company formulated plans to close or exit certain
production facilities of Altivity. Restructuring reserves were established for employee severance
and benefit payments, facility closure costs and equipment removal. 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 seven Altivity facilities and has committed to four additional plant closures. The restructuring
activities are expected to be substantially completed by December 31, 2010.
In addition, as of March 31, 2009, the Company has announced the closure of a GPC facility and a
multi-wall bag facility. Termination benefits and retention bonuses related to workforce reduction
were accrued in accordance with the requirements of SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The amount of termination benefits recorded in the first
quarter of 2009 was $1.9 million and is included in Selling, General and Administrative costs in
the Condensed Consolidated Statements of Operations. The Company did not record any termination
benefits in the first quarter of 2008.
The portion of the restructuring reserves expected to be settled within one year is included in
Other Accrued Liabilities on the Companys Condensed Consolidated Balance Sheets. The long-term portion
of these reserves is included in Other Noncurrent Liabilities on the Companys Condensed
Consolidated Balance Sheets.
The following table summarizes the transactions within the restructuring reserves at March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
Facility |
|
Equipment |
|
|
In millions |
|
and Benefits |
|
Closure Costs |
|
Removal |
|
Total |
|
Establish Reserve |
|
$ |
7.0 |
|
|
$ |
8.5 |
|
|
$ |
1.8 |
|
|
$ |
17.3 |
|
Additions to Reserves |
|
|
13.4 |
|
|
|
2.3 |
|
|
|
0.8 |
|
|
|
16.5 |
|
Cash Payments |
|
|
(6.1 |
) |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
(7.3 |
) |
Other Adjustments |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
Balance at December 31, 2008 |
|
$ |
13.9 |
|
|
$ |
9.8 |
|
|
$ |
2.0 |
|
|
$ |
25.7 |
|
Additions to Reserves |
|
|
2.9 |
|
|
|
0.9 |
|
|
|
0.3 |
|
|
|
4.1 |
|
Cash Payments |
|
|
(2.3 |
) |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
(3.1 |
) |
Other Adjustments |
|
|
(2.3 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
(3.5 |
) |
|
Balance at March 31, 2009 |
|
$ |
12.2 |
|
|
$ |
8.8 |
|
|
$ |
2.2 |
|
|
$ |
23.2 |
|
|
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 first quarter of 2009 was $4.1 million.
12
NOTE 4 INVENTORIES
Inventories by major class:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
In millions |
|
2009 |
|
2008 |
|
Finished Goods |
|
$ |
286.7 |
|
|
$ |
301.3 |
|
Work in Progress |
|
|
49.6 |
|
|
|
46.0 |
|
Raw Materials |
|
|
125.6 |
|
|
|
116.5 |
|
Supplies |
|
|
69.3 |
|
|
|
77.9 |
|
|
|
|
|
531.2 |
|
|
|
541.7 |
|
Less: Allowance |
|
|
(10.0 |
) |
|
|
(9.7 |
) |
|
Total |
|
$ |
521.2 |
|
|
$ |
532.0 |
|
|
NOTE 5 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 Companys obligations under the new Credit Agreement
are collateralized by substantially all of the Companys domestic assets.
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.
Long-Term Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
In millions |
|
2009 |
|
2008 |
|
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 (3.13% at March 31, 2009) payable through 2014 |
|
|
1,000.3 |
|
|
|
1,000.3 |
|
Senior Secured Term Loan Facility with interest payable at various dates at floating
rates (3.90% at March 31, 2009) payable through 2014 |
|
|
1,182.3 |
|
|
|
1,182.3 |
|
Senior Secured Revolving Facility with interest payable at various dates at floating
rates (2.75% at March 31, 2009) payable in 2013 |
|
|
186.5 |
|
|
|
143.2 |
|
Other |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
3,219.9 |
|
|
|
3,176.6 |
|
Less, current portion |
|
|
11.4 |
|
|
|
11.4 |
|
|
Total |
|
$ |
3,208.5 |
|
|
$ |
3,165.2 |
|
|
At March 31, 2009, 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 |
|
|
$ |
186.5 |
|
|
$ |
177.6 |
|
International Facilities |
|
|
17.9 |
|
|
|
7.5 |
|
|
|
10.4 |
|
|
Total |
|
$ |
417.9 |
|
|
$ |
194.0 |
|
|
$ |
188.0 |
|
|
13
|
|
|
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 $35.9 million
as of March 31, 2009. 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 2010 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 March 31, 2009, the Company was in compliance with the financial covenants in the Credit
Agreement. The Companys ability to comply in future periods with the financial covenants 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.
NOTE 6 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 March 31, 2009 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 Options
GPC and the Company have not granted any stock options since 2004. During the three months ended
March 31, 2009, no stock options were exercised and 80,703 stock options were cancelled. The total
number of shares subject to options at March 31, 2009 was 7,035,184 at a weighted average exercise
price of $7.21.
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 RSUs vest and become unrestricted in
one to five years from date of grant. Upon
vesting, RSUs are payable in cash and shares, based on the proportion
set forth in the grant agreements.
14
Data concerning RSUs granted in the first three months of 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Grant Date Fair |
Shares in thousands |
|
Shares |
|
Value Per Share |
|
RSUs Employees |
|
|
8,343 |
|
|
$ |
0.89 |
|
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.
During the first three months of 2009, the Company also issued 15,607 shares of phantom stock,
representing compensation earned during 2008 and deferred by one of its directors. These shares of
phantom stock are fully vested on the date of grant and are payable upon termination of service as
a director. The Company also has an obligation to issue 48,653 shares in payment of employee
deferred compensation.
During the three months ended March 31, 2009 and 2008, $0.4 million and $6.9 million were charged
to compensation expense for RSUs, respectively. Of the amount charged to expense during the first
quarter of 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 as of March 31, 2009 is approximately $7 million and is expected to be
recognized over a weighted average period of three years.
NOTE 7 PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains both defined benefit pension plans and postretirement health care plans for
substantially all of its North American employees. The plans provide medical and life insurance
coverage to eligible salaried and hourly retired employees and their dependents. Currently, the
plans are closed to newly-hired salaried and non-union hourly employees.
The Companys funding policies with respect to its North American pension plans are to contribute
funds to trusts as necessary to at least meet the minimum funding requirements. Plan assets are
invested in equities and fixed income securities.
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 Ended March 31, |
In millions |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
| | | | |
Components of Net Periodic Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost |
|
$ |
4.8 |
|
|
$ |
3.8 |
|
|
$ |
0.4 |
|
|
$ |
0.3 |
|
Interest Cost |
|
|
10.9 |
|
|
|
9.3 |
|
|
|
0.9 |
|
|
|
0.8 |
|
Expected Return on Plan Assets |
|
|
(9.1 |
) |
|
|
(10.0 |
) |
|
|
|
|
|
|
|
|
Amortizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost |
|
|
0.3 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
Actuarial Loss (Gain) |
|
|
5.0 |
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
Net Periodic Cost |
|
$ |
11.9 |
|
|
$ |
4.3 |
|
|
$ |
1.1 |
|
|
$ |
1.0 |
|
|
The Company made contributions of $2.9 million and $29.4 million to its pension plans during the
first three months of 2009 and 2008, respectively. The Company expects to make contributions of
approximately $65 million for the full year 2009. During 2008, the Company made $56.8 million of
contributions to its U.S. pension plans.
The Company made postretirement benefit payments of $0.6 million during the first three months of
2009 and 2008. The Company estimates its postretirement benefit payments for the full year 2009 to
be approximately $4 million. During 2008, the Company made postretirement benefit payments of $2.7
million.
15
NOTE 8 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT
The Company enters into derivative instruments for risk management purposes only, including
derivatives designated as hedging instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133), and those not designated as hedging instruments
under SFAS 133. The Company uses interest rate swaps, natural gas swap contracts, and forward
exchange contracts.
Interest Rate Risk
The Company uses interest rate swaps to manage interest rate risks on future interest payments
caused by interest rate changes on its variable rate term loan facility. At March 31, 2009, the
Company had interest rate swap agreements with a notional amount of $2.3 billion, including $700
million in forward starting interest rate swaps, which expire on various dates from 2009 to 2012
under which the Company will pay fixed rates of 2.24% to 5.06% and receive the three-month LIBOR
rates. At December 31, 2008, the Company had interest rate swap agreements with a notional amount
of $1.6 billion, which expire on various dates from 2009 to 2012 under which the Company will pay
fixed rates of 2.37% to 5.06% and receive the three-month LIBOR rates.
These derivative instruments are designated as cash flow hedges and to the extent they are
effective in offsetting the variability of the hedged cash flows, changes in the derivatives fair
value are not included in current earnings but are included in Accumulated Other Comprehensive
Income (Loss). These changes in fair value will subsequently be reclassified into earnings as a
component of Interest Expense as interest is incurred on amounts outstanding under the term loan
facility. Ineffectiveness measured in the hedging relationship is recorded in earnings in the
period it occurs.
During the first quarter 2009, there were minimal amounts of ineffectiveness related to changes in
the fair value of interest rate swap agreements. Additionally, there were no amounts excluded from
the measure of effectiveness.
Commodity Risk
To manage risks associated with future variability in cash flows and price risk attributable to
certain commodity purchases, the Company enters into natural gas swap contracts to hedge prices for
a designated percentage of its expected natural gas usage. Such contracts are designated as cash
flow hedges. As of March 31, 2009, the Company had entered into natural gas swap contracts to hedge
prices for approximately 72% and 20% of its expected natural gas usage for the remainder of 2009
and 2010, respectively. When a contract matures, the resulting gain or loss is reclassified into
Cost of Sales concurrently with the recognition of the commodity purchased. The ineffective portion
of the swap contracts change in fair value, if any, would be recognized immediately in earnings.
During the first quarter 2009, there were minimal amounts of ineffectiveness related to changes in
the fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the
measure of effectiveness.
Foreign Currency Risk
The Company enters into forward exchange contracts to manage risks associated with future
variability in cash flows resulting from anticipated foreign currency transactions that may be
adversely affected by changes in exchange rates. Such contracts are designated as cash flow hedges.
Gains/losses, if any, related to these contracts are recognized in Other Expense (Income), Net
when the anticipated transaction affects income.
At March 31, 2009 and December 31, 2008, forward exchange contracts existed that expire on various
dates throughout 2009. Those purchased forward exchange contracts outstanding at March 31, 2009 and
December 31, 2008, when measured in U.S. dollars at exchange rates at March 31, 2009 and December
31, 2008, respectively, had notional amounts totaling $56.0 million and $80.8 million.
No amounts were reclassified to earnings during the first quarter 2009 in connection with
forecasted transactions that were no longer considered probable of occurring, and there was no
ineffectiveness related to changes in the fair value of foreign currency forward contracts.
Additionally, there were no amounts excluded from the measure of effectiveness.
16
Derivatives not Designated as Hedges
The Company enters into forward exchange contracts to effectively hedge substantially all of
accounts receivable resulting from transactions denominated in foreign currencies in order to
manage risks associated with foreign currency transactions adversely affected by changes in
exchange rates. At March 31, 2009 and December 31, 2008, multiple foreign currency forward exchange
contracts existed, with maturities ranging up to three months. Those foreign currency exchange
contracts outstanding at March 31, 2009 and December 31, 2008, when aggregated and measured in
U.S. dollars at exchange rates at March 31, 2009 and December 31, 2008, respectively, had net
notional amounts totaling $9.3 million and $4.4 million. Generally, unrealized gains and losses
resulting from these contracts are recognized in Other Expense (Income), Net and approximately
offset corresponding unrealized gains and losses recognized on these accounts receivable.
Fair Value of Financial Instruments
The Companys derivative instruments are carried at fair value. The Company has determined that the
inputs to the valuation of these derivative instruments are level 2 in the fair value hierarchy.
As of March 31, 2009, there has not been any significant impact to the fair value of the Companys
derivative liabilities due to its own credit risk. Similarly, there has not been any significant
adverse impact to the Companys derivative assets based on evaluation of the Companys
counterparties credit risks.
The fair value of the Companys derivative instruments as of March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative |
|
|
|
Derivative |
In millions |
|
|
|
Assets |
|
|
|
Liabilities |
Derivative Contracts Designated as Hedging |
|
Balance Sheet |
|
March 31, |
|
Balance Sheet |
|
March 31, |
Instruments under SFAS No. 133 |
|
Location |
|
2009 |
|
Location |
|
2009 |
|
Commodity Contracts |
|
Other Current Assets |
|
$ |
|
|
|
Other Accrued Liabilities and Other Noncurrent Liabilities |
|
$ |
24.8 |
|
Foreign Currency Contracts |
|
Other Current Assets |
|
|
4.5 |
|
|
Other Accrued Liabilities |
|
|
1.5 |
|
Interest Rate Swap Agreements |
|
Other Current Assets |
|
|
|
|
|
Other Accrued Liabilities |
|
|
57.2 |
|
|
|
|
|
|
$ |
4.5 |
|
|
|
|
$ |
83.5 |
|
|
Derivative Contracts Not Designated as
Hedging Instruments under SFAS No. 133 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts |
|
Other Current Assets |
|
$ |
|
|
|
Other Accrued Liabilities |
|
$ |
0.2 |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Contracts |
|
|
|
$ |
4.5 |
|
|
|
|
$ |
83.7 |
|
|
17
Effect of Derivative Instruments
The effect of derivative instruments in cash flow hedging relationships on the Companys Condensed
Consolidated Statements of Operations for the quarter ended March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
Amount of Gain (Loss) |
|
|
|
Amount of Gain (Loss) |
|
|
Comprehensive Income |
|
Location of Gain |
|
Recognized in Income |
|
Location of Gain |
|
Recognized in Income |
|
|
(Loss) |
|
(Loss) Recognized in |
|
(effective portion) |
|
(Loss) Recognized in |
|
(ineffective portion) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Income (effective |
|
Three Months Ended |
|
Income (ineffective |
|
Three Months Ended |
In millions |
|
March 31, 2009 |
|
portion) |
|
March 31, 2009 |
|
portion) |
|
March 31, 2009 |
|
|
|
Commodity Contracts |
|
$ |
(12.8 |
) |
|
Cost of Sales |
|
$ |
(11.9 |
) |
|
Cost of Sales |
|
$ |
0.5 |
|
Foreign
Currency Contracts |
|
|
4.5 |
|
|
Other Expense (Income), Net |
|
|
(0.5 |
) |
|
Other Expense (Income), Net |
|
|
|
|
Interest Rate Swap
Agreements |
|
|
(12.4 |
) |
|
Interest Expense |
|
|
(9.1 |
) |
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20.7 |
) |
|
|
|
$ |
(21.5 |
) |
|
|
|
$ |
0.5 |
|
|
|
|
The effect of derivative instruments not designated as hedging instruments on the Companys
Condensed Consolidated Statements of Operations for the quarter ended March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
Location of Gain |
|
(Loss) Recognized |
|
|
(Loss) Recognized |
|
in Income |
|
|
|
|
in Income on |
|
Three Months Ended |
In millions |
|
Derivatives) |
|
March 31, 2009 |
|
Foreign Currency Contracts |
|
Other Expense (Income), Net |
|
$ |
|
|
|
Accumulated Derivative Instruments (Loss) Gain
The following is a reconciliation of changes in fair value which have been recorded as Accumulated
Derivative Instruments (Loss) Gain in the Statement of Shareholders Equity as of March 31, 2009:
|
|
|
|
|
In millions |
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
(68.5 |
) |
Reclassification to earnings |
|
|
21.5 |
|
Current period change in fair value |
|
|
(20.7 |
) |
|
Balance at March 31, 2009 |
|
$ |
(67.7 |
) |
|
At March 31, 2009, the Company expects to reclassify approximately $39 million of losses in the
next twelve months from Accumulated Derivative Instruments (Loss) Gain to earnings,
contemporaneously with and offsetting changes in the related hedged exposure. The actual amount
that will be reclassified to future earnings may vary as a result of changes in market conditions.
18
NOTE 9 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.
In 2007, 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 was 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. In addition, during 2008, the Company determined an additional
liability of $0.9 million was necessary and recorded this in discontinued operations within the
Companys Condensed Consolidated Statements of Operations. The Company has paid $3.4 million
against the reserve in 2008.
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.
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 in West Monroe, 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.
19
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 financial position, results of operations or cash flows.
NOTE 10 BUSINESS SEGMENT INFORMATION
The Company reports its results in three business segments: paperboard packaging, 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 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.
Prior year segment results have been reclassified for the allocation of certain corporate costs.
Business segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
In millions |
|
2009 |
|
2008 |
|
NET SALES: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
840.4 |
|
|
$ |
657.1 |
|
Multi-wall Bag |
|
|
124.8 |
|
|
|
50.0 |
|
Specialty Packaging |
|
|
54.0 |
|
|
|
17.2 |
|
|
Total |
|
$ |
1,019.2 |
|
|
$ |
724.3 |
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
56.0 |
|
|
$ |
54.4 |
|
Multi-wall Bag |
|
|
3.1 |
|
|
|
3.8 |
|
Specialty Packaging |
|
|
2.5 |
|
|
|
0.3 |
|
Corporate |
|
|
(28.5 |
) |
|
|
(33.0 |
) |
|
Total |
|
$ |
33.1 |
|
|
$ |
25.5 |
|
|
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 Business |
|
Ø |
|
Overview of 2009 Results |
|
Ø |
|
Results of Operations |
|
Ø |
|
Financial Condition, Liquidity and Capital Resources |
|
Ø |
|
Critical Accounting Policies |
|
Ø |
|
New Accounting Standards |
|
Ø |
|
Business Outlook |
OVERVIEW OF BUSINESS
The Companys objective is to strengthen its position as a leading provider of paperboard 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 coated unbleached kraft paperboard
(CUK board) and coated recycled paperboard (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 also 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 Companys specialty packaging business has an established position in end-markets for food
products, pharmaceutical and medical products, personal care, industrial, pet food and pet care
products, horticulture, military and commercial retort pouches and shingle wrap. In addition, the
Companys label business focuses on two product lines: heat transfer labels and litho labels.
The Company is 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 material 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. Although the
Company is currently experiencing some deflation with certain input costs, its cost of goods sold
during the first quarter of 2009 reflects the higher cost associated with the inventory on hand at
December 31, 2008. This inflation increased the first
quarter of 2009 costs by $24.6 million, compared to the first three months of 2008. The 2009 costs
are primarily related to the December
21
31, 2008 inventory sold during the first quarter of 2009
($19.5 million); outside board purchases ($9.0 million); chemical-based inputs ($6.9 million); and
labor and related benefits ($1.3 million). These costs were partially offset by other lower costs
($12.1 million), primarily due to lower costs for secondary fiber, wood and resin. Energy costs,
including natural gas, were essentially flat for the quarter. As the price of natural gas has
experienced significant variability, the Company has entered into contracts designed
to manage risks associated with future variability in cash flows caused by changes in the price of
natural gas. The Company has hedged approximately 72% and 20% of its expected natural gas usage for
the remainder of 2009 and 2010, respectively. The Company believes that the deflation it has
experienced with certain input costs in the first quarter of 2009 will benefit results in 2009,
although inflationary pressures, including higher costs for chemical-based inputs and labor and
related benefits, will most likely continue to negatively impact its results for 2009. 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 $3,227.4 million of outstanding debt obligations as
of March 31, 2009. 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 also prohibit
or restrict, among other things, the disposal of assets, the incurrence of additional indebtedness
(including guarantees), payment of dividends, loans or advances and certain other types of
transactions. 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.
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 efforts to build a high performing culture. During the first three months of 2009, the Company
achieved $10.5 million in cost savings as compared to the first three months of 2008, through its
continuous improvement programs and manufacturing initiatives.
As part of the integration with Altivity, the Company has accelerated and achieved cost synergies and operating efficiencies sooner than expected. The Company will continue to benefit from
these actions as long as the run rate continues at the current level. The inability to maintain the
run rate could negatively impact future results.
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 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. Continuing
increases in energy, food and other costs of living, conditions in
the residential real estate market, rising unemployment rates, reduced access to credit and
declining consumer confidence, as well as other
22
macroeconomic factors, may significantly negatively
affect consumer spending behavior, which could have a material adverse effect on demand for the
Companys products. 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 2009 RESULTS
|
|
|
Net Sales in the first quarter of 2009 increased by $294.9 million, or 40.7%, to $1,019.2
million from $724.3 million in the first quarter of 2008 due primarily to the Altivity
Transaction as well as improved pricing across the paperboard packaging segment. These
increases were partially offset by lower volume across all segments and unfavorable currency
rates in Europe and Australia. |
|
|
|
|
Income from Operations in the first quarter of 2009 increased by $7.6 million, or 29.8%,
to $33.1 million from $25.5 million in the first quarter of 2008. This increase was
primarily due to the Altivity Transaction, the improved pricing, worldwide continuous
improvement programs and other cost reduction initiatives. These increases were partially
offset by higher inflation; higher depreciation and amortization; the lower volume; costs
associated with the pending closure of the Companys plant in Grenoble, France; and downtime
related to the corrugated medium machine at the West Monroe, LA mill. |
RESULTS OF OPERATIONS
The Companys results of operations for the three months ended March 31, 2008 include the results
of Altivity from March 10, 2008, the date of the Altivity Transaction, through March 31, 2008.
Segment Information
The Company reports its results in three business segments: paperboard packaging, multi-wall bag
and specialty packaging. Prior year segment results have been reclassified for the allocation of
certain corporate costs.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
In millions |
|
2009 |
|
2008 |
|
NET SALES: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
840.4 |
|
|
$ |
657.1 |
|
Multi-wall Bag |
|
|
124.8 |
|
|
|
50.0 |
|
Specialty Packaging |
|
|
54.0 |
|
|
|
17.2 |
|
|
Total |
|
$ |
1,019.2 |
|
|
$ |
724.3 |
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
56.0 |
|
|
$ |
54.4 |
|
Multi-wall Bag |
|
|
3.1 |
|
|
|
3.8 |
|
Specialty Packaging |
|
|
2.5 |
|
|
|
0.3 |
|
Corporate |
|
|
(28.5 |
) |
|
|
(33.0 |
) |
|
Total |
|
$ |
33.1 |
|
|
$ |
25.5 |
|
|
23
FIRST QUARTER 2009 COMPARED WITH FIRST QUARTER 2008
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
In millions |
|
2009 |
|
2008 |
|
Increase |
|
Change |
|
Paperboard Packaging |
|
$ |
840.4 |
|
|
$ |
657.1 |
|
|
$ |
183.3 |
|
|
|
27.9 |
% |
Multi-wall Bag |
|
|
124.8 |
|
|
|
50.0 |
|
|
|
74.8 |
|
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
54.0 |
|
|
|
17.2 |
|
|
|
36.8 |
|
|
|
N.M. |
(a) |
|
Total |
|
$ |
1,019.2 |
|
|
$ |
724.3 |
|
|
$ |
294.9 |
|
|
|
40.7 |
% |
|
|
|
|
Note: |
|
(a) |
|
Percentage calculation not meaningful since the segment was created as a result of the Altivity
Transaction. |
The components of the change in Net Sales by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
Variances |
|
|
In millions |
|
2008 |
|
Price |
|
Volume/Mix |
|
Exchange |
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
657.1 |
|
|
$ |
13.4 |
|
|
$ |
209.3 |
|
|
$ |
(29.7 |
) |
|
$ |
(9.7 |
) |
|
$ |
183.3 |
|
|
$ |
840.4 |
|
Multi-wall Bag |
|
|
50.0 |
|
|
|
0.8 |
|
|
|
80.0 |
|
|
|
(6.0 |
) |
|
|
|
|
|
|
74.8 |
|
|
|
124.8 |
|
Specialty Packaging |
|
|
17.2 |
|
|
|
(0.4 |
) |
|
|
42.0 |
|
|
|
(4.6 |
) |
|
|
(0.2 |
) |
|
|
36.8 |
|
|
|
54.0 |
|
|
Total |
|
$ |
724.3 |
|
|
$ |
13.8 |
|
|
$ |
331.3 |
|
|
$ |
(40.3 |
) |
|
$ |
(9.9 |
) |
|
$ |
294.9 |
|
|
$ |
1,019.2 |
|
|
Paperboard Packaging
The Companys Net Sales from paperboard packaging in the first quarter of 2009 increased by $183.3
million, or 27.9%, to $840.4 million from $657.1 million in 2008 as a result of the Altivity
Transaction, improved pricing across all product lines, as well as improved mix primarily in
beverage. The improvement in pricing reflects negotiated inflationary cost pass-throughs and other
contractual increases. The improvement in product mix was due to sales of higher value products
including large pack soft drink and beer baskets. These increases were partially offset by lower
sales for containerboard, open market in Europe and consumer products. Unfavorable foreign
currency exchange rates in Europe and Australia also negatively impacted the quarter.
The corrugated
medium machine was down for 19 days during the first quarter of 2009 due to
softness in that market. The lower consumer product sales were primarily due to inventory
de-stocking with a few large customers. Overall, consumer product volume held in staples (i.e. dry
mixes, cereals, pizza) and decreased in discretionary items (i.e. candy, frozen foods). First
quarter 2008 included sales for the two coated recycled board mills divested in September 2008.
Multi-wall Bag
The Companys first quarter Net Sales increased by $74.8 million as a result of the acquisition of
the multi-wall bag segment in the Altivity Transaction. Partially offsetting this increase is
lower volume due to weakness in the building products market.
Specialty Packaging
The Companys first quarter Net Sales increased by $36.8 million as a result of the acquisition of
the specialty packaging segment in the Altivity Transaction. Partially offsetting this increase is
lower volume due to weakness in the industrial products market.
24
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
Percent |
In millions |
|
2009 |
|
2008 |
|
(Decrease) |
|
Change |
|
Paperboard Packaging |
|
$ |
56.0 |
|
|
$ |
54.4 |
|
|
$ |
1.6 |
|
|
|
2.9 |
% |
Multi-wall Bag |
|
|
3.1 |
|
|
|
3.8 |
|
|
|
(0.7 |
) |
|
|
N.M. |
(a) |
Specialty Packaging |
|
|
2.5 |
|
|
|
0.3 |
|
|
|
2.2 |
|
|
|
N.M. |
(a) |
Corporate |
|
|
(28.5 |
) |
|
|
(33.0 |
) |
|
|
4.5 |
|
|
|
13.6 |
% |
|
Total |
|
$ |
33.1 |
|
|
$ |
25.5 |
|
|
$ |
7.6 |
|
|
|
29.8 |
% |
|
|
|
|
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 March 31, |
|
|
|
|
|
|
Variances |
|
|
In millions |
|
2008 |
|
Price |
|
Volume/Mix |
|
Inflation |
|
Exchange |
|
Other (a) |
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
Organic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
54.4 |
|
|
$ |
13.4 |
|
|
$ |
19.5 |
|
|
$ |
(2.4 |
) |
|
$ |
(24.9 |
) |
|
$ |
0.7 |
|
|
$ |
(4.7 |
) |
|
$ |
1.6 |
|
|
$ |
56.0 |
|
Multi-wall Bag |
|
|
3.8 |
|
|
|
0.8 |
|
|
|
1.1 |
|
|
|
(0.8 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
(1.1 |
) |
|
|
(0.7 |
) |
|
|
3.1 |
|
Specialty Packaging |
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
2.3 |
|
|
|
(0.4 |
) |
|
|
1.0 |
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
2.2 |
|
|
|
2.5 |
|
Corporate |
|
|
(33.0 |
) |
|
|
|
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
(1.7 |
) |
|
|
(6.3 |
) |
|
|
4.5 |
|
|
|
(28.5 |
) |
|
Total |
|
$ |
25.5 |
|
|
$ |
13.8 |
|
|
$ |
35.4 |
|
|
$ |
(3.6 |
) |
|
$ |
(24.6 |
) |
|
$ |
(0.8 |
) |
|
$ |
(12.6 |
) |
|
$ |
7.6 |
|
|
$ |
33.1 |
|
|
|
|
|
Note: |
|
(a) |
|
Includes the benefits from the Companys cost reduction initiatives. |
Paperboard Packaging
The Companys Income from Operations from paperboard packaging in the first quarter of 2009
increased by $1.6 million or 2.9%, to $56.0 million from $54.4 million in 2008 as a result of the
Altivity Transaction, the improved pricing, and $10.2 million of savings for cost reduction
initiatives consisting primarily of projects to minimize the inflationary impact of throughput
costs. These increases were partially offset by inflationary pressures; higher depreciation and
amortization expense, including accelerated depreciation related to assets that will be removed
from service before the end of their useful lives due to facility closures; the lower volume; costs
associated with the pending closure of the Companys plant in Grenoble, France; and downtime
related to the corrugated medium machine at the West Monroe, LA mill. The inflation was primarily
related to December 31, 2008 inventory sold during the first quarter 2009 ($19.5 million); outside
board purchases ($8.1 million); chemical-based inputs ($6.8 million); and labor and related
benefits ($1.2 million); partially offset by other lower costs ($10.7 million), primarily due to
lower costs for secondary fiber and wood.
Multi-wall Bag
The Companys first quarter Income from Operations decreased by $0.7 million as a result of the
lower sales volume and higher costs due to inflation, primarily related to higher paper costs;
partially offset by the acquisition of the multi-wall bag segment in the Altivity Transaction.
Specialty Packaging
The Companys first quarter Income from Operations increased by $2.2 million as a result of the
acquisition of the specialty packaging segment in the Altivity Transaction and lower inflation
costs due to the price decrease of resin, partially offset by the lower sales volume.
25
Corporate
The Companys Loss from Operations from corporate in the first quarter of 2009 decreased primarily
due to prior year charges including $12.5 million of expense related to the step-up in inventory
basis to fair value and other Altivity Transaction related costs, partially offset by higher
employee compensation and related benefit costs.
INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE AND EQUITY IN NET EARNINGS OF AFFILIATES
Interest Income
Interest Income was unchanged at $0.1 million in the first three months of 2009 and 2008.
Interest Expense
Interest Expense was $52.3 million and $42.8 million in the first three months of 2009 and 2008,
respectively. The increase in Interest Expense was due to the additional debt acquired as part of
the Altivity Transaction, but was partially offset by the lower interest rates on the unhedged
portion of the Companys debt year over year. As of March 31, 2009, approximately 24% of the
Companys total debt was subject to floating interest rates.
Income Tax Expense
During the first three months of 2009, the Company recognized Income Tax Expense of $9.3 million on
Loss before Income Taxes and Equity in Net Earnings of Affiliates of $19.1 million. During the
first three months of 2008, the Company recognized Income Tax Expense of $6.4 million on Loss
before Income Taxes and Equity in Net Earnings of Affiliates of $17.2 million. Income Tax Expense
for the first three months of 2009 and 2008 was primarily due to the noncash expense of $7.9
million and $5.6 million associated with the amortization of goodwill for tax purposes.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates was $0.2 million in the first three months of 2009 and $0.3
million in the first three months of 2008 and is related to the Companys equity investment in the
joint venture Rengo Riverwood Packaging, Ltd.
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
Net cash provided by operating activities in the first three months of 2009 totaled $1.9 million,
compared to cash used in operating activities of $75.2 million in 2008. The increase was primarily
due to lower pension contributions of $26.5 million, higher net income when adjusted for noncash
items such as depreciation and amortization, improved working capital primarily as a result of
lower inventory levels, and in 2008, the $12.5 million inventory step up related to Altivity.
Net cash used in investing activities in the first three months of 2009 totaled $35.0 million,
compared to $4.7 million in 2008. This increase in cash usage was due primarily to the Altivity
Transaction through which the Company acquired $60.2 million of cash, partially offset by the
payment of $29.1 million in acquisition costs in 2008.
26
Net cash provided by financing activities in 2009 totaled $44.5 million compared to $92.1 million
in 2008. This change was primarily due to lower net borrowings under the Companys revolving credit
facilities and lower debt issuance costs. In 2008, the debt proceeds of $1,200 million and the
debt payments of $1,200 million were associated with the acquisition of Altivity.
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.
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 (see
Covenant Restrictions) will be subject to future economic conditions, including the credit
markets 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, as well as conditions across the financial services
industry.
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 dividends 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 and disruptions in the credit market, 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, 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 (U.S. GAAP), plus the aggregate
cash proceeds received by the Company and its subsidiaries from any receivables or other
securitization but excluding therefrom (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(1). 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(1) |
|
October 1, 2008 September 30, 2009 |
|
5.00 to 1.00 |
October 1, 2009 and thereafter |
|
4.75 to 1.00 |
|
|
|
|
Note: |
|
(1) |
|
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. |
27
At March 31, 2009, the Company was in compliance with the financial covenants in the Credit
Agreement and the ratio was as follows:
|
|
Consolidated Secured Leverage Ratio 3.98 to 1.00 |
The Companys management believes that 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 the
financial ratio 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 U.S. GAAP, and is
not a measure of net income, operating income, operating performance or liquidity presented in
accordance with U.S. GAAP. Credit Agreement EBITDA should be considered in addition to results
prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to
U.S. GAAP results. In addition, Credit Agreement EBITDA may not be comparable to EBITDA or
similarly titled measures utilized by other companies because other companies may not calculate
Credit Agreement EBITDA in the same manner as the Company does.
The calculations of the components of the maximum consolidated secured leverage ratio for and as of
the period ended March 31, 2009 are listed below:
|
|
|
|
|
|
|
Twelve Months Ended |
In millions |
|
March 31, 2009 |
|
Pro Forma Net Loss |
|
$ |
(104.6 |
) |
Income Tax Expense |
|
|
37.3 |
|
Interest Expense, Net |
|
|
224.9 |
|
Depreciation and Amortization |
|
|
290.1 |
|
Dividends Received, Net of Earnings of Equity Affiliates |
|
|
0.3 |
|
Non-Cash Provisions for Reserves for Discontinued Operations |
|
|
1.4 |
|
Other Non-Cash Charges |
|
|
32.7 |
|
Merger Related Expenses |
|
|
38.7 |
|
Gains/Losses Associated with Sale/Write-Down of Assets |
|
|
14.6 |
|
Other Non-Recurring/Extraordinary/Unusual Items |
|
|
6.0 |
|
Projected Run Rate Cost Savings (a) |
|
|
54.1 |
|
|
Credit Agreement EBITDA |
|
$ |
595.5 |
|
|
|
|
|
|
|
|
|
As of |
In millions |
|
March 31, 2009 |
|
Short-Term Debt |
|
$ |
18.9 |
|
Long-Term Debt |
|
|
3,208.5 |
|
|
Total Debt |
|
$ |
3,227.4 |
|
Less Adjustments (b) |
|
|
858.3 |
|
|
Consolidated Secured Indebtedness |
|
$ |
2,369.1 |
|
|
|
|
|
Note: |
|
(a) |
|
As defined by the Credit Agreement, this 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. |
28
|
|
|
|
|
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) or (ii) $100 million. |
|
|
|
As a result, in calculating Credit Agreement EBITDA above, the Company used projected run rate
cost savings of $54.1 million 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 March 31, 2009. 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. |
If the negative impact of inflationary pressures on key inputs continues, or depressed selling
prices, lower sales volumes, increased operating costs or other factors have a negative impact on
the Companys ability to increase its profitability, the Company may not be able to maintain its
compliance with the financial covenant in its 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. The Credit Agreement is
collateralized by substantially all of the Companys domestic assets.
Capital Investment
The Companys capital investment in the first three months of 2009 was $36.0 million compared to
$35.9 million (including $6 million for Altivity) in the first three months of 2008. During the
first three months of 2009, the Company had capital spending of $27.3 million for improving process
capabilities, $5.3 million for capital spares, $3.3 million for manufacturing packaging machinery
and $0.1 million for compliance with environmental laws and regulations.
Goodwill
During the quarter ended March 31, 2009, the Company concluded that an interim goodwill impairment
analysis was not required as there were no events or changes in circumstances that would suggest
that the fair value of a reporting unit would no longer exceed its carrying amount.
The Company could be adversely impacted by certain of the risks discussed in Risk Factors in Item
1A. in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and thus could
incur future goodwill impairment charges.
Environmental Matters
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.
The Company has established reserves for those facilities or issues where liability is probable and
the costs are reasonably estimable.
29
For further discussion of the Companys environmental matters, see Note 9 in Part I, Item 1, Notes
to Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. GAAP 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 GPHCs Annual Report on Form 10-K for the year ended December
31, 2008.
NEW ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting the Company, see Note 1 in Part I,
Item 1, Notes to Condensed Consolidated Financial Statements.
BUSINESS OUTLOOK
The Company believes that the deflation it has experienced with certain input costs in the first
quarter of 2009 will benefit results in 2009. The Company expects to realize approximately $110
million in year over year operating cost savings from its continuous improvement programs,
including Lean manufacturing projects. In addition, contractual price escalators and price
increases in 2008 for coated board and cartons should favorably impact 2009.
Total capital investment for 2009 is expected to be between approximately $140 million and $160
million and is expected to relate principally to the Companys process capability improvements and
maintaining compliance with environmental laws and regulations (approximately $142 million),
acquiring capital spares (approximately $18 million), and producing packaging machinery
(approximately $10 million).
The Company also expects the following in 2009:
|
|
|
Depreciation and amortization between $300 million and $320 million. |
|
|
|
|
Interest expense of $220 million to $230 million, including $8.4 million of noncash
interest expense associated with amortization of debt issuance costs. |
|
|
|
|
Debt reduction of $170 million to $200 million. |
|
|
|
|
Pension plan contributions of $60 million to $70 million. |
The Company burns alternative fuel mixtures at its West Monroe and Macon mills in order to
produce energy and recover chemicals. The federal government has implemented a program that provides incentive payments under certain circumstances for
the use of alternative fuels and alternative fuel mixtures. In the first quarter, the Company filed an application with the Internal Revenue Service
for certification of eligibility to receive incentive payments for its use of black liquor in alternative fuel mixtures in
the recovery boilers at the mills.
The Company currently uses approximately 800,000 gallons of alternative fuel mixture per day. Accordingly,
depending on the exact total quantity of alternative fuel mixtures burned, the federal incentive payments that may be received by the Company could be
material. There can be no assurance, however that the federal incentive program for alternative fuel mixtures will continue in effect, that its provisions will not be changed in
a manner that impacts the Company, that the Companys operations will be certified as eligible and remain qualified to receive
the incentive payments, or that the Companys claims for the incentive payments will be approved and paid.
30
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 GPHCs Annual Report on Form 10-K
for the year ended December 31, 2008. There have been no significant developments with respect to
derivatives or exposure to market risk during the first three months of 2009. For a discussion of
the Companys Financial Instruments, Derivatives and Hedging Activities, see Note 10 in Notes to
Consolidated Financial Statements in GPHCs Annual Report on Form 10-K for the year ended December
31, 2008 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 March 31, 2009.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during
the fiscal quarter ended March 31, 2009 that has materially affected, or is likely to materially
affect, the Companys internal control over financial reporting.
31
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 GPHCs Form 10-K
for the year ended December 31, 2008.
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. |
32
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
Stephen A. Hellrung
|
|
Senior Vice President, General Counsel
and Secretary
|
|
May 7, 2009 |
|
|
|
|
|
/s/ DANIEL J. BLOUNT
Daniel J. Blount
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
|
|
May 7, 2009 |
|
|
|
|
|
/s/ DEBORAH R. FRANK
Deborah R. Frank
|
|
Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
|
|
May 7, 2009 |
33