FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-20704
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1208699
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4455 Table Mountain Drive, Golden, Colorado 80403
(Address of principal executive offices) (Zip Code)
(303) 215-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 32,047,804 shares of common stock outstanding as of
November 1, 2001.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED INCOME STATEMENT
(Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $270,818 $283,454 $842,514 $832,963
Cost of goods sold 234,363 245,288 723,549 726,090
-------- -------- -------- --------
Gross profit 36,455 38,166 118,965 106,873
Selling, general and
administrative expense 16,061 14,259 46,978 46,112
Goodwill amortization 5,175 5,179 15,487 15,451
Asset impairment and
restructuring charges --- --- 3,000 3,420
-------- -------- -------- --------
Operating income 15,219 18,728 53,500 41,890
Gain on sale of assets - net --- 2,405 3,650 7,812
Interest expense - net (12,429) (21,702) (42,084) (63,032)
-------- -------- -------- --------
Income (loss) before income
taxes 2,790 (569) 15,066 (13,330)
Income tax (expense) benefit (1,160) 288 (6,026) 5,332
-------- -------- -------- --------
Net income (loss) 1,630 (281) 9,040 (7,998)
Preferred stock dividend
declared (2,500) (1,306) (7,500) (1,306)
-------- -------- -------- --------
Net income (loss)
attributable to common
shareholders ($870) ($1,587) $1,540 ($9,304)
======== ======== ======== ========
Net income (loss)
attributable to common
shareholders per basic
share ($0.03) ($0.05) $0.05 ($0.32)
======== ======== ======== ========
Net income (loss)
attributable to common
shareholders per diluted
share ($0.03) ($0.05) $0.05 ($0.32)
======== ======== ======== ========
Weighted average shares
outstanding - basic 31,882 29,507 31,459 29,054
======== ======== ======== ========
Weighted average shares
outstanding - diluted 31,882 29,507 32,444 29,054
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
------- ------ ------ -------
Net income (loss) $1,630 ($281) $9,040 ($7,998)
Other comprehensive income:
Foreign currency
translation adjustments 46 (137) (284) (145)
Cumulative effect of
change in accounting
principle, net of tax
of $2,012 --- --- (3,217) ---
Recognition of hedge
results to interest
expense during the
period, net of tax of
$214 and $793 343 --- 1,269 ---
Change in fair value of
cash flow hedges during
the period, net of tax
of $969 and $2,017 (1,551) --- (3,224) ---
------- ------ ------ -------
Other comprehensive income
(loss) (1,162) (137) (5,456) (145)
------- ------ ------ -------
Comprehensive income (loss) $468 ($418) $3,584 ($8,143)
======= ====== ====== =======
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $4,292 $4,012
Accounts receivable, net 83,432 75,187
Inventories:
Finished 61,235 61,038
In process 12,604 13,301
Raw materials 22,377 30,889
---------- ----------
Total inventories 96,216 105,228
Other assets 32,361 31,634
---------- ----------
Total current assets 216,301 216,061
---------- ----------
Properties, net 451,451 480,395
Goodwill, net 564,847 580,299
Other assets 36,047 54,695
---------- ----------
Total assets $1,268,646 $1,331,450
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $32,500 $58,500
Accounts payable 43,491 38,903
Other current liabilities 87,418 79,345
---------- ----------
Total current liabilities 163,409 176,748
Long-term debt 531,935 576,600
Other long-term liabilities 57,667 62,951
---------- ----------
Total liabilities 753,011 816,299
Shareholders' equity
Preferred stock, nonvoting,
20,000,000 shares authorized:
Series A, $0.01 par value, no
shares issued or outstanding
Series B, $0.01 par value,
1,000,000 shares issued and
outstanding at stated value of
$100 per share 100,000 100,000
Common stock, $0.01 par value
100,000,000 shares authorized
and 31,996,839 and 30,544,449
issued and outstanding at
September 30, 2001, and December
31, 2000, respectively 320 305
Paid-in capital 419,212 422,327
Retained earnings (deficit) 2,042 (6,998)
Accumulated other comprehensive
income (loss) (5,939) (483)
---------- ----------
Total shareholders' equity 515,635 515,151
---------- ----------
Total liabilities and shareholders'
equity $1,268,646 $1,331,450
========== ==========
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended
September 30,
2001 2000
--------- --------
Cash flows from operating activities:
Net income (loss) $9,040 ($7,998)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Asset impairment and restructuring
charges 3,000 3,420
Gain on sale of assets (3,650) (7,812)
Depreciation and amortization 60,051 63,459
Amortization of debt issuance costs 5,920 6,786
Change in current assets and
current liabilities and other 19,235 (41,014)
-------- --------
Net cash provided by operating activities 93,596 16,841
-------- --------
Cash flows from investing activities:
Capital expenditures (22,135) (24,865)
Sale of assets 8,950 8,196
Collection of note receivable --- 200,000
-------- --------
Net cash provided by (used in) investing
activities (13,185) 183,331
-------- --------
Cash flows from financing activities:
Repayment of debt (225,900) (359,000)
Proceeds from borrowings 155,235 50,800
Proceeds from issuance of
preferred stock --- 98,650
Payment of preferred dividends (9,583) ---
Payment of debt issuance costs --- (5,866)
Issuance of common stock and other 117 3,169
-------- --------
Net cash used in financing activities (80,131) (212,247)
Cash and cash equivalents:
Net increase (decrease) in cash and
cash equivalents 280 (12,075)
Balance at beginning of period 4,012 15,869
-------- --------
Balance at end of period $4,292 $3,794
======== ========
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Basis of Presentation
Graphic Packaging International Corporation (the Company or
GPC) is a manufacturer of packaging products used by consumer
product companies as primary packaging for their end-use
products.
The consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the
disclosures included herein are adequate to make the information
presented not misleading. A description of the Company's
accounting policies and other financial information is included
in the audited financial statements filed with the Securities and
Exchange Commission in the Company's Form 10-K for the year ended
December 31, 2000.
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary to present
fairly the financial position of the Company at September 30,
2001, and the results of operations and cash flows for the
periods presented. All such adjustments are of a normal
recurring nature. The results of operations for the three months
and nine months ended September 30, 2001 are not necessarily
indicative of the results that may be achieved for the full
fiscal year and cannot be used to indicate financial performance
for the entire year.
Certain prior period information has been reclassified to
conform to the current presentation.
Note 2. New Accounting Standards for Goodwill and Business
Combinations
Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, was issued in July 2001. This statement
establishes new accounting and reporting standards that will,
among other things, eliminate the pooling-of-interest method of
accounting for business combinations and require that the
purchase method of accounting be used. This statement is
effective for the Company for all future business combinations.
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, was issued in July 2001.
This statement establishes new accounting and reporting standards
that will, among other things, eliminate amortization of goodwill
and certain intangible assets with an indefinite useful life.
This statement is effective for the Company's financial
statements for the year beginning January 1, 2002. The Company
does not currently have any intangible assets with indefinite
lives and does not expect any impact from this element of the new
statement.
Upon adoption of SFAS No. 142, the Company will stop
amortizing its goodwill. Based upon current goodwill levels, the
annual reduction in amortization expense will be $20.6 million
before taxes. Because some of the Company's goodwill
amortization is nondeductible for tax purposes, the Company's
effective tax rate may be lower as a result of implementing the
new accounting standard. The Company currently follows the
guidance in SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, which
permits the use of an undiscounted cash flow model, to evaluate
its goodwill for impairment. As required by the new standard,
SFAS No. 142, the Company's goodwill will be evaluated annually
for impairment using a fair-value based approach and, if there is
impairment, the carrying amount of goodwill will be written down
to the implied fair value. Any impairment loss as a result of
the initial adoption of the new accounting standard will be
recognized as a cumulative effect of a change in accounting
principle. Any impairment losses incurred subsequent to initial
adoption of the new accounting standard will be recorded as a
charge to operating income. Although management is still
evaluating the impact of SFAS No. 142, including the most
appropriate method to use in valuing the Company's goodwill,
initial estimates using current market data and discounted cash
flow valuations indicate a significant goodwill impairment could
exist upon adoption, potentially up to $200 million.
Note 3. New Accounting Standard for Derivatives and Hedging
Activities
In accordance with the Company's interest rate risk-
management strategy, the Company has contracts in place to hedge
the interest rates on all of its variable rate borrowings.
Interest rate swap agreements are in place on $225 million of
borrowings and interest rate cap agreements are in place to hedge
the remaining $289 million of variable rate debt at September 30,
2001. The swap agreements lock in an average LIBOR rate of 6.5%,
$150 million of the caps provide upside protection to the Company
if LIBOR moves above 6.75% and $200 million of the caps provide
upside protection to the Company if LIBOR moves above 8.13%.
All of the swaps and caps expire in 2002. The fair value of the
interest rate swap agreements at September 30, 2001 was a
liability of $8.4 million, which has been recorded in the
accompanying balance sheet. The interest rate caps have no
market value at September 30, 2001.
The Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities on January 1, 2001. In accordance with the
transition provisions of SFAS No. 133, as of January 1, 2001 the
Company recorded a net-of-tax cumulative loss adjustment to other
comprehensive income totaling $3.2 million which relates to the
fair value of previously designated cash flow hedging
relationships. All $8.4 million of the interest rate hedging pre-
tax loss currently in other comprehensive income is expected to
flow through interest expense during the next twelve months.
All derivatives are recognized on the balance sheet at their
fair value. On the date that the Company enters into a
derivative contract, it designates the derivative as (1) a hedge
of (a) the fair value of a recognized asset or liability or (b)
an unrecognized firm commitment (a fair value hedge); (2) a hedge
of (a) a forecasted transaction or (b) the variability of cash
flows that are to be received or paid in connection with a
recognized asset or liability (a cash flow hedge); or (3) a
foreign-currency fair-value or cash flow hedge (a foreign
currency hedge). The Company does not enter into derivative
contracts for trading or non-hedging purposes. The Company's
derivatives are designated as cash flow hedges and are recognized
on the balance sheet at their fair value. Changes in the fair
value of the Company's cash flow hedges, to the extent that the
hedges are highly effective, are recorded in other comprehensive
income, until earnings are affected by the variability of cash
flows of the hedged transaction through interest expense. Any
hedge ineffectiveness (which represents the amount by which the
changes in the fair value of the derivative exceed the
variability in the cash flows being hedged) is recorded in
current period earnings. Hedge ineffectiveness during the nine
months ended September 30, 2001 was immaterial.
The Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-
management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that
are designated as fair value, cash flow, or foreign currency
hedges to (1) specific assets and liabilities on the balance
sheet or (2) specific firm commitments or forecasted
transactions. The Company also formally assesses (both at the
hedge's inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been
highly effective in offsetting changes in the cash flows of
hedged items and whether those derivatives may be expected to
remain highly effective in future periods. When it is determined
that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting
prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when
(1) it determines that the derivative is no longer effective in
offsetting changes in the fair value or cash flows of a hedged
item (including hedged items such as firm commitments or
forecasted transactions); (2) the derivative expires or is sold,
terminated, or exercised; (3) it is no longer probable that the
forecasted transaction will occur; (4) a hedged firm commitment
no longer meets the definition of a firm commitment; or (5)
management determines that designating the derivative as a
hedging instrument is no longer appropriate.
When hedge accounting is discontinued due to the Company's
determination that the derivative no longer qualifies as an
effective fair value hedge, the Company will continue to carry
the derivative on the balance sheet at its fair value but cease
to adjust the hedged asset or liability for changes in fair
value. When hedge accounting is discontinued because the hedged
item no longer meets the definition of a firm commitment, the
Company will continue to carry the derivative on the balance
sheet at its fair value, removing from the balance sheet any
asset or liability that was recorded to recognize the firm
commitment and recording it as a gain or loss in current period
earnings. When the Company discontinues hedge accounting because
it is no longer probable that the forecasted transaction will
occur in the originally expected period, the gain or loss on the
derivative remains in accumulated other comprehensive income and
is reclassified into earnings when the forecasted transaction
affects earnings. However, if it is probable that a forecasted
transaction will not occur by the end of the originally specified
time period or within an additional two-month period of time
thereafter, the gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings.
In all situations in which hedge accounting is discontinued and
the derivative remains outstanding the Company will carry the
derivative at its fair value on the balance sheet, recognizing
changes in the fair value in current period earnings.
Note 4. Asset Impairment and Restructuring Charges
Asset Impairment Charges
The Company recorded an asset impairment charge of $1.5
million in the quarter ended March 31, 2001 related to its
Saratoga Springs, New York building. Operations of the Saratoga
Springs plant were transferred to other Company manufacturing
locations and the building and real property were sold in June
2001.
Restructuring Charges
The Company recorded a restructuring charge of $1.0 million
in the second quarter of 2001 in continuance of the plan
announced in the fourth quarter of 2000 that will eliminate
approximately 200 positions across the Company, including the
closure of the Company's folding carton plant in Portland,
Oregon. $3.0 million was recorded in the fourth quarter of 2000
and $1.0 million was recorded in the first quarter of 2001
related to this restructuring plan. The 2001 charges relate to
severance packages that were communicated to employees in the
first half of 2001. No additional charges related to this
restructuring plan are expected.
On May 12, 2000, the Company announced the planned closure
of the Perrysburg, Ohio folding carton plant. The shutdown and
related restructuring plan for the Perrysburg facility included
asset impairments totaling $6.5 million and restructuring
reserves of $1.35 million, which were recorded in the second
quarter of 2000. The costs to shut down the Perrysburg facility,
which was part of the acquisition of the Fort James packaging
business, were accounted for as a cost of the acquisition, with a
resultant adjustment to goodwill. The Company completed the
closure of the plant and the transition of the plant's business
to other Company facilities by the end of 2000. On July 11,
2001, the remaining real estate was sold for cash proceeds of
approximately $1.9 million.
The Company recorded a restructuring charge of $3.4 million
in the first quarter of 2000 for anticipated severance costs as a
result of the announced closure of the Saratoga Springs, New York
plant. The Company has completed the closure of the Saratoga
Springs plant and the transition of the plant's business to other
Company facilities. Approximately $0.5 million of the
restructuring charges were not necessary to meet severance
obligations for the plant's former employees and were reversed in
the first quarter of 2001. The Company recorded an asset
impairment charge of $1.5 million in the quarter ended March 31,
2001 related to its Saratoga Springs building. On June 29, 2001,
the Saratoga Springs building and land were sold for cash
proceeds of approximately $3.4 million, with no gain or loss
being recognized.
The following table summarizes accruals related to all
of the Company's restructuring activities during the nine months
ended September 30, 2001:
(in millions)
Balance, December 31, 2000 $ 5.0
Transfer of enhanced benefit
to pension liability (1.5)
Additional restructuring
charges 1.0
Reversal of Saratoga Springs
severance accrual (0.5)
Cash paid (1.6)
----
Balance, March 31, 2001 2.4
Transfer of enhanced benefit
to pension liability (0.5)
Additional restructuring
charges 1.0
Cash paid (1.0)
----
Balance, June 30, 2001 1.9
Cash paid (0.6)
----
Balance, September 30, 2001 $1.3
====
Note 5. Asset Sales
2001
The Company has been closing non-core or under-performing
facilities over the past two years. The Company sold its
Saratoga Springs building and land in June 2001 and its
Perrysburg, Ohio building and land in July 2001 for cash proceeds
of $3.4 and $1.9 million, respectively. No gain or loss was
recognized on the sales.
The Company has completed a review of its strategy for its
plant in North Portland, Oregon, as previously announced in June
2001. The Company has decided to fully integrate the plant into
the Company's operations and is not currently pursuing a sale of
this facility.
2000
The Company sold an airplane in the third quarter of 2000
for approximately $2.6 million, recording a pre-tax gain of $2.4
million. The Company sold patents and various long-lived assets
of its former developmental businesses during the first half of
2000 for approximately $6.2 million, recognizing a pre-tax gain
of $5.4 million. In the first half of 2001, a pre-tax gain of
$3.6 million was recognized upon receipt of additional con-
sideration for assets of the Company's former developmental
businesses.
Note 6. Segment Information
The Company's reportable segment is based on its method of
internal reporting, which is based on product category. The
Company has one reportable segment in 2001 and 2000 - Packaging.
In addition, the Company's holdings and operations outside the
United States are nominal in 2001 and 2000. Therefore, no
additional segment information is provided.
Note 7. Issuance of Subordinated Debt
Pursuant to terms in its senior credit agreement, the
Company completed a $50 million private placement of subordinated
unsecured debt on August 15, 2001. The purchaser of the notes is
Golden Heritage, LLC, a company owned by several Coors family
trusts and a related party. The notes accrue interest at 10% per
annum, payable quarterly, beginning September 15, 2001. The
notes mature August 15, 2008, but are redeemable, subject to the
terms of the senior credit agreement, at a premium of 3% in the
first year, 1.5% in the second year and at par thereafter.
Proceeds were used to repay the remaining $27.9 million balance
on the one-year term note due August 15, 2001 and the balance was
applied against the five-year senior credit facilities.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General Business Overview
Graphic Packaging International Corporation (the Company or
GPC) is a manufacturer of packaging products used by consumer
product companies as primary packaging for their end-use
products. The Company's strategy is to maximize its competitive
position and growth opportunities in its sole business, folding
cartons.
Segment Information
The Company's reportable segment is based on its method of
internal reporting, which is based on product category. The
Company has one reportable segment in 2001 and 2000 - Packaging,
and the Company's holdings and operations outside the United
States are nominal in 2001 and 2000.
Results from Operations
Net sales for the quarter ended September 30, 2001 decreased
4.5% to $270.8 million from $283.5 million in the third quarter
of 2000; however, if the 2000 net sales from the Malvern plant
sold in the fourth quarter of 2000 are subtracted, the decrease
is 1.4% quarter-to-quarter. Year-to-date 2001 net sales of
$842.5 million are 1.1% higher than the comparable period in
2000, 4.6% higher if the 2000 Malvern sales are subtracted.
Stronger sales in the first half of 2001, compared against the
prior year results, have been partially offset in the third
quarter of 2001 due to a softening economy and lower promotion
sales programs by customers. Although the Company believes it is
maintaining its market share with its traditional core customers,
customer orders have been significantly lower in the third
quarter of 2001, compared to the first half of the year. The
Company is unable to predict at this time whether the reduced
sales seen in the third quarter will start to improve before year-
end.
Gross profit margins for the three months and the nine
months ended September 30, 2001 were 13.5% and 14.1%,
respectively. Gross profit margins for the comparable 2000
periods were 13.5% and 12.8%, respectively. The Company's goal
has been to optimize its capacity and personnel in order to meet
customer demand in the most cost-effective manner. In pursuit
of this goal, the Company has initiated plant closings,
reductions in force, and Six Sigma projects company-wide that
have targeted cost-reductions and increased productivity. These
efforts have paid dividends through improved profit margins for
the first nine months of 2001, although the cost reduction
efforts were effectively offset by reduced sales and lower
promotion business for the three months ended September 30, 2001.
Selling, general and administrative expenses continue to be
within the Company's goal of 6% of net sales for all periods.
Operating income margin for the three months ended September
30, 2001 was 6%, compared to 7% in the third quarter of 2000.
Operating income margin for the nine months ended September 30,
2001 was 6%, compared to 5% in the comparable 2000 period. The
Company continues to focus on improving its gross profit margins
through cost reduction efforts, while keeping its selling,
general and administrative expenses below 6% of sales. The
decrease in operating income margin from 7% in the third quarter
of 2000 to 6% in the third quarter of 2001 is due primarily to
the reduced quarterly sales described above and absorption of the
Company's fixed costs.
The Company's net interest expense has decreased 43% quarter-
to-quarter and 33% year-to-date against prior year. Lower
amounts of outstanding debt, lower LIBOR rates, and lower
interest rate spreads over LIBOR as a result of the Company's
improved financial condition, have contributed to these
decreases. One month LIBOR has decreased approximately 4% since
September 30, 2000.
The consolidated effective tax rate for the third quarter
and the first nine months of 2001 was approximately 40%. The
Company expects to maintain an effective tax rate of approxi-
mately 40% for the remainder of 2001.
Asset Impairment and Restructuring Charges
Asset Impairment Charges
The Company recorded an asset impairment charge of $1.5
million in the quarter ended March 31, 2001 related to its
Saratoga Springs, New York building. Operations of the Saratoga
Springs plant were transferred to other Company manufacturing
locations and the building and real property were sold in June
2001.
Restructuring Charges
The Company recorded a restructuring charge of $1.0 million
in the second quarter of 2001 in continuance of the plan
announced in the fourth quarter of 2000 that will eliminate
approximately 200 positions across the Company, including the
closure of the Company's folding carton plant in Portland,
Oregon. $3.0 million was recorded in the fourth quarter of 2000
and $1.0 million was recorded in the first quarter of 2001
related to this restructuring plan. The 2001 charges relate to
severance packages that were communicated to employees in the
first half of 2001. No additional charges related to this
restructuring plan are expected.
On May 12, 2000, the Company announced the planned closure
of the Perrysburg, Ohio folding carton plant. The shutdown and
related restructuring plan for the Perrysburg facility included
asset impairments totaling $6.5 million and restructuring
reserves of $1.35 million, which were recorded in the second
quarter of 2000. The costs to shut down the Perrysburg facility,
which was part of the acquisition of the Fort James packaging
business, were accounted for as a cost of the acquisition, with a
resultant adjustment to goodwill. The Company completed the
closure of the plant and the transition of the plant's business
to other Company facilities by the end of 2000. On July 11,
2001, the remaining real estate was sold for cash proceeds of
approximately $1.9 million.
The Company recorded a restructuring charge of $3.4 million
in the first quarter of 2000 for anticipated severance costs as a
result of the announced closure of the Saratoga Springs, New York
plant. The Company has completed the closure of the Saratoga
Springs plant and the transition of the plant's business to other
Company facilities. Approximately $0.5 million of the
restructuring charges were not necessary to meet severance
obligations for the plant's former employees and were reversed in
the first quarter of 2001. The Company recorded an asset
impairment charge of $1.5 million in the quarter ended March 31,
2001 related to its Saratoga Springs building. On June 29, 2001,
the Saratoga Springs building and land were sold for cash
proceeds of approximately $3.4 million, with no gain or loss
being recognized.
The following table summarizes accruals related to all
of the Company's restructuring activities during the first nine
months of 2001:
(in millions)
Balance, December 31, 2000 $ 5.0
Transfer of enhanced benefit
to pension liability (1.5)
Additional restructuring
charges 1.0
Reversal of Saratoga Springs
severance accrual (0.5)
Cash paid (1.6)
----
Balance, March 31, 2001 2.4
Transfer of enhanced benefit
to pension liability (0.5)
Additional restructuring
charges 1.0
Cash paid (1.0)
----
Balance, June 30, 2001 1.9
Cash paid (0.6)
----
Balance, September 30, 2001 $1.3
====
Asset Sales
2001
The Company has been closing non-core or under-performing
facilities over the past two years. The Company sold its
Saratoga Springs building and land in June 2001 and its
Perrysburg, Ohio building and land in July 2001 for cash proceeds
of $3.4 and $1.9 million, respectively. No gain or loss was
recognized on the sales.
The Company has completed a review of its strategy for its
plant in North Portland, Oregon, as previously announced in June
2001. The Company has decided to fully integrate the plant into
the Company's operations and is not currently pursuing a sale of
this facility.
2000
The Company sold an airplane in the third quarter of 2000
for approximately $2.6 million, recording a pre-tax gain of $2.4
million. The Company sold patents and various long-lived assets
of its former developmental businesses during the first half of
2000 for approximately $6.2 million, recognizing a pre-tax gain
of $5.4 million. In the first half of 2001, a pre-tax gain of
$3.6 million was recognized upon receipt of additional
consideration for assets of the Company's former developmental
businesses.
Financial Resources and Liquidity
The Company's liquidity is generated from both internal and
external sources and is used to fund short-term working capital
needs, capital expenditures, preferred stock dividends and
acquisitions.
Capital Structure
The Company has a revolving credit and term loan agreement
(the Credit Agreement) with a group of lenders, with Bank of
America, N.A. as agent. Currently, the Credit Agreement is
comprised of two senior credit facilities including a $325
million five-year term loan facility and a $400 million five-year
revolving credit facility (collectively, the Senior Credit
Facilities). The Company reduced amounts outstanding under its
Senior Credit Facilities in the first nine months of 2001 by
$120.7 million, with $65.9 million repaid in the third quarter,
through cash generated by operations and through the issuance of
$50 million of subordinated debt. Borrowings under the revolving
credit facility on November 1, 2001 were approximately $237
million, leaving $163 million available for future borrowing
needs.
Amounts borrowed under the Senior Credit Facilities bear
interest under various pricing alternatives plus a spread
depending on the Company's leverage ratio. The various pricing
alternatives include (i) LIBOR, or (ii) the higher of the Federal
Funds Rate plus 0.5% or the prime rate. In addition, the Company
pays a commitment fee that varies based upon the Company's
leverage ratio and the unused portion of the revolving credit
facility. Mandatory prepayments under the Senior Credit
Facilities are required from the proceeds of any significant
asset sale or from the issuance of any debt or equity securities.
In addition, the five-year term loan is due in quarterly
installments. Total annual principal payments for 2001 through
2003, respectively, are $25 million, $35 million and $40 million,
with the balance of the borrowings due in 2004.
Pursuant to terms in its senior credit agreement, the
Company completed a $50 million private placement of subordinated
unsecured debt on August 15, 2001 which is included in long-term
debt at September 30, 2001. The notes accrue interest at 10% per
annum, payable quarterly, beginning September 15, 2001. The
notes mature August 15, 2008, but are redeemable, subject to the
terms of the senior credit agreement, at a premium of 3% in the
first year, 1.5% in the second year and at par thereafter.
Proceeds were used to repay the remaining $27.9 million balance
on the one-year term note due August 15, 2001 and the balance was
applied against the five-year senior credit facilities. Issuance
of the subordinated debt avoided an additional interest rate
spread of 75 basis points on the Company's senior debt and a fee
of $750,000 to the senior lenders.
As of September 30, 2001 the Company's borrowings consisted of
the following (in thousands):
Five-year term facility due August 2, 2004 $259,535
Five-year revolving credit facility due
August 2, 2004 254,900
Subordinated notes due August 15, 2008 50,000
--------
Total 564,435
Less current maturities 32,500
--------
Long-term maturities $531,935
========
The Senior Credit Facilities are collateralized by first
priority liens on all material assets of the Company and all of
its domestic subsidiaries. The Credit Agreement currently limits
the Company's ability to pay dividends other than permitted
dividends on its Series B preferred stock, and imposes
limitations on the incurrence of additional debt, capital
expenditures, acquisitions and the sale of assets. The
subordinated note agreements essentially incorporate the same
covenants as the Senior Credit Facilities agreement. At
September 30, 2001, the Company was in compliance with all
covenants. Although there can be no assurance that these
covenants will continue to be met, management believes that the
Company will remain in compliance with the covenants based upon
the Company's expected performance and debt repayment forecasts.
In the event of a default under the Credit Agreement, the lenders
would have the right to call the Senior Credit Facilities
immediately due and refrain from making further advances to the
Company. If the Company is unable to pay the accelerated
payments, the lenders could elect to proceed against the
collateral in order to satisfy the Company's obligations.
The Company maintains an interest rate risk-management
strategy that uses derivative instruments to minimize
significant, unanticipated earnings fluctuations that may arise
from volatility in interest rates. The Company's specific goals
are to (1) manage interest rate sensitivity by modifying the re-
pricing or maturity characteristics of some of its debt and (2)
lower (where possible) the cost of its borrowed funds. In
accordance with the Company's interest rate risk-management
strategy, the Company has in place contracts to hedge the
interest rates on all its variable rate borrowings. Swap
agreements are in place on $225 million of borrowings and cap
agreements are available for $350 million of borrowings. The
swap agreements lock in an average LIBOR rate of 6.5%, $150
million of the caps provide upside protection to the Company if
LIBOR moves above 6.75% and $200 million of the caps provide
upside protection to the Company if LIBOR moves above 8.13%.
The hedging instruments expire in 2002.
The Company's capital structure also includes $100 million
of Series B preferred stock, issued on August 15, 2000. The
Series B preferred stock is convertible into shares of the
Company's common stock at $2.0625 per share and is entitled to
receive a dividend payable quarterly at an annual rate of 10%.
The Company may redeem the Series B preferred stock beginning on
August 15, 2005 at 105% of par reducing by 1% per year until
August 15, 2010 at which time the Company can elect to redeem the
shares at par. The Series B preferred stock has a liquidation
preference over the Company's common stock and is entitled to one
vote for every two shares held on an as-converted basis.
Working Capital
The Company currently expects that cash flows from
operations and borrowings under its current credit facilities
will be adequate to meet the Company's needs for working capital,
temporary financing for capital expenditures and debt repayments.
The Company's working capital position as of September 30, 2001
was $52.9 million and $163 million was available under the
Company's revolving credit facility.
During the first nine months of 2001, capital requirements
were funded with net cash from operations. During the first nine
months of 2000, capital requirements were met largely through
financing and investing activities. The Company expects its
capital expenditures for 2001 to be approximately $35 million,
primarily related to a new enterprise resource planning system
and upgrades to equipment.
The impact of inflation on the Company's financial position
and results of operations has been minimal and is not expected to
adversely affect future results.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Interest Rate Risk
As disclosed above, as of November 1, 2001, the Company's
capital structure includes approximately $514 million of debt
that bears interest based upon an underlying rate that fluctuates
with short-term interest rates, specifically LIBOR. The Company
has entered into interest rate swap agreements that lock LIBOR at
5.94% on $100 million of borrowings and 6.98% on $125 million of
its borrowings. In addition, the Company has interest rate
contracts that cap the LIBOR interest rate at 8.13% on $200
million of borrowings and 6.75% for $150 million of borrowings.
With the Company's interest rate protection contracts, a 1% rise
in interest rates would impact annual pre-tax results by
approximately $2.7 million.
Factors That May Affect Future Results
Some statements in this filing are forward looking and so
involve uncertainties that may cause actual results to be
materially different from those stated or implied. Specifically,
a) revenue for 2001 might be reduced because customers experience
lower demand, find alternative suppliers, or otherwise reduce
their demand for our products, or because the Company, as a
result of plant closures, is unable to efficiently move business
or to qualify that business at other plants; b) margins might be
reduced due to lower sales, market conditions for products sold
and due to increases in operating and materials costs, including
energy-related costs, recycled fiber and paperboard; c) the
future benefits of restructuring, cost reduction and optimization
are uncertain because of possible delays and increases in costs;
d) capital expenditures might be higher than planned due to
unexpected requirements or opportunities; e) debt may not be
reduced due to lower than expected free cash flow; f) the Company
may be exposed to higher than predicted interest rates on the
unhedged portion of its debt and on any new debt it might incur;
g) if the Company is unable to meet certain financial terms or
tests of its senior debt, it could be subject to higher interest
rates; h) the goodwill impairment charge, if any, required
January 1, 2002 upon adoption of a new accounting standard may
vary materially due to changes in the fair value of the Company's
goodwill and the final methodology adopted by the Company for
valuing goodwill; and i) the Company might not meet its estimates
for 2001 as a result of the transfer of production within the
system, market conditions for pricing products, reduced demand,
higher production costs, higher than predicted interest rates,
general economic conditions, and other business factors.
These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 2000. The accompanying
financial statements have not been examined by independent
accountants in accordance with generally accepted auditing
standards, but in the opinion of management, such financial
statements include all adjustments necessary to summarize fairly
the Company's financial position and results of operations.
Except for certain reclassifications made to consistently report
the information contained in the financial statements, all
adjustments made to the interim financial statements presented
are of a normal recurring nature. The results of operations for
the first nine months of 2001 may not be indicative of results
that may be expected for the year ending December 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Document Description
4.1 Letter Agreement between the Company and the Company's
preferred stockholder, dated as of August 15, 2001
(incorporated by reference from the Company's Form 8-K
filed August 31, 2001).
10.1 $50 million 10% Senior Subordinated Note Agreement, dated
as of August 15, 2001 (incorporated by reference from the
Company's Form 8-K filed August 31, 2001).
10.2 Fourth Amendment to Revolving Credit and Term Loan
Agreement, effective as of August 15, 2001, among the
Company and its lenders (incorporated by reference from
the Company's Form 8-K filed August 31, 2001).
10.3 Form of Employment Agreement Entered Into By and Between
Luis E. Leon and the Company.
10.4 General Release of Legal Rights Agreement Entered Into
By and Between Gail A. Constancio and the Company.
(b) Reports on Form 8-K
On August 31, 2001, the Company filed a Current Report on
Form 8-K disclosing the completion of a $50 million subordinated
debt placement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2001 By /s/ Luis E. Leon
-------------------------------
Luis E. Leon
(Chief Financial Officer)
Date: November 14, 2001 By /s/ John S. Norman
-------------------------------
John S. Norman
(Corporate Controller)