UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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COMMISSION FILE NUMBER:
001-33988
Graphic Packaging Holding
Company
(Exact name of registrant as
specified in its charter)
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Delaware
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26-0405422
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(State of
incorporation)
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(I.R.S. employer
identification no.)
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814 Livingston Court, Marietta, Georgia
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30067
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(Address of principal executive
offices)
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(Zip Code)
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(770) 644-3000
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value per share
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New York Stock Exchange
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Series A Junior Participating Preferred Stock
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New York Stock Exchange
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Purchase Rights Associated with the Common Stock
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of voting and non-voting common
equity held by non-affiliates at June 30, 2008 was
$154.9 million.
As of February 27, 2009, there were approximately
342,568,704 shares of the registrants Common Stock,
$0.01 par value per share outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the registrants definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 13,
2009 are incorporated by reference into Part III of this
Annual Report on
Form 10-K.
TABLE OF
CONTENTS OF
FORM 10-K
2
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 and manufacturing
rationalization, 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 herein under
Item 1A., Risk Factors.
3
PART I
Overview
Graphic Packaging Holding Company (GPHC and,
together with its subsidiaries, the Company) is a
leading provider of paperboard packaging solutions for a wide
variety of products to multinational food, beverage and other
consumer products companies. Additionally, the Company is one of
the largest producers of folding cartons and holds a leading
market position in coated unbleached kraft paperboard,
coated-recycled boxboard, and multi-wall bag. 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 and packaging designs, and its commitment to
customer service.
The Company focuses on providing a range of paperboard packaging
products to major companies with well-recognized brands. Its
customers generally have prominent market positions in the
beverage, food and other consumer products industries. The
Company offers customers its paperboard, cartons and packaging
machines, either as an integrated solution or separately. The
Company has long-term relationships with major companies,
including Kraft Foods, Inc., Anheuser-Busch, Inc., General
Mills, Inc., SABMiller plc., Molson Coors Brewing Company,
Nestlé Group, Kellogg Company, Unilever, The Schwan Food
Company, Perseco, Kimberly-Clark, Proctor and Gamble,
Nestlé Purina PetCare Company, Purina Mills, LLC and
numerous
Coca-Cola
and Pepsi bottling companies.
The Companys packaging products are made from a variety of
grades of paperboard. The Company makes most of its packaging
products from coated unbleached kraft (CUK), coated
recycled board (CRB), and uncoated recycled board
(URB) that the Company produces at its mills. The
remaining portion is produced from paperboard, primarily solid
bleached sulfate (SBS), purchased from external
sources. The Company is a leading supplier of multi-wall bags
and, in addition to a full range of products, provides customers
with value-added graphical and technical support, customized
packaging equipment solutions and packaging workshops to help
educate customers. The Companys specialty packaging
includes flexible packaging, labels and ink.
On March 10, 2008, the business of Graphic Packaging
Corporation (GPC) and Altivity Packaging, LLC
(Altivity) were combined through a series of
transactions. A new publicly-traded parent company, GPHC was
formed and all of the equity interest in Bluegrass Container
Holdings, LLC (BCH), Altivitys parent company,
were contributed to GPHC in exchange for 139,445,038 shares
of GPHCs common stock, par value $0.01 per share.
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 BCH
were contributed to GPHCs primary operating company,
Graphic Packaging International, Inc. (GPII).
Together, these transactions are referred to herein as the
Altivity Transaction.
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 was incorporated on June 21, 2007 under the laws of
the State of Delaware, under the name New Giant Corporation.
GPHC did not conduct any material activities until after the
closing of the Altivity Transaction. The former publicly traded
parent company GPC (formerly known as Riverwood Holding, Inc.),
was incorporated on December 7, 1995 under the laws of the
State of Delaware. On August 8, 2003, the corporation
formerly known as Graphic Packaging International Corporation
merged with and into Riverwood Acquisition Sub LLC, a
wholly-owned subsidiary of Riverwood Holding, Inc.
(Riverwood Holding), with Riverwood Acquisition Sub
LLC as the surviving entity (collectively referred to as the
Merger). Riverwood
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Acquisition Sub LLC then merged into Riverwood Holding, which
was renamed Graphic Packaging Corporation.
The Companys website is located at
http://www.graphicpkg.com.
The Company makes available, free of charge through its website,
its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after such materials are
electronically filed or furnished to the Securities and Exchange
Commission (the SEC). The Company also makes certain
investor presentations and access to analyst conference calls
available through its website. The information contained or
incorporated into the Companys website is not a part of
this Annual Report on
Form 10-K.
As a result of the Altivity Transaction, the Company business
segments were revised. The Company reports its results in three
business segments: paperboard packaging, multi-wall bag and
specialty packaging. Segment disclosures have been reclassified
to conform to the new presentation for all periods presented.
The Company operates in four geographic areas: the United States
(U.S.)/North America, Central/South America, Europe
and Asia Pacific. For business segment and geographic area
information for each of the last three fiscal years, see
Note 18 in the Notes to Consolidated Financial Statements
included herein under Item 8., Financial Statements
and Supplementary Data.
Paperboard
Packaging
The Companys paperboard packaging products deliver
marketing and performance benefits at a competitive cost. The
Company supplies paperboard cartons and carriers designed to
protect and contain products while providing:
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convenience through ease of carrying, storage, delivery,
dispensing of product and food preparation for consumers;
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a smooth surface printed with high-resolution, multi-color
graphic images that help improve brand awareness and visibility
of products on store shelves; and
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durability, stiffness, wet and dry tear strength; leak, abrasion
and heat resistance; barrier protection from moisture, oxygen,
oils and greases as well as enhanced microwave heating
performance.
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The Company produces paperboard at its mills, prints, cuts and
glues (converts) the paperboard into folding cartons
at its converting plants and designs and manufactures
specialized, proprietary packaging machines that package bottles
and cans and, to a lesser extent, non-beverage consumer
products. The Company also installs its packaging machines at
customer plants and provides support, service and advanced
performance monitoring of the machines.
The Company offers a variety of laminated, coated and printed
packaging structures that are produced from its CUK, CRB and
URB, as well as other grades of paperboard that are purchased
from third-party suppliers. The Company produces cartons using
diverse structural designs and combinations of paperboard,
films, foils, metallization, holographics, embossing and other
characteristics that are tailored to the needs of individual
products. The Company provides a wide range of paperboard
packaging solutions for the following end-use markets:
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beverage, including beer, soft drinks, energy drinks, water and
juices;
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food, including cereal, desserts, frozen, refrigerated,
microwavable foods and pet foods;
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prepared foods, including snacks, quick-serve foods for
restaurants and food service products; and
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household products, including dishwasher and laundry detergent,
health care and beauty aids, and tissues and papers.
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For its beverage customers, the Company supplies beverage
cartons in a variety of designs and formats, including 4, 6, 8,
12, 18, 20, 24, 30 and 36 unit multi-packs. Its proprietary
high-speed beverage packaging
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machines package cans, bottles and other beverage containers
into its beverage cartons. The Company believes the use of such
machines creates pull-through demand for its
cartons, which in turn creates demand for its CUK. The Company
seeks to increase the customers use of its integrated
packaging solutions in order to improve its revenue
opportunities, enhance customer relationships, provide customers
with greater packaging line and supply chain efficiencies and
overall cash benefits, and expand opportunities for the Company
to provide value-added support and service. The Company enters
into annual or multi-year carton supply contracts with its
customers, which generally require the customer to purchase a
fixed portion of its carton requirements from the Company.
The Companys packaging applications meet the needs of its
customers for:
Strength Packaging. Through its application of
materials and package designs, the Company provides sturdiness
to meet a variety of packaging needs, including tear and wet
strength, puncture resistance, durability and compression
strength (providing stacking strength to meet store display
packaging requirements). The Company achieves such strength
characteristics through combinations of paperboard and film
laminates tailored on a
product-by-product
basis. The Companys patented
Z-Flute®
carton is a key component of the Companys strength
packaging portfolio. Z-Flute offers customers the strength of
corrugate with the performance characteristic of a folding
carton due to the strategic location of reinforcing paperboard
strips.
Promotional Packaging. The Company offers a
broad range of promotional packaging options that help
differentiate its customers products. The Company provides
products designed to enhance point-of-purchase and marketing
opportunities through package shapes, portability,
metallization, holographics, embossing and micro-embossing,
brilliant high-tech inks, specialized coatings, hot-stamp metal
foil surfaces, in-pack and on-pack customized promotions,
inserts, windows and die-cuts. These promotional enhancements
improve brand awareness and visibility on store shelves.
Convenience Packaging. These packaging
solutions improve package usage and food preparation:
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beverage multiple packaging Fridge
Vendor®
and 4, 6, 8, 12, 18, 20, 24, 30 and 36 unit multi-packs for
beer, soft drinks, energy drinks, water and juices;
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active microwave technologies
MicroRite®,
Microrite Technology Browns, Crisps, Cooks
Evenlytm,
Qwik
Crisp®
trays, Quilt
Wavetm
and
MicroFlex®
Q substrates that improve the preparation of foods in the
microwave;
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easy opening and closing features pour spouts
and sealable liners; and
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IntegraPaktm the
Companys alternative to traditional
bag-in-box
packaging.
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Barrier Packaging. The Company provides
packages that protect against moisture, grease, oil, oxygen,
sunlight, insects and other potential product-damaging factors.
Its barrier technologies integrate a variety of specialized
laminate and extruded film layers, metallized package layers,
package sealing, applied coatings and other
techniques all customized to specific barrier
requirements.
Converting
Operations
The Company converts CUK and CRB, as well as other grades of
paperboard, into cartons at carton converting plants that the
Company operates in the U.S., Canada, Mexico, the United
Kingdom, Spain, France and Brazil, as well as through converting
plants associated with its joint ventures in Japan and Denmark,
contract converters and at licensees in other markets outside
the U.S. The converting plants print, cut and glue
paperboard into cartons designed to meet customer
specifications. These plants utilize roll-fed web-printing
presses with in-line cutters and sheet-fed printing presses to
print and cut paperboard. Printed and cut cartons are in turn
frequently glued and then shipped to the Companys
customers.
Converting plants in the U.S. are dedicated to converting
paperboard produced by the Company, as well as paperboard
supplied by outside producers, into cartons. The presses at
these converting plants have high cutting and printing speeds,
thereby reducing the labor hours per ton of cartons produced for
the high-volume U.S. market. The Companys
international converting plants convert paperboard produced by
the Company, as
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well as paperboard supplied by outside producers, into cartons.
These converting plants outside of the U.S. are designed to
meet the smaller volume orders of these markets.
Paperboard
Production
The following pro forma data assumes that the acquisition of
Altivity and the sale of the mills in Philadelphia, Pennsylvania
and Wabash, Indiana occurred on January 1, 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:
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2008 Net Tons
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Location
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Product
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# of Machines
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Produced
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West Monroe, LA
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CUK
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2
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709,000
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Macon, GA
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CUK
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2
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552,000
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Kalamazoo, MI
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CRB
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2
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400,000
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Battle Creek, MI
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CRB
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2
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151,000
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Middletown, OH
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CRB
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1
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142,000
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Santa Clara, CA
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CRB
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1
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126,000
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Pekin, IL
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URB
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1
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33,000
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West Monroe, LA
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Containerboard
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2
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173,000
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The Company expects to consume most of its coated board output
in its carton converting operations, which is an integral part
of its low-cost converting strategy. In 2008, excluding
containerboard, 78% of mill production was consumed internally.
CUK Production. The Company is the larger of
two worldwide producers of CUK. CUK is a specialized
high-quality grade of coated paperboard with excellent wet and
dry tear strength characteristics and printability for high
resolution graphics that make it particularly suited for a
variety of packaging applications.
CUK is manufactured from blends of pine fibers and, in some
cases, recycled fibers, primarily clippings from its converting
operations. Virgin fiber is obtained in the form of wood chips
or pulp wood acquired through open market purchases or the
Companys long-term purchase contract with Plum Creek
Timber Company, L.P. See Raw Materials. Wood chips
are chemically treated to form softwood pulp, which are then
blended (together, in some cases, with recycled fibers). In the
case of carrierboard (paperboard used in the beverage
industrys multi-pack cartons), chemicals are added to
increase moisture resistance. The pulp is then processed through
the mills paper machines, which consist of a paper-forming
section, a press section (where water is removed by pressing the
wet paperboard between rolls), a drying section and a coating
section. Coating on CUK, principally a mixture of pigments,
binding agents and water, provides a white, smooth finish, and
is applied in multiple steps to achieve desired levels of
brightness, smoothness and shade on the print side of the
paperboard. After the CUK is coated, it is wound into rolls,
which are then shipped to the Companys converting plants
or to outside converters.
CRB Production. CRB is manufactured entirely
from recycled fibers, primarily old corrugated containers (OCC),
doubled lined kraft cuttings from corrugated box plants (DLK),
old newspapers (ONP), and box cuttings. The recycled fibers are
re-pulped, formed on paper machines, and clay-coated to provide
an excellent printing surface for superior quality graphics and
appearance characteristics.
URB Production. URB is an uncoated 100%
recycled paperboard used in the manufacture of chipboard for
folding cartons, gift boxes, trays and file folders; and tube
stock for manufacture of tubes, cores, cans and composite
containers.
Containerboard. The Company manufactures
containerboard corrugating medium and kraft
paper for sale in the open market. Corrugating
medium is combined with linerboard to make corrugated
containers. Kraft paper is used primarily to make grocery bags
and sacks.
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Packaging
Design and Proprietary Packaging Machinery
The Company has research and design centers located in Marietta,
Georgia; Golden, Colorado; Concord, New Hampshire; Menasha,
Wisconsin; West Monroe, Louisiana; Carol Stream, Illinois;
Valley Forge, Pennsylvania; Irvine, California; and Mississauga,
Ontario, Canada. At these centers, the Company designs, tests
and manufactures prototype packaging for consumer products
packaging applications. The Company designs and tests packaging
machinery at its product development centers, including full
size pilot lines. The Company also utilizes a network of
computer equipment at its converting facilities to provide
automated computer-to-plate graphic services designed to improve
efficiencies and reduce errors associated with the pre-press
preparation of printing plates. At the Companys microwave
laboratories, the Company designs, tests and reports food
performance as part of full-service, turn-key microwave
solutions for its food customers.
The Company has broad technical expertise in chemistry, paper
science, microwave engineering, mechanical engineering, physics,
electrical engineering, and food science. This experience base,
along with food technologists and investment in sample line
equipment, enables the Company to rapidly design and test
prototypes to help its customers develop, test and launch
successful microwaveable food products into the market.
The Companys engineers create and test packaging designs,
processes and materials based on market and customer needs,
which are generally characterized as enhanced stacking or tear
strength, promotional or aesthetic appeal, consumer convenience
or barrier properties. Concepts go through a gated review
process through their development to ensure that resources are
being focused on those projects that are most likely to succeed
commercially. The Company also works to refine and build on
current proprietary materials, processes and designs.
At the Companys product development center in Marietta,
Georgia, the Company integrates carton and packaging machinery
designs from a common database, balancing carton manufacturing
costs and packaging line performance. The Company also
manufactures and designs packaging machines for beverage
multiple packaging and other multi-pack consumer products
packaging applications at its principal U.S. manufacturing
facility in Crosby, Minnesota and at a facility near Barcelona,
Spain. The Company leases substantially all of its packaging
machines to customers, typically under machinery use agreements
with original terms of three to six years.
The Company employs a pull-through marketing
strategy for its multiple packaging customers, the key elements
of which are (1) the design and manufacture of proprietary
packaging machines capable of packaging plastic and glass
bottles, cans and other primary containers, (2) the
installation of the machines at customer locations under
multi-year machinery use arrangements and (3) the
development of proprietary cartons with high-resolution graphics
for use on those machines. The Company continues to innovate in
new machinery development and design to offer customers the
latest packaging machinery technology to meet their changing
needs.
Multi-wall
Bag
The Companys multi-wall bag business is the leading
supplier of multi-wall bags in North America. The Company
operates 12 multi-wall bag plants that print, fold and glue
paper into bag packaging. The Company and its predecessors have
made significant investments to install state-of-the-art
equipment at major plants to expand the businesss ability
to manufacture a full range of products.
The Company also provides multi-wall bag customers with
value-added graphical and technical support, customized
packaging equipment solutions and packaging workshops to help
educate customers. These operations are supported by trademarks
such as
Cap-Sac®,
Kitchen
Master®,
Peel
Pak®,
Soni-Lok®,
Soni-Seal®,
and The Yard
Master®.
The Companys multi-wall bag facilities are strategically
located throughout the U.S., allowing it to provide a high level
of service to customers, minimize freight and logistics costs,
improve order turnaround times and improve supply chain
reliability. Furthermore, with relatively comparable
manufacturing lines in
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each of the major facilities, the Company has the capacity and
the flexibility to manufacture all of its primary multi-wall bag
product lines at each location.
The Companys multi-wall bag business had traditionally
provided packaging for low-cost, bulk-type commodity products.
However, with the continuing evolution of materials management,
bag construction, and distribution systems, the Company has
gained access to end-markets in which higher-value products are
now being packaged in multi-wall bags. Key end markets include
food and agriculture, building materials, chemicals, minerals
and pet care. For example, todays applications include
custom-designed barriers (caustic soda), variable package sizes
for varying product weights and increasingly higher quality
graphics for enhanced consumer appeal. The business provides
customers in a wide variety of end-markets with high-end
graphical printing solutions that enable the Company to grow
with its customers.
Specialty
Packaging
The Companys specialty packaging business includes
flexible packaging, labels and ink.
Flexible
Packaging
The Companys flexible packaging business operates five
modern and technologically competitive manufacturing plants in
North America and produces products such as shingle wrap, batch
inclusion bags and film, retort pouches (such as meals ready to
go), medical test kits and transdermal patch overwraps,
multilayer laminations for hard-to-hold products (such as
iodine) and plastic bags and films for building materials (such
as ready-mix concrete). These plants offer flexographic and
rotogravure printing, thermoforming and barrier coating, mono
layer and co-extruded films, extrusion lamination, adhesive
lamination both stand alone and in-line with flexographic
printing, polyethylene bags and rolls, shipping sacks and valve
bags.
The Companys flexible 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. With the capacity to
extrude up to seven layers of multi-layer films and
state-of-the-art printing capabilities, the business is ideally
positioned to service a variety of niche flexible packaging
applications such as
stand-up
pouches, condiment containers for the fast food industry and
plastic valve for shipping sacks. Approximately 17% of the
plastics produced is consumed internally.
Labels
The Companys label business focuses on two segments, heat
transfer labels and lithographic labels.
The Company operates three dedicated label plants. These
facilities feature state-of-the-art lithographic, rotogravure,
flexographic and digital printing, including eight color
sheet-fed and up to eleven color roll-to-roll equipment which
produce cut and stack, in-mold, roll fed and heat transfer
labels. The label business provides customers with high quality
labels utilizing multiple technology applications, such as
DI-NA-CAL®.
The
DI-NA-CAL
heat transfer offering includes a full system solution offering
of both labels and the most advanced application equipment
manufactured today.
The Companys labels business produces labels for: food,
beverage, pharmaceutical, automotive, household and industrial
products, detergents, and the health and beauty markets.
Ink
The Companys ink business operates three manufacturing
plants in North America. Approximately 40% of the ink produced
is consumed internally by the converting facilities.
Joint
Ventures
To market machinery-based packaging systems, the Company is a
party to joint ventures with Rengo Riverwood Packaging, Ltd. (in
Japan) and Graphic Packaging International Schur A/S
(in Denmark), in
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which it holds a 50% and 60% ownership interest, respectively.
The joint venture agreements cover CUK supply, use of
proprietary carton designs and marketing and distribution of
packaging systems.
Marketing
and Distribution
The Company markets its paperboard and paperboard-based products
principally to multinational brewers, soft drink bottlers, food
companies, and other well-recognized consumer products
companies. It also sells paperboard in the open market to
independent and integrated paperboard converters.
The Companys major customers for beverage cartons include
Anheuser-Busch, Inc., SABMiller plc, Molson Coors Brewing
Company, numerous
Coca-Cola
and Pepsi bottling companies, Inbev, Kirin, and Asahi Breweries.
The Company also sells beverage paperboard in the open market to
independent converters, including licensees of its proprietary
carton designs, for the manufacture of beverage cartons.
The Companys non-beverage consumer products packaging
customers include Kraft Foods, Inc., General Mills, Inc.,
Nestlé Group, Unilever, PepsiCo, Inc., Kellogg Company, The
Schwan Food Company, Perseco, Kimberly-Clark, and The
Proctor & Gamble Company. It also sells its paperboard
to numerous independent and integrated converters who convert
the paperboard into cartons for consumer products. The Company
has long-standing relationships with a number of major
independent and integrated converters who have agreed to
purchase a significant portion of their paperboard requirements
from the Company and to assist the Company in customer
development efforts and who use the Companys products to
grow the market for paperboard.
Distribution is primarily accomplished through direct sales
offices in the U.S., Australia, Brazil, China, Denmark, Germany,
Italy, Japan, Mexico, Spain, and the United Kingdom and, to a
lesser degree, through broker arrangements with third parties.
The Companys selling activities are supported by its
technical and developmental staff.
With its industry leadership position and complete product and
services capabilities, the Companys multi-wall bag
business has developed longstanding relationships with customers
ranging from small, regionally focused companies to large
blue-chip consumer and industrial companies. The Companys
customers rely on their strategic partnership with the Company
to provide innovative and customized product solutions. The
Companys multi-wall bag customers include Nestlé
Purina PetCare Company, and Purina Mills. LLC.
The flexible packaging business unit has an established position
in end-markets for food and foodservice, pharmaceutical and
medical, personal care, industrial, pet and pet care products,
horticulture and military and commercial retort pouches. The
majority of the businesss sales are derived from broader
industrial applications.
The label business has a broad base of well-recognized
industrial and consumer clients, such as Kraft Foods.
During 2008, the Company did not have any one customer who
represented 10% or more of its net sales.
Competition
Although a relatively small number of large competitors hold a
significant portion of the paperboard packaging market, the
Companys business is subject to strong competition. The
Companys primary competitors include Caraustar Industries,
Inc., International Paper Company, MeadWestvaco Corporation,
Packaging Corporation of America, R.A. Jones &
Company, Inc., Rock-Tenn Company, and Cascades Inc. There are
only two major producers in the U.S. of CUK, MeadWestvaco
Corporation and the Company. The Company faces significant
competition in its CUK business from MeadWestvaco, as well as
from other packaging materials manufacturers. Like the Company,
MeadWestvaco produces and converts CUK, designs and places
packaging machines with customers and sells CUK in the open
market.
In beverage multiple packaging, cartons made from CUK compete
with substitutes such as plastics and corrugated packaging for
packaging glass or plastic bottles, cans and other primary
containers. Although plastics and corrugated packaging are
typically priced lower than CUK, the Company believes that
cartons
10
made from CUK offer advantages over these materials in areas
such as distribution, high quality graphics, carton designs,
package performance, package line speed, environmental
friendliness and design flexibility.
In non-beverage consumer products packaging, the Companys
paperboard competes principally with MeadWestvacos CUK, as
well as CRB and SBS from numerous competitors and,
internationally, folding boxboard and white-lined chip. CUK and
CRB have generally been priced in a range that is lower than SBS
board. There are a large number of producers in the paperboard
markets, which are subject to significant competitive and other
business pressures. Suppliers of paperboard compete primarily on
the basis of price, strength and printability of their
paperboard, quality and service.
The Companys multi-wall business competes with Hood
Packaging Corporation, Exopack, LLC, Bemis Company, Inc., Mondi
Group, and
Mid-America
Paper Recycling Co. Additionally, the Company faces increasing
competition from products imported from Asia and South America.
The U.S. converted flexible packaging industry is highly
fragmented, comprising over 500 companies operating 800
converting facilities. Participants range from small, private
companies to multinational firms.
Raw
Materials
Paperboard
Packaging
Pine pulpwood, paper and recycled fibers (including DLK and OCC)
and energy used in the manufacture of paperboard, as well as
poly sheeting, plastic resins and various chemicals used in the
coating of paperboard represent the largest components of the
Companys variable costs of paperboard production. The cost
of these materials is subject to market fluctuations caused by
factors largely beyond the Companys control.
The Company relies on private landowners and the open market for
all of its pine pulpwood and recycled fiber requirements,
supplemented by CUK clippings that are obtained from its
converting operations. The Company is a party to a
20-year
supply agreement, expiring in 2016, with Plum Creek Timber
Company, L.P., with a
10-year
renewal option, for the purchase by the Company, at market-based
prices, of a majority of the West Monroe mills
requirements for pine pulpwood and residual chips. An assignee
of Plum Creek supplies residual chips to the Company pursuant to
this supply agreement. The Company purchases the remainder of
the wood fiber used in CUK production at the West Monroe mill
from other private landowners in this region. The Company
believes that adequate supplies of open market timber currently
are available to meet its fiber needs at the West Monroe mill.
The Macon mill purchases most of its fiber requirements on the
open market, and is a significant consumer of recycled fiber,
primarily in the form of clippings from the Companys
domestic converting plants as well as DLK and other recycled
fibers. The Company has not experienced any significant
difficulties obtaining sufficient DLK or other recycled fibers
for its Macon mill operations, which the Company purchases in
part from brokers located in the eastern U.S. The Macon
mill purchases substantially all of its pine pulpwood
requirements from private landowners in central and southern
Georgia. Because of the adequate supply and large concentration
of private landowners in this area, the Company believes that
adequate supplies of pine pulpwood timber currently are
available to meet its fiber needs at the Macon mill.
The Kalamazoo mill produces coated 100% recycled paperboard made
primarily from OCC, ONP, and boxboard clippings. ONP and OCC
recycled fibers are purchased through brokers at market prices
and, less frequently, purchased directly from sources under
contract. Boxboard clippings are provided by the Companys
folding carton converting plants and, to a lesser degree,
purchased through brokers. The market price of each of the
various recycled fiber grades fluctuates with supply and demand.
The Company has many sources for its fiber requirements and
believes that the supply is adequate to satisfy its needs.
The coated and uncoated recycled board produced at the Battle
Creek, Middletown, Santa Clara, and Pekin mills are made
from 100% recycled fiber. The Company has historically procured
the majority of its recycled fiber through a supply agreement
with Smurfit-Stone Container Corporation. Starting in 2009, the
Company intends to procure its recycled fiber from both
Smurfit-Stone Container Corporation and local independent fiber
suppliers. The internalization of the Companys recycled
fiber procurement function is
11
expected to enable the Company to attain the lowest market price
for its recycled fiber given the Companys highly
fragmented supplier base. The Company believes there are
adequate supplies of recycled fiber to serve its mills.
In addition to paperboard that is supplied to its converting
operations from its own mills, the Company converts a variety of
other paperboard grades such as SBS. The Company purchases such
paperboard requirements, including additional CRB and URB, from
outside vendors. The majority of external board purchases are
acquired through long term arrangements with major industry
suppliers including Smurfit-Stone Container Corporation,
MeadWestvaco Corporation, Georgia-Pacific LLC, International
Paper Company, and Paperworks Industries.
Multi-wall
Bag
The multi-wall bag operations use a combination of natural
kraft, high performance, bleached, metallic and clay coated
papers in its converting operations. The paper is supplied
directly through North American paper mills, including Smurfit
Stone Container Corporation, KapStone Kraft Paper Corporation,
Georgia-Pacific LLC, Fraser Papers, Tolko Industries Ltd., and
Canfor Corporation, under supply agreements that are typically
reviewed annually.
Specialty
Packaging
The flexible packaging group currently purchases the majority of
its primary raw material of polyethylene resins or additives
from Equistar Chemical Company, Dow Chemical Canada, Inc., AT
Plastics, Inc., Nova Chemicals, Spartech Plastics and Pliant
Corp. Other key material purchases include films, such as nylon,
both saran coated and not, polyester film, metallized polyester
film, polypropylene films for retort pouch packaging, aluminum
foil, inks and adhesives that are secured through a variety of
short and mid-term agreements.
The label group purchases its primary raw materials, which
includes heat transfer papers and coated
one-side and
two-side papers from a limited number of suppliers. In addition,
the group purchases wet strength and metallized paper for
specific, niche label applications and shrink sleeve film
substrates through short and mid-term agreements.
Other
Raw Materials
The Company purchases a variety of other raw materials for the
manufacture of its products, such as inks, aluminum foil,
plastic filling, plastic resins, adhesives, process chemicals
and coating chemicals such as kaolin and titanium dioxide. While
such raw materials are generally readily available from many
sources, and the Company is not dependent upon any one source of
such raw materials, the Company has developed strategic
long-standing relationships with some of its vendors, including
the use of multi-year supply agreements, in order to provide a
guaranteed source of raw materials that satisfies customer
requirements.
Energy
Energy, including natural gas, fuel oil and electricity,
represents a significant portion of the Companys
manufacturing costs. The Company has entered into contracts
designed to manage risks associated with future variability in
cash flows and price risk related to future energy cost
increases for a portion of its natural gas requirements,
primarily at its U.S. mills through December 2009. The
Companys hedging program for natural gas is discussed in
Note 10 in the Notes to Consolidated Financial Statements
included herein under Item 8., Financial Statements
and Supplementary Data.
Backlog
Orders from the Companys principal customers are
manufactured and shipped with minimal lead time. The Company did
not have a material amount relating to backlog orders at
December 31, 2008 or 2007. The Companys entire
backlog at December 31, 2008 is expected to be shipped
during the first quarter 2009.
12
Seasonality
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 beverage multiple packaging markets, and in
the late summer and early fall due to the seasonality of the
folding carton business.
Research,
Development and Engineering
The Companys research and development staff works directly
with its sales and marketing personnel to understand long term
consumer and retailer trends and create new packaging solutions.
These innovative solutions across the Companys growth
platforms provide the business and customers with differentiated
packaging solutions. The Companys development efforts
include, but are not limited to, extending the shelf life of
customers products, reducing production costs, enhancing
the heat-managing characteristics of food packaging and refining
packaging appearance through new printing techniques and
materials. The Companys revolutionary Fridge Vendor
carton, a horizontal beverage 12-pack that delivers cold
beverages while conserving refrigerator space, is but one
example of the Companys successful projects involving both
carton and machine design to introduce a new consumer-friendly
package. This patented package has proven popular with consumers
because it is convenient. Another award-winning package solution
is the Companys MicroRite even heating trays that are used
for frozen entrees or side dishes that benefit from directing
heat towards frozen food centers and deflecting heat from
vulnerable food edges to emulate in the microwave the even
baking delivered by the conventional oven. Qwik Crisp, MicroFlex
Q and Quilt Wave complete the microwave product line. This new
product line delivers conventional oven quality at microwave
preparation speed and convenience to meet the needs of
todays consumers. The Companys patented Z-Flute
technology is a third area of innovation that is providing a
growth vehicle for the business. Z-Flute technology provides the
strength of a corrugate package with the performance
characteristics of a folding carton due to the strategic
lamination of paperboard strips.
Development efforts also include new product and innovation
teams to assist in working with customers, sales, marketing and
manufacturing to develop new package features; technical
assistance to provide test programs for new or existing packages
and product fitness for use and shelf life improvements;
addressing customers questions related to the compliance
of the Companys products to federal, state and local
regulations; production of samples for marketing evaluation,
checking the package size or other evaluations; and assistance
to identify and quantify the key characteristics of materials
which affect product and packaging performance.
For more information on research and development expenses see
Note 1 in the Notes to Consolidated Financial Statements
included herein under Item 8., Financial Statements
and Supplementary Data.
Patents
and Trademarks
As of December 31, 2008, the Company had a large patent
portfolio, presently owning, controlling or holding rights to
more than 1,350 U.S. and foreign patents, with more than
900 U.S. and foreign patent applications currently pending.
The Companys patent portfolio consists primarily of
patents relating to packaging machinery, manufacturing methods,
structural carton designs, microwave packaging technology,
barrier protection packaging, multi-wall packaging manufacturing
methods and multi-wall packaging machinery. These patents and
processes are significant to the Companys operations and
are supported by trademarks such as Z-Flute, Fridge Vendor,
IntegraPak, MicroRite, Quilt Wave, Cap-Sac, DI-NA-CAL, Kitchen
Master, Peel Pak, Soni-Lok, Soni-Seal, and The Yard Master. The
Company takes significant steps to protect its intellectual
property and proprietary rights. The Company does not believe
that the expiration of any of its patents at the end of their
normal lives will have a material adverse effect on its
financial condition or results of operations, and the
Companys operations are not dependent upon any single
patent or trademark.
13
Employees
and Labor Relations
As of December 31, 2008, the Company had approximately
14,400 employees worldwide (excluding employees of joint
ventures), of which approximately 52% were represented by labor
unions and covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.
Certain employees in the U.S. are covered by collective
bargaining agreements. The Company has contracts with the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied-Industrial and Service Workers International Union
(USW), the Association of Western Pulp and Paper
Workers (AWPPW), the International Brotherhood of
Teamsters (IBT), International Association of
Machinists (IAM), International Brotherhood of
Firemen and Oilers (IBFO), United Food and
Commercial Workers International Union (UFCW),
International Union of Operating Engineers (IUOE),
United Steelworkers Union (USU), and International
Brotherhood of Electrical Workers (IBEW).
|
|
|
|
|
|
|
Name of
|
|
|
Type of Facility and Location
|
|
Union
|
|
Expiration of Agreement
|
|
|
Paperboard Mills:
|
|
|
|
|
Battle Creek, MI
|
|
IBT
|
|
April 2, 2010
|
Battle Creek, MI
|
|
IAM
|
|
April 2, 2010
|
Battle Creek, MI
|
|
IBEW
|
|
April 2, 2010
|
Battle Creek, MI
|
|
IUOE
|
|
April 2, 2010
|
Kalamazoo, MI
|
|
USW
|
|
January 25, 2011
|
Macon,
GA(a)
|
|
USW
|
|
December 31, 2010
|
Middletown, OH
|
|
USU
|
|
May 31,
2009(b)
|
Pekin, IL
|
|
USU
|
|
October 31,
2009(b)
|
Santa Clara, CA
|
|
IBT
|
|
August 31, 2010
|
West Monroe, LA
|
|
USW
|
|
February 28,
2009(c)
|
Paperboard Packaging:
|
|
|
|
|
Atlanta, GA
|
|
IBT
|
|
September 15, 2013
|
Carol Stream, IL
|
|
IBT
|
|
December 31, 2009
|
Carol Stream, IL
|
|
IAM
|
|
May 2, 2011
|
Charlotte, NC
|
|
USW
|
|
August 12,
2009(b)
|
Cincinnati, OH
|
|
USW
|
|
January 31, 2010
|
Fort Wayne, IN
|
|
IBT
|
|
April 30, 2012
|
Fort Wayne, IN
|
|
IBT
|
|
February 19, 2011
|
Gordonsville, TN
|
|
USW
|
|
October 14, 2010
|
Greensboro, NC
|
|
IBT
|
|
November 15,
2009(b)
|
Irvine, CA
|
|
IBT
|
|
August 31, 2010
|
Kalamazoo, MI
|
|
IBT
|
|
July 31, 2010
|
Kalamazoo, MI
|
|
USW
|
|
January 25, 2011
|
Menasha, WI
|
|
IBT
|
|
June 30,
2009(b)
|
Menasha, WI
|
|
USW
|
|
October 31,
2008(c)
|
Morris, IL
|
|
USU
|
|
July 1,
2009(b)
|
Muncie, IN
|
|
IBT
|
|
October 8, 2011
|
Muncie, IN
|
|
UFCW
|
|
August 1,
2009(b)
|
Pacific, MO
|
|
IBT
|
|
July 31, 2011
|
Portland, OR
|
|
AWPPW
|
|
February 28, 2013
|
Renton, WA
|
|
IBT
|
|
February 28, 2011
|
Renton, WA
|
|
IBT
|
|
April 30, 2011
|
Santa Clara, CA
|
|
IBT
|
|
August 31, 2010
|
Solon, OH
|
|
USU
|
|
June 19,
2009(b)
|
Valley Forge, PA
|
|
IBFO
|
|
June 19,
2009(b)
|
Valley Forge, PA
|
|
USU
|
|
June 19,
2009(b)
|
Wausau, WI
|
|
IBT
|
|
June 30,
2009(b)
|
Wausau, WI
|
|
USW
|
|
October 31,
2008(c)
|
West Monroe, LA
|
|
USW
|
|
August 31,
2009(b)
|
14
|
|
|
|
|
|
|
Name of
|
|
|
Type of Facility and Location
|
|
Union
|
|
Expiration of Agreement
|
|
|
Multi-wall Bag:
|
|
|
|
|
Arcadia, LA
|
|
USU
|
|
March 31,
2009(b)
|
Cantonment, FL
|
|
USU
|
|
August 31, 2011
|
Cantonment, FL
|
|
USU
|
|
December 31,
2009(b)
|
Jacksonville, AR
|
|
USU
|
|
November 1,
2009(b)
|
Kansas City, MO
|
|
USW
|
|
October 31, 2011
|
Louisville, KY
|
|
IBT
|
|
October 10,
2009(b)
|
New Philadelphia, OH
|
|
USW
|
|
October 1, 2011
|
Salt Lake City, UT
|
|
IBT
|
|
June 15, 2010
|
Wellsburg, WV
|
|
USW
|
|
May 14, 2011
|
Specialty:
|
|
|
|
|
Bellwood/Riverdale, IL
|
|
IBT
|
|
June 30, 2011
|
Indianapolis, IN
|
|
IBT
|
|
June 30, 2011
|
Norwood, OH
|
|
USU
|
|
March 7,
2009(c)
|
St. Charles, IL
|
|
IBT
|
|
July 2,
2008(d)
|
St. Charles, IL
|
|
IBT
|
|
April 30,
2009(d)
|
St. Charles, IL
|
|
IBT
|
|
November 1,
2009(d)
|
|
|
Notes:
|
|
|
(a)
|
|
The International Association of
Machinists and Aerospace Workers and the International
Brotherhood of Electrical Workers represent certain maintenance
employees at the Macon, GA mill who are covered by the same
agreement that the Company has with USW.
|
|
(b)
|
|
The Company and Union expect to
begin negotiations for a new agreement approximately
30 days before expiration.
|
|
(c)
|
|
The Company and Union are presently
in negotiations for a new agreement.
|
|
(d)
|
|
Facility closing in the first
quarter of 2009.
|
The Companys international employees are represented by
unions in Brazil, Canada, France, Mexico, Spain, and the United
Kingdom.
Environmental
Matters
The Company is subject to federal, state and local environmental
regulations and employs a team of professionals in order to
maintain compliance at each of its facilities. For additional
information on the financial effects of such regulation and
compliance, see Environmental Matters in
Item 7., Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The following risks could affect (and in some cases have
affected) the Companys actual results and could cause such
results to differ materially from estimates or expectations
reflected in certain forward-looking statements:
The
Companys substantial indebtedness may adversely affect its
financial health, its ability to obtain financing in the future,
and its ability to react to changes in its business.
As of December 31, 2008, the Company had an aggregate
principal amount of approximately $3.2 billion of
outstanding debt. Because of the Companys substantial
debt, the Companys ability to obtain additional financing
for working capital, capital expenditures, acquisitions or
general corporate purposes may be restricted in the future. The
Company is also exposed to the risk of increased interest costs
because approximately $0.7 billion of its debt is at
variable rates of interest. As such, a significant portion of
the Companys cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness,
thereby reducing the funds available for other purposes. In
2009, the Company estimates it will pay between
$210 million and $220 million in interest on its
outstanding debt obligations.
Additionally, the Companys Credit Agreement contains
covenants that prohibit or restrict, among other things, the
disposal of assets, the incurrence of additional indebtedness
(including guarantees), payment of
15
dividends, loans or advances and certain other types of
transactions. The covenants also require compliance with a
maximum 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.
The substantial debt and the restrictions under the Credit
Agreement could limit the Companys flexibility to respond
to changing market conditions and competitive pressures, as well
as its ability to withstand competitive pressures. The material
outstanding debt obligations and the Credit Agreement
restrictions may also leave the Company more vulnerable to a
downturn in general economic conditions or its business or
unable to carry out capital expenditures that are necessary or
important to its growth strategy and productivity improvement
programs.
In light
of the continuing volatility in the financial services industry,
the Companys reliance on a large number of financial
institutions for a significant portion of its cash requirements
could adversely affect the Companys liquidity and cash
flow.
The credit and securities markets exhibited extreme volatility
and disruption throughout 2008. The Company has exposure to many
companies in the financial services industry, particularly
commercial and investment banks who participate in its revolving
credit facility and who are counterparties to the Companys
interest rate swaps and natural gas and currency hedges. The
failure of these financial institutions, or their inability or
unwillingness to fund the Companys revolving credit
facility or fulfill their obligations under swaps and hedges
could have a material adverse affect on the Companys
liquidity position and cash flow.
Reduced availability of credit may adversely affect the ability
of some of the Companys customers and suppliers to obtain
funds for operations and capital expenditures. This could
negatively impact the Companys ability to timely collect
receivables and to obtain raw materials and supplies.
Significant
increases in prices for raw materials, energy, transportation
and other necessary supplies and services could adversely affect
the Companys financial results.
Availability of and increases in the costs of raw materials,
including petroleum-based materials, the cost of energy, the
cost of wood primarily for the West Monroe mill, transportation
and other necessary services could have an adverse effect on the
Companys financial results. The Company is also limited in
its ability to pass along such cost increases to customers due
to contractual provisions and competitive reasons.
There is
no guarantee that the Companys efforts to reduce costs
will be successful.
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.
The Companys ability to implement successfully its
business strategies and to realize anticipated savings is
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the
Companys control. These strategies include the
infrastructure and reliability improvements at the
Companys West Monroe mill. If the Company cannot
successfully implement the strategic cost reductions or other
cost savings plans it may not be able to compete successfully
against other manufacturers. In addition, any failure to
generate the anticipated efficiencies and savings could
adversely affect the Companys financial results.
Work
stoppages and other labor relations matters may make it
substantially more difficult or expensive for the Company to
manufacture and distribute its products, which could result in
decreased sales or increased costs, either of which would
negatively impact the Companys financial condition and
results of operations.
Approximately 52% of the Companys workforce is represented
by labor unions, whose goals and objectives may differ
significantly from the Companys. The Company may not be
able to successfully negotiate new union contracts covering the
employees at its various sites without work stoppages or labor
difficulties. These events may also occur as a result of other
factors. A prolonged disruption at any of the Companys
facilities due to work stoppages or labor difficulties could
have a material adverse effect on its net
16
sales, margins and cash flows. In addition, if new union
contracts contain significant increases in wages or other
benefits, the Companys margins would be adversely impacted.
The
Company may not be able to adequately protect its intellectual
property and proprietary rights, which could harm its future
success and competitive position.
The Companys future success and competitive position
depend in part upon its ability to obtain and maintain
protection for certain proprietary carton and packaging machine
technologies used in its value-added products, particularly
those incorporating the Fridge Vendor, IntegraPak, MicroFlex Q,
MicroRite, Quilt Wave, Qwik Crisp, Z-Flute, and DI-NA-CAL
technologies. Failure to protect the Companys existing
intellectual property rights may result in the loss of valuable
technologies or may require it to license other companies
intellectual property rights. It is possible that any of the
patents owned by the Company may be invalidated, circumvented,
challenged or licensed to others or any of its pending or future
patent applications may not be issued within the scope of the
claims sought by the Company, if at all. Further, others may
develop technologies that are similar or superior to the
Companys technologies, duplicate its technologies or
design around its patents, and steps taken by the Company to
protect its technologies may not prevent misappropriation of
such technologies.
The
Company is subject to environmental, health and safety laws and
regulations, and costs to comply with such laws and regulations,
or any liability or obligation imposed under such laws or
regulations, could negatively impact its financial condition and
results of operations.
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, the investigation and remediation of contamination
resulting from releases of hazardous substances, and the health
and safety of employees. Environmental liabilities and
obligations may result in significant costs, which could
negatively impact the Companys financial condition and
results of operations.
The
Companys operations outside the U.S. are subject to
the risks of doing business in foreign countries.
The Company has several converting plants in 6 foreign countries
and sells its products worldwide. For 2008, before intercompany
eliminations, net sales from operations outside of the
U.S. represented approximately 11% of the Companys
net sales. The Companys revenues from export sales
fluctuate with changes in foreign currency exchange rates. At
December 31, 2008, approximately 4% of its total assets
were denominated in currencies other than the U.S. dollar.
The Company has significant operations in countries that use the
British pound sterling, the Australian dollar, the Japanese yen
or the euro as their functional currencies. The Company cannot
predict major currency fluctuations. The Company pursues a
currency hedging program in order to limit the impact of foreign
currency exchange fluctuations on financial results.
The Company is also subject to the following significant risks
associated with operating in foreign countries:
|
|
|
|
|
adverse political and economic conditions;
|
|
|
|
compliance with and enforcement of environmental, health and
safety and labor laws and other regulations of the foreign
countries in which the Company operates;
|
|
|
|
export compliance;
|
|
|
|
imposition or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries; and
|
|
|
|
imposition or increase of investment and other restrictions by
foreign governments.
|
If any of the above events were to occur, the Companys
financial position, results of operations or cash flows could be
adversely impacted, possibly materially.
17
The
anticipated benefits of combining the operations of the Company
and Altivity may not be fully realized, and the Company may face
difficulties integrating Altivitys operations.
The Company and BCH entered into the Altivity Transaction with
the expectation that the transaction would result in various
benefits, including, among other things, cost synergies and
operating efficiencies. However, the achievement of the
anticipated benefits of the transaction, including the cost
synergies, cannot be assured or may take longer than expected.
In addition, the Company may not be able to integrate
Altivitys operations with the Companys existing
operations without encountering difficulties, including:
|
|
|
|
|
inconsistencies in standards, systems and controls;
|
|
|
|
the diversion of managements focus and resources from
ordinary business activities and opportunities;
|
|
|
|
difficulties in achieving expected cost savings associated with
the transaction;
|
|
|
|
difficulties in the assimilation of employees and in creating a
unified corporate culture;
|
|
|
|
challenges in retaining existing customers and obtaining new
customers; and
|
|
|
|
challenges in attracting and retaining key personnel.
|
These risks may be exacerbated by the fact that Altivity is the
result of the combination of the Smurfit-Stone Container
Corporations Consumer Packaging Division and the Field
Companies in 2006. As a result of these risks, the Company may
not be able to realize the expected revenue and cash flow growth
and other benefits that it expects to achieve from the
transaction. In addition, the Company may be required to spend
additional time or money on integration efforts that would
otherwise have been spent on the development and expansion of
its business and services.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Headquarters
The Company leases its principal executive offices in Marietta,
GA.
Manufacturing
Facilities
A listing of the principal properties owned or leased and
operated by the Company is set forth below. The Companys
buildings are adequate and suitable for the business of the
Company. The Company also leases certain smaller facilities,
warehouses and office space throughout the U.S. and in
foreign countries from time to time.
|
|
|
Type of Facility and Location
|
|
Related Segment(s) or Use of Facility
|
|
|
Paperboard Mills:
|
|
|
Battle Creek, MI
|
|
Paperboard Packaging
|
Kalamazoo, MI
|
|
Paperboard Packaging
|
Macon, GA
|
|
Paperboard Packaging
|
Middletown, OH
|
|
Paperboard Packaging
|
Pekin, IL
|
|
Paperboard Packaging
|
Santa Clara, CA
|
|
Paperboard Packaging
|
West Monroe, LA
|
|
Paperboard Packaging; Research and Development
|
Paperboard Packaging:
|
|
|
Atlanta, GA
|
|
Paperboard Packaging
|
Bristol, Avon, United Kingdom
|
|
Paperboard Packaging
|
Carol Stream, IL
|
|
Paperboard Packaging; Research and Development
|
Centralia, IL
|
|
Paperboard Packaging
|
Charlotte, NC
|
|
Paperboard Packaging
|
18
|
|
|
Type of Facility and Location
|
|
Related Segment(s) or Use of Facility
|
|
|
Cincinnati, OH
|
|
Paperboard Packaging
|
Elk Grove,
IL(a)
|
|
Paperboard Packaging
|
Fort Smith, AR
|
|
Paperboard Packaging
|
Fort Wayne, IN
|
|
Paperboard Packaging
|
Golden, CO
|
|
Paperboard Packaging; Research and Development/Office
|
Gordonsville, TN
|
|
Paperboard Packaging
|
Idaho Falls, ID
|
|
Paperboard Packaging
|
Igualada, Barcelona, Spain
|
|
Paperboard Packaging; Packaging Machinery Engineering Design and
Manufacturing
|
Irvine, CA
|
|
Paperboard Packaging; Design Center
|
Jundiai, Sao Paulo, Brazil
|
|
Paperboard Packaging
|
Kalamazoo, MI
|
|
Paperboard Packaging
|
Kendallville, IN
|
|
Paperboard Packaging
|
La Porte, IN
|
|
Paperboard Packaging
|
Lawrenceburg, TN
|
|
Paperboard Packaging
|
Le Pont de Claix, France
|
|
Paperboard Packaging
|
Lumberton, NC
|
|
Paperboard Packaging
|
Marion, OH
|
|
Paperboard Packaging
|
Masnieres, France
|
|
Paperboard Packaging
|
Menasha, WI
|
|
Paperboard Packaging; Research and Development
|
Mississauga, Ontario, Canada
|
|
Paperboard Packaging; Research and Development
|
Mitchell, SD
|
|
Paperboard Packaging
|
Morris, IL
|
|
Paperboard Packaging
|
Muncie, IN
|
|
Paperboard Packaging
|
Orchard Park, CA
|
|
Paperboard Packaging
|
Pacific, MO
|
|
Paperboard Packaging
|
Perry,
GA(b)
|
|
Paperboard Packaging
|
Piscataway, NJ
|
|
Paperboard Packaging
|
Queretaro, Mexico
|
|
Paperboard Packaging
|
Renton, WA
|
|
Paperboard Packaging
|
Richmond, VA
|
|
Paperboard Packaging
|
Santa Clara, CA
|
|
Paperboard Packaging
|
Smyrna, TN
|
|
Paperboard Packaging
|
Solon, OH
|
|
Paperboard Packaging
|
Tuscaloosa,
AL(a)
|
|
Paperboard Packaging
|
Valley Forge, PA
|
|
Paperboard Packaging; Design Center
|
Wausau, WI
|
|
Paperboard Packaging
|
West Monroe,
LA(a)
|
|
Paperboard Packaging
|
Multi-wall Bag:
|
|
|
Arcadia, LA
|
|
Multi-wall Bag
|
Cantonment, FL
|
|
Multi-wall Bag
|
Eastman, GA
|
|
Multi-wall Bag
|
Fowler, IN
|
|
Multi-wall Bag
|
Jacksonville, AR
|
|
Multi-wall Bag
|
Kansas City, MO
|
|
Multi-wall Bag
|
Louisville, KY
|
|
Multi-wall Bag
|
New Philadelphia, OH
|
|
Multi-wall Bag
|
North Portland, OR
|
|
Multi-wall Bag
|
Quincy, IL
|
|
Multi-wall Bag
|
Salt Lake City,
UT(a)
|
|
Multi-wall Bag
|
Wellsburg, WV
|
|
Multi-wall Bag
|
Specialty Packaging:
|
|
|
Bellwood, IL
|
|
Specialty Packaging Ink
|
Brampton Ontario, Canada
|
|
Specialty Packaging Flexible Packaging
|
Des Moines, IA
|
|
Specialty Packaging Flexible Packaging
|
Greensboro, NC
|
|
Specialty Packaging Labels
|
19
|
|
|
Type of Facility and Location
|
|
Related Segment(s) or Use of Facility
|
|
|
Menomonee Falls, WI
|
|
Specialty Packaging Ink
|
Milwaukee, WI
|
|
Specialty Packaging Flexible Packaging
|
Norwood, OH
|
|
Specialty Packaging Labels
|
Portage, IN
|
|
Specialty Packaging Flexible Packaging
|
Riverdale, IL
|
|
Specialty Packaging Ink
|
Schaumburg, IL
|
|
Specialty Packaging Flexible Packaging
|
St. Charles, IL
|
|
Specialty Packaging Labels
|
Other:
|
|
|
Concord, NH
|
|
Research and Development
|
Crosby, MN
|
|
Packaging Machinery Engineering Design and Manufacturing
|
Marietta, GA
|
|
Research and Development and Packaging Machinery Engineering
Design
|
|
|
Notes:
|
|
|
(a)
|
|
Multiple facilities in this
location.
|
|
(b)
|
|
The facility is leased from the
Middle Georgia Regional Development Authority in consideration
of the issuance of industrial development bonds by such entity.
|
|
|
ITEM 3.
|
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.
See Environmental Matters in Item 7.,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
During the fourth quarter of 2008, there were no matters
submitted to a vote of security holders.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of
Form 10-K,
the following list is included as an unnumbered item in
Part I of this Report in lieu of being included in the
definitive proxy statement that will be filed within
120 days after December 31, 2008.
David W. Scheible, 52, was appointed to GPHCs Board
upon its formation (under the name New Giant Corporation) in
June 2007. Prior to the Altivity Transaction, he had served as a
director, President and Chief Executive Officer of GPC since
January 1, 2007. Prior to that time, Mr. Scheible had
served as Chief Operating Officer of GPC since October 2004.
Mr. Scheible served as Executive Vice President of
Commercial Operations from August 2003 until October 2004.
Mr. Scheible served as Graphic Packaging International
Corporations (GPIC) Chief Operating Officer
from 1999 until August 2003. He also served as President of
GPICs Flexible Division from January to June 1999.
Previously, Mr. Scheible was affiliated with the Avery
Dennison Corporation, working most recently as its Vice
President and General Manager of the Specialty Tape Division
from 1995 through 1999 and Vice President and General Manager of
the Automotive Division from 1993 to 1995.
Daniel J. Blount, 53, is the Senior Vice President and
Chief Financial Officer of GPHC. Prior to the Altivity
Transaction, he had served as Senior Vice President and Chief
Financial Officer of GPC since September 2005. From October 2003
until September 2005, he was the Senior Vice President,
Integration. From August 2003 until October 2003, he was the
Senior Vice President, Integration, Chief Financial Officer and
Treasurer. From June 2003 until August 2003, he was Senior Vice
President, Chief Financial Officer and Treasurer of Riverwood
Holding, Inc. From September 1999 until June 2003,
Mr. Blount was Senior Vice President and Chief Financial
Officer of Riverwood Holding, Inc. Mr. Blount was named
Vice President and Chief Financial Officer of Riverwood Holding,
Inc. in September 1998. Prior to joining Riverwood Holding,
Inc., Mr. Blount spent 13 years at Montgomery Kone,
Inc., an elevator, escalator and moving ramp product
manufacturer, installer and service provider, lastly as Senior
Vice President, Finance.
20
James M. Aikins, 51, is the Senior Vice President,
Human Resources of GPHC. Prior to the Altivity Transaction, he
had served as Vice President, Human Resources for Altivity since
August 2006. Mr. Aikins previously held a variety of
senior-level Human Resources roles in the packaging and
consumer products industries, including Senior Vice President,
Human Resources at United States Can Company during 2005 and
2006; Vice President, Human Resources with ConAgra Foods from
1999 to 2005; and, a variety of positions at Continental Grain
Company from 1983 to 1999, including Senior Vice President,
Human Resources.
John C. Best, 49, is the Vice President, Business
Development of GPHC. Prior to the Altivity Transaction, he had
served as Vice President, Business Development of GPC since
January 2006, with responsibility for Marketing, Research and
Development and the successful sale of value-added products into
the marketplace. Previously he had served as Vice President of
Sales for GPC from August 1999 to December 2005. Mr. Best
joined GPC in 1994 as the Business Unit Manager for the Folding
Carton division.
Michael P. Doss, 42, is the Senior Vice President,
Consumer Packaging of GPHC. Prior to the Altivity Transaction,
he had served as Senior Vice President, Consumer Products
Packaging of GPC since September 2006. From July 2000 until
September 2006, he was the Vice President of Operations,
Universal Packaging Division. Since joining GPIC in 1990,
Mr. Doss held positions of increasing management
responsibility, including Plant Manager at the Gordonsville, TN
and Wausau, WI plants. Mr. Doss was Director of Web Systems
for the Universal Packaging Division prior to his promotion to
Vice President of Operations.
Deborah R. Frank, 48, Vice President and Chief Accounting
Officer of GPHC. Prior to the Altivity Transaction, she served
as Vice President and Controller of GPC since April 2005. Prior
to joining the Company, Ms. Frank held various positions of
increasing responsibility in the finance, accounting, audit,
international and corporate areas at Kimberly Clark Corporation,
most recently serving as Assistant Controller.
Philip Geminder, 52, Vice President and Chief Integration
Officer of GPHC. Prior to the Altivity Transaction, he served as
the Vice President, Integration of GPC from September 2007
through March 2008. Prior to that time he had served as Vice
President, Finance of GPC since August 2003 and Vice President,
Financial Services of GPIC since January 2000. Before joining
GPIC, Mr. Geminder served as Director of Finance with Avery
Dennison Corporation after spending 18 years in various
positions with Honeywell International Inc.
Stephen A. Hellrung, 61, is the Senior Vice
President, General Counsel and Secretary of GPHC. Prior to the
Altivity Transaction, he had served as Senior Vice President,
General Counsel and Secretary of GPC since October 2003. He was
Senior Vice President, General Counsel and Secretary of
Lowes Companies, Inc., a home improvement specialty
retailer, from April 1999 until June 2003. Prior to joining
Lowes Companies, Mr. Hellrung held similar positions
with Pillsbury Company and Bausch & Lomb, Incorporated.
Kevin J. Kwilinski, 40, Vice President, Supply Chain of
GPHC. Prior to the Altivity Transaction, Mr. Kwilinski
served as Vice President, Supply Chain for GPC from August 2006
to March 2008. Prior to that time he served as Director, Shared
Services from August 2004 to July 2006, Director,
Sales & Manufacturing from February 2004 to July 2004
and as the Golden, Colorado Plant Manager from December 2001 to
January 2004. Prior to joining the Company, he served as a
Senior Strategy Consultant with i2 Technologies, Inc.
Michael R. Schmal, 55, is the Senior Vice President,
Beverage Packaging of GPHC. Prior to the Altivity Transaction,
he had served as Senior Vice President, Beverage of GPC since
August 2003. From October 1996 until August 2003,
Mr. Schmal was the Vice President and General Manager,
Brewery Group of Riverwood Holding, Inc. Prior to that time,
Mr. Schmal held various positions with Riverwood Holding,
Inc. since 1981.
Donald W. Sturdivant, 48, served as the Executive Vice
President, Mills, Multi-Wall Bag and Specialty Businesses of
GPHC from March 2008 through December 31, 2008. Prior to
the Altivity Transaction, he had served as the Chief Operating
Officer of Altivity since August 2006. Before joining Altivity,
Mr. Sturdivant had served in various senior management
positions at GPC, including Senior Vice President for the
Consumer Packaging Division from August 2003 until August 2006.
From August 1999 until August 2003, he was Senior Vice President
of Performance Packaging for GPIC. Mr. Sturdivant was
President of the Fort James Packaging Business from
December 1998 until August 1999 when the business was purchased
by GPIC. Prior to that, Mr. Sturdivant held various general
management and senior management positions at James River and
Fort James.
21
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
GPHCs common stock (together with the associated stock
purchase rights) is traded on the New York Stock Exchange under
the symbol GPK. The historical range of the high and
low sales price per share for each quarter of 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
First Quarter
|
|
$
|
3.61
|
|
|
$
|
2.73
|
|
|
$
|
6.04
|
|
|
$
|
4.11
|
|
Second Quarter
|
|
|
3.10
|
|
|
|
2.02
|
|
|
|
5.40
|
|
|
|
4.52
|
|
Third Quarter
|
|
|
3.11
|
|
|
|
1.96
|
|
|
|
6.10
|
|
|
|
4.07
|
|
Fourth Quarter
|
|
|
2.06
|
|
|
|
0.94
|
|
|
|
4.97
|
|
|
|
3.66
|
|
|
|
No cash dividends have been paid during the last three years to
the Companys common stockholders. The Companys
intent is not to pay dividends at this time. Additionally, the
Companys credit facilities and the indentures governing
its debt securities place substantial limitations on the
Companys ability to pay cash dividends on its common stock
(see Covenant Restrictions in Item 7.,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 6 in the
Notes to Consolidated Financial Statements included herein under
Item 8., Financial Statements and Supplementary
Data).
On February 27, 2009, there were approximately 2,502
stockholders of record and approximately 2,323 beneficial
holders of GPHCs common stock.
Total
Return to Stockholders
The following graph compares the total returns (assuming
reinvestment of dividends) of the common stock of the Company
and its immediate predecessor, GPC, the Standard &
Poors 500 Stock Index and the Dow Jones
U.S. Container & Packaging Index. The graph
assumes $100 invested on December 31, 2003 in GPCs
common stock and each of the indices. The stock price
performance on the following graph is not necessarily indicative
of future stock price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
|
|
Graphic Packaging Holding Company
|
|
$
|
100.00
|
|
|
$
|
177.34
|
|
|
$
|
56.16
|
|
|
$
|
106.65
|
|
|
$
|
90.89
|
|
|
$
|
28.08
|
|
S&P 500 Index
|
|
|
100.00
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
DJ U.S. Container & Packaging Index
|
|
|
100.00
|
|
|
|
119.64
|
|
|
|
118.89
|
|
|
|
133.26
|
|
|
|
142.22
|
|
|
|
89.17
|
|
|
|
22
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected consolidated financial data set forth below should
be read in conjunction with Item 7.,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements of the Company and the Notes to
Consolidated Financial Statements included herein under
Item 8., Financial Statements and Supplementary
Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In millions, except per share amounts
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
4,079.4
|
|
|
$
|
2,421.2
|
|
|
$
|
2,321.7
|
|
|
$
|
2,294.3
|
|
|
$
|
2,295.5
|
|
Income from Operations
|
|
|
149.9
|
|
|
|
151.2
|
|
|
|
93.8
|
|
|
|
86.5
|
|
|
|
111.6
|
|
Loss from Continuing Operations
|
|
|
(98.8
|
)
|
|
|
(49.1
|
)
|
|
|
(97.4
|
)
|
|
|
(90.1
|
)
|
|
|
(63.2
|
)
|
(Loss) Income from Discontinued Operations,
Net of Taxes
|
|
|
(0.9
|
)
|
|
|
(25.5
|
)
|
|
|
(3.1
|
)
|
|
|
(1.0
|
)
|
|
|
2.3
|
|
Net Loss
|
|
|
(99.7
|
)
|
|
|
(74.6
|
)
|
|
|
(100.5
|
)
|
|
|
(91.1
|
)
|
|
|
(60.9
|
)
|
(Loss) Income Per Share Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
(0.32
|
)
|
|
|
(0.24
|
)
|
|
|
(0.48
|
)
|
|
|
(0.45
|
)
|
|
|
(0.32
|
)
|
Discontinued Operations
|
|
|
(0.00
|
)
|
|
|
(0.13
|
)
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
Total
|
|
|
(0.32
|
)
|
|
|
(0.37
|
)
|
|
|
(0.50
|
)
|
|
|
(0.46
|
)
|
|
|
(0.31
|
)
|
(Loss) Income Per Share Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
(0.32
|
)
|
|
|
(0.24
|
)
|
|
|
(0.48
|
)
|
|
|
(0.45
|
)
|
|
|
(0.32
|
)
|
Discontinued Operations
|
|
|
(0.00
|
)
|
|
|
(0.13
|
)
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
Total
|
|
|
(0.32
|
)
|
|
|
(0.37
|
)
|
|
|
(0.50
|
)
|
|
|
(0.46
|
)
|
|
|
(0.31
|
)
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
315.8
|
|
|
|
201.8
|
|
|
|
201.1
|
|
|
|
200.0
|
|
|
|
198.9
|
|
Diluted
|
|
|
315.8
|
|
|
|
201.8
|
|
|
|
201.1
|
|
|
|
200.0
|
|
|
|
198.9
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as of period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Equivalents
|
|
$
|
170.1
|
|
|
$
|
9.3
|
|
|
$
|
7.3
|
|
|
$
|
12.7
|
|
|
$
|
7.3
|
|
Total Assets
|
|
|
4,983.1
|
|
|
|
2,777.3
|
|
|
|
2,888.6
|
|
|
|
3,005.2
|
|
|
|
3,111.3
|
|
Total Debt
|
|
|
3,183.8
|
|
|
|
1,878.4
|
|
|
|
1,922.7
|
|
|
|
1,978.3
|
|
|
|
2,025.2
|
|
Total Shareholders Equity
|
|
|
525.2
|
|
|
|
144.0
|
|
|
|
181.7
|
|
|
|
268.7
|
|
|
|
386.9
|
|
Additional Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization
|
|
$
|
264.3
|
|
|
$
|
189.6
|
|
|
$
|
188.5
|
|
|
$
|
198.8
|
|
|
$
|
223.1
|
|
Capital
Spending(a)
|
|
|
183.3
|
|
|
|
95.9
|
|
|
|
94.5
|
|
|
|
110.8
|
|
|
|
149.1
|
|
Research, Development and Engineering Expense
|
|
|
8.0
|
|
|
|
9.2
|
|
|
|
10.8
|
|
|
|
9.2
|
|
|
|
8.7
|
|
|
|
Notes:
|
|
|
(a)
|
|
Includes capitalized interest and
amounts invested in packaging machinery.
|
23
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
INTRODUCTION
This managements discussion and analysis of financial
conditions and results of operation is intended to provide
investors with an understanding of the Companys past
performance, its financial condition and its prospects. The
following will be discussed and analyzed:
Overview of Business
Overview of 2008 Results
Results of Operations
Financial Condition, Liquidity and Capital Resources
Critical Accounting Policies
New Accounting Standards
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 CUK and CRB, as well as other grades of
paperboard that are purchased from third party suppliers.
Innovative designs and combinations of paperboard, films, foils,
metallization, holographics, embossing and other are customized
to the individual needs of the customers.
The Company is also a leading supplier of multi-wall bags and in
addition to a full range or 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. The Company
continues to be negatively impacted by inflationary pressures
which increased year over year costs by $126.3 million,
$39.3 million and $67.0 million in 2008, 2007, and
2006, respectively. The 2008 costs are primarily related to
chemical-based inputs ($43.7 million); fiber, outside board
purchases and corrugated shipping containers
($39.9 million); energy costs ($26.9 million), mainly
due to the price of natural gas; labor and related benefits
($15.7 million); and freight ($6.1 million). These
increases were offset by other lower costs of $6.0 million.
The Company has
24
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% of its
expected natural gas usage for the year 2009. The Company
believes that inflationary pressures, including higher costs for
fiber, wood and chemical-based inputs will 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 any inflationary
or other cost increases that the Company may incur, thereby
further exacerbating the inflationary problems.
Substantial Debt Obligations. The Company has
$3,183.8 million of outstanding debt obligations as of
December 31, 2008. This debt can have significant
consequences for the Company, as it requires a significant
portion of cash flow from operations to be used for the payment
of principal and interest, exposes the Company to the risk of
increased interest rates and restricts the Companys
ability to obtain additional financing. Covenants in the
Companys Credit Agreement 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 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 Covenant
Restrictions in Financial Condition, Liquidity and
Capital Resources for additional information regarding the
Companys debt obligations.
Integration Risk. Although the Company has
made substantial progress in integrating the Altivity business
and operations, it is possible that the full amount of expected
benefits, including, among other things, cost synergies and
operating efficiencies may not be achieved or may take longer to
achieve than expected. In addition, the Company may not be able
to fully integrate Altivitys operations with GPCs
existing operations without encountering difficulties, including:
|
|
|
|
|
inconsistencies in standards, systems and controls;
|
|
|
|
difficulties in achieving expected cost savings associated with
the transaction;
|
|
|
|
difficulties in the assimilation of employees and in creating a
unified corporate culture;
|
|
|
|
challenges in retaining existing customers and obtaining new
customers; and
|
|
|
|
challenges in attracting and retaining key personnel.
|
As a result of these risks, the Company may not be able to
realize the expected revenue and cash flow growth and other
benefits that it expects to achieve from the transaction. In
addition, the Company may be required to spend additional time
or money on integration efforts that would otherwise have been
spent on the development and expansion of its business and
services.
Commitment to Cost Reduction. In light of
increasing margin pressure throughout the 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. 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 2008, the Company achieved
$53.8 million in cost savings as compared to 2007, through
its continuous improvement programs and manufacturing
initiatives.
Competition and Market Factors. As some
products can be packaged in different types of materials, the
Companys sales are affected by competition from other
manufacturers CUK 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
25
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 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 beverage multiple packaging markets.
The Company works to maintain market share through efficiency,
product innovation and strategic sourcing to its customers;
however, pricing and other competitive pressures may
occasionally result in the loss of a customer relationship.
OVERVIEW
OF 2008 RESULTS
This managements discussion and analysis contains an
analysis of Net Sales, Income from Operations and other
information relevant to an understanding of results of
operations. To enhance the understanding of continuing
operations, this discussion and analysis excludes discontinued
operations for all periods presented. Information on
discontinued operations can be found in Note 14 in the
Notes to Consolidated Financial Statements included herein under
Item 8., Financial Statements and Supplementary
Data.
|
|
|
|
|
Net Sales in 2008 increased by $1,658.2 million, or 68.5%,
to $4,079.4 million from $2,421.2 million in 2007 due
primarily to $1,601.8 million volume achieved as a result
of the Altivity Transaction. Also contributing to the increase
was improved pricing across all segments and favorable foreign
currency exchange rates in Europe and Japan; partially offset by
lower volume and product mix.
|
|
|
|
Income from Operations in 2008 decreased by $1.3 million,
or 0.9%, to $149.9 million from $151.2 million in
2007. This decrease was primarily due to inflation, partially
offset by the Altivity Transaction, improved pricing, and
worldwide continuous improvement programs and other cost
reduction initiatives.
|
26
RESULTS
OF OPERATIONS
The Companys results of operations include the results of
Altivity from March 10, 2008, the date of the Altivity
Transaction, through December 31, 2008. The results of
operations for 2007 represent the results of the Companys
operations prior to the Altivity Transaction.
Segment
Information
The Company reports its results in three business segments:
paperboard packaging, multi-wall bag and specialty packaging. As
a result of the Altivity Transaction, the Companys
reporting segments were revised and the Company reclassified
prior period information to conform to the current
presentations. Business segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
NET SALES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging
|
|
$
|
3,377.4
|
|
|
$
|
2,340.6
|
|
|
$
|
2,243.1
|
|
|
|
Multi-wall Bag
|
|
|
478.1
|
|
|
|
80.6
|
|
|
|
78.6
|
|
|
|
Specialty Packaging
|
|
|
223.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,079.4
|
|
|
$
|
2,421.2
|
|
|
$
|
2,321.7
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard Packaging
|
|
$
|
220.8
|
|
|
$
|
177.8
|
|
|
$
|
112.9
|
|
|
|
Multi-wall Bag
|
|
|
27.8
|
|
|
|
6.3
|
|
|
|
3.4
|
|
|
|
Specialty Packaging
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(109.7
|
)
|
|
|
(32.9
|
)
|
|
|
(22.5
|
)
|
|
|
|
|
Total
|
|
$
|
149.9
|
|
|
$
|
151.2
|
|
|
$
|
93.8
|
|
|
|
|
|
2008
COMPARED WITH 2007
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
Paperboard Packaging
|
|
$
|
3,377.4
|
|
|
$
|
2,340.6
|
|
|
$
|
1,036.8
|
|
|
|
44.3
|
%
|
Multi-wall Bag
|
|
|
478.1
|
|
|
|
80.6
|
|
|
|
397.5
|
|
|
|
N.M.
|
(a)
|
Specialty Packaging
|
|
|
223.9
|
|
|
|
|
|
|
|
223.9
|
|
|
|
N.M.
|
(a)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,079.4
|
|
|
$
|
2,421.2
|
|
|
$
|
1,658.2
|
|
|
|
68.5
|
%
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Variances
|
|
|
|
|
|
|
|
|
|
Volume/Mix
|
|
|
|
|
In millions
|
|
2007
|
|
|
Price
|
|
|
Acquisition
|
|
|
Organic
|
|
|
Exchange
|
|
|
Total
|
|
|
2008
|
|
|
|
|
Paperboard Packaging
|
|
$
|
2,340.6
|
|
|
$
|
41.0
|
|
|
$
|
990.0
|
|
|
$
|
(7.1
|
)
|
|
$
|
12.9
|
|
|
$
|
1,036.8
|
|
|
$
|
3,377.4
|
|
Multi-wall Bag
|
|
|
80.6
|
|
|
|
6.4
|
|
|
|
387.9
|
|
|
|
3.2
|
|
|
|
|
|
|
|
397.5
|
|
|
|
478.1
|
|
Specialty Packaging
|
|
|
|
|
|
|
|
|
|
|
223.9
|
|
|
|
|
|
|
|
|
|
|
|
223.9
|
|
|
|
223.9
|
|
|
|
Total
|
|
$
|
2,421.2
|
|
|
$
|
47.4
|
|
|
$
|
1,601.8
|
|
|
$
|
(3.9
|
)
|
|
$
|
12.9
|
|
|
$
|
1,658.2
|
|
|
$
|
4,079.4
|
|
|
|
27
Paperboard
Packaging
The Companys Net Sales from paperboard packaging in 2008
increased by $1,036.8 million, or 44.3%, to
$3,377.4 million from $2,340.6 million in 2007 as a
result of the Altivity Transaction, improved pricing across all
product lines, as well as improved product mix primarily in
North American food and consumer cartons, beverage and Europe.
The improvement in pricing reflects negotiated inflationary cost
pass-throughs and other contractual increases, as well as price
increases on open market roll stock. The Company implemented a
$50 per ton price increase for its CRB and URB effective with
shipments on or after July 28, 2008, and a $40 per ton
price increase for CUK grades, effective with shipments on or
after August 1, 2008. The improvement in product mix was
primarily in the soft drink, retail carryout, cereal and dry
foods product lines, as well as the introduction of new beer
promotion items and the introduction of 18 multi-packs which
were previously packaged in containerboard. Also contributing to
the increase was favorable currency exchange rates, primarily in
Europe, Japan, Australia and Brazil. The improved mix was more
than offset by lower volume as the result of the Company exiting
lower margin business and lower open market sales in Europe.
Beverage sales volume decreased in the fourth quarter and
impacted the full year due to continued softness in the soft
drink market due to price increases as well as downtime taken in
the beer market.
Multi-wall
Bag
The Companys Net Sales from multi-wall bag in 2008
increased by $397.5 million as a result of the Altivity
Transaction, as well as improved pricing and volume. The
improved pricing was due to negotiated cost pass-through
increases. The Altivity sales were attributable to price and
volume primarily in the bag packaging markets.
Specialty
Packaging
The Companys Net Sales from specialty packaging in 2008
increased by $223.9 million compared to 2008 as a result of
the acquisition of the specialty packaging segment in the
Altivity Transaction.
Income
(Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
Paperboard Packaging
|
|
$
|
220.8
|
|
|
$
|
177.8
|
|
|
$
|
43.0
|
|
|
|
24.2
|
%
|
Multi-wall Bag
|
|
|
27.8
|
|
|
|
6.3
|
|
|
|
21.5
|
|
|
|
N.M.
|
(a)
|
Specialty Packaging
|
|
|
11.0
|
|
|
|
|
|
|
|
11.0
|
|
|
|
N.M.
|
(a)
|
Corporate
|
|
|
(109.7
|
)
|
|
|
(32.9
|
)
|
|
|
(76.8
|
)
|
|
|
(233.4
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
149.9
|
|
|
$
|
151.2
|
|
|
$
|
(1.3
|
)
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Variances
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume/Mix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2007
|
|
|
Price
|
|
|
Acquisition
|
|
|
Organic
|
|
|
Inflation
|
|
|
Exchange
|
|
|
Other(a)
|
|
|
Total
|
|
|
2008
|
|
|
|
|
Paperboard Packaging
|
|
$
|
177.8
|
|
|
$
|
41.0
|
|
|
$
|
71.0
|
|
|
$
|
3.6
|
|
|
$
|
(120.9
|
)
|
|
$
|
1.1
|
|
|
$
|
47.2
|
|
|
$
|
43.0
|
|
|
$
|
220.8
|
|
Multi-wall Bag
|
|
|
6.3
|
|
|
|
6.4
|
|
|
|
19.4
|
|
|
|
0.7
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
0.4
|
|
|
|
21.5
|
|
|
|
27.8
|
|
Specialty Packaging
|
|
|
|
|
|
|
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.0
|
|
|
|
11.0
|
|
Corporate
|
|
|
(32.9
|
)
|
|
|
|
|
|
|
(84.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(9.6
|
)
|
|
|
17.1
|
|
|
|
(76.8
|
)
|
|
|
(109.7
|
)
|
|
|
Total
|
|
$
|
151.2
|
|
|
$
|
47.4
|
|
|
$
|
17.1
|
|
|
$
|
4.3
|
|
|
$
|
(126.3
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
64.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
149.9
|
|
|
|
Note:
|
|
|
(a)
|
|
Includes the benefits from the
Companys cost reduction initiatives.
|
28
Paperboard
Packaging
The Companys Income from Operations from paperboard
packaging in 2008 increased by $43.0 million, or 24.2%, to
$220.8 million from $177.8 million in 2007 as a result
of the Altivity transaction, $52.2 million of continuing
cost reduction initiatives, the improved pricing and product
mix. These increases more than offset inflationary pressures of
$120.9 million, primarily related to chemical-based inputs
($40.3 million); fiber and outside board purchases
($38.5 million); energy costs ($26.9 million), mainly
due to the price of natural gas; labor and related benefits
($15.5 million); and freight ($5.8 million), partially
offset by other lower costs of $6.1 million. The Company
also recorded a charge for the previously announced permanent
shutdown of the #2 coated board machine at the West Monroe,
LA mill. Results in 2007 included charges related to the
continued infrastructure updates at this mill, accelerated
depreciation for assets taken out of service due to efficiency
improvements, and higher expenses in Europe, primarily relating
to the start up costs for a new converting facility in France.
Multi-wall
Bag
The Companys Income from Operations from multi-wall bag in
2008 increased by $21.5 to $27.8 million from
$6.3 million in 2007 as a result of the Altivity
Transaction, the improved pricing and cost saving initiatives of
$1.6 million. These increases were partially offset by
inflation costs. The segments Income from Operations was
attributable to volume primarily in the bag packaging markets.
Specialty
Packaging
The Companys Income from Operations from specialty
packaging in 2008 increased by $11.0 million compared to
2008 as a result of the acquisition of the specialty packaging
segment in the Altivity Transaction.
Corporate
The Companys Loss from Operations from corporate was
$109.7 million in 2008 compared to a loss of
$32.9 million in 2007. This $76.8 million increase was
due primarily to Altivity Transaction related expenses of
$28.1 million and the inclusion of Altivity Corporate
expenses of $39.4 million. In addition, the Company
recorded $24.4 million of expense related to the
step-up in
inventory basis to fair value. These expenses were offset by a
favorable $10.4 million fair value adjustment for an
interest rate swap and lower bonus accruals, partially offset by
a net foreign currency loss of $9.6 million. The swap was
assumed in the Altivity Transaction. Results for 2007 were
positively impacted by the reversal of a $3.0 million
liability recorded at the time of the merger of GPII and
Riverwood Holdings, Inc. in 2003.
INTEREST
INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET
EARNINGS OF AFFILIATES
Interest
Income
Interest Income increased to $1.3 million in 2008 from
$0.4 million in 2007 primarily as a result of higher
average balances in cash equivalents.
Interest
Expense
Interest Expense increased by $48.5 million to
$216.7 million in 2008 from $168.2 million in 2007.
Interest Expense increased due to the additional debt acquired
as a result of the Altivity Transaction. As of December 31,
2008, approximately 22% of the Companys total debt was
subject to floating interest rates.
Income
Tax Expense
During 2008, the Company recognized Income Tax Expense of
$34.4 million on Loss before Income Taxes and Equity in Net
Earnings of Affiliates of $65.5 million. During 2007, the
Company recognized Income Tax Expense of $23.9 million on
Loss before Income Taxes and Equity in Net Earnings of
Affiliates of $26.1 million. Income Tax Expense for 2008
and 2007 primarily relates to the noncash expense associated
29
with the amortization of goodwill for tax purposes, benefits
related to losses in certain foreign countries and tax
withholding in foreign jurisdictions. Income tax expense for
2007 also increased due to 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 $1.1 million in
2008 and $0.9 million in 2007 and is related to the
Companys equity investment in the joint venture Rengo
Riverwood Packaging, Ltd.
2007
COMPARED WITH 2006
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
In millions
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Change
|
|
|
|
|
Paperboard Packaging
|
|
$
|
2,340.6
|
|
|
$
|
2,243.1
|
|
|
$
|
97.5
|
|
|
|
4.3
|
%
|
Multi-wall Bag
|
|
|
80.6
|
|
|
|
78.6
|
|
|
|
2.0
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,421.2
|
|
|
$
|
2,321.7
|
|
|
$
|
99.5
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
The components of the change in Net Sales by segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Variances
|
|
|
|
|
In millions
|
|
2006
|
|
|
Price
|
|
|
Volume/Mix
|
|
|
Exchange
|
|
|
Total
|
|
|
2007
|
|
|
|
|
Paperboard Packaging
|
|
$
|
2,243.1
|
|
|
$
|
42.9
|
|
|
$
|
35.4
|
|
|
$
|
19.2
|
|
|
$
|
97.5
|
|
|
$
|
2,340.6
|
|
Multi-wall Bag
|
|
|
78.6
|
|
|
|
(0.4
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
2.0
|
|
|
|
80.6
|
|
|
|
Total
|
|
$
|
2,321.7
|
|
|
$
|
42.5
|
|
|
$
|
37.8
|
|
|
$
|
19.2
|
|
|
$
|
99.5
|
|
|
$
|
2,421.2
|
|
|
|
Paperboard
Packaging
The Companys Net Sales from paperboard packaging in 2007
increased by $97.5 million, or 4.3%, to
$2,340.6 million from $2,243.1 million in 2006 due to
improved pricing across all product lines as well as increased
volume in North America open market and consumer packaging. The
improvement in pricing reflects negotiated inflationary cost
pass-throughs and other contractual increases, as well as price
increases on open market roll stock. The 1.5% increase in volume
primarily relates to increased carton sales in the North
American food and consumer product markets, primarily for frozen
and dry cartons, and sales of open market rollstock. North
American beer volumes increased and included the introduction of
18 and 20 multi-packs previously packaged in containerboard.
Also contributing to the increase was favorable foreign currency
exchange rates, primarily in Europe and Australia.
Containerboard net sales increased primarily to improved pricing
in the containerboard medium and bag market; partially offset by
lower volume for liner and post print.
Multi-wall
Bag
The Companys Net Sales from multi-wall bag in 2007
increased by $2.0 million, or 2.5%, to $80.6 million
from $78.6 million in 2006 due primarily to higher volume
partially offset by decrease in price.
30
Income
(Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
In millions
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
Paperboard Packaging
|
|
$
|
177.8
|
|
|
$
|
112.9
|
|
|
$
|
64.9
|
|
|
|
57.5
|
%
|
Multi-wall Bag
|
|
|
6.3
|
|
|
|
3.4
|
|
|
|
2.9
|
|
|
|
85.3
|
|
Corporate
|
|
|
(32.9
|
)
|
|
|
(22.5
|
)
|
|
|
(10.4
|
)
|
|
|
(46.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151.2
|
|
|
$
|
93.8
|
|
|
$
|
57.4
|
|
|
|
61.2
|
%
|
|
|
|
|
|
|
|
|
|
|
The components of the change in Income (Loss) from Operations by
segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Variances
|
|
|
|
|
In millions
|
|
2006
|
|
|
Price
|
|
|
Volume/Mix
|
|
|
Inflation
|
|
|
Exchange
|
|
|
Other(a)
|
|
|
Total
|
|
|
2007
|
|
|
|
|
Paperboard Packaging
|
|
$
|
112.9
|
|
|
$
|
42.9
|
|
|
$
|
11.6
|
|
|
$
|
(38.5
|
)
|
|
$
|
6.4
|
|
|
$
|
42.5
|
|
|
$
|
64.9
|
|
|
$
|
177.8
|
|
Multi-wall Bag
|
|
|
3.4
|
|
|
|
(0.4
|
)
|
|
|
0.6
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
3.5
|
|
|
|
2.9
|
|
|
|
6.3
|
|
Corporate
|
|
|
(22.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(10.1
|
)
|
|
|
(10.4
|
)
|
|
|
(32.9
|
)
|
|
|
Total
|
|
$
|
93.8
|
|
|
$
|
42.5
|
|
|
$
|
12.2
|
|
|
$
|
(39.3
|
)
|
|
$
|
6.1
|
|
|
$
|
35.9
|
|
|
$
|
57.4
|
|
|
$
|
151.2
|
|
|
|
Note:
|
|
|
(a)
|
|
Includes the benefits from the
Companys cost reduction initiatives.
|
Paperboard
Packaging
The Companys Income from Operations from paperboard
packaging in 2007 increased by $64.9 million, or 57.5%, to
$177.8 million from $112.9 million in 2006 due
primarily to the increased pricing and volume and improved
performance, primarily at the Companys West Monroe, LA
mill. As previously disclosed, the Company had undertaken an
initiative to upgrade the mills maintenance program. In
addition, cold outage was expanded to include the overhaul of
the clarifier in 2006. Continuous improvement initiatives also
benefited the other product lines. These increases were
partially offset by inflationary pressures, primarily for fiber,
chemical-based inputs and outside board purchases.
Containerboard contributed improved pricing in the
containerboard medium and bag markets, as well as decrease in
liner and post print which is sold at a lower margin; partially
offset by inflation.
Multi-wall
Bag
The Companys Income from Operations from multi-wall bag in
2007 increased by $2.9 million, or 85.3%, to
$6.3 million from $3.4 million in 2006 due primarily
to performance and volume. These increases were partially offset
by inflation and price.
Corporate
The Companys Loss from Operations from corporate was
$32.9 million in 2007 compared to a loss of
$22.5 million in 2006. This $10.4 million increase was
due primarily to increased expenses for stock-based
compensation, management incentives, and merger-related expenses
related to the anticipated transaction with Altivity. Partially
offsetting these increases was the reversal of a
$3.0 million liability recorded at the time of the 2003
Merger. In addition, 2006 included a favorable legal settlement.
31
INTEREST
INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET
EARNINGS OF AFFILIATES
Interest
Income
Interest Income was $0.4 million in 2007 and
$0.6 million in 2006.
Interest
Expense
Interest Expense decreased by $3.8 million to
$168.2 million in 2007 from $172.0 million in 2006.
Interest Expense decreased due to lower average debt balances
during the year and the refinancing of the Credit Agreement in
May 2007. This decrease was partially offset due to higher
interest rates on the unhedged portion of the Companys
floating rate debt. As of December 31, 2007, approximately
31% of the Companys total debt was subject to floating
interest rates.
Income
Tax Expense
During 2007, the Company recognized Income Tax Expense of
$23.9 million on Loss before Income Taxes and Equity in Net
Earnings of Affiliates of $26.1 million. During 2006, the
Company recognized Income Tax Expense of $20.8 million on
Loss before Income Taxes and Equity in Net Earnings of
Affiliates of $77.6 million. Income Tax Expense for 2007
and 2006 primarily relates to the noncash expense associated
with the amortization of goodwill for tax purposes, benefits
related to losses in certain foreign countries and tax
withholding in foreign jurisdictions. Income Tax Expense for
2007 also increased due to 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 $0.9 million in
2007 and $1.0 million in 2006 and is related to the
Companys equity investment in the joint venture Rengo
Riverwood Packaging, Ltd.
ALTIVITY
TRANSACTION
On March 10, 2008, the businesses of GPC and Altivity were
combined in a transaction accounted for under Financial
Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations. 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.
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.
In connection with the Altivity Transaction, all of the equity
interests in Altivitys parent company were contributed to
GPHC in exchange for 139,445,038 shares of GPHCs
common stock, or approximately 40.6 percent of the
Companys outstanding shares of common stock. Stockholders
of GPC received one share of GPHC common stock for each share of
GPC common stock held immediately prior to the transaction.
Subsequently, all of the equity interests in Altivitys
parent company were contributed to GPHCs primary operating
company, GPII.
The Company determined that the relative outstanding share
ownership, voting rights, and the composition of the governing
body and senior management positions require GPC to be the
acquiring entity for accounting purposes, resulting in the
historical financial statements of GPC becoming the historical
financial statements of the Company. Under the purchase method
of accounting, the assets and liabilities of Altivity were
recorded, as of the date of the closing of the Altivity
Transaction, at their respective fair values and
32
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 preliminary
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
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
60.2
|
|
Receivables, Net
|
|
|
181.2
|
|
Inventories
|
|
|
265.0
|
|
Prepaids
|
|
|
13.1
|
|
Property, Plant and Equipment
|
|
|
637.0
|
|
Intangible Assets
|
|
|
561.1
|
|
Other Assets
|
|
|
4.7
|
|
|
|
Total Assets Acquired
|
|
|
1,722.3
|
|
|
|
Current Liabilities, Excluding Current Portion of Long-Term Debt
|
|
|
257.8
|
|
Pension and Postemployment Benefits
|
|
|
35.3
|
|
Other Noncurrent Liabilities
|
|
|
31.8
|
|
|
|
Total Liabilities Assumed
|
|
|
324.9
|
|
|
|
Net Assets Acquired
|
|
|
1,397.4
|
|
|
|
Goodwill
|
|
|
563.3
|
|
|
|
Total Estimated Fair Value of Net Assets Acquired
|
|
$
|
1,960.7
|
|
|
|
As of December 31, 2008, the preliminary purchase
accounting is still subject to final adjustment and could change
in the subsequent period. The Company has not finalized its
review of all Altivity tax matters and other liabilities. The
Company has plans to close certain facilities and has
established restructuring reserves that are considered
liabilities assumed in the Altivity Transaction. See
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 December 31, 2008
|
|
$
|
408.8
|
|
|
$
|
61.9
|
|
|
$
|
92.6
|
|
|
$
|
563.3
|
|
33
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 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
fourth quarter 2007 results for the divested mills. 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.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Net Sales
|
|
$
|
4,470.5
|
|
|
$
|
4,378.2
|
|
Net Loss
|
|
|
(62.9
|
)
|
|
|
(69.3
|
)
|
Loss Per Share Basic and Diluted
|
|
|
(0.18
|
)
|
|
|
(0.20
|
)
|
|
|
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, equipment removal and
facility closure costs. These restructuring reserves were
established in accordance with the requirement of Emerging
Issues Task Force (EITF)
95-3,
Recognition of Liabilities in Connection with a
Purchase Business Combination, and were considered
liabilities assumed in the Altivity Transaction and will be
finalized by March 10, 2009. The Company has announced the
closure of four Altivity facilities and has committed to seven
additional plant closures. The restructuring activities are
expected to be substantially completed by December 31, 2010.
In addition, during the third quarter 2008, the Company
announced the closure of a GPC 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 2008 was $1.6 million and
is included in Selling, General, and Administrative costs in the
Consolidated Statements of Operations.
The following table summarizes the transactions within the
restructuring reserves and reconciles to accrued liabilities at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Acceleration 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 2008 was $5.4 million.
34
DISCONTINUED
OPERATIONS
On October 16, 2007, Graphic Packaging International
Holding Sweden AB (the Seller), an indirect
wholly-owned subsidiary of GPC, entered into a Sale and Purchase
Agreement with Lagrumment December nr 1031 Aktiebolg, a company
organized under the laws of Sweden that was renamed Fiskeby
International Holding AB (the Purchaser), and
simultaneously completed the transactions contemplated by such
agreement. Pursuant to such Purchase and Sales Agreement, the
Purchaser acquired all of the outstanding shares of Graphic
Packaging International Sweden (GP-Sweden).
GP-Sweden and its subsidiaries are in the business of
developing, manufacturing and selling paper and packaging boards
made from recycled fiber. The Sale and Purchase Agreement
specified that the purchase price was $8.6 million and
contained customary representations and warranties of the Seller.
The Purchaser is affiliated with Jeffrey H. Coors, a member of
the Board of Directors of the Company. The Seller undertook the
sale of GP-Sweden to the Purchaser after a thorough exploration
of strategic alternatives with respect to GP-Sweden. The
transactions contemplated by the Sale and Purchase Agreement
were approved by the Audit Committee of the Board of Directors
of the Company pursuant to its Policy Regarding Related Party
Transactions and by the full Board of Directors other than
Mr. Coors.
In accordance with the FASB SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reviews long-lived assets for
impairment when events or changes in circumstances indicate the
carrying value of these assets may exceed their current fair
values. During 2007, the Company recognized an impairment charge
of $18.6 million relating to GP-Sweden. The Companys
plan to sell the operations led to the testing for impairment of
long-lived assets. The fair value of the impaired assets was
determined based on selling price less cost to sell. The
impairment charge is reflected as a component of Loss from
Discontinued Operations on the Condensed Consolidated Statements
of Operations.
During the third quarter of 2008, the Company determined that an
additional $0.9 million environmental reserve related to
GP-Sweden was necessary and recorded this in discontinued
operations within the Companys Consolidated Statements of
Operations. See Note 15 in the Notes to Consolidated
Financial Statements included herein under Item 8.
Financial Statements and Supplementary Data.
The long-lived assets of GP-Sweden comprised operations and cash
flows that could be distinguished from the rest of the Company.
Since these cash flows have been eliminated from ongoing
operations, the results of operations were reported in
discontinued operations for all periods presented. See
Note 14 in the Notes to Consolidated Financial Statements
included herein under Item 8. Financial Statements
and Supplementary Data.
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 $160.8 million in 2008
due mainly to higher draws on the revolver in response to
general market concern over the potential freezing of lines of
credit by banks.
Net cash provided by operating activities in 2008 totaled
$184.2 million, compared to $141.7 million in 2007.
The increase was due to higher net income as adjusted for
noncash items such as depreciation and amortization and, in
2008, the $24.4 million inventory step up related to
Altivity and the $12.6 million write-off of the #2
coated board machine at the West Monroe, LA mill. Changes in
operating assets and liabilities provided $16.9 million,
primarily from reduction in inventory and receivables due to
focus on cash management and higher interest payable resulting
from higher average debt balances, partially offset by lower
35
accounts payable and other accrued liabilities due mainly to
timing and to accelerated vesting of restricted stock units and
other payments triggered by the change of control resulting from
the Altivity Transaction. Higher pension contributions in 2008
and the noncash add back for the impairment charge in 2007
partially offset the overall increase in cash provided by
operations.
Net cash used in investing activities in 2008 totaled
$143.8 million, compared to $90.8 million in 2007.
This year over year change was due primarily to higher capital
expenditures in 2008 (see Capital Investment) and
the payment of $30.3 million in acquisition related fees.
This increase was partially offset by the Altivity Transaction
through which the Company acquired $60.2 million of cash,
as well as the proceeds from the sale of the two mills located
in Philadelphia, Pennsylvania and in Wabash, Indiana.
Net cash provided by financing activities in 2008 totaled
$119.8 million, compared to $50.0 million used in
financing activities in 2007. This change was primarily due to
higher net borrowings under the Companys revolving credit
facilities and higher debt proceeds, partially offset by higher
debt payments and higher debt issuance costs.
Liquidity
and Capital Resources
The Companys liquidity needs arise primarily from debt
service on its substantial indebtedness and from the funding of
its capital expenditures, ongoing operating costs and working
capital. The Company believes that cash generated from
operations, together with the amounts available under the
revolving credit facility will be adequate to meet its debt
service, capital expenditures, ongoing operating costs and
working capital needs, although no assurance can be given in
this regard. The Company has exposure to many companies in the
financial services industry, particularly commercial and
investment banks who participate in its revolving credit
facility and who are counterparties to the Companys
interest rate swaps and natural gas and currency hedges. The
failure of these financial institutions, or their inability or
unwillingness to fund the Companys revolving credit
facility or fulfill their obligations under swaps and hedges
could have a material adverse affect on the Companys
liquidity position.
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 Company continuously monitors the spread between
LIBOR and prime to ensure the most economic decision. The
facilities under the Credit Agreement replace the revolving
credit facility due on August 8, 2009 and the term loan due
on August 8, 2010 under the Companys previous senior
secured credit agreement. The Companys obligations under
the new Credit Agreement are collateralized by substantially all
of the Companys domestic assets.
In connection with the May 16, 2007 replacement of the
Companys previous revolving credit and term loan
facilities and in accordance with Emerging Issues Task Force
(EITF)
96-19,
Debtors Accounting for a Modification or Exchange
of Debt Instruments and EIFT
98-14,
Debtors Accounting for Changes in Line-of-Credit
or Revolving-Debt Arrangements, the Company recorded a
charge of $9.5 million, which represented a portion of the
unamortized deferred financial costs associated with the
previous revolving credit and term loan facilities. This charge
is reflected as Loss on Early Extinguishment of Debt in the
Companys Consolidated Statements of Operations. In
connection with the new Credit Agreement, the Company recorded
approximately $7 million of deferred financing costs. These
costs, combined with the remainder of the deferred financing
costs relating to the previous senior secured credit agreement,
will be amortized over the term of the new facility.
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 remains in place. The new
term loan bears interest at LIBOR plus 275 basis points.
The Companys weighted average
36
interest rate on senior secured term debt will equal
approximately LIBOR plus 237.5 basis points. The Company
has interest rate swaps covering approximately 69% of its
variable rate debt. 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:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Senior Notes with interest payable semi-annually at 8.5%,
payable in 2011
|
|
$
|
425.0
|
|
|
$
|
425.0
|
|
Senior Subordinated Notes with interest payable semi-annually at
9.5%, payable in 2013
|
|
|
425.0
|
|
|
|
425.0
|
|
Senior Secured Term Loan Facility with interest payable at
various dates at floating rates (5.21% at
December 31, 2008) payable through 2014
|
|
|
1,000.3
|
|
|
|
1,010.0
|
|
Senior Secured Term Loan Facility with interest payable at
various dates at floating rates (6.68% at
December 31, 2008) payable through 2014
|
|
|
1,182.3
|
|
|
|
|
|
Senior Secured Revolving Facility with interest payable at
various dates at floating rates (4.19% at
December 31, 2008) payable in 2013
|
|
|
143.2
|
|
|
|
11.0
|
|
Other
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
3,176.6
|
|
|
|
1,872.0
|
|
Less, current portion
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
Total
|
|
$
|
3,165.2
|
|
|
$
|
1,871.8
|
|
|
|
At December 31, 2008, the Company and its U.S. and
international subsidiaries had the following commitments,
amounts outstanding and amounts available under revolving credit
facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
In millions
|
|
Commitments
|
|
|
Outstanding
|
|
|
Available(a)
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
400.0
|
|
|
$
|
143.2
|
|
|
$
|
220.9
|
|
International Facilities
|
|
|
17.5
|
|
|
|
7.1
|
|
|
|
10.4
|
|
|
|
Total
|
|
$
|
417.5
|
|
|
$
|
150.3
|
|
|
$
|
231.3
|
|
|
|
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 December 31, 2008. These letters
of credit are used as security against its self-insurance
obligations and workers compensation obligations. These
letters of credit expire at various dates through 2009 unless
extended.
|
Principal and interest payments under the term loan facility and
the revolving credit facility, together with principal and
interest payments on the Senior Notes and the Senior
Subordinated Notes (the Notes), represent
significant liquidity requirements for the Company. Based upon
current levels of operations, anticipated cost-savings and
expectations as to future growth, the Company believes that cash
generated from operations, together with amounts available under
its revolving credit facility and other available financing
sources, will be adequate to permit the Company to meet its debt
service obligations, necessary capital expenditure program
requirements, ongoing operating costs and working capital needs,
although no assurance can be given in this regard. The
Companys future financial and operating performance,
ability to service or refinance its debt and ability to comply
with the covenants and restrictions contained in its debt
agreements (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.
The Company uses interest rate swaps to manage interest rate
risks caused by interest rate changes on its variable rate term
loan Facility. The differential to be paid or received under
these agreements is recognized as an adjustment to interest
expense related to the debt. At December 31, 2008, the
Company had interest rate
37
swap agreements with a notional amount of $1,620.0 million,
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
three-month LIBOR rates.
Effective as of December 31, 2008, the Company had
approximately $1.4 billion of net operating loss
carryforwards (NOLs) for U.S. federal income
tax purposes. These NOLs generally may be used by the Company to
offset taxable income earned in subsequent taxable years.
However, the Companys ability to use these NOLs to offset
its future taxable income may be subject to significant
limitations as a result of certain shifts in ownership due to
direct or indirect transfers of the Companys common stock
by one or more 5 percent stockholders, or issuance or
redemption of the Companys common stock, which, when taken
together with previous changes in ownership of the
Companys common stock, constitute an ownership change
under the Internal Revenue Code. Imposition of any such
limitation of the use of NOLs could have an adverse effect on
the Companys future after tax free cash flow.
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(a).
Pursuant to this financial covenant, the Company must maintain a
maximum consolidated secured leverage ratio of less than the
following:
|
|
|
|
|
|
|
Maximum Consolidated
|
|
|
Secured Leverage
Ratio(a)
|
|
|
October 1, 2008 September 30, 2009
|
|
|
5.00 to 1.00
|
|
October 1, 2009 and thereafter
|
|
|
4.75 to 1.00
|
|
|
|
Note:
|
|
|
|
(a)
|
Credit Agreement EBITDA is defined in the Credit Agreement as
consolidated net income before consolidated net interest
expense, non-cash expenses and charges, total income tax
expense, depreciation expense, expense associated with
amortization of intangibles and other assets, non-cash
provisions for reserves for discontinued operations,
extraordinary, unusual or non-recurring gains or losses or
charges or credits, gain or loss associated with sale or
write-down of assets not in the ordinary course of business, any
income or loss accounted for by the equity method of accounting,
and projected run rate cost savings, prior to or within a twelve
month period.
|
At December 31, 2008, the Company was in compliance with
the financial covenants in the Credit Agreement and the ratios
were as follows:
Consolidated Secured Leverage Ratio 3.60 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
38
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 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
December 31, 2008 are listed below:
|
|
|
|
|
|
|
Twelve Months Ended
|
|
In millions
|
|
December 31,
2008(a)
|
|
|
|
|
Pro Forma Net Loss
|
|
$
|
(120.5
|
)
|
Income Tax Expense
|
|
|
35.1
|
|
Interest Expense, Net
|
|
|
246.9
|
|
Depreciation and Amortization
|
|
|
283.7
|
|
Dividends Received, Net of Earnings of Equity Affiliates
|
|
|
(0.4
|
)
|
Non-Cash Provisions for Reserves for Discontinued Operations
|
|
|
1.7
|
|
Other Non-Cash Charges
|
|
|
26.1
|
|
Merger Related Expenses
|
|
|
81.6
|
|
Gains/Losses Associated with Sale/Write-Down of Assets
|
|
|
13.5
|
|
Other Non-Recurring/Extraordinary/Unusual Items
|
|
|
20.3
|
|
Projected Run Rate Cost Savings
|
|
|
58.8
|
|
|
|
Credit Agreement EBITDA
|
|
$
|
646.8
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
In millions
|
|
December 31, 2008
|
|
|
|
|
Short-Term Debt
|
|
$
|
18.6
|
|
Long-Term Debt
|
|
|
3,165.2
|
|
|
|
Total Debt
|
|
$
|
3,183.8
|
|
Less
Adjustments(b)
|
|
|
857.8
|
|
|
|
Consolidated Secured Indebtedness
|
|
$
|
2,326.0
|
|
|
|
Note:
|
|
|
|
(a)
|
As defined by the Credit Agreement, this calculation includes
the historical results of Altivity for the last twelve months.
|
As defined by the Credit Agreement, 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.
The terms of the Credit Agreement limit the amount of projected
run rate cost savings that may be used in calculating Credit
Agreement EBITDA by stipulating that such amount may not exceed
the lesser of (i) ten percent of EBITDA as defined in the
Credit Agreement for the last twelve-month period (before giving
effect to projected run rate cost savings) and
(ii) $100 million.
As a result, in calculating Credit Agreement EBITDA above, the
Company used projected run rate cost savings of $58.8 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 December 31,
2008. Projected run rate cost savings were calculated by the
Company solely for its use in calculating Credit Agreement
EBITDA for purposes of determining compliance with the maximum
consolidated secured leverage ratio contained in the Credit
Agreement and should not be used for any other purpose.
|
|
|
|
(b)
|
Represents consolidated indebtedness/securitization that is
either (i) unsecured, or (ii) Permitted Subordinated
Indebtedness as defined in the Credit Agreement, or secured
indebtedness permitted to be incurred by the Companys
foreign subsidiaries per the Credit Agreement.
|
39
The Senior Notes are rated B- by Standard &
Poors and B3 by Moodys Investor Services. The Senior
Subordinated Notes are rated B- by Standard &
Poors and have no rating on Moodys Investor
Services. The Companys indebtedness under the Credit
Agreement is rated BB- by Standard & Poors and
Ba3 by Moodys Investor Services. As of December 31,
2008, Moodys Investor Services ratings on the
Company remain on negative outlook, while Standard &
Poors ratings on the Company have a stable outlook. During
2008, cash paid for interest was $193.4 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 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 2008 was
$183.3 million (including $38.1 million for Altivity
since the acquisition), compared to $95.9 million in 2007.
During 2008, the Company had capital spending of
$140.9 million for improving process capabilities,
$21.1 million for capital spares, $19.9 million for
manufacturing packaging machinery and $1.4 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
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
40
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 a beneficial environmental project.
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. During 2008 the Company determined that additional
remediation of the site would be required by the County
Administrative Board and recorded any addition of
$0.9 million to the reserve. The reserve was recorded in
discontinued operations within the Company Consolidated
Statements of Operations. The Company paid $3.4 million to
the purchasers in 2008, which reduced the reserve.
On October 8, 2007, the Company received a notice from the
United States Environmental Protection Agency (the
EPA) indicating that it is a potentially responsible
party for the remedial investigation and feasibility study to be
conducted at the Devils Swamp Lake site in East Baton
Rouge Parish, Louisiana. The Company expects to enter into
negotiations with the EPA regarding its potential responsibility
and liability, but it is too early in the investigation process
to quantify possible costs with respect to such site.
In connection with the Altivity Transaction, the Company
acquired several sites with on-going administrative proceedings
related to air emission and water discharge permit exceedances
and soil contamination issues. The Company does not believe that
any of the proceedings will result in material liabilities or
penalties.
The Company has established reserves for those facilities or
issues where liability is probable and the costs are reasonably
estimable. Except for the Title V permit violation 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.
Contractual
Obligations and Commitments
A summary of our contractual obligations and commitments as of
December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
In millions
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
Long-Term Debt
|
|
$
|
3,176.6
|
|
|
$
|
11.4
|
|
|
$
|
469.6
|
|
|
$
|
613.5
|
|
|
$
|
2,082.1
|
|
Operating Leases
|
|
|
156.9
|
|
|
|
38.9
|
|
|
|
58.8
|
|
|
|
25.8
|
|
|
|
33.4
|
|
Interest Payable
|
|
|
969.8
|
|
|
|
213.3
|
|
|
|
354.0
|
|
|
|
291.6
|
|
|
|
110.9
|
|
Purchase
Obligations(a)
|
|
|
575.9
|
|
|
|
98.0
|
|
|
|
117.6
|
|
|
|
114.2
|
|
|
|
246.1
|
|
Pension Funding
|
|
|
65.0
|
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual
Obligations(b)
|
|
$
|
4,944.2
|
|
|
$
|
426.6
|
|
|
$
|
1,000.0
|
|
|
$
|
1,045.1
|
|
|
$
|
2,472.5
|
|
|
|
Notes:
|
|
|
(a)
|
|
Purchase obligations primarily
consist of commitments related to pine pulpwood, wood chips,
wood processing and handling, chemical-based inputs, natural gas
and electricity.
|
41
|
|
|
(b)
|
|
Some of the figures included in
this table are based on managements estimates and
assumptions about these obligations. Because these estimates and
assumptions are necessarily subjective, the obligations the
company will actually pay in the future periods many vary from
those reflected in the table.
|
International
Operations
For 2008, before intercompany eliminations, net sales from
operations outside of the U.S. represented approximately
11% of the Companys net sales. The Companys revenues
from export sales fluctuate with changes in foreign currency
exchange rates. At December 31, 2008, approximately 4% of
its total assets were denominated in currencies other than the
U.S. dollar. The Company has significant operations in
countries that use the British pound sterling, the Australian
dollar, the Japanese yen or the euro as their functional
currencies. The effect of a generally stronger U.S. dollar
against these currencies produced a net currency translation
adjustment loss of $15.1 million, which was recorded as an
adjustment to Shareholders Equity for the year ended
December 31, 2008. The magnitude and direction of this
adjustment in the future depends on the relationship of the
U.S. dollar to other currencies. The Company cannot predict
major currency fluctuations. The Company pursues a currency
hedging program in order to limit the impact of foreign currency
exchange fluctuations on financial results. See Financial
Instruments below.
Financial
Instruments
The functional currency of the Companys international
subsidiaries is the local currency for the country in which the
subsidiaries own their primary assets. The translation of the
applicable currencies into U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts
using a weighted average exchange rate during the period. Any
related translation adjustments are recorded directly to
shareholders equity. Gains and losses on foreign currency
transactions are included in Other Expense, Net for the period
in which the exchange rate changes.
The Company pursues a currency hedging program which utilizes
derivatives to limit the impact of foreign currency exchange
fluctuations on its consolidated financial results. Under this
program, the Company has entered into forward exchange contracts
in the normal course of business to hedge certain foreign
currency denominated transactions. Realized and unrealized gains
and losses on these forward contracts are included in the
measurement of the basis of the related foreign currency
transaction when recorded. The Company also pursues a hedging
program which utilizes derivatives designed to manage risks
associated with future variability in cash flows and price risk
related to future energy cost increases. Under this program the
Company has entered into natural gas swap contracts to hedge a
portion of its natural gas requirements through December 2009.
Realized gains and losses on these contracts are included in the
financial results concurrently with the recognition of the
commodity purchased. The Company uses interest rate swaps to
manage interest rate risks on future income caused by interest
rate changes on its variable rate term loan Facility. These
instruments involve, to varying degrees, elements of market and
credit risk in excess of the amounts recognized in the
Consolidated Balance Sheets. The Company does not hold or issue
financial instruments for trading purposes. See Item 7A,
Quantitative and Qualitative Disclosure About Market
Risk.
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 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 critical judgments
by management relate to pension benefits, retained insurable
risks, future cash flows associated with impairment testing for
goodwill and long-lived assets, and deferred income taxes.
42
Pension Benefits
The Company sponsors defined benefit pension plans (the
Plans) for eligible employees in North America
and certain international locations. The funding policy for the
qualified defined benefit plans in North America is to, at
a minimum, contribute assets as required by the Internal Revenue
Code Section 412. Nonqualified U.S. plans providing
benefits in excess of limitations imposed by the
U.S. income tax code are not funded.
U.S. pension expense for defined benefits pension plans was
$20.5 million in 2008 compared with $17.8 million in
2007. Pension expense is calculated based upon a number of
actuarial assumptions applied to each of the defined benefit
plans. The expected long-term rate of return on pension fund
assets used to calculate pension expense was 8.25% in both 2008
and 2007. The expected long-term rate of return on pension
assets was determined based on several factors, including
historical rates of return, input from our pension investment
consultants and projected long-term returns of broad equity and
bond indices. The Company will continue to evaluate its
long-term rate of return assumptions at least annually and will
adjust them as necessary.
The Company determined pension expense using both the fair value
of assets and a calculated value that averages gains and losses
over a period of years. Investment gains or losses represent the
difference between the expected and actual return on assets. As
of December 31, 2008, the net actuarial loss was
$262.0 million. These net losses may increase future
pension expense if not offset by (i) actual investment
returns that exceed the assumed investment returns, or
(ii) other factors, including reduced pension liabilities
arising from higher discount rates used to calculate pension
obligations, or (iii) other actuarial gains, including
whether such accumulated actuarial losses at each measurement
date exceed the corridor determined under FASB
SFAS No. 87, Employers Accounting for
Pensions.
The discount rate used to determine the present value of future
pension obligations at December 31, 2008 was based on a
yield curve constructed from a portfolio of high quality
corporate debt securities with maturities ranging from
1 year to 30 years. Each years expected future
benefit payments were discounted to their present value at the
appropriate yield curve rate thereby generating the overall
discount rate for U.S. pension obligations. The discount
rate for U.S. plans was a plan specific rate ranging from
6.15% to 6.50% in 2008. The 2007 discount rate ranged from 6.15%
to 6.35%
U.S. pension expense is estimated to be approximately
$47 million in 2009. The estimate is based on an expected
long-term rate of return of 8.25%, a discount rate ranging from
6.15% to 6.35% and other assumptions. Pension expense beyond
2009 will depend on future investment performance, the
Companys contribution to the plans, changes in discount
rates and other factors related to covered employees in the
plans.
If the discount rate assumptions for these plans were reduced by
.25 percent, pension expense would increase by
approximately $3 million and the December 31, 2008
pension funding obligation would increase by about
$22 million.
The fair value of assets in the U.S. plans was
$397.8 million at December 31, 2008 and
$468.0 million at December 31, 2007. The projected
benefit obligations exceed the fair value of plan assets by
$316.8 million and $128.4 million as of
December 31, 2008 and 2007, respectively. Primarily due to
the lower discount rates, the accumulated benefit obligation
(ABO) exceeded plan assets by $289.4 million at
the end of 2008. At the end of 2007, the ABO exceeded the fair
value of plan assets by $108.8 million.
Retained Insurable Risks
The Company is self-insured for certain losses relating to
workers compensation claims and employee medical and
dental benefits. Provisions for expected losses are recorded
based on the Companys estimates, on an undiscounted basis,
of the aggregate liabilities for known claims and estimated
claims incurred but not reported. The Company has purchased
stop-loss coverage or insurance with deductibles in order to
limit its exposure to significant claims. The Company also has
an extensive safety program in place to minimize its exposure to
workers compensation claims. Self-insured losses are
accrued based upon estimates of the aggregate uninsured claims
incurred using certain actuarial assumptions and loss
development factors followed in the insurance industry and
historical experience.
43
Goodwill
The Company evaluates goodwill for potential impairment annually
as of October 1 of each year, as well as whenever events or
changes in circumstances suggest that the fair value of a
reporting unit may no longer exceed its carrying amount.
Potential impairment of goodwill is measured at the reporting
unit level by comparing the reporting units carrying
amount including goodwill, to the estimated fair value of the
reporting unit.
A reporting unit is an operating segment or one level below an
operating segment (referred to as a component). A component of
an operating segment is a reporting unit if the component
constitutes a business for which discrete financial information
is available and segment management regularly reviews the
operating results of that component. The Companys
reporting units are all one level below the reported segments,
and the Company has identified twelve reporting units, of which
seven of the units have goodwill.
The estimated fair value of each reporting unit is determined by
utilizing a discounted cash flow analysis based on the
Companys forecasts discounted using a weighted average
cost of capital and market indicators of terminal year cash
flows based upon a multiple of EBITDA. If the carrying amount of
a reporting unit exceeds its estimated fair value, goodwill is
considered potentially impaired. In determining fair value,
management relies on and considers a number of factors,
including but not limited to, operating results, business plans,
economic projections, forecasts including anticipated future
cash flows, and market data and analysis, including market
capitalization. Fair value determinations are sensitive to
changes in the factors described above. There are inherent
uncertainties related to these factors and judgments in applying
them to the analysis of goodwill recoverability.
The Company performed its annual goodwill impairment test as of
October 1, 2008. During the fourth quarter ended
December 31, 2008, the Company concluded that an interim
goodwill impairment analysis was required based on significant
declines in the capital markets during the quarter, which
included a decline in the Companys market capitalization.
At December 31, 2008, the Companys implied market
capitalization based on the Companys limited float was
less than its total recorded shareholders equity.
In performing the annual and interim goodwill impairment tests,
the Company utilized a number of assumptions. The assumed
revenue growth rates of the reporting units were consistent with
historic growth rates. Projected margins were based on the
current cost structure and anticipated cost reductions,
resulting from the Altivity Transaction and the integration of
the two businesses as a result of that transaction, as well as
on-going cost savings initiatives. Other assumptions included a
weighted average cost of capital of 11.0 percent as of
December 31, 2008 and 9.5 percent as of
October 1, 2008.
The Company performed sensitivity analyses related to the
weighted average cost of capital and the residual multiple and
concluded that, at December 31, 2008, the weighted average
cost of capital could increase by greater than 250 basis
points and the residual multiple could decrease and all of the
reporting units would continue to have estimated fair value in
excess of carrying value.
The Company concluded that the fair value of its reporting units
exceeded their carrying values including goodwill at
October 1, 2008 and at December 31, 2008 and,
therefore, that goodwill was not impaired. In addition, the
Company considered and evaluated the decline in its market
capitalization in the performance of the impairment testing
process.
In the future, the Company will continue to consider the
uncertainty surrounding the current economic environment, as
well as the Companys own stock price in assessing goodwill
recoverability. The assumptions used in the goodwill impairment
testing process could be adversely impacted by certain of the
risks discussed in Risk Factors in Item 1A. and
thus could result in future goodwill impairment charges.
Recovery of Long-Lived Assets
The Company reviews long-lived assets (including property, plant
and equipment and intangible assets) for impairment whenever
events or changes in circumstances indicate that the carrying
amount of such long-lived assets may not be fully recoverable by
undiscounted cash flows. Measurement of the impairment loss, if
any, is based on the fair value of the asset, which is generally
determined by the discounting of future estimated cash flows, or
in the case of real estate, determining fair value. The Company
evaluates the recovery
44
of its long-lived assets by analyzing operating results and
considering significant events or changes in the business
environment that may have triggered impairment. See Note 13
in the Notes to Consolidated Financial Statements included
herein under Item 8., Financial Statements and
Supplementary Data.
Deferred Income Taxes and Potential Assessments
As of December 31, 2008, the Company, in accordance with
Accounting Principles Board (APB) Opinion 23,
Accounting for Income Taxes, Special Areas
has determined that $68.4 million of undistributed
foreign earnings are not intended to be reinvested indefinitely
by its
non-U.S. subsidiaries.
Deferred income tax was recorded as a reduction to the
Companys net operating losses on these undistributed
earnings as well as the financial statement carrying value in
excess of tax basis in the amount of $30.5 million. As of
December 31, 2007, the Company had determined that
$61.0 million of undistributed foreign earnings were not
intended to be reinvested indefinitely. Deferred income tax was
recorded as a reduction to the Companys net operating
losses on these undistributed earnings, as well as the financial
statement carrying value in excess of tax basis in the amount of
$28.3 million. The Company periodically determines whether
the
non-U.S. subsidiaries
will invest their undistributed earnings indefinitely and
reassesses this determination as appropriate.
The Company records current liabilities for potential
assessments. The accruals relate to uncertain tax positions in a
variety of taxing jurisdictions and are based on what management
believes will be the most likely outcome of these positions.
These liabilities may be affected by changing interpretations of
laws, rulings by tax authorities, or the expiration of the
statute of limitations.
NEW
ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting
the Company, see Note 1 in the Notes to Consolidated
Financial Statements included herein under Item 8.,
Financial Statements and Supplementary Data.
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 2009. To
help offset inflation 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 $170 million and $190 million and is
expected to relate principally to the Companys process
capabilities improvements, maintaining compliance with
environmental laws and regulations (approximately
$158 million), acquiring capital spares (approximately
$20 million), and producing packaging machinery
(approximately $12 million).
The Company also expects the following in 2009:
|
|
|
|
|
Depreciation and amortization between $280 million and
$295 million.
|
|
|
|
Interest expense of $220 million to $230 million,
including $8.4 million of noncash interest expense
associated with amortization of debt issuance costs.
|
|
|
|
Pension plan contributions of $60 million to $70 million.
|
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
The Company does not trade or use derivative instruments with
the objective of earning financial gains on interest or currency
rates, nor does it use leveraged instruments or instruments
where there are no underlying exposures identified.
Interest
Rates
The Company is exposed to changes in interest rates, primarily
as a result of its short-term and long-term debt, which bear
both fixed and floating interest rates. The Company uses
interest rate swap agreements effectively to fix the LIBOR rate
on $1,620.0 million of variable rate borrowings. The table
below sets forth interest rate sensitivity information related
to the Companys debt.
45
Long-Term
Debt Principal Amount by Maturity-Average Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
In millions
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
|
|
|
Total Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
425.0
|
|
|
$
|
0.7
|
|
|
$
|
425.0
|
|
|
$
|
|
|
|
$
|
850.7
|
|
|
$
|
674.4
|
|
Average Interest Rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
8.5
|
%
|
|
|
8.63
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
Variable Rate
|
|
$
|
11.4
|
|
|
$
|
22.3
|
|
|
$
|
22.3
|
|
|
$
|
22.3
|
|
|
$
|
165.5
|
|
|
$
|
2,082.1
|
|
|
$
|
2,325.9
|
|
|
$
|
1,764.1
|
|
Average Interest Rate, spread range is 2.00% 2.75%
|
|
|
LIBOR+
spread
|
|
|
|
LIBOR+
spread
|
|
|
|
LIBOR+
spread
|
|
|
|
LIBOR+
spread
|
|
|
|
LIBOR+
spread
|
|
|
|
LIBOR+
spread
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Rate Swaps-Notional Amount by Expiration-Average Swap
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
In millions
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
|
|
|
Interest rate Swaps (Pay Fixed/Receive Variable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
$110.0
|
|
|
|
$960.0
|
|
|
$
|
330.0
|
|
|
$
|
220.0
|
|
|
$
|
|
|
|
$
|
1,620.0
|
|
|
$
|
(53.9
|
)
|
Average Pay Rate
|
|
|
5.03
|
%
|
|
|
4.02
|
%
|
|
|
3.13
|
%
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-Month
|
|
|
|
3-Month
|
|
|
|
3-Month
|
|
|
|
3-Month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Receive Rate
|
|
|
LIBOR
|
|
|
|
LIBOR
|
|
|
|
LIBOR
|
|
|
|
LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange Rates
The Company enters into forward exchange contracts to
effectively hedge substantially all accounts receivable
resulting from transactions denominated in foreign currencies.
The purpose of these forward exchange contracts is to protect
the Company from the risk that the eventual functional currency
cash flows resulting from the collection of these accounts
receivable will be adversely affected by changes in exchange
rates. At December 31, 2008, multiple foreign currency
forward exchange contracts existed, with maturities ranging up
to three months. Those forward currency exchange contracts
outstanding at December 31, 2008, when aggregated and
measured in U.S. dollars at December 31, 2008 exchange
rates, had net notional amounts totaling $4.4 million. The
Company continuously monitors these forward exchange contracts
and adjusts accordingly to minimize the exposure.
The Company also enters into forward exchange contracts to hedge
certain other anticipated foreign currency transactions. The
purpose of these contracts is to protect the Company from the
risk that the eventual functional currency cash flows resulting
from anticipated foreign currency transactions will be adversely
affected by changes in exchange rates.
No amounts were reclassified to earnings during 2008 in
connection with forecasted transactions that were no longer
considered probable of occurring and there was no amount of
ineffective portion related to changes in the fair value of
foreign currency forward contracts. Minimal amounts were
reclassified to earnings during 2007 in connection with
forecasted transactions that were no longer considered probable
of occurring due to the sale of the Swedish operations and there
was no amount of ineffective portion related to changes in the
fair value of foreign currency forward contracts. Additionally,
there were no amounts excluded from the measure of effectiveness.
46
Foreign
Exchange Rates Sensitivity-Contractual Amount by Expected
Maturity-Average Contractual Exchange Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2008
|
|
|
|
|
|
Contract
|
|
|
Fair
|
|
|
|
In millions
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
FORWARD EXCHANGE AGREEMENTS:
|
|
|
|
|
|
|
|
|
|
|
Receive $US/Pay Yen
|
|
$
|
45.5
|
|
|
$
|
(5.9
|
)
|
|
|
Weighted average contractual exchange rate
|
|
|
90.79
|
|
|
|
|
|
|
|
Receive $US/Pay Euro
|
|
$
|
28.8
|
|
|
$
|
2.6
|
|
|
|
Weighted average contractual exchange rate
|
|
|
1.40
|
|
|
|
|
|
|
|
Receive $US/Pay GBP
|
|
$
|
6.5
|
|
|
$
|
1.9
|
|
|
|
Weighted average contractual exchange rate
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
Natural
Gas Contracts
The Company entered into natural gas swap contracts to hedge
prices for approximately 72% of its expected natural gas usage
through December 2009 with a weighted average contractual rate
of $9.94 per MMBTU. The carrying amount and fair value of the
natural gas swap contracts is a liability of $24.4 million
as of December 31, 2008, and is recorded as Other Accrued
Liabilities in the Consolidated Balance Sheet. Such contracts
are designated as cash flow hedges and are accounted for by
deferring the quarterly change in fair value of the outstanding
contracts in Shareholders Equity. On the date 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.
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
GRAPHIC PACKAGING HOLDING COMPANY
|
|
|
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
91
|
|
|
|
48
GRAPHIC
PACKAGING HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In millions, except per share amounts
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net Sales
|
|
$
|
4,079.4
|
|
|
$
|
2,421.2
|
|
|
$
|
2,321.7
|
|
Cost of Sales
|
|
|
3,596.9
|
|
|
|
2,089.4
|
|
|
|
2,048.6
|
|
Selling, General and Administrative
|
|
|
332.7
|
|
|
|
179.2
|
|
|
|
180.7
|
|
Research, Development and Engineering
|
|
|
8.0
|
|
|
|
9.2
|
|
|
|
10.8
|
|
Other Income, Net
|
|
|
(8.1
|
)
|
|
|
(7.8
|
)
|
|
|
(12.2
|
)
|
|
|
Income from Operations
|
|
|
149.9
|
|
|
|
151.2
|
|
|
|
93.8
|
|
Interest Income
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
0.6
|
|
Interest Expense
|
|
|
(216.7
|
)
|
|
|
(168.2
|
)
|
|
|
(172.0
|
)
|
Loss on Early Extinguishment of Debt
|
|
|
|
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
Loss before Income Taxes and Equity in Net Earnings of Affiliates
|
|
|
(65.5
|
)
|
|
|
(26.1
|
)
|
|
|
(77.6
|
)
|
Income Tax Expense
|
|
|
(34.4
|
)
|
|
|
(23.9
|
)
|
|
|
(20.8
|
)
|
|
|
Loss before Equity in Net Earnings of Affiliates
|
|
|
(99.9
|
)
|
|
|
(50.0
|
)
|
|
|
(98.4
|
)
|
Equity in Net Earnings of Affiliates
|
|
|
1.1
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
Loss from Continuing Operations
|
|
|
(98.8
|
)
|
|
|
(49.1
|
)
|
|
|
(97.4
|
)
|
Loss from Discontinued Operations, Net of Taxes
|
|
|
(0.9
|
)
|
|
|
(25.5
|
)
|
|
|
(3.1
|
)
|
|
|
Net Loss
|
|
$
|
(99.7
|
)
|
|
$
|
(74.6
|
)
|
|
$
|
(100.5
|
)
|
|
|
Loss Per Share Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(0.32
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.48
|
)
|
Discontinued Operations
|
|
|
(0.00
|
)
|
|
|
(0.13
|
)
|
|
|
(0.02
|
)
|
Total
|
|
$
|
(0.32
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.50
|
)
|
Weighted Average Number of Shares Outstanding Basic
|
|
|
315.8
|
|
|
|
201.8
|
|
|
|
201.1
|
|
Weighted Average Number of Shares Outstanding Diluted
|
|
|
315.8
|
|
|
|
201.8
|
|
|
|
201.1
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
49
GRAPHIC
PACKAGING HOLDING COMPANY
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
In millions, except share amounts
|
|
2008
|
|
|
2007
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
170.1
|
|
|
$
|
9.3
|
|
|
|
Receivables, Net
|
|
|
369.6
|
|
|
|
226.7
|
|
|
|
Inventories
|
|
|
532.0
|
|
|
|
318.6
|
|
|
|
Deferred Income Tax Assets
|
|
|
31.2
|
|
|
|
13.3
|
|
|
|
Other Current Assets
|
|
|
25.7
|
|
|
|
18.4
|
|
|
|
|
|
Total Current Assets
|
|
|
1,128.6
|
|
|
|
586.3
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
1,935.1
|
|
|
|
1,376.2
|
|
|
|
Goodwill
|
|
|
1,204.8
|
|
|
|
641.5
|
|
|
|
Intangible Assets, Net
|
|
|
664.6
|
|
|
|
140.4
|
|
|
|
Other Assets
|
|
|
50.0
|
|
|
|
32.9
|
|
|
|
|
|
Total Assets
|
|
$
|
4,983.1
|
|
|
$
|
2,777.3
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Short-Term Debt and Current Portion of Long-Term Debt
|
|
$
|
18.6
|
|
|
$
|
6.6
|
|
|
|
Accounts Payable
|
|
|
333.4
|
|
|
|
222.4
|
|
|
|
Compensation and Employee Benefits
|
|
|
87.2
|
|
|
|
69.5
|
|
|
|
Interest Payable
|
|
|
57.8
|
|
|
|
40.9
|
|
|
|
Other Accrued Liabilities
|
|
|
188.6
|
|
|
|
67.4
|
|
|
|
|
|
Total Current Liabilities
|
|
|
685.6
|
|
|
|
406.8
|
|
|
|
Long-Term Debt
|
|
|
3,165.2
|
|
|
|
1,871.8
|
|
|
|
Deferred Income Tax Liabilities
|
|
|
187.8
|
|
|
|
141.5
|
|
|
|
Accrued Pension and Postretirement Benefits
|
|
|
375.8
|
|
|
|
170.3
|
|
|
|
Other Noncurrent Liabilities
|
|
|
43.5
|
|
|
|
42.9
|
|
|
|
|
|
Total Liabilities
|
|
|
4,457.9
|
|
|
|
2,633.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $.01 per share; 100,000,000 and
50,000,000 shares authorized at December 31, 2008 and
December 31, 2007, respectively; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
|
|
Common Stock, par value $.01 per share; 1,000,000,000 and
500,000,000 shares authorized at December 31, 2008 and
2007, respectively; 342,522,470 and 200,978,569 shares
issued and outstanding at December 31, 2008 and 2007,
respectively
|
|
|
3.4
|
|
|
|
2.0
|
|
|
|
Capital in Excess of Par Value
|
|
|
1,955.4
|
|
|
|
1,191.6
|
|
|
|
Accumulated Deficit
|
|
|
(1,075.4
|
)
|
|
|
(975.7
|
)
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
(358.2
|
)
|
|
|
(73.9
|
)
|
|
|
|
|
Total Shareholders Equity
|
|
|
525.2
|
|
|
|
144.0
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
4,983.1
|
|
|
$
|
2,777.3
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
50
GRAPHIC
PACKAGING HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
In millions, except share amounts
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
|
|
Balances at December 31, 2005
|
|
|
198,663,007
|
|
|
$
|
2.0
|
|
|
$
|
1,169.6
|
|
|
$
|
(0.1
|
)
|
|
$
|
(800.6
|
)
|
|
$
|
(102.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100.5
|
)
|
|
|
|
|
|
$
|
(100.5
|
)
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.6
|
)
|
|
|
(10.6
|
)
|
Minimum Pension Liability Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.3
|
|
|
|
23.3
|
|
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.7
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(73.1
|
)
|
Adjustment to Initially Apply SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31.2
|
)
|
|
|
|
|
Options and Other Stock-Based Awards
|
|
|
1,921,584
|
|
|
|
|
|
|
|
17.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
200,584,591
|
|
|
|
2.0
|
|
|
|
1,186.8
|
|
|
|
|
|
|
|
(901.1
|
)
|
|
|
(106.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74.6
|
)
|
|
|
|
|
|
$
|
(74.6
|
)
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
Pension Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.5
|
|
|
|
20.5
|
|
Amortization of Prior Service Cost Included in Net Periodic
Pension Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
|
|
4.7
|
|
Postretirement Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Amortization of Prior Service Cost Included in Net Periodic
Pension Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Postemployment Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(42.5
|
)
|
Options and Other Stock-Based Awards
|
|
|
393,978
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214.9
|
)
|
|
|
(214.9
|
)
|
Amortization of Prior Service Cost Included in Net Periodic
Pension Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Postretirement Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
0.9
|
|
Amortization of Prior Service Cost Included in Net Periodic
Pension Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Postemployment Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain Arising During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
1.2
|
|
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.1
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (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
|
)
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
51
GRAPHIC
PACKAGING HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(99.7
|
)
|
|
$
|
(74.6
|
)
|
|
$
|
(100.5
|
)
|
Noncash Items Included in Net Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
264.3
|
|
|
|
194.8
|
|
|
|
196.0
|
|
Loss on Early Extinguishment of Debt
|
|
|
|
|
|
|
9.5
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
28.0
|
|
|
|
19.0
|
|
|
|
19.5
|
|
Pension, Postemployment and Postretirement Benefits
Contributions, Net of Expense
|
|
|
(38.4
|
)
|
|
|
(7.2
|
)
|
|
|
3.6
|
|
Amortization of Deferred Debt Issuance Costs
|
|
|
7.9
|
|
|
|
6.9
|
|
|
|
8.8
|
|
Inventory Step Up Related to Altivity
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
Write-off #2 Coated Board Machine at the West Monroe, LA Mill
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
Loss (Gain) on Disposal of Assets
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
(3.2
|
)
|
Impairment Charge
|
|
|
|
|
|
|
18.6
|
|
|
|
3.9
|
|
Other, Net
|
|
|
1.8
|
|
|
|
8.2
|
|
|
|
5.9
|
|
Changes in Operating Assets and Liabilities (See Note 3)
|
|
|
(19.0
|
)
|
|
|
(35.9
|
)
|
|
|
7.3
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
184.2
|
|
|
|
141.7
|
|
|
|
141.3
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Spending
|
|
|
(183.3
|
)
|
|
|
(95.9
|
)
|
|
|
(94.5
|
)
|
Acquisition Costs Related to Altivity
|
|
|
(30.3
|
)
|
|
|
|
|
|
|
|
|
Cash Acquired Related to Altivity
|
|
|
60.2
|
|
|
|
|
|
|
|
|
|
Proceeds from Sales of Assets, Net of Selling Costs
|
|
|
20.3
|
|
|
|
9.5
|
|
|
|
5.5
|
|
Other, Net
|
|
|
(10.7
|
)
|
|
|
(4.4
|
)
|
|
|
(1.4
|
)
|
|
|
Net Cash Used in Investing Activities
|
|
|
(143.8
|
)
|
|
|
(90.8
|
)
|
|
|
(90.4
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Issuance of Debt
|
|
|
1,200.0
|
|
|
|
1,135.0
|
|
|
|
|
|
Payments on Debt
|
|
|
(1,195.9
|
)
|
|
|
(1,180.0
|
)
|
|
|
(54.2
|
)
|
Borrowings under Revolving Credit Facilities
|
|
|
985.8
|
|
|
|
848.4
|
|
|
|
674.8
|
|
Payments on Revolving Credit Facilities
|
|
|
(853.4
|
)
|
|
|
(846.3
|
)
|
|
|
(676.5
|
)
|
Debt Issuance Costs
|
|
|
(16.3
|
)
|
|
|
(7.0
|
)
|
|
|
|
|
Other, Net
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
119.8
|
|
|
|
(50.0
|
)
|
|
|
(56.6
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
160.8
|
|
|
|
2.0
|
|
|
|
(5.4
|
)
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
9.3
|
|
|
|
7.3
|
|
|
|
12.7
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
170.1
|
|
|
$
|
9.3
|
|
|
$
|
7.3
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
52
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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. Additionally, the Company is one of the largest
producers of folding cartons and holds a leading market position
in coated-recycled boxboard and specialty bag packaging. The
Companys customers include some of the most widely
recognized companies in the world. The Company strives to
provide its customers with packaging solutions designed to
deliver marketing and performance benefits at a competitive cost
by capitalizing on its low-cost paperboard mills and converting
plants, its proprietary carton designs and packaging machines,
and its commitment to customer service.
GPHC was formed as 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 Consolidated Statements of Operations for
the year ended December 31, 2008 includes nine months and
approximately three weeks of Altivity and twelve months of
GPCs results. See Note 4 Altivity
Transaction.
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 and Principles of Consolidation
The Companys Consolidated Financial Statements include all
subsidiaries in which the Company has the ability to exercise
direct or indirect control over operating and financial
policies. The accompanying Consolidated Financial Statements
include the worldwide operations of the paperboard packaging
segment which includes the paperboard, packaging, packaging
machinery, and containerboard businesses; the multi-wall bag
segment which converts kraft and specialty paper into multi-wall
bags, consumer bags and specialty retail bags; and the specialty
packaging business segment which produces flexible packaging,
label solutions, laminations, and ink coating. Intercompany
transactions and balances are eliminated in consolidation.
53
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has reclassified the presentation of certain prior
period information to conform to the current presentation
format. This includes the reclassification of warehousing
expense from Selling, General and Administrative to Cost of
Sales and the reclassification of the amortization of
intangibles from Other Income, Net to either Selling, General
and Administrative or Cost of Sales depending on the nature of
the underlying assets. These reclassifications had no impact on
the Consolidated Balance Sheets, operating income, Consolidated
Statements of Shareholders Equity or Consolidated
Statements of Cash Flows and had an immaterial impact on certain
captions on the Consolidated Statements of Operations.
The results of operations for Graphic Packaging International
Sweden, the Companys discontinued operations, have been
eliminated from the Companys continuing operations and
classified as discontinued operations for each period presented
within the Companys Consolidated Statements of Operations.
The Company has not reclassified assets and liabilities related
to discontinued operations as Assets Held for Sale or
Liabilities Held for Sale. See Note 14
Discontinued Operations.
The Company holds a 50% ownership interest in a joint venture
with Rengo Riverwood Packaging, Ltd. (in Japan) which is
accounted for using the equity method.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(U.S.) 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
periods. Actual results could differ from these estimates, and
changes in these estimates are recorded when known. Estimates
are used in accounting for, among other things, pension
benefits, retained insurable risks, slow-moving and obsolete
inventory, allowance for doubtful accounts, useful lives for
depreciation and amortization, future cash flows, discount rates
and earnings before interest, taxes, depreciation and
amortization (EBITDA) multiples associated with
impairment testing of goodwill and long-term assets, fair value
of derivative financial instruments, deferred income tax assets
and potential income tax assessments, and contingencies.
Revenue
Recognition
The Company receives revenue from the sales of manufactured
products, the leasing of packaging machinery and the servicing
of packaging machinery. The Company recognizes sales revenue
when all of the following criteria are met: persuasive evidence
of an agreement exists, delivery has occurred or services have
been rendered, the Companys price to the buyer is fixed
and determinable and collectibility is reasonably assured.
Delivery is not considered to have occurred until the customer
takes title and assumes the risks and rewards of ownership. The
timing of revenue recognition is largely dependent on shipping
terms. Revenue is recorded at the time of shipment for terms
designated as free on board (f.o.b.) shipping point.
For sales transactions designated f.o.b. destination, revenue is
recorded when title to the product passes upon delivery to the
customer. The Company recognizes revenues on its annual and
multi-year carton supply contracts as the shipment occurs in
accordance with the shipping terms discussed above.
Payments from packaging machinery use agreements are recognized
on a straight-line basis over the term of the agreements.
Service revenue on packaging machinery is recorded at the time
of service.
Discounts and allowances are comprised of trade allowances and
rebates, cash discounts and sales returns. Cash discounts and
sales returns are estimated using historical experience. Trade
allowances are based on the estimated obligations and historical
experience. Customer rebates are determined based on the
quantity purchased and are recorded at the time of sale.
54
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Shipping
and Handling
The Company includes shipping and handling costs in Cost of
Sales.
Depreciation
and Amortization, and Impairment
Depreciation is computed using the straight-line method based on
the following estimated useful lives of the related assets:
|
|
|
|
|
|
|
Buildings
|
|
|
40 years
|
|
Land improvements
|
|
|
15 years
|
|
Machinery and equipment
|
|
|
3 to 40 years
|
|
Furniture and fixtures
|
|
|
10 years
|
|
Automobiles and light trucks
|
|
|
3 to 5 years
|
|
|
|
Depreciation expense for 2008, 2007 and 2006 was
$222.8 million, $177.8 million and
$176.7 million, respectively.
The Company assesses its long-lived assets, including certain
identifiable intangibles, for impairment whenever events or
circumstances indicate that the carrying value of an asset may
not be recoverable. To analyze recoverability, the Company
projects future cash flows, undiscounted and before interest,
over the remaining life of such assets. If these projected cash
flows are less than the carrying amount, an impairment would be
recognized, resulting in a write-down of assets with a
corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount
and the fair value of the assets. The Company assesses the
appropriateness of the useful life of its long-lived assets
periodically.
Intangible assets (liabilities) with a determinable life are
amortized on a straight-line basis over that period. The
amortization expense for each intangible asset (liability) is
recorded in the Consolidated Statements of Operations according
to the nature of that asset (liability).
The following table displays the intangible assets (liabilities)
that continue to be subject to amortization and aggregate
amortization expense as well as intangible assets not subject to
amortization as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
In millions
|
|
Average Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
Amortizable Intangible Assets (Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
17.5 years
|
|
|
$
|
656.3
|
|
|
$
|
54.1
|
|
|
$
|
602.2
|
|
|
$
|
109.9
|
|
|
$
|
23.0
|
|
|
$
|
86.9
|
|
Non-Compete Agreements
|
|
|
3.2 years
|
|
|
|
31.5
|
|
|
|
25.8
|
|
|
|
5.7
|
|
|
|
23.3
|
|
|
|
23.3
|
|
|
|
|
|
Patents, Trademarks and Licenses
|
|
|
15.0 years
|
|
|
|
119.8
|
|
|
|
62.6
|
|
|
|
57.2
|
|
|
|
107.7
|
|
|
|
54.2
|
|
|
|
53.5
|
|
Supply Contracts and Leases
|
|
|
3.7 years
|
|
|
|
(1.0
|
)
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
806.6
|
|
|
$
|
142.0
|
|
|
$
|
664.6
|
|
|
$
|
240.9
|
|
|
$
|
100.5
|
|
|
$
|
140.4
|
|
|
|
Unamortizable Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
1,204.8
|
|
|
$
|
|
|
|
$
|
1,204.8
|
|
|
$
|
641.5
|
|
|
$
|
|
|
|
$
|
641.5
|
|
|
|
The Company recorded amortization expense of $41.5 million
for the year ended December 31, 2008, and
$11.8 million for each of the years ended December 31,
2007 and 2006, relating to intangible assets (liabilities)
subject to amortization. The Company expects amortization
expense to be approximately
55
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$49 million, $49 million, $46 million,
$43 million and $42 million per year for 2009, 2010,
2011, 2012 and 2013, respectively.
Research
and Development
Research and development costs, which relate primarily to the
development and design of new packaging machines and products,
are expensed as incurred. Expenses for the years ended
December 31, 2008, 2007 and 2006 were $8.0 million,
$9.2 million and $10.8 million, respectively.
Cash
and Cash Equivalents
Cash and cash equivalents include time deposits, certificates of
deposit and other marketable securities with original maturities
of three months or less.
Accounts
Receivable and Allowances
Accounts receivable are stated at the amount owed by the
customer, net of an allowance for estimated uncollectible
accounts, returns and allowances, and cash discounts.
Inventories
Inventories are stated at the lower of cost or market with cost
determined principally by the
first-in,
first-out (FIFO) basis. Average cost basis is used
to determine the cost of supplies inventories. Raw materials and
consumables used in the production process such as wood chips
and chemicals are valued at purchase cost on a FIFO basis upon
receipt. Work in progress and finished goods inventories are
valued at the cost of raw material consumed plus direct
manufacturing costs (such as labor, utilities and supplies) as
incurred and an applicable portion of manufacturing overhead.
Inventories are stated net of an allowance for slow-moving and
obsolete inventory, which is based on estimates.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost. Betterments,
renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance charges are
expensed as incurred. The Companys cost and related
accumulated depreciation applicable to assets retired or sold
are removed from the accounts and the gain or loss on
disposition is included in income from operations.
Costs directly associated with the development and testing of
internally used computer information systems are capitalized and
depreciated on a straight-line basis over the expected useful
life of 5 years as part of property, plant and equipment.
Costs indirectly associated with such projects and ongoing
maintenance costs are expensed as incurred. A total of
$10.9 million and $1.5 million in costs relating to
software development were capitalized in 2008 and 2007,
respectively. The balance as of December 31, 2008 and 2007
is $16.5 million and $12.6 million, respectively.
Interest is capitalized on constructed assets. The capitalized
interest is recorded as part of the asset to which it relates
and is amortized over the assets estimated useful life.
Capitalized interest was $1.8 million, $0.4 million
and $0.6 million in the years ended December 31, 2008,
2007 and 2006, respectively.
Goodwill
The Company tests goodwill for impairment annually as of
October 1, as well as whenever events or changes in
circumstances suggest that the estimated fair value of a
reporting unit may no longer exceed its carrying amount.
56
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recoverability of goodwill is measured at the reporting unit
level by comparing the reporting units carrying amount
including goodwill, to the fair value of the reporting unit. The
estimated fair value of each reporting unit is determined by
utilizing a discounted cash flow analysis based on the
Companys forecasts discounted using a weighted average
cost of capital and market indicators of terminal year cash
flows based upon a multiple of EBITDA. If the carrying amount of
a reporting unit exceeds its fair value, goodwill is considered
potentially impaired. In determining fair value, management
relies on and considers a number of factors, including but not
limited to, operating results, business plans, economic
projections, forecasts including anticipated future cash flows,
and market data and analysis. Fair value determinations are
sensitive to changes in the factors described above. There are
inherent uncertainties related to these factors and judgments in
applying them to the analysis of goodwill recoverability.
During the fourth quarter ended December 31, 2008, the
Company concluded that an interim goodwill impairment analysis
was required based on significant declines in the capital
markets during the quarter, which included a decline in the
Companys market capitalization. At December 31, 2008,
the companys market capitalization was less than total
recorded shareholders equity.
However, based upon its testing, the Company concluded that the
fair value of its reporting units exceeded their carrying
amounts including goodwill at October 1, 2008 and at
December 31, 2008 and, therefore, that goodwill was not
impaired. As part of the Companys ongoing monitoring
efforts, the Company will continue to consider the uncertainty
surrounding the current economic environment as well as the
Companys internal projections of future operating results
in assessing goodwill recoverability.
Retained
Insurable Risks
It is the Companys policy to self-insure or fund a portion
of certain expected losses related to group health benefits and
workers compensation claims. Provisions for expected
losses are recorded based on the Companys estimates, on an
undiscounted basis, of the aggregate liabilities for known
claims and estimated claims incurred but not reported.
Environmental
Remediation Reserves
The Company records accruals for environmental obligations based
on estimates developed in consultation with environmental
consultants and legal counsel. Accruals for environmental
liabilities are established in accordance with the American
Institute of Certified Public Accountants Statement of Position
96-1,
Environmental Remediation Liabilities. The
Company records a liability at the time it is probable and can
be reasonably estimated. Such liabilities are not reduced for
potential recoveries from insurance carriers. Costs of future
expenditures are not discounted to their present value.
Asset
Retirement Obligations
Asset retirement obligations are accounted for in accordance
with the provisions of SFAS 143, Accounting for
Asset Retirement Obligations, and FASB Interpretation
No. 47, Accounting for Conditional Asset
Retirement Obligations An Interpretation of FASB
Statement No. 143. A liability and asset are
recorded equal to the present value of the estimated costs
associated with the retirement of long-lived assets where a
legal or contractual obligation exists and the liability can be
reasonably estimated. The liability is accreted over time and
the asset is depreciated over the remaining life of the asset.
Asset retirement obligations with indeterminate settlement dates
are not recorded.
57
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
International
Currency
The functional currency of the international subsidiaries is the
local currency for the country in which the subsidiaries own
their primary assets. The translation of the applicable
currencies into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Any related translation
adjustments are recorded directly to a separate component of
Shareholders Equity, unless there is a sale or complete
liquidation of the underlying foreign investments.
The Company pursues a currency hedging program which utilizes
derivatives to limit the impact of foreign currency exchange
fluctuations on its consolidated financial results. Under this
program, the Company has entered into forward exchange contracts
in the normal course of business to hedge certain foreign
currency denominated transactions. Realized and unrealized gains
and losses on these forward contracts are included in the
measurement of the basis of the related foreign currency
transaction when recorded.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
(SFAS 57). 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
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 FASB Staff Position
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 for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company
has adopted SFAS 157 as of January 1, 2008 related to
financial assets and financial liabilities. See
Note 11 Fair Value Measurement. The Company is
currently evaluating the impact of SFAS 157 related to
nonfinancial assets and nonfinancial liabilities on the
Companys financial position, results of operations and
cash flows.
In October 2008, the FASB issued FASB Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active
(FSP 157-3),
which clarifies the application of SFAS 157 when the market
for a financial asset is inactive. Specifically,
FSP 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
unobservable data to measure fair value. The guidance in
FSP 157-3
was effective immediately upon issuance and did not have a
material impact on the Companys financial position,
results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB
Statement No. 115, (SFAS 159)
which is effective for fiscal years beginning after
November 15, 2007. This statement permits an entity to
choose to measure many financial instruments and certain other
items at fair value on specified election dates. The Company
adopted SFAS 159 effective January 1, 2008 and did not
elect the fair value option established by SFAS 159. As
such, the adoption had no impact on the Companys financial
position, results of operations and cash flows.
58
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
impact on the Company of adopting SFAS 141R will depend on
the nature, terms and size of the business combinations
completed after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of ARB
No. 51, (SFAS 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 SFAS 141R. The
adoption of SFAS 160 is not expected to 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. The adoption of SFAS 161 is not expected to have a
material impact on the Companys financial position,
results of operations and cash flows.
In April 2008, the FASB issued FASB Staff Position
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 adoption of
FSP 142-3
is not expected to have a material impact on the Companys
financial position, results of operations and cash flows.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles, (SFAS 162) which was
effective November 15, 2008. SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in
conformity with accounting principles generally accepted in the
U.S. The adoption of SFAS 162 did not have an impact
on the Companys financial position, results of operations
and cash flows.
In December 2008, the FASB issued FASB Staff Position
No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets,
(FSP 132(R)-1). FSP 132(R)-1 is
effective for fiscal years ending after December 15, 2009
and 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.
59
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NOTE 2
|
SUPPLEMENTAL
BALANCE SHEET DATA
|
Receivables, Net:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Trade
|
|
$
|
358.3
|
|
|
$
|
219.1
|
|
Less: Allowance
|
|
|
(3.9
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
354.4
|
|
|
|
217.5
|
|
Other
|
|
|
15.2
|
|
|
|
9.2
|
|
|
|
Total
|
|
$
|
369.6
|
|
|
$
|
226.7
|
|
|
|
Inventories by Major Class:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Finished Goods
|
|
$
|
301.3
|
|
|
$
|
157.8
|
|
Work in Progress
|
|
|
46.0
|
|
|
|
27.9
|
|
Raw Materials
|
|
|
116.5
|
|
|
|
79.8
|
|
Supplies
|
|
|
77.9
|
|
|
|
58.9
|
|
|
|
|
|
|
541.7
|
|
|
|
324.4
|
|
Less: Allowance
|
|
|
(9.7
|
)
|
|
|
(5.8
|
)
|
|
|
Total
|
|
$
|
532.0
|
|
|
$
|
318.6
|
|
|
|
Property, Plant and Equipment, Net:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Property, Plant and Equipment, at Cost
|
|
|
|
|
|
|
|
|
Land and Improvements
|
|
$
|
136.2
|
|
|
$
|
56.3
|
|
Buildings
|
|
|
405.9
|
|
|
|
229.0
|
|
Machinery and Equipment
|
|
|
2,949.8
|
|
|
|
2,528.9
|
|
Construction-in-Progress
|
|
|
110.6
|
|
|
|
41.9
|
|
|
|
|
|
|
3,602.5
|
|
|
|
2,856.1
|
|
Less: Accumulated Depreciation
|
|
|
(1,667.4
|
)
|
|
|
(1,479.9
|
)
|
|
|
Total
|
|
$
|
1,935.1
|
|
|
$
|
1,376.2
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Deferred Debt Issuance Costs, Net of Amortization of $19.5 and
$11.6 for 2008 and 2007, respectively
|
|
$
|
34.0
|
|
|
$
|
25.6
|
|
Deferred Income Tax Assets
|
|
|
0.4
|
|
|
|
|
|
Other
|
|
|
15.6
|
|
|
|
7.3
|
|
|
|
Total
|
|
$
|
50.0
|
|
|
$
|
32.9
|
|
|
|
60
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other Accrued Liabilities:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Fair Value of Derivatives
|
|
$
|
84.3
|
|
|
$
|
6.4
|
|
Restructuring Reserves
|
|
|
19.1
|
|
|
|
|
|
Other
|
|
|
85.2
|
|
|
|
61.0
|
|
|
|
Total
|
|
$
|
188.6
|
|
|
$
|
67.4
|
|
|
|
|
|
NOTE 3
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
Cash Flow Effects of (Increases) Decreases in Operating Assets
and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Receivables, net
|
|
$
|
16.5
|
|
|
$
|
(4.4
|
)
|
|
$
|
(1.0
|
)
|
Inventories
|
|
|
32.6
|
|
|
|
(27.0
|
)
|
|
|
10.2
|
|
Prepaid Expenses
|
|
|
(13.7
|
)
|
|
|
(11.5
|
)
|
|
|
(4.7
|
)
|
Accounts Payable
|
|
|
(21.4
|
)
|
|
|
16.1
|
|
|
|
0.8
|
|
Compensation and Employee Benefits
|
|
|
(27.8
|
)
|
|
|
6.6
|
|
|
|
1.4
|
|
Income Taxes
|
|
|
(4.8
|
)
|
|
|
(0.4
|
)
|
|
|
1.1
|
|
Interest Payable
|
|
|
16.5
|
|
|
|
(7.3
|
)
|
|
|
5.6
|
|
Other Accrued Liabilities
|
|
|
(17.1
|
)
|
|
|
(14.0
|
)
|
|
|
(1.7
|
)
|
Other Noncurrent Liabilities
|
|
|
0.2
|
|
|
|
6.0
|
|
|
|
(4.4
|
)
|
|
|
Total
|
|
$
|
(19.0
|
)
|
|
$
|
(35.9
|
)
|
|
$
|
7.3
|
|
|
|
Cash paid for interest and cash paid, net of refunds, for income
taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Interest
|
|
$
|
193.4
|
|
|
$
|
168.3
|
|
|
$
|
161.9
|
|
Income Taxes
|
|
|
5.0
|
|
|
|
2.9
|
|
|
|
1.1
|
|
|
|
Noncash activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Issuance of Common Stock Related to Acquisition
|
|
$
|
762.8
|
|
|
$
|
|
|
|
$
|
|
|
|
|
NOTE 4
|
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 operates recycled boxboard mills and
consumer product packaging facilities in North America.
In connection with the Altivity Transaction, all of the equity
interests in Altivitys parent company were contributed to
GPHC in exchange for 139,445,038 shares of GPHCs
common stock, or approximately 40.6 percent of the
Companys outstanding shares of common stock. Stockholders
of GPC received one share of GPHC common stock for each share of
GPC common stock held immediately prior to the transactions.
Subsequently, all of the equity interests in Altivitys
parent company were contributed to GPHCs primary operating
company, GPII.
The Company determined that the relative outstanding share
ownership, voting rights, and the composition of the governing
body and senior management positions require GPC to be the
acquiring entity for
61
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 preliminary
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
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
60.2
|
|
Receivables, Net
|
|
|
181.2
|
|
Inventories
|
|
|
265.0
|
|
Prepaids
|
|
|
13.1
|
|
Property, Plant and Equipment
|
|
|
637.0
|
|
Intangible Assets
|
|
|
561.1
|
|
Other Assets
|
|
|
4.7
|
|
|
|
Total Assets Acquired
|
|
|
1,722.3
|
|
|
|
Current Liabilities, Excluding Current Portion of Long-Term Debt
|
|
|
257.8
|
|
Pension and Postemployment Benefits
|
|
|
35.3
|
|
Other Noncurrent Liabilities
|
|
|
31.8
|
|
|
|
Total Liabilities Assumed
|
|
|
324.9
|
|
|
|
Net Assets Acquired
|
|
|
1,397.4
|
|
|
|
Goodwill
|
|
|
563.3
|
|
|
|
Total Estimated Fair Value of Net Assets Acquired
|
|
$
|
1,960.7
|
|
|
|
As of December 31, 2008, the preliminary purchase
accounting is still subject to final adjustment and could change
in the subsequent period. The Company has not finalized its
review of all Altivity tax matters and other liabilities. 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 5 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
62
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 December 31, 2008
|
|
$
|
408.8
|
|
|
$
|
61.9
|
|
|
$
|
92.6
|
|
|
$
|
563.3
|
|
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 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
fourth quarter 2007 results for the divested mills. 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.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Net Sales
|
|
$
|
4,470.5
|
|
|
$
|
4,378.2
|
|
Net Loss
|
|
|
(62.9
|
)
|
|
|
(69.3
|
)
|
Loss Per Share Basic and Diluted
|
|
|
(0.18
|
)
|
|
|
(0.20
|
)
|
|
|
|
|
NOTE 5
|
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, equipment removal and
facility closure costs. These restructuring reserves were
established in accordance with the requirement of Emerging
Issues Task Force (EITF)
95-3,
Recognition of Liabilities in Connection with a
Purchase Business Combination, and were considered
liabilities assumed in the Altivity Transaction and will be
finalized by March 10, 2009. The Company has announced the
closure of four Altivity facilities and has committed to seven
additional plant closures. The restructuring activities are
expected to be substantially completed by December 31, 2010.
In addition, during the third quarter 2008, the Company
announced the closure of a GPC 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
63
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
amount of termination benefits recorded in 2008 was
$1.6 million and is included in Selling, General and
Administrative costs in the Consolidated Statements of
Operations.
The following table summarizes the transactions within the
restructuring reserve and reconciles to accrued liabilities at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
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 2008 was $5.4 million.
Short-Term Debt is composed of the following:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Short-Term Borrowings
|
|
$
|
7.2
|
|
|
$
|
6.4
|
|
Current Portion of Long-Term Debt
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
Total
|
|
$
|
18.6
|
|
|
$
|
6.6
|
|
|
|
Short-term borrowings are principally at the Companys
international subsidiaries. The weighted average interest rate
on short-term borrowings as of December 31, 2008 and 2007
was 3.7% and 3.6%, respectively.
On May 16, 2007, the Company entered into a new
$1,355 million Credit Agreement (Credit
Agreement). The Credit Agreement provides for a
$300 million revolving credit facility due on May 16,
2013 and a $1,055 million term loan facility due on
May 16, 2014. The revolving credit facility bears interest
at a rate of LIBOR plus 225 basis points and the term loan
facility bears interest at a rate of LIBOR plus 200 basis
points. The facilities under the Credit Agreement replace the
revolving credit facility due on August 8, 2009 and the
term loan due on August 8, 2010 under the Companys
previous senior secured credit agreement. The Companys
obligations under the new Credit Agreement are collateralized by
substantially all of the Companys domestic assets.
In connection with the May 16, 2007 replacement of the
Companys previous revolving credit and term loan
facilities and in accordance with Emerging Issues Task Force
(EITF)
96-19,
Debtors Accounting for a Modification or Exchange
of Debt Instruments and
EITF 98-14,
Debtors Accounting for Changes in
Line-of-Credit
or Revolving-Debt Arrangements, the Company recorded a
charge of $9.5 million, which represented a portion of the
unamortized deferred financial costs associated with the
previous revolving credit and term loan facilities. This charge
is reflected as Loss on Early Extinguishment of Debt in the
Companys Consolidated Statements of Operations. In
connection with the new Credit Agreement, the Company recorded
approximately $7 million of deferred financing costs. These
costs, combined with the remainder of the deferred financing
costs relating to the previous senior secured credit agreement,
will be amortized over the term of the new facilities.
64
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 is consisted of the following:
|
|
|
|
|
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Senior Notes with interest payable semi-annually at 8.5%,
payable in 2011
|
|
$
|
425.0
|
|
|
$
|
425.0
|
|
Senior Subordinated Notes with interest payable semi-annually at
9.5%, payable in 2013
|
|
|
425.0
|
|
|
|
425.0
|
|
Senior Secured Term Loan Facility with interest payable at
various dates at floating rates (5.21% at
December 31, 2008) payable through 2014
|
|
|
1,000.3
|
|
|
|
1,010.0
|
|
Senior Secured Term Loan Facility with interest payable at
various dates at floating rates (6.68% at
December 31, 2008) payable through 2014
|
|
|
1,182.3
|
|
|
|
|
|
Senior Secured Revolving Facility with interest payable at
various dates at floating rates (4.19% at
December 31, 2008) payable in 2013
|
|
|
143.2
|
|
|
|
11.0
|
|
Other
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
3,176.6
|
|
|
|
1,872.0
|
|
Less, current portion
|
|
|
11.4
|
|
|
|
0.2
|
|
|
|
Total
|
|
$
|
3,165.2
|
|
|
$
|
1,871.8
|
|
|
|
Long-Term Debt maturities are as follows:
|
|
|
|
|
In millions
|
|
|
|
|
|
|
2009
|
|
$
|
11.4
|
|
2010
|
|
|
22.3
|
|
2011
|
|
|
447.3
|
|
2012
|
|
|
23.0
|
|
2013
|
|
|
590.5
|
|
After 2013
|
|
|
2,082.1
|
|
|
|
Total
|
|
$
|
3,176.6
|
|
|
|
At December 31, 2008, the Company and its U.S. and
international subsidiaries had the following commitments,
amounts outstanding and amounts available under revolving credit
facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
In millions
|
|
Commitments
|
|
|
Outstanding
|
|
|
Available(a)
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
400.0
|
|
|
$
|
143.2
|
|
|
$
|
220.9
|
|
International Facilities
|
|
|
17.5
|
|
|
|
7.1
|
|
|
|
10.4
|
|
|
|
Total
|
|
$
|
417.5
|
|
|
$
|
150.3
|
|
|
$
|
231.3
|
|
|
|
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
December 31, 2008. These letters of credit are used as
security against its self-insurance obligations and
workers compensation obligations. These letters of credit
expire at various dates through 2009 unless extended.
|
65
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 December 31, 2008, 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 7
|
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 December 31, 2008 is
the Graphic Packaging Corporation 2004 Stock and Incentive
Compensation Plan (2004 Plan), pursuant to which the
Company may grant stock options, stock appreciation rights,
restricted stock, restricted stock units and other types of
stock-based awards to employees and directors of the Company.
The other plans are the 2003 Riverwood Holding, Inc. Long-Term
Incentive Plan (2003 LTIP), the 2003 Riverwood
Holding, Inc. Directors Stock Incentive Plan
(2003 Directors Plan), the Riverwood Holding,
Inc. 2002 Stock Incentive Plan (2002 SIP), the
Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan
(1999 LTIP), the Riverwood Holding, Inc. Stock
Incentive Plan (1996 SIP), the Graphic Packaging
Equity Incentive Plan (EIP), and the Graphic
Packaging Equity Compensation Plan for Non-Employee Directors
(Graphic NEDP). 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. Shares issued are from the Companys authorized but
unissued shares. Compensation costs are recognized on a
straight-line basis over the requisite service period of the
award.
Stock-based compensation expense for all share-based payment
awards granted, after the Companys adoption of
SFAS No. 123R, Share-Based Payment,
(SFAS 123R) on January 1, 2006 is based on
the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R.
66
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock
Options
GPC and the Company have not granted any options since 2004. The
weighted average fair value of stock options is estimated to be
$2.73 per option as of the date of grant for stock options
granted in 2004. The Company used the Black-Scholes Merton
option pricing model to value stock options with the following
assumptions: dividend yield of zero, expected volatility ranging
from 0% to 74%, risk-free interest rates ranging from 4.23% to
6.75%, a zero forfeiture rate and an expected life of 3 to
10 years.
The following table summarizes information pertaining to stock
options outstanding and exercisable at December 31, 2008
and the option exercise price range per plan. No options have
been granted under the 2004 Plan or the 2003 Directors
Plan, so these plans have been omitted from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Shares
|
|
|
Weighted
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Average
|
|
|
Subject to
|
|
|
Average
|
|
|
Exercise
|
|
Remaining
|
|
|
|
Subject
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Exercise
|
|
|
Price
|
|
Contractual Life
|
|
Plan
|
|
to Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Range
|
|
in Years
|
|
|
|
|
2003 LTIP
|
|
|
913,645
|
|
|
$
|
6.05
|
|
|
|
913,645
|
|
|
$
|
6.05
|
|
|
$4.45 to $6.57
|
|
|
4.7
|
|
2002 SIP
|
|
|
2,130,754
|
|
|
|
7.88
|
|
|
|
2,130,754
|
|
|
|
7.88
|
|
|
7.88
|
|
|
3.0
|
|
1999 LTIP
|
|
|
207,112
|
|
|
|
6.57
|
|
|
|
207,112
|
|
|
|
6.57
|
|
|
6.57
|
|
|
0.4
|
|
1996 SIP
|
|
|
1,266,021
|
|
|
|
6.57
|
|
|
|
1,266,021
|
|
|
|
6.57
|
|
|
6.57
|
|
|
1.1
|
|
EIP
|
|
|
2,588,355
|
|
|
|
7.44
|
|
|
|
2,588,355
|
|
|
|
7.44
|
|
|
1.56 to 13.74
|
|
|
4.4
|
|
Graphic NEDP
|
|
|
10,000
|
|
|
|
3.95
|
|
|
|
10,000
|
|
|
|
3.95
|
|
|
2.88 to 7.11
|
|
|
1.2
|
|
|
|
Total
|
|
|
7,115,887
|
|
|
$
|
7.21
|
|
|
|
7,115,887
|
|
|
$
|
7.21
|
|
|
|
|
|
3.3
|
|
|
|
As of December 31, 2008 and 2007, there were exercisable
options in the amount of 7,115,887 and 12,730,238, respectively.
A summary of option activity during the three years ended
December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
Outstanding December 31, 2005
|
|
|
15,944,339
|
|
|
$
|
6.84
|
|
Exercised
|
|
|
(237,000
|
)
|
|
|
3.13
|
|
Canceled
|
|
|
(820,852
|
)
|
|
|
5.54
|
|
|
|
Outstanding December 31, 2006
|
|
|
14,886,487
|
|
|
|
6.97
|
|
Exercised
|
|
|
(303,640
|
)
|
|
|
2.93
|
|
Canceled
|
|
|
(1,852,609
|
)
|
|
|
4.70
|
|
|
|
Outstanding December 31, 2007
|
|
|
12,730,238
|
|
|
|
7.41
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(5,614,351
|
)
|
|
|
7.66
|
|
|
|
Outstanding December 31, 2008
|
|
|
7,115,887
|
|
|
$
|
7.21
|
|
|
|
Stock
Awards, Restricted Stock and Restricted Stock Units
The Companys 2004 Plan and the 2003 LTIP permit 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, all RSUs granted under the 2004 Plan are payable
50% in cash and 50% in shares of common stock. All other RSUs
are payable in shares of common stock.
67
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Data concerning stock awards, restricted stock and RSUs granted
in the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares in thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
RSUs Employees
|
|
|
1,140
|
|
|
|
2,501
|
|
|
|
2,239
|
|
Weighted-average price per share
|
|
$
|
2.72
|
|
|
$
|
4.76
|
|
|
$
|
2.83
|
|
Stock Awards Board of Directors
|
|
|
434
|
|
|
|
50
|
|
|
|
71
|
|
Weighted-average price per share
|
|
$
|
2.28
|
|
|
$
|
4.83
|
|
|
$
|
3.39
|
|
|
|
The value of the RSUs is based on the market value of the
Companys 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 December 31, 2008 and 2007,
the Company had 1,087,510 and 4,796,944 RSUs outstanding,
respectively. The unrecognized expense at December 31, 2008
is approximately $1 million and is expected to be
recognized over a weighted average period of 2 years.
The value of restricted stock and stock awards is based on the
market value of the Companys common stock at the date of
grant and recorded as a component of Shareholders Equity.
During 2008 and 2007, the Company also issued 56,823 and
17,782 shares of phantom stock, respectively, 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 57,215 shares in payment of employee
deferred compensation.
During 2008, 2007 and 2006, $6.6 million, $6.6 million
and $6.5 million, respectively, was charged to compensation
expense. Of the amount charged to expense during 2008,
$7.1 million was attributable to the accelerated vesting of
RSUs and other payments triggered by the change of control
resulting from the Altivity Transaction on March 10, 2008.
|
|
NOTE 8
|
POSTRETIREMENT
AND OTHER BENEFITS
|
OVERVIEW
OF NORTH AMERICAN PLANS
The Company maintains both defined benefit pension plans and
postretirement health care plans that 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.
68
GRAPHIC
PACKAGING HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pension
and Postretirement Expense
The pension and postretirement expenses related to the North
American plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
In millions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Components of Net Periodic Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost
|
|
$
|
17.8
|
|
|
$
|
14.3
|
|
|
$
|
16.4
|
|
|
$
|
1.3
|
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
|
|
Interest Cost
|
|
|
39.7
|
|
|
|
34.8
|
|
|
|
33.2
|
|
|
|
3.1
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
Expected Return on Plan Assets
|
|
|
(42.0
|
)
|
|
|
(36.0
|
)
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative Expense
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
|
|
2.7
|
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
Actuarial Loss (Gain)
|
|
|
2.2
|
|
|
|
2.4
|
|
|
|
6.0
|
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Net Periodic Cost
|
|
$
|
20.5
|
|
|
$
|
17.8
|
|
|
$
|
26.0
|
|
|
$
|
3.6
|
|
|
$
|
3.5
|
|
|
$
|
3.6
|
|
|
|
|
|
Certain assumptions used in determining the pension and
postretirement expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
Weighted Average Assumptions:
|
|
|
|
|