GRAPHIC PACKAGING CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 1-13182
Graphic Packaging Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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58-2205241
(I.R.S. employer
identification no.) |
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814 Livingston Court
Marietta, Georgia
(Address of principal executive offices)
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30067
(Zip Code) |
(770) 644-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o No þ
As
of April 30, 2007, there were 200,928,883 shares of the registrant’s Common Stock, par
value $0.01 per share, outstanding.
Information Concerning Forward-Looking Statements
Certain statements of Graphic Packaging Corporation’s expectations, including, but not limited to,
statements regarding inflationary pressures, cost savings from its continuous improvement programs
and manufacturing rationalization, capital spending, and depreciation and amortization 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 Company’s historical experience and its present expectations.
These risks and uncertainties include, but are not limited to, inflation of and volatility in raw
material and energy costs, the Company’s substantial amount of debt, continuing pressure for lower
cost products, the Company’s 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 Company’s 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 herein in Part II, Item 1A., “Risk
Factors”.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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| In millions, except share and per share amounts |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current Assets: |
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Cash and Equivalents |
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$ |
9.7 |
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$ |
7.3 |
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Receivables, Net |
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248.5 |
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230.9 |
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Inventories |
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311.8 |
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301.3 |
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Other Current Assets |
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24.0 |
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24.8 |
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Total Current Assets |
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594.0 |
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564.3 |
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Property, Plant and Equipment, Net |
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1,459.4 |
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1,488.7 |
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Goodwill |
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642.3 |
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642.3 |
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Intangible Assets, Net |
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146.3 |
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148.5 |
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Deferred Tax Assets |
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345.6 |
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345.0 |
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Other Assets |
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42.2 |
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44.8 |
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Total Assets |
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$ |
3,229.8 |
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$ |
3,233.6 |
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LIABILITIES |
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Current Liabilities: |
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Short Term Debt |
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$ |
15.7 |
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$ |
12.0 |
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Accounts Payable |
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211.2 |
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214.4 |
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Other Accrued Liabilities |
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164.4 |
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193.9 |
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Total Current Liabilities |
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391.3 |
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420.3 |
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Long Term Debt |
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1,962.0 |
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1,910.7 |
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Deferred Tax Liabilities |
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479.8 |
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475.2 |
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Accrued Pension and Postretirement Benefits |
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209.8 |
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206.7 |
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Other Noncurrent Liabilities |
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36.7 |
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39.0 |
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Total Liabilities |
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3,079.6 |
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3,051.9 |
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SHAREHOLDERS’ EQUITY |
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Preferred Stock, par value $.01 per share;
50,000,000 shares authorized; no shares issued or
outstanding |
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— |
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— |
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Common Stock, par value $.01 per share;
500,000,000 shares authorized; 200,853,883 and
200,584,591 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively |
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2.0 |
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2.0 |
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Capital in Excess of Par Value |
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1,187.6 |
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1,186.8 |
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Accumulated Deficit |
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(939.8 |
) |
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(901.1 |
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Accumulated Other Comprehensive Loss |
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(99.6 |
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(106.0 |
) |
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Total Shareholders’ Equity |
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150.2 |
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181.7 |
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Total Liabilities and Shareholders’ Equity |
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$ |
3,229.8 |
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$ |
3,233.6 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
4
GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, |
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| In millions, except per share amounts |
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2007 |
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2006 |
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Net Sales |
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$ |
608.7 |
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$ |
580.4 |
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Cost of Sales |
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545.5 |
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518.4 |
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Selling, General and Administrative |
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47.8 |
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49.6 |
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Research, Development and Engineering |
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2.6 |
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3.0 |
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Other Expense, Net |
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1.1 |
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0.3 |
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Income from Operations |
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11.7 |
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9.1 |
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Interest Income |
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0.2 |
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0.2 |
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Interest Expense |
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(43.4 |
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(41.5 |
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Loss before Income Taxes and Equity in Net Earnings of Affiliates |
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(31.5 |
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(32.2 |
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Income Tax Expense |
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(7.4 |
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(4.6 |
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Loss before Equity in Net Earnings of Affiliates |
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(38.9 |
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(36.8 |
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Equity in Net Earnings of Affiliates |
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0.2 |
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0.1 |
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Net Loss |
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$ |
(38.7 |
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$ |
(36.7 |
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Loss Per Share — Basic |
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$ |
(0.19 |
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$ |
(0.18 |
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Loss Per Share — Diluted |
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$ |
(0.19 |
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$ |
(0.18 |
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Weighted Average Number of Shares Outstanding — Basic |
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201.3 |
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200.8 |
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Weighted Average Number of Shares Outstanding — Diluted |
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201.3 |
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200.8 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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March 31, |
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| In millions |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net Loss |
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$ |
(38.7 |
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$ |
(36.7 |
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Noncash Items Included in Net Loss: |
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Depreciation and Amortization |
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53.2 |
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49.8 |
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Deferred Income Taxes |
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4.3 |
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4.9 |
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Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions |
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5.8 |
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6.4 |
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Amortization of Deferred Debt Issuance Costs |
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2.2 |
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2.2 |
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Other, Net |
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1.9 |
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0.6 |
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Changes in Operating Assets & Liabilities |
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(61.5 |
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(70.2 |
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Net Cash Used in Operating Activities |
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(32.8 |
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(43.0 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital Spending |
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(19.8 |
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(22.7 |
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Other, Net |
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(0.8 |
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1.7 |
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Net Cash Used in Investing Activities |
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(20.6 |
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(21.0 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowing under Revolving Credit Facilities |
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142.9 |
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210.5 |
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Payments on Revolving Credit Facilities |
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(87.9 |
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(151.9 |
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Other, Net |
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0.8 |
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(0.3 |
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Net Cash Provided by Financing Activities |
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55.8 |
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58.3 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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— |
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(0.2 |
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Net Increase (Decrease) in Cash and Equivalents |
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2.4 |
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(5.9 |
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Cash and Equivalents at Beginning of Period |
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7.3 |
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12.7 |
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CASH AND EQUIVALENTS AT END OF PERIOD |
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$ |
9.7 |
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$ |
6.8 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6
GRAPHIC PACKAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — ORGANIZATION
Graphic Packaging Corporation (“GPC” and, together with its subsidiaries, the “Company”) is a
leading provider of paperboard packaging solutions for a wide variety of products to multinational
and other consumer products companies. 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.
GPC conducts no significant business and has no independent assets or operations other than its
ownership of Graphic Packaging International, Inc. GPC fully and unconditionally guarantees
substantially all of the debt of Graphic Packaging International, Inc.
The Company’s 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 Company’s 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 Company’s year end condensed consolidated balance sheet data was
derived from audited financial statements. The Company has condensed or omitted certain notes and
other information from the interim financial statements presented in this Quarterly Report on Form
10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2006. In addition, the preparation of the
Condensed Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts
of revenues and expenses during the reporting period. Actual amounts could differ from those
estimates.
The Company has reclassified the presentation of certain prior period information to conform to the
current presentation format.
NOTE 2 — ACCOUNTING POLICIES
For a summary of the Company’s significant accounting policies, please refer to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2006.
As described in the Company’s significant accounting policies, the preparation of 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 at the date of the financial statements. Actual results could differ from these
estimates, and changes in these estimates are recorded when known. Certain liabilities of
approximately $3 million were estimated and recorded in 2003 at the time of the Merger (defined in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2006). Changes in these
estimated amounts are expected to favorably impact results during 2007 although the specific period
and amount has not yet been determined.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN No.
48”). FIN No. 48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken
on an income tax return. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN No. 48 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
7
As of
the date of adoption, the Company’s liability for unrecognized
income tax benefits totaled $4.1 million, the total
of which, if recognized, would affect the annual effective income tax rate. As of March 31, 2007,
the Company’s unrecognized income tax benefits total
$6.8 million. The increase in unrecognized income tax
benefits relates to a judgment received in the Swedish tax court during the first
quarter of 2007. The Company intends to defend its tax position but is unable to determine the
ultimate outcome of this matter at this time.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for years before 1999.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits within its global operations in income tax expense. Accrued interest and penalties were
$0.8 million and $1.5 million as of January 1, 2007 and March 31, 2007, respectively.
The Company does not anticipate that total unrecognized tax benefits will significantly change due
to the settlement of audits and the expiration of statute of limitations prior to March 31, 2008.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurements,” (“SFAS No. 157”) which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating
the impact of SFAS No. 157, but does not expect the adoption of SFAS No. 157 to have a material
impact on its financial position, results of operations or cash flows.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for Planned Major
Maintenance Activities” (“FSP AUG AIR-1”) which is effective for fiscal years beginning after
December 15, 2006. This position statement eliminates the accrue-in-advance method of accounting
for planned major maintenance activities. The Company adopted FSP AUG AIR-1 on January 1, 2007 and
changed to the direct expensing method allowed by FSP AUG AIR-1 and has retrospectively adjusted
its 2006 quarters. The Company’s full year 2006 financial
statements were not impacted. The adoption of FSP AUG AIR-1 on January 1, 2007 did not have a material impact on
the Company’s financial position, results of operations or cash flows.
NOTE 3 — STOCK INCENTIVE PLANS
The Company has eight equity compensation plans. The Company’s only active plan as of March 31,
2007 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 Company’s plans generally vest and
expire in accordance with terms established at the time of grant. Compensation costs are recognized
on a straight-line basis over the requisite service period of the award.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment (“SFAS No. 123R”), using the modified-prospective
transition method. The modified-prospective transition method applies to new awards granted,
unvested awards as of the date of adoption, and to awards modified, repurchased, or cancelled after
the date of adoption. Stock-based compensation expense for all share-based payment awards granted
after January 1, 2006 is based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R.
Stock Options
The Company has not granted any stock options since 2004. During the three months ended March 31,
2007, 228,640 stock options were exercised, 543,926 stock options were cancelled and 1,298,010 were
settled in cash and cancelled. The total number of shares subject to options at March 31, 2007 was
12,815,911 at a weighted average exercise price of $7.38.
8
Stock Awards, Restricted Stock and Restricted Stock Units
The Company’s 2004 Plan permits the grant of stock awards, restricted stock and restricted stock
units (“RSUs”). All restricted stock and RSUs vest and become unrestricted in one to five years
from date of grant. Upon vesting, RSUs granted in 2005, 2006 and 2007 are payable 50% in cash and
50% in shares of common stock. All other RSUs are payable in shares of common stock.
Data concerning RSUs granted in the first quarter of 2007 is as follows:
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| Shares in thousands |
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March 31, 2007 |
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RSUs — employees |
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877 |
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Weighted average price per share |
|
$ |
4.63 |
|
The value of the RSUs is based on the market value of the Company’s common stock on the date of
grant. The shares 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. At March 31, 2007, the Company had 3,201,498 RSUs
outstanding. The unrecognized expense at March 31, 2007 is approximately $7 million and is expected
to be recognized over a weighted average period of 2.4 years.
The value of stock awards is based on the market value of the Company’s common stock at the date of
grant and recorded as a component of Shareholders’ Equity.
During the three months ended March 31, 2007 and 2006, $0.9 and $1.2 million was charged to
compensation expense, respectively.
During the first three months of 2007, the Company also issued 2,370 shares of phantom stock,
representing compensation deferred by one of its directors. These shares of phantom stock vest on
the date of grant and are payable upon termination of service as a director. The Company also has
an obligation to issue 189,844 shares in payment of employee deferred compensation.
NOTE
4 — INVENTORIES
Inventories by major class:
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March 31, |
|
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December 31, |
| In millions |
|
2007 |
|
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2006 |
|
| |
Finished goods |
|
$ |
159.2 |
|
|
$ |
159.4 |
|
Work in progress |
|
|
29.0 |
|
|
|
22.1 |
|
Raw materials |
|
|
73.8 |
|
|
|
71.9 |
|
Supplies |
|
|
58.4 |
|
|
|
56.8 |
|
| |
|
|
|
320.4 |
|
|
|
310.2 |
|
Less, Allowance |
|
|
8.6 |
|
|
|
8.9 |
|
| |
Total |
|
$ |
311.8 |
|
|
$ |
301.3 |
|
| |
NOTE 5 — 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 Company’s 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.
9
In addition, some of the Company’s 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. Although the Company believes that
it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such
penalty is not estimable.
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 described above, for which
it is too early in the investigation and regulatory process to make a determination, 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 Company’s financial position, results of
operations or cash flows. Except for the compliance costs described above relating to the West
Monroe, Louisiana mill, the Company cannot estimate with certainty other future corrective
compliance, investigation or remediation costs, all of which the Company currently considers to be
remote. Costs relating to historical usage or indemnification claims that the Company considers to
be reasonably possible are not quantifiable at this time. The Company will continue to monitor
environmental issues at each of its facilities and will revise its accruals, estimates and
disclosures relating to past, present and future operations, as additional information is obtained.
Legal Matters
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business.
Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company
does not believe that disposition of these lawsuits will have a material adverse effect on the
Company’s consolidated financial position, results of operations or cash flows.
NOTE 6 — BUSINESS SEGMENT INFORMATION
The Company reports its results in two business segments: paperboard packaging and
containerboard/other. These segments are evaluated by the chief operating decision maker based
primarily on income from operations. The Company’s reportable segments are based upon strategic
business units that offer different products. The paperboard packaging business segment includes
the production and sale of paperboard for its beverage multiple packaging and consumer products
packaging businesses from its West Monroe, Louisiana, Macon, Georgia, Kalamazoo, Michigan and
Norrköping, Sweden mills; carton converting facilities in the United States, Europe, Brazil and
Canada; and the design, manufacture and installation of packaging machinery related to the assembly
of cartons. The containerboard/other business segment primarily includes the production and sale of
linerboard, corrugating medium and kraft paper from paperboard mills in the U.S.
10
Business segment information is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| In millions |
|
2007 |
|
|
2006 |
|
| |
NET SALES: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
586.4 |
|
|
$ |
560.3 |
|
Containerboard/Other |
|
|
22.3 |
|
|
|
20.1 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
608.7 |
|
|
$ |
580.4 |
|
| |
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS: |
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
25.3 |
|
|
$ |
22.7 |
|
Containerboard/Other |
|
|
(3.7 |
) |
|
|
(4.7 |
) |
Corporate |
|
|
(9.9 |
) |
|
|
(8.9 |
) |
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11.7 |
|
|
$ |
9.1 |
|
| |
NOTE 7 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains defined benefit pension plans for its U.S. employees. Benefits are based on
years of service and average compensation levels over a period of years. The Company’s funding
policies with respect to its U.S. pension plans are to contribute funds to trusts as necessary to
at least meet the minimum funding requirements of the U.S. Internal Revenue Code. Plan assets are
invested in equities and fixed income securities.
The Company also sponsors three postretirement health care plans that provide medical and life
insurance coverage to eligible salaried and hourly retired U.S. employees and their dependents. One
of the salaried plans closed to new employees who began employment after December 31, 1993 and the
other salaried plan closed to new employees who began after June 15, 1999.
Pension and Postretirement Expense
The pension and postretirement expenses related to the U.S. plans consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pension Benefits |
|
Postretirement Benefits |
| |
Three Months Ended March 31, |
| In millions |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
Service Cost |
|
$ |
3.4 |
|
|
$ |
4.0 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
Interest Cost |
|
|
8.7 |
|
|
|
8.1 |
|
|
|
0.6 |
|
|
|
0.6 |
|
Expected Return on Plan Assets |
|
|
(9.0 |
) |
|
|
(8.0 |
) |
|
|
— |
|
|
|
— |
|
Amortizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost |
|
|
0.7 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
Actuarial Loss |
|
|
0.6 |
|
|
|
1.3 |
|
|
|
— |
|
|
|
— |
|
| |
Net Periodic Cost |
|
$ |
4.4 |
|
|
$ |
5.9 |
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
| |
The Company made contributions of $0.7 million to its U.S. pension plans during the first three
months of 2006. No contributions were made in the first three months of 2007. The Company expects
to make contributions of approximately $28 million for the full year 2007. During 2006, the Company
made $25.9 million of contributions to its U.S. pension plans.
The Company made postretirement benefit payments of $0.1 million and $1.0 million during the first
three months of 2007 and 2006. The Company estimates its postretirement benefit payments for the
full year 2007 to be approximately $3 million. During 2006, the Company made postretirement benefit
payments of $2.7 million.
11
NOTE 8 — DEBT
Long-Term Debt consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| In millions |
|
2007 |
|
|
2006 |
|
| |
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 (7.44% at March 31, 2007 and 7.47% at December 31, 2006)
payable through 2010 |
|
|
1,055.0 |
|
|
|
1,055.0 |
|
Senior Secured Revolving Facility with interest payable at various dates at
floating rates (8.35% at March 31, 2007 and 10.25% at December 31, 2006)
payable in 2009 |
|
|
55.0 |
|
|
|
3.6 |
|
Other |
|
|
2.4 |
|
|
|
2.4 |
|
| |
|
|
|
1,962.4 |
|
|
|
1,911.0 |
|
Less, current portion |
|
|
0.4 |
|
|
|
0.3 |
|
| |
Total |
|
$ |
1,962.0 |
|
|
$ |
1,910.7 |
|
| |
At March 31, 2007, 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 |
|
$ |
325.0 |
|
|
$ |
55.0 |
|
|
$ |
255.6 |
|
International Facilities |
|
|
18.0 |
|
|
|
13.0 |
|
|
|
5.0 |
|
| |
Total |
|
$ |
343.0 |
|
|
$ |
68.0 |
|
|
$ |
260.6 |
|
| |
Note:
| |
(a) |
|
In accordance with its debt agreements, the Company’s
availability under its Revolving Credit Facility has been reduced
by the amount of standby letters of credit issued of $14.4
million as of March 31, 2007. 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 2007 unless extended. |
The Senior Secured Credit Agreement, as amended in October 2005, which governs the Term Loan
Facility and the Revolving Credit Facility, imposes restrictions on the Company’s ability to make
capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the
Senior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’s ability to incur
additional indebtedness. Such restrictions, together with the highly leveraged nature of the
Company, could limit the Company’s ability to respond to market conditions, meet its capital
spending program, provide for unexpected capital investments or take advantage of business
opportunities. The covenants contained in the Senior Secured Credit Agreement, as amended, among
other things, restrict the ability of the Company to dispose of assets, incur additional
indebtedness, 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, make capital expenditures and engage in
certain transactions with affiliates.
The financial covenants contained in the Senior Secured Credit Agreement, as amended, among other
things, specify the following requirements for each of the following test periods:
| |
|
|
|
|
| |
|
|
|
Minimum Credit |
| |
|
Maximum Consolidated |
|
Agreement EBITDA to |
| |
|
Debt to Credit Agreement |
|
Consolidated Interest |
| Four Fiscal Quarters Ending |
|
EBITDA Leverage Ratio (a) |
|
Expense Ratio (a) |
| |
|
|
|
|
|
2007 |
|
|
|
|
| |
|
|
|
|
|
March 31, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
June 30, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
September 30, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
December 31, 2007 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
12
| |
|
|
|
|
2008 |
|
|
|
|
| |
|
|
|
|
|
March 31, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
June 30, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
September 30, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
December 31, 2008 |
|
5.50 to 1.00 |
|
2.00 to 1.00 |
|
|
|
|
|
2009 |
|
|
|
|
| |
|
|
|
|
|
March 31, 2009 and thereafter |
|
4.50 to 1.00 |
|
2.90 to 1.00 |
| |
Note:
| |
(a) |
|
Credit Agreement EBITDA is calculated in accordance with the definitions contained in the
Company’s Senior Secured Credit Agreement, as amended. Credit Agreement EBITDA is defined as
consolidated net income before consolidated 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, and any
income or loss accounted for by the equity method of accounting. |
At March 31, 2007, the Company was in compliance with the financial covenants in the Secured
Credit Agreement, as amended, and the ratios were as follows:
Consolidated Debt to Credit Agreement EBITDA Leverage Ratio – 6.01 to 1.00
Credit Agreement EBITDA to Consolidated Interest Expense Ratio – 2.00 to 1.00
The Company’s management believes that presentation of Credit Agreement EBITDA provides useful
information to investors because borrowings under the Senior Secured Credit Agreement are a key
source of the Company’s liquidity, and the Company’s ability to borrow under the Senior Secured
Credit Agreement is dependent on, among other things, its compliance with the financial ratio
covenants. Failure to comply with these financial ratio covenants would result in a violation of
the Senior Secured Credit Agreement and, absent a waiver or amendment from the lenders under such
agreement, permit the acceleration of all outstanding borrowings under the Senior Secured Credit
Agreement.
The calculations of the components of the Company’s financial covenant ratios are listed below:
| |
|
|
|
|
| |
|
Twelve Months Ended |
|
| In millions |
|
March 31, 2007 |
|
| |
Net Loss |
|
$ |
(102.5 |
) |
Income Tax Expense |
|
|
23.0 |
|
Interest Expense, Net |
|
|
173.5 |
|
Depreciation and Amortization |
|
|
199.4 |
|
Dividends Received, Net of Earnings of Equity Affiliates |
|
|
1.2 |
|
Pension, Postemployment and Postretirement Benefits Expense |
|
|
29.8 |
|
Merger Related Expenses |
|
|
0.2 |
|
Write-Down of Assets |
|
|
4.3 |
|
| |
Credit Agreement EBITDA |
|
$ |
328.9 |
|
| |
| |
|
|
|
|
| |
|
Twelve Months Ended |
|
| In millions |
March 31, 2007 |
Interest Expense, Net |
|
$ |
173.5 |
|
Amortization of Deferred Debt Issuance Costs |
|
|
(8.8 |
) |
Credit Agreement Interest Expense Adjustments (a) |
|
|
0.1 |
|
| |
Consolidated Interest Expense (b) |
|
$ |
164.8 |
|
| |
| |
| |
|
As of |
|
| In millions |
March 31, 2007 |
Short Term Debt |
|
$ |
15.7 |
|
Long Term Debt |
|
|
1,962.0 |
|
| |
Total Debt |
|
$ |
1,977.7 |
|
| |
Notes:
| |
(a) |
|
Credit agreement interest expense adjustments include the discount from the financing of
receivables. |
| |
| |
(b) |
|
Consolidated Interest Expense is calculated in accordance with the definitions contained
in the Company’s Senior Secured Credit Agreement. Consolidated Interest Expense is defined
as consolidated interest expense minus consolidated interest income plus any discount from
the financing of receivables. |
13
The Senior Secured Credit Agreement, as amended, requires adjustment to the pricing for the
Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long
as, the Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated less
than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies Inc.) or less
than B1 by Moody’s Investors Service, Inc.
The Senior Notes are rated B- by Standard & Poor’s and B2 by Moody’s Investor Services. The Senior
Subordinated Notes are rated B- by Standard & Poor’s and B3 by Moody’s Investor Services. The
Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated B+ by
Standard & Poor’s and Ba2 by Moody’s Investor Services. As of March 31, 2007, both Standard &
Poor’s and Moody’s Investor services’ ratings on the Company remain on negative outlook.
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 Company’s ability to increase its profitability, the Company may not be able to maintain its
compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The
Company’s ability to comply in future periods with the financial covenants in the Senior Secured
Credit Agreement, as amended, 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 Company’s control and will be substantially dependent on the selling prices
for the Company’s products, raw material and energy costs, and the Company’s ability to
successfully implement its overall business strategies, and meet its profitability objective. If a
violation of any of the 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 Senior Secured Credit Agreement and the indentures governing the Senior
Subordinated Notes and the Senior Notes have covenants as well as 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 Senior
Secured Credit Agreement, as amended, is collateralized by substantially all of the Company’s
domestic assets.
NOTE
9 — COMPREHENSIVE INCOME (LOSS)
The following table shows the components of Comprehensive Income (Loss), net of related tax
effects:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| In millions |
|
March 31, |
|
| |
2007 |
2006 |
Net Loss |
|
$ |
(38.7 |
) |
|
$ |
(36.7 |
) |
Other Comprehensive (Loss) Income: |
|
|
|
|
|
|
|
|
Derivative Instruments Gain (Loss) |
|
|
4.1 |
|
|
|
(5.5 |
) |
Currency Translation Adjustments |
|
|
0.8 |
|
|
|
2.7 |
|
Amortization of Prior Service Cost |
|
|
0.7 |
|
|
|
— |
|
Amortization of Net Actuarial Loss |
|
|
0.8 |
|
|
|
— |
|
| |
Comprehensive Loss |
|
$ |
(32.3 |
) |
|
$ |
(39.5 |
) |
| |
14
|
|
|
| ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
INTRODUCTION
This management’s discussion and analysis of financial conditions and results of operations is
intended to provide investors with an understanding of the Company’s past performance, its
financial condition and its prospects. The following will be discussed and analyzed:
| Ø |
|
Overview of Business |
| |
| Ø |
|
Overview of 2007 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 Company’s 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. The Company is also
implementing strategies (i) to expand market share in its current markets and to identify and
penetrate new markets; (ii) to capitalize on the Company’s customer relationships, business
competencies, and mills and converting assets; (iii) to develop and market innovative products and
applications; (iv) and to continue to reduce costs by focusing on operational improvements. The
Company’s 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 Company’s Business
Impact of Inflation. The Company’s cost of sales consists primarily of energy (including natural
gas, fuel oil and electricity), pine pulpwood, hardwood, chemicals, recycled fibers, purchased
paperboard, paper, aluminum foil, ink, plastic films and resins, depreciation expense and labor.
The Company continues to be negatively impacted by inflationary pressures which increased costs by
$11.2 million, compared to the first three months of 2006. The 2007 costs are primarily related to
fiber, outside board purchases and corrugated shipping containers ($8.6 million); chemical-based
inputs ($1.6 million); labor and related benefits ($0.9 million); and other ($1.9 million). These
increases were offset by lower energy costs ($1.8 million), mainly due to the price of natural gas.
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 entered into swaps to
hedge approximately 40% and 5% of its expected natural gas usage for the years 2007 and 2008,
respectively. The Company believes that inflationary pressures, including higher costs for fiber,
wood and chemical-based inputs will continue to negatively impact its results for 2007. 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 approximately $1,978 million of outstanding debt
obligations as of March 31, 2007. 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 Company’s ability to obtain additional financing. Covenants in the Company’s Senior Secured
Credit Agreement also prohibit or restrict, among other things, the disposal of assets, the
incurrence of additional indebtedness (including guarantees) and payment of dividends, loans or
advances and certain other types of transactions. These restrictions could limit the Company’s
flexibility to respond to changing market conditions and competitive pressures. The covenants also
require compliance with certain financial ratios.
15
The Company’s 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 Company’s control. See “Financial Condition, Liquidity and Capital
Resources — Liquidity and Capital Resources” and “— Covenant Restrictions” for additional
information regarding the Company’s debt obligations.
Commitment to Cost Reduction. In light of increasing margin pressure throughout the paperboard
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. During the first three months
of 2007, the Company achieved approximately $8 million in cost savings through its continuous
improvement programs and other cost reduction initiatives.
Market Factors. As some products can be packaged in different types of materials, the Company’s
sales are affected by competition from other manufacturers’ coated unbleached kraft paperboard, or
CUK board, and other substrates — solid bleached sulfate, or SBS, recycled clay coated news, or
CCN, and, internationally, white lined chipboard, or WLC. Substitute products also include shrink
film, flexible packaging and corrugated containers. In addition, the Company’s sales historically are driven by
consumer buying habits in the markets its customers serve. New product introductions and
promotional activity by the Company’s customers and the Company’s introduction of new packaging
products also impacted its sales. The Company’s containerboard business is subject to conditions in
the cyclical worldwide commodity paperboard markets, which have a significant impact on
containerboard sales. In addition, the Company’s 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 2007 RESULTS
| |
• |
|
Net Sales in the first three months of 2007 increased by $28.3 million, or 4.9%, to
$608.7 million from $580.4 million in the first quarter of 2006 due primarily to improved
pricing and volumes across all of the Company’s product lines. Also contributing to the
increase was $5.7 million relating to the favorable foreign currency exchange rates,
primarily in Europe. |
| |
| |
• |
|
Income from Operations in the first three months of 2007 increased by $2.6 million, or
28.6%, to $11.7 million from $9.1 million in the first
quarter of 2006. Improved
pricing and worldwide continuous improvement programs and other cost reduction initiatives
were partially offset by higher inflation, and higher costs due to continued infrastructure
and reliability upgrades at the Company’s West Monroe, LA mill. |
| |
| |
• |
|
Debt increased by $55.0 million during the first three months of 2007 due to seasonal
factors, primarily higher working capital requirements. |
16
RESULTS OF OPERATIONS
Segment Information
The Company reports its results in two business segments: paperboard packaging and
containerboard/other.
FIRST QUARTER 2007 COMPARED WITH FIRST QUARTER 2006
Net Sales
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
| In millions |
|
2007 |
|
|
2006 |
|
|
Increase |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
586.4 |
|
|
$ |
560.3 |
|
|
$ |
26.1 |
|
|
|
4.7 |
% |
Containerboard/Other |
|
|
22.3 |
|
|
|
20.1 |
|
|
|
2.2 |
|
|
|
10.9 |
|
| |
Total |
|
$ |
608.7 |
|
|
$ |
580.4 |
|
|
$ |
28.3 |
|
|
|
4.9 |
% |
| |
The components of the change in Net Sales by segment are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
|
|
|
Variances |
|
|
|
| In millions |
|
2006 |
|
|
Price |
|
|
Volume/Mix |
|
|
Exchange |
|
|
Total |
|
|
2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
560.3 |
|
|
|
11.3 |
|
|
|
9.1 |
|
|
|
5.7 |
|
|
|
26.1 |
|
|
$ |
586.4 |
|
Containerboard/Other |
|
|
20.1 |
|
|
|
1.9 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
2.2 |
|
|
|
22.3 |
|
| |
Total |
|
$ |
580.4 |
|
|
|
13.2 |
|
|
|
9.4 |
|
|
|
5.7 |
|
|
|
28.3 |
|
|
$ |
608.7 |
|
| |
Paperboard Packaging
The increase in Net Sales from paperboard packaging was due primarily to improved pricing and
volumes across all product lines. The improvement in pricing reflects negotiated inflationary cost
pass-through and other contractual increases as well as price increases on open market roll stock.
The 2.6 % increase in volume primarily relates to increased carton sales in the North American
food and consumer product markets as well as the North American beverage market. Favorable foreign
currency exchange rates, primarily in Europe, also contributed to the increase.
Containerboard/Other
The increase in Net Sales from containerboard/other is due primarily to improved pricing and volume
in the containerboard medium markets. The improved pricing in Containerboard represents a year
over year increase of approximately $30 per ton.
Income (Loss) from Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
|
|
|
|
|
|
|
|
Increase |
|
|
Percent |
|
| In millions |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
25.3 |
|
|
$ |
22.7 |
|
|
$ |
2.6 |
|
|
|
11.5 |
% |
Containerboard/Other |
|
|
(3.7 |
) |
|
|
(4.7 |
) |
|
|
1.0 |
|
|
|
21.3 |
|
Corporate |
|
|
(9.9 |
) |
|
|
(8.9 |
) |
|
|
(1.0 |
) |
|
|
(11.2 |
) |
| |
Total |
|
$ |
11.7 |
|
|
$ |
9.1 |
|
|
$ |
2.6 |
|
|
|
28.6 |
% |
| |
17
The components of the change in Income (Loss) from Operations by segment are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
|
|
|
|
Variances |
|
|
|
|
| In millions |
|
2006 |
|
|
Price |
|
|
Volume/Mix |
|
|
Inflation |
|
|
Exchange |
|
|
Other (a) |
|
|
Total |
|
|
2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging |
|
$ |
22.7 |
|
|
|
11.3 |
|
|
|
0.6 |
|
|
|
(10.3 |
) |
|
|
2.3 |
|
|
|
(1.3 |
) |
|
|
2.6 |
|
|
$ |
25.3 |
|
Containerboard/Other |
|
|
(4.7 |
) |
|
|
1.9 |
|
|
|
(0.2 |
) |
|
|
(0.9 |
) |
|
|
— |
|
|
|
0.2 |
|
|
|
1.0 |
|
|
|
(3.7 |
) |
Corporate |
|
|
(8.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.1 |
|
|
|
13.2 |
|
|
|
0.4 |
|
|
|
(11.2 |
) |
|
|
2.3 |
|
|
|
(2.1 |
) |
|
|
2.6 |
|
|
$ |
11.7 |
|
| |
Note:
| |
(a) |
|
Includes the benefits from the Company’s cost reduction initiatives and the impact of
higher depreciation and amortization expense as well as the infrastructure upgrade at the
Company’s West Monroe, LA mill. |
Paperboard Packaging
The Company’s Income from Operations from paperboard packaging in the first three months of 2007
increased due primarily to the improved pricing, worldwide cost reductions resulting from the
Company’s cost reduction initiatives and the favorable impact of foreign currency exchange rates.
These increases were offset by inflationary pressures primarily on fiber, outside board purchases
and corrugated shipping containers, chemical-based inputs and labor and related benefits,
approximately $10 million of expenses related to the infrastructure upgrade at the Company’s West
Monroe, LA mill, and higher depreciation and amortization. The quarter was also impacted by
approximately $3 million of higher expenses in Europe primarily related to work force reductions in
the United Kingdom and start up costs for a new converting facility in France. In addition, the
2006 first quarter was unfavorably impacted by manufacturing variances of approximately $9 million
primarily related to an unexpected failure in a major turbine generator at the Company’s West
Monroe, LA mill.
Containerboard/Other
The Company’s Loss from Operations from containerboard/other decreased due primarily to the
improved pricing in the containerboard medium markets somewhat offset by inflationary pressures.
Corporate
The Company’s Loss from Operations from corporate increased primarily due to a litigation
settlement for approximately $0.4 million, as well as slightly higher costs relating to management
incentives and other general corporate costs.
18
INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE AND EQUITY IN NET EARNINGS OF AFFILIATES
Interest Income
Interest Income was $0.2 million in the first three months of 2007 and 2006.
Interest Expense
Interest Expense increased by $1.9 million to $43.4 million in the first three months of 2007 from
$41.5 million in the first three months of 2006 due to higher interest rates on the unhedged
portion of the Company’s floating rate debt. The increase was somewhat offset by lower average debt
balances during the first three months of 2007. As of March 31,
2007, approximately 30% of the Company's total debt was subject to
floating interest rates.
Income Tax Expense
During the first three months of 2007, the Company recognized Income Tax Expense of $7.4 million on
Loss before Income Taxes and Equity in Net Earnings of Affiliates of $31.5 million. During the
first three months of 2006, the Company recognized Income Tax Expense of $4.6 million on Loss
before Income Taxes and Equity in Net Earnings of Affiliates of $32.2 million. Income Tax Expense
for the first three months of 2007 and 2006 was primarily due to the noncash expense of $4.9
million associated with the amortization of goodwill for tax purposes and for 2007, an increase in
a liability related to a judgment received in a Swedish tax court.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates was $0.2 million in the first three months of 2007 and $0.1
million in the first three months of 2006 which related to the Company’s 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
Cash and Equivalents increased by $2.4 million in the first three months of 2007. Cash used in
operating activities in the first three months of 2007 totaled $32.8 million, compared to $43.0
million in 2006. This improvement was principally due to improved working capital, particularly
inventory and accounts payable. Cash used in investing activities in the first three months of
2007 totaled $20.6 million, compared to $21.0 million in 2006. This change was principally due to
lower purchases of property, plant and equipment (see “Capital Expenditures”), partially offset by
increased spending on patents. Cash provided by financing activities in the first three months in
2007 totaled $55.8 million, compared to $58.3 million in 2006. This change was principally due to
lower net borrowings under the Company’s revolving credit facilities. Depreciation and amortization
during the first three months of 2007 totaled $53.2 million.
19
Liquidity and Capital Resources
The Company’s 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.
Long-Term Debt consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| In millions |
|
2007 |
|
|
2006 |
|
| |
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 (7.44% at March 31, 2007 and 7.47% at December 31, 2006)
payable through 2010 |
|
|
1,055.0 |
|
|
|
1,055.0 |
|
Senior Secured Revolving Facility with interest payable at various dates at
floating rates (8.35% at March 31, 2007 and 10.25% at December 31, 2006)
payable in 2009 |
|
|
55.0 |
|
|
|
3.6 |
|
Other |
|
|
2.4 |
|
|
|
2.4 |
|
| |
|
|
|
1,962.4 |
|
|
|
1,911.0 |
|
Less, current portion |
|
|
0.4 |
|
|
|
0.3 |
|
| |
Total |
|
$ |
1,962.0 |
|
|
$ |
1,910.7 |
|
| |
At March 31, 2007, 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 |
|
$ |
325.0 |
|
|
$ |
55.0 |
|
|
$ |
255.6 |
|
International Facilities |
|
|
18.0 |
|
|
|
13.0 |
|
|
|
5.0 |
|
| |
Total |
|
$ |
343.0 |
|
|
$ |
68.0 |
|
|
$ |
260.6 |
|
| |
Note:
| |
(a) |
|
In accordance with its debt agreements, the Company’s availability
under its Revolving Credit Facility has been reduced by the amount of
standby letters of credit issued of $14.4 million as of March 31,
2007. 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 2007 unless
extended. |
Principal and interest payments under the Term Loan Facility and the Revolving Credit
Facility, together with principal and interest payments on the Senior Notes and the Senior
Subordinated Notes, 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 Company’s 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 and to financial,
business and other factors, many of which are beyond the Company’s control and will be
substantially dependent on the selling prices and demand for the Company’s products, raw material
and energy costs, and the Company’s ability to successfully implement its overall business and
profitability strategies.
The Company expects that its working capital and business needs will require it to continue to have
access to the Revolving Credit Facility or a similar revolving credit facility after the maturity
date in 2009, and that the Company accordingly will have to extend, renew, replace or otherwise
refinance such facility at or prior to such date. No assurance can be given that it will be able to
do so. The Company has in the past refinanced and in the future may seek to refinance its debt
prior to the respective maturities of such debt.
Effective as of March 31, 2007, the Company had approximately $1.4 billion of net operating loss
carryforwards (“NOLs”) for U.S. federal income tax purposes. These NOLs generally may be used by
the Company to offset taxable income earned in subsequent taxable years.
20
Covenant Restrictions
The Senior Secured Credit Agreement, as amended in October 2005, which governs the Term Loan
Facility and the Revolving Credit Facility, imposes restrictions on the Company’s ability to make
capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the
Senior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’s ability to incur
additional indebtedness. Such restrictions, together with the highly leveraged nature of the
Company, could limit the Company’s ability to respond to market conditions, meet its capital
spending program, provide for unexpected capital investments or take advantage of business
opportunities. The covenants contained in the Senior Secured Credit Agreement, as amended, among
other things, restrict the ability of the Company to dispose of assets, incur additional
indebtedness, 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, make capital expenditures and engage in
certain transactions with affiliates.
The financial covenants contained in the Senior Secured Credit Agreement, as amended, among other
things, specify the following requirements for each of the following test periods:
| |
|
|
|
|
| |
|
|
|
Minimum Credit |
| |
|
Maximum Consolidated |
|
Agreement EBITDA to |
| |
|
Debt to Credit Agreement |
|
Consolidated Interest |
| Four Fiscal Quarters Ending |
|
EBITDA Leverage Ratio (a) |
|
Expense Ratio (a) |
| |
|
|
|
|
|
2007 |
|
|
|
|
| |
March 31, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
June 30, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
September 30, 2007 |
|
6.50 to 1.00 |
|
1.75 to 1.00 |
December 31, 2007 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
|
|
|
|
|
2008 |
|
|
|
|
| |
March 31, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
June 30, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
September 30, 2008 |
|
6.00 to 1.00 |
|
1.85 to 1.00 |
December 31, 2008 |
|
5.50 to 1.00 |
|
2.00 to 1.00 |
|
|
|
|
|
2009 |
|
|
|
|
| |
|
|
|
|
|
March 31, 2009 and thereafter |
|
4.50 to 1.00 |
|
2.90 to 1.00 |
| |
Notes:
| |
(a) |
|
Credit Agreement EBITDA is calculated in accordance with the definitions contained in the
Company’s Senior Secured Credit Agreement. Credit Agreement EBITDA is defined as
consolidated net income before consolidated 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, and any income or loss accounted for by the equity method of accounting. |
At March 31, 2007, the Company was in compliance with the financial covenants in the Secured
Credit Agreement, as amended, and the ratios were as follows:
Consolidated Debt to Credit Agreement EBITDA Leverage Ratio — 6.01 to 1.00
Credit Agreement EBITDA to Consolidated Interest Expense Ratio — 2.00 to 1.00
The Company’s management believes that presentation of Credit Agreement EBITDA provides useful
information to investors because borrowings under the Senior Secured Credit Agreement are a key
source of the Company’s liquidity, and the Company’s ability to borrow under the Senior Secured
Credit Agreement is dependent on, among other things, its compliance with the financial ratio
covenants. Failure to comply with these financial ratio covenants would result in a violation of
the Senior Secured Credit Agreement and, absent a waiver or amendment from the
21
lenders under such agreement, permit the acceleration of all outstanding borrowings under the
Senior Secured Credit Agreement.
The calculations of the components of the Company’s financial covenant ratios are listed below:
| |
|
|
|
|
| |
|
Twelve Months Ended |
|
| In millions |
|
March 31, 2007 |
|
| |
Net Loss |
|
$ |
(102.5 |
) |
Income Tax Expense |
|
|
23.0 |
|
Interest Expense, Net |
|
|
173.5 |
|
Depreciation and Amortization |
|
|
199.4 |
|
Dividends Received, Net of Earnings of Equity Affiliates |
|
|
1.2 |
|
Pension, Postemployment and Postretirement Benefits Expense |
|
|
29.8 |
|
Merger Related Expenses |
|
|
0.2 |
|
Write-Down of Assets |
|
|
4.3 |
|
| |
| |
Credit Agreement EBITDA |
|
|
328.9 |
|
| |
| |
|
|
|
|
| |
|
Twelve Months Ended |
|
| In millions |
|
March 31, 2007 |
|
Interest Expense, Net |
|
$ |
173.5 |
|
Amortization of Deferred Debt Issuance Costs |
|
|
(8.8 |
) |
Credit Agreement Interest Expense Adjustments (a) |
|
|
0.1 |
|
| |
| |
Consolidated Interest Expense (b) |
|
$ |
164.8 |
|
| |
| |
|
|
|
|
| |
|
As of |
|
| In millions |
|
March 31, 2007 |
|
Short Term Debt |
|
$ |
15.7 |
|
Long Term Debt |
|
|
1,962.0 |
|
| |
| |
Total Debt |
|
$ |
1,977.7 |
|
| |
Notes:
| |
(a) |
|
Credit agreement interest expense adjustments include the discount from the financing of
receivables. |
| |
(b) |
|
Consolidated Interest Expense is calculated in accordance with the definitions contained
in the Company’s Senior Secured Credit Agreement. Consolidated Interest Expense is defined
as consolidated interest expense minus consolidated interest income plus any discount from
the financing of receivables. |
The Senior Secured Credit Agreement, as amended, requires adjustment to the pricing for the
Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long
as, the Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated less
than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies Inc.) or less
than B1 by Moody’s Investors Service, Inc.
The Senior Notes are rated B- by Standard & Poor’s and B2 by Moody’s Investor Services. The Senior
Subordinated Notes are rated B- by Standard & Poor’s and B3 by Moody’s Investor Services. The
Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated B+ by
Standard & Poor’s and Ba2 by Moody’s Investor Services. As of March 31, 2007, both Standard &
Poor’s and Moody’s Investor Services’ ratings on the Company remain on negative outlook. During the
first three months of 2007, cash paid for interest was approximately $63 million.
If the negative impact of inflationary pressures on key inputs continues, or depressed selling
prices, lower sales volumes, increased operating costs or other factors that have a negative impact
on the Company’s ability to increase its profitability, the Company may not be able to maintain its
compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The
Company’s ability to comply in future periods with the financial covenants in the Senior Secured
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 Company’s control and will be substantially dependent on the selling prices for the
Company’s products, raw material and energy costs, and the Company’s ability to successfully
implement its overall business strategies, and meet its profitability objective. If a violation of
any of the 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 Senior Secured Credit Agreement and the indentures governing the Senior
22
Subordinated Notes and the Senior Notes have covenants as well as 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 Senior
Secured Credit Agreement is collateralized by substantially all of the Company’s domestic assets.
Capital Investment
The Company’s capital investment in the first three months of 2007 was $19.8 million, compared to
$22.7 million in the first three months of 2006. During the first three months of 2007, the Company
had capital spending of $10.5 million for improving process capabilities, $6.9 million for capital
spares, $2.2 million for manufacturing packaging machinery and $0.2 million for compliance with
environmental laws and regulations.
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 Company’s 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 Company’s 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 LADEQ. The
violations relate to the collection, treatment and reporting of hazardous air pollutants. The
Company recorded $0.6 million of expense in 2006 for compliance costs to correct the technical
issues causing the Title V permit violations. In addition, the Company may be required to pay civil
penalties for violations that occurred from 2001 through 2005. Although the Company believes that
it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such
penalty is not estimable.
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 described above, for which
it is too early in the investigation and regulatory process to make a determination, 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 Company’s financial position, results of
operations or cash flows. Except for the compliance costs described above relating to the West
Monroe, Louisiana mill, the Company cannot estimate with certainty other future corrective
compliance, investigation or remediation costs, all of which the Company currently considers to be
remote. Costs relating to historical usage or indemnification claims that the Company considers to
be reasonably possible are not quantifiable at this time. The Company will continue to monitor
environmental issues at each of its facilities and will revise its accruals, estimates and
disclosures relating to past, present and future operations as additional information is obtained.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date
23
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
Company’s consolidated financial statements are those that are important both to the presentation
of the Company’s financial condition and results of operations and require significant judgments by
management with regard to estimates used.
Certain liabilities of approximately $3 million were estimated and recorded in 2003 at the time of
the Merger (defined in the Company’s Annual Report on Form 10-K for the year ended December 31,
2006). Changes in these estimated amounts are expected to favorably impact results during 2007
although the specific period and amount has not yet been determined.
The Company’s most critical accounting policies which require significant judgment or involve
complex estimations are described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
NEW ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting the Company, see Note 2 in Notes to
Condensed Consolidated Financial Statements.
BUSINESS OUTLOOK
The Company expects inflationary pressures for production inputs, including higher costs for fiber,
wood and chemical-based inputs, to continue to impact results in 2007. These increases should be
somewhat offset by lower energy costs.
To help offset inflation in 2007, the Company expects to realize approximately $40 to $50
million in year over year operating cost savings from its continuous improvement programs. In
addition, contractual price escalators and price increases announced in 2006 for coated board and
cartons have begun to favorably impact 2007 and should continue in the second and third quarters.
Total capital investment for 2007 is expected to be between approximately $100 million and
$110 million and is expected to relate principally to improving the Company’s process capabilities,
the production of packaging machinery, the acquisition of capital spares and compliance with
environmental laws and regulations.
The Company also expects the following in 2007:
| |
• |
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Depreciation and amortization between $185 million and $195 million. |
| |
| |
• |
|
Interest expense of $170 million to $180 million, including $9
million of non-cash interest expense associated with amortization
of debt issuance costs. |
| |
| |
• |
|
Debt reduction of $60 million to $70 million. |
| |
| |
• |
|
Pension plan contributions of $28 million to $30 million. |
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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 the Company’s Annual Report on Form
10-K for the year ended December 31, 2006. There have been no significant developments with respect
to derivatives or exposure to market risk during the first three months of 2007; for a discussion
of the Company’s Financial Instruments, Derivatives and Hedging Activities, see Note 11 in Notes to
Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006 and Management’s 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 Company’s management has carried out an evaluation, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s 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 Company’s disclosure controls and
procedures were effective as of March 31, 2007.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during
the fiscal quarter ended March 31, 2007 that has materially affected, or is likely to materially
affect, the Company’s internal control over financial reporting.
25
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
Company’s consolidated financial position, results of operations or cash flows. For more
information see “Management’s 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 our Form 10-K for
the year ended December 31, 2006.
ITEM 6. EXHIBITS
a) Exhibit Index
| |
|
|
| Exhibit Number |
|
Description |
| |
10.1
|
|
Graphic Packaging International, Inc. Severance Pay Plan. |
|
|
|
10.2
|
|
Graphic Packaging International,
Inc. Management Incentive Plan. |
|
|
|
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. |
26
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 CORPORATION
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President, General |
|
|
|
|
Stephen A. Hellrung
|
|
Counsel and Secretary
|
|
May 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and |
|
|
|
|
Daniel J. Blount
|
|
Chief Financial Officer (Principal
|
|
May 3, 2007 |
|
|
|
|
Financial Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and Controller |
|
|
|
|
Deborah R. Frank
|
|
(Principal Accounting Officer)
|
|
May 3, 2007 |
|
|
27